Global Outlook for Pipes from a Steel Maker

1
Global Outlook for Pipes from a Steel Makers
Perspective

• National Association of Steel Pipe Distributors
• New York
• September 15, 2006

2
Introduction

• Sanjiv Goel
• General Manager Pipes Tubes
• Mittal Steel Holdings B.V.
• Hofplein 20
• 3032 AC Rotterdam
• The Netherlands
• T 31 10 217 96 37
• E sanjiv.goel_at_mittalsteel.com
• www.mittalsteel.com

I am based in Holland
How you can reach me
3
Agenda

• Arcelor Mittal
• Mittal Steel Pipes Tubes
• Global outlook for Pipes Tubes
• Challenges ahead for steel makers

4
Arcelor Mittal
5
Mittal Steel and Arcelor together have created
the global leader in steel
1 steel producerOver 20 acquisitions during the
past 5 years
2 steel producerNumerous acquisitions over the
past 5 years
Creating a sustainable future for the steel
industry through consolidation
6
The merger creates the undisputed leader
Combined Entity Production vs. Competitors (2004
pro forma mt)
Combined Entity EBIT vs. Competitors (2004 pro
forma USbn)
7
The merger creates a powerful combination

• Leadership position in high-end segments in North
  America, with strong RD capabilities
• Operations in high-growth economies with
  low-cost, profitable assets and local operating
  expertise in numerous emerging markets
• Access to raw materials and upstream integration
• Entrepreneurial culture
• Leadership position in high-end segments in
  Western Europe, with strong RD capabilities
• Low-cost slab manufacturing in Brazil which can
  be expanded for export to Europe and North
  America
• Successful distribution business in Europe

8
Forces driving consolidation in the steel industry
Increasing Concentration Among Suppliers
Globalisation Consolidation of Customers

• Service global customer base increasingly seeking
  global procurement
• Critical mass in RD
• New product development

Steel Industry Consolidation

• Disproportionate negotiating power due to raw
  materials supplier consolidation

Capture Growth Opportunities in New Markets
Increasing need for Sustainability

• Reduce earnings volatility
• Better capacity management
• Improved returns on capital

Economies of Scale

• Slow growth in mature markets
• Growth driven by emerging markets

• Plant specialisation, manufacturing excellence,
  and greater ability to sustain RD investments

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Consolidation process is moving to the next phase
2002-2004 Regional Consolidation
2004-2005 Increasing Cross-Border Consolidation
2006- Formation of Global Steel Companies

• Industry remains fragmented and largely regional
• Medium-scale producers
• Large transformational combinations will be
  faster, more capital efficient and carry less
  risk than a series of acquisitions
• Good quality assets becoming increasingly scarce
• Fierce competitive bidding
• Continuous need for integration
• First mover advantage will be critical in global
  steel industry consolidation
• Industry leaders of the future will be global
  producers with annual capacity of 150-200m tonnes

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Mittal Steel Pipes Tubes
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Our profile

• Over 2,000,000 MT/yr of production capacity
• 50/50 seamless-welded (excl. Valin JV in China)
• On four continents
• And growing .

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Our production capacity
Aktau (Greenfield Project)
???
Krakow Iasi Roman Vereeniging
Contrecoeur
Ostrava Karvina
Annaba Galati
Temirtau
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Our recent history

• Early 2005 Mittals tube plants were still a
  conglomerate of independent units.
• Late last year a comprehensive Pipe Tube
  strategy became operational.
• Today Mittal Steel owns a highly profitable tube
  producing division ranking 6 in the world.
• Focus on sales marketing new offices in
  Houston and Dubai
• September 2006 Formation of a separate
  strategic division

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Our sales offices and production units
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Our segmentation

• Mittal Steels Pipe Tube activities are
  approaching customers by application-segment
• Energy
• Construction
• Engineering Automotive
• Thus combining seamless and welded products,
  services and projects as required by our
  customers

