May   2 0 0 5 A Fixed Income (Bond Investor’s) Perspective on the North American Steel Industry David Common david.common@jpmorgan.com 212-270-5260 S T R I C T L Y   P R I V A T E   A N D   C O N F I D E N T I A L

Bond investors have a different outlook vs. equity investors We try to “outperform” Treasuries: 10-year Treasury currently ~ 4.25% “High-grade” investors try to make 50-150 basis points > Treasuries: 4.75-5.75% “High-yield” investors try to make 200-600 basis points > Treasuries: 6.25-10.25% More caution given a different risk/reward ratio and different job description

Credit ratings are important… Majority of the steel companies have high-yield ratings. High Grade High Yield Source: Moody’s and S&P.

… but trading levels vary widely among like-rated bonds Ratings Issue Price Yield Ratings Issue Price Yield BBB B Baa2/BBB- Thyssenkrupp Finance BV 5.000% 105.0 4.0% B1/BB- Texas Industries 10.250% 112.3 6.1% Ba1/BBB+ Ispat Inland 9.750% 114.3 6.3% B1/B+ AK Steel 7.750% 89.8 9.4% Oregon Steel Mills 10.000% 107.3 7.5% BB B2/B+ OAO Severstal 9.250% 103.0 8.7% Ba2/BB International Steel Group 6.500% 99.3 6.7% B2/B Earle M. Jorgensen 9.750% 106.0 8.3% Ba2/BB- California Steel Industries 6.125% 91.0 7.2% Ryerson Tull 8.250% 85.0 10.6% IPSCO 8.750% 111.0 5.9% B3/B+ Allegheny Technologies Inc 8.375% 104.5 7.6% Steel Dynamics 9.500% 107.0 B3/B- Sheffield Steel 11.375% 102.0 11.8% United States Steel 9.750% 110.0 6.9% Corus Group 7.500% 101.8 Ba3/BB- Gerdau Ameristeel 10.375% 109.0 7.8% CCC Russel Metals 6.375% 95.0 7.1% Caa2/CCC Schuff Steel 10.500% 10.8% Source: Moody’s and S&P.

2000 – 2005: A Truly Astonishing Cycle Rating agencies say they try to “look across the cycle” Investors do not; they try to time it. Degree of success? ….. Low! Forecast ingredients: can anybody predict all this? Steel Demand Shipping Rates Capacity Reductions/De-Bottlenecking Currencies Trade Flows Raw Material Costs Capacity Utilization Sentiment Inventory Stocking/De-Stocking

Fortunately, prices and costs are at least correlated Source: JP Morgan and company reports.

2004 unit profits were very high historically 2004 profits were 2~3x historical average Source: JP Morgan and company reports.

Given the unpredictability, use debt with caution Standard corporate finance: Above-average business risk should be paired with below-average financial risk But it’s not just the amount of debt. It’s the source and terms of the debt Optimal capital structure: Working capital supported by asset-based borrowings, backed by accounts receivable and inventories P,P&E supported by long-term, “loan value” type debt, preferably “callable” (pre-payable, to some extent) It’s better to ‘pay-up” for long-term and no/few financial covenants Pay-up and live to fight another day

GM and Ford: A Major Investor Worry Automakers with “legacy costs” face the same issues as similarly situated steel companies: uncompetitive cost structure Something that can’t go on…probably won’t “The market” expects management to go toe-to-toe with labor on legacy costs Bankruptcy may be required to effect the magnitude of reductions thought necessary Detroit vs. the transplants: as long as the cars get made/sold Mix is obviously an issue Longer term: Korea and China as a source of auto imports

