86 Iron and Steel Industry Final Report 29may12 VF

Study on Enhancing the Competitiveness of
the Iron and Steel Industry in Malaysia

Final report
Kuala Lumpur, May 2012

Confidential
Study context and objectives
The ppurpose
p of this studyy is to determine the strategic
g importance
p of the Malaysian
y iron and steel
industry and to define the direction and policy recommendations to ensure industry success
• Current context, achievements and challenges affecting the end-to-end industry
• Economic contribution to-date
• Potential
P t ti l opportunities
t iti tot develop
d l andd grow th
the iindustry
d t
• Government priorities and policies to support industry success
This study will address three key questions for the industry
• What is the strategic importance of the steel industry to Malaysia?
All rights reserved.

– How important is the steel industry for the Malaysian economy today?
– What could be the overall economic impactp of a re-structured industry?
y
onsulting Group, Inc. A

• What are the key challenges affecting the industry? How to address them?
– How competitive is the Malaysian steel industry?
– What should be the target structure of the Malaysian steel industry?
2012 by The Boston Co

– What are the potential restructuring options for Megasteel?
• What policies and initiatives should be put in place to develop the Malaysian steel industry and foster
competitiveness of domestic players?
– What
Wh t measures h
have b
been ttaken
k b by other
th relevant
l t economies?
i ?
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240682-86-Iron and Steel industry-Final report-29May12-vf.pptx 1
Confidential
Iron and Steel industry study was conducted over 9 weeks

4 weeks 3 weeks 2 weeks
Phase III : "How do we

Phase I : "Where we are today" Phase II : "Where we want to be"
get there
there"
1 4 6
Baseline of the iron ore and steel industry
• Regional and domestic production, consumption,
trade flows and trends Steel industry envisaged for Malaysia
• Value chain of industry • Target
T t markets,
k t product
d t types
t
• Key products, markets and players • Type of investors / players required to make
• Economic impact of industry industry a success
• Local industry structure and competitive landscape, • Potential restructuring options for Megasteel
including profiling of key players and challenges • Economic contribution of the industry and related
• Policies and initiatives undertaken and impact of sectors Detailed implementation
p
these policies on the iron, steel and related industries roadmap

• Overall emerging trends • Implementation milestones
• Key issues and challenges faced and roadmap development
• Overall implementation
5 governance mechanism /
2 Assessment of strategic importance/ opportunities model

going forward
• Domestic and regional demand / supply projections Enablers for development of the industry
• What needs to change to capitalize on future growth • New initiatives and policies required
opportunities • Key enablers including, input factors (raw material,
energy, etc.), human capital
3 Lessons learnt from benchmarks

• Benchmarking exercise, including analyzing the
impact of policies to develop the industry
7 Stakeholder engagement
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Project SCM #1 SCM #2 SCM #3 SCM #4
kick-off (3 April 2012) (17 April 2012) (7 May 2012) (29 May 2012)
(19 March 2012) Inception Draft Final
Interim Report Final Report
Source: BCG Report Report
Confidential
Additionally, interviews held with 30+ stakeholders

Steel players
players, consumers
consumers, associations and government bodies
Government agencies Local steel players

Local steel consumers / Associations International steel players / consumers

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Confidential
Executive Summary
Today Malaysian steel industry contributes ~4% to the economy and has a significant opportunity at ASEAN level
• There is a ~22.4 MTA opportunity in ASEAN, of which 18.3 MTA for flat products
• Malaysia should have the ambition to retain and develop a comprehensive end-to-end steel industry
• A fully developed steel industry could contribute up to ~6.5% to the Malaysian economy by 2020
Malaysian long industry is already liberalised and competitive, whereas flat industry is facing challenges
• Sole flat upstream producer (Megasteel) uncompetitive, unprofitable, with negative repercussions on mid/downstream players
The window of opportunity is short for flat industry to become competitive and seize regional opportunity
• Regional players ramping up investments in Indonesia and Vietnam to reduce ASEAN gap

• Current trade policy and signed FTAs putting regional competitive pressure across the entire value-chain
Aside from Lion Group, there are 4 projects to build flat upstream capacity in Malaysia
• Only
O l 1 meeting
ti mostt off long
l term
t success factors
f t

Pre-requisite to address current situation of Megasteel with high sense of urgency: Five main outcomes for Megasteel
restructuring
• Shared responsibility outcome with least cost of resolution for all parties,
parties however requires complex execution

• Shared responsibility outcome would open the way to become competitive over the long-term
Malaysia steel industry could be structurally competitive: 3 Government initiatives to support the entire steel industry
• Provide advantaged access to select inputs: Primarily iron oreore, to a lesser extent gas
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• Enhance capabilities of the Steel Industry (e.g. Steel Institute set-up)
• Enforce trade defenses and trade barriers to guarantee a fair level playing field

Confidential
Steel industry provides key inputs for the overall economy

Steel is largest structural material in the world and is a catalyst for industrial spin-offs
Steel mill
Iron &
Steel-
making Crude steel
Steel
Casting core
Long (Bloom, Billets)
activities
Flat (Slabs)

Rolling &
Finishing Bars, wires, rods, sections Plates, coils, strips

Downstream Construction Automotive Machinery & Oil & Gas Packaging Appliances Potential
industries
Equipment industry
% of global finished steel
industrial
55% 20% 10% 5% 3% 2%
consumption (2005) spin-offs
Residential,
Residential non
non- Manufacturing,
Manufacturing Petrochemicals,
Petrochemicals Food canning,
canning Electronics, home
Electronics
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C
Commercial,i l corporate,
t
residential, ship-building, agricultural etc. etc. appliances, etc.
public transport, etc.
etc. equipment etc.
Note: Simplified overview of steel industry

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Domestic long steel industry important to the economy
Very few countries worldwide without

domestic long steel Long steel is a basic need
Domestic long steel production
capacity across the world Uses of long steel
92% have domestic long steel
76% 13% 8% 84% 7% 5%

0 20 40 60 80 100 % of 0 20 40 60 80 100 %
Both upstream and downstream countries Construction
Only downstream long Automotive

Only upstream long Machinery & IG
No long steel Others
• No high-income country (other than • Rapidly industrializing countries have high

Estonia) exists without a domestic long demand for construction
steel industry1 • Hence high derived demand for long steel in
• Necessary condition to becoming high- Malaysia
income country
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1. Kuwait and Bahrain have no upstream long steel, Denmark has no downstream long capacity, among the 97 countries represented in Metal Bulletin;
Note. 31 high income defined as GDP per capita above $20k in world PPP dollars from the World Bank's 2010 GDP per capita data.
Source: Metal Bulletin Capacity Q3 2011; Worldsteel Steel Statistical Yearbook 2011; WSD, SEAISI, BCG Model; EU DG Trade statistics; BCG Analysis
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Flat steel industry similarly present in almost all high income
economies
>90% high-income Focusing only on downstream

economies produce flat steel steel not optimal for Malaysia
Domestic flat steel production

capacity
p y in high-income
g countries
Pure
downstream
High-income countries without % of high-income countries high-income
flat steel industries are 100 Criteria countries Malaysia
6%
fundamentally different to Malaysia
Small population
 

• Singapore and Trinidad & (<15m)
42%
Tobago
• Island economies with small 50
Small area1
(<150 sq km)  

populations
52%
Domestic iron ore1
 
Domestic automobile
manufacturing2  

0


Small trade:GDP ratio3
No flat steel
Only operate very far
downstream4  
Only downstream flat
Both
B th upstream
t and
d downstream
d t
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1. Norway is an exception; 2. Portugal is an exception; 3. Defined as <100% of GDP. Luxembourg, UAE and Estonia are exceptions; 4. 75% of them operate in tinmills and further downstream where only
40% of Malaysia's downstream capacity is.; Note. 31 high income defined as GDP per capita above $20k in world PPP dollars from the World Bank's 2010 GDP per capita data
Source: Metal Bulletin Capacity Q3 2011; World Bank; BCG Analysis; CIA World Factbook: EU DG Trade statistics; WTO statistics; BCG analysis
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Steel demand in ASEAN1 growing ~5%

5% p.a. for past 20 years
Malaysia steel demand is the 4th largest in ASEAN1 and

is growing at ~6% p.a. across the past 20 years
ASEAN finished steel products consumption per country
(MTA) CAGR CAGR

60 90-10 98-10
49
5.3%

14 Thailand 4.4% 11.3%
40
33

8 11 Vietnam 22.7% 14.9%
2
20 17 7 19
9 Indonesia 3.9% 9.9%
4
6 2
8

3 8 Malaysia 6.0% 8.0%
4 3 Philippines 4.4% 2.4%
3 4 3
2 4
3 4 4 3 Singapore 0% -2.5 %
0
90 97 98 10
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1. ASEAN-6: Indonesia, Thailand, Malaysia, Vietnam, Philippines, Singapore; Source: IISI / WSA Steel Statistical Yearbooks 1990 to 2004, SEAISI 2005 to 2010, BCG analysis
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Regional finished product gap of ~22.4 MTA, including ~18.3
MTA for flat products
Long steel is primarily domestic market Flat demand met largely by imports
In MTA (2010) In MTA (2010)

40 40
Net imports: ~18.3 MTA

30 30
25.8
22 7
22.7
4.3 9.8

20 18.6 20
3.7
6.2
4.4
5.7
10 3.6 10 75
7.5

53
5.3
2.8
4.1 3.8
3.6 4.2
2.7 2.3
2.1 1.8 1.4 1.2
0 0.7 0 0.9
Domestic production Apparent consumption Domestic p production Apparent

pp consumption
p

of finished products1 of finished products1 of finished products1 of finished products1
Thailand Vietnam Indonesia Malaysia Phillipines Singapore
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1. Hot rolled steel products (rails and accessories, steel sheet piles, sections, bars, wire rods, round for tubes, plates, hot rolled sheet and strips and tyres and wheels), cold rolled steel products (cold
rolled sheets and strips, cold rolled electrical sheets), coated sheets and strips (galvanized sheets, tinplates, etc.), pipes and tubes (seamless and welded)
Source: SEAISI, BCG analysis
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Today, Malaysian steel industry contributes ~4% to GDP,
employing ~150,000
150,000 people
Steel industry currently contributes ~90% of the steel industry's ~150k

~4% to Malaysian GDP employment in mid/downstream industry
Steel industry contribution to Malaysian GDP Steel industry contribution to Malaysian employment
(in thousands)
4.3% 4.3% 152 152
Spillovers 1.8% 1.8%

85
Long 100

1.0%
Long 1.6% 14

0.4%
Long Flat
0.2%
Downstream Downstream Flat 52 48
0.5%
Flat 0.9%
0.3% Midstream Midstream
0.1% 5
Upstream Upstream

2009 2009 2009 2009
A fully developed steel industry could contribute ~6.5%1 to

the Malaysian GDP with ~225k2 employees by 2020
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1. Key assumptions: 10 MTA new Malaysian capacity. 6% CAGR real increase in GDP, 1.6% CAGR in iron& steel productivity; 2. Assumes Malaysia serves 10 MTA production in flat steel, supplied by 2
upstream players; Note: Upstream considered from iron to hot-rolling, midstream is cold-rolling to galvanizing, downstream is further down the value chain. Current estimates of Value Added to GDP are
shown for 2009, using data obtained directly from the Department of Statistics for MSIC codes 241, 243, 251 and 259; Current industry multiplier of 1.7 calibrated by benchmarking. Distribution among
flat/long and upstream/midstream/downstream explained on backup slide.
Source: Malaysia Department of Statistics; Bekhet (2011) on "Output, Income and Employment Multipliers in Malaysian Economy:Input-Output Approach"; BCG analysis
Confidential
Long industry already liberalised and competitive

Trade barriers almost non-existent
non-existent, players providing competitive prices & decent profitability levels
Domestic prices 5-10%

All long
g products
p with higher
g than international Decent p
profitability
y levels
<5% of import duty benchmarks recorded by local players
Breakdown of Malaysian Malaysian vs international Avg profit margin of main long steel
imports of long products1 prices for long products manufacturers (2007 – 2011)
(%) (USD/MT)
84% 100%
100 900
Malaysia2
75 800

China3
50 700
Japan4

"Local prices are higher
25 600
16% but will not trigger
massive imports"
Steel consumer

0 0
ASEAN FTA Total Jul Oct Jan Apr Jul Oct Jan 0 2 4 6 8 10
/MFN 10 10 11 11 11 11 12 (%)
Import China Malaysia
0-5% 5%
duty avg5 avg
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1. HS codes 7213 to 7217 2. Mild Steel Round Bars - R25, MS146, 3. Long Products / BOCE Rebar / China West Cash bid/settlement; 4. Long Products / Rebar / Japan domestic (Tokyo Steel) CIF,
5. 2008-09 industry average; Note: Quarterly exchange rate applied; S; Note: Ann Joo and Lion Group: Includes limited non-steel activities , Lion Group: Excludes DRI activities, Southern Steel:
Includes pipe and tube activities;
Source: Bloomberg, company websites, annual reports 2007-2011, China Metallurgical Industry Planning and Research Institute, DOS, CIDB, SBB Steel Prices, BCG analysis
Confidential
Flat industry, however, faces structural challenges

Untenable financial situation of upstream players,
players mid/downstream face high cost of input materials
...with negative
Low profits/losses at Still high HRC import duty repercussions on
Megasteel in Malaysia... mid/downstream players
Megasteel's profitability 2008-2011 Import duty1 applied for Current duties impacting
HRC in ASEAN countries mid/downstream players
• Import d
duties
ties 5% or belo
below for
Positive results due (%) coated / galvanised products
to accounting
200 150 adjustments – 40 and further downstream
100 inventory write-off • Domestic raw materials price
20% ~10-20% higher than
100 20
international prices
4% 5%
A rights reserved.
0% 0%
0 -6x 0
Issues raised on product quality
-500 • Multiple players reporting that
-500
500 Megasteel products lead to 10-
10
onsulting Group, Inc. All

-570 High duty not applying to all 30% lower productivity
-1750 imports: exemptions2 available compared with international
• 908kT HRC duty exemptions raw materials
-1800 awarded in 2010 (~47% of
2008 2009 20101 2011 2012*
2012 consumption)

Profitability Index (2008=100)
Megasteel
g needs restructuring
g of its lending
g facilities
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by June 2012
1. Based on Product HS code7208 – Flat-rolled products of iron or non-alloy steel, of a width of 600 mm or more, hot-rolled, not clad, plated or coated; 2. Duty exemption mechanism recently revised
in 2009; Note: 2012 results are from Megasteel's own projections for profitability; Source: Megasteel's audited accounts for 2008-2011 and own projections for 2012; interviews and confidential inputs
received from other industry players; Press Search, Macmap; Customs data, Government websites, BCG analysis
Confidential
Flat industry: Short window of opportunity to become
competitive and seize regional opportunity
ASEAN: Announced capacity for hot rolled flat and supply-demand gap evolution
Capacity extension in MTA ASEAN supply-Demand Gap in MTA
20 20
18.3 18.6
17.2
15.0
15 15
10.6
10 10

8.6
7.3 7.2
6.8
6.1 5.8
5.5
46
4.6

5 5.0 5
4.4
3.2
NA 0.4
0 0

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Supply-demand gap Thailand Vietnam Indonesia Malaysia Not validated yet
Room for 1-2 p

players
y reaching
g minimum efficiency
y scale
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of 3-4MTA based in Malaysia
Note: Only officially announced and documented projects are included; All projects unlikely to come online in time – Formosa project with 3 years delay already, Lion Group and MIG lack financing;
Source: Plantfacts, Metal Bulletin, Press Search, SEAISI Steel Statistical Yearbook 2011, BCG Analysis
Confidential Backup
Thailand and Indonesia with lower import tariffs, but tighter
non-trade
non trade barriers and defenses
Thailand Indonesia Vietnam Malaysia
2010 flat imports

6.0 3.0 4.4 2.8
Imports
(MTA)
Imports as % of flat
61%4 56%5 100% 67%
consumption
Import tariffs (MFN)1 5% 5-10% 0-7% 20%

Protectionist Policies
Non-ASEAN FTAs 6 2 2 5
Required Required
Import license Required Required
(annual renewal) (monitoring purpose)

Mandatory Chemical and Mainly Mainly
Basic
Standards mechanical analysis chemical analysis chemical analysis
Anti-dumping: 25 Anti-dumping: 21 Anti-dumping: 03 Anti-dumping: 0
Trade Defenses2
P

Safeguards: 0 Safeguards: 6 Safeguards: 03 Safeguards: 03
ventions
sidies &
Build infrastructure, Tax incentives, facilitate

Tax incentives,
FDI/DDI incentive pp
fiscal support, facilitate JVs, JVs, build infrastructure, Pioneer status
facilitate JVs

Subs
Interv
provision of land subsidised financing
"Indonesia's President Susilo said the construction of a steel factory Krakatau-Posco would be an
essential support to accelerate Indonesia’s
Indonesia s economic growth in the next 15 years"
years
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1. Range for flat HRC and CRC products; 2. The data represents cumulative trade defenses employed for base metals and articles, which includes, but is not limited to steel products; 3. Data taken
from the WTO database of cases from 1995-2011. Zero assumed due to no reports received by the WTO from reporting country (as required by the WTO regulations);
4. 3 key upstream producers with multiple mid-stream players; 5. Krakatau key upstream player with multiple mid-stream players
Source: MITI, SIRIM, CIDB, DOSM, ISIT, BSN – SISNI, MIDA, Tariff Finder, UNCOMTRADE , Macmap, OECD, Standards, Regulatory Reforms & Development in APEC, Press Search , SEAISI,
WTO (1995-2011); industry interviews, BCG Analysis
Confidential
Flat industry: Four Malaysian projects, aside from Lion group

Government should be aware of only one project clearly meeting most of long term success factors
Another four local projects underway... ...only one able to meet most KSFs
Critical size Technology Location Global

(3-4 MTA) (BF-BOF, HRM) (Deep-sea port) expertise
1.3MTA DRI-EAF, Tanjung Hantu, Perak

• Project commenced 2007, in-talks with ?
intl players, financing almost finalised
1 5MTA BF
1.5MTA BOF Kemaman,
BF-BOF, K T
Terengganu
• Financing completed, contracts

awarded, commenced earthworks
3-10MTA
3 10MTA BF-BOF
BF BOF (location TBD)

• In-talks with potential international
partners
0.7-0.8 MTA, Penang (confidential techno.)

?

• Financing and contracts completed
Several marks of interest from international p y

players p
to set-up
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operations in Malaysia to serve regional demand
Source: Press searches, Interviews, BCG experience Does not meet criteria Fully meets the criteria
Confidential
Megasteel: Urgent need to resolve challenges in flat industry
especially, related to sole up
up-stream
stream player
Continuum of solutions
Sudden exit Controlled exit Free market Shared Protection
success responsibility
p y
No change to industry No change to industry Change to policy Change to policy

policy policy • Negotiated prices • Duty exemptions
• Gvt compensation • Duty exemptions eliminated1
to Megasteel
g reduced
• 24-36 months timeframe
Govt & Govt & Govt & Govt &

Economy Economy Economy Economy
A rights reserved.
Steel Steel Very low likelihood Steel Steel
Banks Banks Banks Banks
Ind. Ind. given current Ind. Ind.
industry situation

Megasteel Megasteel Megasteel Megasteel

Worst case scenario Improved outcome for Most balanced outcome Best case scenario for
for Megasteel and banks : Larger area • Limited cost for banks Megasteel and banks
banks indicates better and government
Costly for government outcomes Worst case scenario
Megasteel profitable, f steel
for t l industry
i d t
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economy benefits
1. Except for re-export, automotive, shipbuilding and 50-50 for re-rollers
Note: For each stakeholder, the higher the score the better the outcome
Source:: SEAISI; MIDA; Megasteel documents; Megasteel P&L, manufacturing accounts; Megasteel balance sheets; WSD; elasticity estimates by NSC USA; Department of Statistics; Platts SBB
Steel; steelonthenet; Annual Reports of various players; BCG analysis
Confidential Backup
Megasteel: Five potential outcomes for restructuring

Sudden
H Sale of assets exit Shared
M responsibility
Government
M support
Bank-led Sale of business
restructuring M to new investor L Protection
Free market
L success
H Controlled
Laissez-faire exit Shared
L Take-over by M responsibility
Government Government
M
supportt
L

Status quo Protection
L Free market
success
Sh d
Shared

Government H responsibility
intervention Government
H
support
Government-led M Protection
restructuring Controlled Shared
H

M exit responsibility
Government
M support
H : High probability Take-over by M Protection
L Government
M : Medium probability
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Free market
L success
L : Low probability

Confidential
Megasteel: Shared responsibility outcome with least cost of
resolution for all parties ...
Sudden exit Controlled exit Shared Protection

responsibility
Industry
Raw material price + ~ 4%1 + ~ 4%1 + ~ 1%1 ▬ ~3%1

decrease
Change to GDP ▬ ~0.2%10 ▬ ~ 0.2%10 + ~0.1% ▬ Up to ~ 0.6%

Gov & Economy
contribution ( RM 1.4 bn)10 ( RM 1.4 bn)10  RM 0.7bn ( Up to RM 4.2bn)

Job retrenchments
(# of jobs) ▬ 1,700 - 4,6002 ▬ 1,700- 4,6002 negligible ▬ Up
p to 10-20,0003

Loss of duty revenues
(RM Bn)
▬ ~0.14 ▬ 0.14 negligible + ~0.025
Written-off loans
▬ ~0.8
~0 86 ▬ ~0.8
~0 86

Banks
s
(RM Bn)
Rescheduled loans ▬ ~0.67 ▬ ~0.67
RM Bn)
el
Sunk investment ▬ ~0.6

~0 68 ▬ ~0.6
~0 68
Megastee

(RM Bn)
Profit margin + ~8%9 + ~15%9
1. Average change in price index for HRCs, CRCs, coated steel, pipes & tubes, driven by elimination of duties on imported HRCs because no longer produced locally (Sudden exit and Controlled
exit), driven by requisite clampdown in import volumes across value-chain and lower Megasteel prices (Shared responsibility), driven by clampdown in import volumes across value-chain (Protection);
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2. Megasteel's employment is 1700 (4600 including supporting companies); 3. Assuming projected 20 to 40% decline in flat mid/downstream due to prohibitively high raw material prices; 4. From
elimination of duties (no local production means full duty exemption); 5. From 15% duty paid on remaining imports; 6.Banks' exposure to Megasteel (unless provisioned); 7. Syndicated loan amount
outstanding; 8. Share capital; 9. Profitability derived from estimated Megasteel's cost curve at target production levels; 10. Conservative estimates does not include further gains by mid/downstream.
Source: SEAISI; MIDA; Megasteel documents; Megasteel P&L, manufacturing accounts; Megasteel balance sheets; WSD; elasticity estimates by NSC USA; Department of Statistics; Platts SBB
Steel; steelonthenet; customs data; Annual Reports of various players; BCG analysis
Confidential
Megasteel: ...and would open the way to become competitive
in the long run
Three key projects can provide 13% ... improving its competitive position
cost savings to Megasteel... in the region
Blast Furnace Project Cash cost production curve for Hot rolled coils (USD/t)
Construction of a Blast
Furnace (1.6MTA)
(1 6MTA)1 , sinter Landed cost in M
M'sia
sia index
plant and coke oven plant 150 Import duty
• Objective to enable CFR
Megasteel to produce higher 120
grade steel quality and -13% 112 114
105 105
reduce costs 100 100
100 92 95

84 87 87
Iron Ore Pelletisation Project 83
Substitute 50% of imported
iron ore with local iron ore

• Iron ore is a key input in the 50
DRI process
Natural Gas Project

j

Substitute use of diesel as a 0
TAI BOF
JAP BOF
KOR EAF
INDO BOF
CHI BOF
VIE BOF
EAF (Future)
KOR BOF
JAP EAF
INDO EAF
THA EAF
CHI EAF
energy fuel with natural gas
Megasteel
Megasteel
w t/around)2
• Diesel used as input for
reheating
EAF (w
BF-E
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1. Includes 2.1MTA for liquid steel 2. Refers to optimised Megasteel production from short-term turnaraound; current Megasteel at ~ 119
Note: BF/BOF state of the art plant is compared to average BOF and EAF cost bases in Asia-Pacific countries; Megasteel EAF Future based on 100% utilisation rate of 3.2MTA capacity;
Megasteel numbers include $60 margin from Lion BF; Source: BCG Model, WSD March 2012 database, Megasteel, EIU, TNB
Confidential
Megasteel: Any potential Government support should hinge
on Megasteel meeting strict conditions
Conditions to impose on Megasteel Actions to be taken by Government

Lower domestic HRC prices
• Domestic prices capped within 5-10% range of
benchmark import prices Tightening of duty exemptions
• Price reduction to occur simultaneously with • Reduce volume of duty
tightening of duty exemption exemptions
ti granted
t d2
• Tighten governance and
Undertake corporate and debt re-structuring with transparency for duty exemptions
CDRC1 Reduction of
• Transparency on overall corporate borrowings duty Stricter enforcement of duty
• Likely
Lik l tto include
i l d LiLion G
Group, nott jjustt M
Megasteel
t l exemptions exemptions process

for flat steel • Better cross-agency coordination
Formalise turnaround plan for next 24-36 months • Improve importation processes
• Clear plans and milestones to be monitored by imports
and close existing loopholes
independent turnaround program office

– includes quality and delivery evaluations However, Government should not
• Provide visibility on progress and improvement reduce exemptions in the event of
failure on the part of Megasteel to
Bring in global experts in the turnaround meet conditions imposed
• Includes,
Includes global steel players as shareholders

plus technical experts as managers or advisors
• Inject know-how and access to global best-
practices for technology improvements
Failure to meet conditions byy Megasteel
g will lead
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to 'Sudden Exit' outcome
1. Corporate Debt Restructuring Committee under BNM 2. Estimated reduction of ~25% of current imports required Source: BCG
Confidential
Megasteel: "Shared responsibility option" would be
challenging to execute
Maintain domestic prices
within 5-10% range of Tighten duty exemptions Stricter enforcement of
benchmark import prices across the value chain duty exemptions
Transparent mechanism to Target import volumes servicing Improved training for custom
define import benchmark steel value chain officers
Megasteel
M t l
• Weighted average of top-3 additional
• Knowledge of steel
countries of origin for Imports volumes products and common
reference product Total 2.3 0.8
falsification tactics
• Public data sources
• Actual or forward prices HRCs 70% 30% Increased frequency of

• Monthly update CRCs 75% 25% physical checks
• Review guidelines from
Coated 75% 25%
Monitoring of Megasteel's "risk management unit" to

actual prices Pipes 75% 25% open more containers and
• E.g. invoices to domestic conduct sampling
0 1.0 2.0 3.0 MTA
HRC customers
~ 25% reduction in imports
necessary

• Restriction likely compatible
with HRC grade
requirements by midstream
players1
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1. ~40% of current HRC imports are in grades Megasteel does not produce. Reducing imports to 70% will allow the continued import of HRCs in these categories, but reducing to 37% will require
substituting Megasteel grades for some materials in place of grades that Megasteel does not produce.
Note: Volume estimates constructed from multiple sources as below, based on 2011 data. Conversion yields from HRC to CRC, etc. taken from WSD.
Source: Megasteel documents; WSD; MIDA 2011 imports of flat steel by category; Customs data; BCG analysis
Confidential
Overall steel industry: Government should focus efforts on
three key initiatives
Provide advantaged Enforce trade remedies Enhance capabilities of
access to select inputs & standards the overall industry
Exploit Malaysian potential Implement trade remedies Steel institute as mechanism
for iron ore1 • Provide support for anti- to close critical gaps within
• Support renewed dumping, countervailing & the steel industry
exploration to unlock safeguards • Most urgently to help put in
Malaysia's full potential place stricter importation
• However, with specific Strengthen safety nets & processes to meet quality
prerequisites: standards standards
– favor domestic use of • Duty exemptions: Simpler • Help recommend trade
iron ore; but tighter process, better remedies based on robust

– support development of governance and analytics
proper processing transparency
capabilities; • Fine-tune breadth and Independent body with

– encourage mining depth of mandatory derived authority from
industry rationalisation/ standards Government to enforce
sustainable practices standards
Improve importation process • Private sector to play a

Be aware and avoid • Improve interactions large role in implementation
significant price gap for gas between stakeholders • Joint provision with
with regional neighbors (Importers, SIRIM/CIDB, Government on initial seed
Customs) money of ~ RM4-5Mn
Copyright © 2
1. Landed cost is highly sensitive to iron ore – 20% variation of iron ore cost changes landed cost by 8%
Confidential
In summary, two main recommendations to enhance
competitiveness of the overall steel industry in Malaysia
Main initiatives Details
1.0 Proceed with Megasteel
g exit No change
g to industry
yppolicy
y
olutioning1
Megasteel
Change in government policy on flat steel Tighten duty exemptions granted by JPC3
to be implemented for 24 – 36 months only Stricter enforcement of duty exemptions process
1.1
M
so
Implement conditions on Megasteel to Lower domestic HRC price: Keep Megasteel prices within an agreed
demand turnaround within 24 – 36 months range (5-10% of benchmark imports)
1
Re-structuring under CDRC, global expertise, monitoring turnaround
2.1 Provide advantaged access to select inputs

• Export duty for iron ore (e
(e.g.
g 5%) Set export duties to favor domestic use of local iron ore
• Support of iron ore processing capabilities Support beneficiation and pelletisation plant development

and rationalisation of mining industry Have consistent and planned allocation of licenses for mining
pport
• Gas price monitoring Be aware and avoid significant gas price gap with regional neighbors
Enhance capabilities of the overall industry Mechanism to close critical gaps within the industry: especially
especially,
ndustry sup

22
2.2
(esp., with set up of Steel Institute) immediate focus on standards and importation process
2.3 Enforce standards and importation process

• Continual reduction of import duties Flat upstream plans for duty reduction as agreed in 2009
• Tightening
Ti ht i process and d governance ffor d
duty
t St
Streamline
li process, communicatei t criteria,
it i broaden
b d committeeitt
Steel in

exemptions representation
• Mandatory standards enhancement Fine-tune breadth and depth of mandatory standards for testing
• Importation process enhancement Cross-agency coordination, close loopholes, post-import checks
2
24
2.4 Implement trade remedies Joint Private sector/Government effort to leverage best practices from
Copyright © 2
other industries in Malaysia
1. Recommendation 1.0 corresponds to "Sudden exit" and "Controlled exit" options. Recommendation 1.1 corresponds to "Shared responsibility option"
Confidential
Clear implementation milestones defined

Timelines for high impact initiatives
Note: Recommendation 1.0 corresponding to "Sudden exit" and
"Controlled exit" options not detailed in the implementation plan 2012 2013 2014 2015
Main initiatives Resp

Resp. H1 H2 H1 H2 H1 H2 H1 H2
solutioning1
• Provide government support MITI

Megasteeel
Set up
to Megasteel Positive
exemption EBITDA
Remove
exemption
restrictions restrictions
1.1
2-3 years period to

• Implement conditions to Megasteel allow for Megasteel MITI- Financial
turnaroundd Megasteel restructuring- Bring in Financial Remove
Loans under global deadline conditions

CDRC expertise
port
• Provide advantaged access to select inputs

2.1 MITI
Policy Draft Iron ore
dustry supp
roll-out survey report

2.2
• Enhance capabilities of the Steel Industry (e.g. Steel MITI +
Launch
Institute) MISIF-MSA
2•3 Enforce trade barriers and importation process

2.3 MITI
Steel ind

Policy Commence process
roll-out and mandatory
standard roll-out
• Implement trade defenses
2.4 MITI – Trade Process
Practices roll-out
Copyright © 2
Confidential
Immediate next steps
Communication p
plan including g implementation
p approach
pp
• Announcement to key stakeholders (Megasteel, MISIF, MSA, Financial sector, etc.)
• Announcement to the press and other stakeholders
Prepare implementation phase

• Prepare on-boarding of key stakeholders (documentation, meetings, etc.)
Broker detailed agreements with key stakeholders

• E.g. Megasteel restructuring (only if "Shared responsibility option" is decided)

Prepare decrees / regulatory changes
• Draft amendments / documentation

Copyright © 2
Confidential
Agenda
Objectives, approach and timeline
Contribution of the steel industry to the Malaysian economy
Overview of steel market in Malaysia and ASEAN
Competitiveness of the Malaysian steel industry
Benchmarks of steel policies in selected countries

Target structure of the Malaysian flat steel industry

Government initiatives to support the overall steel industry

Implementation plan
Copyright © 2
Confidential
Executive summary (I)

Objectives approach and timeline
Objectives,
This study
y is to determine the strategic g importance
p of the domestic iron and steel industry y and to define
the appropriate direction and policy recommendations for the industry to achieve its full potential
• Current context, achievements as well as key challenges affecting the industry (across the value chain)
• Economic contribution to-date from the industry
• Potential opportunities to further develop and grow the industry to contribute to the economy
• Strategic priorities and policies for the Government to ensure the success of the industry
This study will address three key questions for the industry
• What is the strategic importance of the steel industry to Malaysia?

