Overview of steel and iron market. Deloitte CIS Research Center Moscow, 2017

Transcription

1 Overview of Deloitte CIS Research Center Moscow, 2017

2 Contents 02 Global Introduction 3 4 Global 5 Production output trends 6 8 Commodity prices for Steel prices for Global trade: facts and figures The current state of the steel-making industry 19 Issues, drivers of competitiveness and priority strategies 20 Global trade 21 Digitalization and innovations in the steel and iron industry 22 Appendix Output trends Exports of ferrous metals 16 Ferrous product imports 17 02

3 Introduction Andrey Sedov Partner Leader of the Metals group in Deloitte, CIS We are pleased to present you with the full version of our analytical report. Welcome to the second issue of the Steel and Iron Market in This Issue offers a snapshot of the updated data for 2016, intermediate data for 1H 2017, and outlooks for Global The key findings of our research will be published by leading Russian media outlets. This research has been conducted annually since 2015 and forms the basis for a comprehensive study on the steel industry. Please feel free to contact us if you have any questions regarding our survey. Key topics: Global

4 In 2016, the downward trend in output and consumption that had been continuing from 2015 gave place to a trend featuring greater stability, with industry indicators seeing a change of less than 2 percent: Steel output grew by 0.6 percent up to 1,630 million tonnes; And steel consumption grew by 1.3 percent up to 1,600 million tonnes. Over the first eight months of 2017, the global steel output reached million tonnes, up 4.8 percent from the same period in In August, China s government announced that it would halve steel output in Hebei and three other steel producing provinces by up to 50% with a view to improving air quality during the winter period. As a result, the steel output in China reached a record level of 2.5 tonnes per day in August. Top-3* issues of concern to the industry in 2017: (Top 3 industry concerns in 2017) Shortcomings of government regulation Insufficient capacity Corruption Top-5* priority business strategies in 2017: Bringing new products onto the market Replacement of imported goods Entry into new markets 02 Global The protectionist measures of the US and the EU may result in larger volumes of metal concentrating on fewer markets, which poses a risk of greater price differences across the markets. During 2017, the Russian steel-making industry has tended to cut production. The second quarter of 2017 witnessed a 3.5 percent decrease in steel output in year-on-year terms. Based in the results of 2H 2017, NLMK was the leader in terms of EBITDA and steel output among leading Russian steel-making companies. In 1H 2017, the year-on-year growth rate of the Russian export of basic steel products in monetary terms amounted to 66 percent for rolled products and 136 percent for tube products. In 1H 2017, the year-on-year growth rate of the Russian import of basic steel products in monetary terms amounted to 86 percent for rolled products and 52 percent for tube products. * Based on the annual survey Russian Manufacturing Industry Overview by Deloitte CIS.

5 02 Overview of Global Global 02 Global Production output trends Commodity prices for 2017 Steel prices for 2017 Global trade: facts and figures 05

6 Overview of Global Production output trends Over the first eight months of 2017, the global steel output reached 1,123 million tonnes, up 4.8 percent from the same period in According to the EIU, mid-november will see China cut production, but before then, Chinese factories will continue to increase production capacities. According to the updated forecasts of EIU analysts, in 2017 steel output will increase by 3.2 percent in 2017 (compared to 2016). Output rates are further expected to decrease by about 2% in 2018 totaling 1,640 million tonnes, which is primarily due to a slowdown in the Chinese economy as a major steel producer/consumer (See below for more details). China: The January-July period of 2017 saw a 5.6 percent increase in China s steel output, which was in part due to a strong economic performance in the first three quarters of the year. Steel production reached a record level of 2.5 million tonnes per day in August (910 million tonnes in annual terms) as a result of the government s announcement in August to halve steel output in Hebei and three other steel producing provinces by up to 50% with a view to improving air quality during the winter. These four provinces account for about one third of the Chinese production. Although the implementation of such measures is questionable, analysts expect significant reductions, which could lead to a decrease in productivity down to about 2 million tonnes per day (according to EIU). Concerns regarding future supplies encourage consumers to buy materials in advance resulting in higher prices and increased output. EIU analysts expect the production volume in China to increase by 3.5% in 2017 with a sharp slowdown to start in the last six weeks of the year and continue until early North America: Steel output in the USA in 2017 was supported by the Big River Steel commissioning in December. In addition, Higher prices encouraged producers to turn on some of their idle capacities. In 1H 2017, despite the high profitability of the US steel companies, their output grew by only 1.3 percent in year-on-year terms. However, EIU analysts expect a 3 percent output increase during Figure 1. Steel output since 2010 (million tonnes) F 2018F 2019F Steel output Growth rate Figure 2. Steel output in 2017 (million tonnes) Jan Feb Mar Apr May Jun Jul Aug 02 Global Production output trends Commodity prices for 2017 Steel prices for 2017 Global trade: facts and figures Output, 2017 Output, 2016 Source: WorldSteel Association, EIU forecast

