I ndian Steel Markets 2011 Conference Gurgaon, 15-16 March, 201 1

Steel Market Development in the BRIC Countries: Common Themes, Important Differences Remarks by John Lichtenstein Managing Director, Global Metals Industry Indian Steel Markets 2011 Conference Gurgaon, 15-16 March, 2011 © 2011 Accenture. All rights reserved.

Introduction • The economic crisis was a decisive turning point for the global steel industry, effecting a permanent shift in influence and momentum to the developing world • Market growth • Enterprise scale • Technological development (eventually) • While the conditions for near term steel market growth are well established across all the BRIC countries, important differences exist with respect to • Growth drivers • Vulnerability to shocks • Long term sustainability of market demand growth • Significant differences also exist across BRIC steel industries in maturity levels and future outlook • Concentration, technology development, self-sufficiency are among the key factors • Strong market growth enables, but sometimes can also retard industry maturation • China’s near term growth will slow from recent levels, but remain robust over the next two planning periods due to continuing infrastructure and rising consumer spending • China’s growing export capability for steel-intensive capital and consumer goods poses a growing threat to global steel markets, potentially sapping growth in other BRICS © 2011 Accenture. All rights reserved.

- Global Steel New World Order 1999-2008: Apparent Steel Consumption (CAGR%) Global Steel Apparent Consumption (MT) 2008-Steel Consumption China 14.3% ME 12.1% Russia 7.3% India 6.7% Brazil 6.0% RoW 5.7% Japan 1.8% EU-27 1.5% NA -1.5% © 2011 Accenture. All rights reserved. Source: World Steel Association, Accenture analysis

- Steel Demand Growth and Economic Development Per capita consumption CAGR (1998-2009) Per capita steel consumption Vs. GDP in 2008 1,400 China 13.6% South Korea 1,200 ME 10.7% Steel consumption per capita in 2008 (Kg.) Russia 7.9% 1,000 S.Korea 5.9% Taiwan 800 India 5.0% Japan World 4.7% 600 Italy Germany Brazil 4.6% Canada 400 Australia Russia Japan 1.7% Spain China USA France Turkey Germany 1.5% UK 200 Mexico EU-27 1.3% Brazil 0 France -1.6% India UK -2.2% NA -2.5% GDP per capita in 2008 ($) Steel consumption (MT) Source: GDP per capita from CIA factbook & Steel consumption per capita from World Steel Association © 2011 Accenture. All rights reserved.

Sustainable Demand Growth Long term, sustainable steel demand growth in the BRIC countries will be driven by a combination of factors: each country is likely to take a somewhat different path with increasing inter-dependencies. • Fixed asset investment • Level • Public/private balance • Sector balance • Competitiveness of downstream • Exports • Labor productivity • Innovation • Overall economy • Steel value chain • Consumer spending • Sustainable development model • Overall economy • Steel intensive technologies Drivers of Long Term Market Growth © 2011 Accenture. All rights reserved.

Sustainable Demand Growth and Industry Maturity Moreover, sustainable demand growth is a necessary, but not sufficient condition for industry development, which also requires other conditions. • Fixed asset investment • Level • Public/private balance • Sector balance • Competitiveness of downstream • Exports • Labor productivity • Innovation • Overall economy • Steel value chain • Consumer spending • Sustainable development model • Overall economy • Steel intensive technologies Drivers of Long Term Market Growth Indicators of Industry Maturity • Industry structure • Concentration • Enterprise scale • Integration into global industry • Ownership • Trade (where appropriate) • Adequate raw material self-sufficiency • Onshore or offshore • Steel value chain • Technological prowess • Sustainability • Conformance to government mandates © 2011 Accenture. All rights reserved.