– How important is the steel industry for the Malaysian economy today?
– What could be the overall economic impact of a re-structured industry?
• What are the key challenges affecting the industry? How to address them?

– How competitive is the Malaysian steel industry?
– What should be the target structure of the Malaysian steel industry?
– What are the potential restructuring options for Megasteel?

• What policies and initiatives should be put in place to develop the Malaysian steel industry and foster
competitiveness of domestic players?
– What measures have been taken by other relevant economies?
Copyright © 2
Confidential
Executive summary (II)

Objectives approach and timeline
Objectives,
The study
y was conducted over 9 weeks and split
p into 3 sections
• 19 Mar-15 Apr: "Where we are today." Assessment of the current steel industry
• 16 Apr-06 May: "Where we want to be." Synthesize baseline findings into a coherent end-state vision
• 07 May- 28 May: "How do we get there." Translate requirements into recommendations and implementation
plans
l
The recommendations were derived from an independent and robust fact base
• Comprehensive industry analysis through desktop and market research
• Insights from discussions with ~30 key stakeholders (40+ approached) in the industry

– Local and international industry players
– Local and international steel customers
– Government
G t agencies
i

– Associations
• Benchmarks of best practices and key learning from other markets

The final report will provide clear guidance to MITI on the following areas
• Fact based description of the current situation, key issues and concerns on the iron and steel industry
• Strategic priorities/ initiatives for the Government to implement going forward and corresponding rationale
• A set of action plans to execute the strategic priorities/ initiatives
Copyright © 2
Confidential
Iron and Steel industry study was conducted over 9 weeks

4 weeks 3 weeks 2 weeks
Phase III : "How do we

Phase I : "Where we are today" Phase II : "Where we want to be"
get there
there"
1 4 6
Baseline of the iron ore and steel industry
• Regional and domestic production, consumption,
trade flows and trends Steel industry envisaged for Malaysia
• Value chain of industry • Target
T t markets,
k t product
d t types
t
• Key products, markets and players • Type of investors / players required to make
• Economic impact of industry industry a success
• Local industry structure and competitive landscape, • Potential restructuring options for Megasteel
including profiling of key players and challenges • Economic contribution of the industry and related
• Policies and initiatives undertaken and impact of sectors Detailed implementation
p
these policies on the iron, steel and related industries roadmap

• Overall emerging trends • Implementation milestones
• Key issues and challenges faced and roadmap development
• Overall implementation
5 governance mechanism /
2 Assessment of strategic importance/ opportunities model

going forward
• Domestic and regional demand / supply projections Enablers for development of the industry
• What needs to change to capitalize on future growth • New initiatives and policies required
opportunities • Key enablers including, input factors (raw material,
energy, etc.), human capital
3 Lessons learnt from benchmarks

• Benchmarking exercise, including analyzing the
impact of policies to develop the industry
7 Stakeholder engagement
Copyright © 2
Project SCM #1 SCM #2 SCM #3 SCM #4
kick-off (3 April 2012) (17 April 2012) (7 May 2012) (29 May 2012)
(19 March 2012) Inception Draft Final
Interim Report Final Report
Source: BCG Report Report
Confidential
43 meetings: 33 completed, 10 declined (I)

Local and international steel players
Stakeholder Name Position Status
Lion Group Tan Sri Albert Cheng Executive Director –
Ann Joo Steel Dato Lim Hong Thye Group Managing Director
Kinsteel (Perwaja) Dato Henry Pheng Chief Executive Officer
Southern Steel Mr Chow Chong Long Group Chief Operating Officer
Melewar/ Mycron En Azlan Abdullah Chief Executive Offiver
Local playerrs
CSC Steel En Mark H.C. Liang Managing Director

Hiap Teck / Eastern Steel Ms Law Sook Teng Executive Director
POSCO Malaysia Mr Kim Ji-Yong Managing Director
Federal Iron Works Mr Loh Meng Kiat Managing Director
Ji Kang Dimensi Mr Zhang Weidong Managing Director

Yung Kong Galvanising Industries Mr Arthur Hi Lu Choon Managing Director
Bluescope Steel Malaysia Mr Somkiat Pintatham Malaysia Country President

NICOM Mr KL Loke Assistant Director
Baosteel N/A N/A No response
JFE Steel Mr Akira Chiyoda Director
yers
ArcelorMittal N/A N/A Declined

Interrnational play
Nippon Steel Mr Nakajima General Manager

Tata Steel Mr Andrew Heycott N/A Declined
POSCO Mr Jungsup Lee Manager of overseas investment
Copyright © 2
Formosa Vietnam Mr Chi-Hsing Tu Senior administrator No response
Dongkuk / Union Steel Mr Kwangyong Kwon Manager of corporate strategy dev
Hyundai Steel Mr Hyukje Cha Manager of corporate planning
240682-86-Iron and Steel industry-Final report-29May12-vf.pptx Completed Scheduled 30
Confidential
43 meetings: 33 completed, 10 declined (II)

Government agencies & associations

MIDA En Tan Chee Chai Director
Customs Dato Haji Salleh Customs Director
ncies
Ministry of Finance En Yong Bun Fou Director S/U

Economic Planning Unit Ms Liew Siew Lee Manufacturing Industry Science & Tech
ernment agen
Director.
Ministry of Domestic Trade & En Mohd Nasir Noryakin Director of Domestic Trade sector Declined
Consumer Affairs participation
C y Development
Construction Industry p En Razuki Ibrahim S g of Assessment &
Senior Manager
Gove
Board Accreditation

SIRIM QAS International YM Raja Norsiha YM Raja Abd Head of Civil & Construction Section
Hanan
Bank Negara Madelena Mohamed Director Financial Surveillance

D
Department
t t
Malaysian Iron and Steel Federation Mr Chow Chong Long President
ociations
Malaysian Steel Association Tan Sri Albert Cheng President

Malaysia Steel and Metal Distributors' Mr Lim Sin Seong President
Asso

Association
Copyright © 2
Completed Scheduled
Confidential
43 meetings: 33 completed, 10 declined (III)

Local and international consumers

KUB Malaysia Datuk Wan Mohd Nor Wan Ahmad Group Managing Director Declined
participation
IJM N/A N/A Declined
participation
Proton En Zainal Abidin Omar, Najib bin Mohd Group Technical
cal consumerrs
Razali, Mohd Taufik Kamaruddin Procurement

Petronas Puan Wan Noor Aini Mohd Noor GM Group Supply Chain
Mgmt, Finance Division
Dunham-Bush Mr. Sek Chiong Yeo Managing Director No response
Loc
FMC Technologies Mr Alred Teo N/A No response

MHB Mr Gan Boo Choo TBC
MBAM – Master Builder's Mr Kwan Foh Kwai President
Association

Samsung TBC TBC
sumers
Honda N/A N/A Declined

participation
Interrnational cons

Copyright © 2
Completed Scheduled
Confidential
Agenda



Implementation plan
Copyright © 2
Confidential

The steel industry

yp provides key y inputs
p for the overall economy y
• Steel is largest structural material in the world and is a catalyst for industrial spin-offs
• Key downstream industries include Construction, Automotive, Machinery & Equipment, Oil & Gas, Packaging
and Electrical Appliances
There are two main products of steel-making – long products (typically used in Construction) and flat
products (typically used for Automotive and Electrical appliances)
• Steel is made using two major technology routes– Blast Furnace (BF) or Electric Arc Furnace (EAF)
– New technologies are available (e.g. Corex, Finex), however market penetration is still low

• Steel industry has a long value chain – upstream, midstream and downstream
Today,
T d the
h steell industry
i d contributes
ib ~4%
4% to the
h M Malaysian
l i GDP,
GDP and d most off the
h GDP contribution
ib i is i

attributed to the long industry, and ~90% of employment is specific to midstream & downstream activities
• Direct contribution: 2.5% of GDP, 150,000 jobs
p
• Indirect contribution: 1.8% of GDP is attributed to spill-over effects from the domestic steel industry
y

– Import substitution effects, ancillary employment and activities generation, wage effects through labour
supply, technology and skills transfers, by-products (e.g., slags for cement), reduced international
exposure to steel prices
• In addition,
addition the strategic value of the industry is not yet fully realised
Copyright © 2
– e.g. Symbiotic effects of strategic related industries – construction, automotive

Confidential

Malaysia should have the ambition to retain and develop a comprehensive, end to end steel industry
• Malaysian steel industry should cover long and flat products across upstream, mid stream and downstream
Domestic long steel industry is important to the economy

• No high-income
high income country (other than Estonia) exists without a domestic long steel industry
– ~90% of countries worldwide have a domestic long steel industry
• Long steel is a basic need: ~85% of total world steel consumption is used for Construction
• Longg steel tends to be a largely
g y domestic industry,
y, ~85% of ASEAN consumption
p is p
produced locally
y

Flat steel industry is similarly present in almost all high income economies
• >90% of high-income economies produce flat steel

• High-income countries without any flat steel industries are fundamentally different to Malaysia
– e.g. Trinidad and Tobago, Singapore
• Countries without a flat upstream industry are fundamentally different from Malaysia
– Countries focused purely on downstream activities typically have small populations (<15m)
(<15m), are within

a small area (<150 sq km), and have small trade to GDP ratio, among other characteristics
A fully developed steel industry could contribute up to ~6.5% to the Malaysian economy with 225,000
employees by the year 2020
Copyright © 2
Confidential
Steel industry provides key inputs for the overall economy

Steel is largest structural material in the world and is a catalyst for industrial spin-offs
Steel mill
Iron &
Steel-
making Crude steel
Steel
Casting core
Long (Bloom, Billets)
activities
Flat (Slabs)

Rolling &
Finishing Bars, wires, rods, sections Plates, coils, strips

Downstream Construction Automotive Machinery & Oil & Gas Packaging Appliances Potential
industries
Equipment industry
% of global finished steel
industrial
55% 20% 10% 5% 3% 2%
consumption (2005) spin-offs
Residential,
Residential non
non- Manufacturing,
Manufacturing Petrochemicals,
Petrochemicals Food canning,
canning Electronics, home
Electronics
Copyright © 2
C
Commercial,i l corporate,
t
residential, ship-building, agricultural etc. etc. appliances, etc.
public transport, etc.
etc. equipment etc.
Note: Simplified overview of steel industry

Confidential
Two major technology routes for steel production
Blast furnace steelmaking Electric arc furnace steelmaking

Pellets Pellets
Scrap
Iron ore Iron ore
Continuous casting Ladle
Ladle
Sinter (Refiring) (Refiring)
Coal
Direct
Limestone reduction
Converter Electric
(P i
(Primary Scrap
Coal Coke Blast arc furncace
steelmaking) (Primary

furncace
(Ironmaking) steelmaking)

Hot and cold strip Plate Coils Hot rolled bars Rods Tube rounds Structural shapes Rails
Copyright © 2
Tyre wire – wire,
Cars – white goods Welded pipes – ships Rebars nuts and bolts Pipeline Structural profiles Train rails
Source: Steel raw materials, June 1st, 2009

Confidential
Many new technologies for iron-making available, but market
penetration is still low
SL/RN (coal-based) HyL (gas-based) Midrex (gas-based)
I. ore Coal Char Iron ore (p
(pellets, lump)
p) Iron ore (pellets, lump)
Direct reduction
Natural gas
High pressure (pre-converted)
Natural gas Ambient pressure
Feeder shaft furnace shaft furnace
Rotary kiln
Rotary DRI,
cooler HBI DRI, HBI, hot liquid iron DRI, HBI
• Rotary kiln based process • Shaft furnace based process • Shaft furnace based process
• Coal as reducing agent • Gas is converted to reducing agent in furnace • Gas is prepared for reduction in separate process

Hismelt Finex Corex
Iron ore (fines) Iron ore (pellets, lump)
Hot blast
Fluidized
Fl idi d bed
b d

ng reduction
n
system
Offgas Shaft
furnace
Iron ore Smelt reduction Coal DRI Coal DRI Natural gas
((fines)) vessel (SRV) Natural g
gas (from coal)
Smeltin
S lt
Smelter

O2 (from coal) Smelter
Coal) Hot liquid O2
iron
Slag Hot liquid iron Hot liquid iron
• Airbased direct smelting process • Two-staged process: DRI production + smelting • Two-staged process: DRI production + smelting
• Can handle iron ore fines • Reduction or iron ore to DRI in chain of • Smelting releases coal-based gas, which is
Copyright © 2
fluidized bed reactors used as a reducing agent in shaft furnace
Note: Smelting reduction: Coal directly used as reducing agent, process as substitute of BF; Direct reduction: Gas as reducing agent, even gasification of coal, product used as input in EAF
Source: Lockwood Greene; IEA Clean Coal Center; Rio Tinto Hismelt website; Siemens VAI website; BCG analysis
Confidential
Steel industry has a long value-chain

value chain
Upstream Midstream
Heavy & medium plate
"Integrated route"
Continuous Plate mill Surface finished sheet:
casting
Hot dip aluminizing
Blast furnace Slabs - Aluminized strip
Secondary thin slabs Hot dip galvanizing
Scrap
metallurgy
gy - Galvanized strip
Basic oxygen Ladle Electrogalvanizing
furnace treatment (Vacuum Plastic coating - Plastic coated strip
treatment)
Electrolytic tinning
Hot strip mill Cold rolling - Tinplate strip
Iron ore: mill Electrolytic chromating
beneficiated Sheet metal
pelletized
sintered Hot rolled strip
Tube welding
Straight bead & spiral

welded tubes
Reducing agent: Tube welding
Coke Welded tubes
Natural gas Pipe rolling mill
Coal Drawing, pilger mill Precision tubes
Continuous
casting
Direct reduction Bar Section mill

furnace Section,
S i H
Heavy profiles,
fil H
H-
Bloom
beam, I-beam, rail, piling
Billet
Fluxes section
Section
Bar mill Drawing, pieling, grinding Cold drawn steel
Electric arc Ladle Secondary Bar, merchant bar

Scrap furnace treatment metallurgy
Wire rod

(Vacuum Wi mill
Wire ill
treatment)
Extruding press Complex profiles
"Minimill route"
Cutting Forged parts
Open die forging
Ingot Blooming Die forging
Solid, metallic raw material solid, hot steel casting train
Cast steel Cutting Casted part
Solid raw material Hot formed steel
Copyright © 2
Liquid hot metal Cold formed steel
Liquid crude steel Coated/surface finished steel
Source: VDEh
Confidential
Today, steel industry contributes ~4% to Malaysian GDP,
employing ~150,000
150,000 people
Elements Factors Beneficiaries Contribution

1
Wages Total salaries and wages, People
(compensation employed in
d to current GDP
payments/remuneration by the
of employees) establishments to all employees steel industry
~2.5% of GDP1
2 ~ 150,000 jobs2
Steel players' profit margins Players in steel
Profits
industry
3 Spill-over effects from the domestic steel
alue added
industry
Spill-over

• import substitution effects
effects (via the • ancillary employment and activities generation People outside
industry steel industry ~1.8% of GDP3
• wage effects through labor supply
multiplier)
p ) • technology and skills transfers
Va

• by-products (e.g., slags for cement)
• reduced international exposure to steel prices
4
eyond currrent
Symbiotic effects of strategic related industries

• domestic
d ti automotive,
t ti construction
t ti industries
i d ti Within and

Strategic value • domestic iron ore, limestone, natural gas beyond steel
GDP
of domestic • strategic development, e.g., ports industry, ??

steel industry Efficiency gains from restructuring possible benefits not yet
• higher margins, productivity and technology fully
y realised
Be
Copyright © 2
transfer possible, hence higher contribution
1. Calculations on Value Added to GDP are shown for 2008 and 2009, using data obtained directly from the Department of Statistics for MSIC codes 241, 243, 251 and 259; 2. Employment numbers are
shown for 2009, taken from the 2010 Report on the Annual Survey of Manufacturing Statistics for MSIC codes 241, 243, 251 and 259; 3. Industry multiplier of 1.7 calibrated by benchmarking.
Source: Malaysia Department of Statistics; Malaysia Labour Force Statistics; Bekhet (2011) on "Output, Income and Employment Multipliers in Malaysian Economy:Input-Output Approach"; BCG analysis
Confidential
Most of the GDP contribution is attributed to the long industry
and midstream, downstream activities
Steel industry currently contributes ~90% of the steel industry's ~150k

~4% to Malaysian GDP employment in mid/downstream industry
Steel industry contribution to Malaysian GDP Steel industry contribution to Malaysian employment
(in thousands)
4.3% 4.3% 152 152
Spillovers 1.8% 1.8%

85
Long 100

1.0%
Long 1.6% 14

0.4%
Long Flat
0.2%
Downstream Downstream Flat 52 48
0.5%
Flat 0.9%
0.3% Midstream Midstream
0.1% 5
Upstream Upstream

2009 2009 2009 2009
Copyright © 2
Note: Upstream considered from iron to hot-rolling, midstream is cold-rolling to galvanizing, downstream is further down the value chain. Current estimates of Value Added to GDP are shown for 2009,
using data obtained directly from the Department of Statistics for MSIC codes 241, 243, 251 and 259; Current industry multiplier of 1.7 calibrated by benchmarking. Distribution among flat/long and
upstream/midstream/downstream explained on backup slide.
Confidential Backup
Behind the numbers: Contribution to GDP and employment

Element Calculation steps Outcome
Upstream:
V l
Volume 1 x Value
V l Add
Added
d2 Flat Value Added:
+ Midstream: Proportion of steel
Volume1 x Value Added2 industry by volume1
+ Downstream:
x Steel industry Steel industry
Direct Value Added3 Direct Value
Remainder of Flat VA Added: Multiplier for Steel industry
y
GDP
contribution + = Obtained x Malaysian = contribution
Upstream: directly from the steel industry4 to GDP
Volume1 x Value Added2 Long Value Added: Department of
+ Midstream:
Proportion of steel Statistics3
industry by volume1
Volume1 x Value Added2
+ Downstream:
x Steel industry

Direct Value Added3
Remainder of Long VA
Upstream:
Flat Employment:
Firm-level data on employment 5
+

Proportion of steel industry by volume1
Mid and downstream: x Steel industry Employment6
Remainder of Flat Employment Steel industry
Employment
Upstream:
+ = Employment6
Firm-level data on employment5 Long Employment:
+

Proportion of steel industry by volume1
Mid and downstream:
x Steel industry Employment6
Remainder of Long Employment
1. Volumes for production are for 2009, and taken from SEAISI. Upstream defined as the part of value chain from iron to hot-rolling, midstream defined as cold-rolling to galvanizing, downstream
defined as further down the value chain; 2. Value Added for Flat Upstream estimated from Value Added in converting a ton of slabs into HRCs (from steelonthenet). Value Added for Flat Midstream
estimated from Value Added in converting a ton of HRCs into CRCs (from steelonthenet). Value Added for Long estimated from converting a ton of billets into bars, sections and rods (taken from
Pl tt SBB pricing
Platts i i d data);
t ) 33. 2009 Steel
St l iindustry
d t Di Directt V
Value
l Add
Added
dddata
t obtained
bt i d di
directly
tl ffrom th
the D
Department
t t off St
Statistics
ti ti for
f MSIC codes
d 241
241, 243
243, 251 andd 259
259; 44. IIndustry
d t multiplier
lti li ffor M
Malaysian
l i
Copyright © 2
steel industry obtained from Bekhet's 2011 paper, which compares favorably with BCG's benchmark multiplier data; 5. Firm-level employment data obtained for Megasteel (and its supporting
companies) and Southern Steel, firm-level data for remaining upstream players estimated from production volume and best practices; 6. 2009 Steel Industry Employment data obtained from the
Annual Survey of Manufacturing Industries (2010) from the Department of Statistics for MSIC codes 241, 243, 251 and 259.
Source: SEAISI Steel Statistical Yearbook 2010; steelonthenet.com; Department of Statistics; Bekhet (2011): "Output, Income and Employment Multipliers in Malaysian Economy: Input-Output
Approach", International Business Research Vol 4(1); Annual Reports; company interviews and publications; BCG analysis
Confidential
Domestic long steel industry important to the economy

Very few countries in
world without domestic Long steel is a basic Long steel tends to be a
long steel need largely domestic industry
Domestic long steel production
capacity across the world Uses of long steel Long steel trade in SEA-6 countries
92% have domestic long steel
Domestic
23
5% consumption Net imports
76% 13% 8% 84%
7% 17%
Net imports 4

0 20 40 60 80 100 % of 0 50 100 % 0 10 20 30 Volume in
countries MTA in 2010
Both upstream and downstream Construction Machinery & IG
SEA-6 countries
Only downstream long Automotive Others

Only upstream long
No long steel
No high-income country (other Rapidly industrializing countries have Less than 5% of the world's steel
than Estonia) exists without a high demand for construction consumption in final goods is met by

domestic long steel industry1  Hence high derived demand imported long steel products2
 Domestic long steel industry for long steel in Malaysia  Relatively high transportation
necessary condition to becoming costs make long steel products
high-income country relatively localised
Copyright © 2
1. Kuwait and Bahrain have no upstream long steel, Denmark has no downstream long capacity, among the 97 countries represented in Metal Bulletin; 2. World comprises all the countries
represented in Worldsteel's Steel Statistical Yearbook
Note. 31 high income defined as GDP per capita above $20k in world PPP dollars from the World Bank's 2010 GDP per capita data.
Source: Metal Bulletin Capapcity Q3 2011; Worldsteel Steel Statistical Yearbook 2011; WSD, SEAISI, BCG Model; EU DG Trade statistics; BCG Analysis
Confidential
Flat steel industry similarly present in almost all high income
economies
Countries without upstream
>90% high-income industry are fundamentally
economies produce flat steel different from Malaysia
Domestic flat steel production

capacity
p y in high-income
g countries
Pure
downstream
High-income countries without % of high-income countries high-income
flat steel industries are 100 Criteria countries Malaysia
6%
fundamentally different to Malaysia
Small population
 

• Singapore and Trinidad & (<15m)
42%
Tobago
• Island economies with small 50
Small area1
(<150 sq km)  

populations
52%
Domestic iron ore1
 
Domestic automobile
manufacturing2  

0


Small trade:GDP ratio3
No flat steel
Only operate very far
downstream4  
Only downstream flat
Both
B th upstream
t and
d downstream
d t
Copyright © 2
1. Norway is an exception; 2. Portugal is an exception; 3. Defined as <100% of GDP. Luxembourg, UAE and Estonia are exceptions; 4. 75% of them operate in tinmills and further downstream where only
40% of Malaysia's downstream capacity is; Note. 31 high income defined as GDP per capita above $20k in world PPP dollars from the World Bank's 2010 GDP per capita data
Source: Metal Bulletin Capacity Q3 2011; World Bank; BCG Analysis; CIA World Factbook: EU DG Trade statistics; WTO statistics; BCG analysis
Confidential
A fully developed steel industry could contribute up to ~6.5%
to the Malaysian economy by 2020
Today
y steel industry
y is smaller contributor to Capacity-building
p y g and required
q optimization
p
GDP than Palm oil and Construction can be completed by 2020
% 2009 GDP contribution for selected industries From inception to fully operational, a BF+BOF
6
Direct contribution project typically takes ~ 4
4-5
5 years:
4
2 4.1
only • Formosa's estimates are ~ 4 years per BF
3.3 3.1 2.5
0 0.8 • Krakatau's estimates are ~ 2+ years
Palm Construction Refined Iron and Rubber • Ann Joo's estimates for BOF are ~ 2+ years
Oil Petroleum Steel • Delays have plagued projects in the region, by
about 2 years on average

But a fully developed steel industry could
contribute ~6.5% to Malaysian GDP by 2020 Reaching full production and quality levels
takes
ta es a
another
ot e 1-2 yea
years
s

Steel industry contribution to Malaysian economy
6.5%
4.3% 2.7% Spill-over effects2

1.8% Direct contribution
3.8%
2.5%1
2009 2020
Copyright © 2
1. Current estimates of Value Added to GDP are shown for 2009, using data obtained directly from the Department of Statistics for MSIC codes 241, 243, 251 and 259; 2. Current industry multiplier of 1.7
calibrated by benchmarking. Projections to 2020 assume 6% CAGR real increase in Malaysian GDP and 1.6% CAGR in iron& steel productivity, and that new Malaysian capacity comes online to
produce 10 MTA of hot-rolled products by 2015.
Confidential
Agenda



Implementation plan
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Confidential
Executive summary
The global steel industry is currently facing two major trends – volatility in the environment and the
growing opportunity in Asia
Currently, high fluctuations in raw material prices and end product demand is creating fierce competition
• Steel players are worse positioned than miners to take advantage of market evolutions
• Structural drivers of competitiveness for steel players: critical size, technology and site location
Steel consumption is moving to Asia, creating an greater opportunity for the steel industry in ASEAN
• Within Asia, ASEAN-6 demand growing at a solid 5% p.a. across the past 20 years and is expected to

continue growing at this rate to the year 2020
• Flat products are growing faster (11% CAGR) than long products (7% CAGR) across ASEAN
• At regional level,
level there is an opportunity to substitute imports for domestic production
production, as net imports fulfill

~60% of the ASEAN steel demand
– SEA has minimal intra regional trade and most imports are coming from Japan, China, Korea, Taiwan
– ~80% of ASEAN net imports are flat steel, while long steel is mostly a local market

Specifically in Malaysia, there is an opportunity for the steel industry even though Malaysian domestic
demand will be relatively small at regional level
• Malaysian
y steel demand now 4th largest
g in ASEAN, and is expected
p to continue to g
grow at ~4% p
p.a.
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– There is still room for growth, though Malaysia is the most mature market in the region
• ~70% of Malaysian demand for flat is met with imports rather than domestic production
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Global steel industry facing 2 major trends

(1) Volatile environment (2) Opportunity in Asia
1 Volatile environment : High

g fluctuations in 2 Opportunity
pp y in Asia: Steel consumption
p and
raw material prices and end product demand production moving to Asia
Raw-material spot prices very volatile, contract prices Shift of steel consumption towards China ...
steadily increasing—example IO spot and contract prices 1,386
$/ton 1 203
1,203
1,131
600
200 China
565 (43%)
853 32%
(47%) India
150 20% 4% 5%
4% Other
30% 5%
100 31% 28% North America
27%
50 18% 14% 9% Japan
9% 7% 8% 5%

5% EU(15)
18% 14% 9% 10%
0
2005 2006 2007 2008 2009 2010 2011 2012 2001 2005 2009 2010
AUS 64.9% Fe fines, FOB1 China Import from India 63% Fe dry2

Global steel consumption very volatile and changes in ... as well as production, leaving no growth to developed
GDP with disproportionally high impact regions 1,417
1,224 281
15% 1,144 China top 10
(20%)
11% 19% Other China
10% 345
851 20% (24%) India

5% 8% 27%
10% 4% 5%
3% Other
0% 30% 5%
34% 25% North America
-5% 25%
14% 11% 8% Japan
-10% 12% 10% 7% 8%
7% EU(15)
19% 14% 10% 10%
-15%
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1975 1980 1985 1990 1995 2000 2005 2010 2001 2005 2009 2010
Real GDP PPP growth Finished-steel consumption growth
1. Adjusted to $/t using 6% moisture and normalized to 63% Fe dry to compare it to China import from India (63%) 2. CFR prices used adjusted for freight Capesize voyage rate Goa/Beilun 140,000t
Source: SBB December 2011; Clarkson; EIU; World Steel Association
1 Confidential
Steel players worse positioned than miners to take advantage
of market evolutions
Miners faster consolidation than steel

players.... Miners with higher ROCE ...
Top 3 world market share (%) ROCE (in %)

40 40
Iron ore miners
18
20 20 15
Steel players
15 13
0 0
1975 1990 2005 2002 2003 2004 2005 2006 2007 2008 2009

... gave them stronger market power ... as well as with higher EBITDA margin
Industry traditionally based on annual contracts EBITDA (in %)

• Since 1990s Japanese are setting benchmark 50
37 35
• Since 2000s Chinese market main factor for price level
25
25 16
In 2010, Vale reached quarterly ore price agreement

with Asian steelmakers—other miners followed
• Prices negotiated quarterly for next 3 month based on 0
average spot price of previous 3 month 2002 2003 2004 2005 2006 2007 2008 2009
• Individual negotiations between miner and steel producer
Top 3 miner1 Top 15 steel producers1
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1. Top 15 steel producers: By market cap – Arcelormittal, Posco, CSN, Nippon Steel, JFE, SAIL, Gerdau, Baoshan, TK, Usinas Sider, Jindal, Evraz, Nucor, China Steel Corp, Sumitomo; Top 3 miner:
RioTinto, BHP, Vale
Source: BCG analysis
1
Castiing produc
ction Casting production n
cap
pacities 20
012 capaciities 2008
0
500
1000
0
500
1,000
0
0
Other SA
Source: WSD; BCG analsyis

Other SA
Middle East Middle Eas
st
1. Crude Steel demand as proxy

CIS – LC
CIS
S – LC
India – LC
Other NA – LC
India – LC
Production costs ($/t)
Brazil
Other NA – LC South Afric
ca
East. Eur. – LC
Oceania
Brazil
uth Africa
Sou USA – LC
240682-86-Iron and Steel industry-Final report-29May12-vf.pptx

Eas
st. Eur. – LC
Oce
eania
USAA – LC
China – LC
C
500
500
China – LC France
UK
Taiwan
Eur. – LC
Other W. E
Other Africa
a
South Koreea
Japan
Fran
nce
UK
Taiw
wan
Confidential
Germany
Other W. Eur. – LC
1000 East. Eur. – HiC
1000
Other NA – HCt
Other Africa Other W. EEurope – HC
Other Asia
Sou
uth Korea India – HC
CIS – HC
Jap
pan USA – HC
Key drivers of competitiveness:
Gerrmany
critical size, technology and site location
Easst. Eur. – HC
C
China – HC
Other NA – HCt
C
Other W. Europe – HC
Other Asia
India – HC
1500
1500
CIS
S – HC
USA
A – HC
facilities are structurally better positioned than others
China – HC
In this challenging environment, select steel production
Slab price, Q1 2012

Slab price, Q4 2008
50
Production capacity (mio t p.a.)
2000
2000
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2 Confidential
Within Asia, ASEAN

ASEAN-6
61 demand growing at a solid 5.3% p.a.
CAGR CAGR CAGR
1990- 1990- 1998-
Finished steel p
products consumption
p per
p country
y 2010 1997 2010
Consumption in MTA
60
50 49
5.3%
46
8.3%
44
42
39 14 Thailand 4.4% 3.6% 11.3%
40 37 38 13
13 11
34 33 33 33

9.6% 31
30 14 13
30 13
9 8 26 10 11 8 11 Vietnam 22.7% 36.7% 14.9%
24 24 9 24 8 9 11
19 21 2 2
7 6

17 2 1 5 5 6
20 8 8 7 7 19 6 4 5 9 9 Indonesia
2 6 3 7 3.9% 7.3% 9.9 %
8 4 2 5 7
6 1 0 5 5 6 7 6
6 2 3 5
5 5 8 8
4 4 8 3 8 8 8 Malaysia 6.0% 17.5% 8.0%
10 6 7 7 6 7 7 7
4 5 4 3 6 7
4 4 4 4.4%
4 4% 14.1%
14 1% 2.4%
2 4%

3 3 5 3 4 Philippines
Phili i
2 2 2 3 3 3 4 4 3 3 3 4 3 4
3 3 3 3 3 4 4 4 4 3 3 3 3 3 3 3 3 3 4 3 3 Singapore 0% 7.6 % -2.5 %
0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
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1. ASEAN-6: Indonesia, Thailand, Malaysia, Vietnam, Philippines, Singapore
Source: IISI / WSA Steel Statistical Yearbooks 1990 to 2004, SEAISI 2005 to 2010, BCG analysis
2 Confidential
Different key industries drive demand for long, flat and
tubular finished steel products
Share ASEAN Malaysia
of steel Type of expected expected Examples of steel
Key end-industries demand demand growth1 growth1 products
• Rebars, galvanized steel, wire

Construction ~60% 3% 35% 63% 4.6% 3.7% and rods,, steel plates,
p , sections,,
bars, galvanized steel, rails, etc.
• Hot rolled and cold rolled

Automotive ~20% 2% 81% 16% 6.0% 3.8% sheets, stainless steel

• Stainless steel, cold rolled
Machinery &
~10% 10% 70% 20% 6.6% 6.6%2 sheets, high speed steel
Industrial equipment

5%
• Hot rolled sheets, cold rolled
Oil & Gas ~4% 80%
14% 5.1% -1.4% sheets, pipes and tubes

Others • Tinplates, hot rolled and cold
(incl. shipbuilding, ~6% 0% 67% 33% 3.5% 3.5%1 rolled sheets, etc.
containers packaging)
T b
Tube Fl t
Flat L
Long
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1. 2010-2020 CAGR based on BCG model 2. ASEAN forecasts have been used for Malaysia
Source: BCG Model, WSD, SEAISI Steel Statistical Yearbook 2011, BCG analysis
2 Confidential
Flat products growing faster than long products across ASEAN
Solid growth in long finished products Yet stronger growth in flat finished products1
Consumption in MTA Consumption in MTA

25 30
23
+7% 21 26
20 +11% 25
20 9.8% 24
20
18 18 18 21 22
17 20 14.5%
16 20 19
15 15 13 6%
13.6%
17
16

13 15
11 13 16.5%
10 12
10 8.8%
10
11 2%
11.2%

6.9% 7
5
11.3%
2.9%
1.7%
-1.8%
0 0 1.1%

98 99 00 01 02 03 04 05 06 07 08 09 10 98 99 00 01 02 03 04 05 06 07 08 09 10
Thailand Indonesia Philippines

Vietnam Malaysia Singapore
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xx% : CAGR 1998-2010
1. Including pipes and tubes
Source: IISI / WSA Steel Statistical Yearbooks 1998 to 2004, SEAISI Steel Statistical Yearbook from 2005 to 2010, BCG analysis
2 Confidential
Regional demand growth to 2020 expected to remain ~5% p.a.

