16 Mining Journal London, May 16, 2008

AST year was another record-setting one as global crude steel production rose 7.5% above the levels of 2006, albeit at a slower rate of growth than the 9% increase in 2006. In some instances steel prices have doubled during

the past year, adding to the concerns in the broader economy about higher inflationary expectations.

While high steel prices cushion the impact of higher raw material costs, the latter are a departure from the recent past, and bear noting as policy maker prescrip-tions may have unwanted and unintended consequenc-es. Meanwhile, growth forecasts are being cut, marking another notable departure from the robust growth trend in many of the world’s advanced and developing economies since 2002.

Based on past history, flat economic growth in the US and Europe is not a positive indicator for the steel industry. While the length and severity of the economic slowdown in the US and Europe in 2008 and 2009 are

difficult to estimate, it is also difficult to anticipate what the impact may be on steel demand, steel prices and producers’ margins. Adding to the uncertainty is that China is now the world’s largest steel producer, having increased its annual production by about 338Mt since 2001.

Last year was the fifth consecutive year when global crude steel production rose by more than 7%. This pace of growth is faster than in any of the past five decades: average annual global crude steel output rose by 5.3% in the 1950s; 5.8% in the 1960s; 2.6% in the 1970s; 1% in the 1980s and 0.3% in the 1990s.

Thus, the steel industry since the last prolonged slowdown in the second half of 2001 has been very strong, with about two-thirds of the world’s real economic growth happening in developing world economies. Most of the new steel-making capacity built and incremental steel consumption in recent years has also been in the developing world.

STEEL PRODUCTION GROWTHWithout including China in the global crude steel production figure, world output rose by 3.3% (7.5% including China) in 2007. This reflects China’s size and fast rate of growth with its production of steel in 2007 rising by 15.7% over the prior year, the slowest rate of growth since 2002 and slower than the 18.8% increase achieved in 2006.

Elsewhere around the world, US steel makers produced 1.4% less steel than in 2006 due to weaker markets and supply interruptions. Meanwhile, crude steel output in Europe rose by 2.2% while Brazil and India, for example, increased steel output by 9.3% and 7.3%, respectively. Russia in 2007 increased steel output by 2%. (See table p18.)

The developing BRIC nations (Brazil, Russia, India and China) have been transforming the structure of the world’s steel industry. Their share of global crude steel production rose from 31% of the world’s output of 850Mt in 2001 to almost half of the total production of steel in the first quarter of 2008, up from the 48.2% share of 1,344Mt of steel that was produced in 2007. China has increased its share of the world output from 6% in 1985 and 15.7% in 2001 to a remarkable 36.4% in 2007.

MERGER AND ACQUISITION FLURRYElsewhere in the business, 2007 saw a continuation of further consolidation in the number of players in steel production and related services, ranging from the small to very large firms. Importantly, a number of these transactions have concentrated the production of vari-ous key steel products, generally bolstering the pricing power of steel producers.

India and Brazil in recent years have been at the centre of a number of these deals and appear to be where further expansion is likely. Notably, Mittal Steel acquired Arcelor to make the world’s largest, global steel company while Tata Steel acquired Corus Steel and then Jaguar motors. Both steel companies are powerful and dynamic enterprises with impressive resources and talents. In addition to these giant deals from Indian companies, steel makers from Brazil and Russia have been busy acquiring steel-related assets in the US, Canada and elsewhere.

In the first three months of 2008, global crude steel output rose by 5.6% year-on-year. With a cautionary tone, Tim Alch explains why this may be a year of transition for the global steel industry

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A Ukrainian steelworker works near open-hearth furnaces at the ZaporozhStal steelworks in Zaporozh, UkrainePhoto: Dmitry Beliakov/Bloomberg News

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Nevertheless, the steel business continues to be a very fragmented, competitive industry with many more producers than the mining sector, where the three biggest players mine two-thirds of the world’s seaborne trade of iron ore.

During the past 30 years, the mining industry has undergone a radical period of consolidation, reducing the number of iron-ore and coal producers, for example, to a concentrated few. Furthermore, low commodities prices in the 1990s and much of the 1980s did not spur much reinvestment or expansion of capacity, leading to current tight supplies.

ECONOMIC WARNINGSAs has become apparent to most observers since about mid-2007, a number of issues are beginning to cloud the near-term outlook for the steel industry.

Again, these signs mark another departure from the relatively robust and steady growth of the past seven years.

