The Steel Industry - OneSteel

The Steel Industry - OneSteel

Geoff PlummerCEO & MDOneSteel LimitedAustralian Steel InstituteSeptember 2006

INTRODUCTIONThe international steel industry is still evolving – driven byprivatisation and continued growth in ChinaDespite the changing landscape, the industry as a whole is notdelivering value to investorsTo provide continued customer value in the end markets, theAustralian & New Zealand steel industries need to become morecompetitive – at all parts of the chainConsolidation in domestic long products is one step towardsbeing more competitivep 2 Source: JP Morgan research 2005

EMERGENCE OF A FIVE-COMPANY TOP-TIERCrude steel production (m tonnes)Mittal SteelArcelorNippon Steel6.3%4.4%3.1%32.446.966.6Mittal and Arcelorhave merged to formglobal giantJFE3.0%31.6POSCO2.9%30.2Shanghai BaosteelUS SteelCorus GroupNucor2.0%2.0%1.8%1.7%21.420.819.017.9Top 10 = 304m tonnes= 28% of totalMittal data includes ISG(16.1mt) andKryvoristalThyssenKrupp1.7%17.6Data for 20040 10 20 30 40 50 60 70The top 10 producers now account for some 28% of total steel productionp 5Source: CRU, CRU Steel Conference, Barcelona, 7 March 2006

FOR NOW, STEEL INDUSTRY REMAINS LESSCONCENTRATED THAN OTHER BASE INDUSTRIESTop 10 Market Share (%)Crop chemicalsIron OreNickel959797Industrial gasesPigment8787Coking coal71Newsprint66Thermal coal62Lumber54CopperCement5054Even with regionalAluminiumEthyleneZincGold37424549consolidation, steelindustry concentration isstill very low compared toPulpChlorine2933other industriesSteel27 28p 6© Hatch Associates Limited, 2006Source: Hatch Associates, Joint India/OECD/IISI Workshop, New Delhi, India, 16-17 May 2006

STEEL STOCKS TRADE AT LOWER MULTIPLESCOMPARED TO INDUSTRIAL STOCKS141214 national stock markets havea forward PE of 12 times...Average 12 mth forward PE (X)10864Versus the average of 7 times12 months forward PE for 17major steelmakers20As a result, steel stocks trade at much lower forward price earningsmultiples than other industrial marketsp 8Source: Credit Suisse Equity Research

PRESENT AND FUTURE – THE ROLE OF CHINAChina has fuelled one of the biggest resource booms in historySteel, steelmaking raw materials, coke and a wide rangeof commodities are in growing demandIn 1992, China represented 7–10% of world demand for main base metals.In 2003, it was 20–25% of world demand. In 2005, it was around 25%.Even allowing for a slowdown from current growth rates, by 2010 Chinais likely to account for more than 30% of world demand and more than40% by 2020.China’s path to development is the same as that previously takenby most Western countries. The difference is the size and speedat which they embrace and duplicate Western technologiesThe Chinese government has espoused incredibly ambitiousgoals for development, including quadrupling GDP by 2020p 9Source: Macquarie Research Commodities, China’s impact on world freight markets – role of bulkcommodities, McCloskey’s European Coal Outlook Conference, Nice, France, 22-23 May 2006

SINCE 1999, CHINA HAS CAUSED A MASSIVEACCELERATION IN WORLD STEEL DEMAND GROWTHCrude steel demand growth contribution since 1945million tonnes crude steel3252752251751257525-25-7547141123 1338264World Ex-China China Total43-377663268294-125-611945-491949-541954-591959-641964-691969-741974-791979-841984-891989-941994-991999-042004-09fp 1018%16%Incremental crude steel growth rates in five-yearperiods14%Source: Macquarie Research Commodities, China’s impact on world freight markets – role of bulk12%commodities, McCloskey’s European Coal Outlook Conference, Nice, France, 22-23 May 200610% 9.1%25 years from 1974-1999:Y-o-YAnnual world steel demand growth back to 5–6%15.2% for the first time since the 1960s

