S&P Industrial Metals Jan2008

Industry Surveys
Metals: Industrial
January 17, 2008
Leo J. Larkin Steel & Aluminum Analyst
CURRENT ENVIRONMENT..................................................................1 Steel eased in 2007

Steel profits should rise in 2008 Merger activity accelerated in 2007 BHP rocks the steel market Aluminum profits disappoint in 2007 Aluminum price and profits likely to decline in 2008 Aluminum consolidation heated up in 2007
INDUSTRY PROFILE...............................................................................9 Economic cycles and long-term trends drive metals INDUSTRY TRENDS ..................................................................................9
Thin-slab technology recasts steel sheet market Higher scrap prices to limit minimill expansions Consolidation takes hold in domestic steel Global view: foreign competition looms large Aluminum glut abates Chinas aluminum industry key to conditions in 2008 and beyond Imports remain a challenge for US steelmakers
Contacts: Inquiries & Client Support 800.523.4534 clientsupport@ standardandpoors.com Sales 800.221.5277 roger_walsh@ standardandpoors.com Media Michael Privitera 212.438.6679 michael_privitera@ standardandpoors.com Replacement copies 800.852.1641
HOW
THE INDUSTRY
OPERATES ..............................................................17
Steel: evolving to survive Aluminum: still vertically integrated Economic cycles drive demand Early cycle, late cycle The Internets role Regulation
KEY INDUSTRY RATIOS
AND
STATISTICS ....................................................23
Steel and aluminum Steel Aluminum
HOW
TO
ANALYZE
AN INDUSTRIAL
METALS COMPANY .............................24
Key revenue and cost factors The income statement Balance sheet data
GLOSSARY .............................................................................................31 INDUSTRY REFERENCES.....................................................................33 COMPARATIVE COMPANY ANALYSIS ..............................................35

THIS ISSUE REPLACES THE ONE DATED JULY 12, 2007. THE NEXT UPDATE OF THIS SURVEY IS SCHEDULED FOR JULY 2008.
Standard & Poors Industry Surveys

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VOLUME 176, NO. 3, SECTION 1 THIS ISSUE OF INDUSTRY SURVEYS INCLUDES 1 SECTION.
C URRENT E NVIRONMENT
Steel eased in 2007

Conditions in the US steel industry deteriorated in the first nine months of 2007 due to weakness in three key markets. According to data from the American Iron and Steel Institute (AISI), a trade association, US steel consumption (domestic shipments plus imports, minus exports) decreased to 97.6 million tons, down 12.5% from 111.5 million tons in the comparable year-earlier period. In contrast, consumption in 2006 increased 7.7%. Shipments for the first nine months of 2007 declined to 79.7 million tons, from 84.3 million tons for the first nine months of 2006. Total imports fell to 26.1 million tons from 35.0 million tons. Through December 15, 2007, production totaled 102.4 million tons, versus 104.8 million tons in the comparable period in 2006; the industrys capacity utilization rate for the period in 2007 was 86.0%, versus 87.5% a year earlier. According to AISI statistics, shipments to construction and distributor markets decreased 2.9% and 11.6%, respectively, for the first nine months of 2007 from the comparable year-earlier period. Given that nonresidential building construction rose 17.3% for the first 10 months of 2007, according to the US Census Bureau, we are surprised that shipments to the construction industry fell. If anything, we would have expected to see a low single-digit rise or, at worst, shipments that were flat with 2006. On the other hand, distributors liquidation of inventories and reduced shipments to this sector in the first nine months of 2007 had been expected because their inventories reached excessively high levels in the latter part of 2006. Shipments to the auto market for the first nine months of 2007 fell 1.0% from the same period a year earlier. Total motor vehicle sales for the first 11 months of 2007 decreased 1.7%, while production through November 2007 was down 2.3%. We surmise that since sales and production were roughly in balance during this period, this factor may have lessened the impact of lower vehicle sales on shipments to the auto industry. The industrys downturn is apparent in aggregate financial results for the four leading domestic steel companies for the first nine months of 2007. These firms, which Standard & Poors follows as a proxy for industry performance, are AK Steel Holding Corp., Nucor Corp., Steel Dynamics Inc., and United States Steel Corp. Collectively,
US STEEL PRODUCTION, CAPACITY, UTILIZATION, AND CONSUMPTION

PRODUCTION NET SHIPMENTS APPARENT SUPPLY* US PRODUCTION AS % OF TOTAL WORLD PRODUCTION
YEAR
OPERATING RATE (%)
CAPACITY
EXPORTS IMPORTS
MILLIONS OF TONS
IMPORTS AS % OF SUPPLY
TOTAL WORLD PRODUCTION (MIL. TONS)
2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996
87.9 85.8 93.8 84.9 88.8 79.2 86.1 83.8 86.8 89.4 90.7
123.6 119.8 116.3 121.6 113.6 125.4 130.4 128.2 125.3 121.4 116.1
108.6 102.8 109.1 103.3 101.0 99.3 112.2 107.4 108.8 108.6 105.3
108.6 103.5 112.1 106.0 100.0 98.9 109.1 106.2 102.4 105.9 100.9
9.7 9.4 7.9 8.2 6.0 6.1 6.5 5.4 5.5 6.0 5.0
45.3 32.1 35.8 23.1 32.7 30.1 38.0 35.7 41.5 31.2 29.2
144.2 126.2 140.0 120.9 126.7 122.9 140.5 136.5 138.4 131.0 125.0
31.4 25.4 25.6 19.1 25.8 24.5 27.0 26.2 30.0 23.8 23.3
1,366.3 1,256.2 1,178.2 1,069.2 996.5 937.5 934.4 869.7 856.8 880.6 826.9
8.0 8.2 9.3 9.7 10.1 10.6 12.0 12.3 12.7 12.3 12.7
*Consumption. Sources: American Iron and Steel Institute; International Iron & Steel Institute.
JANUARY 17, 2008 / METALS: INDUSTRIAL INDUSTRY SURVEY
US SHIPMENTS OF STEEL PRODUCTS, BY MARKET CLASSIFICATION

(In thousands of net tons)
MARKETS 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Appliances Automotive Construction Containers Converting & processing Electrical equipment Machinery Oil & gas Svc. centers & dist. Other domestic & comm'l equip. Other Nonclassified Exports Total shipments
1,635 15,251 15,885 4,163 11,263 2,434 2,355 3,811 27,800 992 4,911 12,748 2,610 105,858
1,729 15,842 15,289 3,829 9,975 2,255 2,147 2,649 27,751 1,086 4,672 12,640 2,556 102,420
1,789 16,771 18,428 3,842 11,309 2,267 1,722 2,151 28,089 939 3,748 12,738 2,408 106,201
1,907 16,063 20,290 3,708 12,708 2,055 1,784 2,885 30,108 1,136 3,832 9,725 2,849 109,050
1,820 14,059 21,543 3,232 10,311 1,684 1,456 2,953 27,072 734 3,198 8,342 2,536 98,940
1,714 13,988 20,536 3,237 9,710 1,341 1,402 2,098 27,473 851 3,041 12,342 2,267 100,000
2,018 15,883 23,787 3,028 9,448 1,099 1,178 2,112 28,551 589 2,425 12,962 2,894 105,974
2,035 16,574 21,926 2,973 8,151 1,075 1,434 2,504 33,812 715 2,627 15,079 2,479 111,384
1,895 13,031 15,858 2,504 7,559 1,088 1,300 2,056 23,213 575 1,854 29,950 2,592 103,474
1,781 14,003 17,544 2,535 8,531 1,227 1,360 2,459 23,706 556 2,207 29,632 3,068 108,609
Source: American Iron and Steel Institute.
these companies accounted for 43.7% of industry shipments in 2006. For the four companies in our proxy group, average revenue per ton (revenues divided by shipments) rose to $803 for the first three quarters of 2007, from $716 for the same period of 2006. Shipments declined to 35.5 million tons, from 36.1 million tons, but revenues rose to $28.3 billion from $25.9 billion. Operating profit declined to $3.6 billion from $3.9 billion a year earlier. The rise in revenues for our proxy group reflected higher revenue per ton along with the impact of acquisitions by United States Steel and Nucor. In our view, the proxy group realized increased revenue per ton as higher contract prices and a more lucrative product mix offset lower spot prices for steel. (The average realized price per ton reported by steelmakers is a blend of spot and contract prices.) However, higher costs and lower shipment volume resulted in a decline in profits at both United States Steel and Nucor, and caused aggregate profits for our proxy group to decline. In contrast, both AK Steel and Steel Dynamics recorded higher shipment volume and increased operating profit for the period.
portant markets, and, on that basis, we expect a 1.0% to 3.0% increase in the volume of tons shipped in 2008, an improvement from the projected decline of 5.0% in 2007. We believe that distributors will rebuild inventories in 2008, and we look for flat to slightly higher shipments to the construction market in 2008. In addition, we project a decline in imports in 2008, which should enable domestic companies to gain market share. Partially offsetting these positive factors is a forecasted decline of 3% to 4% in shipments to the auto industry. Service centers. We project that shipments to distributors will increase by 2% to 3% in 2008, following an expected decrease of 11% in 2007. In our opinion, inventory levels at distributors reached unsustainably low levels in 2007 in contrast with the very high levels attained in late 2006. Since September 2006, distributors have steadily liquidated steel inventories. In our view, expected GDP growth of 1.9% combined with very low inventories in 2007 should prompt distributors to rebuild inventories in 2008. According to the Metals Service Center Institute (MSCI), an industry trade association, distributor steel inventories totaled 12.10 million tons at the end of November 2007, or 3.0 months of supply, which is considered normal. At the 12.10 million ton level, inventories were 27% below year-earlier levels and were at the lowest
Mild industry recovery seen in 2008

As of late December 2007, Standard & Poors was forecasting real GDP growth of 1.9% in 2008, versus growth of 2.2% estimated for 2007. We look for a rebound in demand from two of steels three most im-
since November 1997. Consequently, we anticipate that distributors likely ceased liquidations by the end of 2007 and will add to inventory by the middle of the first quarter of 2008. Autos. As of late December 2007, Standard & Poors projected that unit sales of light vehicles would decline in 2008, to 15.5 million units, from 16.1 million units estimated for 2007. Given this projection, we believe that steel shipments to this sector will decline 3.0% to 4.0% in 2008, versus a projected decline of 2.0% in 2007. Year-to-date statistics on the auto industry seem to indicate that production and sales for motor vehicles remain roughly in balance. In our opinion, this balance mitigated the impact of lower sales on steel industry shipments to the sector. Through November 2007, total vehicle sales were down 1.7%, and total auto production was down 2.3%. For the Detroit Three (formerly the Big Three) US auto companies, the balance between production and sales was less favorable than for the industry in the aggregate. For the Detroit Three, vehicle sales declined 7.5% through November, while production decreased just 4.0% through November. Thus, assuming that the Standard & Poors forecast for lower sales in 2008 is correct, this suggests to us that the Detroit Three auto companies will be cutting vehicle production and selling out of inventory through the end of 2007 and into early 2008. Combined with the aggregate industry sales decline that Standard & Poors envisions in 2008, we look for reduced auto production and increased vehicle sales out of inventory. In turn, lower motor vehicle production will likely result in another decline in steel shipments to the auto sector in 2008. Construction. We anticipate flat to slightly higher shipments to the construction markets in 2008 following an estimated decline of 2.5% in 2007. This forecast is based on our assumption of a continued upturn in the private nonresidential sector of the construction market. While Standard & Poors does not have a specific forecast for this subset of nonresidential fixed investment, we anticipate continued gains in the sector in 2008. In our view, the nonresidential sector of the con-
struction market bottomed in 2003, when it declined 5.2% from the level in 2002. According to statistics compiled by the US Census Bureau, private nonresidential spending increased 9.2% in 2005 and 16.2% in 2006. Through October 2007, private nonresidential spending was up 17.3%.
Steel imports likely to decline again in 2008

We project that imports of finished steel (total imports, minus imports of semifinished steel purchased by domestic producers for further processing) will decline by 10% to 12% in 2008, following a projected decrease of 24% in 2007. We see imports declining in 2008 for two reasons. First, we anticipate that increased costs for raw materials and shipping in 2008 will make the US market less attractive for foreign producers. Since US-based companies are less dependent on outside suppliers for raw materials than most of their overseas competitors, higher raw materials place foreign producers at a cost disadvantage. This, when combined with the rising cost of shipping, makes it very difficult for foreign companies to take share from US companies by undercutting US companies on price. Consequently, we see these higher costs leading to another drop in imports in 2008. Second, we believe that a continuing decline in the US dollar in 2008 will make imported steel more expensive and reduce exports to the United States. In 2006, the value of the US dollar, as represented by the trade-weighted Finex US dollar index, fell 10.7%. (Finex is the New York Board of Trades currency options and futures department; the tradeweighted dollar index provides a general indication of the dollars international value by measuring the exchange rates of the US dollar against six major world currencies.) Through late December 2007, the US dollar index was down another 8.4%. The most likely result of a further dollar decline in 2008 would be market limitations to the amount of steel being imported into the United States. Given our expectation of rising raw material and shipping costs, we look for another decrease in steel imports in 2008.
Steel profits should rise in 2008

Following an estimated profit decline of 7% in 2007, we anticipate that aggregate
profits for the four companies comprising our industry proxy will post a 5% gain in 2008. This expectation reflects our forecast for increased volume, firmer spot steel prices, and higher steel contract prices. In our opinion, a combination of inventory rebuilding by distributors, firm demand from construction markets, and lower imports will result in higher volume and another increase in average realized prices. We expect that greater shipment volumes and higher prices will more than offset the increase in raw material costs in 2008. In addition, lower costs for integrating acquisitions should aid profits. Three of the companies in our proxy group made large acquisitions in 2007, and we anticipate that costs associated with these mergers will decline in 2008.
Merger activity accelerated in 2007

In 2006, several significant mergers and acquisitions took place in the steel industry. Arcelor SA completed its unsolicited takeover of Canadian steelmaker Dofasco Inc. for $4.85 billion in March. This was followed in June by the merger of Mittal Steel Co. NV and Arcelor to create the worlds largest steel company. On a smaller scale, Steel Dynamics completed its acquisition of Roanoke Electric Steel in April 2006 for $281 million, raising its capacity to five million tons (from four million) and increasing its capacity to produce steel joists and decking. In 2007, steel industry merger activity exceeded the pace seen in 2006. In January, Russian steelmaker Evraz SA acquired Oregon Steel Mills, a Portland, Oregonbased producer of specialty steel, for $2.3 billion. In March, India-based Tata Steel Ltd. completed its acquisition of UK-based Corus Group Plc for $12.4 billion. That same month, Nucor completed the acquisition of Harris Steel Corp. for $1.45 billion, and privately held Esmark Inc. and WheelingPittsburgh Steel Corp. announced an agreement to merge in a transaction valued at some $300 million (Esmark completed the acquisition on November 27, 2007). In June, United States Steel acquired Lone Star Technologies for $2.1 billion. On July 18, 2007, SSAB Svenskt Stal AB of Sweden completed its acquisition of IPSCO Inc. of Lisle, Illinois, for $7.7 billion. On October 16, 2007, Steel
Dynamics completed the acquisition of privately held OmniSource Corp., a scrap processor and trading company, in a transaction valued at some $1.1 billion. On October 31, 2007, United States Steel completed its takeover of Canada-based steelmaker Stelco Inc. for some $1.2 billion. On November 19, 2007, Quanex Corp. announced that it would sell its steel bar business to Gerdau S.A. as part of a restructuring. We see merger activity continuing in 2008 given the combination of low borrowing costs, high stock prices, and the large amounts of cash being generated by many steel companies although the size and number of acquisitions may fall short of 2007s high level. Another factor we see prompting mergers is what appears to be a secular rise in raw material costs. Steel producers need to become larger in order to cope with this challenge, and we see this as a catalyst for continued merger activity. Finally, despite all the transactions in 2006 and 2007, the industry remains fragmented, both domestically and internationally; therefore, we see room for additional mergers on that basis as well.
The return of vertical integration?

