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 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

Some Things to Think About: Growth & Value

Presentation to

Steel Manufacturers Association

Washington DC

May 15th, 2007


The industry leadership challenge find growth defend value

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

www.first-river.com


More buyers than sellers o s china top 50 steel producers by strategy

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

www.first-river.com

Source: MB, IISI, First River


Drives valuations companies purchased

Drives valuations…Companies purchased

= flat rolled

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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

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

*Outside China

Source: MB, IISI, First River

www.first-river.com


The focus defense returns of focus will provide superior performance

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

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Has the niche lost its cache

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

www.first-river.com


Returns of focus not so special

Returns of focusNot so special?

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

www.first-river.com

Source: CapitalIQ, FRC


Who let the dogs out steel divisions their corporate owners

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

Macsteel

CMC Steel

Schnitzer Corp

Thyssen Steel

Quanex

TKR Steel

Cascade

Thyssen Corp

Timken Corp

CMC Corp

Source: CapitalIQ, FRC

www.first-river.com

NB. Corporate performance includes steel


Mill ssc gross margin performance selected companies 1999 2007 by quarter

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

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Who claimed what ssc hr coil price drivers of increase estimates

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

+$57

+$17

$730

+$56

+$118

+$124

$360

Mill: $580

Mill: $280

Source: First River estimates

www.first-river.com


Shares of ssc hot roll price increase 2003 to 2006 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

www.first-river.com


Scrap volatility asks for attention pig iron versus scrap prices ton monthly

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

Source: Metal Bulletin, AMM, Purchasing Magazine

www.first-river.com


China gdp growth real annual growth rates 1953 2006

China GDP growthReal annual growth rates, 1953-2006

Average since 1978 9.6% p.a.

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Source: National Bureau of Statistics


China steel production growth outpacing gdp

China steel production growthOutpacing GDP?

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


China steel exports china s rise to net exporter monthly 2001 2007 april

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

*includes semi-finished

Source: UBS

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China development similar to others

China development similar to others

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Change uncertainty chinese urban employment changes

Change & uncertaintyChinese urban employment changes

Since 1996

+140M

-70M 50%

Source: National Bureau of Statistics

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Plenty of concerns to go round managing china

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!

www.first-river.com


Finding growth defending value what to do

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

www.first-river.com


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