15th July 2016

Economic and Steel Market Outlook 2016-2017 Q3-2016 Report from EUROFER’s Economic Committee 1)

EU macro-economic overview (y-o-y change in %)

EUROFER Forecast July 2016 EU 2014 2015 2016 2017 (f) (f)

GDP

1.4

2.0

1.8

1.7

Private consumption

1.3

2.0

2.1

1.7

Government consumption

1.1

1.4

1.5

0.9

Investment

2.5

3.1

2.7

2.5

Investment in mach. equip.

2.6

5.0

3.0

2.7

Investment in construction

1.5

2.4

2.1

2.2

Exports

4.0

5.4

3.4

4.0

Imports

4.8

6.2

4.5

4.1

10.8 10.0 9.5

9.2

Inflation

0.6

0.1

0.3

1.5

Industrial production

1.4

1.9

1.6

2.0

Unemployment rate

€ = estimate (f) = forecast

1)

th

Based on information available as of 12 July, 2016

I.

EU Macro-economic overview

 Indicators stable despite uncertainties  Positive data for industry and exports  Consumer recovery remains intact  Brexit seen dampening investment  Net trade supportive to growth again?  ECB adopts wait-and-see approach  Recovery to proceed despite Brexit  Will UK leave vote open Pandora’s box? In the first quarter of 2016, the economic recovery in the EU held up well with GDP rising by 0.5% over the previous quarter in the EU and by 0.6% in the euro area. On an annual basis, economic growth amounted to 1.8% in the EU. Robust domestic demand continued to support economic activity. Private consumption growth strengthened to 0.6% quarter-on-quarter, whereas gross fixed capital formation growth slowed down to 0.8% coming from 1.4% in Q4-2014. Government expenditure growth weakened only slightly compared with the previous quarter. Net trade continued to act as a drag on economic growth, albeit to a lesser extent than in the second half of 2015. At the country level, most EU member states registered stable or improving GDP growth in the first quarter of 2016. Especially in Germany, economic growth gained traction compared with the previous quarter. The UK and particularly Poland were the only major EU economies that performed less positively than in Q4-2015. All in all, the EU economy got off to a solid start in early 2016.

2

Indicators stable despite uncertainties In the second quarter of 2016, surveybased confidence indicators for the EU generally speaking stabilised or improved slightly, following their initial hesitation at the start of this year.

countries brings the average production growth over the first four months to 1.8%. This is actually a somewhat higher growth figure than the PMI survey data for the EU manufacturing industry had suggested.

The monthly business and consumer surveys published by the European Commission showed a slight improvement in economic sentiment since April despite an economic and political climate characterised by uncertainty. In June, industrial confidence reached its best level since October 2015. Sentiment among consumers and in the retail sector remained broadly stable over the past few months. Markit’s Eurozone manufacturing PMI index moved sideways in April and May, but gained some strength in June, ending Q2 at a 6-month high. However, increased political and economic uncertainty following the Brexit referendum may take its toll on business confidence going forward. On balance, the survey data still point to sustained albeit unspectacular growth.

Meanwhile, the latest trade figures signal stronger dynamics in Euro area international trade in goods in April. Owing to a sharp rise in exports combined with a rather dull performance of imports, the trade surplus for the Euro area jumped to a record high of €27.5 bn, compared with a goods surplus of just under €24 bn in March. The steady levels of forward looking indicators and rather solid data for manufacturing activity and exports suggest that the basis for the economic recovery could become somewhat broader as net trade may start contributing positively to growth.

Positive data for industry and exports Also others indicators such as actual activity data underpin the steady momentum of the economic recovery in the EU. Industrial production rose sharply in April following two consecutive months of decline. The1.3% year-on-rise in EU industrial activity, with robust gains across the main sectors and the key

Consumer recovery remains intact The consumer recovery in the EU looks set to proceed this year and in 2017. Uncertainty about the economy, terrorism and the outcome of the Brexit referendum failed to significantly dent consumers' confidence in the past few months. It remains to be seen however to what extent consumer confidence will be shaken up by the Brexit leave victory over the coming months. An important factor contributing to the steady level of consumer sentiment is the positive development of the labour

