Global Steel & Raw Materials Industries and the New China Effect Market Outlook to 2020

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Global Steel & Raw Materials Industries

and the New China Effect

Market Outlook to 2020

A long-term strategic forecast study available in two interdependent volumes, including:

TWO STUDY UPDATES THROUGHOUT THE YEAR

INTERACTIVE STEEL AND RAW MATERIALS DEMAND AND OUTPUT FORECASTING MODEL

“I would positively recommend Metal Bulletin Research as a unique provider of steel & raw

materials market analysis and forecasts.”

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Global steel prices are under pressure and there are clear signs that China has brought too much steel capacity on-stream without phasing out enough of its obsolete steel mills. The problems of global steel oversupply may remain hidden while China continues to invest in steel-intensive infrastructure and construction projects, but a fundamental restructuring of the Chinese steel industry looks inevitable, and increasingly imminent. While steel mills in most countries, like the US and Europe, were idling blast furnaces in early 2009, Chinese mills were increasing their output by an average of about 3%. This report examines the impact across all the key global regions over the next 5 to 10 years and the most likely scenarios we can all expect for the global steel industry.

What is the outlook for China

now and the rest of the global

steel industry?

Will fiscal stimulus packages

succeed in rescuing the world

from continuing recession?

What impact on China and

the rest of world is the global

economic crisis having by sector?

Will China’s changing steel

policy reverse the overcapacity

and avoid a world steel crisis?

What is the outlook for global

steel & raw materials prices?

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Forecasting

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Global Steel & Raw Materials Industries

and the New China Effect

The global steel industry is facing the threat of competitively priced Chinese

steel, such that China’s importance for international steel markets has never been

greater. Understanding what consequences this will have for the international

steel industry will be vital for all market participants.

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Global Steel & Raw Materials Industries and the New China Effect

is the first report of its kind to

provide independent and on-the-ground research amid the current economic crisis. The report offers

unique insights, a long-term outlook and strategic recommendations for those looking to invest, or

already operating, in the steel and raw materials industries.

This two-volume study comprises extensive on-the-ground analysis of the dynamics and structures of the global steel industry, including the upstream raw materials, plant construction, and downstream end-user sectors. It assesses how this will impact the industry in terms of strategic positioning, production, trade, consumption and pricing patterns.

Unique strategic insights into the inner mechanics of the Chinese steel and raw materials industry, from mining up to final end-users, now and out to 2020.

Key questions addressed in

volume 1 include:

• Is there an over-arching and executable plan to China’s steel development?

• What are the new strategies for the emerging Chinese super-groups Baosteel/Guangdong Group, Hebei, Anben, Wuhan and Shandong?

• What are the expansion plans of public and private sector companies and when, if at all, will they be realised?

• What is the future for China’s many small-scale iron and steelmakers?

• Has over-investment now backfired on China’s growth and the growth of its steel industry?

• Have the limits to growth in China’s domestic capital formation created the potential for a catastrophic collapse in investment, growth and steel consumption? • What is the impact and role of China now

on the steel and raw materials markets? • Will Chinese steel over-capacity flood the

world with low cost exports? • Will Chinese exports exacerbate weak

demand elsewhere and precipitate a long period of losses for western steelmakers, with closures and a new wave of take-overs? • Will Chinese steel companies begin an acquisitions trail overseas as their home industry completes its restructuring? • Will the collapse of plant building in China

after 10 years of breakneck growth lead Chinese plant manufacturers, backed by the Chinese sovereign wealth funds, to attack the world market for plant manufacture and contracting?

• Will the expanding Chinese ore mining sector displace imports, or will the majors cut prices enough to recapture

Chinese imports?

• How will China’s massive investments in Australia, Africa and Latin America affect its trade, and the world market for steelmaking raw materials? How will it affect Australia’s mining industry, Africa’s growth and stability, and Latin America’s resurgent economies?

• Will there ever be real opportunities for western investment in China’s steel and raw materials industries?

Volume 1:

China’s Steel & Raw Materials Industry

China’s steel consumption by end-use sector

China’s net exports – flat products

lConstruction 53% lMachinery 20% lAutomotive 6% lShipbuilding 4% lPower sector 4% lRailways 1% lContainers 1% lPipelines 1% lDomestic Appliances 2% lOther 8% 20 15 10 5 0 -5 -10 -15 -20 M t 2000 2001 2002 2003 2004 2005 2006 2007 2008 Slabs Plate HRC&S CRC&S Coated products

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The events of 2008 and 2009 will transform the world’s steel industry, and the policies and actions of the Chinese government and its steel companies will have a significant effect on this transformation.

