CONFIDENTIAL

Megatrends and Value Creation

Levers in the Steel Industry

March 2002
INTRODUCTION

• This PD contains holistic perspectives on the global steel industry. Specifically it provides a solid background into the structural basics of the steel industry, and quickly moves into the key trends affecting the industry, implications, and value creation levers.

• This PD, created from recent client work, is a combination of 1. New/updated knowledge on global trends, value creation levers etc…. 2. Utilization/synthesis of some bodies of work on the steel industry within the Metals and Mining Practice. Some of these PDs include:

– PD #17450: “Achieving World Class Performance for Steelmaking in a Minimill” ,” June 1999
– PD #17075: “Helping Dinosaurs to Dance” Finding New Sources of Value in Primary Industries”
– PD #08779: “A Global Perspective on the Rise and Fall of the World Steel Industries”
– PD #16717: “Overview of Russian Steel Market”, 1998
– Practice PDs:
• “The Impact of Consolidation on the European Steel Industry”
• “South American Steel Industry End Game x New Game, Sao Paulo, 1999
• “NA Steel Industry”
• “Risk Management in Metals and Mining”, Paris, 2001
• “Overview of Steel Distribution in Europe”
• “Startup Package – Steel”, 2001
• “Risk Management in the Steel Industry”
• “End Game vs. New Game: Beating the Vicious Cycle”
• “Profiting from the Restructuring of the Asian Steel Industry”, 1999

• For more information, please contact the authors: Robert Lewis (CL), and Phalgun Raju (CL).

2
PERSPECTIVES ON THE STEEL INDUSTRY

Unfavorable industry drivers and structure is driving overall poor performance. As a result, the
steel industry is under-performing the stock market significantly. The industry is generating
positive cash flows but is not paying its cost of capital.

Traditional value creation levers will help and should be pursued, but are unlikely to be
sufficient to achieve significant positive economic spreads:
•An ambitious operational improvement program could lead to a 3% improvement in
economic spread over 3 years – significant but requiring best in class efforts as most of
the improvements are eaten away by a continuous cost-price squeeze of 2-3%
•So far consolidation has not led to better pricing conduct; it may change with recent
consolidation in Europe, but this remains to be seen as markets become more global
•Overcapacity prevents individual players to influence prices in the short-term

To create significant shareholder value, successful players also work on managing capital,
and risk. This is done primarily through portfolio plays of high-value products and segments
served, and capital productivity improvements

Source: Team analysis

3
TOPICS OF DISCUSSION

Chapter

1 Steel industry financial performance

overview

2 Steel 101: The Basics

3 Global forces at work

4 Value creation in the steel industry

4
CHAPTER 1: STEEL INDUSTRY FINANCIAL PERFORMANCE OVERVIEW

?? ?
How has the steel
industry performed
relative to other
global resource
industries?
Who are the main
steel companies
and what are their
financial measures? How do the
company cash
flows vary over
time?

5
STEEL INDUSTRY RETURNS ARE MUCH WORSE THAN OTHER ESTIMATE

GLOBAL RESOURCE INDUSTRY RETURNS

Percent; after-tax economic profit (ROIC-WACC) over the cycle in 1990’s

Steel (Top 10 -4.2

global players)

Aluminum -0.1

Pulp and Paper -1.1

Chemicals 1.3

Oil refining -2.2

Source: xxxxx analysis 6

AS A RESULT, INDEXED CAPITAL MARKET PERFORMANCE IS WORSE
THAN THESE OTHER INDUSTRIES
January 1, 1995 = 100 index points

400

350

300
S&P Industrial
250 NYSE Composite

200

Dow Jones Chemical

150
Dow Jones Forest
100 Products and Paper

50 Dow Jones Steel

0
95 96 97 98 99 00 01

Source: Compustat
THE STEEL INDUSTRY EVEN UNDERPERFORMS ALL OTHER METALS
Steel
companies
4.8 Copper
Freeport McMoRan
companies
4.4 Benchmarks
(averages)
4.0
3.6 Cement Broken Hill
Market-to-book ratio

3.2 MDAX

2.8 Rio Tinto

Olin

2.4 Baoshan Alcoa Anglo

Aluminum American
Iron&Steel
2.0 Norddeutsche Sumitomo Paper
Affinerie Japan Energy
1.6 Mitsubishi Materials

KGHM Polska Miedz

1.2 KME
Nucor
Union Minière**
Steel Phelps Dodge
Nippon Steel
12
Wolverine Pechiney Noranda Market
0.8 AK Steel
Holding
Outokumpu
China Steel Grupo Mexico 8 cap
USINOR Kobe Steel ThyssenKrupp
0.4 Boliden USX
MIM
Poongsan Holding
Kawasaki
POSCO 4 in U.S.
Arbed $ billions
Bethlehem
Corus Norilsk Nickel
1
0 1 2 3 4 5 6 7 8 9 10
Size (book equity in U.S. $ billions)

Source: Global Vantage; xxxxx analysis 8

THE STEEL INDUSTRY IS HIGHLY FRAGMENTED: TOP 10 GLOBAL
PLAYERS MAKE UP ~30% OF WORLD PRODUCTION
Crude steel production, millions
Newco (Arbed-Usinor) 43.0
Recent merger
Nippon Steel 28.4 will create a production
output of about 43
POSCO 27.7 million tons
Ispat international 22.4

Corus 20.0 Corus is the result

ThyssenKrupp 17.7 of a merger of British Steel
and Hoogovens
Shanghai Baosteel 17.7 in 1999
NKK 16.0
Riva 15.6 Thyssen
and Krupp
Kawasaki 13.0 merged in 1999
Sumitomo 11.6
NKK and
SAIL 10.9 Kawasaki will merge
10.7 2001/02
USX
China Steel 10.0
Total production = 788
Source:Metal Bulletin, 2000 9
NO STEEL PLAYER EXCEEDS $10 BILLION IN MARKET CAPITALIZATION
Operating
Production Revenues margin Market cap
Company Location Million tons $ billions Percent $ billions

Newco (Arbed- Europe 45.1 26.8 8.0 3.9

Usinor)

Nippon Steel Japan 28.4 27.9 5.9 9.8

POSCO Korea 27.7 12.2 16.7 6.8

Ispat International London 22.4 5.1 6.2 0.3

Corus* Europe 20.0 17.5 -1.0 3.9

A long trend of poor
ThyssenKrupp Europe 17.7 7.7 3.2 7.0 performance has left
the steel industry with
Shanghai China 17.7 3.7 16.5 7.0 no dominant players,
Baosteel and only one near $10
Billion in market
NKK Japan 16.0 16.2 4.5 3.0 capitalization
Riva Europe Private Private Private Private

Kawasaki Japan 13.0 11.9 6.0 3.7

Sumitomo Japan 11.6 4.7 1.5 0.8

SAIL India 10.9 3.8 -4.2 0.4

USX U.S. 10.7 6.1 1.0 1.7

China Steel China 10 3.2 21.1 3.4

*Formerly British Steel

Source: Hoovers, 2001 10
PRICES ARE STRONGLY CYCLICAL AND STEADILY DECLINING ACROSS
THE VALUE CHAIN…
U.S. dollars per ton

800

700

600

500

400
Galvanized

300 Cold rolled coil

200 Hot rolled coil

Slabs

100

Source: Metal Bulletin 11

…WHICH HAS A DRAMATIC IMPACT ON THE NOPLAT OF THE TOP 6
PLAYERS*
USD Millions
NOPLAT**

Posco

Nippon Steel

Usinor
NKK

Arbed
Corus

*Top 6 players as of 1999

**Net Operating Profit Less Adjusted Taxes
Source: Worldscope 12
WHICH INVESTORS NOW CONVERT INTO SHARE PRICE VOLATILITY
Percent

HRC price vs. TRS indexed performance* (Europe)

300

250

200 • TRS is correlated to

Average general trends in
150 steel market prices
TRS
• Not reliably
100
predictable, but a
correlation is clear
HRC price
50

0
1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

* In August of each year

Source: xxxxx analysis 13
CHAPTER 1 - SUMMARY

• The global steel industry has a long standing history of destroying shareholder
value (WACC – ROIC ~-4.2%) with no improvement trajectory over the past 10
or more years

• Steel has unattractive returns even when compared to other global resource
industries

• Steel companies are small on a global market scale, and generally thinly
traded. This has left few large-scale investment opportunities

• A strong pricing cycle and downward trend (due to factors discussed later),
adds substantial volatility to steel company cash flows

• The stock markets see steel stocks as primarily cyclical plays

14
??
CHAPTER 2: STEEL 101 – THE BASICS

What is the steel

value chain, what are
the different product
techniques, costs,

?
capital, and
products?
What are the different
players or roles in the
value chain?

How has the

industry evolved
over time?

What are the

basics of supply,
demand and
margins?

15
BUSINESS SYSTEM OF THE STEEL INDUSTRY

Distribution channels
Raw material preparation • Direct sales from producer
• Sintering/pelletizing of to consumer
iron ore • Steel service centers and
stockholders
• Coking of the coal – Owned by steel mills
Iron Steel Hot-
• Shredding of the scrap making making Casting rolling – Independent
Pick- Cold- Annea- Temper- Coating and • Traders
ling rolling ling ing finishing

Type of player Integrated mill

Mini mills

Reroller

Equipment
• Sintering plant Blast Converter • Contin- Hot-rolling • Picking line • Hot-dip
• Pelletizing plant furnace • BOF ous mill • Cold rolling mill galvanizing line
• Coke ovens • EAF casting • Annealing line • Electro-
• Shredders • Ingot • Skin pass galvanizing line
casting • Tinning line
• Color coating
line
• Lacquering line
End products
• Sinter Pig iron Liquid steel Semis Long • Cold-rolled • Galvanized
• Pellets • Blooms products sheets sheets
• Coke • Billets • Rails • Cold-rolled • Tinplate
• Scrap • Slabs • Sections plates • Organic-coated
• Bars sheets
(rebars • Magnetic
and sheets
merchant)
• Wire rods
Flat products
• HR coils
• HR
narrow
strip
• plates

Source: xxxxx
16
 THERE ARE 2 BASIC PROCESSES FOR PRODUCING STEEL:
INTEGRATED AND MINIMILL

Steel Cold
Iron mining Iron making Casting Hot rolling Finishing Distribution
making rolling

