How raw material procurement can pave the way out of the crisis Frank Ehrenberg Raw Material Procurement Outokumpu Group September 4 th, 2013 12th International Stainless & Special Steels Summit
Content 01 Outokumpu at a glance 02 Aspects of the crisis 03 How NPI changed the Nickel world 04 The drama of the South African Ferrochrome industry 05 The role of pricing and risk management 06 Conclusions 2
We can serve our customers everywhere USA New integrated production site in AL High performance alloys, stainless plate, bar and pipe production units Sweden Integrated specialty stainless production and R&D units UK Integrated specialty stainless production site specialized in long products Finland Modern fully integrated chrome mine, ferrochrome works and stainless steel production and R&D unit Mexico Cold rolling mill with focus on ferritics and tailored solutions Germany High quality integrated stainless steel production and R&D units High performance alloys production and R&D units China Cold rolling and service centers Europe 13 000 employees Americas 2 500 employees Asia 700 employees Group total 16 200 employees 1 Chromite Mine 25 Production Sites 29 Steel Service Center/Plate Service Center 73 Sales Offices Frank Ehrenberg - 12th International Stainless & Special Steels Summit 3
Meltshop footprint Avesta, Sweden 500 ktpa 100% of Austenitics 0% of Ferritics Tornio, Finland 1 600 ktpa 90% of Austenitics 10% of Ferritics Sheffield, UK 500 ktpa 95% of Austenitics 5% of Ferritics Calvert, USA 900 ktpa 90% of Austenitics 10% of Ferritics Kreleld, Germany 2 600 ktpa 2 95% of Austenitics 5% of Ferritics Bochum, Germany 800 ktpa 50% of Austenitics 50% of Ferritics Meltshop production numbers are name-plate capacity 1 To be ramped-down and closed in 2013 2 Planned to be closed in 2016 Frank Ehrenberg - 12th International Stainless & Special Steels Summit 4
Raw Material Purchases by Category Purchases 1 by category in 2012 [Ktonnes] Comments 1200 1000 1.000 The main 4 categories represent more than 80% of the spend Outokumpu s position in the world K t o n n e s 800 600 400 200 0 500 100 10 o o o largest consumer of stainless scrap largest consumer of Ferronickel one of the largest consumers of molybdenum All main categories tcurrently a buyer s market 1 only Stainless activities w/o AST and VDM Frank Ehrenberg - 12th International Stainless & Special Steels Summit 5
Dusk or Dawn? Aspects of the stainless crisis 6
Importance of Raw Materials Group Operative costs break-down Group Raw Materials costs breakdown 65% 7% 18% 18% 57% Raw materials Energy and consumables SG&A (excl. personnel and D&A) Personnel Other cost of sales D&A total Nickel Chrome Molybdenum Other Frank Ehrenberg - 12th International Stainless & Special Steels Summit 7
Aspects of the stainless crisis in the regions Americas EMEA APAC Energy costs Market protection Consolidated Overcapacity No upstream integration Price level Consolidation Overcapacity No growth Energy costs Open Market No upstream intregration High Growth Upstream integration Overcapacity Not consolidated Frank Ehrenberg - 12th International Stainless & Special Steels Summit 8
Chinese slab cost advantage coming from Raw Materials Chinese 1 advantage over Western world production 2 in a ton of 304 slab 350 300 E U R / t o n 250 200 150 100 50 0 2012 F M A M J J A S O N D 2013 F M A M J J A 1 Sourced from NPI and Primary 2 Sourced from Scrap and Primary Frank Ehrenberg - 12th International Stainless & Special Steels Summit 9
Challenges for Raw Material Procurement Finding an answer to NPI Providing flexibility to volatile business cycles and short term customer orders Getting in the driver s seat in price risk management Frank Ehrenberg - 12th International Stainless & Special Steels Summit 10
New game, new luck? How NPI changed the Nickel world 11
Nickel A buyer s market MARKET NOW MARKET LATER OVERSUPPLY,... Large projects Nickel Pig Iron (NPI) Ni market in structural oversupply Ni price below cash cost for many suppliers Is Chinese NPI advantage sustainable? Can NPI be replicated elsewhere? Will there be Billion USD funding for new large projects? China Stainless growth dynamic Stainless growth elsewhere stagnant Migration to low/ no nickel grades, but still growth in demand Global primary ratio in raw materials will keep rising Stainless a competitive product BUT... Scant new supply post 2016 BACK TO DEFICIT. Frank Ehrenberg - 12th International Stainless & Special Steels Summit 12