3

market. EU28 unemployment stood at 8.6% in May, down from 8.7% in April and 9.6% in May 2015. Euro area unemployment is at its lowest rate since July 2011. In Q1-2016, employment increased by 0.3% in both the euro area and the EU28. Hiring expectations in the manufacturing and construction sector continued to improve over the past few months. The job vacancy rate in the EU28 was 1.8% in Q1-2016, up from 1.7% in the final quarter of last year. Improving labour market conditions translate into moderate wage rises across most EU countries. At the same time, very low inflation and still lower oil prices support increases in real disposable incomes. As the economic recovery in the EU proceeds, consumers may continue to spend rather than increase savings, also encouraged by low interest rates and relatively easy access to credit. Going forward, inflation may start picking up, primarily driven by higher oil prices; this could dampen private consumption growth to some extent. Private consumption is projected to rise by 2.1% in 2016 and by 1.7% in 2017. Brexit seen dampening investment Slowing growth of investment in Q12016 did not come as a surprise as the strong acceleration in the preceding quarter had largely been driven by temporary factors. Despite the current low interest rate environment and easing credit standards as a result of lower risk perceptions and reduced cost of funds in the banking sector, net loan demand from enterprises remains rather muted. Investment continues to be held back by sluggish global growth as well as economic and political uncertainties. Following its introduction in 2015 there is little evidence that the Juncker investment plan has led to a step change in investment. So far, loans

from the European Fund for Strategic Investment (EFSI) amount to only €12.8bn, whereas total lending from the European Investment Bank appears not to have changed substantially. Although a stronger impact of the investment plan cannot be excluded in 2017, the recovery in investment will remain basically linked with the financial performance of the corporate non-financial sector and its assessment of current and future business conditions. Undoubtedly, the leave victory in the Brexit referendum will have an impact on the EU and UK economy, on the shorter term primarily via weakening confidence levels. However, it remains to be seen how long and how deep business confidence will be affected following the initial shockwave at the end of June. In principle, underlying indicators of the general propensity to invest are still broadly positive. Capacity utilisation and corporate earnings and profits have gradually improved and look set to strengthen further in the remainder of 2016 and in 2017. Construction investment is expected to benefit from a further strengthening of private demand for residential and commercial real estate. On balance, investment is expected to grow by 2.7% in 2016 and by 2.5% in 2017. Mild growth public expenditure Public investment is forecast to remain moderately supportive to GDP growth in 2016 and 2017. After having been hit by a multi-year sovereign debt crisis, government finances in the euro area are now slowly on the mend. While some countries still need to pursue fiscal consolidation, budgetary conditions have improved in other countries, allowing them to stimulate their domestic economy via increased public spending and investment. This

4

could be supportive to infrastructure activity, particularly for those projects aimed at facilitating economic expansion by removing transport bottlenecks. In addition, public expenditure related to the refugee crisis could boost aggregate demand in the EU. On balance, following several years of tightening, the euro area aggregate fiscal stance appears now to have turned mildly expansionary. Government consumption is seen growing by 1.5% in 2016 and by 0.9% in 2017. Net trade supportive to growth again? April trade data signal that the drag from the external sector on economic growth eased somewhat. Should this trend have continued, net trade may have contributed positively to GDP again in Q2-2016. In 2015, GDP had been only supported by domestic demand. However, particularly for 2016 the outlook for international trade remains rather subdued. Global economic growth is expected to remain slow, despite some signs of stabilisation in several of the large emerging economies, and vulnerable to risks. Moreover, with the euro fluctuating within a fairly narrow bandwidth since the start of the year and limited scope for a renewed significant weakening, the boost from the euro depreciation as seen in the 2014-2015 period will be absent. For 2017, the global economic scenario could brighten somewhat, which implies that as the year progresses global trade may improve. In principle, euro area producers are well positioned to gain from the expected improvement in international trade. ECB adopts wait-and-see approach In its June meeting, the ECB decided to keep interest rates unchanged. While the economic recovery in the EU

