Steel market in 2009 and the main risks for exporters Presented by Dr. Vlasjuk V. Director UPE Co., Ukraine

1. Seasonal steel prices in 2005-2008 UPE Co. 1. Seasonal steel prices in 2005-2008 Last year price trend developed very dramatically

2. Steel price dynamics (billet, $/t fob Black Sea) UPE Co. 2. Steel price dynamics (billet, $/t fob Black Sea) Prices effected by speculative factors 587 Prices effected by the fundamental factors UPE forecast Source: UPE Co. Price sky records in 2008 were stimulated by speculative demand in the situation of overheated market

3. Current price moving (billet, $/t fob Black Sea) Low demand Production cost At present time steel prices are moving in narrow horizontal corridor, having been pressed by low demand from above and high production cost from below. Such situation makes tougher the arguments of steel producers during raw material prices negotiations

4. Steel production growth rate, % UPE Co. 4. Steel production growth rate, % 4q 2008 /3q 2008 2008 / 2007 Source: WSA Steel sector was appeared to be one of the most affected by global financial crisis, having varied impact on different countries

5. Сurrent status of global financial system UPE Co. 5. Сurrent status of global financial system The global financial system remains extremely unsteady despite of huge governmental support (above $7 trln) and nobody knows how long it will last Credit markets continue to be frozen The previous bailout programs (about $3 trln) are appeared to be insufficient for curbing financial disturbance. So additional state injections in financial sector are necessary The epicenter of the crisis, USA continues to demonstrate financial instability. Potential losses of American financial sector are estimated at nearly $3,6 trln. Probability of new wave of bank losses and writedowns remains high

6. Some macroeconomic and financial indicators UPE Co. 6. Some macroeconomic and financial indicators Indicators 09.07.08 09.01.09 04.02.09 Interest rate of Federal Reserve System (USA), % 2,0 0,25 Interest rate of European Central Bank (EU), % 4,25 2,5 Interest rate of Bank of Japan, % 0,5 0,1 3 month USD LIBOR/OIS spread, b.p. 0,7 1,2 0,98 Commercial bank deposits at ЕCB, $ bn 0,6 360 220 Oil (Brent), $/barrel 138 42 48 Monthly inflation, %: Jun 08 Nov 08 Dec 08 USA 5,0 1,1 EU 4,3 2,8 2,2 Japan 1,9 1,0   Source: IMF, Bloomberg Despite of some indicator’s improvement, business and investment activity is further deteriorating

7. Basic outlook for 2009 global financial market UPE Co. 7. Basic outlook for 2009 global financial market Despite the prompt and large-scale government actions, world financial crisis is not yet under the control Probability of new wave of bank defaults and writedowns remains high Under such conditions, it is not worth to expect substantial advance in lending of real sector at least in the first half of 2009

8. Precondition and potential of crude steel consumption growth UPE Co. 8. Precondition and potential of crude steel consumption growth Consumption level for industrial countries ~450-550 kg Source: WSA, UPE Co. est. Steel consumption per capita (fact 2007), kg The difference between the present consumption per capita in developing countries and standards for advanced economies strategically creates the great potential for further growth

9. Potential of crude steel consumption growth UPE Co. 9. Potential of crude steel consumption growth +930 Mt Source: UPE Co. est. Strategically the demand for steel remains high, thereby we shall expect the renewal of high growth rate of steel demand in future

10. World steel consumption (fact 1950-2008 and expectation) UPE Co. 10. World steel consumption (fact 1950-2008 and expectation) Source: WSA, UPE Co. est. Now we have recession but it doesn’t cancel the basic upward trend. Most probably steel market will renew upward tendency in 2010 and growth cycle caused by “march” of developing countries is able to last till 2025.

UPE Co. 11. Infrastructure projects as key direction of state economic stimulus programs Source: Bloomberg, UPE Co. est. The steel market in 2009 will be maintained by implementation of infrastructure projects as far as infrastructure spending is considerable part of state economic stimulus programs

12. 2009 steel market general outlook UPE Co. 12. 2009 steel market general outlook Global finance remains unstable, respectively we shouldn’t expect lending resumption in the near future However, there will be demand for steel supported by construction, particularly within the infrastructure projects Most probably steel production will hit the bottom in the first quarter of current year due to high inventories and lowest consumption within 2009 Source: UPE Co. est.

