Industrial Metals

INTELLIGENCE REPORT2011

INDUSTRIAL METALSMARKET FORECAST AND ANALYSISNAICS 331-332

© 2011 NEPIRC

INDUSTRIAL METALS

1. Mature Industry - In-line with macroeconomy. Profit margins generally weaker in this industry. Intense competition for market-share. 2. Business Cycle Reaction – industries are those whose profitability tracks the business cycle. The cyclical swings for the industry are often of greater amplitude than economic cycles.

© 2011 NEPIRC

Strategic View:

• Mature Industry 1 • Business Cycle Reaction–Cyclical Industry 2 • Large iron ore expansion in Australia projected to increase production. • Metal Packaging industry experienced a decline in 2009, but the market increased to $102.8 billion in 2010 and projects continuous growth through 2020. • Substitution of copper conductors by aluminum; new interest in copper clad aluminum.

Financial Trends:

• 2010 U.S. Revenues: $274 billion (a 2.2% decline from 2009). • U.S. steel revenues: $178 billion (a 15.1% decline from 2009). • Other primary metals output expected to increase 8.4% in 2011 and 2012. • 2011 Revenue Forecast • $249.6 billion (a 8.9% decline from 2010). • U.S. steel projects $190.9 billion in 2011 (an increase of 7.3%) and $209.9 in 2012 (a 10% increase).• Operating Expenses • Projected to decline 0.3% year-over-year in 2011. • 2010 U.S. steel employment compensation down 1.4% to $43.05/hr; expected to decrease further in 2011 and 2012. (1.8% to $42.30/hr and 0.4% to $42.13/hr, respectively). • U.S. steel operating expenses down 12.4% in 2010; projected to increase 7.2% in 2011 before falling 9% in 2012. • Capital Spending decreased by 6.2% in 2010; projected to fall an additional 7.1% in 2011. • U.S. steel decreased by 10.9%; projected to increase 11.9% in 2011 and 14.2% in 2012.• Net Profit Margin will fall 0.2% in 2011. • Steel Net Profit Margin to increase 9.1% in 2011.• U.S. Steel Exports to remain essentially flat: • 8.6 million-ton projections in 2011 and 2012 represent year-over-year changes of just -0.4% and -0.1%, respectively.• U.S. Steel Imports to rise 50.2% in 2011 (to 144.5 million tons).• Fabricated Metals Avg. Hourly Earnings • Relatively unchanged December 2009-December 2010 ($21.27/hr for all employees).

Macro Drivers:

• Vehicle sales are expected to increase 10.3% for 2011 and 8.2% in 2012. • Non-residential construction is expected to grow 4.4% in 2011 and 7.8% in 2012.• U.S. demand for coatings, sealants, and adhesives within the automotive industry is projected to reach $5.6 billion in 2014. • Aerospace Industry grew 5.2% in 2010 and is projecting a 6.8% increase in 2011 and 9.5% in 2012. • The defense industry is expected to grow 7.8% in 2012. • Electronic equipment added 5.9% in 2010, and forecasts 10.1% growth in 2011 and 11.5% in 2012. • U.S. expenditures for iron ore expansion in Australia will reach $13 billion, subsequently increasing capacity to 333 million tons.• Steel Industrial Production Index increased 1.7% in 2010 and is projected to add 2.8% and 2.4% in 2011 and 2012, respectively.• Chinese demand for metal food cans is expected to grow at an approximate annual rate of 6% in 2011.• Global aluminum production is projected to expand 2.9% in 2011. • Gold prices topped $1,400.00/ounce in January 2011, due in part to a lack of confidence in the U.S. dollar and potential fluctuation in the Chinese Yuan.

Industry Drivers:

• Aluminum consumption is forecast to grow 4.5% in 2011.• Beverages will continue to represent the largest metal can segment; it is expected to grow 6.1% annually through 2011.• Steel industry capacity fell to 78.95% in 2010. It is anticipated to climb to 91% in 2011 before declining to 88% in 2012.• The U.S. dollar slipped 0.6% against the Euro in December 2010; this increased commodity prices, including those for silver and gold.• Advanced economies expanded by 2% in 2010. Projected growth for 2011 is 2.5%, although the outlook remains lower than pre-recession levels. • Rio Tinto has forecast a global capital expenditure of $13 billion for the 18-month period ending in December 2011. • Primary Metals leading index is expected to shed 3.8% in 2010. • Rolled product demand in the United States has been resilient, although China remains the key driver for these products.

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© 2011 NEPIRC

Market Trends:

• The Steel and Iron industry is expected to recover slowly, with growth rates of 2.9% in 2011 and 3.2% in 2012.• Steel inventories in 2010 declined 26.2% compared to January 2009.• Aluminum shipments in 2010 increased 25.6% year-over-year. • U.S. steel shipments increased 42.7% from 2009 to 2010.• Stainless steel demand continues to decline, however, as consumer preferences favor nickel, molybdenum, and iron.• The 2009 and 2010 decline in electrolytic capacitor demand is expected to reverse in 2011, driven in large part by new product development.• Aluminum capacitor use will increase in response to growth among industrial and medical markets, which are projected to gain 12.8% and 14.8% in 2011 and 2012, respectively.• Copper production is expected to exceed 661,000 tons for 2013-2014. • Global metallic cable consumption is projected to rise 7.6% in 2011.• Hot Rolled Sheet—up 0.5% in 2010—projects robust increases in 2011 and 2012 (9.8% and 11.2%)• Galvanized Sheet declined 5.4% in 2010, but is expected to increase 8.7% in 2011 and 10.1% in 2012.• Coiled Plate—down 14.9% in 2010—is estimated to increase 8.1% in 2011 and 10.3% in 2012.• Wide Flange Beams, which declined 7.7% in 2010, are projected to grow 6.8% in 2011 and 11.1% in 2012.• Wire Rod, down 4.3% in 2010, is expected to grow 4% in 2011 and 9.3% in 2012.• The Fabricated Metals Producer Price Index logged a 2.1% year-over-year increase in December 2010.

Pricing: • Zinc prices rebounded in the last 4-5 months, but continue to run in surplus. The average is expected to fall to $0.90/pound in 2011.• The Aluminum market will shift from surplus to deficit in 2011; prices are expected to increase 1%. • Base metal prices will see a slow but steady recovery in 2011.• Silver prices hit a 30-year high in 2010.• Copper prices are projected to increase by 7% in 2011, averaging $3.80/pound.• Gold is expected to average $1,457/ounce in 2011, according to the London Bullion Market Association.• Iron-ore is set to trade at $135/ton in 2011.• Steel prices are expected to fall 17% in 2011.

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Source: Bureau of Labor Statistics; Moody’s Economy.com; Lexus Nexus; Integra; Deloitte; Department of Commerce, Global Insight, Inc.; Harvard Business Review; Hoovers; Integra; McKinsey Quarterly; ING Foreign Exchange Wholesale Banking; Economist Intelligence Unit; Edgar; Federal Reserve Bank; Standard & Poors; Security Price Index; Wall Street Journal; Consumer Confidence Board; EcoTrends 2008; USDA; ThomasNet News; Steel.org; The American Iron and Steel Institute; The Metals Service Center Institute; The McGraw-Hill Companies (Platts.com); Metal Miner; The Aluminum Association; Market Watch- Vishay Release; Rio Tinto.com; Freedonia Group; PRLog.org; ACSPublications-WORLD CHEMICAL OUTLOOK ,;IMF,; Report Linker,; What Investment; Reuters.com; Visiongain.com; USGS; CRUgroup; ResearchWikis.com; Aluminum.org; Bloomberg;

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