Future merger activity could differ slightly from the recent past in that steel companies attempt to become more vertically integrated. Instead of buying other steel producers, mergers between service centers and steel companies may come back into vogue in the US market. For example, the merger of Esmark Inc. and Wheeling-Pittsburgh Steel combines Esmarks service centers with Wheeling-Pittsburghs steel production. Part of the large contraction that occurred in the US industry in the 1980s and 1990s involved the separation of service centers from steel producers. The Esmark/Wheeling-Pittsburgh merger is a clear change in trend, but whether such transactions become pervasive remains to be seen. In addition to buying service centers, another aspect of vertical integration in merger activity is apparent in the takeover of OmniSource by Steel Dynamics. Traditionally, steel minimills relied on outside scrap vendors for their raw material needs. The Steel Dynamics purchase of OmniSource may represent a trend toward becoming less dependent on outside vendors. In short, it represents an
attempt to become more vertically integrated via mergers.
BHP rocks the steel market

On November 8, 2007, BHP Billiton Ltd., the worlds largest miner of base metals, stunned the steel industry by announcing an unsolicited offer to acquire Rio Tinto PLC (another base metals mining company) in an all-stock transaction valued at $153.2 billion, based on the closing stock prices of both companies on October 31, 2007. On the very same day, directors of Rio Tinto rejected BHPs offer, stating that it significantly undervalued Rio Tinto and its prospects. A merger of the two companies would create the worlds second largest iron ore mining company and add to what is already a highly concentrated oligopoly for shipped iron ore. Currently, BHP, Rio Tinto, and Vale (formerly Companhia Vale do Rio Doce) account for 75% of all shipped iron ore. BHPs proposed merger has triggered vigorous opposition from steel industry federations in China and Japan on the grounds that the combination would injure steel companies by creating an overly concentrated iron ore industry. In addition, the International Iron and Steel Institute (IISI) an industry trade association based in Brussels issued a statement on November 19, 2007, asking regulatory authorities to prevent the planned merger on the grounds that the combination would be contrary to the public interest. BHP has tried to defuse steel industry opposition by pointing out that the proposed merger would result in the elimination of competition for increasingly scarce transportation assets and thereby improve delivery times to customers. On December 1, 2007, Rio Tinto issued a statement that said it would speak with BHP, provided BHP was prepared to raise its offer. Rio Tinto subsequently reiterated its rejection of BHPs offer in a December 27 letter to Rio Tinto shareholders in which the company said that BHPs offer undervalued Rio Tinto and its prospects. As of late December 2007, there had been no formal discussions between BHP and Rio Tinto.
Aluminum profits disappoint in 2007

For the first three quarters of 2007, the four largest North American aluminum
companies Alcan Inc., Alcoa Inc., Century Aluminum Co., and Kaiser Aluminum Corp. which Standard & Poors follows as a proxy for industry performance, reported an operating profit of $5.74 billion, versus $5.71 billion a year earlier. Revenues increased to $45.1 billion from $42.1 billion, while shipments declined to 8.08 million metric tons from 8.12 million metric tons. In our view, the increase in revenues resulted entirely from a higher aluminum price. We believe that a higher price offset the decline in shipment volume. The aluminum price as measured by the industrys main benchmark, the London Metal Exchange primary (or ingot) price averaged $1.25 a pound for the first three quarters of 2007, versus $1.14 a pound for the same period in 2006. However, due to the impact of lower volume and increased raw material costs, margins contracted, and aggregate profits were virtually unchanged despite a 9.6% increase in the average price of aluminum and a 7.1% rise in revenues. We think that shipment volume decreased due to lower motor vehicle production and a sharp decline in housing starts in the US. Increased demand from aerospace and from the rest of the world partially offset the weakness in the auto and housing segments, and may have tempered the decline in shipment volume. Through October 2007, global consumption was up 9.4%, led mostly by China. For the same period, aluminum demand in the US fell 9.3%. The increase in the aluminum price in 2007s first three quarters compared with 2006s first three quarters likely reflected tighter supply early in 2007 and stronger demand outside the United States. According to statistics compiled by the World Bureau of Metal Statistics, a UKbased metal publishing company, total commercial stocks (the sum of metal exchange inventories and aluminum held by individual nations) stood at 2.79 million metric tons at the end of March 2007, versus 2.96 million metric tons a year earlier. We believe that this reduced level of commercial stocks, along with a market deficit of 315,000 metric tons at the end of 2006, and higher global demand led to an increase in the average price of aluminum.
WORLD CONSUMPTION OF REFINED ALUMINUM

(In thousands of metric tons)
UNITED STATES UNITED KINGDOM WORLD TOTAL
YEAR
CANADA
SPAIN
FRANCE
GERMANY
ITALY
JAPAN
CHINA
RUSSIA
2006 2005 2004 2003 2002 2001 2000 1999 1998 1997
6,150 6,114 5,800 5,667 5,509 5,230 6,161 6,158 5,814 5,390
854 803 760 736 747 743 800 777 721 644
620 624 603 596 533 508 526 494 436 430
713 719 749 754 762 746 782 774 734 724
1,823 1,758 1,795 1,916 1,690 1,580 1,491 1,439 1,519 1,558
1,021 977 987 956 850 756 780 735 675 654
401 353 439 302 428 433 576 597 579 583
2,323 2,276 2,319 2,235 2,010 2,014 2,225 2,112 2,082 2,434
8,648 7,119 6,043 5,178 4,115 3,492 3,499 2,925 2,425 2,260
1,047 1,020 1,020 802 990 786 748 563 489 469
34,053 31,711 29,964 27,606 25,370 23,721 25,059 23,312 21,825 21,797
Source: World Bureau of Metal Statistics.
WORLD PRODUCTION OF REFINED ALUMINUM

(In thousands of metric tons)
UNITED STATES UNITED KINGDOM WORLD TOTAL
YEAR
CANADA
FRANCE
GERMANY
NORWAY
INDIA
AUSTRALIA
CHINA
RUSSIA
2006 2005 2004 2003 2002 2001 2000 1999 1998 1997
2,281 2,480 2,517 2,704 2,705 2,637 3,668 3,779 3,713 3,603
3,051 2,894 2,592 2,792 2,709 2,583 2,373 2,390 2,374 2,327
440 442 451 443 463 461 441 455 424 399
516 648 668 661 653 652 644 634 612 572
360 368 360 343 344 341 305 270 258 248
1,422 1,376 1,322 1,192 1,095 1,068 1,026 1,020 996 919
1,105 942 861 799 671 624 649 621 545 547
1,932 1,903 1,895 1,857 1,836 1,784 1,762 1,719 1,626 1,490
9,349 7,806 6,689 5,547 4,321 3,371 2,794 2,598 2,335 2,035
3,718 3,647 3,594 3,478 3,348 3,302 3,247 3,146 3,005 2,906
33,952 32,021 29,922 28,001 26,076 24,436 24,418 23,710 22,654 21,798
Source: World Bureau of Metal Statistics.
Aluminum price and profits likely to decline in 2008

Based mostly on our expectation for an average aluminum price of $1.15 in 2008 (versus an estimated average price of $1.25 in 2007), as well as lower shipment volume, we anticipate lower sales and profits for aluminum companies in 2008. As was the case in 2007, US demand for aluminum in 2008 will likely decline due to weakness in two key markets, along with less vibrant economic growth. As of late December 2007, Standard & Poors was projecting real US GDP growth of 1.9% in 2008, versus growth of 2.2% (estimated) in 2007. Standard & Poors also forecasted a decline in unit sales of light vehicles to 15.5 million in 2008, from 16.1 million estimated for 2007, and a precipitous drop in housing starts (1.02 million units in 2008, versus 1.35 million estimated for 2007).
Partly offsetting the impact of slower growth and a decline in key markets is our expectation for a continued upturn in demand from the aerospace market, along with increased economic growth in the rest of the world. Another critical factor that could mitigate the negative impact of reduced US demand on prices and profits is the behavior of Chinas aluminum industry. In our view, Chinas transition from being a net importer of aluminum from 1993 through 2001 to a net exporter in 2002 has been a drag on the aluminum price and aluminum industry profits. In our view, had China remained a net importer of aluminum, or had its domestic supply and demand been in balance, the aluminum price and industry profits would have been higher in recent years. Moreover, while the price of aluminum has been rising steadily since 2002, it has dramatically
ALUMINUM SHIPMENTS TO MAJOR US/CANADIAN MARKETS*

(In millions of pounds)
2000 2001 2002 R2003 R2004 2005
Building/construction Transportation Consumer durables Electrical Machinery & equipment Containers & packaging Miscellaneous industries Total domestic Exports Total
3,204 3,297 3,447 3,432 3,692 3,693 7,947 7,028 7,518 7,804 8,509 8,683 1,692 1,439 1,522 1,498 1,585 1,561 1,704 1,513 1,493 1,433 1,583 1,657 1,496 1,476 1,427 1,452 1,610 1,664 4,992 4,961 4,979 4,941 5,098 5,115 645 812 925 843 827 740 21,680 20,526 21,311 21,403 22,904 23,113 2,816 1,984 2,433 1,988 2,048 2,482 24,496 22,510 23,744 23,391 24,952 25,595
*Includes imports of ingots and semifabricated metal; US only before 2001. Latest available. R-Revised. Source: The Aluminum Association.
that efforts by the Chinese government to reduce exports and their negative impact on the world market are beginning to take hold, albeit with a lag. Before 2004, aluminum exports received a 15% tax refund. Beginning in January 2005, the Chinese government cancelled the 15% export tax refund and placed a 5% tax on exports of aluminum. We believe that these actions had the effect of shifting overseas sales back into the domestic market in 2006. If our assumption is correct, the decline in the surplus of domestic Chinese production over domestic consumption seen through most of 2007 should continue in 2008.
lagged the increases in the price of other base metals, such as copper and nickel. In 2006, for the fifth time in as many years, China had a surplus of production over consumption: 701,000 metric tons, up from a surplus of 687,000 metric tons in 2005. However, the increase in the surplus in 2006 was the smallest since China became a net exporter in 2002. This contraction in the surplus was solely the result of much higher consumption. Notwithstanding a news report in the China Daily newspaper in December 2005 that 23 of that nations largest smelters planned to cut production by some 250,000 metric tons, production increased 19.8% in 2006 versus a 16.7% rise in production in 2005. Consequently, there appears to have been very little letup in Chinas production. However, in the first 10 months of 2007, Chinas surplus of production over consumption totaled 220,000 metric tons, down from 590,000 metric tons in the comparable yearearlier period, as sharply higher demand offset increased production. As long as the surplus continues to shrink for the balance of 2007 and persists in 2008, via an increase in Chinas domestic consumption, this should help offset lower US demand and prevent a collapse in the aluminum price. Of course, an acceleration in output or a decline in Chinas consumption could cause the surplus to expand and exacerbate the impact of a projected decline in US demand on the aluminum price in 2008. Based on the decrease in the surplus through October 2007, along with the comparatively small rise in the surplus from 2006 over 2005, we are cautiously optimistic
Aluminum consolidation heated up in 2007

Aluminum industry consolidation picked up in 2007 with the formation of United Company Rusal on March 27, 2007. The new company was formed through a threeway merger combining Russias OAO Rusal, the worlds third-largest aluminum producer, with Sual Group, a Russian aluminum producer, and Glencore International AG, a Switzerland-based trading company. Following the merger, United Company Rusal became the worlds largest aluminum company, with annual aluminum capacity of some four million metric tons and alumina capacity of 11 million metric tons. On May 15, 2007, Atlanta-based Novelis Inc., the worlds largest producer of aluminum rolled products, was acquired by India-based Hindalco Industries Limited for some $6 billion. Hindalco is one of Asias largest producers of primary aluminum; the company also produces copper. On November 15, 2007, Rio Tinto PLC completed its takeover of Alcan Inc., the worlds third largest aluminum producer, in an all cash transaction valued at $38.1 billion. Rio Tinto topped a hostile cash and share offer by Alcoa Inc. to acquire Alcan for $27.8 billion. Following the merger, Rio Tinto is the worlds largest aluminum producer and the worlds second largest alumina producer. (As mentioned earlier in this section, BHP Billiton is attempting to acquire Rio Tinto in an all-stock transaction.) We believe that BHP will ultimately prevail in its attempt to acquire Rio Tinto, albeit at a higher price that includes a cash
component. In addition, we surmise that the proposed new company would have to divest some of its iron ore assets in order to eliminate antitrust concerns. In our opinion, a merger with BHP is a compelling proposition given the large savings that a combined company could achieve. Merging the two companies would create a much larger entity that would have greater power to negotiate favorable terms from suppliers. A merger would also make large cost reductions possible via the elimination of duplication in mining locations where both companies currently operate. Further, combining the companies would reduce competition for increasingly scarce transportation assets and improve delivery to customers. Finally, the merger would give Rio Tinto exposure to oil and natural gas, which it lacks as a standalone company. If the proposed merger is completed, the new company would become the worlds largest producer of aluminum and copper, and the second largest producer of iron ore. In addition, the planned merger would make the aluminum industry more concentrated than ever. We estimate that United Company Rusal, Alcoa, and Alcan together accounted for 43.6% of primary global aluminum production in 2006. Collectively, Alcoa, Alcan, and Rusal accounted for 36.6% of global output in 2000. On a pro forma basis, which assumes that BHP had acquired Alcan and Rio Tinto in 2006, United Company Rusal, Alcoa, and BHP would have accounted for 54% of global primary aluminum production in 2006. In our view, consolidation of the industry is a positive development. The concentration of production in the hands of fewer, more financially able companies should result in greater price and production discipline. A more concentrated industry is likely to resist radical price cuts at the trough and over expansion at the peak of the cycle. In turn, this should result in less volatility in sales and profits over the course of the business cycle.
I NDUSTRY P ROFILE
Economic cycles and long-term trends drive metals

Steel and aluminum are the dominant products of the US industrial metals sector. However, the manufacturing processes and scales for these two metals are quite different. The aluminum industry is concentrated and oligopolistic. The steel industry is more fragmented, and steelmakers are smaller than aluminum companies. For example, in 2006, the two largest North American aluminum producers accounted for 28.0% of the worlds primary aluminum production, whereas the two largest North American steel companies accounted for just 3.8% of global steel output. However, the steel industry is undergoing a technological and structural transition, and competition together with rising costs for raw materials is forcing consolidation. is economic growth, as measured by real gross domestic product (GDP). Industrial metals companies are highly dependent on the fortunes of the cyclical auto and construction industries. In 2006, those two industries accounted for 33.3% of US direct steel shipments, according to data from the American Iron and Steel Institute (AISI), a trade association. For the US and Canadian aluminum industries, the transportation and construction markets accounted for 47.3% of shipments in 2006. Containers (mostly beverage cans) and packaging are also critical markets for aluminum, accounting for 19.7% of shipments in 2006. (The industrys sensitivity to economic cycles is discussed further in the How the Industry Operates section of this Survey.) Against a backdrop of economic cycles, the most important long-term trends shaping the industrial metals industries are related to new manufacturing technology, consolidation, foreign competition and imports, and raw materials costs. These trends will exert significant influence on the direction of industrial metals companies for the foreseeable future.
INDUSTRY TRENDS
The primary factor affecting near-term performance of the industrial metals industry
LARGEST NORTH AMERICAN ALUMINUM COMPANIES

(Ranked by 2006 revenues, in millions of dollars)
COMPANY 2004 2005 2006
Alcoa Inc. Alcan Inc. Century Aluminum Kaiser Aluminum

Source: Company reports.
23,478 24,885 1,061 942
26,159 20,320 1,132 1,090
30,379 23,641 1,559 668
Thin-slab technology recasts steel sheet market

Since the 1960s, changes in manufacturing technology have revolutionized the US steel industry. In the late 1980s, the advent of thin-slab casting technology a refinement of continuous casting allowed minimills to compete in the carbon sheet and strip products market, the last market fully controlled by the integrated producers. (Continuous casting is described in this Surveys How the Industry Operates section.) The importance of these products to industry revenues is apparent: in 2006, carbon sheet and strip products totaled 57.4 million tons, or 52.4% of total industry shipments.
LARGEST US STEEL COMPANIES

(Ranked by 2006 revenues, in millions of dollars)
COMPANY 2004 2005 2006
Nucor Corp. United States Steel Corp. AK Steel Holding Steel Dynamics Inc.
Source: Company reports.
11,377 9,917 5,217 2,145
12,701 9,739 5,647 2,185
14,751 10,407 6,069 3,239
Nucor Corp., currently one of the largest domestic steelmakers and the nations biggest minimill operator, was the first minimill firm to use thin-slab casting to make flat-rolled sheet products. After SMS SchloemannSiemag AG of Germany developed a thinslab casting machine, Nucor pioneered the use of the machine at its plants in Crawfordsville, Indiana, and Hickman, Arkansas. The machine uses a funnel-shaped mold to squeeze molten steel down to a thickness of 1.5 to 2.0 inches. This eliminates the need for the primary stands to reduce the typically eight- to 10-inch-thick slabs produced by conventional casters. Nucors Crawfordsville mill initiated the thin-slab casting process in August 1989. Subsequently, the company added another thin-slab, flat-rolled plant in Hickman, Arkansas, in 1992, and a third such plant in Berkeley County, South Carolina, in 1996. Nucors successful entrance into the flatrolled market prompted a number of other minimill operators to follow suit. As of December 2007, three other US-based firms with thin-slab casting plants were producing steel: Gallatin Steel Co., Steel Dynamics Inc., and North Star BlueScope Steel LLC. Together, they have added some 6.6 million tons of steel to the market. Following Nucors acquisition of Trico Steel in July 2002, and with increased output at its other plants, Nucors flat-rolled sheet capacity increased to 10.8 million tons, or 19.6% of the domestic carbon flat-rolled market at the end of 2006, up from zero before August 1989.
Higher scrap prices to limit minimill expansions

