Successful strategies volatile markets - effective operating - - PowerPoint PPT Presentation

Successful strategies volatile markets - effective

• perating models and high
• perational efficiencies

Perfect Storm

February 19, 2015 VIEWPOINT

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PwC and Strategy& are creating a new kind of consulting business that delivers extraordinary client impact

Scale, quality prominence, and deep relationships, skills, and insight Global strategy model, leading foresight, capabilities positioning

Our Vision

The pre-eminent strategy through execution firm that delivers superior value, offers premium talent, and is differentiated by its ability to help clients build their own capabilities

• n a global scale.

Feb, 2015 Confidential Property 1

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Combined capabilities offer broader, deeper value to our clients

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Consulting services Industry practices

Strategy OPS HR IT Financial Communications & media Financial services Consumer goods Energy Healthcare Manufacturing Public sector Retail Utilities

Consulting services Industry practices

Strategy OPS HR IT Financial Communications & media Financial services Consumer goods Energy Healthcare Manufacturing Public sector Retail Utilities

Consulting services Industry practices

Strategy OPS HR IT Financial Communications & media Financial services Consumer goods Energy Healthcare Manufacturing Public sector Retail Utilities Forensics Assurance Deals Tax

None Outstanding Strong Moderate Limited

Source: Kennedy Consulting & Research Advisory Feb, 2015 Confidential Property 2

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Trends such as high volatility, customer integration & product commoditization have impact on metals companies

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• Uncertain raw material prices and availabilities
• Changing industry structures
• Complex regulatory and legal environment (e.g. carbon emissions)
• Shifting public involvement (e.g. Chinese government)

Industry trends

• Increasing degree of production outsourcing
• Intensive rate of application development usage
• Close supply chain management integration
• Increased need for price stability
• Higher stability in production and quality processes
• Available in know how in process technology
• Increasing customers driven standardization of steel grades

Manage volatility Integrate with customers process Recognize product commoditization

1 2 3

Feb, 2015 Confidential Property

METALS & MINNING INDUSTRY TRENDS

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Cor Core

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To benefit from these trends, all business model transformations need to be based on coherent capabilities

Strategy& “Capabilities-driven strategy“: Growth priorities

Source: Strategy& analysis

Growth of core capabilities

• Increase sales with existing

customers

• Gain new customers in the same

market segment Multiplication

• f capabilities
• Develop in new, complementary in

product and service areas by using existing and available capabilities Transfer of capabilities

• Transfer and shift of capabilities in

new geographies and market segments Development

• f new

capabilities

• In case of fundamental change of

success factors for the company : adaptation of skills

• If additional skills are required:

targeted close by acquisitions … only in isolated cases …

Confidential Property

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For example, ArcelorMittal’s capabilities are centred around a coherent “core” to differentiate from competition

Common capabilities of ArcelorMittal (“core“) METALS & MINING EXAMPLE

Coherent capabilities of ArcelorMittal

• Tailored balance of global and local:

Integration and balance of global (e.g. mining) and local business (e.g. distribution) across entire value chain with strong local execution

• High customer proximity: Flexible
• rientation on the needs, requirements

and geographical location of customers

• Continuous product and process
• ptimization: Technical improvements

leveraging and impacting the network

• Global consistency: Reliability and

dependability in the application of quality standards for products and processes

Source: Strategy& analysis Confidential Property

Expansion of global and low cash raw material access New frontiers in process excellence for entire network Quality and solutions focus

• n products and customers

Customer proximity and distribution service excellence

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• Stronger corporate core with close controlling and integration (e.g. procurement and sales processes price/margin

setting)

• Significant development of commercial capabilities (e.g. controlling & supply chain management)

“Steel companies will need to adapt a ‘transformation’ business model which floats on top of current price

• fluctuations. The only model of continuous efficiency optimization is outdated.” (EVP, Steel Company)

Steel business model

Steel marketing and sales Steel supply chain management and

• perations

Steel procurement

• Strategic sourcing excellence
• Financial hedging as an emerging
• ption for some steel companies
• Selective inventory build up if credit

facilities allows

• Close monitoring of market

indicators

“We have not considered financial hedging as option. If we see

• pportunities, we employ selective

forward buying” (CEO Steel Company)

• Increase in operational flexibility for

blast furnace and steel plant

• Continuous focus on optimization
• f charge by raw iron production

and procurement

• Allocation of free capacity to

accommodate different operating mode

“The need for operational flexibility in blast furnaces requires reduced utilization.” (EVP, Steel Company)

