Developments in the Metallics Market and Its Effects on the Global Steel Industry

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1 Jan-97 Jul-97 Jan-98 Jul-98 Jan-99 Jul-99 Jan- Jul- Jan-1 Jul-1 Jan-2 Jul-2 Jan-3 Jul-3 Jan-4 Jul-4 Jan-5 Jul-5 Jan-6 Jul-6 Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 67th SESSION OF THE OECD STEEL COMMITTEE 1-11 December 29, Paris SPO Developments in the Metallics Market and Its Effects on the Global Steel Industry MEHMET AKİF KOCA State Planning Organization of Turkey Expert for the Iron and Steel Industry Metallics and Steel Prices Metallics prices are increasing more than steel prices in the upward cycle. Metallics prices are decreasing more than steel prices in the downward cycle. CRU Steel and Metallics Price Indices (Jan 1997 = 1) Source: CRU Longs Index Global Index Metallics Index P. 2 1

2 Long-Term Trends Affecting Metallics Market 1. Increasing electric arc furnace capacity in the world 2. Restrictions on exports of raw materials 3. Consolidation among raw materials producers 4. Horizontal and vertical consolidation in the steel industry P Increasing EAF Capacity in the World Share of EAF production within the total crude steel production in the world increased from 25.4 % in 1985 to 33.9 % in 2; however it decreased to 3.6 % in 28. EAF Share (%) in Global Crude Steel Production (Milllion Tons) China? Others? Total EAF EAF (%) 1 Source: World Steel Association P. 4 2

3 1. Increasing EAF Capacity in the World Share of EAF production has been decreasing in China; whereas it has been increasing in the rest of the world. EAF Share (%) in Total Crude Steel Production (Million Tons) (CHINA) EAF Share (%) in Total Crude Steel Production (Million Tons) (EXCL. CHINA) Total EAF EAF (%) Total EAF EAF (%) Source: World Steel Association Source: World Steel Association P Increasing EAF Capacity in the World EAF plants are favored against integrated plants Low investment cost Short investment time Low minimum efficient scale Flexible production terms Conversion to EAF technology in Russia and Ukraine 3 million tons of new production capacity planned before the crisis China may invest more on EAF technology in the future Grade and cost problems in domestic iron ore mines Risk of high dependency on imported iron ore Higher domestic supply of scrap as a result of increasing consumption Restrictions on integrated plants due to environmental concerns P. 6 3

4 2. Restrictions on Exports of Raw Materials Reasons for export restrictions Supporting competitiveness of domestic steel industries Keeping materials at home for future usage Export restrictions applied by different countries Export quotas (Coking coal and coke) Export licenses (Coking coal and coke) Export taxes (Scrap, iron ore) Port and transportation limitations (Scrap) P Consolidation Among Raw Materials Producers Advantages of consolidation in raw materials sector Improved bargaining power vis-a-vis steel producers Less competition in local, regional and global markets Fast and easy growth? High consolidation in the iron ore market 3 largest producers (VALE, Rio Tinto and BHP Billiton) 35% of global production and 7% of seaborn trade Potential merger between BHP Billiton and Rio Tinto? Iron ore market influences scrap market Consolidation efforts in scrap markets European Metal Recycling (EMR) Sims Metal Management (SIMS) P. 8 4

5 4. Horizontal and vertical consolidation in the steel industry Mergers and acquisitions in the steel sector Optimization of production among different plants Increased bargaining power against raw materials producers Potential cost savings in operations, R&D and logistics Better access to emerging markets and global customers Better access to capital markets Important consolidations in recent years 26, Merger between Mittal Steel and Arcelor 27, Acquisition of Corus by Tata Steel Backward consolidation with raw materials production Secure raw materials sourcing with advantageous pricing Integration between raw materials production and steel production P. 9 Conclusions Long-term trends affecting metallics market Increasing electric arc furnace capacity in the world Restrictions on exports of raw materials Consolidation among raw materials producers Horizontal and vertical consolidation in the steel industry Raw materials producers will gain increased bargaining power against the steel producers that are not backward integrated with raw materials production. Policy response by respective governments Promote unrestricted better access to raw materials Higher scrutiny on consolidation efforts in raw materials market. Elimination of restrictions on raw materials exports. Policy response by the industry Increase alternatives for raw materials sourcing Investment on scrap substitutes (DRI, HBI) P. 1 5

6 67th SESSION OF THE OECD STEEL COMMITTEE 1-11 December 29, PARIS SPO THANK YOU! MEHMET AKİF KOCA State Planning Organization of Turkey Expert for the Iron and Steel Industry 6