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September 2011

Jim Tumulty Managing Director, Raymond James & Associates. STEEL INDUSTRY OUTLOOK. September 2011. Disclaimer.

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September 2011

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  1. Jim Tumulty Managing Director, Raymond James & Associates STEEL INDUSTRY OUTLOOK September 2011

  2. Disclaimer This information is not to be shared with unauthorized parties. The material is solely for discussion purposes. It is prepared for informational purposes only. Not an official confirmation of terms. It is based on information generally available to the public from sources believed to be reliable. No representation is made that it is accurate or complete, that any returns indicated will be achieved or that you should rely on it to make an investment decision. Changes to assumptions may materially impact returns. Past performance is not indicative of future results. Price/availability is subject to change without notice. This is neither an offer to sell nor a solicitation of an offer to buy a new or existing issue or security. The remarks, slides, charts and descriptions contained in this presentation express the views of James S. Tumulty, and do not necessarily represent the views of Raymond James and Associates. Jim Tumulty Managing Director T: 732-936-2900 C: 732-539-8421 jim.tumulty@raymondjames.com

  3. Raymond James Overview • Full-service securities firm founded in 1962 and public since 1983 (“RJF” on NYSE) • LTM revenue in excess of $3.3 billion; net income over $278 million • Equity market cap in excess of $3.3 billion, client assets $269 billion • Major presence in North America and Europe • Over 5,300 financial advisors, with offices in all 50 states; over 2.0 million accounts* • Ranked “Highest in Investor Satisfaction with Full Service Brokerage Firms” in J.D. Power and Associates 2008 Study** • Named one of “America's Most Trustworthy Companies” – the only major investment services firm on the list – by Forbes (2008) • Member of the Fortune 1000 (2008) • Named on Forbes list of “400 Best Big Companies in America” for the 7th time in 2008 • 27 domestic and international investment banking and institutional sales offices* • European operations in London, Paris, Geneva, Brussels, and Düsseldorf* • 500 capital markets professionals organized along industry and product lines, providing a full spectrum of investment banking and capital markets services* • Industry-focused, knowledge-driven approach, backed by highly ranked equity research team • Powerful retail and institutional distribution capabilities *RJF data as of 8/31/2011 **For J.D. Power and Associates award information, visit www.jdpower.com. With over 5,400 financial advisors and 500 capital markets professionals, Raymond James is positioned among the top securities firms.

  4. Debt Oxford English Dictionary definition of debt: Debt, n. Forms: 3-4 dete, 3-6 dette, 4-6 dett, det, deytt(e, 5-7 debte That which is owed or due; anything (as money, goods, or service) which one person is under obligation to pay or render to another

  5. Investment Banking Debt Levels Source: Bloomberg

  6. Common Stock Return Analysis Source: Bloomberg *Dividends reinvested

  7. Three Types of Debt • Government • State & Local • Household Debt Levels • Corporate Debt

  8. Not A Politician

  9. Steve Wynn’s View of US Government Policies As quoted to CNBC: “Macau has been steady. The shocking, unexpected government is the one in Washington. That’s where we get surprises every day. That’s where taxes are changed every five minutes. That’s where you don’t know what to expect tomorrow. To compare political stability and predictability in China to Washington is like comparing Mount Everest to an ant hill.” Steve Wynn

  10. President Obama’s Recent Budget Source: whitehouse.gov

  11. If You Don’t Know Where You Are Going - You’ll End Up Somewhere Else Economic forecasts underestimated nominal GDP growth 2003-2005; were in line 2006-2007 and substantially overestimated growth since 2008. Source: Bloomberg and Eurostat

  12. We Are Not Greece Yet, Are We? Greek public debt as a percent of GDP(2011e)= 157% Greek 10 year notes yield 24.08% Source: Bloomberg and Eurostat

  13. Who is the BIS? • The Bank for International Settlements (BIS) is an international organization which fosters international monetary and financial cooperation and serves as a bank for central banks. • The BIS fulfils this mandate by acting as: • A forum to promote discussion and policy analysis among central banks and within the international financial community • A centre for economic and monetary research • A prime counterparty for central banks in their financial transactions • Agent or trustee in connection with international financial operations • Definition of Primary Balance: • Primary balance is when total government expenditures, except for interest payments on the debt, equal total government revenues.

  14. BIS Projected Debt Trajectory as Percentage of GDP Source: Bank for International Settlements

  15. Primary Balance Surplus Required to Normalize Debt at 2007 Levels (Percent) Source: Bank for International Settlements

  16. Foreign Holders of US Treasury Debt (in billions of dollars) Source: Department of the Treasury

  17. Municipal, Government and Corporate Yields Source: Bloomberg

  18. Taxable Equivalent Yield of AA Municipal vs. B Rated Corporate Bond Source: Bloomberg *Taxable equivalent yield adjusted for 35% tax rate

  19. Steel Industry Corporate Debt Working Capital Consuming Integrated Producers * Worthington February 2009 Source: Bloomberg

  20. Corporate Debt Source: Bloomberg

  21. High Yield Issuance Source: Bloomberg

  22. Leverage Loan Issuance Source: Bloomberg

  23. Consumer / Individual Household Balance Sheets Consumer Credit Right Scale Source: Bloomberg

  24. Commodities Volatility = Inflation? Stagflation? Depression? Source: Bloomberg, AMM

  25. Steel Outlook 2011

  26. Housing Mess: Residential Construction Source: US Census Bureau Source: National Association of Realtors

  27. Housing Mess: Delinquencies and Foreclosures Source: Mortgage Bankers Association

  28. Construction Non-Residential Source: National Association of Realtors and U.S. Census Bureau

  29. Auto / Light Truck Sales Source: Bloomberg

  30. N.A. Steel Company EBITDA – Heading? Source: Bloomberg, company reports, Raymond James estimates.

  31. HRB vs. Change in US GDP US GDP – right scale Hot Rolled Steel – left scale Source: AMM & Bloomberg

  32. HRB and Scrap vs. EURO - $$$ Cross Sources: American Metals Markets and American Iron and Bloomberg

  33. Critical Relationship Between Metal Margin & Capacity Utilization Sources: American Metals Markets and American Iron and Steel Institute.

  34. Looking Forward

  35. Positives • US major financial institutions stabilized (too big to fail) • Government intervention should abate • Improving steel demand for replacement

  36. Concerns • European Union financial affairs under pressure • Global banking system stress • Competitive currency devaluation • Middle East unrest likely to elevate energy prices • Withdrawal of government stimulus programs • Volatile energy and raw material costs

  37. Can The EU Handle the Pressure? • Some EU banks make Lehman look like a piker

  38. And down goes Frazier • Don’t expect a market warning if a bank fails…….

  39. Potential Black Swans • Civil unrest becomes viral • Assault on Western interests in the Middle East • Saudi Arabian oil supply is disrupted • Chinese inflation erodes growth • Euro pressures continue and spread to Spain / Italy • Default by a large US Sovereign issuer

  40. Conclusions

  41. Thank you for your time!

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