• Initiation of value based pricing
• Closer customer integration in

supply chain processes

• Discontinuation of price formulas

“Steel provides more ‘green’ value to many products that its price reflects” (EVP, Steel Company) “Supply chain excellence provides added value and lock-in” (EVP Sales, Steel Company)

Only coherent capabilities provide the foundation for the successful transformation of metals business models

Feb, 2015 Confidential Property

STEEL INDUSTRY TRENDS

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Metals industry trends also require adaptations in

• rganizational operating models and core processes

Operating Models: Requirements for Steel

Management of volatility Customer integration Recognition of steel commoditization Shared Services Strategic Guidance Results/ Accountability Corporate Policy Service Business Units

• Execution of market

strategies

• Resources optimization

in personnel, Energy and CAPEX

• Continuous process

efficiency optimization

• Development and

standardization

• f administrative

and support resources Corporate Core: Holding Leader- ship Functions Service (SLAs) Request

• Supply chain management integration from “Iron ore”

to steel service centers

• Strategy and guidelines on production and

maintenance optimization from raw iron to cold rolling

• Guidelines on strategy development processes KPI

+ +

Main Challenges

Feb, 2015 Confidential Property 7

STEEL INDUSTRY TRENDS

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Revenue by segments, USD mln, 2013 Market positioning

Integrating a significant local mining base, Russian metall- urgical companies have successfully focused on exports

7 323 15% 28% 1% 30% 26% 8 190 4% 96% 8 575 32% 6% 52% 10% 10 909 3% 9% 88% 0% 13 312 11% 9% 80% 14 775 6% 15% 75% 4%

Other Steel less mining internal Mining internal Mining external

• #1 Russian beams and

rails producer

• Most diversities product

mix

• #1 producer of flat polymer-

coated products

• #1 Russian coking coal

and producer

• Focus on hot-rolled flat

products (63% of sales)

• #1 Russian iron ore

producer

% of interna- tional sales 57 55

60 32* 16 55

*- For steel products as they have the biggest proportion of sales Source: Annual reports; PwC analysis 8

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Revenue, USD bn, Q1’13-Q2’14 EBITDA margin, %, Q1’13-Q3’14

Despite declining revenues, companies have been able to improve EBITDA margin and have consequently …

16% 16% 12% 12% Q1’14 14,4 24% 18% 20% 21% 12% 13% Q4’13 14,9

• 3,1%

14,1 Q2’14 14% 13% 20% 14% 12% 24% 24% 17% 13% 23% 13% 12% Q3’13 15,2 23% 18% 12% 21% 14% 12% Q2’13 16,2 23% 17% 13% 21% 14% 12% Q1’13 16,5 22% 17%

Metalloinvest Mechel NLMK MMK Severstal Evraz

CAGR, Q1’13- Q2’14, %

• 2

+4 +2

• 3
• 2

5 10 15 20 25 30 35

Q1’13 Q3’14 Q2’14 Q1’14 Q4’13 Q3’13 Q2’13

Metalloinvest MMK Mechel NLMK Severstal Evraz 9

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… focused on operational efficiency and sustainable development as main strategic priorities.

Strategic priorities

Operational efficiencies throughou t the business Maintaining good progress achieved in self-sufficiency Leadership in

• perational efficiency

Introduction of new technologies to maintain low costs production Being to enhance the company’s efficiency, not its size Health, safety and environment Sustainable development Leadership in sustainability and safety Workforce, social & environment development Healthy & sustainable business Growth of the business Emphasized direct exposure to niche segments Leading positions in strategic markets Market penetration Generation of positive free cash flow Achieving quality balance sheet Generation of positive free cash flow World-class resource base Effective development

• f the iron ore base

Market position consolidation in the high added-value products

Operational efficiency Sustainable development Leading position in strategic market Capital projects efficiency Resource base development Higher value-added products

Also companies are following the strategic priorities/goals: Human capital, Maximum commercialization of newly launched facilities, Introduction of world-class standards of corporate governance

Note: Mechel company is not included due to specific strategic goals that are not comparable Source: Annual reports; PwC analysis Year of publishing: Evraz – Annual Report 2013, MMK – Annual Report 2013 and Investor presentation 2014, NLMK – Annual Report 2013, Metalloinvest - Annual Report 2013, Severstal - Annual Report 2013 10

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In our view, the sustainable agenda for Russian Mining and Metals companies needs to be reinforced now

Confidential Property

Russian Mining and Metals companies: Agenda for the future Russian Mining and Metals companies

• “left side of

industry cost curve” due recent RUB devaluation

• continue to boost

their efficiency

• build competitive

advantage and differentiate from competition as devaluation effect will not last forever

