July 2008- Despite economic turbulence that began in the summer, healthy demand across a variety of end markets, including infrastructure development, aerospace and defense, commercial construction and capital equipment markets, drove profitability throughout the metals industry. A major theme of 2007 was inventory destocking throughout the supply chain, which, combined with record-low inventories, served to deplete supply levels and drive pricing higher toward the end of the year and into the beginning of 2008. Also, supporting ferrous pricing were high raw-material costs as record scrap prices created a pricing floor above $500 per ton for hot-rolled coil throughout the year. Subsequent to the end of 2007, continued elevated scrap prices were supporting prices above $700 per ton. In addition, the world's top steelmakers recently agreed on a 2008 iron ore contract price 65 percent above previous year levels, which, together with an expected doubling of coking coal prices, will significantly increase the cost of production.

Sound industry fundamentals led to continued industry consolidation and M&A activity on a global scale by both strategic and financial buyers. Strategic buyers used healthy balance sheets to capitalize on the fundamental long-term advantages of consolidation, including economies of scale and horizontal and vertical integration, and continued to rationalize capacity and cost structures in the face of high raw-material costs and rising capital costs. Supported by strong global demand, strategic players sought access to new resources and markets through acquisitions.

Significant transactions by strategic buyers during the year included Nucor Corp.'s acquisition of Harris Steel Group Inc., U.S. Steel Corp.'s acquisition of Lone Star Technologies Inc., Essar Steel's purchase of Algoma Steel Inc. and its subsequent acquisition of Minnesota Steel Industries, SSAB Svenskt Stal AB's acquisition of Ipsco Inc., Grupo Simec SAB de CV's purchase of Corporacion Aceros DM SA de CV, Gerdau AmeriSteel Corp.'s purchase of Chaparral Steel Co. and Platinum Equity LLC's acquisition of Ryerson Inc. In addition, the highly fragmented scrap industry continued to consolidate, particularly toward the end of the year as Sims Group Ltd. announced the acquisition of Metal Management Inc., Steel Dynamics Inc. announced the purchase of OmniSource Corp. and, subsequent to the end of the year, Nucor Corp. announced the acquisition of The David J. Joseph Co.

The nonferrous industry also witnessed significant M&A activity, particularly within the aluminum sector. Following the second quarter, Rio Tinto plc announced the acquisition of aluminum giant Alcan Inc. for approximately $43.9 billion, besting Alcoa's hostile bid for Alcan and creating the world's largest aluminum producer. This acquisition furthered the rapid consolidation of the aluminum sector, which started with Hindalco Industries Ltd.'s announced acquisition of Novelis Inc. in February. In addition, financial sponsor Apollo Management LP announced the acquisition of Xstrata Aluminum in April. Going forward, analysts expect consolidation to continue within the aluminum sector as mining companies with healthy balance sheets pursue integrated operations.

Financial sponsors also continued to find value within the metals industry, completing some of the industry's largest transactions. Highlighting the year was Platinum Equity LLC's acquisition of Ryerson Inc. The buyout preceded a proxy battle over Ryerson's board composition. Hedge fund Harbinger Capital Partners, which had owned a 9.6 percent share in Ryerson and led the unsuccessful proxy challenge, sold its stake after the annual meeting. Other notable transactions by financial sponsors included DLJ Merchant Banking Partners' purchase of RathGibson Inc. and Genstar Capital LLC's acquisition of International Aluminum Corp.

Domestic carbon steel prices remained healthy throughout 2007, declining slightly in the second and third quarters but picking back up again at the end of the year. However, U.S. pricing traded at a discount to global levels during the year, resulting in decreased imports and declining service center inventories. Driving the price differential between domestic and foreign steel prices has been healthy global demand, particularly from the non-residential construction and energy markets. At the end of the year, steel imports had fallen approximately 53.9 percent from their July 2006 peak levels while service center inventories were drawn down to 10-year lows. These declining supply levels helped drive domestic prices higher toward the end of 2007 as hot-rolled coil increased to $580 per ton, representing a 7.4 percent increase over previous year levels and a 9.4 percent increase from third quarter levels. According to analysts, domestic prices are expected to continue to increase in the beginning of 2008 as price levels need to increase to an appropriate level to attract much-needed imports.

