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31 Mount Pleasant, London WC1X 0AD UKTel +44 20 7903 2000 Fax +44 20 7837 0976

www.cruanalysis.com

LONDON | BEIJING | PHILADELPHIA | WASHINGTON

The near term outlook for world steel markets

Prepared for:

ASSOCHAM 4th India Steel SummitDelhi, August 2010

Prepared by:

Paul ScottGroup Manager, CRU Steel Group

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Presentation plan

• Latest developments

• CRU’s forecast

• Focus on India and the key challenges faced by its steel industry

• Key issues facing the world steel industry

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Latest developments

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Prices for finished steel, both flat and long products, have generally been following a downward trend during the past two-to-three months

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J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A

CRUspiCRUspi flatsCRUspi longs

CRU steel price index (CRUspi), index, April 1994 = 100

Data: CRU Analysis.

2007 2008 2009 2010

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And when we take a look at the regional CRUspi indices it’s clear that none of the major steel consuming regions have escaped the weakness

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J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A

CRUspi North AmericaCRUspi EuropeCRUspi Asia

CRU steel price index (CRUspi), index, April 1994 = 100

Data: CRU Analysis.

2007 2008 2009 2010

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Concentrating on demand, world finished steel consumption has weakened of late and for the third quarter as a whole we’re expecting it to fall for the first time in almost two years

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Q1 Q2 Q3 Q4 Q1e Q2e Q3e Q4e Q1e Q2e Q3e Q4e Q1e Q2e Q3f

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250Total finished products (y1) Total long products (y2) Total flat products (y2)

World apparent consumption, m tonnes

Data: CRU Analysis.

2007 2008 2009 2010

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And it’s interesting, and perhaps worrying, to note that finished steel consumption is contracting in both developed and developing markets

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OECD countries Non-OECD countries

Quarter-on-quarter changes in apparent consumption of finished steel products, %

Data: CRU Analysis.

2007 2008 2009 2010

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If we look at the reasons behind the slowdown in demand, seasonal factors have played a role in North America, Europe and parts of Asia (especially for flat products)

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North America Western Europe Eastern Europe China Other E&SE Asia

Typical quarter-on-quarter changes in apparent consumption of finished steel products, %

Data: CRU Analysis.

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In addition, the rebound that had been experienced by some developed economies has proved unsustainable as the positive impact of the inventory cycle has now passed

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Stock/GDP ratio in the USA

Stock-to-GDP ratio in the US economy, %

Data: CRU Analysis.

2007 2008 2009 2010

An end to destocking has meant that demand has needed

to be satisfied by new production, but further growth

requires an improvement in “real” demand or restocking

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Meanwhile, in some developing economies the slowdown in the rate of growth in economic activity has been driven mostly by government policy

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70%India - industrial production (y1) China - investment funded by loans (y2)

Year-on-year changes, %

Data: CRU Analysis.

2007 2008 2009 2010

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Steel mills responded to the growth in finished steel demand during 2009 and H1 2010 by raising output and, while this has since been cut, supply is currently exceeding demand

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Crude steel production, m tonnes

Data: CRU Analysis.

2007 2008 2009 2010

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The recent decline in world crude steel production has clearly had a negative impact on the demand for some key steelmaking raw materials

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65Iron ore (y1) Hard coking coal (y2) Scrap (y2)

World apparent consumption of key steelmaking raw materials, m tonnes

Data: CRU Analysis. Note: consumption calculated by using 2009 consumption rates.

2007 2008 2009 2010

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And it’s this contraction in demand that has contributed to recent falls in the prices for iron ore, coking coal and scrap, which in some cases have exceeded 30%

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J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J

Iron ore (63.5% Fe), cif China

Hard coking coal, fob Australia

Scrap (#1HMS), fob US East Coast

Spot prices of key steelmaking raw materials, US$/tonne

Data: CRU Analysis.

2007 2008 2009 2010

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CRU’s forecast

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On the face of it, this year looks as if it will be a strong one for finished products demand, as both flat and long products consumption is expected to grow by well over 10%

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Total finished products Total long products Total flat products

Year-on-year changes in world apparent consumption, %

Data: CRU Analysis.

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These impressive rates of growth (albeit from a relatively low base) will give rise to new record levels of consumption, for both flat and long products

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Total flat products (y2)

World apparent consumption, m tonnes

Data: CRU Analysis.

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And it will be non-OECD countries that continue to dominate; their share of world finished steel consumption, which hit 75% in 2009, is expected to remain at around this level

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Total finished productsOECD countries

Non-OECD countries

World apparent consumption of finished steel products, m tonnes

Data: CRU Analysis.

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Figures for 2010 as a whole, however, disguise the weakness that we’re anticipating in the second half, when world finished steel consumption is actually expected to fall

262.848

32.062

27.01012.767 1.550

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19.068

352.484

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World apparent consumption of finished steel products, m tonnes

Data: CRU Analysis.

