Purchasing

The purchasing activities of the Group are focused mainly on raw materials and energy for the production of steel, as well as semi-finished goods for tube production. The purchase of steel products by our trading companies is an aspect of the sale of Group steel and tube products and is not considered here.

The tremendous global demand for raw materials had a great impact on the procurement markets in 2005 as well. Despite some significant shortfalls in most raw materials markets, the supply of the steel and tubes companies was assured both in terms of volume and timing; in some segments, however, considerable price concessions had to be made.

Movement in the Price of selected Raw Materials and Energy Resources

The extremely tense situation on the ore market triggered price increases of 71.5% for fine ore and up to 86% for pellets and lump ore fob port of lading. The volume of ore purchased in 2005 came to 5.9 million tons.

In 2006 as well, we anticipate that the demand for ore will rise, especially in view of the great demand in China. Therefore, price hikes cannot be excluded.

The global demand for coking coal exceeded supply in 2005 as well. Accordingly, price increases of 118% fob port of lading had to be absorbed. In the first half of the year, the availability of high-grade coking coal on the spot market was limited. In the second half of the year, the situation eased as greater volumes were traded on a spot basis. The greater production and port capacities paved the way for additional volume to be placed in the market. In the calendar year 2005, the amount of coking coal purchased totaled 2.0 million tons, of which 1.4 million tons were imported.

In the ”coal year 2006/2007”, we predict that, depending on the quality, prices will remain stable and even fall slightly.

In the first half of the calendar year 2005, SZFG operated three blast furnaces. The relining of Blast Furnace A in the third quarter reduced the amount of coke needed with the result that the running production of the Group's own coking plant was able to build up inventories. Consequently, there will be no need to procure the full volume of 350 kton of coke from third parties in 2006. In contrast to the coking coal price trend, prices for blast furnace coke fell sharply. At the start of 2005, there was a slight downtrend discernible which accelerated toward mid-year. At the end of 2005, prices had settled at the level of December 2003. This downtrend was the result of China's aggressive pricing policy. By mid-year, Chinese ports were storing huge volumes of coke, which exerted a great influence on the market, causing considerable price reductions.

In 2006, we anticipate that prices will settle at the current level. Requirements in 2006 are largely secured by long-term contracts.

After December 2004 when the spot sea freight market for Capesize ships reached its all-time high, with rates for the Tubarao/Rotterdam route at US-$ 25 per ton, the market in the first half, as in the year-earlier period, staged a sharp downturn and, by July, had reached a low point of US-$ 11 per ton. The background to this development were measures taken by the Chinese authorities to improve the organization of the import market, consistently reduced waiting times in the loading and destination ports, as well as additional newly built ships which flooded the market.

Rates have been rising again since August but at a much more moderate pace than in recent times. In mid-December, Capesize ships of the Tubarao/Rotterdam type cost US-$ 13 per ton. All in all, prices on this market slid US-$ 3 per ton by comparison with the previous year's average. Rates are expected to firm up at the current level, of course, with the fluctuations customary throughout the year. Anticipated newly built bulk carriers should be sufficient to cover additional demand.

A more or less similar development was observed in the shipment of coal where the prices of Panamax units in the second half of the year were considerably more stable than those of larger shipment units.

In 2005, bunker oil cost around an average US-$ 100 more per ton as compared with 2004. The level of US-$ 250 reached at the end of December is not only the annual average but corresponds to expectations for the current year.

The influence of the spot sea freight market on costs was marginal, as ore and coal freights had been mainly covered by favorable long-term contracts. In 2006 as well, ore and coke requirements are largely covered by long-term sea freight contracts..

In 2005, the market trend in ferro alloys and metals varied greatly depending on the individual groups of materials.

As regards metals, the trend on the market of nickel and zinc, which constitute the main metals needed, was disparate. In the first half of the year, during which nickel was quoted at the extremely high price of more than US-$ 17,000 per ton on the London Metal Exchange (LME), the situation eased in the second half of the year. In November 2005, quotations on the exchange stood at US-$ 11,500 per ton.

Developments on the exchange in 2006 will depend mainly on the economic trend in stainless steel. On the supply side, research conducted by the International Nickel Study Group (INSG) indicate that there will be sufficient quantities available. From today's standpoint, there is little likelihood of a shortfall in supply.

By contrast, the price of zinc soared on the exchange in the fourth quarter of 2005. December quotations stood at over US-$ 1,800 per ton, following an annual low of US-$ 1,165 per ton in July 2005. These price increases were compensated for by long-term price hedging at favorable prices. How zinc quotations will develop over the course of the current calendar year cannot be predicted.

Following the high levels seen in 2004, prices for bulk alloys (manganese and silicon carriers) fell by nearly half. It can be assumed, however, that this level will not hold steady in 2006. Price increases are likely to be moderate.

The market scenario for noble alloys − mainly ferrovanadium and ferromolybdenum − eased notably over the course of the year and settled at US-$ 67,000, after prices for ferromolybdenum had peaked at US-$ 100,000 (May 2005) per ton of pure molybdenum. At year-end 2005, the price level for ferrovanadium was in the range of US-$ 45,000 per ton of pure vanadium, following price quotations of US-$ 130,000 per ton in May 2005. It can be assumed that prices at the current level will prevail in the year ahead as well.

The steel companies SZFG and PTG purchased 410 kton and 950 kton of scrap respectively in 2005. In comparison with 2004, the average price dropped by 7%, but is expected to rise again in 2006.

Prices for liquid reducing agents consisting of heating oil ”S” and substitute reducing agents (heavy oil, animal fat) for use in the blast furnaces of the Salzgitter plant climbed 37 % over the previous year.

The main cause of the unusually sharp increase in heating oil ”S” prices was stock exchange speculation which drove up prices for crude oil, especially in the first half of the year. All in all 165 kton of heating oil ”S” were used in the financial year 2005.

In 2006, average prices are expected to rise again slightly.

The increase in the price of electricity, which set in at the start of 2002, accelerated sharply in 2005, which led to the cost of electric power rising (excluding use of the grid, the Renewable Energies Law, the Cogeneration Law and electricity tax) by 21% compared with 2004. In 2006, the cost of buying in electricity is expected to rise by another 17% in comparison with 2005.

The cost of natural gas advanced 5% in 2005 over the previous year, attributable to the increase in the price of heating oil ”S” in the reference months which affects natural gas prices with a time lag. In the year 2006, a massive increase in gas prices (+40%) is to be expected.

Hüttenwerke Krupp Mannesmann GmbH (HKM) in Duisburg is the principal supplier of input material to the companies of the Tubes Division. The MRW Group companies purchased 0.9 million tons of slabs from HKM for the manufacturing of plate destined for large-diameter pipes and for the production of hot strip as an input material used for HFI-welded line pipes and welded precision tubes. HKM delivered 60 kton of tube rounds to SMG for the production of seamless precision tubes. HKM is also the major supplier (1.0 million tons) of tube rounds for the manufacture of seamless tubes by Vallourec & Mannesmann Tubes S.A., which is meanwhile a wholly-owned subsidiary of Vallourec S.A. Moreover, the companies producing welded tubes purchased 142 kton of hot-rolled strip from other Salzgitter Group companies and third-party suppliers.

The price of semi-finished products ex HKM, calculated on the basis of a reference grade, have risen as against 2004, which is mainly attributable to the increase in the price of reduction agents and alloys.