Metal Expert Europe Steel Trade Conference 2013Stresa - 8 April, 2013

Steel Distribution: rethinking the value chain

Tommaso Sandrini CEO S.Polo Lamiere S.p.A.Vicepresident Assofermet

After 5 years of crisis all the rings of the value chain in Europe are destroying value

Mining Mills Distribution End-Users

• High profits

• Tight market control by oligopolists

• New capacity to come into force in medium term

• Not of interests for Italy/Europe

• Huge overcapacity

• Negative results: record losses in 2012

• Deleveraging in progress but with serious problems

• BAT investments not sustainable

• Hostile regulatory environment

• Hostile social and environmental consensus

• Huge overcapacity

• Highly fragmented market

• Role overlapping among market operators with steel mills distribution jeopardizing SSCs business

• Insufficient Profitability

• Often unstructured market operators

• Hostile regulatory environment

• Continuous volume reduction: delocalization of production sites and bankruptcy/insolvency

• Increasing competition in most of the competing arena from emerging markets’ operators

• Business environment unable to support and boost research and innovation

• Widespread financial weakness

• Often unstructured market operators

Through commercial agreements or equity

shares in SSC

Strong role overlaps within the value chain

Production

Distribution

Consumption End-users

SSCsStockholders

Traders

Domestic Mills

ImportMills

SSCs are basically running two separate business at a time

Steel processing for end-users’ applications

1

Managing the complexity of the sourcing process

2

• Highly Capital intensive

• Focus on production efficiency

• Mature technology: no significant innovation or discontinuity expected

• Long term return

• Huge overcapacity

• Traditionally has been the KSF

• Skill profile highly available within the market

• Managing the price volatility

• Thorough “upstream” and “downstream” knowledge: from scouting of steel mills to deep understanding and counseling of the end-users

• Short term return

• Skills and systems insufficient: mainly managed through unstructured and not-formalized process

• Overlap with traders

Running the two businesses synergically has a big potential of value creation

• Arbitrage opportunity in the upstream part of the business: continuous scouting of the market

Main benefits

• Permanent liquidity of the downstream market thanks to the relationship with the end-users

• Managing the complexity of a fragmented portfolio

Main risks

• Understanding the risks of the businesses of our end-users

From

Managers of Technical Assets ….

to

Portfolio Managers

Skills ????Systems ????

Organization ?????Sufficient scale ?????

Main trends for the near future

1. Strong selection in progress among the end-users: KSFs are company-specific not business dependent

2. Likely reshaping of the production arena within Europe with opportunity for SSCs arising from a more open market. European Union position to be clarified.

3. Selection process among SSCs and other distribution operators boosted by end-users insolvency rather than margin squeeze: KSFs are the intangibles

4. Unlikely consolidation of cooperation/acquisition models among SSCs and Steel Mills.

5. Threat for SSCs arising from the increasing role of the integrated distribution of the Steel Mills

6. A new balance has to be found in every ring of the value chain with a significant lower volume with the respect to the pre-crisis time: no recovery has to be expected

7. Deleveraging required: investments process basically stopped for mature technologies. Only technological discontinuity can boost a new investment cycle

Thank you