For the most part, nonferrous metal prices declined during 2007 largely due to record prices in 2006 combined with a destocking phase during 2007, which increased LME inventories and backed up the supply chain. In addition, hedge funds and other commodity players helped to drive prices downward as they rebalanced portfolios, reducing their exposure to commodities that have outperformed, including the base metals. During the year, zinc experienced the greatest price depreciation, declining 47.2 percent to $1.04 per pound in 2007 from $1.96 per pound in 2006. Copper prices increased 6.3 percent, increasing from $2.85 per pound in 2006 to $3.03 per pound in 2007. In the near term, analysts expect demand for nonferrous metals to increase as consumers and traders restock following heavy destocking in the fourth quarter of 2007, helping to drive pricing upward. In the long term, supply and demand dynamics indicate that most nonferrous metals are in deficit or at a slight surplus, leaving tight market conditions, which, combined with supply disruptions and continued strong demand from emerging economies, particularly China, should support healthy nonferrous pricing going forward.

Metals industry dynamics
Prices of most ferrous products increased during 2007, driven primarily by rising scrap prices, low service center inventories and declining imports. The fourth quarter was particularly strong, as all ferrous prices increased over third quarter levels. Hot-rolled coil increased to $580 per ton during the year, representing a 7.4 percent increase over 2006 levels and a 9.4 percent increase from third quarter levels. Hot-dipped galvanized sheet prices increased, as well, rising from $740 per ton in the fourth quarter of 2006 to $810 per ton at the end of 2007, or 9.5 percent. This represented a 6.6 percent increase over previous quarter levels of $760 per ton. The only ferrous product to decrease during the year was oil country tubular goods (OCTG), which declined 4.5 percent from $1,350 per ton in 2006 to $1,289 per ton in 2007. In addition, news from China indicates production growth is slowing to near-estimated demand growth, increased measures to control excess exports are taking effect and continued strong demand is supporting pricing. These factors should combine to mitigate oversupply concerns and enhance the sustainability of the steel cycle.

End-market demand for long products remained strong throughout the year as a result of continued activity in the commercial construction, infrastructure development and industrial building markets, both domestically and globally. During the year, steel bar prices increased to $595 per ton, up 11.6 percent from $533 per ton in the prior year and 2.6 percent from third quarter levels. According to analysts, the structural steel market is expected to remain healthy throughout 2008 due to healthy demand from the domestic and international markets, particularly Europe, Asia and the Middle East. Scrap prices, a primary driver of ferrous pricing, increased significantly during the year as No. 1 HMS scrap increased 41.2 percent, from $170 per ton in 2006 to $240 per ton in 2007. This represents a 4.3 percent increase over third quarter pricing levels of $230 per ton.

Service center inventories fell to record lows during the year. Inventories were 12.3 million tons in December, representing a 25.6 percent decline from previous year levels while December shipments from service centers were down 4 percent from previous year levels, continuing a decline that began in September 2006. According to analysts, shipments are expected to be down in early 2008 compared to previous year levels mainly due to strong shipments in the beginning of 2007. An estimated 7 percent of steel demand was satisfied out of inventory in 2007, a trend that most likely will not be repeated in 2008 as inventories are at record lows. This should enable mills to ship at a higher rate in 2008 as they replace the supply that was sourced from inventory in 2007, taking market share from imports in the early part of the year, according to analysts.

During 2007, imports declined to levels not witnessed since early 2004 as domestic prices were too low to attract much-needed foreign products. High freight rates also led to decreased imports as they increased the cost of shipping for domestic buyers. At the end of 2007, imports were 2 million tons, representing a 34.3 percent decline from 2006 levels and a 53.9 percent decline from July 2006 peak levels. Imports are expected to remain weak in the near term as strong demand for steel from overseas, particularly the Middle East, Black Sea, Eastern Europe and China, is expected to drive foreign prices higher. In addition, slower Chinese steel production growth, which is currently below demand growth, should result in lower net exports out of that country. In the long-term, however, analysts expect U.S. pricing to eventually outpace global pricing, as it's essential for the United States to obtain a price premium versus global markets in order to attract the necessary supply of imports.