Thailand and Vietnam the largest markets
markets, with Thailand expected to be 40% of flat demand
Regional growth driven by Expected regional consumption by country and by product type
Thailand and Vietnam in 2020
Consumption in MTA
150 Share of total consumption in %
36 38 5
100
+5% 5%
100 17%
31 79
8
9 80 40% 29%
49
50
32%

0 60
2010 Delta 2020
18%
36%
Flat products growing faster 40
17%

Consumption in MTA 21%
150 17%
20 23%
+5% 13%
10%

100
31 79 4% 6% 1%
Tube 7% 3%
55%1 0
49 45% Flat
50 0 20 40 60 80 100
Long Long Flat Tube
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0
2010 Delta 2020 Thailand Vietnam Indonesia Malaysia Philippines Singapore
1. Share of flat products including pipes and tubes
Source: BCG Model, SEAISI Steel Statistical Yearbook 2011, IHS Global Insights, Rystad, BCG analysis
2 Confidential
Today, net imports fulfill ~60% of ASEAN steel demand,
indicating substitution opportunity for local steel makers
SEA supply-demand gap in 2010

In MTA
60
22.4
22
2.2
6.6
Current supply
4.9 14.1
40 gap of ~32 Mt
3.7
(>60% of 3.3
9.2 1.9
consumption) 2.0 10.6

3.8
1.8
19.6 0.0 2.4
20 0.4 1.2 9.0
4.1

4.3
Malaysia is a net exporter of semi- 8.3
3.7
finished products (billets)
5.7 4.0
0.7 1.1 2.7
0

Local crude Net exports Net imports Net imports Apparent consumption
steel manufacturing semi-finished Semi Finished1 Finished2 Finished steel2
Metal yield Thailand Vietnam Indonesia Malaysia Phillipines Singapore
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1. Ingots, nillets, blooms and slabs 2. Hot rolled steel products (rails and accessories, steel sheet piles, sections, bars, wire rods, round for tubes, plates, hot rolled sheet and strips and tyres and
wheels), cold rolled steel products (cold rolled sheets and strips, cold rolled electrical sheets), coated sheets and strips (galvanized sheets, tinplates, etc.), pipes and tubes (seamless and welded)
Source: SEAISI Steel Statistical Yearbook 2011
2 Confidential
SEA has minimal intra regional trade and imports from Japan,
China, Korea and Taiwan
Net imports of semi-finished and finished products1 in MTA (2010)
From
Indonesia Malaysia Thailand Vietnam Japan China Korea Taiwan CIS Others2
To
Indonesia - 0.2 0.1 0.0 1.7 1.3 0.6 0.5 1.7 0.2
Malaysia -0.2 - -0.0 -0.6 1.5 0.6 0.5 0.8 0.1 0.1
Thailand -0.1 0.1 - -0.2 4.8 1.6 1.0 0.5 2.6 1.6

Vietnam 0.1 0.7 0.3 - 1.6 1.5 1.1 1.2 0.3 -0.2

Singapore -0.5 -0.2 0.1 0.0 0.6 1.0 0.5 0.2 0.1 0.2
Philippines 0.0 0.0 0.0 0.0 0.5 0.8 0.2 0.4 0.9 0.1

Total -0.8 0.8 0.5 -0.7 10.7 6.8 3.9 3.6 5.6 2.0
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Low volume of SEA intra regional trade ~32 Mt of net imports from outside SEA
rolled sheets and strips, cold rolled electrical sheets), coated sheets and strips (galvanized sheets, tinplates, etc.), pipes and tubes (seamless and welded) 2. Includes USA, EU, India, Australia and
any other trade partners
Source: SEAISI Steel Statistical Yearbook 2011
2 Confidential
~80% of ASEAN net imports are flat steel, while long steel is
mostly a local market
Long steel is primarily domestic market Flat steel demand met largely by imports
In MTA (2010) In MTA (2010)

40 40

30 30
25.8
22 7
22.7
4.3 9.8

20 18.6 20
3.7
6.2
4.4
5.7
10 3.6 10 75
7.5

53
5.3
2.8
4.1 3.8
3.6 4.2
2.7 2.3
2.1 1.8 1.4 1.2
0 0.7 0 0.9
Domestic production Apparent consumption Domestic p production Apparent

pp consumption
p

of finished products1 of finished products1 of finished products1 of finished products1
Thailand Vietnam Indonesia Malaysia Phillipines Singapore
Regional finished product gap of ~22.4 MTA, including

~18.3 MTA for flat products
Copyright © 2
rolled sheets and strips, cold rolled electrical sheets), coated sheets and strips (galvanized sheets, tinplates, etc.), pipes and tubes (seamless and welded)
Source: SEAISI, BCG analysis
Confidential
Malaysian steel demand now 4th largest one in ASEAN
Malaysia
y only
y reached 1997 consumption
p ... as a result,, its share of ASEAN consumption
p
levels in 2008... fell from 25% in '97 to 16% in '10
Consumption (MTA) Share of consumption (in %)

33 19 24 26 30 33 33 37 39 38 44 46 42 49
10 100
8.5 23 21 27 25 25
8.1 8.3 30 33 34 29 29 26 29
8 7.7 80 36 34
7.4
7.1 7.1 5 11
6.8 6.8 6.6 10 10 13
62
6.2 62
6.2
14
6 5.6 60 21 15 14 15 21 18 26 22
14 18 14 16

17
15
18 14 15 19
4 40 25 18 16 17 18 18
3.3 24
24 25

21 19
16 19
17 18 18 18 16 17
2 20 13 14 12
11 11 11
8 8 8 8 8 8
19 8
14 12 11 9 9 9 8 6 7 7 8 7 6
0 0

97 98 99 00 01 02 03 04 05 06 07 08 09 10 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Thailand Indonesia Philippines
Vietnam Malaysia Singapore
From largest steel market in ASEAN in '97, Malaysia has
Copyright © 2
become the 4th behind Thailand, Vietnam and Indonesia
Source: IISI / WSA Steel Statistical Yearbooks 2008 to 2004, SEAISI 2005 to 2010, BCG analysis
Confidential
Malaysia consumes similar volumes of long and flat products

Malaysia is less industrialized than neighbors such as Indonesia and Thailand
Split of annual apparent consumption1 per product type in 2010
4.0 2.7 10.6 8.3 8.9 14.1

n in MTA
100 3.9% 1.9% 1.0%

7.1% 10.7% 10.7%
27 2%
27.2% 32 0%
32.0%
e of apparentt consumption
80
34.1%
39.7%
49.3% 68.5%
60
40

68.9% 66.2%
58.9%
49.6%
20 40.0%
30.5%
Share

0
Philippines Singapore Vietnam Malaysia Indonesia Thailand
Share of
33% 28% 41% 41% 47% 45%
industry/
y GDP:

Degree of industrialization
Copyright © 2
Pipes and tubes2 Flat carbon Long carbon
1. Production (hot-rolled steel products) – Imports + Exports 2. Pipes and tubes are derived from welded flat products (produced and imported), with the exception of limited imports of seamless
pipes and tubes
Source: SEAISI Steel Statistical Yearbook 2011, EIU (2010 data), BCG analysis
Confidential
Still room for growth, though Malaysia is the most mature
market in the region
Steel consumption per capita in 2010 in Asia-Pacific

Asia Pacific
Steel consumption per capita (in kg)

1,500
x 3.8
1,131
1,000
,

778
516 507

500
312 293
293
215
120

43 38
0
Korea Taiwan Sing. Japan Australia Malaysia Thailand Vietnam Philippines Indonesia
Copyright © 2
Source: SEAISI Steel Statistical Yearbook 2011, EIU, BCG analysis
Confidential
Malaysian demand expected to grow at 4% p.a. till 2020

Malaysian demand product mix expected to remain balanced between flat and long
Expected
p consumption
p growth
g in Malaysia
y Resulting
g evolution in consumption
p split
p
Apparent consumption in MTA Share of consumption in %

15 100
+4% 10.7% 9.0%
0.9 0.1 0.2 12.1

0.6 0.1 0.2 0.7 80
0.9 0.4
2.2 0.6
8.3 39.7% 41.4%
10 1.9
0.5 2.2
0.5 60
2.1

1.0
1.4 40
5
49 6%
49.6% 49 7%
49.7%

71
7.1
20
4.9
0 0
2010 Const
Const. Auto Machinery Oil &
Auto. Others 2020 2010 2020

Gas
Tube Flat Long
BCG Model p
projections
j in line with consensus steel analyst
y
Copyright © 2
views (e.g. Business Monitor International)
Source: BCG Model, SEAISI Steel Statistical Yearbook 2011, IHS Global Insights, Rystad, BCG analysis
Confidential
In Malaysia, 80% of net imports of finished products are flat

~70%
70% of flat demand is met with imports rather than domestic production
Most long
g consumption
p met with local While most flat p
products consumed are
production imported
In MTA (2010) in MTA (2010)

10 10
Tubes and pipes
Flat Primarily carbon hot rolled sheets
Mostly sections and
8 8 and strips, cold rolled sheets and
wire rods
strips and galvanized sheets
6 6

3.8 1.0
1.0 0.5 0.7 0.4
4.1 0.5 4.2
4 3.6 4
0.9

3.1
2 2
1.4 3.3
0.7
0.7
0 0

Domestic Imports Exports Apparent Domestic Imports Exports Apparent
production1 consumption2 production1 consumption2
Malaysian finished product gap of ~3.3 Mt including ~2.8 Mt

for flat products
Copyright © 2
1. Hot rolled steel products (rails and accessories, steel sheet piles, sections, bars, wire rods, round for tubes, plates, hot rolled sheet and strips and tyres and wheels) 2. Apparent consumption is
based on production of hot rolled steel products + all steel product imports – all steel product exports
Source: SEA ISI Steel Statistical Yearbook 2011
Confidential
Agenda



Implementation plan
Copyright © 2
Confidential

The total steel p

production in Malaysia
y has remained fairly y stable across the p
past 5 years,
y although
g
production volumes have dropped slightly from 2009
• Long production remains fairly constant
• Flat production seen to be reducing progressively for both upstream and midstream from 2009
Malaysian long steel industry is competitive, performing well today

• Malaysian long steel demand is and will remain mostly served by domestic production
• Trade barriers almost non
non-existent
existent and players recording decent profitability levels

Moving forward, the Malaysian long steel industry should continue to benefit from a fair level of playing
field and should explore select opportunities to create more value add
• Proactively
P i l controll trade
d environment
i

• Support substitution of select imports of high-value add products, favor export of finished rather than semi-
finished products

Copyright © 2
Confidential

The Malaysian
y flat steel industry
y only
y has a small window to become competitive
p and to seize on the
regional opportunity
• In 2020, there will be an additional ~7MTA addressable market opportunity at ASEAN level
– Assuming efficient use of existing capacities and ~29 MTA new capacity coming online in the region
– Addressable market for Malaysian players will be around 6 6-7
7 MTA in 2020
• Current trade policy already putting regional competitive pressure across the entire value-chain
– Signed FTAs will further increase competitive pressure over the next 4-5 years
Moving forward, the Malaysian flat steel industry could be structurally competitive to address the regional

market opportunity, but many urgent changes are required
However, today
H d theh Malaysian
M l i flat
fl upstream industry
i d is
i currently l uncompetitive
i i andd unprofitable
fi bl

• Megasteel, Malaysia's current sole upstream producer has been recording low profits / losses across past 4-
5 years
• Domestic flat is still p
protected by
y high
g HRC import
p duty, y, with negative
g repercussions
p on mid/downstream

players
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Confidential
Malaysian steel production fairly constant

Flat midstream production significantly affected from 2009
Upstream:
p Longgpproduction fairly
y stable;; Midstream: Longgpproduction fairly
y stable;;
Flat production reducing across past 5 years Flat production affected from 2009
MTA Upstream production 2010 MTA Midstream production 2010

8 8
-1%
1%
6.9
-3%
6.4
6 5.8 5.7 6 5.7 5.9 5.8
5.4
5.1 5.0
4.7

4 4.6 4 3.5 3.5
3.8 3.9
4.0 4.4
3.7 3.6

2 2
2.0 2.2 2.2 2.3

1.8 1.9
1.4 1.3 1.4 1.4
0 0

2006 2007 2008 2009 2010 2006 2007 2008 2009 2010
Long Flat Long Flat1
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1. Including pipes and tubes
Source: SEAISI Steel Statistical Yearbook 2011, BCG analysis
Confidential
Malaysian players around critical size levels

However very limited penetration of BF/BOF technology
Upstream Midstream
Raw material Iron making /
Casting Rolling & Finishing
treatment Steel making
g
Pig Iron (2.5 MTA) BF (2.2 MTA)1 Slab (3.2 MTA)
Lion Group Long (2.4 MTA), Flat (4.9 MTA)
DRI (1.5MTA) EAF (4.0 MTA) Billet (3.1 MTA)
Billet (2.0 MTA)
Kinsteel DRI (1.8 MTA) EAF (2.0 MTA) Long (2.0 MTA)
Bloom (0.5 MTA)
Melewar DRI (1.4MTA)2 EAF (1.4 MTA)2 Billet (0.03 MTA) Long (0.07 MTA), Flat (0.29 MTA), Pipes (0.18 MTA)
Southern Steel EAF (1.5 MTA) Billet (1.5 MTA) Long (1.5 MTA), Pipe (0.2 MTA)
BF (0.5 MTA)
Ann Joo Billet (0.9 MTA) Long (0.7 MTA)
EAF (0.8 MTA)

Masteel EAF (0.6 MTA) Billet (0.6 MTA) Long (0.4 MTA)
CSC Steel Flat (0.9 MTA)
Maju steel Long (0.1

(0 1 MTA)

Bluescope Flat (0.3 MTA)
Federal Iron Flat (0.3 MTA)

Ji Kang Dimensi Flat (0.7 MTA)
Petropipe Flat (0.4 MTA)
Yung Kong Galv. Flat (0.4 MTA)
Copyright © 2
Others Long (0.2 MTA), Flat (1.1 MTA), Pipes (0.8 MTA)
1. Lion Group plant under construction; 2. Melewar MIG plant plans for construction; Note: Eastern Steel recently commenced construction of 2.2 MTA BF plant in Kemaman;
Note: in additon, ~5000 SMEs are active in metal manufacturing (<RM 25 mil or <150 employees)
Source: Metal Bulletin Capacity Q3 2011, Company website, Press search
Confidential
Malaysian players mostly benefiting from coastal location

Location of semi-finished steel production (Malaysia)
Perlis
Kedah
Sabah
Kinsteel
Southern steel Pinang
Sarawak
Ann Joo (BF plant) Terengganu
Kelantan
Eastern Steel
Ann Joo Perak (BF project Kemaman,

Terengganu)
Perwaja
Melewar (BF project Pahang

a a g Lion Plate Mills

Tanjung Hantu)
Selangor Southern Steel
Megasteel SDN BHD Kuala Lumpur
Malaysia Steel
Amsteel Kinsteel
Lion Group Negeri

(BF project Banting) Sembilan
Melewar Melaka
Flat
Johor
Long CSC
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Upcoming capacity
Source:SEAISI, Company websites, BCG Analysis Southern Steel Antara Steel

Confidential
Current local upstream flat with uncompetitive technology
and relatively small size compared to largest sites in Asia
Current technology (EAF) applied by ... and relatively small size compared to
Megasteel is less cost effective than BF/BOF... largest sites in Asia
Typical cash cost for slabs and HRC Megasteel, Banting

Cash Cost1 , USD/MT • Capacity: 4.7MTA
800 -20% • ~500 acres
-15%
• ~4,600 employees
700
JSW Steel, Mumbai
• Capacity:
Capacit 7.8MTA
7 8MTA
600 • ~3,700 acres

500

POSCO, Pohang
• Capacity: 13.7MTA
400
• ~2,200 acres
• ~6,500 employees (highly
automated
t t d steelworks)
t l k )

EAF BF/BOF EAF BF/BOF
Semi-finished Steel Finished Steel

Wisco, Hubei Province
(Slabs) (HRC) • Capacity: 13.4 MTA
• ~5,200
~5 200 acres
Copyright © 2
1.Cash cost based on 2008 Malaysia production cost curves, import tariffs, inbound and outbound freight. Production cost curve for Malaysia BOF estimated based on Asian BOF cost curve adjusted
for labour productivity, inbound freight and energy costs.
Source: World steel dynamics, Simpson Spence Young, Steel Business Briefing (SBB), EIU, Metal Bulletin Capacity 2011, BCG analysis
Confidential
Long products

Copyright © 2 All rights reserved.
Confidential
Malaysia utilisation rate for long products
is comparable if not better than other ASEAN countries
Malaysia Indonesia Thailand Vietnam
50-60% 50-60% 35-45% 45-60%

32%
MTA MTA MTA MTA
30 30 30 30
28.0
20 20 20 20

58% 60%
55% 43%
51% 49%
11.1 45% 10.6
90
9.0

10 10 10 8.5 10
8.0
7.1 7.2 6.4 6.1 6.3
4.4 3.7
3.6 3.5
2.7
0 0 0 0

Upstream Midstream Upstream Midstream Upstream Midstream Upstream Midstream
Production
Capacity
Copyright © 2
Note: Production based on SEAISI figures for 2010, Capacity figures based on Q3 2011 figures from MBR; Utilisation rate measured as production divided by capacity;
Source: Metal Bulletin Capacity Q3 2011, SEAISI Steel Statistical Yearbook 2011
Confidential
Trade barriers almost non-existent today for long products,
and with no major complaints from market participants
Domestic prices 5-10%
All long
g products
p with less higher
g than international No major
j complaints
p from
than 5% of import duty benchmarks market participants
Breakdown of Malaysian imports Malaysian vs international prices

of long products1 for long products
"AFTA
AFTA liberalization has helped
(%) (USD/MT)
84% 100% long manufacturers to become
100 900 competitive [...] Malaysia has
11%
more integrated steel mills for
7% Malaysia2 long products than neighboring
75 17% Other 800 countries and is quite advanced
Taiwan for high grade production"

Japan China3 - MISIF
19%
50 Korea 700
Japan4
China
C a

29% Indonesia
25 600 "Big steel mills in Malaysia
16% Thailand
4% produce reasonable quality of
12% products. Domestic prices are
0 0

slightly
li htl higher
hi h thanth international
i t ti l
ASEAN FTA Total Jul Oct Jan Apr Jul Oct Jan prices. Much higher prices would
/MFN 10 10 11 11 11 11 12 encourage more imports."
Import - MBAM
0-5% 5%
duty
Copyright © 2
1. HS codes 7213 to 7217 2. Mild Steel Round Bars - R25, MS146 3. Long Products / BOCE Rebar / China West Cash bid/settlement 4. Long Products / Rebar / Japan domestic (Tokyo Steel) CIF
Note: Quarterly exchange rate applied
Source: DOS, CIDB, SBB Steel Prices, BCG analysis
Confidential
Malaysian long industry has decent profitability levels
Kinsteel turnaround of operations

p well
Key players show decent profitability received by financial analysts
Average profit margin of main long steel manufacturers Upstream: operation of iron ore mine and
(2007 – 2011) construction of concentration plant
(%) • Kinsteel applied to operate iron-ore
iron ore mining
concession in Bukit Besi, Terengganu
10
• Construction of new concentration plant and
pelletizing plant in Terengganu, completed by 2013
8 – RM 570 Mln annual cost savings estimated
– Kinsteel has the ambition to become lowest cost

local long steel producer
6
Malaysia Downstream: streamlining of Perfect Channel

4 average operations

6.0% China • 50% of employees to be redundant although plant
5.6% average4 remains open
2 3.8% 3.8%
" [Recommendation on Kinsteel] Maintain Buy and
0 2%
0.2%
RM0.70 TP for potential revenue upside from mining
0

rights and ETP "
Lion Ann Joo Southern Masteel Kinsteel - DBS Vickers
Industries Resources Steel3 Bhd
Corporation Bhd1 " Kinsteel is embarking on the construction of an iron
Bhd1,2
ore concentration and p pelletizing
gpplant which should
Copyright © 2
reduce price volatility"
- RBS
1. Includes limited non-steel activities 2. Excludes DRI activities 3. Includes pipe and tube activities 4. 2008-09 industry average
Source: Bloomberg, company websites, annual reports 2007-2011, China Metallurgical Industry Planning and Research Institute, BCG analysis
Confidential
Malaysia should control open trade environment

Illustration: imports from China are systematically cheaper than imports from other countries
2007-2010 import price for top-5 long products: delta to average (USD/ton)
200
Import volumes
Bars and rods 0 -58 14 54 16
-94 -134
(diam. <14 mm)
-200
200
200
I sections 0 -11 -53 27 17 23

-119
-200

200
H sections 76 106
0 -55 -39 -83
-101

-200
200
149 150
0 -21 31 3 1
U sections
-200
200

200
110 N/A
0 -10 9
L, T sections -36 -47
-200
200
Copyright © 2
China Korea Japan Thailand Taiwan Indonesia
Source: UN Comtrade, BCG analysis

Confidential
Flat products

Confidential
Today ~18 MTA supply-demand gap for hot rolled products in
ASEAN
Flat steel upstream Flat steel midstream
Steel making and Coating and

H rolling
Hot lli C ld rolling
Cold lli
casting finishing
Crude steel making Hot rolled sheets and Cold rolled sheets and Coating
• BOF or EAF strips
p making g strips
p making g • Hot dip
pggalvanizing,
g,
High-level
High level
Slab casting • Hot roll mill • Pickling line etc.
description Plates making • Cold roll mill Welding of tubes and
• Plate mill pipes
Etc.
4.1 MTA 9.7 MTA 3.7 MTA 4.9 MTA

Direct gap1 7.7 17.3 7.9 10.6
3.5 7.6 4.3 5.7
Total

Prod. Cons. Prod. Cons. Prod. Cons. Prod. Cons.
22.4
22 4

Full potential 4.1 18.3
gap2 9.7 9.7 8.6
4.9
3.7 3.7 3.7
4.9 4.9 4.9
Copyright © 2
1. Assuming net imports can be replaced by local production that can match downstream needs in terms of specifications / quality and cost competitiveness 2. Indirect gap assumes that additions to
upstream capacity is matched with similar downstream capacity increases (e.g. increasing slab production beyond 4.1 MTA requires additional HRC capacity, etc.)
Source: SEAISI Steel Statistical Yearbook 2011, BCG Analysis
Confidential
But gap for hot rolled products in ASEAN could reduce to
5-7
5 7 MTA by 2015 if all capacity extensions come online
ASEAN: Announced capacity for hot rolled flat and supply-demand gap evolution
Capacity extension in MTA ASEAN supply-Demand Gap in MTA
20 20
18.3 18.6
17.2
15.0
15 15
10.6
10 10

8.6
7.3 7.2
6.8
6.1 5.8
5.5
46
4.6

5 5.0 5
4.4
3.2
NA 0.4
0 0

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Supply-demand gap Thailand Vietnam Indonesia Malaysia Not validated yet
Room for 1-2 p

players
y reaching
g minimum efficiency
y scale
Copyright © 2
of 3-4MTA based in Malaysia
Note: Only officially announced and documented projects are included; All projects unlikely to come online in time – Formosa project with 3 years delay already, Lion Group and MIG lack financing;
Source: Plantfacts, Metal Bulletin, Press Search, SEAISI Steel Statistical Yearbook 2011, BCG Analysis
Confidential
Major capacity is expected to come online shortly

Example of Formosa developing the Ha Tinh integrated steel mill in Vietnam
Formosa p
plans to build the largest
g steel mill in
ASEAN The project timeline is ambitious
Privileged sea access with a deep sea port

(22m depth including iron ore and coal Activity 11 12 13 14 15 16 17 18
wharves and steel product wharves)
Harbour
BF1 (3.5 MTA)
BF2 (3.5 MTA)

BF3 (3.5 MTA)
BF4 ((3.5 MTA))

HRM / CRM
Finishing

7.5 MTA capacity 7.5 MTA capacity
Large investment of Milestones
launch1 launch1
USD 8.9Bn for target The"best available technology"
capacity of 15 MTA1 from BOF to rolling and finishing
and 4 blast furnaces process thanks to the involvement
Copyright © 2
over >2,000 ha of land of China Steel (5% stake)
1. Both long and flat products
Source: Formosa documentation, press search
Confidential
Regional players are ramping up investments to produce flat
steel at all steps of the value chain
Flat steel upstream Flat steel midstream Not all investments validated
Coating and
H t rolling
Hot lli 1 C ld rolling
Cold lli
finishing
Krakatau 0.4MTA 2011 Krakatau NA 2013 Bluescope (galv.) 0.3MTA 2011
Krakatau-Posco 3.0MTA 2013 Bajatama 0.1MTA 2012
• Plate mill 1.0MTA
• HRM 2.0MTA
Krakatau2 (HRM) 2.0MTA 2015
Lion Grp (plates) 1.6MTA 2014 Mycron (CRM) 0.2MTA 2013 - - -

Eastern3 (plates) Acerinox4(CRM) 0.4MTA 2013

Phase 1 0.7MTA 2014
Phase 2 0.8MTA 2015
MIG (HRM) 1.3MTA 2015 Project on-hold

Canadoil (plate mill)1.2MTA 2012 - - - JFE St.(galv.) 0.4MTA 2013
Nippon St. (galv.) 0.4MTA 2013
Formosa Formosa Formosa

Phase 1 4.5MTA
4 5MTA 2014 Phase 1 - - Phase 1 - -

Phase 2 5.5MTA 2018 Phase 2 6.0MTA 2018 Phase 2 3.2MTA 2018
Viet. St.(HRM) 2.0MTA 2012 ChinaSt. (CRM) 1.2MTA 2013 ChinaSt. (galv.) 0.4MTA 2013
ChinaSt. (HRM) 1.6MTA 2013 Posco (CRM) 0.2MTA 2012 Posco (galv.) 0.4MTA 2015
Posco (HRM) 3.0MTA 2015 Hao Sen (CRM) 0.4MTA 2013 Sunsco (galv.) 0.2MTA 2013
Hao Sen ((HRM)) 1.5MTA 2015
Copyright © 2
1. Only impact on flat hot-rolling capacity shown, higher upstream projects including steel making and casting not shown 2. Additionally, 1.25MTA BF and 0.3MTA DRI to feed existing EAF 3. JV
between Hiap Teck – Shougang 4. Additionally 0.25MTA came online in December 2011 (stainless steel)
Note: Only officially announced and documented projects are included, confidential plans not included, some small capacity additions (<0.1MTA) may not appear, only flat steel products are shown
Source: Plantfacts, Metal Bulletin, Press Search, BCG Analysis
Confidential
If all announced capacity comes online, the ASEAN gap for
hot rolled products will be ~7
7 MTA in 2020
Conservative scenario assuming all announced capacity goes online
SEA expected supply-demand gap for hot rolled flat steel products in 2020
Volumes in MTA
50
Vietnam expected to become a major steel
16.9 42.8 14.1
exporter if all announced capacity comes
40 5.7 online
9.0
3.8 15.5
3.1
3 1
30 4.5 21.7
2.0