continues, the ECB still sees the risks to the growth outlook as skewed to the downside. As a consequence, the ECB takes a wait-and-see approach, to monitor the effectiveness of the new monetary policy measures taken in March aimed at providing an additional stimulus to the recovery going forward and at bringing inflation back to the ECB target level of close to 2%. The ECB also reiterated that it does not exclude using additional unconventional - easing measures, available within its mandate. Meanwhile, euro area inflation (flash estimate) rose to 0.1% in June, from 0.1% in May. While inflation is expected to rise further in the second half of the year, the key driver will be higher energy prices rather than the array of unconventional monetary policies which are increasingly being criticised as counterproductive to economic growth and inflation. In line with expectations, the euro exchange rate hardly reacted on the announcement of the ECB and remained within a narrow bandwidth of 1.11-1.14USD up to late June. The outcome of the Brexit vote resulted in only a very slight depreciation of the euro versus most other currencies. Should the Fed decide to start raising US interest rates during the second half of this year – on evidence of firmer economic fundamentals in the US – downward pressure on the euro is most likely to persist. Recovery to proceed despite Brexit Moderately positive economic fundamentals underpin the continuation of the economic recovery in the EU. Domestic demand prospects are relatively healthy, owing to the expected strength of consumer spending. Less rigid is the outlook for investment and exports, reflecting heightened uncertainties regarding business conditions following Britain’s

5

vote to exit the EU and global headwinds. From 2017, international trade activity is seen picking up, supported by the expected moderate improvement in global economic conditions. A relatively competitive euro exchange rate against the US dollar should keep euro area exporters well positioned to gain from strengthening external demand, which in combination with healthy domestic demand conditions is seen boosting business confidence and investment. On balance, the July 2016 outlook from EUROFER’s Economic Committee foresees EU GDP growing by 1.8% in both 2016 and by 1.7% in 2017. As such the recovery will proceed amid a higher-risk economic framework. Will Brexit ‘yes’ vote open Pandora’s box? For the time being, Britain’s leave vote overshadows all other internal EU risks, with most likely at least temporarily some negative impact on confidence as well as on the economic, political and financial stability in the EU. It is also clear that the outcome of the Brexit referendum should be a wakeup call for the mainstream political parties in the EU, which so far have not come up with a satisfactory answer to the challenge of increasing populism and euro-scepticism across the EU. The risk of contagion is real, given the advance of radical right parties in France, Denmark, Austria and the Netherlands. As such, the EU faces the difficult task to reinvent itself, by finding a better balance between deepening EU-wide cooperation and returning decision-making to the national level. The problems facing Britain are probably even more severe: it will lose access to the EU's trade barrier-free single market while it must negotiate new trade agreements, not only with the EU but also with other countries

around the world. Moreover, it will have to deal with an internal leadership crisis while facing the risk of the United Kingdom being broken apart itself as Scotland may call for another vote on independence since almost two-thirds of the Scottish voters wanted to stay in the EU. The referendum reveals also deep splits in British society, which will be difficult to mend. The leave vote will initiate at least two years of separation proceedings between Britain and the EU, the first exit by any member state and therefore unchartered waters. The EU leaders are united in their view that the proceedings should start on a relatively short term, to avoid a prolonged period of uncertainty. Another key issue for the EU is the internal management of the migrant flows into its territory. Progress has been made in recent months and pressures have eased after the EUTurkey deal. Terrorism and political violence is a global problem and the events so far in 2016 illustrate a trend of increasing regional instability and a growing spectrum of potential risks. As far as the global economic outlook is concerned, there is some evidence that the emerging markets are entering a period of more stability, owing to slight improvements in Latin America (Brazil) and Eastern Europe (Russia). The bigger picture, however, is still one of stability rather than recovery. This is in particular the case for China. The outcome of the US presidential elections poses another risk, because of its impact on the political, economic and financial stability of the world’s largest economy. On balance, risks to the outlook remain significant, reflecting changing market conditions, significant volatility and constant uncertainty.

6

USA  Disappointing Q1’16 GDP growth  Consumer fundamentals remain strong  Continued muted prospects for business investment and exports  Increased likelihood of rate hike in H2 but Fed to remain cautious Q1-2016 GDP growth amounted to just 0.8% at an annualised rate; while consumer spending continued to provide the main boost to growth, there was a drag from investment, net trade and inventories. Despite disappointing labour market data for May - only 38,000 jobs were added - consumer fundamentals remain overall strong. Rising wages, lower fuel prices and low inflation help boosting real disposable incomes. Retail sales rose strongly in May, suggesting that even though higher energy prices will result in a rise in inflation, consumer momentum looks set to remain strong going forward. While residential investment also benefited from robust consumer confidence levels, business investment suffered from weak global growth, the strong US dollar, uncertainty regarding the political and economic postelection framework and sluggish oil and gas sector activity with mid-June oil exploration activity in the U.S. 47% down year-on-year. It is expected that the US export performance and business investment will remain hampered by fragile global economic growth, the strength of the US dollar and weak oil and gas sector activity. Concerns about the stability of the business climate will deepen in the run-up to the presidential election. The Fed is expected to keep a very cautious stance towards raising interest rates, particularly if economic conditions do not develop as anticipated in their projections. On balance, rising inflation and reduced global financial market volatility have increased the likelihood of a second rate hike in H2-2016. GDP growth is expected to slow to around 2% in 2016 before accelerating to almost 2.5% in 2017.

