Spain Metals Report Q1 2013

BMI's Spain Metals Report for Q1 2013 examines the effects of the eurozone crisis and domesticrecession on the steel industry and warns that the sector will witness a protracted downturn that couldpermanently affect the industry's structure. The report examines how key market segments, such as theconstruction and automotive sectors, are affecting consumption and production and the long-term impacton the industry.

Recovery in the Spanish steel industry will largely depend on growth in exports of manufactured goods.Germany has been the chief target for Spanish steel exports, but the decline in the performance of theGerman manufacturing sector from mid-2011 is having a deleterious effect on export performance.

According to reports in Q412, ArcelorMittal was evaluating the possible reopening of one galvanisedproduction line in its plant in Aviles in order to provide steel to local automotive industry. This indicatedgrowing optimism that the export-oriented Spanish automotive industry was set for growth in 2013.

Acerinox also predicted a recovery in the global stainless steel market in 2013, bolstered by theautomotive industry. However, the Spanish flat steel market is unlikely to recover its full momentum overthe medium-term with packaging and consumer durables hit by high unemployment. At the same time,the long steel market has been hit by the collapse in residential construction.

Over the last quarter BMI has revised the following forecasts/views:

BMI estimates that overall output in 2012 was down 10.5% to 13.95mnt, which is worse thanour forecast of a 9.0% decline. Poor performance in 2012 follows a 4.6% drop in production in2011, when production totalled 15.6mnt.

BMI sees the pace of economic contraction easing in 2013 to 0.5% as domestic and externaldemand conditions stabilise. Indeed, we expect household spending to fall by a fairly modest0.2% and exports to increase by 2.5%. This should provide some upside to Spanish steelmaking.

Over the longer run, we believe economic growth in Spain will prove moribund and the localsteel market will fail to return to pre-recession levels of consumption. In 2012, domestic crudesteel consumption is estimated to have fallen 10% to 12.6mnt and demand will remain at least50% down on pre-crisis levels.

Given current trends in terms of both output and the state of domestic and external markets, theindustry is unlikely to return to pre-2011 levels of output until 2017, when gradual growthshould see the industry return to producing 15.7mnt, which is still over 3mnt lower than the 2007peak.