18.3 25.8 1.9 0.9 Gap primarily in
0.6 0.4
8.2
Thailand and Indonesia
6.0
20 9.8 13.6

4.3
3.0 4.4 9.8 12.4
3.8
2.8
10 7.6 5.4 5.7 Residual
0.9 1.2 5.3 3.5
3.8 6.1 29
2.9 gap:

4.2
4 2 0.7
2.4 1.2 1.8 1.8 ~7 MTA
0 1.4 0.9 1.3 1.3
2010 2010 2010 2010-2020 2020 Efficient use Efficient use Net Net
Production Gap Consumption growth Consumption of current of new exports imports
capacity1 capacity1
Copyright © 2
Thailand Vietnam Indonesia Malaysia Philippines Singapore
1. Using average downstream capacity utilization per country as starting point and assuming 75% utilization rate of existing and new capacity in 2020 (Arcelor Mittal benchmark)
Note: Only officially announced and documented projects are included
Source: SEAISI Steel Statistical Yearbook 2011, BCG model, Plantfact, Metal Bulletin, Press search, BCG analysis
Confidential
The addressable market for Malaysian players will be around
6-7
6 7 MTA in 2020
Flat Addressability for local BF/BOFs
demand
share Local JV (e
(e.g.
g Japanese) Rationale for addressability
• Local customers and distributors

Construction 41% >90% >90% • Small share niche flat products
• Some barriers due to lack of R&D

Automotive 30% ~30% ~90% co-location
• Some specialty products

• Local customers and distributors
Machinery 17% 70-80% 80-90% • Some specialty products

• Significant specialty product share
Oil & Gas 5% <30% ~50% • Seamless pipes to be excluded
• Favorable import conditions1

Others • Shipbuilding with niche needs
(incl. shipbuilding, 8% ~50% 80-90% • E&E with R&D co-location barrier
E&E, packaging) • Packaging with limited barriers
Copyright © 2
Addressable gap 4-5 MTA 6-7MTA
1. Several project with Government Special Projects status allowing for different customs duty conditions
Source: BCG model, SEAISI Statistical Yearbook, expert interviews, BCG analysis
Confidential Backup
Access to ASEAN markets without tariffs, however strict non-
tariff barriers can present a challenge
Thailand Indonesia Vietnam Malaysia
2010 flat imports

6.0 3.0 4.4 2.8
Imports
(MTA)
Imports as % of flat
61%4 56%5 100% 67%
consumption
Import tariffs (MFN)1 5% 5-10% 0-7% 20%

Protectionist Policies
Non-ASEAN FTAs 6 2 2 5
Required Required
Import license Required Required
(annual renewal) (monitoring purpose)

Mandatory Chemical and Mainly Mainly
Basic
Standards mechanical analysis chemical analysis chemical analysis
Anti-dumping: 25 Anti-dumping: 21 Anti-dumping: 03 Anti-dumping: 0
Trade Defenses2
P

Safeguards: 0 Safeguards: 6 Safeguards: 03 Safeguards: 03
ventions
sidies &
Build infrastructure, Tax incentives, facilitate

Tax incentives,
FDI/DDI incentive pp
fiscal support, facilitate JVs, JVs, build infrastructure, Pioneer status
facilitate JVs

Subs
Interv
provision of land subsidised financing
"Indonesia's President Susilo said the construction of a steel factory Krakatau-Posco would be an
essential support to accelerate Indonesia’s
Indonesia s economic growth in the next 15 years"
years
Copyright © 2
1. Range for flat HRC and CRC products; 2. The data represents cumulative trade defenses employed for base metals and articles, which includes, but is not limited to steel products; 3. Data taken
from the WTO database of cases from 1995-2011. Zero assumed due to no reports received by the WTO from reporting country (as required by the WTO regulations);
4. 3 key upstream producers with multiple mid-stream players; 5. Krakatau key upstream player with multiple mid-stream players
Source: MITI, SIRIM, CIDB, DOSM, ISIT, BSN – SISNI, MIDA, Tariff Finder, UNCOMTRADE , Macmap, OECD, Standards, Regulatory Reforms & Development in APEC, Press Search , SEAISI,
WTO (1995-2011); industry interviews, BCG Analysis
Confidential
There is room for competitive exports to ASEAN

Despite stringent non-tariff barriers
barriers, Thailand and Indonesia import relatively large volumes of steel
Thailand imports accounted for ~60% of Indonesia imports accounted for ~55%
flat consumption of flat consumption
Thailand production and trade of flat Indonesia production and trade of flat
finished products (2010) finished products (2010)
I MTA
In I MTA
In
12 60% 12
10 0.5 0.5 10
0.5
0.6

8 8 55%
6 4.8 6
10
1.0 0.6

9.8 0.4
4 4 0.7
1.5
5.3
2 3.8 2

2.3
0 0
Prod Japan S. Korea Aus- Others Exports Dom. Prod Japan S. Korea Taiwan Others Exports Dom.
-uction tralia Consumption -uction Consumption
Copyright © 2
Source: Tariff Finder, UN COMTRADE, SEAISI Steel Statistical Yearbook 2011, BCG Analysis
Confidential
In addition, signed FTAs will further increase competitive
pressure over the next 4-5
4 5 years
Agreed 2012 import rates for Malaysia
HRC CRC Coated / Galvanized Finished Products
ASEAN FTA 0% 0% 0% 0%
(ASEAN ATIGA) (2008) (2008) (2008) (2008)
ASEAN – China 0%
20% 15% 20% 15% 20%1 15%
(ACFTA) (2005)
(2012) (2015) (2012) (2015) (2012) (2015)

Malaysia-Japan
Econ. Partnership 0%
9-18%2 0%2 9-18% 0% 5% 0%
Agreement (2006)
(2012) (2016) (2012) (2016) (2012) (2016)

(MJEPA)
20% Standard Import

ASEAN Korea FTA 0%
Duty 20% 5%3 20% 5%4
(AKFTA) (2007)
(2012) (2012) (2016) (2012) (2016)

20% 20% 20% 20%
MFN
(2012) (2012) (2012) (2012)
Copyright © 2
1. 7210.50 & 72010.69 are already at 0% import duty 2. Includes 7208.10, 7208.27, 7208.39, 7208.51; 3. Only includes 7209.18 ; 4. Does not include 7210.41, 7210.50, 7210.70, 7210.90;
Note: Based on 2012 numbers from the original agreement; Slabs based on code 7207.12.10, HRC-7208, CRC-7209, Coated / Galvanised – 7210;
Source: Tariff Finder
Confidential Backup
Many FTA agreements agreed and already in place at regional
(ASEAN) and bilateral (Malaysian) level
ASEAN Malaysia
ASEAN Free Trade Area (AFTA) Malaysia-Japan Economic Partnership Agreement

(MJEPA)
ASEAN - China
Malaysia-Pakistan Comprehensive Economic Partnership
Agreement (MPCEPA)
ASEAN - ROK
Concluded Malaysia-New Zealand FTA (MNZFTA)
ASEAN – Japan (AJCEP)
Malaysia-Chile FTA (MCFTA)
ASEAN – India
Malaysia-India Comprehensive Economic Cooperation
ASEAN – Australia – New Zealand A
Agreement (MICECA)

ASEAN – Japan1 Malaysia-Australia
ASEAN – India1 Malaysia Turkey

Malaysia-Turkey

Under
negotiations
Trans-Pacific Partnership (TPP) Agreement2 Malaysia-EU (MEUFTA)
Gulf Cooperation Council

ASEAN +3 (Japan, China and Korea) Malaysia-Bangladesh
For ASEAN + 6 (Japan, China, Korea, Australia, New

Consideration Zealand and China))
Copyright © 2
1. Investment and Services only – Goods already approved; 2. Involving 9 countries – Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, US, Vietnaml; Source: MITI, MITI website
Confidential Backup
Singapore and Thailand lead the way for FTA adoption and
many discussions currently underway for other countries
Singapore Thailand Indonesia Vietnam
Singapore-Japan Thailand-Laos2 Indonesia – Japan Vietnam-Japan

Singapore-EFTA Thailand-China3 Indonesia – Pakistan (PTA) Vietnam-Israel
Singapore-Australia Thailand-Peru
Singapore-US Thailand-Australia
Singapore-Japan Thailand-New Zealand
Singapore-Quad Pacific 4 Thailand-Japan
Concluded
Singapore-Korea
Singapore-India

Singapore-Panama
Singapore-Peru
Singapore-GCC

Singapore-Qatar
Singapore-Mexico Thailand-India Indonesia-S. Korea Vietnam-Mexico

Singapore-Canada Thailand-Peru Indonesia-EU Vietnam-EFTA

Singapore-SACU Indonesia-Iran Vietnam-Russia, Belarus,
Thailand-Papua New Guinea
Under Khazakstan
Singapore-Egypt Indonesia-Australia
negotiations / Thailand-Chile Vietnam-Chile
consideration Singapore-Ukraine Indonesia-Egypt
Thailand-US Vietnam-US
Singapore Pakistan
Singapore-Pakistan Indonesia-GCC
Indonesia GCC
Copyright © 2
Thailand-Pakistan
Singapore-Sri Lanka Indonesia-Chile
Indonesia-NZ
1. Palm oil only, 2. Limited FTA, Agriculture only; Note: Based on press search from 2009-2012; Source: Bilaterals.org, press search, Government websites
Confidential
Flat imports originating mainly from FTA countries

~50%
50% of flat imports already entering at 0% rate under duty exemption
51% of HRC imports from 76% of CRC imports from 74% of galv./ coated imports
countries under FTAs countries under FTAs from countries under FTAs
Sources of Malaysian Sources of Malaysian Sources of Malaysian galv./
HRC imports (2011) CRC imports (2011) coated imports (2011)
% % %
41% 100% 13% 100% 19% 100%
100 100 100
12% 11%
18%
6%
80 38% 80 76% 80 74%
9%
10%
8% 9%
60 60 60
51% 19%

11% 28%
40 40 40
13%

20 20 20 45%
30%
23%
0 0 0
FTA CEPT MFN 100% FTA CEPT MFN 100% FTA CEPT MFN 100%

Total Taiwan S.Korea Total Taiwan S.Korea Total Taiwan China
Other China Japan Other China Japan Other S. Korea Japan
New production capacities in Vietnam would benefit from 0% CEPT
Copyright © 2
rate for CRC and potentially for HRC (40% local content)
Source: MITI, SEASI, Steel Statistics Yearbook 2011, UN Comtrade

Confidential
Major integrated steel mills with BF/BOF technologies are
filling the SEA gap with competitive cost bases1
Examples of most competitive steel mills in Asia
Japan
South
Anshan Integrated
g Steel Complex
p Korea
Focus on high-end flat steel products
16 MTA capacity
Yawata Steel Complex
HRC FOB cost: 490 USD/MT
5 MTA capacity
China HRC FOB cost: 657 USD/MT
Taiwan
A rights reserved.
Dangjin
8 MTA capacity
HRC FOB cost: 603 USD/MT
Malaysia

Jamshedpur Integrated Steel Mill
7 MTA capacity
HRC FOB cost: 333 USD/MT Kaohsiung
Copyright © 2
10 MTA capacity
Major exporters to SEA HRC FOB cost: 638 USD/MT
1. Not exhaustive, examples of largest coastal integrated steel mills in North Asia with low cash cost
Source: Plantfacts 2011, press search, BCG analsysis
Confidential
Further integrated steel mills with BF/BOF technologies are
expected to come online in the coming years
Major projects announced in Asia-Pacific (2012-2020)
Japan
South
Korea
Dangjin Integrated Steel Mill 3rd line
4 MTA capacity – 2015
BF/BOF, slab, HRC
Asansol Integrated Steel Mill
6 MTA capacity – 2015 China
BF/BOF slab,
BF/BOF, slab HRC
Taiwan
A rights reserved.
Zhanjiang
Zh ji Integrated
I t t d Steel
St l Mill
BF/BOF, slab, HRC, CRC, HDG
Malaysia

Orissa Integrated Steel Mill
4 MTA capacity – 20151 WISCO
BF/BOF, slab, HRC
Fangchengang Integrated Steel Mill
Copyright © 2
Major exporters to SEA
BF/BOF, slab, HRC, CRC, plates
1. POSCO plant project postponed by Environmental Court
Source: Plantfacts 2011, press search, BCG analsysis
Confidential
In current conditions, Malaysia flat steel industry could be
structurally competitive to address this market opportunity
Applying current market conditions
Landed cost1 to Malaysia Landed cost1 to Vietnam

Landed cost in USD/MT Landed cost in USD/MT
-10% -10%
1,000
784 785 842 857 907 1,000
713 749 701 718 731 759
622 651 690 626 633 652 657
514 544 600
500 500 434
0 0
IND MAL CHI MAL IND CHI TAI KOR JAP JAP KOR IND CHI IND CHI MAL TAI KOR MAL JAP JAP KOR
BOF BOF BOF EAF EAF EAF BOF BOF EAF BOF EAF BOF BOF EAF EAF BOF BOF BOF EAF EAF BOF EAF

Landed cost1 to Thailand Landed cost1 to Indonesia

Landed cost in USD/MT Landed cost in USD/MT
-10% -10%
1,000 1,000
742 755 787 749 762 794
649 680 681 699 625 628 629 686 687 696
564 627 631 543
500 454 500 454

0 0
IND CHI IND MAL CHI TAI KOR MAL JAP JAP KOR IND CHI CHI MAL IND TAI KOR MAL JAP JAP KOR
BOF BOF EAF BOF EAF BOF BOF EAF EAF BOF EAF BOF BOF EAF BOF EAF BOF BOF EAF EAF BOF EAF
Copyright © 2
1. Cash cost excluding overheads, interest, depreciation;
Note: Antidumping measures targeting Malaysia assumed not applicable to new players, BF/BOF state of the art plant is compared to average BOF and EAF cost bases in Asi-Pacific countries
Source: BCG Model, WSD March 2012 database, EIU, TNB
Confidential Backup
Malaysia should enforce its trade defenses

Illustration: Japan & S
S. Korea with high price differential (domestic vs
vs. export)
HRC CRC
Gross
G USD/ MT (2011) Gross
G USD/ MT (2011)
imports imports
(2010) Dom. Export ∆ (2010) Dom. Export ∆
03
0.3
800 609 191 02
0.2
1,069
, 789 280
917 726 191 903 788 115

0.2 0.2
A rights reserved.
0.1
643 593 50 0.1
805 706 99

Other 0.7 0.4

1.2 0.9
00
0.0 05
0.5 10
1.0 1 5 MTA
1.5 00
0.0 05
0.5 1 0 MTA
1.0
Copyright © 2
Note: Trade volumes uses data from 2010 to highlight major trading countries, price data is representative of Nov. 2011.
Source: SEASI, Steel Statistics Yearbook 2011, UN Comtrade, Metal Bulletin Research
Confidential
However, sole upstream producer is facing structural
problems, with negative impact on mid/downstream players
...with negative
Low profits/losses at Still high HRC import duty repercussions on
Megasteel in Malaysia... mid/downstream players
Megasteel's profitability 2008-2011 Import duty1 applied for Current duties impacting
HRC in ASEAN countries mid/downstream players
• Import d
duties
ties 5% or belo
below for
Positive results due (%) coated / galvanised products
to accounting
200 150 adjustments – 40 and further downstream
100 inventory write-off • Domestic raw materials price
20% ~10-20% higher than
100 20
international prices
4% 5%
A rights reserved.
0% 0%
0 -6x 0
Issues raised on product quality
-500 • Multiple players reporting that
-500
500 Megasteel products lead to 10-
10

-570 High duty not applying to all 30% lower productivity
-1750 imports: exemptions2 available compared with international
• 908kT HRC duty exemptions raw materials
-1800 awarded in 2010 (~47% of
2008 2009 20101 2011 2012*
2012 consumption)

Profitability Index (2008=100)
Megasteel
g needs restructuring
g of its lending
g facilities
Copyright © 2
by June 2012
1. Based on Product HS code7208 – Flat-rolled products of iron or non-alloy steel, of a width of 600 mm or more, hot-rolled, not clad, plated or coated; 2. Duty exemption mechanism recently revised
in 2009; Note: 2012 results are from Megasteel's own projections for profitability; Source: Megasteel's audited accounts for 2008-2011 and own projections for 2012; interviews and confidential inputs
received from other industry players; Press Search, Macmap; Customs data, Government websites, BCG analysis
Confidential
...and current trade policy already putting regional
competitive pressure across the entire value-chain
value chain
Duty structure not providing price wall Duty exemptions putting indirect
to coaters and galvanizers pressure on upstream players
HRC duty exemptions

kTA
Coated / Fini 908 859
HRC CRC 1,000
Galv. -shed 82 104 LMW
500 826 Import with
755
Price exemption
Difference 0
~15%
15% ~13%
13% ~21%
21% N/A
(
(Domestic – Given as a % of: 2010 2011
Import Price)6

Imports 87% 89%
Consumption 39% 34%
Import Duty
~20%2 ~18%3 ~5%4 0%5
Applied1

kTA CRC duty exemptions
1,000 743 715
Advantage to 46 32 LMW
domestic ~5% ~5% (~16%) N/A 500 Import with
697 683
players7 exemption

0
Given as a % of: 2010 2011
Imports 86% 84%
Consumption 51%
Copyright © 2
1. Selected the tariff rate where majority of the imports for this product category comes in. 2. Taiwan is the largest exporter of HRC to M'sia under MFN rates of 20% 3. Japan is the largest exporter of
CRC to M'sia under MJEPA tariffs of 18% 4. Japan is the largest exporter of Galvanised/ coated steel to M'sia under MJEPA tariffs of 18% 5. Majority of finished steel products have 0% (CEPT, MFN
& FTA) 6. Price differences are obtained from industry interviews 7. Calculated as = Import Duty Applied – Average Price Difference
Source: Tariff Finder, BCG Analysis, Interviews with Industry Players
Confidential
Agenda



Implementation plan
Copyright © 2
Confidential

We can leverageg learning g from other countries, and have conducted a benchmarking g exercise on four
countries: China, Korea, Turkey and Mexico
• Selection criteria: Steel plays an integral role in the economy, country's steel player(s) are significant in the
global steel market, country is a net exporter of steel, country is a developing economy
South Korea: ~60MTA crude steel production

• Government established solid industry foundation through heavy protectionism
– Price regulation, prescribed product range, tariffs, subsidies to import of technology
• Progressive liberalization lowered the financial burden for the government and the transition towards an

export driven steel industry and a competitive international player
– Signature of FTA with US, China

Mexico: ~17MTA crude steel production
• Government initially intervened with heavy financial support and ultimately nationalization
– Driven byy adverse economic environment causing g strain to the steel industry
y

• Followed by privatization of the state companies and sale to local and foreign firms
– Unsuccessful nationalization lead the Government to decide to increase competitiveness and long-
term sustainability of the industry through privatization
• Lastly,
L tl ffurther
th openingi off th
the economy tto promotet exportst to
t drive
d i growth th and
d encourage competition
titi
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Confidential

Turkey: ~30MTA crude steel production

• Early realization by the government of the need to liberalize the economy contributed to increased
competitiveness and long-term sustainability of the industry
– Focus on acquisition of technology and knowknow-how
how to increase competitiveness
• Signature of trade agreements (in particular with the EU) and export to multiple markets (including Middle
East, Gulf) contributed to significantly increase output and avoid dependence on a single export market
China: ~640MTA crude steel production

• Significant government intervention through protectionism (grants, financial assistance, trade barriers)
– Facilitated rapid development and dramatic growth of the industry to become #1 producer in the world
• Fast
F growth
h createdd a ffragmented
d iindustry
d

• Current policies promote industry consolidation to create larger, more competitive and efficient companies,
with upgraded technology

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Confidential
South Korea: Government policies drove transformation in
three stages...
1970 1990 2000 2012
Industry foundations Liberalization Export orientation

• Implemented tariffs (e.g. on • Removed several tariffs on • Liberalized trade on most
Tariffs long products to protect steel products across the value steel products (i.e. zero to low
minimills from the threat of chain duties on imports)
& Japan
p imports)
p ) • Initiated anti dumping
p g dutyy
non-tariff barriers • Implemented non-tariff investigations on Japan
barriers for long products imports
• Created a monopoly in the • Deregulated entry restrictions • Created new legislation forcing
upstream flat segment across all segments of the steel companies to minimize
Price regulation ((POSCO)) market and value chain environmental impactp with
• Regulated prices on several • Removed majority of price prescribed limits in order to
&

steel products including HRC controls on steel products obtain operations license
operations licensing below international levels except HRC (semi-finished flat
• Prescribed companies product steel)
portfolio

• Removed tariffs for imported • Started to remove subsidies • Signed free trade
Export promotion raw materials and machinery and tax benefits for steel export agreements with key trading
used in the steel industry firms partners (China & USA)
& • Removed steel export taxes
FTA • Set special corporate tax
rates for steel export firms

• Facilitated technology • Liberalized capital markets to • Completed privatization of
transfer & industry 'know-how' attract FDI POSCO (started in 1997 and
Incentives from Japan • Facilitated foreign loan finalized in 2000) to enable
& • Provided subsidized acquisitions signing an FTA with the US in
fi
financing
i • Suspended
S d d economic i 2007
Copyright © 2
other interventions • Provided tax breaks assistance to failing steel
companies
Sources: World Steel Association; POSCO Steel: KIET, Korea Steel Association, ISSB, World Bank, BCG Analysis
Confidential
South Korea: ... resulting in a boost of steel industry
performance
Meas res of Performance

Measures 1990 2010
Contribution to GDP (%) 1.91 2.8
Growth Rate (%) 5.6 21.3
Production (MTA, crude steel) 23.1 58.9

Utilization (%) 84.41 73.4

Exports (MTA) 7.1 23.9

Employment(% of total pop.) 0.16 0.18
Labor productivity (t per employee) 344.8 684.9
Copyright © 2
1. 1989 2. 2009 # employees
Confidential
South Korea: Key learning from steel industry evolution
Government objectives for steel industry Policies used to achieve objectives

Set solid industry foundations Protectionism and significant gov. intervention
1. Protect national players from imports 1. Protectionist policies
2. Facilitate access to key resources: • Creation of a monopoly (POSCO), but with
• Raw materials and machinery government imposed constraints:
• Technology and industry know-how – Price regulation: 10% below
• Financing international prices
• Import tariffs for specific products

2. Removal of taxes and trade barriers for raw
materials and machinery
• Provision of subsidized financing

Deregulate the industry once it is self sufficient Industry liberalization and opening to FDI
and sustainable • Remove tariffs and price controls
• Remove industrial restrictions • Deregulate entry restrictions across value chain

• Privatize key industry players • Suspend assistance to non performing firms
Promote export policies to drive growth Preparation to become a competitive

• Liberalize all trade restrictions international player
• Enter into Free Trade Agreements with key • Signature of FTA with China and the US
Copyright © 2
trading partners • Anti dumping investigations on Japan imports
Confidential
Mexico: After poor results of nationalization, privatization
and opening of the economy have been preferred policies
1970 1986 1994 2012
Nationalization Privatization Export orientation / FTAs
• Crisis of steel industry in the • Change of government brought • Mexico joined GATT (now
beginning of 70's, driven by: a policy of "structural changes", WTO) in 1986, reducing
– Global steel demand shock based on privatization and significantly import barriers
– Energy crisis of 1973 opening of the economy (from up to 40% to 10%)
– US import barriers
– Devaluation of peso in • The decision to privatize • Imports increased dramatically
1976 after 24 years of
1976, generated a restructuring when Mexico joined NAFTA in
stability process (technology, 1994, a FTA with the US and

organization, HR) to make the Canada
• As economic situation of steel steel companies attractive to – Import barriers for some
companies deteriorates
deteriorates, private investors products reduced

government actively progressively up to 0%
supports the industry with • Opening of the economy
loans and subsidies caused the launch of • Similar agreements were
modernization / expansion signed with Central and South

• Despite government support, programs in the privatized America and Israel (currently
key industry players go companies to face competition no import barriers)
bankrupt and the government (total of USD 7.4B would be
takes over their assets invested between 1990 and • In total,
total Mexico has
Copyright © 2
1998) commercial agreements with
~40 countries, including Japan
Source: Acerotek, Universidad Nacional Autonoma de Mexico, Canacero
Confidential
Mexico: Privatization and FTAs significantly improved
performance
M
Measures off P
Performance
f 1990 2010
Contribution to GDP1 (%) 1.1 0.9

Utilization (%) 77.72 76.1


Employment3 (% of total pop.) 0.07 0.054
Labor productivity (t per employee) 143.3 318.94
Copyright © 2
1. Current prices 2. 1989 3. Direct employees 4. 2011 employees
Source: Ministry of Economy of Mexico, Canacero, Instituto Nacional de Estadistica
Confidential
Mexico: Key learning from steel industry evolution

Rescue key steel players from bankruptcy Nationalization of key industry players
• Help local industry facing consequences of • Despite an initial period of financial support
adverse economic environment (global steel through loans and subsidies, government had to
demand shock, US import barriers, devaluation) step in and take over their assets
Increase competitiveness and long term Privatization of government owned steel players
sustainability of the industry • Restructuring process to increase

• Modernize the industry, employing private attractiveness for private sector
sector investments • Privatization open to local and foreign players
• Benefit from higher operating efficiency of • Privatized companies (AHMSA, SICARTSA)

privately run companies represented >50% of national output
Promote exports to drive growth and Signature of FTAs and dramatic reduction of
encourage competition and efficiency trade barriers

• Facilitate trade to boost industrial output • Signature of FTA with key economies (US,
• Encourage optimization of steel players costs Central and South America, Japan...)
by promoting access to multiple markets and • Reduction of trade barriers from 40% to 10%
facing of competition (average)
• Progressive reduction of trade barriers
Copyright © 2
continues until today (current average 1.4%)
Source: Acerotek, Universidad Nacional Autonoma de Mexico, Canacero, Ministry of Economy
Confidential
Mexico: Opening of economy brought international players

Contribution to improve know-how and competitiveness of Mexican industry
Production Foreign Year

Company name Ownership
2010 (MTA) stake established
Subsidiary
Arcelor Mittal 3.8 100% 2001
(A l )
(Arcelor)
AHMSA 3.5 Mexican 0% 1942

Subsidiary
Ternium Mexico 3.2 100% 2005
(Techint)

DeAcero 2.1 Mexican 0% 1952
Subsidiaryy 2002
TAMSA 10
1.0 100%

(Techint) (current set up)
Others (ICH, Grupo San Luis,

~15% of total 2010 Mexican 0% Various
Aceros Corsa, Grupo SIMEC...)
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Source: company websites
Confidential
Turkey: Liberalization followed by export orientation

1980 1996 2012
Liberalization Export orientation through FTAs
• Liberalization included promotion of growth • Turkey joined the Customs Union treaty with
through exports, based on: the EU in 1996, which involved the abolition of
– Wage supression customs duties and quotas on bilateral steel
– Generous export subsidies trade
– Gradual domestic currency depreciation
• Facilitation of trade with Europe and other
• Liberalization of the economy initiated a period regions (Middle East
East, Gulf)
Gulf)... has contributed to
of progress for the iron and steel industry, boost steel output and to encourage the

which began with the establishment of electric incorporation of innovations in the Turkish
and furnace mills steel industry, to be able to respond to
– This initiated a key feature of the Turkish evolutions in world steel markets

steel industry: the tendency to pursue – Current world-class infrastructure and
technological developments to enhance latest production technologies
long-term viability of the industry in the
global marketplace • Growth has been consistent since 19961996, even

– Liberalization and the technology focus during the 2008 financial crisis:
eliminated the government need to – Exponential growth in the last 7 years
intervene, and until today all Turkish steel driven by strong world demand for
producers are private quality steel products
Copyright © 2
– Third fastest growing producer globally
Source: Steelworld, Turkish Ministry of Industry and Trade, Turkish Iron and Steel Producers Association, Istanbul Technical University
Confidential
Turkey: Output multiplied by three, thanks to trade
agreements
M
Measures off P
Performance
f 1990 2010
Contribution to GDP (%) N.A. 4.3

Utilization (%) N.A. 68.1


Employment1 (% of total pop.) N.A. 0.16
Labor productivity (t per employee) N.A. 254.2
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1. Direct employees
Source: TISPA, WSA,
Confidential
Turkey: Key learning from steel industry evolution

Increase competitiveness and long-term Liberalization of the economy
sustainability of the industry • Supporting growth and strengthening of the
• Develop a solid steel industry with world-class industry by facilitating exports, mainly through
capabilities which can compete in international subsidies and currency devaluation
markets • Promotion of technology acquisition to ensure
• Focus on acquisition of technology to increase long-term viability of the industry
competitiveness

Increase steel industry output through exports Signature of trade agreements and export to

to multiple markets multiple markets
• Have access to the EU market • Customs Union treaty with the EU in 1996
• Search other markets beyond the EU that • Promotion of exports to a variety of markets,
value high quality steel and appreciate the even beyond Europe, to diversify risks in case

technology advancement and know-how of of recession in a given market:
Turkish steel industry – Middle East
– Gulf
– ...
Copyright © 2
Source: Steelworld, Turkish Ministry of Industry and Trade, Turkish Iron and Steel Producers Association, Istanbul Technical University
Confidential
Turkey: Industry is mostly local but foreign players have
started to be attracted and form JVs/subsidiaries
Production
Foreign Year
Company name 2009 (base Ownership
stake established
sales, Mn TRY)
Ereğli Demir Çelik 3,576 Turkish 0% 1960
Habas Sinai ve Tibbi Gazlar Istihsal
2,520 Turkish 0% 1964
Endustrisi
İçdaş Çelik Enerji Tersane ve
2,450 Turkish 0% 1880
Ul
Ulaşım S
San. AS
A.S.

