20-F 1 d338624d20f.htm FORM 20-F FORM 20-F
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

 

     ¨ Registration statement pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934

or

 

     x Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2011

or

 

     ¨ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

or

 

     ¨ Shell company report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number: 001-32734

TERNIUM S.A.

(Exact Name of Registrant as Specified in its Charter)

N/A

(Translation of registrant’s name into English)

Grand Duchy of Luxembourg

(Jurisdiction of incorporation or organization)

29, Avenue de la Porte-Neuve — 3rd floor

L-2227 Luxembourg

(Address of registrant’s registered office)

Alicia Alvarez

29, Avenue de la Porte-Neuve — 3rd floor

L-2227 Luxembourg

Tel. +352 26 68 31 52, Fax. +352 26 59 83 49, e-mail: luxembourg@ternium.com

(Name, Telephone, E-Mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

      

Name of Each Exchange On Which Registered

American Depositary Shares        New York Stock Exchange
Ordinary Shares, par value USD1.00 per share        New York Stock Exchange*

 

* Ordinary shares of Ternium S.A. are not listed for trading but only in connection with the registration of American Depositary Shares which are evidenced by American Depositary Receipts.

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

2,004,743,442 ordinary shares, par value USD1.00 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities

Act.     Yes  x    No  ¨

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ¨    No  x

Note—checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer  x                Accelerated Filer  ¨                Non-accelerated filer  ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  ¨    International Financial Reporting Standards as issued by the International Accounting Standards Board  x    Other  ¨

If “Other” has been checked in response to the previous question indicate by check mark which financial statement item the registrant has elected to follow Item 17  ¨ Item 18  ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Please send copies of notices and communications from the Securities and Exchange Commission to:

 

Cristian J.P. Mitrani
Mitrani, Caballero, Ojam & Ruiz Moreno Abogados
Alicia Moreau de Justo 400, 3rd Floor
C1007AAH — Buenos Aires, Argentina
(54-11) 4590-8600
  Robert S. Risoleo, Esq.
Sullivan & Cromwell LLP
1701 Pennsylvania Avenue N.W.
Washington, D.C. 20006
(202) 956-7500

 

 

 


Table of Contents

TABLE OF CONTENTS

 

PART I

     6   

Item 1. Identity of Directors, Senior Management and Advisers

     6   

Item 2. Offer Statistics and Expected Timetable

     6   

Item 3. Key Information

     6   

Item 4. Information on the Company

     21   

Item 4A. Unresolved Staff Comments

     53   

Item 5. Operating and Financial Review and Prospects

     53   

Item 6. Directors, Senior Management and Employees

     75   

Item 7. Major Shareholders and Related Party Transactions

     84   

Item 8. Financial Information

     87   

Item 9. The Offer and Listing

     89   

Item 10. Additional Information

     91   

Item 11. Quantitative and Qualitative Disclosures About Market Risk

     103   

Item 12. Description of Securities Other Than Equity Securities

     106   

PART II

     107   

Item 13. Defaults, Dividend Arrearages and Delinquencies

     107   

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

     107   

Item 15. Controls and Procedures

     107   

Item 16A. Audit Committee Financial Expert

     108   

Item 16B. Code of Ethics

     108   

Item 16C. Principal Accountant Fees and Services

     109   

Item 16D. Exemptions from the Listing Standards for Audit Committees

     110   

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

     110   

Item 16F. Change in Registrant’s Certifying Accountant

     111   

Item 16G. Corporate Governance

     111   

Item 16H. Mine Safety Disclosure

     113   

PART III

     113   

Item 17. Financial Statements

     113   

Item 18. Financial Statements

     113   

Item 19. Exhibits

     113   

 

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CERTAIN DEFINED TERMS

In this annual report, unless otherwise specified or if the context so requires:

 

   

References to the “Company” refer exclusively to Ternium S.A., a Luxembourg public limited liability company (société anonyme);

 

   

References in this annual report to “Ternium,” “we,” “us” or “our” refer to Ternium S.A. and its consolidated subsidiaries;

 

   

References to the “Ternium companies” are to the Company’s manufacturing subsidiaries, namely Ternium México S.A. de C.V., or Ternium Mexico, a Mexican corporation, Siderar S.A.I.C., or Siderar, an Argentine corporation, Ferrasa S.A.S., or Ferrasa, a Colombian corporation, Ternium Internacional Guatemala S.A., or Ternium Guatemala, a Guatemalan corporation, and Ferrasa Panamá S.A., or Ferrasa Panama, a Panamanian corporation, and their respective subsidiaries;

 

   

References to “Tenaris” are to Tenaris S.A., a Luxembourg public limited liability company (société anonyme) and a significant shareholder of the Company;

 

   

References to “San Faustin” are to San Faustin S.A., a Luxembourg corporation and the Company’s indirect controlling shareholder;

 

   

References to the “Ternium commercial network” or “Ternium Internacional” are to an international group of companies wholly owned by Ternium that market and provide worldwide distribution services for products offered primarily by Ternium;

 

   

References to the “Lomond Holdings” comprise the network of companies under the brand “Exiros” and their subsidiaries;

 

   

References to “Usiminas” refer to Usinas Sideúrgicas de Minas Gerais – Usiminas, a Brazilian corporation. For further information on the Usiminas shares purchase transaction, see Item 5. “Operating and Financial Review and Prospects—G. Recent Developments—Acquisition of participation in Usiminas”;

 

   

References to “ADSs” are to the American Depositary Shares, which are evidenced by American Depositary Receipts;

 

   

References to “finished steel products” when used in connection with production capacity are to finished steel products and semi-finished steel products capable of being sold to third parties;

 

   

References to “tons” are to metric tons; one metric ton is equal to 1,000 kilograms, 2,204.62 pounds or 1.102 U.S. (short) tons; and

 

   

References to “billions” are to thousands of millions, or 1,000,000,000.

 

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PRESENTATION OF CERTAIN FINANCIAL AND OTHER INFORMATION

Accounting Principles

We prepare our consolidated financial statements in conformity with International Financial Reporting Standards and IFRIC interpretations as issued by the International Accounting Standards Board, or IASB and adopted by the European Union (EU), or IFRS. IFRS differ in certain significant respects from generally accepted accounting principles in the United States, commonly referred to as U.S. GAAP.

 

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Currencies

In this annual report, unless otherwise specified or the context otherwise requires:

 

   

“dollars,” “U.S. dollars,” “USD” or “US$” each refers to the United States of America dollar;

 

   

“Mexican pesos” or “MXN” each refers to the Mexican peso; and

 

   

“Argentine pesos” or “ARP” each refers to the Argentine peso.

On December 31, 2011, the noon buying rate between the Mexican peso and the U.S. dollar (as published by Banco de México, or the Mexican Bank) was MXN13.9476=USD1.0000, and the U.S. dollar sell exchange rate in the Argentine Republic (as published by Banco Central de la República Argentina, or the Argentine Central Bank) was ARP4.3032=USD1.0000. Those rates may differ from the actual rates used in preparation of the Company’s consolidated financial statements. We do not represent that any of these currencies could have been or could be converted into U.S. dollars or that U.S. dollars could have been or could be converted into any of these currencies.

Rounding; Comparability of Data

Certain monetary amounts, percentages and other figures included in this annual report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be the arithmetic aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated may not be the arithmetic aggregation of the percentages that precede them.

Our Internet Site is Not Part of this Annual Report

We maintain an Internet site at www.ternium.com. Information contained in or otherwise accessible through this website is not a part of this annual report. All references in this annual report to this Internet site are inactive textual references to this URL, or “uniform resource locator” and are for your informational reference only. We assume no responsibility for the information contained on this site.

 

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This annual report and any other oral or written statements made by us to the public may contain “forward-looking statements” within the meaning of and subject to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. This annual report contains forward-looking statements, including with respect to certain of our plans and current goals and expectations relating to Ternium’s future financial condition and performance.

Sections of this annual report that by their nature contain forward-looking statements include, but are not limited to, Item 3. “Key Information,” Item 4. “Information on the Company,” Item 5. “Operating and Financial Review and Prospects” and Item 11. “Quantitative and Qualitative Disclosures About Market Risk.”

We use words such as “aim,” “will continue,” “will likely result,” “contemplate,” “seek to,” “future,” “objective,” “goal,” “should,” “will pursue,” “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” and words and terms of similar substance to identify forward-looking statements, but they are not the only way we identify such statements. All forward-looking statements are management’s present expectations of future events and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These factors include the risks related to our business discussed under Item 3. “Key Information—D. Risk Factors,” and among them, the following:

 

   

uncertainties about the behavior of steel consumers in the markets in which Ternium operates and sells its products;

 

   

changes in the pricing environments in the countries in which Ternium operates;

 

   

the impact in the markets in which Ternium operates of existing and new competitors, including competitors that offer less expensive products and services, desirable or innovative products, or have extensive resources or better financing, and whose presence may affect Ternium’s customer mix, revenues and profitability;

 

   

increases in the prices of raw materials, other inputs or energy or difficulties in acquiring raw materials or other inputs or energy supply cut-offs;

 

   

the policies of, and the economic, political and social developments and conditions in, the countries in which Ternium owns facilities or other countries which have an impact on Ternium’s business activities or investments;

 

   

inflation or deflation and foreign exchange rates in the countries in which Ternium operates;

 

   

volatility in interest rates;

 

   

the performance of the financial markets globally and in the countries in which Ternium operates;

 

   

the performance of our investment in Usiminas (including the operating and financial performance of Usiminas, and changes in the Brazilian Real versus the U.S. dollar), and the results of our association with Nippon Steel and Usiminas;

 

   

changes in domestic and foreign laws, regulations and taxes;

 

   

regional or general changes in asset valuations;

 

   

our ability to successfully implement our business strategy or to grow through acquisitions, greenfield projects, joint ventures and other investments; and

 

   

other factors or trends affecting the flat and long steel industry generally and our financial condition in particular.

By their nature, certain disclosures relating to these and other risks are only estimates and could be materially different from what actually occurs in the future. As a result, actual future gains or losses that may affect Ternium’s financial condition and results of operations could differ materially from those that have been estimated. You should not place undue reliance on the forward-looking statements, which speak only as of the date of this annual report. Except as required by law, we are not under any obligation, and expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.

 

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PART I

Item 1. Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Not applicable.

Item 3. Key Information

 

  A. Selected Financial Data

The selected consolidated financial data set forth below have been derived from our audited consolidated financial statements for each of the years and at the dates indicated herein. Our consolidated financial statements were prepared in accordance with IFRS, and were audited by PricewaterhouseCoopers S.àr.l., Réviseur d’ entreprises agréé, as of December 31, 2011 and for the year ended December 31, 2011 and were audited by Price Waterhouse & Co. S.R.L. as of December 31, 2010 and for the two years in the period ended December 31, 2010, which are independent registered public accounting firms that are member firms of the PwC International Ltd. network. IFRS differ in certain significant respects from U.S. GAAP.

Ternium obtained control over Grupo Imsa, a Mexican steel processor, on July 26, 2007. Accordingly, the audited consolidated financial statements of Ternium as of December 31, 2011, 2010, 2009 and 2008, and for the years then ended, included in this annual report consolidate the results and other financial data of Grupo Imsa for the entire year, and the audited consolidated financial statements of Ternium as of December 31, 2007, and for the year then ended, included in this annual report consolidate the results and other financial data of Grupo Imsa beginning on July 26, 2007. As a result, Ternium’s results and other financial data for the years ended December 31, 2011, 2010, 2009 and 2008 varied significantly from the results and other financial data for the year ended December 31, 2007.

For a discussion of the currencies used in this annual report, exchange rates and accounting principles affecting the financial information contained in this annual report, see “Presentation of Certain Financial and Other Information—Accounting Principles” and “Currencies.”

 

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In thousands of U.S. dollars    For the year ended December 31,  
(except number of shares and per share data)    2011     2010     2009     2008     2007  

Selected consolidated income statement data

          

Continuing operations

          

Net sales

     9,157,198        7,382,004        4,958,983        8,464,885        5,633,366   

Cost of sales

     (7,094,252     (5,665,254     (4,110,370     (6,128,027     (4,287,671
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     2,062,946        1,716,750        848,613        2,336,858        1,345,695   

Selling, general and administrative expenses

     (786,161     (665,306     (531,530     (669,473     (517,433

Other operating (expenses) income, net

     (11,566     2,493        (20,700     8,662        8,514   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     1,265,219        1,053,937        296,383        1,676,047        836,776   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

     (100,712     (72,969     (105,810     (136,111     (133,109

Interest income

     28,689        27,347        21,141        32,178        41,613   

Interest income – Sidor financial asset

     11,390        61,012        135,952        —          —     

Other financial (expenses) income, net

     (239,997     115,112        81,639        (693,192     (38,498

Equity in earnings of associated companies

     1,293        1,688        1,110        1,851        434   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

     965,882        1,186,127        430,415        880,773        707,216   

Income tax expense, benefit

          

Current and deferred income tax expense

     (315,974     (406,657     (91,314     (258,969     (291,345

Reversal of deferred statutory profit sharing

     —          —          —          96,265        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     649,908        779,470        339,101        718,069        415,871   

Discontinued operations

          

Income from discontinued operations

     —          —          428,023        157,095        579,925   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit for the year

     649,908        779,470        767,124        875,164        995,796   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Attributable to:

          

Equity holders of the Company

     513,541        622,076        717,400        715,418        784,490   

Non-controlling interest

     136,367        157,394        49,724        159,746        211,306   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     649,908        779,470        767,124        875,164        995,796   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization

     405,842        383,300        385,105        413,541        355,271   

Weighted average number of shares (1)

     1,968,327,917        2,004,743,442        2,004,743,442        2,004,743,442        2,004,743,442   

Basic earnings per share (expressed in USD per share) for profit: (2) (3)

          

From continuing operations attributable to the equity holders of the Company

     0.26        0.31        0.15        0.27        0.15   

From discontinued operations attributable to the equity holders of the Company

     —          —          0.21        0.09        0.24   

For the year attributable to the equity holders of the Company

     0.26        0.31        0.36        0.36        0.39   

Dividends per share

     0.075 (4)      0.075        0.05        —          0.05   

 

(1) Of the 2,004,743,442 shares issued as of December 31, 2011, Ternium held 41,666,666 through its wholly-owned subsidiary Ternium International Inc. and such shares were not considered outstanding. For further information related to the repurchase of shares in 2011, see note 30 to our consolidated financial statements included elsewhere in this annual report.
(2) International Accounting Standard N° 1 (IAS 1) (Revised) requires that income for the year as shown in the income statement includes the portion attributable to non-controlling interest. Basic earnings per share, however, continue to be calculated on the basis of income attributable solely to the equity holders of the Company.
(3) Diluted earnings per share (expressed in USD per share), equals basic earnings per share.
(4) Reflects dividend proposal submitted to the shareholders’ meeting to be held on May 2, 2012.

 

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In thousands U.S. dollars    At December 31,  

(except number of shares and per share data)

   2011      2010      2009      2008      2007  

Selected consolidated balance sheet data

              

Non-current assets

     5,181,973         5,579,438         5,250,135         5,491,408         8,553,123   

Property, plant and equipment, net

     4,032,675         4,262,896         4,040,415         4,212,313         6,776,630   

Other non-current assets (1)

     1,149,298         1,316,542         1,209,720         1,279,095         1,776,493   

Current assets

     5,564,601         5,532,893         5,042,538         5,179,839         5,095,959   

Cash and cash equivalents

     2,158,591         1,779,416         2,095,798         1,065,552         1,125,830   

Other current assets (2)

     3,395,637         3,743,516         2,937,494         4,108,954         3,200,987   

Non-current assets classified as held for sale

     10,373         9,961         9,246         5,333         769,142   

Total assets

     10,746,574         11,112,331         10,292,673         10,671,247         13,649,082   

Capital and reserves attributable to the Company’s equity holders (3)

     5,756,372         5,880,740         5,296,342         4,597,370         4,452,680   

Non-controlling interest

     1,084,827         1,135,361         964,897         964,094         1,805,243   

Non-current liabilities

     1,934,775         2,540,594         2,872,667         3,374,964         5,401,549   

Borrowings

     948,495         1,426,574         1,787,204         2,325,867         3,676,072   

Deferred income tax

     748,999         877,742         857,297         810,160         1,327,768   

Other non-current liabilities

     237,281         236,278         228,166         238,937         397,709   

Current liabilities

     1,970,600         1,555,636         1,158,767         1,734,819         1,989,610   

Borrowings

     1,041,550         513,083         539,525         941,460         406,239   

Other current liabilities

     929,050         1,042,553         619,242         793,359         1,369,608   

Liabilities directly associated with non-current assets classified as held for sale

     —           —           —           —           213,763   

Total liabilities

     3,905,375         4,096,230         4,031,434         5,109,783         7,391,159   

Total equity and liabilities

     10,746,574         11,112,331         10,292,673         10,671,247         13,649,082   

Number of shares (3)

     1,963,076,776         2,004,743,442         2,004,743,442         2,004,743,442         2,004,743,442   

 

(1) As of December 31, 2011, 2010, 2009, 2008 and 2007, includes goodwill mainly related to the acquisition of our Mexican subsidiaries for a total amount of USD663.8, USD750.1, USD708.6, USD683.7 and USD850.7 million, respectively.
(2) As of December 31, 2011, 2010, 2009, 2008 and 2007, includes deposits with maturity of more than three months for a total amount of USD281.7, USD848.4, USD46.8, USD90.0 and USD65.3 million, respectively.
(3) The Company’s share capital as of December 31, 2011, 2010, 2009, 2008 and 2007 was represented by 2,004,743,442 shares, par value USD1.00 per share, for a total amount of USD2,004.7 million. Of the 2,004,743,442 shares, as of December 31, 2011, Ternium held 41,666,666 through its wholly-owned subsidiary Ternium International Inc. For further information related to the repurchase of shares in 2011, see note 30 to our consolidated financial statements included elsewhere in this annual report.

 

  B. Capitalization and Indebtedness

Not applicable.

 

  C. Reasons for the Offer and Use of Proceeds

Not applicable.

 

  D. Risk Factors

You should carefully consider the risks and uncertainties described below, together with all other information contained in this annual report, before making any investment decision. Any of these risks and uncertainties could have a material adverse effect on our business, financial condition and results of operations, which could in turn affect the price of the Company’s shares and ADSs.

 

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Risks Relating to the Steel Industry

A downturn in the global economy would cause a reduction in worldwide demand for steel and would have a material adverse effect on the steel industry and Ternium.

Ternium’s activities and results are affected by international economic conditions, as well as by national and regional economic conditions in the markets where Ternium operates and/or sells its products. A downturn in the global economy would reduce demand for steel products. This would have a negative effect on Ternium’s business and results of operations.

If global macroeconomic conditions deteriorate, the outlook for steel producers would be adversely affected. In particular, a recession or depression in the developed economies (such as the global downturn experienced in 2008 and 2009 and the current European crisis), or slower growth or recessionary conditions in emerging economies that are substantial consumers of steel (such as China and India, as well as emerging Asian markets, the Middle East, Latin America and the Commonwealth of Independent States regions) would exact a heavy toll on the steel industry, and would depress demand for our products and adversely affect our business and results of operations. The ongoing effects of the global financial crisis and the current European crisis have had and may continue to have adverse effects on the steel industry, and, accordingly, may adversely affect our business and results of operations.

A protracted fall in steel prices would have a material adverse effect on the results of Ternium, as could price volatility.

