21 October 2011

st

Economic and Steel Market Outlook 2011-2012

Q4-2011 Report from EUROFERs Economic Committee 1)

EU macro-economic overview
(y-o-y change in %)

I.

EU Macro-economic overview

EUROFER Forecast October 2011 EU

2009 2010 2011 2012 (f) (f)

GDP Private consumption Government consumption Investment

-4.3

1.9

1.5

1.0

-1.7

0.9

0.4

0.7

2.2

0.6

0.2

-0.1

-11.8

0.0

1.9

2.3

Investment in mach. -17.7 equip. Investment in construction Exports Imports Unemployment rate Inflation Industrial production
(f) = forecast

3.8

5.2

3.7

-6.3

-3.4

0.7

0.9

-10.9 10.4

6.1

4.2

-10.3

9.3

4.3

3.2

9.1

9.6

8.7

8.7

0.7

1.9

2.8

2.0

-13.8

7.1

3.8

2.3

Recovery lost steam in Q2 Indicators weaken on resurfacing of sovereign debt concerns Manufacturing to remain bright spot in darkened outlook ECB changing its policy stance Fragile recovery - no recession Risks skewed to the downside GDP growth in the second quarter of 2011 slowed to a disappointing 0.2% q-o-q. The recovery losing steam did not come as a surprise. The boost from mild weather conditions which had temporarily bolstered growth in early 2011 faded at the end of the first quarter. At the same time, the negative effect of austerity measures through fiscal tightening and subdued government consumption on domestic demand became more pronounced. Private consumption was rather dull, reflecting weak confidence levels and the effect of high inflation and fiscal tightening on disposable incomes. Meanwhile, slowing global economic growth dampened dynamics in international trade, thereby reducing export opportunities for EU exporters. The Euros relative strength versus the US dollar has also hurt foreign trade in the second quarter. The strongest deceleration in economic growth was seen in the core countries Germany and France as well as in some smaller EU countries that

1)

Based on information available as of 17 October, 2011

th

had registered a robust performance in the first quarter. Consequently, growth differentials at the country level narrowed to some extent. Leading indicators head south Due to sovereign debt concerns resurfacing, leading indicators headed south during summer. Readings had already been under pressure during the second quarter on concerns about the sovereign debt crisis and the vulnerability of EUs financial systems and on evidence that global economic growth had started to slow. Agreement on a second bailout programme of 109 billion Euro for Greece could calm down market turmoil only for a short while. Since August, doubts about the progress made by the Greek government on its debt reduction programme fuelled speculation on Greece not being able to meet several critical fiscal targets that are conditional to getting the next instalment of the bailout money from the EU, IMF and ECB. Under the current circumstances, rumours suffice to send big ripples into the markets. Stock markets registered hefty losses, bond spreads increased and the Euro came under pressure.

Economic confidence in the EU decreased quite significantly in August and September. Also other forward looking indicators turned sour in recent months. The Markit Eurozone Composite Output index fell to below 50 in September, reflecting that the assessment of business activity in the corporate sector has hit a two-year low. Also the OECD leading economic indicators for Europe lost strength in recent months. Poor Q2 growth figures, not only in the EU but also elsewhere in the advanced economies, slipping indicators and increased risk and uncertainty levels related to the intensification of the Eurozone sovereign debt crisis have led to EUROFERs Economic Committee revising its economic growth forecasts for 2011 and 2012. Manufacturing sentiment is weakening Indicators on manufacturing activity have been mixed lately.

Sentiment in industry has been losing strength since April, and slipped further in September to just above the longterm average. In addition to a less positive assessment of order intakes and production expectations, the latest surveys suggest that since July stocks of finished products in the supply chain are on the rise.

Meanwhile, since June actual order data have started to mirror weakening business conditions as well. Month-onmonth growth in industrial new bookings turned negative in June and July, more so in the Eurozone than in the EU27. Meanwhile, industrial production in July and August continued to grow at a rate of close to 5% year-on-year. Germany registered in July even two-digit output growth.

Underlying data show that particularly output of capital goods continued to increase at a healthy rate, with demand increasingly supported by domestic sales. Corporate investment in machinery and equipment in Europe has picked up following very weak investment activity during the 2009 recession. This has broadened the basis of the manufacturing recovery in the EU which had been strongly reliant on exports until this year.

