CSN | Companhia Sirderúrgica Nacional

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• Net income of R$ 5,8 billion, almost double the 2007 figure, a new record;
• Net revenue of R$ 14 billion, also a new record and 22% up on the year before;
• EBITDA margin of 47%five percentage points higher than in 2007 and in line with the Company’s history of EBITDA margins consistently above 40%;
• Sale of a 40% stake in Namisa to the Japanese-Korean consortium
• Big Jump Energy Participations;
• Total iron ore sales of 18 million tonnes, 73% up on the previous year;
• The domestic market accounted for 85%of consolidated flat steel sales volume, raising the Company’s share of the national flat steel market by five percentage points to 39%;
• Average net revenue of R$ 2,205/tonne 16% higher than in 2007;
• Return on equity of 70%and return on capital employed of 24%.

Economic background - Top

Brazil’s economy demonstrated its sound fundamentals, closing the year with GDP growth of 5.1%, while inflation, measured by the IPCA consumer price index,closed at 5.9%, close to the upper limit of the tolerance band.

The growth cycle begun in 2004 continued during the first nine months of 2008, exemplified by strong economic expansion, buoyant demand, record production, and a substantial increase in GDP.

In the last quarter, however, Brazil felt the impact of the global crisis, characterized by a sharp reduction in credit, a significant decline in demand, reduced investments and an economic slowdown.

The Brazilian steel sector - Top

The crisis undoubtedly affected Brazilian flat steel production in 2008. At the beginning of the year, domestic sales volume was expected to reach record levels thanks to the healthy performance of several steel-consuming sectors; however, the sudden slowdown in the final quarter interrupted this trajectory.

National crude steel output totaled 33 million tonnes, 24 million of absorbed by the domestic market.

The auto industry did exceptionally well, with record production and sales, hence Brazil moved up to fifth place in the global auto sales rankings.

Construction recorded annual growth of 10%, although activity slowed dramatically in the last two months, accompanied by reduced demand for mortgages.

Agricultural machinery recorded substantial growth of 30.7% over the previous year, with production of 85,000 units, a new record. Exports put up a particularly strong performance, absorbing 35% of total output.

Home appliance sales moved up by 4%, fueled by the slight upturn in the bulk of wages, a decisive factor in increasing consumption.

The metal packaging sector, which is mainly geared towards the food and chemical industries, recorded sales of 580,000 tonnes, in line with the previous year.

International scenario - Top

In contrast to Brazil, the international economy, which had already been showing signs of weakening since the end of 2007, entered into a period of sharp decline in September 2008. Flagging consumer confidence, together with the lack of liquidity, led to a drop in industrial production, in turn reducing demand from basic industries and raw-material producers.

In this climate of uncertainty, dwindling demand and lack of credit, the world’s biggest steel manufacturers announced production cut-backs which reached as high as 50% in some countries, and governments of the world’s leading economies were forced to take corrective measures and stimulate the economy in order to avoid systemic risk, injecting billions of dollars to prop up ailing companies and banks.

Attention is now turned towards the emerging markets, especially China. These countries are major consumers of steel, have introduced measures to encourage domestic consumption and are investing strongly in infrastructure.

Sales - Top

According to Inda (the National Steel Distributors’ Association), domestic sales moved up by 12% over 2007 to 3.7 million tonnes, an excellent result. However, final-quarter sales to distributors fell by 30% over the previous three months to just 737,000 tonnes.

In the same period, sales by the distributors dropped by an even heftier 39% to 655,000 tonnes, raising their year-end inventories to 2.7 million tonnes, 10% more than at the close of the third quarter.

In the specific case of CSN, the Presidente Vargas Steelworks produced 5 million tonnes of crude steel, only 6% down on 2007, and both blast furnaces remained operational throughout the year. Rolled output stood at 4.5 million tonnes, 9% less than the year before.

Sales volume came to 4.89 million tonnes, also 9% down on the previous year. Of this total, 85% (or 4.16 million tonnes) went to the domestic market, while exports accounted for 15%. In the case of the parent company, domestic sales absorbed 92% of the total, with only 8% being shipped abroad.

Export volume fell by 58% over 2007 to 733,000 tonnes, thanks to the Company’s strategy of prioritizing the domestic market through October and the big decline in international steel demand in the final quarter.

Costs and prices - Top

CSN’s total production costs came to R$5.41 billion in 2008, R$665 million up on the previous year. It is worth noting, however, that this amount was directly impacted by the reversal of the revaluation reserve totaling R$316 million in compliance with Law 11638/07. Excluding this positive effect on the depreciation line, annual production costs would have come to R$5.73 billion, 20% (or R$980 million) up on 2007.

The main factors behind this upturn were:

Raw Materials – increase of R$ 967 million, due to:

• Coal: increase of R$ 305 million, due to higher international prices;
• Coke: upturn of R$ 304 million, thanks to increased consumption and price hikes;
• Scrap: growth of R$ 32 million, basically due to higher consumption;
• Metals (aluminum, zinc and tin): reduction of R$ 203 million, due to lower consumption and prices;
• Third-party slabs and hot-rolled coils: increase of R$ 449 million, due to the use of imported slabs and hot-rolled coils;
• Other raw materials: upturn of R$ 80 million.

Labor – growth of R$ 51 million, thanks to the pay rise in May 2008 following the collective bargaining agreement.

General Costs – overall decrease of R$ 15 million, with the following being of particular importance:

• Natural gas, electricity and fuel: rise of R$ 68 million due to higher gas prices;
• Other general costs: decline of R$ 83 million due to the slide in annual output;
• Depreciation: reduction of R$ 23 million, excluding the above-mentioned reversal of the revaluation reserve (R$ 316 million).

CSN introduced three price increases on the domestic market in March, May and July, giving the following totals:

• Hot-rolled: 50%
• Cold-rolled: 38%
• Galvanized: 27%
• Tin plate: 12%

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