7 Overview of Global European Union (EU): In April 2017, the EU did not apply import tariffs on hotrolled products from Serbia, Russia, Ukraine, Iran, and Brazil, despite the fact that steel was delivered. This gave access to inexpensive steel for industrial production. In July, the EU decided to impose a 5-23 percent duty on suppliers (except Serbia) while the anti-dumping duty was set to a minimum import price (MIP) of EUR 472 per tonne. However, this decision was rejected by the EU countries. The European commission put forward other options, such as fixed import surcharges. However, the EU may not have enough time to take protective measures with respect to the domestic market until October, when the final decision is to be made. EIU experts expect that the existing tariffs and positive demand will push steel output in the EU up by 3.4 percent in India: During M8 2017, the Indian steel industry increased its output by 5.1 percent year on year, due to an increase in new capacity and reduction of stocks volumes. Indian producers benefited from the introduction of MIPs for almost all steel products in February The level of MIPs was substantially higher than market prices, prohibiting, thus, imports into India. After the approval of an MIP for a five-year period, anti-dumping duties are imposed on the amounts imported below this price. Given such market protection, EIU expects a 6 percent increase in steel output in India in 2017, which is helped by an increase in the use of existing and commissioning of new capacities. Figure 3. Steel output by region (%, 2016) 50% 2% 6% 6% 6% 13% 7% 10% Source: WorldSteel Association, EIU forecast Europe except EU Other countries CIS Japan NAFTA EU Asia (except Japan and China) China 02 Global Production output trends Commodity prices for 2017 Steel prices for 2017 Global trade: facts and figures 07

8 Overview of Global In 2016 steel consumption increased by 1.3 percent from 2015 to 1,600 million tonnes. The EIU has revised its growth outlook for 2017 from 1.4 percent to 2.4 percent. The growth rate is expected to continue at the level of 2017 with a slight decrease of 0.2% until late China: China s GDP grew in 2Q 2017 and continues to show positive growth. The construction sector (including infrastructure and real estate) will remain key to overall steel demand in China, as it accounts for two thirds of the country s steel consumption. Growing demand for steel supported by government incentives in 2016 ensured growth in The remaining one third of China s steel consumption occurs in production, including shipbuilding, auto production and manufacturing of household appliances and industrial goods. In 1H 2017 industrial production saw a 7.1 percent increase (against 5.5 percent in the same period in 2016). EIU analysts expect a 3 percent year-on-year growth in steel demand In China. European Union: In 2016, a strong automotive market delivered a boost to demand for steel, accounting for almost 20 percent of the regional needs. This growth continued in 2017, the number of newly registered cars increased by 4.1 percent yearon-year in 1H Declining unemployment has also encouraged demand from other steel consumers such as house appliance producers and private housing builders. EIU analysts expect steel consumption to grow by 2 percent in 2017 Asia: In 2016, a growth in demand in several emerging economies, including Vietnam, Indonesia, Thailand, and the Philippines, reached 10 percent largely due to a high level of investment in infrastructure. In 2017, Thailand saw a decrease in demand while other markets remained active consumers. The smaller economies of Southeast Asia account for only 25 percent of total demand in Asia. India accounts for almost 20 percent of the regional needs: while steel consumption increased in 2H 2016, in 2017 the growth slowed due to industrial production index downfall. Weak demand in other major economies of the region in Japan and South Korea constrained the region-wide growth which is estimated by the EIU at 2 percent in Figure 4. Global steel consumption since 2010 (million tonnes) F 2018F 2019F Steel consumption Growth rate Figure 5. Global steel consumption by region (%, 2016) 3% Europe apart from EU 3%4% CIS 9% 9% Japan NAFTA 45% Other countries 10% EU Asia (apart from Japan and China) 17% China Source: WorldSteel Association, EIU forecast 02 Global Production output trends Commodity prices for 2017 Steel prices for 2017 Global trade: facts and figures 08