Key emerging regions  The first green shoots of stabilisation in the emerging markets?  Recession in Brazil and Russia not over yet China's economy expanded 6.7% at an annualised rate in Q1-2016, slightly slower than the previous quarter's 6.8% pace. Growth was boosted by China's monetary stimulus. Particularly the construction sector benefited, owing to rising real estate investment and infrastructure activity. More recent data for April and May suggest that growth momentum moderated slightly as the policy stimulus started to fade. Investment hit an all-time low in May, with specific weakness in private business investment, reflecting overcapacity and weak exports. A gradual further decline is on the cards for H2-2016 and in 2017; the authorities will prevent a sharper downturn by additional policy measures if needed. GDP growth is forecast to slow to 6.2% in 2016 and to 6% in 2017. India looks set to have another year of robust growth supported by strong domestic momentum, private consumption being the core growth driver. But also investment and exports are expected to pick up some speed. Risks remain on the downside, however, the key concern being delays in the implementtation of the necessary reforms. GDP could grow by 7.5% in 2016 and by 7% in 2017. Brazil remained stuck in a deep recession in Q1-2016 despite a slight improvement in the rate of contraction due to a rise in exports. Domestic demand continued to fall sharply, reflecting low confidence and continued political uncertainty. GDP is expected to fall by around 3.5% before returning to growth (+0.8%) in 2017. Russian GDP fell 1.2% in Q1-2016, a milder contraction than expected thanks to more supportive fiscal and monetary policies. April data signal better manufacturing and export activity, underpinning the stabilisation signals. GDP is expected to contract slightly in 2016 (-1.1%); 1.3% growth is currently pencilled in for 2017.

7

II.

The EU Steel Market

Overview Steel Using Sectors Development of the main steel using sectors – EUROFER forecast July 2016 % change year-on-year in the SWIP (Steel Weighted Industrial Production) index1) % share Year Year Year in total Q116 Q216 Q316 Q416 Q117 Q217 Q317 Q417 2016 2017 Consumption 2015 Construction

35

1.5 1.1 0.3

2.8

2.9

1.8

1.0

3.4

2.5

2.4

2.4

Mechanical engineering

14

0.1 0.7 0.2

0.9

1.2

0.7

2.7

2.5

2.5

2.7

2.6

Automotive

18

7.5 6.8 7.2

4.0

3.8

5.5

3.0

3.7

4.5

3.5

3.6

Domestic appliances

3

4.3 2.9 3.1

2.9

2.4

2.8

2.3

1.8

2.1

2.6

2.2

Other Transport

2

6.7 4.6 3.5

1.9 -1.3 2.1

1.9

3.1

3.2

3.2

2.8

Tubes

13

-5.5 -6.8 -1.6 5.7

8.1

1.1 10.8 8.5

2.3

0.8

5.6

Metal goods

14

2.2 2.6 3.1

1.7

1.4

2.2

2.3

2.2

2.9

2.5

2.5

2

1.4 0.9 1.7

1.1

1.2

1.2

1.6

1.1

2.3

2.1

1.8

100

2.0 1.8 2.2

2.8

2.9

2.4

2.9

3.5

2.9

2.6

3.0

Miscellaneous TOTAL

 

Robust Q1’16 activity growth Consumer-driven rebound continues in 2016  Investment and exports more supportive to growth in 2017 The EU steel using sectors started 2016 on a positive tone: output increased by 1.8% y-o-y. The mild winter resulted in work on construction projects continuing or starting earlier than anticipated. Automotive activity continued to grow vigorously. The only sector that continued to act as a drag on total growth of output in the steel using sectors was the steel tube sector. First estimates for the second quarter of 2016 are relatively positive and signal the likelihood of a mild acceleration in production growth of the key steel using sectors in the EU. As in the previous quarters, the recovery will remain predominantly consumer-driven, with again robust support from growing activity in automotive and residential construction sector as well as the domestic appliances industry. The negative trend in output of the steel tube sector

is seen coming to an end in Q2-2016. The outlook for the second half of this year is rather healthy, with also somewhat better support to growth from the investment-led sectors such as the mechanical engineering and the steel tube sector. On balance, total output in the steel using sectors is forecast to rise by 2.4% this year. In 2017, investment is forecast to strengthen moderately further; this will broaden the basis for activity growth in the steel using sectors. Also international trade is seen becoming more supportive to growth. The SWIP index is forecast to rise by 3% in 2017.