Steel prices are volatile and are sensitive to trends in cyclical industries, such as the construction, automotive, appliance and machinery industries, which are significant markets for Ternium’s products. Steel prices in the international markets, which had been rising fast during the first half of 2008, fell sharply beginning in the second half of 2008 as a result of collapsing demand and the resulting excess capacity in the industry. The fall in prices during this period adversely affected the results of steel producers generally, including Ternium, as a result of lower revenues and writedowns of finished steel products and raw material inventories. For example, in the second half of 2008 Ternium recorded a valuation allowance on inventories in an amount of USD200 million and in the first half of 2009 it recorded an additional valuation allowance in the amount of USD127.6 million. Beginning in the second half of 2009, steel prices in the international markets rebounded mainly as a result of the increase in the demand for steel in China and other emerging markets, and the subsidence of the worldwide de-stocking process. This positive trend in international steel prices partially reversed during the second half of 2010 as the increase in demand for steel products was more than offset by new capacity additions and idled capacity restarts. A more balanced market and the increase in steel demand by year-end 2010 supported a steel price rally during the first quarter of 2011. During 2011 and the first quarter of 2012, steel prices followed a pattern similar to that witnessed during the previous year. Historically, the length and nature of business cycles affecting the steel industry has been unpredictable. A downturn in steel prices would materially and adversely affect Ternium’s revenues and profitability.

In addition, the steel industry is highly competitive with respect to price, product quality, customer service and technological advances, and competition has frequently limited the ability of steel producers to raise the price of finished products to recover higher raw material and energy costs. Moreover, in some cases, the governments of some countries are reluctant to accept price increases of products which are used as raw materials for the manufacture of other goods, as such increases could ultimately affect competitiveness in other industries or increase inflation. In some other cases, governments restrict the ability of companies to pass on to the domestic markets any increases in international prices. Accordingly, increases in the purchase costs of raw materials, energy and other inputs might not be recoverable through increased product prices.

A sudden increase in exports from China could have a significant impact on international steel prices affecting Ternium’s profitability.

As demand for steel has surged in China, steel production capacity in that market has also increased, and China is now the largest worldwide steel producing country, accounting for close to half of the worldwide steel production. Due to the size of the Chinese steel market, a slowdown in steel consumption in that market could cause a sizable increase in the volume of steel offered in the international steel markets, exerting a downward pressure on sales and margins of steel companies operating in other markets and regions, including Ternium.

Excess capacity, resulting in part from the 2008 global financial crisis and the current European crisis that reduced steel demand and from a strong increase in steel production capacity in recent years, may hamper the steel industry’s ability to sustain adequate profitability.

 

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In addition to economic conditions and prices, the steel industry is affected by other factors such as worldwide production capacity and fluctuations in steel imports/exports and tariffs. Historically, the steel industry has suffered, especially on downturn cycles, from substantial over-capacity. Currently, as a result of the 2008 global downturn, the current European crisis and the increase in steel production capacity in recent years, there are signs of excess capacity in all steel markets, which is impacting the profitability of the steel industry. Accordingly, it is possible that the industry’s excess capacity will result in an extended period of depressed margins and industry weakness.

Sales may fall as a result of fluctuations in industry inventory levels.

Inventory levels of steel products held by companies that purchase Ternium’s products can vary significantly from period to period. These fluctuations can temporarily affect the demand for Ternium’s products, as customers draw from existing inventory during periods of low investment in construction and the other industry sectors that purchase Ternium’s products and accumulate inventory during periods of high investment and, as a result, these companies may not purchase additional steel products or maintain their current purchasing volume. Accordingly, Ternium may not be able to increase or maintain its current levels of sales volumes or prices.

Price fluctuations or shortages in the supply of raw materials, slabs and energy could adversely affect Ternium’s profitability.

Like other manufacturers of steel-related products, Ternium’s operations require substantial amounts of raw materials, energy and other inputs from domestic and foreign suppliers. In particular, the Ternium companies consume large quantities of iron ore, scrap, ferroalloys, electricity, coal, natural gas, oxygen and other gases in operating their blast and electric arc furnaces. In addition, Ternium is a large consumer of slabs and hot and cold-rolled steel, which are used as inputs in the production process. Also, the availability and price of a significant portion of the raw materials, slabs, energy and other inputs Ternium requires are subject to market conditions and government regulation affecting supply and demand. For example, shortages of natural gas in Argentina and the consequent supply restrictions imposed by the government could lead to higher costs of production and eventually to production cutbacks at Siderar’s facilities in Argentina. See “—Risks Relating to the Countries in Which We Operate—Argentina—Restrictions on the supply of energy to Siderar’s operations in Argentina could curtail Siderar’s production and negatively impact Ternium’s results of operations.” In the past, Ternium has usually been able to procure sufficient supplies of raw materials, slabs, energy and other inputs to meet its production needs; however, it could be unable to procure adequate supplies in the future. Any protracted interruption, discontinuation or other disruption of the supply of principal inputs to the Ternium companies (including as a result of strikes, lockouts or other problems) would result in lost sales and would have a material adverse effect on Ternium’s business and results of operations. For example, during 2007 Companhia Vale do Rio Doce, or Vale, our main third party supplier of iron ore, was unable to provide us with the quantities of iron ore required for Siderar’s operations; in addition, there was limited transportation capacity from Brazil to Argentina through the Paraguay and Parana rivers. For further information related to raw materials, energy and other inputs requirements, see Item 4. “Information on the Company—B. Business Overview—Raw Materials, Energy and Other Inputs.”

The Ternium companies depend on a limited number of key suppliers.

The Ternium companies depend on certain key suppliers for their requirements of some of their principal inputs, including Vale for iron ore and ArcelorMittal for slabs; there is also a trend towards consolidation among suppliers of iron ore and other raw materials. The Ternium companies have entered into long-term contracts for the supply of some of their principal inputs (including iron ore) and it is expected that they will maintain and, depending on the circumstances, renew these contracts. However, if any of the key suppliers fails to deliver or there is a failure to renew these contracts, the Ternium companies could face limited access to some raw materials, energy or other inputs, or higher costs and delays resulting from the need to obtain their input requirements from other suppliers. As an example, in 2007 Vale was unable to provide Siderar with the quantities of iron ore that it required, forcing Siderar to import iron ore from Ternium’s mining operations in Mexico.

Intense competition could cause Ternium to lose its share in certain markets and adversely affect its sales and revenues.

The market for Ternium’s steel products is highly competitive, particularly with respect to price, quality and service. In both the global and regional markets, Ternium competes against other global and local producers of flat and long steel products, which in some cases have greater financial and operating resources. Competition from larger steel manufacturers could result in declining margins and reductions in sales volumes and revenues.

 

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Ternium’s larger competitors could use their resources against Ternium in a variety of ways, including by making additional acquisitions, implementing modernization programs, expanding their production capacity, investing more aggressively in product development, and displacing demand for Ternium’s products in certain markets. To the extent that these producers become more efficient, Ternium could confront stronger competition and could fail to preserve its current share of the relevant geographic or product markets. In addition, there has been a trend in recent years toward steel industry consolidation among Ternium’s competitors, and current smaller competitors in the steel market could become larger competitors in the future. For example, in June 2006, Mittal Steel and Arcelor merged to create the world’s largest steel company, ArcelorMittal; in April 2007, Tata Steel completed the acquisition of Corus; in 2008 Severstal acquired Sparrows Point, WCI Steel and Esmark (subsequently divesting in 2011 Sparrows Point, Warren and Wheeling); and in 2011 Sumitomo Metal Industries and Nippon Steel announced plans to merge their operations. Regional players in Ternium’s markets have also experienced consolidation through acquisitions; for example, Siderperu was acquired by Gerdau in 2006, Sicartsa of Mexico was acquired by ArcelorMittal in December 2006 and Aceria Paz del Rio of Colombia was acquired by Votorantim in March 2007. For further information, see Item 4. “Information on the Company—B. Business Overview—Competition.”

Moreover, competition from alternative materials (including aluminum, wood, concrete, plastic and ceramics) could adversely affect the demand for, and consequently the market prices of, certain steel products and, accordingly, could affect Ternium’s sales volumes and revenues.

Competition in the global and regional markets could also be affected by antidumping and countervailing duties imposed on some producers in major steel markets and by the removal of barriers to imported products in those countries where the Ternium companies direct their sales. For further information, see Item 4. “Information on the Company—B. Business Overview—Regulations—Trade regulations.”

Risks Relating to our Business

If Ternium does not successfully implement its business strategy, its opportunities for growth and its competitive position could be adversely affected.

Ternium plans to continue implementing its business strategy of enhancing its position as a low cost steel producer, pursuing strategic growth opportunities, gaining further access to iron ore and other inputs, developing value-added products, and providing services to a wider range of customers in the local and export markets. Any of these components or Ternium’s overall business strategy could be delayed or abandoned or could cost more than anticipated, any of which could impact its competitive position and reduce its revenue and profitability. For example, Ternium could fail to develop its projects to increase steel production capacity and lose market share in its regional markets. Even if Ternium successfully implements its business strategy, it may not yield the desired goals.

Recent and future acquisitions, green-field projects, significant investments and strategic alliances could have an adverse impact on Ternium’s operations or profits, and Ternium may not realize the benefits it expects from these business decisions.

A key element of Ternium’s business strategy is to identify and pursue growth-enhancing strategic opportunities, and as part of that strategy we regularly consider capital investments, strategic acquisitions, greenfield projects and alliances. However, any growth project will depend upon market and financing conditions. We must necessarily base any assessment of potential capital investments, acquisitions, green-field projects and alliances on assumptions with respect to operations, profitability and other matters that may subsequently prove to be incorrect. Furthermore, we may fail to find suitable acquisition targets or fail to consummate our acquisitions under favorable conditions.

In the recent past, Ternium acquired interests in various companies, including Hylsamex, one of the main steel producers in Mexico; Grupo Imsa, a leading steel processor with operations in Mexico, the United States and Guatemala; and Ferrasa, a Colombian steel producer and proccesor. In addition, Ternium, together with Nippon Steel, formed the Mexican company Tenigal S.R.L. de C.V., or Tenigal, for the manufacturing and sale of hot-dip galvanized and galvannealed steel sheets to serve the Mexican automobile market, including Japanese car makers. Finally, on January 16, 2012, Ternium, together with its subsidiary Siderar, acquired a participation in the control group of Usiminas, the largest flat steel producer in Brazil (for further information on the Usiminas shares purchase transaction, see Item 5. “Operating and Financial Review and Prospects—G. Recent Developments — Acquisition of participation in Usiminas”).

 

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Our recent and future acquisitions, investments and alliances may not perform in accordance with our expectations and could have an adverse impact on our operations and profits. Furthermore, we may be unable to successfully integrate any acquired businesses into our operations or to accomplish the business objectives or complete the initiatives or strategies that we expected to accomplish at the time of deciding any such investment. Moreover, we may also acquire, as part of future acquisitions, assets unrelated to our business, and we may not be able to integrate them or sell them under favorable terms and conditions. These risks, and the fact that integration of any acquired businesses will require a significant amount of time and resources of Ternium’s management and employees, could have an adverse impact on Ternium’s ongoing business and could have a material adverse effect on its business, financial condition and results of operations.

Ternium may be required to record a significant charge to earnings if it must reassess its goodwill or other amortizable intangible assets.

In accordance with IFRS, management must test all of Ternium’s goodwill, intangible assets with an indefinite useful life and intangible assets not yet available for use annually for impairment, or more frequently if there are indicators of impairment, and recognize a non-cash charge in an amount equal to any impairment. We recorded goodwill in connection with the acquisition of our Mexican subsidiaries, the balance of which, as of December 31, 2011, amounted to USD662.3 million. In addition, we may record goodwill in connection with the recent acquisition of a participation in Usiminas during 2012 (for further information on the Usiminas shares purchase transaction, see Item 5. “Operating and Financial Review and Prospects—G. Recent Developments — Acquisition of participation in Usiminas”). If Ternium’s management were to determine in the future that the goodwill from our acquisitions was impaired, Ternium would be required to recognize a non-cash charge to write down the value of goodwill, which would adversely affect Ternium’s results.

Labor disputes at Ternium’s operating subsidiaries could result in work stoppages and disruptions to Ternium’s operations.

A substantial majority of Ternium’s employees at its manufacturing subsidiaries are represented by labor unions and are covered by collective bargaining or similar agreements, which are subject to periodic renegotiation. Strikes or work stoppages could occur prior to or during the negotiations leading to new collective bargaining agreements, during wage and benefits negotiations or, occasionally, during other periods for other reasons. Ternium could also suffer plant stoppages or strikes if it were to implement cost reduction plans.

The various measures that Ternium has taken in the recent past, in order to become more competitive in Mexico and in Colombia, have not resulted in significant labor unrest. Notwithstanding this, we cannot assure that this situation will remain stable.

In Argentina, in early 2009, following a decrease in the level of activity since the last quarter of 2008 due to the global economic downturn, Siderar downsized contractor and subcontractor activities and temporary personnel, triggering adverse reactions from the construction workers’ union and the steelworkers’ union. Later in 2009, during the negotiations between Siderar and the steelworkers’ union regarding the annual bonuses related to results, the unions called for work stoppages and other measures. Since then, the various measures that Siderar has taken in order to become more competitive did not result in significant labor unrest. For more information on the collective bargaining agreement applicable to most of Siderar’s employees in Argentina, see Item 6. “Directors, Senior Management and Employees—D. Employees—Argentina.”

Any future stoppage, strike, disruption of operations or new collective bargaining agreements could result in lost sales and could increase Ternium’s costs, thereby affecting our results of operations. For more information on labor relations, see Item 6. “Directors, Senior Management and Employees—D. Employees.”

Ternium’s related party transactions with companies controlled by San Faustin may not always be on terms as favorable as those that could be obtained from unaffiliated third parties.

Some of Ternium’s sales and purchases are made to and from other companies controlled by San Faustin. These sales and purchases are primarily made in the ordinary course of business, and we believe that they are made on terms no less favorable than those we could obtain from unaffiliated third parties. Ternium will continue to engage in related party transactions in the future, and these transactions may not be on terms as favorable as those that could be obtained from unaffiliated third parties. For information concerning the principal transactions between Ternium and related parties see Item 7. “Major Shareholders and Related Party Transactions—B. Related Party Transactions.”

 

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Changes in exchange rates or any limitation in the Ternium companies’ ability to hedge against exchange rate fluctuations could adversely affect Ternium’s business and results.

The operations of the Ternium companies expose them to the effects of changes in foreign currency exchange rates. A significant portion of Ternium’s sales are carried out in currencies other than the U.S. dollar. As a result of this foreign currency exposure, exchange rate fluctuations impact the Ternium companies’ results and net worth as reported in their income statements and statements of financial position in the form of both translation risk and transaction risk.

In the ordinary course of business, the Ternium companies enter from time to time into exchange rate derivatives agreements to manage their exposure to exchange rate changes. Future regulatory or financial restrictions in the countries where Ternium operates may affect its ability to mitigate its exposure to exchange rate fluctuations, and thus cause an adverse impact on Ternium’s results of operations and financial condition.

Risks Relating to our Mining Activities

Iron ore is one of the principal raw materials used by Ternium’s operating subsidiaries. Ternium has equity interests in two iron ore mining companies in Mexico: a 100% interest in Las Encinas and a 50% interest in Consorcio Minero Benito Juárez Peña Colorada, S.A. de C.V., which operates Peña Colorada, Mexico’s largest iron ore mine. In addition, Ternium may seek to expand its mining activities in the future. Our present and future mining activities are or would be subject to particular risks, as follows:

Our mining activities depend on governmental concessions and on our ability to reach and maintain lease agreements (or other agreements for the use of land) with the owner of the real estate where the mines are located.

Our mining activities are subject to specific regulations and depend on concessions and authorizations granted by governmental authorities. Amendments to applicable law and regulations may change the terms pursuant to which we are required to pursue our exploration, mining and ore processing activities. Such changes may result in new taxes or royalties or require modifications to the processes and technologies used in our mining activities, leading to unexpected capital expenditures and higher costs. If the relevant government authority determines that we are not in compliance with our obligations as concessionaires, it may terminate our concession. Furthermore, in order to explore or exploit mines it is necessary to obtain the right to occupy and use the land where the mines are situated. Even though government regulations frequently establish provisions intended to facilitate the establishment of such rights, in some cases it may be difficult to reach and maintain agreements with the owners or such agreements may be excessively onerous. If we are unable to establish use and occupancy rights on acceptable terms, our mining activities may be compromised.

Our exploration activities are subject to uncertainties as to the result of such exploration; even if the exploration activities lead to the discovery of ore deposits, the effective exploitation of such deposits remains subject to several risks.

Exploration activities are highly speculative, involve substantial risks and may be unproductive. We may incur substantial costs for exploration which do not yield the expected results. The failure to find sufficient and adequate reserves could adversely affect our business. In addition, even if ore deposits are discovered, our ability to pursue exploitation activities may be delayed for a long time during which market conditions may vary. Significant resources and time need to be invested in order to establish ore resources through exploration, define the appropriate processes that shall be undertaken, obtain environmental licenses, concessions and other permits, build the necessary facilities and infrastructure for greenfield projects and obtain the ore or extract the metals from the ore. If a project does not turn out to be economically feasible by the time we are able to exploit it, we may incur substantial write-offs.

Our expected costs for exploration or exploitation activities may vary significantly and affect our expected results.

We may be subject to increased costs or delays relating to the acquisition of adequate equipment for the exploration and exploitation of ore deposits. We may also fail to obtain any necessary permits, or experience significant delays in connection with the issuance of such permits. Adverse mining conditions, whether permanent or temporary, may lead to a significant increase on our costs and/or affect our ability to produce the expected quantities of mineral. All of the above may adversely affect our ability to conduct our mining activities as planned and affect our expected results of operations.

 

 

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Difficulties in the relationships with local communities may adversely affect our mining activities.

Communities living near areas where we operate may take actions to oppose and interfere with our mining activities. Although we make significant efforts to maintain good relationships with such communities, actions taken by them may hamper our ability to conduct our mining activities as planned, or significantly increase the cost of exploring and/or exploiting the mines and adversely affect our business and results of operations. For example, in Aquila, Mexico, in 2011 and 2012, native communities blocked roads demanding higher compensation for the use of land for mining activities. These actions prevented Ternium from transporting iron ore from the mines to the pelletizing facilities for several months and ultimately resulted in a technical stoppage of the mining activities in Aquila for several weeks.

Risks Relating to the Structure of the Company

As a holding company, the Company’s ability to pay cash dividends depends on the results of operations and financial condition of its subsidiaries and could be restricted by legal, contractual or other limitations.

The Company conducts all its operations through subsidiaries. Dividends or other intercompany transfers of funds from those subsidiaries are the Company’s primary source of funds to pay its expenses, debt service and dividends and to repurchase shares or ADSs. The Company does not and will not conduct operations at the holding company level.

The ability of the Company’s subsidiaries to pay dividends and make other payments to the Company will depend on their results of operations and financial condition and could be restricted by, among other things, applicable corporate and other laws and regulations, including those imposing foreign exchange controls, and agreements and commitments of such subsidiaries. If earnings and cash flows of the Company’s operating subsidiaries are substantially reduced, the Company may not be in a position to meet its operational needs or to pay dividends. In addition, the Company’s ability to pay dividends is subject to legal and other requirements and restrictions in effect at the holding company level. For example, the Company may only pay dividends out of net profits, retained earnings and distributable reserves and premiums, each as defined and calculated in accordance with Luxembourg laws and regulations.

The Company’s controlling shareholder may be able to take actions that do not reflect the will or best interests of other shareholders.

As of March 31, 2012, San Faustin beneficially owned 62.02% and Tenaris, which is also controlled by San Faustin, held 11.46% of our outstanding voting shares. Rocca & Partners Stichting Administratiekantoor Aandelen San Faustin, or RP STAK, controls a significant portion of the voting power of San Faustin and has the ability to influence matters affecting, or submitted to a vote of, the shareholders of San Faustin. As a result, RP STAK is indirectly able to elect a substantial majority of the members of the Company’s board of directors and has the power to determine the outcome of most actions requiring shareholder approval, including, subject to the requirements of Luxembourg law, the payment of dividends. The decisions of the controlling shareholder may not reflect the will or best interests of other shareholders. For example, the Company’s articles of association permit the board of directors to waive, limit or suppress preemptive rights in certain cases. Accordingly, our controlling shareholder may cause our board of directors to approve an issuance of shares for consideration without preemptive rights, thereby diluting the minority interest in the Company. See “—Risk Factors—Risks Relating to our ADSs—Holders of our shares and ADSs in the United States may not be able to exercise preemptive rights in certain cases” and Item 7. “Major Shareholders and Related Party Transactions—A. Major Shareholders.”

