GLOBAL INSIGHT STEEL OUTLOOK Supply Chain Blues: Resurgent Steel Prices Erode Manufacturers' Margins John Anton Director, Global Insight Steel Service (202) 481-9231 john.anton@globalinsight.com

The Squeeze on Steel Consumers Steel product prices increased between 100% and 280% in 2004 Prior to 2004, approximately 45% of a fabrication was steel, 45% labor, and 10% energy and overhead As steel costs doubled, fabrication prices should have risen 20% Yet fabricated metal prices rose only 9% The difference comes straight out of profits Copyright © 2005 Global Insight, Inc. 2005Q1

What Do The Next Few Years Hold? Auto parts makers are paying premiums for steel and other commodities Yet, car makers are unwilling to pay more for parts Ford, GM show lackluster sales Raising prices (cutting incentives) causes falling sales If parts makers agree to contracts that are comparable to 2003, they will not be able to stay in business After several parts suppliers go bankrupt, the remainder will win cost increases from car makers Copyright © 2005 Global Insight, Inc. 2005Q1

Motor Vehicles and Demand Destruction If steel prices stay high, alternate materials are considered Aluminum Plastic If domestic steel costs more than overseas, fear of more outsourcing (Section 201, exchange rates) Countervailing forces Just-in-time inventory Transportation Quality If the industry loses an application, it may never come back Demand destruction fear could easily be overblown Iron ore is plentiful, petroleum (for plastic) is not More Fe ore than bauxite Outsourcing limited by the countervailing forces Copyright © 2005 Global Insight, Inc. 2005Q1

Outline of the Steel Forecast Demand is firm, but there is less upward momentum Much of the recovery already took place in 2004 China remains the big driver U.S. supply has loosened, globe is tight High production and imports replenished inventory U.S. consumption caused less availability elsewhere Raw materials additions are the key to relief Prices will continue to ease High input costs and weak dollar prevent collapse More supply means lower prices Copyright © 2005 Global Insight, Inc. 2005Q1

Good News/Bad News for Buyers Prices are declining, will continue to ease Supply is sufficient to meet demand Tumble in prime scrap costs undercuts surcharges End market demand will be strong in 2005 Prices will be permanently higher than in 1998–2003 Capacity utilization is so high that any outage would be disruptive Raw materials remain tight, cost of making steel rises Demand outlook for 2006 is getting worrisome Copyright © 2005 Global Insight, Inc. 2005Q1

Summary of Forecast Assumptions U.S. demand grows slower in 2005, plateaus in 2006 China demand continues to grow strongly for first half of 2005, but the breakneck pace will then moderate Western Europe and Japan are in danger of stagnating again, Central and Eastern Europe are looking strong Apparent supply in the U.S. was too strong, and inventory tightness became inventory surplus High prices are spurring raw material investment such that global supply will improve as time passes The dollar continues declining until 2007, then stays low Copyright © 2005 Global Insight, Inc. 2005Q1

Steel: 2002 Started A Reversal of Fortune Copyright © 2005 Global Insight, Inc. 2005Q1

United States — The Fundamentals have Shifted Consolidation means fewer sellers with more power More consolidation yet to come A weaker dollar changes the trade in finished steel Imports are choice of last resort, exports are a viable market Dependence on imports may be untenable in the future New labor contracts Integrateds’ costs are lower Narrows gap with electric mills Raw materials will cost more Weak dollar Imported ore and coke more expensive Also makes scrap exports more lucrative Energy prices feel same pinch Competing with China for scarce inputs Copyright © 2005 Global Insight, Inc. 2005Q1

2004 Was The Strongest Growth Year for USA Steel Endmarkets Copyright © 2005 Global Insight, Inc. 2005Q1

Demand in the U.S. Needs Until 2008 to Regain Peak Rising from 2003q2 trough But below 2000q2 peak Demand fell 14%, has risen only 6.8% through 2004q4 Without consumer goods (autos and appliances), there would have been a complete rout Now business investment is strong, and consumer side is starting to weaken 30% Real Nonres. Construction 30% Motor Vehicles & Parts 20% Fabricated Metal Product 10% Elect. Eqpt., Appliance, & Comp. 5% Machinery 5% Oil & Gas Extraction Copyright © 2005 Global Insight, Inc. 2005Q1

Demand Sectors — Construction Residential Sustained the downturn as low interest rates made home payments affordable Likely to weaken on higher interest rates, price hikes, and satisfied demand Steel impact via pipes, appliances, utensils, and tools Nonresidential — much more important for steel Suffered greatly in the downturn Fell 25% between 2000:4 and 2002:4 Recovering slowly with the overall economy Rebounded late in 2004, all of 2005, then slows in 2006 Will need years to regain old peak level Copyright © 2005 Global Insight, Inc. 2005Q1

Demand — Light Vehicles Held up remarkably in recent years Low rates, incentives Sales are mediocre Market saturation Higher gasoline prices Detroit bet on SUVs Sales will recover as new models entice buyers Parts makers are squeezed by steel prices Copyright © 2005 Global Insight, Inc. 2005Q1

The Steel Market Must Be Viewed Globally U.S. apparent consumption is only 13% of global total China is 3 times larger in production and consumption The U.S. does not have enough capacity to fulfill domestic demand and must import 20% to 30% of tonnage While domestically focused international factors cannot be ignored, and often predominate WHY IS IT REALLY IMPORTANT? If China usurps iron ore/scrap/coke, those materials are not available to us Copyright © 2005 Global Insight, Inc. 2005Q1

