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Steel Market Report: May 2011

Summary The latest World Steel Association demand forecasts predict continued growth in world apparent consumption. In Europe, manufacturing output has continued to grow, whereas construction activity remains poor. Raw material prices continue to rise, putting upward pressure on steelmakers' costs.

Steel demand outlook World steel demand Global apparent steel demand recovered strongly in 2010, and exceeded prerecession levels. The World Steel Association's latest forecasts predict continued growth over the next two years at a robust, but more sustainable, rate of 6% per annum.

World apparent consumption of finished steel products

1500

9% 7% -1% -6% 13% 6% 6%

1200 Million tonnes

7% 7%

3% 6%

900 600 300 0

7% 2%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011 (F)

Source: worldsteel

2012 (F)

Chinese apparent consumption of finished steel products

700 600 500 Million tonnes 400 300 200 100 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 (F) 2012 (F) 0

1% 27%21% 26% 15% 23% 9% 12% 5% 26% 5% 5% 5%

Chinese demand Chinese demand for steel boomed during the recession, and is the main driver for the ongoing surge in raw material prices. In 2010, demand growth slowed to 5% year-on-year, and is forecast to remain at this rate for the next two years. China currently consumes 43% and produces 44% of the world's steel.

Source: worldsteel

The strongest growth in 2010 was in the developed world, the CIS countries and Latin America, as these regions recovered from the collapse in demand caused by the economic crisis. The EU, USA and Japan have all yet to return to pre-recession demand levels however. Looking forward to 2011 and 2012, demand growth is predicted to remain solid in the developed world, apart from Japan, with the USA looking particularly strong. But it is the developing world (excluding China) that is expected to drive the improvement in demand, with double-digit growth forecast for Turkey, Kazakhstan, Ukraine, Chile, Peru, South Africa, India, Indonesia (where growth has been running at +20% per annum), Malaysia, Philippines, Thailand and Vietnam.

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Apparent steel demand by region

Consumption: million tonnes 2009 2010 2011 (F) 2012 (F) 119 145 152 157 24 30 33 35 36 48 52 57 83 110 122 130 34 46 49 53 27 26 25 27 42 45 46 50 769 834 880 931 548 576 605 635 1,134 1,284 1,359 1,440 Growth rates 2010 2011 (F) 2012 (F) 21.8% 4.8% 3.3% 25.0% 10.0% 6.1% 33.3% 8.3% 9.6% 32.5% 10.9% 6.6% 35.3% 6.5% 8.2% -3.7% -3.8% 8.0% 7.1% 2.2% 8.7% 8.5% 5.5% 5.8% 5.1% 5.0% 5.0% 13.2% 5.8% 6.0%

EU 27 Other Europe CIS NAFTA Central & South America Africa Middle East Asia & Oceania of which China TOTAL WORLD

Source: worldsteel European market Eurofer (our European steel federation) is predicting growth in excess of 5% for all the major steel consuming sectors in the EU with the exception of construction (+1.7%) and shipbuilding (-2.1%). This has resulted in an upgraded forecast for 2011. The quarterly progress in steel demand is forecast to be: Year-on-year % change Real demand Apparent demand +4.0% +22.2% +8.7% +9.9% +5.0% +3.5% +3.9% +6.0% +3.6% +4.7% +5.2% +6.0% +3.8% +1.5% +3.6% +4.9% +4.0% +4.4% +4.2% +4.4% +3.9% +3.8%

Year 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Year 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Year 2012 Source: Eurofer

Raw material prices The growth in world steel production has continued to run ahead of the ability of the miners to expand their output capacity. While demand growth rates in other developing countries are now exceeding China's, the sheer scale of the latter's appetite for raw materials is still the driving force behind the continuing rise in raw material prices experienced in the first two quarters of the year.

3

Iron ore ­ contract prices Last year the principal miners ended the annual benchmark price contract system, which had ensured price predictability for the industry's key raw material, and imposed index-linked quarterly prices. As a result, ore prices rose by 112% in 2010, and by a further 38% in the first two quarters of 2011.

2011

Vale standard sinter feed for Europe, FOB Tubarão 300 FOB $ cent/dmtu 250 200 150 100 50 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: Steel Business Briefing

Iron Ore Spot Price $/tonne CFR North China port 250 200 150 100 50 0 Mar 08 Mar 09 Mar 10 Nov 07 Nov 08 Nov 09 Nov 10 Mar 11 Jul 08 Jul 09 Jul 10

Iron ore ­ spot prices The new quarterly contract price is derived from the preceding quarter's spot price for exports from India to China, lagged by one month, e.g. the Q3 price will be based on the average daily spot price in March to May. Recognising that May is not yet complete, it is predicted that the Q3 contract price will be virtually unchanged from Q2.

Source: Steel Business Briefing

Hard coking coal: Australian export price 450 400 US $ per tonne FOB 350 300 250 200 150 100 50 0 Jun 08 Jun 09 Jun 10 Sep 08 Sep 09 Sep 10 Dec 07 Dec 08 Dec 09 Dec 10 Mar 08 Mar 09 Mar 10 Mar 11

Coking coal Coking coal prices shot up in the early months of the year in reaction to the Queensland floods, nearly reaching the alltime peak established in 2008. In the two months from December 2010 to February 2011 Australian coking coal prices rose by 66%. Since February, prices have fallen back somewhat, but the April price was still 50% higher than the average for 2010.