Bloom/
Bloom Billet Bar
billet cast- Bars
mill mill mill
Ore Sinter ing Long
line products
Rod Tube
Tubes
Integrated Iron ore Blast Steel melting mill mill
process pellets furnaces shop
Slab Plate
Ingot Plate
mill mill
teeming
Coal Coke
ovens
Galvanizing Galvanized
mill coil

Slab Hot strip Picklers Cold roll- Anneal- Flat

Minimill Scrap Electric arc
caster mill ing mills ing products
furnace
process

Cold
Ore DRI* rolled
coil

Hot rolled coil

*Direct reduced iron: scrap substitute

Source: xxxxx 17
ANIMATED STEELMAKING PROCESS

18
ANIMATED STEEL FINISHING PROCESS

19
INTEGRATED PLANTS HAVE A HIGHER PROPORTION
OF FIXED COSTS FOR HRC PRODUCTION TYPICAL HRC EXAMPLE

Percent Fixed costs*

Minimill Integrated
100%=$280 100%=$350
Capital cost 5
18
Materials and services** 15
Labor 5
20
Energy 12

15 Differences in
2 processes and
technologies result
Raw materials 63 in different cost
45 structures

Fixed cost proportion ~ 15% ~ 40%

Typical volume 1 MTPY 4 MTPY
Typical investment $100/ton $350/ton

*Capital costs, labor, energy (20%), materials and services (15%)

**Includes refractories and electrodes
Source: xxxxx analysis 20
THERE ARE 2 BASIC TYPES OF STEEL PRODUCTS: Flat products

FLAT AND LONG Long products

Narrow strip/skelp Welded tubes

Plates
Slabs HR sheets
Galvanized and
HR coils or HR
wide strip electrogalva-
Crude steel or Cold-rolled coils Electrical sheets nized sheets
liquid steel

Metallic coa-ted Tinplate + TFS

sheets + backplate
Ingots
Coated sheets
Original coa-ted
sheets Aluminized
Wire rods sheets

Rebars Other bars

Billets Bars
Pig iron Light sections <
Merchant bars
80 mm

Flats
Tube rounds Seamless pipes

Beams
Rail and rail
accessories
Angles
Bloom

Heavy sec-tions (
80 mm) Channels
Iron castings Steel
casting
Shapes

Forgings Sheet pilings or

piles
Source: xxxxx 21
FLAT AND LONG PRODUCTS HAVE DIFFERENT CHARACTERISTICS
Characteristic
Method of production
Trade patterns
Markets served
Economies of scale
Ease of production
Pricing patterns
Impact of CIS mills on Western mills
Government involvement
Impact of new technologies
Dependence on raw materials
Dependence on energy
Ease of entry
New product development/R&D
Battle against competing materials
Importance of downstream outlets
Price levels
Degree of regionalization
Fixed vs. variable cost
Number of producers
Source: WSD 2000
Long Products Flat-rolled Products
• Typically electric are furnace (EAF) • Typically blast furnace
• Regional/international. Includes sizable trade in semis. • International/regional. Also includes sizable trade in semis.
(slabs)
• Construction generally • Consumer durables (especially automotive)
• 200,000-400,000 tonnes • 1-3 million tonnes; ~500,000 with EAF technology
• Merchant bar, rebar and commodity grade wire rod easy. SBQ/engineered • Historically, an expensive, complex technology. New TS/FR EAF
steels far more difficult. technology easier.
• Steel scrap prices the big factor. Adjusted for scrap prices, prices far less • Demand and market influenced. Massive swings on world export
volatile than for flat-rolled steels. market.
• A big factor on the export market • Less of a factor, but still significant in commodity grade sheet and
plate
• Typically only minor to no involvement • Very involved traditionally in many countries
• Not significant • Very significant since Nucor’s first thin-slab/flat-rolling plant in 1989
• Steel scrap • Iron ore, coking coal and coke
• Needs cheap electricity • Natural gas, coal, oil, and electricity
• Fairly easy. Relatively low capital cost, low tech and low economies of scale. • Difficult with high capital costs, although far less difficult tan before
with EAF-based TS/FR units
• Only at a moderate pace • Many grades and products developed,especially for automotive
applications
• On-going with cement. Steel structurals and rebar in a continuing battle for • Fierce with aluminum and plastics
the construction market.
• Sometimes significant, especially in wire rod. • Important
• Lower priced • Higher priced
• Very high – lower foreign exchange impact • Moderate – higher foreign exchange impact
• Low fixed costs • High fixed costs except EAF operations
• Highly fragmented • Only one or two in many developing nations, still many globally
22
INTEGRATED PLANTS MAKE MORE HIGH VALUE FLAT NOT EXHAUSTIVE

PRODUCTS THAN MINIMILLS • Main products

Percent; EU, US, Japan categories

100% ~ 135 Mtpy 100% ~ 210 Mtpy

• Rebar • Plate
• Merchant bar 15 • Hot rolled sheet
• Light / medium
sections
• Mesh quality wire rod Minimill 70

• Drawing quality wire 85

rod • Cold rolled sheet
• Steelcord • Deep drawing
• Sections for critical Integrated 30
quality sheet
applications (off- • Tin plate
shore,…)
Long Flat
products products

Main product focus Commodity Higher quality

Source: World capacity and Production Report; James F. King; 1998; 1996 23
??
CHAPTER 2: STEEL 101 – THE BASICS

What is the steel value

chain, what are the
different product
techniques, costs,

?
capital, and products?

What are the

different players or
roles in the value
chain?
How has the
industry evolved
over time?

What are the

basics of supply,
demand and
margins?

24
STEEL PLAYERS HAVE MANY ROLES ACROSS THE VALUE CHAIN

Iron Iron Steel Hot Cold

Casting Finishing Distribution
mining making making rolling rolling
Examples

• Posco
• Usinor/Arbed
1 Wholly integrated players* • Nippon Steel
• CSN

• CST
2 Slab makers • Imexsa

• Nucor
3 Mini-mills • Steel Dynamics
• Lucchini

4 Rollers • California Steel

5 Re-rollers • Worthington

*Including "mini-grated" players, using electric furnaces within classic

6 Service • Ryersen-Tull
production chain
centers**
**Mainly independent operators in the U.S.
Source: Metal Bulletin; xxxxx analysis 25
HOWEVER DOMINANT PLAYERS ARE USUALLY INTEGRATED
% of total flat products production

Surface-
Slabs HRC CRC
treated sheets # of players in Top 50
steel producers

Integrated
1 players 80 82 78 78 41

2 Slab makers 8 0 0 0 4

3 Mini-mills 12 13 12 12 5

4 Rollers 0 5 5 5 0

5 Re-rollers 0 0 5 5 0 Too small players to

be in our focus

TOTAL 100 100 100 100

Source: xxxxx analysis 26

Source: xxxxx analysis
3 MAIN TYPES OF PLAYERS HAVE UNIQUE CHARACTERISTICS

Producers Distributors

Characteristics 1. Integrated mills 2. Minimills 3. Service centers

Product mix Flat products (HR coils, CR Flat products (HR coils, CR Flat products (HR coils, CR
coils, plate, galvanized coils); coils, plate, galvanized coils); coils, plate, galvanized coils);
long products (bar, tube, wire) long products (bar, tube, wire) long products (bar, tube, wire)

Product sweet-spot Narrow gauge, large width CR All HR product, large width CR and HR product with
coils, high surface and flatness coils; commodity products narrower width
requirements

Input feedstock Iron ore, limestone, coal Steel scrap, fluxes Master coils from the mills

Internal processes Coke ovens, blast furnace, Electric arc furnace, caster, Slitting, blanking, painting
steel melting shop, caster, rolling mills
rolling mills

Lead times 1-4 months 0.5–2 months 1-30 days

Cost structure Highly fixed, capital intensive, Less fixed, less capital Highly variable, less capital
higher than minimills intensive, and lower than intensive
integrated mills

Service capabilities R&D capability, involvement in R&D capability, involvement Inventory management, short
early product design in early product design lead times, daily delivery

Some major players Usinor/Arbed, Posco, Nucor, Steel Dynamics Worthington, Ryerson,
Nippon Steel, U.S. Steel Metals USA, Steel Technologies

27
SO FAR, SIZE HAS BEEN NEGATIVELY CORRELATED Integrated
Minimills
WITH PROFITABILITY

Integrated and minimills 1990s ROA

Percent Reasons for lower
20 profitability for bigger players
Relatively lower performance
15 along several core processes

Relatively more costly to control

10 the operations with different
focuses
5
Slow to manage portfolio
actively (e.g., divest unprofit-
0 able businesses)

More difficult to respond to

-5
market demand changes in
downturn
-10
Sales
$ Millions U.S.
Source: Global Vantage 28
??
CHAPTER 2: STEEL 101 – THE BASICS

What is the steel value

chain, what are the
different product
techniques, costs,

?
capital, and products?

What are the different

players or roles in the
value chain?

How has the

industry evolved
over time?

What are the

basics of supply,
demand and
margins?

29
WORLD STEEL LEADERSHIP HAS EVOLVED WITH DEMAND
Reason for
ERA Leader success Cause for downfall
1945-1970 USA WWII victory • Milk asset base, insufficient reinvestment in
BOF, CC, etc.
• Transfer rent to steel workers
• Oligopolistic pricing breeds complacency by
management

1960-1975 Western Europe Rebuilding • Government interference to locate new

economies golden facilities
sixties • Social pressure to prevent closure of
obsolete facilities
• Transfer of rent to steel workers
• Oligopolistic pricing breeds complacency by
management
1965-1985 Eastern Building military
Europe complex • Bureaucracy and centralism leads to
Political credo tonnage objectives without regards to quality
or client needs
• Transfer of rent to steel workers
• Pricing disconnected to cost breeds
complacency by management
1970-1985 Japan Building economy
Technology • Government interference to prevent capacity
mastery adjustment
Quality orientations • Transfer of rent to steel workers
MITI • Oligopolistic pricing breeds complacency by
management
1985-? Korea, Taiwan, Building economy
other use of modern • Probably the same reasons as the four
S.E.A., U.S. technology previous leaders
minimill standardization
30
ASIAN COUNTRIES TODAY ARE EXPERIENCING COST LEADERSHIP

1950-1960 1960-1970 1970-1980 1980-1990 1990-2000

Leader USA Germany Japan Japan Taiwan

USSR Benelux Korea
UK France
UK
US mini

Follower Other Japan Germany Korea Japan

Europe USA Italy Taiwan Germany
USSR Europe Benelux
UK Italy
France

Laggard Japan Other Europe Other Europe USA USSR

USA USSR Eastern Europe
USSR US integrated
Spain

Source:xxxxx estimates 31
…AND RAPID GROWTH*

Apparent steel consumption/GDP

Kg per US$ thousands

160 Steel consumption at Steel consumption

or above GDP generally below GDP
140

120

100 RoA
Korea
Eastern
80 Middle Europe*
East/
60 Africa

40 South America
China** Western Europe Japan
20 India* Oceania North America

0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Steel
intensity
evolution Rapid Stabilization Rapid Decline Maturity
Growth

* 1990s
**PPP adjusted
Source: xxxxx analysis 32
??
CHAPTER 2: STEEL 101 – THE BASICS

What is the steel value

chain, what are the
different product
techniques, costs,

?
capital, and products?

