Colin Hamilton's, from Macquarie Capital, presentation on the macro environment and the effect on steel at SteelOrbis Spring '12 Conference & 66th IREPAS Meeting

1. IREPAS presentation
p
The macro environment and the effect on steel
April 2012
Colin Hamilton
Macquarie Capital (Europe) Limited
Levell 7 28 Ropemaker St London, UK
L 7, R k St, L d
colin.hamilton@macquarie.com
colin hamilton@macquarie com
In preparing this research, we did not take into account the investment objectives, financial situation and particular needs of the reader. Before making an investment decision on the basis of this research, the
reader needs to consider, with or without the assistance of an adviser, whether the advice is appropriate in light of their particular investment needs, objectives and financial circumstances. Please see disclaimer.

2. Commodities research team
London
Jim Lennon Colin Hamilton Duncan Hobbs Ryan Belshaw Hayden Atkins
Senior Strategist
g Associate Director Senior Analyst
y Analyst
y Senior Analyst
y
Nickel & Steel, Copper, Base Metals Base Metals Coal, Precious
Stainless Steel Iron ore, Coal +44 20 3037 4497 +44 20 3037 2732 Metals, Uranium
+44 20 3037 4271 +44 20 3037 4061 +44 20 3037 4476
Singapore & Sh
Si Shanghai
h i
Bonnie Liu Graeme Train Angela Bi
Associate Director Senior Analyst Associate
Base Metals
Metals, Steel,
Steel Bulks Base Metals
Thermal Coal +86 21 2412 9035 +86 21 2412 9086
+65 6601 0144
Agricultural commodities - London
g Oil and Gas - Houston
Kona Haque Chris Gadd Vikas Dwivedi
Senior Analyst Research Associate Global oil and gas
Softs Grains Economist
+44 20 3037 4334 +44 20 3037 4433 +1 713 275 6352
Page 2

3. Macro backdrop – Upturn in 2H12 if policy makers
p p p y
can get it right
 China demand uncertainty persists: Still uncertainty
Summary of Macquarie Global IP Forecasts
S fM i Gl b l F t
about degree of downside risks to demand in % Change Y-o-Y 2007 2008 2009 2010 2011f 2012f
China, but slowdown so far not overly alarming. Western Europe 5.4% 0.2% -10.5% 5.8% 3.0% -1.5%
Eastern Europe 3.0% -1.7% -9.2% 13.6% 6.0% 0.5%
 But policymakers not behind the curve. Easing so Total Europe 3.4% -2.1% -12.4% 7.3% 3.8% 1.2%
far has been relatively small, but still plenty of room
small
Japan 2.9% -3.4% -21.8% 16.6% -3.7% 2.0%
to move and we think policymakers will be effective China 17.1% 12.7% 12.3% 14.3% 13.8% 12.0%
in managing slowdown. Other Asia 6.8% 4.7% -1.8% 12.0% 3.7% 3.0%
Total Asia 7.6% 4.1% -4.2% 13.3% 6.6% 6.3%
 Euro risks elevated but receding, with central bank
g
action going a long way to helping stabilise activity. USA
Total NAFTA
2.7%
3.2%
-3.7%
-3.5%
-11.2%
-10.9%
5.3%
5.4%
4.0%
3.8%
2.0%
2.0%
 Stronger signs of OECD trough policy makers have Latin America 6.6% 1.1% -6.1% 10.0% 2.3% 3.0%
avoided creating more uncertainty. US activity
remains solid
solid. OECD 4.1% -1.7%
1.7% -11.7%
11.7% 7.2% 2.4% 0.7%
 IP growth of 2¼% in 2012. Weakness in activity Total World 4.9% 0.3% -6.8% 8.6% 4.9% 2.3%
likely to be concentrated in 1Q, with improvement
through mid-year and into year end.
Source: Ecowin, Macquarie Research, April 2012
Page 3

4. China slowing but not collapsing, nadir may be in
g p g, y
sight in OECD
Index Index 15% 15%
China official PMI
60 60 10% 10%
55 55 5% 5%
0% 0%
50 50
2010 -5% -5%
45 2011 45 OECD IP
Median 2005-2007 -10% -10%
2012 Leading indicator (6mth annualised) -
40 2008 40 -15% foward 6 months -15%
-20% -20%
35 35
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Apr
Aug
Dec
Jul
Jan
Feb
Jun
Sep
Oct
May
Nov
Mar
Source: CEIC, OECD, Macquarie Research, April 2012
Page 4