NPI from RKEF puts FeNi rivals towards the upper end of the cash cost curve CASH COST US $ / t Ni metal Cash cost and cumulative production (kt) of primary nickel, forecast for 2015 situation of 2 millon t production of primary Ni 22 000 16 500 11 000 6 600 90th percentile FeNi plants RKEF / NPI plants Other NPI PROCESS FeNi PAL NPI/ RKEF NPI / EA NPI / BF MAIN ISSUES Ore quality requirement Ore quality, energy, reagents Cost of ore + logistics Cost of ore + logistics Coke, energy, environment Frank Ehrenberg - 12th International Stainless & Special Steels Summit 13
New NPI production allows discount to LME Nickel price 22.000 Nickel LME and NPI 1 bid prices U S D / t o n 20.000 18.000 16.000 14.000 12.000 Since mid 2012 spread of NPI to LME price widened 10.000 2012 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2013 Feb Mar Apr May Jun Jul Aug NPI 10%-Ni bid Nickel LME 1 Average bid price of Tisco & Baosteel Frank Ehrenberg - 12th International Stainless & Special Steels Summit 14
The full picture comparing 1 NPI with Scrap and Ferronickel % of LME Nickel 30% NPI advantage over European scrap & ferronickel 25% 20% 15% 10% 5% 0% 2012 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2013 Feb Mar Apr May Jun Jul Aug 304 Scrap FeNi 20%-Ni 1 Comparison done between 10%-Ni NPI, 20%-Ni FeNi and European 304 solids scrap. Frank Ehrenberg - 12th International Stainless & Special Steels Summit 15
Actions for Nickel procurement Establishing Scrap as Western World s answer to NPI Aligning Ferronickel price conditions to NPI Increasing optional quantities for higher flexibility Maximizing scrap ratio Assessing upstream participation Frank Ehrenberg - 12th International Stainless & Special Steels Summit 16
Back to the roots The drama of the South African Ferrochrome industry 17
Ferrochrome prices European 1 and Chinese 2 spot prices [USD/lb] 1,4 U S D / l b 1,3 1,2 1,1 1 0,9 0,8 Jun'12 Jul Aug Sep Oct Nov Dec 2013 Feb Mar Apr May Jun Jul Aug European Chinese 1 Ferro-chrome Ryan Notes 49-51% Cr European FM 2 Ferro-chrome China import charge chrome 50% Cr index, CIF Shanghai, duty unpaid, $ per Ib Cr Frank Ehrenberg - 12th International Stainless & Special Steels Summit 18
Ferrochrome producers cost curve Data source: CRU Ferrochrome Cost Service Frank Ehrenberg - 12th International Stainless & Special Steels Summit 19
Actions for Chrome procurement Aligning ferrochrome price conditions to Asian levels Considering country risk South Africa Upstream engagement requires low investment Overcapacity in Western World will keep pressure on prices Frank Ehrenberg - 12th International Stainless & Special Steels Summit 20
Stainless how to accept being a converted Nickel product The role of pricing and risk management 21
Stainless Steel pricing system - a structural mistake in a future market driven environment Main pricing driver is Nickel Price reference for Nickel in Stainless is the LME LME Nickel is quoted daily from cash to 63 months forward Stainless Steel took historical Nickel prices as a reference for current prices The spread between actual and historical prices have led to distortions and increased order volatility as customers /market participants have tried to maximize self-interest Frank Ehrenberg - 12th International Stainless & Special Steels Summit 22
Actions for price risk management Creating a risk culture sensitivity for market price risks Intensifying collaboration between sales and procurement Customizing pricing mechanism to customers to generate value-added Introducing daily metal position(s) to balance out metal intake and sales Frank Ehrenberg - 12th International Stainless & Special Steels Summit 23
Conclusions 24
Action summary Western world needs competitive raw material prices o o o Re-establish scrap as the most competitive raw material Align Ferronickel price conditions to NPI Align Ferrochrome price conditions to Asian levels Stainless industry needs to grow into base metal behavior o o Price risk management crucial for survival Different pricing models for stainless should be seen as competitive advantage Frank Ehrenberg - 12th International Stainless & Special Steels Summit 25