What are the different

players or roles in the
value chain?

How has the

industry evolved
over time?

What are the

basics of supply,
demand and
margins?

33
WHILE STEEL CONSUMPTION IS FLAT GLOBALLY, DEMAND OF SOME
FLAT AND LONG PRODUCTS HAS INCREASED
Thousand tons
Global
growth
3% CAGR
0.5%
360,000 1990-1999
HRC
300,000

240,000

180,000 CRC

120,000 Plate
Rebar
3% CAGR
60,000 Rails
Heavy sections 1990-1999

Wire rod
0
1990 91 92 93 94 95 96 97 98 1999

Source:JFK 34
STEEL DEMAND IS PRIMARILY DRIVEN BY THE CONSTRUCTION AND
AUTOMOTIVE INDUSTRIES
Percent
World consumption
100% = 760 million tons

Others
Containers
and packaging

Oil and gas 6

3
4
Machinery and equipment
7
36 Construction
Converting and processing 8

15
Automotive

21

Service centers

Source: WSD; Eurostat 1999 35

ASIA AND SOUTH AMERICA ARE MAJOR DEMAND GROWTH REGIONS
Percent
Consumption by region Regional consumption growth expectations
100% = 760 million tons
South America 5.0

South Middle
China 3.8 "Growth
America East Africa
Oceania regions"
Other Asia 3.2
CIS
4 221 Eastern Europe 2.9
4
North
America 19 44 Asia Africa 2.1
Small but
Australia 2.1 growing regions

24 Middle East 2.1

Europe
NAFTA 0.9
"Restructuring,
EU 15 0.8 slow growth
regions"
Japan 1.0
Source: IISI 2000, xxxxx 36
FLAT PRODUCTS, ESPECIALLY IN ASIA, ARE HIGH-GROWTH SEGMENTS
Percent annual growth

Products W. Europe* N. America** Asia*** Latin America****

Long Sections,
-2.6 2.4 5.1 3.6
pro- bars
ducts Wire rod 2.0 5.0 6.2 3.8

Coated 3.4 4.8 2.8

Flat sheets/plates 6.8
pro- Sheets -1.4 3.9 9.2
ducts
Plates -0.8 4.0 8.5 0.2

Pipes, tubes -1.4 1.5 10.3 -0.2

Total -0.5 3.6 6.5 4.6

*Based on period between 1990 and 1994

**Based on period between 1990 and 1996
***Based on period between 1993 and 1996
****Based on period between 1990 and 1995
Source: Eurostat, AISI, SEASI, ILFA 37
VIRTUALLY EVERY MAJOR GEOGRAPHY HAS SUBSTANTIAL STEEL
PRODUCTION
Million tons
123

Top 10 producing
97 94 nations account for 70%
of total production

50
42 41

27 25 25 24

China USA Japan Russia Germany South Ukraine Brazil Italy India
Korea

Source: IISI 2000, xxxxx 38

WITHIN FLAT PRODUCTS, MARGINS INCREASE AS MORE
VALUE IS ADDED
U.S. $ / metric ton 19

15 40 Avg.
Avg. profit
HRC margin, while Avg.
large, is highly volatile conver- margin
120 profit
sion
margin
cost
67 Avg.
conver- 550
64 Avg. sion 491
profit cost
Avg. margin 356
conver-
sion
225
cost

Slab HRC CRC Galvanized

cost price price price

*Assumption based on reasonable profit margin on value-added CRC to galvanized conversion

Source: xxxxx Steel Cost Model; xxxxx analysis 39
CHAPTER 2 - SUMMARY

• Integrated players generally serve higher quality, more demanding plant product
segments, but
– Are very capital intensive (~$350/ton of capacity)
– Are typically 25% more costly than minimills
– In North America, usually have substantial legacy costs

• Minimills emerged in the last 20 years and have captured most of the long products and
a substantial portion of commodity grade flat products

• Returns do not correlate with size or degree of integration and global players typically
are integrated

• Steel is consumed across many segments and tends to evolve from long to flat products
as countries evolve
– Consumption is global
– Demand growth varies dramatically by region
– Production is global, often supported early on by governments
– Margins tend to become more attractive (and stable) as more value is added to the
products

40
CHAPTER 3: GLOBAL FORCES AT WORK

??
What are the
structural
characteristics of
the global steel
industry?

What are the “wild

cards” and important
uncertainties in the
future?

• China
• Russia
• Latin America
• Traded HRC marketplace
• Steelmaking/casting
technologies

41
THE GLOBAL STEEL INDUSTRY SUFFERS FROM A VICIOUS CYCLE
WHICH PERPETUATES THE POOR RETURNS DESCRIBED IN CHAPTER 1

Development
of new effective,
inexpensive Financial
technology pressure by
shareholders
Intense
pressure for
cost reduction
from existing
Debottlenecking capacity
investments
Growth in
Poor profitability
developing world Entry
Restructuring by
high-cost players
Increasing
scrap pool
Flat demand in
developed world Flatter
and collapse in cost curve
Eastern Europe Persistent and sub-
stantial excess
capacity
Downward
Differences in pressure on
regional growth prices
rates, slow global
growth

42
THIS CYCLE IS CAUSED BY SEVERE STRUCTURAL DISADVANTAGES
Key structural issue
Does market growth exceed the
debottlenecking rate of capacity
expansion?
Are entry barriers high enough to
retard significant entry?
Is the industry highly
concentrated?
Are operating rates high enough to
support full-cost pricing?
Is the cost curve steep enough to
support good returns for well
positioned players?
Do transportation costs or trade
barriers create attractive local
markets?
Steel
NO Debottlenecking rate
exceeds market growth by
0.5 to 1.0 percent
NO Investment as low as
$.50 per $1.00 of revenue
with minimill technology
NO Globally, the top 10
producers own only 26% of
capacity; regionally
concentrated in Europe
NO Operating rates only
around 75 percent at cycle
midpoint
NO Difference between
highest and lowest quartile
only around 35%
NO With the exception of a
handful of markets (e.g.,
Brazil), trade is very open
and driven by excess
capacity and cost position
Other basic materials
> 1% annual capacity
“shortfall” in aluminum, paper,
and chemicals
More than $1 of investment
required for $1 of revenue in
all cases; >$5 in oil refining
Comparable concentration
ratio in oil refining, but higher
elsewhere (e.g., 75% in Al)
85 to 90% operating rates in
other basic materials
Much steeper – nearly 200%
gap in oil refining, 100% in
paper and Al
Same

Result: Global 2-3% price cost squeeze over the past 10-30 years
and deteriorating performance for most companies 43
GLOBAL STEEL PRODUCTION EXCEEDS LOW Global steel
production
DEMAND GROWTH Global steel
consumption
Million metric tons

706
1994
703

732
1995
717

730
1996 716
Demand
growth = 0.5%
779 vs. GDP=2.5%
1997
756

757
1998
751

765
1999
749

791
2000 760

44
 Utilized
THIS RESULTS IN HUGE EXCESS CAPACITY LOOKING capacity
FOR MARKETS
Million tons, percent
Between 100-200
million tons of
excess flat
product capacity
estimated in year
2000

1,165
1,090 1,130
1,006 1,034 1,063
973 949 976

There are
regional
differences
in capacity
utilization
76 76 77 75 77 73 71 71 71 rates

1993 94 95 96 97 98 99E 2000E 2001E

*Of carbon crude steel

Source: Deutsche Bank 45
FURTHER, LOW MINIMILL CAPITAL COSTS AND RICH SCRAP MARKETS
MAKE COMPETITIVE ENTRY EASY
Minimum efficient capacity
Million tons
2.5 3.0
Traditional
1.0
integrated route 0.4

Capital expenditure/ton 475 140 400 250

$/ton capacity
Electric furnace is Thin-slab technology
always low capital- allows minimill entry
cost option into sheet products

Minimal efficient capacity

Million tons
1.0 1.0
Minimill route 0.4 0.4

Capital expenditure/ton $10 $140 $225 $250

$/ton capacity 0
Steel making Long Sheet Cold rolling/
products products finishing (sheet
products)
Casting/hot rolling

“Classic minimill”
Source: xxxxx analysis 46
FINALLY, LOW REGIONAL UTILIZATION AND RELENTLESS
DEBOTTLENECKING ENSURES PERSISTANT OVERCAPACITY ESTIMATE

Percent Productivity increase,

increases capacity
faster than market
Insufficient Debottlenecking exceeds growth
utilization rates growth upstream
Average utilization Global change in excess capacity
rates without investments*

Crude steel 1.0

EU (15) 80
• Structurally
Up- overcapacities in
stream Hot rolled long > 2.0
upstream avoid
US 87 attractive positioning
HRC 0.0 • Only cost leadership in
upstream will provide
Japan 68 chances for
CRC economically sufficient
-0.4 utilization
• Downstream demand
Asia 72 Down- growth provides
stream Galvanized -2.1
options to grow and
Organic take attractive
CIS 47 coated -1.4 positions

Target 85%
* Net balance between debottle-
Investment options, however are
• Regionally different
necking rate and demand growth
• Customer specific
Source: 1999 IISI, xxxxx 47
DESPITE CONSOLIDATION IN EUROPE, THE GLOBAL STEEL INDUSTRY
REMAINS HIGHLY FRAGMENTED…
Percent market share of top 10 producers
World Europe

73

1980 2001 1980 2001

Nippon Steel NewCo Finsider NewCo
US Steel Posco Thyssen Corus
Nippon Kokan Nippon Steel Usinor LNM
Finsider Corus British Steel ThyssenKrupp
Bethlehem Ispat International Krupp Riva
Sumitomo Shanghai Baochan Hoesch Salzgitter
Kawasaki ThyssenKrupp Hoogovens Voest-Alpine
Thyssen Riva Klöckner Rautaruukki
Usinor NKK Arbed Lucchini
J&L US Steel Salzgitter SSAB