9 Overview of Global Commodity prices for Global Ore: In 2016 the average price for ore was USD 57 per tonne. This was mainly due to a rally in 2H2016 when prices were above USD 80 per tonne. Higher prices continued into early 2017, reaching USD 90 per tonne. In May and June prices went down to approximately USD 50 per tonne due to an increase in stocks amidst a decline in steel prices. In late August, a strong Chinese market contributed to a steel price increase of up to almost USD 80 per tonne. However, concerns about the China s output decrease in output led to another decline in prices, and EIU analysts expect a decline in the fourth quarter this year. Coal. Coking coal prices rose in April 2017, as cyclone Debby struck Queensland in Australia, which caused damage to the main railway lines carrying coal to the ports and forced miners to declare force majeure. Spot prices temporarily doubled to USD 300 per tonne, as buyers had to seek alternative suppliers. The railway lines were repaired earlier than expected, and spot prices returned to the level of USD per tonne in Australia. Since then, spot prices have risen to USD 200 per tonne on the back of strong demand from China. EIU analysts expect contract prices at USD 200 per tonne in 3Q 2017, before they fall by the end of the year. Figure 6. Iron ore, spot price (Fe 62%, CFR, Tianjin, China, 2017), USD per tonne 80 Jan Figure 7. Coking coal (FOB, Australia, 2017), USD per tonne Feb Mar Apr May Jun Jul Aug 67 Sep 63 Oct Production output trends Commodity prices for 2017 Steel prices for 2017 Global trade: facts and figures Jan Feb Mar Apr May Jun Jul Aug Sep Oct Source: WorldSteel Association, EIU, The Steel Index S&P Platts 09

10 Overview of Global Steel prices for Global According to the EIU, global steel market will return to in In January 2017 capacities were loaded at 70 percent, in June this figure exceeded 74 percent and further decreased to 72 percent in August. The EIU believes that by the end of 2017 and in 2018 the level of capacity utilization will rise to 75 percent even on the reduction of China s capacities and shutdowns in other markets this is explained by the fact that the growth in demand will be limited, and producers will not support high product prices in the long term. Excess capacity will lead to a reduction in the difference between raw materials and finished products and further decrease in the profitability of manufacturers. Exceptions are protected markets, including the EU and the US, where the exclusion of any product imports increases the profitability of its own production. However, China s efforts to shut down facilities in 2017 seem to have been successful and led to a decrease in output of 40 million tonnes of products, giving a positive momentum to fixtures price. The Chinese government may close another 150 million tonnes of steelmaking capacities before the end of 2017, and potentially another 100 million tonnes of capacities will be closed in In such a scenario, steel and iron prices will gain a long-term growth momentum. In 2017, steel prices in China remain high. In 2Q 2017 demand exceeded the expected level resulting in an increase in prices to USD 550 per tonnes in August and September. Given the demand, experts believe that prices will remain at higher levels in the third quarter. However, the end of the year will see prices fall, when stocks are restored, unless the production is limited to keep prices at high levels. Prices in the US and EU markets will depend on regulation: the introduction of a large package of import sanctions by the US will lead to an increase in prices in the US. If the EU follows, prices in the EU market will increase as well. This poses a risk of greater price differences across the markets as larger volumes of metal will be concentrated in a smaller number of markets. Figure 8. Month-by-month average capacity utilisation across 67 producing countries on a monthly basis (%) Figure 9. Hot-rolled products prices for 2017 (USD per tonne, FOB Black Sea) 493 Jan 478 Feb Mar 71 Capacity utilization, 2017 Capacity utilization, Apr May 440 Jun 478 Jul Aug Jan Feb Mar Apr May Jun Jul Aug Source: EIU, The Steel Index S&P Platts Sep Oct Production output trends Commodity prices for 2017 Steel prices for 2017 Global trade: facts and figures 10