While Nucor and other minimill operators have taken sizable market share from integrated companies, future gains will be limited due to an apparent secular rise in the cost of scrap steel. Since its beginnings in the 1960s, the US minimill industry has been able to make raw steel at a lower cost than its integrated rivals. This competitive advantage, along with lower labor costs, allowed the minimill operators to undercut the integrated companies on price and drive them out of nearly every market except flat-rolled carbon sheet. From December 2001 through November 2004, scrap costs rose dramatically. The
scrap price, as measured by the Factory Bundles Index (a benchmark series tracked by American Metal Market), was $298 a ton in December 2007 down from the record high of $442.50 per ton seen in November 2004, but above the levels of 2003 and 2002. The main catalyst for the generally higher prices appears to be searing demand from China. The high cost of scrap has trimmed the minimills cost advantage in raw steel production. This has forced the minimill operators to keep prices high and will limit their ability to take market share by undercutting their integrated rivals. Higher scrap costs also have increased the cost of raw steel production for integrated mills. The impact is not as great, however, because their primary raw material is pig iron. Integrated companies typically use about a 3-to-1 ratio of molten pig iron to scrap and, thus, are less sensitive to rising prices for scrap. For minimills, in contrast, scrap accounts for nearly all their raw materials costs. Consequently, rising scrap has a larger negative impact on minimills and reduces their financial attractiveness. Standard & Poors believes that higher scrap costs will remove much of the incentive to construct new minimill flat-rolled plants in the foreseeable future. Only one minimill flat-rolled plant has entered the market in recent years. The $880 million plant was financed and built by a joint venture company named SeverCorr Holdings LLC and began production in August 2007. The mills capacity is 1.5 million tons and it will sell its products to the automotive, building, agricultural, pipe and tube, and appliance industries. Ultimately, the company plans to increase its capacity to 3.4 million tons. Only one other minimill producer, Indiana-based Steel Dynamics, is contemplating the construction of additional minimill flat-rolled capacity. The company has stated that it might build another flatrolled steel plant if scrap costs moderate.
Consolidation takes hold in domestic steel

The severe downturn in the US steel industry that began in 1998 and minimills gains in the sheet steel segment forced domestic firms to consolidate and implement dramatic cost cutting. Industry concentration intensified
10
in May 2003, with the acquisition of bankrupt Bethlehem Steel by International Steel Group Inc. (ISG) and United States Steel Corp.s takeover of bankrupt National Steel. In July 2002, Nucor acquired the assets of Trico Steel, renaming it Nucor Steel Decatur LLC. The combined shipments of AK Steel Holding, Nucor, Steel Dynamics, and United States Steel accounted for 43.7% of domestic steel shipments in 2006. By way of comparison, eight companies accounted for about 50% of the domestic market in 2001. In past downturns, bankrupt producers used the reorganization process to cut costs and to emerge from bankruptcy as independent companies with lower debt and nearly the same amount of production capacity. In the process, however, they retained their pension and healthcare liabilities (the so-called legacy costs), which made them unattractive for acquisition. LTV Corp. is an example of a company that emerged from bankruptcy (in 1986), but was not acquired because it retained its legacy costs. The severe deterioration of the industrys finances since 1998 with some companies unable to generate enough cash to continue operating under the protection afforded by bankruptcy forced an involuntary reduction of capacity and set the stage for consolidation. For example, after entering Chapter 11 bankruptcy protection in December 2000, LTV ran out of cash and ceased operations in December 2001. Subsequently, W.L. Ross and Co. LLC, a private investment firm, acquired LTVs assets in April 2002 and renamed the company International Steel Group. Because ISG purchased the assets and not the ongoing business of LTV, ISG was not obligated to assume LTVs pension and retiree healthcare costs. This made the acquisition possible. Similarly, the assumption of the pension plans of Bethlehem Steel and National Steel by the Pension Benefit Guaranty Corp. (PBGC) in late 2002 cleared the way for these two companies to be acquired. (The PBGC is a federal corporation that insures the employee benefits of participating companies.) Although the PBGCs actions removed the pension liabilities of Bethlehem Steel and National Steel, both retained the burden of healthcare expense and generally high cost structures. This, combined with the companies burdensome debt, made it impossible for either company to emerge
from Chapter 11 bankruptcy as an independent entity.
Can merged integrated steelmakers compete with minimills?

While the newly-merged integrated companies will enjoy lower cost structures than before due to their more flexible work rules and lower employment levels, it remains to be seen if they can match Nucors low cost structure and high profit margins. ISG operates its plants with a union work force, although it is managed based on the Nucor model. ISGs president and chief executive, Rodney Mott, is a former executive of both United States Steel and Nucor. Mr. Mott oversaw the launch of Nucors thin-slab, flatrolled carbon plants in Hickman, Arkansas, and Berkeley County, South Carolina. Since ISG began operations in May 2002, it has produced 90% of the amount of steel made by LTV with less than one-quarter of the hourly employees needed previously. In addition, it has just three layers of management, compared with LTVs seven, as reported by online newsletter Morning Call in early November 2002. Finally, because W.L. Ross and Co. purchased the assets and not the ongoing business of LTV, ISG was not obligated to pay the pension and other retiree benefits of LTV, which put it at a tremendous advantage compared with the other integrated steel companies. Based on the terms of the contracts that ISG negotiated with its work force, it appears to us that the company will come much closer to matching Nucors labor costs than will United States Steel. ISGs legacy costs consist of funding for a postretirement medical plan, which covers a limited number of employees under its current labor agreements until December 15, 2008. ISG will not provide similar coverage for employees who retire after the current labor agreement expires. ISGs other legacy costs consist of funding for a defined benefit pension and postretirement benefit plan that it inherited from the acquisition of an interest in an iron ore mining joint venture. This plan was inherited as a result of ISGs takeover of Bethlehem Steel. At the end of 2004, the plans pension and healthcare obligations totaled $260.7 million, and the unfunded liability for the plan totaled $174.3 million. In contrast, at the end of 2004, the combined
11
pension and other postretirement obligations for United States Steel amounted to $10.7 billion, and its unfunded liability for these obligations totaled $2.6 billion. ISGs contribution to the pension plan in 2004 was $1 million, versus United States Steels contribution of $330 million. These two plans constitute the extent of ISGs exposure to the burden of defined benefit pension and other postretirement plans. (A defined benefit pension plan involves a contractual promise to pay a specific amount of retirement income to an employee, usually based on the length of employment and salary level. Such plans generally are funded entirely by the corporation and are among its liabilities.) ISG has instituted a defined contribution plan for most of its hourly work force. For each union employee, the company contributes $1.50 for each hour worked to a pension trust fund managed by the United Steelworkers Union. The contribution represents the full extent of the companys liability. Unlike a defined benefit plan, ISGs plan does not promise to pay a specific amount of retirement income to an employee. Nor does it involve the management of any pension assets or require the accrual of pension expense and pension liability. However, ISGs plan is not as flexible as Nucors defined contribution plan; unlike Nucor, ISG must contribute even if the company is not profitable. Following its acquisition of National Steel in May 2003, United States Steel retained a defined benefit pension plan. However, because of a new labor agreement that accompanied the merger, the plan does not cover the National Steel employees who were retained after the acquisition. In addition, the plan is closed to all new employees. The former employees of National Steel will be covered by a defined contribution plan virtually identical to that provided by ISG: National Steel employees will receive pension benefits through the Steelworkers Pension Trust based on United States Steels contribution for each employee for the number of hours worked. Thus, United States Steels pension expense will be lower in the future than it was before the National merger. Nevertheless, the retention of the plan places United States Steel at a labor cost disadvantage relative to ISG and Nucor. In April 2005, ISG
was acquired by Arcelor Mittal (then known as Mittal Steel Company NV), the worlds largest steel company. In March 2007, AK Steel Holding, the third largest integrated producer in the US, concluded the last of a series of new labor contracts aimed at eliminating what the company estimates is a $40 per ton cost disadvantage vis--vis its competitors. Following implementation of these contracts, the company believes that it will have effectively capped its pension and healthcare costs. In addition, the new agreements will enable AK Steel to reduce the number of job classifications from about 1,000 to seven, in an effort to become more efficient. In our opinion, work force reductions, work rule changes, and contract changes limiting pension and health care costs that have occurred since 1998 will enable Mittal and other integrated companies to compete more effectively with Nucor. In addition, Nucors decision to source about one-third of its metal feedstock internally will raise its level of fixed costs and, in effect, make it a more integrated operation. Consequently, we think that the gap in cost structure and profit margins between Nucor and its integrated rivals will be far narrower than at any time in the past. If this proves to be correct, we believe that Nucor will not be in a position to aggressively cut prices to gain market share as it did in the 1980s and 1990s. Thus, if Nucor gains market share at the expense of the integrated companies in the future, it will do so at a much less rapid rate than in the past. Nucors fixed costs will not approach the level of the integrated mills or Mittals. In addition, costs for equipment outages are greater for integrated companies. Combined with Nucors labor cost advantage, we believe that Nucor still will retain an overall cost advantage and achieve higher profit margins over the course of the business cycle. Nucors labor cost advantage is particularly important in the context of balance sheet strength and its impact on the cost of capital. For example, in addition to their outstanding funded debts, Mittal and United States Steel ended 2006 with unfunded pension and other postretirement benefit liabilities totaling $2.6 billion and $2.0 billion, respectively. In contrast, Nucor had no such unfunded liabil-
12
ities at the end of 2006, since it does not offer its work force pension or other postretirement benefits. Because it is not encumbered by these kinds of obligations, Nucor will have lower total debt levels compared with its rivals. In our view, this will permit Nucor to enjoy a lower cost of capital, because its finances are less risky than those of its rivals.
Global view: foreign competition looms large

US steel and aluminum firms both face fierce competition from overseas producers and must contend with global overcapacity. However, international pressures have affected the industries competitive positions quite differently. US aluminum companies constitute a major force in the global industry, as they have for some time. For example, in 2006, Alcoa Inc. accounted for 15.1% of global aluminum production. In contrast, the two largest US steel
US EXPORTS AND IMPORTS OF STEEL MILL PRODUCTS, BY GROUP
(In net tons)
companies accounted for just 3.8% of aggregate global steel output. Because they have always had to obtain raw materials from overseas, US aluminum companies have been global competitors, virtually since their inception. The top-tier US company, Alcoa, has substantial overseas manufacturing holdings and derives sizable portions of its sales and earnings from outside the United States. In 2006, for example, overseas operations accounted for 43.5% of Alcoas revenues. The large overseas presence of the aluminum companies makes it difficult to analyze import data. What is classified in government statistics as an import may be a product shipped to a US company from one of its foreign facilities. Thus, import data do not provide a completely accurate picture of the extent to which foreign companies are penetrating or not penetrating the US market. What is clear, however, is that the global market is highly concentrated. Following Alcan Inc.s acquisition of Pechiney, three
PRODUCTS
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
EXPORTS Ingots, blooms, billets, slabs Wire rods Structural shapes & piling Plates Rails & accessories Bars & tool steel Pipe & tubing Wire & wire products Tin mill products Sheets & strip Total exports IMPORTS Ingots, blooms, billets, slabs Wire rods Structural shapes & piling Plates Rails & accessories Bars & tool steel Pipe & tubing Wire & wire products Tin mill products Sheets & strip Total imports 6,358,322 2,236,642 1,140,842 2,938,609 238,190 2,627,180 3,030,239 654,650 637,548 6,775,848 2,366,198 2,994,206 5,175,987 337,270 3,605,440 3,680,855 697,391 657,314 8,579,716 2,765,030 1,549,615 2,496,580 284,436 4,093,428 3,053,329 738,482 865,071 8,555,945 2,971,481 2,142,523 2,544,363 274,851 4,357,587 4,190,694 737,162 724,967 6,439,977 3,013,003 1,144,291 1,657,071 237,421 3,904,662 4,577,412 686,795 687,887 7,731,515 8,843,717 3,490,415 883,072 1,817,084 240,597 3,525,275 3,864,238 768,271 494,206 8,759,085 4,816,330 2,166,277 647,468 1,120,298 170,532 3,204,423 3,826,000 756,562 439,776 7,419,288 3,774,189 735,870 2,064,063 244,963 4,422,116 4,907,243 945,423 536,489 6,916,502 2,506,381 738,079 2,137,656 237,105 3,998,205 5,731,293 855,709 572,576 9,319,702 3,046,072 1,146,470 3,415,523 352,233 5,110,667 7,544,035 903,397 748,755 210,320 85,005 480,621 779,576 92,095 835,268 1,352,006 136,697 410,011 1,653,990 6,035,587 233,204 73,836 369,284 630,700 89,386 769,879 1,232,014 137,378 321,356 1,662,566 5,519,601 138,159 69,441 429,544 637,053 39,792 741,131 865,203 164,661 337,222 2,004,225 5,426,434 112,394 63,512 409,202 956,042 54,421 808,488 985,332 160,565 376,670 2,602,713 6,529,337 140,397 45,697 411,276 756,271 94,444 770,336 992,475 154,521 278,240 2,500,166 6,143,821 112,741 66,213 305,097 863,129 95,592 813,827 997,175 148,663 256,478 2,349,642 6,008,556 233,147 84,883 523,193 1,190,307 77,522 913,995 944,883 140,439 337,016 3,774,293 8,219,679 283,914 100,031 676,835 1,499,007 119,897 987,177 1,082,432 159,083 326,634 2,697,885 7,932,896 335,463 161,116 776,904 1,900,081 126,157 967,657 1,224,957 155,263 315,780 3,429,840 9,393,218 219,381 150,748 892,302 1,806,426 163,564 1,103,981 1,488,507 182,354 3,479,503 9,727,522
240,755
11,294,366 15,229,191 11,304,837 11,457,080
5,977,680 10,758,558
8,415,038 13,685,606
31,156,586 41,519,702 35,730,524 37,956,654 30,080,034 32,685,959 23,125,346 35,808,202 32,108,544 45,272,458
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producers accounted for some 39.2% of primary global aluminum output in 2006.
Aluminum glut abates

From 1989 through 2006, the aluminum market generally was in surplus, reflecting lower demand caused by recessions combined with excess supply. The global aluminum glut had its roots in the breakup of the Soviet Union. Before that time, most of that nations aluminum was used internally, primarily for military applications. The collapse of the Soviet government caused a dramatic decline in domestic consumption, which made more aluminum available for export. With a pressing need to raise hard currency, Russia began to export most of its output. This led to an oversupply in the market and placed downward pressure on prices. Exports as a percentage of total output peaked at 84.6% in 1996 and gradually declined through 2006, as internal consumption rebounded. In 2002, China became the worlds largest aluminum producer and became a net exporter as well. In our view, Chinas emergence as a net exporter added to the global oversupply. From 1993 through 2001, China was a net importer, according to data compiled by the World Bureau of Metal Statistics, a publisher of data on the global metals industry. An increased supply from China, coupled with a recession in the United States in 2001, resulted in the global aluminum market experiencing a surplus from 2001 through 2003, following a deficit in 2000. The supply deficit reappeared in 2004, as production lagged behind consumption; in 2005, the deficit narrowed, but it expanded again in 2006 as consumption increased at a greater rate than production. In 2006, there was a deficit of 315 metric tons, versus a deficit of five metric tons in 2005 and a deficit of 337 metric tons in 2004.
Chinas aluminum industry key to conditions in 2008 and beyond

In 2007, we think that the aluminum market experienced a small surplus (versus the deficit seen in 2006) due to global demand increasing less rapidly than supply. According to Global Insight Inc., an economic forecasting consultancy, global GDP growth is expected to increase 3.6% in 2007, versus
GDP growth of 3.9% in 2006. If this forecast is correct, aluminum demand could trail the rate of gain in 2006. Together with rising aluminum output, a small surplus could develop and place downward pressure on the price of aluminum. In our view, the supply and demand for aluminum in China will be one of the most important factors in determining whether the projected aluminum market surplus for 2007 will expand or contract in 2008 and beyond. As mentioned earlier, China became the worlds largest aluminum producer in 2002, and went from being a net importer of aluminum to a next exporter in the same year. In 1993, Chinas production accounted for 6.3% of global output; by 2006, China accounted for 27.5% of global output. Chinas imports totaled 705,000 metric tons in 2000, whereas its exports totaled 701,000 metric tons in 2006. We believe that this huge swing accounts for the fact that the increase in the price of aluminum since 2002 has been dramatically outpaced by higher prices of other base metals such as copper and nickel. Through October 2007, Chinas exports totaled 220,000 metric tons, down from 590,000 metric tons in the same period in 2006. This large decline is a result of an increase in Chinas demand in excess of supply. Through October 2007, Chinas production was up 36.1%, while consumption rose 44.4%. Consequently, exports fell. However, the overall global aluminum market experienced a surplus of 398,000 metric tons for the period, versus a deficit of 326,000 metric tons in 2006s first 10 months, as production outside of China increased in excess of consumption. For all of 2007, it appears that Chinas exports declined. Whether exports will continue to decline in 2008 remains to be seen. For 2008, we anticipate that global demand will trail 2007s growth rate. This expectation is based on Global Insights forecast that global economic growth in 2008 will be 3.4% versus 3.6% estimated for 2007. In that context, a decline in Chinas exports in 2008 would help mitigate a glut caused by less robust demand in the rest of the world. Apart from world economic growth, aluminum industry conditions beyond 2008 will depend mostly on the developments in the Chinese aluminum industry. Outside of China, the global aluminum industry has undergone a large amount of consolidation. At the end of
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US SHIPMENTS OF STEEL PRODUCTS, BY PRODUCT LINE

