OUR YEAR

Outokumpu Annual Report 2012 Our Year

List of contentsOur Year

03Big deal

03What is the big deal?

04Here today, strong tomorrow

05Made in the USA

06Year of the Snake

07Back to the future

08Legacy

08Legacy of 100 years

09Stainless steel spins in Miele's washing machines

10Supported by stainless steel

11Profitability

11Paving the path for profitability

12Forward with P100 and P250

13Thinking big

14Leadership

14The world needs advanced materials

15Unique track record

Annual Report 2012List of contents

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What is the big deal?The biggest news of 2012 in thestainless steel industry was thecombination of Outokumpu andInoxum to become the world'snumber one provider of stainlesssteel and high-performance alloys.The industry has been saying it foryears, something has to happen.The rise in the number of stainlesssteel manufacturers, particularly inAsia, subsequent over-capacity andshaky global economy have all ledto dwindling margins and fiercecompetition.

Widest product portfolio in theWidest product portfolio in theindustry.industry. Outokumpu's strength inhigh value added austenitic andduplex grades blends perfectly withInoxum's leadership in ferriticgrades and high-performancealloys. It even gives the companyall-round expertise to address allcustomer segments, fromdemanding industrial applicationsto consumer focused industries,and to better cater to customerrequirements.

Global market position.Global market position. With the acquisition, Outokumpu strengthens its foothold in Asia and the Americas, whereit is ramping up a new integrated mill. Outokumpu's global market share rose to 12% from 5%.

Synergy savings.Synergy savings. Acquiring Inoxum offers significant synergy savings that neither company could have reachedalone. Annually, these synergy savings will amount to EUR 200 million. While Inoxum's and Outokumpu's activitiesare complimentary, there are of course some overlaps. This means difficult but necessary decisions, andOutokumpu has already announced its intention to close the Krefeld and Bochum mills in Germany.

Annual Report 2012 – Our YearWhat is the big deal?

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Here today, strong tomorrowIn Europe, Middle-East and Africa(EMEA), the market situation istough, with supply outstripping adepressed demand, increasingimports from Asia and economicdownturn. Outokumpu's recipe for itis to streamline operations and takespecial care of existing customers.

Stainless Coil EMEA is the largest ofthe business areas: its operationsaccount for almost half ofOutokumpu's sales, employing some7 200 professionals. "The Europeanmarket situation in particular istough," says Ulrich Albrecht-Früh,President of Stainless Coil EMEA."But Outokumpu now has thecombined skills and strengths toreally change things in the comingyears. European customers have a lotof choice but we have a realopportunity to differentiate throughour culture of strong customerrelationships and going the extra mileto provide tailored customersolutions."

With Inoxum, Outokumpu has an even stronger presence in Europe and it can offer its customers a comprehensiverange of products. One key driver for the synergy savings, and ultimately profitability, is production optimization inEurope – balancing which stainless grades each mill produces and the optimum capacity for each mill. Part of theequation is to create a better balance between hot and cold rolling coil, which Outokumpu is now doing. UlrichAlbrecht-Früh says, "The main challenge in the EMEA region is to reach profitable business in a tough market whileachieving a smooth and successful integration. In short term, it will require us to remain close to our customer,realize the synergies in a fast and practical way, and improve our cash flow and inventory efficiency."

Annual Report 2012 – Our YearHere today, strong tomorrow

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Made in the USAThe Americas represent a diverseregion of market growth for stainlesssteel with the United States toppingthe league with 2-million-tonnestainless steel consumption, theMexican market growing fast andCanada, Brazil and South Americanmarkets following close behind.

The new Outokumpu has well-established presence in theAmericas. Its production split instainless flat products fully reflectsthe industry needs, about 70%austenitic and 30% ferritic.Outokumpu has facilities in Mexicoand the US, where the lynchpin of thefuture success is the new state-of-the-art, integrated stainless steel millin Calvert, Alabama, US. It will beramped up in 2013–2014. Localasset base will enable shorterdelivery cycles for customers andenable Outokumpu to lower its owncosts.