11 Overview of Global Global trade: facts and figures Table 1. Top-20 exporters (2016, million tonnes) 1 China Japan 41 3 Russia 32 4 South Korea 30 Million tonnes Table 2. Global trade (2016, millions of tonnes) EU Europe apart from EU CIS Import NAFTA Other America Africa and the Middle East EU China Japan Other Asia Oceania Total import Table 3. Top-20 importers (2016, million tonnes) 1 EU (1) 40 2 US 31 3 Germany (2) 26 4 South Korea 23 Million tonnes 02 Global Production output trends Commodity prices for 2017 Steel prices for 2017 Global trade: facts and figures 5 EU (1) 30 6 Germany (2) 25 Europe apart from EU CIS Italy (2) 20 6 Vietnam 20 7 Ukraine 18 8 Italy (2) 18 9 Belgium (2) Turkey France (2) 14 Export NAFTA Other US countries Africa Middle East China Thailand 18 8 Turkey 17 9 France (2) China Belgium (2) Brazil 13 Japan Indonesia Taiwan 12 Other Asian countries Mexico India 10 Oceania Poland (2) Netherlands (2) 10 Total export India Spain (2) 9 Extra-regional export Spain (2) 9 17 US 9 Balance (export import) Egypt 9 18 Austria (2) 7 18 Netherlands 8 19 Canada 6 20 Iran 6 Source: Based on data of WorldSteel Association, EIU forecast (1) excluding intra-european trade (2) including intra-european trade 19 Taiwan 8 20 Canada 8 11

12 02 Global Output trends Exports of ferrous metals Ferrous product imports 12

13 Overview of Output trends During 2017, the Russian steel-making industry has tended to cut production. According to the results of the 2Q 2017, the industry s output in Russia decreased by 3.5 percent year-on-year due to a decrease in production of finished ferrous products (-4.8 percent year-on-year), unalloyed steel (-5.1 percent year-on-year) and cast iron (-2.2 percent year-on-year). It should be noted that production of stainless steel and tubes for oil and gas pipelines contracted at a double-digit pace (+24.4 percent and percent year-on-year, respectively). Figure 10. Shipments of metallurgical products in 2017 (year-on-year, RUB million) Jan Feb Mar Apr May Jun Jul Aug Global Output trends Exports of ferrous metals Ferrous product imports In August, for the first time in 2017, the index of metallurgical production in Russia showed a positive value. The Ministry of Economic Development forecasts the annual index of metallurgical production at 1.9 percent. Noteworthy, according to Rosstat, in 2017 shipments in monetary terms exceeded the previous year figure by an average of 19 percent, which is higher than the inflation rate, and may be due to an increase in orders from the automotive and oil and gas industries. Figure 11. Index of metallurgical production in 2017 (year-on-year, %) Jan Feb Mar Apr May Jun Jul Aug Source: RosStat; calculations by the Russian Ministry of Economic Development mmk.ru, Kommersant 13