millio-25-75SINCE-1251999, CHINA HAS CAUSED-61A MASSIVEACCELERATION IN WORLD STEEL DEMAND GROWTH1945-49World Ex-China China Total1949-541954-591959-641964-691969-741974-79-371979-841984-891989-941994-991999-042004-09f18%16%14%Incremental crude steel growth rates in five-yearperiods15.2%% Change Y-o-Y12%10%8%6%4%2%0%-2%9.1%7.0%7.0%5.8%4.3%2525yearsyearsfromfrom1974-1999:1974-1999:average annual wor;ld w orldsteel growth th 0.9% a year2.1%1.2%1.7%-1.0%-0.9%6.0%5.0%1945-491949-541954-591959-641964-691969-741974-791979-841984-891989-941994-991999-042004-09fQuantum of growth in five-year periods is now huge –leading to large investment requirements in steel and raw material capacityp 11Source: Macquarie Research Commodities, China’s impact on world freight markets – role of bulkcommodities, McCloskey’s European Coal Outlook Conference, Nice, France, 22-23 May 2006

SINCE 1999, CHINA HAS CAUSED A MASSIVEACCELERATION IN WORLD STEEL DEMAND GROWTH1200World Crude Steel Production – 1950 to 20051000800Million Metric Tonnes60040020001950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005Trend rate of growth may accelerate in the next decadep 12Source: International Iron and Steel Institute, World Steel in Figures 2006

CHINESE GROWTH – STRONGER,PROTECTED AND SUSTAINABLEDrivers of growth in China are the same as for other developingeconomies – urbanisation, huge pent-up demand for infrastructure andconsumer durables, exports/import substitution. Chinese underlying trendsfor steel are still strong, at least as strong as GDP trend growth of 7–8% paMain issue in China is relieving bottlenecks to allow growth to proceed.Problems arise when bottlenecks – including power, coal, rail and rawmaterials – become binding, as they did last yearSources of investment funding – domestic savings/retained earnings –are insulated from the vagaries of the global financial systemLarge trade surplus and foreign exchange reserve base are very positivefor sustainable growthChina is essentially profitable, with huge productivity gains continuingto offset margin erosion. Overcapacity is needed and will encourageproductivity improvementsp 13Source: Macquarie Research Commodities, Metal Bulletin’s Iron Ore Conference,Athens, 30 May – 1 June 2006

p 14

AUSTRALASIAN STEEL INDUSTRY – AN OVERVIEWThe Australasian Steel IndustryIs extremely small on an international scale, the ability of local companiesto impact global or regional trends is negligibleIs advanced. Despite its size, it is relatively innovative, is less fragmentedat the production end than overseas steel sectors, and has ready accessto good quality raw materialsEnjoys a broad distribution footprintCan compete effectively against imported and fabricated productand provide a solid return for shareholdersManages complexity well – producing and supplying a wide rangeand depth of products despite relatively small scale productionRequires strong relationships for mutual dependencep 15

AUSTRALASIAN STEEL INDUSTRY – INTERNATIONAL IMPACTImports, at all levels, are a reality of the Australasian steel landscape:semi-finished steelsteel productfabricated steel productmanufactured steel productsThe choices available to our customers have increased markedlyover the last 10 yearsCompeting on price alone will not provide sufficient returns for thelongevity of the steel industryp 16The Australasian steel industry must play a critical role.It must continue to add value and evolve with the dynamic landscapeor it will fall the way of steel within the automotive industry

AUSTRALASIAN STEEL INDUSTRY –WHAT DOES OUR END MARKET WANT?Our customers are lookingBeyond price and availabilityFor further value-adds such as innovation, new products,new markets, customer and technical support services,quality guarantees and reliabilityAt supply providers who reduce or manage riskFor suppliers who are key components of their successp 17

AUSTRALASIAN STEEL INDUSTRY –WHAT DO WE NEED TO FOCUS ON?To continue to compete, Australasian steel companies needA competitive strategy to provide:lower cost make and servecontinuous increases in value to our customerinnovation in product and service delivery at all levels of the value chain –manufacturers, distributors, processors, fabricators, specifiers and service providersTo understand and deliver value to changing customer requirementsand demands while delivering maximum value to shareholdersA whole of industry (steel value chain) approach to delivering acompetitive and highly valued offer to our customers and markets.We have to recognise and be confident that our industry doesprovide value in what we offerp 18

