United Kingdom Metals Report Q1 2013

BMI's UK Metals Report for Q1 2013 examines how British steelmakers are responding to a high cost,high risk environment in the short-term and the long-term challenges posed by a structural change in theglobal steel market with a great focus on quality and niche production over large volume continuouscasting. The report also assesses prospects for growth in an increasingly volatile external market as wellas domestic stagnation, but warns the chief challenge to competitiveness will remain the UK's highelectricity prices, which are putting margins under pressure.

In the first 10 months of 2012, British crude steel output grew 0.7% y-o-y to 8.19mn tonnes (mnt). Whilethe rate of growth appears unimpressive, it was markedly better than the EU average. Output wasbolstered by the restart in April of slab production at the Sahaviriya Steel Industries' (SSI) plant inTeesside, formerly known as Teesside Cast Products (TCP) and recently acquired from Tata Steel in2011

The outlook for 2013 is poor due to EU-wide synchronised austerity programmes and an unresolvedbanking and sovereign debt crisis. With European steel demand remaining 25% below pre-recessionnorms and further declines in demand predicted, a sustained contraction going into 2013 represents asignificant downside risk for British steelmaking. Austerity measures introduced by the new coalitiongovernment have compounded the uncertainties facing the construction industry with fears that reducedspending will depress steel demand.

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

BMI estimates that crude steel output grew 3.0% to 9.81mnt in 2012 with base effects helping toboost growth figures in Q412. It follows declines of 1.9% and 3.6% in 2011 and 2010respectively.

While the growth rates were reassuring following the effects of weaknesses caused by a stagnantdomestic economy and poor export performance, the situation could deteriorate in 2013 andBMI has forecasted just 1.0% growth in steel output over the year with average monthlyproduction set to decline slightly from the levels seen in Q412.

Tata Steel is pressing ahead with the restart of a blast furnace at Port Talbot in 2013 as part of aGBP250mn programme. The additional capacity will see the company restart a hot-strip rollingmill at nearby Llanwern, which was mothballed in December 2011. Together with the steel millon the Port Talbot site, the company will be able to process the output of the two blast furnaces.