14 Overview of With a combined steel output of 62.4 million tonnes in 2016, EVRAZ, NLMK, Severstal, MMK, Metalloinvest, and Mechel account for 90 percent of Russian steel output. In September 2017, Sergey Stepanov, the CEO of JSC Raspadskaya Coal Company (RCC, managing company for coal producing assets of Evraz Group PJSC Raspadskaya and JSC Yuzhkuzbassugol) said that the company intends to increase the share of its coal deliveries to Evraz Group metallurgical plants from 50 percent to 80 percent over the next two to three years. In physical units, an increase in supplies was estimated at million tonnes per year on the back of current deliveries to Evraz of 4.5 million tonnes and total deliveries of 15 million tonnes (2016 data). The company plans to increase extraction through higher production of OS-grade and KS-grade coal. Evraz currently purchases coal of these grades from third-party producers. Figure 12. EBITDA of leading steel-makers in 1H 2017 (year-on-year, USD million) Evraz Figure 13. Steel output of leading steel-makers in 1H 2017 (year-on-year, thousands of tonnes) NLMK Severstal MMK Metalloinvest Mechel 02 Global Output trends Exports of ferrous metals Ferrous product imports Magnitogorsk Iron and Steel Works increased its share of supplies to the Russian steel service centers (SSCs) in total shipments of rolled metal to the domestic market: the respective supplies increased from 32 percent in 2015 to almost 40 percent in Such growth was driven particularly by the use of advanced technology in sales activities. Evraz NLMK Severstal MMK Source: Severstal.ru, Interfax, Russian Ministry of Economic Development mmk.ru, Kommersant Metalloinvest Mechel 14

15 Overview of Leading indicators of industrial activity show that industrial production will probably continue to grow in September. Manufacturing PMI in August (51.6, Figure 14) was somewhat down from July (52.7), yet remained above the level of 2Q 2017 (51.2) due to a strong growth in the volume of new orders. Rosstat s Entrepreneurial Confidence Index shows a significant improvement in business sentiment on (in?) the same period last year. The IEP s Industrial Optimism Index remains positive. Based on the preliminary estimate for 15 September, energy consumption adjusted for seasonality, calendar time, and temperature in the current month is growing by 1.4 percent year-on-year (the same growth was observed in August). At the same time, the annual growth rate of industrial production in September will be adversely affected by the calendar factor associated with fewer working days compared to the previous year (21 day in 2017 against 22 days in 2016). According to the Ministry of Economic Development, the industrial production growth rate accelerated in August (by 0.4 pp to 1.5 year-on-year) following the recovery of manufacturing industries. The manufacturing industry saw positive dynamics in August (0.7 percent year-on-year and 1.6 percent month-on-month, seasonally adjusted) after a noticeable decline in July (-0.8 percent year-on-year, -2.9 percent monthon-month, seasonally adjusted). The chemical sector and the food industry, which have long been the drivers of the manufacturing industry, gained the growth momentum back (3.1 percent and 4.8 percent year-on-year, respectively). Improvement in manufacturing was also boosted by a slowdown in engineering output decline in August (down to -1.4 percent year-on-year), which was primarily due to volatile product groups like aircraft, trucks, and buses. At the same time, production of passenger cars continued to grow at high rates in August (24.9 percent year-on-year). According to the results of 1H 2017, the key contributor to the machine-building industry s growth was the production of other vehicles and equipment (+29.9 percent year-on-year), which, as in previous periods, was incentivised by the government support for domestic rail car builders and an increase in passenger (+20.2 percent year-on-year) and freight cars production (by a factor of 2.3). Production vehicles continues to grow at a double-digit pace (+13.7 percent year-onyear) supported by an increase in production of passenger cars (+16.9 percent year-onyear), freight cars (+9.4 percent year-on-year) and buses (+32.1 percent year-on-year). Figure 14. Russian Manufacturing Purchasing Managers Index (PMI) A growth of investments in Julywas supported by a continued recovery of the construction industry. The volume of construction works performed has been increasing for the fifth consecutive month (in terms of seasonallyadjusted monthly increments). In year-onyear terms, the construction growth in July was 7.1 percent against 5.3 percent in June. A rebound of the construction industry accelerated the output of construction goods to 7.6 percent year-on-year (2.3 percent yearon-year in the previous month), particularly through an increase in the production of steel pipes and construction metal structures and products Global Output trends Exports of ferrous metals Ferrous product imports Jan Feb Mar Apr May Jun Jul Aug Sep Source: Markit Economics, Russian Ministry of Economic Development 15

