Annual Report 2010

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(1)WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. Annual Report 2010.

(2) WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. Annual Repor t 2010.

(3) WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. 2.

(4) ACERINOX Group in Figures ........................................ 4 Letter from the Chairman.............................................. 6 Letter from the Chief Executive Officer ........................ 8 1. Directors’ Report of the Consolidated Group ......... 13 1. World Production .............................................. 14 2. Raw Materials .................................................... 16 3. Markets.............................................................. 20 4. ACERINOX Group Production ........................... 24 5. Excellence Plan 2009 ......................................... 26 6. Commercial Network ........................................ 28 7. Sales .................................................................. 30 8. Human Resources .............................................. 31 9. Economic Report ............................................... 32 10. Investments ....................................................... 37 11. Financial Report ................................................ 38 12. Stock Exchange Market Report ....................... 40 13. Board of Directors ............................................. 45 14. Important events after the closing of the year .. 48 15. Management of the Financial Risk ................... 49 16. Additional information in view of 116-bis article of the Stock Market law ........................ 56 2.– Report on Acerinox Corporate Social Responsibility ........................................................ 59 3.– Financial Statements of the Consolidated Group . 83 – Auditors´ Report................................................... 85 – Consolidated Annual Accounts............................ 87 4.– Management Report of ACERINOX, S.A. y other Group Companies ................................................ 161 1. ACERINOX, S.A. .............................................. 162 1.1 Factory ................................................... 162 1.2 Environment .......................................... 163 1.3 R + D + I ................................................. 167 1.4 Sales ....................................................... 168 1.5 Investments ............................................. 168 1.6 Economic report ..................................... 169 1.7 Management of the financial risk ......... 170 1.8 Important events after the closing of the year .............................................. 174 1.9 Additional information in view of 116 bis Article of the Stock Market Law 176 2. NORTH AMERICAN STAINLESS (NAS) ............. 178 3. COLUMBUS STAINLESS ................................... 182 4. BAHRU STAINLESS .......................................... 186 5. ROLDAN and INOXFIL .................................... 188 6. Trading Companies ........................................ 190 5.– Board of Directors, Committees and senior management ................. 193. 3. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. CONTENTS.

(5) Most significant data of Acerinox !. !. Melting shop production. Net Sales 5,051. 2,060. 2,044 1,806. 4,500. Thousand Mt. Million Euros. 2,993. 09. 10. 08. E.B.I.T.D.A. 300. 8.7%. 5.9%. 1500. 500. -165 08. 0. Million Euros. 381. 5000. 8.5%. 6000 % over sales. 2000. 1000. 10. Gross operating result 390. Million Euros 2500 % over sales. 09. -5.5%. 4000. 171. 3000. 3.4%. 2000. 10. 1000. -191 08. 10. -6.4%. 0. 09. 09. (*) EBITDA is defined as the operating result plus depreciation and provisions. 400 Profit after 350 300 Million Euros 250 EPS 200 150 -10 100 -0.04 50 08 0 -50 -100 -150 -200. 400 Operating result 350 E.B.I.T. 300 232 Million Euros 250 % over sales 200 5.2% 150 100 48 50 0.9% -319 0 08 10 -50 -10.7% -100 -150 -200. taxes and minorities 123 0.49. -229 10. -0.92. !. 09. 09. Net cash flow 250 200 Million Euros 150 100 50 0 111 -50 -100 -150 -200 -250 08 -300 -350. 271. 150. 300. 0. 231. 217. 09. 10. -50 -100. -104. -150. 10. -200 -250. 08. 350 300. 200. 250. 100. Million Euros. 50. 250 150. Investments. 100. 09. 4. 342. 200 150. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. 08.

(6) R.O.E.. R.O.C.E. 7.7. 6.4. -0.5. %. %. 1.6. -13.1 10. 08. -11.3 10. 08. 09. 09 !. !. 9 6 3. Book value per share December, 31st 7.95. 7.72. Euros. 7.03. 0. 8 6 4 2 0 -2 -4 -6 -8 -10 -12. -3 -6 -9 -12 -15. 08. !. 8 7 6 5. 09. 0.45. 13.125. Euros. 11.37. 09. 10. !. 0.45. 15. Net financial debt / equity. 12. Euros / Shale. 4. 9. 1,075. 1,084. 09. 10. 939. Million Euros. 6. 3 2. 14.53. 08. 10. Return to shareholders Dividend + Issue premium 0.48 0.03. Share value official close of the business year. 0.45. 3. 1. 08. n Attendance bonus AGM. 0,5 0,4. 09. 10. Net financial debt / E.B.I.T.D.A.. 1200. Net financial debt / equity. 1000. 3.1. 2.8. 0,3 0,2. 08. !. nº of times. 600. -6.5 08. 10. 0,1. 61.3. 800. 56.3. %. 46.5. 400 200. 0,0. 0. 09. 08. 09. 10. (*) EBITDA is defined as the operating result plus depreciation and provision. 4 3 2 1 0 -1 -2 -3. 80 70 60 50 40. 5. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. 0. 0.

(7) LETTER FROM THE CHAIRMAN Dear shareholders, It is a privilege for me to speak to you as Acerinox Chairman in this General Shareholders Meeting. It is also a satisfaction to be able to inform you on the performance of the company in a year as complex as the two previous years, but in which the world economic situation seems to start a recovery, also reflected in the stainless steel sector. This fact, together with the consistent improvement plan internally established has had a positive effect in the results, about which you will be informed in detail during this assembly. I would like to highlight a feature of our Group that I think it is very significant for the future. During 2010 successions plan designed in 2007 came to an end, about which you have been duly informed.. This way we are fulfilling our target of continuity in the expertise and the Group spirit, which involves a management guarantee for a long period. The policy carried out during the last forty years of recruiting young people, together with the very low rotation of staff, allows our Group to achieve an exceptional accumulated expertise in the sector. Within this plan, we have also decided to split up the position of Chairman of the Chief Executive Officer. This separation of tasks is suggested by the Good Corporate Governance recommendations. Thus, the Board of Directors resolved to appoint Mr. Bernardo Velazquez as Chief Executive Officer, who had already been appointed as executive Board Director in the last general shareholders meeting. I feel really satisfied to have been able to fulfill these aims and to have been fully supported by the company and the Board of Directors.. 6. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. This plan, essential for the future of this company, has allowed to carry out gradually the generation change in the Group executive management and in other management levels, with persons who have an enormous expertise in stainless steels and who have an age which will allow them to hold their position for a long time..

(8) One of the strategic mainstay of our activity is the trust in the stainless steel future. In the last three years and for the dramatic effect of the world crisis, the world production have been falling, accumulating a drop of 13.4%. In year 2010 when the world economic conditions started their recovery, the world Stainless steel consumption and production has regained its historical trend. The world production has increased by 24.9%, achieving a new all time high of 30.6 million tons. This allows to consolidated again the exceptional annual growth rate of 6% during the last sixty years. This confirms once again the consistency of the parameters on which our strategic plan is based. Nevertheless, we are facing in some areas some overcapacity problems, as in Europe, which should be tackled by means of the consolidation or reduction of the non integrated capacities, or as in China for the result of the extraordinary investment program implemented during the last years. Notwithstanding, if the annual growth rate is kept, this situation will become balanced in the most accelerated growing areas, as Asia. I would like to thank everyone that has supported us and has helped not only to overcome the very tough conditions, but also to become stronger and readier to the new growth stage which we hope to face in the next year.. 7. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. Rafael Naranjo Olmedo Chairman.

(9) LETTER FROM THE CHIEF EXECUTIVE OFFICER Dear shareholder, It is an honor for me to speak to you for the first time after my appointment as Chief Executive Officer on the 27th July 2010, after twenty years working in this company. We must thank all of you and the Board of Directors to carry out the exemplary generation change, through internal promotions, as it is customary in the Group, planned well in advance and implemented efficiently and without internal conflicts. This gratefulness is even greater for having trusted our management while we were tackling with the strongest crisis of the recent history.. This year has also been very encouraging. After three consecutive years of fall, the stainless steel production has strongly recovered, improving by 24.9% with regard to the previous year, achieving an all time high of 30.6 million tons and our material has been returned to its historical growth rate of 60%, the average of the last 60 years, unique rate among the metals and industrial alloys. In 2011 an additional growth higher than 10% is expected. Stainless steel is an extraordinary material, with new applications still to be discovered and with a long way ahead in emerging countries, particularly in Asia. We trust in a brilliant future for our material, which is the base of our strategy. The year started with a great uncertainty, after the dramatic year 2009 when all industrial and commercial sectors collapsed, squeezing to the limit the inventories along the whole supply chain, from the raw materials to the stainless steel manufactured goods in the distribution to the market.. 8. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. Last year can be considered to have been very difficult due to the complexity of the management in such an uncertain, volatile environment and for the lack of trust in the economic situation. Nevertheless, for the Acerinox Group, it has also been a year of hope, when it has been proved the response capacity, our flexibility to get adapted to tough market conditions and our decision to make the most of our opportunities. We feel very proud of the results of this year, which have been achieved with a production capacity utilization lower than 80%..