Source:IISI 48
…WHILE THE MAIN CUSTOMER SEGMENTS ARE HIGHLY
CONCENTRATED…
Percent

Global market share of top 4 companies*

Automotive Containers

Would need to combine top 8

Would need to combine top 20
steel companies into 4 to
steel companies into 4 to
match customer
match customer concentration
concentration
78

48
53
26 21 25

OEMs Producers of Beverages Tinplate

automotive (soft drinks) producers
steel

*Top 4 white goods manufacturers represent ~60% of global consumption

Source:xxxxx analysis 49
…AND HIGHLY REGIONAL (AUTOMOTIVE EXAMPLE)
Percent share in production

Western Europe North America Japan

100%=13.0 million units 100%=15.3 million units 100%=10.3 million units

Others VW Group Others

Others
GM Toyota
Honda
GM
Daimler
Chrysler Honda
Renault/
Nissan
Ford Nissan Ford Mitsubishi

Top 4 Top 4 Top 4

market share market share market share
=58% =84% =71%

Source: 1999 Global market data book Automotive News 50

OVERCAPACITY AND COMMODITIZATION OF PRODUCTS FORCE
STEEL TO BE PREDOMINANTLY A COST GAME
U.S. $/ton HRC
Only ~35% separates the top
and bottom quartiles making
it difficult even for well-
positioned players to win

Accumulated capacity
*Production costs (1,000 t)
**Estimated hot rolled cost
Source:World Steel Dynamics 51
 BRAZIL
STRUCTURAL FACTORS OVERWHELM TRANSPORTATION
DISADVANTAGES AND DRIVE GLOBAL TRADE…
U.S. $/ton HRC
• Cheap access to high-
quality raw materials
(iron ore, coke, gas)
• High quality equipment

FOB Port Shipping Port Inland Import Landed Usinor Usinor Nucor Rouge
cost costs costs** cost transport duties*** cost CSN Fos Florange Craw- Dearborn
HRC at **** into France France fordsvill U.S.
CSN Western U.S.
(Brazil) Europe
or U.S.
*Operating costs, does not include depreciation and plant overhead
**For a 45,000 t shipment. Large quantities arrangement with long term clients insurance included
***Based on a US$ 280 transfer price
****Transport to deliver in central Germany, Sidor delivery to the USA
Source: World Steel Dynamics, James F. King, Aduaneiras, xxxxx estimates 52
. . . WHILE EXCHANGE RATES HAVE A DRAMATIC IMPACT ON
COMPETITIVENESS 1999 Exchange rate
Aug. 2001 exchange
rate

U.S. Dollar vs. Relevant Impact on Import Cost Position vs. 1999*; Delivered
Currencies to Philadelphia
1999 Average Vs. August 2001 Dollar/ton HRC**
Typical low cost
270 vs. Produced
+35%
245
238 234
226 220 224
215
200

190
+20% +20%

+14%

+10%

DM FF ¥ £ Brazilian KTS USINOR Nippon Corus - CSN –

real Fos sur Steel - Llanwern Volta
Mer OITA Red
* Assumes no charge to cost position on 1999 delivered cost curve except exchange rate effect
** Assumes 60% of cash costs are in local currencies
Source: xxxxx analysis 53
GLOBAL HRC CAPACITY DELIVERED TO PHILADELPHIA
DEMONSTRATES THE WEAK POSITION OF THE U.S. * . . .

Cost
$/ton Nearly 60 million tons of
350 global capacity can be
shipped to the U.S. and
arrive cheaper than local
300
capacity

250

Western Europe - Medium

200

North America - Medium

Western Europe - High

Western Europe - Low

North America - High

North America - Low

150
E. Europe - Low

Japan - Medium
Mexico - Low

Asia - Middle

Japan - High
100
Brazil - Low

India - High
India - Low
Asia - High
Posco

50

0
0 50 100 150 200 250 300
Capacity
Millions of tons
*Includes local shipping, port costs, overseas shipment, and U.S. port costs, 1999
Source: xxxxx analysis 54
WHILE PRIMARILY A REGIONAL BUSINESS, GLOBAL TRADE IS AN
IMPORTANT FEATURE OF THE STEEL INDUSTRY
Net trade flows, million tons
5

Russia/CIS
7
North 16 16
Europe 2
America
China 2
1 Japan
3 All Other
Asia Asia
1
South
America 4

Asia 2000
Import 16 (only
Russia)
Export 10
Net import 8
Source: IISI; Salomon Smith Barney 2000; xxxxx 55
ASIA AND RUSSIA HAVE SIGNIFICANTLY GAINED IMPORTANCE
FOR TRADE

"WINNER" "LOSER"

Asia Europe
1997 -8.5 1997 6.5
+7 Mt -13 Mt
2.5% of 6.2% of
1998 -1 production 1998 -6.5 production

North
America
Russia/CIS
1997 -20 -5 Mt
1997 17 3.8% of
+5.5 Mt production
6.9% of 1998 -25
1998 production
22.5 Latin
America
1997 5 -1 Mt
4 2.8% of
1998 production

Source: IISI; Salmon Smith Barney; xxxxx 56

LOCAL TRADE REGULATIONS CAN FURTHER AFFECT GLOBAL TRADE
FLOWS AND COMPETETITIVENESS
PRELIMINARY

Trade regulations Implications

European Union • Quota on imports from Russia Text

• 201 trade case

U.S. • Bankruptcy laws
• Anti-dumping laws on Latin
American steel

Asia • Low import duties

Latin America

Source:xxxxx 57
THESE STRUCTURAL FACTORS HAVE LED TO A LONGSTANDING PRICE-
COST SQUEEZE
Index, Western Europe

160

140 Trend 1970 - 98

-2% to -3% p.a.; 1.9%
120 in North America
100

80

60

40

20

0
1970 72 74 76 79 80 82 84 86 88 90 92 94 96 1998

*Example calculated with: Iron ore 24%, coal/coke 16%, scrap 6%, power 6%, labor 24%, other 24%
**Costs for coal/coke 1996 estimated
Source: xxxxx 58
CHAPTER 3: GLOBAL FORCES AT WORK

??
What are the
structural
characteristics of the
global steel industry?

What are the “wild

cards” and
important
uncertainties in the
future?

• China
• Russia
• Latin America
• Traded HRC marketplace
• Steelmaking/casting
technologies

59
THERE ARE 4 ‘WILDCARDS’ OR IMPORTANT UNCERTAINTIES
IN THE GLOBAL STEEL INDUSTRY
Key Question Answer

• Will Russia become a substantial, • Yes, mostly in lower value

Role of Russia longstanding exporter? products

• Will China’s investments turn • Not likely. Local demand will

Role of China them into a net explorer of steel? exceed domestic capacity for
the next 10 years

Role of Latin America • Will Latin America’s access to • Yes, but mostly in slab or HRC
superb raw materials and high production. Most likely will
quality equipment establish them become a “hot end utility” for a
as major global players? US or WE player

Emergence of traded
HRC market
• Will Enron (or similar) succeed in • Unlikely, given current market
creating a liquid HRC market conditions and the value to
place? companies

New technology
• Will thin slab casting and strip • Thin slab, yes, already a
casting become widespread? standard product. Thin strip 60
THE FORMER USSR IS A NEAR-TERM THREAT TO
WESTERN PRODUCERS
Summary perspectives
• Currently, Russian manufacturers have a tremendous cost
Role of Russia advantage due to devaluation of ruble-denominated labor,
freight, and energy expense – strong firms will prosper over 2-3
years, and will need to invest in long-term competitive
advantage and world class standards (Severstal, NLMK, Oskel)
• Huge capacity overhang will drive Russia further into export
markets over the long term
• Due to stagnating demand and the increasingly difficult exports
situation, Russian steel production is expected to contract (large
Asia exports market fell 20-25%). Ukrainian production is to
shrink significantly in the near future.
• Many producers have switched to commodities, unable to sell
value add products due to anti-dumping regulations, poor
quality, and distribution difficulties. This has led to deterioration
of finances and competitive position where weaker companies
will exit (Zapsid, KMK, NTMK)
• In near term, Russia is a major threat to Western players with
large cost advantages. A JV in Russia may be more attractive
than acquisition due to government view of sales to foreigners

61
RUSSIA HAS A NEAR-TERM COST ADVANTAGE AS THEIR
INPUT PRICES FELL FOLLOWING THE RUBLE DEVALUATION
U.S. cents

14.0

12.0

10.0 Taking into

account historic
8.0 price apprecia-
tion, one can
6.0 expect Russian
Rail freight input prices to
Cents per 10 ton/km provide domestic
4.0
manufactures
Electricity
with an advantage
2.0 Cents per Kwt/Hr
for the next
Gas 2-3 years
0.0
1992 93 94 95 96 97 98 Cents per 10 m3

62
OVER THE MEDIUM-TERM, RUSSIAN STEEL PRODUCTION IS
EXPECTED TO CONTRACT…
Million tons

• Stagnating domestic demand

• Difficult exports situation

41.3
37.8 37.5 36.9 36.3 36.5

Export 25.3
21.8 21.9 21.7 21.5 22.0

Domestic
consumption 16.0 16.0 15.6 15.2 14.8 14.5

1997 1998 1999 2000 2001 2002

Source: xxxxx analysis; EIU; analysts' estimates

63
…PARTIALLY DUE TO DECLINE IN EXPORTS TO ASIA
Russian exports, Million tons
Total Russian production = 25.3
Most stable market
The largest market
• European market is • Fell 20-25 percent in
heavily regulated by Flat 1.5
1998, expected to shrink
quotas, which are 1.6 further
Long
expiring in 2002 • Lifeline of Urals-Siberian
plants
Semi 0.4
Flat 2.2
Long 3.2
Other
Flat 0.7
3.5 Semi 3.4

Long 0.2

Europe 8.8 Asia

Semi 1.8 2.7
Fastest growing market
• Due to political affiliations
and low quality
requirements this market is
willing to take a lot of
Russian steel redirected
The biggest
4.2 "Value added"
from SE Asia Middle
East/Africa market
Flat 1.1
6.1 • Grew in 1998
0.5
Long as a result of
2.6
Americas redirection of
Semi
3.9 Asian exports
Flat
• Expected to
0.2
Long stabilize at
Semi 2.1 1996-97 level
due to self-
imposed quotas
Source: Customs Committee; Ministry of Economy, 1997; xxxxx analysis 64
FEW WINNING RUSSIAN FIRMS WILL EMERGE THAT ARE
OF POTENTIAL INTEREST TO WESTERN STEEL MARKETS
Million tons