İskenderun Demir ve Çelik A.S. 2,362 Turkish 0% 1975
Other Turkish players 10,428 Turkish 0% Various

Subsidiary of
Rozak Demir Profil 443 51% 2007
Arcelor Mittal
JV with Korean
Daiyang
y g Metal Sanayi
y 40 30% 2006
co. SK N
Networks
t k

Subsidiary of
Alfa Çelik N.A. 80% 2009
Zeman (Austria)
JV with Russian
Copyright © 2
Atakaş Metalurji N.A. 50% 2007
co. MMK
Source: company websites
Confidential
China: Initial focus on rapid growth led to a fragmented
industry that required consolidation
1990 2005 2012
Protectionism: Focus on growth Industry consolidation

• Restricted imports of raw material and other steel • Maintained largely controls on imports – quotas, tariffs
Tariffs inputs to control prices and tax rates to limit steel imports
• Employed tariffs and quotas on foreign equipment and • Removed selected policies due to WTO pressure
& technology
gy to p
promote domestic suppliers
pp
non-tariff
t iff • Regulated strictly foreign ownership on Chinese steel
barriers companies
• Imposed high tax rates (VAT) for steel importers
• Eliminated licensing restrictions during the formative • Forced small steel companies to close or to agree to
Price regulation yyears M&A
• Restricted exports of coke, keeping its domestic price • Restricted capacity expansion through licensing
&

artificially low • Restricted licensing, forcing steel companies to relocate to
operations • Regulated prices for iron ore producers coastal regions to reduce logistics costs
• Prescribed companies product portfolio and the
licensing technology that they employ

• Granted tax exemption for steel exports • Continued subsidization of export oriented steel
Export • Kept currency undervalued , promoting companies
promotion competitiveness of exports • Subsidized foreign investments and long-term contracts
• Signed free trade agreements with key trading with foreign suppliers (coke & iron ore)
& partners (USA, ASEAN...)
FTA

• Provided multiple incentives: • Provided multiple incentives:
Incentives – Capital and land grants – Capital and land grants
& – Subsidized financing – Debt to equity swap – companies unable to
– Tax exemptions service debt gave shares to banks instead
other
Copyright © 2
– Research funding • Construction of facilities (i.e. technology parks) to support
interventions – Debt forgiveness the steel industry
Sources: World Steel Association; International Iron and Steel Institute; Organisation for Economic Co-operation and Development (OECD); JP Morgan, ISSB, BCG Analysis
Confidential
China: Dramatic growth in 20 years, becoming #1 world
producer
Meas res of Performance

Measures 1990 2010
Contribution to GDP (%) 3.6 1.981

Utilization (%) 88.4% 92.0%


Employment(% of total pop.) N.A. 0.131
Labor productivity (t per employee) N.A. 361.91
Copyright © 2
1. 2009; Sources: World Steel Association; International Iron and Steel Institute; Organisation for Economic Co-operation and Development (OECD); JP Morgan, ISSB, BCG Analysis
Confidential
China: Key learning from steel industry evolution

Rapid industry growth Significant government intervention and
• Grow local steel industry, key to the country's protectionism
industrial development: • Incentives to attract local businesses to enter
– Iron ore producers into the steel industry
– Steel mills • Financial assistance in the form of subsidies
• Keep the steel industry mostly government reduce the cost burden on steel companies
owned, due to its strategic importance • Debt forgiveness for overleveraged companies

• Quotas and tariffs were employed to protect
domestic prices for key inputs

Consolidation and upgrading key industry Policies discouraging further industry
players fragmentation and encouraging consolidation
• Create larger and more efficient steel • Incentives given for steel companies to merge
companies or acquire other steel companies

• Concentrate output (top 10 steel makers to • Limited capacity expansion
represent 60% of total output by 2015, up from • Promoted concentration steel companies in
48% in 2010) coastal regions to reduce logistic costs
• Upgrade steel industry technology (non-balst • Maintained financial assistance to upgrade
furnace, clean technology, carbon reduction...) operations
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• Put greater emphasis on high-end products
Sources: World Steel Association; International Iron and Steel Institute; Organisation for Economic Co-operation and Development (OECD); JP Morgan, ISSB, BCG Analysis
Confidential
Agenda



Implementation plan
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Confidential

Target industry structure for flat steel industry in Malaysia for 1-2 players operating integrated steel mills
• The addressable market for Malaysian players will be around 6-7 MTA in 2020
• Minimum efficient scale of flat steel production via an integrated mill is ~ 3-4 MTA
– Around USD 2-4Bn of investment for 4MTA capacity will be required
Reaching competitive levels will require bringing in an international player with the relevant know-how
• All high grade projects involve large international steel makers
• Large integrated players dominate the market of high-value added flat steel products

Currently there are five projects at various stages of development in Malaysia for flat upstream
• Maegma project: 1.4MTA DRI-EAF. Financing pending
• Newe technology
ec o ogy p project:
ojec 0.8MTA
08 technology
ec o ogy confidential.
co de a Co Construction
s uc o tender
e de d
discussions
scuss o s

• Lion BF project: 2.2MTA BF-EAF. Financing pending
• Eastern Steel project: 1.5MTA BF-BOF slab-casting. Commenced construction
• Integrated steel project: 3-10MTA BF-BOF, In early stages of discussion

Local projects assessed against key success factors critical to ensure the competitiveness of the Malaysian flat
steel industry – only one meets most of the success factors
• Critical size (3-4MTA), technology (BF/BOF), location, global expertise, timing, financial strength, know-how in the
b i
business, customer
t network
t k and
d project
j t status
t t
Copyright © 2
Confidential

There have also been multiple marks of interest from international players for an investment in Malaysia
flat upstream
• Shougang recent investment in Eastern Steel, CSC binding offer for Lion Group assets and ongoing
discussions with several international players (details protected for confidentiality reasons)
• International investors anticipate the end of protection in Malaysia and are looking for opportunities with
genuine competitive advantage
– Requirements: location, investment flexibility, access to inputs, select form of government support
Today, Malaysia's current sole upstream flat producer, Megasteel is in urgent need of a turnaround

• Megasteel cannot break even if relying only on aggressive cost-cutting
• Need to increase production volumes and utilisation ratio to break even

There are five main outcomes possible for Megasteel restructuring in the short-term, however low
likelihood for free market success given the current industry conditions
• Sudden exit: Sale of assets via bank-led restructuring

• Controlled exit: Departure via government-led restructuring
• Free market success: Natural evolution of the market
• Shared responsibility: Controlled prices for Megasteel products, reduced duty exemptions
• Protection: Elimination of most duty exemptions
Copyright © 2
Confidential
Executive summary (III)

Shared responsibility
p y outcome has the least cost of resolution for all p
parties involved, however is fairly
y
complex to execute
• Steel industry, Government & the economy and Megasteel expected to benefit from the shared responsibility
outcome, with limited cost for banks
• Strong coordination and support required from the Government over period of 2-3 years to ensure execution
success
The shared responsibility outcome would open the way for Megasteel to be competitive in the long-term
• In addition to benefits from increased production in the shared responsibility outcome, three projects will

improve Megasteel's competitive position in the long-term
– Blast Furnace, Iron ore pelletisation and Natural gas projects
• However,
However Megasteel will need to keep utilization ratio above 75% to continue to be competitive in ASEAN

Shared responsibility option requires Government intervention, that would hinge on Megasteel meeting
strict conditions

• Control of domestic HRC prices within 5-10% of benchmark import prices
• Restructuring of Megasteel loans under CDRC
• Involving global experts in Megasteel turnaround
• Formalized turnaround plans (including implementation of 3 key projects) and monitoring of execution
Copyright © 2
Confidential
Target industry structure with room for more than one player
based in Malaysia
Flat steel industry has high economies ...but addressable domestic and
of scale... regional demand can serve >1 player
Average cost curve of a flat steel producer
• Minimum efficient scale of flat steel production
Average
g cost / RM p
per MT
Key:
K via
i an iintegrated
t t d mill
ill iis ~ 3
3-4
4 MTA
Inefficient producer
Efficient producer • Addressable market size in 2020, potentially by
Minimum Addressable demand
Malaysian player(s) : ~ 10 MTA
High efficient scale prod ction gap2
– SEA region's addressable production
cost
~6-7 MTA

Low – in addition to this SEA gap, Malaysia's own
cost1 Production pipeline projects announted3 expected to
/ MTA produce ~ 3 3.5
5 MTA

1 MTA 4 MTA 10 MTA
Addressable market size • Room for more than 1 player to efficiently and
Efficient player 1's share simultaneously supply the market

Efficient player 2's share
Inefficient player
Copyright © 2
1. Average cost benchmarked for a Japanese notional steel producer, cost shown for production of an MT of liquid steel via the BOF route; 2. Gap and consumption figures shown for hot-rolled
products; gap includes direct hot-rolled products gap and indirect derived hot-rolled products gap; 3 Announced pipeline projects include Lion Group, Eastern Steel and MIG-Melewar's announced
capacity-building, all assumed to run at 75% capacity.
Source: "Industry Studies" by Deutsch; IISI / WSA Steel Statistical Yearbook 2011; steelonthenet.com; BCG model; BCG analysis
Confidential
Initial investment expected to be ~USD 2-4 Bn, given
minimum efficient scale of 3
3-44 MTA
Capex per metric ton of capacity for announced new steel mills
Budget estimates k$/t
1.5
1 3 1.3
1.3
Low budgets – 1.3
unclear if all CAPEX included 1.2
1.1
1.1 1.1
1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0
1.0
Ø 0.90
0 8 0.8
0 8 0.8 08
0.7 0.8
0 8 0.8
0 8 0.8
0.7

0.5 0.5 0.5 Korea
0.5
Other
Brazil
02
0.2

China
India
0.0

R l off thumb:
Rule th b ~500-1000
500 1000 USD per metric
t i tton off capacity
it
Copyright © 2
Source: SBB 2011, BCG analysis
Confidential
High-value added flat steel requires know-how transfer from
leading international players
All high
g grade
g projects
p j involve large
g Large
g international steel makers bring
g access
international steel makers to technologies and know-how

Shougang with 40% stake "We need
"W d th
the JV ((...)) tto b
be able
bl tto b
build
ild a world-class
ld l
Eastern Steel • Leading state-owned steel industry (...) so that we can feed our downstream
(Project) Chinese integrated industries with Indonesian steel"
Malaysia
player - President Susilo Bambang Yudhoyono
Currently seeking a


Maegma foreign partner for "Lim says he is looking at a meaningful equity participation
(Project) high-grade know-how of not less than a 20% stake in Ann Joo, but stresses that
the group will only do so if the partner is able to contribute
technical know
know-how
how to propel the group into the higher
higher-

Thailand
grade product segment"

Tata Steel
Leading Indian
integrated player  - The Edge Malaysia, 19 March 2012

"Having Shougang group as a partner will enable Eastern
Krakatau- Steel to gain expertise and the technology to build and run

Posco with 70% stake
Indo.
Posco the blast furnace plant. Shougang group also has the
• Leading Korean financial muscle to lead the project"
(Under integrated player
construction) g Malaysia,
- The Edge y , 12 December 2012
Copyright © 2
 International player involved  Seeking international partner
Source: Company websites, press search, BCG experience
Confidential
SEA players set-up JVs with leading international players

Example of Krakatau and Posco developing a large integrated steel mill in Indonesia
SEA's first large

g scale integrated
g steel mill Posco's financial and technical strength
g is
expected to come online next year instrumental to the project
Plant expected to start with a capacity of

"While the Krakatau provides expert knowledge of the
3 MTA in 2013, which may be doubled to
Indonesian environment including cooperation with the
6 MTA by 2015
government and local communities, Posco brings world-
class technologies and competitive steel making
capabilities"
Krakatau-Posco JV recruitment website

"POSCO is accelerating efforts to ensure a successful
70% stake 30% stake steel mill construction project in Indonesia, as it hosts

t h l
technology exchange
h sessions
i and
d mutual
t lb
benchmarking
h ki
initiatives with its joint venture partner"
News bites, 08 Aug. 2011

Cigading harbour to "As steel mills require very large investments, Indonesia is
Latest BF/BOF technology from
be extended from 2km attracting international investment by providing incentives
leading manufacturers including
to 3.5 km to host including 10 year tax exemptions"
SMS Demag, Siemens VAI,
panamax and President-Director of Krakatau Posco,
Posco 11 Feb
Feb. 2012
Mi t bi hi etc.
Mistubishi, t
Copyright © 2
handymax vessels
Source: Krakatau-Posco JV website, press search, BCG analysis

Confidential
Large integrated players dominate the market of high-value
added flat steel products
Global split of production capacity for flat finished products in 2010
Share of production capacity in %

100
9
17
22 Standalone
29
midstream players
80
54
60

91
40 83
78 Large
71
integrated players2

46
20

HRC3 Hot dip galv. Electrolytic Tin Electrolytic galv. Organic coated
Lower value Higher value

added product added products1
Copyright © 2
1. High value added products categorized here as cold-rolled and processed steel 2. Large integrated players refers to the following 20 players her: ArcelorMittal, BaoSteel, Nippon Steel, Posco , US
Steel, Anben, TATA Steel, ThyssenKrup JFE, Severstal, Wuhan, China Steel, Magnitogorsk, Hebei, Essar, Chougang, Hyundai, Sistema Usiminas, Techint, Riva 3, HRC data using Metal Bulletin
2011 while other data using Platfact 2008
Source: Plantfact database 2008; WSA, Metall Bulletin 2011, BCG analysis
Confidential
Today, five projects for flat upstream production in Malaysia

All of them at various stages of development
1 Maegma (Melewar Steel)
Parent companies: Melewar, TBC 4 Eastern Steel
Production: DRI-EAF, HRM Parent companies: Hiap Teck Venture
Capacity: 1.4 MTA Perlis Bhd (55%),
(55%) Chi
China Shougang
Sh G
Group
Investment: USD 1.3 Bn (40%), Chinaco Investment (5%)
License: Approved Production: BF, BOF, slab-casting
Online date: 2015 Capacity: 1.5 MTA (50:50 flat and long)
Status: Financing nearing completion, Kedah Investment: USD 1.7B
M t contracts
Most t t signed
i d License: Approved
Online date: 2015
Pinang
Status: Financing completed, performing
2 New technology Project earthworks
Parent companies:Confidential Terengganu
Kelantan
Production: Slabs,
Slabs HRM (new techno) Eastern Steel
Capacity: 0.7-0.8MTA Perak (BF project Kemaman,

Investment: ~USD1Bn Melewar (DRI project Terengganu)
License: Approved Tanjung Hantu)
Online date: 2014
5 Integrated
g Steel Project
j
Status: Financing completed, Pahang
a a g

undergoing construction tender Parent companies: Confidential
Selangor Production: BF, BOF, HRM
Kuala Lumpur Capacity: 3-10 MTA
3 Lion Blast Furnace Investment: USD 3-10 Bn
Parent companies: Lion Group, TBC License: Unknown
Negeri
P d ti
Production: BF Slabs,
BF, Sl b HRM

Sembilan Online date: Unknown
Capacity: 2.2 MTA Status: In discussions with international
Lion Blast Furnace
Investment: USD 1.04 Bn players to agree on partnerships and to
- Lion Group Melaka
License: Approved choose a suitable location
(BF project Banting)
Online date: TBC – 18 months after Johor
f nding in place
funding
Copyright © 2
Status: Currently on hold due to
uncertainty of Megasteel's future
Source:SEAISI, Company websites, Interviews, BCG Analysis
Confidential
Existing projects assessed based on 9 key requirements to
ensure Malaysia's
Malaysia s competitiveness in the flat steel market
Production facilities Management capabilities
Minimum efficient scale of a steel Financial Large capital amounts required to

producer is 3-4 MTA (~USD2-4Bn) launch a competitive plant
Critical size • Competitive steel mills in Asia
backing / • Lack of financing could delay
can have up to 5-16MTA capacity strength projects
Most competitive steel mills are Experience in producing and

fully integrated Know-how in selling flat steel products
Technology • Most often: BF/BOF, HRM the business • Good understanding of industry
Use of proven technology and business
Strong commercial and marketing

Sufficient land available with good
access to deep-sea port capabilities
Location Near to Vale palletisation site Affinity with end-consumer
Customer industry of flat products
network
t k

• Commercial credibility and
knowledge of customer needs
Experience in production of high-
Good foreign presence / reputation
Global grade flat steel products
expertise • Manufactured by limited no. of
l
large iintl.
tl players
l

Track record
• Credibility of project – on-time
Most officially announced projects implementation
expected to come online by 2015 Project Current status of project against
• Flat steel products reduced to 5-
5 status y milestones
key
Timing
Copyright © 2
7MTA by 2015 • Financing agreed, contracts
finalised, land developed, level of
construction, securing of inputs)
Confidential
One of the five existing projects meet most requirements

Integrated Steel Project has the right aspiration
aspiration, however concerns on execution and timing
1 2 New tech 3 4 5 Int. Steel
Criteria Maegma Project Lion BF Eastern Project
Critical size
(3-4 MTA)
duction facilities
Technology ? ?
(BF BOF HRM)
(BF-BOF,
Location
(Land, port
access)
Prod
Global

expertise
Timing

Financial
backing /
strength
gmt capabilities
Know-how

in the
business
Customer
Network
Mg
Copyright © 2
Status
240682-86-Iron and Steel industry-Final report-29May12-vf.pptx Does not meet criteria Fully meets the criteria 122
1 Confidential
Maegma project: Melewar Group plans to build
a DRI
DRI-EAF
EAF plant in Tanjung Hantu, Perak
Planned announced Financing almost

Critical size capacity of 2.2MTA of Financial finalised
(3-4 MTA) pellets, 1.4MTA liquid backing / • Need 25% equity
steel, 1.3MTA HRC strength injection – currently in
talks with intl players
DRI-EAF (gas-based),
Technology
(BF, BOF, HRM) ? HRM
Know-how in
No experience of HRC
production
the business • 26 yrs CRC production
and
d sales
l
Located in Tanjung

Location Hantu, Perak Experience in sales of
(Land, port • Own port of ~16m Customer CRC products
access) depth, ~20km from Vale network
pelletising plant (Commercial &

Some small exports to Sri
marketing, end- Lanka, Bangladesh,
None today consumer, foreign
Thailand, Indonesia &
Global • Currently in talks with presence)
Vietnam
expertise
p 2-3 international

(High-grade) players for 25% equity Project discussions
(JFE & Silverstal) commenced in 2007
Project
Production expected to status Obtained license,
Timing be running in 2015 (Track record,
record contracts signed with
Copyright © 2
(Online by 2015) • Preparation of the land milestone status) most major suppliers
expected to start end • Currently negotiating
2012 gas agreement
Confidential
DRI-EAF gas technology not mainstream, but can achieve
competitive levels when in close proximity to cheap resources
~5% of total using DRI-EAF ...of which >40% is in ... driven by good
t h l
technology... ME & NN. A
America...
i supplyl off gas
Middle East:~70% of ME steel
% total iron-making capacity
100%
% DRI-EAF capacity production
100 2% Others 100 • Local supply of gas & low gas
5% Direct Reduction prices
Coal-based
31
DRI-EAF
– ~40% of global gas reserves
80 80
• Marginal use of BF technology in
1 3 the region2
5

60 60
9
N. America: ~7% of NA steel
93% BF1 9 production
40 40
• Local supply of shale gas & low

15
gas prices
20 20 – ~30% of global shale gas
27 reserves
– Gas prices fallen to just under

0 0
Total iron-making DRI-EAF
$2.50 per MMBtu from >$8
India CIS Africa per MMBtu in 2008; and
China Other Asia NAFTA potential to fall another 30% in
EU 27 L ti A
Latin America
i Middl E
Middle Eastt the long-term
long term
Copyright © 2
1. Includes EAF by smelting reduction, 2. One BOF plant in Iran – IMIDRO Esfahan steel company 2.2MTA;
Source: Metal Bulletin Capacity 2011, BP Statistical Review of World Energy June 2011, US Energy Information Administration 2011 report, Company websites, press search, BCG analysis
2 Confidential
New technology project: Plans to build an integrated steel
mill using new technology in Penang
Planned announced Financial Financing completed

Critical size capacity of 0.7-0.8 MTA
backing /
(3-4 MTA)
strength
DRI and scrap-based No experience of HRC

Technology confidential technology, Know-how in production
(BF, BOF, HRM) ? slabs and HRM the business • Downstream
experience
Customer Experienced in sales of

Located in Penang
Location network downstream products
(Land, port (Commercial & • Plans to cater to local
access) marketing, end- market only

consumer, foreign
presence)
Partnership with
Global technology manufacturer Project proceeding as
expertise • Ppl to be stationed on scheduled
site
it for
f 2 years

(High-grade) • Contracts completed
Project • Finalising construction
status tender within a month
Production expected to (Track record, • Equipment delivery mid
commence in 2014 milestone status) 2013
Timing
Copyright © 2
(Online by 2015)
3 Confidential
Lion BF: Lion Group plans to build BF steel mill
in Banting Selangor
Planned announced Financing to be finalised

Critical size capacity of 2.2 MTA Financial • In negotiation with
(3-4 MTA) China's lenders to
backing / finalise loan ($500M)
strength
g • Additional $500M
Plans to build BF, and use equity to be raised
Technology of existing EAF tech to
(BF, BOF, HRM) produce slabs and HRC 15 years experience
Know-how in producing and selling
th business
the b i HRC in
i SEA

Located in Banting near
Location existing HRM operations
(Land, port
• ~30-40 km from Port
Customer Sales & Mktg employees
access) network Total:106, Megasteel: 33
Klang

(Commercial & Exports to ~12 countries
marketing, end- Anti-dumping measures
None today consumer, foreign taken by Indonesia &
Global • Previously in talks with presence) Thailand
expertise CSC Steel and
B
Baosteel
t l

(High-grade) Initial project completion
in 2010
Project • Delayed due to
To be announced status Megasteel difficulties
• Expected online in 18 (
(Track record,, Contracts finalised
Timing
Copyright © 2
months after funding is milestone status) • Building contracts &
(Online by 2015)
in place MOU with iron ore and
coal supply
Source: Interviews, press searches, company website
4 Confidential
Eastern Steel: Plans to build steel mill in Kemaman as part of
JV with China Shougang
Planned announced Financial China Shougang & Hiap

Critical size capacity of 1.5MTA for
backing /
Teck financing for Stage
(3-4 MTA) Phase 1 1 Phase 1 completed
• 50% slabs, 50% billets strength
Plans to build BF-BOF, China Shougang has

Technology slab-casting, billet- Know-how in strong experience in
(BF, BOF, HRM) casting the business producing and selling flat
products
Hiap Teck experience in

East coast – Kemaman
Location Heavy Industrial Park
Customer sales of long products
(Land, port
Terengganu network (sections and tubes)
access) (Commercial & Ji Kang experience in
• ~7km
7km from Port

marketing, end- sales of plates
consumer, foreign Limited SEA foreign
JV with China Shougang presence) presence
Global Group
expertise • Experienced in BOF
and
d HRC production
d ti

(High-grade) Project proceeding as
planned
Project • Financing agreed
Phase 1 Stage 1 status • Contracts awarded
completed 2013-2014 (
(Track record,, • Land being g developed
p
Timing
Copyright © 2
Phase 1 Stage 2 by 2015 milestone status) • Inputs – in-progress
(Online by 2015)
• Construction – May /
June 2012
Source: Interviews, BCG analysis
5 Confidential
Integrated Steel Project: Plans to build an integrated BF-BOF
steel mill either on the East or West coast of Malaysia
Planned capacity of Financial Strong financial

Critical size between 3-10MTA
backing /
reputation
(3-4 MTA)
strength
Plans to build a fully Local player with limited

Technology integrated steel mill using Know-how in experience in flat product
(BF, BOF, HRM) BF, BOF technology to the business International player with
produce HRC and CRC strong knowledge
Customer Local player has strong

Unknown coastal location
Location with its own port network international presence
(Land, port (Commercial & and sales in SEA, ME,
access) marketing, end- India, Australia, etc.

consumer, foreign
presence)
In talks with potential
Global international partners Still in discussions
expertise with know-how between partners

(High-grade)
Project Location and land not yet
status finalised
Date of completion (Track record,
unknown milestone status)
Timing
Copyright © 2
(Online by 2015)
Source: Interviews, BCG analysis

Confidential
Marks of interest from international players for an investment
in Malaysia flat upstream, with key requirements to be met
Marks of interest from international players for

an investment
i t t in
i Malaysia
M l i flat
fl t upstream
t K requirements
Key i t tto b
be mett
Several international players have plans to set-up flat Infrastructure, logistics and location
upstream in Malaysia, to serve regional demand... • Good infrastructure - electricity, ports, roads
– Important to be near a deep sea port
China Shougang1 and Hiap Teck have formed Eastern Steel to
"China
• Proximity to key markets / customers with the promise
build a steel mill in Terengganu. Shougang has a 40 % stake."
of future growth opportunities
"Taiwan’s largest steel maker China Steel Corp has made a
binding offer for Lion Group steel assets (August 2011)" Investment flexibility
• Smaller units initially and build up "piece
piece by piece"
piece
"Several large steel corporations, ranging from Vale's clientele, – e.g. Phase 1: 1.5-2MTA, Phase 2: another

have expressed interest to set-up their factories in Malaysia"
additional 1.5-2MTA
"If we invest in Malaysia, our ambition will be to serve the
ASEAN market." Raw materials supply
• Securing stable supply of raw materials

... however, some will not consider Malaysia as a – Accounts for ~70% of total costs
suitable location • Proximity to raw materials – e.g. Australia
"As POSCO has already invested in Indonesia, we don't have
further investments in SEA p
planned in the future" Government support

• e.g. Mining rights / license, favour domestic use of
"Malaysia is not big enough and not developed enough yet... local raw materials, traditional Pioneer status
concerns with developing relationships with the Government" incentives
Most international p
players
y seeking
g genuine
g competitive
p advantage;
g ;
Copyright © 2
they anticipate the end of protection for flat upstream in Malaysia
1. China Shougang is the 5th largest steel producer in China; Source: Press searches, Interviews, BCG experience
Confidential
Leading international players assessed along 6 key
dimensions for suitability as a potential JV partner
Ability to produce Financial strength to invest in a

sophisticated high-value add competitive plant
Know-how flat products Capacity to • High profits / margins
transfer invest
High quality levels for HR and No other high investment
CR1 projects
No current p
presence
O
Openness to
t JV investments
i t t

No current No announced planned JV
presence in upstream flat Successful outcomes of
presence experience
production in SEA previous JVs

Good reputation
Strong affinity with Asia and
• Seen to "play
p y by
y the rules"
particularly SEA market

• Expressed interest in
Asia / SEA Market Supplying steel for wide range
potential expansions within
interest perception of applications / industries
the region
• In discussions with local
Seen to provide an advantage
companies
Copyright © 2
to partner with
1. Based on World Steel Dynamics rankings
Source: World Steel Dynamics, BCG experience
Confidential
Top 3 potential international players identified (I)

ArcelorMittal Baosteel and TataSteel
ArcelorMittal,
Know-how No current Asia / SEA Capacity to JV Market

Companies transfer presence interest invest experience perception
ArcerlorMittal
Baosteel
POSCO
Nippon
pp Steel

JFE
Jiangsu

Shagang
TataSteel

US Steel
Ansteel
Copyright © 2
Gerdau
Source: World Steel Association; Press search, Company website, BCG analysis
Confidential
Top 3 potential international players identified (II)

ArcelorMittal Baosteel and TataSteel
ArcelorMittal,
Know-how No current Asia / SEA Capacity to JV Market

Companies transfer presence interest invest experience perception
Nucor
Severstal
Wuhan
ThyssenKrupp
y pp

Evraz
Shougang

Riva
SAIL

Sumitomo
Hyundai
y
Copyright © 2
;
Source: World Steel Association; Press search, Company website, BCG analysis
Confidential
Top 20 leading international steel players assessed (I)

Prod. (MTA)1 Margin(%)2 Products Industries
ArcelorMittal 98.2 8.6 Billets, Blooms, Slabs, HRC, CRC, Rebars, Construction, automotive, domestic
Wire rods,, Sections,, Rails,, Sheet piles,
p , drawn appliances,
pp , energy,
gy, transport,
p ,p packaging,
g g, by-
y
wire, coated products, tinplate, heavy plate, product sales
seamless and welded tubular pipes
Baosteel 37.0 13.6 Bar, heavy plate, HR steel sheet, CR steel Automotive, railway, aviation, aerospace,
sheet, Wire rod, Seamless and welded pipe machinery, petrochemicals, electronics,
tube,, stainless steel,, special
p steel energy,
gy, construction
POSCO 35.4 11.2 Hot rolled steel, Steel plate, Wire rod, Cold Construction, Gas cylinders, Oilwell pipes,
rolled steel, galvanised steel, electrical steel, Automobile, Machinery,Transportation,
stainless steel, titanium Covered electrodes, Household applications,
nuclear, thermal power plants
Ni
Nippon Steel
St l 35 0
35.0 93
9.3 Pl t
Plates, sheets,
h t bars
b and
d wire
i rods,
d shapes,
h IInfrastructure
f t t (bridges,
(b id flood
fl d control,
t l railway,
il
pipes & tubes, titanium, stainless steel, steel roads & tunnels, structures, harbours &

slag products, fabricated products airports), power generation, batteries & power
devices, electrical & household equipment,
Roofs, walls, agriculture
JFE 31 1
31.1 13 6
13.6 Sh t plates,
Sheets, l t shapes,
h electrical
l t i l sheets,
h t pipes
i A t
Automotive,
ti Home
H electrical
l t i l appliance,
li

and tubes, stainless, steel bars, wire rods, iron Building materials, Beverage containers,
powders, titanium Machinery
Jiangsu Shagang 23.2 8.6 Rebar, wire rods, slabs, HRC, stainless steel, Info not available
zinc-plated steel

Tata Steel 23.3 10.1 Bars, Billets, Plates, Sheets, pre-finished steel, Automotive, Construction, Consumer Goods,
sections, Wire rods, Tubes and pipes, Engineering, Packaging, Lifting & Excavating,
Speciality steels Energy & Power, Aerospace, Ship-building,
Rail, Defence & Security
US Steel 22 3
22.3 41
4.1 Slabs, Blooms, Hot Rolled Steel Plate, Black Appliances, Automotive, Construction
Copyright © 2
Plate, Electrolytic Tin Plate and
Tin Coated Sheet, Galvanised Sheet,
1. Based on crude steel production over 3mmt in 2010, 2. Measured as EBITDA / revenue;
Source: World Steel Association, Bloomberg, Company websites
Confidential
Top 20 leading international steel players assessed (II)

Prod. (MTA)1 Margin(%)2 Products Industries
Ansteel 22.1 6.3 Hot-rolled, heavy & medium plates, cold rolled, Machinery, Mining, Oil, Chemicals, Coals,
galvanised, silicon steel, colour coated,
g Electricity,
y Rail, Shipping,
pp g Automobiles,
seamless pipes, heavy section, wire rods Construction, Home Appliances, Aviation
Gerdau 18.7 13.0 Angles, Billets, Wires, Beams, Bars, Stainless Agriculture, Civil Construction, Industry,
Steel, Hot rolled heavy plate, Hot rolled plate Mining, Automotive, Infrastructure
and coil, cold rolled plate and coil, slabs, tubing,
blooms, forged parts
Nucor 18.3 10.1 Bar, Sheets, Plates, Wire Rod, Drawn Wire, Info not available
Coiled Rebar
Severstal 18.2 4.6 Blooms, Billets, Hot-rolled products, Cold-rolled Ship-building, Engineering, Construction,
products, Sections, Pipes, Bars, Wire rods, By- Machinery, Automotive, Appliance & Furniture
products, Galvanised sheets, Coated Sheets
Wuhan 16.6 7.6 Sections, Angles, Plates, Hot-rolled coils / Ship-building, Automobile, Infrastructure,

sheets, Cold-rolled coils / sheets, tinned sheets, Containers
colour-coated sheets, wires, Bars
ThyssenKrupp 16.4 7.1 Hot strip, heavy plate, electrical steel, sheet / Automotive, Construction, Transportation
coated products, tinplate / backplate

Evraz 16.3 12.0 Info not available Info not available
Shougang 14.9 Not available Info not available Info not available
Riva 14.0 2.4 Slabs, Billets, Rebar, Wire rods, Bars, HR Oil & Gas, Infrastructure, Construction
plates & coils, CR coils, galvanised steel, pipes

