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Some Things to Think About: Growth & Value

Some Things to Think About: Growth & Value. Presentation to Steel Manufacturers Association Washington DC May 15 th , 2007. The industry leadership challenge Find growth – defend value. In a dynamic environment it’s a hard balance to strike Valuations continue to rise – can you keep up?

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Some Things to Think About: Growth & Value

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  1. Some Things to Think About: Growth & Value Presentation to Steel Manufacturers Association Washington DC May 15th, 2007

  2. 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 www.first-river.com

  3. More buyers than sellers o/s China?Top 50 steel producers by “strategy” www.first-river.com Source: MB, IISI, First River

  4. Drives valuations…Companies purchased = flat rolled www.first-river.com Source: Company reports, US Steel, Gerdau, UBS, First River

  5. But how to m(c)atch Mittal? Top 15 producers* 2007 Pro-forma, 2006 crude steel, MT *Outside China Source: MB, IISI, First River www.first-river.com

  6. The focus defenseReturns of focus will provide superior performance Diversified Steel Differentiated Steel Product A Consolidation & restructuring moves aim to annex valuable ‘niches’ Digging into niches to avoid consolidators aims to raise the competitive level Product B www.first-river.com

  7. 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 www.first-river.com

  8. Returns of focusNot so special? *Averages calculated in US$ & exclude Mittal; Thyssen/Timken/CMC are steel only www.first-river.com Source: CapitalIQ, FRC

  9. Who let the dogs out?Steel divisions & their corporate owners Macsteel CMC Steel Schnitzer Corp Thyssen Steel Quanex TKR Steel Cascade Thyssen Corp Timken Corp CMC Corp Source: CapitalIQ, FRC www.first-river.com NB. Corporate performance includes steel

  10. Mills include: X, NUE, STLD, CMC, IPS; SSC’s include: RS, RYI, ZEUS, RUS Source: CapitalIQ, First River Mill & SSC gross margin performance Selected companies, 1999-2007, by quarter www.first-river.com

  11. Who claimed what?SSC HR coil price – drivers of increase, estimates +$57 +$17 $730 +$56 +$118 +$124 $360 Mill: $580 Mill: $280 Source: First River estimates www.first-river.com

  12. Combined $ margin & % of sales price Shares of SSC hot roll price increase2003 to 2006, estimates Less about owning SSC’s for control than ensuring the efficiency of the supply chain Source: First River estimates www.first-river.com

  13. Scrap volatility asks for attention Pig iron versus scrap prices $/Ton, monthly Source: Metal Bulletin, AMM, Purchasing Magazine www.first-river.com

  14. China GDP growthReal annual growth rates, 1953-2006 Average since 1978 9.6% p.a. www.first-river.com Source: National Bureau of Statistics

  15. China steel production growthOutpacing GDP? www.first-river.com Source: ABARE, CISA, IISI, National Bureau of Statistics

  16. China steel exportsChina’s rise to net exporter, monthly 2001-2007 (April)* *includes semi-finished Source: UBS www.first-river.com

  17. China development similar to others www.first-river.com

  18. Change & uncertaintyChinese urban employment changes Since 1996 +140M -70M 50% Source: National Bureau of Statistics www.first-river.com

  19. 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! www.first-river.com

  20. 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 www.first-river.com

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