Capital efficiency Labor efficiency / cost optimization

February 24, 2015 Source: Strategy&

High quality production and customer service High quality and reliable raw materials access

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CAPEX projects face significant challenges to fulfil budget and performance expectations

Capital efficiency

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Overview Current Challenges for CAPEX Projects

Raw Material Price Volatility Scarcity of Resources Emerging High Technology Inadequate Execution Rising Public Scrutiny Scarcity of Sources of Finance

Source: Strategy& analysis

• Raw Material Price Volatility

– Rising need for cost planning and monitoring – Increasing need for hedging

• Scarcity of Resources

– Human resources and natural resources – Return to global growth increases price pressure

• Emerging High Technology

– Projects become technically more challenging – Ultra deep water drilling & off-shore wind parks

• Inadequate Execution

– Incomplete design slows down execution and challenges cost estimating – Unskilled labor force helps hold down labor productivity – Mixed experience of supply base

• Rising Public Scrutiny

– Increasing public awareness – Bad press regarding project failures, e.g. deepwater horizon, Heathrow Terminal 5

• Scarcity of Sources of Finance

– Post financial crisis capital is harder to obtain – Increasing selectivity in project portfolios management

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February 24, 2015 Confidential property 12

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Start-up Management Quality Assurance Project Controls Licensing Management Project and Program Management and Governance Engineering Management Procurement Management Construction Management

Metals and mining companies need to build capabilities throughout the lifecycle of an CAPEX project or program

Capital efficiency

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Infrastructure Project Development

Project Selection Vendor and Tech Selection Financing Regulatory Review

Cross-cutting Toolkits Project and Program Risk Assessments Program Value Realization (PvR) Capability and Effectiveness Framework

February 24, 2015 Confidential property 13

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For the current plants, the operating asset effectiveness identifies levers in utilization, throughput and quality

Example: Impact of OAE implementation

Situation: Differentiated maintenance as a tool to improve Overall Asset Effec- tiveness (OAE ≈ “effective time”) Key levers include optimizing equipment uptime, planned maintenance, and preventive maintenance Benefit: Systematic measurement of OAE as a key maintenance KPI Opportunity to grow production in a demand driven market through maintenance excellence Equipment: Heat Treatment in Pipe Production

61 Prod. Volume in spec. Quality losses

• 11

72 Actual Prod. (heats) Throughput Losses

• 4

Max Prod. Volume (heats) 76 Net Prod. Time (h) 7,900 Utilization Loss (h) 860 Total Time (h) 8,760

Utilization 90% Throughput 95% Quality 85% OAE 73% Utilization 96% Throughput 95% Quality 91% OAE 83%

Shutdown time (h) Unplanned maintenance (h) Quality loss (heats) Before 556 114 11 After 160 40 7

• 396 h
• 74 h
• 4 heats

Source: Strategy& May 14, 2014 Confidential Property 14

STEEL CLIENT EXAMPLE: PRODUCTION

Capital efficiency

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Large share of OPEX Conflicting targets Improvement potential in cost/performance pattern

• Benchmark studies show a wide

spread of relative maintenance cost

• Cost drivers are mainly

maintenance excellence, but also inherent factors like equipment structure, product range and site set-up

• Balance between performance

and cost targets needs to be managed closely

• Best-practice maintenance
• rganizations have an integrated

view on weighted targets and are measured accordingly

• High maintenance cost do not

necessarily indicate high performance

• Past boom years have left

maintenance out of focus, the crisis actions have rarely had structural impact

OAE Cost

Low High 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

? ? ?

Health & Safety Availability Quality Output Maintenance Cost

VS

33% 8%

Compared to <5% in other industries

It’s worth looking at It requires careful management beyond pure cost cutting There is potential for improvement

To boot asset performance, maintenance is a key cost and performance driver in steel manufacturing and mining

Maintenance characteristics

Conversion Cost Total 1) Other Cost Media, Energy Mainten- ance 1) excluding raw material Source: Strategy& Feb, 2015 Confidential Property 15

METALS & MINNING INDUSTRY TRENDS

Labor efficiency / cost optimization

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Example Maintenance: Functional integration removes the traditional barrier between production and maintenance

Objective of functional integration

Traditional Functional Integration

Production Maintenance Production Maintenance

• Traditionally, operations runs equipment while

maintenance fixes it

• Even for minor repairs, operators call for

maintenance

• No joint responsibility for availability and

performance of the equipment

• Operators perform additional equipment

related tasks like reliability activities, cleaning, minor repairs, support of maintenance at major repairs, depending on skill level and operator time availability