Activity not seen falling off a cliff The current mix of indicators and hard data on industrial bookings and activity appears to suggest that, while high uncertainty and risk levels have a negative impact on business confidence, industrial momentum has not yet grinded to a halt. Well-filled order books in most manufacturing sectors will for the time being cushion the impact of slowing order intakes, keeping industrial activity at a rather satisfactory level. Nevertheless, it is evident that output will slow down or could even turn temporarily negative in the months ahead should the weakening trend in new order intakes persist. The recent depreciation of the Euro against the US dollar could help improving the competitiveness of Eurozone companies abroad and soften the effects of such a downturn. The outlook for 2012 is currently clouded by more uncertainties than some months ago. The central forecast assumes investment growth in the EU to continue at a rate of around 2% in 2012. Should the sovereign debt crisis deteriorate to beyond a manageable level, it will most certainly backfire on industrial confidence and result in a more pronounced slowdown or reduction in corporate investment. This will be exacerbated by tightening credit conditions in EUs financial markets. Interbank lending is reportedly showing signs of tension since summer which appears to suggest that access to credit could become more difficult and cost of lending for the private sector will rise. Export demand is to remain another important pillar supporting activity in EUs manufacturing industry. However, the rebound in international trade

appears to have entered a soft patch. EUs export opportunities are largely shaped by the economic performance of Asia and other emerging economies. Capacity limits and monetary tightening in response to high inflation have in 2011 tempered GDP growth in this part of the world. Growth prospects for 2012 look nevertheless still rather solid; inflation is easing and governments could decide to stimulate the economy by loosening up their fiscal and monetary policies if necessary. Despite activity losing momentum, manufacturing looks set to remain a relatively bright spot on the overall darkened EU economic landscape in the remainder of 2011 and in 2012. Consumption showing signs of sagging The outlook for the other components of domestic demand is bleak. Pressure on EU governments to cut budgets more rapidly has intensified in recent months, not only in the debt-ridden peripheral Eurozone countries but also in the core countries with a structurally solid budget and debt performance. As a result, government spending across the EU will be reduced more briskly than projected before. Inevitably, this will be felt in all sectors of the economy.

Consumer confidence deteriorated quite sharply in recent months due to the sovereign debt crisis in the Eurozone countries flaring up and on concerns that the policy response is too late and too little. As a result, private consumption was quite sluggish in Q2-2011. The bottom line is that consumers fear for their jobs, their income and pensions; particularly in the peripheral Eurozone countries fiscal retrenchment and governments shedding jobs has fuelled social instability. The modest economic rebound in the EU has so far not resulted in a significant decline in unemployment. In August, the EU27 unemployment rate stood at 9.5% compared with 9.6% in the same month of 2010. These figures hide huge differentials at the country level: unemployment rates range from around 4-5% in Austria and the Netherlands to over 21% in Spain. Generally speaking, employment growth has been quite benign in the Northern European countries in which the manufacturing sector benefitted strongly from the recovery in international trade. Harsh fiscal measures resulting in downward pressure on household income, weak job creation and high unemployment will most likely result in a certain degree of consumer retrenchment in 2012; our central forecast sees private consumption growth remaining below 1% next year. The risks are clearly on the downside, owing to unusual high uncertainties clouding the consumers assessment of current and expected economic and financial conditions.

ECB seen changing its policy stance Excessive public debt loads in the peripheral Eurozone countries have continued to spook financial markets. Surging yields on government bonds resulted in surging financing costs for these countries. Due to rising concerns about their ability to withstand further pressure with the focus shifting from Greece and Portugal to Spain and Italy the ECB decided to purchase Spanish and Italian debt securities. This support operation was followed in September by a move in the ECB policy from a tightening to an easing stance. The escalation in financial market pressures, evidence of lower inflation, combined with slowing GDP growth in Q2 and continued weak prospects for the remainder of the year and into 2012 have been the catalysts in the change in policy reaction.

months of 2012 should downside risks to economic growth and inflation persist. The shift in ECB stance triggered downward pressure on the Euro. The currency had kept its strength during the second quarter and in the JulyAugust period, remaining within a rather narrow bandwidth of 1.401.45US$, despite weakening indicators and financial market woes.

