Consumption of flat steel in Europe: drivers and challenges

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Information about Consumption of flat steel in Europe: drivers and challenges

Published on June 6, 2019

Author: metinvestgroup

Source: slideshare.net

1. 1 Metinvest Western Europe Consumption of flat steel in Europe: drivers and challenges Milan 13th May 2019 Europe-Turkey-CIS Steel Summit

2. 2 Economic growth moderates in Europe -2,0% -1,0% 0,0% 1,0% 2,0% 3,0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Eurozone GDP growth, % Actual Forecast 90 95 100 105 110 115 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Consumer confidence – developed economies -2,0% -1,0% 0,0% 1,0% 2,0% 3,0% 4,0% 5,0% Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Industrial production - Eurozone -5,0% 0,0% 5,0% 10,0% Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Global trade volumes Sources: IMF, ECB Global trade wars, vulnerability of European producers, in particular in Germany Lower business and consumer confidence around Europe Brexit: remaining uncertainty Italian government – discontinuation of economic policies Yellow vest protests and threats to reforms Upcoming EP elections

3. 3 But economy remains fundamentally strong 80 90 100 110 120 130 140 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19 EU exports, adjusted volume indexes All goods Machinery, transport equipment 7,5% 8,2% 0 0,02 0,04 0,06 0,08 0,1 0,12 0,14 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Unemployment rate Eurozone Sources: Eurostat, IMF Production and export levels remain high, and credit to private sector is sufficient to support development A no-deal Brexit is the worst case scenario which will be avoided as the base scenario Unemployment rate close to pre-2008 level supporting consumers activity

4. 4 EU: political disruptions - Brexit Hard Brexit would harm steel trade with EU 4.26Mln 2.85Mln UK Steel Exports 2017 2018 EU 28 2.746.945 2.846.767 France 704.048 580.574 Germany 435.998 428.237 Ireland 324.899 367.901 Netherlands 233.219 343.339 Spain 248.857 302.484 Belgium 226.756 254.703 Italy 212.720 227.496 Third Out EU28 842.652 701.935 Turkey 289.693 315.791 United States 166.711 91.792 UK automotive sector might halve as a result Honda to leave its Swindon plant for Japan in 2021 Cars: 150.000/year Workers: 7,000 at risk Jaguar-Land Rover to restructure global workforce Plants: Solihull, Halewood Workers: 2,000/3,000 at risk Nissan to reduce its presence in the UK Plant: Sunderland Cars: 440.000/year New models to be built in Japan Toyota warned that a bad Brexit deal puts Burnaston plant under threat £82B sector turnover 1.51M cars produced in 2018 (-9% YoY) 81.5% were exported, half to EU 1.5M Tons of steel products consumed yearly BMW shut down its Mini factory in Oxford for a month in April Flats; 62% Longs; 32% Others; 6% Flats; 47% Longs; 35% Others; 18% Sources: Eurostat

5. 5 EU: political disruptions - Italian Government Policies Political instability harming investors trust Macro indicators to slightly recover in 2019H2 European elections as mid-term polls Deputy Chamber Senate of the republic -60 -40 -20 0 20 40 60 80 100 120 140 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Long term government bonds yield (10y) EU 28 Germany Spain France Italy 98 103 108 113 2017 2018 2019 Business confidence index Sources: Eurostat, Istat, IMF 0,08 2013 2015 2017 2019 2021 2023 GDP Growth rate, % 100 105 110 2017 2018 2019 Manufacturing Turnover Index 100 105 110 2017 2018 Industrial Production

6. 6 EU: Industrial performance Industrial production growth rate in EU, y-o-y changes (Eurofer SWIP Index) Construction 30% Tubes incl.HS 15%Automotive 25% Mech eng. 12% Metal goods 10% White goods 4% O.trans.(shipb) 2% Misc 2% Consumption of flats by sector 0% 2% 4% 6% 2015 2016 2017 2018 2019 2020 Total 0% 2% 4% 6% 2015 2016 2017 2018 2019 2020 Construction -5% 0% 5% 10% 2015 2016 2017 2018 2019 2020 Automotive 0% 2% 4% 6% 8% 2015 2016 2017 2018 2019 2020 Mech. engineering -10% -5% 0% 5% 10% 2015 2016 2017 2018 2019 2020 Tubes -2% 0% 2% 4% 6% 2015 2016 2017 2018 2019 2020 Metal goods Sources: Eurofer

7. 7 EU: Automotive is one of the key steel consuming sectors in Europe Worldwide Harmonized Light vehicle Test Procedure applicable on cars produced in EU from 01/09/2018 Total vehicle production EU 2017: 19,6 mln. units Of which exports: 5,9 mln. units 1,16 0,57 0,52 0,30 0,28 0,21 USA China Turkey Switz. Japan Australia EU exports 2017, mln. units Chinese economy slowdown impacting on EU and US cars producers business Brexit risk of higher transactional costs forced UK car manufacturers to think about alternatives Taxation on diesel cars requires quicker adaptation to electric cars standards Trade barriers tariffs and sanctions by US are threatening profitability of European car manufacturers Exposure of EU steel to automotive sector: 2018 flat steel shipments HDG: 15 Mt CRC: 2 Mt HRC: 3 Mt Other products supplied: SBQ, precision tubes, wire rod etc. Automotive Other sectors Automotive sector: disruptors Share in flat shipments Turkey: economic slowdown and risk of recession in 2019 with associated drop of consumer demand

