Volkswagen (VLKAY)

Natural Gas

Natural Gas

Natural gas is priced regionally. European prices are usually linked with petroleum prices, normalizing for each fuel’s energy content. North American natural gas prices trade independently of oil prices and are set by spot and future contracts, traded on the NYMEX exchange or over the counter. Prices elsewhere are set on an oil derivative or bilateral basis, depending on local market conditions. International oil prices are dominated by global supply and demand conditions and are also influenced by geopolitical factors, such the ability of the Organization of Petroleum Exporting Countries (“OPEC”) to limit production.

In 2009, North American natural gas prices remained at low levels due to ample supply and reduced demand, bringing prices down to $3 per MMBTu before recovering slightly to $5 per MMBTu. Non-conventional gas supply remained at an unprecedented level and the absence of major weather related supply disruptions led markets to become oversupplied due to low demand.

During the first quarter of 2009, oil prices fell below $50 per barrel for the first time since 2004 due to lower demand from OECD countries, as oil demand decreased for the first time in a decade. The supply discipline of OPEC countries resulted in prices recovering part of the lost ground of 2008, with prices reaching $80 per barrel at the end of 2009. The rising price of oil had an upward impact on oil-based natural gas indices in Europe. Because of delayed indexation mechanisms, the decrease in 2008 oil prices, only impacted European natural gas prices in 2009, and oil prices increased in the second half of 2009 will impact European natural gas prices in 2010.

Ocean Freight

After the freight market collapsed in the fourth quarter of 2008 on the back of world financial turmoil, the dry bulk freight market recovered substantially in 2009 due to the gradual economic recovery around the world and the continued growth of emerging markets, led by China. Steel production growth in China sustained the shipping market as steel producers account for almost 50% of demand for dry bulk shipping. During 2009 the average of spot rates for Capesize was $42,705/day, for Panamax $19,116/day, for Supramax $17,207/day and for Handysize $11,223/day. The Baltic Dry Index (BDI) saw a low of 772 in January 2009 and a high of 4661 in November 2009. The relative strength of the freight market during 2009 can be ascribed to China’s high demand for raw materials (specifically iron ore and coal), (ii) high slippage rates of new ship deliveries, (iii) port congestion, and (iv) imbalance in trade growth that resulted in low ships utilization.

Impact of Exchange Rate Movements

After reaching highs in the second half of 2008 and the first quarter of 2009, the U.S. dollar weakened significantly in a volatile market for the rest of 2009 against the currencies of the key jurisdictions where ArcelorMittal operates (including the Polish zloty, the Czech koruna, the Romanian leu, the Canadian dollar, the euro, the Brazilian real, the South African rand and the Mexican peso).

Because a substantial portion of ArcelorMittal’s assets, liabilities, sales and earnings are denominated in currencies other than the U.S. dollar (its reporting currency), ArcelorMittal has exposure to fluctuations in the values of these currencies relative to the U.S. dollar. These currency fluctuations, especially the fluctuation of the value of the U.S. dollar relative to the euro, as well as fluctuations in the currencies of the other countries in which ArcelorMittal has significant operations and sales, can have a material impact on its results of operations. In order to minimize its currency exposure, ArcelorMittal enters into hedging transactions to lock-in a set exchange rate, as per its risk management policies.

In June 2008, ArcelorMittal entered into a transaction in order to hedge U.S. dollar-denominated raw material purchases until 2012. The hedge involved a combination of forward contracts and options that initially covered between 60% to 75% of the dollar outflow from the Company’s European subsidiaries based on then-current raw materials prices, amounting to approximately $20 billion. The transaction was unwound during the fourth quarter of 2008, resulting in a deferred gain of approximately $2.6 billion recorded in shareholders’ equity and of $349 million recorded in operating income. The gain recorded in equity along with the recording of hedged expenses is being recycled in the statement of operations during the period 2009-2012; of this amount, $979 million was recorded as income within cost of sales during the year ended December 31, 2009. See Note 16 to ArcelorMittal’s 2008 consolidated financial statements and Note 15 to ArcelorMittal’s 2009 consolidated financial statements.

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Table of Contents

Trade and Import Competition

Natural Gas

Domestic natural gas production decreased 0.6% to 1,896 mmcf/d in the nine-month period ended September 30, 2009 compared to 1,908 mmcf/d in the nine-month period ended September 30, 2008, due to limited gas-fired thermoelectric demand attributable to high reservoir levels at hydroelectric power plants in Southeastern Brazil.

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International gas production decreased 4.0% due to reduced imports of Bolivian gas and reduced consumption of natural gas at our gas-powered thermoelectric plants, which supplement the base hydroelectric system. This decrease was partially offset by higher production from Argentina due to the increase in our interest in the Sierra Chata gas field in the fourth quarter of 2008.