Kari Parvento, President of StainlessCoil Americas, will lead Outokumpu'steam of 2 000 professionals in the Americas. His background is a melting pot of mining, metallurgy, sales andmarketing, making him an ideal person to head the American operations and to bring more innovation to theAmerican market with his team.

"Innovation is not simply creating a good idea; it's something that adds value to the customer's business. And it'smore than just a product; it's having the local presence to listen to the customer and steer product developmentto make sure that new products offer enough value for the customer to want to buy." He continues: "I am veryexcited about the future. Our customers expect a lot from quality and delivery. We have the capability to meetthose expectations. Our number one priority is to ramp up production at the Calvert mill, quickly and safely. Thenwe'll build our business efficiency through delivering quality products and services."

Annual Report 2012 – Our YearMade in the USA

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Year of the SnakeAsia is the fastest growing region inthe stainless steel consumption witha growth of around 6%. The wholeAsia-Pacific region has driven muchof the dramatic change in theindustry over the last ten years or so.It's a huge market, accounting forabout 60% of the global stainlesssteel consumption. The demand isnot just for standard grade stainless,but increasingly for specialty gradesas customers seek purpose-builtsolutions, long-term profitability andenvironmental safety.

Outokumpu has had a presence inAsia for many years, but more as astainless steel importer from Europe.During the last year, however, thecompany has begun expanding thefoothold into a full-scale materialssolution provider. With the Inoxumacquisition, 9% of the sales comefrom the region. The biggestopportunities lie in high-end products,where the margins are better andOutokumpu has an advantage overthe competition.

Austin Lu, President of Stainless APAC, says, "There is a huge opportunity for us. But this will take hard work andtime. No one succeeds in Asia without putting the customer first. The good news is that we are making progress.We doubled our sales force during 2012 and we will continue to invest in customer-facing expertise, especially inthe higher growth markets, like China, India and South-East Asia. Our strategy is based on growth in specialtystainless, utilizing our Chinese joint venture, driving localization and increasing profitability. It is very satisfying torecently win an important contract in China for hot water storage tanks in domestic water heaters. And I am surethat we can build on that success."

Outokumpu now has a cold-rolling unit in Shanghai, China and service centers in Australia and China as well as anextensive sales network covering the entire region to offer faster delivery times to all customers. Some 660professionals work in the Outokumpu operations in the Asia and Pacific region.

Annual Report 2012 – Our YearYear of the Snake

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Back to the futureNowhere is the dual 100-yearheritage of Outokumpu and Inoxumas visible as in high-performancestainless and alloys. These materialsare designed to the highestrequirements for grade, thicknessand surface finish. They have betterproduct characteristics than normalstainless steel: higher corrosion-resistance, resistance to extremetemperatures – both high and low –and the strength to withstand highpressure. All this enables thecustomers to make thinner, lighterand more cost-efficient tools andequipment.

Outokumpu is the global marketleader in specialty stainless andalloys. The company's current line-upin high-performance materials is aperfect fusion of Outokumpu'sspecialty stainless steels andInoxum's nickel-based alloys (VDM),even reaching up to titanium andzirconium where strength-to-weightratios and biocompatibility are in aclass of their own. The bulk ofspecialty products are divided into Special Coil, Thin Strip, Special Plate, Long Products and High PerformanceAlloys.

The High Performance Stainless and Alloys (HPSA) business area employs some 4 600 specialty professionalsmostly in Germany, Sweden, the UK and US, where it also has its specialized production units. HPSA is headed byJarmo Tonteri who says: "I started my career in Outokumpu but left back in 1985 to work on the customer side inthe United States for two years and since 1992 for various steel companies in Sweden. When Outokumpu phonedme and asked me to come back, I was standing on the Singapore Marina Bay Bridge, which ironically had beenbuilt using Outokumpu's stainless steel. Whether it was fate or not, I'm very proud to be 'back home' in such anexciting business."