(In thousands of net tons)
PRODUCTS 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Semifinished steel 7,927 Shapes and piling 6,029 Plates 8,855 Rails 731 Other railroad products 144 Bars & tool steel 18,771 Pipe and tubing 6,548 Wire products 619 Tin mill products 4,057 Sheetshot rolled 18,221 Sheetscold rolled 13,322 Sheetsgalvanized 18,300 Electrical sheets & strip 510 Hot & cold rolled strip 1,822 Net total steel products 105,858
7,216 5,595 8,864 784 154 18,406 5,409 725 3,714 15,715 13,185 19,380 587 2,683 102,420
6,369 6,134 8,200 501 133 18,663 4,779 638 3,771 18,687 13,987 20,747 562 3,030 106,201
6,219 6,657 8,914 654 159 17,955 5,385 580 3,742 19,770 14,847 20,506 529 3,131 109,050
4,181 6,880 8,797 499 145 16,430 5,376 678 3,202 18,287 12,404 19,207 481 2,373 98,940
4,439 6,673 8,689 597 194 16,332 4,808 723 3,419 19,444 12,691 19,655 442 1,891 100,000
5,060 7,405 9,325 571 177 17,404 4,597 568 3,513 21,946 13,521 19,738 419 1,729 105,974
3,661 7,819 10,811 667 213 18,391 5,328 567 3,247 22,712 14,762 21,072 444 1,689 111,384
3,220 8,062 10,250 698 216 17,206 5,096 669 2,874 22,356 12,793 19,352 468 1,711 104,971
5,102 8,652 10,827 800 216 36,496 5,426 603 2,880 20,862 13,281 21,049 530 1,692 108,609
China pressures raw materials costs

In recent years, the emergence of China as the worlds largest steelmaking country has
15
2006, three companies accounted for 39.2% of world primary output, up from 36.6% at the end of 2000. With the merger of Rusal Ltd., Sual Group, and Glencore International AG in late March 2007 to form aluminum giant United Company Rusal, together with the acquisition of Alcan Inc. by Rio Tinto Ltd. in October 2007 (see this Surveys Current Environment section for more details), the aluminum industry outside China is now more concentrated than ever. Had these mergers been completed in 2006, three companies Alcoa, Rio Tinto, and United Company Rusal would have accounted for about 48.4% of world primary output in 2006. By way of contrast, there were approximately 100 primary aluminum producers operating in China in 2006. Aluminum Corp. of China, the nations largest aluminum company, accounted for just 22.3% of Chinas total aluminum output in 2006. In short, while the aluminum industry outside of China is becoming more concentrated, Chinas aluminum industry remains quite fragmented. If the large number of Chinese producers ultimately shrinks due to consolidation, the world aluminum market will become far less prone to the chronic oversupply and depressed pricing over the course of future business cycles, in our opinion.
placed immense upward pressure on the prices of raw materials, such as iron ore, ferrous scrap, coke, and coal. Chinas steel production rose to 423 million metric tons in 2006, from 100 million in 1996, according to statistics compiled by the International Iron and Steel Institute (IISI), a Belgium-based steel industry trade association. Chinas production accelerated dramatically in recent years, rising to 423 million metric tons in 2006, from 127 million in 2000. Rising Chinese production has been the main reason for higher global steel production since 1999. As a result of the sharp rise in Chinas steel production, raw materials costs have increased dramatically. For example, Brazilbased Vale (formerly Companhia Vale do Rio Doce), the worlds largest iron ore mining company, increased the price it charges its steel customers. Vales price for iron ore fines was $14.95 a metric ton in 2002. The price rose steadily through 2006, to $40.00 a metric ton. Similarly, the price Vale charged for iron ore pellets, which was $30.96 a metric ton in 2002, rose to $75.31 in 2006. For the first nine months of 2007, Vales price for iron ore fines was $44.92 a metric ton, versus $39.47 for the same period in 2006. Vales price for iron ore pellets for 2007s first three quarters was $77.46 per metric ton, versus $76.72 per metric ton for the same period in 2006. As this Survey was being prepared in December 2007, it appeared that upward
pressure on iron ore would continue in 2008. According to several analysts quoted in a Financial Times article dated October 23, 2007, a combination of strong demand and tight supply could result in a 50% hike in the price of iron ore in 2008. The article noted that spot iron ore prices had soared over the past year. For example, spot prices for iron ore from India increased to $130 per metric ton from $53 per metric ton a year earlier, while spot prices for iron ore from Australia and Brazil increased 39% and 71%, respectively. Besides sharply higher prices for iron ore, the ramp-up in Chinas steel production has boosted the price of other raw materials inputs such as coking coal. As noted in Mittals 2006 Annual Report form 20-F, the price of coking coal increased to $125 a ton in 2005, from $57 in 2004, due to strong Chinese demand. Growth in the coal supply caused the price to decline to $115 a ton in 2006. The company also noted that in 2006, Chinas sharply higher demand for iron ore and coal contributed to a shortage of cargo ships and led to higher ocean freight rates. In our view, the sharply higher cost of raw materials will prove to be a powerful catalyst for more consolidation of the global steel industry. While we do not expect raw materials costs to rise at the searing rate seen since 2002, it appears to us that the secular trend for raw materials prices is likely to be up. Given that three companies (Vale, BHP Billiton Ltd., and Rio Tinto PLC) account for an estimated 75% of the seaborne iron ore trade, steelmakers need to become much larger entities in order to cut overall costs and obtain better contract terms with their suppliers. By virtue of becoming larger through mergers and controlling more steel production, the steel companies will have greater power when it comes time to negotiate contracts to buy iron ore and other raw materials. In addition, the financial strength that normally results from a merger would give steelmakers the option to become more self-sufficient in raw materials. Greater financial resources resulting from mergers should enable companies to directly source raw materials through acquisitions, or become more vertically integrated through direct investment in iron ore production.
In our opinion, the imperative to cut raw materials costs has been a strong motivating factor in merger activity in recent years. For example, we believe that Mittals acquisition of the Kryvosizhstal steel assets from Ukraine in October 2005 was motivated in part by the desire to become more self-sufficient in iron ore. Besides increasing its steelmaking capacity by 8.0 million metric tons, the acquisition gave Mittal one billion metric tons of iron ore reserves. The imperative to cut raw material costs via steel industry mergers and joint ventures could receive an additional impetus if BHP Billitons unsolicited bid to acquire Rio Tinto ends in a deal (see the Current Environment section of this Survey for more details). A combination of BHP and Rio Tinto would create the worlds second largest iron ore mining company and add to what is already a highly concentrated oligopoly in the market for shipped iron ore. Such a merger would increase the formidable pricing power of the iron ore mining companies and likely hasten steel industry mergers as a response.
Imports remain a challenge for US steelmakers

In contrast to the US aluminum industry, only two steel companies Commercial Metals Co. and United States Steel have overseas steel plants. In general, the portion of steel company revenues derived from outside the United States is minimal. However, by way of contrast to the minimal presence of US companies overseas, the US steel market itself is far more international now than at any time in the past. As a result of merger activity that began in 1997, some 40% of current domestic capacity may be foreign-owned by the end of 2007. Moreover, it is quite conceivable foreign ownership will continue to rise in the future. Although foreign steel has taken a substantial bite of the US industrys domestic market share since 1960, the domestic industry was able to withstand record high imports of both finished and semifinished products in 2006 and still prosper. For 2006, total imports of steel were 32.0% of apparent supply (equivalent to domestic production plus imports, minus exports), versus 25.6% in 2005, according to AISI statistics. Finished imports were 27.1% of
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WORLD STEEL PRODUCTION

PRODUCTION (MIL. METRIC TONS) UNITED STATES WORLD TOTAL AS % OF WORLD TOTAL UNITED STATES
YEAR
CHINA
JAPAN
CHINA
JAPAN
2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996
423 349 274 219 180 143 126 124 114 108 100
116 112 113 111 108 103 106 94 94 105 99
99 94 99 91 92 90 101 96 97 97 94
1,222 1,106 1,039 947 882 825 828 771 760 779 730
34.6 31.5 26.4 23.2 20.4 17.3 15.3 16.0 15.0 13.9 13.7
9.5 10.2 10.9 11.7 12.2 12.5 12.9 12.2 12.3 13.4 13.5
8.1 8.5 9.5 9.6 10.4 10.9 12.2 12.5 12.8 12.4 12.9
Source: International Iron & Steel Institute.
finished supply, versus 21.3% in 2005. Semifinished imports (steel slab purchased by the steel industry itself to meet its raw materials needs) were 20.5% of total imports in 2006, versus 21.5% in 2005. Through the first nine months of 2007, total imports were 26.8% of apparent supply, and finished imports accounted for 22.8% of finished supply. In 1960, steel imports into the United States totaled 3.4 million tons, or 4.7% of the 71.5 million tons consumed in the nation that year, according to the AISI. From 1985 through 2006, imports ranged from a low of 17.5% of annual consumption in 1990, to a record high of 32.0% in 2006. Given the size of the US market and its generally lessrestrictive import barriers, foreign steelmakers will continue to provide competition in supplying the US market. The consolidation of the US domestic industry has resulted in considerable cost reduction and an industry that is far more competitive vis--vis foreign rivals. Combined with a weaker US dollar, this should enable the domestic industry to mitigate the impact of imports and compete more effectively in the future. Despite the fact that imports as a percentage of total consumption in 2006 exceeded 1998, and finished imports as a percentage of finished consumption matched 1998, the domestic steel industry achieved record profits in 2006. By way of contrast, most of the industry reported severe losses in 1998. In our view, the combination of rising costs of raw materials and higher transportation costs has considerably reduced the cost advan-
tages enjoyed by foreign steelmakers. This will make it difficult for foreign producers to easily undercut domestic steelmakers on price and to flood the market. While the emergence of China as a net exporter of steel in 2006 and beyond could result in a global glut of steel, it is highly unlikely that any nation, including the United States, will allow China to flood its markets. While the United States has the fewest import restrictions of any nation, US producers have occasionally had the US government impose restraints on imports in the form of quotas, tariffs, and voluntary restraint agreements. We believe that any attempt by China to swamp the US market with surplus steel would generate demands for protectionist measures and the filing of antidumping suits.
HOW THE INDUSTRY OPERATES

The industrial metals companies that manufacture steel and aluminum products operate in industries that are highly capitalintensive. Aluminum companies are vertically integrated, meaning that they own the sources of raw materials, as well as the plants and equipment used to manufacture finished products. Steel companies, once highly integrated, have become much less so since the 1980s. Operations concentrated on the raw materials side of the industry are referred to as being in the primary, or upstream, end of the business. Those focused on finishing or processing are in the downstream portion of the business.
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Steel: evolving to survive

For the better part of the twentieth century, the steel industry operated in a vertically integrated fashion. This entailed massive capital investment to process coal, iron ore, limestone, and other raw materials into molten iron, which was then transformed into finished steel products. It required huge investments in processing plants and equipment, and in iron ore and coal mines. The original method of steelmaking used by integrated companies was the ingot teeming method, in which molten steel was poured into a mold and allowed to cool in the form of an ingot before eventually being transformed into a semifinished product: a slab, a bloom, or a billet. Today, however, a method known as continuous casting is more commonly employed. In this process, molten metal is poured into a water-cooled mold, and then drawn down into a series of rolls and water sprays. The advantage of this process is that it yields the semifinished products slabs, blooms, and billets in a single step, saving energy and creating a better product.
came part of union contracts long before minimills emerged as a competitive threat. To the extent that minimills incur legacy costs at all, they are far lower than that of the integrated companies. As a result of the restructuring and consolidation that has taken place since 2002, legacy costs will become less expensive for integrated steelmakers in the future. Accordingly, the labor cost advantage that minimill operators have traditionally enjoyed, vis--vis integrated companies, will diminish.
US steel industry downsizes

Due to increased steel imports, the advent of minimills, and the reduced consumption by the automobile industry, traditional US steelmakers have lost a substantial portion of tonnage. Demand from the US automobile industry has been declining for decades. In 1973, direct shipments of steel to the US auto industry totaled 23.2 million tons; data for 2006 show that figure at 15.5 million tons. The most recent high for shipments was 16.8 million tons in 1999. Two factors were behind this decline. In response to greater demand for smaller, lighter, more fuel-efficient cars in the 1970s and 1980s, the auto industry substituted aluminum, plastic, and other materials for steel. In addition, rising imports of foreign cars during this period cut demand for US-produced vehicles made with US-manufactured steel. Because high volume was critical to steelmakers ability to keep unit costs down, the decrease in tonnage led to sizable losses. Bankruptcies, plant closures, and mergers forced a massive contraction in the integrated steel industry, substantially reducing the number of integrated steelmakers. In 1960, these firms accounted for 91.6% of US raw steel production; in 2006, their share was 42.9%.
Integrated steelmakers bear high costs

The integrated production process requires expensive plant and equipment purchases that will support production capacities ranging from two million to four million tons per year. Its capital costs are significant approximately $2,000 per ton of capacity, compared with minimills $500 per ton. (Minimills are discussed in more detail later in this section.) For integrated steelmakers, raw materials and energy comprise the majority of costs, representing 60% to 65% of sales, followed by labor, at 22% to 25%. Costs per ton have been declining for integrated producers, but they still exceed minimill costs. Lowering these costs is critical in becoming more competitive because companies cannot count on higher prices to ensure their profitability. Integrated companies employ unionized workers, whose labor is more expensive over the course of a business cycle than is nonunion labor. Union contracts prevent integrated companies from reducing total compensation costs when demand and production decline. In addition, integrated companies incur legacy costs contractual obligations to pay pension and health benefits to retirees. These obligations be-
Steelmakers exit primary end

To cope with the decline in demand from automakers, as well as to cut costs and comply with more stringent environmental legislation, the steel industry has become less vertically integrated. Producers have cut back on the raw steelmaking end of their operations, reducing their raw materials holdings of coal and iron ore, and shutting down coke ovens, blast furnaces, and other primary steelmaking equipment.
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Today, more than ever before in their history, steel companies are buying raw materials (coke, coal, and iron ore) and semifinished steel from outside suppliers. At present, only United States Steel Corp. comes close to being self-sufficient in supplying its own primary raw materials in its domestic operations. The use of outside suppliers is intended to cut fixed costs. By divesting raw materials holdings in coke, coal, and iron ore, companies can lower their asset- and fixed-cost bases. In the process, companies also have reduced the labor costs associated with owning and mining raw materials. However, this strategy could backfire if the US dollar continues what appears to be a cyclical decline, raising the cost of purchasing slabs and, thus, of production. Indeed, the downsizing of the primary side of steelmaking has been so extensive that many integrated companies have found themselves short of the primary capacity needed to make molten steel into slabs, the basic material of finished products. Consequently, beginning in the early 1990s, they substantially increased their purchases of foreign-produced slabs. In 1992, semifinished steel accounted for 14.1% of total imports; in 2006, it accounted for 20.6% of total imports. Given the large increase in the cost of slabs and other raw materials since late 2001, as well as the recent consolidation of the domestic industry, we believe that the integrated steelmakers may halt their efforts to become less vertically integrated. In fact, we think that the sharp rise in the cost of raw materials since 2001 could prompt companies eventually to reverse course and become more vertically integrated. In our view, this would entail increasing holdings of coke, coal, and iron ore. Although owning and mining these raw materials would increase fixed costs, it would give producers more control over their raw material costs. At the very least, rising raw materials costs will provide the industry with an incentive to consolidate further. For example, in April 2005, International Steel Group (ISG) was acquired by Mittal Steel Co. NV to form the worlds largest steel company. (See the Industry Trends section of this Survey for more information.) One of the reasons cited for
the merger was ISGs need to cut its raw materials costs.
Minimills step up production

