Some Things to Think About: Growth & Value

Presentation to

Steel Manufacturers Association

Washington DC

May 15th, 2007

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The industry leadership challengeFind growth – defend value

In a dynamic environment it’s a hard balance to strike Valuations continue to rise – can you keep up? Relative consolidation levels require acceptance of new risks –

offshore, union operations, different technologies, etc. Once protected positions such as niches, divisions of larger

companies, even private companies are not so safe Conventional diversification strategies are strained by the

opportunities & demands in steel Relative strength of producers provides temptation to co-opt

different parts of the value chain up and down And China could – at any time – slow growth &/or ruin value

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More buyers than sellers o/s China?Top 50 steel producers by “strategy”Type Acquirers Sellers EU Inc Japan Inc Undeclared?

Number 14 (7) 3 3 (4) 6 (6) 24 (26)

Volume 2006 286MT (198) 15MT 17MT (23) 94MT (92) 207MT (198)

% of Top 50 46% (35%) 2% 3% (4%) 15% (16%) 33% (35%)

Companies ArcelorMittal CMC CSN Essar Evraz Gerdau Nucor SDI Severstal SSAB Tata Techint Thyssen US Steel

AK Steel Erdemir Stelco

Ruukki

Salzgitter voestalpine

JFE Kobe Nippon Nisshin Sumitomo Tokyo Stl

CIS(8) Asia (4) Europe (4) MidEast (3) RoW (3) India(2)

Source: MB, IISI, First River

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Drives valuations…Companies purchased

Source: Company reports, US Steel, Gerdau, UBS, First River

= flat rolled

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$/T

on

Ca

pa

city

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But how to m(c)atch Mittal? Top 15 producers* 2007 Pro-forma, 2006 crude steel, MT

Source: MB, IISI, First River*Outside China

JF

E

Te

ch

int

SA

IL

Su

mit

om

o

Ge

rda

u

Ev

raz

Th

ys

se

n

Se

ve

rsta

l

Riv

a A

cc

iao

Nu

co

r

US

Ste

el

Nip

po

n

PO

SC

O

TA

TA

-Co

rus

Arc

elo

r-M

itta

l

0

20

40

60

80

100

120

140

MT

Europe NAFTA ASIA Latin America CIS Other

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The focus defenseReturns of focus will provide superior performance

Product B

Product A

Differentiated SteelDiversified Steel

Consolidation & restructuring moves aim to annex valuable ‘niches’

Consolidation & restructuring moves aim to annex valuable ‘niches’

Digging into niches to avoid consolidators aims to raise the competitive level

Digging into niches to avoid consolidators aims to raise the competitive level

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Has the niche lost its cache?

Niches in low growth industries yielding better than average returns are prized

Where “niche” performance is no better than that of broader market positions – the niche has lost its value

Classic niches may only be viable where the owners of the niche occupier provide the defense:– e.g. voestAlpine, Salzgitter, ThyssenKrupp, etc.

But niche strategies not an excuse to indulge fears of the bigger opportunity

And note - close ownership is an important element in an offensive growth posture too:– Mittal, Tenaris, Evraz, Severstal

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Returns of focusNot so special?

Source: CapitalIQ, FRC

*Averages calculated in US$ & exclude Mittal; Thyssen/Timken/CMC are steel only

0%

5%

10%

15%

20%

25%

30%

35%

0% 10% 20% 30% 40% 50%

5 Year Revenue Growth (CAGR)

5-Y

ea

r E

BIT

DA

Ma

rgin

%

US Steel

Macsteel

Nucor

Gerdau

Steel Dynamics

Tenaris

Thyssen* Bohler

CartechVallourec AvgMargin:

16%*

Avg annual growth: 21%*

Timken*voestalpine

Salzgitter

MTCMC

0%

5%

10%

15%

20%

25%

30%

35%

0% 10% 20% 30% 40% 50%

5 Year Revenue Growth (CAGR)

5-Y

ea

r E

BIT

DA

Ma

rgin

%

US Steel

Macsteel

Nucor

Gerdau

Steel Dynamics

Tenaris

Thyssen* Bohler

CartechVallourec AvgMargin:

16%*

Avg annual growth: 21%*

Timken*voestalpine

Salzgitter

MTCMC

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0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0% 10% 20% 30% 40% 50% 60%

5-Year Revenue Growth (CAGR)

5-Y

ea

r E

BIT

DA

Ma

rgin

Who let the dogs out? Steel divisions & their corporate owners

Thyssen Corp

Timken Corp

CMC Steel

CMC Corp

QuanexThyssen Steel

TKR Steel

Macsteel

Source: CapitalIQ, FRC

NB. Corporate performance includes steel

Schnitzer Corp

Cascade

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Mill & SSC gross margin performance Selected companies, 1999-2007, by quarter

Source: CapitalIQ, First River

Mills include: X, NUE, STLD, CMC, IPS; SSC’s include: RS, RYI, ZEUS, RUS

0%

5%

10%

15%

20%

25%

% G

ross

Ma

rgin

SSC's Mills

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Who claimed what?SSC HR coil price – drivers of increase, estimates

$0

$100

$200

$300

$400

$500

$600

$700

$800

2003 Scrap MillMargin

MillCosts

SSCMargin

SSCCosts

2006

$/T

on $360

$730

+$124

+$118

+$56+$57 +$17

Source: First River estimates

Mill

: $2

80

Mill

: $5

80

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Shares of SSC hot roll price increase2003 to 2006, estimates

Scrap33%

Mill Costs15%

SSC Costs5%

SSC Margin15%

Mill Margin32%

Source: First River estimates

$0

$50

$100

$150

$200

$250

2003 2006

0%

5%

10%

15%

20%

25%

30%

35%

Combined $ margin & % of sales price

Less about owning SSC’s for control than ensuring the efficiency of the supply chain

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Scrap volatility asks for attention Pig iron versus scrap prices $/Ton, monthly

Source: Metal Bulletin, AMM, Purchasing Magazine

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

CIS exp pig Iron USA Auto Bundles

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China GDP growthReal annual growth rates, 1953-2006

Average since 1978 9.6% p.a.

Source: National Bureau of Statistics

-30

-20

-10

0

10

20

30

1953

1956

1959

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

%

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China steel production growthOutpacing GDP?

0

50

100

150

200

250

300

350

400

450

Mill

ion

To

nn

es

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Ind

ex,

19

49

= 1

00

Steel GDP

Source: ABARE, CISA, IISI, National Bureau of Statistics

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China steel exportsChina’s rise to net exporter, monthly 2001-2007 (April)*

(8,000)

(6,000)

(4,000)

(2,000)

0

2,000

4,000

6,00020

01

2002

2003

2004

2005

2006

2007

KT

*includes semi-finishedSource: UBS

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China development similar to others

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Change & uncertaintyChinese urban employment changes

0

50

100

150

200

250

1978

1980

1985

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Em

plo

yee

s M

illio

n

SOE's Other Urban

Source: National Bureau of Statistics

+140M

-70M 50%

Since 1996

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Plenty of concerns to go roundManaging China…

The “4 un’s”– “Unstable, Unbalanced, Uncoordinated & Unsustainable”

Wen Jiabao describing macro conditions, March 2007– Exports, fixed assets, output growth, lending increases– Income disparity, excess resource consumption,

environment Demographics

– 30M “surplus” males 15-34 by 2020– >65’s from 7-8% to 20% by 2025 as working population

declines (US 12% to 18%) 17th Congress & leadership change towards a new model?

– Lawyers replacing engineers!

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Finding growth – defending valueWhat to do?

Do not stand still Extend your view – timeline, breadth, depth Maintain a growth posture focused on strategic goals

– buy, invest, build are choices to the same ends Actively evaluate acquisitions – real test of valuation perspective