• Joint equipment condition responsibility of

maintenance and operators

• As operators do not work when the equipment

is down and technicians work less when it is up, there are untapped efficiency potentials

• As responsibility for the equipment is frag-

mented, availability and performance suffer

• Efficiency gains through better utilization of

both, maintenance staff and operators

• Improved availability and performance of the

equipment

• Higher motivated staff through job enrichment

Source: Strategy& Jan, 2015 Confidential Property 16

Labor efficiency / cost optimization

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Administrator

Transformation

Example HR: Six levers – mainly demand management and standardization – reduce resource requirements

Business Enabler

55% 15% 10% 15% 5% 20% 20% 25% 10% Fasciliation of guidelines, programs and services Coach/Advisor Change Agent HR program design Strategy 25%

Optimization Service- portfolio Demand Management Process- Standards/ Optimization Usage

• f Self

Services Shared Services Out- sourcing

• Approx. 20%

Savings Development in Workshops of the Joint Project Teams Utilization of Benchmarks and Best Practice Examples Consideration of implications of the business models, as well as the required skills in the processes Formulation of concrete Actions

Confidential Property February 24, 2015 Source: Strategy& 17

STEEL CLIENT EXAMPLE: HR

Optimization: Human resources for production sites

Labor efficiency / cost optimization

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• Chinese steel demand is by far the

biggest in the world

• China has overtaken US as the

biggest car market in 2009

• China has only just entered the

accelerated growth phase of an emerging market

• China’s consumption patterns and

macro-economic policy will drive supply/demand

• Main 3 mines BHP, Rio Tinto and

Vale dominate iron ore market by 70 %

• Joint introduction of quarterly

contracts lead to 80% to 100% price increase for many customers

• New ‘Independents’ with huge growth

rates, but real impact only mid-term

• Steel market far less concentrated

than iron ore market: 10 biggest steel producers are mainly from Asia (28 % share), 4 (9% share) from China

• No alignment among steel producers

achieved so far

• No optimized and clear strategy

developed towards increased volatility

Three dominating industry factors will continue to drive raw material and steel price volatility

High quality and reliable raw materials access

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Main Drivers of Steel Price Volatility

Steel and Iron Ore Dominated by China Oligopolistic Structure No Concerted, Aligned Action Steel Industry

Price Mechanisms are Determined by Chinese Demand/Supply Share and Oligopolistic Iron Ore Structure by the Big Three Iron Producers

February 24, 2015 Confidential property 18

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Addressing decreased margins, metals and mining producers should focus on a selection of these levers

High quality and reliable raw materials access

3

Management Summary “Implications for Steel Companies”

Capability Development & Integration in Procurement, Controlling, Marketing, Sales and Supply Chain Functions is Key for Organizations to Deliver Those Recommendations

Optimize Transformation Model Financial Hedging as an Emerging Option Focus on Operational Flexibility Focus on Value- based / “Green” Pricing

• Adapt a ‘transformation’ business model which floats on top of current price fluctuations
• The only model of continuous efficiency optimization is outdated
• Hedging by backward integration has been a successful business model, but acquiring

iron ore companies and shares becomes extremely expensive

• Financial hedging is an emerging option. The market is still in its infancy, but developing:

– Independent miners looking to hedge their iron ore price for projects – BHP’s move to spot prices brings in more liquidity/transparency

• Changing input mix, e.g. by maximizing scrap steel usage could increase resilience to

iron ore price volatility

• Outsourcing improves operational and cost flexibility
• Sales should use value based pricing: price in the ‘green’ value of many steel applications
• Supply chain excellence should provide added value and lock-in, in order to drive

customer value and loyalty

February 24, 2015 Confidential property 19

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The execution an high quality customer and product service portfolio yields significant profitability improvements

Structural Differences Optimization in Portfolio, Sales and Service-Levels

Production Efficiency Product Structure EBIT Client Scale Advantage Contract Management EBIT Best Competitor Customer Satisfaction Service Offerings Strategic Price mgmt Sales Channels

• Distribution network scale
• Yield and energy efficiency
• Segmentation of steel grades,

widths and surface qualities

• Industry focus e.g. Auto OEM
• Cut-to-length and slitting
• Surface treatment
• Special logistics and

packaging services

• KPI-system by customer, aligned

with logistics and production

• Long-term customer relationships

Confidential property

EBIT Profitability: Contributions of Portfolio & Service Levels

STEEL CLIENT EXAMPLE

• Customer segmentation by logistics

service level and application support

• Value based pricing

High quality production and customer service

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