"High-performance stainless and alloys have always been a bit in the shadow of the big-volume standard stainlesssteel. So it's very motivating that the two specialty materials teams from Outokumpu and Inoxum are joiningforces. We have an intense common interest in advanced technology – and we are really looking forward to workingtogether, sharing best practices and supporting each other across the portfolio. This can only be good forcustomers."

Annual Report 2012 – Our YearBack to the future

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Legacy of 100 yearsThe year 2012 marked the 100thyear of stainless steel innovation. Inthe early 1900s, several discoveriesin France, Britain, Germany and theUnited States led to the commercialdevelopment of stainless steel. Someyears later, Sweden introduced thefirst commercial production of duplexstainless steel. It was in this age ofmetallurgical invention thatOutokumpu was born. It can be saidthat the company cut its teeth oncopper and learnt its trade in miningand metallurgy, before eventuallysettling down in stainless steel in theseventies.

Stainless steel was a great inventionthat significantly changed thestandard of living in many areas. Aproduct engineer once estimatedthat we interact with stainless steelproducts over 30 times a day; fromcutlery and kitchen sinks to cars andbuilding structures. And it is true thattoday Outokumpu has a globalshowroom of everyday tools andiconic landmarks across stainlessgrades, industries and geography. Most of us don't see the industrial applications but there are familiar namesthat carry Outokumpu's material; the double-helix Stonecutters' Bridge in Hong Kong, the inimitable "Bean"sculpture in Chicago, new look at Leicester Square in London, the Chrysler Building and Freedom Tower in NewYork and the majestic Burj Khalifa Tower in Dubai.

Both Outokumpu and Inoxum have been pioneers of stainless steel innovation for 100 years each. Bothcompanies grew up in mining and metallurgy, with Outokumpu divesting its interest in gold, silver, copper and othermetals to concentrate on stainless steel. As separate companies they have brought quality, efficiency and safetyto their customers and best practices to the whole industry. So it is fitting that they have now come together toaccelerate that pioneering product work.

Annual Report 2012 – Our YearLegacy of 100 years

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Stainless steel spins in Miele'swashing machinesA good case in point to demonstrateOutokumpu's increased customerfocus in Europe is the recent deliveryof critical stainless steel flat productsto the German company, Miele,which manufactures the world'slongest-lasting washing machines anddryers. Independent tests haveconfirmed that Miele machines havethe world's longest product life. Theysailed through tests of 5 000 washcycles (about 20 years of normaluse) with flying colors. With itsproducts constantly subject to toughusage and wet conditions around theworld, Miele can only rely on the verybest materials to secure widespreadconsumer confidence and protect itsslogan "Forever better". That's whyMiele chose Outokumpu. The ferriticstainless steel grade used offers highcorrosion-resistance, durability and aglossy, mirror-like surface. Believe itor not, stockings are used in tests todemonstrate surface smoothnessafter prolonged machine use. Initialand successful tests and trial runs ofcomponents for the drums of washingmachines and tumble dryers in 2011 led to ramping up of full-scale deliveries in 2012.

Annual Report 2012 – Our YearStainless steel spins in Miele's washing machines

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Supported by stainless steelQatar Foundation is building a new,modern headquarters in EducationCity on the outskirts of Doha, Qatar.Outokumpu delivers some 170tonnes of specialty steel for thestructural section made out of duplexstainless steel to provide support forthe 57-meter tall, cube-shapedbuilding. Outokumpu suppliesrectangular hollow sections and L-profiles manufactured from duplexplate. Duplex was chosen as itprovides required strength for thecore of the structure. Also, the QatarFoundation headquarters project is aprime example of the added valueservices Outokumpu can provide toits customers. The production of thestructural sections included varioussteps from cutting and bending toedge preparation to ensure a smoothinstallation at the construction site.The building is scheduled forcompletion in mid-2013.