Minimill steelmakers small regional companies that make a limited number of commodity steel products using a less capitalintensive process than the integrated steelmakers do have played a major role in displacing those larger firms. According to the American Iron and Steel Institute (AISI), an industry trade association, minimills accounted for 8.4% of total US raw steel production in 1960; by year-end 2006, their share was 57.1%. Minimill companies vary in size, from oneplant operations with annual capacities of as little as 150,000 tons, to multiplant operations with annual capacities of between 400,000 tons and 22 million tons. Minimill operators enjoy a labor cost advantage because their operations are largely nonunion. With nonunion labor, compensation is often linked directly to production and profits. When production and profits rise, so does compensation; conversely, lower production and declining profits result in lower labor costs. Minimill steel production methods do not require as much of an investment in raw materials and capital equipment as do the production methods of integrated steelmakers. Because minimills use scrap metal as their raw material, they do not have to build and maintain blast furnaces, coke ovens, and equipment to handle other materials. Thus, minimill operators have been able to undercut integrated companies on price, driving them out of many commodity steel markets. With the advent of thin-slab casting in the late 1980s, minimills began to compete in the flat-rolled sheet market, the industrys largest and most lucrative segment. The invention of the thin-slab caster substantially reduced capital requirements for producing flat-rolled steel, removing the main barrier to entry into this market segment. As a result, minimills have grown in number, increasing competitive pressure in the last remaining market segment dominated by integrated producers.
Recyclings role
Integrated steel companies do not achieve the kind of cost savings through recycling that
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aluminum companies do. While the integrated steel industry does recycle internally generated scrap steel and purchases scrap from outside suppliers, producers limit the amount of scrap they use, partly because of their investments in production equipment that relies on traditional sources of iron ore and coal. Rising scrap prices and product quality are other considerations; high-grade scrap is expensive. Ford No. 1 bundles, a highgrade scrap used for making more expensive grades of steel and also a component of the American Metal Market Factory Bundles Index, trade at a premium to the standard No. 1 heavy melt. Prices for the Factory Bundles Index rose steadily from December 2001 through November 2004. At the same time, the No. 1 heavy melt price increased to record levels. As this Survey was being prepared in December 2007, it appeared that prices for the Factory Bundles Index may have peaked in November 2004 (though they remain well above the level seen in 2003), while No. 1 heavy melt set a record in March of 2007. Iron ore, coke, and limestone make up about three-fourths of the typical integrated steelmakers materials; only about onequarter is recycled steel scrap. For minimills, recycled scrap is the chief raw materials cost. Minimill operators purchase scrap from outside suppliers and, thereby, avoid the high fixed costs associated with sourcing their raw materials needs internally. However, the rising price of scrap has prompted several minimill firms to produce raw materials internally via the production of scrap substitutes. For example, in 2003, Nucor Corp., the nations largest minimill operator, entered into a joint venture with Vale (formerly Companhia Vale do Rio Doce), the worlds largest iron ore company, to produce pig iron in northern Brazil. (Production at the joint venture commenced on October 2, 2005.) Similarly, Steel Dynamics Inc., an Indiana-based minimill operator, successfully recommenced the production of pig iron internally in November 2003. Consequently, the rising cost of scrap over time could diminish recyclings role in the minimill steelmaking process.
heyday, the integrated companies owned the firms that distributed their goods. The function of the distributors, or service centers, was to take the finished steel products from the mills, process them further, and resell them to manufacturers, large companies, or suppliers of large companies. The service centers supplemented the efforts of the steelmakers direct sales forces and were, thus, part of the overall operation, which began with the mining of raw materials and ended with the sale of finished steel products. The industry has divested its distribution operations for the same reasons it cut back its raw steelmaking capabilities: to reduce fixed costs and to focus on the manufacturing and finishing end of the steel business. In July 1998, Inland Steel Industries (now Ryerson Inc.) sold its integrated steel business to Ispat International NV in order to concentrate on distribution. In 2003, United States Steel discontinued its electronic distribution operations. Virtually all service centers now operate as independent companies. On average, the steel industry currently ships 25% of its products to service centers, up from about 17% in the 1970s. However, ongoing consolidation in the US industry may alter this arrangement. Its possible that some service centers will once again become the distribution arm of a steel producer through mergers.
Aluminum: still vertically integrated

Like integrated steelmakers, aluminum manufacturers must make large capital investments to transform raw materials into finished products. Unlike steelmakers, however, US aluminum companies still function as vertically integrated entities both mining and producing the raw materials used in finished products. Aluminum companies mine bauxite, a basic raw material, and transform it into a substance called alumina. Alumina is made into aluminum ingot, which is subsequently used to make finished aluminum products. The major aluminum companies own large reserves of bauxite and spend substantial amounts of money on plants and equipment.
Distribution gets divested

The steel industry has exited the sales, or distribution, side of the business. In their
Recycling reduces integrated aluminum costs

The aluminum industry has been able to stay vertically integrated, largely by successful-
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ly reducing its manufacturing costs through recycling. Recycling consists of melting aluminum scrap (in the form of used beverage cans and scrap generated from operations) and forming it into ingots and finished products. In 2006, 38.7% of total US and Canadian aluminum output was composed of recycled scrap. By eliminating the mining, shipping, refining, and reduction processes, recycling saves the industry approximately 95% of the energy costs involved in making aluminum from bauxite. Refining and reduction are the most energy-intensive steps of primary aluminum production.
Aluminum minimills minimal influence

Another important factor behind the aluminum industrys ability to remain both vertically integrated and profitable is that minimill technology has not displaced the operations of established companies. Several aluminum minimills are operating in the United States; to date, however, their impact on the old-line aluminum companies has been minimal. Aluminum minimills lack the technology to make can sheet the aluminum industrys second-largest and most lucrative segment that matches the high quality of can sheet produced by integrated operations. This makes the prospect of minimills ascendance in the near future unlikely. The absence of minimill competitors in this critically important market has helped perpetuate the aluminum oligopoly.
Ongoing oligopoly
Because the US aluminum industry remains vertically integrated, it requires vast amounts of capital to function. This requirement effectively prevents start-up competitors from entering the business. Given the massive resources needed to mine bauxite, handle materials, and operate smelters, rolling mills, and finishing plants, it would be extremely difficult for any new company to enter this industry and operate as a vertically integrated firm. Consequently, the North American aluminum industry is likely to remain an oligopoly. As of December 2007, the aluminum oligopoly was composed of a small number of US firms, including Alcoa Inc., Century Aluminum Co., Aleris International Inc. (formerly Commonwealth Industries Inc., and now privately held), Kaiser Aluminum Corp., and
Economic cycles drive demand

The demand for aluminum and steel is cyclical in nature and highly sensitive to whether the economy is growing or declining. Revenues and earnings for both commodities rely heavily on demand for such consumer products as appliances, cars, and containers. Nevertheless, there are some differences: aluminum depends more heavily on consumer demand than does steel, which relies more on the capital goods markets. For example, shipments to the automotive, household consumer durables, and container markets accounted for 59.4% of
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Canadian based Alcan Inc. (now a subsidiary of Rio Tinto Group). Compared with the 13 companies producing in the US steel market in the same period, just three publicly listed companies compete in the US aluminum market (four, if Rio Tinto is included). Practically speaking, only minimill companies are capable of entering the aluminum industry because their operations are much less capital- and energy-intensive. Unlike integrated companies, aluminum minimills do not own and mine bauxite reserves to meet their raw materials needs; they also do not require smelters, materials handling, and other expensive equipment for processing the raw materials into aluminum ingot and finished products. Instead, minimills melt aluminum scrap in furnaces and then use thin-slab casters, and hot- and cold-rolling mills to make commodity aluminum sheet products. Consequently, their capital costs are substantially lower than those of their integrated rivals, and their method of operation lets them bypass many of the costly steps that integrated companies must undertake. But the aluminum minimills can make only a limited range of commodity sheet products for the building and distributor markets, which are mature. Thus, existing minimills can expand only by taking market share from those integrated companies that sell to the distributor and building markets. Additional capacity would kill profits in these markets, which makes it unlikely that new aluminum minimills will come into existence, unless some technological breakthrough makes it possible to produce high quality can sheet with the use of continuous casters.
aluminum shipments in 2006, according to the Aluminum Association, a trade group. Direct steel shipments to those same markets accounted for 18.6% of the steel total for 2006, according to statistics compiled by the AISI. Including sales made through distributors, these consumer-oriented markets could account for about 35.0% of steel shipments. In this comparison, we have excluded shipments to the building and construction markets because it is difficult to quantify how much of either product goes toward residential, as opposed to commercial, building. Materials used by the former would be classified as consumer durables; those used by the latter would be classified as capital goods. We do know, however, that a substantial portion of aluminum shipments to construction markets goes to residential buildings in the form of aluminum siding, windows, and gutters. Consequently, we believe that aluminum industry shipments for all consumer goods applications are close to 65% to 70% of total shipments in a typical year. In contrast, most of the building products made of steel, such as I-beams, are used in commercial construction projects.
A capital goods sector or company will not experience an upturn in sales and earnings until the economic recovery is in full swing. Its sales and earnings typically do not peak until after the economic cycle turns down. Thus, demand for capital goods typically increases at about the time that demand for consumer durables hits a plateau.
The Internets role

Electronic commerce (e-commerce) the linking of producers, distributors, and end users via the Internet has gained ground steadily since the formation of MetalSite.com in August 1998. Several e-commerce Web sites serving the steel and aluminum industries have since been established, including NewView.com (formerly e-steel.com) and MetalSpectrum.com. These sites function as electronic business-to-business (B2B) exchanges through which companies can buy and sell products over the Internet. However, many such sites have not been financially successful. For example, both MetalSite.com and ScrapSite.com declared bankruptcy and were acquired by Management Science Associates Inc. in October 2001. They operate under their previous names but are subsidiaries of the latter firm. Another entity, MetalMaker.com, ceased operations in April 2001. In 2003, United States Steel took a charge to discontinue its unprofitable Straightline electronic distribution subsidiary. Thus, the shortterm impact of e-commerce has been negative, as steel companies have had to take charges to write off investments in bankrupt e-commerce Web sites. In the long term, ongoing consolidation in the e-commerce industry will weed out the weak Web sites and result in a group of viable survivors. Ultimately, the Internet is expected to increase market transparency by providing abundant information to buyers and sellers. It is also likely to improve management of inventory and receivables, as buyers and sellers better match production and order flows. E-commerce likely will diminish the role of distributors that merely warehouse the metal. However, distributors that perform value-added processing of metal products will remain in the picture. Use of the Internet also should reduce overall administrative and
Early cycle, late cycle

Industrial metals industries can be classified as either early cycle or late cycle. Analysts make this distinction in order to track the industries sales and earnings trends. The early stages of economic recoveries are generally led by rising demand for consumer durables. Because aluminum derives a substantial portion of its revenues from consumer durables, we classify it as an earlycycle industry. The largest gains will occur in the early stage of an economic recovery. As the economic expansion enters its latter stages, sales and profits reach a plateau and then begin to decline. Overall, the steel industry is a late-cycle industry: demand for capital goods on which its shipments rely tends to rise in the latter stages of an economic expansion. However, the integrated steelmakers are more closely tied to consumer durables, particularly autos, than are the minimill operators. Consequently, this segment of the steel industry qualifies as an early-cycle industry.
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selling expenses. Because of the savings that it will deliver, e-commerce will become an integral part of the day-to-day operations of the steel and aluminum industries. E-commerce thus represents an important change in the way in which steel and aluminum will be sold in the coming years.
As this Survey was being prepared in December 2007, the bill had not been reintroduced in the current congressional session. Whether the bill will be reintroduced in the next session of Congress in 2008 remains to be seen.
Regulation
The aluminum and steel industries are highly regulated with respect to the environment. Both are subject to a variety of federal, state, and local environmental laws that regulate air emissions, wastewater, and hazardous waste disposal. At the federal level, legislation includes the Clean Air Act Amendments of 1990. For the steel industry, the laws mandate to reduce coke oven emissions became so expensive that many companies closed their coke ovens and came to rely on outside vendors. United States Steel is the largest such vendor; it had the funds needed to modernize the equipment for compliance. Under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (also known as the Superfund), aluminum and steel companies are involved in proceedings pertaining to the treatment of hazardous substances at plant sites, and they incur costs for rehabilitating such sites. The ultimate costs for complying with the Superfund legislation are currently unknown. However, because of the Bush administrations decision not to seek reinstatement of corporate taxes to replenish the Superfund, corporate compliance costs will decline. The Superfunds resources have fallen gradually since 1995, when the laws authorizing the taxes supporting its cleanups expired. In fiscal 2003, the Bush administrations action effectively shifted some $633 million in clean-up costs to taxpayers. In both fiscal 2004 and fiscal 2005, taxpayers funded the entire cost of approximately $1.25 billion, according to the Environmental Protection Agency. In addition, the administration is seeking to cut the number of sites covered by the fund. A bill to reinstate Superfund taxes, introduced by Senator Barbara Boxer (D-Cal.), was referred to the Senate Finance Committee on January 15, 2003, but no action was taken. The bill was reintroduced in 2005 but was not acted upon and was not reintroduced in 2006.
KEY INDUSTRY RATIOS AND STATISTICS Steel and aluminum

Automobile sales and production. Vehicle production is critical to the traditional integrated steel manufacturers because it accounts for nearly 25.0% of industry shipments (direct and indirect) and for nearly all of the value-added products. It is also critically important for aluminum. In 2006, shipments to the transportation segment accounted for 33.4% of the aluminum industrys total shipments, surpassing containers and packaging for the tenth time in as many years. Wards Automotive Reports, a car industry trade publication, compiles statistics on auto and truck production, and inventories on a weekly and a monthly basis. Monthly sales statistics also appear in the Wall Street Journal. Value of new construction in the United States. Reported monthly by the US Department of Commerce, these statistics cover every category of US construction spending. They are useful for estimating demand from this important sector of the economy. Construction accounted for 13.9% of aluminum shipments in 2006, according to the Aluminum Association, and 19.1% of steel shipments in 2006, based on data compiled by the American Iron and Steel Institute (AISI), an industry trade association.
Steel
Production and capacity utilization rates. Steel industry data are compiled every week by the AISI. This series contains the data for the previous year and the previous week so that numbers can be analyzed both sequentially and year over year to derive trends. The data appear weekly in American Metal Market. In 2006, production totaled 108.2 million tons at a capacity utilization rate of 87.5%,
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versus production of 104.6 million tons at a capacity utilization rate of 87.5% in 2005. Service center inventories. Because service centers account for about 25.0% of steel industry shipments, their inventory levels are an excellent proxy for the industrys underlying strength or weakness. The Metals Service Center Institute (MSCI), a trade association, publishes monthly data on service center inventories and shipping rates. An important statistic supplied by the MSCI is the number of months of shipments on hand. For example, a 3.0-month supply of inventory is considered normal. Variations above or below this number indicate possible shortages or surpluses. In November 2007, service centers had a 3.0-month supply of shipments on hand, which is regarded as normal for the industry. Steel scrap prices. The direction of scrap prices can be used to gauge the strength or weakness in the steel industry and the likely direction of steel product pricing. American Metal Market compiles and publishes the price for steel scrap on a daily basis. The price is an average of scrap prices from three locations where scrap is traded. For full-year 2006, the average price was $222.42 a ton, versus $195.50 a ton in 2005, $213.68 a ton in 2004, $122.93 in 2003, $94.21 in 2002, $76.18 in 2001, and $97.42 in 2000.
As of the end of November 2007, producer inventories stood at 2.75 million metric tons, versus 2.84 million metric tons at the end of November 2006. As of November 30, 2007, aluminum inventories on the LME stood at 929,250 metric tons, versus 697,075 metric tons on January 2, 2007. (Producer inventory refers to production that a company holds for future sale; it appears on a companys balance sheet as inventory in the current asset section of the balance sheet. Aluminum inventory on the LME refers to production that has already been sold but is being stored in a warehouse for future shipment.) Shipments of beverage cans. Because can sheet is such an important end market for aluminum producers, the level of beverage can shipments is critical to tracking the aluminum industrys health. The Can Manufacturers Institute, a trade association, reports shipments of beverage cans for monthly, quarterly, and annual periods. Prices. Information on the price of aluminum ingot is published daily in American Metal Market, the New York Times, and the Wall Street Journal. The price of aluminum ingot is probably the industrys most closely watched statistic. The trend of ingot prices, either rising or falling, is the most reliable indicator of industry profitability. The ingot price (as measured by metal traded on the LME) averaged $1.16 a pound in 2006, versus 86 cents a pound in 2005, 78 cents a pound in 2004, 65 cents a pound in 2003, 62 cents a pound in 2002, 66 cents a pound in 2001, 70 cents in 2000, 63 cents in 1999 and 1998, and 73 cents in 1997. Through 2007s first three quarters, aluminum averaged $1.25 a pound.
Aluminum
Shipments, production, and orders. The Aluminum Association, an industry trade association, publishes virtually all of the key industry statistics pertaining to the US aluminum business on a monthly basis. The International Aluminium Institute (IAI), a trade organization, publishes worldwide shipment, production, and inventory data monthly. The London Metal Exchange (LME) publishes daily inventory and price data for aluminum. Inventories. The behavior of inventories is very useful in analyzing industry trends. The IAI publishes monthly statistics for worldwide producer inventories. The LME publishes daily data on aluminum inventories held at LME-approved warehouses.
HOW TO ANALYZE AN INDUSTRIAL METALS COMPANY

When analyzing an aluminum or steel company, important elements to consider include shipment volume, market share, product mix, and cost controls. Trends in these basic areas should be evaluated. A thorough financial analysis also entails a close look at the income statement, balance sheet, and statement of cash flow.
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To project a companys results, industry analysts usually take a top-down approach. Based on a general economic forecast, they extrapolate a projection model for industry shipment levels and pricing (which considers the topics discussed in the Key Industry Ratios section of this Survey). They then assess how well an individual company is likely to perform within that picture.
Key revenue and cost factors

