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ECONOMIC ENVIRONMENT

The world economy was in robust shape in the first months of 2006. International early indicators point to continuing strong growth, although high energy and raw material prices again weighed heavily on economic activity.
All the major economic regions continued their economic expansion at the beginning of the year. After the dip in growth in the 4th quarter 2005 the pace of expansion has accelerated again in the USA, supported by private consumption and high business spending. The economic upswing in the countries of Latin America continued, partly thanks to continuing high raw material prices. The economic mood in the euro zone has improved considerably. Following a slightly weaker final quarter in 2005, economic growth was stronger in the 1st quarter 2006, according to initial estimates. Lively business spending was one factor in this. The economic picture in Germany was similar. Following stagnation in the final months of 2005, economic growth accelerated in the 1st quarter 2006 due to higher private consumption and continuing investment. In the countries of Central and Eastern Europe, the economic upswing continued at the start of 2006. In Japan, the economic situation improved further in the 1st quarter 2006, with impetus coming from both domestic and foreign demand. Economic growth in most of the rest of Asia remained strong. China in particular, but India as well, continue to report high growth rates.

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

Global crude steel production increased by 5.9% in the reporting quarter. This was mainly due to China and India, which increased their production by 18 and 20%, respectively. Total production in the other regions was unchanged . In the European Union, crude steel output was slightly down from the previous year. After a weak period in summer 2005, demand for carbon steel flat products had already stabilized at the end of last year, and this positive trend continued in the 1st quarter 2006. All the Western European mills report full order books, reaching at least to the middle of the year. The improvement in demand is due to increased consumption by steel processors and inventory building by distributors and processors. Inventory levels at steel customers are still at a low to normal level, although anticipated price increases have probably triggered speculative purchases in some cases at least. Demand was strong above all for hot-dip coated products and in some cases also for hot strip. Not least for this reason there was again a large rise in imports of carbon steel flat products from non-EU countries. The market situation allowed price increases to be effected across a broad front at April 01, 2006.
The market for stainless steel flat products improved at the beginning of the year. Starting from a very low level, order volumes increased significantly in Western Europe in the first months of 2006. As the market improved, base prices were increased. In North America, demand in the 1st quarter 2006 was slightly lower than a year earlier but up sharply from the prior quarter, allowing price increases. The demand situation in Asia was similar. The supply overhang caused by the sharp capacity expansion in China was counteracted by production cutbacks by most producers in the region, raising the extremely low price level. Demand for nickel-base materials remained strong in the 1st quarter 2006 as a result of growth in the aviation, oil, gas and engineering construction industries.
The international automobile market shows regional differences. In North America, vehicle production in the first months of 2006 was higher than a year earlier. Increased fuel prices impacted the market for high-consumption vehicles – light trucks such as minivans and sport utility vehicles – while production of more fuel-efficient passenger cars increased. In the USA, new car sales improved slightly at the beginning of the year. The Asian and European manufacturers benefited particularly from this. The Brazilian automobile sector remained on expansion track at the beginning of 2006. China is showing high growth compared with the weaker prior-year period. In the European Union, demand for passenger cars improved in the first months of 2006. The pleasing performance of the German auto industry is mainly due to high foreign demand, although domestic sales were also up.
The continuing strong growth of the world economy is favoring the capital goods industry. In the USA and China, mechanical engineering output increased further. German machinery manufacturers reported high orders from abroad in the first months of 2006, and domestic demand also improved significantly. The project situation in the German engineering construction sector was likewise positive.
After a long phase of recession the German construction market has stabilized. Order intake at the start of 2006 was higher than a year earlier. Building activity in Asia and in Central and Eastern Europe was also pleasing on the whole.