Annual Report 2012 – Our YearSupported by stainless steel

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Paving the path for profitabilityTwo years ago, radical changes thathad been happening in the marketrequired Outokumpu to make somequick decisions to increase itsbusiness focus and pursue globalexpansion. Since then, the companyhas rearranged its organization andshifted its operations up a gearthrough ambitious plans and fastimplementation. This move alreadyresulted in improved cash flow andcapital management in 2012, andcash flow continued to be positivethroughout the year. Read moreabout P100 and P250 in the Ourstrategy section.

Highlight of the year and the startingpoint of the turnaround was thecompletion of the acquisition ofInoxum, the stainless steel arm ofThyssenKrupp. This deal created anew global leader in stainless steeland paves the path for profitabilitythrough significant synergy savings –savings that neither company couldhave reached alone.

Outokumpu expects these synergy savings to be 200 million euros per year. More than one third of these willcome from production site closures in Germany, which will also help to balance the company's melting and cold-rolling capacities. Further opportunities for capacity utilization and optimization – through specialization, productswaps and lower variable costs – will bring another quarter of the savings. Economies of scale and thecentralization of vast procurement and raw material purchases allow savings of some 50 million euros on anannual basis. Last but not least, a reduction in general costs, including streamlining of sales offices, servicecenters, head office and IT, will bring the remaining 15% of savings.

All in all, in the face of a very challenging market situation, the company managed not only to make progress in itssavings programs but also to go a good deal further with an acquisition that is enabling structural change,significant synergy savings and expansion to the growth markets in Asia and the Americas. Although progress todate is not sufficient to turn Outokumpu's fortunes around, it provides the right platform to continue to reshapeoperations through necessary restructuring, to capitalize on the investment the company has made and to utilizethe growth opportunities that lie ahead.

Annual Report 2012 – Our YearPaving the path for profitability

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Forward with P100 and P250Outokumpu made good headway in2012 in two key financially relatedprograms – P100 and P250. P100aimed to cut annual costs by 100million euros by the end of 2012,while P250 had a target of loweringworking capital tied up in inventoriesby 250 million euros.

P100 was a success and cut annualcosts by 100 million euros per year,with the full impact of savingsmaterializing from the beginning of2013. To cut costs, Outokumpureduced production shifts,streamlined the organization,outsourced some support functionsand divested non-core businesses,such as the remaining brass-rodbusiness. Unfortunately, thenecessary streamlining of theorganization resulted in a reductionof more than 1 200 jobs during theyear. Some 50% of the savings camefrom job-related costs and the otherhalf from fixed costs, such astransportation, material efficiencyand IT. The progress made in P100has been a key principle for planning and budgeting for 2013 to ensure that the company maintains lower costlevels also in the future.

P250 has also reaped significant benefits, releasing cash and improving inventory efficiency in 2012. Outokumpureached the 90-day target well before the end of the year – at the year-end inventory days stood at 86. Cashreleased from inventories was 600 million euros, significantly higher than the targeted 250 million euros. The totalrelease of cash from working capital since June 2011, starting point of the program, was 886 million euros at theend of 2012, including a significant positive contribution from accounts payable and receivable.

Work continues in the new Group: In February, new Outokumpu initiated further cost-saving measurements – afurther reduction of 100 million euros in annual costs and a further release of cash from inventories, targeted at300 million euros.

Annual Report 2012 – Our YearForward with P100 and P250

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Thinking bigOutokumpu is doubling the annualproduction capacity of ferrochrome innorthern Finland to 530 000 tonnes,gearing up the operations to meetthe challenge of its new position asworld leader in stainless steel.

Stainless steel uses ferrochrome,which is an alloy of chromium andiron, to give the material itscorrosion-resistance and shiny finish.The company's own mine at Kemiproduces chromite concentrate asraw material for the ferrochromeworks at Tornio, which is just downthe road. The mine is not only thebiggest one in Europe, it boasts thelargest known chromite reserves inEurope. After the doubled productioncapacity, Outokumpu produces 5% ofthe world's ferrochrome production. Itis a huge advantage when it comesto serving Outokumpu's new globalnetwork in mills and managingfluctuations in raw material sourcing.After doubling the capacity, it willcover a majority of the company'sferrochrome needs.