Remaining minority interests in our subsidiaries could delay or impede our ability to complete our strategy.

We do not own one hundred percent of the interests in certain of our subsidiaries.

Approximately 26.03% of Siderar is held by Administración Nacional de la Seguridad Social, or ANSeS, Argentina’s governmental social security agency, approximately 10.46% is publicly held, and approximately 2.56% is held by certain Siderar employees. ANSeS became a significant shareholder of Siderar in the last quarter of 2008 as a result of the nationalization of Argentina’s private pension system, which caused assets under administration of Argentina’s private pension funds—including significant interests in publicly traded companies, such as Siderar, held by such funds—to be transferred to ANSeS.

 

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Ternium holds a 54% ownership interest in Ferrasa and Ferrasa Panama, and the former controlling shareholders hold the remaining 46% interest in each of Ferrasa and Ferrasa Panama. Ternium holds a 51% ownership interest in Tenigal, and Nippon Steel holds the remaining 49%.

The existence of a minority interest in these subsidiaries could prevent Ternium from taking actions that, while beneficial to Ternium, might not be beneficial to each relevant subsidiary, considered separately. As a result, we could be delayed or impeded in the full implementation of our strategy or the maximization of Ternium’s competitive strengths.

Risks Relating to the Countries in Which We Operate

Negative economic, political and regulatory developments in certain markets where Ternium has a significant portion of its operations and assets could hurt Ternium’s financial condition, shipments and prices and disrupt its manufacturing operations, thereby adversely affecting its results of operations and financial condition.

The results of Ternium’s operations are subject to the risks of doing business in emerging markets, principally in Mexico and Argentina and to a lesser extent in Colombia, and have been, and could in the future be, affected from time to time to varying degrees by economic, political and regulatory developments, such as forced divestiture of assets; restrictions on production, domestic sales, imports and exports; interruptions to essential energy inputs; exchange and/or transfer restrictions; inflation; devaluation; war or other international conflicts; civil unrest and local security concerns that threaten the safe operation of our facilities; direct and indirect price controls; tax increases; changes (including retroactive) in the enforcement or interpretation of tax laws and other retroactive tax claims or challenges; expropriation of property; changes in laws or regulations; cancellation of contract rights; and delays or denial of governmental approvals. Both the likelihood of such occurrences and their overall effect upon Ternium vary greatly from country to country and are not predictable. Realization of these risks could have an adverse impact on the results of operations and financial condition of Ternium’s subsidiaries located in the affected country and, depending on their materiality, on the results of operations and financial condition of Ternium as a whole.

Mexico

Ternium has significant manufacturing operations and assets located in Mexico and a majority of its sales are made in this country. The majority of Ternium’s revenues from its Mexican operations, therefore, are related to market conditions in Mexico and to changes in its economic activity. Ternium’s business could be materially and adversely affected by economic, political and regulatory developments in this country.

Economic and social conditions and government policies in Mexico could negatively impact Ternium’s business and results of operations.

In the past, Mexico has experienced several periods of slow or negative economic growth, high inflation, high interest rates, currency devaluation and other economic problems. Furthermore, the Mexican national economy tends to reflect changes in the economic environment in the United States. If problems such as deterioration in Mexico’s economic conditions reemerge, or social instability, political unrest, reduction in government spending or other adverse social developments reemerge in the future, they could lead to continued volatility in the foreign exchange and financial markets, and, depending on their severity and duration, could adversely affect the business, results of operations, financial condition or liquidity of Ternium. Moreover, adverse economic conditions in Mexico could result in, among other things, higher interest rates accompanied by reduced opportunities for refunding or refinancing, reduced domestic consumption of Ternium’s products, decreased operating results and delays in the completion of ongoing and future capital expenditures, including the construction of new cold-rolling and galvanizing facilities in the vicinity of Monterrey City, Mexico, which are expected to commence production in 2013.

Increasing violence and crime in Mexico could negatively impact Ternium’s business and operations.

In recent years there have been high incidences of violence and crime related to drug trafficking in Mexico, especially in the Monterrey area, where our main facilities are located. Security issues could affect our day-to-day operations and could also result in an economic slowdown, reducing domestic demand for our products and thereby having an adverse effect on our business. A continued deterioration of the security situation may result in significant obstacles or additional costs to the implementation of our growth plans in Mexico, including delays in the completion of capital expenditures.

 

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Argentina

Ternium’s subsidiary Siderar has significant manufacturing operations and assets located in Argentina and a significant portion of its sales are made in Argentina. Ternium’s main revenues from Siderar’s operations, therefore, are related to market conditions in Argentina and to changes in Argentina’s gross domestic product, or GDP, and per capita disposable income. Accordingly, Siderar’s business could be materially and adversely affected by economic, political, social, fiscal and regulatory developments in Argentina.

Economic and political instability, which resulted in a severe recession in 2002, may occur in the future, thereby adversely affecting our business, financial condition and results.

Our business and results of operations in Argentina have closely followed macroeconomic conditions. Domestic sales of Siderar were severely affected by Argentina’s recession during 2001 and 2002. The domestic economic recovery over the 2003 – 2008 period, with sustained growth in construction, agriculture, industrial activity and particularly a significant improvement in the automobile industry, led to a recovery of steel shipments to the Argentine domestic market. During the last quarter of 2008, however, the downturn in the global economy reached the Argentine economy and had a significant adverse impact on our shipments to the Argentine domestic market until their recovery beginning in the second quarter of 2009.

The Argentine economy is currently facing significant challenges. Inflation is high, as further discussed below, and the economy has been affected by supply constraints. Capital investment in general has lagged due to, among other factors, political and economic uncertainties and government actions, including price controls, export taxes, the nationalization of Argentina’s private pension system, an increased level of government intervention in, or limitations to, the conduct of business in the private sector, and other measures affecting investor confidence. For example, as price controls are concerned, in February 2011, Argentina’s Secretary of Commerce issued Resolution 14/2011 requiring that prices for steel products sold in Argentina, including products sold by Siderar, be limited to those in effect on January 21, 2011, and that sales of steel products be invoiced in Argentine pesos. Although Ternium believes that price controls are illegal under Argentine law and Resolution 14/2011 was ultimately revoked, other price control measures could be imposed in the future. Declining capital investment may affect growth and, accordingly, cause demand for our local subsidiary’s products in the domestic market to drop. A lack of financing alternatives could significantly impair Argentina’s ability to sustain the economy’s activity level, foster economic growth and/or avert a sovereign default.

Economic conditions in Argentina have deteriorated rapidly in the past and may deteriorate rapidly in the future. The Argentine economy may not continue to grow and economic instability may return. Our business and results of operations in Argentina could be adversely affected by rapidly changing economic conditions in Argentina or by the Argentine government’s policy response to such conditions.

Inflation may undermine economic growth in Argentina and impact our costs, thereby adversely affecting our results of operations and financial position.

In the past, inflation has undermined the Argentine economy and the government’s ability to stimulate economic growth. Beginning in 2004, inflation indicators began showing significant year-over-year increases, signaling a trend characteristic of an inflationary economy. The pace of inflation has increased rapidly and significantly over the last few years; however, since 2007 Argentina’s official inflation data published by the Instituto Nacional de Estadística y Censos, or INDEC, Argentina’s national statistics institute, have been subject to changes in calculation; following the implementation of such changes, the official inflation figures have been consistently disputed by independent economists. For example, the annual inflation rates based on consumer data published by INDEC (IPC GBA) were 7.2% , 7.7%, 10.9% and 9.5% for December 2008, 2009, 2010 and 2011, respectively, while private estimates, on average, refer to annual rates of inflation significantly higher than those published by INDEC.

 

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Sustained high inflation in Argentina could negatively impact our results of operations and financial position as the Argentine peso-denominated costs (mainly labor-related costs) at Siderar increase, thereby affecting its cost-competitiveness and deteriorating its margins. In addition, a high inflation economy could undermine Argentina’s foreign competitiveness in international markets and negatively affect the economy’s activity and employment levels. Argentine inflation rate volatility makes it impossible to estimate with reasonable certainty the extent to which activity levels and results of operations of Siderar could be affected by inflation in the future.

The Argentine government has increased taxes on Argentine companies and could further increase the fiscal burden in the future.

Since 1992, the Argentine government has not permitted the application of an inflation adjustment on the value of fixed assets for tax purposes. As a result of the substantial devaluation of the Argentine peso in 2002 and significant inflation in recent years, the amounts that the Argentine tax authorities permit Siderar to deduct as depreciation for its past investments in plant, property and equipment have been substantially reduced in real terms, thus creating artificial gains for tax purposes which result in higher-than-nominal effective income tax charges. If the Argentine government continues to increase the tax burden on Siderar’s operations, Ternium’s results of operations and financial condition could be adversely affected.

Argentine exchange controls could prevent Ternium from paying dividends or other amounts from cash generated by Siderar’s operations.

In the past, the Argentine government and the Argentine Central Bank introduced several rules and regulations to reduce volatility in the ARS/USD exchange rate, and implemented formal and informal restrictions on capital inflows into Argentina and capital outflows from Argentina. In addition, Siderar is currently required to repatriate U.S. dollars collected in connection with exports from Argentina (including U.S. dollars obtained through advance payment and pre-financing facilities) into Argentina and convert them into Argentine pesos at the relevant exchange rate applicable on the date of repatriation. Since the last quarter of 2011, the Argentine government tightened its controls on transactions that would represent capital outflows from Argentina, limiting formally or informally the ability of Argentine individuals and companies to purchase foreign currency or transfer funds (including in connection with the purchase of goods or services or as dividends or royalties) abroad. The existing controls, and any additional restrictions of this kind that may be imposed in the future, could expose Ternium to the risk of losses arising from fluctuations in the exchange rate or affect Ternium’s ability to finance its investments and operations in Argentina or impair Ternium’s ability to convert and transfer outside Argentina funds generated by Siderar, for example, to fund the payment of dividends or to undertake investments and other activities that require offshore payments. For additional information on current Argentine exchange controls and restrictions, see Item 10. “Additional Information—D. Exchange Controls.”

Restrictions on the imports of key steelmaking inputs for Siderar’s operations in Argentina could adversely affect Siderar’s production and, as a result, growth projects and negatively impact Ternium’s results of operations.

Some of Siderar’s key steelmaking inputs, including iron ore and coking coal, are imported into Argentina. The Argentine government has recently implemented significant import restrictions, which may affect the availability of key steelmaking inputs for our operations in Argentina. All payments on imports of goods and services must be approved by the Argentine federal tax authority and other authorities, such as the Secretary of Commerce. The authorization criteria for such imports have not been determined in the applicable regulations. Such import restrictions could delay imports and, if sustained, adversely affect our business, operations and growth projects in Argentina. In addition, they could affect Siderar’s exports from Argentina, considering that foreign countries may adopt and implement counter-measures. A significant number of members of the World Trade Organization jointly expressed on March 2012 their deepening concern about Argentina’s import controls, and urged Argentina to remove those trade controls.

 

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Restrictions or an increase of the costs on the supply of energy to Siderar’s operations in Argentina could curtail Siderar’s production and negatively impact Ternium’s results of operations.

In recent years, there has been an insufficient level of investment in natural gas and electricity supply and transport capacity in Argentina, coupled with a substantial increase in demand for natural gas and electricity. This in turn resulted in shortages of natural gas and electricity to residential and industrial users including Siderar during periods of high demand. Such shortages may, in the future, result in significant price increases for gas and electricity. Siderar’s operations experienced constraints in their natural gas supply requirements and interruptions in their electricity supply at peak hours on many occasions. If demand for natural gas and electricity increases and a matching increase in natural gas and electricity supply and transport capacity fails to materialize on a timely basis, Siderar’s production in Argentina (or that of its main customers and suppliers) could be curtailed, and Siderar’s sales and revenues could decline. In addition, the Argentine government announced a cut off in the government’s subsidies to the price of the natural gas and electricity. An increase in Siderar’s energy costs may adversely affect Siderar’s results of operations. See “—Risks Relating to the Steel Industry—Price fluctuations or shortages in the supply of raw materials, slabs and energy could adversely affect Ternium’s profitability” above.

Colombia

Ternium has manufacturing operations and assets located in Colombia and a share of its sales is made in Colombia. The majority of Ternium’s revenues from its Colombian operations, therefore, are related to market conditions in Colombia and to changes in Colombia’s GDP, and per capita disposable income. Accordingly, Ternium’s business could be adversely affected by economic, political and regulatory developments in Colombia.

Colombia has experienced internal security issues that have had or could have in the future a negative effect on the Colombian economy.

Colombia has experienced internal security issues, primarily due to the activities of guerrillas, paramilitary groups and drug cartels. In the past, guerrillas have targeted the crude oil pipelines, including the Oleoducto Transandino, Caño Limón-Coveñas and Ocensa pipelines, and other related infrastructure disrupting activities in the oil industry. These activities, their possible escalation and the effects associated with them have had and may have in the future a negative impact on the Colombian economy, thus affecting our business in the country.

Certain Regulatory Risks and Litigation Risks

International trade actions or regulations and trade-related legal proceedings could adversely affect Ternium’s sales, revenues and overall business.

International trade-related legal actions and restrictions pose a constant risk for Ternium’s international operations and sales throughout the world. We are a significant purchaser of slabs for our operations in Mexico (which we buy from various suppliers in Mexico and overseas) and a significant purchaser of steel products for our operations in Colombia (which we buy from our subsidiaries overseas and from various suppliers in Colombia and overseas). Imports of slabs into Mexico and steel products in Colombia are, subject to certain conditions, imported under zero- or low-import duties. In the future, we may not be able to make such imports under the zero- or low-duty regime, or the Mexican or Colombian government may increase the applicable duties or impose restrictions in the quantities allowed to be imported.

Increased trade liberalization has reduced certain of Ternium’s imported input costs and increased Ternium’s access to many foreign markets. However, greater trade liberalization in its domestic markets is increasing competition for Ternium in such markets. In recent times, as a consequence of the global downturn, the number of antidumping and countervailing actions limiting trade has increased substantially. Accordingly, producers from certain countries find themselves excluded from certain markets and in need to find alternatives for their products. Ternium’s domestic market share could be eroded in the face of foreign imports in light of the recent reduction or elimination of tariffs or if other barriers are reduced or eliminated in Ternium’s domestic markets. Ternium’s increased exports to foreign markets where import barriers have been reduced may not completely offset domestic market share losses resulting from increased foreign competition.

 

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Countries can impose restrictive import duties and other restrictions on imports under various national trade laws. The timing and nature of the imposition of trade-related restrictions potentially affecting Ternium’s exports are unpredictable. Trade restrictions on Ternium’s exports could adversely affect Ternium’s ability to sell products abroad and, as a result, Ternium’s profit margins, financial condition and overall business could suffer. One significant source of trade restrictions results from countries’ imposition of so-called “antidumping” and “countervailing” duties, as well as “safeguard measures.” These duties can severely limit or altogether impede an exporter’s ability to export to relevant markets. In several of Ternium’s export destinations, such as the United States or Europe, safeguard duties and other protective measures have been imposed against a broad array of steel imports in certain periods of excess global production capacity, as is currently the case. Furthermore, certain domestic producers have filed antidumping and/or countervailing duty actions against particular steel imports. Some of these actions have led to restrictions on Ternium’s exports of certain types of steel products to certain steel markets. As domestic producers’ filing of such actions is largely unpredictable, additional antidumping, countervailing duty or other such import restrictions could be imposed in the future, limiting Ternium’s export sales to and potential growth in those markets. See Item 4. “Information on the Company—B. Business Overview—Regulations—Trade regulations.”

The cost of complying with environmental regulations and potential environmental and product liabilities may increase our operating costs and negatively impact our business, financial condition, results of operations and prospects.

We are subject to a wide range of local, provincial and national laws, regulations, permit requirements and decrees relating to the protection of human health and the environment, including laws and regulations relating to hazardous materials and radioactive materials and environmental protection governing air emissions, water discharges and waste management. Laws and regulations protecting the environment have become increasingly complex and more stringent and expensive to implement in recent years. International environmental requirements vary.

Environmental laws and regulations may, in some cases, impose strict liability rendering a person liable for damages to natural resources or threats to public health and safety without regard to negligence or fault. Some environmental laws provide for joint and several strict liability for remediation of spills and releases of hazardous substances. These laws and regulations may expose us to liability for the conduct of, or conditions caused by others or for acts that were in compliance with all applicable laws at the time they were performed.

Compliance with applicable requirements and the adoption of new requirements could have a material adverse effect on our consolidated statement of financial position, results of operations or cash flows. The ultimate impact of complying with environmental laws and regulations is not always clearly known or determinable since regulations under some of these laws have not yet been promulgated or are undergoing revision. The expenditures necessary to remain in compliance with these laws and regulations, including site or other remediation costs, or costs incurred from potential environmental liabilities, could have a material adverse effect on our financial condition and profitability. While we incur and will continue to incur expenditures to comply with applicable laws and regulations, there always remains a risk that environmental incidents or accidents may occur that may negatively affect our reputation or our operations.

Some of the activities for which Ternium supplies products, such as canning for consumption, construction and the automotive industry are subject to inherent risks that could result in death, personal injury, property damage or environmental pollution, and subject us to potential product liability risks that could extend to being held liable for the damages produced by such products. Furthermore, Ternium’s products are also sold to, and used in, certain safety-critical appliances. Actual or claimed defects in our products may give rise to claims against us for losses suffered by our customers and expose us to claims for damages. The insurance we maintain may not be adequate or available to protect us in the event of a claim, its coverage may be limited, canceled or otherwise terminated, or the amount of our insurance may be less than the related impact on enterprise value after a loss.

Risks Relating to our ADSs

The market price for our ADSs could be highly volatile.

Volatility in the price of our ADSs may be caused by factors within or outside of our control and may be unrelated or disproportionate to Ternium’s operating results. In particular, announcements of potentially adverse developments, such as proposed regulatory changes, new government investigations or the commencement or threat of litigation against Ternium, as well as announced changes in Ternium’s business plans or those of its competitors could adversely affect the trading price of our ADSs, regardless of the likely outcome of those developments or proceedings. Broad market and industry factors could adversely affect the market price of our ADSs, regardless of its actual operating performance. As an example of this volatility, the price of our ADSs closed at USD45.18 on June 2, 2008, fell to USD4.55 on November 20, 2008, recovered to a closing price of USD43.26 on January 5, 2011, fell to USD15.54 on November 29, 2011 and closed at USD23.68 on March 30, 2012.

 

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Furthermore, the trading price of our ADSs could suffer as a result of developments in emerging markets. Although the Company is organized as a Luxembourg corporation, almost all of its assets and operations are located in Latin America. Financial and securities markets for companies with a substantial portion of their assets and operations in Latin America are, to varying degrees, influenced by political, economic and market conditions in emerging market countries. Although market conditions are different in each country, investor reaction to developments in one country can have significant effects on the securities of issuers with assets or operations in other emerging markets, including Mexico, Argentina and Colombia. See “—Risks Relating to the Countries in Which We Operate.”

In deciding whether to purchase, hold or sell our ADSs, you may not be able to access as much information about us as you would in the case of a U.S. company.

There may be less publicly available information about us than is regularly published by or about U.S. issuers. Also, Luxembourg regulations governing the securities of Luxembourg companies may not be as extensive as those in effect in the United States, and Luxembourg law and regulations in respect of corporate governance matters might not be as protective of minority shareholders as state corporation laws in the United States. Furthermore, IFRS differ in certain material aspects from the accounting standards used in the United States.

Holders of our ADSs may not be able to exercise, or may encounter difficulties in the exercise of, certain rights afforded to shareholders.