Among the issues of concern are: the revaluation and retrenchment of credit, which is still unwinding and apparently neither limited to subprime mortgages nor the US; the health of the US economy, which is being impacted on by the nation’s banking and finance systems’ efforts to revalue risk and a weaker housing market; the value of the US dollar and other currencies that are increasingly more volatile, as have been the equity and financial markets in general; and soaring food, energy and metals prices.

Higher commodity prices and raw material costs are troubling as they reflect (in general) very strong demand that is outpacing relatively tight supplies and low inventories.

In the BRIC and oil-exporting nations, the Interna-tional Monetary Fund has lowered growth forecast to between 4% and 10% in 2008 and 2009.

While these regions are also forecast to have a slower pace of growth than in recent years, the IMF’s view is that developing nations’ economies, in general, are likely to sustain growth, while the Middle East will

likely outperform most regions.

According to the IMF’s estimates, China’s economy will grow by 9.3% in 2008 and 9.5% in 2009. Notably, in the first quarter of 2008, China’s GDP rose by 10.6% above year-ago levels, albeit at a slower pace than the 11.2% rate in the final quarter of 2007.

For the world, the IMF forecast 3.7% growth in 2008 and a modestly faster rate in 2009 of 3.8%. This is in the wake of growth of 4.9% in 2007, 5.4% in 2006 and 4.8% in 2005.

Nevertheless, steel producers and suppliers should review current and long-term plans. The duration and severity of the US slowdown and impact on the steel industry may not be known today and issues concern-ing monetary and economic policy makers and leaders add to uncertainty and risk.

Steel demand is currently robust, though slowing economic growth in the US and Europe may quickly impact on steel makers’ profits and order books, in spite of recent reports that orders for construction, machin-ery, transportation and oil and gas industry products are strong.

Evaluating the sustainability of growth in the developing nations is important, although in its favour the steel, mining and metals industry in recent years has reported record profits.

RECENT STRUCTURAL CHANGESDuring the past seven years, skilled management by policy makers and industry leaders has fuelled

investments and grown the manufacturing base and infrastructure of developing nations, in particular those of the BRIC group.

Another important factor in the growth of developing economies has been the expansion of the world’s capital markets. As such, increased flow of capital in the devel-oping world has fuelled rapid economic expansion.

Major capital investment in local infrastructure underwritten by local authorities or foreign investors has led to local steel consumption keeping pace with higher levels of production. The growth of a burgeon-ing middle class in China, India and the Middle East has all contributed to a strong demand for steel, with analysts forecasting that China’s car industry will soon be the world’s largest.

In addition to these structural and economic policy changes, much of the world’s new steel-making capacity has been built in the developing world. The combined shares of crude steel produced in the BRIC nations as

Continued on page 18

Net steel exports from China need to be carefully monitored. The country switched from being a net importer of steel in 2004 to being a net exporter in 2005. New exports of steel from China in 2007 reached an all-time high of about 52Mt (10% of production); any more could tip the industry’s delicate balance.

As yet there are no clear signs that China’s recent economic growth will be derailed but signs of change will need to be monitored between now and the end of 2009 as there are an innumerable number of variables that suggest this period may be different from the recent past in the steel industry.

If the world’s economies do slow in the remain-der of 2008 and 2009, and/or the US slips into a full-blown recession, steel demand will fall from current levels and steel customers are likely to resist steelmakers passing on the higher costs for metals and energy. Until these issues are sorted out, most steelmakers that buy iron ore, coking coal and molybdenum on a spot market basis and rely on annual coking-coal and iron-ore contracts are likely to see profits decline.

Another issue is whether China’s economic growth and growing steel consumption and indus-try will be sustainable. The issues (pollution, rising costs of energy, efforts to limit growth through various restrictive policies) bring into question whether the future course and growth of China has

been geared too heavily on heavy and export-led industry.

Having said that, China does appear to have a long growth path ahead as there are about 160 cities with populations larger than 1M people, com-pared with only nine such cities in the US. Moreover, to date its leadership has deftly handled its growth, and accumulated a healthy cushion in the form of reserve surpluses.

Steel is a cyclical business, as are the metals and mining industries. Whether the policy makers in the US, Europe, and China will be able to sustain economic growth will be an impor-tant factor influencing whether the steel industry will continue to enjoy continued robust growth in 2009.

