Raw Materials: The Changing Dynamic in the Supply Chain

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1 Raw Materials: The Changing Dynamic in the Supply Chain Sabyasachi Bandyopadhyay Director of Quality, Product Development & Process Technology Severstal Columbus March 04, 2014

2 Agenda How are scrap, iron ore, and DRI influencing the cost of production for carbon / alloy steel pipe? Flat rolled products: Is the move by pipe makers toward higher-strength flat-rolled steel expected to continue? Aluminum Drill Pipe: Where and why is it being used? How does ADP compare to SDP? Is it a threat or an opportunity for producers? 1

3 Pricing Comparison: HRC and Pipe / Tube $1,400 $1,300 $1,200 $1,100 Jun-13, $1,125 Jan-14, $1,170 $1,000 $900 Jun-13, $1,020 Jan-14, $1,050 $800 $700 $600 Jun-13, $580 Jan-14, $670 $500 $400 CRU-HRC Domestic ERW linepipe (X42) ex-mill Domestic OCTG API 5CT - casing J/K55 2

4 Overview of Steelmaking Process Iron Ore Electric Arc Furnace Produces molten steel Steel Refining Facility Coal Injection Natural Gas Direct Reduction Produces solid metallic iron from iron ore Continuous Casting Coal Recycled Steel Slabs Thin Slabs Basic Oxygen Furnace Produces molten steel Blooms Billets Coke Oven Coal By-Products Limestone Slag Molten Iron Blast Furnace Produces molten pig iron from iron ore Pig Iron Casting 3

5 Pricing Comparison: Raw Materials and CRU HRC $700 Jan-14, $670 $650 $600 $550 Jun-13, $580 $500 $450 $400 $350 Jun-13, $407 Jun-13, $380 Jun-13, $362 Jan-14, $431 Jan-14, $421 Jan-14, $418 $300 CRU-HRC Shredded Scrap Price - Source AMM Busheling Price - Source AMM Imported Pig Iron - average of MBR, RN & CRU 4

6 Raw Material Cost Estimate for Steelmaking Type Raw Materials Distribution Total Cost (Mill Dependent) Blast Furnace - Basic Oxygen Furnace Electric Arc Furnace Metallurgical Coke Iron Ore / Pellets Scrap Scrap Pig Iron / HBI / DRI 78% Hot Metal (Liquid Pig Iron) & 22% Scrap 20% Virgin Iron (Pig Iron / HBI / DRI) & 80% Scrap Raw Materials, Utilities, Labor, Alloys & Overhead - plus conversion cost 5

7 Optimizing Raw Material Cost for Steelmaking Scrap mix optimization Backward integration Logistics cost optimization 6

8 Agenda How are scrap, iron ore, and DRI influencing the cost of production for carbon / alloy steel pipe? Flat rolled products: Is the move by pipe makers toward higher-strength flat-rolled steel expected to continue? Aluminum Drill Pipe: Where and why is it being used? How does ADP compare to SDP? Is it a threat or an opportunity for producers? 7

9 High-Strength Flat Rolled Steel Consumption Projection High-strength steel Good formability, weldability, strength, industry experience / acceptance & price High-strength steel offers weight reduction / cost savings 8

10 High-Strength Flat Rolled Steel Savings Estimate Benchmarking Comparatives Thickness Compared to X-52 (Expressed in % of x inches) Line Pipe Grade (API 5L Specification) X-52 X-56 X-60 X-65 X-70 X % 92.90% 87.10% 81.10% 74.70% 65.50% Example (Thickness in inches) Weight of Pipe / Mile (Tons) Weight of Pipe in Tons = [{Diameter of Pipe in inches*π*(mile conversion to inches )*(Thickness of pipe in inches)*(density of steel in lb/cubic inch)}/2000] Density of Plain Carbon Steel = lbs/cubic inch Thickness of Pipe " for X-52 and subsequent equivalent for the higher strength material Diameter of Pipe - 16 inches 9

11 Agenda How are scrap, iron ore, and DRI influencing the cost of production for carbon / alloy steel pipe? Flat rolled products: Is the move by pipe makers toward higher-strength flat-rolled steel expected to continue? Aluminum Drill Pipe: Where and why is it being used? How does ADP compare to SDP? Is it a threat or an opportunity for producers? 10

12 Aluminum Drill Pipe Current Usage Drill pipe market share 3% to 5%, deep offshore projects Benefits: Lighter weight higher strength-to-weight ratio Improved fatigue life and decrease of casing wear Reduction in drill string torque and drag Stretch under drill string weight is similar or smaller than that of SDP Greater flexibility allows increased build-angles for side tracking Drawbacks: Supply / Demand not many producers Price ~35% to 40% premium over SDP Higher buckling tendency and susceptibility to corrosion for ph > 11.0 Lower yield / tensile strength Loses strength above 300 F (149 C) constant cooling is required 11

13 Agenda How are scrap, iron ore, and DRI influencing the cost of production for carbon / alloy steel pipe? Flat rolled products: Is the move by pipe makers toward higher-strength flat-rolled steel expected to continue? Aluminum Drill Pipe: Where and why is it being used? How does ADP compare to SDP? Is it a threat or an opportunity for producers? 12

14 Aluminum Drill Pipe (ADP) vs. Steel Drill Pipe (SDP) Supply/Demand is a significant consideration Competes with other applications of Aluminum as a commodity Premium pricing Drillers exploring ERW SDP for off-shore projects Development & availability of higher strength steel Reduction in weight ADP is not a one-size-fits-all solution Overall, not a major threat to steel drill pipe 13

15 Thank You! Questions?