Relationship Between Graphite Electrode Demand And EAF Steel Production

　　The improved efficiency of electric arc furnaceshas resulted in a decrease in the average rate of consumption of graphiteelectrodes per metric ton of steel produced in electric arc furnaces (called “specificconsumption”). We estimate that specific consumption declined from about2.5 kilograms of graphite electrodes per metric ton of steel produced in 2000to about 2.1 kilograms per metric ton in 2006. We believe that the rate ofdecline of specific consumption over the long term has become lower. We believethat the decline in specific consumption will continue at a more gradual pace,on average, as the costs (relative to the benefits) increase for EAF steelmakers to achieve further efficiencies in specific consumption. We furtherbelieve that the rate of decline in the future will be impacted by the additionof new EAF steel making capacity. To the extent that this new capacity replacesold capacity, it has the accelerated effect of reducing industry wide specificconsumption due to the efficiency of new electric arc furnaces relative to theold. However, to the extent that this new capacity increases industry wide EAFsteel production capacity and that capacity is utilized, it creates additionaldemand for graphite electrodes.

　　Increases in EAF steelproduction, offset by declines in specific consumption, resulted incorresponding changes in demand for graphite electrodes. Graphite electrodedemand is expected to grow over the long term at an estimated average annualgrowth rate of about 1% to 2%, based on the anticipated growth of EAF steelproduction, partially offset by the decline in specific consumption describedabove. We believe that the graphite electrode industry manufacturing capacityutilization rate worldwide was about 96% in 2004, 95% in 2005 and 95% in 2006.