Inflation has eased somewhat in recent months owing to oil and food coming down from their peaks registered in early 2011. In August 2011, EU annual inflation stood at 2.9% coming from rates above 3% in the second quarter. However, inflation is still substantially higher than in the same period of 2010 when the annual inflation rate was around 2%. An interest rate cut appears to be on the cards later this year, possibly followed by another one in the first

Since early September however, pressure started to mount and the Euro exchange rate versus the US dollar slipped recently below 1.35 US$. The Euro depreciation is good news for Eurozone exporters. It should be supportive to softening the effects of slowing dynamic in international trade on EU exports. Against the background of weakened economic growth prospects for the Eurozone countries and the likelihood of on-going financial market turbulence chances are that the Euro will remain under downward pressure for the time being Fragile recovery recession avoided The latest forecasts for the macroeconomic framework in the remainder of 2011 and in 2012 from EUROFERs Economic Committee show downward revisions for annual GDP growth in 2011 and 2012 in comparison with our previous outlook. EU economic growth

will amount to 1.5% in 2011, and decelerate further to 1% in 2012. In the July outlook a moderation in growth had already been pencilled in, due to the EU economy facing significant headwinds and with already high uncertainty levels potentially weighing down on EUs overall growth perspectives. Over summer, risks and uncertainties have intensified to unusually high levels due to the Eurozone debt crisis entering a critical stage. A key issue is that financial markets apparently have lost confidence in the ability of EU political leaders to provide structural solutions to the debt problems in the peripheral Eurozone countries. It is feared that the EU will be sailing deeper into uncharted territory while the ships officers continue to discuss about the best course to safer waters. Meanwhile, it is also clear that there is no easy way out. Many options exist, all of them will have a negative impact on EUs economic performance which will be extremely difficult to quantify with respect to the direct and indirect effects incorporated in the various bailout-default scenarios. The most likely scenario still appears to be that European policymakers will be able to contain the debt crisis in the peripheral Eurozone countries. This muddling through scenario assumes the implementation of the euro-area financial stability measures announced on July 21st 2011, together with the first outline of necessary steps towards improved governance of the euro area and a further strengthening of the capitalisation of EU banks. Future steps could include a greater harmonisation and co-operation in financial crisis management and a

stronger role for the European Commission including a larger budget. However, reaching agreement on these topics will be an even more challenging tour de force and encounter opposition from several EU member states. The central scenario also assumes the continuation and probably intensification of fiscal tightening which inevitably will stifle economic growth, which will make the road to recovery longer and more difficult particularly for the Southern European economies. Nevertheless, the EU economy is seen escaping a double-dip recession. However, stringent austerity measures imply that most governments are left with very little room provide their ailing economies with new stimulus measures. Internal risks have come to the fore Early 2011 risks to the outlook for the EU economy were rather diverse, ranging from the internal risk of Eurozone indebtedness to external risks such as rising commodity, energy and food prices fuelling inflation, the instability in the Arab world and later also the impact of the devastating earthquake in Japan. These external risks appear to have become more balanced in recent months, whereas the internal risks in the EU have come to the fore and are presently skewed heavily to the downside. These risks are not limited to the financial and economic stability of certain endangered Eurozone member states, but pose a serious threat to the stability of the banking sector in Europe and abroad and as such also to other EU members and the global economy.

USA GDP growth slows further in Q2 Data revisions reveal weaker growth than earlier estimated No near term rebound expected Growth to remain subdued GDP growth was only 1.3% (seasonally adjusted annualised rate) in Q2-2011. Moreover, the recent revisions to US national accounts show that the downturn during the recession has been deeper and the rebound slower than previously estimated. Private consumption came almost to a halt in Q2 and manufacturing activity lost much of the strength it had before. The exceptionally weak construction and real estate markets continue to act as a drag on economic growth. Looking forward, confidence indicators have remained weak during Q3-2011. The ISM manufacturing index fell to just above 50 in August. The debate and last-minute agreement on raising the federal debt ceiling revealed the lack of a credible fiscal policy. This was confirmed by S&Ps downgrade of US long-term debt rating. Together with concerns about the Eurozone debt crisis this has introduced new risks and uncertainties that will dampen growth. Against the background of continued high inflation, the high indebtedness of the federal, state and local governments as well as private consumers, disappointing job creation and the persisting housing sector downturn is it hard to see what could be driving a near term rebound of the economy. The Fed has indicated it will keep the federal funds rate to close to zero until, but a third round of quantitative easing has not yet been confirmed. GDP growth is forecast around 1.5% in 2011 by most economic institutes. For 2012 economic growth is projected to be nearing 2%.