16 Overview of Exports of ferrous metals In 1H 2017, exports of flat-rolled products grew up by 66 percent in monetary terms and by 9 percent in natural terms year-on-year and totaled USD 1,901 million or 3,843 thousand tonnes. Figure 15. Flat-rolled products, quarterly Q Q Q Q Q Q 2017 In 1H 2017, exports of tube products grew up by 136 percent in monetary terms and by 75 percent in natural terms year-on-year and totaled USD 810 million or 919 thousand tonnes. Figure 16. Tube products, quarterly Q Q Q Q Q Q Global Output trends Exports of ferrous metals Ferrous product imports Weight (thousand tonnes) Exports (USD million) Weight (thousand tonnes) Exports (USD million) Table 4. Flat-rolled products 1H H 2016 Weight (thousand tonnes) Exports (USD million) Weight (thousand tonnes) Turkey Belarus Egypt Kazakhstan Italy Uzbekistan Iran Vietnam Ukraine LATVIA Exports (USD million) Flat-rolled products: TNVED 7208, 7209, 7210, 7211 and 7212, tube products: TNVED 73,73,7305 and 75 Table 5. Tube products 1H H 2016 Weight (thousand tonnes) Exports (USD million) Weight (thousand tonnes) Finland Kazakhstan Belarus Usa Kyrgyzstan Ukraine Azerbaijan Turkey Estonia LATVIA Source: FCS of Russia Exports (USD million) 16

17 Overview of Ferrous product imports Q 2016 In 1H2017, imports of flat-rolled products grew up by 86 percent in monetary terms and by 53 percent in natural terms year-on-year and totaled USD 1,505 million or 1,2 thousand tonnes. Figure 17. Flat-rolled products, quarterly Q Q Q Q Q 2017 In 1H2017, imports of tube products grew up by 52 percent in monetary terms and by 62 percent in natural terms year-on-year and totaled USD 509 million or 375 thousand tonnes. Figure 18. Tube products, quarterly Q Q Q Q Q Q Global Output trends Exports of ferrous metals Ferrous product imports Weight (thousand tonnes) Imports (USD million) Weight (thousand tonnes) Imports (USD million) Table 6. Flat-rolled products, key destinations 1H H 2016 Weight (thousand tonnes) Imports (USD million) Weight (thousand tonnes) Kazakhstan China Ukraine South korea Germany Belgium Finland France Turkey Poland Imports (USD million) Flat-rolled products: TNVED 7208, 7209, 7210, 7211 and 7212, tube products: TNVED 73,73,7305 and 75 Table 7. Tube products, key destinations 1H H 2016 Weight (thousand tonnes) Imports (USD million) Weight (thousand tonnes) Germany China Ukraine Kazakhstan Belarus Italy Japan Spain USA France Source: FCS of Russia Imports (USD million) 17

18 02 Global The current state of the steel-making industry Issues, drivers of competitiveness and priority strategies Global trade Digitalization and innovations in the steel and iron industry 18

19 Overview of The current state of the steel-making industry 02 Global In 2H 2017, Deloitte CIS held a comprehensive survey Russian Manufacturing Industry Overview As part of the research, we surveyed experts from a number of steel- and tube-making companies. The detailed analysis of this survey allowed us to get a picture of the Russian steel-making industry and identify sentiment and expectations of the market players, as well prospects they have for the future direction of their businesses and the industry as a whole. Figure 18. Current state of the respondents 20% Company s current conditions 4% Industy s current conditions Positive Rather negative Rather positive Negative 46% 63% 46% 17% 4% Manufacturing companies and steel-makers particularly tend to be positive about the current state of their business (84 percent responded positively and rather positively to this question). Opinions on the current state of the industry are divided half of the respondents view the current market conditions as positive, while the other half hold negative views. The views on the current state of the Russian manufacturing sector are generally somewhat more optimistic (by 4 pp) than the assessments of the steel and iron industry s current conditions. The current state of the steel-making industry Issues, drivers of competitiveness and priority strategies Global trade Digitalization and innovations in the steel and iron industry More than half of the industry experts shared positive views on the prospects for their companies (55 percent). At the same time the companies are less optimistic about the outlook for the industry 58 percent of the respondents expect the situation to remain unchanged or even worsen. Economic expectations on the Russian iron and steel market corresponds to the general situation in the manufacturing sector in Russia in Figure 19. Outlook for the respondents 17% 38% 42% Outlook for the industry 8% 33% 46% Outlook for the company The situation will improve The situation is likely to get worse 8% 4% 4% The situation is likely to improve The situation will get worse The situation will not change much 19

