Black swans in the steel industry: What do they mean

1
Black swans in the steel industry What do they
mean?

• SMA Annual Members Conference
• First River
• May 20, 2008

2
We used to believe all swans are white
3
Black swan events are

• Rare (highly improbable)
• Hard to predict
• Consequential

4
Steel stocks trounce the market for five
consecutive years and counting
2003
2007
2006
2005
2004
2008 YTD
Source Cap IQ
5
Hot band sells for over 1,000 per ton
2008 (Weeks)
Source Steel Index
6
A new blast furnace announced in
the US by a mini-mill! (includes coke)
7
What do black swan events mean?

• Recalibrate your mental models

• Expand your frame of reference

• Think bigger, think longer

8
RecalibrateWhat range of prices should we plan
for?
2009 Beyond
2008?
2003
2007
of Total Observations
Spot Hot Band Price (/Ton)
Source First River
9
RecalibrateHow long is a cycle?
Crude Steel Demand 5.9

• Steel grows faster than GDP
• 4 down years in 33

World GDP 4.7
Source IMF, IISI, First River
10
Expand your frame of referenceWhy not 1,500 or
2,000 hot band?
Energy
Metals
Steel
Source IMF, Purchasing Magazine
11
Expand your frame of referenceGlobal GDP growth
in perspective
Average 4.8
Average 4.8
Average 4.5
Average 3.4
Source IMF World Economic Outlook, Angus
Maddison
12
Expand your frame of referenceSteel companies
still at low end of valuation range
Enterprise Value to EBITDA Multiple
Source Capital IQ, First River
13
Think biggerChinas steel production 1 Billion
tonnes!
Forecast
Source IISI, Macquarie Research forecast
14
Think bigger and longerYour career will end
before the industry stops growing
World average per capita income
2007
2015
Steel intensity curve
Source IISI, CIA World Fact Book, First River