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Some Things to Think About: Growth & Value. Presentation to Steel Manufacturers Association Washington DC May 15 th , 2007. The industry leadership challenge Find growth – defend value. In a dynamic environment it’s a hard balance to strike Valuations continue to rise – can you keep up?

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Some Things to Think About: Growth & Value

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Some Things to Think About: Growth & Value

Presentation to

Steel Manufacturers Association

Washington DC

May 15th, 2007

The industry leadership challengeFind growth – defend value

  • In a dynamic environment it’s a hard balance to strike

  • Valuations continue to rise – can you keep up?

  • Relative consolidation levels require acceptance of new risks – offshore, union operations, different technologies, etc.

  • Once protected positions such as niches, divisions of larger companies, even private companies are not so safe

  • Conventional diversification strategies are strained by the opportunities & demands in steel

  • Relative strength of producers provides temptation to co-opt different parts of the value chain up and down

  • And China could – at any time – slow growth &/or ruin value

More buyers than sellers o/s China?Top 50 steel producers by “strategy”

Source: MB, IISI, First River

Drives valuations…Companies purchased

= flat rolled

Source: Company reports, US Steel, Gerdau, UBS, First River

But how to m(c)atch Mittal? Top 15 producers* 2007 Pro-forma, 2006 crude steel, MT

*Outside China

Source: MB, IISI, First River

The focus defenseReturns of focus will provide superior performance

Diversified Steel

Differentiated Steel

Product A

Consolidation & restructuring moves aim to annex valuable ‘niches’

Digging into niches to avoid consolidators aims to raise the competitive level

Product B

Has the niche lost its cache?

  • Niches in low growth industries yielding better than average returns are prized

  • Where “niche” performance is no better than that of broader market positions – the niche has lost its value

  • Classic niches may only be viable where the owners of the niche occupier provide the defense:

    • e.g. voestAlpine, Salzgitter, ThyssenKrupp, etc.

  • But niche strategies not an excuse to indulge fears of the bigger opportunity

  • And note - close ownership is an important element in an offensive growth posture too:

    • Mittal, Tenaris, Evraz, Severstal

Returns of focusNot so special?

*Averages calculated in US$ & exclude Mittal; Thyssen/Timken/CMC are steel only

Source: CapitalIQ, FRC

Who let the dogs out?Steel divisions & their corporate owners


CMC Steel

Schnitzer Corp

Thyssen Steel


TKR Steel


Thyssen Corp

Timken Corp

CMC Corp

Source: CapitalIQ, FRC

NB. Corporate performance includes steel

Mills include: X, NUE, STLD, CMC, IPS; SSC’s include: RS, RYI, ZEUS, RUS

Source: CapitalIQ, First River

Mill & SSC gross margin performance Selected companies, 1999-2007, by quarter

Who claimed what?SSC HR coil price – drivers of increase, estimates








Mill: $580

Mill: $280

Source: First River estimates

Combined $ margin & % of sales price

Shares of SSC hot roll price increase2003 to 2006, estimates

Less about owning SSC’s for control than ensuring the efficiency of the supply chain

Source: First River estimates

Scrap volatility asks for attention Pig iron versus scrap prices $/Ton, monthly

Source: Metal Bulletin, AMM, Purchasing Magazine

China GDP growthReal annual growth rates, 1953-2006

Average since 1978 9.6% p.a.

Source: National Bureau of Statistics

China steel production growthOutpacing GDP?

Source: ABARE, CISA, IISI, National Bureau of Statistics

China steel exportsChina’s rise to net exporter, monthly 2001-2007 (April)*

*includes semi-finished

Source: UBS

China development similar to others

Change & uncertaintyChinese urban employment changes

Since 1996


-70M 50%

Source: National Bureau of Statistics

Plenty of concerns to go roundManaging China…

  • The “4 un’s”

    • “Unstable, Unbalanced, Uncoordinated & Unsustainable” Wen Jiabao describing macro conditions, March 2007

    • Exports, fixed assets, output growth, lending increases

    • Income disparity, excess resource consumption, environment

  • Demographics

    • 30M “surplus” males 15-34 by 2020

    • >65’s from 7-8% to 20% by 2025 as working population declines (US 12% to 18%)

  • 17th Congress & leadership change towards a new model?

    • Lawyers replacing engineers!

Finding growth – defending valueWhat to do?

  • Do not stand still

  • Extend your view – timeline, breadth, depth

  • Maintain a growth posture focused on strategic goals

    • buy, invest, build are choices to the same ends

  • Actively evaluate acquisitions – real test of valuation perspective

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