8. 8 EU Automotive: registrations back to average levels in Q1 2019 100 120 140 160 180 200 220 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Italy registrations, ‘000 units 800 1000 1200 1400 1600 1800 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 EU registrations, ‘000 units Sources: ACEA, JATO, Metinvest 180 230 280 330 380 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Germany registrations, ‘000 units Sales in EU (mln. units)… …and worldwide 2017 2018 % Change 18/17 Germany 3,4 3,4 -0,2% UK 2,5 2,4 -6,8% France 2,1 2,2 3,0% Italy 2 1,9 -3,2% Spain 1,2 1,3 6,8% EU 15,1 15,2 0,2% 2017 2018 % Change 18/17 China 28,9 28,1 -2,8% USA 17,3 17,3 0,0% Japan 5,2 5,2 0,6% India 3,6 3,9 9,0% Brazil 2,4 2,5 1,4% Others 13,9 13,9 -0,3% Total 86,4 86,0 -0,5%

9. 9 0 2 4 6 8 10 12 14 16 18 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018e Passenger cars – EU production, mln. units Germany Spain France UK Czech Rep Italy Others Automotive production, all vehicles, mln. units (forecast) Sources: ACEA, VDA, CRU EU: Production to recover to healthier levels in the short term 20,0 40,0 60,0 80,0 100,0 120,0 140,0 160,0 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May-15 Oct-15 Mar-16 Aug-16 Jan-17 Jun-17 Nov-17 Apr-18 Sep-18 Feb-19 EU registrations - DE production Index prod DE Index sales EU Jan 2012 = 100 3,0 3,5 4,0 4,5 5,0 5,5 6,0 6,5 2014 2015 2016 2017 2018 2019 2020 2021 Germany 10,0 12,0 14,0 16,0 18,0 20,0 22,0 24,0 2014 2015 2016 2017 2018 2019 2020 2021 Europe

10. 10 0,7 SWE 0,5 BEL 3,4 DE 1,9 UK 1,6 FRA 0,5 TUR 0,5 NOR 0,5 ITA 0,4 SPA 0,3 DEN 0,2 AUT 0,2 GRE 0,7 RoE EU: Windmills sector stumbles in 2018 but steel demand is still solid -49% -35% +310% -55% -8% +40% -18% +260% 48% +79% +170% 0,4 SER -27% +17% - 1,0 1,1 1,2 1,1 1,4 1,0 1,1 1,1 1,2 0 5 10 15 20 2013 2014 2015 2016 2017 2018 2019 2020 2021 Wind turbines installations in EU, GW Onshore Offshore Est. plate cons., Mt 23,3 38,1 51,5 37,8 42,3 42,2 0 20 40 60 2013 2014 2015 2016 2017 2018 Installations RoW, GW Share of European projects in portfolio (Vestas, Siemens-Gamesa, Enercon): 30-50% Installations by country in 2018, GW Share of European projects of all tower fabrication in EU: 50-70%

11. 11 EU: Construction sector is still supportive Construction output (value added), y-o-y changes 21 out of the main 46 markets in the world expected to warm up, just 2 to cool-8,0 -6,0 -4,0 -2,0 0,0 2,0 4,0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Italy -4,0 -2,0 0,0 2,0 4,0 6,0 8,0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Germany -6,0 -4,0 -2,0 0,0 2,0 4,0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Eurozone 0,0 1,0 2,0 3,0 4,0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 World Construction is the core steel consuming sector in EU: 2018 steel shipments Quarto plate : 5 Mt HDG : 5 Mt CRC : 2 Mt HRC – incl. hollow sections: 18 Mt Construction Tubes+HS Others

12. 12 China 31% Korea 18% Europe 27% Japan 13% Others 11% 2016 China 33% Korea 32% Europe 17% Japan 7% Others 11% 2017 • Global market is recovering from 2016 collapse, which was caused mainly by prolonged oversupply • China, Korea suffered the most due to their exposure to tankers, dry cargo and other cargo vessels • Europe remains key global player thanks to its focus on passenger segment. Approx. 80% of European total orders fall into the cruise business Shipbuilding sector: Europe maintains positions in spite of sector downturn Sources: Clarkson Research, Assonave, Eurostat World fleet orders by region - 10.000 20.000 30.000 40.000 50.000 60.000 70.000 80.000 World ship fleet - annual orders '000 Gtons

13. 13 Passengers segment in the Golden Age 2020 25 Ships 1.83M Gross Ton $11.5B 2019 22 Ships 1.61M Gross Ton $10.1B 2021 22 Ships 1.69M Gross Ton $11B 2022 15 Ships 1.69M Gross Ton $10.7B 2023 12 Ships 1.49M Gross Ton $9.1B 2024 7 Ships 1.08M Gross Ton $6.6B 2025 4 Ships 0.41M Gross Ton $2.5B 2026 4 Ships 0.54M Gross Ton $3.4B 2027 3 Ships 0.23M Gross Ton $1.5B Sources: AMEM, Eurostat, Assonave Cruise ships orderbook 113 Fincantieri - STX - Meyer 90% MV Werften, SWS & others 10% Cruise market shares