2009 2010

Forecast

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By varying degrees, seasonal factors; austerity measures; the end to stimulus packages; and, poor sentiment will contribute to this continued malaise in world steel demand

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USA Europe Asia

Markit’s Steel PMIs

Data: Markit. Note: readings above 50 signify growth; below 50 signify contraction.

2007 2008 2009 2010

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And even in 2011 we’re not expecting to see a particularly robust set of macroeconomic conditions, with industrial production growth set to slow in most major economies

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USAGermanyIndiaChinaJapan

Year-on-year changes in industrial production, %

Data: CRU Analysis.

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This slowdown in the rate of growth in industrial activity from 2010 to 2011 will likely translate into a slowdown in the rate of growth in finished steel consumption

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Total finished products Total long products Total flat products

Year-on-year changes in world apparent consumption, %

Data: CRU Analysis.

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But, let’s not forget that any growth from 2010’s levels will result in new record levels of finished steel consumption (which again will be dominated by non-OCED countries)

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Total flat products (y2)

World apparent consumption, m tonnes

Data: CRU Analysis.

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And, it’s worth pointing out that from the fourth quarter of this year we’re expecting world finished steel consumption to grow quarter-after-quarter through until the end of 2011

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Apparent consumption of finished steel products, m tonnes

Data: CRU Analysis.

2009 2010 2011

Forecast

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So, we see a steady improvement in the demand-side picture for finished products and, given record levels of consumption, we also see support from raw materials prices

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Q1 Q2 Q3 Q4 Q1 Q2 Q3f Q4f Q1f Q2f Q3f Q4f

Iron ore (63.5% Fe), cif China

Hard coking coal, fob Australia

Scrap (#1HMS), fob US East Coast

Spot prices of key steelmaking raw materials, US$/tonne

Data: CRU Analysis.

2009 2010 2011

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The upshot for finished steel prices is that we believe that we’re pretty much at the low point now and that we should see a gradual recovery over the coming quarters

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J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D

CRUspiCRUspi flatsCRUspi longs

CRU steel price index (CRUspi), index, April 1994 = 100

Data: CRU Analysis.

2009 2010 2011

Low point about now!

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And while the regional CRUspi indices are likely to show a generally similar trend, note the relative weakness expected in Europe and North America (versus Asia) during H2 2010

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J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D

CRUspi North AmericaCRUspi EuropeCRUspi Asia

CRU steel price index (CRUspi), index, April 1994 = 100

Data: CRU Analysis.

2009 2010 2011

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Focus on India and the key challenges faced by its steel industry

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Supported by a firm outlook for end-use sectors, finished steel consumption in India is forecast to grow at a CAGR of 9.2% between 2009 and 2014, reaching almost 100m tonnes

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Total finished products

Apparent consumption in India, m tonnes

Data: CRU Analysis.

CAGR 2009-2014:• Infrastructure: 10%• Real estate: 11%• Automotive: 15%• Engineering: 8%• Consumer durables: 9%

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This growth may well be impressive, but we do have some concerns as to the local steel industry’s ability to satisfy this demand: key challenges faced by the Indian steel industry

1. Delays in acquiring clearance for projects

– While we appreciate that the consent of all stakeholders is imperative, we fear that it is hindering the development of the steel industry: there is a need for simpler processes.

2. Raw materials availability

– For iron ore, acquiring project clearance is a concern. For coking coal, however, the issue is that India does not have large reserves of coking quality coal.

3. Infrastructure bottlenecks

– Bottlenecks exist in power, water, roads and port handling capacity, despite substantial efforts by the government.

4. Labour productivity

– Although there are exceptions, labour productivity in the Indian steel sector is low.

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Key issues facing the world steel industry

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Issue 1: The new quarterly pricing mechanism for iron ore looks unsustainable unless steel mills hedge their margin risk; introduce an iron ore surcharge; or reduce the lag

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Iron ore (63.5% Fe), cif China (lagged by one quarter) CRUspi (Global)

Quarter-on-quarter changes, %

Data: CRU Analysis.

2007 2008 2009 2010

This represents a variation in

margin

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Issue 2: We believe that iron ore exports from India have now peaked, but there is a risk that they will fall more sharply, which has upward implications for iron ore prices

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Iron ore exports from India

Indian exports of iron ore, m tonnes

Data: GTIS, CRU Analysis.

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Issue 3: Chinese net exports of finished steel are expected to increase by 65% between the third quarter of this year and the end of 2011

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Chinese net exports of finished steel products, m tonnes

Data: CRU Analysis.

2009 2010 2011

Forecast

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Thank you for your attention!

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Please address questions or comments relating to this presentation to:

Paul ScottManaging Consultant, CRU Steel Team

CRU Group31 Mount PleasantLondonWC1X 0AD

Tel.: +44 20 7903 2185Fax.: +44 20 7833 5634Email: [email protected]