Demand — China and Other Hot Spots China is growing at an un-sustainable rate The Chinese government is trying to cool the rate of growth Restrictive lending Denial of permits Slows in 2005 and 2006, but still fast compared to rest of the world If it doesn’t slow soon, it could crash later India is poised to follow China into extreme growth Massive population, living in near-poverty Liberalizing governmental policies aiding expansion Outsourcing China and India insure strong global steel demand China is the main driver Largest in terms of size, and in terms of growth We expect a soft landing: continued growth, but slower Western Europe, Japan weak Recovery foundering, barely better than stagnation Asian crisis is finally behind us Caused much of the low global steel prices of 1998-2003 Central and Eastern Europe booming Entry into European Union allows outsourcing from Western Europe Latin America is wild card Good workers and resources, offset by high risk Copyright © 2005 Global Insight, Inc. 2005Q1

Chinese Consumption Still Has Room to Grow Copyright © 2005 Global Insight, Inc. 2005Q1

Copyright © 2005 Global Insight, Inc. Production and Supply Global steel production Up by 40% since January 1995 Probably exceeded 1 billion metric tonnes in 2004 Growth rate of 2.1% from 1994 thru 2001 Growth rate of 9.0% from 2002 thru July 2004 Copyright © 2005 Global Insight, Inc. 2005Q1

Production and Supply — The Crunch Global steel production is up by 40% since January 1995 But raw materials expansion did not keep pace Lousy profits Excess capacity As long as there was a surplus, no one noticed But furnace capacity eventually hit materials constraint Which is why prices exploded Line represents raw materials capacity (ore, coke, scrap, etc). The line is arbitrary and for illustration only. It is not to be taken as an empirically determined level. Copyright © 2005 Global Insight, Inc. 2005Q1

Production — Raw Materials Raw materials prices are sharply higher Your supplier isn’t making it up Early last year, metallurgical coke could not be obtained at any price Chinese demand Mine fire Scrap is twice as expensive than in January 2003 New ore and metallurgical coal mines are being dug But little relief until 2006 and 2007 Scrap supply cannot be increased easily, depends on junking of steel products sold 10–15 years ago Copyright © 2005 Global Insight, Inc. 2005Q1

Production — China is the Key China’s steel production was equivalent to U.S. and Japan in the early 1990’s By 2003, China made 2.4 times more steel than the U.S., twice as much as Japan China accounts for 59% of growth in global production since 1995 Tremendous acceleration for 2001 thru 2004 Copyright © 2005 Global Insight, Inc. 2005Q1

Copyright © 2005 Global Insight, Inc. Raw Materials Scrap supply is limited by rate of junking Steel use 10 to 15 years in the past Ore mines are being expanded in Australia, Brazil Little relief before 2005 and 2007 before they really help Coke is tight as mines have to be expanded Can’t get enough miners in the United States Ukraine, China want to retain coke for domestic mills Help by 2007 Transportation Ocean freight strained by China Domestic rail will be tight as trains haul grain instead of steel supplies Copyright © 2005 Global Insight, Inc. 2005Q1

Copyright © 2005 Global Insight, Inc. Price — Outlook Prices fell slightly in the fourth quarter of 2004, and continue easing through 2005 Down pressures Imports Inventory restocking Global price lower than in U.S. Up pressures Shipping still expensive China may rebound Global supply of raw materials Dollar Significant declines in 2006 and 2007 as ore and coke become plentiful, uptrend in long term as demand keeps rising Tide turned in late 2004 Many products peaked in September, others in October and November Plate didn’t turn until February, SBQ still rising Declining early in 2005 as inventory worked off Continues to decline as input supply improves and global demand moderates Only as raw materials expansions come online will significant drops be seen Copyright © 2005 Global Insight, Inc. 2005Q1

Price — Rapid Rise, Slower Descent Copyright © 2005 Global Insight, Inc. 2005Q1

Risk — China Hard Landing We believe China is slowing rate of expansion But, growth could resume at breakneck pace Prices stay near current levels Chinese government would react by slamming on the brakes sometime in 2005 Global prices crash, then rebound once weak Chinese mills go out of business Copyright © 2005 Global Insight, Inc. 2005Q1

Price — Causes for the Price Rise Raw materials unavailability Dollar 10% fall vs. the yen means Japanese steel makers must raise prices 10% or take hit to profit Actual depreciation was 22% against the yen, 44% against the euro Demand U.S. and North America demand does NOT justify prices But steel is global, and Chinese demand does justify Supply Mills operating flat out Imports did not rise until May Inventory was extremely lean History Downtrend since 1992 Each peak lower than the prior, each trough deeper Bottomed just before LTV shut down Price was below cost of production for integrateds, occasionally below cost for EAF Current Highest prices ever In real terms, well below legendary spike of 1974 Doubled and tripled since last year Copyright © 2005 Global Insight, Inc. 2005Q1

Copyright © 2005 Global Insight, Inc. Implications Other commodities face same pressure from China and under-investment Petroleum, and petrochemicals (plastic) Non-ferrous metals Most commodities will be permanently above levels of recent years This adds global inflationary pressure Copyright © 2005 Global Insight, Inc. 2005Q1