Key emerging regions Growth in China holding up well, no indication of sharp slowdown Fiscal and monetary policy in BRICs could become loser if necessary The Chinese economy continued to grow at a robust pace in Q2-2011; annual growth was 9.5%. So far this year, investment remained the driver of growth despite fading support from the fiscal policy. No signals point to a marked near term deceleration of the economy. While weak growth in the advanced economies does not bode well for Chinas manufacturing sector, production and export held up rather well so far this year owing to continued solid demand from the Asian region. GDP growth is seen around 9% in 2011 and at slightly below 9% in 2012. In India high inflation and interest rates are putting investment under pressure. Combined with a moderation in export growth, economic momentum slowed in recent months. Should this continue, the central bank may revise its tightening policy. GDP is seen growing around 7% in 2011 and 8% in 2012. Brazils economy has been growing moderately so far this year. Interest rates had been raised to control inflation; this has attracted large capital inflows. The central bank cut interest rates again in August on concerns about the overvalued Real and weaker than expected Q2 growth. GDP growth may amount to 4% in 2011 and 2012. In Russia GDP growth slowed to 0.6% q-o-q in the 2nd quarter of this year. Manufacturing momentum has remained fairly robust so far this year. Inflationary pressures have eased, supported by the appreciation of the Rouble. Investment is seen picking up in 2012 supported by a fiscal boost. GDP is forecast to grow 3.5% in 2011 and 4% in 2012.

II.

The EU Steel Market

Overview Steel Using Sectors

Development of the main steel using sectors EUROFER forecast October 2011 % change year-on-year in the SWIP (Steel Weighted Industrial Production) index
% share Year Year Year in total Q111 Q211 Q311 Q411 Q112 Q212 Q312 Q412 2010 2011 2012 Consumption Construction Structural steelwork Mechanical engineering Automotive Domestic appliances Shipyards Tubes Metal goods Miscellaneous TOTAL

27 11 14 16 4 1 12 12 3 100

-2.6 1.6

7.6 9.1

1.8 1.8

0.1 2.6 6.1 7.5

1.5 2.3 3.8

2.4 -1.6 2.7 3.8 9.2 1.1 4.3 1.5 3.7 1.0 4.1

3.9 2.6 3.5 2.8 3.2

5.3 3.2 2.5 2.2 4.2 2.5 2.5 3.9 3.7 3.5

2.8 2.1 3.4 1.9 2.9 0.9 2.3 3.0 2.8 2.6

9.9 15.9 11.9 20.7 19.4 10.9 2.7 0.9

3.9 10.3 1.7 1.6 -0.3 0.4

-3.4 -0.9 -8.2 8.2 7.8 4.5 5.8 2.0 2.3 4.6 2.6 3.1

-18.9 0.7 13.1 22.3 8.3 12.1 6.0 4.6

4.0 -0.6 0.8 -1.0 1.6 2.0 4.6 1.4 2.8 8.7 7.3 3.2 5.9 1.8 2.2 1.9 1.2 2.2 2.3 1.6 2.4 3.0 3.8 3.4 3.4

5.9 12.7

Q2 activity growth cooled down in line with expectations Further moderation in growth momentum is on the cards In Q2-2011, growth momentum in the steel using sectors in the EU slowed in line with previous expectations. Q1 activity had risen by almost 13% y-o-y, driven by strengthened market dynamics in most sectors and temporary factors such as mild weather conditions in early 2011 and related base-year and catching-up effects. As the boost from these factors had faded by the end of the 1st quarter, growth in output eased to a more sustainable rate, still reflecting the continuation of favourable business conditions across the EU. Q2-2011 growth in output is estimated to have amounted to around 6% y-o-y. In the coming quarters, growth in activity in the steel using sectors is seen slowing further downwards; y-o-y growth in the SWIP index is forecast to cool to 3% in the second half of the

year. This will result in 6% output growth in the whole of 2011. Despite weakening business sentiment, further mild growth in investment in machinery and equipment in the domestic EU market is forecast for 2012. Also export demand is seen remaining at a supportive level despite the moderation of global GDP growth. For 2012, a growth rate of just below 3% is foreseen.