NLMK OEMK
Flat products Long products
1997 production: 7.41 1997 production: 1.65
Pros • Good location • Excellent location
• 100 percent BOF • Most modern plant (built in
• 100 percent CC mid 19980's by Germans)
• Very high • Largest DRI producer in
• Export share Europe
• Controlling interest • Good management
• Belong to a private equity • Own Europe's richest iron
consortium ore mine
• Unlikely to be affected by
anti-dumping legislation

Cons Exposure to exports • Relatively small produces

• Questionable management low margin products
• Owners may be reluctant
to sell

Source: xxxxx analysis 65

ROLE OF CHINA: ASIA AND CHINA ARE IMPORTANT MARKETS
Demand Growth
• Asia consumes >40% of
global crude steel
• Heavily focused on China
(6% growth) and Japan (no
growth) collectively
represents 65% of Asian
demand
• Regional growth rate higher
than global growth driven
heavily by China, Taiwan,
and India
Customers Globalizing
• Major investments by global
OEMs in Asia driving shift to
value-added products
• Still strong demand for basic long
products for infrastructure objects,
etc.
• Asia takes 60% of global auto Supply
OEM investment
• Low cost production and
strong export focus at
POSCO likely to remain
• Chinese mills investing is
Players new, higher value
• Low overall profitability for most capacity, will remain a net
players; POSCO an exception importer of steel for at
• Dramatic consolidation expected least 5 years
within China, unlikely to change • Major exporting region
profitability due and persistent
• Further alliances expected in overcapacity (25% or
region and globally to supply more)
global OEMs

Net: Asia will be an attractive volume growth region overall, with particular focus
on the huge Chinese market
• Japan and Korea will continue to have persistent overcapacity and will export
aggressively
• Overall returns to be low for Asia steel industry 66
ASIA IS THE LARGEST CONSUMER OF STEEL
Percent, million tons

100% = 690 Mt 100% = 283 Mt

consumption

ROW (61 Mt)

107 China*
9 63% of
consum-
ption
41 Asia
Europe 29 (283 Mt) 72 Japan
(203 Mt)
26 Korea
20 Taiwan
21
58 Other
North America/
NAFTA (143 Mt)
Asia detailed

*130 million tons in 2000

Source: IISI, 1997; xxxxx
DEMAND GROWTH IS DRIVEN BY S.E.A. AND EMERGING ASIAN
MARKETS
Mature countries Developing countries Emerging countries
Countries • Japan • South Korea • India
• Singapore • ASEAN countries • China
• Hong Kong

Growth • Limited growth • Growth sensitive to • Internal growth, not

export and global significantly depending on
growth export

Position in • Strong position of • Depending on imports, • Heavily investing in

steel existing players with the exemption of new and updated steel
production dominating market South Korea no significant production capacities
capacities

Market
indicators*
•Population 123 150 2,500
(millions)
•Steel 93 95 95
consumption
(million tons)
*Base 1997
Source: xxxxx
WHILE ASIAN DEMAND GROWTH IS SIMILAR FOR FLAT AND LONG
PRODUCTS OVERALL…
Percent
Market size CAGR, 1990 - 97

100% = 283 Mt Ø flat 5%

Flat HR/CR 18 8
products
Tubes
17 4
Coated
8 2
Other flats 5 6
Long Concrete reinforcing 13 5
products bar
Wire rod 12 9
Heavy section 7 0
Railway track material -1
Other long products 19 4

* Drawn wire, tubes and other smaller segments Ø long 5%

Source: IISI 1997; Euroconsult; team analysis
THE FLAT PRODUCT MARKET IS MORE INFLUENCED BY GLOBAL TRADE

‘000 tons
Import ratio
Market size Percent
Approximately 25% of
the consumption is
Total flat 141,483 24 depending on
products imported quality
products
Total long 129,539 8
products

Thereof
Long product market
is mainly regional
Concrete domi-nated, only
24,695 0 effected in some
reinforcing bars
smaller segments
with higher value-
Wire rod 17,844 14 added products

Railway track 2,238 14

Source: IISI 1997; xxxxx

SIMILAR TO ROW, ASIA IS EXPERIENCING OVERCAPACITY
'000 metric tons, HRC

Excess
capacity

170,000 Capacity
160,000
150,000 • Drop of Asian
28%
demand in wake
140,000
of crisis has
130,000 Demand* created
120,000 substantial over-
110,000 capacities
100,000 • This situation is
90,000 unlikely to
80,000 change in the
0 near future
1992 93 94 95 96 97 98 99 2000 2001

Annual demand growth 2%

Annual capacity growth 5%
Operating rates 88%

*Based on IISI; MEP forecasts, August 1998

Source: Interviews; xxxxx analysis
DOMINANT CHINESE PLAYERS ARE BECOMING GLOBALLY
COMPETITIVE
New entrants likely
• SBMI gradually losing
power to control mills
• Low tariff* 6% in under-
supplied quality flats
Supply global • Foreign investment Market growth with
• 30% of ore has to welcomed undersupply
be imported • Heavily growing
• Technical market: 2000 130
equipment Steel producers Mt demand
continuously consolidation • Undersupply in hot-
upgraded to world- • Formation of market rolled material by
class level leaders occurring 15-20 million tons,
• Persistent (Baoshan, Wuhan) 2000
undersupply of • Consolidation and • Lack in capabilities
local market due to integration of smaller to produce high-
strong demand producers supported quality steel
by government

Clear strategy • Cover local demand

• Become globally competitive
• Upgrade equipment and build capabilities to cover most
product segments of steel, e.g., OEM-related demand
* HRC width >800 mm normal tariff 14%, MFN 6%; HRC width <800 mm normal tariff 30%, MFN 8%
Source: SBMI; Steel Statistic Yearbook 98; xxxxx
…BUT CHINA WILL CONTINUE TO BE A NET IMPORTER OF
STEEL IN THE NEAR-TERM
Million tons of crude steel
Demand Projection Supply Projection
180 180

27
+6%
annual
130 25 Despite
substantial
13 growth in
domestic
capacity, China
110 will continue to
be a major
importer of steel
for the next
5 years

2000* 2005 2000 Projected Announced Gap to be 2005

(projected) domestic increase to capacity filled by consumption
production 95% increased imports or (projected)
(85% utilized) (high further
utilized) confidence) domestic
and expansion
*20 million tons imported in 2000 debottle(?)
Source: xxxxx 73
THE DOMINANT PRODUCERS NEED TO LOWER THEIR COST
POSITIONS TO BE COMPETITIVE HRC ESTIMATE
USD per ton*

Low cost produc Top Chinese pro High value adde

ers ducers d producers

239 244
229 232 224
222 219 219
207
189

Automotive
sheet focus

Thyssen-Krupp

Voest-Alpine
Panzhihua
Maanshan
Shougang

Baoshan
POSCO

Anshan
Wuhan
Iscor

Capacity
0 10 20 30 ‘000 tons

Source: World Steel Dynamics, xxxxx 74

THE CHINESE STEEL INDUSTRY WILL UNDERGO GREAT CHANGE
IN THE MEDIUM TO LONG-TERM

The number of steel • Producers will gradually merge into 6 - 7 regional

clusters grouped around existing major mills
producers will
gradually decline • Some mid-sized mills will survive stand-alone
from 1,500 to less • Blast furnaces <100 m3 will close at 2 Mt/a/a
than 20

Mills will • Mills will invest heavily in downstream facilities to

aggressively seek increase production of flat and tubular products
to improve the • Mill will undertake widespread technical renovation to
profitability of improve the efficiency and productivity of existing
existing production capacity
• Mills will extensively rationalize their workforces
• More profitable mills will expand their upstream capacity

Mills will ultimately • For example, mills will seek international joint venture
adopt a more partners to assist them in becoming competitive
outward focus

Source: xxxxx 75
DESPITE STRUCTURAL ADVANTAGES LATIN AMERICAN STEEL
INDUSTRY HAS BEEN UNDERPERFORMING

Summary Perspectives

Role of Latin America • South American steel companies have been enjoying favor-
able conditions when compared to mature markets like
Western Europe, North America and Japan; with fast growing
demand, there are few players and sizable import protections

• Even with structural advantages of cheap iron ore and other

inputs, and modern facilities, these companies destroyed
value consistently, and poor investment and capital
management

• Brazilian producers are well positioned to take on a role of

“hot end utilities” for a sizeable U.S. or European producer; or
will forward integrate into these markets

• Net, Latin America will continue to be an important force

in global trade flows (particularly in semi or HRC products)
because of extremely low costs and an attractive local market,
but unlikely to migrate deeply into value added products

Source: xxxxx 76
SOUTH AMERICA IS A HIGH GROWTH REGION AND ENJOYS COST
ADVANTAGES

• The apparent steel consumption has been growing faster than regional production,
Favorable market resulting in an increase in domestic sales for local players
conditions • Import duties, port costs and geographic location create a barrier to import
• There are few competitors in each product line, allowing firms to have some market
power and avoid price-competitive behavior

• Costs of key inputs for steel production are low compared to more mature steel
Good cost markets
position • Operational efficiency is improving but has not reached international benchmark levels,
with asset productivity below international players
• The overall balance of cost is favorable, with the South American firms enjoying strong
positions in the world cost curve
• Scale for Brazilian plants is good (4 to 5 million ton/year) and reasonable for Sidor and
Siderar (2 to 3 million tons/year)
• In 2001, CSN announced intent to build 4/0 million tons of slabmaking capacity for
export market
Recent moves
• CST approved plans to expand 2.0 million tons for domestic and export HRC market
• CST purchases Heartland steel, signaling a move of forward integrating into advanced
economies?

