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ECONOMIC ENVIRONMENT

The expansion of the world economy continued in the 2nd half of 2005. Prices on the oil markets eased temporarily, reducing slightly the risks to the economy from high energy prices. Prices for industrial raw materials remained tight.

The main engines of growth were again the USA and the Asian countries. In the USA, the continuing upswing was driven by domestic demand. The dynamic performance of the Asian economies was due largely to continuing high growth in China. In Japan, the economic improvement continued in the second half of 2005 thanks to rising consumer and business spending. The high pace of economic growth in Latin America slowed slightly last year. The upswing in the countries of Central and Eastern Europe was largely stable.

Growth in Western Europe was slower than in the other regions, although the economic picture brightened slightly in the second half of 2005. The depreciation of the euro strengthened the price competitiveness of exports. In Germany, private consumption continued to show weaknesses, while German industrial performance improved markedly.

In the sectors of importance to ThyssenKrupp the picture was as follows:

Global steel output increased further in the 4th quarter of 2005. Most of the growth was again due to higher production in China and India. In the European Union and North America, on the other hand, production cutbacks from the high levels of the prior year dominated the scene. Increased efforts by steel producers in these regions to stabilize the market began to show an effect in the final quarter of 2005. Previously excessive inventories at steel distributors and processors returned largely to normal levels, including in Europe. One factor in this was reduced imports from third countries. At the beginning of the 4th quarter, Western European producers of carbon steel flat products were able to push through moderate price increases on the market. In North America, prices accelerated much faster. This was one of the reasons why import pressure in Western Europe remained relatively low in the reporting quarter. According to figures available so far, shipments by Western European carbon flat steel producers to the EU market were down from the high prior-year level, but new orders showed an improvement after the weak summer months, without quite reaching the high levels of the prior-year period. By contrast, third-country business showed extremely strong growth. The general workload situation of steel producers has largely returned to normal.
The market for stainless steel flat products was generally weak. In Western Europe, demand was subdued and caused most producers to cut back production and shipments again in the 4th quarter 2005. Continuing strong pressure on base prices, which were at an all-time low in the reporting quarter, decreased only minimally. Towards the end of the reporting period there were signs of a slight easing of the market situation; one factor in this was a normalization of inventory levels. In the USA, the falling demand trend continued. In Asia and particularly in China, on the other hand, demand increased further. However, capacities in China grew even faster, resulting in an increasing imbalance between supply and demand. As a result, the clear downward trend in prices largely continued in the reporting quarter. In the nickel-base materials area, the market continued to perform strongly in the 4th quarter of 2005.
The international auto industry showed a mixed regional picture. In North America, the auto market has weakened in recent months. In the USA, sales figures in the final quarter of 2005 were significantly lower than a year earlier. While passenger car sales decreased only slightly, sales of light trucks such as minivans and sport utility vehicles showed a larger drop due to increased fuel prices. US vehicle production also declined in the period. In Canada and Mexico, on the other hand, more vehicles were produced. The Brazilian auto industry continued its production upswing. China again showed high growth rates. In the European Union, demand for new vehicles decreased. In the German auto industry, subdued domestic demand for cars was outweighed by a strong rise in exports in the 4th quarter of 2005. The performance of the truck market also remained very positive.
The robust growth of the world economy stimulated demand for capital goods. The mechanical engineering sectors in the USA and China in particular performed positively. German equipment manufacturers reported high orders from abroad, while domestic demand also accelerated in the final months of 2005. The situation in the German engineering construction industry was particularly pleasing.
Construction activity remained favorable above all in Asia and Central and Eastern Europe. The situation in the German construction industry stabilized in the second half of 2005 after years of recession. Both orders and construction output showed a slight upward trend.