Construction

Q2-2011 output growth slowed down to below 2% y-o-y Uneven country performance Near term prospects to remain subdued, some improvement in 2012 EU construction activity growth in the EU eased off to below 2% y-o-y in the 2nd quarter of 2011, coming from 7.6% in the 1st quarter. Q1 construction activity had been boosted by mild weather conditions which helped output to strengthen considerably compared with the weak level registered in Q1-2010. Drilling down into country data reveals large differentials in performance. Poland, Germany, Sweden and France have seen a positive trend in construction activity over the 1st half of the year, much in contrast with Spain and Hungary where a double-digit drop in activity was registered. The other EU countries have on average seen activity falling slightly or moving sideways at a rather depressed level. The recovery in Germany, France and Sweden has been largely driven by new projects and rising renovation and modernisation activity in the private residential sector. Meanwhile in Poland the key driver of construction output growth remained civil engineering investment in projects related to the Euro2012 football championship and public infrastructure.

The outlook for the construction sector for the coming months remains on balance rather dim. Construction sector confidence fell in September to the lowest level since December 2010, signalling that construction companies are not expecting any near term improvement in market conditions. On balance, output in 2011 will increase by almost 2.5%, primarily reflecting strong growth in Q1 relative to 2010 and despite an uneven performance at the country level. These fundamentals are not likely to change significantly going into 2012. The rebound in Poland, Germany, France and Sweden will continue, albeit at a slowing pace in the latter three western European countries. The other Central European countries except Hungary expect some improvement in market conditions in 2012. Meanwhile, construction activity in Spain will hit bottom and move on balance sideways. Activity in residential and renovation and modernisation projects will improve further, in contrast with publicly funded infrastructure and non-residential activity. Unfortunately this implies that the actual boost on demand for constructional steel products will be fairly small. All in all, construction output is projected to increase almost 3% in 2012.

10

Automotive

EU car sales slightly fell 1.3% yo-y in 8m-2011 CV sales continued to rise Car exports remained firm Output +10% in 2011 Slowdown in 2012 to 3% In the first 8 months of 2011, EU passenger car sales declined by 1.3% y-o-y. Sales in August rose almost 8%; the rebound was widespread with all large markets registering growth. The weakest markets however remained Spain, Greece and Portugal due to the extremely low levels of consumer confidence in these debt-ridden countries. Commercial vehicles sales continued to grow over summer; in August sales grew by almost 16% y-o-y. Year-todate sales rose more than 12% y-o-y. Particularly demand for medium and heavy trucks remained buoyant, with sales in the 1st eight months of this year growing by just below 40%. Export demand remained robust in recent months. German passenger car exports grew 17% y-o-y August and 9% in September; 77% of total car output was for export in the JanuarySeptember period. Automotive output grew by slightly more than 10% y-o-y in Q2-2011; continued strong growth since Q1-

2010 has resulted in output nearing the pre-crisis production level by mid 2011. Looking forward this is one explanation of output growth cooling down over the coming quarters. The other one is the rather weak outlook for private consumption, due to consumer confidence falling rather sharply in recent months. At the same time prospects for investment have become clouded by uncertainties with respect to the general business climate in the coming quarters. Also export demand is seen slowing on a par with the expected moderation in global economic growth. Output growth in 2011 is forecast to amount to just over 10%; while growth is positive in all EU countries with an automotive manufacturing base, Germany and all Central European countries will register double-digit growth this year. Market fundamentals are expected to weaken further in 2012, while still remaining slightly positive and supportive to further but significantly slower output growth. On balance, automotive output in the EU is seen easing off to around 3%; activity in Central Europe will continue to increase at a faster pace than in Western Europe.