Source: xxxxx 77
CONSUMPTION GROWTH OUTPACES PRODUCTION GROWTH
Million tons, South America

Flat products Long products

Production
CAGR = 4.1%
Production
Consumption CAGR =
CAGR = 9.0% 3.3%
Consumption
CAGR = 7.9%

Source: Instituto Latino Americano del Fierrp y el Acero, 1997 78

SOUTH AMERICAN FLAT PRODUCTS ENJOY VERY GOOD
INDUSTRY CONDUCT
Brazil* Argentina Total Mercosul

Slab (to market) 3 – 3

Hot rolled coil 2 1 3

Cold rolled coil 2 1 3

Galvanized 2 1 3
sheet
1 1 2
Tin plate
1 1 2
Plate
1 – 1
Stainless sheet
1 – 1
Electrical sheet
*Usiminas/Cosipa assumed as 1 player
Source: xxxxx
79
LOCAL PRICES ARE ADVANTAGED OVER LANDED STEEL COSTS
HRC Index BRAZIL EXAMPLE

The local price

advantage is
over 30%

Import Shipping Port Import Landed Premium Local

FOB costs* costs tariffs** price price
price
Hot rolled coil
275 35 7 33 350 NA 345
example
(US$/t)
*Shipping costs may change depending on the product value-added. For example: it is higher in percentage
terms for hot rolled and lower for cold rolled coated
**Import tariffs for non-Mercosul countries
Source: HGI, Metals Bulleting, Aduaneiras, xxxxx 80
AS A RESULT, DOMINANT S.A. COMPANIES ENJOY RELATIVELY
HIGHER MARGINS
U.S.$/ton

Siderar
Cosipa
Usiminas
CST**
CSN

Accumulated capacity
*Production costs (1,000 t)
**Estimated hot rolled cost
Source:
BI World Steel Dynamics 81
CSN IS CURRENTLY THE LOWEST COST PLAYER IN LATIN AMERICA
U.S. $/ton ESTIMATE

353
335

Western USA
Europe cost cost
range range

239 243

FOB Port Shipping Port Inland Import Landed CST/ Usiminas Sidor****
cost Costs costs** cost Transport duties cost Cosipa
**** *** CSN

*Operating costs, does not include depreciation and plant overhead.

**For a 45,000 t shipment. Large quantities arrangement with long term clients insurance included
***Based on a US$ 280 transfer price
****Transport to deliver in central Germany, Sidor delivery to the USA
Source: World Steel Dynamics; James F. King, Aduaneiras, xxxxx estimates 82
A TRADED HRC MARKETPLACE IS IN ITS INFANCY AND WILL
LIKELY NOT TAKE OFF IN THE NEAR-TERM

xxxxx Perspective Product characteristics

Despite several attempts (including Enron),

we believe traded slab or HRC markets are Market characteristics
not likely to take off in the short run (1-3
years) as they do not satisfy the interests of
key players Industry changes

Source: xxxxx 83
THE NECESSARY CONDITIONS FOR ITS SUCCESS ARE NOT
CURRENTLY IN PLACE
Condition Evaluation Rationale
• Standardized physical product • Large product range, no standard specification, quality seen as
a major issue
teristics
Product
charac-

• Open access to logistics • Coils require specific transportation

infrastructure
• Storable product with reasonable • Coil oxydate when stored
shelf life
• Fragmented buyers and sellers • High fragmentation of both suppliers and buyers
Market characteristics

• Low degree of vertical integration • Strong vertical integration

• Product frequently bought and sold • High frequency of transactions ?

• Reliable market depth • Reasonable market size

• Industry supply / demand imbalance • No shifting in imports/exports

• No physical intermediaries

• Change in supplier / customer • No evidence of interruption of historical relationships, no

relationships deregulation, no price shock
changes
Industry

• New entrants disrupt industry chain • Enron offering physical contracts on coil

• Triggering event (deregulation, • US steel players in financial distress could trigger restructuring
unbundling) of industry

• Likelihood to take off

Source: CST interviews 84

COMPANIES ARE ADOPTING THIN-SLAB CASTING TECHNOLOGY TO
LOWER THEIR COST POSITION
Advantages

• Step into the $20 billion

flat-rolled steel market,
Conven- Slabs Reheating and which include higher-
Poured into a margin products
tional 8-10 inches rolling through
caster • Lower capital costs,
production thick 10 rolling stands
enabling minimills to
produce sheet in small
volume
Molten Flat steel • Faster production
steel 0,1 inches • Overall cheaper production
Thin-slab Disadvantages
casting • All parts of the automated
Slabs Reheating and mill must run at near-
Thin-slab
2 inches rolling through 4 perfect efficiecy or
casting
thick rolling stands production will stop
• To get into lucrative
appliences and auto-body
market large amounts of
high-quality scrap are
40% energy cost savings needed
50% time reduction • If the thickness is too low it
wrecks the mill

Net: Working today in

some mills, standard SMS
product now
Source: xxxxx 85
CHAPTER 4: VALUE CREATION IN THE STEEL INDUSTRY –

??
THE INVESTOR PERSPECTIVE

Given this
background, how
can individual
companies create
value?
Can an investor
read the cycle?

86
WHILE ALL STRONG STEEL COMPANIES PULL THE “TRADITIONAL”
LEVERS
How value is created Realistic improvements
required to fight price/cost
Cost productivity
• Reduce consumption of input factors by lean • 1–2% reduction in variable
manufacturing, e.g., waste reduction costs/ unit p.a.**
• Reduce total purchasing spend by better pooling of • 2% throughput increase per
purchasing and TCO* mindset year
• Reduce fixed cost/unit by increasing throughput

Market productivity
• Improve customer and product mix by knowing • 2–5% increase in return on
customers better and understanding true profitability sales
per product/customer
• Capture price premiums by more tailored product and service
offerings
• Achieve higher average price/unit by improved pricing policy
• Achieve better salesforce performance by improved
capabilities and incentives

Capital productivity
• Eliminate or postpone low-return investments/capital • 10–20% reduction of planned
expenditures by better investment decision process investments
• Increase returns on investment portfolio by • 50–100% higher returns on
strengthening return on investment mindset new capital

*Total cost of ownership

**Equals 5–10% reduction in 5 years
Source Expert interviews; team analysis 87
THERE ARE 2 MAIN MOVES TO CREATE VALUE: SPECIALIZE OR
CONSOLIDATE

Performance
• ROA Redefine core to
• Market/book differentiate via
• etc. disaggregation and
specialization, e.g.
automotive

Grow core via

consolidation to
create value and
improve market
Achieve excel- environment
lence in multiple
core processes to
defend core

Size
• Operating assets
• Market value
• Revenues
• etc.
Source: xxxxx 88
CHARACTERISTICS OF DIFFERENT PLAYERS – FOR DISCUSSION

END GAME PERSPECTIVE

"Volume “Specialist
producers" players"

Size • Size of > 75 mt • Size above 3 mt but

below 75 mt
• Will result in
two strategic
Business focus • Broad product portfolio • Focused product types of
covering long and flat portfolio, covering high producers with
quality products a common
focus on
Production • Global production • Global customer reach relentless cost
operation strategy control
• Will lead to
global players
M&A strategy • Ongoing identification of • Targeting JV and but also to
new acquisition targets acquisitions of other locally
or JV partners players with same quality dominant steel
focus suppliers

Main success • Cost leadership and • Product leadership in one

factor ability to absorb M&A or two product segments
at leading cost position

Source: xxxxx 89
THERE ARE SEVERAL EXAMPLES OF SUCCESSFUL EXAMPLE

COMPANIES USING THESE STRATEGIES

Volume oriented Quality oriented

player Specialists
player

Company ROS Company ROS Company ROS

Nippon
4.8 AK Steel 7.3 VDM 7.6
Steel

Thyssen-
Arbed 3.5 3.4 SSAB 6.6
Krupp Note: Only
small
production
Böhler –
Usinor 1.9 Salzgitter 2.5 6.1 volumes
Uddeholm approx.
 1 million ton
Average Average Average
3.4 4.4 6.8

Source: Bloomberg; Hoppenstedt, 1999/2000 90

ROCEs ABOVE 10% CAN BE ACHIEVED
Percent

Aspiration
Company Characteristics level 12 - 14%

11.4
AK Steel Integrated, 7.2 13.0 • ROCE targets
(1996 - 98) quality products of > 12% are as well
feasible in steel
13.1 industry
Böhler- EAF, specialty 9.8 14.8
Uddeholm products
• Despite the steel
cycle average per-
(1996 - 99)
formance, above
15.7
Nucor EAF, long 11.7 18.7 10% can be
(1996 - 99) commodity achieved
products
ROCE
5 10 15 20

Source: Bloomberg; xxxxx Corporate Finance 91

THE SPECIALIST'S STRATEGY
Acquire/build M&A, PMM,
skill transfer, rationalizing
capabilities
• Acquire/merge with other
players, with same product
focus
• Gain size in specialist
segment
Source: xxxxx
Invest in
Consolidate Disaggregate further and
new capacity
selected seed new businesses
and/or in selected
niches
niches
• Create/extend leading • Continuously assess
position business portfolio and
• Improve performance revitalize focus through,
through skill transfer/ e.g., innovation, on more
synergies, as no guarantee skill based niches as even
for improved conduct skill based advantage
deteriorate over time
• Continuous enforce lean
organization approach
and principles
92
SPECIALIST STRATEGY CASE STUDY: KRUPP
THYSSEN STAINLESS
Acquisition
New activity
Crude steel capacity JV
Kt/year

Krupp Hoesch Thyssen AST Mexinox Shanghai

Edelstahl
Germany Germany Italy Mexico China

1994 1995 1994-1996 1995-1997 2001

Leader towards
3,000 2,730 2,800 global leader in
2,610 stainless flat
2,500

2,000
1,510
1,500
Please note that
1,000 840
market size of
stainless flat with
500 ca. 9000 tpa is
significant smaller
0 than previous
example

Source: World capacity report James King; press review; annual reports 93
EXAMPLE: RAUTARUUKKI – DIFFERENTIATION VIA SERVICE EXAMPLE
Days from receipt of order to delivery

70 70
Superior delivery
time and reliability Rautaruukki's activities
allow Rautaruukki to • Increase in flexibility throughout
earn a price premium steel mill
of 3 - 5% – Small batch size
42 – Roll changeovers in 12 minutes
– 2,000 products offered; order
size as small as 2 tons possible
• Increase in efficiency
21 – Use of electronic data inter-
change with customers
14
• Improvement of transport logistics
– Establishment of own
transportation company with
superior logistics
Rauta- Compet- Compet-
ruukki itor A* itor B*
Finland Finland Europe Europe Europe
1990 1996 1996 1996 1996
*Major European steel makers
Source: Annual reports; press clippings; xxxxx 94
EXAMPLE: AUTOMOTIVE SPECIALIST STRATEGY ESTIMATE
Million tons

Breakdown by metal type

Percent

60
6
Interior,
20 other
compo- Steel
nents sheet
Chassis 20 Others*
25 9
70
Engine,
10
power- Aluminum
train

