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Continuing global growth

World economic growth remained relatively robust at the start of the new fiscal year. According to current forecasts, the growth rate in 2006 will remain unchanged from the prior year at 4%. However, the risk of an economic slowdown has increased significantly, particularly due to the sharp rise in oil prices. Unless the oil market eases again slightly in the medium term, global economic growth is likely to turn out weaker than predicted.

The economic growth centers in 2006 will continue to be the countries of Asia, Central and Eastern Europe as well as the USA. The USA remains on a solid growth track thanks to high business investment and robust private consumption resulting from favorable developments on the labor market. In Asia, the Chinese economy will maintain its momentum and exert a positive influence on the rest of the region. The upswing is expected to continue above all in India, while slower growth is anticipated in Japan. In Latin America, economic growth will weaken slightly. The pace of expansion in the countries of Central and Eastern Europe in 2006 is expected to be at a similar high level to the prior year.

In the euro zone, the economy will improve slightly at a low level, assuming the euro-US dollar exchange rate remains stable. Internal demand will pick up somewhat in 2006, but GDP growth will remain below average at 1.5%. In Germany, too, only a moderate improvement in the economic situation is forecast for 2006. A slight impetus will come from capital investment and exports, while private consumption is expected to stagnate.

Gross domestic product 2006* Real change compared to previous year in %

On the markets important to ThyssenKrupp we expect the following developments:

• The outlook for the world steel market remains favorable overall. According to the latest IISI forecast, the market supply of rolled steel will increase by over 5% in 2006 to 1,053 million metric tons. That equates to a crude steel output of almost 1.2 billion tons. The main demand stimulus will continue to come from China and other emerging countries of Asia and Latin America. In the EU, growth of around 3% is expected following the fall in demand in 2005 for inventory cycle reasons. A slight increase in demand in Western Europe is expected above all to trigger positive inventory cycle effects. German crude steel production should exceed the 45 million ton mark.
• Following a weak year overall in 2005, we expect the situation for flat-rolled stainless products to improve in Western Europe and North America. In Asia, and in particular China, the positive market trend looks set to continue. However, with capacity expansion continuing unabated in China and new capacities coming on stream in Europe, there will be no significant easing of the competitive situation in these regions for the time being. The market for nickel-base alloys will continue to recover. Demand for titanium products is expected to be very positive.
• With car ownership increasing, particularly in Asia, world auto production will expand by just under 4% in 2006 to more than 68 million vehicles. Growth impetus is expected above all from China, and also from India, while South America should at least hold its current volumes. The countries of Central and Eastern Europe should maintain their current growth levels. We expect a slight increase in vehicle production for the North American and Western European markets. German auto production could once again reach 5.7 million cars and trucks in 2006.
• The international mechanical engineering industry will continue to expand in 2006, though at a slowing pace. Particularly high growth rates are expected for the Chinese mechanical engineering sector. In Germany, production growth is expected to level off at less than 2% due to weak domestic demand.
• The situation in the international construction sector remains positive overall, but with large regional differences. Demand is expected to remain particularly buoyant in the markets of Central and Eastern Europe and Asia. In Germany, the recent slight recovery in orders could help stabilize construction output.

Subsequent events

Subsequent events are presented under "Note 31" in the Financial Report.

Positive performance in 2005/2006

If the economic forecasts prove accurate, we anticipate a positive performance overall in 2005/2006. We expect the following developments:

• Sales: According to current plans, we expect sales in the region of €43 billion in the current fiscal year.
  • Steel is aiming for an increase in sales of flat-rolled carbon steel, driven mainly by higher shipments with prices remaining stable.
  • Stainless forecasts sales growth as a result of higher shipments and the expected normalization of the market.
  • Automotive forecasts an overall improvement in sales. The launch of new plants and models will be central to this and more than offset the expected decline in North American business.
  • With a strong order backlog and order intake expected to be high, Technologies anticipates an increase in sales.
  • Based on the high order intake in fiscal 2004/2005, the Elevator segment expects significant sales growth in the coming fiscal year, particularly in North America. However, all the other regions are also planning increases in activities, in some cases significant.
  • Services anticipates slightly lower sales, due mainly to the expected decline in prices and a slight fall in rolled steel volumes. Improvements are forecast in the service activities of the Industrial Services business unit and in the Eastern European market.
• Earnings and dividend: Our long-term target for pre-tax earnings is around €1.5 billion, and in fiscal 2005/2006 we once again plan to achieve a figure of this magnitude, excluding major nonrecurring effects. We will continue to pay a dividend based on our earnings performance.
• Employees: According to current plans we will have around 187,000 employees at September 30, 2006, representing a roughly 1% increase in the Group's workforce. The longtime general trend toward an increase in the headcount outside Germany and a decline in employee numbers in Germany will continue in moderate fashion. Training young people remains a high priority. We will continue to provide apprentice training beyond our own requirements to give as many young people as possible a sound start to their working lives.
• Procurement: Material expense in the current fiscal year is once again expected to amount to significantly more than 50% of sales due to persistently high raw material prices and the continuing high proportion of purchased products. However, thanks to our long-term supplier relationships, we do not anticipate any bottlenecks in the procurement of components, services or operating materials.
  Our aim for 2005/2006 is to further reduce procurement costs and integrate our suppliers as partners. Purchasing in low-cost countries will be increased worldwide. The new Global Sourcing Tool implemented for this purpose will allow us to determine and compare the cost advantages of individual countries. In addition, a standardized strategic supplier management system will be established on an international scale. Our aim is to concentrate on the best suppliers and achieve cost savings through active supplier management. The international roll-out of the Strategic Sourcing module on our internet platform also gives our suppliers the opportunity to offer their products and services in response to specific requests for quotes, which intensifies competition. The systematic enlargement of our Catalog Ordering module is also aimed at optimizing procurement processes.
  Increased energy prices will have a significant impact on our procurement costs in the new fiscal year. With demand for coal and oil still high, we do not anticipate any easing of this situation. The oil market also dictates developments in gas prices. For this reason, high demand, limited production capacities and political uncertainties will exert a major influence on future prices. In addition, there is continuing major uncertainty over the costs of CO₂ certificates, which is supporting high electricity prices. This is also making energy-intensive products such as industrial gases more expensive. For this reason, we are working with the relevant associations and other major energy users to make the market situation more transparent, e.g. on the question of how CO₂ certificates allocated free of charge should be reflected in electricity prices. It remains to be seen whether the new German Energy Industry Law will reduce the transmission charges for electricity and gas and thus promote competition among energy providers. However, we expect some impetus in this area.
• Research and development: In the current fiscal year we plan to increase our research and development spending to around €800 million. Basic R&D and customer-related projects will account for over €500 million, while spending on technical quality assurance will remain at the prior-year level of €280 million. Overall we intend to significantly further increase our ratio of R&D spending to sales. Central to all our development efforts are market-related projects and the aim of strengthening the Group's materials and systems capabilities. We want to offer our customers new steel, titanium and magnesium materials, optimized automotive components and more effective engineering processes which use fewer resources. Our aim is to position ourselves as a solution provider for our customers. We will provide particular support for cross-segment R&D projects in order to make stronger use of synergies in the Group. Following the great success of previous contests, a new ThyssenKrupp Innovation Contest will be staged in 2006 to tap the potential for innovation in the Group. By the end of the current fiscal year, the number of people working in the Group's development and other innovation centers will rise slightly to 3,500. Most of them are university-educated engineers and scientists.
• Environmental protection: Spending on ongoing environmental protection programs is expected to total €400 million in fiscal 2005/2006, level with the prior-year figure. Most of this will once again go toward reducing water and air pollution. Despite rising production, expenditure on recycling is not expected to increase due to the efficiency of the waste recycling methods now in place. Environmental protection measures to reduce dust emissions account for a high share of many investment projects, such as the construction of the new blast furnace 8 in the Steel segment. The Group's high environmental protection standards also apply at our foreign plants. For example, the equipment at our planned steel mill in Brazil is to be designed to the highest European environmental standards.
• Capital expenditures and financing: The volume of investment approved by the Supervisory Board is higher than the previous year at €3.6 billion. In 2005/2006, additions to fixed assets are expected to total €1.8 billion, €0.4 billion above depreciation. The Group has adequate funds to finance these capital expenditures.