DRI Production Where are the new hubs?

DRI Production Where are the new hubs?

2 Objectives What are the central questions that this paper attempts to answer? How will the recent shale gas finds influence DRI production locations? How is the attractiveness of DRI production from an economic and technology stand point? What could be the new DRI production locations? What is the future of the existing locations? Can China be an emerging DRI user?

The transformation of the access, availability and locations the drivers makes it timely to examine the hubs of DRI production 3 The drivers of DRI production remains the same. But the access, availability and location of these drivers are undergoing transformation Availability, prices of NG and Power 1 Shale gas discoveries Scrap shortage DRI producti on drivers EAF steelmaking 2 3 4 Fall in gas prices Increasing role of EAF: US & Europe Technology Improvement Steel consumption Clean steel production 5 China's scrap generation

In addition to 61Mt of installed capacity, 22 Mt is being planned globally of which a majority is in MENA 4 DRI/HBI Facilities Currently Operating and Planned Nucor St. James, LA 2.25 Mt North America Capacity in Operation 4.9 Mt +2.25 Mt Europe Capacity in Operation 0.4 Mt MENA Capacity in Operation 18.8 Mt +16.19 Mt CIS Capacity in Operation 4.0 Mt Asia Capacity in Operation 17.6 Mt +2.54 Mt South America Capacity in Operation 11.5 Mt +0.8 Mt Africa Capacity in Operation 4.1 Mt Source: Midrex

EAF steel making will account for 51% share of global steel production. India and MENA will be the epicentres of the increase in EAF steel making 5 Forecast of global steel consumption (Mt) Growth of EAF steel making (Mt) upto 2030 2,500 2,000 690 Mt 19Mt 61Mt 69Mt 690 Mt ROW L. America CIS 6Mt 20Mt 44Mt 355Mt ROW L. America CIS 1,500 2063 175Mt India 66Mt India 1,000 500 0 1373 2011 2030 81Mt 92Mt 29Mt 23Mt 10Mt 130Mt MENA Other Asia Japan & S. Korea N,America Europe China 79Mt 42Mt 11Mt 17Mt 18Mt 51Mt MENA Other Asia Japan & S. Korea N,America Europe China Source : World Steel Stats, Hatch Analysis

Both EAF route only BF route only The CIS and India score highest in global competitiveness using the BF route - for the EAF route, the CIS, N. America and MENA come out on top 6 Key factors impacting cost competitiveness in crude steel production, BF & EAF, major countries/regions, 2012 North Americ a South Americ a Europe CIS China India Japan & S.Kore a Othe r Asia MENA Rest of World Captive iron ore Captive coking coal Close proximity to raw materials Quality of captive raw materials Likelihood of avoiding carbon taxes Proximity to scrap pool Low electricity costs Low gas costs Low labour costs BF integrated 4 7 0 9 7 9 1 4 2 5 EAF steelmaking 5 2 2 5 3 2 2 4 2 Source: Hatch

The recent shale gas discoveries are significant that the reserves size is comparable to natural gas and it is more widespread than natural gas 7 Major Shale Gas Basins and Top Reserves Holders Recoverable Reserves: 200 trillion cu mt. Distribution of Natural Gas Proven Reserves Proven Reserves: 208 trillion cu mt. Russia 21.4% Turkmenistan 11.7% Iran 15.9% Qatar 12.0% USA 4.1% KSA 3.9% Venzueala 2.6% ROW 28.4% Source : EIA, Reuters, BP Statistical Review

The latest IEA forecasts for shale gas production is hugely contingent on proper mitigation of the environmental risks 8 USA China Canada Australia India Indonesia Russia Mexico Argentina Forecast of shale gas production up to 2035 ( cu mt)* Poland Brazil 0 100 200 300 400 * Golden Rules Scenario With opportunities, there are also some challenges to shale gas production. There are major environment risks : o Water consumption during the hydraulic fracturing process Effects on bio diversity Channeling away from agriculture uses o Treatment and disposal of Waste Water Proper secure storage on site Infrastructure to recycle or treatment for discharge or reuse o Groundwater Contamination from fracturing fluid Accidentals spills Leakages Higher scale leading to higher risks o Some wells at least in China could be more complex and deeper. Economics for drilling these wells have not been clearly established Source : IEA Golden Rules for Golden Age of Gas Major steel consuming and producing countries

