# A Ro

# ller 

# Coaster 

# Ride in 

# To

# day's 

# Met

# al Market:



# The Current Shortage 

# and its 

# Financi

# al pact. China's massive growth, a weak U.S. dollar, and sweeping raw material shortages are the dynamics at play within the global metals market today. As the major material component to our electrical products we rely heavily on the metals industry, an industry in the midst of change unseen in the last two decades. With U.S. plants closing, workers being laid off, and metal prices skyrocketing, price relief in the near future is not expected nor predicted. This paper will focus primarily on the steel market, but a look at the London Metal Exchange (www.lme.co.uk) shows the extent to which raw metals such as aluminum, copper and zinc have experienced sharp price increases in the last two years as well. 

### Aluminum, Copper and Zinc

3000 1100
2000

800 1000'r i Y T i1 700' 1 Feb02 June02 Oct02 Feb03 June03 Oct03 Feb04 Feb02 June02 Oct02 Feb03 June03 Oct03 Feb04 12001

1000 900

Aluminum Copper

1800- 1700- 1600- 1500- 1400
- 1300- 1200
- Feb 02 June02 Oct02 Feb03 June03 Oct03 Feb04 Zinc As a result, we believe electrical component distributors should be cautious moving forward, understand the potential risks and challenges these dynamics present to you and your customers, and continue to stay informed to protect the profitability and existing margins within your distribution business. At EGS Electrical Group, along with our parent company Emerson, we will continue to monitor the global metals marketplace. As your manufacturer, we will strive to keep you informed and abreast of the ramifications these dynamics may have on the electrical components industry. 

# A Roller CoasterRide in Today's Metal Market: The Current Shortage andits Financial Impact. China's massive growth, a weak U.S. dollar, and sweepingraw material shortages are the dynamics at play within the global metals market today. 

### As the major material component to our electrical productswe rely heavily on the metals industry, an industry in the midst ofchange unseen in the last two decades. With U.S. plants closing, workers being laid off, and metal prices skyrocketing, price reliefin the near future is not expected norpredicted.This paperwill focus primarily on the steel market, but alook at the London Metal Exchange (www.lme.co.uk) shows the extent to which raw metals such as aluminum, copper and zinc have experienced sharp price increases in the last two years as well. 

### Aluminum, Copper and Zinc

3000 1200 1100 1000 2000 900 800 1000+----.----.---..,---..,---..,----,-**700+----~----~----~---r-----r---__r**

Feb 02 June02 Oct02 Feb 03 June 03 Oct03 Aluminum
1800 1700 1600 1500

1300 Feb 04 Feb 02 June 02 Oct02

1200+---.,....---,...---...,-----,----,----,- Feb 02 June 02 Oct02 Feb 03 June 03 Oct03 Feb 04 Zinc Feb 03 June 03 Oct03 Copper

As a result, we believe electrical component distributors should be cautious moving forward, understand the potential risks and challenges these dynamics present to you and your customers, and continue to stay informed to protect the profitability and existing margins within your distribution business. At EGS Electrical Group, alongwith ourparent company Emerson, we will continue to monitor the global metals marketplace. As your manufacturer, we will strive to keep you informed and abreast ofthe ramifications these dynamics may have on the electrical components industry. Feb 04 

# A Roller CoasterRide in Today's Metal Market: The Current Shortage andits Financial Impact. China's massive growth, a weak U.S. dollar, and sweepingraw material shortages are the dynamics at play within the global metals market today. 

### As the major material component to our electrical productswe rely heavily on the metals industry, an industry in the midst ofchange unseen in the last two decades. With U.S. plants closing, workers being laid off, and metal prices skyrocketing, price reliefin the near future is not expected norpredicted.This paperwill focus primarily on the steel market, but alook at the London Metal Exchange (www.lme.co.uk) shows the extent to which raw metals such as aluminum, copper and zinc have experienced sharp price increases in the last two years as well. 

### Aluminum, Copper and Zinc

3000 1200 1100 1000 2000 900 800 1000-1----.-----,-----,---,..----r----,- 700+---.,----.,----.,----.,----.,-----,-

Feb 02 June02 Oct02 Feb 03 June 03 Oct03 Aluminum
1800 1700 1600 Feb 04 Feb 02 June 02 Oct02

1200-1----r----.---....----.----.-----r Feb 02 June 02 Oct02 Feb 03 June 03 Oct03 Feb 04 Zinc Feb 03 June 03 Oct03 Copper