5. Euro area growth forecasts
 We are forecasting growth of -0.4% this year and 1.3% next year. This is broadly similar to
the IMF and Consensus for 2012, but above for 2013.
 The balance of risks to our forecasts is now to the upside.
upside
Euro area growth forecasts: Macquarie, Consensus and the IMF
% Macquarie Consensus IMF
1.5 1.30
0.90
1.0 0.8
0.5
0.0
-0.5 -0.30
-0.40
-0.5
-1.0
-1 0
2012 2013
Source: IMF, Consensus, Macquarie Research, April 2012

6. External demand has driven the recovery…
y
 Europe’s recovery has been overwhelmingly driven by external demand – net exports have
accounted for 2.2pts of the 3.6% growth in GDP since the trough.
Exports have driven the recovery Much more than is the case elsewhere
Index, 2Q09=100 ppt Ho useho ld Co nsumptio n Go vernment
125 Ho useho ld co nsumptio n Go vt co nsumptio n 8 B usiness Investment Net expo rts
GFCF Expo rts Invento ries
7
120
6
15
1
5
10
1 4
3
105
2
100 1
0
95
-1
90 -2
M ar 07 Dec 07 Sep 08 Jun 09 M ar 10 Dec 10 Sep 11 US Japan Euro area UK
Source: Eurostat, Macquarie Research, April 2012

7. …particularly when compared to the BRICs…
p y p
 In the BRICs, the recovery has been driven by private final domestic demand. This is much less the
case in the developed world, particularly the UK and Euro area.
The recovery in GDP since the trough by component
ppt
35 Household Consumption Government Business Investment Net exports Inventories
30
25
20
15
10
5
0
-5
-10
10
Brazil Russia India US Japan UK Euro area
Source: CEIC, Macquarie Research, April 2012

8. …but this is normal for Europe
Exports lead Europe’s economic cycle
E t l dE ’ i l
YoY % YoY %
Exports (LHS) GDP (RHS)
20 6
15
4
10
2
5
0 0
-5
-2
-10
-4
-15
-20 -6
Mar 92 Jun 94 Sep 96 Dec 98 Mar 01 Jun 03 Sep 05 Dec 07 Mar 10 Jun 12
Europe’s business cycle
Source: Eurostat, Macquarie Research, April 2012

9. Europe’s industrial core has re-oriented its export
exposure
 Europe, particularly its industrial core, has been successful at re-orienting its export
exposure.
exposure
Exports to emerging economies Exports to advanced economies
% o f to tal
% o f to tal UK Germany France
35 UK Germany France
90
Italy Spain Italy Spain
30
85
25 80
20 75
15 70
10 65
Jan-90 A ug-93 M ar-97 Oct-00 M ay-04 Dec-07 Jul-11 Jan-90 A ug-93 M ar-97 Oct-00 M ay-04 Dec-07 Jul-11
Source: IMF, Macquarie Research, April 2012

10. C a st the core ocus o steel
China still t e co e focus for stee - NPC po cy targets in
C policy ta gets
2012 more subdued, but how relevant are they?
 Lower GDP target suggests that policy makers
expect weaker growth, although this is not new
news to the market.
2011 2011 2012
(ann chg) Target Actual Target  I fl ti t
Inflation target of 4% iin a year where it is
t f h i
GDP 8% 9.3% 7.5% coming down suggests policy makers will be a
bit more tolerant of price pressure than the last
CPI inflation 4% 5.4% 4% 24 months.
M2 16% 14.7%
14 7% 14%
 We are forecasting a 22% increase in FAI and
FAI 18% 23.8% 16% the lower target for 2012 does raise some
questions about how willing policymakers will
be to use this as a tool to reinvigorate growth
growth.
But against the backdrop of achieved FAI in
2011, this target may not be particularly
meaningful.
Source: NBS, Macquarie Research, April 2012
Page 10

11. China construction – rolling over, some support from social
g pp
housing
80%
100% Floor area sold
70% Total Commodity Real Estate
Floor area under construction Economic Housing
80% 60%
Floor area completed
60% 50%
YoY, 3mma
YoY, 3mma
40%
40%
30%
20%
20%
0% 10%
-20% 0%
-10%
-40%
n-07
n-08
n-09
n-10
n-11
May -07
p-07
May -08
p-08
May -09
p-09
May -10
p-10
May -11
p-11
-20%
Jan-07
7
May-07
7
Jan-08
8
May-08
8
Jan-09
9
May-09
9
Jan-10
0
May-10
0
Jan-11
May-11
Sep-07
7
Sep-08
8
Sep-09
9
Sep-10
0
1
Sep-11
Jan
Jan
Jan
Jan
Jan
Sep
Sep
Sep
Sep
Sep
Source: CEIC, Macquarie Research, April 2012
Page 11

