Production Capacity Of Graphite Electrode

　　We believe that the worldwide total graphiteelectrode manufacturing capacity is over 1.4 million metric tons. Themarket in which we compete, which excludes capacity used to make electrodes fordomestic non-melter applications in China, is approximately 1.1 millionmetric tons. There are 2 global, and approximately7other notable regional or local producers, who we believe have approximately829,000 metric tons of this capacity. The remaining capacity is maintained byover fifteen other local or regional manufacturers.

　　We believe that in themarkets in which we compete there is over 1.0 million metric tons ofdemand that corresponds with this capacity, representing a utilization rate ofover 95%.

　　As a result ofrepositioning our global manufacturing network and other actions, as well asour proprietary process and technological improvements, we have the capability,depending on product demand and mix, to manufacture up to 223,000 metric tonsof graphite electrodes annually from our existing assets. We believe that ourMonterrey, Mexico facility is one of the largest graphite electrodemanufacturing facilities in the world.

　　Graphite Electrode MarketShare.We estimate that about 65% of the EAF steel makers worldwide(other than in China, for which reliable information is not generallyavailable) and about 77% of the EAF steel makers in the U.S. and the marketswhere we have manufacturing facilities, purchased all or a portion of theirgraphite electrodes from us in 2006. For 2006, we further estimate that wesupplied about 36% of all graphite electrodes purchased in the U.S. and themarkets where we have manufacturing facilities, and about 16% worldwide(including China), and about 20% in markets in which we compete. We estimatethat the worldwide market for graphite electrodes was approximately$3.8 billion in 2006 (including China).

　　We estimate that, in 2006,we sold graphite electrodes in about 70 countries. Sales in the United Statesand South Africa account for approximately 18% and 10%, respectively, of totalnet sales of our graphite electrode segment. No other country accounts for morethan 10% of the total net sales of our graphite electrode segment.

　　Graphite electrodes areconsumed primarily in electric arc furnace steel production, the steel makingtechnology used by all “mini-mills,” typically at a rate of one graphiteelectrode every eight to ten operating hours. Electric arc furnace steel makersare called “mini-mills” because of their historically smaller capacity ascompared to basic oxygen furnace steel makers and because they historicallyserved more localized markets. We believe that mini-mills constitute the higherlong term growth sector of the steel industry. Graphite electrodes are also consumedin the refining of steel in ladle furnaces and in other smelting processes suchas production of titanium dioxide.

　　Electrodesact as conductors of electricity in the furnace, generating sufficient heat tomelt scrap metal, iron ore or other raw materials used to produce steel orother metals. The electrodes are consumed in the course of that production.

　　Electric arc furnaces thatproduce steel typically range in size from those that produce about 25 metrictons of steel per production cycle to those that produce about 150 metric tonsper production cycle. Electric arc furnaces operate using either alternatingelectric current (A/C) or direct electric current (D/C). The vast majority ofelectric arc furnaces use alternating current. Each of these furnaces typicallyuses nine electrodes (in three columns of three electrodes each) at one time.The other electric arc furnaces, which use direct current, typically use onecolumn of three electrodes. The size of the electrodes varies depending on thesize of the furnace, the size of the furnace’s electric transformer and theplanned productivity of the furnace. In a typical furnace using alternatingcurrent and operating at a typical number of production cycles per day, one ofthe nine electrodes is fully consumed (requiring the addition of a newelectrode), on average, every eight to ten operating hours. The actual rate ofconsumption and addition of electrodes for a particular furnace dependsprimarily on the efficiency and productivity of the furnace. Therefore, demandfor graphite electrodes is directly related to the amount and efficiency ofelectric arc furnace steel production.

　　Electric arc furnace steelproduction requires significant heat (as high as 5,000 degrees Fahrenheit,which we believe is the hottest operating temperature in any industrial orcommercial manufacturing process worldwide) to melt the raw materials in thefurnace, primarily scrap metal. Heat is generated as electricity (as much as150,000 amps) passes through the electrodes and creates an electric arc betweenthe electrodes and the raw materials.

　　Graphite electrodes arecurrently the only products available that have the high levels of electricalconductivity and the capability of sustaining the high levels of heat generatedin an electric arc furnace producing steel. Therefore, graphite electrodes areessential to the production of steel in electric arc furnaces. We believe thereis currently no commercially viable substitute for graphite electrodes inelectric arc furnace steel making. We estimate that, on average, the cost ofgraphite electrodes represents about 3% to 4% of the cost of producing steel ina typical electric arc furnace.

　　Electricarc furnace steel production for the last five years has grown at an estimatedaverage annual growth rate of about 3%. We believe that EAF steel productionwill continue to grow at an average annual long term growth rate of about 3% to4%. We estimate that there are currently approximately 2,000 electric arc steelproduction furnaces operating worldwide. Electric arc furnace steel productiongrew from approximately 90 million metric tons in 1970 to approximately 325million metric tons in 2005, representing approximately a third of the world’ssteel production. We estimate that steel makers worldwide added 11 millionmetric tons of new EAF capacity in 2005, not all of which was fully operationalin 2005. We are aware of about 37 million metric tons of announced new electricarc furnace steel production capacity that is scheduled to be added in the 2006through 2008 time period, approximately 11% of which is replacement capacity.Additionally, not all of such capacity is expected to be fully operationalduring this time period.