At the year-end, Matti Suurnäkki took on the responsibility to head the ferrochrome operations, which at the sametime became part of the Stainless Coil EMEA operations, its biggest internal customer. Matti Suurnäkki says, "It isvery exciting to enter the next phase of the strategy implementation of our ferrochrome operations. We have agreat team and valuable assets in place to manage the operations and to maximize the cash flow and profitabilityof Outokumpu, in a safe and sustainable way. The role of ferrochrome operations remains as important as ever, asit gives Outokumpu competitive advantage of access to an essential raw material at a low cost."

Annual Report 2012 – Our YearThinking big

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The world needs advancedmaterialsDemand for stainless steel isforecast to continue its steady growthover the next few years. Whiledemand is growing fastest in theAsia-Pacific region, there are globalmegatrends that drive the demandfor stainless steel and high-performance alloys everywhere.

First, strong economic and populationeconomic and populationgrowthgrowth drive demand in manyindustries, such as energy, chemical,appliances, oil and gas just to namea few. As population grows, food andwater supplies are becoming moreimportant, and as standard of living isrising across the globe, some naturalresources, such as metals, energyand fresh water, are becomingscarce. For example, the need forclean water has created a need forsea water desalination, something inwhich stainless steel has one of itsuses.

Therefore stainless steel is closelylinked to a high standard of livinghigh standard of living.Increasing urbanizationurbanization meansincreasing demand for architecture, construction and transport and for white goods, such as cutlery, kitchen sinksand washing machines. As a material stainless steel satisfies high standards of hygiene, which is why, for instance,commercial kitchens around the world are built from stainless steel.

Climate change and limited resourcesClimate change and limited resources create an urgent need for more efficient consumption solutions and forsaving irreplaceable raw materials. Radical changes in the energy production towards renewable energy sourceshas created opportunities for stainless steel: there are strict requirements for material properties in energyapplications – for strength and durability, hygiene and recyclability. Stainless steel and high-performance alloys cancontribute to a sustainable future. As they are designed to last and are 100% recyclable, extremely strong,corrosion-resistant and heat-resistant, they are one of the best examples of life-cycle thinking. Moreover,Outokumpu strives to produce it in as sustainably as possible and to minimize the environmental impact of itsproduction.

History may show the biggest discovery of this century to be our realization that we cannot continue to consumeour own planet. Already now, we have alternatives to secure a more sustainable future while still reaching businessgoals. Outokumpu represents one such alternative.

Annual Report 2012 – Our YearThe world needs advanced materials

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Unique track recordFor years, Outokumpu has been aleader in environmental performancein the industrial sector. Sustainabilityis the core of its operations: stainlesssteel in itself is sustainable material,and it is an integral part ofproduction process. While pleasedwith the progress, Outokumpu setsambitious targets to further improveits environmental performance. As aproof of its environmental work, thecompany has managed to decreaseits carbon footprint by 40% since the1990s, and targets to achieve afurther 20% reduction by 2020.Another example is the recycledcontent of Outokumpu steel, whichexceeds 80%, against the industryaverage of 60%. This was confirmedby external assurance in 2012.

Outokumpu's unique track record insustainability is the result of a long-term commitment. Outokumpu's workhas been recognized by Dow JonesSustainability Indexes (for the sixthtime in a row), by Carbon DisclosureLeadership Index (for the third time ina row) and by oekom research AG most recently, for the first time.

For example in Dow Jones, Outokumpu was particularly recognized for its environmental work, receiving highestpossible score in the climate strategy, environmental policy and management system as well as the highest scorein its industry for occupational health and safety.

These indices rate companies for their economic, environmental and social performance, serving as benchmarkand reference point for investors and companies alike.

Annual Report 2012 – Our YearUnique track record

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