1

ISRI Convention & Expo

Steel Indexing & Price Transparency

Patrick A. McCormickManaging Partner

April 20, 2007

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WorldSteelDynamics

High Rates of Steel Demand Growth Are Likely to Continue

Price Indexing & Price TransparencyNew Tools for A New World Economy

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WorldSteelDynamics

Price Indexing & Price TransparencyWhy Is It Needed?

Customers Want to Know Their Cost

Businesses Want to Know that Margins are Secure

How can This be Accomplished in Volatile Markets?Requires a Measurement of Market Value Over Time

Indexing prices in Physical Contracts and Financial Contracts Can Achieve Stable Pricing/Cost

Price Transparency

Price Indexing

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WorldSteelDynamics

The SteelBenchmarkerTM ProcessAchieving Price Transparency

Easy internet access

All market participants can become a price opinion provider

Collecting price opinions from mills, end-users, traders, distributors, scrappies, etc.

WSD has experience in collecting price opinions WSD PriceTracker series initiated in 1981SteelBenchmarkerTM carried on in April 2006

Steel products include HRB, CRC, Plate, and Rebar

Steel scrap prices for #1 HM, shredded, and #1 busheling

You Too Can Become a Price Opinion Provider at www.steelbenchmarker.com

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WorldSteelDynamics

SteelBenchmarker Hot Rolled Band

0

20

40

60

80

100

120

140

05-A

pr-06

19-A

pr-06

03-M

ay-06

17-M

ay-06

31-M

ay-06

14-Ju

n-06

28-Ju

n-06

12-Ju

l-06

26-Ju

l-06

09-A

ug-06

23-A

ug-06

06-S

ep-06

20-S

ep-06

04-O

ct-06

18-O

ct-06

01-N

ov-06

15-N

ov-06

29-N

ov-06

13-D

ec-06

27-D

ec-06

10-Ja

n-0724

-Jan-07

07-Feb

-0721

-Feb-07

07-M

ar-07

21-M

ar-07

04-A

pr-07

Num

ber o

f Pric

e O

pini

ons

300

350

400

450

500

550

600

650

700

750

800

Pric

e pe

r Met

ric T

onne

Robust SteelBenchmarkerTM Prices Will be Used to Settle Steel Futures Contracts

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WorldSteelDynamics

Hot Rolled Band Prices Larger Price Spreads Between Regions

SteelBenchmarker TM HRB PriceUSA, China, Western Europe and World Export

630

440

591

677

100

200

300

400

500

600

700

800

900

Jan-00

Apr-00

Jul-0

0Oct-

00Ja

n-01Apr

-01Ju

l-01

Oct-01

Jan-02

Apr-02

Jul-0

2Oct-

02Ja

n-03Apr

-03Ju

l-03

Oct-03

Jan-04

Apr-04

Jul-0

4Oct-

04Ja

n-05Apr

-05Ju

l-05

Oct-05

Jan-06

Apr-06

Jul-0

6Oct-

06Ja

n-07Apr

-07

Dol

lars

per

met

ric to

nne USA

FOB mill

World ExportFOB port of export

China ex-works

Western Europeex-works

April 9, 2007

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WorldSteelDynamics

The ABC’s of Price Indexingand Financial Hedge Accounting

A. The buyer and seller agree to use a price index such as the SteelBenchmarkerTM in their supply contract

Base price adjustments are driven by index changesAdders/deducts are negotiated and are typically held constant in the price calculation

B. Use OTC or trading exchanges to achieve fixed pricing via financial swaps or futures contracts

C. FAS 133 “effectiveness” measurement must be met to avoid booking unrealized future gains and losses to income

Use the same settlement index in the physical and financial contracts

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WorldSteelDynamics

Trading Market Structure

End UserProducer

Koch

Index Swap Price

Steel

$

End UserProducer

OTC

FuturesExchange

Exchange Market

OTC Market

Index Swap Price

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WorldSteelDynamics

OTC Financial SwapsThe Opportunity and The Math

USA Hot Roll Prices & Forecast

450

475

500

525

550

575

600

625

650

Apr-06

May-06

Jun-06

Jul-0

6Aug-0

6Sep-0

6Oct-

06Nov-0

6Dec-0

6Ja

n-07Fe

b-07

Mar-07

Apr-07

May-07

Jun-0

7Ju

l-07

Aug-07

Sep-07

Oct-07

Nov-07

Dec-07

Jan-0

8Fe

b-08

$ pe

r Net

Ton

WSD Med-High FCWSD Med-Low FCWSD Hot rolled Band

Koch January FCKoch Apri FC

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WorldSteelDynamics

May Jun Jul Aug Sep Oct Nov DecMarket Price $605 $610 $605 $590 $585 $595 $600 $600

Base Price $605 $610 $605 $590 $585 $595 $600 $600Budget price $559 $559 $559 $559 $559 $559 $559 $559

Variance $46 $51 $46 $31 $26 $36 $41 $41(Pos = Bad)

Market Price $605 $610 $605 $590 $585 $595 $600 $600Swap Price $559 $559 $559 $559 $559 $559 $559 $559