11

Mechanical Engineering

Growth in Q2 remained robust EU investment in machinery & equipment is rising Output growth in 2012 limited due to cooling investment and export growth In the 2nd quarter of 2011, activity in the mechanical engineering industry in the EU increased almost 12% y-o-y; this is only a mild deceleration compared to the close to 16% growth in the 1st quarter of this year. Increasingly, domestic demand - driven by rising corporate investment in Europe - has been driving growth in output. Investment in machinery and equipment has been rising since late 2010. Meanwhile, also exports continued to contribute to the improvement in activity and in order books. First indications for the 3rd quarter signal a continuation of rather healthy business conditions. The German mechanical engineering association VDMA reported a 14% y-o-y rise in orders in August, with domestic orders growing 22% and export orders 9% yo-y. The German industry nearing capacity limits has boosted activity in other countries such as Austria, the Netherlands, Sweden and most Central European countries.

Business prospects for the remainder of 2011 and 2012 have remained quite positive despite high uncertainty levels impacting on industrial sentiment. Order books have continued to increase in recent months; the existing backlog will guarantee activity staying at overall satisfactory levels in the coming quarters. EU investment in machinery and equipment is projected to increase by more than 3% in 2012, coming from 4% in 2011. The competitive position of Eurozone producers on the key markets abroad could improve if the EU remains around its current level of close to 1.35US$. This could help to soften the moderation expected for growth in global GDP and international trade. On balance, mechanical engineering output in the EU is seen rising by more than 9% this year. This implies that average growth in the 2nd half of the year will slow down to around 5% yearon-year. In 2012, output in the EU mechanical engineering industry is seen keeping a rather satisfactory pace. Activity is forecast to rise further by almost 3.5%, with growth in the 1st half probably outpacing growth in the remainder of 2012, reflecting the industry nearing its capacity limits again.

12

Tubes

Moderation Q2-2011 tube output growth momentum Outlook for growth easing off further in the months ahead Firm demand from all tube client sectors in 2012 Output in the steel tube industry in the EU continued to grow strongly in the 2nd quarter of this year. Nevertheless, compared with the extremely robust increase in production in Q1-2011 of more than 22% y-o-y the deceleration to a growth of around 8% y-o-y was quite significant. This trend could be observed in almost all EU countries. Since the 2nd quarter real consumption in the steel tube using sectors has become the main driver of demand growth, whereas in the 1st quarter also inventory replenishment had played a significant role in the rise in tube demand. Basically all client sectors of the tube industry have registered a robust rise in activity in Q2-2011. First estimations for output in the 3rd quarter show a further moderation in output growth to around 2.5%, closely in line in the growth in activity expected for the key client sectors.

The outlook for the coming months is for output growth cooling further to 2% y-o-y in Q4. This looks also set to become the average growth rate in the first half of next year. Demand for small and medium-sized steel tubes should strengthen mildly further over the forecast period, in sync with the expected trend in activity in the main tube using sectors such as automotive, engineering and metal goods. OCTG demand will be supported by higher activity in the Middle East and a sustained high level of activity in North America, assuming that oil prices remain close to their current levels. Solid pipeline project activity is foreseen to keep global demand for large welded tubes at a satisfactory level in Eastern Europe, the Middle East and Asia. On balance, total steel tube production in the EU is forecast to increase by almost 9% in 2011. Output growth in 2012 is projected to cool down to around 2.5%.

13

Domestic Appliances

Output in H1-2011 slightly lower than in the same period of 2010 Market expected to see some improvement in 2012 The latest figures for production of electric domestic appliances in the 1st half of 2011 signal that contrary to earlier estimates activity in this sector has registered a slight decline in the first half of this year. Demand for electric domestic appliances has remained under pressure so far in 2011. Waning consumer confidence and still depressed residential property markets across the EU have been acting as a drag on sales of white goods. The modest improvement in new residential housing activity in some EU countries has not been sufficient to unlock the demand side potential in the EU. EU manufacturers of electric domestic appliances have been facing difficult market conditions since 2008. In contrast to other manufacturing sectors, the gap with pre-crisis production levels has remained quite significant. Fierce competition and heavy pressure on profit margins have resulted in manufacturers relocating production to low-wage countries. Since 2005 Central Europe has seen a

marked increase in its domestic appliances manufacturing capacity. At the country level, divergences in the evolution of sector activity persisted in Q1-2011. More recently, new capacities have been built in Eastern Europe (Slovenia, Russia) and Turkey. Meanwhile, competition with suppliers from China and Korea has also intensified. Near term prospects for this sector are not particularly bright. Weak private consumption growth and the hesitant recovery of the residential property markets will keep demand in the EU rather subdued for the time being. First estimates and projections for the 2nd half of this year signal output moving sideways, which will result in production in the whole of 2011 falling slightly compared with 2010. The outlook for 2012 is better as the residential construction market is expected to see a further, more widespread rebound across the EU. The market will continue to be characterised by fierce competition, however. Production of domestic appliances is forecast to increase by around 3% in 2012, basically driven by a rise in output in Central Europe.