(10) Timidly during the first months of the year, and strongly in March and April, the markets began to recover all over the world, leaded by the consumer goods, like automobile and household appliances. To a great extent, we can state that part of the production was devoted to the replenishment of inventories, not as much in stainless steel producers and distributors as in the distribution chain of goods manufactured with this material. The rise of the raw material prices during this period made it easy to return to positive results for almost all the stainless steel producers during the second quarter of the year. Again, the bad financial news, in this case the Greek debt in May, led to a drop of the raw material prices, nickel included and to a consumption slow down, afraid of falling again in a situation still so vivid to all of us. We had to face again a fall of prices, weak demand, and reduction of inventories, emphasized for near summer in the North hemisphere. The reasonable inventory levels allowed us to forecast a demand recovery once the seasonal halt of July and August was over, but it only took place in the United States and Asia, but not in Europe. Despite the good progress of the economy in Central Europe, the problem of the debt in the countries of Southern Europe slowed down the improvement of the stainless steel consumption. With the clear target of reducing the debt by the end of the year in all the sectors, the situation lasted during the fourth quarter, forwarding a nervousness situation in the European market – where the problems worsen because of the overcapacity – and new drops of prices did not achieve to stimulate demand and reduce margins. Once more United States has proven to have a more dynamic demand and has led the recovery, which also occurred in Asia but with lower prices.. Our results showed the above mentioned situation: slightly positive in the first quarter, a fast progression in the second quarter to get similar profits to those obtained prior to the crisis, return to the adjustments in the second half of the year, but always remaining positive. In the whole of the year very satisfactory profits were registered, 123 million euros after taxes and minorities, improving by 352 million euros the figure achieved in 2009. The EBITDA, 390 million euros, improved in 555 million euros with regard to the previous year. In 2010 net sales amounted to 4,500 million euros, improving by 50% the invoiced figure of 2009. We have been strengthened by the crisis and the correct decision of our geographical diversification has been proved. We think to have reached a new competitiveness standard during the last two years and to a great extent it is the result of the Excellence Plan 2009-2010. In February 2009 we launched a two-year plan internally developed and aimed to improver the management and the operation, based in very practical and realistic criteria of the best practices comparison – benchmarking - among the similar units of the different factories. The targets of the different section set after having been previously achieved in any of the Group factories. The economic impact was around 133 million euros of saving yearly.. 9. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. We work in the heavy industry and our production and sales cycle has a strong inertia which hinders the adaptation to such a short cycles of demand. For this reason we feel proud of the flexibility level we have achieved and of being the only western world producer registering profits during seven consecutive months..

(11) LETTER FROM THE CHIEF EXECUTIVE OFFICER. Once this reference period was over, we can state that 73% of the targets have been fulfilled – 97 million euros yearly – which is very satisfactory. And the most important fact, this technical and cultural exchange among persons from three different continents – which will become four when our new factory in Malaysia starts its operation – has get deeply rooted in our organization. As a proof of it, our engineers have proposed a second plan, to follow up the previous one and also biannual, including the targets not fulfilled in the first one, but also with new target, more ambitious and new performance areas. The recurrent saving per year is forecasted to be 90 million euros, which will be added to the savings already achieved. We also have to highlight the financial health of the Group. Its debt amounts to 1,083.6 million euros, almost the same as the previous year, despite the highest activity, the more expensive prices for raw materials and the availability of more warehouses. This difficult equation has been possible thanks to the control of inventories and the good management carried out with customers and suppliers. Once more the Spanish bank has shown its trust and support to our project and has allowed us to deal with the difficult situation comfortably and without excessive prices. This financial strength has allowed us to keep the shareholders refund in 0.45 euros per share and to go ahead with our Strategic Plan, which lays down our way until 2020. It has to be pointed out the construction of a new factory in Malaysia, Bahru Stainless and the expansion of our commercial network. In 2010 we invested 217 million euros, 71% was located to the Bahru Stainless factory. Bahru Stainless finishing liner started up in December and the cold rolling mill is foreseen to come onto stream at the end of the third quarter 2011. This way will would complete No. 1 investments phase for an amount of 370 million dollars. According to our plans, more than 60 Malaysian engineers and workers have been trained at our factories located in South Africa and Spain.. We have also continued with the commercial network expansion. During 2010 new cutting lines were installed in the service centers of Monterrey (Mexico), Pennsylvania (US) and Warsaw (Poland) and the new warehouses of Bologna (Italy) and Penang (Malaysia) began their operation. We also started the works of the new service center of Pinto (Madrid). We approved the opening Acerinox Turkey and Acerinox Indonesia and 25% stake of a new service center in Barranquilla (Colombia). Now, more than ever, are answering to our international vocation. We have to regret the two fatal accidents occurred in two of our factories. I take this opportunity to express our deepest condolences to the families and to insist in the importance of safety at work. We need everybody’s collaboration to prevent this sad casualties from happening again and we have the technical and human teams to achieve it.. 10. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. Our trust in this project is such that in July 2010, before the 1st phase was completed, we approved No. 2 phase, amounting to 310 million dollars. It will consist of a new rolling mill and a new annealing and pickling line for cold rolled material thin gauge and higher added value products. We have included a metallurgic laboratory, the partial urbanizing of the land, the building of bays and offices and the electric substation that will supply the melting shop furnaces in the future. The start up of this phase is foreseen to come onto stream in the first quarter 2013..

(12) Finally, I would like to give thanks for the generosity of the first generation of Acerinox managers and employees, at all levels, who have transferred to us their knowledge during more than 40 years of dedication and the fact that they have enhanced the generation change. From their hands we take this legacy and we will devote all our effort for this exciting project, Acerinox Group, will go on appealing and thrilling all of us involved in it, employees, shareholders, customers and suppliers. Thanks to all of them and particularly to the management team and the human team who has made it possible that we will go on being a world leading company in the Stainless steel sector. We are still in an uncertain economic scenery, with short visibility, but there is no doubt that the improvement has already began and the new situation will allow us to prove Acerinox Group strength in the next years.. 11. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. Bernardo Velázquez Herreros Chief Executive Officer.

(13) WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a.

(14) WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. Directors’ Report of The Consolidated Group. 01.

(15) DIRECTORS’ REPORT OF THE CONSOLIDATED GROUP. 1. World production After three consecutive years of decreases in world production, with an accumulated drop of 13,4% from 2006 to 2009, in 2010 there has been a strong rise of 24.9% achieving a historical all time high of 30.6 million tons (according to ISSF). (THOUSAND OF MT). 1Q.. 2Q.. 3Q.. 4Q.. TOTAL. 2009 2010. 4,832 7,624. 6,015 8,022. 7,015 7,395. 6,700 7,646. 24,562 30,687. 57.8%. 33.4%. 5.4%. 14.1%. 24.9%. The confidence in the economic recovery and the exceptional characteristics of stainless steel, have given this material historical rates of growth, with an annual rate of 5.9% in the last 60 years, which is a unique behaviour among all the metals and industrial alloys. Carbon steel production has also strongly increased during the year to 15.2%, although this is far lower than the growth rate of stainless steel.. WORLD PRODUCTION OF STAINLESS STEEL Thousand Mt.. 32,000 30,000 28,000 26,000 24,000 22,000. Compound annual growth rate Years 1950-2010: +5.9%. 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 2,000 0 50. 60. 70. By regions, the growth in all the areas is outstanding but particularly so in Europe and America, where. 80. 90. 00. 10. Source: VALE INCO e ISSF. the crisis was more accentuated during the previous years.. Area. 2009. 2010. +/- %. Western Europe / Africa. 6,449. 7,871. 22.1. 237. 340. 43.6. 1,942. 2,609. 34.4. Central and Eastern Europe America Asia (Except China). 7,130. 8,611. 20.8. China. 8,805. 11,256. 27.8. TOTAL WORLD. 24,562. 30,687. 24.9. 14. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. 4,000.