Analysts' Compensation: The research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors and overall firm revenues. The firm's overall revenues include revenues from its investment banking and fixed income business units. Principal Trading: JPMorgan and/or its affiliates normally make a market and trade as principal in fixed income securities discussed in this report. Ratings System: JPMorgan uses the following sector/issuer portfolio weightings: Overweight (over the next three months, the recommended risk position is expected to outperform the relevant index, sector, or benchmark), Neutral (over the next three months, the recommended risk position is expected to perform in line with the relevant index, sector, or benchmark), and Underweight (over the next three months, the recommended risk position is expected to underperform the relevant index, sector, or benchmark). JPMorgan uses the following fundamental credit recommendations: Improving (the issuer’s credit profile/credit rating likely improves over the next six to twelve months), Stable (the issuer’s long-term credit profile/credit rating likely remains the same over the next six to twelve months), Deteriorating (the issuer’s long-term credit profile/credit rating likely falls over the next six to twelve months), Defaulting (there is some likelihood that the issuer defaults over the next six to twelve months). Legal Entities: JPMorgan is the marketing name for JPMorgan Chase & Co. and its subsidiaries and affiliates worldwide. J.P. Morgan Securities Inc. is a member of NYSE and SIPC. JPMorgan Chase Bank, N.A. is a member of FDIC and is authorized and regulated in the UK by the Financial Services Authority. J.P. Morgan Futures Inc., is a member of the NFA. J.P. Morgan Securities Ltd. (JPMSL) is a member of the London Stock Exchange and is authorized and regulated by the Financial Services Authority. J.P. Morgan Equities Limited is a member of the Johannesburg Securities Exchange and is regulated by the FSB. J.P. Morgan Securities (Asia Pacific) Limited (CE number AAJ321) is regulated by the Hong Kong Monetary Authority. JPMorgan Chase Bank, Singapore branch is regulated by the Monetary Authority of Singapore ("MAS"). J.P. Morgan Securities Asia Private Limited is regulated by the MAS and the Financial Services Agency in Japan. J.P. Morgan Australia Limited (ABN 52 002 888 011/AFS Licence No: 238188) (JPMSAL) is a licensed securities dealer. General: Information has been obtained from sources believed to be reliable but JPMorgan does not warrant its completeness or accuracy except with respect to any disclosures relative to JPMSI and/or its affiliates and the analyst's involvement with the issuer. Opinions and estimates constitute our judgment as at the date of this material and are subject to change without notice. Past performance is not indicative of future results. The investments and strategies discussed here may not be suitable for all investors; if you have any doubts you should consult your investment advisor. The investments discussed may fluctuate in price or value. Changes in rates of exchange may have an adverse effect on the value of investments. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. JPMorgan and/or its affiliates and employees may act as placement agent, advisor or lender with respect to securities or issuers referenced in this report. Clients should contact analysts at and execute transactions through a JPMorgan entity in their home jurisdiction unless governing law permits otherwise. This report should not be distributed to others or replicated in any form without prior consent of JPMorgan. U.K. and European Economic Area (EEA): Investment research issued by JPMSL has been prepared in accordance with JPMSL's Policies for Managing Conflicts of Interest in Connection with Investment Research. This report has been issued in the U.K. only to persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001 (all such persons being referred to as "relevant persons"). This document must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is only available to relevant persons and will be engaged in only with relevant persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) in their home jurisdiction. Australia: This material is issued and distributed by JPMSAL in Australia to "wholesale clients" only. JPMSAL does not issue or distribute this material to "retail clients." The recipient of this material must not distribute it to any third party or outside Australia without the prior written consent of JPMSAL. For the purposes of this paragraph the terms "wholesale client" and "retail client" have the meanings given to them in section 761G of the Corporations Act 2001. Korea: This report may have been edited or contributed to from time to time by affiliates of J.P. Morgan Securities (Far East) Ltd, Seoul branch. Revised November 12, 2004 Copyright 2004 JPMorgan Chase & Co. All rights reserved. Additional information available upon request. *JPMSI or an affiliate has managed or co-managed an offering of securities within the past twelve months. ^A senior employee, executive officer, or director of JPMSI and/or its affiliates is a director of the company.