Most nonferrous metal prices declined for 2007, due primarily to record-high prices in 2006 and the first half of 2007, a destocking phase during 2007, which increased LME inventories and backed up the supply chain, and hedge funds and other commodity players rebalancing their portfolios and reducing their exposure to commodities that have outperformed, including the base metals. During the year, copper was the only nonferrous metal to experience price appreciation, increasing 6.3 percent from $2.85 per pound in 2006 to $3.03 per pound in 2007. According to analysts, extended maintenance shutdowns are expected in China during 2008, which, combined with overall healthy demand, should tighten copper fundamentals and support higher pricing. Nickel prices experienced a significant decline during the year, decreasing from $15.51 per pound in 2006 and a record high of $23.09 per pound in May 2007 to $11.70 per pound at the end of 2007 as a result of higher LME inventories and a slowdown in stainless steel production toward the end of the year. However, according to analysts, this could be the bottom for nickel prices as stainless steel production is expected to ramp up in the beginning of 2008 and consumers are expected to restock inventories. Aluminum prices declined 17.5 percent during the year, from $1.29 per pound in 2006 to $1.07 in 2007 as a result of consumer destocking and increased short positions by hedge funds and other commodity players. According to analysts, industry fundamentals going forward support aluminum prices as China is expected to become a net aluminum importer as a result of declining production growth due to rising energy costs, the shutdown of old technology smelters and the nation's crackdown on energy-intensive industries. Zinc also experienced a decline in 2007, decreasing 47.2 percent from $1.96 per pound in 2006 to $1.04 per pound in 2007 as a result of historically high LME inventories. However, the galvanized steel market, particularly in Europe, appears to be healthy and, combined with consumer restocking after a heavy destocking period prior to the new year, should serve to support healthy zinc pricing going forward.

M&A and financing market and analysis
Global M&A activity remained healthy during the year, driven largely by strategic buyers, as strong profit growth and increased competition continued to drive companies to strengthen their positions in the rapidly consolidating industry. Since the Arcelor/Mittal combination in 2006 created the world's largest steel producer, strategic players with strong balance sheets have rushed to consolidate in order to garner market share and gain more leverage with suppliers of raw materials. Companies have also begun looking for opportunities to combine upstream and downstream businesses through vertical integration. 2007 continued these trends, as witnessed by the following deals:

• Symmetry Holdings Inc.'s purchase of Novamerican Steel Inc. for $545.9 million
• DLJ Merchant Banking Partners' acquisition of RathGibson Inc. for $662.7 million
• Bluscope Steel Ltd.'s acquisition of IMSA Steel Corp. for $750 million
• Steel Dynamics Inc.'s announced purchase of OmniSource Corp. for $1.1 billion
• Nucor Corp.'s acquisition of Harris Steel Group Inc. for $1.2 billion
• Apollo Management LP's acquisition of Xstrata Aluminum for $1.2 billion
• Essar Steel Ltd.'s acquisition of Algoma Steel Inc. for $1.4 billion and its subsequent purchase of Minnesota Steel Industries
• Sims Group Ltd.'s acquisition of Metal Management Inc. for $1.5 billion
• Platinum Equity LLC's purchase of Ryerson Inc. for $1.8 billion
• U.S. Steel Corp.'s acquisition of Lone Star Technologies Inc. for $2 billion
• U.S. Steel Corp.'s purchase of Stelco Inc. for $3.5 billion
• Gerdau AmeriSteel Corp.'s acquisition of Chaparral Steel Co. for $4 billion
• Hindalco Industries Ltd.'s acquisition of Novelis Inc. for $5.9 billion
• SSAB Svenskt Stal AB's acquisition of Ipsco Inc. for $8.3 billion
• Rio Tinto Group's acquisition of Alcan Inc. for $43.9 billion

During 2007, the number of announced transactions declined from 2006 levels, dropping from 104 to 90. However, reflecting the continued strength of the M&A market, announced transaction values increased significantly over previous-year levels. In total, $86.7 billion of North American transactions were announced compared to $43.3 billion of total announced values in all of 2006.