As a result, we believe electrical component distributors should be cautious moving forward, understand the potential risks and challenges these dynamics present to you and your customers, and continue to stay informed to protect the profitability and existing margins within your distribution business. At EGS Electrical Group, alongwith ourparent company Emerson, we will continue to monitor the global metals marketplace. As your manufacturer, we will strive to keep you informed and abreast ofthe ramifications these dynamics may have on the electrical components industry. Feb 04The shifting of regional imbalances

One of the biggest factors changing the dynamics of the metals industry has been the massive growth of China. A review of Paul Glader's recent article, "Steel Prices Surge, Causing Problems for Manufacturers" in the February 23rd edition of The Wall Street Journalreinforces this point. Specifically with regards to the steel industry, in the last ten years Chinese consumption has more than doubled, rising 30% last year alone'. China now consumes one-third of the world output of rolled steel. Analysts do not expect that Chinas steel consumption will reach its peak until 2010, causing the country to continue scouring the globe in search of raw material S2. 

### Global Steel Production and Consumption

40% 35% 30% 25% 20% 15% 10% % 0% 1992

NA China Japan EU Other 2002 40% 35% 30% 25% 20% 15% 10% 5% 0% ICI Production Consumption


### China's 13°I° consumption growth over the last decade is eglli`al t"o North America'stotal current production capacity. Source: IISI

Surging raw material prices impacting operating costs In the U.S., surging prices for steel scrap, coke and coking coal are also driving factors within the steel industry. At least five mills are production constrained due to coke shortages saying their first quarter orders will spill over into April. As a result, the price of Chinese coke delivered to U.S. east coast ports has risen over 300% to at least $325-$350 per ton versus only about $75 per ton in early 20023. Steel makers are therefore seeking to place a higher proportion of steel scrap in their steel making furnaces. Given this surge, spot rolled hot-band for April delivery appears to be in the $410-$475 per net ton. The cost less than 18 months ago was closer to $220 per net ton,4 representing a nearly 100% price increase. 

### Global Operating Rate vs. World HRB (Hot-Rolled Band) Price

65% 100 Co n n, r- -- W.- m m W r" CO W m rn._ m m m m m m m m O. 0 0 0 c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c m m m m m m m m m m m m m m <a m _---_---Effective 01JeratinRate with 31VIVA

(Left Scale)

Global HRB Price, FOB the

port (Right Scale) 

### The shiftingofregional imbalances One ofthe biggest factors changingthe dynamics ofthe metals industryhas been the massive growth ofChina. A review ofPaul Glader's recent article, "Steel Prices Surge, CausingProblems for Manufacturers" in the February23rdedition of 

### The "WallStreetJournalreinforces this point. Specificallywith regards to the steel industry, in the last ten years Chinese consumption has more than doubled, rising 30% lastyear alone!. Chinanow consumes one-third ofthe world output of rolled steel. Analysts do notexpect that China's steel consumptionwill reach its peak until 2010, causing the country to continue scouringthe globe in search ofraw materials2• 

### Global Steel Production and Consumption 1992 2002 40% 40% 35% 35% 30% 30% 25% 25% 20% 20% 15% 15% to% 10% 5% 5% 0% 0% NA China Japan EU Other NA China Japan EU Other Production 

### IIConsumption


### China's 13% consumption growth overthe last decade is equal to North America's total current production capacity. Surgingrawmaterialprices impactingoperatingcosts Source: 1151

In the U.S., surgingprices for steel scrap, coke and coking coal are also driving factors within the steel industry. At least five mills are production constrained due to coke shortages saying their first quarter orders will spill over into April. As a result, the price ofChinese coke delivered to U.S. east coast ports has risen over 300% to at least $325-$350 per ton versus only about $75 per ton in early 20023• Steel makers are therefore seeking to place a higher proportion ofsteel scrap in their steel making furnaces. Given this surge, spotrolled hot-band for April delivery appears to be in the $410-$475 per net ton. Thecost less than 18 months ago was closer to $220 per net ton,4 representing a nearly 100% price increase. 

### Global Operating Rate VS. 

### World HRB (Hot-Rolled Band) Price

105% 

## r-------------------------------------------------, 100% 95% 90% 85% +-t+l1\j--"-W 80% 75% 70% Global HRB Price, FOB the port IRight Scale)**M~~~~oomO~NM~~~~oomO_NM~~~~oomO_NM~ ~~~~~~~oooooooooooooooooooommmmmmmmmmooOOO**  c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c ro ro ro ro ro ro rn ro ro ro ro m m rn rn rn rn rn rn rn rn rn ro ro rn ro rn rn rn ro ro rn**~~~~~JJJJJJJJJJJJJJJJJJJJJJJJJJJ** 500 450 400 Ql c: c: 350**~** 