Fixed Asset Investment Except for Brazil, BRIC countries exhibited high levels of FAI in the past decade. Differences in FAI components account for important differences in steel markets. Fixed Asset Investment as % of GDP China India Korea Russia Japan EU Brazil USA Actual Forecast © 2011 Accenture. All rights reserved. Source: Global Insight, 7 Feb 2011

FAI: Pre-Salt Impact in Brazil Over the next decade, investment in oil extraction plus related infrastructure and industry requirements will drive a significant increase in Brazil's rate of FAI. Oil Reserves Global Ranking (Bn of Barrels) Oil and Gas share of PAC Investments (U$ Bn) PAC is the Brazilian Government investments Plan to accelerate the country growth. PAC 1 was launched in 2007 and PAC 2 was launched in 2010 Aggressive Estimative Other Conservative Estimative Oil & Gas Source: BP Statiscal Review of World Energy (2009), Credit Suisse Estimatives (conservative), ANP Estimative (Aggressive) and Accenture Analysis © 2011 Accenture. All rights reserved. Source: Brazilian Government, Accenture analysis

FAI: China’s Future Requirements The emphasis in China’s 12th Five Year Program on balancing of urban-vs.-rural development implies greater investments in the under-developed regions. China per capita steel consumption by region 2009 © 2011 Accenture. All rights reserved. Source: www.arcelormittal.com

FAI: China’s Future Requirements China’s massive urbanization program will ensure continuing high levels of fixed asset development and sustained high levels of steel demand. Source: McKinsey Global Institute, March 2009, “Preparing for China’s Urban Billion”. © 2011 Accenture. All rights reserved.

Downstream Competitiveness The Korean's economy's very high level of steel intensity is in part due to the global competitiveness of its downstream industries. Finished steel consumption in 2008 Steel consuming sectors Export(%) Estimated finished steel consumption without manufacturing exports Others (Machinery etc.) 74.0% 42.4% Appliances Finished steel Consumption(MT) 28 97.5% Shipbuilding Total finished steel Consumption(MT) Per capita finished steel Consumption(Kg.) 58.5 578 Per capita finished steel Consumption(Kg.) 1210 70.2% Automobile Construction © 2011 Accenture. All rights reserved. Source: Industry associations, SBB, Accenture Analysis.

9 Labor Productivity India and China's labor productivity, relative to the global average, improved dramaticlaly in the past decade, while that of Brazil stagnated… a poor omen for future growth. LABOUR PRODUCTIVITY PER WORKER (US$ At constant prices and PPP and as % of Global average) Global Average Russia 46% Brazil China India 15 © 2011 Accenture. All rights reserved. Source: MPW index based on EIU data

Downstream Competitiveness: Investment in Education In the long run, competitiveness requires significant investment in education. 2008 Expenditure as % of GDP 16 © 2011 Accenture. All rights reserved. Source: UNESCO

0 Innovation: R&D Spending China’s share of Global R&D spending increased by a third since 2008; the metals value chain is an important target area. Chinese R&D Spend in 2009 Share of Global R&D Spending USA Japan 11.1% 12.2% China 9.1% Europe 24.9% 24.0% 23.2% India 2.4% 2.9% 2.5% 1.6% 1.6% 1.6% Brazil 13.4% 13.2% 13.0% RoW 2008 2009 2010 © 2011 Accenture. All rights reserved. Source: Battelle, R&D Magazine

Vibrant Consumer Economy: Automotive Sector Vehicles to no. of people • In 2009, China’s automotive market overtook the US to become the world’s largest • Vehicle intensity will increase dramatically with economic growth. Estimates of the market size in 2025 are as high as 50 – 60 million vehicles: 3X – 4X the combined markets of Russia, India, Brazil and Korea • The Chinese auto industry is expected to become a global leader in the production of electric/green vehicles within a few years (Warren Buffet investment in BYD) • Chinese steel producers will soon be at the forefront in the development of advance automotive steels Vehicle per capita and GDP 18 © 2011 Accenture. All rights reserved. Source: nationmaster.com

Sustainable Economic Development Model: China China’s coal-based economy is the most energy-intensive and carbon-intensive in the world. Energy intensity by country (2009) Carbon intensity by country (2009) Kg Co2/US$ GDP Kg Oil/US$ GDP 20 © 2011 Accenture. All rights reserved. Source: Deutsche Bank Analyst report

Sustainable Economic Development Model: China • China’s energy usage is forecast to grow from 91 quadrillion BTUs in 2010 (16% of world total) to 125 quadrillion BTUs in 2020 • China has set the goal of deriving 20% of energy in 2020 from renewable sources. This will be accomplished through a combination of laws, standards, fiscal incentives, subsidies, industrial promotion and price management policies • An indication of the Government’s seriousness about energy conservation is seen in the mandated temporary closure of steel plants in 2010 Q3 to meet Five Year Plan limits • Implications for steel companies include both pressures to reduce energy consumption and rapid growth of green technology company markets (e.g. wind turbines) Source: Deutsche Bank, CEIC, National Energy Bureau © 2011 Accenture. All rights reserved.

