General Business Conditions in the next two Financial Years

The recovery in the global economy, the first signs of which were evident in the second half of 2009, is likely to continue in the years 2010 and 2011, while its pace will vary depending on the respective economy. Whereas economic impetus in the industrial nations is likely to be more moderate, many of the emerging markets will benefit from brisk domestic demand. Seen from a general standpoint, the process of recovery to date has first and foremost been driven by stimuli of a temporary nature. Factors decelerating this process may again weigh more heavily in the months ahead if the banking sector requires fresh financial aid, the real economy is starved of credit, and the unemployment rate rises. In its forecast for 2010 and 2011, the International Monetary Fund (IMF) anticipates GDP growth of 3.9 % and 4.3 % respectively.

There are increasing signs of a recovery in the United States of America. The unprecedented volume of support measures by the Fed and the US government has stabilized the real estate and the financial markets, as well as consumer spending. The IMF has forecasted growth of 2.7 % and 2.4 % for 2010 and 2011 respectively.

In its most recent outlook, the EU Commission predicts that the European Union will record slight growth in GDP of only 0.7 %, mainly driven by government capital expenditure and consumer spending. Only in 2011 is economic growth expected to gain somewhat more momentum, and then also on the back of a recovery in private demand. In comparison with other economies, however, the 1.6 % growth is more in the below-average range.

Economic expansion in Germany will be only very moderate in the 2009/2010 winter half-year. A repeat of the surge seen last summer that resulted mainly from a technical counter-reaction to the dramatic slump is unlikely. Impetus from abroad will remain downbeat as economic growth in the important trading partner countries will initially continue to be moderate. Against this backdrop, most research institutes exercise caution in their predictions. GDP is expected to expand between 1.4 % and 2.1 % in 2010. 1.9 % growth might then be possible in 2011.

The global steel industry may now recover more swiftly than originally expected. The German Steel Association anticipates an increase in global demand of around 11 % to 1.23 billion tons of rolled steel, which brings demand to the level seen prior to the crisis. Market observers anticipate another above-average increase to 1.3 billion tons for 2011.

This outlook is based on regional developments which vary widely, with China in particular playing a special role. Slowing impetus from programs to support the economy launched by the Chinese government and huge stockpiling are likely to put pressure on Chinese demand for steel in the next two years, bringing it from more than 20 % in 2009 down to 7 %. At the same time, this means absolute growth in the mid double-digit million ton range. By contrast, strong impetus driving the demand for steel is expected to emanate from most of the other emerging economies in 2010 and 2011. There are signs that consumption in India and the MENA region (Middle East and North Africa) is likely to exceed the pre-crisis level in 2011. This is contrasted by the recovery in the CIS countries that is markedly slower.

The close correlation between crude steel production and GDP growth gives rise to medium-term expectations of only marginal growth in the steel markets of the industrial nations. The mainstay of recovery will initially be attributable to supplementing inventories. The forecasts for the year 2010 suggest a sideways movement followed by an only moderate growth in demand in 2011. Eurofer anticipates an increase of 13 % in the market supply of the EU and, accordingly, a rise of 10 % in Germany. In the coming year, the recovery is expected to gain ground, and will then also be supported by moderate growth in the demand for steel. There are signs that, in 2011, the European Union, Japan and the USA will only reach between 75 % to 80 % of the level attained in 2007.

Structural shifts in the international steel industry are taking place more swiftly owing to the varying pace of economic recovery. All in all, around 70 % of the demand for steel in 2011 may be accounted for by the emerging and developing countries as opposed to 65 % in 2007.

On the back of adjustments to inventories across the value chain in 2009, the global demand for steel tubes outside China is likely to improve moderately in the second half of the year. Chinese producers will continue to reap the benefit of domestic programs designed to boost the economy.

As the most important customer sector of steel tubes producers, the energy sector should gradually start to invest again in new exploration and development projects motivated by the rising price of oil and gas. However, demand for oilfield tubes in the USA as the world’s largest single market is still suffering from the excessively high inventories. There are currently no signs of recovery in the awarding of new pipeline projects and global plant construction. Mechanical engineering is only making a slow recovery from the production slump in 2009. Moreover, there is also uncertainty as to how the automotive industry will develop once the government subsidy programs have expired. The impact of a slew of confrontations about trade policies, first and foremost with Chinese steel tubes producers, on global trade flows is also not yet foreseeable.

In 2011, the global economic upswing should pick up momentum. In conjunction with the processes involved in adjusting inventories which have been brought to final completion, global steel tubes output is likely to climb again without, however, being able to repeat the boom years of 2007 and 2008.