Certain shareholders rights under Luxembourg law, including the right to vote, to receive dividends and distributions, to bring actions, to examine the books and records and to exercise appraisal rights may not be available to holders of ADSs, or may be subject to restrictions and special procedures for their exercise, as holders of ADSs only have those rights that are expressly granted to them in the deposit agreement. The Bank of New York Mellon, as depositary, through its custodian agent, is the registered shareholder of the deposited shares underlying the ADSs and therefore only the depositary can exercise the shareholders rights in connection with the deposited shares. For example, if we make a distribution in the form of securities, the depositary is allowed, at its discretion, to sell that right to acquire those securities on your behalf and to instead distribute the net proceeds to you. Also, under certain circumstances, such as our failure to provide the depositary with voting materials on a timely basis, you may not be able to vote by giving instructions to the depositary. In the circumstances specified in the deposit agreement, if the depositary does not receive voting instructions from the holder of ADSs or the instructions are not in proper form, then the depositary shall deem such holder to have instructed the depositary to give, and the depositary shall give, a proxy to a person designated by the Company with respect to that amount of shares underlying such ADSs to vote that amount of shares underlying such ADSs in favor of any proposals or recommendations of the Company (including any recommendation by the Company to vote that amount of shares underlying such ADSs on any issue in accordance with the majority shareholders’ vote on that issue) as determined by the appointed proxy. No instruction shall be deemed given and no proxy shall be given with respect to any matter as to which the Company informs the depositary that (x) it does not wish such proxy given, (y) substantial opposition exists, or (z) the matter materially and adversely affects the rights of the holders of ADSs.

Holders of our shares and ADSs in the United States may not be able to exercise preemptive rights in certain cases.

Pursuant to Luxembourg corporate law, existing shareholders of the Company are generally entitled to preemptive subscription rights in the event of capital increases and issues of shares against cash contributions. Under the Company’s articles of association, the board of directors had been authorized to waive, limit or suppress such preemptive subscription rights until October 26, 2010; such authorization was renewed in the Extraordinary General Meeting of Shareholders held on June 2, 2010 until July 15, 2015. The Company, however, may issue shares without preemptive rights only if the newly issued shares are issued:

 

   

for, within, in conjunction with or related to, an initial public offering of the shares of the Company on one or more regulated markets (in one or more instances);

 

   

for consideration other than cash;

 

   

upon conversion of convertible bonds or other instruments convertible into shares of the Company; provided, however, that the preemptive subscription rights of the then existing shareholders shall apply in connection with any issuance of convertible bonds or other instruments convertible into shares of the Company for cash; or

 

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subject to a certain maximum percentage, as compensation to directors, officers, agents or employees of the Company, its direct or indirect subsidiaries or its affiliates, including without limitation the direct issuance of shares or the issuance of shares upon exercise of options, rights convertible into shares or similar instruments convertible or exchangeable into shares issued or created to provide compensation or incentives to directors, officers, agents or employees of the Company, its direct or indirect subsidiaries or its affiliates.

For further details, see Item 10. “Additional Information—B. Memorandum and Articles of Association.”

Furthermore, holders of our shares and ADSs in the United States may, in any event, not be able to exercise any preemptive rights, if granted, for shares unless those shares are registered under the U.S. Securities Act of 1933, as amended (the “Securities Act”) with respect to those rights or an exemption from registration is available. We intend to evaluate, at the time of any rights offering, the costs and potential liabilities associated with the exercise by holders of shares and ADSs of the preemptive rights for shares, and any other factors we consider appropriate at the time, and then to make a decision as to whether to register additional shares. We may decide not to register any additional shares, requiring a sale by the depositary of the holders’ rights and a distribution of the proceeds thereof. Should the depositary not be permitted or otherwise be unable to sell preemptive rights, the rights may be allowed to lapse with no consideration to be received by the holders of the ADSs.

It may be difficult to obtain or enforce judgments against the Company in U.S. courts or courts outside of the United States.

The Company is a public limited liability company (société anonyme) organized under the laws of Luxembourg, and most of its assets are located outside of the United States. Furthermore, most of the Company’s directors and officers named in this annual report reside outside the United States. As a result, investors may not be able to effect service of process within the United States upon the Company or its directors or officers or to enforce against the Company or them in U.S. courts judgments predicated upon the civil liability provisions of U.S. federal securities law. Likewise, it may be difficult for a U.S. investor to bring an original action in a Luxembourg court predicated upon the civil liability provisions of the U.S. federal securities laws against the Company, its directors or its officers. There is also uncertainty with regard to the enforceability of original actions in courts outside the United States of civil liabilities predicated upon the civil liability provisions of U.S. federal securities laws. Furthermore, the enforceability in courts outside the United States of judgments entered by U.S. courts predicated upon the civil liability provisions of U.S. federal securities law will be subject to compliance with procedural requirements under applicable local law, including the condition that the judgment does not violate the public policy of the applicable jurisdiction.

Item 4. Information on the Company

Overview

Ternium is a leading steel company in Latin America, manufacturing and processing a wide range of flat and long steel products for customers active in the construction, home appliances, capital goods, container, food, energy and automotive industries. Ternium has a production capacity of finished steel products of approximately 10.8 million tons per year as of December 31, 2011, and shipped approximately 8.8 million tons of steel products in 2011. The Company believes that it is a competitive steel producer due to its proximity to customers and high-quality raw material sources, state-of-the-art and flexible production facilities and downstream integration into value-added steel products. In addition, through our recently-acquired participation in the control group of Usiminas, Ternium expects to strengthen its association in Latin America with Nippon Steel, one of the leading steelmakers in the world, and Usiminas, a leader in the Brazilian flat steel market and the largest flat steel producer in Brazil. For further information on the Usiminas shares purchase transaction, see Item 5. “Operating and Financial Review and Prospects—G. Recent Developments — Acquisition of participation in Usiminas.”

Ternium produces and distributes a broad range of finished and semi-finished steel products, including value-added steel products such as cold-rolled coils and sheets, galvanized and electrogalvanized sheets, pre-painted sheets, tin plate, welded pipes, hot-rolled pickled and annealed and tailor-made flat products. Ternium also produces long steel products such as bars and wire rod.

 

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Ternium primarily sells its flat and long steel products in the regional markets of the Americas. Ternium provides specialized products and delivery services, mainly to customers in Mexico, Argentina, Colombia and various Central American countries, through its network of manufacturing facilities and service centers. We believe that Ternium is the leading supplier of flat steel products in Mexico and Argentina, a significant supplier of steel products in Colombia and in various other countries in South and Central America, and a competitive player in the international steel market for flat and long steel products. Through its network of commercial offices in several countries in Latin America, the United States and Spain, Ternium maintains an international presence that allows it to reach customers outside its local markets, achieve improved effectiveness in the supply of its products and in the procurement of semi-finished steel, and maintain a fluid commercial relationship with its customers by providing continuous services and assistance.

In 2011, approximately 55% of Ternium’s sales were made to North America, 44% to South and Central America, and 1% to Europe and other markets. In 2011, Ternium’s net sales were USD9.2 billion, operating profit was USD1.3 billion, and net income attributable to equity holders was USD513.5 million.

 

  A. History and Development of the Company

The Company

Our legal and commercial name is Ternium S.A. The Company was organized as a public limited liability company (société anonyme) under the laws of the Grand-Duchy of Luxembourg on December 22, 2003. Our Luxembourg office is located at 29, Avenue de la Porte-Neuve – 3rd floor, L-2227 Luxembourg, telephone number +352 2668 3152. Our agent for U.S. federal securities law purposes is Ternium International U.S.A. Corporation, located at 2200 West Loop South, 8th floor, Houston, TX 77027, United States.

Ternium

Ternium’s origins began in September 1961 with the founding of Propulsora Siderúrgica, or Propulsora, by San Faustin’s predecessor in Argentina. Propulsora began its operations as a producer of cold-rolled coils in December 1969 and in the early 1990s began to evolve through a series of strategic investments aimed at transforming Propulsora into an integrated steel producer. In 1993, Propulsora merged with Aceros Parana (a company formed by the Argentine government in connection with the privatization of Somisa, at that time the main integrated producer of flat steel in Argentina), Aceros Parana’s subsidiary Sidercrom, a tin plate processing company, and two other steel industry subsidiaries of Propulsora (Aceros Revestidos and Bernal). After the merger, Propulsora changed its name to Siderar S.A.I.C. San Faustin held a controlling interest in Siderar, with the remainder being held mainly by Usiminas, certain former employees of Somisa, and the public.

In December 1997, Amazonia (a consortium formed by San Faustin, Siderar, Usiminas, Hylsamex and Sivensa) won the bid in the privatization of 70% of the shares of Sidor, the largest steel company in the Andean Community, while Venezuela retained the remaining 30%. The continuing worldwide steel production crisis, the deterioration of the financial markets, the appreciation of the Venezuelan Bolívar and other adverse factors negatively affected Sidor and Amazonia, which undertook debt restructurings in 2000 and 2003. In the 2003 restructuring, Amazonia’s interest in Sidor was reduced to 59.7%, while Venezuela increased its interest to 40.3%. In addition, Ylopa (an entity formed by San Faustin, Siderar, Tenaris, Usiminas and Hylsamex’s former controlling shareholder) provided financial assistance to Sidor under a participation account agreement. Subsequently, Venezuela transferred a 19.9% interest in Sidor to employees and former employees of Sidor under the terms of a special employee participation plan.

As part of a multiple-step corporate reorganization in 2005, San Faustin reorganized its investments in flat and long steel manufacturing, processing and distribution businesses by contributing its controlling interests in Siderar, Sidor (through Amazonia and Ylopa) and Ternium Internacional to the Company. On August 22, 2005, we acquired, together with Siderar, an indirect 99.3% interest in the Mexican company Hylsamex and its subsidiaries and the equity stakes owned by Hylsamex’s former controlling shareholder, Alfa, S.A. de C.V., in Amazonia and Ylopa. We subsequently purchased additional shares of Hylsamex in the open market, subject to applicable law, thereby increasing our and Siderar’s direct and indirect interest in Hylsamex to 99.9%. In 2005, each of Tenaris and Usiminas exchanged its interests in Amazonia, Ylopa and, in the case of Usiminas, Siderar for shares of the Company, and Sivensa exchanged its interest in Amazonia for shares of the Company.

On January 11, 2006, the Company launched an initial public offering of 24,844,720 ADSs, each representing 10 shares of the Company, in the United States. In connection with the offering, the Company granted the underwriters of the Company’s initial public offering an option to purchase up to 3,726,708 additional ADSs to cover over-allotments in the sale of the ADSs. The offering was settled on February 6, 2006.

 

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On December 28, 2006, we acquired an additional 4.85% interest in Siderar from CVRD Internacional S.A., a wholly-owned subsidiary of Vale, thereby increasing our ownership in Siderar to 60.93%.

On April 29, 2007, the Company entered into an agreement with Grupo Imsa and Grupo Imsa’s controlling shareholders pursuant to which Grupo Imsa came under our control on July 26, 2007. Under the agreement, the Company, through a wholly owned subsidiary, made a cash tender offer under applicable Mexican law for all of the issued and outstanding share capital of Grupo Imsa. Pursuant to the tender offer, we acquired 25,133,856 shares, representing 9.3% of the issued and outstanding capital of Grupo Imsa. Concurrently with the consummation of the tender offer, on July 26, 2007, all the shares of Grupo Imsa that were not tendered into the tender offer (including the shares owned by Grupo Imsa’s majority shareholders), representing 90.7% of Grupo Imsa’s issued and outstanding share capital, were redeemed for cash pursuant to a capital reduction effected at the same price per share. Following this capital reduction, we became the sole shareholder of Grupo Imsa.

In 2007, Grupo Imsa was renamed Ternium Mexico and, effective March 31, 2008, Hylsamex merged with and into Ternium Mexico. In connection with this merger, Siderar became a shareholder of Ternium Mexico with a 28.7% interest.

On April 29, 2008, the National Assembly of Venezuela passed a resolution declaring that the shares of Sidor, together with all of its assets, were of public and social interest, and authorizing the Venezuelan government to take any action it deemed appropriate in connection with any such assets, including expropriation. On May 11, 2008, Decree Law 6058 of the President of Venezuela, regulating the steel production activity in the Guayana region in Venezuela (the “Decree”), dated April 30, 2008, was published. The Decree ordered that Sidor and its subsidiaries and associated companies be transformed into state-owned enterprises (“empresas del Estado”), with Venezuela owning not less than 60% of their share capital. On May 7, 2009, Ternium completed the transfer of its entire 59.7% interest in Sidor to Corporación Venezolana de Guayana, or CVG, a Venezuelan state-owned entity. For more information on the Sidor nationalization process, see note 27 to our audited consolidated financial statements included elsewhere in this annual report.

On August 25, 2010, Ternium completed the acquisition of a 54% ownership interest in Ferrasa through a capital contribution in the amount of USD74.5 million. Ferrasa has a 100% ownership interest in Sidecaldas S.A.S., Figuraciones S.A.S. and Perfilamos del Cauca S.A.S., all of which are also Colombian companies. Ternium also completed the acquisition of a 54% ownership interest in Ferrasa Panama for USD0.5 million. Ferrasa Panama is a long steel products processor and distributor based in Panama. Through these investments Ternium expanded its business and commercial presence in Colombia as well as in Central America. For more information on the Ferrasa acquisition, see note 3 to our audited consolidated financial statements included elsewhere in this annual report.

On October 4, 2010, Ternium and Nippon Steel signed a definitive agreement to form a joint venture in Mexico for the manufacturing and sale of hot-dip galvanized and galvannealed steel sheets to serve the Mexican automobile market. The joint venture company, Tenigal, was established in November 2010 with Ternium and Nippon Steel holding 51% and 49% participations, respectively. Tenigal began work on the construction of a hot-dip galvanizing plant in the vicinity of Monterrey City, Mexico, which is expected to commence production of high-grade and high-quality galvanized and galvannealed automotive steel sheets, including outer-panel and high-strength qualities, in 2013. For more information on the Tenigal project, see note 29 to our audited consolidated financial statements included elsewhere in this annual report.

On January 16, 2012, Ternium Investments, Siderar, and its subsidiary Prosid Investments S.C.A., and Confab Industrial, a subsidiary of Tenaris, or TenarisConfab, joined Usiminas’ existing control group through the acquisition of 84.7, 30.0 (Siderar jointly with Prosid), and 25.0 million ordinary shares, respectively, and formed the so called T/T Group. In addition, Nippon Steel acquired from Caixa dos Empregados da Usiminas (Usiminas employee pension fund, or CEU) 8.5 million ordinary shares. In addition, Ternium Investments, Siderar and Prosid entered into an amended and restated Usiminas shareholders’ agreement with Nippon Steel, Mitsubishi, Metal One and CEU, governing Ternium Investments, Siderar (and Prosid) and TenarisConfab’s rights within the Usiminas control group. Following the closing of the transaction, at the request of the T/T Group, Messrs. Daniel Novegil, Roberto Vidigal and Alcides Morgante were appointed as members of Usiminas’ board of directors, together with their alternates, to replace the board members nominated by Camargo Correa and Votorantim. In addition, Usiminas’ board of directors appointed Julián Eguren, previously a senior executive with Ternium, as chief executive officer (Diretor-Presidente) of Usiminas. For further information on the Usiminas shares purchase transaction, see Item 5. “Operating and Financial Review and Prospects—G. Recent Developments—Acquisition of participation in Usiminas.”

 

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For information on Ternium’s capital expenditures, see “B. Business Overview—Capital Expenditure Program.”

 

  B. Business Overview

Our Business Strategy

Our main strategic objective is to enhance shareholder value by strengthening Ternium’s position as a low cost producer of steel products, in a manner consistent with minority shareholders’ rights, while further consolidating Ternium’s position as a leading flat and long steel producer in Latin America and a strong competitor in the Americas with strategic presence in other major steel markets.

The main elements of this strategy are:

Focus on higher margin value-added products. We intend to continue to shift Ternium’s sales mix towards higher margin value-added products, such as cold-rolled sheets and coated and tailor-made products, and services, such as just-in-time delivery and inventory management. In this regard, the pickling, cold-rolling, annealing and tempering lines planned in the vicinity of Monterrey City will allow Ternium to increase its offering of cold-rolled and galvanized products to meet the demanding requirements of our industrial customers in Mexico;

Pursue strategic growth opportunities. We have a history of strategically growing our businesses through acquisitions and joint ventures. In addition to strongly pursuing organic growth, we intend to identify and actively pursue growth-enhancing strategic opportunities to consolidate Ternium’s presence in its main markets and expand it to the rest of Latin America, gain further access to iron ore and other inputs, expand its offerings of value-added products, increase its steel production, and increase its distribution capabilities. For example, through our recently-acquired participation in the control group of Usiminas we expect to strengthen our association in Latin America with Nippon Steel, one of the leading steelmakers in the world, and Usiminas, a leader in the Brazilian flat steel market and the largest flat steel producer in Brazil. For further information on the Usiminas shares purchase transaction, see Item 5. “Operating and Financial Review and Prospects—G. Recent Developments — Acquisition of participation in Usiminas”;

Implement Ternium’s best practices. We believe that the implementation of Ternium’s managerial, commercial and production best practices in acquired new businesses should generate additional benefits and savings. For example, the implementation of Ternium’s cost control procedures and performance analysis in Ternium Mexico improved control over its production variables and led to cost savings;

Maximize the benefits arising from Ternium’s broad distribution network. We intend to maximize the benefits arising from Ternium’s broad network of distribution, sales and marketing services to reach customers in major steel markets with a comprehensive range of value-added products and services and to continue to expand its customer base and improve its product mix; and

Enhance Ternium’s position as a low cost steel producer. We are focused on improving utilization levels of our plants, increasing efficiency and further reducing production costs from levels that we already consider to be among the most competitive in the steel industry through, among other measures, capital investments and further integration of our facilities.

Our Products

The Ternium companies produce mainly finished and semi-finished flat and long steel products which are sold either directly to steel processors or to end-users, after different value-adding processes. Flat steel products include slabs (steel in its basic, semi-finished state), hot-rolled coils and sheets, cold-rolled coils and sheets, tin plate, hot dipped galvanized and electrogalvanized sheets and pre-painted sheets. Galvanized and pre-painted sheets can be further processed into a variety of corrugated sheets, trapezoidal sheets and other tailor-made products to serve Ternium’s customer requirements. Long steel products include billets and round bars (steel in its basic, semi-finished state), wire rod, bars and stirrups.

 

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Flat steel products

Slabs: Slabs are semi-finished steel forms with dimensions suitable for its processing into hot-rolled flat products. The use of slabs is determined by their dimensions and by their chemical and metallurgical characteristics.

Hot-rolled flat products: Hot-rolled flat products are used by a variety of industrial consumers in applications such as the manufacturing of wheels, auto parts, pipes, gas cylinders and containers. They are also directly used for the construction of buildings, bridges and railroad cars, and for the chassis of trucks and automobiles. Hot-rolled products can be supplied as coils or as sheets cut to a specific length. These products also serve as inputs for the production of cold-rolled products.

Cold-rolled products: Cold-rolled products are applied mainly to the automotive, home appliance and capital goods industries, as well as to galvanizers, drummers, distributors and service centers. Cold-rolled coils are sold as coils or cut into sheets or blanks to meet customers’ needs. These products also serve as inputs for the production of coated products.

Tin plate: Given its resistance to corrosion and its mechanical and chemical characteristics, tin plate is mainly sold to the packaging industry for food canning, sprays and paint containers. Tin plate is produced by coating cold-rolled coils with a layer of tin that is attached by an electroplating continuous process.

Hot dipped galvanized and pre-painted sheets: Hot dipped galvanized sheets are produced by adding a layer of zinc to cold-rolled coils, which are afterwards cut into sheets. Galvanized sheets can also be pre-painted, resulting in a product that is mainly sold to the construction industry for building coverings, manufacturing of ceiling systems, panels, air conditioning ducts and several other uses. Ternium also offers, under the trademark Zintroalum in Mexico and Cincalum in Argentina, a distinctive type of galvanized product with coating composition that contains approximately 55% aluminum and 44% zinc to improve product performance for the construction industry, including rural, industrial and marine sites.

Electrogalvanized and pre-painted sheets: Electrogalvanized and pre-painted sheets are sold mainly to customers in the automotive and home appliance industries. Electrogalvanized and pre-painted sheets are produced from cold-rolled coils by adding a layer of zinc that is attached by an electroplating continuous process, in one or both sides. The electrogalvanized coils are subsequently cut and sold either as sheets or are further processed with a color coating to produce pre-painted sheets. Electrogalvanization provides products with a longer useful life and more resistance to corrosion compared to other coating methods.