Among the key factors affecting an industrial metals companys health and outlook are shipment volume, market share, product mix, and cost control. These areas tie into an analysis of income statement data (discussed later in this section).
much about its prospects for long-term profitability and about its ultimate viability. If a companys shipments change relative to the industry at large, try to ascertain whether its market share is rising or falling. Is it gaining market share at the expense of profits? Is its market share rising or declining over the course of an entire business cycle? Determining an aluminum companys market share is important, though not as crucial as in the case of a steelmaker. This is because the aluminum industry is highly concentrated, while the fragmented steel industry is in the process of consolidation, and traditional players face rising competition from minimill operators.
Product mix
Given the global overcapacity and competitiveness in their industries, aluminum and steel companies are compelled to maximize profits by including value-added goods in their product mix. In the case of steel, this means concentrating on producing highervalue, coated, flat-rolled sheet rather than commodity-grade, hot-rolled sheet products. In the case of aluminum, it entails producing flat-rolled sheet for transportation markets rather than commodity-grade sheet for the building and beverage can markets. Because value-added products generally bring more revenue and profit per unit, a higher-value product mix boosts profits in good times, when strong demand pushes up volume and profit on each unit of production. During downturns, a higher-end product mix may be less price-sensitive, which can help to cushion the impact of volume declines. More broadly, a diversified product mix helps to insulate the manufacturer from cyclical downturns in individual markets.
Shipment volume
Increases or decreases in volume have a large impact on industrial metals companies profits. Because fixed costs are sizable, profitability improves as these costs are spread over more units of production. Higher volume provides lower unit costs. To forecast shipment trends, analysts must first establish economic assumptions. Industrial metals shipments correlate closely with trends in gross domestic product (GDP), and, in particular, with auto sales and construction spending.
Market share
Market share is a crucial issue for steelmakers. The steel market is mature and has limited secular growth potential, while the number of competitors has grown as new technology has reduced barriers to entry. For example, companies such as Nucor Corp., Gallatin Steel Co., and Steel Dynamics Inc. were able to enter the market for flat-roll carbon steel following the invention of thin-slab casting. Minimill companies in the market for nonflat-roll steel include Bayou Steel Corp., Commercial Metals Co., and Gerdau AmeriSteel Corp. These companies impact on the market has been a factor in the industrys consolidation in recent years. With more firms vying for business in a slow-growth market, the only way to increase revenues is to gain market share. An individual steel companys market share over the course of an economic cycle can reveal
Cost control
Whether a company produces commodity or value-added products, it must exercise strict cost control. Value-added products command higher prices than commodity products, but they also cost more to produce and market. Therefore, raising sales of value-added products is no guarantee of success if a company does not exercise firm cost control. It is very important to examine a companys cost trends over the course of a cycle. Do the profit margins from value-added
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STEEL INDUSTRY INCOME STATEMENT

(In millions of dollars, except as noted)
2002 2003 2004 2005 2006
REVENUES Sales Interest, dividends & other income Total revenues COSTS Employment costs, materials, supplies, freight, and other services Depreciation, depletion and amortization Interest and other financial costs Taxes other than income Loss or (gain) on sales of assets Loss or (gain) attributable to shutdown or restructuring of facilities Unusual items Taxes on income Total costs Extraordinary and other items Net income Return on sales (%)
31,498.8 132.0 31,630.8
33,125.1 1,132.9 34,258.0
38,504.4 71.4 38,575.8
41,185.5 89.8 41,275.3
45,849.5 120.7 45,970.2
29,980.0 1,751.4 664.3 200.0 (25.9) 15.7 517.3 (276.8) 32,826.0 (126.6) (1,321.8) (4.2)
33,705.2 1,536.9 564.1 0.0 0.0 3,583.5 2,404.5 (656.3) 41,137.9 (1.6) (6,881.5) (20.8)
33,024.2 1,233.3 332.0 0.0 (57.1) (207.9) (14.0) 1,049.8 35,360.3 0.0 3,215.5 8.3
35,507.2 1,205.2 292.8 0.0 (47.2) 0.0 1.5 1,397.4 38,356.9 0.0 2,918.4 7.0
38,867.0 1,182.0 245.9 0.0 (11.7) 0.0 0.0 1,711.1 41,994.3 0.0 3,975.9 8.7
products justify the companys investment in plant and equipment? In addition to fixed capital costs, it is important to examine labor and other operating cost trends. Legacy costs related to labor contracts (as discussed in the Industry Trends section of this Survey) are also a key item.
The income statement

Income statement analysis is one of the principal tasks in evaluating a company. The analyst should examine trends over the course of a business cycle in sales, gross profit margin, times interest earned, pretax profit per unit of production, net income, and earnings per share. The results indicate if the company is profitable and growing.
Sales
Sales numbers depend on volume and pricing trends. A rise in volume may be a function of strong market conditions, or it could indicate that the company is gaining market share. A price increase might occur in line with a general increase in product prices or because of an improved product mix. Trends in company sales over the course of the business cycle should be com-
pared with those of rival companies and the overall industry. To forecast revenues, the first step is to project shipment volume. Once assumptions about industry shipments, company market share, and product mix have been made, one must forecast the average price or revenue per unit of production. In the case of a steel company, the unit of production is a ton of steel. Aluminum also can be measured in tons, although, in practice, tons are converted to pounds, as described later in this section. Trends in the industrys capacity utilization rates and in shipment volume provide a reliable indicator of the direction of pricing. In general, rising shipments and higher utilization rates lead to price increases. Product mix is another factor in pricing trends. For example, revenue per ton might rise in a flat pricing environment because a companys product mix has become more lucrative. To project future sales revenues, multiply the forecast shipment volume by the expected price or revenue per ton. For example, if total steel shipments are forecast to reach 98 million tons in a given year, and you estimate that the market share for
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STEEL INDUSTRY BALANCE SHEET

(In millions of dollars)
2002 2003 2004 2005 2006
Current assets: Cash & marketable securities Receivables, less allowances Inventories Other current assets Total current assets L-T receivables & other invest. Fixed assets: Property, plant & equipment Less DDA Net fixed assets Other assets Total assets Current liabilities: Accounts payable Accrued taxes, incl. fed. inc. tax L-T debt maturing within 1 year All other current liabilities Total current liabilities Long-term liabilities Long-term debt 1 Deferred income tax Liabilities for facility shutdowns All other L-T liabilities & reserves Minority interests 2 Total liabilities Redeemable preferred stock (RPS) Stockholders' equity Total liabilities, RPS & stockholders' equity LIFO inventory reserves incl. above
1,036.4 3,492.3 5,477.5 755.2 10,761.4 750.0 39,823.7 21,908.4 17,915.3 4,670.2 34,096.9
1,581.7 3,632.3 4,893.1 887.3 10,994.4 540.2 30,208.2 15,638.2 14,570.0 3,689.2 29,793.8
2,500.5 4,265.7 4,585.8 1,101.0 12,453.0 385.3 26,640.6 14,863.5 11,777.1 4,494.1 29,109.5
4,615.9 4,107.9 4,761.5 1,221.3 14,706.6 358.1 27,848.4 15,655.1 12,193.3 2,432.0 29,690.0
4,855.6 4,578.8 5,290.1 1,258.9 15,983.4 389.5 28,580.0 16,398.6 12,181.4 2,384.5 30,938.8
2,663.6 755.5 1,054.3 3,267.9 7,741.3
2,833.0 512.0 178.1 8,501.0 12,024.1
2,682.0 418.8 37.4 2,212.6 5,350.8
2,817.2 237.4 271.9 2,706.0 6,032.5
3,084.8 257.0 195.0 2,862.4 6,399.2
7,785.2 995.7 890.3 14,927.1 246.5 32,586.1 122.3 1,388.5 34,096.9 870.3
7,582.5 363.3 0.0 14,537.5 194.5 34,701.9 59.2 (4,967.3) 29,793.8 0.0
5,090.4 1,043.9 0.0 6,868.6 226.5 18,580.2 30.0 10,499.3 29,109.5 0.0
5,064.8 547.8 0.0 6,525.1 313.3 18,483.5 30.0 11,176.5 29,690.0 0.0
4,076.8 421.9 0.0 6,482.8 384.3 17,765.0 30.0 13,143.8 30,938.8 0.0
DDA-Depreciation, depletion, and amortization. L-T-Long-term. LIFO-Last in, first out. 1Less the amount maturing within one year. 2In companies not wholly owned. Source: American Iron and Steel Institute. JANUARY 17, 2008 / METALS: INDUSTRIAL INDUSTRY SURVEY
imaginary company XYZ Inc. will be 8.3%, then its shipments will total 8.134 million tons. If you project revenue per ton of $508 for the companys products, XYZs expected sales for that year would total about $4.132 billion. Similar steps are taken to estimate sales for an aluminum company. Aluminum sales are reported in tons; however, to derive a sales number, the general practice is to convert the tons into pounds, and then to multiply the number of pounds by the forecast price or revenue per pound. An aluminum companys sales projections can be more complicated than a steel-
makers, because some aluminum companies also operate nonaluminum businesses, and some do not disclose shipment volumes or prices in those segments. In contrast, nearly all steel companies operate solely in the steel business.
Gross profit margin

Subtracting the cost of goods sold from revenues or sales and dividing the result by sales calculates the gross profit margin. The computation excludes selling, general, and administrative (SG&A) expenses and interest expenses. Some companies include depreciation in the cost of goods sold, while others
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do not. Ideally, depreciation should be included in the cost of sales. A companys gross margin should be viewed in relation to its peers margins and to the industry average, both year over year and sequentially. In addition, it should be compared with the companys own past performance. Gross margin levels and trends depend on volume, pricing, product mix, raw materials and labor costs, and depreciation. The gross margin indicates how efficiently a company manages its largest assets and greatest costs. Relatively small changes in pricing, volume, or other components of the cost of goods sold can cause large positive or negative changes in the gross margin ratio. Financial analysts refer to this characteristic as operating leverage. Because industrial metals companies operating leverage is high, they can experience greater profit volatility than less capitalintensive industries and companies.
needed in the case of industrial metals companies. Carrying large amounts of debt as part of their capital structure, they incur significant interest expense as a fixed cost, greatly magnifying the impact that any change in sales can have on profitability. The combination of a large amount of financial leverage and high operating leverage increases earnings volatility.
Pretax profit per unit of production

Pretax profit per unit of production is derived by subtracting pretax operating cost per unit of production from the average revenue per unit of production or by dividing pretax profits by the number of units produced. It is the single most useful and comprehensive calculation for comparing companies in terms of cost efficiency and overall profitability. This figure shows how a company is performing relative to the industry and to its peers, with respect to both operating and financial leverage. It can indicate a companys success in coping with market downturns and its ability to capitalize on market booms. Finally, it lets one assess whether a company is benefiting from efforts to increase sales of value-added products. Pretax operating cost per production unit (per ton) equals the sum of the cost of goods sold, SG&A expenses, depreciation, and interest expense, divided by the number of tons shipped. For purposes of comparison, restructuring charges, asset sales, and other unusual operating items should be excluded from the calculation. In the analysis of an aluminum company, the calculation of per-unit profits would be difficult if the company had nonaluminum business segments, because cost of goods sold and other income statement expense items might not be broken out separately by segment. Such companies usually report aluminum operating profit by segment, but that calculation might not include interest expense, so comparisons of pretax operating profit per pound of aluminum would not be valid.
The times-interest-earned ratio

The times-interest-earned ratio, also known as fixed-charge coverage, measures the number of times a company earns or covers its interest expense. The ratio is calculated by dividing income (before depreciation, interest, and taxes) by interest expense. If periodic principal repayments of long-term debt are coming due, they should be added to interest expense. This ratio gauges the degree to which a companys bondholders and other creditors are protected from the possibility of default: the higher the ratio, the greater the protection. Conversely, the lower the ratio, the lower the protection and, thus, the higher the risk. A decrease in the ratio over time, thus, warrants scrutiny, as it indicates that the companys ability to repay debt is deteriorating. The ratios limitation in assessing risk is that it uses earnings (or income) rather than cash flow in the numerator. Interest expense is paid with cash, not earnings. Thus, a high times-interest-earned ratio might overstate the degree of protection if the company generates little cash flow from operations. Nevertheless, a companys creditors monitor the ratio carefully. It should be compared with the companys past performance, as well as with that of other companies in the industry. These comparisons are particularly
Net income
Net income the bottom line equals pretax income minus taxes (and in some cases, minus preferred dividends and minority interest). To avoid distortions and to permit valid comparisons and the analysis of trends,
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this figure should be adjusted to exclude restructuring charges, gains or losses from asset sales, asset write-downs, gains from litigation settlements, and other items that are not expected to recur or are not considered genuine operating items. The analyst also should be aware that net income could be distorted by changes in accounting practices. Companies can adopt different inventory valuation methods, revise depreciation schedules, or change assumptions for employee benefit costs to make their earnings look better than they would under a different accounting method. Typically, notification of these changes is buried in the footnotes of a companys annual report. While such changes may be acceptable under Securities and Exchange Commission accounting guidelines, it is up to the analyst to determine the net income number and whether the quality of such earnings is normal or subpar. For instance, the earnings quality of a company using liberal accounting methods may not be, in fact, as good as those of another company employing methods that are more conservative. Even when specific accounting changes are detected, it is difficult to quantify their impact. In general, the analyst should be wary when a company makes frequent changes of this nature.
net income for an extended period, however, a close examination is warranted.
Balance sheet data

The balance sheet details a companys finances at a particular point in time, listing its assets, liabilities, and net worth or equity. These data are used to calculate various capitalization ratios, which are very important because industrial metals companies typically have high debt. To be of use, debt ratios must be examined over time. Trends in debt ratios indicate the way a company manages its assets and liabilities. Is the company adding too much debt in view of its sales and earnings growth? Are debt ratios increasing or decreasing as an economic expansion approaches its end? Industrial metals companies generally have high debt levels and volatile earnings, so investors and creditors pay close attention to trends in the various debt-to-capitalization ratios. Probably the most commonly consulted measurement is the ratio of long-term debt to total capitalization. It is calculated by dividing long-term debt by the sum of longterm debt plus retained earnings, preferred stock, deferred taxes, and minority interest. A steady increase in this ratio that is not accompanied by rising earnings and cash flow would cause concern, because it might signal that the company is taking on too much debt. A more comprehensive risk measurement uses total debt (the sum of long- and shortterm debt) divided by company capitalization. This ratio gives a more complete and accurate picture of the companys financial leverage. Historically, companies have often experienced severe financial difficulties in conjunction with short-term debt problems. Unusually large additions to short-term debt could signal that a company is having trouble generating operating cash flow. More often than not, excessive short-term debt is what precipitates liquidity problems and bankruptcy. To refine debt-to-capitalization ratios and enhance their usefulness in assessing risk, the analyst should exclude preferred stock from a companys capitalization. Very often, companies with large amounts of debt and chronically poor earnings are unable to obtain additional credit or to sell common stock. Instead, they issue preferred stock.
Earnings per share