Body-in- Total
white weight
. . . but expected to decline over
time

*Including cast iron and forged steel

Source:Opel, xxxxx 95
COMPANIES WITH THE LARGEST SHARE OF AUTOMOTIVE EXAMPLE
SALES ARE PERFORMING RELATIVELY WELL
Percent

60 61 ROS, 1998
Percent

41 AK Steel 8.9
36
Rouge 5.1

ThyssenKrupp 4.1

Usinor 2.5

AK Rouge Thyssen- Usinor

Steel Steel Krupp Sollac
Year 1998 1998 1998 1997 Focusing on
automotive
Million 2.3 1.8* 6.5* 6.6*
pays off
tons

*Estimate
Source: Annual reports, xxxxx 96
THIS IS DRIVEN BY GREATER PROFITABILITY IN HIGHER EXAMPLE
STRENGTH STEELS Cash cost
Indexed Margin
Relative price
HRC CRC HDG

135 140
132

40
39
100 100 100 44

14 10
21

96 100
86 90 88
79

Mild High Mild High Mild High

steel strength steel strength steel strength

Higher costs incorporated into comparison

Source:MEPS, Hoesch Hohenlimburg GmbH, Thyssen-Schulte Werkstoffe GmbH, xxxxx Steel Practice 97
SPECIALIZING MAY INVOLVE FORWARD INTEGRATION STAMPED BLANK
INTO DOWNSTREAM ACTIVITIES EXAMPLE

Sheet production Fabrication Assembly

"Conventional" • Metal companies • Blanking and stamping • Traditionally done by

are traditionally done by OEMs
– OEMs
– Automotive suppliers

Sheet production
and further value Fabrication Assembly
added

"New age" • Downstream • Less upstream activities, • Some outsourcing to

expansion for new e.g., stamping, but "tier-0.5" suppliers
products, e.g., further downstream (e.g., subassembly of
tailored blanks and expansion towards Smart body by
new processes, subassembly Magna)
e.g., hydroforming

Source: New Steel, team analysis 98

OPTIMIZED STEEL CAN HAVE HIGH IMPACT ON VEHICLE
CHARACTERISTICS…

ULSAB body
Steel types <10 Regular steel Weight
Kg
Reference
body
ULSAB
>90 High- body
strength steel
-18%
Forming process
Deep drawing Stiffness
Others Index
of sheet steel
sandwich
5 5 Reference 100
Hydro- body
forming 15 40 Conventional ULSAB
deep drawing body 180
Deep
drawing of 35 +80%
tailored
blanks

Source:ULSAB publication 99
…AND CAN INCREASE STEEL PRODUCER ROIC THROUGH PROFITABLE
VALUE ADDED PROCESSING
Assumptions

Revenues ROIC
Steel
Percent Percent
production

• Example: steel Steel 8.9

8.0
company, focused 0.9
production
on automotive
• ROS = 5.6% 78
• ROIC = 8.0%

Production of 22
tailored
blanks Tailored Steel Tailored Inte-
blank produc- blank grated
• Example: average production tion produc- busi-
producer of tailored tion ness
blanks
• ROS = 9%
• ROIC = 12%

Source:ULSAB team, xxxxx 10

ADDITIONAL ENGINEERING ACTIVITIES CAN FUTHER CONCEPTUAL
INCREASE PROFITABILITY OF STEEL PRODUCERS ROUGH ESTIMATE

Assumptions

Revenues ROIC
Steel Percent Percent
production
100% =
USD 0.9 billion
• Example: steel company, focused on
automotive Steel 8.5
• ROS = 5.6% 8.0
production 0.5
• ROIC = 8.0%
92
+
Engineering 8
activities Steel Engin- Combined
pro- eering business
Engineering
• Example: EDAG, Germany activities
duction activities
• One development project each year,
worth ~USD 70 million, e.g., BiW
development, prototyping, tool
planning Additional engineering
• ROS = 11% services can support
• ROIC = 27% sales and strengthen
interface to OEM

Source:xxxxx 10
KEY INITIATIVES MUST BE TAKEN BY PRODUCERS TO CREATE VALUE
IN AUTOMOTIVE SPECIALIZATION
Initiatives

Reorganization Focus on downstream activities

of interaction • Need to review opportunities to optimize metal
between supplier components along the entire value chain
and OEM • Need to build capabilities to handle sophisticated
• OEM focus on module design
modularization Focus on multi-material
• Joint vehicle Profitability
• Alternative materials to go beyond performance of
optimization current products
towards • Need to evaluate limits of current concepts and go
enhanced beyond these limits, using new multi-material concepts
performance Building customer link
• Engineering support
• Marketing and sales activities
+

Globalization of Follow their customer base

automotive • Follow OEM globally, if cost efficient
production • Capture volume from emerging new OEM

Improvement of
operational effectiveness

Source:xxxxx 10
INDUSTRY QUOTES

"Brazil will be the

upcoming region, where Restructuring in Europe
to serve slabs from" will be source of
– European CEO enormous value creation
– European CEO

"Next generation of
cooperations will cross Emerging alliances
continent cooperations" • Alliance Usinor – Nippon Steel
– Chairman of leading • ThyssenKrupp talks with
steel company NKK/Kawasaki
• Upcoming alliances (?):
TKS, AK Steel, NKK/Kawasaki
– Press clippings

Source: Press clippings; interviews 10

THE CONSOLIDATOR'S STRATEGY
ROA 3
Consolidate selected businesses

• Create/extend leading position

• Improve performance through skill
transfer/synergies, as no guarantee for improved
industry conduct
• Continue managing business portfolio
2
Acquire/build M&A, PMM, skill transfer,
rationalizing capabilities
• Acquire/merge with lower performing company,
where success in turnaround is possible, to build
resources and processes
1
Disaggregate and focus, and institutionalize high
performance ethics
• Ensure optimal relational form for each part of product/chain/function
matrix, e.g.
– Introduce market mechanisms between up-and downstream
– Potentially decrease exposure to asset intensive upstream (e.g., JV,
divestiture, source during up-cycle)
• Focus on businesses where excellence can be built/maintained

Growth
Source: xxxxx 10
PRICE SENSITIVITY TO UTILIZATION AND POTENTIAL FOR
CONSOLIDATION – GLOBAL PERSPECTIVE HRC producers
Correlation between HRC prices and HRC operating rates 1990 - 1998
USD per ton (1997 inflation-adjusted)

Adjusted Restructuring required

HRC price 600
• Managing capacity
500 will result in value
creation for industry
400 • Closures of obsolete
Full-cost price level* capacities have to be
promoted
300
2001 transfer price + 30% but
200
• Global interdepen-
dencies do not
guarantee long-term
100
sustainability, if
75 80 85 90 95 100
restructuring takes
place in only one
region
Utilization
Needed capacity Percent
adjustments to regain
break-even on
full cost basis

*Including overhead and capital cost

Source: Team analysis; IISI; Deutsche Morgan Greenfell (CRU) 10
CONSOLIDATION IN GLOBAL STEEL PRODUCTION IS OCCURING
Millions of tons Examples of move
Top 15 steel producers, 1980 Top 15 steel producers, 2001

Nippon Steel 32.9 UAA 43.1

US Steel 21.1 Posco 26.5
Nippon Kokan 14.0 Nippon Steel 24.3
Finsider 13.7 Corus 21.3
Bethlehem Steel 13.6 LNM 19.9
Sumitomo 12.7 Shanghai Baosteel 16.7
Kawasaki 12.7 ThyssenKrupp Steel 16.5
Thyssen 12.4 Riva 14.1
Usinor 9.2 NKK 11.6
Jones & Laughlin 8.8 USX 10.9
British Steel 8.4 Kawasaki 10.2
Inland Steel 7.8 SAIL 9.8
Republic Steel 7.7 China Steel 9.5
Broken Hill 7.6 Nucor 9.4
Global Market Global Market
Kobe Steel 7.4 share of top 15 Sumitomo 9.2 share of top 15
27% 33%
Source: IISI, Metal Bulletin 10
KEY ACTORS IN EUROPEAN CONSOLIDATION...
European capacity in t. million

Usinor/ Global 46 total

ARBED consolidator 33 flat steel

National 17 total
TKS Potential targets ?
consolidator 16 flat steel

Global 24 total • VA Stahl 5.1

ISPAT consolidator 16 long products • Rautaruukki 4.3
(long
products)
• Salzgitter 5.1
• SSAB 3.4
Bilateral 21 total
Corus • Huta Katovice 4.4
8 long products
• USX Kosice 4.6
Unclear 16 total
RIVA consolidation 10 long products
strategy

Source: xxxxx 10
...ARE INCREASING THEIR CONCENTRATION* IN INDIVIDUAL NewCo

SEGMENTS
Percent
Top 3 players

EZ 38 40 18 86 NewCo, TKS, Corus

Downstream process

Organic
38 21 15 75 NewCo, TKS, Corus
coated
HDG 47 14 9 70 NewCo, TKS, Corus

CRC 40 17 9 66 NewCo, TKS, Corus

HRC 35 16 12 63 NewCo, TKS, Corus

KTN, NewCo, Avesta

Flat stainless 35 26 22 83
Polarit**
Beams 21 13 10 44 NewCo, Corus, Riva

Rails 33 18 15 66 Corus, TKS, VA

Wire 11 10 8 29 Riva, NewCo, Ispat

TWB 40 17 10 67 TKS, Solblanc, VA

*Basis: installed capacities ** Without investment in new hot rolling mill
Source: xxxxx, VDEh 10
WHAT CONSOLIDATING COMPANIES ARE LOOKING FOR

Desired attributes
Potential consolidator
• Equipment capability and skills
• Customer relationships and
• Usinor/Arbed/Aceralia? market access
• NKK/Kawasaki? • Flexible, modular business
• Nippon Steel? system

• Thyssen/Krupp? • Stellar track record of operating

performance improvements

Source: xxxxx 10
PROFILE IN
CONSOLIDATION: NEWCO

11
NEWCO: STRUCTURE AND RATIOS

NewCo

Long + Stainless Trading

Flat steel and
sectional steel
services

Share of sales (%) 50% 15% 16% 19%

Market share (%)

- Europe 35% 21% 26% N/A
- World 10% 4% 15% N/A
World production (Mt) 33 11 1 N/A

Total employees Approx. 110,000 (world-wide)

Source: Annual reports, xxxxx 11

COMPANY PROFILE NEWCO BACKUP

Status of merger: Memorandum of Understanding signed (19 Feb., 2001) U = Usinor

Amalgamation: Agreement and terms of merger (8 June, 2001) A = Arbed
Ac = Aceralia
Planned time of official merger: January 2002** Organizational structure

