Organisation de Coopération et de Développement Economiques Organisation for Economic Co-operation and Development

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1 Unclassified DSTI/SU/SC(2007)35 DSTI/SU/SC(2007)35 Unclassified Organisation de Coopération et de Développement Economiques Organisation for Economic Co-operation and Development 25-May-2007 English - Or. English DIRECTORATE FOR SCIENCE, TECHNOLOGY AND INDUSTRY STEEL COMMITTEE EFFECTS OF CONSOLIDATION ON THE GLOBAL STEEL MARKET: IMPLICATIONS OF CROSS BORDER M & A AND INTRA-COMPANY TRADE 18 May 2007 Presentation by Mr. Chanakya Chaudhary, Tata Steel. Roundtable on consolidation in the world steel industry,18 May 2007, Istanbul, Turkey. English - Or. English Anthony de Carvalho, Administrator, Structural Policy Division Tel: +(33-1) , Fax: +(33-1) , Anthony.decarvalho@oecd.org JT Document complet disponible sur OLIS dans son format d'origine Complete document available on OLIS in its original format

2 Effects of Consolidation on the Global Steel Market: Implications of Cross Border M & A and Intra-Company Trade 18 th May, 2007: Istanbul, Turkey 1 Global Steel Industry Steel Demand has entered a new phase of growth and Developing countries will continue to drive the demand. Prices are expected to remain healthy which would drive new capacity additions. De-integration of Value Chain and Shift in the Primary Steel making to resource rich countries expected to gain momentum. Consolidation will continue and may move to a new phase, in line with high supplier and customers consolidation, urge to grow and to attain economies of scale. 2 2

3 Global steel demand has entered into a new phase of robust growth Steel demand has evolved in phases as a result of series of global events and discontinuities 1,200 Crude Steel Production (Million Tonnes) 1, The Early Years The 1 st Plateau The 1 st Surge The 2 nd Plateau The 2 nd Surge Source : IISI CAGR 5 % CAGR 2 % Great Depression WW 2 WW 1 CAGR 7 % Oil Crisis CAGR 1 % Fall of USSR CAGR 4 % Asian Financial Crisis Strong growth expected to continue as Steel demand is low in developing countries Potential for Exponential Growth Point of Inflection Peak Point (typically between kg/person) Point of Saturation Trigger Point Finished Steel Consumption per Capita (kgs) 979 Huge potential for increased steel demand World Average: Source : IISI South Korea Japan US EU-15 Russia China Brazil South Africa India All figures for

4 China and the other developing world will lead the Steel consumption growth in coming decade Crude Steel Consumption Million Tonnes P 2020 P 40% 51% 2% 5% Global Steel Demand Source : IISI / WSD Share of Developing Economies in Steel Demand Steel Demand in Developed Economies Steel Demand in China Steel Demand in other Developing Economies 5 Cost of Production (HRC) for 200E Upstream producers will shift towards the resource rich countries in USD / t Russia Brazil India China USA- mini Taiwan South Korea E. Euope Canada Australia Japan USA- Integrated Europe Source: Company analysis USD 30/ t 4

5 Forces driving Consolidation in the Steel Industry Globalisation & Consolidation of Customers Increasing Concentration among Suppliers Steel Industry Consolidation Increasing Need for Sustainability Capture Growth Opportunities in New Markets Economies of Scale 7 Concentration among Suppliers Sea borne Coking Coal Market In % 100 In % 100 Iron Ore Exports 80 Others 80 Others 0 Xstrata Rio Tinto 40 Anglo 40 Rio Fording Top 5: Tinto Top 3: % 58% BHP Biliton CVRD % Price increase in % Price increase in BHP Biliton Iron Ore Top 5 producers: % and % 8 5

6 Consolidation among Consumers Global Market share in Iron Ore, Automotive and Steel Iron Ore Steel Automotive Others CVRD Top 10 GM others Ford Toyota BHP Bhilliton Rio Tinto Others Daimlar Chrysler Renault Nissan 9 Impetus for consolidation: Consolidated industries earn higher returns 30% Iron Ore ROCE % 10% 0% Source: Deutsche Bank Diamonds Alumina Nickel Aluminium Zinc Gold Coal Steel Number of companies producing >40% of total global production 10

7 4Arcelor Mittal DSTI/SU/SC(2007)35 Consolidation in Steel Industry Crude steel production in million tonnes Nippon Usinor Nippon POSCO 28 2 Mittal Steel Arcelor 47 3 Corus USX POSCO NKK % Arbed Thyssen Krupp British Steel Usinor Nippon Steel* POSCO* JFE Baosteel % 33% Bethlehem Sumitomo 12 T15 :145 World : 780 Riva NKK T15 : 225 US Steel World : 800 Nucor T15 : 374 World :32 Kawwasaki Thyssen ISCOR 7 US Steel LNM Group Kawasaki 12 Corus Riva ThyssenKrupp Kobe SAIL Tangshan 1 LTV Sumitomo Evraz 14 BHP Ispat Inland Bethlehem Severstal 10 9 Gerdau Severstal* Source : IISI and UBS Share of Top 15 players in global steel production T15: Total production of TOP 15, World : World Production Consolidation has gained momentum Top 20 largest steel makers (mt) 4 Top 15 producers have ~34% global market share at present Dofasco Nippon POSCO JFE Corus + Tata Baosteel US Steel Nucor Tangshan Riva Acciao Severstal Thyssen Evraz Gerdau Sumitomo SAIL Wuhan Anshan Magnitogorsk Jiansu Shagang Source: IISI, Company information 12 7

8 There is sufficient regional Consolidation in the industry Share of Top 5 in each region (%) EU North America China (E) (E) World (E) Asia (excluding China) Latin America (E) (E) (E) Consolidation Process has to move to the Next Phase Regional Consolidation Increasing Cross Border Consolidation Formation of Global Companies Industry remains fragmented and largely regional Medium scale producers Large transformational combinations will be faster, more capital efficient and carry less risk than a series of acquisitions Good quality assets becoming increasingly scarce Fierce competitive bidding Continuous need for integration First mover advantage will be critical in global steel industry consolidation Industry leaders of the future will be global producers with annual capacity of million tonnes. 14 8

9 Impact of the Consolidation Process Better pricing power There were signs of production controls in parts of Europe and N America in the latter part of 200. The loss making (though low cost) steel units of the CIS countries have been privatised so there would be better discipline in the market place Better control of material costs: Greater purchasing power of raw material Better ability to acquire mining resources Moving upstream production to low cost countries for steel making 15 Impact of the Consolidation Process Increased scale leading to value from knowledge Exchange operational knowledge and best practices Lower Capex from sharing of know-how and facilities Faster and cheaper product development Better product mix and market mix Presence in different geographies to hedge the risk Cross selling of products Improving environmental parameters Better processes from sharing of know-how Lower energy usage Lower carbon emissions 1 9

10 For Successful Consolidation Structural Consolidation V/s Cultural Consolidation 17 10