18th May 2004

Global Steel Industry Trends:Is the perception the reality?

2

Investors have perceived the steel industry negatively

“Poor returns over the long term,

high volatility,

relatively small size and constrained liquidity

has moved the steel sector

to the fringe of the equity investment universe” ABN Amro (early this decade)

3

Structural issues have caused poor steel industry returns

Low demand growth Fragmented industry

High fixed & capital costs Political industry

Historical Industry PerformanceOvercapacity

Long term price declineFull utilisation, marginal pricing

Price volatilityPoor returns

Capacity creep Concentrated Suppliers

High exit costs Global auto customers

4

However, recent dramatic rises in global steel prices may suggest structural improvement

60

80

100

120

140

160

Sep Dec

Mar

Jun

Sep Dec

Mar

Jun

Sep Dec

Mar

Jun

Sep Dec

Mar

Jun

Sep Dec

Mar

Jun

Sep Dec

Mar

Jun

Sep Dec

Mar

1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04

Global Flat Products Long Products

CRU Global Steel Price Index (Index April 1994 = 100)

Source: CRU International

5

What is changing?

Global economic growth – synchronised

Global steel demand, especially China

Supply/demand gap in China

Industry behaviour in OECD/privatisations

Input costs

Different pattern for capacity additions

6

Strong global economic growth outlook

Real Global GDP % Growth

0%

1%

2%

3%

4%

5%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2010

Forecast

Source: Consensus Economics, IISI

7

Likely to be synchronised growth in OECD

-9

-6

-3

0

3

6

9

12

15

Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04

US Europe Japan

OECD Leading Indicators6 Month Annualised

% Change

Source: OECD

8

Also, strong growth in large emerging economies

-6

-4

-2

0

2

4

6

8

10

12

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

China India Russia Brazil

Forecast

GDP % Growth - Emerging Economies

Source: Consensus Economics, IISI

9

Australia performing strongly – including steel using sectors

0%

4%

8%

12%

16%

20%

90 92 94 96 98 '00 '02 '04 '06

90 Day Bank Bills

CPI

Unemployment Rate

Real Interest Rates

Forecast

Inflation, Interest Rates & Unemployment (%, pa)

0%

1%

2%

3%

4%

5%

6%

90 92 94 96 98 '00 '02 '04 '06

Forecast

Australian GDP Growth (%, pa)

Source: BIS Shrapnel, Access Economics

0

10

20

30

40

90 92 94 96 98 '00 '02 '04 '06

Construction Value (Constant A$bn)

ResidentialEngineering

Non-Residential

0

4

8

12

16

90 92 94 96 98 '00 '02 '04 '06

Manufacturing Mining

Agriculture

Forecast Forecast

Sectoral Investment (Constant A$bn)

10

Global steel demand growing strongly – largely driven by China

87 101 103 111 123 124 153 186233

275 295 315385

563 558595 571 576

623 601 619 631 654 668 672 705650 659698 681 699

748 755805

864929 963 987

1,090

0

200

400

600

800

1,000

1,200

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2010

China ROW WorldForecast

Global Steel Demand – IISI Base Case(million tonnes)

By 2010, China may be 35% of global demand, vs 27% in 2003

Source: IISI

11

Has the steel industry returned to the demand growth seen before the 1973 oil crash?

World Steel Consumption by Region(million tonnes crude steel)

Forecast1,200

China1,000

800Japan

Other Asia600

West Europe400 East EuropeEx Soviet

Oceania, Mid East, Africa200CanadaUSA0

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Source : Macquarie Bank, ‘The Steel, Iron Ore & Coal Outlook’, Jan 04

12

There is currently a large Supply / Demand gap in China“Let China sleep, for when she wakes she will shake the world” - Napoleon

812 14 14

20

29

4

32

4

4

9

1998 1999 2000 2001 2002 2003

Flat Products Long Products

Total Chinese Steel Imports(million tonnes)

12

38

24

181615

Source : Macquarie Bank, ‘The Steel, Iron Ore & Coal Outlook’, Jan 04

13

China is experiencing massive capacity growth

Estimated Chinese Industry Capacity Expansion from 2002 vs 2006(million tonnes)

167195

58

12

230

267

108

38

Ironmaking Steelmaking Hot Strip Mills Cold RollingMills

20022006

63

68

45

26

Source: HB Advisors/Rothschild, ‘China – Should We Be Scared?’, Feb 04, World Steel Dynamics

14

Consolidation in OECD

Production Share of Top 3 Steelmakers in Each Region (%, 1998 vs 2003)

Japan

‘98 ‘03

49%

64%

JFE,NSC,

Sumitomo

EU

‘98 ‘03

31%

50%

Arcelor, LNM, Corus

US

‘98 ‘03

33%

55%

USS,ISG,

Nucor

Source : POSCO, ‘POSCO Growth & Innovation, Jan 04

15

Input costs are rising - Scrap

US #1 Heavy Melting Scrap (US$/ mt)

90 91 92 93 94 95 96 97 98 99 00 01 02 0360

80

100

120

140

160

180

200

220

240

Source: Datastream

16

Input costs are rising – Steelmaking raw materials

Source : ANZ Bank ‘Resources Market Outlook’, Mar 04, Tex Report

17

Increased Chinese demand is causing rise in input costs. Currently no excess seaborne iron ore capacity

Seaborne Iron Ore Demand Vs Theoretical Capacity (million tonnes)

0

100

200

300

400

500

600

700

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2010

Others

China

Japan

EU

Forecast

Theoretical capacity

DEMAND

Source: IISI

18

Shipping costs have risen dramatically: Global fleet cannot meet demand – exacerbated by port congestion

64 72 77 82 81 82 87 90 93

1995 1996 1997 1998 1999 2000 2001 2002 2003

Capesize Fleet Capacity (Million DWT)Shipping rates (Index)

0

2,000

4,000

6,000

8,000

Jan-95

Mar-96

May-97

Jul-98 Oct-99

Dec-00

Feb-02

May-03

BDI Index BCI Index

Port Congestion Index – Aust Coal Ports

16SSY Coal Port Congestion Index

12

8

4

0Jan-02 Jan-03 Jan-04Sep-02 Sep-03May-02 May-03

BDI – Baltic Dry Index, BCI – Baltic Cape IndexSource: IISI, Baltic Dry Index, SSY

19

Other raw material costs also increasing

Source: Datastream

20

What is changing?

Global economic growth – synchronised

Global steel demand, especially China

Supply/demand gap in China

Industry behaviour in OECD/privatisations

Input costs

Different pattern for capacity additions

21

Implications

Don’t expect a weak Chinese economy any time soon

Steel prices are likely to remain high for some time

Pressure for structural change in finished products pricing

An inflationary phase?