1. World Steel Market and Ukrainian metallurgy in 2010 Vlasyuk V.S. SE UPE Co. Research & Consulting, Ukraine 69 th Session of the OECD Steel Committee Meeting, Paris, 2-3 December 2010 SE UPE Co. Research & Consulting Ministry of Industrial Policy of Ukraine

2. 1. Dominating tendencies Presently two powerful factors dominate in the post-crisis market which enhance competition and worsen cost efficiency of steel producers I. World steel market development 1. Expensive raw materials and increasing production cost of steel 2. Excessive capacities, lack of markets and strengthen of competition

3. 2. Increase of raw materials prices in 2010 Record steel production and increased demand for raw materials have resulted in iron ore average price raise by 111% and coking coal price raise by 64% y-to-y in 2010 Source: UPE Co. I. World steel market development $/t fob Australia, Peak Downs Itabira fines, 64.2% Fe $/t fob Brazil (to Asian market)

4. 3. Steel cost increase Upswing of raw materials prices have resulted in substantial increase (+35÷45%) of steel production costs. By the results of 2010 production cost growth rate exceeds those one for steel product prices Source: UPE Co. I. World steel market development Billet production cost $/t

5. 4. Excessive steel capacities Intensive input of new steel capacities has been continued despite of the crisis in 2008-2009 and currently about 475 million tons of capacities stay idle due to lack of markets Source: WSA, OECD, UPE Co. est. I. World steel market development World capacity and production of crude steel, mln. tonnes Capacity utilization, % 475 Mt

6. I. World steel market development 5. Post-crisis changes in the world market. Millstones of competition Post-crisis situation in the global steel market is quite different from the pre-crisis one. The main distinction consists in the availability of two factors unfavorable for producers, namely “excess” of capacities and high production costs. This situation intensifies competition dramatically and bears substantial risks for numerous outdated and non-efficient mills, especially for those not integrated with raw material producers Overcapacity Increased production costs Capacity utilization % Steel cost $/t

7. 6. Ukrainian crude steel production Under the weak market demand the volume of steel production in Ukraine has reduced to the level of a decade ago (to 32 Mt or 25% less than record pre-crisis production in 2007) *estimation Source: UPE Co. II. Ukrainian steel sector development *

8. 7. Capacity utilization in Ukraine and in the world Due to changes in the global market and export orientation of Ukrainian steel industry, the level of capacity utilization in Ukraine during 2010 was substantially lower than in the world Source: UPE Co., WSA, OECD Ukrainian capacity utilization 2007-2010 II. Ukrainian steel sector development

9. 8. Steel production cost growth Domestic price increase for iron ore (+96%), coking coal (+77%) and scrap (+55%) has push up production cost of steel in Ukraine by 137$/t or +40% Source: UPE Co. II. Ukrainian steel sector development 325 462 $/t

10. 9. Decrease of Ukrainian steel export by regions In 2009 - 2010 Ukraine total export has fallen by 5.5 mln. tons as compared with pre-crisis 2007. Currently Ukraine has restored export sales to EU27, Middle East and Asia. EU27 and Middle East are the biggest Ukrainian trade partners sharing about 23% each Source: State Statistics Committee of Ukraine, UPE Co. II. Ukrainian steel sector development est. Steel products export, Mt

11. 10. Apparent consumption in Ukraine (finished steel products) * estimation Source: UPE Co. mln. tonnes Domestic market in Ukraine remains weak. Under the influence of the economic stress in 2008-2009 steel consumption in Ukraine has fallen down to 6.2 Mt or 45% less than in 2007. However, this year domestic consumption has started to recover, increasing to 8.2 mln. tonnes II. Ukrainian steel sector development

12. 11. Steel import to Ukraine * estimation Source: UPE Co. mln. tonnes This year Ukraine has turned back to an active import. In 2010 total Ukrainian import of steel products is expected to reach 1.7 mln. tons II. Ukrainian steel sector development *

13. 12. Steel demand to renew the accumulated steel resources The replacement of depreciated steel-made facilities requires 330 mln tonnes of steel to be consumed in the domestic market. Source: UPE Co. *share of fixed assets with 100% depreciation II. Ukrainian steel sector development

14. 13. Corporate ownership in Ukrainian steel sector has changed substantially Current situation on the global steel market requires urgent capital investments in the modernization of the sector, which could be provided by strategic investors only Source: UPE Co. 2007 2010 II. Ukrainian steel sector development

15. Next year steel production in Ukraine is expected to increase at a modest rate about 3.0-3.5% After 2 years, impact of the crisis on the Ukrainian steel industry still remains very essential II. Ukrainian steel sector development

16. 14. Further increase of steel production and price for raw materials World steel production in 2011 will make up about 1475 mln. tons and thus beat 2010 year record by 60-70 mln. tons. Under the growing demand raw material prices will increase by 25% (iron ore) and +20% (coking coal) Source: UPE Co. III. Glance at the market 2011 Itabira fines, 64.2% Fe $/t fob Brazil Coking coal $/t fob Australia, Peak Downs Mt

17. 15. Modest steel price increase in 2011 In 2011 further steel product prices increase should be expected mainly due to the production cost growth. At the same time the world market and price will remain under the pressure of the overcapacity and the limited import demand Source: UPE Co. Billet, $/t fob Black Sea III. Glance at the market 2011

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