Utilising analysis from volume 1, MBR applies its long-term forecasting model to analyse alternative scenarios for world steel and raw materials consumption, trade, and production, and their impact on steel investment and closures in markets outside China.

Volume 2 analyses two different scenarios for capacity, consumption, production and trade, in the context of two different scenarios for the world’s recovery from recession.

Key questions addressed in

volume 2 include:

• What has actually happened to demand and production during 2008 and early 2009? • What is the impact of changes in the global

end-user industries such as automotive, construction and mechanical engineering? • What will be the global balance of steel

capacity and demand, given China’s likely policies on capacity and exporting? • What will be the balance in global iron ore?

What is the implication for the big ore mining projects currently being developed by the majors and especially those being developed by the junior miners?

• Where will steel closures take place? • What does the future hold for the greenfield

slab export projects in Latin America and SE Asia, and other steel investments?

• What is the implication for the GHG emissions policy in the steel industry? • What will be the future profile of steel, scrap

and ore prices?

Volume 2:

Global Steel & Raw Materials and the Impact of China

An extensive appendix describes the

projections resulting from each scenario for all regions of the world.

• Regions covered are:

:: China

:: Industrial Asia (Japan, S Korea, Taiwan) :: ASEAN

:: South Asia

:: Middle East & North Africa :: Africa

:: Europe :: CIS

:: NAFTA (North America) :: Central & South America :: Oceania

• User sectors covered for China include:

:: Construction :: Automotive :: Shipbuilding :: Railways :: Domestic appliances :: Packaging :: Mechanical engineering

• Product groups covered in production and trade forecasts by region are:

:: Semis

:: Flat products and welded tubes :: Long products and seamless tubes

• Raw materials and inputs covered are:

:: Iron ore

:: Coking coal and coke :: Scrap

:: Ferro-alloys

:: Refractories and electrodes :: Power

:: Transport and logistics

Source: Metal Bulletin Research

Fast Recovery Slow Adjustment

Optimistic world growth; 8% growth in China with high investment

Prolonged world recession; slow growth and low investment in China

No constraints

China’s steel expansion plans fulfilled; export incentives

Most likely case if world recession is short; China’s recovery plan successful. Likelihood XX%

2012: Cap XXX Net Export XX Crude Steel XX

‘Stress test’: High exports and excess capacity: big impact on trading partners.

Likelihood XX% 2012: Cap XXX

Net Export XX Crude Steel XX

China’s plan case: Allows rapid closures of old, dirty plant; high capacity utilisation. Likelihood XX%

2012: Cap XXX Net Export -X Crude steel XXX

Best response if world recession prolonged and/or China’s recovery plan is less successful. Likelihood XX%

2012: Cap XXX Net Export XX Crude Steel XX

Capacity constraints Expansion plans postponed; closures accelerated; restricted exports

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Brian Levich

Head of Research for Metal Bulletin Research, Brian Levich specialises in the steel and raw material sectors. He has written numerous major studies on the global steel industry and has done extensive consultancy and market research work for a number of major steel producers, consumers and financial institutions.

Stuart Reynolds

Over the last five years Stuart Reynolds has written a series of special reports for MBR on aspects of the global steel industry. He was previously technical director of the industry consultancy division of Atkins Management Consultants, and over a span of 25 years carried out steel industry planning, investment, privatisation and restructuring studies worldwide. He is a graduate of Cambridge University, and did postgraduate research on steel industry development at the Institute of Development Studies and the Science Policy Research Unit in Sussex University.

Mike Mytton

Mike Mytton is a renowned industry consultant and works in the areas of business planning, financial modelling, logistics and market studies. He has wide experience in Europe, CIS, Asia and Latin America - carrying out feasibility studies, due diligence for banks and acting as an advisor in M&A activities.

In collaboration with:

Dr Zhongbo Xu

Zhongbo Xu gained a doctorate in metallurgy at the Technical University Aachen in Germany, where he carried out research from 1985 to 1992. Since then he has worked at the Institute of Steelmaking in the University of Science and Technology, Beijing, where he became Director in 1997.

Biographies

• Future demand and capacity, year-by-year out to 2013 and for 2020.

• Includes full details and print-outs from a comprehensive model of economic growth, steel demand by product group, steel production by process, and raw materials demand, for China and for each of the ten world regions.