SAIL 13.6 17.8 Billets, Blooms, Slabs, Wire rods, Bars, Info not available
Sections,HR plates
Sumitomo 13.3 13.1 Pipe & Tube, Steel Sheet & Plate, Specialty Energy, Automotive, Railway, Ship, Aircraft &
steel bars, wire rods, stainless steel, titanium Construction Machinery, Electric, Engineering
Hyundai
y 12.9 13.0 Beams, Bars, Hot-rolled steel, Plates, Sections Construction, Energy,
gy Automobile, Electrical
Copyright © 2
goods, Oil & Gas, Ship-building, Machinery
1. Based on crude steel production over 3mmt in 2010, 2. Measured as EBITDA / revenue;
Source: World Steel Association, Bloomberg, Company websites
Confidential
Options for Megasteel restructuring

Confidential
Megasteel cannot break even if relying only on aggressive
cost cutting
cost-cutting
Megasteel will need to reduce costs by But even aggressive cost-cutting at

15% to break even now current volume will make task infeasible
Current and breakeven cost per ton • Retrenchment of 50% of personnel1 will save only
of Megasteel's HRC production <4% of the costs
Cost per ton 100 Current cost
of HRC / 15%
Current • Consolidation with relevant Lion Group companies
indexed RM price (e.g., Lion DRI, Amsteel Mills) marginal:
80
(2011 100)
(2011=100)
– Molten steel markup elimination will save

60 <0.5%
100 – DRI markup elimination will save <0.5%
40 85% Target cost
• IImproving
i yields
i ld 2 to
t the
th level
l l off 75% utilisation
tili ti rate
t

20 will save Megasteel < 3% of costs
0 • Reducing alloys1 by 50% will save ~1%

Current cost Required

structure cost structure
Megasteel
g will have to increase p production volume and
Copyright © 2
utilisation ratio to break even
1. Unrealistic from a production perspective 2. By assuming order sizes increase without volumes increasing, for example.
Source: Megasteel costs and audited final accounts; BCG analysis
Confidential
Five main outcomes for Megasteel restructuring (I)

Sudden
H Sale of assets exit Shared
M responsibility
Government
M support
Bank-led Sale of business
restructuring M to new investor L Protection
Free market
L success
H Controlled
Laissez-faire exit Shared
L Take-over by M responsibility
Government Government
M
supportt
L

Status quo Protection
L Free market
success
Sh d
Shared

Government H responsibility
intervention Government
H
support
Government-led M Protection
restructuring Controlled Shared
H

M exit responsibility
Government
M support
H : High probability Take-over by M Protection
L Government
M : Medium probability
Copyright © 2
Free market
L success
L : Low probability

Confidential
Five main outcomes for Megasteel restructuring (II)

Continuum of solutions
Sudden exit Controlled exit Free market Shared Protection
success responsibility
p y
No change to industry No change to industry Change to policy Change to policy

policy policy • Negotiated prices • Duty exemptions
• Gvt compensation • Duty exemptions eliminated1
to Megasteel
g reduced
• 24-36 months timeframe

A rights reserved.
Steel Steel Very low likelihood Steel Steel
Ind. Ind. given current Ind. Ind.
industry situation


Worst case scenario Improved outcome for Most balanced outcome Best case scenario for
for Megasteel and banks : Larger area • Limited cost for banks Megasteel and banks
banks indicates better and government
Costly for government outcomes Worst case scenario
Megasteel profitable, f steel
for t l industry
i d t
Copyright © 2
economy benefits
1. Except for re-export, automotive, shipbuilding and 50-50 for re-rollers
Note: For each stakeholder, the higher the score the better the outcome
Source:: SEAISI; MIDA; Megasteel documents; Megasteel P&L, manufacturing accounts; Megasteel balance sheets; WSD; elasticity estimates by NSC USA; Department of Statistics; Platts SBB
Steel; steelonthenet; Annual Reports of various players; BCG analysis
Confidential
Shared responsibility outcome with least cost of resolution
for all parties

responsibility
Industry
Raw material price + ~ 4%1 + ~ 4%1 + ~ 1%1 ▬ ~3%1

decrease
Change to GDP ▬ ~0.2%10 ▬ ~ 0.2%10 + ~0.1% ▬ Up to ~ 0.6%

Gov & Economy
contribution ( RM 1.4 bn)10 ( RM 1.4 bn)10  RM 0.7bn ( Up to RM 4.2bn)

Job retrenchments
(# of jobs) ▬ 1,700 - 4,6002 ▬ 1,700- 4,6002 negligible ▬ Up
p to 10-20,0003

Loss of duty revenues
(RM Bn)
▬ ~0.14 ▬ 0.14 negligible + ~0.025
Written-off loans
▬ ~0.8
~0 86 ▬ ~0.8
~0 86

Banks
s
(RM Bn)
Rescheduled loans ▬ ~0.67 ▬ ~0.67
RM Bn)
el
Sunk investment ▬ ~0.6

~0 68 ▬ ~0.6
~0 68
Megastee

(RM Bn)
Profit margin + ~8%9 + ~15%9
1. Average change in price index for HRCs, CRCs, coated steel, pipes & tubes, driven by elimination of duties on imported HRCs because no longer produced locally (Sudden exit and Controlled
exit), driven by requisite clampdown in import volumes across value-chain and lower Megasteel prices (Shared responsibility), driven by clampdown in import volumes across value-chain (Protection);
Copyright © 2
2. Megasteel's employment is 1700 (4600 including supporting companies); 3. Assuming projected 20 to 40% decline in flat mid/downstream due to prohibitively high raw material prices; 4. From
elimination of duties (no local production means full duty exemption); 5. From 15% duty paid on remaining imports; 6.Banks' exposure to Megasteel (unless provisioned); 7. Syndicated loan amount
outstanding; 8. Share capital; 9. Profitability derived from estimated Megasteel's cost curve at target production levels; 10. Conservative estimates does not include further gains by mid/downstream.
Source: SEAISI; MIDA; Megasteel documents; Megasteel P&L, manufacturing accounts; Megasteel balance sheets; WSD; elasticity estimates by NSC USA; Department of Statistics; Platts SBB
Steel; steelonthenet; customs data; Annual Reports of various players; BCG analysis
Confidential Backup
Behind the numbers: Impacts on GDP contribution,
employment, tariff revenues (I)
Option Element Calculation steps and key assumptions
Sudden exit IImpactt on GDP • N

No ddomestic
ti flflatt upstream
t means ~0.1%
0 1% lless di
directt contribution
t ib ti tto GDP and
d ~0.07%
0 07%
contribution less indirect contribution to GDP
1 2
Controlled exit
• No domestic flat upstream means retrenchment of flat upstream workforce in the short
Impact on
employment run3
• No domestic HRC producer means HRCs come in duty-exempted. Decline in tariff

Impact on tariff revenue:
revenues Current volume of full-duty paid imports4 x Import price5 x 20%6
• Fall in raw material prices along the value chain means increased margins across the

Shared flat value chain of ~1.4 percentage points and increased direct contribution to GDP of
responsibility Impact on GDP
contribution ~0.08%7. This feeds into indirect contribution to GDP of ~0.06%8 via the multiplier
effect1

Impact on • Employment assumed to stay approximately at current, status-quo levels.
employment
• Tariff revenues estimated to stay approximately at current

current, status-quo
status quo levels
levels.

Impact on tariff
revenues
1. Malaysian steel industry multiplier of 1.7 calibrated from Bekhet's (2011) study, which compares favorably with BCG's benchmark multiplier data; 2. Effects of increased costs to be borne by
mid/downstream players in hedging increased exposure to global markets (reducing value added contribution), and cost savings incurred from fall in raw material prices (increasing value added
contribution). assumed to counterbalance, hence omitted; 3. Megasteel employs 1700 people . Together with its supporting companies, that number is ~4600; 4. MIDA duty exemption data used, in
conjunction
j ti withith SEAISI data;
d t 5.5 2011 average iimportt prices
i used;
d 66. currentt MFN duty
d t rate
t used;
d 7.
7 2% average decline
d li ini raw material
t i l prices
i ttranslates
l t tto an iincrease iin profit
fit margins
i ffor upstream
t
Copyright © 2
and midstream players by ~1.4 percentage points (raw materials are ~70% of costs). Conservative estimates of average profit margins across value chain are ~4%, so increase in profits from the flat
steel industry is by ~35%. Profits comprise ~60% of direct GDP contribution so increase in GDP contribution across value chain is by 0.6*0.35*(0.1+0.3)%=0.084%; 8. Via the multiplier detailed in
footnote 1, indirect contribution increase is 0.7*0.084%= 0.06%;
Source: SEAISI; Department of Statistics; TEX Report; Bekhet (2011): "Output, Income and Employment Multipliers in Malaysian Economy: Input-Output Approach", International Business Research
Vol 4(1); Annual Reports; company interviews and publications; BCG analysis
Confidential Backup
Behind the numbers: Impacts on GDP contribution,
employment, tariff revenues (II)
Option Element Calculation steps and key assumptions
• Ri
Rise in
i raw material
t i l prices
i along
l the
th value
l chain
h i means d depressedd margins
i across
Protection Impact on GDP the flat value chain of ~2.8 percentage points and decreased direct contribution to
contribution GDP of ~0.336%1. This feeds into indirect contribution to GDP of ~0.235%2 via the
multiplier effect3
• Prohibitively high raw material prices means some downstream players may have to
Impact on
shut down/relocate to outside Malaysia. With 20%-40% shutdowns, employment falls
employment
by 10,000-20,000 people4
• Tariff revenues from HRCs estimated to rise byy comparing

p g against
g status q
quo tariff
revenues versus new volume of full-paid imports and new tariff rate of 15%5:

Impact on tariff
revenues ( Current volume of full-duty paid imports6 x Import price7 x 20%8 )
- ( Target volume of full-duty paid imports9 x Import price7 x 15%5 )

1. 4% average rise in raw material prices translates to an increase in profit margins for upstream and midstream players by ~2.8 percentage points (raw materials are ~70% of costs). Conservative
estimates of average profit margins across value chain are ~4%, so decrease in profits from the flat steel industry is by ~70%. Profits comprise ~60% of direct GDP contribution so decrease in GDP
contribution across value chain is by 0.6*0.70*(0.3+0.5)%=0.336%; 2. Via the multiplier detailed in footnote 3, indirect contribution increase is 0.7*0.336%= 0.235%; 3. Malaysian steel industry
multiplier of 1.7 calibrated from Bekhet's (2011) study, which compares favourably with BCG's benchmark multiplier data; 4. Employment in flat midstream/downstream is ~47700 people. With 20% to
Copyright © 2
40% assumed shutdowns, loss in employment is given by 0.2*(47700), which is ~10% of employment; 5. Target tariff rate under Protection option is 15%; 6. MIDA duty exemption data used, in
conjunction with SEAISI data; 7. 2011 average import prices used; 8. current MFN duty rate used;9. Target volumesof HRC imports obtained by reducing HRC imports by 63% as detailed in
accompanying slide.
Source: SEAISI; Department of Statistics; TEX Report; Bekhet (2011): "Output, Income and Employment Multipliers in Malaysian Economy: Input-Output Approach", International Business Research
Vol 4(1); Annual Reports; company interviews and publications; BCG analysis
Confidential
Steel industry: Stands to benefit over status quo from all
options except Protection
Steel Steel Steel Steel
Industry Industry Industry Industry

responsibility
+ Price of raw + Price of raw + Price of raw ▬ Price of raw

materials likely to materials likely to materials likely to materials likely to
fall1 fall1 fall2 rise3
% Anticipated % Anticipated % Anticipated % Anticipated
price evolution price evolution price evolution price evolution
5 5 5 5 3
3 4 Ø +3%
-3 -2 -3 -2 0 0 2
0 0 0 -1 0
-3 -3 -3 Ø -1%
-6 Ø -4%
4% -6 Ø -4%
4%
-5 -5 -5 -5

Coated
Coated
Coated
Coated
HRC
CRC
Pipes
HRC
CRC
Pipes
HRC
CRC
Pipes
HRC
CRC
Pipes
Impact on flat -10 -10 -10 -10
midstream,
downstream ▬ Increased exposure ▬ Downstream players
IIncreasedd exposure

▬
and end users to global markets to global markets and end-users may
• small players • small players shut down/relocate
may have trouble may have trouble • prohibitively high
p g
importing importing raw material

prices
+ Broad range of + Broad range of ▬ Products partly ▬ Products highly
possible suppliers reliant on reliant on
possible suppliers
Megasteel's quality Megasteel's quality
Copyright © 2
1. Numbers shown assume import gduties for HRC eliminated, and cost-drops are passed-through at 50-50 with customers down the value-chain; 2. numbers shown assume only HRC exemptions
gets patched and cost-drops passed-through at 50-50 with customers down the value-chain; 3. Numbers shown assume clampdowns on exemptions at all levels as explained in backup slide.
Source: SEAISI, MIDA exemptions data; Megasteel documents; customs data; BCG analysis
Confidential Backup
Steel industry: Shared responsibility and Protection options
only feasible with limits on imports coming into Malaysia
* Volumes shown for all products are in equivalent required HRC volumes
Current Shared Protection
production responsibility
Megasteel profit impossible Restricting ~.8 MT imports Restricting ~2.3 MT imports

at current import volumes can ensure target profits will allow excessive profits
C
Current
t iimportt volumes
l servicing
i i T
Target
t import
i t volumes
l servicing
i i T
Target
t import
i t volumes
l servicing
i i
steel value chain steel value chain steel value chain
Imports Imports Megasteel Imports Megasteel
Total 3.2 Total 2.3 0.8 Total 0.9 2.3
HRCs 1.0 HRCs 70% 30% HRCs 37% 63%

CRCs 0.8 CRCs 75% 25% CRCs 41% 59%
Coated 0.7 Coated 75% 25% Coated 7% 93%

20%
Pipes 0.7 Pipes 75% 25% Pipes 80%
0 1.0 2.0 3.0 MTA* 0 1.0 2.0 3.0 MTA* 0 1.0 2.0 3.0 MTA*

• current imports
i ~3.2
3 2 MTA • ~ 25%% reduction in imports • ~ 70%
0% reduction
d i iin iimports
• ~ 90% of HRC and CRC imports necessary necessary
currently benefit from duty • restriction likely compatible with • restriction not fully compatible
exemptions granted by JPC3 HRC grade requirements by with HRC grade requirements by
midstream p players
y 1 midstream p players
y 1
Copyright © 2
1. ~40% of current HRC imports are in grades Megasteel does not produce. Reducing imports to 70% will allow the continued import of HRCs in these categories, but reducing to 37% will require
substituting Megasteel grades for some materials in place of grades that Megasteel does not produce.
Note: Volume estimates constructed from multiple sources as below, based on 2011 data. Conversion yields from HRC to CRC, etc. taken from WSD.
Source: Megasteel documents; WSD; MIDA 2011 imports of flat steel by category; Customs data; BCG analysis
Confidential
Steel industry: Shared responsibility option additionally
requires temporary control of domestic HRC prices
Simple, transparent mechanism proposed to control prices But regular attention needed
Simple, transparent mechanism to calculate controlled price index Regularly monitoring Megasteel's
• weighted by volume of 3 largest HRC exporters to Malaysia to be representative actual prices for compliance
• Invoices from domestic HRC
Volume of CIF cost of customers
Volume of HRC ( imports from A1 x imports from A2 ) – e.g., Mycron, CSC
1 imports into Malaysia +
(by country/region) 1 Volume of CIF cost of Regularly recalibrating index to
( imports from B1 x imports from B2 ) reflect current reality
• e.g., monthly
2 Volume of CIF cost of
+
CIF cost of HRC imports ( x )

imports from C1 imports from C2 Illustrative evolution of
(by HRC grade and origin)2
controlled prices
Price in RM '000
2.1
HRC import
i t 2.2
2 2 Weighted import price index 2.6
2 6

prices Freight 2.4
costs + 5~10%6
• by HRC 2.2
grade and • by route4 Controlled price index 2.0 Illustrative
origin3 2.3
23 1.8

Insurance, Illustrative
Jul 12 Aug 12 Sep 12 Oct 12 Nov 12
x 1.057 x 17 x 0.917
landing costs5
Import price index
Controlled price Controlled price Controlled price
for grade X7 for grade Y7
... for grade Z7 Controlled price index
1. Moving average basis from Department of Statistics data 2. Cost, insurance and frieght cost, per ton 3. Metal Bulletin, TEX Report and Platts SBB are just 3 possible sources. Prices should be
Copyright © 2
current, or preferably forward-looking where available, referring a specific grade of HRC from a specific origin. 4. Simpson, Spence and Young is one possible source, 5. Average cost per ton
Malaysia 6. 5-10% markup will decrease average cost of HRCs in Malaysia (from current average price), benefiting mid/downstream and end-users. 5-10% will also allow Megasteel to make profits
7. Controlled price index will need to be decomposed and scaled appropriately to apply to each international grade of HRC made by Megasteel (e.g., JIS G 3132 SPHT2); one way is to look at
historical price differentials among the grades and apply those
Confidential Backup
Behind the numbers: Impacts on prices

Element Calculation steps and key assumptions
Megasteel price1 x
IImportt price
i 1x (Importt price
(I i 1 + 20%3) x
Megasteel share of HRC price
domestic HRC + Duty-exempted import share of + Duty-paid import share of = index
domestic HRC consumption2 domestic HRC consumption2
consumption2
• Similarly, CRC price index, Coated price index, Pipes price index4
• Average price is the weighted average of the price indices, weighted by volume:
HRC price index x HRC price index x HRC price index x HRC price index x
HRC share of HRC share of HRC share of HRC share of Average price
domestic flat steel
+ domestic flat steel + domestic flat steel
+ domestic flat steel = index
consumption5 consumption5 consumption5 consumption5

Impact on • Megasteel shuts down, so Megasteel share of domestic consumption falls to 0.
prices Sudden exit • Because there is 'no local production' of HRCs, all imports enter duty-exempted.
• Resulting price savings assumed passed-through 50-50 by HRC buyers to their
Controlled exit

customers along the value-chain.
• Megasteel produces an extra 0.8 MTA of HRCs, imports fall by the same amount.
Shared • Proportion of full-duty paid and exemptions assumed to remain at current levels.
responsibility • Resulting price savings assumed passed-through 50-50 by HRC buyers to their

customers along the value-chain.
• Megasteel produces an extra 2.3 MTA of HRCs, imports fall by the same amount.
Protection • Exemptions assumed to be patched fully.
• Resulting price savings assumed passed-through 50-50 by HRC buyers to their
customers
t along
l th value-chain.
the l h i
Copyright © 2
1. 2011 averages used for Megasteel and import prices; 2. Shares at 2011 calculated from SEAISI and MIDA numbers; 3. current MFN tariff rate for HRCs; 4. Proportion of exempted versus full-duty
paid products assumed at same ratio as for HRCs (due to unavailability of detailed data); 5. Considered as sum of HRC consumption, CRC imports, Coated steel imports and imports of pipes & tubes
Source: SEAISI Steel Statistical Yearbook 2010; steelonthenet.com; MIDA; interviews with domestic steel players; Megasteel documents; BCG analysis
Confidential
Government and the Malaysian economy: Shared
responsibility option least costly

responsibility
▬ Substantial ▬ Limited Government ▬ Limited Government

government support support support
Impact on the • Grants ((land,, • Debt restructuring
g • Debt restructuring
g
license, etc) guarantee guarantee
Government • Subsidized credit
▬ Decreased tariff ▬ Decreased tariff
and Treasury
revenues revenues provision + Increased tariff
• ~ RM 120mn • ~ RM 120mn revenues
• ~ RM 20mn
20

▬ Short-term drop in ▬ Short-term drop in + Increase in GDP ▬ Short-term drop in
employment and employment and contribution employment and
GDP contribution GDP contribution • GDP rises byy GDP contribution

• GDP drops by • GDP drops by 0.1% • GDP drops by
0.2% 0.2% – Increased 0.6%
– Megasteel's – Megasteel's value added – Increased raw
Impact on the demise offsets demise offsets due to fallen material prices
Malaysian increased increased prices – Downstream

economy value added value added • No change in and end-users
due to fallen due to fallen employment shut down
prices prices /relocate
• Employment falls • Employment falls • Employment falls
by 1,700-4,600 by 1,700-4,600 by 10,000-20,000
Copyright © 2
Source: Department of Statistics Manufacturing publication 2010; Platts SBB Steel; steelonthenet; Annual Reports of various players; Megasteel documents; BCG analysis
Confidential
Financial system: Pain in all options, but less so for Shared
responsibility and Protection options

responsibility
▬ Banks need to absorb ▬ Banks need to absorb ▬ Banks need to ▬ Banks need to
Megasteel's Megasteel's restructure restructure
bankruptcy bankruptcy Megasteel's loans, Megasteel's loans,
• Sell
S ll / liliquidate
id t • Receive
R i partt off debt
d bt andd makek allowances
ll andd make
k allowances
ll
Megasteel's assets (at haircut) from for more credit for more credit
• Write-off rest of Megasteel • Restructure ~RM • Restructure ~RM
Impact on Megasteel's bad bankruptcy 0.6bn2 syndicated 0.6bn2 syndicated
financial debt (if not • Write-off rest of loan by June 2012 by June 2012
institutions / provisioned ) Megasteel's bad – forgone earnings – forgone earnings

• Cross-exposure to debt (if not from missed from missed
banks with
potential other Lion provisioned) repayments repayments
direct Group defaults • Cross-exposure to • May grant further • May grant further
exposure
p • Banks
Banks' profitability potential other Lion credit for credit for

hurt Group defaults Megasteel's Megasteel's
– up to RM 0.8bn1 • Banks' profitability proposed projects proposed projects
across banks hurt – potential risk of – potential risk of
– up to RM 0.8bn1 future defaults future defaults
across banks

▬ Limited harm on rest ▬ Limited harm on rest • Rest of financial • Rest of financial
Impact on
of system of system system unaffected system unaffected
rest of • Financial system as • Financial system as – May grant – May grant
Copyright © 2
Financial a whole can contain a whole can contain Megasteel future Megasteel future
system potential damage potential damage investment credit investment credit
1. Banks' exposure to Megasteel (unless provisioned); 2, Syndicated loan amount outstanding; Source: Megasteel accounts; Megasteel interviews and documents; Discussions with Bank Negara
Confidential Backup
Financial system: Impacts from Sudden exit and Controlled
exit options seem containable
Megasteel's
g exit would hurt bank p
profits,, banks Impact
p on trade creditors seem likely
y to be
may seek compensation from Government contained
~ 40% of Megasteel's 2011 outstanding trade payables

" Malaysian financial system as a whole, and financial can be settled internally
institutions with direct exposure to Megasteel (local and • through liquidating its inventory and drawing in trade
foreign banks, development institutions) will be able to receivables
contain a bankrupt Megasteel "
Bank Negara Malaysia TNB also has limited exposure
• Megasteel's payables to TNB comprises ~5% of
TNB's receivables
" Megasteel has had financial troubles (including

• Megasteel's entire payables comprise <4% of TNB's
restructuring) over an extended period; many financial net profit in 2010
institutions with exposure to Megasteel would have
provisioned some of their loans off "
Direct contribution of Megasteel to the

Bank Negara Malaysia
Malaysian economy is also limited
Megasteel contributes <0.2% to Malaysian GDP

" Although the number of Malaysia's financial system with
• Together with its supporting companies1
exposure tot the
th Lion
Li GGroup ((as a whole)
h l ) iis llarge,

individual exposures are within acceptable limits. "
Megasteel employs ~1700 people
Bank Negara Malaysia
• Total <5,000 people including supporting companies1
Copyright © 2
1. Includes other companies that directly support Megasteel, e.g., Lion DRI Sdn Bhd, Secomex Manufacturing Sdn Bhd, Lion Waterway Logistic Sdn Bhd, Compact Energy Sdn Bhd
Note: Megasteel does not have significant bondholdings.
Source: Megasteel audited Balance Sheet; Megasteel-provided documentation; BNM interview with the Director of the Financial Surveillance Department on 25 April 2012; Tenaga Annual Report
2011; Lion Corporation Berhad Annual Report 2010; BCG analysis
Confidential
Megasteel: Shared responsibility and Protection are the only
two favourable options

responsibility
▬ Megasteel's ▬ Megasteel's + Megasteel profitable, + Megasteel profitable,

shareholders suffer shareholders suffer competitiveness sustainability
large losses losses likely to become questionable
M t l shuts
• Megasteel h t M t l shuts
• Megasteel h t t i bl
sustainable
down and files for down and files for Import Import
Lower prices Prices as is
bankruptcy bankruptcy reductions reductions
(~8%)
– Sell assets to – Sell assets to (~.8 MTA 2) (~2.3 MTA2)
pay off lenders pay off lenders
and creditors and creditors Higher Higher

• Shareholders' • Shareholders' production production
equity negative equity negative (~100%2) (~200%2)
Impact on
– Shareholders – Shareholders
Megasteel's
lose injected lose injected

shareholders Lower average Lower average
capital (~ RM capital (~ RM
cost per ton cost per ton
0.6 bn1) 0.6bn1)
(~15% )3 (~20%3)
– Potential cross- – Potential cross-
default into other default into other

Lion Group Lion Group loans Benchmark High
loans possible possible EBITDA margin EBITDA margin
• Potential (~8%3) (~15%3)
government
compensation
Copyright © 2
Further Further
mitigates impacts
investments investments
1. Share capital; 2. Import reductions of this volume detailed in accompanying slide, directly translates to increase in Megasteel's production from 2011 numbers; 3.. Profitability derived from estimated
Megasteel's cost curve at target production levels; Source: Megasteel accounts; Megasteel interviews and documents; BCG analysis
Confidential Backup
Megasteel: Profitability from Shared responsibility option
(and Protection option) driven by increased volumes
Shared Increased volume and lower prices affords Megasteel
responsibility benchmark profitability under Shared responsibility
Megasteel's average cost (AC) curve and profit

Average cost / Unit price /
indexed RM per MT (2011=100) indexed RM per MT (2011=100)
Leaner operations
lowers average Lowering prices
costs absorbs increased
100
demand

current Megasteel price
100
92-982
anticipated
p p
price

86-913
AC curve
Qty / indexed MTA
(2011=100)
100 190-2251 Key:

Megasteel current production
Restricting imports Shared responsibility production
raises local orders Profit made under
p y option
shared responsibility p
Copyright © 2
1. Depends on assumptions made on landed price of imports. With higher landed price of imports, indexed quantity closer to 190; 2. Depends on assumptions made on import prices. With lower landed
price of imports, number closer to 92; 3. Depends on assumptions made on import prices. With lower landed price of imports, number closer to 86; Note: Megasteel's audited P&L accounts and
manufacturing accounts used as basis for constructing cost curves. Demand, volume and price estimates constructed from multiple sources. Source: Megasteel P&L accounts, Megasteel manufacturing
accounts, steelonthenet.com estimates, WSD, MIDA, 2011 imports of flat steel by category; elasticity estimates by NSC USA; BCG analysis
Confidential
Building on shared responsibility, Megasteel plans to
complete 3 long-term
long term projects reducing its landed cost...
Blast Furnace Iron ore pelletisation Natural gas
Construction of a Blast Substitute 50% of imported Substitute use of diesel as a

Furnace (2.1MTA), sinter plant iron ore with local iron ore energy fuel with natural gas
ption
and coke oven plant • Iron ore is a key input in the • Diesel used as input for
• Objective to enable DRI process reheating
Descrip
Megasteel to produce higher

grade steel quality and
increase productivity

d savings
USD/t USD/t USD/t

Raw materials 25 Raw materials 18 Raw materials -
Conversion 31 Conversion - Conversion 19
Labour 2 Labour - Labour -
Estimated

Other 3 Other - Other -
Total savings 61 Total savings 18 Total savings 19
Copyright © 2
Note: Based on assumption Megasteel will be operation at 100% utilisation rate of 3.2MTA; Source: Megasteel, BCG analysis
Confidential
...improving Megasteel's competitive position in the region

Megasteel within acceptable range of 5-10% vs.
vs international prices of most regional competitors
Cash cost production curve for Hot rolled coils (USD/t)

Landed cost in M'sia index (Megasteel current = 100)
120
120 114
112
-13% 105 105
100 100
100 95 95
92
87 87
83 84
80
69
60

40

20
Import duty
CFR

0
INDIA INDO INDO Megasteel CHI THA VIE INDIA Megasteel CHI TAI KOR JAP JAP KOR
BOF BOF EAF BF-EAF BOF EAF BOF EAF EAF EAF BOF BOF EAF BOF EAF
(Future) (Current)
% diff to Megasteel
(excl import duties) -34%
34% -4%
4% -3%
3% -16%
16% 6% 10% -8%
8% -3%
3% 1% 0% 10% 11% 16%
Copyright © 2
Note: BF/BOF state of the art plant is compared to average BOF and EAF cost bases in Asia-Pacific countries; Megasteel BF-EAF Future based on 100% utilisation rate of 3.2MTA capacity;
Megasteel numbers include $60 margin from Lion BF; Source: BCG Model, WSD March 2012 database, Megasteel, EIU, TNB
Confidential
To be competitive in ASEAN Megasteel needs to keep
utilization ratio above 75%
Cash cost for Megasteel HRC in USD/t

Cash cost of Megasteel HRC index (100% utilisation ratio = 100)
120
115
Landed cost to Malaysia

110 from ASEAN best-in-
class producer + 10%

105

Megasteel
100 Megasteel landed cost
Blast furnace running below landed cost 10%
>10% higher than best-
technical limits lower than best-
in-class imports
in-class
in class imports

95
0 10 20 30 40 50 60 70 80 90 100 Utilization ratio (%)
0% DRI 45% DRI
Copyright © 2
100% Hot 55% Hot
metal1 metal
1. Assumes BF running at minimum limit of 70% capacity 1.4MTA;
Source: Megasteel savings estimates, BCG analysis
Confidential
Megasteel: Any potential Government support should hinge
on Megasteel meeting strict conditions
Conditions to impose on Megasteel Actions to be taken by Government

Lower domestic HRC prices
• Domestic prices capped within 5-10% range of
benchmark import prices Tightening of duty exemptions
• Price reduction to occur simultaneously with • Reduce volume of duty
tightening of duty exemption exemptions
ti granted
t d2
• Tighten governance and
Undertake corporate and debt re-structuring with transparency for duty exemptions
CDRC1 Reduction of
• Transparency on overall corporate borrowings duty Stricter enforcement of duty
• Likely
Lik l tto include
i l d LiLion G
Group, nott jjustt M
Megasteel
t l exemptions exemptions process

for flat steel • Better cross-agency coordination
Formalise turnaround plan for next 24-36 months • Improve importation processes
• Clear plans and milestones to be monitored by imports
and close existing loopholes
independent turnaround program office

– includes quality and delivery evaluations However, Government should not
• Provide visibility on progress and improvement reduce exemptions in the event of
failure on the part of Megasteel to
Bring in global experts in the turnaround meet conditions imposed
• Includes,
Includes global steel players as shareholders

plus technical experts as managers or advisors
• Inject know-how and access to global best-
practices for technology improvements
Failure to meet conditions byy Megasteel
g will lead
Copyright © 2
to 'Sudden Exit' outcome
1. Corporate Debt Restructuring Committee under BNM 2. Estimated reduction of ~25% of current imports required Source: BCG
Confidential
Agenda