14

Real Consumption
Forecast for real consumption - % change year-on-year
Period Year Year Year Q111 Q211 Q311 Q411 Q112 Q212 Q312 Q412 2010 2011 2012
4.8 13.8 7.6 2.3 1.7 6.1 0.6 1.9 2.4 3.2 2.0

Real consumption growth in Q22011 rose 8% y-o-y Slowdown in growth momentum in H2-2011 and in early 2012 Mild acceleration consumption growth in H2-2012 Real steel consumption in the EU increased by more than 8% y-o-y in Q2-2011, driven by still robust growth momentum in the manufacturing sectors. The deceleration from the double-digit growth pace in the 1st quarter marked the transition to a more sustainable growth trend as the effect of temporary factors boosting activity faded away. Looking forward, a further cooling down of real steel consumption growth is on the cards for the coming quarters. First estimates for Q3 real consumption signal a further slowdown in growth to just below 2.5% y-o-y, in line with the manufacturing recovery losing steam.

In Q4-2011 consumption growth may slip below 2% y-o-y, which will result in total real steel consumption in 2011 rising by around 6%. Prospects for 2012 have remained mildly positive despite high levels of uncertainty surrounding the outlook for the steel using industries in the EU. Activity in the manufacturing sectors and in construction will continue to grow, albeit in the case of the manufacturing industry at a significantly slower pace than in 2010 and 2011. Particularly in the first half of 2012 real steel consumption is forecast to grow only modestly. From mid-2012 onwards improving end-user fundamentals should result in a modest acceleration in consumption growth. On balance, real steel consumption is projected to increase by 2% in 2012.

15

Apparent Consumption
Forecast for apparent consumption - % change year-on-year
Period Year Year Year Q111 Q211 Q311 Q411 Q112 Q212 Q312 Q412 2010 2011 2012
22.0 16.5 11.4 3.5 -1.6 7.5 -3.1 0.5 4.0 7.7 2.0

Annual Apparent Consumption in Mio Tonnes

2004 2005 2006 2007 2008 2009 2010 2011 (f) 2012 (f)
179 170 195 204 188 123 150 161 164

Q2-2011 apparent consumption rose 11% y-o-y Imports take larger share of EU steel market Distribution stocks rising in Q3 Real and apparent consumption growth 2012 seen slowing down EU apparent steel consumption continued to grow rather vigorously in Q2-2011. Growth was just over 11%, compared with 16.5% in the 1st quarter. Inventory replenishment continued to have an effect on demand, but the key driver for growth was clearly the solid increase in real consumption. Customs data confirm the continuation of high imports from third countries entering the EU steel market in Q2. Imports grew 45% y-o-y and were almost 20% up on the preceding quarter, rising to the highest quarterly level since Q3-2008. The huge rise in imports resulted in EU domestic deliveries in Q2-2011 falling below the Q1 level and imports accounting for a 21% share of the EU steel market. Supply pressures in the EU steel market have risen during summer. Particularly stocks in the distribution

chain have increased further as the market entered the seasonally weaker holiday period while deliveries were still coming in. At the current level of distribution chain sales - which is unlikely to improve towards the end of the year - stocks account for 3 months of shipments. Ample stocks and short delivery times in combination with slowing demand growth and high levels of uncertainty surrounding the business climate in the months ahead imply that bookings will continue on a hand-to-mouth basis. Import license data suggest that import pressure could ease to some extent, which appears to be confirmed by July and August import data. In the whole of 2011 apparent consumption is forecast to rise by 7.5%. In 2012, real consumption will drive apparent consumption growth, but a cooling down is inevitable. The stock cycle effect is expected to be fairly neutral. Imports are forecast to come down from the high levels registered in 2012. On balance, apparent steel consumption is forecast to rise by 2% in 2012.