M&A activity across all sectors of the ferrous and nonferrous markets remained strong, led by continued service center consolidation, activity in the OCTG markets and the emergence of scrap industry consolidation. M&A in the highly fragmented service center market continued, including Symmetry Holdings Inc.'s acquisition of Novamerican Steel Inc., Reliance Steel & Aluminum Co.'s purchase of Clayton Metals, Russel Metals Inc.'s acquisition of Jms Metal Services Inc., Mitsui & Co.'s acquisition of Steel Technologies Inc. and Platinum Equity LLC's purchase of Ryerson Inc. M&A activity was strong in the OCTG market, as well, highlighted by Marmon/Keystone Corp.'s purchase of Victory Tube Co. Inc., Tinicum Capital Partners LP's acquisition of Western Pneumatic Tube Co., U.S. Steel's acquisition of Lone Star Technologies and DLJ Merchant Banking Partners' acquisition of RathGibson Inc.

Recently, the scrap industry has witnessed a consolidation wave primarily due to industry fragmentation; an increase in scrap metal prices; the growth in global steel production, which has driven demand for scrap metal; the ability of large, well-capitalized scrap recyclers to leverage scale and achieve competitive advantages by making capital expenditures to improve efficiencies and lower processing costs; and steel mills' desire to vertically integrate in order to capture the benefits of a captive raw material supply. During 2007, record profitability drove further industry consolidation, highlighted by Metals Management's acquisitions of Shredder Masters LLC and Timco Scrap Processing Inc. and Sims Group Ltd.'s subsequent acquisition of Metal Management, Steel Dynamics Inc.'s purchase of OmniSource Corp. and Icahn Enterprises LP's acquisition of PSC Metals Inc. Subsequent to the end of the year, Nucor Corp. announced the acquisition of The David J. Joseph Co. for approximately $1.4 billion, providing Nucor with a natural hedge to the volatility of the scrap market.

The aluminum market witnessed rapid consolidation throughout the year, highlighted by Rio Tinto's announced acquisition of Alcan Inc. in July. The Alcan acquisition is expected to create the worldÕs largest aluminum producer, with capacity to produce approximately 4.1 million tons per year of primary aluminum and 8.7 million tons per year of alumina, almost 12 percent of global aluminum and alumina capacity. Other notable transactions within the aluminum sector included Hindalco Industries Ltd.'s acquisition of Novelis Inc. and Apollo Management LP's purchase of Xstrata Aluminum. Going forward, analysts expect M&A within the industry to continue as producers seek vertical integration and access to the entire value chain in order to compete in a consolidating industry.

The mining industry witnessed continued consolidation during 2007, as well. High base metals pricing and sound global demand created an environment where the world's largest mining companies had healthy balance sheets and were seeking to secure enough proven mineral assets to meet growing demand from developing countries. Significant transactions during the year included Xstrata plc's announced acquisition of Jubilee Mines NL and Norilsk Nickel's acquisition of Lionore Mining International Ltd. Going forward, analysts expect consolidation to continue as acquisitions will allow larger mining companies to capitalize on historically high commodity prices and protect their market share without investing capital into projects that could take years to develop. Subsequent to the end of the year, BHP Billiton was in the midst of a $147 billion takeover attempt of Rio Tinto while Companhia Vale do Rio Doce was working to secure the financing and political support it would need to execute a $90 billion bid for Xstrata.

The financing market remained healthy during the first part of 2007, driven by a strong M&A market, the continuation of private equity buyouts and global liquidity. However, market turbulence began to weigh on financing markets beginning in the summer, driving the number of financings and total dollar value downward. During 2007, 382 financings with announced values of $153.8 billion were announced compared to 396 financings with announced values of $140.5 billion in 2006. In the fourth quarter of 2007, total financings declined to 83 with announced values of $28.4 billion, down from 192 financings with announced values of $91.3 billion in the fourth quarter of 2006 and 83 financings with announced values of $48.3 billion in the third quarter of 2007. Credit market weakness has led many analysts to predict a slowdown in financing and large capital LBO activity in the near term.