Sustainable Economic Development: China’s Steel-IntensiveWind Energy Sector By first targeting the local market, China has quickly developed world-class capabilities, with 3 of the top 10 suppliers and growing exports. Global market share of wind power equipment players in 2009 Chinese Market supply of wind turbines Vesta (13%) Next 3 (36%) GE Wind (12%) Sinovel (9%) Enerconl (9%) Dongfang (7%) Gamesa (7%) Goldwind (7%) © 2011 Accenture. All rights reserved. Source: World l Wind Energy Association, Deutsche bank etc.

Regional Industry Concentration (2009) The Chinese steel industry remains highly fragmented: government pressure for consolidation is increasing. 1,211 Mt 83 37 151 62 573 137 96 100% • The central government’s 12th Five-Year Plan calls not only for more consolidation in China’s steel industry, but also stresses shutting down outdated capacity. • Hebei province has an ambitious plan to consolidate over 200 mills with iron & steel melting capacity into ten groups by 2015, with the top five having at least 75% share of output. The figure was 48% of total output in 2009. • With China’s top 10 mills already accounting for half of output, the number of attractive M&A targets has shrunk. The cost of integrating outdated mills will be a significant hurdle for larger mills. CSN 80% Usiminas Gerdau China Steel Severstal 60% Gerdau SMI Salgitzer Severstal Nucor RINL TKS JFE Essar MMK 40% Riva Technit Arcelor Mttal JSW US Steel Tata Steel Nippon Tata Steel Shangang NLMK Anshan Benxi ArcelorMittal ArcelorMittal 20% Wuhan Arcelor Mittal POSCO Hebei SAIL Evraz Bao Steel 0% World EU CIS NA SA East Asia India China Top-5% 29% 16% 55% 56% 69% 88% 65% 51% © 2011 Accenture. All rights reserved. Source: WSA, company rexports

Raw material self-sufficiency: China’s challenge Domestic Iron ore production (ROM) & Quality of major mines China’s dependence onImported iron ore Domestic Iron ore production(MT) Fe(%) of Run of Mine Chinese Iron ore cost of production $144 $135 Sales tax $120 Transfer to market $88 Concentrating Pre-concentrating $/Ton Mining Source: UNCTAD, SBB(Macquire Research, & Goldmansach) © 2011 Accenture. All rights reserved.

Industry sustainability: China’s challenge The Chinese steel industry contributes a disproportionate amount of the 1.3 billion tonnes of CO2 emissions from the global industry. Steel Industry CO2 Emissions by Country (2008) The global steel industry’s 1.3 billion tons of CO2 emissions represents around 6% of total global emissions from all sources © 2011 Accenture. All rights reserved. Source: SBB & WSA

Industry sustainability: India’s challenge At the same time, the Indian steel industry produces more carbon on a per tonne of steel basis due to the extensive use of coal-fired DRI Estimated Co2 emissions per tonne of steel in 2007 © 2011 Accenture. All rights reserved. Source: Paper by AIST

Conclusion: Preliminary Comparison of BRIC Countries Accenture is presently developing an assessment framework to score each country against each of the key steel demand growth and industry maturity indicators Preliminary Industry Maturity • China: solid,long term market growth; industry fragmentation and lack of raw materials are problems which are being addressed. Manufactured exports will impact other countries • India: sustainabily of market growth likely, but not guaranteed; ore self-sufficiency a major plus, but growing industry fragmentation an issue • Brazil: strong growth prospects from energy FAI and rising consumer demand, but strong currency and the need for financial reform are huge issues; industry already mature • Russia: dependence on energy sector and demographics are biggest challenges; industry consolidation will occur eventually China Korea India Brazil Sustainable Market Growth Russia Low High © 2011 Accenture. All rights reserved.

I ndian Steel Markets 2011 Conference Gurgaon, 15-16 March, 201 1