Forecast

General Market Conditions

In the opinion of the research institutes, the global economy in 2006 will match the pace of the year 2005. The International Monetary Fund expects growth to remain unchanged at 4.3%. Given an assumed oil price remaining at the still high level of US-$ 55 a barrel, the pressure exerted by the preceding oil price hikes is easing. Similarly, the stimulus for demand, triggered by the strong economic growth of the emerging markets, is unabated. Whereas forecasts for economic growth in the USA, China and most of the Asian economies are marginally lower than in 2005, the positive development of the countries of Central and Eastern Europe should continue uninterrupted. The EU and Germany will also show positive trends. Above all, positive impetus is expected from abroad, boosted by greater economic momentum and the depreciation of the euro. The economic upswing on the domestic market will be reflected by plant and equipment expenditure in particular which, encouraged by improved sales prospects on the global markets, is set to increase markedly. Private consumption will remain a weak point. Premature buying is expected, however, prompted by the increase in value added tax (VAT) due next year. GDP growth in the EU is likely to post 2.2% in 2006 (2005: 1.5%), while an increase of 1.5% has been forecast for Germany (2005: 0.9%).

In 2007, the OECD's recent global economic outlook expects worldwide economic growth to remain robust, as in 2006. Similarly, this forecast predicts that the economy of the euro zone will expand by 2.2% in 2007, which is more or less the same as this year. In Germany, the gradual recovery of the economy is likely to hold steady in the year ahead, although at a slower pace, although dampened by the rise in VAT. A self-supporting upswing remains unlikely for the time being. Accordingly, there is still risk that a tangible slowdown in the global economy would result in a setback for the German economy.

Given the robust global economy expected for the year 2006, the consumption of steel will increase further. The forecasts of the International Iron and Steel Institute (IISI) talk of 1,053 million tons, which corresponds to growth picking up pace again (5.5%). Above-average growth rates are expected in Asia (China: +10%), with consumption in the EU expanding rapidly again by 3.3% in 2006, following a decline in 2005 due to destocking.

According to estimates of the Wirtschaftsvereinigung Stahl (German Federation of the Steel Economy), world production of crude steel is expected to rise to more than 1.2 billion tons (+7.2%).

China will be a determinant factor although the rate of increase in Chinese production is likely to slow in comparison with 2005. European crude steel production is expected to grow by 3% to 193 million tons and thereby compensate for the decrease in 2005 (−3.1%). In Germany, the forecast is for an increase of 3% to 45.7 million tons.

In China, where per-capita steel consumption is 270 kilograms, and only half that of industrial nations, the country's still huge backlog demand is an argument in favor of this trend persisting in 2007 as well. Moreover, global demand for steel is also driven by investments in infrastructure and construction in other populated emerging markets. The challenges for the global steel industry are nonetheless great. For this reason, besides China, and in particular India and South America, considerable capacities are being built up outside of Europe. In future, competition on the international steel markets will therefore become even fiercer.

Given the general economic conditions, we expect the steel tubes market to develop at least equally as well as the market for rolled steel products in 2006 and 2007.

With forecasts varying greatly for individual countries and different sectors, the major buyer industries throughout the world continue to experience positive trends.

The oil price is expected to remain around US-$ 55 a barrel in 2006 and 2007. This guarantees that drilling activities will remain at a high level, with concurrent brisk demand for OCTG tubes and a huge downstream demand for new pipelines.

The market for HFI-welded line pipes and large-diameter pipes is currently not showing any signs of weakness, particularly in view of the fact that there are a series of new projects. The trend in seamless tubes is also expected to remain upbeat.

How this demand will be satisfied remains to be clarified. In China, for instance, several tube plants became operational in 2005, and there are plans to expand capacities in 2007. China is already a net exporter of steel tubes. The creating of additional capacity will most certainly have an impact on the export of tubes, and thus on the existing flow of goods.

The general conditions which affect the SZAG Group are still more or less assessable in 2006. They are nonetheless still subject to swift change as a result of global developments and the ”China effect”, which is especially relevant. Beyond 2006, however, no reliable forecasts can be made. For this reason, the Group's stability in terms of its financial position and strong balance sheet remain a top priority which is to be underpinned on an ongoing basis by profitability improvement projects.