Steel pipes and tubular products: These products include tubes for general use, structural tubes, tubes for mechanical applications, conduction tubes, conduction electrical tubes and oil tubes. These products, uncoated or galvanized, have applications in several sectors including home accessories, furniture, scaffolding, automotive, bicycles, hospital equipment, posts for wire mesh garden and poultry tools, handrails, guard-rails, agricultural machinery, industrial equipment, conduction of water, air, gas, oil, high-pressure liquids and special fluids and internal building electrical installations.

Beams: These products, including C and Z section steel profiles (purlings) and tubular section beams, are obtained by roll-forming of steel strips and have applications in window frames, stilts, mainstays, crossbeams, building structures, supports, guides and crossbars for installing windows, doors, frames and boards.

Roll formed products: These products include insultated panels, roofing and cladding, roof tiles and steel decks. Obtained from the mechanical transformation of flat steel, uncoated, galvanized or pre-painted, these products are used mainly in the construction industry in warehouses, commercial and industrial refrigeration installations, grain storage, poultry and porcine confinement facilities, roofing and side walls for buildings, and terraces and mezzanine floorings.

Long steel products

Steel billets: Billets are semi-finished steel forms with dimensions suitable for processing into hot-rolled long steel products, such as wire rods, bars and other shapes.

Steel round bars: Round bars are semi-finished steel forms with dimensions suitable for processing into hot-rolled steel products, such as seamless tubes.

 

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Wire rod: Rods are round, thin, semi-finished steel products that are rolled from a billet and coiled for further processing. Rods are commonly drawn into wire products or used to make bolts and nails. Wire rod can be produced in different qualities according to customers’ demands.

Bars: Bars are long steel products that are rolled from billets. Two of the most common types of bars produced are merchant bars and reinforcing bars (rebar). Merchant bars include specific shape features, such as rounds, flats, angles, squares and channels, that are used by customers to manufacture a wide variety of products such as furniture, stair railings and farm equipment. Rebar is used to strengthen concrete highways, bridges and buildings.

Stirrups: Obtained from the mechanical transformation of rebars, stirrups are used in the construction industry in cement-based structures.

Other products

Pre-engineered metal building systems: These products are obtained from the mechanical transformation of flat steel. These steel construction systems are designed for use in low-rise non-residential buildings. They include frames, secondary steel members, roofs and walls panels, as well as finishing and accessories.

Pig iron: A semifinished product obtained in the blast furnace, it is mostly used as metallic charge in the steel shop for the production of crude steel; it is also marketed to other steel producers and to manufacturers of iron-based cast products.

Iron ore pellets: A raw material for the production of steel, it is mostly used as metallic charge (after being reduced in DRI modules or blast furnaces) in the steel shop for the production of crude steel; it is also marketed to other steel producers.

Within each of the basic product categories, there is a range of different “items” of varying qualities and prices that are produced either to meet the particular requirements of end users or sold as commodity items.

Production Facilities and Processes

Ternium has steel production facilities, service centers and distribution centers, or DCs, in North, Central and South America and iron ore mining operations in North America.

Ternium’s aggregate production capacity of steel products as of December 31, 2011, calculated based on management estimates of standard productivity, product mix allocations, the maximum number of possible working shifts and a continued flow of supplies to the production process, was approximately 10.8 million tons, of which 9.1 million tons correspond to flat steel products and 1.7 million tons correspond to long steel products, and of which 7.6 million tons correspond to facilities located in North America and 3.2 million tons correspond to facilities located in South and Central America.

Steel production facilities, service centers and distribution centers

The assets described in this section are owned by Ternium’s operating subsidiaries. The following table provides an overview, by type of asset, of Ternium’s production capacity as of December 31, 2011:

 

Production asset

   Quantity      Capacity (thousand tons per year) 1  
      Mexico      Argentina      Other      Total  

Coke Plant

     4            1,030            1,030   

Sinter Plant

     1            1,490            1,490   

Direct Reduced Iron (DRI) Plant

     3         2,700               2,700   

Blast Furnace

     2            3,890            3,890   

Electric Arc Furnace

     5         3,990            160         4,150   

Basic Oxygen Furnace

     3            5,000            5,000   

Thin Slab Continuous Caster

     1         2,300               2,300   

Slab Continuous Caster

     1            2,880            2,880   

Billet Continuous Caster

     3         1,620            150         1,770   

 

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Production asset

   Quantity      Capacity (thousand tons per year) 1  
      Mexico      Argentina      Other      Total  

Slab - Rolling Mill

     4         6,030         2,830            8,860   

Skin - Pass Mill

     4         2,220         940            3,160   

Billet - Rolling Mill

     4         1,080            160         1,240   

Pickling Line

     8         3,590         1,790            5,380   

Cold-Rolling Mill (Tandem or Reversing)

     9         2,540         1,800            4,340   

Electrolytic Cleaning

     4         1,260         200            1,460   

Annealing Line

     4         1,240         1,240            2,480   

Temper Mill

     6         1,360         1,770            3,130   

Tension-Leveling / Inspection Line

     7         800         980            1,780   

Electro-tin plating line

     1            150            150   

Hot Dip Galvanizing Line

     12         1,450         550         390         2,390   

Electro-galvanizing Line

     1            120            120   

Color - Coating Line

     8         660         110         180         950   

Slitter

     37         1,960         450         280         2,690   

Cut to Length

     37         560         860         130         1,550   

Roll Forming Line

     35         490         410         250         1,150   

Panel Line

     4         80               80   

Profile Line

     16         190            80         270   

Tube Line

     23         500         200         50         750   

Structural Beams Lines

     1               50         50   

Wire Drawing Lines

     15               110         110   

Wire Mesh Lines

     2               30         30   

Rebar Processing Lines2

     35               100         100   

 

1 

In this annual report annual production capacity is calculated based on management estimates of standard productivity, product mix allocations, the maximum number of possible working shifts and a continued flow of supplies to the production process.

2 

Includes shears, straighteners, stirrup benders and shaping centers.

North America Region. Ternium has twelve steel production and/or processing units in this region, consisting of three integrated steel-making plants (two of which produce long steel products and one of which produces flat steel products and includes two steel service centers), five downstream flat steel processing plants, combining hot-rolling, cold-rolling and/or coating facilities (two of which include steel service centers), and four steel service centers. In addition, Ternium has ten distribution centers in this region, aimed at serving customers mainly in the construction sector.

The following table sets forth key items of information regarding Ternium’s principal production locations and production units:

 

          Type of Plant          
Unit    Country    Integrated    Downstream   

Service

Center

  

Distribution

Center

   Location    Products
Guerrero1    Mexico    X       X       San Nicolás d.l.G., Nuevo León    Flat
Norte2    Mexico    X             Apodaca, Nuevo León    Long
Puebla3    Mexico    X             Puebla, Puebla    Long
Juventud4    Mexico       X    X       San Nicolás d.l.G., Nuevo León    Flat
Churubusco5    Mexico       X    X       Monterrey, Nuevo León    Flat
Monclova6    Mexico       X          Monclova, Coahuila    Flat
Universidad7    Mexico       X          San Nicolás d.l.G., Nuevo León    Flat
Apodaca Industrial8    Mexico          X       Apodaca, Nuevo León    Flat

 

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          Type of Plant          
Unit    Country    Integrated    Downstream   

Service

Center

  

Distribution

Center

   Location    Products

Apodaca Comercial9

   Mexico          X       Apodaca, Nuevo León    Flat

Varco-Pruden10

   Mexico          X       Ciénaga de Flores, Nuevo León    Metal buildings

San Luis11

   Mexico          X       San Luis, San Luis Potosí    Flat

DC Chihuahua

   Mexico             X    Chihuahua, Chihuahua    Flat

DC BC

   Mexico             X    Tijuana, Baja California    Flat

DC MTY

   Mexico             X    Monterrey, Nuevo León    Flat

DC Puebla

   Mexico             X    Puebla, Puebla    Flat

DC Guadalajara

   Mexico             X    Guadalajara, Jalisco    Flat

DC Mexico

   Mexico             X    Tultitlán, Estado De México    Flat

DC Culiacán

   Mexico             X    Culiacán, Sinaloa    Flat

DC Veracruz

   Mexico             X    Veracruz, Veracruz    Flat

DC Mérida

   Mexico             X    Mérida, Yucatán    Flat

DC Tuxtla

   Mexico             X    Tuxtla Gtz, Chiapas    Flat

Shreveport12

   USA       X          Shreveport, Louisiana    Flat

 

1 

The Guerrero unit, located in the metropolitan area of Monterrey, Nuevo León, Mexico, produces hot-rolled and cold-rolled coils for the industrial, construction and home appliance sectors and for further processing in other Ternium Mexico’s units. It also produces slitted and cut-to-length products for the industrial sector, and profiles and tubes for the industrial and construction sectors. This unit includes two steel service centers, a slab-rolling mill, and an integrated facility based on direct reduced iron, or DRI, mini-mill steelmaking and thin-slab casting/rolling mill technologies that uses iron ore pellets and steel scrap as main raw materials. The facility sources all of the iron ore from Ternium Mexico’s mining operations and the electricity and natural gas from the Mexican grid. In addition, the facility sources its net requirements of slabs from Mexican and international producers. Ternium’s procurement policy for these products is described in greater depth in Item 4. “Information on the Company—B. Business Overview—Raw Materials, Energy and Other Inputs.”

2 

The Norte unit in Nuevo León, Mexico, produces billets and rebar for the construction industry. It is an integrated facility based on mini-mill steelmaking technology that uses steel scrap as its main raw material. The facility sources electricity from the Mexican grid. Ternium’s procurement policy for these products is described in greater depth in Item 4. “Information on the Company—B. Business Overview—Raw Materials, Energy and Other Inputs.”

3 

The Puebla unit in Puebla, Mexico, produces rebar and wire rod mainly for the construction and industrial sectors, including high-carbon, low-carbon and micro-alloyed wire rod. It is an integrated facility based on DRI and mini-mill steelmaking technologies that uses iron ore pellets and steel scrap as main raw materials. The facility sources all of the iron ore from Ternium Mexico’s mining operations and the electricity and natural gas from the Mexican grid. Ternium’s procurement policy for these products is described in greater depth in Item 4. “Information on the Company—B. Business Overview—Raw Materials, Energy and Other Inputs.”

4 

The Juventud unit in Nuevo León, Mexico, produces galvanized and color coated coils for the construction, home appliance and other industries and has a steel service center that produces slitted and roll-formed products, panels and tubes for the construction and industrial sectors. This plant processes hot-rolled and cold-rolled coils received from Ternium Mexico’s units in Nuevo León.

5 

The Churubusco unit in Nuevo León, Mexico, produces hot-rolled and cold-rolled coils for the industrial, construction and home appliance sectors and for further processing in other Ternium Mexico’s units. It also produces slitted and cut-to-length products for the industrial sector. The facility sources its requirements of slabs from other Mexican producers and from the international markets. Ternium’s procurement policy for slabs is described in greater depth in Item 4. “Information on the Company—B. Business Overview—Raw Materials, Energy and Other Inputs.”

6 

The Monclova unit in Coahuila, Mexico, produces galvanized and color coated sheets for the home appliance industry. This plant processes cold-rolled coils mainly received from Ternium Mexico’s units in Nuevo León.

 

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7 

The Universidad unit in Nuevo León, Mexico, located across the street from the Guerrero unit, produces galvanized and color coated coils for the construction, home appliance and industrial sectors. This plant, which also has a cold-rolling mill, processes hot-rolled coils received from Ternium Mexico’s units in Nuevo León.

8

The Apodaca Industrial unit in Nuevo León, Mexico, is a steel service center that produces slitted and cut-to-length products for industrial customers. This plant processes coated coils mainly received from Ternium Mexico’s units in Nuevo León.

9 

The Apodaca Comercial unit in Nuevo León, Mexico, is a steel service center that produces slitted and roll-formed products, profiles and tubes for the construction industry. This plant processes coated coils mainly received from Ternium Mexico’s units in Nuevo León.

10 

The Varco-Pruden unit in Nuevo León, Mexico, produces metal buildings systems for commercial construction. This plant processes heavy plates procured from the local and international markets and coils received from Ternium Mexico’s units in Nuevo León.

11

The San Luis unit in San Luis Potosí, Mexico, is a steel service center that produces slitted and cut-to-length products for the home appliance and other industries. This plant processes coated coils received from Ternium Mexico’s units in Nuevo León.

12 

The Shreveport unit in Louisiana, US, produces galvanized and color coated sheets. It processes cold-rolled coils procured in the international markets.

On October 4, 2010, Ternium and Nippon Steel signed a definitive agreement to form a company in Mexico for the manufacturing and sale of hot-dip galvanized and galvannealed steel sheets to serve the Mexican automobile market. The company, Tenigal, was established in November 2010 with Ternium and Nippon Steel holding 51% and 49% participations, respectively. Tenigal began work for the construction of a hot-dip galvanizing plant in the vicinity of Monterrey City (equivalent to the state-of-the art equipment now in operation at Nippon Steel’s steelworks in Japan) with a production capacity of 400,000 metric tons per year. The plant is expected to commence production of high-grade and high-quality galvanized and galvannealed automotive steel sheets, including outer-panel and high-strength qualities, in 2013. Tenigal is expected to serve the requirements of the growing automotive industry in Mexico, including those of the Japanese car makers. In addition, Ternium Mexico plans to construct a new cold-rolling facility, including new pickling, cold-rolling, annealing and tempering lines at the same site, which is also expected to commence production in 2013. Part of the output from these lines will be used to supply the Tenigal plant. For more information on the Tenigal project, see note 29 to our audited consolidated financial statements included elsewhere in this annual report.

South and Central America Region. Ternium has twenty-four steel production and/or processing units in this region, consisting of two integrated steel-making plant (one of which produces flat steel products and one of which produces long steel products), five downstream flat steel processing plants, comprising cold-rolling, coating or tube making facilities (four of which include steel service centers), and seventeen steel service centers. In addition, Ternium has four steel retail distribution centers in this region, aimed at serving customers mainly in the construction sector.

The following table set forth key items of information regarding Ternium’s principal production locations and production units:

 

          Type of Plant          
Unit    Country    Integrated    Downstream   

Service

Center

  

Distribution

Center

   Location    Products

San Nicolás13

   Argentina    X             Ramallo, Buenos Aires    Flat

Canning14

   Argentina       X    X       Canning, Buenos Aires    Flat

Haedo14

   Argentina       X    X       Haedo, Buenos Aires    Flat

Florencio Varela15

   Argentina       X    X       Florencio Varela, Buenos Aires    Flat

 

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          Type of Plant          
Unit    Country    Integrated    Downstream   

Service

Center

  

Distribution

Center

   Location    Products
Ensenada16    Argentina       X          Ensenada, Buenos Aires    Flat
Rosario17    Argentina          X       Rosario, Santa Fe    Flat
San Luis17    Argentina          X       San Luis, San Luis    Flat
Serviacero III18    Argentina          X       Ramallo, Buenos Aires    Flat
Sidercrom19    Argentina          X       Ramallo, Buenos Aires    Flat
Manizales Acasa20    Colombia    X             Manizales, Caldas    Long
Barranquilla21    Colombia          X       Malambo, Atlántico    Flat
Itaguí22    Colombia          X       Itaguí, Antioquía    Long
Calí Perfilamos23    Colombia          X       Puerto Tejada, Cauca    Flat
Medellín24    Colombia          X       Medellín, Antioquía    Flat and long
Bogotá24    Colombia          X       Bogotá, Cundinamarca    Flat and long
Calí Ferrasa24    Colombia          X       Calí, Valle del Cauca    Flat and long
Montería24    Colombia          X       Montería, Córdoba    Flat and long
Manizales Ferrasa24    Colombia          X       Manizales, Caldas    Flat and long
Villa Nueva25    Guatemala       X    X       Villa Nueva, Guatemala    Flat
DC Norte    Guatemala             X    Guatemala, Guatemala    Flat
DC Occidente    Guatemala             X    Mazatenango, Suchitepéquez    Flat
Tegucigalpa26    Honduras          X       San Pedro Sula, Cortés    Flat
DC Tegucigalpa    Honduras             X    Tegucigalpa, Distrito Central    Flat
San Salvador26    El Salvador          X       San Salvador, San Salvador    Flat
DC San Miguel    El Salvador             X    San Miguel, San Miguel    Flat
Managua26    Nicaragua          X       Managua, Managua    Flat
Heredia27    Costa Rica          X       Heredia, Heredia    Flat
Panamá24    Panama          X       Panama, Panama    Long

 

13 

The San Nicolás unit in the Province of Buenos Aires, Argentina, produces hot-rolled, cold-rolled and tinplate coils for the construction, industrial and packaging sectors and for further processing in other Siderar units. San Nicolás includes an integrated facility based on blast furnace and basic oxygen furnace technologies, supplemented with a sinter plant, coking batteries, a by-product plant and a power plant. It uses metallurgical coal and iron ore lumps, pellets and fines as main raw materials. The facility sources all of its coal and iron ore needs from the international markets, shipped to its own port on the banks of the Paraná river. It sources the natural gas from the Argentine grid, produces most of its electricity needs in its own power plant and sources its net requirements of electricity from the Argentine grid. Ternium’s procurement policy for these products is described in greater depth in Item 4. “Information on the Company—B. Business Overview— Raw Materials, Energy and Other Inputs.”

14 

The Canning and Haedo units in the Province of Buenos Aires, Argentina, produce galvanized sheets, slitted and roll-formed products and profiles for the construction and home appliance sectors. In addition, the Canning facility produces color coated sheets for such markets. Both plants process cold-rolled coils received from Siderar’s San Nicolás and Ensenada units.

15 

The Florencio Varela unit in the Province of Buenos Aires, Argentina, produces electrogalvanized sheets, blanks and slitted products for the automotive, construction and other industries. This plant processes cold-rolled coils received from Siderar’s San Nicolás and Ensenada units.

16 

The Ensenada unit in the Province of Buenos Aires, Argentina, produces cold-rolled coils for the construction and industrial sectors and for further processing in Siderar’s own facilities. This plant processes hot-rolled coils received from Siderar’s San Nicolás unit.

17 

The Rosario unit in the Province of Santa Fe, Argentina, and the San Luis unit in the Province of San Luis, Argentina, are steel service centers that produce tubes for the construction industry. These plants process hot-rolled coils received from Siderar’s San Nicolás unit.

 

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18 

The Serviacero III unit in the Province of Buenos Aires, Argentina, is a steel service center that produces cut-to-length products for the construction and industrial sectors. This plant processes hot-rolled coils received from Siderar’s San Nicolás unit.

19 

The Sidercrom unit in the Province of Buenos Aires, Argentina, is a steel service center that produces cut-to-length and slitted products for the packaging sector. This plant processes tinplate coils received from Siderar’s San Nicolás unit.

20 

The Manizales Acasa unit in Caldas, Colombia, produces billets and rebar for the construction industry. It is an integrated facility based on mini-mill steelmaking technology that uses steel scrap as its main raw material. The facility sources all of its scrap and electricity needs from local suppliers. Ternium’s procurement policy for these products is described in greater depth in Item 4. “Information on the Company—B. Business Overview—Raw Materials, Energy and Other Inputs.”

21 

The Barranquilla unit in Atlántico, Colombia, is a steel service center that produces slitted, cut-to-length, drawn wire, wire mesh and customized rebar-based products for the construction industry. This plant processes wire rod purchased in the international market and rebar received from Ferrasa’s Manizales unit and rebar purchased in the international markets. Hot-rolled and cold-rolled coils are received mainly from Ternium Mexico’s units in Nuevo León.

22 

The Itaguaí unit in Antioquía, Colombia, is a steel service center that produces drawn wire, wire mesh and customized rebar-based products for the construction industry. This plant processes wire rod purchased in the international markets and rebar received from Ferrasa’s Manizales unit and rebar purchased in the international markets.