• Includes full forecast details on Microsoft Excel, to which users can input their own assumptions.

The forecasting model uses an innovative methodology which simulates not just economic growth, but also changes in investment, structure of regional economies, changes in steel intensity and stock change effects.

Study updates

At a time of unprecedented upheaval in the global steel industry this report offers two

study updates with revised forecasts and analysis when half-year and full-year data is

available and Chinese policy revisions are announced.

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Contents

VOLUME 1:

CHINA’S STEEL &

RAW MATERIALS INDUSTRIES

EXECUTIVE SUMMARY PREFACE

1 CHINA’S ECONOMIC PROSPECTS

1.1 Economic development 1.1.1 Brief history 1.1.2 Current policies 1.1.3 Policy directions 1.2 The present economic situation

1.2.1 Structure and growth of the economy 1.2.2 Current economic issues

1.2.3 Foreign exchange imbalances 1.3 Future economic prospects

1.3.1 China’s strengths 1.3.2 Risks

1.3.3 The demographic time bomb 1.3.4 Forecasts of GDP growth

1.3.5 The threat to investment levels and steel demand

2 THE CHINESE STEEL MARKET

2.1 The main steel consuming sectors 2.1.1 Construction

2.1.2 Automotive 2.1.3 Shipbuilding 2.1.4 Railways 2.1.5 Oil & gas; utilities 2.1.6 Mechanical engineering 2.1.7 Packaging

2.1.8 Domestic appliances 2.1.9 Other metal goods

2.2 Export prospects for the key consumer sectors 2.3 Past trends in steel consumption and trade

2.3.1 Production and apparent consumption 2.3.2 Trade

2.4 Future demand and trade scenarios 2.4.1 The scenarios

2.4.2 Demand and production projections 2.4.3 Crude steel production scenarios

3 STEEL INDUSTRY DEVELOPMENT AND POLICIES

3.1 Legacy of the historical origins 3.1.1 The origins

3.1.2 The Great Leap Backward

3.1.3 Development 1978-2000: formation of today’s older works

3.2 The investment boom 2000 – 2008 3.2.1 The 2005 steel policy 3.2.2 Closure policy

3.3 Institutional arrangements and powers 3.4 Future policy influences

3.4.1 Impact of the 2008 global financial crisis 3.4.2 The 2009 steel revitalisation plan

3.4.3 Updating the 2005 steel plan 3.4.4 Finance for M&A and overseas

investment 3.4.5 Environmental issues 3.4.6 Raw materials supply 3.4.7 Trade policy

4 STRUCTURE OF THE STEEL INDUSTRY

4.1 Current structure and capacity

4.1.1 Size distribution and type of companies 4.1.2 Consolidation and restructuring 4.1.3 The major companies 4.2 Expansions and closure plans

4.2.1 The flat products expansions 2004-2010 4.2.2 The new greenfield coastal works 4.2.3 Closures

4.2.4 Likely future supply and demand balance 4.3 Ownership patterns, trends and management

4.3.1 The role of central and regional governments

4.3.2 Regional distribution of steel and raw materials companies

4.3.3 Recent M&A

4.3.4 Privatisation, foreign investments and collaborations

4.3.5 The search for raw materials 4.4 Costs, profitability and competitiveness

4.4.1 Technology 4.4.2 The cost base 4.4.3 Cost trends

4.4.4 Recent financial performance 4.5 Investments in mining

5 STEEL COMPANIES AND THEIR STRATEGIES

5.1 Shanghai Baosteel Group 5.2 Anben Steel Group

5.3 The Hebei Iron and Steel Group: Tangshan / Handan / Chengde

5.4 Shougang 5.5 Wuhan Group 5.6 Jiangsu Shagang Group 5.7 Magang Group

5.8 Shandong Iron and Steel Group: Jinan / Laiwu Steel / Rizhao

5.9 Anyang Iron & Steel Group 5.10 Hunan Valin Group

5.11 Baotou Iron & Steel Group (Baogang) 5.12 Fosun (Jianlong Group/ Nanjing) 5.13 Beitai

5.14 Hebei Jinxi

5.15 Other Tangshan groupings

6 STEELWORKS DESIGN AND CONSTRUCTION

6.1 EPC contractors

6.1.1 China Metallurgical Group Corporation (MCC)

6.1.2 Sinosteel 6.1.3 Minmetals

6.2 Research and consultancy capabilities 6.3 Plant manufacturing

6.4 Steel industry capital costs 6.5 Future outward investment

6.5.1 Outward investment by steel companies 6.5.2 Export policy of the plant manufacturers

7 RAW MATERIALS AND LOGISTICS

7.1 The iron ore mining sector 7.1.1 The supply of iron ore 7.1.2 The mining industry 7.1.3 Costs and profitability 7.1.4 Reserves and exploration 7.1.5 Overseas investment