20 Overview of Issues, drivers of competitiveness and priority strategies 02 Global Figure 20. Top-3 issues for the steel-making industry (rating from 0 to 1) Shortcomings of government regulation of the industry (administrative, trade, economic and other barriers) Insufficient manufacturing capacities Corruption Compared to our last year survey, the ranking of the key issues has changed significantly: this year the issue of government regulation shortcomings ranked first (rather than currency risks) and the lack of capacities and corruption issues were added to the ranking. The current state of the steel-making industry Figure 21. Top-3 drivers of competitiveness of the Russian steel-making industry in the global market (rating from 0 to 1) Figure 22. Top-3 drivers of competitiveness of the Russian steel-makers in the Russian market (rating from 0 to 1) Issues, drivers of competitiveness and priority strategies Logistics (timely procurement to increase the quality of production and streamline the production process) Lower currency risks Stability and unambiguity of labor legislation and regulatory policy Reduction of production costs (including energy resources) Increased demand in Russia Improving manufacturing capacity (launch of new facilities) Global trade Digitalization and innovations in the steel and iron industry About a quarter of the respondents (26 percent) particularly note the significance of logistics optimization among other drivers of competitiveness of the industry in the global market. At the same time production costs reduction in production costs was mentioned the key driver of competitiveness in the Russian market. Based on our expert interviews, we prepared a ranking of priority strategies for Russian steel-makers: Topping the list is a strategy of bringing new products to the market, which is best illustrated by MMK s launch of the smelting of new steel grade to be used for the ship building purposes (building of ice-breakers) Import substitution in the Russian market and market expansion strategies ranked second and third, respectively. Figure 23. Top-5 priority business strategies in 2017 (rating from 0 to 1) Bringing new products onto the market Replacement of imported products in the local market Entry onto new markets Improving manufacturing capacity (launch of new facilities, production increase) The next section shows a detailed review of import and export issues. Business development through organic growth

21 Overview of Global trade Figure 24. Export revenue in total revenue, % (for 2016) 29% 13% 4% 21% 33% Less than 5% From 5% to 25% From 26% to 50% From 51% to 75% More than 75% Figure 28. Export structure of the respondents The surveyed Russian steel-making companies are active exporters (the weighted average share of export revenue accounts for 28 percent of the total revenue) exporting mainly to the CIS. Figure 25. Purchases of raw materials -1 9% 48% 35% 9% Imported raw materials Figure 26. Purchases of machinery and equipment -1 4% 13% 65% 17% Imported machinery/equipment Figure 27. Weighted average share of purchases of raw materials and machinery/equipment 22% Raw materials Local raw materials -100% 100% 1 1 Local machinery/equipment Nearly half of those surveyed (48 percent) maintain a balance of local sourcing and imports of raw materials (Figure 25). Most respondents (65 percent) also purchase machinery and equipment in equal proportions from local and foreign suppliers (Figure 26). However, generally they reported a predominant use of local raw materials (the average weighted share is -22%, where -100 percent represent the use of Russian materials only and 100% represent the use of only imported materials), while having a predominant reliance on imported equipment (the average weighted share is -20%) (Figure 27). 02 Global The current state of the steel-making industry Issues, drivers of competitiveness and priority strategies Global trade Digitalization and innovations in the steel and iron industry Machinery and equipment -20% -100% 100% Import Russia Top-5 buyers Other buyers from our respondents Top-5 buyers from our respondents: Kazakhstan 54% Belarus 43% Germany 33% China 29% USA 29% Top-5 suppliers to our respondents: China 33% Kazakhstan 29% Germany 29% Belarus 26% Turkey 17% 21