Source: Steel Business Briefing

4

Shredded scrap prices in mainland Europe

450 400 Euros per tonne, ex works 350 300 250 200 150 100 50 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Scrap After the volatility experienced in 2010, scrap prices have shown greater stability in recent months. Scrap peaked in January, then in the course of the following three months dropped by 11%. Prices have been rising slowly since April. It should be noted that scrap prices remain at historically high levels.

Source: Steel Business Briefing

Iron ore and scrap price com parison 1200 Index: 2000 = 100 1000 800 600 400 200 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Iron ore/scrap relativities Traditionally, iron ore and scrap prices tended to move in tandem. The spectacular hikes in iron ore prices in the past 15 months have meant that the divergence between iron ore and scrap prices has continued to widen. Ore is now relatively a far more expensive source of Fe input than scrap. This is largely a result of the high proportion of blast furnace based steelmaking in China and other emerging countries. We continue to predict that this imbalance will encourage integrated steel producers to maximise the volumes of scrap they use, thereby putting upward pressure on scrap prices in the medium term.

Scrap

Ore

Index derived from Steel Business Briefing data

Steel product prices

North European flat product prices 1000 900 800 700 600 500 400 300 200 100 0 Jan 00 Jul 00 Jan 01 Jul 01 Jan 02 Jul 02 Jan 03 Jul 03 Jan 04 Jul 04 Jan 05 Jul 05 Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11

Hot rolled coil Cold reduced Galvanised Plate

Flat products Flat product prices bottomed out in November 2010, and over the following four months rose by some 22% on average. This is partly a reflection of the improved output by EU and UK manufacturing industry, but has also been driven by the stark need for European steelmakers to recover the huge increases in raw material prices. In the past two months flat product prices have been either stable or have fallen back slightly.

Source: Steel Business Briefing

Euros per tonne ex works

5

With the exception of Brazil, prices in other major producing areas continue to move in line with European price trends.

International price comparison for hot rolled coil

1600 1400 1200 1000 800 600 400 200 0 Jul 03 Jul 04 Jul 05 Jul 06 Jul 07 Jul 08 Jul 09 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jul 10 Jan 11

US Dollars per metric tonne

N. Europe

N. America

Japan

Russia

China

Brazil

Source: Steel Business Briefing N. Europe domestic - ex works N. America domestic - FOB Mid-west mill Japan domestic (Tokyo Steel) - FOT Russia Black Sea export - FOB China domestic - Shanghai Brazil domestic - delivered

North European long product prices

Euros per tonne delivered

1000 900 800 700 600 500 400 300 200 100 0

Long products Long product prices have moved very similarly to flat products. They bottomed out in November and then recovered by 23% on average up to February. Since then prices have reached a plateau, falling slightly by 3% on average. The recent uptick in scrap prices suggests that long product prices will start to rise again, and there is some evidence that this has already started for rebar and wire rod.

Jan 00

Jan 01

Jan 02

Jan 03

Jan 04

Jan 05

Jan 06

Jan 07

Jan 08

Jan 09

Jan 10

Rebar

Merchant bar

Medium sections

Wire rod

Source: Steel Business Briefing

Import activity

EU Imports of Finished Steel Products

3000

Jan 11

1000 tonnes per month

2500 2000 1500 1000 500 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 0

After two years of subdued activity, imports into the EU have risen quite rapidly so far this year: Q1 2011 imports were 34% above Q4 2010 levels. This is a reflection of the improvements in EU manufacturing output. Nevertheless, it is notable that import volumes remain significantly below pre-recession levels. Within this total picture, long product import volumes remain extremely low, reflecting the poor construction activity levels in several EU member states, including the UK.

Source: Eurofer

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Outlook UK Steel does not issue demand forecasts and nor do we attempt to predict future price movements. However, we would point to a number of factors that could indicate future developments. As noted above, the World Steel Association is forecasting healthy demand growth in all regions of the world, while within Europe, Eurofer predicts increased output in the next two years in most steel-consuming sectors, including construction resulting in positive growth in both real and apparent consumption for steel. Added to this is the significantly worsened cost-price squeeze that integrated steel producers in particular have experienced.

Iron ore prices versus steel product prices

1200 1000 Index 2002 = 100 800 600 400 200 0 2002 2003 2004 Iron ore 2005 2006 2007 2008 2009 2010

Iron ore prices have risen by 670% since the start of the surge in 2005. Hot rolled coil by contrast is currently selling in Europe at just 16% above early 2005 levels. Thus there continues to be strong pressure on steel producers throughout the world to redress this cost-price squeeze as soon as market conditions permit.

Hot rolled coil

Merchant bar

Index derived from Steel Business Briefing data

UK steel prices compared with general inflation

Steel price movements compared with the Retail Price Index

250 230

Despite recent price increases, steel on average remains good value for money compared with UK prices in general.

Index: 1987 = 100

210 190 170 150 130 110 90 70 50

19 91

19 93

19 95

19 97

19 89

19 99

20 01

Steel

RPI

Source: ISSB Ltd

Note: All prices used in this report were extracted from data published by Steel Business Briefing on its website in the week commencing 23rd May 2011.

27 May 2011

20 03

20 05

20 07

19 87

20 09

Information

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