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Taiwan Metals Report Q3 2011 Published on July 2011

Report Summary Taiwanese steelmaking will face headwinds from the impact of the Japanese earthquake and an expected slowdown in the mainland Chinese market, making them more dependent on growth in the domestic market, according to this latest Taiwan Metals Report from BMI. In the first four months of 2011, Taiwanese crude steel output was up 10.4% year-on-year (y-o-y) to 6.83mn tonnes. The performance was weaker than BMI had anticipated and not enough to return the industry to pre-recession norms. BMI estimates that the industry is operating at 80-85% of full capacity. Output was lifted by 6.2% y-o-y and recorded 3.2% quarter-on-quarter (q-o-q) growth in Q111. In March, Taiwan's industrial production index climbed by 13.8% y-o-y, the 17th consecutive month of double-digit growth. Manufacturing was up 14.4%, but building construction rose by just 2.7%, indicating the skewed nature of the recovery which is not favouring long products. This constitutes a major blow to producers using electric arc furnaces (EAFs), which rely on scrap and typically produce long products. With around half of Taiwan's crude steelmaking capacity in EAFs, compared with an average of less than 20% for Asia and 28% globally, the island's steel industry is vulnerable to declines in scrap supplies. Scrap feedstock may decline in availability and therefore rise in price due to Japan's infrastructural damage and the potential radioactive contamination of Japanese scrap. Japan is the world's second biggest scrap exporter, typically supplying 7.5-9.5mn tonnes per annum (tpa) of scrap to the world market, while Taiwan typically imports over 5mn tpa of scrap. As such, Taiwanese EAFs may see margins squeezed, while failing to secure a foothold in a rapidly expanding Japanese construction steel market. We are sticking with our below-consensus 2011 real GDP growth forecast of 4.3%, as we expect to see a softer domestic property market given the Chinese economic slowdown and ramifications from the Japanese disasters, which will weigh on Taiwan's growth. There are already signs that this is negatively affecting Taiwanese steel production. In May 2011, China Steel Corporation (CSC)'s steel production volume dropped 1.1% month-on-month (m-o-m) and 7.0% y-o-y to 770,653 tonnes. This came on the back of a sales drop of 4.0% m-o-m and 9.8% y-o-y to 783,000 tonnes. However, a rise in steel prices ensured that the steelmaker's sales revenue fell just 0.2% m-o-m and 2.6% y-o-y to TWD20.72bn (US$722mn). While the recovery in 2010 was led by exports, the fortunes of the Taiwanese steel industry in 2011 will depend on domestic demand. The domestic market will be important in mitigating the industry's dependence on the Chinese mainland, which is set to see a slowdown in its property market, causing a chain reaction that will hurt Taiwanese steel exports. This is exacerbated to an extent by the lingering effects of the Japanese earthquake on the Taiwanese steel industry and the country's economy in general. Taiwan's export growth could also be dampened by supply disruptions. As a result of domestic and external weaknesses, we have revised down our forecasts for the Taiwanese steel industry. With exports now set to rise by 12% instead of the previously forecast 23%, BMI forecasts crude output growth of 6.2% to 20.54mn tonnes, a downward revision from the 12.8% growth forecast in the previous quarter. However, BMI has made no change to hot-rolled production, which we believe will rise 11.6% to 22.21mn tonnes in 2011, with growth generated by demand in the growing Taiwanese manufacturing sector.

Table of Content Executive Summary 5 SWOT Analysis 7

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>> Get this Report Now by email! Taiwan Political SWOT 7 Taiwan Economic SWOT 8 Taiwan Business Environment SWOT . 8 Global Market Overview 9 Steel Forecast . 9 Steel to Average US$580/tonne In 2011 9 BMI Steel Forecast . 9 Steel Prices . 10 Cost Push On The Supply Side 10 Few Supply Constraints In Sight, For Now . 11 Commodities Forecast 15 Commodity Strategy ' Metals Update 15 Aluminium. 15 Copper 16 Gold 17 Lead 18 Nickel 19 Tin. 20 Zinc . 21 Regional Overview 22 Table: Top 10 Asian Steel Producers, 2009 22 Forecast Scenario . 26 Table: Taiwan's Metals Industry ('000 tonnes unless stated), 2008-2015 . 28 Macroeconomic Outlook . 29 Taiwan ' Economic Activity . 31 Competitive Landscape 32 Steel 32 Aluminium. 34 Company Profiles 36 China Steel Corporation (CSC) 36 Chung Hung Steel . 37 Global Assumptions, Q311. 38 Table: Global Assumptions, 2009-2015 38 Table: Global And Regional Real GDP Growth, 2010-2013 (% change y-o-y) . 39 Table: Selected Exchange Rates, 2010-2013 (average) 39 Developed States . 40 Table: Developed States' GDP Growth, 2010-2013 (% change y-o-y) 41 Emerging Markets 42 Table: Emerging Markets' GDP Growth, 2010-2013 (% change y-o-y) 43 Consensus Forecasts. 44 Table: Bloomberg Consensus GDP Growth Forecasts, 2011-2012 (% change y-o-y) . 44 BMI Methodology 45 How We Generate Our Industry Forecasts . 45 Petrochemicals Industry . 45 Cross Checks 46 Country Snapshot: Taiwan Demographic Data . 47 Section 1: Population 47 Table: Demographic Indicators, 2000-2030 . 47

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>> Get this Report Now by email! Section 2: Labour Market and Spending Power 48 Table: Employment Indicators, 2000-2005 . 48 Table: Consumer Expenditure, 2000-2005 (US$) . 48 Table: Average Annual Manufacturing Wages, 2005-2012 48

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