23 

The Calí Perfilamos unit in Cauca, Colombia, is a steel service center that produces profiles, tubes and structural beams for the construction industry. This plant processes hot-rolled and cold-rolled coils received mainly from Ternium Mexico’s units in Nuevo León and purchased in the international markets.

24 

The Medellín unit in Antioquía, Colombia, the Bogotá unit in Cundinamarca, Colombia, the Calí Ferrasa unit in Valle del Cauca, Colombia, the Montería unit in Córdoba, Colombia, the Manizales Ferrasa unit in Caldas, Colombia and the Panamá unit in Panama, Panama, are steel services centers that produce customized rebar-based products for the construction industry. These plants process rebar received from Ferrasa’s Manizales unit and rebar purchased in the international markets.

25 

The Villa Nueva unit in Guatemala, Guatemala, produces galvanized sheets for the construction industry and for further processing in other Ternium Mexico’s units in Central America. It also has a steel service center that produces slitted, roll-formed and cut-to-length products, and profiles for the construction industry. This plant processes hot-rolled, cold-rolled and coated coils received from Ternium Mexico’s units in the Nuevo León area and from the international markets.

26 

The Tegucigalpa unit in Cortés, Honduras, the San Salvador unit in San Salvador, El Salvador, and the Managua unit in Managua, Nicaragua, are steel service centers that produce roll-formed products for the construction industry. These plants process coated coils received mainly from Ternium Mexico’s Villa Nueva unit.

27 

The Heredia unit in Heredia, Costa Rica, is a steel service center that produces roll-formed products and profiles for the construction industry. This plant processes hot-rolled, cold-rolled and coated coils received from Ternium Mexico’s units in Nuevo León and from the Villa Nueva unit.

 

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Iron ore mining facilities

Ternium has a 100% interest in Las Encinas S.A. de C.V., or Las Encinas, and a 50% interest in Consorcio Minero Benito Juárez Peña Colorada, S.A. de C.V., or Peña Colorada. The following table provides an overview, by type of asset, of Ternium’s production capacity:

 

Production asset

   Las Encinas      Peña Colorada  
   Quantity      Capacity*      Quantity      Capacity*  

Crushing Plant

     2         5,300         1         9,200   

Beneficiation Plant

     1         2,000         1         4,500   

Pelletizing Line

     1         1,900         2         4,000   

 

  * 

In thousand of tons per year

Las Encinas operates the Aquila open pit mine located in Michoacán, Mexico. The expected mining life of active mining sites is 17 years. Las Encinas produces iron ore pellets. The facilities include crushing and beneficiation plants located close to the mines and beneficiation and pelletizing plants located near Alzada in Colima, Mexico, approximately 160 kilometers from Aquila. The iron ore pellets are transported by train to Ternium Mexico’s integrated facilities. The utilization rate of Las Encinas’s facilities in 2011, based on its pellet production, was 89%. Las Encinas used to operate El Encino underground mine located in Jalisco, Mexico. During 2011, El Encino’s cost-effectively minable reserves were exhausted and the mine ceased operations.

Peña Colorada operates an open pit mine located in Colima, Mexico. The expected mining life of active mining sites is 26 years. Peña Colorada produces iron ore pellets and magnetite concentrate. The facilities include crushing and beneficiation plants located close to the mine, near Minatitlán, and a pelletizing plant, including two pelletizing lines, located near the Manzanillo seaport on the Pacific coast in Colima, Mexico, 50 kilometers from Minatitlán. Ternium and ArcelorMittal each own 50% of Peña Colorada. Under the existing arrangements, Peña Colorada is required to sell half of the mine’s production to each of Ternium and ArcelorMittal. See Item 4. “Information on the Company—B. Business Overview—Raw Materials, Energy and Other Inputs—Mexico—Iron Ore.” Both iron ore pellets and magnetite concentrates are transported by train or from the Manzanillo seaport to Ternium’s facilities, to ArcelorMittal’s facilities and abroad. The utilization rate of Peña Colorada’s facilities in 2011, based on its pellet production, was 100%.

The mining concessions of Las Encinas and Peña Colorada were granted for a 50-year period; following the expiration of the initial concession term, the concessions are renewable for an additional 50-year term in accordance with, and subject to the procedures set forth in, applicable Mexican mining law.

Production process

Ternium specializes in manufacturing and processing finished flat and long steel products. Ternium’s facilities use different technologies and have different levels of integration. The basic inputs for steel production are iron ore and energy. Iron ore is used in three different formats: fines and lumps, which are purchased in the marketplace, and pellets, which are partly purchased in the marketplace and partly produced by Ternium. Ternium’s steel production processes consume energy mainly in the form of natural gas, coal and electricity.

Iron ore extraction and processing. The iron ore pellet production process begins with the sourcing of iron ore from Ternium’s own mines in Mexico. The ore is extracted from open pit mines. Extraction consists of removing waste and ore from the surface with explosives and loading and transporting it by truck to the crushing facilities where it is resized to a specified size.

After crushing, the ore goes through several grinding and concentration stages. Grinding reduces the size and shape of the ore while concentration, through magnetic drums, separates the iron from the sterile material to obtain an iron ore concentrate with high iron content. This process is carried out using water as an auxiliary element. Excess water is afterwards eliminated through a filtering process, leaving only the necessary humidity for the formation of pellets using pelletizing disks. Pellets are separated according to their size and are then hardened in ovens and shipped to the steel producing facilities.

Steel production. Ternium produces semi-finished steel in the form of thin slabs, slabs, billets and round bars through the electric arc furnace and the blast furnace methods. Under the electric arc furnace method, which is used in Mexico and Colombia, the iron metal charge is heated with other elements to obtain molten steel. The molten steel is then cast, using the continuous casting method, into billets and thin slabs. The iron metal charge in the Norte and Manizales plants is steel scrap, and the iron metal charge in the Monterrey and Puebla plants is a mix of DRI and steel scrap. The DRI results from the conversion of pellets in the DRI modules. One of Monterrey’s DRI plants includes the latest DRI HYL ® technological advances, such as Hytemp ®, which permits the hot discharge of the DRI to the electric arc furnace, generating significant energy savings and improving productivity.

 

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Under the blast furnace method, which is used in Argentina, iron ore pellets, lumps, sinter (a mixture of iron ore fines and limestone produced in our sinter plant) and coke (a solid residue obtained from the distillation of coal produced in our coking batteries) are mixed in the blast furnaces in a process that melts and reduces the iron ore, obtaining pig iron. The molten pig iron is then mixed with steel scrap and other products in a basic oxygen furnace through a process that removes impurities from the pig iron by injecting pure oxygen at high pressure into the molten metal, burning-off carbon and other elements. The molten steel is then cast using the continuous casting method, into slabs.

Steel processing. Semi-finished steel is then processed into finished products using hot-rolling, cold-rolling, coating, tubing, paneling, slitting and cut-to-length facilities among other processes. Ternium purchases semi-finished steel in the marketplace in the form of slabs, as its slabs processing capacity in Mexico is higher than its slabs production capacity in the country. It may purchase hot-rolled and cold-rolled coils as well for further processing in its lines.

Slabs and billets are processed in the hot-rolling mills in Mexico, Argentina and Colombia to obtain hot-rolled products using different technologies. In the case of flat products, hot-rolled coils are obtained from thin or conventional slabs. Thin slab hot-rolling, a technology Ternium uses only in Mexico, requires less energy than conventional slab hot-rolling, as it does not require a roughing section at the mill and does not need to be reheated from room temperature to reach rolling temperature. In the production of long products, which is carried out in Mexico and Colombia, billets are reheated and taken to rolling temperature. The softened steel is processed in the rolling trains to obtain wire rods and rebars as finished long products and, depending on its final use, rebars can be further processed into stirrups and other customized shapes in our service centers in Colombia and Panama.

Depending on its final use, the hot-rolled coils are then tempered and/or pickled, both in Mexico and Argentina, before being sent for sale as coils or cut into steel sheets. Alternatively, the hot-rolled coils may be sent to a cold-rolling mill where they are put under a deformation process at room temperature to reduce their thickness and obtain cold-rolled coils. Cold-rolled coils can be sold in crude form to the market (full hard) or processed in the reheating ovens, annealing bays and tempers lines to modify their metallurgic and physical characteristics. The tempered products can be sold as coils or sheets or further processed by adding coatings.

Cold-rolled coils can be further processed into tin plate at Siderar’s facility in Argentina (by adding a thin layer of tin), into galvanized or electrogalvanized sheets at several of Ternium’s facilities in Mexico, the United States and Guatemala and at Siderar’s facility in Argentina (by adding a thin layer of zinc to the products through different processes) or into pre-painted products. Some of these products can be further processed into slit, cut-to-length and tailor-made products according to customers’ needs at Ternium’s service centers, which are located in several countries. In addition, coated, cold-rolled and hot-rolled coils can be further processed into tubular products, such as welded pipes, insulated panels and architectural panels, among other products.

Sales and Marketing

Net Sales

Ternium primarily sells its steel products in the regional markets of North America and Central and South America, where it can leverage its strategically located manufacturing facilities to provide specialized products, delivery services to its clients and reduced freight costs.

Our total net sales amounted to USD9.2 billion in 2011, USD7.4 billion in 2010 and USD5.0 billion in 2009. For further information on our net sales, see Item 5. “Operating and Financial Review and Prospects—A. Results of Operations.”

 

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The following table shows Ternium’s total consolidated net sales by product and geographical region for the years indicated:

 

In millions of U.S. dollars

   For the year ended December 31,  
   2011      2010      2009  

Flat Steel Product Sales

        

North America

     4,108.8         3,464.9         2,371.9   

South and Central America

     3,658.1         2,886.2         1,717.1   

Europe and Other

     25.2         25.3         161.0   
  

 

 

    

 

 

    

 

 

 

Total Flat Steel Products Sales

     7,792.0         6,376.4         4,250.0   

Long Steel Product Sales

        

North America

     880.3         640.7         512.0   

South and Central America

     337.5         163.9         57.3   

Europe and Other

     —           28.6         3.5   
  

 

 

    

 

 

    

 

 

 

Total Long Steel Product Sales

     1,217.9         833.1         572.9   

Total Other Sales (1)

     147.3         172.5         136.1   
  

 

 

    

 

 

    

 

 

 

Total Sales

     9,157.2         7,382.0         4,959.0   

 

  (1) The item “Other Sales” primarily includes iron ore, pig iron and pre-engineered metal buildings.

 

In thousands of tons    For the year ended December 31,  

(unaudited)

   2011      2010      2009  

Flat Steel Product Sales Volume

        

North America

     4,014.7         3,852.1         3,114.5   

South and Central America

     3,285.7         2,877.0         1,903.6   

Europe and Other

     34.9         42.6         287.0   
  

 

 

    

 

 

    

 

 

 

Total Flat Steel Product Sales Volume

     7,335.3         6,771.7         5,305.2   

Long Steel Product Sales Volume

        

North America

     1,104.0         974.2         931.2   

South and Central America

     384.3         258.7         118.4   

Europe and Other

     —           50.0         6.1   
  

 

 

    

 

 

    

 

 

 

Total Long Steel Product Sales Volume

     1,488.3         1,282.9         1,055.6   
  

 

 

    

 

 

    

 

 

 

Total Sales Volume (1)

     8,823.6         8,054.6         6,360.8   

 

  (1) The Total Sales Volume does not include Other Sales.

North America Region

Sales to customers in the North America Region accounted for 55.5% of Ternium’s consolidated sales during 2011, 57.0% during 2010 and 60.0% during 2009. See Item 5. “Operating and Financial Review and Prospects—A. Results of Operations—Fiscal Year Ended December 31, 2011 compared to Fiscal Year Ended December 31, 2010—Net Sales” and “—Fiscal Year Ended December 31, 2010 compared to Fiscal Year Ended December 31, 2009—Net Sales.”

Ternium’s largest markets in the North America Region are Mexico and the United States.

 

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Most of Ternium’s Mexican customers are located near its plants. Flat steel non-coated products are mainly sold in Mexico to construction companies, industrial customers in the packaging, electric motors and service center industries, and distributors and auto parts manufacturers. The principal segments in the Mexican coated steel market are construction, manufacturing (air conditioning, lamps and furniture), appliances and auto parts. Ternium generally serves industrial customers, who require high-quality specifications, as well as commercial customers through service centers and warehouses. Long steel rebar and wire rod markets in Mexico are generally characterized by a large number of orders of small volume, and competition is largely based on price. The customer base for bar and rod products in Mexico consists primarily of independent dealers and distributors, who in turn retail the products to their customers in the construction industry. Ternium markets its tubular products mainly through Mexican independent distributors, and the balance is sold directly to industrial customers.

Customers in the United States are served directly through the Shreveport plant and through Ternium Internacional’s Houston commercial office and distribution center, which manage transport and logistics issues and provide local services and assistance. The Gulf Coast and a large portion of the West Coast, in particular, are regions in which our Mexican facilities have distribution advantages. Our main markets in the United States are the construction industry and the energy related sectors.

South and Central America Region

Sales to customers in the South and Central America Region accounted for 43.9% of Ternium’s consolidated sales during 2011, 41.4% during 2010 and 35.9% during 2009. See Item 5. “Operating and Financial Review and Prospects—A. Results of Operations—Fiscal Year Ended December 31, 2011 compared to Fiscal Year Ended December 31, 2010—Net Sales” and “—Fiscal Year Ended December 31, 2010 compared to Fiscal Year Ended December 31, 2009—Net Sales.”

Ternium’s sales are oriented toward the construction and agriculture sectors, the automotive industry, the packaging sector (for food, paints, sprays and petrochemicals), the tube and pipe sector (related to liquids and gas transportation and distribution networks), the capital goods sector and the home appliances sector.

The customer base in South and Central America consists primarily of independent small- and medium-sized companies and distributors, which in turn process or retail products to their customers in different market sectors. In addition, Ternium serves large industrial customers, such as the automotive industry, that require customized products that Ternium can produce through its service centers and finishing facilities.

Ternium’s principal customers in the region are located near Siderar’s plants in Argentina and Ternium’s plants in Colombia and Central America. We also sell to customers in other South American countries, including Brazil, Bolivia, Chile, Ecuador, Paraguay, Peru and Uruguay.

Europe and Other

Sales to customers in Europe and other regions, which are generally made on a spot basis, accounted for 0.6% of Ternium’s consolidated sales during 2011, 1.6% during 2010 and 4.0% during 2009. See Item 5. “Operating and Financial Review and Prospects—A. Results of Operations—Fiscal Year Ended December 31, 2011 compared to Fiscal Year Ended December 31, 2010—Net Sales” and “—Fiscal Year Ended December 31, 2010 compared to Fiscal Year Ended December 31, 2009—Net Sales.”

Ternium’s sales in Europe and other regions are carried out through the Ternium commercial network and in 2011 were mainly destined for the European Union, Pakistan, India and Vietnam.

Pricing

The prices of our steel products generally reflect international market prices for similar products. We adjust prices for our products periodically in response to changes in the import prices of foreign steel, export prices, and supply and demand. See Item 5. “Operating and Financial Review and Prospects—Overview.” The actual sales prices that we obtain for our products are also subject to the specifications, sizes and quantity of the products ordered.

Marketing

Our marketing strategy is to continue increasing higher margin value-added products and services in Ternium’s sales mix. We expect to increase Ternium’s offerings of value-added products, such as cold-rolled sheets and coated and tailor-made products, and services, such as just-in-time deliveries and inventory management. In order to do so, Ternium will continue to work with its customers to anticipate their needs and develop customized products for particular applications and to maintain a strategic presence in several steel markets through its network of commercial offices.

 

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Ternium adapts its marketing strategy according to the different regions it serves. Its sales force specializes in different regional requirements, ranging from product specifications to transport logistics.

In order to increase Ternium’s participation in regional markets and improve services provided to customers, Ternium manages its exports through Ternium Internacional’s network of commercial offices. Ternium Internacional operates through subsidiaries strategically located in Ternium’s key international markets, providing customers with support and services. Ternium Internacional has extensive experience promoting steel products. Its marketing expertise helps Ternium to expand its position in current markets and to develop new ones.

North America Region

The North American steel market is highly competitive, since most major international steel producers direct part of their sales efforts to this region. Ternium’s steel customers in Mexico are in the construction industry, the automotive industry, the energy sector and the home appliances sector, among other industries. In Mexico, where our main production facilities are located, we can offer customized services.

Through our service centers, located in the southern United States and in northern and central Mexico, Ternium can cut, paint or roll-form its products to specific client requirements. Customized products include metallic roofing, auto parts and cut-to-length products used in the home appliance and construction industries.

Ternium has commercial offices in Mexico and the United States. These offices provide services such as logistics, stock management and customer assistance, as well as analysis of businesses opportunities in their respective markets.

Ternium Mexico has a department focused on the development of small- and medium-sized companies in Mexico under a program created by the Techint group for the development of its customers and the local industry (“Propymes”). The objective of the program is to improve the competitiveness of customers and suppliers, to increase their exports and to allow them to substitute imports with local products. Approximately 150 companies are part of this program in Mexico, which provides support for industrial, training, and institutional requirements of the participating companies.

Several Mexican steel producers compete with us in the flat and long steel markets, as discussed below in “—Competition.” Ternium’s experienced sales force specializes in the needs of each market sector and focuses on value-added products and services. In this competitive and end-user oriented market, the extensive use of well-known commercial brands allows customers to clearly recognize Ternium’s products. Ternium seeks to increase its competitive advantage by providing value-added services, including the technical assistance related to steel use and production, and developing new steel products.

South and Central America Region

A principal component of Ternium’s marketing strategy in South and Central America is establishing lasting and close relationships with customers. This allows Ternium to provide assistance to its customers in their use of steel products and to obtain downstream information that can be applied to future product development.

Ternium’s sales force in this region is oriented toward serving the specific needs of different market sectors, such as the construction industry, the automotive industry, the home appliances sector, the packaging sector (for food, paints, sprays and petrochemicals), the agricultural equipment and capital goods sector, the tube and pipe sector (related to liquids and gas transportation and distribution), and steel processors.

Through Siderar’s service centers in Argentina and Ternium’s service centers located in Colombia, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama, Ternium can cut, paint or roll-form its products to specific client requirements. Customized products include metallic roofing, auto parts, steel for agricultural machinery, different types of tin used to produce sprays and food containers and cut-to-length products used in the home appliance and construction industries.

 

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Ternium has commercial offices in Argentina, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Nicaragua, Panama and Uruguay. These offices provide services such as market development, analysis of businesses opportunities, and customer support in their respective countries. Propymes was implemented in Argentina in 2002, with the objective of promoting the local industry. Approximately 640 companies are part of this program, which provides support for industrial, training, commercial, financial and institutional requirements of the participating companies.

Europe and Other

A small share of Ternium’s shipments is destined for steel markets outside the Americas. Sales to Europe, Asia and Africa are carried out mainly through Ternium Internacional’s office in Spain. Ternium Internacional is focused on trading activities, including the development of commercial and marketing activities.

Competition

Global Market

The steel industry operates predominantly on a regional basis, with large industry participants selling the bulk of their steel production in their home countries or regions, where they have natural advantages and are able to more effectively market value-added products and provide additional customized services. Despite the limitations associated with significant transportation costs, as well as the restrictive effects of protective tariffs and other trade restrictions, international trade of steel has generally increased in the last decade as production has shifted towards low-cost production regions. In addition, since 2002, several large steel manufacturers have merged with each other or acquired steel companies in other parts of the world. This wave of consolidation has resulted in a number of large, global producers with significant operations in several regions and/or continents, contributing to the increasing globalization of the steel industry. Considered as a whole, however, the steel industry still remains considerably fragmented, compared with market conditions characterizing certain of our suppliers and customers, e.g. iron ore suppliers and the automotive industry.

Steel consumption has historically been centered in developed economies, such as the United States, Western Europe and Japan. However, in recent years steel consumption in Asia, and in particular China, has increased significantly. Moreover, while production in Europe, Japan and the United States remains significant, steel producers in those regions have increasingly focused on the rolling and finishing of semi-finished products.