1) As of 2013, “steel structures” is no longer a separate sector but is included in the construction sector. Shipbuilding activity is now included in “other transport” which includes all non-automotive transport equipment such as railway material, air & spacecraft and motorcycles

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Construction



Q1’16 activity grew 1.1% y-o-y, bucking a seasonal slowdown  Housing activity remains key growth driver in 2016 - other sectors to strengthen in 2017  Overall healthy outlook EU construction activity rose by 1.1% y-o-y in the first quarter of 2016, bucking the seasonally slowing trend in output registered usually in this period of the year. Thanks to mild winter conditions, work on many projects could continue during the first months of this year, whereas also the number of new project start-ups was higher than usual. Output growth was primarily supported by residential construction activity gaining further momentum, most notably so in Germany, Italy, the Netherlands and Sweden. France, the United Kingdom and Poland were the only large EU markets showing a decline in activity in Q1-2016. Preliminary data and estimates for Q2 activity signal that growth was dampened by higher activity growth in the previous quarter. Output growth is currently pencilled in at just 0.3% y-o-y. France, the United Kingdom and Poland are expected to have remained stuck in a downward trend. In most other markets, activity continued to grow at a moderate growth rate. Prospects for the second half of this year are rather positive. Activity growth

in the construction sector is expected to accelerate to almost 3% y-o-y in the third and fourth quarter. Rising demand for new housing and renovation and upgrading of the residential building stock will continue to provide the main boost to output growth in the sector. Private property demand is supported by attractive financing conditions and the positive development of the labour market and disposable incomes in several countries. The increase in publicly financed housing projects can be explained by the recent migrant influx. All in all, construction output is forecast to grow by 1.8% in 2016. In 2017, construction industry activity will remain on an expansionary course and supported by a broadening recovery across the different construction sectors. In addition to continued strength in the residential sector, also demand for non-residential property is expected to improve, owing to rising demand for commercial offices, hospitality and logistic property in gateway locations across the EU. Increasingly, international investors are eyeing the EU market for core investment opportunities. Prospects for civil engineering projects are brightening as well, thanks to public investment to remove bottlenecks in EU’s aging infrastructure. Total EU output is forecast to rise by 2.4% in 2017.

9

Automotive

   

EU sales boom continues Exports lack momentum Q1’16 output higher than foreseen Continued growth expected, albeit slowing going forward The EU automotive market remained buoyant in the second quarter of 2016. Car sales rose again strongly in April and May, resulting in a year-to-date rise of EU car registrations of 9.9% yo-y. Demand in France, Italy and Spain registered double-digit growth over the first five months of this year. Also commercial vehicle demand continued its upward trend in April and May. Registrations are up by 13.5% yo-y over the first five months of this year. All market segments posted significant gains, but particularly sales of heavy commercial vehicles rose sharply over this period; particularly in Italy, Spain and France growth was robust. As far as exports from the premium segment manufacturers in Germany and the UK are concerned, sales to China appear to be holding up better than expected, but the contracting market in Russia acts as a drag on overseas demand. Together with continued albeit slowing demand from the US, overseas exports increased only moderately so far this year. Automotive output grew by 6.8% y-o-y in Q1-2016, twice the growth rate previously foreseen. Production in the

United Kingdom and Spain posted a double-digit gain compared with the same period of 2015. Based on healthy factory order books and lengthening lead times also Q2 production looks set to exceed earlier expectations. First estimates signal again around 7% growth compared with the same period of 2015. The outlook for the second half of 2016 and for 2017 is for the continuation of robust market fundamentals for EU passenger car and commercial vehicle demand. Rising employment and household income will support confidence, whereas low interest rates, manufacturers’ incentive packages and still lower cost of fuel will be supportive to car affordability. The ongoing economic recovery in the EU will have a positive impact on road transport activity, which will be supportive to commercial vehicle demand. The outlook for car exports remains opaque. Signs that the US market is nearing a sales peak are getting stronger. The purchase tax cut in China will expire at the end of 2016, whereas the Russian market looks set to remain depressed. Also localisation trends in emerging markets will limit car exports from the EU. Total EU automotive output - including parts and components - is forecast to rise by 5.5% in 2016 and by 3.6% in 2017.

