Iron Ore & Steel Derivatives Let the Battle Begin Topics Raw Material Price Volatility Financial Hedging Attributes Iron Ore World Steel Exchange Scrap Presented by: DATE: Tuesday November 30, 2010 Patrick A. McCormick Managing Partner WORLD STEEL DYNAMICS President WORLD STEEL EXCHANGE MARKETING
WSD Steel Stratagems Consulting Service Offering Creative Business Solutions to Clients WSEM Total Supply Chain coverage Raw Materials Mill Service Center OEM s Value proposition Experienced hands-on consulting to improve client s buying/selling performance Steel Industry Analysis Performance Benchmarking Strategy Development Tools & Tactic Support Non-competing clients. If two clients buy or sell to each other we work as a facilitator Automotive Warehouse Storage Systems Appliance Agriculture Global Manufacturing HAC Components Fabrication Distribution & Processing Managing price volatility is a common concern among clients 2
Volume (Millions MT) Price ($/MT) WSEM iron Ore Price Elasticity Analysis India Iron Ore FOB Spot Price Versus Global Demand Changes 500 200 465 180 430 160 395 140 360 120 325 290 255 220 185 150 1Q 06 2Q 06 Global I.O. Requirement India FOB spot Price 3Q 06 4Q 06 1Q 07 2Q 07 3Q 07 4Q 07 1Q 08 2Q 08 3Q 08 4Q 08 1Q 09 2Q 09 3Q 09 4Q 09 1Q 10 2Q 10 3Q 10 4Q 10 1Q 11 2Q 11 3Q 11 4Q 11 100 80 60 40 20 Global I.O. Requirement FC India FOB spot Price FC 0 3
Volume (Millions MT) Price ($/GT) WSEM USA Steel Scrap Scrap Price Price Versus Elasticity Global Analysis Demand Changes 180 1,000 170 900 160 800 150 140 130 120 110 100 90 80 1Q 06 2Q 06 3Q 06 Global Scrap Requirement USA #1 Busheling 4Q 06 1Q 07 2Q 07 3Q 07 4Q 07 1Q 08 2Q 08 3Q 08 4Q 08 1Q 09 2Q 09 3Q 09 4Q 09 1Q 10 2Q 10 3Q 10 4Q 10 1Q 11 2Q 11 3Q 11 4Q 11 700 600 500 400 300 200 100 Global Scrap Requirement FC #1 Bushling scrap price FC 0 4
WSEM Financial Hedging Value Proposition Forward price curve from which to judge hedging opportunities Offers the user timing flexibility on forward price commitments Guaranteed contract performance There have been no defaults on exchange cleared trading 5
Monthly Traded Tonnes WSEM Steel Industry Futures/Swap Trading Volumes Are Rising 1,000,000,000 Shanghai - Rebar 100,000,000 10,000,000 1,000,000 100,000 LME - Mediterranean Billet SGX - Iron Ore Swaps Shanghai - Wire Rod 10,000 1,000 100 10 1 Jan-08 Feb-08 Mar-08 LME - Far East Billet Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 CME/NYMEX - Hot-Rolled Coil Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 6
WSEM When Should You Consider Hedging Price Risk The following quotes frame the financial hedging rational from a steel Industry player: I choose to financially hedge when the risk from market price volatility is a large percentage of my profit margin! If the risk from market price volatility is a small percentage of my profit margin I am willing to take the risk! 7
Hedge Payout Price volatility WSEM Financial Hedge Off-Sets Physical Contract Exposure Physical Contract Price Variation time Physical Contract Price volatility flows thru via changes in the price index Financial Contract Hedge Payout time = Fixed Price Financial Contract Hedge payout is the reciprocal of the changes in the price index 8
WSEM Iron Ore Benchmark Price Changes Add to Volatility Quarterly Benchmark Prices and Cleared Swap Forward Prices Iron Ore Swap Prices Q3 LQ Q4 LQ Q1 LQ FC Q2 LQ LQ = Lagging Qtr Price 9
WSEM Battle of the Cleared Iron Ore Swaps & Futures Contracts China COC of metals supports Iron ore futures development North America CME/NYMEX (CS) - TSI Index ICE (CS) - Platts Index UK LCH - TSI Index India ICEX (F) Pending Singapore SGX (CS) - TSI Index SMX (F) - MBIO Index 10
Dedicated to Serving the Needs of the Global Steel Industry World Steel Exchange Update CCFE partnership mutually terminated in June 2010 WSEM Steel hedging consulting advice Just a phone call away WSE global distribution strategy has been defined WSE exchange partner selection nearing completion Announcements will be forthcoming
WSEM World Steel Exchange Preparing to Launch Steel Scrap Futures Contracts Contracts Covering the Steel Mill Supply Chain Raw Materials Semi Finished Steel Products Ferrous Scrap Slab Hot-Rolled Band Shredded #1 Busheling Billet Cold rolled #1 Heavy Melt Iron ore MBIO - China - Our initial focus using the SteelBenchmarker Price Index 12
WSEM Safety In Numbers Easy internet access with a secure computerized roll-up process All qualified market participants can become a market price assessment provider at www.steelbenchmarker.com Collecting market price assessments twice a month from mills, endusers, traders, distributors, and scrappies WSD has experience in collecting market prices: WSD PriceTracker series initiated in 1981 SteelBenchmarker TM carried on in April 2006 Free Access Multi regional prices for HRB, CRC, Plate, and Rebar. USA scrap prices for #1 HM, shredded, and #1 busheling added in February 2007 13