## '5 300 Ql :2:**~** 250 0-**~ ~**  200 '0 0 150 

### The shiftingofregional imbalances One ofthe biggest factors changingthe dynamics ofthe metals industryhas been the massive growth ofChina. A review ofPaul Glader's recent article, "Steel Prices Surge, CausingProblems for Manufacturers" in the February23rdedition of 

### The "WallStreetJournalreinforces this point. Specificallywith regards to the steel industry, in the last ten years Chinese consumption has more than doubled, rising 30% lastyear alone!. Chinanow consumes one-third ofthe world output of rolled steel. Analysts do notexpect that China's steel consumptionwill reach its peak until 2010, causing the country to continue scouringthe globe in search ofraw materials2• 

### Global Steel Production and Consumption 1992 2002 40% 40% 35% 35% 30% 30% 25% 25% 20% 20% 15% 15% to% 10% 5% 5% 0% 0% NA China Japan EU Other NA China Japan EU Other Production 

### IIConsumption


### China's 13% consumption growth overthe last decade is equal to North America's total current production capacity. Surgingrawmaterialprices impactingoperatingcosts Source: 1151

In the U.S., surgingprices for steel scrap, coke and coking coal are also driving factors within the steel industry. At least five mills are production constrained due to coke shortages saying their first quarter orders will spill over into April. As a result, the price ofChinese coke delivered to U.S. east coast ports has risen over 300% to at least $325-$350 per ton versus only about $75 per ton in early 20023• Steel makers are therefore seeking to place a higher proportion ofsteel scrap in their steel making furnaces. Given this surge, spotrolled hot-band for April delivery appears to be in the $410-$475 per net ton. Thecost less than 18 months ago was closer to $220 per net ton,4 representing a nearly 100% price increase. 

### Global Operating Rate VS. 

### World HRB (Hot-Rolled Band) Price

105% 

## r-------------------------------------------------, 100% 95% 90% 85% +-t+l1\j--"-W 80% 75% 70% Global HRB Price, FOB the port IRight Scale)**M~~~~oomO~NM~~~~oomO_NM~~~~oomO_NM~ ~~~~~~~oooooooooooooooooooommmmmmmmmmooOOO**  c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c ro ro ro ro ro ro rn ro ro ro ro m m rn rn rn rn rn rn rn rn rn ro ro rn ro rn rn rn ro ro rn**~~~~~JJJJJJJJJJJJJJJJJJJJJJJJJJJ** 500 450 400 Ql c: c: 350**~** 

## '5 300 Ql :2:**~** 250 0-**~ ~**  200 '0 0 150Weak U.S. dollar limiting imports

In the U.S., the weak dollar is also playing a crippling role affecting supply and demand. By limiting the purchasing power of American manufacturers to buy steel from foreign producers, manufacturers must continue to rely on U.S. producers. Producers who continue to increase price under the protection of a weakening dollar. At the same time, U.S. steel producers are capitalizing on a weak U.S. dollar to sell more steel overseas to China, limiting the availability to domestic buyers. 

### Currency Code USD/1 Unit 

### Euro EUR .8758 Japanese Yen JPY .007462 Currency Code USD/1 Unit Euro EUR 1.2688 

### Japanese Yen JPY 0.009247 February 25, 2002 February 25, 2004 U.S. supplier consolidation reducing capacity The biggest unknown for the steel industry this year will be the extent to which raw material shortages prevent steel production from rising in the first half of 2004. In the U.S., consolidation among steel producers has compounded this problem. Capacity is recovering due to restarts but it is 10 million tons below historic levels. The World Steel Dynamics (www.worldsteeldynamics.com) analysis indicates that the global steel industry entered a shortage last November 2003 when it was operating at about 100% of its effective (real) capacity. Because of availability problems and low offshore deliveries, steel sheet users have raised their voice to ensure their supply is available to meet their needs. With this as a backdrop, price is no longer a key factor with steel buyers. Ensuring availability today and building inventories for tomorrow, as a price hedge against further price increases expected in 

### the next six to twelve months, is the focus of today.



### U.S. production capacity is 8% less than in 2000 and operating at 100 % capacity.
U.S. Steel Making Capacity

[CST-- Kansas City t+larthu,estern 115 Steel $ Wire; 

# ITrico; Auburn Bar Tech Steel Lamont CSC: Quatech



### U.S. Production Capacity 

### WeakU.S. dollar limitingimports In the U.S., the weak dollar is also playing a crippling role affecting supply and demand. By limiting the purchasing power ofAmerican manufacturers to buy steel from foreign producers, manufacturers must continue to rely on U.S. producers. Producers who continue to increase price under the protection ofa weakening dollar. At the same time, U.S. steel producers are capitalizing on a weak U.S. dollar to sell more steel overseas to China, limiting the availability to domestic buyers.