Variance ($46) ($51) ($46) ($31) ($26) ($36) ($41) ($41)(Pos = Bad)Net Variance $0 $0 $0 $0 $0 $0 $0 $0

May Jun Jul Aug Sep Oct Nov DecMarket Price $560 $558 $550 $545 $540 $545 $550 $550

Base Price $560 $558 $550 $545 $540 $545 $550 $550Budget price $559 $559 $559 $559 $559 $559 $559 $559

Variance $1 ($1) ($9) ($14) ($19) ($14) ($9) ($9)(Pos = Bad)

Market Price $560 $558 $550 $545 $540 $545 $550 $550Swap Price $559 $559 $559 $559 $559 $559 $559 $559

Variance ($1) $1 $9 $14 $19 $14 $9 $9(Pos = Bad)Net Variance $0 $0 $0 $0 $0 $0 $0 $0

Steel Cost

Financial Swap Cost

OTC Financial Swap Calculation (Buyer)

Financial Swap Cost

Steel Cost

Med Low Market Forecast

Med High Market Forecast

Med High FCMay – Dec’07

• $599 ST MKT• $559 ST Swap------------------------------------------------------

• $40 ST Savings• 8 Mo Fixed Price

Med Low FCMay – Dec’07

• $550 ST MKT• $559 ST Swap------------------------------------------------------

• $9 ST Cost• 8 Mo Fixed Price

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WorldSteelDynamics

New Steel Financial Hedging Tools Are Coming

NYMEX, LME and CME are all considering launching steel futures contracts

The NYMEX has signed a letter of intent to use the WSD/AMM/MB SteelBenchmarkerTM price series to settle steel futures contracts on its “Clearport” system

Expected advantagesElectronic visibility of the forward traded price curveSmaller contract size allows for more sophisticated hedging strategiesExchange trading is expected to improve trading liquidity

Steel Futures contracts will not have the same exposure tospeculative financial trades. Steel futures will be settled with

a physical transaction price index, e.g. SteelBenchmarkerTM

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WorldSteelDynamics

Lets Talk About ScrapServing the Supply-Chain

Scrap price volatility has increased in price magnitude and frequency of price change

Scrap exports seek to find the highest priced marketsEAF expansion in CIS is impacting scrap exportsHigher global growth rates of steel production have tightened metallics supply capabilities

Customers Want to Know Their CostBusinesses Want to Know that Margins are Secure

ScrapCollectors

Scrap Processors Steel Mills Manufacturing

Are Scrap Collectors and Processors Ready to ProvideFixed Price Solutions to Their Customers?

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WorldSteelDynamics

AMM – WSD USA Scrap PricesRecord Prices for #1HM & Shredded

SteelBenchmarker TM Scrap PriceUSA, delivered to steel plant

270

317336

50

100

150

200

250

300

350

400

450

Jan-00

Apr-00

Jul-0

0Oct-

00Ja

n-01Apr

-01Ju

l-01

Oct-01

Jan-02

Apr-02

Jul-0

2Oct-

02Ja

n-03Apr

-03Ju

l-03

Oct-03

Jan-04

Apr-04

Jul-0

4Oct-

04Ja

n-05Apr

-05Ju

l-05

Oct-05

Jan-06

Apr-06

Jul-0

6Oct-

06Ja

n-07Apr

-07

Dol

lars

per

gro

ss to

n

#1 Heavy Melting

Shredded Scrap

April 9, 2007

#1 Busheling

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WorldSteelDynamics

SteelBenchmarkerTM – AMM Scrap PricesAlready Achieving Close Agreement

Composite Prices ($/GT)

36836435434929830026 Mar 07

3593363433172912709 Apr 07

36536134033729429712 Mar 07

29730028829225227126 Feb 07

29329428328025025312 Feb 07

AMM#1 Bush

WSD#1 Bush

AMMShred

WSDShred

AMM#1 HM

WSD#1 HM

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WorldSteelDynamics

WSD Does Not Believe China Will Return to Large Imported Quantities of Scrap

China’s obsolete scrap reservoir doesn’t increase much until after 2010Over the cycle, iron based steelmaking cost remains lower than scrap based EAF steelmaking costChina is developing capabilities that allow greater use of low concentrated oresLarge steelmaking capacity additions are best served by iron based steelmaking

China Scrap Net Imports

0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

Feb-03May-0

3Aug-03Nov-0

3Feb-04May-0

4Aug-04Nov-0

4Feb-05May-0

5Aug-05Nov-0

5Feb-06May-0

6Aug-06Nov-0

6Feb-07

1,00

0 to

nnes

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WorldSteelDynamics

Price Indexing & Price TransparencyKey Takeaways

The world has transitioned to a higher economic growth

Market price volatility is likely to continue

Price series, such as the SteelBenchmarkerTM, are needed to track the rapid market changes

Sign up at www.steelbenchmarker.com

Customers and businesses want predictable cost and margins

Emerging price risk management tools can provide a viable solution

provided that:Market participants understand price risk management toolsPrice risk management strategies are tied to business objectivesSufficient financial liquidity is available to make timely trades