The outlook for 2010 suggests another difficult year for both the German mechanical engineering sector as a whole and for the manufacturers of special machinery in the food and packaging solutions business. The German Engineering Federation (VDMA) anticipates a consolidation at a low level in 2010. The experts assume that the level achieved in the first few months of the current year will fall considerably short of the previous year but that subsequent periods may well see positive growth rates again. German mechanical engineering should generally be able to maintain production volume around the level of the year 2009 against the backdrop of a slight uptrend. VDMA’s outlook for 2010 therefore remains unchanged: ”zero percentage growth”. Once consolidation at a low level has taken place, the federation sees a good chance of matching the successes achieved in previous years. This would, however, be in 2011 in the best case scenario. There are nonetheless the first positive signs. ”drinktec”, the most important trade fair in the filling and packaging technology sector which took place in September 2009, provided confident impetus for the sector.

PET bottling material is increasingly emerging as the big winner in the packaging market. A growth rate of more than 4 % a year has been forecast in almost all beverages segments. Alongside the exceptional importance in the segments where PET bottles are customarily used (water, soft drinks etc.), PET material also carved out large market shares in the Eastern European beer market. Even wine and spirits are already being filled into PET bottles in some parts of the world. In addition, PET is gaining increasing significance in the food and non-food business as a packaging material.

Recognizing opportunities and risks at an early stage is crucial to our ability to react to market developments in a timely manner. With this in mind, we not only monitor the economy as a whole and the relevant economic indicators but also our specific individual markets where changes may exert a considerable influence on the future profit potential in the product market segments of the Group. In this process, we use economic data, sector indices as well as information from the respective associations in our customer sectors. Moreover, the management of our Group companies takes in market-relevant information from discussions with suppliers, customers and associations in an ongoing process.

The information thus collated forms the fundaments for assessing developments in the pertinent markets. Long-term trends and changes in the structure of the market and competition are documented and communicated within the Group through an ongoing process of recording these types of opportunities and risks in the groupwide controlling system.

For instance, the shipment and sales figures anticipated by the Steel Division, and by the tubes companies with their customer relationships in the automotive sector, can be derived from sales forecasts for motorized vehicles and vehicle components, in part very effectively differentiated by countries and regions. Individual Group companies continue to display on occasion great sensitivity in relation to the business outlook of the construction, chemical and/or mechanical engineering sectors: For example, the statistical data on order intake in construction contracts are meaningful for the assessment of the sales prospects of sections. The approval of major publicly funded programs such as, for instance, for the use of wind power, enables deductions to be made about the future requirements for plate and tubes products. Information on the performance expected by the global oil and gas markets, depending on the oil price, may be an indication in particular of the order book levels which can expected by the large-diameter tubes companies. Important individual indicators relevant here are the so-called rig count, which is the number of oil wells worldwide, and the total scope of exploratory drillings.

Furthermore, the forecast for capacity utilization in our Technology Division’s virtually accords with the developments predicted in the mechanical engineering sector.

Given the cyclical nature of our industry, a basic differentiation must be made between indicators with short-term informative value and those with a long-term horizon: situations may therefore arise in which there may be a short- to medium-term imbalance in supply and demand due to excess inventories held by traders and end consumers or unfavorable situations on the import front which temporarily distort long-term trends. By contrast, spikes in demand, driven by speculation, may on occasion be deceptive because they cover up structural deficits in the market. It is readily understandable that the plethora of factors exerting an influence and the complexity of their interaction make it difficult for us, especially in phases of pronounced economic volatility, to provide detailed predictions retaining validity over a longer term for the Group as a whole.

The ongoing screening and analysis of the relevant markets and competitors, carried out centrally by the holding as well as decentrally by the subsidiaries, form the basis in our Group for the timely identification of opportunities. We strive to develop suitable strategies in good time and to implement them in order to leverage inherent potential for the success of the company. The strengths and core competences of the companies within our Group are incorporated into the preparations underlying strategic decisions. Discernible risks are fully and responsibly taken account of.

Basically, Salzgitter AG has honed its strengths, in particular through investment in existing and new production facilities, in order to successfully take advantage of perceived opportunities through adjusting its product mix, through the selective ramping up of capacity, above all in the Steel Division, and by exploiting the different sales channels in the various regions. Consistent cost management in all divisions, coupled with the ongoing optimization of product quality, is a foundation that we view as a matter of course for our corporate success.

Along with current and planned projects aimed at growing organically, we also fundamentally review external growth options at all times in terms of their suitability.

More detailed explanations can be found in the sections entitled ”Goals and Key Factors for Success”, see page 56.