NASS Annual Steel Industry Dinner

28 Oct 2004

Building the Platform for Growth
Speech by Philippe Varin, Chief Executive at the National Association of Steel Stockholders (NASS) Annual Steel Industry Dinner

Mr. President, ladies and gentlemen, I am honoured to have been invited to speak at this 6th Annual Steel Industry Dinner of NASS.

I am greatly heartened by the fact that presently, the overall business conditions for the steel industry and our customers are significantly better than in recent years. The collective well being of steel producers and many of you here tonight, is more and more closely connected as the role of service centres and stockholders in the supply chain continues to grow. Clearly, however, we are all experiencing a number of challenges, some of which I shall discuss this evening.    

Most of you already know Corus well, and will have read last month that Corus reported an interim operating profit of £147 million, after cumulative losses of £2 billion over 2000-2003. There must have been periods last year  when you wondered whether Corus would survive.I believe this has marked the turning point in our Group’s future.

I recently attended the International Iron & Steel Institute meeting in Istanbul, where more than 50% of participants were from Asia. This is a true reflection of where our industry is moving and provides us in the EU with challenges that I will return to during my discussion.

Let me highlight 3 key developments taking place in the global steel industry. They include:

•   demand and production factors in China and Asia.
•   the issue of raw materials availability and prices.
•   structural developments including relocation and consolidation.

We recognise that our customers are also affected by these issues and as I update you on recent developments at Corus, I will outline our priorities for addressing your concerns, including our focus on customer service.

Firstly, the China and Asia factor - We have seen phenomenal growth in world steel demand in the last 2 years underpinned by China. China now accounts for a quarter of global steel production, which has now crossed the 1 billion tonne mark. We are expecting world demand to grow at around 3% annually in the foreseeable future, as compared to 1% over the last few decades.

Growth in China should be more balanced this year at around 11-13%. Asian demand outside of China continues to grow strongly at 8-9%. North American steel demand is also expected to have grown 8-9% compared with  relatively lower growth of 3-4% in Europe this year. Apart from China, we can expect the other emerging major steel producing countries to be Russia, Brazil and India, owing to their low cost positions and access to raw material supplies.  In the current scenario, the utilisation rate of effective steelmaking capacity is running close to maximum this year and is estimated to be above 90% in the foreseeable future.

Turning to raw materials - Global growth, dominated by China, is putting pressure on the availability and prices of raw materials. Rising input costs, including energy prices, are exerting a continuous pressure on steel margins. So far, steel companies have been able to successfully increase selling prices for most products and more than offset the increase in input prices. In 2005 we anticipate further cost increases of at least those of 2004. We believe that this will drive further price increases in 2005 and that the availability of, in particular, coal will make steel producers very cautious about expanding output -  with tight supplies the ‘extra tonne’ is likely to be very expensive to produce.  In the longer term steel producers may be driven to integrate further up the supply chain or to form strong partnerships with suppliers to gain greater security and certainty.

Looking at the structural developments, including the industry re-location and consolidation taking place – The ratings agency, Standard & Poor’s recently published its view on how Europe’s steelmakers should be implementing strategies to tackle the structural shifts taking place in the world steel industry. It advocates that Western producers invest cash earned from higher steel prices in lower cost steel producing regions, in order to counter the threat from low-cost producers.

Having said this, I believe there is inherent risk in such strategies if we do not leverage the strengths we have invested in and developed over the decades. Among these strengths are our intellectual capital and high productivity - in terms of world-class production facilities; and our proximity to customers and consumer markets. In this regard, this strategy is already being followed by Arcelor, which is investing in Brazil and China, while keeping value-added production close to its home markets.

We are seeing that consolidation in the main steel producing regions is already well advanced. The top five producers in Western Europe account for more than 60% of total steel production; in North America 50%  and in Japan,  about 80% of steel production. Nevertheless the industry is still fragmented and even with the proposed creation of the Mittal Steel Company the top 5 producers in the world account for under 20% of global steel production. By contrast, the top 5 iron ore producers account for about 90% of the global iron ore market; in the automotive sector, the 5 biggest players account for about 65% of market share. In aluminium the 5 largest players account for over 40% of primary production, globally. We share the view that in the overall consolidation process, the big players plan to grow bigger by corporate action over the next 5-10 years. The news this week regarding Ispat/LNM/ISG suggests this may happen sooner rather than later. Hence, we can expect to soon see a number of truly global steel companies with 50-100 million tonnes capacity. Nevertheless, a company of such a size still represents only 5-10% of the volume of steel produced globally. These are the big developments and challenges the whole industry faces – now permit me to look more closely at Corus.

When I joined in May 2003, we were in ‘intensive care’. Our immediate priority was to refinance the Group, change top management and develop plans to close our competitive gap with our European peers. In 2004, as we are in ‘recovery mode’, we are beginning to deliver on those plans under our Restoring Success programme. We are delivering on the disposal of non-core assets and have sold most of the North American assets, this year. We have successfully refinanced our working capital, raised £291million through last year’s equity issue and recently raised EUR800 million on the bond market.

Looking forward, our priorities are to deliver the balance of Restoring Success. We are on track to achieve our target totalling almost £680 million benefits by the end of 2006. But, our Restoring Success Program is only a turnaround project with limited ambition, as we catch up with our European peers.

I would like to leave you with a clear idea about ‘The Corus Way’ for building a strong platform for growth. Our goal is to be one of the most value creating companies in the world steel industry. Value creating for our customers, for our employees and for our shareholders.

We understand that many of the industry issues I have talked about are also creating tremendous pressure on our customer base. Corus is addressing, as a matter of priority, areas within our control that are of concern to you.

Firstly, the global outlook for our main raw material supplies remains one of tightness. Most of Corus’ facilities have excellent access to port facilities and railway links. We are doing everything we can to leverage on our total purchasing power and to maximise our internal synergies to reduce cost and ensure the reliability of all deliveries to customers. We have already secured a substantial part of our iron ore and coal requirements though our long-term contracts with CVRD, Rio Tinto and Kumba.

Secondly, we are working towards being a preferred supplier for customers in construction, automotive, packaging and engineering supply chains. A key priority we have is to do a lot more to improve customer service. Corus can do a lot better at meeting the delivery promises it makes to customers. Time and time again we have surveyed our customers and each time we get the message that delivery reliability is the most wanted improvement in our service. 

Our own internal statistics show that, in many areas of our business there continues to be unacceptable levels of delivery performance. We are determined to address this basic weakness. We will be looking at what needs to be done internally and externally so that we achieve improvements in line with customers’ needs.

In the coming months, we will be asking to work with you to understand the priorities for action and to develop solutions which will enable better service, more efficient supply chains and better value-in-use. This will involve us investing time and money in our people and processes. These are not new ideas but progress is often too slow or halted by a lack of commitment of sufficient or properly trained resources. We are committed and over the coming months, we will identify and train the people who can deliver on this commitment.

Thirdly, I know there are serious concerns about the speed and size of recent price increases and the different problems there can be in passing these increases through to the final users of steel. What has happened is a global movement in steel prices and naturally our pricing policy reflects that movement. Our duty is to explain what we are doing and why, to customers.  I believe Corus has worked hard at informing customers as to the background of the increases and at explaining what is happening well beyond its immediate customer base. In many cases this action has created a climate in which our immediate customers can better negotiate with well-informed final users. I also believe that during 2004, Corus has behaved in a clearer and more consistent manner than has been the case in the past. Some of the old internal conflicts between Corus mills and our own distribution organizations not only defied common sense, but worked against the interests of Corus and created confusion in the market. We believe things have improved greatly and  people changes have had a major impact in this area.

Turning to the immediate future and against the background of raw material cost increases in 2005 – as I have already said, at least as much as in 2004 – we anticipate further price rises in 2005 and probably in the early part of the year. We will clarify our intentions, product by product, over the next few weeks.

The steel industry experience is that when things are up, they are about to go down, and vice versa. After little more than a year, I would not claim to be an   expert but the fundamentals of the industry look as if they are changing promising a period of sustained and significant growth in demand – the first time for 30 years. If this is correct, we cannot afford to waste this greater opportunity by negative over-reactions to any short term blips we may experience along the way.     

We are frequently asked about longer-term contracts. The packaging business of Corus is seeking agreement with customers for minimum 20% increases in 2005 and we are in the midst of negotiations with our automotive customers for a similar increase to reflect market trends. I am confident that the outcome will be in line with these expectations.

Finally, and in a nutshell, a summary of my messages is:

There is exceptional growth in world steel demand. This is putting pressure on the availability and price of raw materials. We expect our  input costs  to rise in 2005 by more than the unprecedented increase of 2004.

 We expect steel prices to rise further in 2005, probably starting in the early part of the year.

The steel industry is changing fast and further consolidation is probable – we can expect to see a number of truly global steel companies emerge over the next few years.   

Most importantly, we recognise deficiencies in our service to customers. When we identify a gap in our performance we work hard to improve – our approach to improvements in safety and the progress we have made this year, are an example. Service is right there at the top of our agenda for next year.   

Of course, we recognise there is much still to do. We are encouraged by our progress and would like to thank you, our customers, for your continued support. Our program for Restoring Success will enable Corus to lay the strong culture of continuous improvement, a pre-requisite for having the best in class manufacturing in the world and a truly international mindset.

I would like to thank NASS for inviting me to speak this evening and also to thank those many customers here tonight who continue to buy from us.

Thank you for your attention.