Metallics/scrap Sourcing in Today s Volatiles World. Henk van de Belt Lead Buyer Metallics, Group Procurement Tata Steel Group

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1 Metallics/scrap Sourcing in Today s Volatiles World Henk van de Belt Lead Buyer Metallics, Group Procurement Tata Steel Group

2 Commodity Sourcing in Today s Volatile Times Agenda Tata & Tata Steel Observations Trade Managing commodity sourcing Summary

3 Tata Group & Tata Steel

4 Tata Group A worldwide concern (I) India s largest business group with businesses in seven sectors and operations in over 80 countries; with products and services available in over 85 countries, and over 425,000 employees. Group revenue of $ 83.3 bn; 58% in geographies other than India.

5 Tata Group A worldwide concern (II) Largest companies Tata Steel Tata Motors Tata Consultancy Services Tata Power Tata Communications Tata Chemicals Tata Teleservices Titan Voltas Tata AutoComp Systems Indian Hotels

6 Tata Steel Group At a glance Tata Steel Group: Fortune 500 company One of the world s top steel company The world s 2 nd most geographically diversified steel producer Global mining portfolio Employees strength of 81,000 A balance global presence in 50 markets Manufacturing operations in 26 countries across 5 continents Serving customers all across the globe Turnover : $26.6 billion

7 Tata Steel Group Our values Unity Working together Integrity Fair, honest and transparent Responsibility Commitment and ownership Understanding Care, respect and genuine interest Excellence Highest standards, first time right

8 Tata Steel Group Automotive Construction Energy & power Lifting & excavating Packaging Rail Industry & portfolio (consumer goods, shipbuilding, aerospace, defence & security)

9 Tata Steel Group Global reach Tata Steel Group UK & Ireland 2 production hubs Crude steel capacity 10.7mtpa 16 manufacturing locations 33 distribution centres EU (excl. UK, Irl & NL) 19 manufacturing locations 13 distribution centres Thailand Tata Steel 3 production facilities Europa Crude steel capacity 1.2mtpa 3 distribution centres Netherlands 1 production facility Crude steel capacity 7.5mtpa 6 manufacturing locations 3 distribution centres USA 3 manufacturing locations 2 distribution centres India 1 production facility Crude steel capacity 6.8mtpa 22 distribution centres South East Asia 1 production facility Crude steel capacity 0.65mtpa 4 distribution centres BOF EAF 9

10 Observations

11 Global Scrap Demand & Supply observations Global scrap demand remains positive and is projected to keep growing with 25 to 30 Mt/year ( ) expect to grow from 535Mt in 2012 to 648Mt in 2017 > +113Mt; growth mainly in SEA, China and India, not in EU27 Russia moving from large over-supply to under-supply (conversion of OHF s into EAF s, depletion of scrap reservoir) China accounted for 99Mt of this demand in 2012 and this is expecting to grow to 137mT by 2017 > +38MT What if China scrap charge achieved government aim of 200 kg/t of crude steel (first signals are an increase from 500kg/T to 600kg/T in EAF production) ; additional demand of ~75Mt of scrap is likely to lead to supply issues? Scrap prices movements trends with steel price/demand but typically show a strong first quarter and weakness in the fourth quarter of a calendar year; Global prices trend in the same direction Prices are volatile, again suggesting it is a competitive internationally traded commodity. Results highly impacted by demand volatility, lead times and shipping (container) rates as a consequence users moved from international to more interregional supply. Source: WSA

12 Global Scrap Demand & Supply observations DRI production capacity is forecast to increase by over 40Mt to 2018 (from ~120Mt in 2012 to ~ 170Mt to 2018), additional short term supply mostly from N- America and Middle East supported by low cost energy (Shale gas), with the majority of planned capacities in troubled regions Venezuela, Bahrain, Egypt, Iran, etc. DRI production is forecast to increase by over 30Mt to 2017 (from ~75Mt in 2012); Source: WSA

13 International Scrap Trade The majority of scrap generated is consumed within the region it arises. c.10% is international trade and typically flows from developed economies into developing economies with the biggest exporters being NAFTA and EU27. Internationally trade set by import requirement of Turkey who import c.21.5mt in 2011 (+11.8%) Asia (excluding China) currently import c.14.3mtpa and China 5.3mTpa. Dependency on scrap varies dramatically by region, SEA make 83% of their steel from scrap whilst China 18%, India 29%, Japan/ S.Korea and Taiwan 41%. Source: WSA 04

14 Issues in scrap market Situation Main Concerns Scrap Trade 40 countries restrict scrap export by prohibiting exports, imposing taxes or controlling through administrative measures. This protectionism could have a domino effect and hinder scrap trade (EU, USA) Export taxes creates distortions in the intern. scrap market (price) Scrap quality Flexible scrap collection acceptance encourages exports in small quantities. Recession and process efficiency leads to lower prompt scrap generation. Increase of non-desirable trace elements (Ni, Cr, ) in steel due to repeated recycling. More scrap flow in several countries. Availability of prompt could become an issue Without additional pure material, this scrap will no longer be fit for commodity grade products

15 Strategic Objectives for Scrap From our scrap strategy meetings the following objectives were noted: Optimising the use of internal scrap generation Working with steel plants to manage metallics based on value-in-use Securing low cost supply chains and making them more efficient for both domestic and import markets Group lead buying of imported scrap Reducing Group s working capital Emphasis on supply chain visibility and control, including targeted purchases without merchant involvement & backward integration Set up more strategic long term scrap supplier relationship Explore scrap exporting area s again

16 Megatrends Impact in Steel & Commodities Global trends impacted massively China drove demand; India is accelerating it Capacity utilisation not yet on pre crisis levels Price volatility enormous in the last few years Cost price of raw material in steel > 60 % ; spread in scrap versus steel squeezing Consolidation in commodity market reduced due to crisis but could it go any further? Prohibiting exports by imposing taxes or controlling through administrative measures Consequences Spot prices very volatile Hedging and backward integration part of sourcing strategies Supplier /customer relationships changed; long term damaged? CSR stretches wider and outside consumer industries Adjust sourcing strategies Adapt sourcing organisations

17 Managing Commodity Sourcing

18 Tata Steel Group Procurement Principles Maintain a single face to the market Maximise value through our supplier relationships Achieve visibility of all spend and its co-ordination by sector Align and integrate our processes and communications with those of our end-users To be a single World Class organisation sharing best practice in tools, processes and procedures To promote compliance with Supplies and Corporate policy across all Tata Steel Businesses Annual spend in the Group: Corporate Services Services MRO Goods Transport Capital Steel Other Raw Materials Paint Rolls Minerals Metals Energy & Utilities Refractories Scrap Alloys Bulk Shipping

19 Managing Commodity Sourcing Moving to the Next Phase Supplier Relationship Management is vital moving forward Needs to be carefully managed in raw materials and scrap markets driven by commodity behaviour Balance of power a challenge Technical projects will need to be more robust to drive value Risk management will play a greater role Hedging Cover policies Input pricing more closely linked to outsell prices Backward integration is an important strategic choice o Maybe in partnership with suppliers o Will need to be carefully managed and value creation clearly understood

20 Summary & Conclusions

21 Commodity Sourcing in today s volatile times Summary & Conclusions The markets have changed forever You need to adjust sourcing organisations to respond Sourcing strategies are more linked to marketing & sales due to the impact of cost changes It can be managed do not have to be a complete hostage to fortune Be proactive evaluate options and put them on the corporate agenda

22 Thank You