Earnings per share (EPS) are probably the most closely watched measure of profitability. Analysts and investors focus much attention on EPS in order to discern trends. Is the companys EPS rising or falling over the course of a cycle? How does it compare with that of its peers and with companies in related and unrelated industries? As with net income, management can influence the level of EPS. For example, if gains in EPS consistently exceed growth in net income, chances are that the company is buying back common shares. Because EPS is calculated by dividing net income by the total number of shares outstanding, reducing the number of shares via stock buybacks will increase EPS without requiring any increase in net income. A share buyback may be an appropriate corporate strategy if a company has little debt and can fund its capital spending from cash flow. When EPS rises much faster than
29
This method of financing was quite common among steel companies in the late 1970s and early 1980s. Because the failure to pay a dividend on preferred stock does not constitute a default, such stock gives a weak company an extra layer of protection in its capitalization. In fact, continual issuance of preferred stock by an industrial metals company is often a sign of deteriorating finances and should prompt the analyst to look for other signs of trouble.
Cash flow
Cash flow analysis is an excellent tool for gauging how a company generates profits and where it places its funds. Cash flow equals the sum of net income plus noncash charges such as depreciation, depletion, and amortization of goodwill. For most industrial metals companies, amortization is a small item. Depreciation, in contrast, tends to be sizable. In attempting to assess cash flow trends, it is important to exclude cash generated by asset sales or litigation settlements, because such events are essentially nonoperating items. In the case of industrial metals companies, cash flow is an extremely important measure to monitor due to the large interest costs these firms incur and the sizable ongoing capital expenditure programs that they must fund. Does a firms cash flow cover its capital spending, or will it have to increase its borrowing? Does the company generate enough cash flow to cover capital spending and make acquisitions, pay dividends, or fund joint ventures? For industrial metals companies, the capital requirements and interest costs are often so significant that they can limit the ability of companies to pay large dividends or to regularly buy back stock over the course of the business cycle. This is true for both steel and aluminum companies.
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G LOSSARY
Alumina A substance produced from bauxite by a chemical process; it may be subsequently transformed into aluminum. Annealing The process of heating and then cooling metal to improve its formability and to make its surface more durable. Basic oxygen furnace A pear shaped furnace, lined with heat resistant (refractory) bricks, that refines molten iron from the blast furnace and scrap into steel. Bauxite An ore from which alumina is extracted and aluminum is eventually smelted. Bauxite usually contains at least 45% alumina. About four pounds of bauxite are required to produce a pound of aluminum. Blast furnace A cylindrically shaped furnace, lined with refractory bricks, used by integrated steel mills to smelt iron from iron ore. Carbon steel Steel without substantial amounts of other alloying elements; its properties are dependent chiefly on its carbon content. Carbon steel accounts for the largest percentage of steel made worldwide. Cold rolling The process of rolling steel without first reheating it. Cold rolling makes steel easier to machine by reducing the metals thickness and giving it a smooth surface. Continuous casting An operation in which molten metal is poured from a ladle through a water-cooled mold and solidified into a particular shape. This process is much less costly than the traditional ingot method, because it eliminates such time-consuming processes as ingot teeming, stripping, soaking, and certain preliminary rolling steps. Direct reduced iron (DRI) A metallic iron product made from iron ore pellets, lumps, or fines. DRI is used as a feedstock, mainly in electric arc furnaces. Direct steelmaking A theoretical method of producing steel in one vessel. It is only in the experimental stage; United States Steel and Nucor are exploring it via a joint venture. It is unknown when this process might become commercially viable. Fabrication The process of transforming a metal into a finished state by machining, forming, or joining. Flat-roll products Plate, strip, or sheet products made by passing metal through pairs of rollers with flat surfaces. Common flat-roll products include sheet, strip, plate, black plate, and tin plate. To make structural or shaped products such as beams and bars (referred to as long products), rollers with grooved or cut faces are used.
Galvanized steel Carbon steel that has been coated with zinc to increase its resistance to corrosion. Hot band A steel slab that has been placed through a hot mill to reduce its thickness for processing into a coil. Hot briquetted iron (HBI) Direct reduced iron (DRI) that has been processed into briquettes. The process of converting DRI into HBI involves the use of natural gas to remove oxygen from the ore and results in a substance that is 90% to 92% iron. HBI can be used in both electric-arc furnaces and blast furnaces as a high-quality substitute for steel scrap. Hot rolling A process in which steel slabs are reduced in thickness. The slabs are first reheated and passed through rolls in a hot mill to reduce their thickness; they are then rolled into coils. Ingot A large metal shape, formed when molten steel or aluminum is poured into an ingot mold to solidify. The metal is later reheated and rolled into a semifinished shape such as a billet, bloom, or slab. Iron ore A mineral containing enough iron to be a commercially viable source of the element for use in steelmaking. London Metal Exchange (LME) The international trading body that facilitates the open-market sale and purchase of metals worldwide. Long products Structural or shaped products, such as beams, bars, and billets, that are formed by passing the metal through rollers with grooved or cut faces. Metric ton A unit of mass equal to 2,204.6 pounds.
Mill products Steel or aluminum that has been fabricated into an intermediate form before being made into a finished product. For example, aluminum sheet, a mill (or intermediate) product, is used to make beverage cans, a finished product. No. 1 heavy melt Obsolete grade steel scrap, at least one-quarter inch in thickness and in sections no larger than five feet by two feet. Much of this metal comes from demolished buildings, truck frames, and heavy-duty springs. Minimills are the main consumers of this scrap. Pickling The process of using acid to remove undesirable scale that can form on a metal surface during hot rolling and annealing. Pig iron The term used for the melted iron produced in a blast furnace.
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Slab A semifinished aluminum or steel product that is later rolled or processed into a finished product. Smelting A process whereby ore is melted in order to extract or refine the metal it contains. Stainless steel Grades of steel containing more than 10% chromium, which are combined with other alloys to resist corrosion.
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I NDUSTRY R EFERENCES
PERIODICALS
American Metal Market American Metal Market LLC 1250 Broadway, 26th Fl., New York, NY 10001 (646) 274-6230 Web site: http://www.amm.com Daily newspaper; covers developments in ferrous and nonferrous metals. Wards Automotive Reports Wards Automotive Group 3000 Town Center, Ste. 2750, Southfield, MI 48075 (248) 357-0800 Web site: http://www.wardsauto.com Weekly; covers auto industry developments with comprehensive statistics on vehicle production, sales, and inventories. World Metal Statistics World Bureau of Metal Statistics 27a High St., Ware, Hertfordshire SG12 9BA UK +44 19 2046 1274 Web site: http://www.world-bureau.com Monthly; covers production, consumption, and trade of the major nonferrous metals. Also publishes an annual World Metal Statistics Yearbook and a quarterly World Metal Statistics Quarterly Summary.
TRADE ASSOCIATIONS
International Aluminium Institute (IAI) New Zealand House, 8th Fl., Haymarket London SW1Y 4TE, UK +44 20 7930 0528 Web site: http://www.world-aluminium.org Trade association; provides monthly data on aluminum production and inventories. International Iron and Steel Institute (IISI) Rue Colonel Bourg 120, B-1140 Brussels, Belgium +32 2 702 8900 Web site: http://www.worldsteel.org Steel industry trade association; publishes comprehensive monthly and annual data on the global steel industry. Metals Service Center Institute (MSCI) 4201 Euclid Ave., Rolling Meadows, IL 60008 (847) 485-3000 Web site: http://www.ssci.org Trade association for steel and aluminum service centers; publishes steel shipment data for distributors on a monthly basis.
GOVERNMENT AGENCIES
The Aluminum Association Inc. 1525 Wilson Blvd., Ste. 600, Arlington, VA 22209 (703) 358-2960 Web site: http://www.aluminum.org Aluminum industry trade association; publishes data on a monthly and an annual basis. American Iron and Steel Institute (AISI) 1140 Connecticut Ave. NW, Ste. 705 Washington, DC 20036 (202) 452-7100 Web site: http://www.steel.org Trade association representing North American companies engaged in the iron and steel industries; publishes monthly and annual data. Can Manufacturers Institute 1730 Rhode Island Ave. NW, Ste. 1000 Washington, DC 20036 (202) 232-4677 Web site: http://www.cancentral.com Trade association; publishes monthly, quarterly, and annual data on can manufacturing and shipments.
US Environmental Protection Agency (EPA) Ariel Rios Building 1200 Pennsylvania Ave. NW, Washington, DC 20460 (202) 272-0167 Web site: http://www.epa.gov Government agency with responsibility for enforcing compliance with clean air laws and other environmentrelated legislation. US Geological Survey (USGS) Mineral Resources Program 12201 Sunrise Valley Dr. 913 National Ctr., Reston, VA 20192 (703) 648-6110 Web site: http://minerals.usgs.gov The USGS is a division of the US Department of the Interior; its Mineral Resources Program produces publications and data products focused on the worldwide supply, demand, and flow of minerals and materials. US International Trade Commission 500 E St. SW, Washington, DC 20436 (202) 205-2000 Web site: http://www.usitc.gov An independent federal agency that provides trade expertise to the legislative and executive branches of the government, determines the impact of imports on US industries, and directs actions against certain unfair trade practices.
WEB SITES
London Metal Exchange http://www.lme.co.uk
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D EFINITIONS
FOR
C OMPARATIVE C OMPANY A NALYSIS TABLES
Operating revenues Net sales and other operating revenues. Excludes interest income if such income is nonoperating. Includes franchised/leased department income for retailers and royalties for publishers and oil and mining companies. Excludes excise taxes for tobacco, liquor, and oil companies. Net income Profits derived from all sources, after deductions of expenses, taxes, and fixed charges, but before any discontinued operations, extraordinary items, and dividend payments (preferred and common). Return on revenues Net income divided by operating revenues.
Price/earnings ratio The ratio of market price to earnings, obtained by dividing the stocks high and low market price for the year by earnings per share (before extraordinary items). It essentially indicates the value investors place on a companys earnings. Dividend payout ratio This is the percentage of earnings paid out in dividends. It is calculated by dividing the annual dividend by the earnings. Dividends are generally total cash payments per share over a 12-month period. Although payments are usually calculated from the ex-dividend dates, they may also be reported on a declared basis where this has been established to be a companys payout policy. Dividend yield
Return on assets Net income divided by average total assets. Used in industry analysis and as a measure of asset-use efficiency. Return on equity Net income, less preferred dividend requirements, divided by average common shareholders equity. Generally used to measure performance and to make industry comparisons. Current ratio Current assets divided by current liabilities. It is a measure of liquidity. Current assets are those assets expected to be realized in cash or used up in the production of revenue within one year. Current liabilities generally include all debts/obligations falling due within one year. Debt/capital ratio Long-term debt (excluding current portion) divided by total invested capital. It indicates how highly leveraged a company might be. Long-term debt includes those debts/obligations due after one year, including bonds, notes payable, mortgages, lease obligations, and industrial revenue bonds. Other long-term debt, when reported as a separate account, is excluded; this account generally includes pension and retirement benefits. Total invested capital is the sum of stockholders equity, longterm debt, capital lease obligations, deferred income taxes, investment credits, and minority interest. Debt as a percent of net working capital Long-term debt (excluding current portion) divided by the difference between current assets and current liabilities. It is an indicator of a companys liquidity.
The total cash dividend payments divided by the years high and low market prices for the stock. Earnings per share The amount a company reports as having been earned for the year (based on generally accepted accounting standards), divided by the number of shares outstanding. Amounts reported in Industry Surveys exclude extraordinary items. Tangible book value per share This measure indicates the theoretical dollar amount per common share one might expect to receive should liquidation take place. Generally, book value is determined by adding the stated (or par) value of the common stock, paid-in capital, and retained earnings, then subtracting intangible assets, preferred stock at liquidating value, and unamortized debt discount. This amount is divided by the number of outstanding shares to get book value per common share. Share price This shows the calendar-year high and low of a stocks market price. In addition to the footnotes that appear at the bottom of each page, you will notice some or all of the following: NANot available. NMNot meaningful. NRNot reported. AFAnnual figure. Data are presented on an annual basis. CFCombined figure. In this case, data are not available because one or more components are combined with other items.
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C OMPARATIVE C OMPANY A NALYSIS M ETALS : I NDUSTRIAL

Operating Revenues
Million $ Yr. End DEC DEC DEC JUN DEC DEC AUG DEC OCT DEC DEC DEC # MAY 6,069.0 1,303.4 A,C 855.4 D 876.1 A,C 5,647.4 1,178.2 A,C 886.7 1,001.8 5,217.3 1,014.7 A 848.0 786.9 4,041.7 D 758.3 A 712.0 D 512.7 A 4,289.0 D 645.1 A 613.0 475.4 3,994.1 616.0 A 654.0 436.8 C 2,301.8 343.0 A 948.0 294.2 10.2 14.3 (1.0) 11.5 8.7 16.2 5.5 14.9 2,971.8 2,897.2 3,078.9 2,379.1 2,219.9 A 1,745.0 1,911.7 A 4.5 11.2 2.6 7.5 10.6 (3.5) (12.5) 14,751.3 2,032.6 5,742.6 A 3,238.8 A 15,715.0 12,701.0 11,376.8 1,969.0 A,C 1,460.3 D 3,367.1 A 2,943.0 2,184.9 2,144.9 14,039.0 13,969.0 C 6,265.8 1,031.2 1,882.9 A 987.2 9,328.0 A 4,801.8 A 994.4 1,745.0 A 864.5 6,949.0 4,139.2 924.4 1,657.0 A 607.0 6,386.0 A,C 3,647.0 895.7 A 654.0 A 252.6 6,547.0 15.0 8.5 24.3 29.1 9.2 28.9 17.1 28.2 39.8 19.7 16.1 3.2 70.6 48.2 11.9 404 227 878 1,282 240 155 264 380 90 298 348 220 515 865 214 152 245 344 94 341 4,936.6 1,568.2 1,177.6 A 1,933.4 7,555.9 3,539.9 A 1,314.2 959.0 1,752.6 C,D 6,572.6 2,733.0 A 1,016.7 761.0 1,218.0 D 4,766.8 A 1,937.4 C 871.1 543.0 D 835.7 2,875.9 1,907.8 977.1 C 538.1 D 598.6 C,D 2,441.5 2,128.0 1,324.1 611.3 373.6 2,441.2 3,815.6 A 865.3 A 672.6 503.2 2,320.6 F 2.6 6.1 5.8 14.4 12.5 18.3 3.4 14.0 38.9 25.4 39.5 19.3 22.8 10.3 15.0 129 181 175 384 326 93 152 143 348 283 72 117 113 242 205 312 163 450 849 213 161 227 296 89 267 30,379.0 D 1,558.6 26,159.0 D 1,132.4 23,478.0 D 1,060.7 A 21,504.0 D 782.5 20,263.0 A,C 22,859.0 711.3 654.9 A 13,061.0 688.9 D 8.8 8.5 5.9 18.9 16.1 37.6 233 226 200 164 180 154 2006 2005 2004 2003 2002 2001 1996 10-Yr. 5-Yr. 1-Yr. 2006 2005 2004 2003 165 114 51 101 81 166 124 172 115 288 391 142 124 176 221 75 174 Compound Growth Rate (%) Index Basis (1996 = 100) 2002 155 103 50 113 80 119 105 132 111 267 342 106 116 186 188 65 162
Ticker
Company
ALUMINUM AA * ALCOA INC CENX CENTURY ALUMINUM CO
STEEL ATI CRS CAS CLF CMC
ALLEGHENY TECHNOLOGIES INC CARPENTER TECHNOLOGY CORP CASTLE (A M) & CO CLEVELAND-CLIFFS INC COMMERCIAL METALS
NUE NX RS STLD X
* *
NUCOR CORP QUANEX CORP RELIANCE STEEL & ALUMINUM CO STEEL DYNAMICS INC UNITED STATES STEEL CORP
WOR
WORTHINGTON INDUSTRIES
OTHER COMPANIES WITH SIGNIFICANT STEEL OPERATIONS AKS AK STEEL HOLDING CORP DEC ROCK GIBRALTAR INDUSTRIES INC DEC GTI GRAFTECH INTERNATIONAL LTD DEC STTX STEEL TECHNOLOGIES INC SEP
Note: Data as originally reported. S&P 1500 Index group. * Company included in the S&P 500. Company included in the S&P MidCap. Company included in the S&P SmallCap. # Of the following calendar year. ** Not calculated; data for base year or end year not available. A - This year's data reflect an acquisition or merger. B - This year's data reflect a major merger resulting in the formation of a new company. C - This year's data reflect an accounting change. D - Data exclude discontinued operations. E - Includes excise taxes. F - Includes other (nonoperating) income. G - Includes sale of leased depts. H - Some or all data are not available, due to a fiscal year change.
Net Income
Million $ Yr. End DEC DEC DEC JUN DEC DEC AUG DEC OCT DEC DEC DEC # MAY 12.0 49.9 42.4 13.7 (0.8) 44.7 (125.2) 36.3 113.9 146.0 179.4 30.5 50.8 17.0 35.2 1,757.7 160.3 354.5 396.7 1,374.0 1,310.3 177.2 205.4 221.8 910.0 1,121.5 57.6 169.7 295.3 1,077.0 62.8 42.9 34.0 47.1 (406.0) 86.8 (594.4) 27.0 (26.0) 9.2 162.1 55.5 30.2 81.3 61.0 75.2 (475.6) 23.9 (15.0) 15.8 571.9 211.8 55.1 279.8 356.3 361.8 135.5 38.9 273.2 285.8 19.8 36.0 16.9 320.5 132.0 (313.3) (10.9) (17.9) (34.9) 18.9 (65.8) (6.0) (9.3) (66.4) 40.5 (25.2) 35.2 (5.1) (32.2) 24.3 113.0 29.2 36.3 3.1 (218.0) 6.5 (92.4) 12.5 (87.0) 0.8 2,161.0 (41.0) 1,233.0 (116.3) 1,402.0 28.0 1,034.0 6.8 498.0 (18.6) 908.0 (13.7) 2006 2005 2004 2003 2002 2001 1996 514.9 16.2 226.5 60.1 26.1 61.0 46.0 248.2 32.9 29.8 (2.6) 275.0 93.3 145.9 16.0 145.0 11.7 Compound Growth Rate (%) 10-Yr. 15.4 NM 9.7 13.4 7.8 16.5 22.7 21.6 17.2 28.1 NM 17.5 2.0 (22.1) 12.1 (11.6) 1.6 5-Yr. 18.9 NM NM 43.2 NM NM 71.0 73.1 40.6 57.7 163.1 NM 77.3 NM 31.8 NM 78.0 1-Yr. 75.3 NM 58.1 56.3 41.7 2.4 24.7 34.1 (9.5) 72.6 78.9 51.0 (22.0) NM 11.6 NM (62.4) 2006 420 (252) 252 352 211 459 774 708 487 1,190 NM 500 122 8 312 29 117 Index Basis (1996 = 100) 2005 239 (716) 160 225 149 448 621 528 539 690 NM 331 156 (1) 280 (86) 311 2004 272 172 9 60 65 525 287 452 175 570 NM 392 192 21 318 12 301 2003 201 42 (138) (18) (68) (57) 41 25 130 114 NM (148) 93 (407) 169 (18) 78 2002 97 (115) (29) (10) (36) (109) 88 65 169 101 NM 22 81 (326) 149 (10) 135
Ticker
Company
NUE NX RS STLD X
* *
WOR
Note: Data as originally reported. S&P 1500 Index group. * Company included in the S&P 500. Company included in the S&P MidCap. Company included in the S&P SmallCap. # Of the following calendar year. ** Not calculated; data for base year or end year not available.
35
36
Return on Revenues (%)