Analysts expect global consolidation trends to continue for the foreseeable future, albeit not on the scale witnessed in 2006 and 2007 due primarily to recent market turbulence. However, M&A activity is projected to remain healthy as large global players are expected to continue to drive capacity increases, realizing economies of scale and pricing power while smaller niche companies look to solidify their market positions in an increasingly global market place. A major trend that has emerged during the last 12 months has been a focus by major steel mills on the acquisition of both downstream and upstream assets such as U.S. Steel's acquisition of Lone Star and Nucor's purchase of Harris Steel and later, The David J. Joseph Co. In addition, analysts project the next consolidation wave to occur in China. The world's largest steel producer and a net exporter, China is considered highly fragmented as its top five producers have less domestic market share than they did five years ago. Major steel players are expected to compete for the countryÕs most valuable assets, creating global companies with low-cost production.

Equity market analysis
All subsectors of the Houlihan Lokey Metals Index experienced gains during 2007. The integrated sector experienced the strongest appreciation, increasing 89.4 percent. The mining, scrap, and tube and pipe segments also experienced solid performance, rising 86.8 percent, 80.9 percent and 75.7 percent, respectively. In addition, the aluminum, mini-mills, service centers/processors and specialty/nonferrous subsectors increased 24.8 percent, 19.9 percent, 17.3 percent and 3.2 percent, respectively.

The Houlihan Lokey Metals Index outperformed the broad market indices during 2007, increasing 52.6 percent, while the Dow Jones Industrial Average gained 6.3 percent, the S&P 500 increased 3.7 percent and the Russell 2000 Index lost 2.7 percent. The Houlihan Lokey International Producer Index led all indices with a gain of 75.5 percent.

During the fourth quarter of 2007, the Metals Index experienced a mixed performance as general market conditions were turbulent. The best performing segments of the Metals Index included the integrated, mini-mills and tube and pipe sectors, increasing 10.5 percent, 4 percent and 1 percent, respectively. The mining, aluminum, scrap, service centers/processors and specialty/nonferrous sub-sectors all experienced losses, having declined 3.1 percent, 6.4 percent, 8 percent, 12.6 percent and 17.3 percent, respectively.

For the fourth quarter, the Houlihan Lokey Metals Index and the Houlihan Lokey International Producer Index both experienced declines, decreasing 4.1 percent and 7.6 percent, respectively, while the Dow Jones Industrial Average decreased 5.8 percent, the S&P 500 lost 5.1 percent and the Russell 2000 Index decreased 7.1 percent.

Metals companies posted solid LTM and NFY EBITDA multiples throughout 2007, despite market weakness toward the end of the year. Multiples were healthy as a result of healthy balance sheets and investor confidence in the sustainability of the steel cycle. Production discipline also played a role as it created a floor for domestic pricing at times of seasonally weak demand.

During the fourth quarter, the mining segment posted the highest LTM EBITDA multiple of 10.0x, followed by the scrap segment, which had a multiple of 8.2x. Both sectors were viewed favorably by investors due to healthy industry dynamics and continued consolidation.

The highest NFY EBITDA multiple, 8.2x, was posted by the mining segment. This was followed closely by the scrap segment which posted a multiple of 7.6x. The lowest multiple, 3.7x, belonged to the international segment.MM

ABOUT HOULIHAN LOKEY
Houlihan Lokey, an international investment bank, provides a wide range of services including mergers and acquisitions, financing, financial opinions and advisory services, and financial restructuring. The firm has more than 700 employees in 13 offices in the United States, Europe and Asia. Houlihan Lokey's Basic Industrial Group provides metals industry clients with strategic and creative advice to help maximize shareholder value by offering investment banking, corporate finance and financial restructuring services to every segment of the industry. For more information, visit Houlihan Lokey's Web site at www.hl.com or contact William G. Peluchiwksi at 312/456-4714.