10

Mechanical Engineering

Slight growth Q1’16 activity – mixed country performance  Demand held back by sluggish global growth and uncertainties  Brexit may dampen confidence  Mild recovery on the cards for 2017 Activity in the EU mechanical engineering industry rose by a modest 0.7% y-o-y in the first quarter of 2016. Underlying country data signal that the performance of investment goods manufacturers remains mixed. While output growth was positive in France, Italy, Spain and some smaller EU markets, production in Germany, the UK, the Benelux and Poland remained on a negative trend. Slow domestic demand for machinery and equipment and continued headwinds from international trade are the key factors explaining the continuation of subdued business conditions in the EU. Also in the second quarter of 2016, investment is expected to have been held back by sluggish global growth as well as economic and political uncertainties. The lack of transparency and predictability of the business environment remains a drag on demand for investment goods. Therefore, output growth in the mechanical engineering sector is 

expected to have been again sluggish in Q2-2016. Prospects for the second half of 2016 remain rather muted. It had been anticipated that the main headwinds in 2016 would come from the weakness in external demand, while EU capital goods investment would see the start of a modest rebound. However, due to Britain’s vote to leave the EU, business confidence could suffer an unexpected blow-back and political, economic and financial stability in the EU could be undermined, crucial factors in major investment decisions. As a consequence, the scope for an improvement in business conditions in the second half of 2016 remains limited. On balance, output growth will remain below 1% in 2016. A mild recovery still seems a plausible scenario for 2017. Sooner or later, the dust will settle in the aftermath of the Brexit, and lead to better levels of confidence. The EU investment climate will be also supported by rising capacity utilisation and corporate profits. The expected moderate upturn in global demand combined with the likelihood of continued downward pressure on the euro exchange rate will benefit euro area exporters. Output is forecast to rise by 2.6% in 2017.

11

Tubes

Q1’16 output fell sharply Indications for Q2 are less negative  Business conditions for the various tube sectors seen improving going forward EU steel tube production fell by 6.8% y-o-y in the first quarter of 2016, reflecting the continuation of difficult market conditions across the key market segments for steel tubes in the EU as well as abroad. Production activity contracted again sharply in Germany, France, Spain and in almost all smaller EU countries with tube manufacturing sites. In contrast, output in Italy and the Netherlands is reported to have increased. With oil prices still generally below what producers need to generate satisfactory returns on investment, oil and gas exploration and production activity has faltered. As a consequence, international demand for large welded and oil country tubular goods remained subdued. Meanwhile, global overcapacity in steel tube production has resulted in fiercening competition on most tubes markets. Some tube markets benefit from stable or even improving business conditions, such as tubular products for automotive applications.  

First estimates for steel tube production in the second quarter of this year signal a moderation in the yearon-year decrease in production activity. The upward trend in oil prices in April and May helped to dampen the downward trend in oil and gas sector capital expenditure; growing global oil supply disruptions, rising demand and declining US crude production supported a price rise. Oil market fundamentals appear not to be in support of major further price rises going on the relatively short term. The outlook for the remainder of 2016 and for 2017 is for steel tube production to gradually climb back to somewhat higher production levels, although even at the end of next year output is forecast to remain some 30% below the 2008 production peak. Business conditions for large welded tubes have started to improve owing to several projects in the European region demanding significant quantities. Also worldwide project activity is improving, thereby globally reducing competitive pressures. Demand for smaller welded tubes and seamless tubes will benefit from rising activity in the automotive industry, construction, metal goods and mechanical engineering. EU output is expected to rise by 1.1% in 2016 and by around 5.5% in 2017.