Yr. End DEC DEC DEC JUN DEC DEC AUG DEC OCT DEC DEC DEC # MAY 0.2 3.8 5.0 1.6 NM 3.8 NM 3.6 0.6 5.0 2.0 4.5 NM 3.6 NM 1.8 NM 3.7 NM 3.3 0.2 4.2 4.7 2.9 NM 4.1 NM 8.1 0.6 5.9 1.7 9.1 NM 4.0 NM 3.0 3.8 5.0 5.8 3.6 3.4 6.1 7.8 10.3 5.6 5.1 NM 4.3 NM 5.3 11.9 7.9 6.2 12.2 8.7 10.3 9.0 6.1 10.2 6.5 9.9 3.9 5.8 13.8 7.7 1.0 4.2 1.8 4.8 NM 3.4 5.6 1.7 9.4 0.9 23.4 13.9 13.2 19.8 13.4 19.7 17.5 12.3 12.7 8.6 21.1 7.2 11.6 18.6 11.3 1.4 6.3 2.7 3.5 NM 4.0 8.0 2.7 6.6 0.7 38.6 22.7 25.5 37.6 36.6 12.1 3.8 9.5 NA 5.2 33.9 30.6 22.2 25.7 26.0 16.5 NM 9.4 NA 15.4 11.6 13.5 4.7 14.5 4.7 10.2 10.3 4.1 15.6 4.3 0.7 3.5 2.2 26.3 2.8 NM NM NM NM 0.7 NM NM NM NM 1.7 19.0 11.9 10.0 14.9 13.6 14.3 8.6 9.4 18.4 13.2 0.9 2.4 4.4 30.7 8.1 NM NM NM NM 1.5 NM NM NM NM 3.5 49.9 25.8 29.4 39.2 33.6 59.0 21.9 26.8 49.8 36.6 6.6 7.0 14.4 96.7 22.6 38.7 12.2 23.1 41.2 45.8 23.9 42.2 12.0 NA 19.8 7.1 NM 4.7 NM 6.0 2.6 4.8 0.9 2.5 NM 6.1 NM 3.7 NM 4.4 2.5 3.4 0.6 1.7 NM 15.5 NM 9.3 NM 11.1 10.0 2006 2005 2004 2003 2002 2006 2005 2004 2003 2002 2006 2005 2004 2003 9.4 2.9 NM NM NM NM 3.7 2.7 9.9 5.4 8.5 NM 13.2 NM 7.8 NA 6.8
Return on Assets (%)
Return on Equity (%)

2002 4.9 NM NM NM NM NM 8.7 7.2 15.8 5.1 17.3 2.7 12.1 NM 9.3 NA 12.3
Ticker
Company
NUE NX RS STLD X
* *
WOR
Note: Data as originally reported. S&P 1500 Index group. * Company included in the S&P 500. Company included in the S&P MidCap. Company included in the S&P SmallCap. # Of the following calendar year.
Current Ratio
Yr. End DEC DEC DEC JUN DEC DEC AUG DEC OCT DEC DEC DEC # MAY 2.7 3.7 2.6 3.2 2.5 2.7 2.1 3.7 2.3 2.0 1.7 2.8 2.8 2.1 2.8 3.2 2.2 3.0 2.6 1.9 3.2 1.6 2.5 3.5 1.8 3.0 1.6 2.5 2.9 1.7 2.6 1.7 2.7 2.7 1.5 1.8 1.7 2.5 1.3 2.5 2.4 1.7 3.7 2.7 1.8 1.6 2.0 3.1 1.5 2.0 3.1 3.7 1.3 2.1 1.8 2.6 2.9 2.0 1.8 1.9 2.4 2.1 1.7 2.9 1.8 1.9 2.5 1.8 1.4 1.9 2.4 1.8 2.1 1.5 1.9 1.3 0.8 1.2 0.6 1.2 0.7 1.3 1.7 1.4 1.9 25.6 76.6 26.2 22.7 26.7 0.0 19.7 14.8 13.7 36.1 19.4 17.6 18.3 72.8 39.1 114.3 29.0 2006 2005 2004 2003 2002 2006 2005 25.3 66.2 40.6 26.7 27.2 0.0 28.0 16.2 15.7 21.6 28.3 28.9 18.1 83.5 43.6 124.6 22.8
Debt / Capital Ratio (%)

2004 25.6 42.3 56.5 31.8 37.2 0.0 35.0 19.0 19.0 29.9 29.4 22.9 19.9 84.9 36.2 96.7 32.5 2003 32.0 58.1 74.3 37.1 43.7 0.0 31.6 24.5 3.2 40.2 45.7 63.2 25.9 104.6 33.1 112.1 38.3 2002 41.6 56.1 53.2 35.2 41.5 26.1 32.4 25.7 14.3 34.5 47.7 38.5 26.1 70.4 33.0 180.1 33.9
Debt as a % of Net Working Capital

2006 315.0 NM 39.5 45.8 99.4 0.0 33.5 28.6 54.0 96.7 56.3 37.8 44.6 69.0 120.2 190.8 57.2 2005 371.2 NM 59.3 69.2 55.9 0.0 47.8 32.8 99.7 59.7 84.5 65.5 48.5 83.0 170.4 286.9 40.4 2004 447.4 NM 82.9 127.1 94.3 0.0 63.6 43.8 93.1 85.7 99.4 79.6 62.4 81.6 121.9 262.5 56.9 2003 404.1 428.2 144.7 172.7 120.5 0.0 63.8 91.2 17.1 137.3 232.3 193.4 80.6 206.8 147.6 534.0 93.0 2002 451.7 340.2 108.3 227.6 112.7 36.6 67.5 105.5 74.4 88.3 275.2 131.8 154.0 150.1 120.3 660.2 91.1
Ticker
Company
NUE NX RS STLD X
* *
WOR
Price / Earnings Ratio (High-Low)

Yr. End DEC DEC DEC JUN DEC DEC AUG DEC OCT DEC DEC DEC # MAY NM-69 19-12 18-10 29-15 NM-NM 18-12 NM-NM 12-6 57-13 16-8 89-44 10-5 NM-NM 16-10 NM-NM 21-9 NM-NM 17-10 NM-NM 14-5 0 9 0 29 NM 13 NM 9 0 8 0 6 NM 10 NM 21 NM 12 NM 10 17-12 13-9 11-8 18-12 23-15 52 41 32 63 73 4.2-3.1 0.0-0.0 0.7-0.5 0.0-0.0 1.9-1.0 4.5-3.2 0.0-0.0 1.1-0.7 0.0-0.0 1.5-0.7 12-6 11-7 10-6 9-4 7-4 8-5 10-6 11-6 9-5 8-4 8-4 20-11 8-5 7-3 6-3 73-44 18-11 33-12 24-10 NM-NM 34-17 12-7 36-20 11-6 35-17 38 11 5 12 5 22 8 6 8 5 7 20 5 4 2 100 25 22 0 NM 37 17 25 0 32 6.4-3.2 1.7-1.0 0.8-0.4 2.9-1.4 1.2-0.8 4.1-2.6 1.3-0.8 1.1-0.6 1.6-0.9 1.1-0.6 1.8-0.8 1.8-1.0 1.0-0.6 1.2-0.6 0.8-0.4 4.1-2.9 0.0-0.0 1.0-0.5 0.0-0.0 1.3-0.7 17-6 17-8 15-8 8-5 10-6 10-5 13-9 10-5 8-4 8-5 NM-38 41-17 14-7 4-1 12-5 NM-NM NM-NM NM-NM NM-NM 48-19 NM-NM NM-NM NM-NM NM-NM 17-10 7 7 8 7 6 7 7 0 5 5 104 22 0 1 7 NM NM NM NM 48 NM NM NM NM 19 1.2-0.4 0.9-0.4 1.1-0.5 1.5-0.9 0.9-0.5 1.6-0.8 0.8-0.6 0.0-0.0 1.3-0.6 1.0-0.6 2.8-1.0 1.3-0.5 0.0-0.0 0.5-0.2 1.5-0.6 11.4-1.7 6.1-1.8 0.0-0.0 0.0-0.0 2.5-1.0 2.3-1.4 2.4-1.4 1.8-0.7 0.0-0.0 2.1-0.5 5.4-3.5 0.0-0.0 1.1-0.6 0.0-0.0 2.4-1.0 15-11 NM-NM 23-16 NM-NM 24-18 31-20 32-15 97-24 67-30 NM-NM 24 NM 43 NM 37 0 50 0 102 NM 2.3-1.6 0.0-0.0 2.7-1.9 0.0-0.0 2.1-1.5 0.0-0.0 3.3-1.5 0.0-0.0 3.4-1.5 2.6-0.9 12.7-3.5 12.9-4.3 0.0-0.0 0.0-0.0 1.8-1.1 2.1-1.1 2.3-1.4 1.3-0.7 0.0-0.0 1.9-0.9 4.7-3.1 0.0-0.0 1.3-0.7 0.0-0.0 2.0-0.7 2006 2005 2004 2003 2002 2006 2005 2004 2003 2002 2006 2005 2004 2003 2002
Dividend Payout Ratio (%)
Dividend Yield (High-Low, %)
Ticker
Company
NUE NX RS STLD X
* *
WOR
Earnings per Share ($)

2006 1.41 (3.62) 3.76 2.77 2.37 6.16 2.42 4.17 4.69 3.12 2.48 7.87 1.65 (0.01) 1.51 (1.28) 2.82 0.28 1.73 0.18 3.12 (5.48) 1.11 (0.38) 0.94 (4.42) 1.04 (0.28) 1.62 2.05 1.01 0.88 8.73 3.44 3.76 (1.29) 18.59 3.54 1.56 2.62 2.99 9.47 0.20 1.18 0.54 0.50 (4.09) 0.52 1.66 0.47 0.86 0.62 15.56 13.16 8.25 12.25 36.82 13.80 9.93 9.11 10.19 26.00 8.54 1.30 2.31 (2.35) 18.30 10.83 9.07 7.14 8.74 32.60 7.28 0.92 5.60 (0.78) 15.63 0.23 0.75 1.01 7.39 1.15 (3.87) (0.28) (1.19) (0.85) 0.17 (0.82) (0.17) (0.63) (1.64) 0.37 12.71 16.89 2.20 18.02 9.91 6.11 12.78 8.22 14.55 7.36 2.30 9.69 5.51 9.52 5.29 (0.29) 8.79 4.49 5.06 4.44 7.45 10.33 5.00 6.04 3.76 6.48 (1.57) 4.32 (1.64) 12.27 1.61 0.95 1.21 0.23 0.59 (1.00) 9.14 1.07 7.55 1.96 7.00 6.25 5.36 3.01 3.27 2.25 3.15 9.20 5.55 1.17 4.39 7.43 9.53 5.13 5.48 15.74 6.04 3.02 6.66 (7.16) 11.75 2005 2004 2003 2002 2006 2005 2004 2003 2002
Tangible Book Value per Share ($)

2006 36.96-26.39 56.57-26.14 98.72-35.47 71.06-34.97 44.25-22.16 55.18-31.39 31.69-18.40 67.55-33.63 49.02-29.15 49.75-28.43 35.90-17.50 79.01-48.05 21.79-16.16 17.31-7.58 32.72-20.77 7.87-4.23 29.94-15.80
Share Price (High-Low, $)

2005 32.29-22.28 34.70-17.82 36.66-17.30 36.04-24.83 24.52-11.05 49.63-23.40 19.50-11.37 35.10-22.77 45.14-28.10 33.63-17.30 23.20-12.52 63.90-33.59 21.38-15.11 18.23-6.23 26.70-18.10 9.64-3.21 33.56-16.49 2004 39.44-28.51 29.70-18.64 23.48-8.64 30.95-12.88 13.90-6.63 27.02-9.70 13.20-5.53 27.74-13.04 31.29-17.63 21.38-13.59 21.22-10.39 54.06-25.22 22.73-15.85 16.00-3.65 26.91-14.15 16.00-7.93 30.58-15.51 2003 38.92-18.45 22.25-5.61 14.00-2.10 15.94-4.72 7.45-3.95 13.60-3.69 7.96-3.20 14.70-8.76 21.37-12.41 17.50-6.57 12.06-4.88 37.05-9.61 18.23-11.80 8.90-1.74 18.21-11.10 14.10-2.35 19.45-8.50 2002 39.75-17.62 17.51-5.70 19.10-5.21 15.27-5.13 12.55-4.32 8.06-3.92 6.22-3.88 17.54-9.00 19.64-12.46 17.13-9.49 9.65-5.30 22.00-10.66 20.40-13.55 14.85-6.45 17.26-9.97 14.40-3.35 23.25-7.89
Ticker DEC 2.49 DEC (1.26) DEC JUN DEC DEC AUG DEC OCT DEC DEC DEC 1.32 5.73 4.28 4.85 4.22 11.88 5.74 4.16 2.95 6.52 3.02
Company
Yr. End
NUE NX RS STLD X
* *
WOR
# MAY
OTHER COMPANIES WITH SIGNIFICANT STEEL OPERATIONS AKS AK STEEL HOLDING CORP DEC 0.11 ROCK GIBRALTAR INDUSTRIES INC DEC 1.68 GTI GRAFTECH INTERNATIONAL LTD DEC 0.43 STTX STEEL TECHNOLOGIES INC SEP 1.05
Note: Data as originally reported. S&P 1500 Index group. * Company included in the S&P 500. Company included in the S&P MidCap. Company included in the S&P SmallCap. # Of the following calendar year. J-This amount includes intangibles that cannot be identified.
The analysis and opinion set forth in this publication are provided by Standard & Poors Equity Research Services and are prepared separately from any other analytic activity of Standard & Poors. In this regard, Standard & Poors Equity Research Services has no access to nonpublic information received by other units of Standard & Poors. The accuracy and completeness of information obtained from third-party sources, and the opinions based on such information, are not guaranteed.
37
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S&amp;P Industrial Metals Jan2008

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Industry Surveys

January 17, 2008

Leo J. Larkin Steel & Aluminum Analyst

CURRENT ENVIRONMENT..................................................................1 Steel eased in 2007

KEY INDUSTRY RATIOS

Steel and aluminum Steel Aluminum

METALS COMPANY .............................24

GLOSSARY .............................................................................................31 INDUSTRY REFERENCES.....................................................................33 COMPARATIVE COMPANY ANALYSIS ..............................................35

Standard & Poors Industry Surveys

Steel eased in 2007

US STEEL PRODUCTION, CAPACITY, UTILIZATION, AND CONSUMPTION

OPERATING RATE (%)

TOTAL WORLD PRODUCTION (MIL. TONS)

JANUARY 17, 2008 / METALS: INDUSTRIAL INDUSTRY SURVEY

US SHIPMENTS OF STEEL PRODUCTS, BY MARKET CLASSIFICATION

Source: American Iron and Steel Institute.

JANUARY 17, 2008 / METALS: INDUSTRIAL INDUSTRY SURVEY

Mild industry recovery seen in 2008

Steel imports likely to decline again in 2008

Steel profits should rise in 2008

JANUARY 17, 2008 / METALS: INDUSTRIAL INDUSTRY SURVEY

Merger activity accelerated in 2007

The return of vertical integration?

JANUARY 17, 2008 / METALS: INDUSTRIAL INDUSTRY SURVEY

attempt to become more vertically integrated via mergers.

BHP rocks the steel market

Aluminum profits disappoint in 2007

JANUARY 17, 2008 / METALS: INDUSTRIAL INDUSTRY SURVEY

WORLD CONSUMPTION OF REFINED ALUMINUM

Source: World Bureau of Metal Statistics.

WORLD PRODUCTION OF REFINED ALUMINUM

Source: World Bureau of Metal Statistics.

Aluminum price and profits likely to decline in 2008

ALUMINUM SHIPMENTS TO MAJOR US/CANADIAN MARKETS*

Aluminum consolidation heated up in 2007

JANUARY 17, 2008 / METALS: INDUSTRIAL INDUSTRY SURVEY

JANUARY 17, 2008 / METALS: INDUSTRIAL INDUSTRY SURVEY

Economic cycles and long-term trends drive metals

LARGEST NORTH AMERICAN ALUMINUM COMPANIES

Alcoa Inc. Alcan Inc. Century Aluminum Kaiser Aluminum

23,478 24,885 1,061 942

26,159 20,320 1,132 1,090

30,379 23,641 1,559 668

Thin-slab technology recasts steel sheet market

LARGEST US STEEL COMPANIES

11,377 9,917 5,217 2,145

12,701 9,739 5,647 2,185

14,751 10,407 6,069 3,239

Higher scrap prices to limit minimill expansions

Consolidation takes hold in domestic steel

from Chapter 11 bankruptcy as an independent entity.

Can merged integrated steelmakers compete with minimills?

JANUARY 17, 2008 / METALS: INDUSTRIAL INDUSTRY SURVEY

JANUARY 17, 2008 / METALS: INDUSTRIAL INDUSTRY SURVEY

Global view: foreign competition looms large

11,294,366 15,229,191 11,304,837 11,457,080

Source: American Iron and Steel Institute.

Aluminum glut abates

Chinas aluminum industry key to conditions in 2008 and beyond

JANUARY 17, 2008 / METALS: INDUSTRIAL INDUSTRY SURVEY

US SHIPMENTS OF STEEL PRODUCTS, BY PRODUCT LINE

China pressures raw materials costs

JANUARY 17, 2008 / METALS: INDUSTRIAL INDUSTRY SURVEY

Imports remain a challenge for US steelmakers

S&P Industrial Metals Jan2008

S&P Industrial Metals Jan2008