Implementation plan
Copyright © 2
Confidential

To enable the competitiveness

p of the entire steel industryy in Malaysia,
y the Government should focus on
three key activities
• Enhance capabilities of the Steel Industry – e.g. Steel Institute set-up
• Enforce trade defenses and trade barriers to guarantee a fair level playing field
Access to key inputs is critical to the competitiveness of the Malaysian steel industry
80% of the total cost base is attributed to cost of raw materials and energy
• ~80%
• Iron ore is the key cost driver – 20% price increase will increase total cost by ~8%

– Potential Gov policies: Support beneficiation and pelletization plant development, favour local use of
iron ore (e.g. apply export duty 5%), support mining industry rationalisation
• Natural
N l gas – further
f h hik hikes will
ill make
k MMalaysian
l i players
l uncompetitive
ii

– Potential Gov policy: Be aware and avoid significant price gap for gas with regional neighbours
Currently, many critical capability gaps with the MalaysianSteel industry need to be addressed
Currently

• Gap in capabilities around technology research, industry analytics, human capital development and
promotion compared to other Asian countries
• Foreign steel institutes benefit from significant resources
Copyright © 2
• Potential Gov policy: Set-up Steel institute to enhance steel industry capabilities and close gaps
– Initial phase requires RM4-5Mn seed money from the Government

Confidential

Enforcement of trade barriers, trade defenses and control of import process is required to guarantee a fair
level playing field
• Tariff and non-tariff barriers
– Import duties: Proceed with progressive reduction (as planned)
– Duty exemptions: Simplified application process,
process refined governance and transparency
– Mandatory standards: Selectively fine-tune breadth and depth of testing
• Trade defenses
– Joint p
private-Government effort to implement
p anti-dumping
p g measures for steel
– Leverage best practices from other industries – e.g. Paper, plastics

• Importation process
– Several actions required to close loopholes

Copyright © 2
Confidential
Provide advantaged access to select inputs

Confidential
Steel cost base is dominated by raw materials and energy

Primary cost competitiveness lever is iron ore sourcing cost by far
HRC cost base dominated by

y raw materials
and energy cost Iron ore cost impact 4x gas impact
Cash cost of HRC with Malaysian BOF in USD/t1 Cash cost of HRC with Malaysian BOF in USD/t
800 680 8%
4 670
42 6 9 631 5%
660
600 76 42 3%
23 650
498 15
38
640 2%

108
400 630 Ø 631
3
144 620

610
200
600
245
1 590
0 580

Raw mat. Energy Labour Other Out Total -20% -10% 0% 10% 20%
incl. freight costs costs costs1 freight FOB cost
Customs Other cost Gas Coal & coke Gas Scrap Coal Iron ore
Copyright © 2
Freight Other fuels Labour cost Iron ore
Credits Electricity Scrap x% : Impact of 20% variation on total HRC cost base
1. Cash cost example is for Thailand market
Source: WSD March 2012, BCG analysis
1 Iron ore Confidential
Currently mined reserves in Malaysia are limited

12 years to go at current rate with current mined reserves in Malaysia
25,000
140 250
3,500
63% 56%
6,300
170
65%
6,000 75 125
3,000
30% 40%
6,900 23,000
128
30% 2,500 83 19
56% 33%
7,000

50 100
700 4,000 250 29 121
57% 1,100
30% 50
60% 64% 50%
12,000 29,000
35,000

74
240
73
56% 56%
1,000 18 65%
RoW
65%
Worldwide mined reserves

t t l ~170
total 170 Mt

xxx xxx
Mined reserves
xxx Reserves/production 2011 (years) xx% Average iron ore (% Fe) xx% Top 3 2011 (Mt)3 Top 3
Copyright © 2
1. Production assumed at ~4 Mt based on JMG data and interviews
Source: BMI 2011 Mining Malaysia, USGS 2011, BCG analysis
Existing mines with limited reserves, renewed exploration
necessary to unlock Malaysia's
Malaysia s full potential
Current iron ore p

production primarily
p y Extensive exploration
p likely
y to identify
y
leveraging historical mines 1 significant additional reserves
- Primarily based on surveys performed in the 1960s - Iron price level

Bukit Besi with additional Market • High current prices driven by
l d iin th
reserves explored 1990
the1990s diti
conditions Chinese demand making
2 licenses awarded to Eastern Malaysian iron ore competitive
and Perwaja
Exploration technologies
• New exploration techniques
will enable identification of
new deposits

Mining technologies
Perak with high grade iron ore, Inactive mining in Technology • Historically problematic
but known deposits
p depleted
p Kuala Lipis - to be deposits potentially exploitable

investigated Processing technologies
• Widen range of exploitable ore
types / grades e.g. lateritic
Selangor with lateritic limonite, limonite in China
recently used by Chinese plant

Recent development of
Several key Johor known infrastructure to impact
deposits considered exhausted
Infrastructure competitiveness
• E.g. deep sea harbors,
Historical iron ore deposits
p railways and roads
Copyright © 2
Major iron ore basins
1. Current production boom primarily from old mines reopening to mine remaining low grade iron ore
Source: Iron Ore Deposits of West Malaysia – Minerals and Geoscience Department Malaysia, published in 1969
Current domestic production is sufficient, but using it needs
compliance with several pre
pre-requisites
requisites
Production now exceeds demand,, Several p

pre-requisites
q still missing
g to
but most steel input is still imported substitute imports
MTA
8 A Processing required prior to
Iron ore feeding BF / DRI to get
6.31 processing • Pellets / sinter
Production CAGR: 55.2% capabilities • Blended lumps and fines of
6
Consumption CAGR: 6.1% different quality
B Chinese steel industry

purchasing iron ore
4 Domestic use of • Local iron ore industry geared
2.9 3.5 3.5
0.3
3.1
3.0
3.2 5.7 local iron ore to cater for Chinese market

2.6 (including Vale plant)
2 2.8 2.6 2.9 C
2.5 1.5 2.3 Sourcing from fragmented local
0.7 2.1 0.8 2.7
1.0 mining industry not viable
0.2 0.3
0.4
0 4
0.8 Rationalized • Complexity of different sources

0.5 mining industry
0.5 0.5 0.6 0.6 0.6 0.6 0.7 0.7 0.72 0.72 and stakeholders not cost
0
2006 2007 2008 2009 2010 2011F
competitive
Production ((total)) Consumption

p (total)
( )
Copyright © 2
Exported Imported
Sold domestically Produced domestically
1. Export numbers both from mining and de-stocking 2. Local consumption of domestic iron ore is considered similar to 2010 (data not available)
Sources: Mineral Yearbook 2010 (Malaysia), Department of Statistics, BCG analysis
Local iron ore sourcing likely to generate significant savings
Significant
g savings
g from local iron ore Prices expected
p to remain high
g ,
sourcing1 unless Chinese steel demand falls significantly
Local mining of 50% of iron ore input and local

processing results in ~30 USD cost saving "We expect iron ore price to average at USD150 a tonne
• Reduction of inbound freight cost (e (e.g.
g 1t of 50% Fe in the short to medium term given the high cost of mining
content iron ore vs. 1.57t pellets saves 10-15 USD) at China’s iron ore mines, and there being a likelihood that
• Raw iron ore price vs. beneficiated and pelletized scheduled projects will not come to market"
price including margins (10-20 USD/t)
Auerback Grayson - OSK, Nov 29th 2011
Cash cost of HRC with Malaysian BOF in USD/t

"The local cost of mining, crushing and transporting iron
680
ore to Malaysian steel mills is ~USD50 per ton (...) Rio
670
Tinto's operating costs (2nd largest player) is slightly over
660
50 USD/t on average
average"

650
640
OSK, Nov 04th 2011
630 631
620 -5%
610 601 "We
We believe China's
China s steel production peaked in 2011 and

600 current weakness in demand represents a major structural
590 -10% change in demand, rather than a cyclical downturn"
580
-20% -10% 0% 10% 20% Nomura Equity Research, March 23rd 201
Iron ore cost
Copyright © 2
1. Assumption: Local iron ore can be supplied at market price, 50% of local iron ore is used with the rest from Australia, margins on iron ore processing about 10%
Source: WSD, BCG model, Steel Index, Brokers' reports, SSY, BCG analsysis
Potential key government policies to match pre-requisites for
iron ore import substitution
Cost
Potential policy Pros Cons est.
A
Support beneficiation and pelletization • Focused policy • Does not address Limited
plant development with significant matching of iron cost
I
Iron ore processing
i • Access to financing impact on local ore supply and Incl. in
capabilities • Equipment duty waivers value added demand current
• Infrastructure support pioneer
• Technical support status

Favor local use of domestic iron ore • Optimize • Potential Neutral
• Export duties below national industry contribution of complaints from Export
Domestic use of profit margins in order to minimize iron ore to key trading duties
local iron ore impact
p on export
p p price ((e.g.
g 5%)) Malaysian
y partners ((e.g.
p g finance

• Incentives for investments enabling economic China) incentives1
sales to local processing plants development
C
Support rationalization of mining • Allow long term • Potential conflicts Limited

• Ensure continuity of mining activity investments with states who cost
Mining industry through consistent and planned • Reduce cost of issue licenses Incl. in
allocation of licenses across Malaysia mining in Malaysia • Likely current
rationalization
• Access to financing • Improve efficiency industrialization pioneer
qu p e t duty waivers
• Equipment a es and
a d co
control
to oover
e of local
o oca mining g status
Copyright © 2
• Technical support industry
1. For example, at currently assumed mining rate (~4 MTA), 50% domestic sourcing of iron ore by steelmakers will result in 40% of mining output or ~1.5 MTA consumed locally and 60% generating
export duties (~USD 5-10M) Such revenues would then be redistributed to finance sales to local processing plants
2 Coal Confidential
Malaysia has coal reserves: location and quality make it
unattractive for steel making
Production ramping up, but exclusively Limited exploitable coking coal reserves
thermal coal (<100 Mt), unlikely to be economical
Production in MTA
3 Most of 1.9 Bnt deposits are located in interior
areas, which lack infrastructure, therefore they
2.5 are uneconomical
2.4
2 80% of reserves (or Sabah

1.5 Bnt) are in

1.5 Sarawak, all of
which thermal coal
2.5 2.4 Sarawak
1.1
1

0.8
1.5 Other 20% (or 0.4 Bnt) are in
1.1 Sabah and include coking coal
0.3 0.8 But 72% in Maliau Basin Conser-
0.1 0.1 0.3 vation Area and cannot be mined
0 00
0.0 00
0.0 00
0.0 00
0.0 00
0.0 00
0.0 00
0.0 00
0.0 S b h expected
Sabah t d tto b
be reluctant
l t t tto

1990 1995 2000 2005 2007 2008 2009 2010 explore coal deposits in general
Thermal coal Coking coal

Maliau Basin Conservation Area
Copyright © 2
Major thermal coal reserves Major coking coal reserves
Source: IEA, Malaysia Mineral yearbook 2010, BCG analysis
2 Coal Confidential
But Malaysia is strategically located nearby key met coal
sources: China, Australia and India
Malaysia strategically located: 72% of global Distance disadvantage vs. Indonesia can be
met coal produced in the region offset with efficient coastal setup
249
Row #1
450
51
China
Malaysia

#5 Other landed costs:
Up to 15 USD/t Freight cost:
35 143 ~20 USD/t
Other landed costs:

India
Up to 15 USD/t Freight Cost:
Malaysia Indonesia ~15 USD/t

100 Indonesia #2
Met coal production 2011 (Mt)
152
Freight
g cost from Australia
x Global rank as 2011 met coal producer
Copyright © 2
217 Reserves / production 2011 217 Other landed cost
Australia
Source: IEA Coal information 2011 edition and IEA 2003 report on reserves, SSY, BCG analysis
3 Scrap Confidential
Limited potential for trade policy to reduce scrap prices
High
g scrap
p prices
p compared
p with other Asia- Malaysian
y exports
p of scrap
p remain limited
Pacific markets while imports are already significant
Scrap price in USD/MT2 Volumes in MTA Malaysia already applies 10% export
600 5 duties to limit export of scrap
+16%
Steel players claim that significant volumes
486 are exported under other HS codes
473 473 478
450 4
425 3.6
419 3.5
400
3

2.2
2.1
2
1.6
200

1
0.1 0.1 0.1 0.1 0.1

0 0

Japan India China Indo. Korea Viet Malaysia 2007 20081 2009 2010 2011
Exports Imports Nam
Export
p duties on scrap
p are unlikely
y to impact
p export
p
Copyright © 2
volumes, if most exports are under other HS codes
1. Volume derived from total import and export values 2. Price as of March 2012
Source: UN Com Trade via Department of Statistics as of March 2012, WSD database as of March 2012, MISIF-MSA interview, BCG analysis
4 Gas Confidential
Current industrial gas prices are still competitive

However other prices remaining equal,
However, equal further hikes will make Malaysian players uncompetitive
Industrial g
gas price
p fixed by
y the state and Current industrial p
prices still competitive
p
set to increase by 3 RM every 6 months within the region
Price in RM/MMBtu1 Natural gas price in RM / mmBtu

80 3 RM/mmBtu increase 80
every 6 months
th started
t t d
Current market price of LNG
in 2011
imports to Asia based on
Japanese JCC
60 60
45.0

40 40
22 8
22.8

20.4 2 21.0
20 20 18.4
0 0

1/1/02 1/1/04 1/1/06 1/1/08 1/1/10 1/1/12 Malaysia Thailand Indonesia Vietnam EPU est.
of market
Singapore residual fuel oil 180 cst spot price price
Malaysian NG price to large industry (>2 MMscfd)
Copyright © 2
1. Assuming 1038 liter per metric ton in fuel oil with high sulphur, 4.546 liters per imperial gallon and 177,000.00 Btu per imperial gallon, using yearly average RM/USD exchange rate 2. Using PTT
natural gas price as of Q4 2011
Source: Bloomberg, Energy Commission Malaysia, PGN, PVD, PTT, Oanda, BCG analysis

4 Gas Confidential
Gas hike impact expected to be mitigated by other countries'
policies and downward pressure on LNG market prices
A B
All countries expected
p to Downward ppressure on
move towards market price market price expected
Thai subsidies expected to be LNG spot price unclear

phased out shortly • Market price is ~45 RM/mmBtu
• Thai production peak reached based on Japanese JCC
Natural gas price in RM / mmBtu
• Imports of LNG started in • However India imports based
2011 80 on HH index at ~20 RM/mmBtu
A B
• Discount cards expected for
specific sectors Analyst consensus around 30
60
RM/mmBtu in the long run

Vietnamese subsidies expected • Temporary pressure on prices
to be phase out by 2014 due to Japanese switch from
45.0
• Price expected to rise >20% nuclear to gas
in Q4 2012 40 • North American shale gas

• PVGas plans to sell at market expected to drive prices down
price when LNG imports start • Significant liquefaction capacity
22.8
18.4
20.4 21.0 expected to come online in the
20 region (e.g. Australia) and
Indonesia attempting to reduce
subsidies generate oversupply risk

• Several proposals including
volume caps and price hikes 0 Additionally, significant local
• However, all initiatives Malaysia Thailand Indonesia Vietnam EPU est. production expected
blocked or postponed of market • Malaysian with significant
price reserves (83,000 bcm)
Copyright © 2
Indonesia is the only country likely to • Petronas pursuing intense
sustain subsidies in the medium run capex as price goes up
Source: Bloomberg, Energy Commission Malaysia, PGN, PVD, PTT, Oanda, Brokers's reports, Press search, Expert interviews, BCG analysis
4 Gas Confidential
Not all industries are equal when facing energy price hikes
Key criteria for industry selection: Energy intensiveness
intensiveness, commoditized products
products, regionalized market
mod-
Regional-
sive
Energy
ed
ized
d
intens
Comm
itize
Key consuming Subsidy
sectors Impact of gas and electricity tariff hikes needed
Power
• Gas concessions with fixed price till 2015
• Gas price increase expected to be fully passed on to Tenaga
  −
• Majority of Petronas Chem's electricity supply generated in-house
Petrochemical • Expected to be able to pass some of the hike   +

Cement
• Large impact of electricity prices on cost base (~20% of cost)
• Minimal impact on profitability as cement market is local   −
• Significant
Si ifi t iimpactt on costt b
base ((~10%
10% off cost)
t)
  +

Iron and steel • Selling price adjustment unlikely in flat steel given regionalized market
• In the short run, ASP adjustment unlikely, given globalized nature of

Gloves market and current overcapacity
• In
I the
th medium
di run, rising
i i global
l b ld
demandd expectedt d tto supportt rising
i i ASP
   ?

Food and
beverage    −
• Limited impact on cost base should be passed on to end-customers
 : St
Strongly
o gy
Copyright © 2
Malaysia should attempt to mitigate Indonesian subsidies
 : Moderately
Source: Broker's report, Gas Malaysia, BCG analysis

for selected industries, including steel
 : No
Confidential
As a result, scenarios show need for government support,
at least in two key drivers
Extensive support Moderate support Conservative

K d
Key drivers
i scenario
i scenario
i scenario
i
100% local iron ore use 50% local iron ore use Unchanged inbound freight cost
Iron ore • No inbound freight cost, in- • Fall in inbound freight cost and • Sourced from Western
house processing of pellets pellet processing cost Australia
Subsidies match other ASEAN Moderate hike relative to others Cost hike as announced
countries for steel makers • 30 RM/mmBtu in Malaysia • 45 RM/mmBtu in Malaysia
Gas1 • Unchanged
U h d relative
l ti costt off • No
N hik
hike assumed d iin other
th • No
N hik
hike assumedd iin other
th
gas vs. other players countries: 10 RM/mmBtu gap countries: 25 RM/mmBtu gap

Cash cost USD/t 831 Cash cost USD/t 831 Cash cost USD/t 831
719 719 748 761 719 719 748 761 704 719 719 748
761
654 686 654 686 654 686
562 597 597 628 597
471 471 471
Landed cost to

Malaysia2
IND MAL CHI IND CHI TAI KOR JAP JAP KOR IND CHI MAL IND CHI TAI KOR JAP JAP KOR IND CHI IND CHI MAL TAI KOR JAP JAP KOR
BOF BOF BOF EAF EAF BOF BOF EAF BOF EAF BOF BOF BOF EAF EAF BOF BOF EAF BOF EAF BOF BOF EAF EAF BOF BOF BOF EAF BOF EAF
Very competitive Competitive Not competitive
Copyright © 2
Note: Assuming existing export incentives remain in India and China, taking into account only changes in the cost base that have a relative impact on Malaysian cost base versus other players' cost
bases (e.g. evolution of iron ore global prices are ignored as they are assumed to equally impact all players for the purpose of this analysis)
1. Gas prices in other countries are assumed to remain at current levels (e.g. at 45 RM/mmBtu in Japan) 2. Assuming key FTAs are renegotiated to (but not below) 10% or MFN rate falls to 10%
Source: BCG Model, WSD March 2012 database, EIU, TNB
Confidential
Enhance capabilities of the Steel Industry

Confidential
Enhancement of capabilities of Malaysian steel industry
currently facing a gap
Steel Instit. Steel Instit. Steel Instit. Steel Instit. Various

S
Scope
Conduct R&D (incl. research grants &

Techno. tech exchange)
Research
R&D Outsourcing
Industry Competitive benchmarking (incl. demand

Analytics analysis & thought leadership)
Provide insight on the steel industry 1 1
Human (knowledge repository)

capital
Conduct training programs for steel 1 1 1
dvpt
workforce
1
Pro ide technical advisory
Provide ad isor services
ser ices

Support &
Promote consumption for domestic steel
Promotion
Assist coordination and cooperation 1

between industry stakeholders
Legend: Involved Partially involved Not involved
S tti up a St
Setting Steell IInstitute
tit t could
ld h
help
l close
l capability
bilit gap
Copyright © 2
1. Mechanism/ service provided to the steel industry, however by another institution (e.g. association)
Source: Research Institute of Industrial Science and Technology (RIST), Australian Steel Institute, Iron and Steel Institute of Thailand, China Iron & Steel Research Institute Group, China Steel
Association
Confidential
Potential service offering for the Malaysian Steel Institute

Critical success factor to staff Steel Institute with Malaysian and global industry experts
Techno. research Industry analytics
• Conduct research • Conduct

& development competitive
• Issue
I researchh benchmarking
grants • Conduct demand
• Facilitate tech. analysis
exchange • Publish industry
• Provide research thought leadership
outsourcing

Steel
Institute

• Trade surveillance • Conduct training
(dumping & programmes
unfair trade) • Manage a

• Refine mandatory stds knowledge hub/
• Provide technical support to sharing
industry & government • Assist industry
• Promote consumption of recruitment
Copyright © 2
M'sian steel
Support & promotion Human capital development
Confidential
Foreign steel institutes benefit from significant resources

Malaysia already supports institutes for its strategic industries
Foreign Steel Institutes Other Malaysian Institutes/ Boards
South
Australia China Thailand Malaysian Malaysian
Korea
Key Characteristics Palm Oil Rubber Iclif
Board Board
Financial
Industry Steel Steel Steel Steel Palm Oil Rubber
Services
Number of employees 4221 N/A 7,4892 ~50 1451 1265 36
Total funding provided (RM

~1661 N/A N/A N/A ~14003 ~1754 ~8005
millions)
Private & Private &

Source of financing Private Gov't Gov't Gov't Gov't
Gov'tt
Gov Gov'tt
Gov

Private Private
BoD Representation Gov't Led Gov't Led Gov't Led Gov't Led Mixed
Sector Led Sector Led
Level of involvement of the
None Low High High High High High

government
Malaysian Steel Institute should be supported by

Government at the beginning
Copyright © 2
1. Figure based on 2010 data; 2. Figure based upon 2007 data; 3. Total disposable income 2010; 4. Funding allocated for FY2011 5. Amount available in trust 2010 6. South Korea was able to run a
privately funded institute as it is able to successfully commercialise its research (supported by POSCO)
Source: Research Institute of Industrial Science and Technology (RIST), Australian Steel Institute, Iron&Steel Institute of Thailand, China Iron&Steel Research Institute Group, China Steel Association
Confidential
Potential roadmap for the Malaysian steel institute

Service offering would evolve overtime
Ph
Phase 3
3: P t T
Promote Tech.h IInnovation
ti
(5 years)
Phase 2: Create Industry Expertise
(3 years)
Phase 1: Build Internal Capability
(2 years) • Conduct own R&D
• None • Issue research grants • Provide R&D outsourcing services - pilot
Techno.
• Facilitate technology exchange plant for int'l players to test new tech.
Research
• Commercialise tech developed
Industry • Conduct competitive benchmarking • Provide detailed analytics for all segments • Provide detailed demand analysis for

Analytics • Conduct demand analysis (M'sia only) • Conduct demand analysis (ASEAN) individual steel consuming industries
• Publish trend analysis • Publish though leadership
Human • Train steel generalist (basic skills) • Train specialists • Train industry experts

Capital • Attract talent to the steel industry • Provide customised & vocational training • Facilitate secondment programmes
Dvpt • Manage basic info repository • Manage knowledge hub
• Facilitate overseas secondments
• Refine mandatory stds & laboratory • Monitor int'l competitiveness trends • Promote FDI into the steel industry
Support & g
testing • Technical advisoryy for g
gov't & industry
y

Promotion
P ti • Monitor trade – investigate dumping • Promote consumption of Malaysian steel
• Conduct research for gov't & industry
Gvt seed 1
Money ~RM 4-5 Mln3 ~RM 10 Mln5 ~RM 75 Mln6
Employee 2
~20 FTE4 ~40 FTE ~70 FTE
Copyright © 2
Req.
1.Requirements represent seed funding req. for proposed services; 2. Total human capital requirement – full time equivalents; 3. Financial support approved for Steel Institute; 4. Based upon function
requirements Mgt (4), Ind Analytics (3) Human Capital Dev. (8) Alliance Mgt (5); 5. Assumes double of workforce and RM5 mn for research grants; 6. 0.1mt pilot plant built (RM50 mn), land is given,
R&D lab (RM5 mn), org. growth (25%) Researchers is 30% of desired size (20), research grants (RM10 mn) – benefits to be realised from R&D outsourcing services (financial and tech transfer)
Confidential
Enforce trade defenses and trade barriers

Confidential
Enforcement of trade barriers, trade defenses and control of
import process required to guarantee a fair level playing field
Tariff barriers
• Import duties
• Duty exemptions
Non-tariff barriers
• Mandatory
M d t standards
t d d Trade barriers
• Import licenses
• Quotas1

Interactions between Fair Trade
different stakeholders Anti-dumping
Anti dumping

• Importers Countervailing
• SIRIM/CIDB Importation
Trade defence Safeguards
• Customs process
• ...

Copyright © 2
1. Quotas require very careful design to be WTO compliant
Confidential
Tariff barriers: Malaysia with highest HRC import duties (1/2)

Reduction of import duties is conditional on how quick local producers can become competitive
Trade Tariffs for Flat Steel1, % Hot-Rolled Coils

Exporting countries
Australia Brazil China Taiwan India Japan Korea Malaysia Singapore Thailand Vietnam Indonesia
Australia 5.0% 5.0% 0.1% 5.0% 5.0% 0.1% 0.1% 0.0% 0.0% 5.0% 5.0%
Brazil 11.6% 11.6% 11.6% 11.6% 11.6% 11.6% 11.6% 11.6% 11.6% 11.6% 11.6%
China 5.2% 5.2% 5.2% 5.2% 5.2% 5.2% 0.0% 0.0% 0.0% 0.0% 0.0%
Taiwan 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
ntries
India 5 0%
5.0% 5 0%
5.0% 5 0%
5.0% 5 0%
5.0% 5 0%
5.0% 5 0%
5.0% 5 0%
5.0% 5 0%
5.0% 5 0%
5.0% 5 0%
5.0% 5 0%
5.0%
porting coun

Japan 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Korea 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Imp

Malaysia 20.0% 20.0% 20.0% 20.0% 20.0% 18.2-20% 20.0% 0.0% 0.0% 0.0% 0.0%
Singapore 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Thailand 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 0.0% 0.0% 0.0% 0.0%

Vietnam 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Indonesia 5.0% 5.0% 0.0% 5.0% 5.0% 5.0% 5.0% 0.0% 0.0% 0.0% 0.0%
Volumes for HRC from other ASEAN

countries
t i are nott significant
i ifi tddue tto
Copyright © 2
current lack of production capacity
1. Based on Product HS code7208 – Flat-rolled products of iron or non-alloy steel, of a width of 600 mm or more, hot-rolled, not clad, plated or coated
Note: Ad valorem tariff: calculated as a % of the value of goods cleared through customs. For example, 15% ad valorem tariff means; Includes FTA information for ASEAN countries 15% of the value
of the entered merchandise; Source: WTO, Tariff Finder, Press Search, Macmap; Government websites, BCG Analysis (Note: selected non ASEAN countries are using 2007 data)
Confidential
Tariff barriers: Malaysia with highest CRC import duties (2/2)

Reduction of import duties is conditional on how quick local producers can become competitive
Trade Tariffs for Flat Steel1, % Cold-Rolled Coils

Exporting
p g countries
Australia Brazil China Taiwan India Japan Korea Malaysia Singapore Thailand Vietnam Indonesia
Australia 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 0.0% 0.0% 0.0% 5.0% 5.0%
Brazil 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0%
China 4.8% 4.8% 4.0% 3.5% 4.8% 3.5% 0.0% 0.0% 0.0% 0.0% 0.0%
Taiwan 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
porting countries
India 5 0%
5.0% 5 0%
5.0% 5 0%
5.0% 5 0%
5.0% 5 0%
5.0% 5 0%
5.0% 5 0%
5.0% 5 0%
5.0% 5 0%
5.0% 5 0%
5.0% 5 0%
5.0%

Japan 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Korea 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Imp
Malaysia 20.0% 20.0% 20.0% 20.0% 20.0% 18.2-20.0% 20.0% 0.0% 0.0% 0.0% 0.0%
Singapore 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Thailand 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 0.0% 0.0% 0.0% 0.0%

Vietnam 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 0.0% 0.0% 0.0% 0.0%
Indonesia 7.5-10.0% 7.5-10.0% 7.3% 7.5-10.0% 7.0% 7.5-10.0% 7.5-10.0% 0.0% 0.0% 0.0% 0.0%
Volumes for CRC from other ASEAN
countries
t i are nott significant
i ifi tddue tto
Copyright © 2
current lack of production capacity
1. Based on Product HS code7209 – Flat-rolled products of iron or non-alloy steel, of a width of 600 mm or more, hot-rolled, not clad, plated or coated
Note: Ad valorem tariff: calculated as a % of the value of goods cleared through customs. For example, 15% ad valorem tariff means; Includes FTA information for ASEAN countries 15% of the value
of the entered merchandise; Source: WTO, Tariff Finder, Press Search, Macmap; Government websites, BCG Analysis (Note: selected non ASEAN countries are using 2007 data)
Confidential
Tariff barriers: Malaysia is the only ASEAN country with
significant variation of import duty along the value chain
Average import duty weighted by import volumes for top-3 countries (MFN & FTA rates)1
Downstream
HRC CRC Coated Steel Non-Coated Steel
(e.g. Containers)
Malaysia
19.7% 16.0% 16.3% 11.2% 0.0%
Indonesia
5 0%
5.0% 7 1%
7.1% 11 6%
11.6% 9 1%
9.1% 0 0%
0.0%
A rights reserved.
Thailand
2.6% 4.6% 5.7% 6.7% 8.2%

Vietnam
0.0% 6.1% 6.8% 3.2% 11.2%

As downstream products are already at 0% import duty and not likely to
increase (due to FTAs),
FTAs) upstream import tariffs should decrease over time
Copyright © 2
1. Not taking into account duty exemptions
Note: HS Code definitions: HRC – 7208, CRC – 7209, Coated Steel – 7210, Non-coated Steel 7211 & 7212, Downstream 7308, 7309, 7310, 7311.
Source: MIDA, Tariff Finder, UNCOMTRADE, DOSM, Macmap
Confidential
Tariff barriers: Duty exemption process is cumbersome and
requires refinement in governance and transparency
A Duty exemption process B Governance and transparency
Only manufacturers and SSCs5 are eligible Users are not represented in Technical Committee
• Traders are not eligible • Current composition: MITI, MIDA, Customs, HRC
• Import
I t licenses
li are automatically
t ti ll granted
t d and
d producer
d
used for monitoring purposes only
Selected duty exemptions can be granted outside
Qualification assessed by a Technical Committee of JPC3 committee
(provide recommendation only) based on 3 • E.g.
E g MOF has authority to grant duty exemptions
criteria on its own

• Raw material not available domestically1
– Importer has to obtain a non-objection letter Available reporting is partial, aggregated and on a
from domestic manufacturer y
yearly
y basis

