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March 12, 2014

Global Iron Ore & Steel Forecast 17th Annual Conference

Changes ahead Key Drivers of Steel Demand and Outlook

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Steel leadership shifts along the stagnant demand

Structural Changes in the Steel Industry – Past

U.K.

(19C) U.S.

(1910-1960)

Japan

(1970-1990)

China

(2000-present)

Stagnation

- 1907-1946(about 40yrs)

- Annual avg of 1.9%

The third boom The second boom

- 1875-1907(about 33yrs)

- Growth at annual avg of 10.8%

- Beginning of the world’s steel

industry

- 1946-1973(About 27yrs)

- Annual avg of 7.0% - 1998-2007(about 9 yrs)

- Annual avg of 6.3%

The first boom

Stagnation

- 1973-1998(about 25 yrs)

- Annual avg of 0.9%

- The first and second oil shocks

12

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1875 1900 25 40 45 50 55 60 65 70 75 80 85 90 95 00 05 10

Global steel production

Excluding China

China’s steel production - 2008-present

- Annual avg of 2.3%

Stagnation?

(billion tons)

3

Adopted new steel-making technology

- Industrial Revolution and Bessemer process

- Used coal within the area

Key: Innovative technology

Coastal steel mills as a new business model

- Commercialization of continuous casting

- LD converter

- Mass production through large blast furnaces

Key: Technology and raw materials

Open-hearth furnace, Integrated steel mills

- Automobiles expansion, railway revolution

- Domestic market, self-sufficient raw materials

Key: Market and raw materials

Demand grown rapidly

- Led by automobile and shipbuilding industries

- Use the existing technology, adopt new facilities

- Domestic coal reserves, abundant labor force

Key: Large domestic market

Structural Changes in the Steel Industry – Past

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Structural Changes in the Steel Industry – Present

40%

35%

55%

42%

40%

25%

18%

6%

23%

15%

2%

3%

9%

14%

12%

28%

20%

21%

24%

23%

17%

16%

5%

7%

Source : worldsteel, KOSA, NSRI, Eurofer

Others

Machinery

(2012)

(2012)

(2011)

(2012)

(2012)

5

2000-2007 2008-2011

6.8%

2.7%

(steel production)

△4.1%p

① Growth

2007 2012

13.2%

0.2%

(Top 10 steel makers)

△13.0%p

② Profit

Source : worldsteel Source : Bloomberg

2005 2012

9 companies

7 companies

(Fortune 500 firms)

△ 2

③ Company Value

Source : Fortune

*Excluding 4 Chinese steel companies * Operating profit/Sales

Structural Changes in the Steel Industry – Present

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China, the core of the global steel, is staggering

China Risk

(Unit : %, yoy)

Oversupply across industries - On average, 28% in the manufacturing,

21% in the steel and 12% in the auto industry

Protectionism - Rapid increase in case filing against China

over anti-dumping and countervailing duties

Slowdown

of China’s

GDP growth

Serious oversupply - Capacity reached 1 billion tons

- Construction of large steel mills continues

Sharp fall in growth and profit - Demand increase around 4%

- Operating profit near zero

Steel

- Its status as a leader falls sharply

- Mecca of growth Epicenter of chaos

Structural Changes in the Steel Industry – What is the Problem?

Impact of uncertain global economy

9.7 9.5

9.1

8.9

7.9 7.6

7.4

7.9 7.7

7.5

7.8

7.7

'11.1Q 3Q '12.1Q 3Q '13.1Q 3Q

7

Hebei 42.8

Bao Steel 42.7

Wuhan 36.4

Shagang 32.3

Shougang 31.4

Ansteel 30.2

Player Steel

production

Baoshan 17.7

Source : worldsteel, million tons Source : worldsteel

Structural Changes in the Steel Industry – Future?

Source : worldsteel

2000 2012

55 million tons

Export

11 million tons

15.1%

46.9%48.5%

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- Struggle over interests between the central and local governments

- Difficulty in systematic restructuring due to inadequate financial system

- Sharp decline in profits of steelmakers

Rising pressure for survival and restructuring

- Financial costs in the distribution process : Increase 50% per ton

- Limits to the steel industry heavily depending on gross fixed capital formation

- Basis for growth, such as investment in infrastructure, has weakened

The Xi Jinping government,

“The government won’t continue to

provide the current level of financial

support. We’ll follow the logic of

market even if that means decreases

in steel production.”

The new government’s policies

for the steel industry

The Steel Industry

Market

concentration

(Top 10 companies)

3~5 global companies 60%

* Joint statement released by 12 government

ministries (Jan. 22, 2013)

Structural Changes in the Steel Industry – Future?

