OECD STEEL COMMITTEE Developments In World Steelmaking Capacity Russia: Steel Market Developments Paris, 5-6 June 2014
RUSSIA: STEEL OUTPUT 2000-2013 59,1 59,0 59,8 16,2 15,5 14,2 8,6 8,8 8,9 61,5 13,6 9,4 65,6 66,1 14,5 14,6 10,7 10,8 70,8 72,8 12,9 11,9 16,3 19,3 68,5 11,6 20,0 60,0 5,9 16,1 66,9 6,5 18,0 68,9 6,7 18,5 70,4 69,4 3,6 2,5 21,0 21,0 4% 30% 34,3 34,6 36,7 38,5 40,4 40,8 41,7 41,2 38,9 38,0 42,4 43,7 45,8 46,1 66% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 OHF EAF BOF Russian steelmakers have modernized the assets to produce steel in a more effective and environment-friendly way [2]
STEEL TRADE BALANCE 30 million t 25 20 15 6,5 11,2 7,4 5,2 4,0 3,4 10 5 15,7 13,6 15,1 12,1 14,8 13,6 0 2008 2009 2010 2011 2012 2013 Semi-finished steel net exports Finished steel net exports Exports Imports Surplus of steel is exported from Russia mostly as semi-finished products Net exports of finished steel are declining as domestic steel demand grows attracting imports Source: Research market agencies 2013, Russian statistics, NLMK estimates [3]
2013 EXPORTS 11% Slabs 8% 4% Europe 13% 19% 24 m t 21% 36% Billets HRC Other flat products Long products 10% 19% 24 m t 21% 38% Middle East South-East Asia CIS North America Other Semi-finished products account for 57% of exports 74% of finished steel exports are flat steel products Europe, Middle East and South-East Asia are key export destinations of Russia Source: Research market agencies 2013, Russian statistics, NLMK estimates [4]
KEY IMPORTING REGIONS IN 2013 19% 3% CIS Asia 20% 7 m t 58% Europe Other Imports accounted for 16% of steel consumption in 2013 Imports mainly come from CIS countries 19% is imported from Europe Source: Research market agencies 2013, Russian statistics, NLMK estimates [5]
EUROPE AS A TRADING PARTNER EXPORTS TO EUROPE IN 2013 IMPORTS FROM EUROPE IN 2013 14% 2% 7% Slabs Billets 5 m t 11% 8% 1% 30% Pre-painted sheet Galvanized sheet Other flat products 19% 54% HRC 8.7 m t 1.0 m t CRC 14% 12% Sections Rails 4% Other flat products 24% Other long products Long products Semi-finished steel Russia accounts for over 80% of European slab imports Europe exports high value-added flat steel and long steel in Russia Source: Research market agencies 2013, Russian statistics, NLMK estimates [6]
RUSSIAN STEEL SECTOR INVESTMENTS Fixed asset investments of Russian steel companies billion RUB 23 31 29 36 81 101 122 128 204 173 159 188 176 100 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Significant investments in modernization, including in minimization of environmental footprint, energy efficiency and transport infrastructure Source: Russian steel consortsium estimates, companies data * Data for Russian steel consortsium members, excluding OMK [7]
PRODUCTIVITY GROWTH AND MINIMIZATION OF ENVIRONMENTAL FOOTPRINT: NLMK CASE AIR EMISSION AND WASTE WATER DISCHARGE LABOUR PRODUCTIVITY AND ENERGY EFFICIENCY kg/t of steel kg/t of steel 40 1,5 30 1,09 1,0 20 37,5 BAT 18.9 30,5 30,4 28,5 27,9 10 22,6 19,4 0,5 0,02 0 0 0,0 2007 2008 2009 2010 2011 2012 2020E Air emissions per tonne of steel Waste water discharge per tonne of steel, rhs 450 400 350 300 250 200 150 100 t of steel per employee 2001 2007 2008 2009 2010 2011 2012 2013 Labour efficiency Energy efficiency (RHS) Gcal/t Source: Company 7,5 7 6,5 6 5,5 5 NLMK has a track record of environmental footprint reduction o Since 2007 air emissions have reduced by 40% and waste utilization has increased by 20% o Zero waste water discharge at Lipetsk site achieved Labour productivity growth of over 2.5 times since 2001 Note: NLMK Russia average. BAT = Best available technology. *Russian Flat Products [8]
RUSSIAN STEEL SECTOR PROFITABILITY EBITDA margin 35% 30% 30% 25% 20% 15% 10% 11% 10% 5% 0% 2007 2008 2009 2010 2011 2012 2013 2014П 2015П Profitability margins to stagnate at single digit numbers capping ability to expand capacity and leading to capacity rationalization and restructuring Source: Companies data, Bloomberg, NLMK estimates [9]
RUSSIAN STEEL SECTOR DEBT Debt leverage of Russian steel companies* 40 30 billion RUB 3,0 3,1 4 3 20 2,1 35 36 34 2 10 17 12 11 1 0 2011 2012 2013 Net debt EBITDA Net debt/ebitda (RHS) 0 Capex is expected to decline due to high debt leverage, lower profitability and focus shift from growth to efficiency improvements Source: Russian steel consortsium data [10]
ENVIRONMENTAL & FISCAL POLICIES TIGHTEN UP FISCAL TIGHTENING Recent initiatives (land, real estate) additional c. $100 mln p.a. TIGHTENING ENVIRONMENTAL LEGISLATION Initiatives under discussion: o Increasing payments for negative environmental $100 mln p.a. impact by 3 times o Increasing fees for waste accumulation $300 mln p.a. o Capex for construction of additional waste water $300 mln p.a. treatment facilities o Capex to achieve Best available technologies (BAT) $35 bn (total value of the program) Source: Russian steel consortsium estimates Based on RUB/$ FX rate as at May 2014 [11]
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E STEEL DEMAND IN RUSSIA 70 million t 60 50 40 30 20 10 0 Steel consumption has increased by 2.7x times since 1994 to 43 million t Huge pent-up demand from the 1990-s Source: Worldsteel Association 2013. [12]
PRODUCT MIX DEMAND CHANGING Steel demand breakdown by sector 36% 16% 43% 14% 27% 17% 7% 22% 8% 2% Other Machinery&Equipment 23% 16% 25% 27% 49% 68% Automotive Construction USA Europe BRIC Russia Gradual shift is expected to the more value added products demand o Machinery and equipment o Automotive steel o Sophisticated tubular solutions Source: NLMK estimates, bank reports [13]
RUSSIAN STEEL FORECAST 1,1 Index, 2012 = 1.0 1 0,9 0,8 0,7 0,6 2012 2013 2014E 2015E 2016E 2017E Crude steel output Steel exports Crude steel output is expected to decline as competition on the global markets intensifies Steel exports are forecast to decrease on the back of domestic demand growth and decline in output Source: Russian steel consortium estimates [14]
SUMMARY Russian steel sector used super cycle profits to modernize and improve products quality Capital structure and new normal profitability caps further capital outlays Increasing 779 burden on the steel sector (tax, limited access to capital, tariffs inflation and stricter environmental legislation) will lead to precipitated capacity closures and restructurings Sustainable demand driven by fundamentals will increase steelmakers domestic market focus, leading to improved service and increased share of value added products sales [15]