Pricing Outlook Down the Supply Chain. John Mothersole Principal, Pricing and Purchasing Service June 24, 2009

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1 Pricing Outlook Down the Supply Chain John Mothersole Principal, Pricing and Purchasing Service June 24, 29

The Commodity Supercycle Commodities are very much part of the bubble - prices fell by more than 6% between July and December 28 But since January prices are up 5% For many

commodities And we do see signs that the worst is over the stand out is China where a recovery already seems to be gaining traction But fundamentals continue to suggest the

2 The Commodity Supercycle Commodities are very much part of the bubble - prices fell by more than 6% between July and December 28 But since January prices are up 5% For many commodities prices pushed below costs in Q4 Risk aversion has declined; investors are feeling more confident Dollar has weakened since March, boosting all dollar based commodities And we do see signs that the worst is over the stand out is China where a recovery already seems to be gaining traction But fundamentals continue to suggest the recent run-up in commodity prices will have difficulty moving downstream Capacity appears to be ample in almost all industries when matched against projected near-term demand growth 2

3 The Commodity Supercycle IHS Global Insight Industrial Materials Price Index, weekly, 22= $ based based 3

4 Signs of a Turn? PMI Indexes for Manufacturing 65 (Index, over 5 indicates expansion) United States Eurozone China 4

5 China: Improvement But Not Out of the Woods Yet Chinese Electricty Generation, billions of KWH Monthly 12 Month Moving Average 5

6 E.U. Backlogs: A 1 Year Low EC Industry Survey, EU27, Months Production Given Current Order Books

7 E.U. Capacity Utilization: Off A Cliff EC Industry Survey, EU27, Capacity Utilization, Percent 7

8 Same Story in the U.S. U.S. Factory Operating Rate, percent

9 Cap Ex Plans Point to a Continuing Shift in Markets ISM Average Commitment Leadtime, Capital Expenditures Days, Monthly, 12 Month Moving Average NABE Industry Survey Capital Spending, Net Rising Index Four Qtr Moving Average

10 Leadtimes Unwinding Avearge leadtimes in weeks Pumps Compressors Heat Exchangers Gas Turbines Q1 28 Q3 28 Q1 29 Q2 29 Source: IHS CERA 1

11 No Tightness in Steel Markets Lead Time - Hot Rolled Steel Sheet, weeks /4/6 2/1/6 19/3/7 3/9/7 18/2/8 4/8/8 19/1/9 6 US Northern Europe Southern Europe Turkey China (Right Scale) 11

12 Rising Capacity Overhang Threatens Key European Industries Capacity Overhang is the ratio of capital stock to sales, divided by its 5-year historical average -- A rising ratio indicates capacity out of line with demand Rising Capacity Overhang threatens buyers of Industrial (CapEx) equipment Autos and Chemicals face a migration of demand and production; Metals and Energy additionally face commodity price volatility Communication electronics additionally hit by retrenchment of European and U.S. Consumers 27 % Change Capacity Overhang in West Europe (95 Industries) 27 Capacity Overhang Measure 29 Capacity Overhang in West Europe (95 Industries) Non-Ferrous Metal 1 Iron & Steel 1 Fertilizers Basic Chemicals 27: None in *High Risk Area Synthetic Fibers 5 Motor Vehicles 5 Communication Receivers, Players % Change 25 2 Refined Petroleum Oil & Gas Mining 29 Capacity Overhang Measure *High Risk indicates Industries with a Capacity Overhang Measure over 1.2 and Rising 12 Coal Mining

13 Capacity Overhang is the Same Globally Capacity Overhang is the ratio of capital stock to sales, divided by its 5-year historical average A rising ratio indicates capacity out of line with demand Rising Capacity Overhang signals falling order backlogs for many types of industrial equipment Many basic industries should be able to easily meet the recovery in demand Global Capacity Overhang (95 Industries) Global Capacity Overhang (95 Industries) 27 % Change : None in *High Risk Area Capacity Overhang 29 % Change Oil & Gas Mining Coal Mining Refined Petroleum Non-Ferrous Metals Basic Chemicals Iron & Steel Motor Vehicles Fertilizers Mining of Metals Communication Receivers, Players Capacity Overhang *High Risk indicates Industries with a Capacity Overhang Measure over 1.2 and Rising 13

14 The Migration Downstream - Europe Year over year change IHS Global Insight Industrial Materials Based Price Index lagged 3 months PPI, EU27, Intermediate Materials and Capital Goods, right scale 14

15 The Migration Downstream U.S. Year Over Year Change IHS Global Insight Industrial Materials $ Based Price Index, lagged 3 months, left PPI, U.S. Intermediate Materials less Food and Energy, right 15

16 Summary and Implications Deep and prolonged downturn in global manufacturing More U than V With inventory overhangs in many industries And ample capacity in almost all industries when matched against near-term demand The combination means little pricing leverage for producers Which should restrain price escalation The bottom line: supply chains will see a buyers market persists into 21 16

17 Thank you John Mothersole Principal, Pricing and Purchasing Service

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Capital Expenditure Trends: When and Where Will Firms Start Investing Again? Peter Loveridge European Manager, World Industry Service th June 009 What This Means for You Outlook for growth in E.U. sectors