Critical Supply Market

Paul Close

© 2008 KBR, Inc. All Rights Reserved.

Global Supply Issues

Freight
Finite Costs
Commodity
Supplier/
Price
Subcontractor
Inflation Capacity Diminished
Quality
Dramatically
Growing
Coinciding Demand
Projects
Sub Supplier/
Currency & Subcontractor
Financial Management
Risk

Local Wage Rates

Content
& Staff
Requirements
Turnover

© 2008 KBR, Inc. All Rights Reserved.

1
Global Supply Issues

Freight
Finite Costs
Commodity
Supplier/
Price
Subcontractor
Inflation Capacity Diminished
Quality
Dramatically
Growing
Coinciding Demand
Projects
Sub Supplier/
Currency & Subcontractor
Financial Management
Risk
But
But wait
wait !!
!!

Local Wage Rates

Content
& Staff
Requirements
Turnover

© 2008 KBR, Inc. All Rights Reserved.

Trend of Material Prices

350

300
Baseline
250

200
Index

150

100

50

0
Steel Structure Columns AFC (CS) S/T H/E (Tube: Seamless Pipe
CS)

2003 2004 2005 2006 2007 2008 - YTD

© 2008 KBR, Inc. All Rights Reserved.

2
Trend of Delivery Schedule

30

25

20
Months

15

10

0
Reactors Structural Steel Large Vessels Centri. Compr'r Recip. Compr'r Large Alloy
Valves

Jan-03 Jun-07 Jun-08

© 2008 KBR, Inc. All Rights Reserved.

Process Equipment Manufacturing Capacity Utilization

140

120

100

80

60
Caution
Caution !!
40

20

0
Aircoolers Motors Exchangers Columns/Vessels Pumps Control Valves

2004 Shop Load 2005 Shop Load 2006 Shop Load 2007 Shop Load 2008 Shop Load

© 2008 KBR, Inc. All Rights Reserved.

3
STEEL: Structural vs. Cyclical

Coking Coal – Contract Prices Iron Ore – Contract Prices

220 160
Goonyella Benchmark Grade FOB Carajas Fines FOB Brazil for Europe
200 Australia
140

Forecast
Range
180
2003 > 120 2003 >
160 2008
2008

US$c/% Fe
US$/tonne

140 +341% +340%

100
120
80
100
80 60
60
40
40
20
20

92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09

2008 contract year prices are 66% increase in fines reference price
forecast to reach record levels for the 2008 vs. 2007 contract year

© 2008 KBR, Inc. All Rights Reserved.

STEEL : Capacity & Inflationary Pricing

Global excess effective capacity & utilisation Steel remains good value ?
90% 225
In d e x J a n 1 9 8 8 = 1 0 0

88% 200
Production / Capacity

86% 175
84% 150
82% 125
80% 100
78% 75
76% 50
8
9
0
1
2
3
4
5
6
7
8
9
0
1
2
3
4
5
6
7

74%
8
8
9
9
9
9
9
9
9
9
9
9
0
0
0
0
0
0
0
0
9
9
9
9
9
9
9
9
9
9
9
9
0
0
0
0
0
0
0
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010

1
1
1
1
1
1
1
1
1
1
1
1
2
2
2
2
2
2
2
2

UK RPI USA Domestic German Domestic

UK Domestic Japan Export Steel

Global steel supply/demand balance remains tight

© 2008 KBR, Inc. All Rights Reserved.

4
Logistics

LOGISTICS: Highest ever demand, outstripping supply – Costs + >40% over 3yrs
Ship building frenzy , tight yard capacity – Relief ?? Bunker Prices

© 2008 KBR, Inc. All Rights Reserved.

The Critical Sub-Contract Market

♦ Subcontractors working at
maximum capacity
♦ Significant resource
competition (across industries)
♦ Subcontractors selective and
inflexible (T&C’s)
♦ Margin enhancement not lower
prices
♦ Critical labour shortages –
demographics
♦ Knock on effect of schedule
over-runs

© 2008 KBR, Inc. All Rights Reserved.