13. Macroeconomic background for 2009 UPE Co. 13. Macroeconomic background for 2009 World GDP will drop to - 0.2% in 2009 influenced by financial and economic crisis (2.1% in 2008) United States and other advanced economies lead recession, with GDP fall 1.2% in 2009 (increase 1.0% in 2008) Emerging and developing economies are likely to weather storm better, but not insulated, with growth up to 2.5% in 2009 (5.5% in 2008) Global inflation will lower in 2009 to 2.1% comparing with 3.5% in 2008 Real estate, construction, finance, retail and automotive will be most affected by world financial and economic crisis in 2009 Infrastructure projects within the framework of implementing the economic stimulus plan would support global steel consumption next year Annual average oil price (Brent) for 2009 – $50 per barrel Source: IMF, IIF

14. Crude steel consumption 2009 by regions UPE Co. 14. Crude steel consumption 2009 by regions Source: UPE Co. est. The world steel consumption in 2009 will decrease from 1306 (2008) to 1245 mln. t or approx. by 60 mln. t. China will show the increase up to 10 mln. t but it will not be enough to prevent global descending trend. EU, NAFTA, Japan will demonstrate the most deep drop next year.

15. World crude steel consumption 2009 UPE Co. 15. World crude steel consumption 2009 Source: UPE Co. est. The decrease in 2009 will bring back world steel consumption to the level of 2006

16. World crude steel production 2009 UPE Co. 16. World crude steel production 2009 Source: WSA, UPE Co. est. To consume current excessive inventories and restore world market balance it will be necessary to cut global production to 1 230 mln. t in 2009 or by 100 mln t (-8% y-to-y)

17. Steel capacity utilization 2009 UPE Co. 17. Steel capacity utilization 2009 Source: WSA, UPE Co. est. Source: UPE Co. est. Despite market depression and cut of production, global steelmaking capacities will continue to expand by 59 mln. t. in 2009, thereby reviving the “excessive capacity” problem With the 77% capacity utilization next year, world will see a lot of inefficient and excessive mills. Due to the lack of orders the market in 2009 should be considered as the market of buyers and the producer’s profit will be restricted by 5-7%

18. Prices for raw materials 2009 UPE Co. 18. Prices for raw materials 2009 fob Brazil fob Australia fob Rotterdam Carajas fines, 67% Fe Source: ISSB, UPE Co. est. In view of market reality raw materials suppliers will be forced to reduce the raw material prices in 2009: for iron ore by 35-50%, for coking coal by 50-57%, for scrap by 45-50%

Consumption per 1t steel UPE Co. 19. Steel production cost for Ukrainian mills (nonintegrated vertically*) Raw materials unit Consumption per 1t steel 2008 year 2009 year Cost changes 2009-2008, $/t Price for unit, $ Cost component $/t Price changes 2009/2008 % Iron ore t 1,39 117,5 163 -50% 59 82 -82 Coking coal 0,57 300 171 -60% 122 69 -102 Scrap 0,27 310 84 -45% 46 -38 Transport $/t 35 0% Natural Gas th.m3 0,16 229 37 35% 309 49 13 Ferroalloys kg 11 2 22 1 -11 Other 102 -30% 71 -31 Total   614 364 -250 * mills without own raw materials sources Source: UPE Co. est. Due to reducing the raw materials prices, cost production will drop approx. by $250 to the level of $364 per ton in case of Ukraine

20. Production cost level determining steel price in 2009 UPE Co. 20. Production cost level determining steel price in 2009 Production cost determining steel prices in 2009 *-integrated mills with own iron ore resources Source: UPE Co. est. Predominantly world price level in 2009 will be determined by production cost of China’s producers

21. Chinese game on the global market in 2007- 2008 UPE Co. 21. Chinese game on the global market in 2007- 2008 Source: ISSB, UPE Co. est. Presently China is a world price determining power. During 2007-2008 the price trend depended essentially upon Chinese export volume

22. Steel price dynamics (billet, $/t fob Black Sea) UPE Co. 22. Steel price dynamics (billet, $/t fob Black Sea) Prices effected by speculative factors Prices effected by the fundamental factors Source: UPE Co. est. Under effect of the fundamental factors the price are getting back to their historical orbit

23. Forecast of export steel price in 2009 ($/t fob Black Sea) UPE Co. 23. Forecast of export steel price in 2009 ($/t fob Black Sea) The very smooth price trend in the first half of 2008 will be followed by some uptrend in the second half of 2009

24. Current price moving (billet, $/t fob Black Sea) UPE Co. 24. Current price moving (billet, $/t fob Black Sea) Low demand Production cost At present time steel prices are moving in narrow horizontal corridor, having been pressed by low demand from above and high production cost from below. Such situation makes tougher the arguments of steel producers during raw material prices negotiations

25. The main risks for exporters in 2009 UPE Co. 25. The main risks for exporters in 2009 Rise of trade protectionism Cancellation of steel export tax in China Shrinkage of the import markets

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