Dollars per metric tonne Dollars per gross ton HRB and USA Scrap Price History www.steelbenchmarker.com WSEM USA, China, Western Europe and World Export (WSD's PriceTrack data, Jan. 2000 - March 2006; SteelBenchmarker data begins April 2006) USA, delivered to steel plant (AMM scrap price data, Jan. 2000 - Jan. 2007; SteelBenchmarker data begins Feb. 2007) 1200 1100 November 22, 2010 900 800 November 22, 2010 #1 Busheling 1000 900 800 700 600 500 USA FOB Western Europe ex-works 683 618 595 552 700 600 500 400 300 Shredded Scrap 388 354 327 400 300 200 100 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 World Export China ex-works Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 200 100 0 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 #1 Heavy Melting Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 14
$/Ton WSEM Mini Mill Price/Cost Squeeze Evident in Narrowing USA Price Spreads Price Spread (HRB - #1 Busheling) $700 Increased Price Volatility $600 $500 $400 $300 $200 $100 $0 Jan-00 May-00 Sep-00 Jan-01 May-01 Sep-01 Jan-02 May-02 Sep-02 Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 Margin Squeeze May-10 Sep-10 15
WSEM WSEM is Finding Steel Scrap Industry Support for Scrap Futures Increased price volatility has added to inventory price risk Some scrap processors have financial hedging experience Successful non-ferrous hedging experience tees up interest in hedging steel scrap Some believe applying their hedging expertise to steel scrap can become a marketing advantage Able to provide fixed price quotations to customers Steel scrap purchases from manufacturers are often price indexed 16
Thank You for your kind attention Pat McCormick President Work: (201) 503-0920 Cell: (314) 378-4858 pmccormick@wsemgroup.com The information contained in this report is based upon or derived from sources that are believed to be reliable; however, no representation is made that such information is accurate or complete in all material respects, and reliance upon such information as the basis for taking any actions is neither authorized nor warranted. A variety of factors, including changes in prices, shifts in demand, variations in supply, international currency movements, technological developments, governmental actions and/or other factors, including our own misjudgments or mistakes, may cause the statements herein concerning present and future conditions, results and trends to be inaccurate. The officers, directors, employees or stockholders of World Steel Dynamics Inc. do not, directly or indirectly, hold securities of, and/or that are related to, any of the companies that are referred to herein. World Steel Dynamics Inc. may act as a consultant to one or more of the companies mentioned in this report. 17 Copyright 2010 by World Steel Dynamics Inc., all rights reserved.
Million Metric Tonnes Record Levels of Global Steel Production 2010 Production to Eclipse 2007 Levels WSEM 450 Global Steel Production Quarterly Forecast by Region 400 350 300 2007 2010FC Developing 250 200 Advanced 150 100 50 0 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 China 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 The outlook for global production growth remains positive despite a slowdown in the Chinese growth rate 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 18
Million Metric Tonnes Different Choices of Steelmaking Investments China Driving Iron Ore Demand Developing Countries Driving Scrap Demand 900 800 213 182 700 600 500 183 262 186 400 300 200 100 0 +166% 157 245 145 +127% 487 118 415 187 128 166 183 82 96 40 2003 2007 2009 2003 2007 2009 BOF EAF China Advanced Developing China s prodigious and rapid growth via the BF/Integrated route has changed the landscape of global steel production 19
Low Buffer Stocks Add to Price Volatility USA Steel Service Center Inventories Rising Slowly From Historically Low Levels WSEM 20
Million Tonnes Million Tonnes Changes in Scrap Trade Flows USA Largest Scrap Exporter Turkey Largest Scrap Importer, Wildcard - China Scrap Imports Global Scrap Exports Global Scrap Imports 25.0 25.0 20.0 20.0 15.0 15.0 10.0 10.0 5.0 0.0 U S A GERMANY RUSSIA JAPAN FRANCE UNITED KINGDOM NETHERLANDS CANADA BELGIUM ROMANIA KAZAKHSTAN CZECH REPUBLIC AUSTRALIA AUSTRIA DENMARK Other 2007 2008 2009 5.0 0.0 TURKEY SOUTH KOREA GERMANY SPAIN TAIWAN ITALY BELGIUM U S A MALAYSIA CHINA FRANCE LUXEMBOURG INDIA EGYPT 2007 2008 2009 THAILAND Other
$/tonne Tonnes Regional Price Arbitrage is Driving China s Scrap Imports Price Gap Has Been Narrowing China's Scrap Imports and Domestic Scrap Price v. USA Scrap Price(s) $700 $600 USA scrap plus freight to China Left axis Chinese monthly scrap imports Right Axis 1,800,000 1,600,000 1,400,000 $500 $400 China domestic HM scrap Left axis 1,200,000 1,000,000 $300 $200 $100 $0 Apr-06 Jun-06 USA domestic HM scrap Left axis Aug-06 Oct-06 Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 800,000 600,000 400,000 200,000 0 22