Production volume (t. mill.): 45 Supervisory board

Chairmen: F. Mer (U), J. Kinsch (A)
Sales
EUR bill.
Total ~30 CEO
G. Dollé (U)
Flat ~15
Long ~4
Stainless ~5 CFO Strategy and Planning
Distribution, ~6 M. Wurth (A) P. Mathys (A)
trading, processing
Purchasing, R&D, IT
J. Ricaud (U)*
No. of employees: >110,000
EBIT margin (2000): 8% (estimate)
EBITDA margin (2000): 12% (estimate) Flat Long Stainless Distribution,
Pro-forma market capitalization (15 Feb., 2001): >EUR 5 billion Trading,
Processing
Expected synergies from merger: ~ EUR 700 million
Additional CAPEX savings by 2005: ~EUR 350 million
G. Ulacia R. Junck(Ac) J.-Y. Gilet (U) R. Hudry (U)
(Ac)
*In addition, implementation of alliance with Nippon Steel Corp.
**Depends on approval of EU Commission
Source: Press clippings, annual reports, Usinor website 11
KEY FINANCIAL FIGURES NEWCO

Turnover EBIT Margin

Million EUR Percent
29.488
27.076
24.218 Usinor Arbed
21.188
15,783
14,665
13,625
10,949
Usinor 8
7 6 5
13,755 4 4
Arbed 10,239 10,595 12,411 3
2

1998 1999 2000 2001E 1998 1999 2000 2001E 1998 1999 2000 2001E

Rationales for weak Usinor-Performance

• Disadvantages in downstream-structure
• High share of spot-grades and HRC-sales
• Some locations with cost disadvantages (Florange, Chertal)

Source: Annual reports; xxxxx 11

LEVERS FOR SYNERGIES IN NEWCO MERGER

• Economies of scale to counteract price-cost

squeeze
– Capex reduction
– Reconfiguration of locations Expected synergies of EUR
(non-coastal locations, Bremen, EKO ?) 700 million from 2006
onwards from
• Regional and global presence in fast-growing • Production optimization
markets, option of further growth • Adjustment of overhead
• Purchasing
• Synergies in R&D • Exchange of best practice
• Improved presence in the capital markets,
increase in liquidity with high share of
independent shareholders

Source: Press clippings; xxxxx Metals Practice 11

EUROPEAN CAPACITIES – FLAT STEEL
T. million

Sidmar Gent SW Bremen

BF/BOF 4.2 BF/BOF 3.8

EKO-Eisenhüttenstadt
BF/BOF 2.2
Sollac Dunkerque
BF/BOF 6.5 Cockerill Chertal
BF/BOF 2.6

ACB Sollac-Florange
EAF 1.8 BF/BOF 2.9

ACERALIA Aviles
BF/BOF 3.5 Sollac-Fos-sur-Mer Total flat
BF/BOF 4.5 steel
capacity:
32
Source: Plantfacts, JFK 11
EUROPEAN CAPACITIES – LONG PRODUCTS
T. million

Aceralia-Bar
Rund-EAF 1.0 Stahlwerke Thüringen
EAF 1.0

Aceralia-Aristrain
EAF 0.8 + 0.7 Arbed-Esch
EAF 1.2 + 0.9

Aceralia-Gijon
BF-BOF 2.0

Aceralia-Madrid
EAF 0.8 Arbed-Differdange
EAF 1.4
Rund-EAF 0.4

Aceralia-Zaragossa
Aceralia-UCIN Total long products
EAF 0,5.
Rund-EAF 0.7+0.9+0.8 capacity: 13.1
Source: Plantfacts, JFK 11
NEWCO’S NON-EUROPEAN LOCATIONS

J&L*
Stainless steel
JV-Baosteel-Corus- TrefilArbed Korea
100% Usinor
Newco wire production
0.8 mill. t
10% Usinor
0.8 mill. t
Belgo Mineira* tin cans
>50% Aceralia
CST Thai Inox
long products
flat products stainless rolling mill
2.0 mill. t
43.9 % Usinor 85% Usinor
Acindar 4.4 mill. t 0.2 mill. t
EAF – long products
Acesita
50% participation
stainless steel
1.1 mill. t long
28% Usinor
1.6 mill. t
* Included in NewCo‘s stated total production/capacity
Source:xxxxx 11
NEWCO ALLIANCES

JV
Usinor-Severstal
? for HDG for
automotive

Open issues
• Strategy for
– Flat steel in North America? Alliance*
– Flat steel in Asia? ? Usinor – Nippon Steel
for automotive

*Purchasing, Automotive
Source:Clippings, xxxxx 11
POSITIONING OF NEWCO – TOTAL FLAT STEEL MARKET

Growth
Market size (1995 - 2000)
Region Tonnes mill. Percent Lever

Japan 50 -0.8 Alliance with Nippon Steel

South America 15 Usinor and Arbed have good

0.5
position due to merger

Europe 98 1.4 Formation of NewCo

Eastern Europe
• Position/presence through EKO
(excl. CIS)
16
1.7
• JV with Severstal to dominate
automotive sector

North America 78 3.8 Unclear (stainless or flat steel?),

need for consolidation

Asia (excl. Japan) 100 9.5 Unclear (China/India)

Activities in growth
regions are to be expected
for global players

Source: xxxxx, IISI 11

SIMILAR TO STEEL PRODUCTION, STEEL DISTRIBUTION REQUIRES NEW
VALUE CREATION LEVERS

Distributor function/
Description value proposition

Brokered delivery • Arranging • Contact/contract

direct deliveries function
Steel mill – customer • Financing
dis-
tribu-
tion
Standard • Supply • Quantity bundling
"normal steel" • Basic supply
ex-stock • Proximity
Stock
• Different
Special • Supply products • Product quality financials and
products for special (guarantee function) operational
requirements • Product know-how success factors
Special (advisor function)
• Assortment depth • Most companies
have sales in all
segments

Special • Depending on customer • Meet individual

services request customer needs
– Complex value-added
treatment
– Logistics (JIT etc.)
– Flexibility/
emergency assistance

Source:xxxxx 12
THIS REQUIRES GOING BEYOND CURRENT FUNCTIONS...

Distribution

Classic functions Contemporary functions

• Contacting and contracting • Transformation through value-
• Assortment (product spectrum) added treatment
• Volume (quantity bundling) • Expanded service (system
• Stockkeeping (temporary
reconciliation)
• Bridging distances (logistics)
+ solutions, JIT etc.,)
• Advising

Source:xxxxx 12
... TO A GREATER VALUE ADDED ROLES
Function of Reasons for increase Reasons for decrease
distributor in importance in importance

• Contact/contract • Complexity reduction • Increasing market

for producers (fewer transparency (tech-
interfaces) nologies, EUR)
• Financing • Overall, no
• Customer change in
concentration share of
• Volume • Larger lot sizes • Completion of distribution
(quantity bundling) for producers single expected
• Stockkeeping • Producers' lead european market (number of
(temporary recon- times increasing • Customer distributors
ciliation) concentration will continue
• Stock reduction to decline)
for customers (JIT) • A shift to
• Assortment* • Complex products higher
(product spectrum) with wider range value-added
of materials functions is
forecasted
• Value-added • Customer trend • Producers' for-
treatment to outsourcing ward integration
• (SSC)
Advising • More new alloys
for special
applications
*In some cases, also quality function (ensuring consistent quality)
Source:Interviews, xxxxx 12
KEY DIAGNOSTIC QUESTIONS FOR MANAGEMENT
If you hear….. …you should ask
« We have set aggressive cost • What is the projected price-cost sueeze
targets…. » for the company?
• How exactly will you improve cost
position?
• What capex is required to fund these
cost reductions?
« We are managing our capital
expenditure… » • What capital management strategies are
in place to increase productivity and
target highest ROIC investments? What
decapitalization strategies are they
employing, if any?
« We have a sound growth
strategy…. » • How will they grow?
• How will they achieve this growth?
Organic, vs. M&A
• What is the likelihood of being acquired?
Who is the natural owner? What
operational/ information synergies can be
achieved?
Source: xxxxx
Desired response
• Not more than industry average of 2-3%
annually
• Through new technologies, improved
operations, e.g. throughput rates, or low
cost positions on input variables
• The capex investment required is
minimal and the projects will achieve
returns above WACC
• Most future investments are expected to
be capital light, where projects will be
above WACC
• We are de-capitalizing our balance
sheet, working capital, and capex
• Through consolidation or specialization in
high margin downstream businesses,
e.g. automotive
• We will dominate a niche position,
primarily through M&A
12
CHAPTER 4: VALUE CREATION IN THE STEEL INDUSTRY – THE

??
INVESTOR PERSPECTIVE

Given this
background, how
can individual
companies create
value?
Can an investor
read the cycle?

12
STEEL CONSUMPTION AND PRICES ARE CYCLICAL
Example HRC* in European** key markets

Cyclicality in consumption (adjusted by growth rate of +1.3%)

Indexed
volumes

Swing
100
+/-5% Key success
factor
• Experience
how to
manage the
cycle
Cyclicality in price
Indexed
price Swing per cycle
+/-10% price-
cost-squeeze
100 ~ 2 p.a.%

1986 89 92 95 98

* HRC: Hot-rolled coil

**Key markets: UK, Germany, France, Belgium/Luxemburg, Netherlands, Spain, Italy
Source: IISI, MEPS, xxxxx 12
BUT MARKET PERFORMANCE CYCLES CANNOT BE NORTH AMERICA
EASILY PREDICTED BY THE 3 KEY DRIVERS EXAMPLE

Shares vs. HRC price

140%
120%
100%
80% HRC price index
60%
40% Shares index
20%
0%

Shares vs. Inventory While a clear correlation

140%
120% exists between industry
100% Inventory
80% performance and key
60%
40%
Shares index drivers, it is risky to place
20%
0% too much weight on these
drivers
Shares vs. Industrial production
140%
120% Industrial production
100%
80%
60%
40% Shares index
20%
0%
Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01
Jul-95

Jul-96

Jul-97

Jul-98

Jul-99

Jul-00

Source: xxxxx analysis 12

KEY SOURCES OF INFORMATION

Company websites
Trade journals www.iisi.com Investment banks
• Daily newswire with industry • Salomon Smith
• World Steel news Barney
Dynamics • Prices information – market • Goldman Sachs
• Metal bulletin intelligence • Morgan Stanley
• Company information • Merrill Lynch
• Supply/demand information

12