12

Domestic Appliances

Output continued to rise in Q1’16 Private consumption growth and housing rebound will continue to support demand  Production activity seen expanding further in 2016-2017 Output in the electrical domestic appliances sector in the EU remained on a rising trend in the first quarter of 2016; total production activity grew by 2.9% y-o-y. Particularly in France and Poland the increase in output was significant. A negative performance was registered in the UK and Spain. Demand for electrical domestic appliances sector is boosted by the continued strength of private consumption in the EU and the broadening rebound in the residential property sector. The latter translates into several countries in the EU seeing now an upturn in the residential construction sector with both gains in new work and in the modernisation and upgrading of the existing housing stock. Improving labour market conditions, moderate wage rises in combination with very low inflation and still lower oil prices support increases in real disposable incomes. Low interest rates and easing access to finance have lowered financial barriers to big ticket purchases.  

First estimates for production activity in the second quarter of this year signal that growth remained around the 3% yo-y rate. The outlook for the remainder of 2016 and for 2017 is for continued growth in production activity of the electrical domestic appliances sector in the EU. The ongoing economic recovery in the EU is expected to support a further improvement in labour market conditions and some upward pressure on real wages. Prospects for the residential property sector are robust, with rising new work and renovation activity stimulating new and replacement demand for household appliances. Taking into account that most domestic appliances are standardised products, international competition is fierce. Suppliers from Turkey and Asia are looking to increase sales in the EU market which offers rather attractive price levels compared to other markets. However, EU producers are well positioned because of their insight in regional consumer preferences and focus on energy efficiency and product design. Production activity in the EU household appliances sector is forecast to grow by 2.8% in 2016 and by 2.2% in 2017.

13

Real Consumption Forecast for real consumption - % change year-on-year Period

Year Year Year Q116 Q216 Q316 Q416 Q117 Q217 Q317 Q417 2015 2016 2017 1.3



4.0

1.5

2.0

2.0

Real consumption rose 4% compared with weak Q1’15 level  End-use sectors registered higher activity levels  Further growth in 2016 and 2017 In the first quarter of 2016, EU real steel consumption grew by 4% compared with the relatively low level of end-user demand in the same quarter of 2015. Despite this base effect, it is evident that the positive trend in year-on-year growth of real steel consumption and the underlying activity growth in the steel using sectors in the EU remained intact. Basically all steel using sectors registered higher activity growth in the first quarter of 2016 compared with the same period of the previous year. Particularly the automotive sector performed strongly. The key exception was steel tube manufacturing which registered a deeper drop in activity than in 2015; as such, it was the only sector acting as a drag on total activity growth and as a consequence on real steel consumption.

2.4

3.5

2.8

2.0

1.7

2.5

For the remainder of 2016 it is expected that real steel consumption will continue to increase at an overall moderate year-on-year growth, in line with the anticipated positive trend in production growth in the steel using sectors. On balance, total real steel consumption is forecast to rise by 2.4% over the whole of 2016. Prospects for 2017 are moderately positive. Growth of production activity in the steel using sectors in the EU is foreseen to gain some momentum compared with 2016, based on the assumption of investment and international trade becoming more supportive to growth. This implies that the basis for end-user activity growth and therefore steel consumption will broaden. Steel intensity is forecast to exert a negative impact on real steel demand going forward. As a consequence, EU real steel consumption is forecast to increase by 2.5% in 2017.

1) steel intensity is the ratio of steel consumption to steel weighted production in the steel using industries (SWIP)

14

Apparent Consumption Forecast for apparent consumption - % change year-on-year Period

Year Year Year Q116 Q216 Q316 Q416 Q117 Q217 Q317 Q417 2015 2016 2017 3.5

3.1

0.5

-0.1

1.0

1.1

1.8

0.7

2.0

1.6

1.5

EU Apparent Consumption in million tonnes per annum 2009 121 2010 148 2011 158 2012 141 2013 141 2014 147 2015 152 2016 (f) 153 2017 (f) 156

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EU steel demand rose 3.1% in Q12016 - but only imports benefit  EU mills lost again market share  Key uncertainty going forward: level of imports coming to the EU  Fairly similar conditions in 2017 EU apparent steel consumption grew 3.1% y-o-y in the first quarter of 2016. Improving business activity at the enduser level and inventories in the downstream steel supply chain having been trimmed down at the end of 2015 fuelled steel demand. Improving international steel pricing conditions since mid-February and lengthening lead times also explain the increase in buying interest and related stockpiling over the quarter. Meanwhile, imports continued to rise sharply in Q1-2016. The 24% y-o-y increase signals that only third country suppliers gained from the growth in demand and continued to capture a larger portion of the EU steel market. Fairly similar market conditions appear to have shaped the market in Q2-2016. EU pricing and supply conditions