• Manufacturing for export • Only exemptions granted by JPC3
• Manufacturing of nil duty finished products • Only one product: HRC
• No breakdown of applications
Decision made by JPC3 committee based on a • No monthly/quarterly analysis

staged formula
f
• First-time application: 50% of application2 "It is "near to impossible" to get duty exemption using this
• Additional application: extrapolated mechanism" / "Duty exemption can always be obtained... if
performance3 less exemption already approved2 MITI rejects it, we can always go to MoF or another gov't
• Renewal of application: past performance4 plus agency
g y to g
get it" – Industryy p
players
y
Copyright © 2
10% increase2
1. Domestic availability in Sabah & Sarawak should be understood as local manufacturing in Sabah & Sarawak 2. Subject to maximum capacity 3. Quantity consumed/Period in monthsx12 4.
Quantity consumed/Period in monthsx12 5. Steel Service Centres
Source: MITI, MIDA, Industry interviews
Confidential
A Duty exemption: Process

Simplification could be accompanied by process tightening
Potential simplification of duty Inward processing:

exemption process 2 methods to tighten duty relief
Raw materials not available domestically: shift Suspension system
from systematic non-objection letter to non- • Importer provides collateral held by govt
objection letter by exception – E.g. bond, insurance
• Define a list of agreed upon (non)feasibilities, • Importer continuously provides adequate
based on international standards and HS documentation1 to prove duty exemptions
codes – Falsification or breach of trade policy leads
• Treat exceptions with non-objection letters to monetization of collateral as a penalty

• Reference list to be updated on a quarterly • Method used in EU for UK &Turkey imports
basis – Not applicable to exemptions for export
manufacturing

Explore possibilities to review calculation
formulas Draw back method
• Avoid multiple submissions across the year • Upfront payment of duty import by importer
• Adequate documentation provided by importer

Overall objective to shorten turnaround time to claim back exempted import duty
– Reviews on a quarterly basis
• Method used in EU for UK &Turkey imports
– Different port for entry/exit allowed,
application needs to mention processing
Copyright © 2
locations
1. E.g. K2 form, packing list, bill of lading
Source: Guidelines for traders for inward processing (Revenue)
Confidential
B
Duty exemption: Governance and transparency
Technical Committee with broader Reporting communicated to government

industry representation agencies
Technical Committee should have a broader Consolidation of all duty exemption granted
representation of industry players • Exemptions granted by all govt agencies to be
• Multiple players currently not represented in communicated to JPC3
Technical Committee
– Cold rollers, galvanizers and coaters, pipe Entire product range covered
makers, steel service centers... • HRC, CRC, galvanized & coated sheets,
• Pragmatic approach to have a maximum of 3-4 pipes...

persons representing the broader industry
– Deep technical expertise as primary driver Breakdown of applications and comparison
– Private sector players to jointly agree on with actual performance

representatives • Monthly/quarterly analysis
All iron&steel duty exemptions should get a

non-binding recommendation from Technical

Committee
Copyright © 2
Confidential
Non-tariff barriers: Breadth and depth of mandatory
standards could be selectively fine-tuned
fine tuned
Mandatory standards cover imports but Moreover, testing for mandatory standards
not domestic production could be enhanced
~87% of imports under mandatory standards Key dimensions1

EU Thai. Ind.2 Mal.
and
a d require
equ e Certificate
Ce t cate oof Approval
pp o a
Illustration for Flat Steel (2011 imports - ktons) Carbon content    
Other components
Chemical
   
alysis
141 1,012 794 649 33
% 100 5% 4% 4% None content for classification
Oth componentt
Other
   
ana
content for environment

50 97% 100% Mandatory
95% 96% 96%
Standards
Coating analysis    
0 3%
   

External soundness 3 4
Slabs HRC CRC Galvanised Coated
Internal soundness
   
Mechanical and
Steel Steel
   
other ttests
Corrosion resistance 5
Domestic production currently not covered by
Yield strength
   

mandatory standards
Tensile strength
"Currently there are plans to implement • Room temperature
   
mandatory standards for domestic production • Other temperature
   
to improve quality of local products " - CIDB Hardness assessment    
Copyright © 2
1. The list displays key dimensions assessed by the European Union for iron and steel products, testing methods vary depending on the iron and steel products being evaluated, moreover, not all
dimensions are assessed for all products 2. Standards are mandatory for commercial steel only, where local production is considered competitive, advanced standards for high value added steel are
voluntary as of now 3. Auditors to check producer's quality management system, production capabilities and perform visual check of products 4. Visual check of 10% sample, no external analysis
beyond visual control 5. Visual check only
Source: MITI, SIRIM, CIDB, DOSM, CEN=ECISS (EU), ISIT (Thailand), BSN – SISNI (Indonesia), Expert Interviews, BCG Analysis
Confidential
Trade defences: Need for a joint private-Government effort
to implement anti
anti-dumping
dumping measures for steel
Malaysia has yet to employ trade Need for a joint effort between private
defenses to protect its steel industry sector and government agencies
Countervailing measures2 for steel products1 Currently steel players complaining about lack of
Nb government support...
60 "Th anti-dumping
"The ti d i process iis complex
l with
ith ttemplates
l t and d
Measures
lack government assistance" / "Thailand and Vietnam
40
have already taken measures in response to Chinese
56
20
boron steel exports... Malaysia has yet to do something"
17
– Industryy p
players
y
0 5 3 0

...other industries suggest there are best practices to
USA EU S. Africa Australia Malaysia be leveraged in Malaysia
Nb Anti-dumping measures for steel products1 Nb Malaysian anti-dumping measures

30 30
Initiated Initiated
20 Measures 20 Measures
30 27
23 26
10 21 10
13

8 7 6 6
0 3 2 2 0 0 0 3 2 2 2 1
Thailand Indonesia Philippines Singapore Malaysia Paper Plastics, Chemicals Vehicles Stones,
rubber glass
Government could support by establishing the Steel Institute
Copyright © 2
(industry analytics) and providing legal trade assistance
1. The data represents cumulative trade defenses employed for basic metals which includes, but not limited to steel products 2. Currently no ASEAN country has yet implemented countervailing
measures, but investigations have been initiated by Indonesia and Thailand on boron steel coming from China
Source: WTO (1995-2011); industry interviews
Confidential
Trade defences: Anti-dumping measures implemented by
Malaysia
Illustrations for paper and plastics industries
Industry Countries Impacted by AD Measures Anti-Dumping Duty Year Initiated
Japan 5-19% 1999
Indonesia 3-14% 2002

Paper

South Korea ~43% 2008
United States ~39% 2008

Philippines ~32% 2008
Canada ~34% 2008

Plastics,
rubber
Thailand 5-49% 2006
Copyright © 2
Note: The paper and plastics industry contributes 2.2% & 4.2% respectively to the Malaysian economy
Source: DOSM, MITI
Confidential
Importation process: ~90% of HRC and CRC imports
entering Malaysia with duty exemption or through LMWs
(kTA)
HRC1 and CRC2 imports entering Malaysia (K1 forms)
1500
1047
1000 961
13%
848 860 11% 849
8%
8% 11%
10% 681 5%

4%
3%
500 Other
79%

79% LMW iimportt
83% 81% 80%
91% Import with exemption

HRC CRC HRC CRC HRC CRC
2009 2010 2011
Copyright © 2
1. HS code 7208 2. HS code 7209
Source: Customs data
Confidential
Importation process: Industry players identify several
opportunities to improve control
• Consignment checks are not thorough in terms of
container coverage and product inspection
2 Consignment Check • Samples
p are not p
picked up
p at p
ports or are not checked
&OObtain SSamples against the load imported
• Imports enter M'sia for Testing
without inspection
• Falsified Tariff Payment
y
documentation - 0% 5
& Consignment
tariff when duties
should be applied Enters M'sia
A rights reserved.
1 Consignment Arrives at Royal Malaysian
Port & Document Check Customs • Consignments enter Malaysia
even without a COA

• Consignment unduly enter
Malaysia from LMW1

• Tests carried out are
not robust enough; 3 4 Issue COA
e.g if imports fail tests
– importers resubmit
a new sample Laboratory
Copyright © 2
Testing & Verify
Report
1. Licensed manufacturing warehouse
Source: SIRIM QAS, Industry Interviews
Confidential
Importation process: Potential actions to close loopholes
Q i k wins
Quick i L
Long-term
t actions
ti
Improved training for custom officers Current/ future enhancement of Customs IT
• Knowledge of steel products2 and common systems
falsification tactics • Data-mining
Data mining of custom
c stom data
Increased frequency of physical checks Conversion of all approval documents1 to

• Review guidelines from "risk management electronic
unit" to open more containers and conduct • To be validated by all agencies
sampling3

Post-importation checks to verify usage
Formalized auditing of foreign steel mills
• Importers need to provide an certificate issued

by an independent 3rd party

Copyright © 2
1. Approval documents include certificate of approvals, importation and exportation documents, proof of payment of tariffs; 2. To be conducted by an independent 3rd party; 3.Enforcement includes
Customs and SIRIM
Confidential Backup
Marginal volumes of HRC and CRC transiting from East
Malaysia to Sabah & Sarawak
(kTA)
Movements from Sabah & Sarawak to Peninsula
20
10

8.4

1.6 HRC1
0.9 0.6 0.5
0.0 CRC2
0

2009 2010 2011
Copyright © 2
1. HS code 7208 2. HS code 7209
Source: Customs data
Confidential
Agenda



Implementation plan
Copyright © 2
Confidential
Executive summary
Implementation plan
The report
p recommendations are translated into an implementation
p plan
p made of two main sections and
five initiatives
• Section 1: Megasteel solutioning, focuses on the "Shared responsibility" option, the most complex to
implement
– If another option is decided by the Economic Council
Council, Section 1 is not applicable
• Section 2: Support to the wider steel industry, which is split in four distinct initiatives
– Provide advantaged access to select inputs
– Enhance capabilities of the steel industry - e.g. Steel Institute
– Enforce trade barriers and importation processes

– Implement trade defenses
Effective
Eff i governance will ill require
i clear
l lleadership
d hi and d allocation
ll i off resources to coordinate di the
h project
j

• Implementation steering committee to be a subset of the MITI management committee
• Temporary dedicated PMO team to provide support and coordination for the duration of the project
• Initiative leaders to allocate 20% of their time to driving their initiative for the duration of the project

A detailed roadmap has been developed to spread the workload over time
• Implementation milestones spread over time, with Megasteel prioritized in 2012, other initiatives from 2013
Copyright © 2
• Immediate next steps to be taken by PMO staff following the EC approval to comply with project objectives
• Charters and roadmaps for each initiative will provide guidance to project members
Confidential
In summary, two main recommendations to enhance
competitiveness of the overall steel industry in Malaysia
Main initiatives Details
1.0 Proceed with Megasteel
g exit No change
g to industry
yppolicy
y
olutioning1
Megasteel
Change in government policy on flat steel Tighten duty exemptions granted by JPC3
to be implemented for 24 – 36 months only Stricter enforcement of duty exemptions process
1.1
M
so
Implement conditions on Megasteel to Lower domestic HRC price: Keep Megasteel prices within an agreed
demand turnaround within 24 – 36 months range (5-10% of benchmark imports)
1
Re-structuring under CDRC, global expertise, monitoring turnaround
2.1 Provide advantaged access to select inputs

• Export duty for iron ore (e
(e.g.
g 5%) Set export duties to favor domestic use of local iron ore
• Support of iron ore processing capabilities Support beneficiation and pelletisation plant development

and rationalisation of mining industry Have consistent and planned allocation of licenses for mining
pport
• Gas price monitoring Be aware and avoid significant gas price gap with regional neighbors
Enhance capabilities of the overall industry Mechanism to close critical gaps within the industry: especially
especially,
ndustry sup

22
2.2
(esp., with set up of Steel Institute) immediate focus on standards and importation process
2.3 Enforce standards and importation process

• Continual reduction of import duties Flat upstream plans for duty reduction as agreed in 2009
• Tightening
Ti ht i process and d governance ffor d
duty
t St
Streamline
li process, communicatei t criteria,
it i broaden
b d committeeitt
Steel in

exemptions representation
• Mandatory standards enhancement Fine-tune breadth and depth of mandatory standards for testing
• Importation process enhancement Cross-agency coordination, close loopholes, post-import checks
2
24
2.4 Implement trade remedies Joint Private sector/Government effort to leverage best practices from
Copyright © 2
other industries in Malaysia
1. Recommendation 1.0 corresponds to "Sudden exit" and "Controlled exit" options. Recommendation 1.1 corresponds to "Shared responsibility option"
Confidential
Recommendations translate into 2 sections and 5 initiatives
with clear views on objectives and deliverables
"Controlled exit" options not detailed in the implementation plan
Initiatives Key objectives Key deliverables Resp.

1
Coordinate resolution of Megasteel issue • Duty exemption restrictions MITI –
in line with EC option
p selection with all key
y • Megasteel domestic price Bahagian
g
Megasteel stakeholders and follow-up on controll Dasar
solutioning implementation • Megasteel turnaround conditions Sektoral II
• Megasteel competitiveness
(price-quality-delivery) in 2015
2 21
2.1 MITI –
Support steel industry competitiveness by • Data and policies allowing
Access to significant / long term use of Bahagian

improving access to key inputs at
key inputs domestic iron ore Dasar Sektoral
competitive cost
II
2.2
Steel Coordinate / facilitate the creation of an • Launching g Steel Institute incl. MITI

independent entity to enhance the overall key services (training, industry +
industry competitiveness of the Malaysian steel analytics, industry promotion,
Steel capabilities MISIF-MSA
industry and R&D development)
industry 2.3
• Enhanced mandatory MITI –
support Trade barriers Improve trade barriers including tariff and standards and testing Bahagian
non-tariff
non tariff barriers as well as import

and import
process processes to better support the steel industry • Enhanced customs process Dasar Sektoral
II
2.4
Improve usage and effectiveness of trade • Increase in the number of MITI – Trade
Trade defense mechanisms to g
guarantee a fair antidumping
p gp petitions Practices
defenses
Copyright © 2
level playing field Section

Confidential
Effective governance will require clear leadership and the
allocation of resources to coordinate the project
Members' Meeting
g
Organization chart Role profile frequency
Make key KSU / TKSUI

Monthly in H2'12
Sub-set of MITI management committee decisions, remove Initiative leaders
Quarterly
y onwards
roadblocks PMO manager
MITI – Bahagian Continuous

MITI Coordinate
BDSII- PMO team Dasar Sektoral II • 2-3 full time
project
TBD mgt.
g FTEs

Drive Team lead
MITI MITI MITI MITI implementation
MITI TP -
BDSII - BDSII - BDSII - BDSII/Customs for one initiative

TBD Two meetings
TBD TBD TBD -TBD
Report status and Senior per month
1 2.1 2.2 2.3 Trade 2.4 key issues to management
Steel steering /officers from
Megasteel Access to barriers and Trade
industry
committee
itt all
ll key
k

solutioning key inputs import defenses
capabilities
process stakeholders
as part of
initiative team
:Person designated ((e.g.,
g MIDA,
to lead the team
Copyright © 2
Customs,
SIRIM)
Source: BCG experience
Confidential
Temporary roles required to drive and coordinate the
implementation project
Initiative leaders PMO team
Director / Assistant Director level (Sector Assistant Director to head PMO team
head or deputy) • Manager role required
Profile • Significant experience at MITI or other At least one other team member with prior
federal agencies steel experience
• Some experience with the steel industry
Project management skills Functional skills

• Leadership, negotiation and presentation skills • Planning skills
• Strong execution skills • Proactive coordination / Good communication
Skills • Ability to multitask and prioritize • Willingness to challenge constructively
Industry skills • Strong analytical skills

• Ability to navigate the industry Industry skills
• Good understanding of industry environment
20% of a full
full-time
time workload initially Initially 3 full
full-time
time equivalent resources

• About 1 day per week dedicated to the • Full team to prepare initiatives, support
Workload initiative steering committee and initiatives and
Gradual ramp down in 2014 and 2015 provide transversal support (e.g.
over time
• Initiative to close in mid-2015 communication)
Grad al ramp do
Gradual downn from 2013
Copyright © 2
• One person in 2014-2015

Confidential
Backup
The PMO team takes on 4 key roles for the implementation
Prepare Support to steering Support to initiative Cross-initiative

implementation committee teams support
• Prepare • Prepare and • Challenge initiative • Manage internal and
implementation coordinate steering team output / external
setup (e.g. finalize committee meetings recommendations communication of
charters with specific • Provide regular weekly in preparation the implementation
members and process updates
p p to of committee project
p j
detailed roadmaps) steering committee • Ensure initiative • Ensure overall

• Brief initiative members (e.g. progress in line with consistency of
members on weekly update) roadmap project and manage
background and • Facilitate interactions internal and external

objectives with relevant interdependencies
• Provide initiative stakeholders
members with • Perform selected

implementation tools research and
analysis
Copyright © 2
Confidential
Implementation milestones are spread over time with
Megasteel in H22012 and other initiatives in 2013
"Controlled exit" options not detailed in the implementation plan 2012 2013 2014 2015
Recommended initiatives to be implemented Resp

Resp. H1 H2 H1 H2 H1 H2 H1 H2
Set up
exemption
solutioning
1.1
• Provide government support MITI
eel
restrictions
Megaste
Positive Remove
EBITDA exemption
restrictions
2-3 years period to

1.2
• Implement conditions to Megasteel allow for Megasteel MITI-
turnaroundd Megasteel Bring in Financial Remove
global deadline conditions

expertise
port

2.1 MITI
Policy Draft Iron ore
dustry supp
roll-out survey report

2.2
• Enhance capabilities of the Steel Industry (e.g. Steel MITI +
Launch
Institute) MISIF-MSA
2•3 Enforce trade barriers and importation process

2.3 MITI
Steel ind

Policy Commence process
roll-out and mandatory
standard roll-out
• Implement trade defenses
2.4 MITI – Trade Process
Practices roll-out
Copyright © 2
Confidential
Immediate next steps
Communication p
plan including g implementation
p approach
pp
• Announcement to key stakeholders (Megasteel, MISIF, MSA, Financial sector, etc.)
• Announcement to the press and other stakeholders
Prepare implementation phase

• Prepare on-boarding of key stakeholders (documentation, meetings, etc.)
Broker detailed agreements with key stakeholders

• E.g. Megasteel restructuring (if "Shared responsibility" option is decided)

Prepare decrees / regulatory changes
• Draft amendments / documentation

Copyright © 2
Confidential
Overall roadmap to enhance the competitiveness of the Iron
and Steel industry in Malaysia
: Milestone
: Potential milestones (options 3&4)
x : Activities H2 2012 2013 2014 2015
x : Potential activities (options 3&4) May Jun Jul Aug Sep Oct Nov Dec
1 EC option Commu- Plan approved

selection nicate Follow-up on stakeholder commitments
and commenced
Megasteel Agree/Com-
mit on p
plan Restrict duty
y exemptions
p Follow-up
p on implementation
p
Remove
policy
solutioning changes
Setup
(Megasteel exit options price Price revisions
ready
Revised Megasteel prices Finalize all
projects
revisions Positive EBITDA
not detailed in the Turnaround
planning Restructuring operations, corporate restructuring Monitoring
implementation plan) Turnaround
Turnaround pplan ready
y
Quick wins plan ready
(quality,

delivery)
Draft final
2 2.1 Com. survey report
Access to key

EC option Agree on plan with stakeholders Iron ore survey
inputs selection
Roll out policies Follow-up on impact and fine tune
2.2 Com. Launch
Steel industry
EC option Refine setup and prepare launch Build internal capabilities
Steel capabilities selection
l ti

Develop industry capabilities and promote sector
industry 2.3 Support technological innovation
support Trade barriers Com.
Remove trade
and import EC option Exemption process policy changes
process selection Improve customs process
24
2.4
Copyright © 2
Extend mandatory standards/testing
Com.
Trade defenses EC option Identify roadblocks and KSF
selection
Drive roll-out
Source: BCG project and analysis
1 Confidential Note: Recommendation 1.0 corresponding to "Sudden exit" and
Megasteel solutioning – Shared responsibility option

Initiative charter
Team In-scope Out of scope

O
Organization
i ti Position
P iti R l
Role • Megasteel solutioning in • Wider steel industry
MITI-Sec Policy II TBD Initiative leader the short and medium run • Long run performance of
EPU TBD Initiative member
BNM-CDRC, Banks TBD Initiative member Megasteel
Customs, MIDA, MOF TBD Initiative member
Objectives Risks and issues to be tackled

• Based on EC option selection
selection, define specific plan and • Ensure fast and effective implementation of industrial and
requirements from each stakeholder (gov., banks, industry) trade policy changes approved

• Obtain formal approval and commitment from all key • Ensure Megasteel profitability and financials become
stakeholders on plan sustainable as opposed to temporary alignment to KPIs
• Ensure implementation of key steps for solutioning • Ensure long term improvement projects take place in a
– Provide
P id governmentt supportt (reduce
( d d
dutyt exemptions
ti ti l manner (3 years lilimit)
timely it)

granted by JPC3) • Retain attractiveness for foreign investors despite policy
– Implement conditions on Megasteel (control Megasteel changes
domestic prices, loans under CDRC, global expertise, • Ensure stakeholders' comply with their commitments
monitoring
g turnaround pplans))

• Perform independent follow-up of progress to 2015
Key interdependencies Key KPIs

• Impacted by Trade Barriers in charge of implementing • Megasteel EBITDA • Megasteel equity/debt ratio
Copyright © 2
exemption customs process improvement and Key Inputs for – Utilization rate • HRC price, quality and
the pelletizing plant and Steel Ind. Capabilities on expertise – Cost per tonne delivery time
Source: BCG project, MITI interviews

1 Confidential Note: Recommendation 1.0 corresponding to "Sudden exit" and
Megasteel solutioning – Shared responsibility option

Detailed roadmap
A ti it
Activity 2012 2013 2014 2015
Launch initiative
Agree on plan Follow-up on stakeholders commitments
and obtain
commitment
Provide government support
Restrict duty Follow-up on implementation Remove
exemptions exemption restrictions
Implement conditions on Megasteel

Set up Megasteel Bring global expertise and monitor turnaround plan Finalization
domestic price control including BF, gas and pelletizing projects of large
projects
PMO coordination

Communicate Continuous coordination and support to initiative
and on-board
members
Key milestones

EC Positive New restructuring Close
committee EBITDA deadline initiative
(Q1 2013)
Copyright © 2
2.1 Confidential
Access to key inputs

Initiative charter

Organization Position Role • Local iron ore reserves • Gas pricing discussions
MITI-Sec Policy II TBD Initiative leader and mining covered by MIDA and
NRE TBD Initiative member steel industry lobbying
Malaysian States TBD Initiative member • Other inputs notably
JMG TBD Initiative member
scrap and coking coal

• Support steel industry competitiveness by improving access • Coordinate between Federal and State level regarding iron
to iron ore at competitive cost ore reserves and issuance of licenses

– Launch extensive survey of Peninsular Malaysia iron ore • Manage ramp down of iron ore exports to China and
reserves including location, size, quality and economic potential conflict of interest
viability of deposits • Ensure mining industry is sustainable by guaranteeing long
– Enact and ensure enforcement of iron ore import term strategy

substitution policies incentivizing development of iron
ore processing capabilities, local usage of domestic iron
ore and mining industry rationalization

Copyright © 2
• Impact on Megasteel solutioning as pelletizing plant comes • Share of local iron ore usage in domestic steel production
online

2.1 Confidential
Access to key inputs

Detailed roadmap
A ti it
Activity 2012 2013 2014 2015
Iron ore survey

Agree on approach Monitor survey
Iron ore policy

Agree on Prepare and refine Follow up on impact and fine tune policies
Follow-up
policy changes policies

PMO coordination
Communicate On-board Continuous coordination and support to initiative

stakeholders
Key milestones

EC Obtain approval Iron ore policy Draft final Complete
committee on detail proposal roll-out survey report initiative
Copyright © 2
2.2 Confidential
Steel industry capabilities

Initiative charter

Organization Position Role • Development of • Regular trade association
MITI-Sec Policy II TBD Initiative leader independent initiatives to activities and government
MISIF-MSA
MISIF MSA TBD End-user
End user de elop Malaysian
develop Mala sian steel polic making
policy
MIDA TBD Initiative member industry capabilities • Regional initiatives
MOF TBD Initiative member
EPU TBD Initiative member

• Coordinate and facilitate the creation of an independent • Ensure coordination between MITI / pubic sector and MISIF-
Steel Institute in charge of enhancing the overall MSA and other expert institutes to prevent rework and
competitiveness of the Malaysian steel industry across the redundancies

entire value chain including • Leverage existing expertise and resources
– Industry analytics incl. analysis of industry economics • Ensure compliance with key success factors to ensure long
– Domestic steel industry support and promotion (incl. term sustainability and impact (independence, expertise,
standards and testing support) financing, government support, strategic partnerships,
– Human capitalp development
p ((e.g.
g training)
g) financial governance)

– R&D development (tech., process, etc.)

• Potentially supportive of Megasteel solutioning
solutioning, Trade • Seed fund awarded • # experts hired
Copyright © 2
Defenses and Trade Barriers and import process • Steel institute launched • # workers trained
• Share private funding • Width and usage of data
• Potential overlaps with MISIF-MSA initiatives • # of key activities launched
2.2 Confidential
Steel Industry Capabilities

Detailed roadmap
A ti it
Activity 2012 2013 2014 2015
Team build-up
Setup Appoint Appoint Develop local and Team build-up
Committee CEO N-1/N-2 international partnerships
Industry analytics
Build business Publish Gradually expand data and
information database initial reports analyses coverage
Human capital development
Prepare trainings Launch key Gradually increase sophistication of trainings
Identify contributors services
Industry support and development

Refine mandatory Develop testing standards
standards and capabilities
R&D development
Facilitate research Develop own research

PMO coordination
Communication On-boarding Prepare detailed mission On-going coordination and support to initiative
of stakeholders and fast track approval
process
Key milestones

EC Launch Start initial
committee Steel institute operations
with seed funding
Copyright © 2
2.3 Confidential
Trade barriers and import process

Initiative charter

Organization Position Role • Tariff and non-tariff barriers • Trade defenses incl. anti-
MITI-Sec Policy II TBD Initiative co-leader incl. import duties, duty dumping, countervailing ,
Customs TBD Initiative co-leader exemptions, mandatory safeguards
MOF TBD Jurisdiction standards, testing, import • Policies specifically for
MIDA TBD Implementation
p licenses and qquotas
SIRIM TBD Implementation • Importation processes Megasteel tturnaround
rnaro nd

• Improve trade barriers including tariff and non
non-tariff
tariff barriers • Ensure active involvement and alignment of all relevant
– Streamline duty exemption process to reduce burden on stakeholders

the industry and the government • Ensure decision making translates into workable
– Enhance duty exemption process governance and processes
transparency

– Strengthen mandatory standards/Stricter testing process
• Improve customs import control processes to better support
the steel industry

• Mandatory standards strengthening needs Steel Institute • Import volumes • Range of tests performed
Copyright © 2
• Exemption and customs processes support implementation • Exemption volumes vs. peers
of Megasteel turnaround
2.3 Confidential
Trade barriers and import process

Detailed roadmap
A ti it
Activity 2012 2013 2014 2015
Duty exemptions
Simplify duty exemption Follow-up and fine-tune
process / Improve
I governance duty
d t exemption
ti processes
Customs processes
Identification of Detailed Oversee Follow-up and fine-tune
detailed weaknesses recommendations implementation process
M d t
Mandatory standards
t d d
Update mandatory standards policy

and testing requirements in line with
Steel Institute recommendations
PMO coordination
Communicate On board
On-board Continuous coordination and support to initiative

stakeholders
Key milestones
EC Commence trade Implement Approve customs Finalize mandatory

committee policy changes streamlined process improvements standards and customs
exemption process process changes
Copyright © 2
2.4 Confidential
Trade defenses
Initiative charter
Organization Position Role • Trade defenses including • Tariff barriers and non-tariff
TBD Initiative leader anti-dumping, barriers incl. import duties,
MITI-Trade Practice
TBD Initiati e member
Initiative co nter ailing and
countervailing duty exemptions
exemptions,
MITI trade mandatory standards,
agreements- TBD safeguards
import licenses and quotas
MISIF TBD Initiative member • Importation processes

• Identify roadblocks and key success factors for the Malaysian • Ensure not initiative produces facilitating tools rather than
steel industry to better leverage trade defenses based on additional burden and processes for steel players
other industryy best practices
p • Develop p aligned
g understanding
g of role and impact
p of

• Drive the development of the appropriate environment for different trade defense measures amongst all key
trade defense usage by steel players stakeholders

• Steel Industry Capability to contribute upon request • •Number
TBD of antidumping petitions
Copyright © 2
• Potential support to Megasteel solutioning (e.g. countervailing • Share of imports due to unfair practices
duties on Boron steel from China)
2.4 Confidential
Trade defenses
Detailed roadmap
A ti it
Activity 2012 2013 2014 2015
Best practices
Identify best practices Prepare report
Drive roll-out
Align
g with stakeholders Drive roll-out of recommendations Follow-up
p on
on recommendations implementation

PMO coordination
Communicate On-board Continuous coordination and support to initiative

stakeholders
Key milestones

EC Approval Finalize
committee of recommendations transformation
Copyright © 2

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Study on Enhancing the Competitiveness of

the Iron and Steel Industry in Malaysia

Kuala Lumpur, May 2012

Study context and objectives

All rights reserved.

onsulting Group, Inc. A

2012 by The Boston Co

Iron and Steel industry study was conducted over 9 weeks

Phase III : "How do we

All rights reserved.

onsulting Group, Inc. A

2012 by The Boston Co

Additionally, interviews held with 30+ stakeholders

Government agencies Local steel players

All rights reserved.

onsulting Group, Inc. A

All rights reserved.

onsulting Group, Inc. A

2012 by The Boston Co

240682-86-Iron and Steel industry-Final report-29May12-vf.pptx 4

Steel industry provides key inputs for the overall economy

All rights reserved.

onsulting Group, Inc. A

Note: Simplified overview of steel industry

Domestic long steel industry important to the economy

Very few countries worldwide without

92% have domestic long steel

76% 13% 8% 84% 7% 5%

All rights reserved.

onsulting Group, Inc. A

• No high-income country (other than • Rapidly industrializing countries have high

2012 by The Boston Co

>90% high-income Focusing only on downstream

Domestic flat steel production

All rights reserved.

onsulting Group, Inc. A

2012 by The Boston Co

Steel demand in ASEAN1 growing ~5%

Malaysia steel demand is the 4th largest in ASEAN1 and

ASEAN finished steel products consumption per country

(MTA) CAGR CAGR

All rights reserved.

onsulting Group, Inc. A

2012 by The Boston Co

In MTA (2010) In MTA (2010)

Net imports: ~18.3 MTA

All rights reserved.

onsulting Group, Inc. A

Domestic production Apparent consumption Domestic p production Apparent

2012 by The Boston Co

Thailand Vietnam Indonesia Malaysia Phillipines Singapore

Steel industry currently contributes ~90% of the steel industry's ~150k

Spillovers 1.8% 1.8%

All rights reserved.

onsulting Group, Inc. A

2012 by The Boston Co

A fully developed steel industry could contribute ~6.5%1 to

Long industry already liberalised and competitive

Domestic prices 5-10%

All rights reserved.

onsulting Group, Inc. A

2012 by The Boston Co

Flat industry, however, faces structural challenges