5
Changing Equipment Market

Keen competition, mergers and acquisitions has led

to market dominance in equipment supply

Industrial Low Alloy Carbon Steel Reactors

Pumps Plates

Sulzer Industeel Arcelor Mittal Hitachi

Flowserve Dillinger Tata Group HHI
Clyde Sumitomo Larsen
Tenaris &Toubro
Duro Felguera

© 2008 KBR, Inc. All Rights Reserved.

Changing Equipment Market

International Production Diversification

India China Eastern Europe

ABB ABB ABB

Schneider Siemens Siemens
Flowserve Flowserve Macchi
MAN Turbo MAN Turbo
Larsen and Toubro GEA BTT
Larsen and Toubro

© 2008 KBR, Inc. All Rights Reserved.

6
Supply Summary

Remains the Most Difficult Supply / Subcontractor

Market for 30 Years
KBR is well equipped to deliver in this challenging market…

© 2008 KBR, Inc. All Rights Reserved.

KBR Supplier Management

MANAGEMENT

© 2008 KBR, Inc. All Rights Reserved.

7
Supplier Performance Evaluation (SPE)

MEASURE

© 2008 KBR, Inc. All Rights Reserved.

Supplier Fact Sheet

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Inc.

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1234567

MONITOR

© 2008 KBR, Inc. All Rights Reserved.

8
Processes

DISCIPLINE

© 2008 KBR, Inc. All Rights Reserved.

Procurement and Materials Management

Capital Projects - EP, EPC, Program Management
Corporate Business MRP REQUSITION AWARD POST AWARD SITE MATERIALS
Intelligence

P&M
P&MWEBWEB Portal
Portal Glossary A/P Repository
SAP System
Intelligent Purchase Orders
Work
WorkMethods,
Methods, A/P Interface
Material Coding Goods Receipt
Standards
Standards,Tools
,Tools
IPMS
Integrated Project Invoice
PROWIRE Engineering RFID
Management System Accounts Payable
Spend Data Interfaces Receipts & Issues
D&B Analytics EMM Real Time Locating
ESR - Reporting
eWarehouse (RTLS)
Expediting Status
Supplier Fact Sheet
Supplier History
Commodity Data Materials Site Material
Award
Catalog, Requisition Post Award Control
Suppliers
Bills of Material Request for Expediting, Warehouse

TECHNOLOGY
Summaries Awards Requests, Issues
Quotations Logistics
SPE Database Spares Change Orders Prevent. Maint.
Supplier Ratings

Work Plan
KBRSupplier.com KBRSupplier.com SQS
Dynamic
Materials
Supplier Registration Online RFX &Contract Management Inspection Material Allocation
Arena Planning
Logistics
Simulation

Document Management

Engineering and Supplier Documents Documentum

Stock and Roll
Registers and Transmittal Tracking Vaulting
Tool Room

Project and Corporate Dashboards – All IPMS Data, Graphics, Drill Down, KPIs

© 2008 KBR, Inc. All Rights Reserved.

9
What Can You Do to Mitigate Risk?

♦ Contracting Strategies
ƒ Risk management
ƒ Buy forward – buy early > client and/or KBR
ƒ Understand & mitigate currency risk
ƒ PEpC strategy to fix lead times & book productions slots
ƒ Develop key supplier/subcontractor strategic relationships

♦ Technical Influence
ƒ Challenge the need for high specs (weight, size, material)
ƒ Limit change – review / restructure the sequence of work/design
ƒ Utilize new emerging suppliers for lower cost procurement &/or
availability.

© 2008 KBR, Inc. All Rights Reserved.

Summary

♦ Most difficult supply/subcontractor market in 30 years

♦ Possible relief expected short to medium term
♦ Early commitment is still vital
♦ Supplier relationship, sub-supplier and subcontracts
management essential
♦ “Right first time” – remedial action after the event is
too expensive
♦ Invest in “post award activity” - EIT (expediting,
inspection, traffic)
♦ Commitment with a quality EPC contractor essential
to success

© 2008 KBR, Inc. All Rights Reserved.

10
Thank you very much…

Questions?

© 2008 KBR, Inc. All Rights Reserved.

11