There has been a trend in recent years toward steel industry consolidation among Ternium’s competitors. In addition, the Venezuelan government has reestablished itself as a steel producer with the nationalization of Sidor. Below is a summary of the most significant transactions:

 

   

June 2006: Mittal Steel and Arcelor merge to create ArcelorMittal, the world’s largest steel company.

 

   

March 2007: Votorantim acquires Colombia’s Aceria Paz del Rio.

 

   

April 2007: Tata Steel completes the acquisition of Corus.

 

   

July 2007: Gerdau acquires Chaparral Steel.

 

   

August 2007: US Steel acquires Stelco.

 

   

March 2008 to May 2008: Severstal acquires Sparrows Point, WCI Steel and Esmark (subsequently, during 2011, it divested Sparrows Point, Warren and Wheeling).

 

   

February 2011: Nippon Steel and Sumitomo announce a merger plan.

Despite this trend, the global steel market remains highly fragmented. In 2010, the five largest steel producers, ArcelorMittal, Hebei, Baosteel, Angang and Wuhan, accounted for 19% of total worldwide steel production, compared to 15% for the five largest steel producers in 2000.

 

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Steel prices in general, including both flat and long products, have exhibited significant volatility in recent years. From 2000 to 2002, the industry, especially in North America, experienced fluctuating capacity utilization, low demand growth levels and other adverse conditions, which led to depressed steel prices, adversely impacting many steel producers’ profitability. In 2003 and 2004, steel prices increased worldwide, due to higher economic growth in most regions, particularly China and other developing countries, as well as higher raw material prices (for iron ore, ferroalloys and energy). During the first quarter of 2008, steel prices went up significantly due to higher demand for steel products and higher input costs resulting from constraints in the availability of raw materials. However, this trend reversed beginning in the second half of 2008 due to a global economic downturn, with prices and costs declining steeply. Beginning in the second half of 2009, steel prices in the international markets rebounded mainly as a result of the increase in the demand for steel in China and other emerging markets, and the subsidence of the worldwide de-stocking process. This positive trend in international steel prices partially reversed during the second half of 2010, as an increase in demand for steel products was more than offset by new capacity additions and idled capacity restarts. A more balanced market and the increase in steel demand by year-end 2010 supported a steel price rally during the first quarter of 2011. During 2011 and first quarter 2012, steel prices followed a pattern similar to that witnessed during the previous year.

North America Region

Mexico. Ternium has strong domestic competitors in the Mexican steel market and faces significant competition from imports. According to Canacero, the Mexican chamber of the iron and steel industry, imports of hot-rolled, cold-rolled and galvanized steel products into Mexico accounted for approximately 30%, 31% and 27% of the Mexican market in 2011, 2010 and 2009, respectively, as steel consumption in Mexico is higher than the installed steel capacity in the country.

Our largest Mexican competitor in the flat products market is AHMSA, an integrated steel producer located in Monclova, Coahuila, that produces a wide variety of steel products. AHMSA focuses on low value added products such as plate and commercial quality hot-rolled and cold-rolled coils. Other significant domestic competitors are Lámina y Placa Comercial S.A. de C.V. (Grupo Villacero), a producer of galvanized coils and a distributor of steel products with operations throughout Mexico, and POSCO, a Korean steel company that produces galvanized coils in Mexico.

In the rebar market, Ternium’s largest competitor is ArcelorMittal. To a lesser extent, Ternium also faces competition from Aceros San Luis and Deacero. In the low-carbon wire rod market, Ternium’s main competitors are Deacero, ArcelorMittal and, to a lesser extent, Talleres y Aceros and Aceros San Luis.

In the small diameter welded pipe market, Ternium’s main competitors are Tubería Laguna, Maquilacero and imports. Orders in this market are usually small and cover a wide range of product specifications.

United States. Ternium has a very small participation in the U.S. steel markets in comparison with U.S. domestic steel manufacturers and importers. It successfully competes in the Gulf Coast and a large portion of the West Coast where its facilities have logistical advantages.

South and Central America Region

Ternium’s most significant markets in the South and Central America Region are Argentina and Colombia. Other relevant markets in the region are Central America, Paraguay, Uruguay, Bolivia and Chile.

Argentina. Siderar is the main producer of flat rolled steel products in Argentina. Its main competition in the Argentine flat steel market are imports, mainly from Brazil. The main Brazilian producers of flat steel value-added products are Usiminas, Companhia Siderúrgica Nacional and ArcelorMittal.

Colombia. In 2010, Ternium acquired a 54% ownership interest in Ferrasa. Ferrasa is the main flat steel processor in Colombia and is also a long steel producer. Its main competitors in the Colombian steel market are Acerías de Colombia, Acerías Paz del Río and Diaco. Through the acquisition of Ferrasa, Ternium increased its market share in Colombia.

 

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Other South and Central American markets. Ternium keeps an active presence in the region, particularly in those steel markets where there is the absence or limited presence of domestic competitors. Ternium keeps a leading position in the flat steel markets of Paraguay and Uruguay and has a presence in the flat steel markets of Chile and Bolivia, where the location of Ternium’s facilities in neighboring Argentina provides a logistical advantage to supply these markets vis a vis its foreign competitors. In addition, Ternium is present in the steel markets of Ecuador and Peru, although it usually faces strong competition in these markets from steel producers located in Brazil and Venezuela. Finally, Ternium keeps a leading position in the flat steel market of Central America, where it leverages its logistical advantages stemming from the location of its facilities in Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, Mexico and Panama.

Capital Expenditure Program

Capital expenditures in Ternium’s facilities during 2011 amounted to approximately USD601 million. We currently expect that our capital expenditures for 2012 for future and ongoing capital expenditure projects will amount to approximately USD1 billion and that such amount will be financed with cash from operations and debt.

The main objectives of Ternium’s current capital expenditure program are to:

 

   

maintain and replace equipment;

 

   

increase steel production and processing capacity;

 

   

increase product range;

 

   

reduce production costs;

 

   

improve product quality, equipment reliability and productivity;

 

   

comply with applicable environmental standards; and

 

   

provide enhanced customer services.

In the past, we announced new investments and projects to be developed in Mexico and in Argentina. These investments were aimed at increasing steel production and processing capacity through the construction of new facilities and the expansion of existing ones. The current status of these projects is discussed below.

North America Region

During 2011, Ternium’s capital expenditures in the region amounted to USD391 million. We carried out a basic capital expenditure plan in order to maintain our equipment’s operating performance and, at the same time, we continued with some projects of which the most significant were:

 

   

Construction of new cold-rolling and galvanizing facilities in the vicinity of Monterrey City, Mexico. The cold-rolling facilities include new pickling, cold-rolling, annealing and tempering lines. Part of the output from these lines will be used to supply the new galvanizing facilities. Ternium expects that these lines will commence production in 2013 and that the required total investment will be approximately USD700 million. The expected production capacity of the new cold-rolling facility upon completion is 1.5 million tons per year. In addition, Tenigal, a Mexican company established in November 2010 with Ternium and Nippon Steel holding 51% and 49% participations, respectively, is building the hot-dip galvanizing plant at the same site. Ternium expects that this plant will commence production of high-grade and high-quality galvanized and galvannealed automotive steel sheets, including outer-panel and high-strength qualities, in 2013, and that the required total investment will be approximately USD350 million. The expected production capacity of the new galvanizing facility upon completion is 400 thousand tons per year. For more information on the Tenigal project, see note 29 to our audited consolidated financial statements included elsewhere in this annual report.

 

   

Expansion and enhancement of our service and distribution center network in Mexico. This project is expected to be completed during 2015 in two stages, for a total investment of approximately USD50 million. The first stage includes the expansion and enhancement of three distribution centers, completed during 2011, and rail network connection enhancements, to be completed during 2012. The second stage includes the development of a new service center in the distribution center located in central Mexico to be completed during 2015.

 

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Enhancement of our defuse emission control equipment at our steel shop in the Norte unit. This environmental project was completed during 2011 for a total investment of approximately USD25 million.

 

   

Revamping of a grinding plant. This plant is part of the Las Encinas mining operations in Mexico. The project, completed during 2011 for a total investment of approximately USD30 million, is aimed at expanding the facility’s iron ore processing capacity.

South and Central America Region

During 2011, Ternium’s capital expenditures in the region amounted to USD209 million. We carried out a basic capital expenditure plan to maintain our equipment’s operating performance, continued with some projects and started new ones, of which the most significant were carried out in Argentina:

 

   

Progress in the expansion of hot rolling mill capacity. This mill is part of the San Nicolás unit of Siderar’s operations. The expansion, for a total investment of approximately USD80 million, includes the installation of an additional coiler (completed in the first quarter of 2012), and the installation of a new exit (to be completed during 2013), enabling an expected increase in the mill’s annual processing capacity of approximately 100,000 tons of slabs.

 

   

Revamping and expansion of the by-products plant at Siderar’s coking facilities. These facilities are part of the San Nicolás unit of Siderar’s operations. The project is expected to be completed during 2012 and, together with the repairs and enhancements at the coking facilities, is expected to allow the increase in coke annual production capacity by approximately 400,000 tons. The required total investment is expected to be approximately USD70 million.

 

   

Construction of a vacuum degassing in the steel shop. These facilities are part of the San Nicolás unit of Siderar’s operations. This equipment will enable the production of interstitial-free steel for certain applications in the automobile industry. It is expected that the project will be completed during 2013 and that the required total investment is expected to be approximately USD50 million.

 

   

Progress in repairs and enhancements at Siderar’s coking facilities. These facilities are part of the San Nicolás unit of Siderar’s operations. Works included repairs in one chimney, completed during 2011, and in coke oven batteries #3 and #4, expected to be completed during 2012. The required total investment is expected to be approximately USD90 million.

 

   

Progress in the expansion of galvanizing capacity. These facilities are part of the Haedo unit of Siderar’s operations. Works include the revamping and expansion of a hot-dip galvanizing mill, a project we expect to complete during 2012 for a total investment of approximately USD20 million.

 

   

Progress in the construction of a new continuous caster in the steel shop. These facilities are part of the San Nicolás unit of Siderar’s operations. The project, expected to be completed during 2013, is expected to increase slab annual production capacity by approximately 500,000 tons. The required total investment is expected to be approximately USD180 million.

 

   

Expansion of service center processing capacity. This project, completed during 2011 for a total investment of approximately USD15 million, involved the expansion of warehouse capacity and the installation of a new slitter at the Florencio Varela unit of Siderar’s operations.

2012 Capital Expenditures

In 2012, Ternium intends to further develop its ongoing projects, primarily in Mexico and Argentina. Our main ongoing project consists of the new cold-rolling and galvanizing facilities being constructed in the vicinity of Monterrey City, Mexico. Consistent with the objectives of our capital expenditure program, we also plan to conduct feasibility studies on, and eventually implement, other projects in Mexico, Argentina and Colombia.

 

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In addition, we will continue evaluating growth opportunities in the region. In Brazil, for example, we are exploring a project (the Açu Port project) to produce iron ore pellets and steel products, which would involve building a pelletizing facility in a first stage, and subsequently constructing a DRI-based mini-mill steelmaking facility. We have taken several preliminary steps in connection with this project. The acquisition of the land for the facilities is nearly complete; we also have a port services contract in place and negotiations for a long term iron ore supply agreement with Anglo American are in progress. We have already obtained a preliminary environmental license, and intend to request an installation license for the pelletizing facility by mid-2012. However, we have yet to secure sufficient quantities of natural gas at competitive pricing, a critical factor for the feasibility of the steel mill. Under existing agreements, we are required to elect whether or not to move forward with the project by September 2012. At that time, we may decide to build a complete project, to build the pelletizing facility only, or to call off the entire project.

Information Technology Investments

We spent an aggregate of approximately USD34 million in information technology during 2011, mainly for the integration of our Mexican facilities into Ternium’s core business administration system.

Raw Materials, Energy and Other Inputs

The main inputs for Ternium’s facilities in Mexico are slabs, iron ore, steel scrap, electricity and natural gas; the main inputs for Siderar’s integrated steel facilities in Argentina are iron ore and coal; and the main inputs for Ternium’s facilities in Colombia are steel products, steel scrap and electricity. Below is a more complete description of the supply conditions for raw materials, energy and other inputs at Ternium’s facilities in these countries. For a description of some of the risks associated with Ternium’s access to raw materials, energy and other inputs, see Item 3. “Key Information—D. Risk Factors—Risks Relating to the Steel Industry—Price fluctuations or shortages in the supply of raw materials, slabs and energy could adversely affect Ternium’s profitability.”

Mexico

In Mexico, Ternium’s manufacturing of finished steel products relies on the supply of crude steel from its steelmaking facilities, which are based on the mini-mill technology, and on the purchase of crude steel slabs from third parties. The mini-mill technology melts a variable combination of DRI and steel scrap to produce steel slabs, billets and round bars. Ternium’s production process in Mexico requires extensive use of natural gas and electricity. Third-party slabs are the largest component of production costs; iron ore, scrap, electricity and natural gas costs are also significant.

Slabs. Ternium’s Mexican subsidiary has some non-integrated facilities that consume large quantities of slabs purchased from third-party steel suppliers. Currently, slabs are purchased both in Mexico (primarily from ArcelorMittal) and in the international markets. In addition, in the past Siderar supplied slabs from time to time to our Mexican operations. Slab consumption varies significantly from year to year in accordance with market conditions. Our Mexican subsidiary purchased 2.5 million, 2.6 million and 1.7 million tons of slabs in 2011, 2010 and 2009, respectively. Slab purchase prices are market-based.

Iron ore. As described under “—Production Facilities and Processes—Iron ore mining facilities” above, Ternium’s subsidiaries own interests in two mining companies in Mexico: 100% of the equity of Las Encinas and a 50% equity stake in Peña Colorada. In 2011, Ternium’s Mexican facilities sourced 100% of their iron ore requirements from the mines operated by these two companies. Under our arrangement with Peña Colorada’s other shareholder, an ArcelorMittal subsidiary, we are committed to off-take 50% of the annual production of the Peña Colorada mine. In 2011, approximately 91% of the iron ore production available to Ternium went to our own direct reduction plants and the remaining 9% was sold in the international markets. Most of our iron ore exports during 2011 were made on a spot price basis. On average, we consume approximately 1.17 tons of iron ore to produce one ton of crude steel at our mini-mill facilities in Mexico.

Steel scrap. In 2011, approximately 79% of Ternium’s scrap requirements were obtained in the Mexican market through its own steel scrap collecting and processing operations and approximately 21% was purchased in the United States. Scrap is purchased at market prices. On average, we consume approximately 0.33 tons of scrap to produce one ton of crude steel at our mini-mill facilities in Mexico.

 

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Electricity. Electric arc furnaces consume large quantities of electricity. During 2011, 60% of Ternium Mexico’s total consumption was supplied by the Comisión Federal de Electricidad or CFE, Mexico’s state-owned electricity company. The remainder was mostly purchased under long-term contracts from two other suppliers with power plants in the Monterrey area, Iberdrola Energía Monterrey, S.A. de C.V., or Iberdrola, a subsidiary of a Spanish utility company, and Tractebel Energía de Monterrey, S. de R.L. de C.V., or Tractebel, a subsidiary of a U.S. utility company. We have a long-term contract with Iberdrola for approximately 111 MW power capacity and a long-term contract with Tractebel for approximately 90 MW power capacity. Electricity purchases under these contracts are made at prices linked to prevailing market conditions. On average, we consume approximately 0.67 MWH of electricity to produce one ton of crude steel at our mini-mill facilities in Mexico.

Natural gas. Natural gas is mainly used as a reducing agent for the production of DRI and for the reheating of slabs and billets before the hot-rolling process. In Mexico, Ternium purchases natural gas from Pemex, the Mexican state-owned oil and gas company that is Mexico’s sole producer of natural gas, and from three distributors: Gas Industrial de Monterrey S.A. de C.V. (GIMSA), Compañía Mexicana de Gas (CMG) and Gas Natural Mexico. Natural gas prices for Ternium Mexico are determined based on the average of the quoted prices of several indexes plus transportation and service costs depending on the areas or cities or pursuant to the methodology approved by the Energy Regulatory Commission for prices applicable to an area, as the case may be. Those prices are related to the market prices of natural gas in the southern United States. On average, we consume approximately 9.4 million btu of natural gas to produce one ton of crude steel at our mini-mill facilities in Mexico.

Argentina

In Argentina, Siderar produces crude steel through the use of blast furnace technology. The principal raw materials used to produce steel are iron ore and coal. The manufacturing process also requires significant quantities of electricity and natural gas.

Iron ore. Iron ore is purchased under long-term agreements from suppliers in neighboring Brazil. Prices under these contracts are determined in accordance with market conditions. Our main suppliers of iron ore, in the form of lumps, pellets and sinter feed fines, are Vale and MMX. Our geographic location provides favorable access to high quality iron ore lump and fines produced in Brazil’s iron ore mines in the Pantanal Region (Mato Grosso do Sul state), which are transported on barges navigating the Paraguay and Parana Rivers; accordingly, our costs associated with the provision of iron ore are low in comparison with customers requiring seaborne shipping. In addition, Siderar’s steelmaking facility in Argentina receives iron ore pellets and fines from ports located on Brazil’s ocean coast. We consume approximately 1.34 tons of iron ore to produce one ton of crude steel in Argentina.

Coking coal and related materials. Siderar obtains its coke through the distillation of coking coal and petroleum coke in its coke ovens. Siderar requires different types of coal to produce coke. Coking coal is purchased under short-term contracts and on the spot market from several major international suppliers based mainly in Australia and the United States. Prices under contracts are determined in accordance with market conditions. Petroleum coke is sourced domestically from oil companies such as Exxon Mobil and Repsol YPF. The volume purchased from each supplier mainly depends on the technical quality requirements of the blast furnace operations. We consume 0.47 tons of coking coal and petroleum coke to produce one ton of crude steel in Argentina.

Electricity. Siderar consumes large quantities of electricity for its manufacturing activities, particularly in its San Nicolás and Ensenada facilities. Most of the electricity required by our San Nicolás facility is self-generated on site by a wholly-owned thermoelectric plant with an installed power capacity of 110 MW. This thermoelectric plant uses steam primarily generated from by-product gases obtained in the steelmaking process (blast furnace and coke oven gases) and also steam purchased at market prices under a long-term steam sales agreement, from a power plant located within the San Nicolás facility owned by Siderca S.A.I.C., a subsidiary of Tenaris. Additional fuel requirements for steam production are covered with natural gas purchased from different market vendors, and/or fuel oil bought at market prices. Siderar covers electricity shortfalls or sells excesses, as the case may be, at spot prices in the wholesale market. In order to cover its electricity requirements Siderar entered into electricity supply contracts with the Central Puerto and Genelba, utilities controlled by SADESA Group and Petrobras, respectively. Over the course of the last several years, demand for electricity has increased substantially, resulting in shortages of electricity to residential and industrial users during periods of high demand. Accordingly, in 2008 certain Siderar facilities suffered interruptions in their electricity supply at peak hours. We consume approximately 0.10 MWH of electricity to produce one ton of crude steel in Argentina.

 

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Natural gas. Siderar also consumes substantial volumes of natural gas, particularly to operate its blast furnace and power generation facilities in San Nicolás. Siderar purchases natural gas at market prices mainly from Pan American Energy, Total Austral, Tecpetrol S.A., a company controlled by San Faustin, and natural gas traders, including MetroEnergía, Albanesi, Gas Patagonia and Energy Traders. As is the case with electricity, natural gas demand has increased significantly, and supply to industrial users (including Siderar) has often been restricted during the Southern Hemisphere winter due to supply shortages.

For its San Nicolás facility Siderar has separate transportation and distribution agreements with Transportadora de Gas del Norte S.A., or TGN, and Litoral Gas, companies in which San Faustin holds significant but non-controlling interests. Siderar’s firm transportation contracts with TGN expire in April 2028, whereas its distribution agreement with Litoral Gas expires in December 2012. For its other facilities Siderar’s transport and distribution needs are covered by the corresponding regional distributors Camuzzi Gas Pampeana S.A., Gas Natural Ban S.A. and Metrogas S.A. We consume approximately 4.9 million btu of natural gas to produce one ton of crude steel in Argentina.