14. 14 Steelmaking raw materials elevated in 2019, led by supply disruptions 30 40 50 60 70 80 90 100 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Iron ore 62% $/t CFR CHN 50 100 150 200 250 300 350 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 HCC $/t FOB AUS 100 150 200 250 300 350 400 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Scrap $/t CFR TUR Vale dam collapse Brazil January 2019 Veronica cyclone Australia March 2019

15. 15 Steemakers’ margins are squeezed in H1 2019 Iron ore 32% Coal 22% Scrap 22% Labor 6% FA etc 7% Other 11% EU integrated mill: crude steel production cost structure 0 100 200 300 400 500 600 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 HRC - raw materials spread, €/t HRC, EXW S Europe Raw materials BOF charge Spread HRC - RM

16. 16 EU Imports and safeguard regime 27,3 29,9 30,8 34,0 2015 2016 2017 2018 Steel imports to EU, Mt 2,8 2,0 2,5 2,5 0 1 2 3 2015 2016 2017 2018 CRC IND KOR UA BRA SER Others 2,7 3,9 5,0 5,2 0 2 4 6 2015 2016 2017 2018 HDG CHN KOR IND TW Others 2,6 2,8 2,6 2,4 0 1 2 3 2015 2016 2017 2018 Quarto plate UA KOR RUS IND Others 1,6 1,5 1,4 2,1 0 1 2 3 2015 2016 2017 2018 Rebar TUR RUS UA BOS MLD Others Rebar 1,8 2,2 2,2 2,8 0 1 2 3 2015 2016 2017 2018 Wire rod UA CH RUS TUR BLR MLD Others WR Imports by products and origins, Mt 7,9 8,6 7,1 8,3 0,0 5,0 10,0 2015 2016 2017 2018 HRC TUR RUS IND UA KOR Others

17. 17 8,3 5,2 2,4 8,6 4,3 2,9 HRC HDG HRP Safeguard quotas and actual import patterns 2018 SG period2 EU Imports and safeguard regime: asymmetric product influences HRC: Additional availability on top of already high level of imports in 2018 allows virtually unrestricted access to European market, used intensively, in particular, by Turkish suppliers HDG: Sharp limitation compared to high level of imports in 2017- 2018, which was inflated by Chinese material. Currently the slowdown in automotive prevents the potential shortage, but situation might change in short term HRP: Quota is more than sufficient for import shipments, but actual import volumes remain moderate as domestic suppliers contest the competitiveness of imports in 2019

18. 18 169,3 166,1 162,0 168,5 167,7 140,0 145,0 150,0 155,0 160,0 165,0 170,0 175,0 2014 2015 2016 2017 2018 Crude steel prod. EU, Mt Steel production in EU peaks in 2017, driven by profitability 1,3 1,2 1,1 0,8 0,7 0,7 0,2 -0,1 -0,1 0,8 PL DE FRA ESP AUT ITA BEL NL UK Other EU 2017 change of crude steel prod, Mt 0% 5% 10% 15% 0 500 1000 1500 2016 2017 2018 SSAB EBITDA/t EBITDA margin 8% 8% 9% 9% 10% 10% 0 20 40 60 80 100 2016 2017 2018 ArcelorMittal EBITDA/t EBITDA margin 0,0% 1,0% 2,0% 3,0% 4,0% 5,0% 6,0% 0 10 20 30 40 50 2016 2017 2018 ThyssenKrupp Steel EBIT/t EBIT margin European steelmakers profitability indicators* * AM – USD, SSAB – SEK, TK, SG - EUR ** no trading -2% -1% 0% 1% 2% 3% 4% 5% 6% -20 -10 0 10 20 30 40 2016 2017 2018 Salzgitter** EBT/t EBT margin

19. 19 Market supply might shrink slightly in 2019, but remains high 71 75 78 78 78 77 78 2014 2015 2016 2017 2018 2019 2020 Apparent consumption of flat products* in EU, Mt Construction Automotive Tubes Mech engin Metal goods White goods Other transport Misc Direct shipments** by sector * - HRC, CRC, HDG, quarto plate ** - mills to end-users (no distribution) Sources: Eurofer, Metinvest

20. 20 European steel distribution is the least profitable part of supply chain 51% 56% 42% 46% HRC CRC HDG HRP Share of distribution in mills’ shipments 9,8% 13,6% 11,5% 2,9% ArcelorMittal Voestalpine SSAB Distribution bench. EBITDA margins, steel industry, 2017 EBITDA margins in mining sector Vale 52%; Rio Tinto 44%; BHPB 54% Mining: 50% 10% 3% Steelmaking Distribution Profitability along steel supply chain 40 60 80 100 120 HRC/S CRC HDG Plate Average inventories index Eurometal 2015 2016 2017 2018 2019YTD

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