Column1 Jul-1997 Feb-1998 Sep-1998 Apr-1999 Nov-1999 Jun-2000 Jan-2001 Aug-2001 Mar-2002 Oct-2002 May-2003 Dec-2003 Jul-2004 Feb-2005 Sep-2005 Apr-2006 Nov-2006 Jun-2007 Jan-2008 Aug-2008 Mar-2009 Oct-2009 May-2010 Dec-2010 Jul-2011 Feb-2012 Sep-2012 Gas prices have fallen in US but in ROW it remain linked to oil indexed prices. It does not appear that it will follow the US path very soon 9 In the US, gas prices have decoupled from oil prices...... but what about other regions? 160 140 120 US historical oil and natural gas prices In Europe, it is a mix of oil indexed gas 16 prices ( from Statoil and Gazprom) and some hub prices from Qatar mirroring 14 current spot prices. But the average gas prices remain very high. In the medium term, this is unlikely to change. 12 100 80 60 40 20 0 10 8 6 4 2 0 In China gas prices remain stubbornly linked to oil indexed prices despite pressure from buyers. There is talk about reforming these to reflect the current spot prices but it could take a number of years before shale gas imports and local shale gas production to start before prices align to market levels in the US. In Brazil, the situation is no different from Europe and China.

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 The key question is whether gas prices in US will continue to remain at current levels. In ROW it appears unlikely that the prices will reduce to current levels in US 10 Forecast of natural gas prices* ( $/mbtu) 14 12 10 8 6 Although gas prices are historic lows, forecasts for long term gas prices suggest that these prices may not remain at these levels, at least in the US. In Europe, it may never even reach US levels at all! In the US at least, the ready gas pipeline and distribution infrastructure was available. Therefore it has been possible to increase gas supplies relatively easily. 4 2 0 US Natural Gas Europe Natural Gas In other regions like India, Brazil, Indonesia, Mexico the pipeline infrastructure is underdeveloped. Meeting the large growing production would require building new pipeline infrastructure which is inherently very capital intensive and potentially slow with burdens of permitting process *Nominal Source: World Bank Commodity Price Forecasts, Jan 2013, Oxford Institute of Energy Studies

The EAF route is now almost capable of producing any steel product 11 EAF Steelmaking Market Accessibility 1980-2015 1980 1988 1996 2000 2015 Galvanized Cold Rolled Coil Hot Rolled Coil Plate Beams Wire Rod Rails Rebar 0 25 50 75 100 0 25 50 75 100 0 25 50 75 100 0 25 50 75 100 Percent Percent Percent Percent 0 25 50 75 100 Percent EAF BOS Only Source: Hatch Beddows

Capacity, Mt Today DRI module capacity is comparable to BF capacity and the technology is mature, making it a good economic alternative to BF 12 Comparison of DRI modules vs. blast furnace 2.0-5.0 Alternative Iron Making Technology Development 2.5 2.5 1.90 1.95 Ezz Egypt Suez Egypt Nucor Louisiana JSPL India Typical BF The DRI route to iron making makes it a compelling route in India, Mexico, Brazil : Lack of coking coal reserves Russia: Coking coal reserves in the hands of few producers and lack of access to it to newer, smaller privately owned steel makers US : Replacing BF-BOF with EAF Source : Midrex, Hatch

If gas and electricity prices are competitive, natural gas based DRI making is an attractive economic choice of iron making Comparative consumption figures for Capex and Opex for different iron making technologies* 13 Technology BF Midrex and Coal HYL & Coal Midrex & Gas HYL & Gas Corex RK RK and Smelter Typical Capacity Mt/a >1 1.6 1.6 1.6 1.6 1/5 0.2 0.2 RK 0.8 Sm Number of Units 1 1 1 1 1 1 8 8 RK/2Sm Pellets, t/t 1.53 1.45 1.44 1.43 1.42 1.5 1.48 1.54 Coke kg/t 367 Coal kg/t 160 430 390 914 650 776 Natural Gas GJ/t 9.2 9.2 Oxygen Nm3/t 94 245 280 16 16 670 10 10 Electricity, kwh/t 150 245 95 16 16 670 10 10 Power produced kwh/t 400 834 572 627 Capital Cost $ million 759 842 851 432 432 1075 619 868 Operating Cost $/t 371 262 250 224 222 289 219 270 Source : Hatch Paper Selection of Iron Making Technology - Principles and Risk Yakov Gordon and Sunil Kumar * Figures calculated for a specific location in CIS region

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019 2022 2025 2028 There is enough capacity build up in China to meet production growth for many years. China could eventually emerge as net scrap exporter 14 Forecast crude steel production and capacity in China ( Mt) 1000 950 Projected Steel Capacity 2014 : 974 Mt 900 850 800 750 700 650 600 550 500 450 400 350 300 250 200 150 100 50 0 Forecast of scrap generation in China ( Mt) Source : Hatch, DB Research

It is unlikely that China will be a large user or producer of DRI. Scrap is more likely to be the metallic of choice as it becomes a net scrap exporter 15 Implications in China : China's status could change dramatically in the next decade as it shifts from being a major scrap importer to major scrap exporter. Scrap based steel making will start to play an increasingly important role in China.. Even if scrap usage intensity in Chinese BF- BOF increased, it would not have any major influence on its scrap exporting capacity. In the scenario, DRI is unlikely to play a major role as a metallic. It is likely that the scrap exports could help feed growth in EAF steel making in SE Asia as its own steel consumption increases.

