A Roller Coaster Ride in Today's Metal Market:

The Current Shortage and its Financial 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.

 EE-RM/STD-00-550 COMMENT 86

A Roller Coaster Ride in Today's Metal Market: 

The Current Shortage and its Financial Impact. 

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 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 Oct 02 

1200+---.,....---,...---...,-----,----,----,-

Feb 02 June 02 Oct 02 Feb 03 June 03 Oct 03 Feb 04 

Zinc 

Feb 03 June 03 Oct 03 

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, 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. 

Feb 04 

A Roller Coaster Ride in Today's Metal Market: 

The Current Shortage and its Financial Impact. 

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 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 Oct 02 

1200-1----r----.---....----.----.-----r 

Feb 02 June 02 Oct 02 Feb 03 June 03 Oct 03 Feb 04 

Zinc 

Feb 03 June 03 Oct 03 

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, 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. 

Feb 04 
The 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 Journal reinforces 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)

 EE-RM/STD-00-550 COMMENT 86

The 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 Journal reinforces 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 China's steel consumption will reach its peak until 2010, causing the country to 

continue scouring the globe in search of raw 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 II Consumption 

China's 13% consumption growth over the last decade is 

equal to North America's total current production capacity. 

Surging raw material prices impacting operating costs 

Source: 1151 

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 

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 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 Journal reinforces 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 China's steel consumption will reach its peak until 2010, causing the country to 

continue scouring the globe in search of raw 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 II Consumption 

China's 13% consumption growth over the last decade is 

equal to North America's total current production capacity. 

Surging raw material prices impacting operating costs 

Source: 1151 

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 

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 
Weak 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;

I

Trico; Auburn Bar Tech

Steel Lamont

CSC: Quatech

U.S. Production Capacity

 EE-RM/STD-00-550 COMMENT 86

Weak 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. 

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 half of2004. 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 

135 

130 ~ '(3 

co 

c. 125 co 

u 

..... 

0 

en 120 c: 

~ ..... 

0 

en 115 c: 

~ 

~ 110 

105 

4/00 10/00 4/01 

LTV's Cleveland West; 

Acme Steel. 

10/01 4/02 

- U.S. Production Capacity 

10/02 4/03 10/03 

Weak 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. 

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 half of2004. 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 

135 

130 ~ '(3 

co 

c. 125 co 

u 

..... 

0 

en 120 c: 

~ ..... 

0 

en 115 c: 

~ 

~ 110 

105 

4/00 10/00 4/01 

LTV's Cleveland West; 

Acme Steel. 

10/01 4/02 

- U.S. Production Capacity 

10/02 4/03 10/03 
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

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 (N leton Curlee E ®•Z/GEONEY .'r® c

HEAT TRACING SYSTEMS HEV1-DUTY

 EE-RM/STD-00-550 COMMENT 86

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 

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 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: 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 Stteet Journal. Steel Prices Jump, Spurring Protests ji'Oln Customers. January 23,2004 

2 Putchasing. Steel Flash Report. January 30, 2004 

3 World Steel Dynamics. Global Steel Alert #21. No Coke, No Smoke. 

'\ World Steel Dynamics. Steel Thermomete1: #3/January 29 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 

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 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: 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 Stteet Journal. Steel Prices Jump, Spurring Protests ji'Oln Customers. January 23,2004 

2 Putchasing. Steel Flash Report. January 30, 2004 

3 World Steel Dynamics. Global Steel Alert #21. No Coke, No Smoke. 

'\ World Steel Dynamics. Steel Thermomete1: #3/January 29 2004 

@JAppleton" Curlee EASYHEAT O 

www.egseg.com 

NELSON 

HEAT TRACING SYSTEMS O.ZlGEDNEV SOLA! 

HEVI·OUTY