12. With real estate, is important to distinguish between top tier
estate top-tier
cities and the rest of the market
 Tier-1 and 2 cities have had very difficult years recently but they are only 20% of the
market
Top tier cities have been underperforming in Clearly a bubble in tier 1 cities, less obvious
sales for a while else where
nnual household
40% 17
1-tier 2-tier 3-tier
30%
20% 15
operty sales, 3mma YoY
10%
a,
ffordibilty ratio - house price/an
0% 13
income
-10%
11
-20%
-30%
Pro
9
-40%
Tier 1+2 cities
-50%
Total China 7
-60%
r-10
y-10
Jul-10
v-10
n-11
r-11
y-11
Jul-11
v-11
p-10
p-11
5
Af
May
Nov
May
Nov
Jan
Mar
Mar
Sep
Sep
2011 E
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: NBS, Macquarie Research, February 2012
Page 12

13. C ese es e
Chinese investment in infrastructure crashes – room
as uc u e c as es oo
for 2012 improvement YoY changes in Chinese fixed asset
investment
60
50
% change % change % change 40
RMB bn 2009 2010 2011 2009/08 2010/09 2011/10
% change yoy
30
Equipment/IT/light manufg 1,910 2,543 3,734 29% 33% 47%
Other manufg/mining/metals 4,757 5,841 7,660 24% 23% 31% 20
Transport infrastructure
T ti f t t 2,198
2 198 2,616
2 616 2,508
2 508 49% 19% -4%
4% 10
Utilities infrastructure 3,201 3,772 4,042 38% 18% 7%
Total infrastructure 5,399 6,388 6,550 42% 18% 3% 0
Real estate 4,401 5,872 7,731 23% 33% 32% -10
Nov-088
Nov-099
Nov-100
Nov-11
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
May-08
Sep-08
May-09
Sep-09
May-10
Sep-10
May-11
Sep-11
Mar-08
Mar-09
Mar-10
Mar-11
Tertiary & Rural 2,947 3,497 4,518 39% 19% 29%
Equipt/IT/light manufg
Other manufg/ming/metals
Total Fixed Asset investment 19,414 24,141 30,193 31% 24% 25% Total infrastructure
Real estate
Source: NBS, Macquarie Research, April 2012
Page 13

14. China autos and machinery – looking for recovery on easier
y g y
credit
Vehicle output Output of excavators
23 350
21 300
19
m units annualised
k units, annualised
250
17
15 200
13
s,
150
,
11
9 100
7 50
5
-
May
Jan
n
Feb
b
n
Jun
Aug
g
Sep
p
Nov
ul
ct
ar
pr
Dec
Ju
Oc
Ma
Ap
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2007 2008 2009 2010 2011
2007 2008 2009 2010 2011
Source: CEIC, Macquarie Research, April 2012
Page 14

15. China’s big risk is the rise of sticky inflation
 China’s previous inflation problems have been linked to surges in money supply or food supply shocks.
 A wage/price spiral would be a new challenge – machinery/automation would be a solution
C hinese money supply grow th (M2) Labour market demand/supply
30% 12.5%
28%
10.0%
26%
$ chnage yoy: CPI
% change yoy: M2
7.5%
24%
5.0%
5 0%
y
22%
20% 2.5%
18%
0.0%
16%
-2.5%
14%
12% -5.0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Money supply growth (M2) Inflation (CPI)
Source: NBS, MOHRSS, Macquarie Research, February 2012
Page 15

16. Our steel survey shows sentiment is holding up
 Outlook remains positive after a difficult Feb, helped by improving conditions in March
Are you positive or negative on the market over the next three months?
100 Increasing number of respondents p
g p positive
90
80
70
60
50
40
30
20 Mills
Steel traders
10
Iron ore traders Increasing number of respondents negative
0
Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12
Source: Macquarie China Steel Sector Survey, April 2012

17. The biggest change has been improving orders
 Traders registered a significant MoM change in orders
 Mills also saw improvement, although less dramatic
Traders Mills
Have sales volum es increased or decreased?
Have dom estic orders increased or decreased over the
Increasing no . o f traders seeing sales rise last m onth?
100
To tal Increasing no . o f mills seeing o rders rise
90 Large Traders (>1mtpa) 100
M edium Traders (0.5-1mtpa) 90 To tal
80
Small Traders (<0.5mtpa) Large M ills (>10mtpa)
70 80
M edium M ills (5-10mtpa)
70 Small M ills (<5mtpa)
60
60
50
50
40
40
30
30
20 20
10 10
Increasing no . o f traders seeing sales fall Increasing no . o f mills seeing o rders fall
0 0
Jul-11 Aug- Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Jul-11 Aug- Sep- Oct-11 Nov- Dec- Jan-12 Feb-12 Mar-12
11 11 11 11 11
Source: Macquarie China Steel Sector Survey, April 2012