In the US, DRI production is set to grow in the next decade. Indian DRI production will grow as long as difficulties with building integrated plants remain 16 US India The Nucor plant ( Phase 1) in Louisiana will make its more than self sufficient, with plans for Phase 2 at the same site AM, given its current financial constraints, is an unlikely candidate for further DRI expansion There are some specific opportunities for DRI if and when some of the BF- BOF production shifts to EAF, reflective of the longer term trends in steel production in mature economies DRI production will be supported as steel consumption starts to recover. India's DRI production will continue to grow primarily through the coal based DRI production. A key part of the driver will be the lack of success in building integrated BF-BOF facilities planned since 2006. If access to mines, land acquisition, people rehab issues are resolved, BF-BOF will play the larger, logical role in the Indian steel making scenario Syngas based DRI production is beginning in India but its high capital costs will limit its wide acceptance

In MENA, it is uncertain whether there is enough gas to meet the increased DRI production. While in Russia, scrap pool bottoming will create conditions for DRI production to increase 17 MENA Russia The case for DRI production is most clear in this region. Scrap short Growing consumption Support prices for natural gas and power But support prices also create 'infinite' demand for gas Can the industry secure natural gas for an additional 78 Mt steel production? In MENA, DRI production could fall well short of its required volumes to meet local demand Russian scrap exports have declined Increased scrap consumption in Russia with a number of scrap based plants being constructed. Russian scrap pool is not limitless and future growth could be severely limited Russia and its producers see view itself as important players in the global metallics markets Overall, trends point towards increased DRI production from Russia.

The conditions in Mexico are better suited to support increase in DRI production but they could be limited to production of value added flats 18 Brazil Mexico Indonesia Scrap short Iron ore rich, but short on coking coal Steel consumption forecast to grow Pipeline infrastructure immature and needs huge investments Natural gas from offshore pre-salt deposits Competing demand for gas from power generation Alternative options like BF route less constrained on raw materials or land acquisition issues Unlikely for any DRI production to take off Scrap short but located next to largest scrap exporter US Shale gas production to increase but not before the pipeline infrastructure is built Growing consumption Mexico' s conditions and resources lends it self to increased DRI production but these could be limited to production of high value flat products which need clean steel Scrap short Consumption set to grow strongly New plants will need to be built to meet demand Pipeline infrastructure immature Electricity prices set to increase as government start to remove subsidies Competing demand for gas from power generation Land Acquisition Issues On the balance, still good opportunities for DRI production to increase for flat products

DRI production is favourably suited in S. Africa but who has the appetite to invest? 19 Argentina South Africa Poland Scrap short Steel consumption forecast to grow Uncertainty around foreign investments in Argentina after Repsol nationalisation Natural gas prices to increased to support investments in production Uncertain how whether this will result in positive trickledown for DRI production Good Iron Ore, Thermal Coal and some coking coal reserves Net importer of steel Growth in steel consumption Scrap short High power prices Competing demand for gas in power generation BF and coal based DRI less constrained compared to gas based DRI production Surplus capacity in the region Scrap long Highly uncertain whether shale gas production will be allowed given the environmental concerns

Summary 20 The major regions for DRI production are likely to be : 0-5 years 5-10 years 10-20 years US, MENA, Russia, India, US, MENA, Russia, India Mexico, South Africa, Indonesia MENA, Russia, India The new shale gas finds and projected increases in natural gas production is not likely to make a dramatic change in the DRI production scenario in the next decade or so. In countries with shale gas discoveries, the pipeline infrastructure would need massive investments before it can support DRI production. DRI needs to compete with a number of other demands for gas in particular power generation, domestic consumption, fertilisers, petrochem in developing countries. Outside the US, it is uncertain whether gas prices as $3-$4 band can support massive investments in production and associated pipeline infrastructure. All indicators points towards much higher gas prices being sustained. The Indian model of coal based DRI production is very specific to its conditions and cannot be replicated in other countries. It is not the ideal economic response to a country with massive increase in steel production but more a reflection of the inconsistencies and efficiencies of policy making and mining regulation and the challenges in building large integrated facilities. China's will eventually emerge as large scrap exporter and this could supply enough AIU as a more economic alternative.

Contacts 21 Siddhartha Sengupta Julian Clark Director Regional Director Hatch Hatch MENA + Portland House + Al Bateen Tower (C6-B906) Bressenden Place Bainuna Street, 34 Al Bateen London SW1E 5BH Abu Dhabi, UAE ( +44-20-7906 5126 ( +971 2 650 5665 * ssengupta@hatch-europe.com * jclark@hatch-europe.com