While China today is the major fac-tor in the global steel business, there are a number of ‘wild cards’ to look for that may hurt or improve the steel industry, including continued higher energy and transportation costs, the impact of legislative efforts to limit greenhouse gas emissions and/or trade-related legislative efforts, as well as the severity and duration of the downturn of the US economy.

On the plus side, should the situa-tion in Iraq improve and that country

begin exporting oil again, for example, energy prices could return to the norm.

In the interim, watching for change in China’s fixed-asset investments and its steel exports will be important indicators for the global steel industry. As the year progresses, the steel industry may crank back up, or else the world’s economic engines may take an extended breather. In the latter case, suppliers beware.

CHINA: A DELICATE BALANCE

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Photo: StockXchange

Steel reinforcing rods on a Shanghai construction sitePhoto: Kevin Lee/Bloomberg News

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18 Mining Journal London, May 16, 2008

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a percent of the world’s output rose from 31% in 2001 to 48.2% in 2007. In this period, global crude steel production rose from 850Mt in 2001 to 1,343Mt in 2007 – a 58% increase in seven years – while China’s crude steel production rose from 151Mt to 489Mt.

An important factor supporting the steel industry is greatly expanded inter-regional steel trade in Asia-Pacific, parts of the Americas, Africa and the Middle East (as the developing nations and China continue to expand ties with the advanced economies of the world). China continues to expand trade with its largest trading partners, led by the US and including Hong Kong, Japan, South Korea, Germany and Taiwan.

The Middle East in particular in recent years has vastly expanded the scope of its economic activities and construction and development plans as part of a greater plan of raising the standards of living by broad-ening its economic base from energy. Steel imports in the Middle East in 2007 rose by about 35%, equal to about 35Mt of steel.

GROWTH IS OUTPACING SUPPLYThe size and growth of China’s steel industry is impres-sive and continues to amaze most observers. In 2007, China’s steel industry produced 489.2Mt of crude steel, equal to over 36% of the world’s total output of 1,343Mt. Thus, China last year produced more than four times the 116Mt of crude steel produced by Arcelor Mittal, the world’s largest steel company, and the 120Mt of steel produced in Japan, the second-largest steel producing country.

The economic growth of China is distinguishable from that of most other developing nations as its econ-omy has grown at double-digit rates in each of the past five years. Since 2001, China’s steel making capacity and crude steel output has increased by more than 338Mt, an amount almost three and a half times the 97Mt of crude steel produced by the US steel industry in 2007.

To achieve this feat, hundreds of billions of dollars have been invested in China’s steel industry. A much greater sum of money has been fed into various fixed-asset investments in its public and private infrastruc-ture, manufacturing base, services and equipment related to the electrical, utility, transportation and infrastructure sectors.

The impact of China’s greater steel production has reached far beyond its borders on many mining and metals projects under development around the world, affecting the price and availability of many key raw ma-terials that are at near record price levels today. China’s

steel industry has accounted for about two-thirds of the an-

nual growth of global steel produc-

tion and

more than 90% of iron-ore demand since 2001. As such, China and the developing nations are

consuming greater volumes of steel and steel-making raw materials and energy. As has occurred in the mining industry, the expansion of various key parts of the global energy industry has trailed global demand for fossil fuels, contributed to higher energy costs.

Consequently, high com-modity prices have boosted the fortunes of Russia, Brazil and the Middle East, which are forecast to continue growing at above-average rates of growth.

The higher cost of energy is not a positive development for the steel industry or global economic growth. While some of the recent surge in oil (and metals) prices is attributable to investors speculat-ing and seeking to hedge the impact of a declining US dollar, the recent spike in prices is another departure from recent years past when energy prices were more or less stable.

STRATEGIC REVIEWHigh prices are a major departure from the recent past which has seen a period of relatively benign inflation. Given the importance and difficulty of reigning in infla-tionary expectations, this is an issue that may impact on the steel industry, depending on the success and nature of various policy makers’ prescriptions.

While China’s recent trade surplus and currency re-serves continue to grow, it is experiencing much higher inflation: its consumer price index rose above 8% in April 2008, having steadily increased from less than 3% one year ago. As a result, China’s policy makers and industry leaders are facing challenges and obsta-cles of their own.