### Euro 

### EUR .8758 Euro 

### EUR 1.2688 Japanese Yen JPY 

### .007462 Japanese Yen JPY 

### 0.009247 February 25, 2002 February 25,2004
U.S. supplier consolidation reducing capacity The biggest unknown for the steel industry this year will be the extent to which raw material shortages prevent steel production from rising in the first halfof2004. In the U.S., consolidation among steel producers has compounded this problem. Capacityis recovering due to restarts butit is 10 million tons below historic levels. 

### The WorldSteelDynamics (www.worldsteeldynamics.com) analysis indicates that the global steel industryentered a shortage last November 2003 when itwas operating at about 100% ofits effective (real) capacity. Because ofavailability problems and low offshore deliveries, steel sheet users have raised their voice to ensure their supply is available to meet their needs. With this as abackdrop, price is no longer akey factor with steel buyers. Ensuring availability today andbuilding inventories for tomorrow, as a price hedge against further price increases expected in the next six to twelve months, is the focus oftoday. 

## *U.S. production capacity is 8% less than in 2000 and operating at 100% capacity.

U.S. Steel Making Capacity

135 130**~** '(3 co c. 125 co u


### ..... 0 en 120 c:**~** 

### ..... 0 en 115 c:**~ ~**  110 1054/00 10/00 4/01 LTV's Cleveland West; Acme Steel.

10/01 4/02



### - U.S. Production Capacity 10/02 4/03 10/03 

### WeakU.S. dollar limitingimports In the U.S., the weak dollar is also playing a crippling role affecting supply and demand. By limiting the purchasing power ofAmerican manufacturers to buy steel from foreign producers, manufacturers must continue to rely on U.S. producers. Producers who continue to increase price under the protection ofa weakening dollar. At the same time, U.S. steel producers are capitalizing on a weak U.S. dollar to sell more steel overseas to China, limiting the availability to domestic buyers.



### Euro 

### EUR .8758 Euro 

### EUR 1.2688 Japanese Yen JPY 

### .007462 Japanese Yen JPY 

### 0.009247 February 25, 2002 February 25,2004
U.S. supplier consolidation reducing capacity The biggest unknown for the steel industry this year will be the extent to which raw material shortages prevent steel production from rising in the first halfof2004. In the U.S., consolidation among steel producers has compounded this problem. Capacityis recovering due to restarts butit is 10 million tons below historic levels. 

### The WorldSteelDynamics (www.worldsteeldynamics.com) analysis indicates that the global steel industryentered a shortage last November 2003 when itwas operating at about 100% ofits effective (real) capacity. Because ofavailability problems and low offshore deliveries, steel sheet users have raised their voice to ensure their supply is available to meet their needs. With this as abackdrop, price is no longer akey factor with steel buyers. Ensuring availability today andbuilding inventories for tomorrow, as a price hedge against further price increases expected in the next six to twelve months, is the focus oftoday. 

## *U.S. production capacity is 8% less than in 2000 and operating at 100% capacity.

U.S. Steel Making Capacity

135 130**~** '(3 co c. 125 co u


### ..... 0 en 120 c:**~** 

### ..... 0 en 115 c:**~ ~**  110 1054/00 10/00 4/01 LTV's Cleveland West; Acme Steel.

10/01 4/02



### - U.S. Production Capacity 10/02 4/03 10/03The end result: metal prices will continue to rise

As a major buyer within the metals industry, we are beginning to see that "pricing power" may be shifting to the hands of the mills over a larger portion of the cycle in the future. Prices on the world steel market in the future may be even more volatile than in the past, with the length of time from the price peak to the price trough, and vice versa, being quite compressed. And unfortunately, price peaks may be higher and price troughs not as deep as in the past. As well, keeping a balance between supply and demand for metallic and coke will remain a driving force in the global steel business for the near and long term future. When combined with high new order levels, the consequence is the announcement of massive "surcharges," currently being passed in the range of $20-$80 per ton on shipments. With accidents and labor disputes restricting ore production around the world, in key producing areas, copper is heading for a substantial deficit this year. As a result, prices are soaring towards $3,000/ton, reaching an eight-year high. At the same time, zinc is currently at a three-year high and aluminum at a four-year high. Distributors: Understand the opportunity and risks associated with long-term contracts. Price fluctuations will continue to be unpredictable for the next 6-12 months. As distributors of products with high metal content, committing to fixed price contracts with customers can be risky and shorter terms should be investigated. In today's environment, contract length is the one thing you can control. So until this ride starts to settle down - when raw material supply and demand levels begin to balance out, the U.S. dollar strengthens and Chinese production needs taper off - cushion the bumps as best you can.

