1. 31 Mount Pleasant, London WC1X 0AD UK Tel +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 4 th India Steel Summit Delhi, August 2010 Prepared by: Paul Scott Group Manager, CRU Steel Group

2. 2 Presentation plan Latest developments CRUs forecast Focus on India and the key challenges faced by its steel industry Key issues facing the world steel industry

3. 3 Latest developments

4. 4 Prices for finished steel, both flat and long products, have generally been following a downward trend during the past two-to-three months CRU steel price index (CRUspi), index, April 1994 = 100 Data: CRU Analysis. 2007 2008 2009 2010

5. 5 And when we take a look at the regional CRUspi indices its clear that none of the major steel consuming regions have escaped the weakness CRU steel price index (CRUspi), index, April 1994 = 100 Data: CRU Analysis. 2007 2008 2009 2010

6. 6 Concentrating on demand, world finished steel consumption has weakened of late and for the third quarter as a whole were expecting it to fall for the first time in almost two years World apparent consumption, m tonnes Data: CRU Analysis. 2007 2008 2009 2010

7. 7 And its interesting, and perhaps worrying, to note that finished steel consumption is contracting in both developed and developing markets Quarter-on-quarter changes in apparent consumption of finished steel products, % Data: CRU Analysis. 2007 2008 2009 2010

8. 8 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) Typical quarter-on-quarter changes in apparent consumption of finished steel products, % Data: CRU Analysis.

9. 9 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 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

10. 10 Meanwhile, in some developing economies the slowdown in the rate of growth in economic activity has been driven mostly by government policy Year-on-year changes, % Data: CRU Analysis. 2007 2008 2009 2010

11. 11 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 Crude steel production, m tonnes Data: CRU Analysis. 2007 2008 2009 2010

12. 12 The recent decline in world crude steel production has clearly had a negative impact on the demand for some key steelmaking raw materials 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

13. 13 And its 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% Spot prices of key steelmaking raw materials, US$/tonne Data: CRU Analysis. 2007 2008 2009 2010

14. 14 CRUs forecast

15. 15 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% Year-on-year changes in world apparent consumption, % Data: CRU Analysis.

16. 16 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 World apparent consumption, m tonnes Data: CRU Analysis.

17. 17 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 World apparent consumption of finished steel products, m tonnes Data: CRU Analysis.

18. 18 Figures for 2010 as a whole, however, disguise the weakness that were anticipating in the second half, when world finished steel consumption is actually expected to fall World apparent consumption of finished steel products, m tonnes Data: CRU Analysis. 2009 2010 Forecast

19. 19 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 Markits Steel PMIs Data: Markit. Note: readings above 50 signify growth; below 50 signify contraction. 2007 2008 2009 2010

20. 20 And even in 2011 were not expecting to see a particularly robust set of macroeconomic conditions, with industrial production growth set to slow in most major economies Year-on-year changes in industrial production, % Data: CRU Analysis.

21. 21 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 Year-on-year changes in world apparent consumption, % Data: CRU Analysis.

22. 22 But, lets not forget that any growth from 2010s levels will result in new record levels of finished steel consumption (which again will be dominated by non-OCED countries) World apparent consumption, m tonnes Data: CRU Analysis.

23. 23 And, its worth pointing out that from the fourth quarter of this year were expecting world finished steel consumption to grow quarter-after-quarter through until the end of 2011 Apparent consumption of finished steel products, m tonnes Data: CRU Analysis. 2009 2010 2011 Forecast

24. 24 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 Spot prices of key steelmaking raw materials, US$/tonne Data: CRU Analysis. 2009 2010 2011

25. 25 The upshot for finished steel prices is that we believe that were pretty much at the low point now and that we should see a gradual recovery over the coming quarters CRU steel price index (CRUspi), index, April 1994 = 100 Data: CRU Analysis. 2009 2010 2011 Low point about now!

26. 26 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 CRU steel price index (CRUspi), index, April 1994 = 100 Data: CRU Analysis. 2009 2010 2011

27. 27 Focus on India and the key challenges faced by its steel industry

28. 28 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 Apparent consumption in India, m tonnes Data: CRU Analysis. CAGR 2009-2014: Infrastructure: 10% Real estate: 11% Automotive: 15% Engineering: 8% Consumer durables: 9%

29. 29 This growth may well be impressive, but we do have some concerns as to the local steel industrys 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.

30. 30 Key issues facing the world steel industry

31. 31 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 Quarter-on-quarter changes, % Data: CRU Analysis. 2007 2008 2009 2010 This represents a variation in margin

32. 32 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 Indian exports of iron ore, m tonnes Data: GTIS, CRU Analysis.

33. 33 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 Chinese net exports of finished steel products, m tonnes Data: CRU Analysis. 2009 2010 2011 Forecast

34. 34 Thank you for your attention!

35. 35 Please address questions or comments relating to this presentation to: Paul Scott Managing Consultant, CRU Steel Team CRU Group 31 Mount Pleasant London WC1X 0AD Tel.: +44 20 7903 2185 Fax.: +44 20 7833 5634 Email: paul.scott@crugroup.compaul.scott@crugroup.com