In an effort to slow the growth of its economy and control inflation, China’s leaders have

sought to limit steel and other exports by instituting restrictive policies. While these efforts go well beyond the steel industry, the higher costs of metals, energy, labour and transportation in China is not only making its steel industry less competitive globally, but is also making it less competi-

tive in general, as well as raising social and political concerns as consumers are faced with

higher food and energy costs. Policy makers are facing the challenges of

striking a delicate balance of steady economic and employment growth with moderate inflation.

However, China’s leaders, policy makers and business leaders are not alone as they struggle to meet this challenge. Recent reports of higher inflation in the US, Europe, Russia, the Middle East, India and Brazil are common and entering into the psychology of business people and consumers.

In the interim, resource-producing nations such as Brazil, Russia and the Middle East will likely continue to profit from tight supply conditions in the metals and oil markets, as will various privately- and state-owned min-ing, metals and oil and gas enterprises. Furthermore, as a result of their first hand knowledge, these and various other private and quasi governmental interests, such as sovereign wealth funds (SWFs), are now investing large sums of capital in the resource sector.

The latter source of capital is considerable. China, Japan and Russia have very large foreign reserve sur-pluses valued in excess of several trillion dollars which, like SWFs, are expanding investment activities in the resource sectors and elsewhere.

As the commodities markets continue to boom, large capital investments are being made to build and expand railroads, port facilities and other related infra-structure. Therefore the mining and metals processing sectors in Australia, Latin America, Africa, Canada and Russia are the investment hubs of today.

Also responding to higher prices and tight supplies, steel producers are investing to become self sufficient and secure supplies of needed resources. For example, Nucor Corp is acquiring scrap steel processing compa-nies in the US, Arcelor Mittal is acquiring coking-coal mining assets in Russia and has made contractual purchases from South African collieries, and various

Continued from page 17 LARGEST CRUDE STEEL PRODUCING COUNTRIES2006 2007 1Q 2008 2007/2006 2007/2001 Share 2001 Share 2007 1Q08/1Q07

(Mt) (Mt) (Mt) (%) (%) (%) (%) (%) 1. China 423.0 489.2 124.9 15.7 224 17.7 36.4 8.6 2. Japan 116.2 120.2 38.4 3.4 17 12.1 8.9 4.4 3. US 98.6 97.2 25.4 -1.4 8 10.6 7.2 7.9 4. Russia 70.8 72.2 19.2 2.0 22 6.9 5.4 5.0 5. India 49.5 53.1 14.3 7.3 95 3.2 4.0 6.1 6. South Korea 48.5 51.4 13.2 6.0 17 5.2 3.8 5.0 7. Germany 47.2 48.5 12.1 2.8 8 5.3 3.6 -2.1 8. Ukraine 40.9 42.8 11.0 4.7 29 3.9 3.2 3.6 9. Brazil 30.9 33.8 8.6 9.3 27 3.1 2.5 8.110. Italy 31.6 32.0 8.3 1.2 21 3.1 2.4 -0.7Share Total 71.1 77.4 5.6Global Total 1,250.7 1,343.5 340.7 7.5 58 100 100 340.7BRIC TOTAL 574.2 648.3 167.0 12.9 146 31.0 48.2 49.0BRIC TOTAL 574.2 648.3 167.0 12.9 146 31.0 48.2 49.0Source: International Iron and Steel Institute, Brussels.Source: International Iron and Steel Institute, Brussels.Figures may not add up due to rounding.

and employment growth with moderate inflation.

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Japanese and Asian steel makers continue to expand joint venture operating partnerships in South America or contractual agreements to purchase commodities such as iron ore and coking coal.

However, in the recent past there have been a record number of mining and metals industry acquisitions and mergers that have concentrated the supply of steel-making raw materials in fewer hands, and certain na-tions have sought to limit foreign control of resources.

All of this is contributing to the greater investor interest in the commodity sector in the past five years, with investors allocating a greater share of capital in

commodities as an alternative asset class. While some of this interest is speculative and may be a hedge against the decline of the US dollar and other technical considerations (rather than based solely on industry fundamentals), the trend underscores a view that recent robust prices and tight supply in the commodities sec-tor will likely continue into the near future.

This year is shaping up to be the fifth consecutive year when strong global economic growth will support record prices for steel, metals and other commodity products at levels well above historical trend lines. Conditions to date in 2008 have also enabled steel pro-

ducers to raise prices, evidencing both healthy demand and tight supplies.