' Wall Street Journal. Steel Prices jump, Spurring Protests fimorn Customers. January 23, 2004 - Purchasing
. Steel Flash Report. January 30, 2004 3 World Steel Dynamics. Global SteelAlert #21. No Coke, No Smoke. ' World Steel Dynamics. Steel Thermometer: #3/January 29 2004



### www.egseg.com BOLA/ 

# G ILL 

## WELSON ®•Z/GEONEY 

### (N let

# on Cu

# rlee E .'r® c HEAT TRACING SYSTEMS HEV1-DUTY The end result: metal prices will continue to rise As a major buyer within the metals industry, we are beginning to see that "pricing power" may be shifting to the hands ofthe mills over a larger portion ofthe cycle in the future. Prices on the world steel market in the future may be even more volatile than in the past, with the length oftime from the price peak to the price trough, andvice versa, being quite compressed. Andunfortunately, price peaks maybe higher and price troughs not as deep as in the past. As well, keeping a balance between supply and demand for metallic and coke will remain a driving force in the global steel business for the near and long term future. When combinedwith high new order levels, the consequence is the announcement ofmassive "surcharges," currentlybeing passed in the range of$20-$80 per ton on shipments. With accidents and labor disputes restricting are production around the world, in key producing areas, copper is heading for a substantial deficit this year. As a result, prices are soaring towards $3,000lton, reaching an eight-year high. At the same time, zinc is currently at a three-year high and aluminum at a four-year high. Distributors: Understandthe opportunityand risks associated with long-term contracts. Price fluctuations will continue to be unpredictable for the next 6-12 months. As distributors ofproducts with high metal content, committing to fixed price contracts with customers can be risky and shorter terms should be investigated. In today's environment, contract length is the one thingyou can control. So until this ride starts to settle down

- when raw material supply and demand levels begin to balance out, the U.S. dollar strengthens and Chinese production needs taper off

- cushion the bumps as best you can.

\ Wall StteetJournal. SteelPricesJump, Spurring Protestsji'Oln Customers. January 23,2004 2 Putchasing. SteelFlash Report. January 30, 2004 3 World Steel Dynamics. GlobalSteelAlert#21. No Coke, No Smoke. '\ World Steel Dynamics. Steel Thermomete1: #3/January29 2004



## @JAppleton" 

# Curlee EASYHEAT O www.egseg.com NELSON HEAT TRACING SYSTEMS O.ZlGEDNEV SOLA! HEVI·OUTY The end result: metal prices will continue to rise As a major buyer within the metals industry, we are beginning to see that "pricing power" may be shifting to the hands ofthe mills over a larger portion ofthe cycle in the future. Prices on the world steel market in the future may be even more volatile than in the past, with the length oftime from the price peak to the price trough, andvice versa, being quite compressed. Andunfortunately, price peaks maybe higher and price troughs not as deep as in the past. As well, keeping a balance between supply and demand for metallic and coke will remain a driving force in the global steel business for the near and long term future. When combinedwith high new order levels, the consequence is the announcement ofmassive "surcharges," currentlybeing passed in the range of$20-$80 per ton on shipments. With accidents and labor disputes restricting are production around the world, in key producing areas, copper is heading for a substantial deficit this year. As a result, prices are soaring towards $3,000lton, reaching an eight-year high. At the same time, zinc is currently at a three-year high and aluminum at a four-year high. Distributors: Understandthe opportunityand risks associated with long-term contracts. Price fluctuations will continue to be unpredictable for the next 6-12 months. As distributors ofproducts with high metal content, committing to fixed price contracts with customers can be risky and shorter terms should be investigated. In today's environment, contract length is the one thingyou can control. So until this ride starts to settle down

- when raw material supply and demand levels begin to balance out, the U.S. dollar strengthens and Chinese production needs taper off

- cushion the bumps as best you can.

\ Wall StteetJournal. SteelPricesJump, Spurring Protestsji'Oln Customers. January 23,2004 2 Putchasing. SteelFlash Report. January 30, 2004 3 World Steel Dynamics. GlobalSteelAlert#21. No Coke, No Smoke. '\ World Steel Dynamics. Steel Thermomete1: #3/January29 2004



## @JAppleton" 

# Curlee EASYHEAT O www.egseg.com NELSON HEAT TRACING SYSTEMS O.ZlGEDNEV SOLA! HEVI·OUTY