(16) EVOLUTION OF THE STAINLESS STEEL WORLD PRODUCTION Million Mt.. YEAR 2007. YEAR 2006 10.3. 16.0. 15.1. 28.4. 2.6. 9.1. 3.0. YEAR 2008. -2.0%. 27.8. Europe & Africa. YEAR 2009 2.3. 8.6. 6.7. 25.9 Asia. 8.2. 2.0. -5.2%. 24.6. 2.6. 19.8. 15.9. 15.0. -6.9%. YEAR 2010. +24.9%. 30.6. Americas. NAS continuous casting.. 15. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. Source: International Stainless Steel Forum (ISSF).

(17) DIRECTORS’ REPORT OF THE CONSOLIDATED GROUP. 2. Raw materials Europe. This led to a drop in demand and prices.. All the raw materials have followed a similar trend in 2010. At the beginning of the year there was a price rise based on the confidence in an economic recovery, which subsequently decreased due to the weakness of the financial systems in the South of. From June to the end of the year, consumption and prices increased again but at a more moderate rate.. 2.1 NICKEL OFFICIAL NICKEL PRICE IN THE L.M.E. Average price: cash / three months (USD/Mt. Ni.). (2009-2010). 35,000. 30,000. 25,000. 20,000. 15,000. 10,000. 5,000. E. F. M. A. M. J. J. A. S. Prices during the year have increased by 32.4% to close the year at 24.960 USD/Mt. During the year there have been three clearly differentiated stages: a rise from 18.855 USD/Mt from the beginning of January, reaching a high of 27,600 USD/Mt in April, followed by a plummet, due to the liquidity problems. O. N. D. E. F. M. A. M. J. J. A. S. O. N. D. in some countries of the South of Europe, which led the price to 17,955 USD/Mt on the 18th June. This dramatic fall which occurred in the second quarter, characterised the behaviour of the Stainless steel market, which is explained in detail in the following section.. OFFICIAL NICKEL PRICE IN THE L.M.E. (2001-2010) 55,000. Monthly average values (USD/Mt. Ni.). 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 2001. 16. 2002. 2003. 2004. 2005. 2006. 2007. 2008. 2009. 2010. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. 0.

(18) 2.2 FERROCHROME Ferrochrome is not an alloy listed in the LME, hence its behaviour evolves in a way similar to Stainless steel.. The price of ferrochrome was 1.01 USD/Lb during the first quarter, rising by 35% in the second quarter to 1.36 USD/Lb, increasing simultaneously in line with the increase of in stainless steel demand. Finally, it falls, together with the slow down in the market to a level of 1.30 USD/Lb during the third and fourth quarters.. FERROCHROME QUARTERLY AVERAGE PRICE US¢ / Lb. Cr.. 240 220 200 180 160 140 120 100 80 60 40 20 0 2001. 2002. 2003. 2004. 2005. 2006. 2007. 2008. 2009. 2010. Raw materials yard.. 17. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. Source: Metal Bulletin.

(19) DIRECTORS’ REPORT OF THE CONSOLIDATED GROUP. 2.3 MOLYBDENUM Since then it made consistent moderate increases and ended the year at 16 USD/Lb.. Its evolution was similar to the rest of the raw materials. It started the year with a 60% rise to reach a maximum of 19 USD/Lb in March. It then nose dived to 14 USD/Lb.. MOLYBDENUM PRICE Weekly average price (USD / Lb. Mo.). 40 35 30 25 20 15 10 5 0 2001. 2002. 2003. 2004. 2005. 2006. 2007. 2008. 2009. 2010. Source: Metals Week. 2.4 STEEL SCRAP In some countries, mainly Germany and the United States, the economic recovery has contributed to the price rises, which reached its annual peak of 450 USD/Mt in the 4th quarter.. PRICE OF CARBON STEEL SCRAP HMS 1&2 FOB ROTTERDAM USD/Tm. 700 650 600 550 500 450 400 350 300 250 200 150 100 50 2001. 18. 2002. 2003. 2004. 2005. 2006. 2007. 2008. 2009. 2010. Source: Metal Bulletin. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. Steel scrap prices increased during the first quarter, from 300 USD/Mt to 420 USD/Mt during April, returning in the third quarter to the levels of the beginning of the year..

(20) 19. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. Birmingham service centre – slitting line..

(21) DIRECTORS’ REPORT OF THE CONSOLIDATED GROUP. 3. Markets demand was expected, which materialized in the United States and in Asia but not in Europe, where consumption was held back by the lack of liquidity in the financial system.. As the world production figures attest, 2010 has been a year of recovery and replenishment of stocks. In a similar vein to the rest of the basic materials, the behaviour of the stainless steel market, exhibited three very different phases during the year.. Despite the strong increase in production this year, the inventory levels at the end of the period are considered to be relatively low.. The first phase was characterised by an increase in market confidence and consumption. The second quarter saw a lack of trust in the liquidity of the financial markets which affected the whole world. This uncertainty, coupled with the fall of the raw materials prices and the alloy surcharges, led to a sharp contraction in the stainless steel market and the beginning of a new stage of destocking.. Stainless steel, which is present in all the sectors of industrial activity, has seen its demand improved by the consumer goods sectors, while the lack of trust has prevented a similar reaction from happening in the capital goods sector.. This situation affected the five continents in the face of the lower activity in the Summer months. In September the third phase begins. A recovery in. STAINLESS STEEL COLD ROLLED SHEET PRICES AISI. 304 2.0 mm (2001 – 2010) USD/Mt, final price, alloy surcharge included 7,000 6,500 6,000 5,500. 4,500. USA. 4,000. Germany. 3,500. Asia. 3,000. (since year 2008; average of China,Taiwan and South Korea). 2,500 2,000 1,500 1,000 01. 02. 03. 04. 05. 06. 07. 08. 09. 10. SOURCE: Metal Bulletin Research “Stainless Steel Monthly”. 20. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. 5,000.

(22) Europe: As a direct result of the activity sectors, in Europe there was a clear difference between the deliveries of cold rolled products, linked to the consumer goods – which increased by 18.8% - and the deliveries of hot rolled products, related to capital goods, which increased by 10.8%. During the first months of the year, the higher activity together with the expected increase in the alloy surcharges, led to an increase in demand and the beginning of a period of restocking. This also allowed for the rise of base prices, which extended up to the end of May and the second quarter became the best of the year. The aforementioned drop in the nickel prices, the waning confidence in May, and the expected fall in the alloy surcharge, led again to a collapse in the Stainless steel market, which lasted beyond the Summer.. The fears caused by the lack of liquidity and the need to reduce the working capital to minimum levels, kept activity low until the end of the year. This situation, together with the threatening higher Asian imports because of the strength of the euro and the impatience of certain European producers, seeking unsuccessfully to contract bigger volumes, led to a new price plummet during the last months of the year. The European market behaviour highlighted the structural problems of overcapacity existing in Europe and the necessity of consolidation. The Spanish market has evolved similarly to the rest of the European countries thanks to the export vocation of the main stainless steel consumers.. STAINLESS STEEL COLD ROLLED SHEET PRICES AISI. 304 2.0 mm (2001 – 2010) €/Mt, German market 5,000 4,500. 3,500 3,000 2,500 2,000 1,500 1,000 500 0 01. 02. 03. 04. Base Price. 05. 06. 07. Alloy Surcharge. 08. 09. 10. Source: MBR. 21. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. 4,000.

(23) DIRECTORS’ REPORT OF THE CONSOLIDATED GROUP. United States: This market had a similar evolution to the European market until the month of September, when the higher strength of the American economy became apparent.. The apparent consumption of flat products grew by 32.3% in 2010 with regard to 2009, with regard to long products, they rose by 48.9% in bars and 77.9% in wire rod.. From September until the end of the year demand was strong, allowing for stock replenishment, although still at reasonable levels lower than those existing in the years prior to the crisis.. Prices have remained stable, although the differences mainly with the Asian markets have prevented them from increasing.. STAINLESS STEEL COLD ROLLED SHEET PRICES AISI. 304 2.0 mm (2001 – 2010) USD/Mt, North American market 7,000 6,500 6,000 5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 02. 03. 04. Base Price. 05. 06. 07. Alloy Surcharge. 08. 09. 10. Source: MBR. South Africa: The South African market, where Columbus has an important share, behaved satisfactorily. Deliveries increased by 33% with regard to 2009. There is still concern about the strength of the local currency, the rand, which in the last two years has appreciated by 30% against the dollar and 33%. 22. against the euro, which has a detrimental impact on exports from this country. Despite this fact, there seems to be some growth, particularly in the automobile and capital goods sectors for the rest of South African countries, which proves South Africa position as the main growth booster of the continent.. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. 01.

(24) EVOLUTION SOUTH AFRICAN RAND Vs USD AND EURO (Years 2009 – 2010) Daily percentage data. 20%. 31-Dic-08 Exchange rate USD/ZAR: 9,413 Exchange rate EUR/ZAR: 13,135. 10%. 31-Dic-09 7,380 10,581. 31-Dic-10 6,587 8,805. EURO/ZAR USD/ZAR. -16.8 % 0% -10.7 % -10%. -20% -19.4 % -30.0% -33.0%. -30% -21.6 % -40% 2009. 2010. Source: Bloomberg. Asia:. In 2010 stainless steel demand in Asia has followed the same trend of the American market, although with lower prices and higher volatility. According to our estimations, inventories in this country were low at the end of the year. For the first time in history, China has become a net exporter of stainless steel, but this trend does not prevent us from continuing to sell in a market where there is a real demand for products with high added value.. Chinese production amounted to 11.2 million Mt, 27.8% higher than in 2009. According to CSSC (China Special Steel Enterprises Association) the whole production of all the Chinese producers totals already 37% of the world output. The prospect that Asia will turn into the main consumption engine in the future made us decide to strategically establish our position in this continent and to increase our already important presence there. Firstly through the acquisition and creation of distribution centres and finally through our establishment there as producers with Bahru Stainless.. Bahru Stainless factory under construction.. 23. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. Asia will undoubtedly be the main consumption engine in the coming years: its economies in continuous growth and its high population guarantees it..

(25) DIRECTORS’ REPORT OF THE CONSOLIDATED GROUP. 4. Acerinox Group Production In such a difficult year as 2010, Acerinox Group production has matched the market demands and the established plans for reducing stocks. The geographical diversification of the production facilities and the wide commercial network in the five continents have played an essential role, capitalising on the improvements in demand in the. areas where they were occurring. The year began with good activity, as a consequence of the dramatic reduction of inventories that took place during the last quarter of 2009, not only in the Stainless steel sector but also in all the supply chain. 2010 1Q.. 2Q.. 3Q.. 4Q.. TOTAL. Melting. 535.5. 559.2. 492.7. 472.1. 2,059.7. Hot Rolling. 461.6. 489.8. 416.8. 414.8. 1,783.1. Cold Rolling. 319.3. 366.8. 309.1. 295.5. 1,290.7. Long products (Hot rolling). 44.1. 60.9. 53.7. 50.7. 209.5. Long products (Finished). 39.5. 54.4. 49.6. 50.6. 194.1. The Group melting production in the first half of the year was 13.5% higher than in the second half and this percentage is also applicable to the cold rolling production. Regarding long products, hot rolling output was virtually the same in both halves of the year. Concerning finished products, the output grew by 6.3% in the second half of the year.. In this context ACERINOX Group has had a positive behaviour, increasing its melting production by 14%, the cold rolling output by 20.5% and the long finished products by 51% with regard to year 2009. This increase would have been higher if our South African factory had not suffered the lack of gas supply, which is mentioned in the chapter regarding Columbus.. PRODUCTION OF ACERINOX GROUP. YEAR 2010 Mt. Variation over 2009. ACERINOX. NAS. COLUMBUS. TOTAL. Melting Shop. 682,498. 899,150. 478,016. 2,059,664. 14.0%. Hot rolling. 562,967. 753,962. 466,138. 1,783,066. 9.5%. Cold rolling. 437,601. 559,848. 293,266. 1,290,715. 20.5%. ROLDAN. NAS. TOTAL. Variation over 2009. Hot rolling. 95,525. 113,988. 209,513. 48.5%. Finished products. 87,947. 106,150. 194,097. 51.0%. FLAT PRODUCT. LONG PRODUCT. 24. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. Thousand Mt.

(26) and proves the success of the Excellence Plan 2009/2010, which has allowed the reduction in profitability thresholds of the different factories.. Throughout the whole of the year, Acerinox melting shop worked under 80% of its historical capacity, which make the achieved results really noteworthy. PRODUCTION OF ACERINOX GROUP Thousand Mt.. MELTING SHOP. HOT ROLLING. COLD ROLLING. LONG PRODUCT. 2,750. 2,750. 2,000. 300. 2,500. 2,500. 1,800. 270. 2,250. 2,250. 1,600. 240. 2,000. 2,000. 1,400. 210. 1,750. 1,750. 1,200. 180. 1,500. 1,500 1,000. 150. 1,250. 1,250. 1,000. 1,000. 800. 120. 750. 750. 600. 90. 500. 500. 400. 60. 250. 250. 200. 30. 0. 0 01 02 03 04 05 06 07 08 09 10. Total. 0. Acerinox, S.A.. 0. 01 02 03 04 05 06 07 08 09 10. 01 02 03 04 05 06 07 08 09 10. NAS. 01 02 03 04 05 06 07 08 09 10. Roldan. Columbus. QUARTERLY EVOLUTION OF ACERINOX GROUP PRODUCTIONS 700 611 600 536. 559 493. 500 435. 472. 421. 400 340 300. 200. 100. 0 Q1. Q2. Q3 Year 2009. Q4. Q1. Q2. Q3. Q4. Year 2010. 25. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. MELTING SHOP (Thousand Mt.).

(27) DIRECTORS’ REPORT OF THE CONSOLIDATED GROUP. 5. Excellence plan 2009. This plan is born as a result of an internal and intense program of “benchmarking” among the Group companies, which share their best practices aiming to improve the processes across the whole supply chain. Ambitious targets were set, but they were also realistic since each of them had been achieved in each factory.. NAS long products factory.. 26. Acerinox Group geographical diversification, with 3 integrated factories of similar size and structure, located in three different continents, offers a unique opportunity in the sector to carry out these comparative exercises. The exchanges of technical information among the experts of the different fields in all the factories are the perfect frame to achieve the continuous improvement of quality, processes, efficiency and control of costs. As at 31st December 2010, after 22 months of the plan implementation, 73% of the targets (97 million euros) have been achieved on a regular basis and the forecasted savings are being consistently reached.. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. In February 2009 the “Excellence Plan 2009-2010” was brought out. It consists of 10 chapters including improvements of quality and processes, inventory management, cost reduction and best use of the synergies among the factories and service centres of the Group. The results of this plan were projected to achieve an annual savings of 133 million euros, on a regular basis, from the third year..

(28) 27. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. NAS melting shop..

(29) DIRECTORS’ REPORT OF THE CONSOLIDATED GROUP. 6. Commercial network During 2010 the distribution network of the Group has continued to expand, following the Strategic Plan aimed to improve the allocation of the production in the factories and to increase our presence in the markets where we were already operating. In line with this, in Europe, in September the new warehouse in Bologna (Italy) started operation in September, and the installation of the CS and Slitter lines in Warsaw (Poland) are almost complete. In Pinto (Spain) new facilities are being built, which will incorporate in a single location both the Service centre and distribution warehouse , now located in different places.. In Asia, at the beginning of the year the Penang warehouse (Malaysia) started operation. It is added to the previously existing warehouses in Johor and Kuala Lumpur (also in Malysia). The representative office was also opened Yakarta (Indonesia). The Group commercial network currently has a total of 1,335 persons distributed in the five continents, 22 service centres with 60 process lines, 32 warehouses and 18 commercial offices. According to the Excellence Plan 2009-2010, initiatives have been implemented to reduce distribution costs and to achieve more efficiency in the commercial network.. Service centers Warehouses Offices Factories. 28. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. In America, the format continuous shearing lines in Monterrey (Mexico) and Pennsylvania (US) were finished. In the latter centre the slitting line was put on-stream. Regarding Colombia, a pre-agreement with the customers Metaza and Acerex, local distributors, was signed to incorporate a Society which will open a service centre in Barranquilla to organise the distribution in this country as well as in Central America and the Caribbean..

(30) 29. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. COMMERCIAL NETWORK OF ACERINOX GROUP . YEAR 2010.

(31) DIRECTORS’ REPORT OF THE CONSOLIDATED GROUP. 7. Sales The Group net sales, 4,500 million euros, is 50.31% higher than the invoiced figure of 2009 and. involves a trend change with regard to the two previous years.. EVOLUTION OF ACERINOX GROUP NET SALES Million euros 7,000 6,500 6,000. Consolidated Group. 5,500 5,000. Trading Companies. 4,500. 4,500. N.A.S.. 4,000 3,500. ACERINOX S.A.. 3,000 2,500 2,000. 2,079 2,014. 1,500. 1,553. 1,000. Roldan + Inoxfil. 833. 500. 324 01. 02. 03. 04. 05. 06. 07. 08. The geographical distribution of the consolidated Group net sales proves, once more, the advantages of our global presence, with integrated production in three continents, which will become four when Bahru Stainless factory is completed, with a. 09. 10. commercial presence all over the world. This year, for the first time in our history, America is the primary market for Acerinox Group, with 44.41% of our whole sales, which has increased by 9% that of 2009.. GEOGRAPHICAL DISTRIBUTION OF ACERINOX GROUP NET SALES YEAR 2010. YEAR 2009 EUROPE 40.3%. OCEANIA 0.3%. EUROPE 40.8%. AFRICA 5.4%. AFRICA 5.9% ASIA 9.1%. 30. OCEANIA 0.3%. AMERICAS 44.4%. ASIA 17.7%. AMERICAS 35.8%. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. 0. Columbus.

(32) 8. Human resources adjusted to match the needs as a result of the Adjustment plan carried out due to the international economic recession.. 2010. 2009. Variation. ACERINOX, S.A.. 2,529. 2,576. -1.82%. N.A.S.. 1,368. 1,340. 2.09%. COLUMBUS. 1,751. 1,736. 0.86%. BAHRU STAINLESS. 101. 24. 320.83 %. ROLDAN & INOXFIL. 607. 586. 3.58%. SPANISH TRADING COMPANIES. 403. 411. -1.95%. OVERSEAS TRADING COMPANIES. 627. 655. -4.27%. 7,386. 7,328. 0.79%. TOTAL GROUP. NAS cold rolling mill.. 31. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. Acerinox staff has increased by 58 persons during the year, mainly due to 77 new employees in Bahru Stainless to start up its finishing and cold rolling facilities. In the rest of the Group, staff have been.

(33) DIRECTORS’ REPORT OF THE CONSOLIDATED GROUP. 9. Economic Report trend against years 2008 and 2009 and confirms our conviction that 2010 is a transitional year. It is 555 millions higher than in 2009.. The Group net sales, 4,500 million euros, improves by 50.3% the invoiced figure of 2009. The EBITDA of the year, 390 million euros, shows a change of. EVOLUTION OF THE CONSOLIDATED GROUP EBITDA (*) Million euros (% over sales) 1,000. 962.7. 900. Average 2006 – 2010: 447.8 (8.9%). 752.2. 800 700 600. 17.1 10.9. 500. 389.5. 400. 299.7. 300. 8.7. 200. 5.9. 100 2009. 0 -100. 2006. 2007. 2008. -200. 2010. -5.5 -165.0. -300. The results before taxes amounts to 192.5 million euros. All of these improvements prove the success of the Strategic Plan being developed and the. improvements achieved by the Excellence Plan 2009-2010 in such a difficult economic environment and also the cost savings attained.. 31ST DECEMBER 2010 RESULTS. Thousand euros. CONSOLIDATED GROUP. Net Sales EBITDA (*) EBIT (**) Profit before taxes and minorities Depreciation Gross Gash Flow Profit afther taxes and minorities Net Cash Flow (*) EBITDA is defined as the operating result plus depreciation and provisions (**) EBIT is defined as the net operating result. 32. 2010. 2009. 4,500,467 389,499 232,146 192,519 147,791 340,310 122,739 270,530. 2,993,409 -165,007 -319,158 -348,582 125,090 -223,492 -229,206 -104,116. Variation. 50.3% — — — 18.1% — — —. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. (*) EBITDA is defined as the operating result plus depreciation and provision.

(34) difficulties of the year, due not only to the adverse economic environment but also to the troubles of the stainless steel sector.. In 2010 Acerinox Group has registered a result after taxes and minorities of 122.7 million euros. This result is particularly satisfactory in view of the. EVOLUTION OF THE RESULT AFTER TAXES AND MINORITIES. ACERINOX GROUP Million euros. 550. 503.0. 500 450 400 350. 312.3. 300 250 200 122.7. 150 100 50. 2008. 0. 2006. -50. 2007. 2009 2010. -10.5. -100 -150 -200 -250. -229.2. excellent. No other Western producer has been able to register profits continuously in the last six quarters.. The Group competitiveness level and particularly the geographical diversification and our capacity to maximise on the potential of the areas with best behaviour, allow us to consider this result as. QUARTERLY EVOLUTION OF THE RESULT AFTER TAXES AND MINORITIES 125 87.9. 75. 71.0. 66.7. 19.4. 25 Q3 Q1. Q4. Q1. 6.4. Q2. Q2. Q3. Q4. 16.4. 10.1 Q1. Q2. Q3. 25.2. Q4. -25 -29.2. -75 -93.0. -125 -135.8 -162.0. -175 2008. 2009. 2010. 33. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. Million euros.

(35) DIRECTORS’ REPORT OF THE CONSOLIDATED GROUP. The financial net debt at the end of the year is 1,083.6 million euros, virtually the same as in the previous year, despite the expensive investments carried out, the increased commercial and manufacturing activity and the higher prices of the raw materials.. The debt versus equity ratio was 5 points lower, remaining at 50.33%. Two thirds of the total debt is long term, which allow us to be optimistic regarding the liquidity to face a strong market recovery and the increase of raw material prices.. ASSETS Million e. 2010. 2009. Non-current assets. 2,235.57. 2,002.06. 11.7%. Current assets. 2,004.79. 1,615.72. 24.1%. – Inventories. 1,336.66. 1,154.45. 15.8%. 534.96. 371.19. 44.1%. Trade debtors. 494.44. 304.17. 62.6%. Other debtors. 40.52. 67.01. -39.5%. 133.17. 90.09. 47.8%. 4,240.36. 3,617.79. 17.2%. Million e. 2010. 2009. Equity. 1,923.74. 1,752.52. 9.8%. 992.19. 800.07. 24.0%. – Interest-bearing loans and borrowings. 724.74. 543.18. 33.4%. – Other non-current liabities. 267.45. 256.89. 4.1%. 1,324.43. 1,065.19. 24.3%. – Interest-bearing loans and borrowings. 472.39. 604.63. -21.9%. – Trade creditors. 603.76. 306.15. 97.2%. – Other current liabities. 248.27. 154.42. 60.8%. Total equity and liabilities. 4,240.36. 3,617.79. 17.2%. – Debtors. – Cash ant other current assets Total Assets. Variation. LIABILITIES. Current liabities. 34. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. Non-current liabities. Variation.

(36) CONSOLIDATED GROUP. 2010. 2009. Cash-flow per share. 1.09. -0.42. Earning per share. 0.49. -0.92. 27.5%. 18.0%. EBITDA margin (*). 8.7%. -5.5%. Operating margin EBIT. 5.2%. -10.7%. ROE. 6.4%. -13.1%. ROCE. 7.7%. -11.3%. 56.3%. 61.3%. Net debit / EBITDA. 2.78. -6.51. Book Value at 31-Dec. 7.72. 6.51. Gross margin. GEARING. *) EBITDA is defined as the operating result plus depreciation and provisions. The asset value per share, 7.72 euros, increases by 9.8%, reflecting a significant improvement of the results achieved in 2010. The ratio “net financial debt/EBITDA” is 2.8 and it is lower than the ratio for 3.1 times achieved in 2008. It widely complies with the agreed covenants for our long term debt financing.. the 61.3% registered in 2009. Notwithstanding, the investment volume has been maintained, according to our strategic plan, consolidating the total refund to our shareholders (0.45 euros per share, like in year 2009), having financed the increased activity and the rise of the raw material prices during the year. The net financial debt, 1,083.6 million euros, slightly increased by 0.8% with regard to the previous year (1,074.5 million euros).. Inoxfil factory.. 35. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. The Gearing is 56.3%, decreasing with regard to.

(37) DIRECTORS’ REPORT OF THE CONSOLIDATED GROUP. The working capital evolution is still satisfactory and, despite the higher levels of activity, it has only been increased by 75 million euros. CONDENSED CASH-FLOW STATEMENT OF ACERINOX CONSOLIDATED GROUP Year 2010. Year 2009. Result before taxes. 192.5. -348.6. Adjustmentes for:. 205.5. 46.6. 147.8. 125.1. 1.0. -118.9. 56.7. 40.5. 33.3. 497.6. Changes in operating working capital (1). -74.9. 285.4. Others. 108.2. 212.1. -75.9. -7.0. Income tax. -26.2. 37.2. Financial expenses. -49.7. -44.2. 355.5. 188.6. -223.2. -230.4. -11.0. 1.9. -234.2. -228.4. 121.3. -39.8. 0.0. -3.3. -112.2. -112.2. 11.5. 108.9. Changes in bank debt. 49.3. 129.3. Conversion differences. -37.8. -20.4. 11.7. 38.2. 0.4. 1.9. -88.6. 33.5. Net increase/(decrease) in cash and cash equivalents. 32.8. -6.3. Opening cash and cash equivalens. 73.3. 79.7. 7.5. 0.0. 113.6. 73.3. Depreciation and amortisation Changes in provisions and impairments Other adjustments in the result Changes in working capital. Other cash-flow from operating activities. Net cash-flow operating activities Payments for investments on fixed assets Others Net cash-flow from investing activities Net cash-flow generated Acquisition of treasury shares Dividens payed to shareholders and minorities Changes in net debt. Attributable to minority interests Others Net cash-flow from financing activities. Effect of the exchange rate fluctuations on cash held Closing cash and cash equivalents (1) Inventories + trade debtors - trade creditors. The cash flow statements prove that the Group is able to generate cash flow through operating activities (355.5 million euros), not only to cover the. 36. investments (234.2 million euros) but also to refund the shareholders with the same amounts as in previous years.. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. Million euros.

(38) 10. Investments During the last years Acerinox Group has maintained its Strategic Plan of investments despite the world economic recession and the difficult situation of the sector. In the period 2008-2010 investments of an amount of 790 million euros have been made which will allow us to not only improve efficiency but also take advantage of a market recovery and improve our global presence. In 2010 217 million euros were invested. 71% of the investments were devoted to the Johor Bahru factory, whose finishing shop is already under operation. The. cold rolling mill is projected to start up in the Summer 2011. In Acerinox, S.A., Phase XVII of the Investments Plan has culminated with significant improvements and upgrades to its main units. The recent investment plans have been completed in the factories of Middelburg (South Africa) and Carrollton (USA) to complete their latest expansions. Likewise, investments of 11.5 million euros have been made to expand the commercial presence abroad, particularly in Bologna, (Italy) and Warsaw (Poland).. Thousand euros. – ACERINOX, S.A. – NAS – COLUMBUS – BAHRU – ROLDAN & INOXFIL – SPANISH TRADING COMPANIES – OVERSEAS TRADING COMPANIES TOTAL. 2010. 2009. 23,789 15,371 11,498 154,367 843 169. 40,859 45,996 29,784 101,977 1,682 138. 11,313 217,350. 10,449 230,886. Warsaw Service Center.. 37. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. INVESTMENTS IN THE CONSOLIDATED GROUP.

(39) DIRECTORS’ REPORT OF THE CONSOLIDATED GROUP. 11. Financial report Refunds to shareholders. the Ibex-35 reduced or even cancelled the dividend. In 2010 more than half of the listed companies did this.. In the 25 years that Acerinox, S.A. has been listed, it has never stopped paying its shareholders in spite of the negative economic environment or even despite registering negative results as in 2008 and 2009. The payments to shareholders have never been cut, maintaining the constant policy of consolidating the agreed increases in the years when the profit increases suggested it.. In contrast to most Ibex-35 societies, in 2010 Acerinox kept the dividend to shareholders at 0.45 euros per share, however, the usual interim dividend payments for January and April, and also the complementary payment of July, were replaced by a single dividend payment, effective on the 5th July 2010 for a total amount of 0.35 euros per share on account of voluntary reserves. In October, as in previous years, the issue premium refund was paid for an amount of 0.10 euros per share.. This policy is particularly significant in times of crisis and recession such as in the current period. In fact, in 2009 one third of the companies listed in DATE. Concept. Euros/share. TOTAL AMOUNT. 5-07-10. Dividend on account to voluntary reserves. 0.35. 87,256,591. 5-10-10. Issue premium refund.. 0.10. 24,930,455. 0.45. 112,187,046. Total year 2010. The amount of 0.45 euros per share paid to the shareholders during 2010 is equivalent to 3.4%. profitability with regard to the closing quotation of the year.. Thousand euros. 140,000 116,775. 120,000. 100,000. 121,314 112,226. 112,187. 2009. 2010. 88,230. 80,000. 60,000. 40,000. 20,000. 0 2006. 38. 2007. 2008. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. RETURN TO SHAREHOLDERS.

(40) Annual refunds per share RETURN TO SHAREHOLDERS Euros/share 0.55. A second dividend on account of year 2010 will be paid to the shareholders on the 5th April 2011 for an amount of 0.10 euros per share.. 0.45. In the General Shareholders meeting to be held on the 9th June 2011, the ratification of the two dividends will be requested on account of year 2010 and the payment of a complementary dividend on account of said year for 0.15 euros per share to be effective on the 5th July 2011. The authorisation from the General Shareholders Meeting will also be required to pay the shareholders 0.10 euros per share on account of the issue premium to be refunded on the 5th October 2011.. 0.30. With this refund program and despite all the troubles of the financial environment, Acerinox will pay 0.45 euros per share to the shareholders in 2011.. 0.48. 0.50. 0.40 0.35. 0.45. 0.03. 0.45. 0.45. 0.10. 0.10. 0.10. 0.10. 0.35. 0.35. 0.35. 0.35. 07. 08. 09. 10. 0.34 0.08. 0.25 0.20 0.15. 0.26. 0.10 0.05 0.00 06. Attendance bonus AGM Issue Premium Refund Dividend. General Shareholders Meeting 2010.. 39. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. In the meeting held on 16th December 2010 , the Acerinox Board of Directors, agreed the payment of a first dividend on account of year 2010, for an amount of 0.10 euros per share effective on the 5th January 2011..

(41) DIRECTORS’ REPORT OF THE CONSOLIDATED GROUP. 12. Stock exchange market report The share performance during 2010 has been characterised by the general fear in the market of a relapse into recession and the debt crisis. Investors chose to disinvest in the countries with more deficit problems and to focus on those countries showing a clearer economic recovery. In this context, Ibex-35 has been one of the markets with the worst behaviour, with 17.43% depreciation, heavily affected by the lack of confidence in the face of the debt of the neighbour countries, burdened by the rescue requests from Greece (April) and Ireland (November). The rating reductions of the Spanish Kingdom by the main rating agencies, resulted in an increased fear that the rescue could affect Portugal and even Spain. The maximum attained by the Ibex-35 in the year, was on the 6th January, which is revealing of the share evolution during the rest of the year.. depreciated by 5.44%, the Irish by 3.21%, the Italian by 13.23% and the French index by 2.17%. Quite the opposite, the British and the German stock exchanges appreciated by 10.31% and 16.06% respectively. This punishment inflicted on the Spanish Stock Exchange must be related to the appreciation achieved in the previous years. Thus, for example, in the previous five years the Ibex35 had appreciated by 31.49% against the 14% average in the rest of Europe. In this scenario and despite the consolidation of Acerinox, S.A. results, with quarterly profits since the middle of 2009, the value has been affected by the distrust of the foreign investors towards the values listed in the Spanish Stock exchange, which has dropped by 9.7%. Nevertheless, Acerinox share performance is 45% better than the rest of the Ibex-35 companies.. Ibex-35 has had the second worst performance in Europe. Only Greece had the worst evolution, depreciating by 35.6%. The Portuguese index. EVOLUTION OF THE STOCK EXCHANGE MARKET ACERINOX, S.A. AND IBEX 35. 10% 5% 0% ACERINOX. -5% -9.7%. -10% -15%. -17.4% -20% -25% -30% Jan Feb Mar Apr May Jun. 40. Jul Aug Sep Oct Nov Dec. IBEX 35. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. Daily percentage data, year 2010.

(42) the last ten years is 61.5% against the 8.2% of the Ibex- 35, in other words, 650% higher.. In the long run, once more, Acerinox share performance is higher than the rest of the Spanish Stock Market. Acerinox share appreciation during. EVOLUTION OF THE STOCK EXCHANGE MARKET ACERINOX, S.A. AND IBEX 35 Weekly percentage data 200%. 150%. ACERINOX. 100%. 61.5%. 50%. 8.2%. 0%. -50%. IBEX 35. 01. 02. 03. 04. 05. 06. 07. 08. 09. 10. OFFICAL CLOSE OF THE ACERINOX SHARE 25. 23.05. 20 16.83 14.53. 15. 13.125 11.37. 10. 5. 0 2006. 2007. 2008. 2009. 2010. 41. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. Euros/share.

(43) DIRECTORS’ REPORT OF THE CONSOLIDATED GROUP. Capitalization As at 31st December 2010, Acerinox share capitalization amounted to 3,272,122.17 euros.. MARKET CAPITALIZATION OF ACERINOX, S.A. 2001 - 2010 Million euros. 7,000. 6,000. 5,000. 4,000 3,272. 3,000. 2,000. 1,000. 0 2001. 2002. 2003. 2004. 2005. 2006. 2007. 2008. 2009. 2010. Profitability calculation carried out on the last day of each year. According to the chart data, we can see that in 84% of the cases, Acerinox shareholders get a positive profitability.. Share profitability in % of Acerinox share, including refunds to shareholders. Entry in Acerinox capital as of 31 December. Exit year of Acerinox capital as of 31 December. 42. Year. 2001. 2002. 2003. 2000. 18.86. 14.31. 25.17. 59.08. 69.17. 205.78. -3.94. 5.46. 34.81. 43.54. 161.78. 10.09. 41.58. 50.96. 177.85. 29.48. 38.26 6.94. 90.32. 2001 2002 2003 2004 2005 2006 2007 2008 2009. 2004. 2005. 2006. 2007. 2008. 2009. 2010. 134.77. 73.48. 117.91. 106.15. 100.32. 47.27. 85.73. 75.55. 111.89. 54.96. 96.23. 85.31. 157.04. 95.29. 42.00. 80.63. 70.41. 100.93. 52.07. 9.91. 40.47. 32.39. 43.37. 2.85. 32.22. 24.45. -46.64. -30.98. -35.12. -29.59. -8.14. -13.81. 31.75. 23.35. -25.03. -6.57. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. The following chart shows the accumulated annual profitability of Acerinox shares in the last decade, including the refunds to shareholders (dividend plus premium issue), considering both the investment and the subsequent profitability.

(44) Acerinox shares were traded for the 256 days that the continuous market was operational in 2010, with a total contracting of 325,688,227 shares, 20.96% higher than in the previous year, equivalent to 1.31 times the number of shares representing the share capital at the closing of the year. The total contracted cash amounted to 4,281,549,004.59 euros, 28.78% higher than in 2009. The average daily contracting during 2010 was 1,272,219 shares, equivalent to 16,724,800 euros. During 2010 the lowest value was on the 24th November, 10.95 euros, and the highest quotation was achieved on the 16th April, 15.50 euros per share.. CONTRACTS OF SHARES AND CASH 700. 14,000. 600. 12,000. 500. 10,000. 400. 8,000. 300. 6,000. 200. 4,000. 100. 2,000. 0. 0 2006. 2007. 2008. 2009. 2010. No. of shares (million) Cash (million `). 43. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. Contracting shares and cash.

(45) DIRECTORS’ REPORT OF THE CONSOLIDATED GROUP. MONTHLY CONTRACTS OF SHARES IN THE YEAR 2010 Thousand euros. 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec. Capital. 44. At the close of 2010, the number of shares directly represented by Acerinox, S.A. Board of Directors, totalled 60.73% of the share capital. In the General Shareholders meeting held on 8th June 2010, 79.86% of the share capital was either present or represented.. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. As of 31st December 2010 Acerinox share capital amounted to 62,326,136.50 euros, represented by 249,304,546 ordinary shares of 0.25 euros face value each. All of them are admitted to official quotation in Madrid and Barcelona Stock Exchanges and are traded in the continuous market..

(46) 13. Board of Directors Mr. Velázquez replaces Mr. Rafael Naranjo in the position of Chief Executive Officer. The latter left this position for age reasons but still holds the position of Chairman of the Board of Directors. During the year Mr. Saburo Takada, Domanial Director, was replaced by Mr. Ryoji Shinohe who left the Board for personal reasons.. ACERINOX, S.A. Board of Directors Meeting in Kentucky factory.. 45. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. In the General Shareholders Meeting held on the 8th June 2010 it was resolved that Mr. Bernardo Velazquez Herreros be appointed as a member of the Board. Later, the Board of Directors meeting held on the 27th July would appoint him as Chief Executive Officer of the company and member of the Executive Committee. Previously he had been holding the position of Managing Director of the Acerinox Group..

(47) DIRECTORS’ REPORT OF THE CONSOLIDATED GROUP. BOARD OF DIRECTORS Chairman : Mr. RAFAEL NARANJO OLMEDO Chief Executive Officer Mr. BERNARDO VELázQUEz HERREROS Board Directors: Mr. CLEMENTE CEBRIáN ARA Mr. ÓSCAR FANJUL MARTÍN Mr. JOSÉ RAMÓN GUEREDIAGA MENDIOLA Mr. RYO HATTORI Mr. LUIS LOBÓN GAYOSO Mr. SANTOS MARTÍNEz-CONDE GUTIÉRREz-BARQUÍN Mr. FERNANDO MAYANS ALTABA Mr. BRAULIO MEDEL CáMARA Mrs. BELÉN ROMANA GARCÍA Mr. FUMIO ODA Mr. DIEGO PRADO PÉREz-SEOANE Mr. MVULENI GEOFFREY QHENA Mr. RYOJI SHINOHE Secretary: Mr. ALVARO MUÑOz LÓPEz. Mr. RAFAEL NARANJO OLMEDO (CHAIRMAN ) Mr. ÓSCAR FANJUL MARTÍN Mr. JOSÉ RAMÓN GUEREDIAGA MENDIOLA Mr. RYO HATTORI Mr. LUIS LOBÓN GAYOSO Mr. SANTOS MARTÍNEz-CONDE GUTIÉRREz-BARQUÍN Mr. BERNARDO VELázQUEz HERREROS Secretary: Mr. áLVARO MUÑOz LÓPEz. 46. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. EXECUTIVE COMMITTEE.

(48) APPOINTMENTS AND REMUNERATIONS` COMMITTEE Mr. JOSÉ RAMÓN GUEREDIAGA MENDIOLA (CHAIRMAN) Mr. ÓSCAR FANJUL MARTÍN Mr. BRAULIO MEDEL CáMARA Mr. SANTOS MARTÍNEz-CONDE GUTIÉRREz-BARQUÍN (Secretary). AUDIT COMMITTEE Mrs. BELÉN ROMANA GARCÍA (CHAIRWOMAN) Mr. CLEMENTE CEBRIáN ARA Mr. RYO HATTORI Mr. FERNANDO MAYANS ALTABA Mr. DIEGO PRADO PÉREz-SEOANE Secretary: Mr. áLVARO MUÑOz LÓPEz. SENIOR MANAGEMENT Chief Executive Officer: Mr. BERNARDO VELázQUEz HERREROS Directors: Mr. ANTONIO FERNáNDEz PACHECO Managing Director Mr. JOSÉ RIESTRA PITA Assistant to the Chairman. Mr. JOSÉ LUIS MASI SAINz DE LOS TERREROS Director of the Campo de Gibraltar factory Mr. MIGUEL FERRANDIS TORRES Chief Financial Officer Mr. LUIS GIMENO VALLEDOR General Counsel. 47. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. Mr. OSWALD WOLFE Commercial Director.

(49) DIRECTORS’ REPORT OF THE CONSOLIDATED GROUP. 14. Important events after the closing of the year. 1. Market situation. 4. Incorporation of Acerinox Turkey. In the period elapsed of this year the Group order book has improved to the levels of the fourth quarter and this has substantially improved the activities in the factories compared with the same period in 2010.. Acerinox is represented in this country through its 25% stake in Betinoks. The recent development of stainless steel consumption and the prospect of an extended relationship with the European Union demonstrate that the Group should have the adequate tool to channel its sales.. The last Board Meeting of 2010 resolved to sign up to the Good Tax Practices Code sponsored by the Economy and Tax Ministry. In January 2011 the authorities were formally informed of our adherence to this code which, among other measures, foresees a permanent relationship between the Inland Revenue and the companies. The first bilateral meeting was held in January and we have been able to confirm the advantages implied in a discussion and relationship channel with the tax authorities.. 3. Phase XVII of the Investments Plan The company Board of Directors has already approved the investments for Phase XVII of the Investments Plan for the Campo de Gibraltar Factory. Such investments, amounting to 54 million euros, will be designated for equipment upgrades, a sign of trust in the future of our factory and the commitment to remain the leading factory in Europe.. 48. 5. Bahru Stainless SDN, BHD New investments in Johor Bahru continue to be approved. The second phase contracts have already been awarded and the first two cutting lines are already in operation.. 6. Excellence Plan 2011/2012 In the Board of Directors Meeting held on 24th February the Second Excellence Plan for 2011 and 2012 has been approved. Due to the fact that most of the targets of the First Excellence Plan were focused on production, this second Plan will also involve the different stages of transport and trading of the products. The forecasted savings of this second Plan are around 90 million euros.. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. 2. Membership to the Good Tax Practices Code.

(50) 15. Management of the financial risk. The Group does not acquire financial tools with speculative aims.. 15.1 Market risks 15.1.1 Exchange rate risk The Group operates internationally and consequently it is exposed to the exchange rate risk for operations in different currencies, particularly the USD. The exchange rate risk is born out of the trading transactions, financial and investment operations and the conversion of financial statements whose currency is not the Consolidated Group currency. To control the exchange rate risk of financial operation the group uses financial derivatives such us “cross currency swap” Not all the insurance contracts traded by the Group comply with the conditions to be considered as cover tools of the cash flows. Those which do not. comply with these conditions have been accounted according to the assessment rule defined for the financial tools with a reasonable value with changes in the results. The reasonable value of the contracts of change on credit is the same as its market value on the balance date, in other words, the current value of the difference between the insured value and the price on credit for each contract. The Group covers most of its commercial and financial transactions in currency and for this purpose each society at the beginning of the month, and reviewed every fortnight, considers the loans on non local currencies, the balance of customers and suppliers in foreign currency, the forecast of purchases and sales in foreign currencies for this period and the contracted insurance exchanges. The Group can consider the commercial transactions to assess the initial exposure when having to cover the financial transactions. Finally, the Group is exposed to an exchange rate risk as a result of the conversion of the individual financial statements, whose functional currency is different from the Group currency, particularly for the USD and the South African Rand. The variation sensitivity of the euro against these currencies, keeping other variables fixed, is the following:. Profit and Losses 10% 10% Appreciation Depreciation. 31 December 2010 USD zAR MYR 31 December 2009 USD zAR MYR. Assets 10% Appreciation. 10% Depreciation. 14,567 -1,497 -150. -11,969 1,225 123. 122,485 42,391 30,861. -100,215 -34,684 -25,250. -3,630 -3,369 -1,780. 2,970 2,757 1,457. 121,523 36,839 14,111. -99,428 -32,181 -11,545. 49. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. The Group activities are exposed to several financial risks: market risks (currency risks, interest rate risks, price risks), credit risks and liquidity risks. The Group seeks to minimize the potential effects on the financial profitability of the Group by means of financial tools derived from those risks deemed necessary and also the contracting of insurances..

(51) DIRECTORS’ REPORT OF THE CONSOLIDATED GROUP. The Group is financed in different countries and different currencies (mainly in euro, rand and dollar) and with different maturity terms, mainly referred to a variable interest rate. Both our financial assets and liabilities are exposed to the risk of the interest rate. In order to manage this risk, the interest rate curves are regularly studied and sometimes we use tools derived from interest rate financial exchanges. They comply with the conditions to be considered coverage tools of cash flow in accounting terms. The reasonable value of the financial exchanges of the interest rates is the estimated amount that the Group would receive or pay to close such financial exchange on the balance date considering the interest rate and exchange on such date and the credit risk of its counterparties. In this sense during 2010 the Group carried out different covers of interest rates for some of its loans. In May 2010 Acerinox contracted an interest rate swap with four Spanish financial bodies to cover the interest rate of the loan of 400 million euros contracted with ICO (Official Credit Institute) in 2007. Through this operation Acerinox turned a variable loan into a fixed loan with a base rate of 2.38% for the same amounts and redemptions calendar as the ICO loan. In the case of the ICO loan of 160 million USD, Acerinox also contracted in May 2010 a cross currency swap with four Spanish financing bodies to cover both the currency and the interest rate of this loan. In this way the loan went from a variable type in dollars to a fixed interest rate in euros. After this operation the base rate became 2.39% in euros. In addition, during March and May 2010 Acerinox contracted two loans for 45 and 30 million euros. 50. with Banesto and Banco de Santander respectively, with fixed total rates of 3.15% and 3.05%. In November 2010 Bahru Stainless Sdn Bhd closed with a loan amounting to 63 million USD with Bank of Tokyo Mitsubishi on a 7- year term with a 3 year grace period. This loan is guaranteed by Nisshin Steel. Likewise, Bahru Stainless contracted a crosscurrency swap to cover both the currency risk and the interest rate risk, being the cost of the loan 5.85% of the total loan in Malaysian ringgits. As a result of the international financial crisis and the distortions in the money market, the risk fees and the exchange rate differential losses have increased since 2009, although in the last part of 2010 they have stabilized. The Group has minimized this risk by means of balancing the long and short term debt. After the generalized drops of the interest rates during 2009, in the first half of 2010 the minimums were reached and at this point they began to rise partly as a result of the beginning of the world economic recovery. Regarding the Group sensitiveness towards the interest rates, if such rates had been higher than 100 basic points, keeping stable the rest of the variables, the consolidated result after taxes would have been lower by 7.65 million euros due to a higher financial expense derived from the debts of variable type. (10.7 million lower in 2009), The effect of the interest rates increase upon the Group net assets would have been a net increase of 11.34 million euros due to the fact that the higher financial expenses would have been offset by the positive variations in the assessments of the cover derivatives of the interest rates at the end of the current year.. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. 15.1.2 Risk of interest rates.

(52) The Group is exposed to three main risks for variations in the prices: 1- Risks of variation in the price of the shares of listed companies. The risks of variation in the prices of the listed companies shares is caused by the stock portfolio the Group owns of Nisshin Steel, listed in Tokyo Stock Exchange. The Group does not use any derivative financial tool to cover this risk. 2- Risk due to regional crisis. Acerinox has a global presence with three factories in three geographical areas and an active commercial presence in five continents which allows the reduction of its exposure to a specific area. 3-Risk due to variation in raw material prices The stainless steel market is characterised by the. strength of demand, which has been growing at an approximate annual rate of 6% for more than 50 years. Exceptionally, in the period 2007-2009, due to the world economic recession, the market reduced by 14.8%, but in 2010 the market recovery of more than 30%, has corrected that drop, confirming the previously mentioned growth rate in the medium term. The need for stainless steel in all the industrial applications and its presence in all the sectors guarantee this growth rate in the coming years. Despite stable final consumption due to, the market in hands of the independent stockists, makes apparent consumption volatile (depending on the price oscillations of the nickel in the London Metal Exchange). To reduce the risk derived from the majority market control by independent stockists – whose policy is accumulation/realization of inventories – Acerinox strategy has been to develop a commercial network which allows the supply to final customers through warehouses and service centres channelling the. Slabs in Campo de Gibraltar factory.. 51. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. 15.1.3 Prices risks.

(53) DIRECTORS’ REPORT OF THE CONSOLIDATED GROUP. The convenience of maintaining sufficient stock levels in our warehouses involves the risk that this stock may become overvalued in relation to the actual market price. This risk is lessened by, which the Group lessens by trying to keep the level of inventories under control. In 2010 and despite the improved levels of activity, the Group kept its level of inventories (+0.3%) stable. To solve the volatility risk of the raw materials a natural cover of 85% is applied on the Group sales (all the sales in Europe, America and South Africa) through the alloy surcharge application which allows the nickel fluctuations in the London Metal Exchange during the period of the order manufacturing, and also the fluctuations of euro/ dollar to be transferred directly to the customer. Due to this natural cover, a 10% decrease of the nickel quotation in the LME involves 1% variation of the gross margin over sales for the Group. The assessment of the raw materials, material in process and finished products at an average price, helps to reduce the costs volatility and consequently to decrease the impact on margins of the nickel price fluctuations.. Efficient management of the aforementioned solutions to the other risks reduces our exposure to this one.. 15.2 Credit risk The credit risk is defined by the possible loss, incurred by the customer or debtor’s not compliance with their contractual obligations. The Group exposure to the credit risk is determined by the individual features of each customer and by the risk of the country where the customer operates. Due to the diversity of customers and countries, the Group does not have a concentration of individual, sector or geographical risks. The Group policy is to cover the political and commercial risks by means of credit insurance companies, letters of credit or bank warranties confirmed by banks with AA rating in countries with low financial risk. The credit insurance covers between 85 and 90% of the commercial risks, depending on the insurance company and 90% of the political risks. The principal insurance credit company of the Group has a credit rating of A of Standard & Poor’s and A3 from Moody’s. During 2010 we have received compensations derived from the collection insurance policy for the amounts receivables, 2,538 million euros (4,571. The policy of order commitment followed by the Group implies a natural cover regarding the raw material costs, due to the fact that every accepted order has a known risk. Nevertheless, the nickel corrections in the London Metal Exchange determine the evolution of the apparent consumption related of the expectations of the stockists and its subsequent realization or accumulation of inventories.. million euros in 2009). There is a Risks Committee, responsible for following up the Group policy regarding the credit risk. Should it be necessary, it studies the customer credit capacity on an individual basis, establishing the credit limits and the payment conditions. New customers are studied together with the insurance company, before the Group general payment conditions are offered. Those who do not comply. The main risk is still the apparent consumption volatility for being a factor out of the Group control.. 52. with the necessary credit conditions are invoiced on a cash basis.. WorldReginfo - 2b47bfc3-5093-47af-b902-486e04a36a3a. Group productions. Thanks to this policy, Acerinox has achieved a significant rate in the final customers market, which stabilizes our sales thus, reducing this risk. Illustrations of this strategy are the investments in 2010 in the service centres of Pinto (Madrid), Bologna (Italy) and Warsaw (Poland)..