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Global Outlook for Pipes Tubes
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Market environment consumption of 85 million
tons, dominated by China
57.0
84.9
1.0
1.8
3.2
Apparent consumption 2005, mln tons
Welded
23.8
Seamless
27.9
CIS
China
Europe
North America
Developed Asia
Emerging Asia
Latin America
Middle East
Africa
Australia
Total
Percentage of total
28
20
13
12
10
5
5
4
2
1
Absolute growth 2000-2005
146
12
3
-6
31
30
17
49
21
69
Absolute growth 05-10 (projected)
48
12
10
-4
21
25
11
27
17
9
Source IISI ISSB JFK McKinsey 2006
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Market environment expected growth of 4.1 per
annum to 104 million tons
0.1
Real GDP CAGR
CAGR 05-10
Total 2005
Projection 2010
Welded
Seamless
Total 2005
China
23.8
35.2
11.2
Europe
17.2
19.3
4.9
North America
11.0
12.1
3.2
1.1
Developed Asia
10.3
9.9
CIS
8.2
9.8
3.4
Emerging Asia
4.2
5.3
0.6
Latin America
4.2
4.7
1.6
Middle East
3.2
4.1
1.3
1.8
Africa
2.1
0.5
1.0
Australia
1.1
0.1
Total
Source Global Insight McKinsey analysis
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Market environment capacity concentrated in
seamless, fragmented in welded
89
Seamless capacity, 2005 100 39 mln tons

• Large share of capacity controlled by few players
  
• Global players Tenaris (10), Vallourec (7),
  and Sumitomo (5)
• Local champions TMK (9), Interpipe (5),
  Tianjin (4), Bao Steel (3)

• Seamless capacity concentrated to small set of
• Global players
• Local champions in CIS and China
• In the next 5 years time we expect new capacity
  of 2.5 mi tons
• Welded capacity is very fragmented
• Small and medium diameter dominated by local
  players
• Large diameters is a global market driven by
  investment and know-how
• In the next 5 years time we expect new capacity
  of nearly 1.5 mi tons
• Still further options for consolidation out

Global players
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58
Other
21

• Very fragmented market
• Over 1,000 companies Characteristics differs by
  products
• Small diameter pipes (lt6.3)
• 67 of welded market
• Highly fragmented local/regional market driven by
  efficiency
• Medium pipes (6.3lt D lt 16)
• 16 of welded market
• Regional/global market driven by efficiency
• Large diameter pipes (gt16)
• 17 of welded market
• Global market driven by investments and know-how

Local champions
Welded capacity, 2005 100 109 mln tons
Global players
Local champions
9
4

• 89

Tenaris, Vallourec Mannesmann, Sumitomo TMK,
OMK, Interpipe, Tianjin, Bao Steel
Other
Source JFK China steel yearbook Company
publications Analyst reports company websites
McKinsey
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Market environment summary of global perspective

• The overall tube market shows attractive growth
  from 85 million tons in 2005 to104 million tons
  in 2010
• Some selected segments are of major interest due
  to high share of growth, financial attractivity,
  or stable (less cyclical) demand, e.g. OCTG, line
  transportation, automotive or specific parts of
  industrial.
• Regions to focus upon include
• China,
• OCTG in North America,
• line transportation in CIS and Middle East.
• In the tube market polarization is occurring
  around solutions in specialties and standard
  products with different success factors for
  customer value creation and supplier value
  capture, with the specialty market being more
  protected against competition.

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Challenges Ahead for Steel Makers
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World energy demand.. ever growing
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Oil prices continue going up
2007 -2010
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Landscape

• High oil prices are there to stay gt US 70 per
  barrel and expected to rise further during the
  next 10 years
• Allowing for economic exploration for deep
  reservoir both land and marine under difficult
  climatologically conditions and for energy source
  of lower quality (for example high sulfur)

Lead to following challenges
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Challenges

• More higher steel grades required gt X70 X120
• Q125 specialty grades and beyond
• Gas discoveries lead to large diameter pipes gt
  plates

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Challenges

• Sour service requirements everywhere
• Drilling in difficult areas leads to the need for
  alloyed / high strength material

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What producers need to do to face the
challenges...

• Embrace growth geographies these are a major
  driver of the future
• Market better to open up latent demand
• Manage better for value, rather than volume
• Price better microeconomics based minimize
  volatility
• Continue consolidation trend

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Which trends will influence the pipes industry?

• The upstream steel industry is consolidating
• The pipe tube industry will also consolidate-
  Has already partially taken place in seamless-
  Mittal Steel will grow its participation in
  tubes
• Direct producer of pipes tubes
• Key supplier of inputs for pipe tube-making
• Access to inputs and raw materials will be
  paramount

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Some less obvious medium term trends

• Within 5 years the growth rate for natural gas
  will be twice as high as for crude oil (fueling
  demand for large diameter pipes)
• Within 7 years premium connections will have some
  sort of universal standard rather than the
  multiple proprietary types (is API strong enough
  to drive this process?)

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Summary

• Further consolidation in Pipe Industry as already
  seen in Steel. Recent mergers Tenaris/Maverik
  Ipsco/NS group.
• Pipe industry shall need dedicated steel sources.
• Steel and Pipe Industry to work together in RD
  efforts to meet new challenges.

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• THANK YOU!
• Any questions?