A financial analysis of the European steel industry, in the context of the global recession Kevin Fowkes Prague, 21 st September 2009

Integer Research – who we are and what we do Founded in 2002 London-based research, strategy consulting and publishing company, staff of 27 people Leading provider of financial analysis of global steel industry Quarterly Steel Financial Bulletin and Steel Financial Insight reports sold to wide client base in the steel sector Research also in wire & cable, fertilisers, automotive, environment & emissions sectors

The Central & Eastern European steel industry: Does it make sense to look at it in isolation?

Ownership of Eastern European steel industry – now 80% is controlled by steel multinationals Ownership of steel industry in the 12 countries that have joined the EU since 2004 (weighted by volume of crude steel production in 2008): Data: Integer Research Major West European- based producers: ArcelorMittal Celsa Sidenor Major North American- based producers: US Steel Commercial Metals Major CIS-based producers Severstal Mechel TMK Ind Union of Donbass Ind Metallurgical Holding Still locally / independently owned

Ownership of Eastern European steel industry – now 80% controlled by steel multinationals Over the past decade, the Eastern European steel sector has become an integral part of the EU / Western European steel industry, with major assets acquired by ArcelorMittal and other significant players. The Eastern European steel industry no longer really exists as a separate entity It therefore makes most sense to analyse the financial performance of the European steel sector as a whole, rather than try to separate into East and West Acquisitions in the region by US, Russian and Ukrainian producers have even more closely linked the Eastern European steel sector to the financial performance of the global steel industry

The structure and financial performance of the European steel industry

Whether a company is publicly traded, and where it is listed/based, largely determine the scope and availability of financial information Publicly-traded companies have much stricter reporting requirements than privately owned companies Most publicly-traded companies report quarterly financials Most private companies report only annually, often with a long time lag Reporting requirements vary considerably between countries, especially for private companies For multinational companies, it can be difficult to analyse operations in a particular country or region in isolation from the rest of the business

Ownership structure of the European steel industry (weighted by volume of crude steel production in 2008): Data: Integer Research Major European-listed producers: ArcelorMittal ThyssenKrupp Salzgitter voestalpine SSAB Rautaruukki Vallourec Acerinox Sidenor Outokumpu Major foreign-listed producers: Tata (Corus) US Steel (Kosice) Severstal (Lucchini) Mechel TMK Other producers (mostly privately owned): Celsa Riva Saarstahl Duferco Moravia Cogne Acciai

Quarterly vs annual financial statements Many publicly-traded companies report quarterly financials Monitoring quarterly financials are the best way of maintaining an up-to- date view of the financial performance of an industry – especially when the economic / market circumstances suddenly change For detailed financial analysis at the company level, annual accounts are the most appropriate source. They are usually more detailed, and the most accurate, as audit adjustments are generally not made to all quarterly financials

How to measure financial performance – definitions of profitability Various accounting measures of profitability:Usefulness: Gross Profit Trading Profit (EBITDA) Operating Profit (EBIT) Profit Before Tax Net Profit (after tax) Declining level of profit Indicates production efficiency of business Indicates profit before any capital expenditure (depreciation) Indicates total profit for existing assets and structure, as if financed by no debt Indicates total profit including finance charges but before taxation EBIT margin is profitability relative to sales = EBIT ÷ Revenue

Profitability of the European steel industry before the recession took hold Data: Integer Research, company filings Operating profit (EBIT) margin for major steel companies producing in Europe, 2008: All major producers made operating profits in the boom In general, the foreign-listed producers performed slightly better than the European-listed producers In general, private companies performed less well than listed companies Caveats: Non-European assets included in financials Recession impacted financials at different times depending on the company

Most European steelmakers have made an operating loss since Q4-2008, and their financial performance has not improved so far in 2009 Data: Integer Research, company filings Operating profit (EBIT) for European-listed steel producers: There was an instant disappearance of profitability in Q4-2008, with most producers reporting an operating loss Losses have not been reduced so far in 2009 Very similar picture for CIS / US listed companies Likely that smaller / privately owned producers have fared even worse

The global picture

Producers listed elsewhere have experienced a similar development to those in Europe. Chinese producers are the only major exception to this Average operating profit (EBIT) margins for public steel companies by region of main listing: Data: Integer Research, company filings

The Chinese steel industry, following a disastrous Q , has bounced back quickly to a break-even financial position Operating profit (EBIT) for major Chinese-listed steel producers: Data: Integer Research, company filings

Why have Chinese producers recovered first, and when will Europe follow? Its the demand, stupid- China alone has seen growth in steel demand in 2009, thanks to a massive government economic stimulus Consequently, Chinese producers have not had to shoulder as much cost as a result of idling capacity / layoffs Arguably, Chinese producers have been less locked in to raw material supply contracts so have taken quicker advantage of falling input prices Recovery of demand in Europe will be crucial, as will the supply response Raw material pricing for 2010 will also be key A less export-focused China should be of long-term benefit to Europe

Structurally, the big steel companies remain lacklustre financial performers compared to the mining giants Data: Integer Research, company filings Operating profit (EBIT) margins for top-3 world steel companies versus two iron ore mining multinationals: The major suppliers of iron ore have remained comfortably profitable through the recession Steel companies big and small have all suffered losses Leading steel companies have not realised the improvement in profitability through consolidation that the mining giants have. Is this an argument for more consolidation or less? The mining giants remain in a powerful position regarding raw material prices, and will be a key determinant of the recovery of steel industry profitability in 2010 If underlying profitability does not improve, developments such as emissions trading pose a threat to industry viability

Thank you for your attention For more information please contact Kevin Fowkes Business Manager, Steel Integer Research Limited 55 Farringdon Road London EC1M 3JB United Kingdom Tel: Fax: