Presentation by
Fumio Oda,
Managing Executive Officer of Nisshin Steel Company Limited, Japan
At the AMM China Conference, Vancouver
October 24-26, 2005

Introduction

It is my great honor to have a chance of making a presentation at this AMM China conference in Vancouver.

The title of my presentation is ‘Chinese stainless steel market potential growth and impact.’ As you know well, the Chinese stainless steel market is growing sharply, same as carbon steel market. Due to the fast growth of the Chinese domestic market, a lot of capacity has been built and more new plants are coming up.

There is a huge supply & demand gap in Chinese stainless steel industry.

Before go for the details, let me briefly provide basic statistics about Nisshin. After that I will explain about world stainless steel production and China’s position.

Then, Chinese stainless steel market including supply and demand update and China’s trade situation. After that, energy, raw materials and macro control influence of the government. Then, I will talk about possible scenarios.

At last, let me explain about Nisshin’s activities.

In year 2004, Nisshin’s net sales reached 3.5 billion US$. Out of that domestic sales were 2.9 billion US$ and export were 600 million US$. Exports ratio was about 17%.

Nisshin’s income before special items was 427 million US$. As you may know, 2001 was terrible year for all steel mills. Since then, we made a great effort to have good results.

Nisshin’s crude steel production was about 4 million metric tons. Nisshin is the fifth largest integrated steel mill in Japan.

Look at the product mix. Nisshin produces coated steel, stainless steel, special steel, hot & cold rolled steel. As you can see, about one-third of our sales comes from stainless.

China’s Stainless Information:

In 2003, world stainless steel production was 22.8 million tons. Out of that China produced 1.78million tons. This was 7.8% in total world stainless steel production. In 2004, world total was 24.6 million tons and china was 2.3 million tons. China share was 9.6%. In 2005, world total was 25 million tons and China was 3.1 million tons. China share was 12.3%. As you can observe, Chinese share keeps on growing.

This slide shows major capacity in China by group.

Tisco (Taiyuan Iron works of Stainless Steel Corporation) is the state owned company located in Shan Xi province.
Baosteel group is another state owned company which has Shanghai no.1, no.5, Ningbo Baoxin - Nisshin’s joint venture - SKS - Thyssen Krupp’s joint venture – and Shanghai Stal. Posco’s joint venture forms another group. Last one is Yusco’s project known as Lisco.

This slide shows capacity of the cold-rolled mills. In 2004, Tisco was the biggest mill. Total cold-rolled capacity in China was only 2.5 million tons. Second biggest mill was ZPSS, a Posco joint venture which has 360,000 tons in capacity. Ningbo Baoxin followed them. After the completion of Yusco’s project and Baoxin’s expansion in 2005, total capacity in China increased to 3.5 million tons. In 2006, total cold-rolled capacity reaches 4.6 million tons. By the end of 2008, this will be 5.2 million tons.

Let’s look at melting capacity. In 2004, total capacity was only 2.9 million tons. In 2006, its capacity jumped up to 5.9 million tons. In 2008, capacity will be reach 9 million tons. This is due to the huge increase at Tisco, Shanghai Baosteel group and ZPSS.

This slide shows the demand of cold-rolled & melting from 2004 to 2008. These figures are based on ISSF data. Average demand growth rate of cold-rolled is 10.7% and average demand growth rate of melting is 15%. As you can see, in 2008 both cold-rolled and melting demand will reach 4.28 million tons and 5.0 million tons, respectively.

This is the supply and demand situation in cold-rolled stainless sheet. In 2004, there was about 1.4 million tons of cold-rolled stainless steel sheet import (include Hong Kong). As a result, about 700,000 tons of supply & demand gap was there. The average growth rate of cold-rolled demand is 10.7%. In 2006, the supply & demand gap will be reached 1.87 million tons. this is so-called ‘year 2006 problem in china.’

This is the supply and demand gap of melting. The meaning of melting is same as hot-rolled. In most cases, hot-rolled capacity is the same melting capacity. In 2004, melting gap was only 1.7 million tons. In 2006, this gap will be widening to 2.7 million tons. By 2008, the gap may reach almost 4.7 million tons. After 2006, hot-rolled stainless steel import will be lower than current level. China may export more hot- rolled stainless steel coils.

In 2002, China imported 1.5 million tons of cold-rolled stainless steel sheet. Main sources are Japan, Korea and Taiwan. Since China filed anti-dumping cases against Korea, Japan and Taiwan, most of the materials from these countries are products for re-export or products which Chinese mills are unable to produce.

Chinese main suppliers of the hot-rolled stainless steels are Japan, Korea, Taiwan and India. Except for India, each country has their own joint venture in China. Most of the hot-rolled materials are shipped to these joint ventures.

China’s main cold-rolled stainless sheet export destinations are Taiwan, Korea, Hong Kong, USA and Vietnam. Export to USA shows rapid increase in recent years.

China’s hot-rolled export is not such a high volume yet. Export to Taiwan shows big growth in these years. The reason is not clear the reason, but this may be the 200 series.

Electricity shortage is a serious issue in China, with 70% of electricity relying on coal – fired power plants. The government is trying to increase nuclear and natural gas power. However, it takes a little longer from now. Electricity shortage for 2004 summer was 30 million kilo watt. 2005 summer was slightly better, but still 25 million kilo watt shortage happened.

China produces crude oil but since 2004, China turned to a net importer. Import of the crude oil reached 117million tons.

FeCr demand is closely linked to the production of stainless with 86 % of FeCr mined in South Africa. World FeCr demand reached about 5.7 million tons in 2004. China imported 277,000 tons of FeCr which contains more than 4% carbon. FeCr consumption in China is increasing.

FeNi is another important element when we produce type 304 stainless steel. As you know well, in the first quarter of 2005 due to china’s strong demand, nickel price hit more than $17,500/ton at the peak time. 140,000 ton demand in 2004 is about 10% of the world demand. China’s demand is the key element of nickel price.

Another issue is macro control by Chinese government. To cool down overheated investment, especially stainless steel, the government tries to restrict new project license in coastal area for the time being. However, Chinese government does encourage more investment in inland and rural areas.

To enhance productivity, government authority tries to restrict small mills.

Tight money policy has been taken to control interest and money supply.

Scenarios:
Huge supply and demand gap arises since 2004 for both cold-rolled and hot-rolled stainless steel.
This causes worldwide market confusion of the stainless steel.
Higher demand with resulting stability.

Pessimistic scenarios:
Demand growth will be lower than expected. Chinese economy growth will be lower than current level. This will be caused by the macro control effect and energy shortage etc. Eventually, stainless demand will not grow as we expect.
Despite huge over supply situation, Chinese mills will continue to expand market share. Chinese mills will not accept production cut back. Production will be kept at high level.
To fulfill the capacity, Chinese mills increase their export volume.
As a result, trade friction may occur.
Even more serious market confusion will arise.

Optimistic scenarios:
Higher demand growth. Thanks to Beijing Olympics (2008) and Shanghai Exp. (2010).
On the contrary, mills production will be lower because of energy shortage, insufficient supply of the raw materials and macro control influence.
Supply and demand gap will be smaller than our expectation.
Market price will gradually increase.
World stainless steel market will be stabilized.

Nisshin’s Activities:

From now, I will introduce Nisshin’s activities. To prepare for global competition, Nisshin put a focus on high value added markets both domestic and overseas. This means Nisshin will try to promote special ferritic & austenitic grades both domestic and overseas. This is one of the ways for Nisshin to survive global competition.

In USA, Nisshin starts providing special grade hot coils for automobile’s exhaust manifold to North American stainless which produces cold-rolled products for Nisshin Auto Tubing in the U.S. We are studying similar ideas in china as well.

Beside these activities, Nisshin invests in stainless steel mills such as Acerinox (Spain) and Baoxin (China). Alliance with Acerinox started in the 1970s’. For Baoxin it was 1999. Baoxin is one of the most competitive stainless steel mills in China.

As I mentioned before, Nisshin has a stainless steel pipe mill (Nisshin Automotive Tubing) in the U.S. This company provides exhaust system materials for automotive manufacturers.

Other major activities are technical assistance for world stainless steel mills. A lot of big names are here on this list.

Talking about coated steel, Nisshin invests in Wheeling-Nisshin Inc. which produces high quality coated steel in West Virginia.

Nisshin invests in downstream industries as well. We have 2 coil centers in China. Both of them are able to process both stainless steel and carbon steel.

These are the pictures of our partners plants. Nisshin is trying to enhance the relationship among these companies.

These are the pictures of Acerinox and Wheeling-Nisshin. They are one of the most powerful and competitive companies in the steel industry.

This map shows global network of Nisshin Steel’s family and partners. For further progress, we will establish win-win relation with our precious clients and network members.

Thank you for your attention.

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