BENEFITS OF PROPOSED ONESTEELAND SMORGON STEEL MERGERMore competitive businessStrategic benefits are expected to be realised through: efficiencies inmanufacturing operations, improved facility utilisation, improved supplychain management, production, and other savings. The results will benefitcustomers and improve our ability to compete against importsGrowthExciting and complementary growth options include: Project Magnet, theinternational potential of LiteSteel TM beam, and expansions in metal recyclingwhich offer shareholders diverse sources of potential earnings growthStronger companyWith pro forma revenue in excess of $5.5 billion 1 , EBITDA in excessof $700 million 1 and more than 10,000 employeesp 191 Sales and EBITDA are based on the average of current broker estimates for OneSteel andSmorgon Steel for the year ending 30 June 2006 less sales and EBITDA from the steel andmerchandising arm of the Smorgon Steel distribution business. EBITDA includes full pro formasynergies of $70 million. Approximate only. Further detail will be provided in the ExplanatoryMemorandum to the scheme of arrangement.

BENEFITS OF PROPOSED ONESTEELAND SMORGON STEEL MERGERIncreased ability to service customersA more diverse geographical manufacturing footprintWider range of products and servicesDiversity and size of operationsOneSteel expects to have an enhanced regional footprint with over 200sites across Australia and more than 10 offshore offices and operations.This presence is expected to provide a solid platform for growth in newand existing marketsExpected synergiesThe combination of the businesses is expected to generate net EBITDAsynergies of $70 million per annum by the third full-year after completionof the proposed transaction. These synergies will allow the further growthand development of OneSteelp 20

BENEFITS OF PROPOSED ONESTEELAND SMORGON STEEL MERGERNew revenue streams developedWill allow OneSteel to offer an extended product offering to customersand facilitate the development of new business structuresImproved security of raw material supplyReliable raw material supply via OneSteel’s long-term iron ore resourcesthrough Project Magnet and Smorgon Steel’s scrap recycling business.Also expect to be more competitive through the natural hedges associatedwith these improved raw material supply arrangementsIncreased liquidityFollowing the proposed transaction, OneSteel will be a stronger Australiancompany, expected to rank well inside the top-100 companies on the ASX.This should provide greater liquidity for investors and facilitate greaterinterest from domestic and international investorsp 21

ONESTEEL AND SMORGON STEEL MERGER:BENEFITS TO OUR CUSTOMERSA more viable and stronger industry structureMore cost competitive long products manufacturing baseImproved reliability and service to customersA greater percentage of product manufactured closer to market whichincreases responsivenessThe ability to move product more effectively across and around the countryIncreased ability to innovate and invest in new products and servicesAbility to provide solutions and services to reduce or mitigate keyrisks in marketA long products company with increased financial depth and investingin the future of the industryAbility to take the best of both businessesp 22

ONESTEEL AND SMORGON STEELMERGER: STATUSOneSteel and Smorgon Steel are continuing to engage the ACCCto reach regulatory approvalOneSteel and Smorgon Steel have asked the ACCC for a ‘pause’in its consideration to provide additional information on some complexcommercial issuesAt the end of that time, the companies will discuss new timeframeswith the ACCC. The ACCC will then determine a new decision dateOneSteel and Smorgon Steel look forward to continuing discussionswith the ACCC and remain strongly committed to the mergerIt continues to be ‘business as usual’We appreciate the assistance of many of our customers, suppliersand associates in your support through this process to datep 23

IN SUMMARYThe Steel IndustryIs going through an accelerated phase of evolutionHas shaken off the shackles of regulationIs experiencing regional consolidationIs still fragmented but some large regional players are formingIs underperforming on returns to sales and assets comparedto other industriesDelivers sub-optimal share market returns. As such, steel sharestrade on lower multiplesThereforeThe Australasian Steel sector and OneSteel must become more competitivein order to help our customers be more competitive and more successfulDomestic consolidation in long products manufacturing is a step towardsbecoming more competitivep 24

Australian Steel InstituteSeptember 2006

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