18. Improvement has co e ac oss most e d use
po e e as come across os end
sectors
 Biggest change has been construction and infrastructure
Net change in orders at mills - end use sectors
Construction
Infrastructure
Machinery
30 Autos
White goods
20 Shipbuilding
p g
10
0
-10
-20
-30
-40
Jul-11
Jul 11 Aug-11
Aug 11 Sep-11
Sep 11 Oct-11
Oct 11 Nov-11
Nov 11 Dec-11
Dec 11 Jan-12
Jan 12 Feb-12
Feb 12 Mar-12
Mar 12
Source: Macquarie China Steel Sector Survey, April 2012

19. Profitability is c eep g bac into the sec o ,
o ab y s creeping back o e sector,
although there are regional variations
 North China mills are making money
What is the current level of profitability?
Increasing no . o f mills making mo ney
100
90
80
70
60
50
40
30 To tal
No rth
20
Central So uth
10 So uth East
West Increasing no . o f mills lo sing mo ney
0
Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12
Source: Macquarie China Steel Sector Survey, April 2012

20. Steel margins – the perennial problem for
steelmakers
Raw material costs for a "typical" Steel price minus raw material costs
steelmaker
700
1100
1000 600
900
500
800
700
400
$/tonne
$/tonne
600
500 300
400
300 200
200
100
100
0
0
Nov-08
Nov-09
Nov-10
Nov-11
May-08
May-09
May-10
May-11
Jan-08
Mar-08
Jul-08
Sep-08
Jan-09
Mar-09
Jul-09
Sep-09
Jan-10
Mar-10
Jul-10
Sep-10
Jan-11
Mar-11
Jul-11
Sep-11
Jan-12
Mar-12
Nov-08
Nov-09
Nov-10
Nov-11
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
May-08
Sep-08
May-09
Sep-09
May-10
Sep-10
May-11
Sep-11
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Using contract prices Using spot prices Using contract raw material costs
Composite HRC price (E /US)
C i i (Eur/US) Using spot raw material costs
Source: Platts, CRU, Macquarie Research, April 2012
Page 20

21. $/tonn CFR Turkey
ne, y
100
150
200
250
300
350
400
450
500
550
Sep-08
N
Nov-08
Source: Platts, Macquarie Research, April 2012
J
Jan-09
M
Mar-09
May-09
J
Jul-09
Sep-09
N
Nov-09
J
Jan-10
M
Mar-10
May-10
J
Jul-10
Page 21
Sep-10
N
Nov-10
J
Jan-11
Metal spread - Rebar over scrap
M
Mar-11
May-11
J
Jul-11
Sep-11
N
Nov-11
J
Jan-12
M
Mar-12
Conversion margins remain pretty slim for rebar

22. Small Chinese mills have adapted much better to
p
operating as cyclical, low margin converters…
Cash margins at Chinese mills
200
150 Rebar
HRC
100
$/tonne
50
US$
0
-50
-100
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
Jul-11
Jan-12
J
J
J
J
J
J
J
Source: Mysteel, Macquarie Research, April 2012
Page 22

23. …with iron ore prices reacting to the change in
p g g
futures prices
SHFE Rebar vs Spot iron ore
700 220
Rebar- SHFE 3M (LHS)
650 Spot Iron ore (RHS) 200
600
180
550
/tonne
/tonne
500 160
US$/
US$/
450
140
400
120
350
300 100
May-10
May-11
v-09
ar-10
v-10
ar-11
v-11
ar-12
n-10
ul-10
p-10
n-11
ul-11
p-11
n-12
Nov
Nov
Nov
Jan
Sep
Jan
Sep
Jan
Ma
Ju
Ma
Ju
Ma
Source: Mysteel, Macquarie Research, April 2012
Page 23

24. Chinese domestic ore output is highly price sensitive
 Q4 2011 showed how flexible Chinese
Apparent domestic iron ore use
domestic ore can be – fell by >100mtpa
as prices dropped into cost curve.
400 200
Import iron ore price 180
350
 Declining grades, rising costs and
160
300
140
250
environmental concerns have meant that
$/t cfr price
mt iron ore
120
200 100
production has been constrained.
363
345
336
316
07
80
98
m
3
293
3
30
$
150
29
270
270
261
256
 High-cost domestic supply only in the
231
231
60
216
196
100
market as much as it needs to be.
40
50
20
- 0
 If steel production rises so Chinese
rises,
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
domestic ore must respond.
Source: NBS, Platts, Macquarie Research, April 2012
Page 24