22 Overview of Digitalization and innovations in the steel and iron industry 02 Global Figure 29. Structure of innovation inputs by type* Figure 32. Implementation of advanced innovative technology 9% 64% 27% Product Process RosStat; * See Apendix Type of innovation Marketing and administrative Figure 30. Innovation inputs (percent of revenue) 18% 23% 41% 36% 32% 27% До 5% 5% 10% 11% 15% От 16% Figure 31. Innovation activities 77% 82% 41% 45% 73% 41% 32% 27% 27% 36% 23% 36% 18% 18% 9% 14% Staff training and development Our latest surveys showed that the steel-making industry is one of the most technologically advanced industries keen on sustainable innovative solutions. The majority of the respondents (64 percent) noted the primacy of process innovation which is mostly used to cut production costs. Acquisition of advanced equipment and machinery Research and development (R&D) Digitalization of business functions Market research and analysis Acquisition of technologies Acquisition of rights to patents, licenses, etc , , 2018 Energy saving technologies Alternative energy sources Electronic document management (EDM) RPA Full automation of business process chain Full automation of selected business processes Advanced ERP systems (CRM, SAP, etc.) Internet of things (machine-to-machine communication, IoT-technologies) Augmented or virtual reality Blockchain technology Big data Computer intelligence Implemented To be implemented Neither implemented nor to be implemented Among the technologies planned for implementation, it is important to note the automation of selected business processes and automation of business process chains 68 percent and 64 percent, respectively, plan to introduce these technologies in the near future. Almost two-thirds of the companies surveyed spend 5-15 percent of their revenue on innovation activities And they named staff training and development as their top business priority (77 percent). This trend is going to continue (in 2017 and 2018). Notably, investing in the acquisition of advanced equipment is becoming irrelevant (down by 32 pp from 2016) on the back the growing need for new technologies and market research (up by 13 pp and by 9 pp, respectively). 9% 14% 9% 18% 18% 18% 18% 18% 23% 32% 41% 18% 32% 64% 32% 27% 36% 41% 55% 36% 64% 68% 55% 32% 4% 41% 4% 36% 18% 18% 32% 50% 64% 60% 46% 50% The current state of the steel-making industry Issues, drivers of competitiveness and priority strategies Global trade Digitalization and innovations in the steel and iron industry 22

23 Appendix Innovation by type Types of technology innovation: Product innovation: A good or service that is new or significantly improved. This includes significant improvements in technical specifications, components and materials, software in the product, user friendliness or other functional characteristics; Process innovation: A new or significantly improved production or delivery method. This includes significant changes in techniques, equipment and/or software. Organisational innovation: A new organisational method in business practices, workplace organisation or external relations. 02 Global Marketing innovation: A new marketing method involving significant changes in product design or packaging, product placement, product promotion or pricing. Terms defined in accordance with the Oslo Manual for measuring innovation developed by Organisation for Economic Co-operation And Development (OECD) and Statistical Office of the European Communities (Eurostat) 23

24 Andrew Sedov Leader of the Metals group in Deloitte, CIS Partner, Head of Consumer and Industrial Products Audit department Vladimir Perfiliev Director, Consumer and Industrial Products Audit (Metals) Deloitte CIS 02 Global Authors: If you have any questions regarding the survey, please do not hesitate to contact us. Lora Zemlyanskaya Manager Research Centre Leader, Deloitte CIS + 7 (495) , ext lzemlyanskaya@deloitte.ru Dmitriy Kasatkin Senior Specialist Research Centre, Deloitte CIS + 7 (495) , ext dkasatkin@deloitte.ru 24

25 deloitte.ru About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ( DTTL ), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as Deloitte Global ) does not provide services to clients. Please see for a more detailed description of DTTL and its member firms. Deloitte provides audit, consulting, financial advisory, risk management, tax and related services to public and private clients spanning multiple industries. Deloitte serves four out of five Fortune Global 500 companies through a globally connected network of member firms in more than 150 countries bringing world-class capabilities, insights, and high-quality service to address clients most complex business challenges. To learn more about how Deloitte s approximately 244,000 professionals make an impact that matters, please connect with us on Facebook, LinkedIn, or Twitter. This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the Deloitte Network ) is, by means of this communication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this communication ZAO Deloitte & Touche CIS. All rights reserved.