16

Imports

Rise in imports accelerated in Q2-2011 Particularly flat product imports rose sharply Imports may slow down in the remainder of 2012 Imports in 2012 seen decreasing moderately The latest steel trade figures confirm that import pressure increased further in the 2nd quarter of 2011. Total third country imports rose 45% y-o-y and were almost 20% higher than in the 1st quarter of this year. At a monthly level of just under 3.1 million tonnes, third country imports reached the highest level in three years time. The share of imports in the EU steel market was 21% in Q2 compared with on average of almost 16% in 2010. In line with the trend seen in 2010, particularly imports of flat products have risen sharply so far this year. In the first 8 months of this year, quarto plate imports rose 89% y-o-y, cold rolled imports 68% and hot-rolled coil imports 43%. Total flat imports were 51% up on last year compared with 21% for long products. Within this product group, differentials at the product level are significant with falling wire rod and rebar imports being overshadowed by a strong rise in merchant bars.

With respect to the main countries of origin, China has remained the dominant third country supplier for several products, most notably hotdipped galvanised sheets and organic coated sheets; Meanwhile, nearby steel producer Turkey has stepped up its flat product deliveries to the EU steel market. In the January-July period Turkey was the largest supplier of hot-rolled wide strip to the EU. Other countries such as the Russian Federation and Ukraine have kept a strong presence in the EU flat product markets as well. The latest import license information and first estimates for Q3 point towards a further y-o-y rise in imports but they are seen moderating compared with the Q2 level. Imports in the final quarter are seen moving sideways, which will result in total imports rising by 30% in 2011. The outlook for 2012 is for a decrease of around 5% in third country imports. The weakening growth trend in demand and the likelihood of the Euro remaining below 1.40US$ for some time should be supportive to keeping imports at a reduced level.

17

Exports

EU exports fell 10% y-o-y in 2011 EU net importer since 2011 Trade surplus in long products only Exports seen falling by almost 6% in 2011 Exports may rise again in 2012 In the 2nd quarter of 2011, EU steel exports decreased by 10% compared with the same quarter of 2010, while rising 4% in comparison with the 1st quarter of the year. Particularly in the 2nd quarter the competitive position of Eurozone exporters was negatively affected by the relative strength of the Euro. Over the first 8 months of 2011, flat product exports declined by 10% y-o-y whereas long product exports increased by 3% y-o-y. Since 2011, the EU is again a net importer of steel products, to the tune of 590,000 tonnes per month over the January-August period. Whereas there is a trade deficit in semis and flat products, long products continued to run a surplus. Net trade in long products amounted to 488,000 tonnes per month in this period with exports dominated by rebars and heavy sections.

The largest trade deficit persisted in semis, averaging 502,000 tonnes per month over the 1st 8 months of this year. As far as the main export destinations for long products are concerned, Algeria has remained the largest outlet. Exports in Q3-2011 are estimated to have decreased to some extent in comparison with the Q2 level. A slight rise in in the quarterly export tonnage is forecast for the final quarter of the year. This will result in total exports falling by almost 6% in the whole of 2011. For 2012, EU steel exports are projected to rise. The weaker Euro should be supportive to Eurozone exporters regaining market share abroad. With unrest in the North African markets cooling down, steel mills export opportunities should improve during the year.

18

Changes in %
Year 2010 Q.1/2011 Q.2/2011

IMPORTS Third Countries

EXPORTS Third Countries

DELIVERIES into EU27

TOTAL DELIVERIES

29.9 40.9 44.9

6.3 -6.2 -10.0 FORECAST

20.9 12.9 4.2

18.3 9.3 2.4

Q.3/2011 Q.4/2011 Year 2011 Q.1/2012 Q.2/2012 Q.3/2012 Q.4/2012 Year 2012

14.1 4.8 26.2 -6.1 -18.1 0.4 8.7 -5.2

-8.5 2.7 -5.7 13.8 13.0 11.8 8.0 11.6

2.5 -1.7 4.5 -1.7 4.4 4.9 7.5 3.6

1.2 -0.4 3.1 0.3 5.5 5.8 7.5 4.7