remained supportive to the purchasing behaviour of EU steel buyers; bookings have reportedly remained at overall satisfactory levels. Demand remained close to the level of the previous quarter, while imports continued to increase. The outlook for the second half of this year is for apparent consumption to stabilise around the year earlier level. While real steel demand is expected to continue its pattern of moderate growth, the seasonal stock cycle suggests that inventories will be reduced gradually over this period. The key uncertainty with regards to supply remains the level of imports into the EU market. Steel demand is forecast to rise by around 1% in 2016. Demand-side fundamentals in 2017 are seen as moderately positive, supported by s steady rise of real consumption and an overall neutral stock cycle. Supply-side distortions pose the key risk to steel market stability in the EU as long as global overcapacity persists.

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Imports

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Q1-2016 imports grew 24% y-o-y Continued rise in April and May China remained largest exporter of steel products to the EU  But other countries are targeting the still open EU market as well So far this year, steel imports from third countries into the EU continued to rise at a pace which exceeds the rate of improvement in domestic apparent steel consumption. Total imports in Q1- 2016 grew by 24% y-o-y, with semis’ imports rising by 26% y-o-y and finished product imports increasing by 23% y-o-y. Customs data for April and May show that finished imports continued to rise, both in comparison with the same period of 2015 and compared with the previous quarter; the increase was 16% respectively 4%. The year-on-year rise in long product imports was much pronounced than growth in flat product imports and amounted to 33% respectively 11%. A similar divergence could be seen in the quarter-on-quarter comparison. At the specific product levels, some worrying trends can be observed. Within the flat products group the yearon-year drop in hot-rolled and coldrolled imports was outpaced by the massive increase in hot-dipped galvanised sheet imports; following a

77% y-o-y rise in Q1-2016, imports rose by 85% y-o-y over the April-May period. Also imports of organic coated material have been rising rather sharply over the past few months. While imports of all long products have been on a rising trend so far this, the increase over the April-May period in wire rod (+54% y-o-y) and heavy sections (+253% y-o-y) imports is also a reason for concern. As for the main countries of origin, China remained the most important exporter to the EU, followed by the Russia, the Ukraine, South Korea and Turkey. Together these countries accounted for 69% of total imports over the January-May period. Over this period, imports from Taiwan showed the strongest year-on-year increase (+171% y-o-y), followed by Turkey (+63%), Iran (+46%), South Korea (+41%) and the Ukraine (+35%). Despite anti-dumping duties already in place or potential trade cases under investigation by the European Commission, imports have continued to absorb the improvement in domestic steel demand in the EU. This underpins concerns that import distortions will continue to hammer the EU steel sector.

16

Exports

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EU exports fell 19% over the first four months of 2016  EU trade deficit in finished products continued to widen  Global steel supply: little evidence of net reduction in steelmaking capacity The falling trend in EU exports – which started in 2015 – proceeded over the four months of this year. Customs data for steel exports from the EU to third countries show a 19% drop in total exports over this period, with semis falling by 65% and finished steel products falling by 10%, due to a 11% drop in long product exports and a 9% reduction in flat product exports. This negative development in EU steel exports reflects overall weak global steel demand conditions which in combination with overcapacity problems have fuelled competition and unfair trade practices. The resulting remedial measures against imports distortions have exacerbated the fight for tonnage in the remaining markets. As a result of rising imports and falling exports, the EU remained a net importer of steel products. The total trade deficit over the first four months of 2016 amounted to 911,000 tonnes per month, compared with an average monthly deficit in 2015 of

381,000 tonnes. The deficit results from net imports of semis (681,000 tonnes per month) and flat products (549,000 tonnes per month) and a trade surplus in long products (318,000 tonnes per month). With regards to the main countries of destination of EU exports, Turkey is by far the key destination for flat product exports and Algeria for long products. The available customs data for 2016 underpin earlier fears that market conditions in international steel trade would remain difficult. There is no evidence that an improvement is to be expected for the second half of this year. Prospects for 2017 are anticipated to be slightly better, at least with regards to demand-side fundamentals. As far as the supply side is concerned, the situation remains highly uncertain taking into account that other than in the EU there is no clear evidence of a significant net reduction in steelmaking capacity at a regional or national scale. This fuels concerns of continued distortions of the EU supply-demand balance by third country exports.