7.1.6 Inward investment in iron ore mining 7.1.7 Iron ore pricing

7.2 Coking coal 7.2.1 Coal mining 7.2.2 The coke ovens sector 7.3 Other critical inputs

7.3.1 Scrap 7.3.2 Ferro-alloys 7.3.3 Power

7.3.4 Refractories and electrodes 7.4 Transport and logistics

7.4.1 Transport issues 7.4.2 Ports and shipping 7.4.3 Railways

7.4.4 Steel stockholding and distribution

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VOLUME 2:

GLOBAL STEEL &

RAW MATERIALS AND THE

IMPACT OF CHINA

1 WHAT HAPPENED TO THE WORLD STEEL INDUSTRY IN 2008?

1.1 The main changes in the macro economy 1.2 Steel supply and demand

1.3 The changing pattern of trade 1.4 The impact on company profits

1.4.1 Capacity utilisation 1.4.2 Product prices 1.4.3 Steel company profits 1.5 The impact on raw materials suppliers 1.6 End user sectoral performance in 2008

1.6.1 Construction 1.6.2 Mechanical engineering 1.6.3 Transport equipment 1.7 Summary and conclusions

2 STEEL DEMAND SCENARIOS BY REGION

2.1 Forecasting methodology 2.1.1 The cross sectional approach 2.1.2 The time series approach

2.1.3 The methodology adopted for projecting steel demand by region

2.1.4 The scenarios of steel demand 2.2 Scenario A: The “rapid recovery” scenario

2.2.1 The economics

2.2.2 Steel demand in the IMF scenario 2.3 Scenario B: The ”extended recession” scenario

2.3.1 The economics

2.3.2 Steel demand in the stress test scenario 2.4 A scenario for 2020

2.5 The implications of the two scenarios for steelmakers

3 STEEL PRODUCTION AND TRADE SCENARIOS BY REGION

3.1 Forecasting methodology

3.1.1 China and the future trade in steel 3.2 Scenario A1: Rapid recovery, China’s exports

unconstrained

3.2.1 The projected trade flows 3.2.2 The implications for production 3.3 Scenario A2: Rapid recovery, China’s exports

constrained

3.3.1 The projected trade flows 3.3.2 The implications for production 3.4 Scenario B1: Extended recession, China’s

exports unconstrained 3.4.1 The projected trade flows 3.4.2 The implications for production 3.5 Scenario B2: Extended recession, China’s

exports constrained

3.5.1 The projected trade flows 3.5.2 The implications for production 3.6 A scenario for 2020

3.7 The scenarios compared

4 THE IMPLICATIONS FOR RAW MATERIALS

4.1 Forecasting methodology

4.2 Crude steel production by process route 4.2.1 Scenario A2: production by process route 4.2.2 Scenario B1: production by process route 4.3 The demand for scrap

4.3.1 The factors affecting scrap supply 4.3.2 Global and regional demand for scrap 4.3.3 Scrap price forecasts

4.4 The demand for iron ore

4.4.1 Global and regional demand for iron ore 4.4.2 China’s iron ore demand and its

implications for the rest of the world 4.4.3 Iron ore price forecasts

4.5 The demand for coke

4.5.1 Global and regional demand for coke 4.5.2 China’s coke demand and its

implications for the rest of the world 4.5.3 The demand for coking coal 4.5.4 Coal and coke price forecasts 4.6 A scenario for 2020

5 CONCLUSIONS: CHINA IN THE WORLD – THE ‘NEW’ CHINA EFFECT

5.1 China in world development 5.2 The development of world steel 5.3 China’s trade partners

5.3.1 Taiwan 5.3.2 Japan and S Korea 5.3.3 India

5.3.4 ASEAN 5.3.5 Australasia 5.3.6 North America 5.3.7 Africa and Latin America

5.4 Limits to Chinese exports: world trade policies 5.5 China’s impact on world prices

5.6 Import dependence in raw materials and energy 5.7 The impact of future inward investment to

China

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