The steel industry is considered to be one of the most polluting sectors, contributing to ~5% of CO2 emissions in the EU and 7% globally. To reach carbon neutrality by 2050, the EU Commission is implementing numerous programs to develop market mechanisms to enforce economic agents to reduce pollution, specifically ETS and CBAM (Carbon border adjustment mechanism, or “CO2 import tax”). With average CO2 emissions of 1,8-2,2 CO2t/steel and current CO2 price of ~60 eur/ton, the average steelmaker or importer of steel will have to pay additional ~108-132 eur/tonne of steel by 2034 (when CBAM will be fully implemented according to the EC roadmap). Consensus EU CO2 price forecast for 2030 is well above 100 euro/tonne CO2 (~180 euro/tonne of steel). By 2034, all free ETS allowances will be cancelled and CBAM tax rate will reach 100% of the EU values for importers of steel products to Europe. This will create a high price environment market till all the players decarbonise and new “green” capacities will bring price to “normal” levels.

The EU steel industry has a huge legacy in the form of blast-furnace route (BF-BOF) – using coal as the source of carbon and iron ore (pellets, lump or concentrate). Almost all flat product suppliers in the EU are operating BF-BOF (which was efficient, if not consider the externalities – CO2 pollution). The entire EU steel industry is about to transform: incumbents are trying to decarbonize using various technologies (carbon capture, hot-briquetted iron or HBI-EAF, etc.) in order to minimize paying the ”CO2 tax”. Nevertheless, even if all the announced carbon-neutral projects will take place (~30-35 mln.t/year of announced capacity replacement), it equates only to ~30% of flat product supply by 2032 (~90-100 mln/t of flat steel will be required in the EU).

We believe that there is a strong investment case for a new carbon-neutral steel service company located in the region with the growing markets, low competition level and the source of local scrap to build electric arc furnace (EAF, to have minimum or no CO2 footprint in the future).

Ussuri Capital believes that Romania (EU) is the right fit for the following 2 or 3-stages approach project: At Phase-1 the new company, located nearby port of Constanta, will build a state-of-the-art cold-rolling complex to produce pre painted steel (~130KT/year), galvanized steel (~250KT/year), cold rolling mill (250KT/yeaa) and push-pull pickling line (400KT/year) together with steel service centre. At this stage, initial feedstock – hot rolled coils (~320-400KT/year) will be imported from non-EU countries to catch the discount to local EU hot rolled prices. Phase-1 will provide required market footprint, create strong brand and necessary cash flows to finance equity stake for investment round B (Phase-2).

At Phase-2 of the project, EAF and continuous strip casting module (CSP or ESP technology) will be built to produce ~1.2 MT/year of crude steel and hot rolled coils using local scrap.

At this stage, CO2 emissions of the final products will be ~0.4 CO2t/steel versus marginal player (local or imported from Asia BF-BOF made steel with 1.8-2.2 CO2t/steel), that creates additional margin of ~140 euro/tonne of steel.

We will operate in the interconnected EU market of ~85 mln.t. of flat steel products which is exposed to ETS/CBAM CO2 trading system. The EU annually imports more than 20 mln.t. of flat steel products (hot rolled, cold rolled, galvanized (HDG) and pre painted steel (PPGI)). In 2022, the EU imported from the non-EU countries 8 mln.t. of hot rolled coils, 4 mln.t. of cold rolled coils, 5.1 mln.t. of HDG and 1.2 mln.t. of PPGI. Romanian PPGI market was 378KT in 2022, growing with ~10.3% CAGR (2015-2022), HDG market was 312KT/year with CAGR of ~3.2% (2015-2022).

The EU has been implementing numerous trade measures to limit unfair competition from imports, including anti-dumping and CV duties (eps. against PPGI & HDG products ex. Asian countries) and quotas/tariffs from all imports. UCP believes that together with CBAM, all these trade measures will lead to the limited import competition, higher prices and margins for local producers in the next several years.

After the Russian attack on Ukraine, the market supply in the Mediterranean region was reduced by ~4-6 mln.t./year of flat products (capacities destroyed/annexed, sanctions/ban on Russian steel products).

There is a single BF-BOF mill in Romania, producing a maximum of ~90KT/year of PPGI and ~230 KT/year (gross capacity) of HDG products of medium quality (with limitations both on size ranges and quality). This leaves enough market capacity to be absorbed by our project.

The right location (having access to both raw materials – hot rolled coils (Phase-1) and scrap (Phase-2) and local markets), product mix/technology and the scale of operations to fit the market demand are the critical factors to success in the steel business. Our competitors’ logistics to Romania is ~35-75 €/tonne, which will protect our margins. We will provide the local and nearby markets (within 1,000 km range) with the best quality products, utilizing latest technologies to achieve the shorter lead-times (several days vs. 1-2 months in case of BF-BOF production) and the best product mix (thin gauges, tolerances, etc.).

We want to build a customer-oriented business of a steel service center with a production function rather than typical European bureaucratical, vertically hierarchical company with slow market reaction and weak customer engagement.

After reaching target KPIs, 2032 revenues will be ~1,2 bln.euro, EBITDA (forward) is projected at ~230 mln.euro, giving a MCAP of ~1,5bln.euro (EV/EBITDA x6.5 with virtually no net debt). For A-Round equity investors, multiple on invested capital (taking into account dilution at B-Round) is projected at ~ x4.7 (~725 mln.euro exit value attributed to A-Round investors / 160 mln. invested equity).