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After the low growth trap in the SR, New Normal is 3%

Source : Global Insight, Note: On the basis of PPP

Around 4% before the crisis 2% recently Low- to mid-3% after 2015

%

World New Normal

Low

Growth

- 4.0

- 2.0

0.0

2.0

4.0

6.0

8.0

00 02 04 06 08 10 12 14 16 18 20 22

Emerging Countries

Developed Countries

%

8.0

4.0

0.0

4.0

8.0

12.0

00 02 04 06 08 10 12 14 16 18 20 22

China

India

Brazil

Russia

Challenging Environments – ① Delayed recovery of the world economy

Developed economies : Prolonged low growth due to excessive national debt and

accumulated current account deficit

Emerging economies : Return to a New Normal of 5% from a high growth of 8%

- BRICs : Growth expected to slow down compared to that before the global economic crisis

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Steel industry faces stagnant growth engines

Worldsteel.org has adjusted down its continued low steel demand projection

Annual growth in global steel demand will slow down to around 2% for the next 10 years,

after recent high level of 5%

- China moves into slower growth phase, while emerging economies struggling with structural issues

Source : worldsteel (Oct 2013) Source : worldsteel, POSRI

Challenging Environments – ② Slow growth in steel demand

World

China

India

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

'00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 22

(mil tons)

Note: Apparent steel use, finished steel

1,219 1,219

1,141

1,300

1,403 1,430

1,475 1,523

7.0

0.0

-6.4

14.0

7.9

2.0 3.1 3.3

-10.0

-5.0

0.0

5.0

10.0

15.0

800

1,000

1,200

1,400

1,600

'07 '08 '09 '10 '11 '12 '13(e) '14(f)

demand (mil tons)

y-o-y growth (%)

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Overcapacity, a continued crucial issue

(million tons)

Excess steelmaking capacity is estimated at 525 million tons around the world (2013)

- East Asia has more than 50% of total surplus

- Steel capacity utilization ratio trends down to mid-70%, from 90% of the pre-Crisis level

Source : worldsteel, POSRI

Korea

666 808

205 250

2012 2022

69

66 65

68

2012 2022

106 136

12

- 11

2012 2022

29 40

20 12

2012 2022

62 78

- 28 - 35 2012 2022

77

115

24 11

2012 2022

27

40

7 0

2012 2022

56 60

23 30

2012 2022

Africa

India

China

Brazil

USA

ASEAN

Japan

Overcapacity

Crude Steel Consumption

Challenging Environments – ③ Global overcapacity

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High raw material costs laying heavier burden

Prices of iron ore and coking coal rose 7.4x and 3.6x respectively (2000~13)

- Despite having decreased, the prices remain high, and its volatility has increased since quarterly

pricing was adopted (2Q ’10)

Cost portion of raw materials in the steelmaking cost getting higher

- High costs can be attributed to various supply risks(oligopoly, low grade materials, natural disasters)

- China’s high production cost serves as the lower limit of international raw material price

49.8 49.0

58.3 61.4

69.9 70.0 74.0

'00 '02 '04 '06 '08 '10 '12

Note: On the basis of integrated steel mills, Source: MBR, etc.

0

50

100

150

200

250

300

350

'00 '02 '04 '06 '08 '10 '12 '14.1

Coking coal

(hard coking coal, Australia

FOB)

Iron ore (iron ore fines, Fe 62%, China CFR)

131 143

289

161

61

91

18

51

172

250

125

40

Challenging Environments – ④ High raw material cost

(%) ($/ton)

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Varied Demand & Competing Alternative Materials

∙ Lighter car bodies

∙ Electric vehicles

∙ Hydrogen-fuel cars

∙ Extra-large vessels

∙ Eco-ships

∙ Efficient transportation

∙ Oil fields in deep sea &

coldest places

∙ Shale gas

Changes in Steel-using Sectors Decline of Steel Use

+

2012

980

(57%)

1,720

740

2025

710

(46%)

1,550

840

Source : Ducker Worldwide

Steel materials

Non-ferrous materials

(Polymer, Aluminum)

Steelmakers must provide technical solutions, as well as the steel product itself

Challenging Environments – ⑤ Customer needs / Steel alternatives

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Soaring environmental costs & emergence of new energy

* CCS: Carbon Capture and Storage

* ETS: Emission Trading Scheme

Tighter regulations on environmental pollutions, such as greenhouse gas emission, have

driven up costs

- Need to use clean energy and CCS technology to reduce CO2 emissions

Shale gas could lead to structural changes in cost competitiveness among steelmakers

Challenging Environments – ⑥ Environmental issues and energy

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1,511

1,700

1,950

717 815

930

2012 2017 2022

For the next decade, low growth is inevitable without next growth engine and recovery of economy

- Global steel production is expected to rise by 400 million tons to reach 1.95 billion tons in 2022

Growth will improve due to new coastal integrated steel mills in Southern China

- Baosteel’s Zhanjiang mill by the end of 2015, Wugang's Fangchenggang mill around 2017

Source : worldsteel, POSRI * Steel demand outlook considering economic growth, fixed asset investment and each country’s plan to expand facilities

(million tons, % CAGR)

2.4%

2.8%

200

400

600

800

1000

1200

1400

1600

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Steel in the world

Steel in China

Steel: World 4.7%, China 17.6%

Price: Iron ore -1.3%, Coking coal -0.6%

Steel: World 10.8%, China 31.5%

Price: Iron ore 21.7%, Coking coal 15.8%

1992-2002 2002-2012

China Effect

Global Steel production, low growth for next 5 years

China’s steel production to be only 2.6% of annual growth

∆ RM Price > ∆ Steel Production

Increased Volatility

Outlooks on Demand

2.6% 2.7%

W O R L D

C H I N A (mil tons, % CAGR)

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Conclusion

Steel industry faces an unprecedented crisis

- Stagnant demand, Oversupply Intense competition

- Low steel prices, High RM costs Profit squeeze

Breakthrough opportunities are pursued

- Urbanization and population growth

- Innovations in sustainable technologies for

product and process

- Excess capacity absorbed in the long term

Cooperation between steel and raw materials

- Necessary for win-win growth

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