Continued tight market conditions in the steel indus-try have been exacerbated recently as supplies of vari-ous materials were curtailed due to heavy snow storms in China, heavy rains in Australia and recent power outages in South Africa – all of which have added to cost pressures. However, as the US and European economies slow, steel producers may want to review plans and prepare for various economic scenarios and slower rates of growth.

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WORLD ANNUAL REAL GDP GROWTH* (ANNUAL CHANGE)

2005 2006# 2007 E# 2008 F# 2009 F# (%) (%) (%) (%) (%)

US 3.1 2.9 2.2 0.5 0.6Latin America 4.6 5.3 5.6 4.3 3.6Brazil 2.9 3.8 5.4 4.8 3.7Japan 1.9 2.4 2.1 1.4 1.5European Union 2.0 2.8 2.6 1.3 1.3South Korea 4.2 5.1 5.0 4.2 4.4Taiwan 4.1 4.9 5.7 3.4 4.1China 10.4 11.1 11.4 9.3 9.5Russia 6.4 7.4 8.1 6.8 6.3CIS 6.6 8.2 8.5 7.0 6.5India 9.0 9.7 9.2 7.9 8.0Middle East 5.4 5.8 5.8 6.1 6.1Africa 5.6 5.9 6.2 6.3 6.4World 4.8 5.0 4.9 3.7 3.8World 4.8 5.0 4.9 3.7 3.8* Source: International Monetary Fund* Source: International Monetary Fund# Figures reflect the IMF data as of April 2008 published in its World Economic Outlook (except US, 2005)(except US, 2005)The above data is computed on the basis of purchasing power parity (PPP). If market exchange rates were used, world growth would be more than a percentage point lessexchange rates were used, world growth would be more than a percentage point lessE denotes estimate, while F denotes forecast

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20 Mining Journal London, May 16, 2008

In addition to the need to continue managing higher raw materials and energy costs, producers should strengthen ties with regions that are likely to continue benefiting from higher, sustainable growth. Alterna-tively, refocusing strategies to benefit from record high orders in the oil and gas pipeline segment may be another option.

BUOYANT STEEL PRICESAs was noted earlier, the steel industry in the major markets in North America, Europe and Asia is cur-rently seeing record prices, which reflect both healthy demand and producers passing on higher costs. For example, in Europe steel prices are higher due to the higher cost of iron ore and coking coal, with shortages reported in places.

In North America, steel prices in certain segments were at all-time highs as of early 2008 as producers of flat and long products have also passed on higher raw material and transportation costs to customers.

Contributing to tight supplies, there have been many years of industry restructuring, consolidating the share of key steel product markets while vastly improving op-erations, which has added to producers’ pricing power.

As a result, steel prices in the US and Europe are higher in the first half of 2008 compared with 2007 levels. How-ever, while the power and energy-related steel products segments, including tubular pipe products, continue to enjoy firm pricing, steel products used in the auto and housing sectors are forecast to be weaker later in the year.

The markets in Asia as of early 2008 were also at near-record levels as steel makers pass along higher costs of materials, energy and transportation. However, these markets will be sensitive to any changes that occur in China and the developing economies. If these economies slow more than expected, the steel industry may face the unwanted result of surplus steel coming to market, as so much new steel-making capacity has been added in the past six years.

Tim Alch, Anderson & Schwab Inc, New York. E-mail: timalch@gmail.com

Continued from page 19

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TSX.V: NAU

OSLO BØRS: NAUR

FRANKFURT: NBS.F

The metallurgical work was performed under the supervision of Paul Marsden, VP Metallurgical Development and Operations for Northland. Mr. Marsden is a member of the IMMM, a Chartered Engineer and a Chartered Scientist and is the Qualified Person as defined in NI 43-101 responsible for overseeing the design and execution of the metallurgical test work program at Stora Sahavaara.

New Sources of High-Quality Pellet Feedin Sweden and Finland for the European andMiddle Eastern Markets

A scoping study is underway on Northland’s iron projectsin northern Sweden and Finland. Pilot scale test-work has already demonstrated that magnetite concentrate from the Stora Sahavaara project can produce high quality commercial-grade iron ore pellets. We’re now working on the basic engineering to confirm the project economics.

Northland’s magnetite projects represent important potential sources of new iron ore production for the European and Middle Eastern markets. The region’s advanced infrastructure, including a rail link to deep-water ports, offers distinct advantages for reaching commercial markets at a time when the European community is placing renewed emphasis on securing domestic European mineral supplies.

www.northlandresourcesinc.com

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