Other inputs. Siderar has on-site oxygen, nitrogen and argon separation plants in order to extract these gases for use in the steelmaking process. Siderar’s separation plants are being managed by Air Liquide Argentina S.A., or Air Liquide. Siderar is a party to a long-term contract with Air Liquide for the supply of oxygen, nitrogen and argon. As of December 31, 2011 the agreement requires Siderar to take or pay minimum daily amounts of these gases for an aggregate amount of USD59.0 million to satisfy Siderar’s current production needs through 2021, and to make incremental purchases of these gases for an aggregate amount of USD116.1 million to satisfy the requirements through 2025 of a new separation facility to be constructed as part of Siderar’s expansion plan. As a result of the several global crisis that began in 2008 and the uncertainties surrounding the evolution of steel demand in the domestic and global markets, the parties engaged in discussions for the renegotiation of the contract. In February 2011, Siderar and Air Liquide reached agreement on the terms of the renegotiation; the obligations of the parties under the agreement related to the new separation facility were suspended through March 31, 2012 (subsequently extended to May 15), and Siderar agreed to purchase from Air Liquide certain equipment for an aggregate amount of approximately, as of December 31, 2011, USD21.4 million (as of December 31, 2011, Siderar paid advances in an amount of USD12.6 million). If Siderar was to resume its expansion plan on or prior to May 15, 2012, Air Liquide would be required to repurchase that equipment, and all of the parties’ obligations under the contract would be reinstated; otherwise, all rights and obligations relating to the new separation plant and the related supply of gases would terminate automatically on May 15, 2012, and Siderar would be required to pay to Air Liquide an aggregate amount currently estimated at USD12.0 million.

Colombia

In Colombia, Ternium’s manufacturing of finished steel products relies on two sources: (a) the production of steel in its steelmaking facilities, which are based on the Electric Arc Furnace (EAF) technology; and (b) on the purchase of steel products, both from our overseas subsidiaries and from third parties. The EAF technology melts steel scrap to produce steel billets, which are then rolled into various long products. Ternium’s production process requires extensive use of electricity. Steel products are the largest component of production costs; scrap and electricity costs are also significant.

Steel products. Ternium’s operations in Colombia include non-integrated facilities that process steel supplied by Ternium’s overseas subsidiaries at market prices and steel purchased from third-party suppliers procured in the domestic and international markets. Our subsidiary purchased from third parties approximately 235,000 tons of steel products in 2011 and 64,000 tons of steel products from August 2010, the month in which we acquired Ferrasa, until year-end 2010.

Steel scrap. Scrap is the main raw material for producing steel in our steelmaking facilities in Colombia. Ternium sources 100% of its steel scrap needs from the local scrap market. We consume approximately 1.1 tons of scrap to produce one ton of crude steel in Colombia.

Electricity. Manizales is our main electricity consuming unit in Colombia, mainly due to its electric arc furnace-based steel production operations. Manizales purchases electricity from ISAGEN S.A. E.S.P., a Colombian power company, under a five-year supply contract expiring in April 2013. The contract is based on annual consumption rates of approximately 68,400 MWH. Electricity prices under the contract are determined according to local regulations and adjusted with the wholesale price index. We consume approximately 0.58 MWH of electricity to produce one ton of crude steel in Colombia.

 

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Product Quality Standards

Ternium develops its products and services with a philosophy of continuous improvement and seeks to excel in its internal quality control of its products and processes. Ternium’s products are manufactured in accordance with proprietary standards and the requirements of customers, and within the specifications of recognized international standardization entities including the International Organization for Standardization, or ISO, the American Society for Testing and Materials, or ASTM, the European Standards, or EN, the Japanese Industrial Standards, or JIS, the Society of Automotive Engineers, or SAE, and the standards of the American Petroleum Institute, or API.

Ternium established and implemented a Quality Management System, or QMS, and continuously improves its effectiveness in compliance with the requirements of the applicable ISO 9001:2008 and ISO / TS 16949:2009, intended for production of automotive supplies, and other specific requirements. Ternium’s QMS operates with aligned strategies, objectives and criteria throughout Ternium’s subsidiaries. To keep its ISO multisite certification, the QMS is audited annually by Lloyd’s Register Quality Assurance. In 2011, our U.S., Colombian and Costa Rican facilities were included and certified as part of Ternium’s multisite certification scheme.

Ternium Mexico’s and Siderar’s metallurgical testing laboratories are accredited for the performance of various technical tests in accordance with ISO/IEC 17025:2005 General Requirements for the Competence of Testing and Calibration Laboratories or equivalent standards.

Research and Development; Product Development

Product research and development activities at Ternium are conducted through a central Product Development Department in coordination with local teams that operate in several of our facilities. Applied research efforts are carried out in-house and in conjunction with universities and research centers, as well as through participation in international consortia. Ternium also develops new products and processes in cooperation with its industrial customers. Research expenditures are recognized as expenses, and development costs are recorded as cost of sales. For more information on our accounting policy, see note 4 (e) (5) to our audited consolidated financial statements included elsewhere in this annual report.

In 2011, Ternium’s product research and development activities focused on initiatives aimed at increasing market share, adding value to our products and reducing costs. During the year, Ternium completed the first stage of a plan entailing the implementation of an IT system in Mexico that fully integrates product and processing route specifications among its plants. This effort will enable significant optimization in our processes and products, including increasing opportunities for productivity enhancement, cost reduction and inventory optimization.

During 2011, Ternium’s metal building systems division developed the engineering and manufacturing processes required to supply the steel structures and roofing for Tenigal’s facilities in Mexico. Of note were the insulated metal panels and cool roofing systems designed in order to comply with the best criteria for green building. In 2011, we continued certifying our products with customers in the automotive industry in Mexico and Argentina, related to newly defined standards and new car models to be produced in these countries. In this regard, in Argentina, a market that is expected to continue showing dynamism in new models introduction, Siderar gained market share upon receiving customer approval of our hot rolled products for a new light truck model. In addition, Siderar is going through the approval process for a recently developed hot rolled high resistance steel grade for heavy trucks.

During 2011, Ternium developed a new process to manufacture coated steel products with textured high-resistance surface for the appliance market in North America. This new process significantly reduced production costs while yielding an improved and sophisticated aesthetics, allowing Ternium to gain market share and to increase the attractiveness of its products in the high-end appliances market. In 2011, Ternium continued developing products for tube and pipe manufacturers, and completed a project for the manufacturing of high-quality low-inclusion bars, a new family of semi-finished products for oil and gas seamless pipe manufacturing. In addition, it developed rolling processes to obtain thick-gauge high-resistance steels for the manufacturing of welded pipes. These processes will allow Ternium to develop hot rolled coils for the manufacturing of natural gas and water pipelines being developed under Mexican infrastructure plans.

Ternium is continuously reassessing its production processes and products, and developing new ones, with a view to complying with existing and upcoming environmental regulations. During 2011, Ternium launched a project to develop pre-painted galvanized steel free from hexavalent chromium, an element that poses health risks. This project will allow Ternium to keep up with regulations related to the disposal of electric and electronics goods. In addition, Ternium initiated feasibility studies aimed at changing the composition of the electrolyte used in its electro-tin plating line in order to reduce inherent health risks. In 2011, Ternium developed new panels in compliance with the Montreal Protocol regulations. These panels do not require the use of foaming agents that could potentially damage the ozone layer.

 

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Ternium’s medium-term product research and development plans are based on a continuing assessment of steel product performance and the emerging requirements of the industry, carried out in close collaboration with leading steel customers. Based on customer needs, we improve, adapt and create new applications and define future technology requirements at our facilities. With the aim of further developing our metallurgical knowledge and its applications, we continued participating in various medium-term projects, including those related to high-resistance cold rolled steel, through a consortium associated with the University of Pittsburgh in the United States; coating of advanced high strength steels for the automotive industry through consortia associated with McMaster University in Canada and the International Zinc Association; high performance coil coating applications for buildings through the French Corrosion Institute; optimization of cutting sheet steel technologies in direct association with the Instituto Argentino de Siderurgia, and new environmentally friendly processes for the canning industry through the International Tin Research Institute.

In 2012, Ternium plans to develop new products for the agricultural machinery sector to expand its product range and increase its market share in Mexico and Colombia, and to consolidate its market leadership in Argentina. Of note among the products to be developed are quenchable hot and cold-rolled ultra-high-strength steel grades. For welded pipe manufacturers Ternium intends to expand its range of hot-rolled steel grades to capture the expected increased demand for these products following the Mexican government’s announcement of multiple infrastructure projects to increase distribution capacity of natural gas and water in that country. In addition, Ternium expects to develop new high-performance steel grades for round bars for oil and natural gas seamless pipe manufacturers. Ternium also plans to launch an assistance program for Argentine truck bodywork manufacturers in order to implement the usage of high-resistance steel grades that entail increased competitiveness in terms of fuel consumption and payload. In addition, it intends to introduce new high-strength cold-rolled steel grades for the manufacturing of light-weight parts used by the automotive industry. Finally, Ternium is assessing the development of boron-added steel grades for hot and cold-rolled products, an ultra-high resistance product envisioned as a customer choice for high-performance crash-resistance requirements.

Regulations

Environmental Regulation

Ternium’s operations (including mining activities in Mexico) are subject to a broad range of environmental laws, regulations, permit requirements and decrees relating to the protection of human health and environment, including laws and regulations relating to land use; air emissions; wastewater treatment and discharges; the use, handling and disposal of hazardous or toxic materials and the handling and disposal of solid wastes. Laws and regulations protecting the environment have become increasingly complex and more stringent and expensive to implement in recent years. International environmental requirements vary. Ternium’s revised corporate environmental policy commits each of its business units to comply with all applicable environmental laws and regulations and aims to achieve the highest standards of environmental performance as a basis to enhance sustainable development. Compliance with environmental laws and regulations, and monitoring regulatory changes, is addressed primarily at the regional level.

Ternium reports to the World Steel Association eleven sustainability indicators, among which carbon dioxide emissions data is being reported on an annual basis as part of the association’s initiative to collect emissions data from member companies. We support the steel industry’s ongoing effort to develop innovative solutions to reduce greenhouse gas (GHG) emissions over the life cycle of steel products. According to the Intergovernmental Panel on Climate Change (IPCC), the steel industry accounts for approximately 4% to 5% of total world GHG emissions. Our steel production facilities in Mexico have achieved GHG-specific emission levels that are close to the theoretical minimum. Our Guerrero steel production unit in Mexico has been recognized by the state government for its increased GHG capture levels. In Argentina, Siderar’s GHG-specific emission levels are close to the industry average for blast furnace technology.

 

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The ultimate impact of complying with existing laws and regulations is not always clearly known or determinable since regulations under some of these laws have not yet been promulgated or are undergoing revision. In addition, new laws and regulations could emerge as a result of ongoing negotiations for new commitments on GHG emissions following the expiration of the Kyoto Protocol in 2012. The expenditures necessary to remain in compliance with these laws and regulations, including site or other remediation costs, or costs incurred from potential environmental liabilities, could have a material adverse effect on our financial condition and profitability. While we incur and will continue to incur expenditures to comply with applicable laws and regulations, there always remains a risk that environmental incidents or accidents may occur that may negatively affect our reputation or our operations.

Ternium has not been subject to any material penalty for any environmental violations in 2011, and we are not aware of any current material legal or administrative proceedings pending against Ternium with respect to environmental matters which could have an adverse material impact on Ternium’s financial condition or results of operations.

Mining regulations in Mexico

Because our operations in Mexico include mining, we are also subject to Mexican regulations relating to mining and mining concessions. Under Mexican law, mineral resources belong to the Mexican nation and a concession from the Mexican federal government is required to explore for or exploit mineral reserves. Pursuant to the Ley Minera (“Mining Law”), mining concessions may only be granted to Mexican individuals and to legal entities incorporated under Mexican law. Foreign investors may hold up to 100% of the shares of such entities.

A mining concession allows its holder to perform both exploration works (including identifying mineral deposits and quantifying and evaluating economically minable reserves) and exploitation works (including detaching and extracting mineral products from such deposits). Mining concessions are granted for a 50-year period from the date of their recording in the Public Mining Registry; following the expiration of the initial concession term, the concessions are renewable for an additional 50-year term in accordance with, and subject to, the procedures set forth in the Mining Law.

Mining concessions grant several specified rights to the concessionaire, including:

 

   

the right to dispose freely of mineral products obtained as a result of the exploitation of the concession;

 

   

the right to obtain the expropriation of, or an easement with respect to, the land where the exploration or exploitation will be conducted; and

 

   

the use of water in the mine to facilitate extraction.

In addition, a concessionaire of a mining concession is obligated, among other things, to explore or exploit the relevant concession, to pay for any relevant mining rights, to comply with all environmental and safety standards, and to provide information to and permit inspections by the Secretaría de Economía. Mining concessions may be terminated if the obligations of the concessionaire are not satisfied.

A company that holds a concession must be registered with the Public Mining Registry. In addition, mining concessions and permits, assignments, transfers and encumbrances must be recorded with the Public Mining Registry to be enforceable. We believe that our material mining concessions are duly registered in the Public Mining Registry.

Trade regulations

Intense global competition in the steel industry can lead many countries to increase duties or impose restrictions on steel product imports to protect their domestic industries from trades that are not made under market conditions or that are otherwise unfair. Such measures protect domestic producers from increased imports sold at dumped or subsidized prices.

During a period of intense competition in 2001, some regions to which Ternium exports its products, such as the United States and Europe, implemented these measures as well as other general measures known as safeguards. While safeguards were lifted in December 2003, antidumping and countervailing duties remain in place. At the same time, bilateral or regional free trade agreements have liberalized trade among some countries, providing for reduced or zero tariffs for many goods, including steel products.

 

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Countries’ imposition of trade remedy measures and the entry into force of various free trade agreements can and have both benefited and adversely affected Ternium’s home market and export sales of steel products, as described below. See also Item 3. “Key Information—D. Risk Factors—Certain Regulatory Risks and Litigation Risks—International trade actions or regulations and trade-related legal proceedings could adversely affect Ternium’s sales, revenues and overall business.”

Mexico.

The Mexican government has imposed certain antidumping measures on steel import products that are similar to the ones produced by Ternium Mexico. The following antidumping measures are currently in effect:

Hot-rolled products: On March 28, 2000, the Mexican government imposed antidumping duties on the Russian Federation and Ukraine of 30.31% and 46.66%, respectively, on hot-rolled products. On March 25, 2005, the first sunset review was initiated by the Mexican authorities, and on March 17, 2006 a final resolution was issued, extending the antidumping duties for an additional five-year period. On March 16, 2010, a second sunset review was initiated; and on September 8, 2011, the final resolution was published by which new antidumping duties of 21% and 25% were set for Russia and Ukraine, respectively.

Furthermore, since September 2005, Mexico has imposed antidumping duties against Ukraine (60.1%), Romania (67.60%) and Russia (36.80%) on cut-to-length plates. A sunset review procedure was initiated on September 21, 2010. On March 12, 2012, the Mexican authorities published the final resolution of the sunset review, determining the continuation of the antidumping duties until September 2015.

Cold-rolled products: In June 1999, Mexico imposed antidumping duties on cold-rolled steel sheets from Bulgaria, the Russian Federation and Kazakhstan. On December 12, 2005, as a result of the first sunset review, the Mexican authorities extended the antidumping duties for an additional five-year period until June 2009. On December 28, 2010, following the completion of the second sunset review procedure, the Mexican government published the final resolution eliminating antidumping duties on cold-rolled steel sheets from Bulgaria and setting antidumping duties on cold-rolled steel sheets from the Russian Federation at 15% and from Kazakhstan at 22%.

Plate in coil: Since June 1996, an antidumping duty of 29.3% on imports from Russia has been imposed. In June 2003, the first sunset review resolution concluded that the application of the antidumping duty should continue. In June 2007, the Ministry of Economy issued the final resolution of the second sunset review, determining the continuation of the antidumping duties for an additional five-year period. There is an ongoing third sunset review procedure which began on June 6, 2011.

Long products: Imports of reinforcing bars from Brazil are currently subject to an antidumping duty of 57.69% since 1995. In June 2006, the second sunset review resolution determined the continuation of antidumping duties. On August 9, 2010, a third sunset review was initiated, and on January 12, 2012, the Mexican authority determined the continuation of antidumping duty of 57.69% until August 2015. Imports of wire rod from Ukraine are currently subject to an antidumping duty of 30.52% since September 2000. In June 2006, the first sunset review resolution determined the continuation of antidumping duties for an additional five-year period. On September 7, 2010, a second sunset review was initiated, and on March 7, 2012, the Mexican government determined to increase the antidumping duty from 30.52% to 41% until September 2015.

U.S. authorities have imposed a number of measures on flat and long steel import products from Mexico, thereby restricting Ternium’s exports to that country. Below is a description of measures currently in effect:

 

   

Ternium Mexico’s wire rod exports are subject to an antidumping duty of 17.94% pursuant to an antidumping duty order on carbon and certain alloy steel wire rod from Mexico. Following the most recent sunset review, such duty was extended for five more years, beginning in June 2008.

 

   

During 2007, the U.S. Department of Commerce, or DoC, initiated an antidumping investigation of light-walled rectangular pipe and tube (“LWRPT”) from, among other countries, Mexico. On June 13, 2008, the DoC made a final determination of sales at less than fair value in the investigation of LWRPT from Mexico and, consequently, LWRPT from Mexico is subject to antidumping duties. On February 18, 2011, the DoC published the final results of the first administrative review by which Ternium Mexico’s LWRPT exports are now subject to an antidumping duty of 6.13%.

 

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Since 1992, pursuant to an antidumping duty order on circular welded non-alloy steel pipe -or standard pipe- from various countries, including Mexico, standard pipes manufactured by Hylsamex and Grupo Imsa were subject to antidumping duties. In 2007, such measures were extended for five more years. In August 2009, the DoC published the final results of a changed circumstances review, concluding that Ternium Mexico is the successor-in-interest to Hylsamex for purposes of determining antidumping duty liability. In accordance with the latest administrative review, the applicable duty for Ternium Mexico is 48.33%.

Mexico has signed trade agreements with several countries or trade blocs aimed at liberalizing trade between them:

NAFTA was signed among Canada, Mexico and the United States and came into effect on January 1, 1994. NAFTA provided for the progressive elimination over a ten-year period of duties on, among other things, steel products traded between or among Mexico, the United States and Canada. As a result, zero tariffs currently apply to steel products traded within NAFTA countries. Accordingly, Ternium has greater access to the U.S. and Canadian markets through Ternium Mexico, but also faces increased competition in Mexico from U.S. and Canadian steel imports. NAFTA provides that NAFTA member companies (including Mexican steel producers such as Ternium Mexico) can challenge trade restrictions imposed by other NAFTA countries before a binational dispute resolution panel.

The Mexican-European Free Trade Agreement, or MEFTA, became effective on July 1, 2000. MEFTA provides for the phase-out and eventual elimination of Mexican and European duties on all industrial goods, including finished steel products. The European Union, or EU, eliminated all import duties on Mexican industrial goods, including finished steel products, as of January 1, 2003, while Mexico eliminated all import duties on European industrial goods, including finished steel products, as of January 1, 2007. Accordingly, Ternium has increased access to EU markets under MEFTA through Ternium Mexico, but also could face increased competition in Mexico from EU steel imports.

In November 2003, Mexico and Argentina signed an Economic Complementation Agreement, or ACE 6, whereby reciprocal tariff preferences were granted. In 2006, Mexico and Argentina modified the ACE 6 Agreement, reducing to zero import duties on imports of certain steel products from the other country. Zero import duties included exports from Mexico to Argentina and from Argentina to Mexico for up to 90,000 tons per year of slabs, 60,000 tons per year of cold rolled coils and 30,000 tons per year of corrosion resistant coils, including hot dip galvanized and pre-painted sheets.

In addition, the Mexican government has signed trade agreements with Venezuela, Colombia, the European Free Trade Association—an intergovernmental organization set up by Liechtenstein, Norway, Iceland and Switzerland—Japan, Chile, Bolivia, Nicaragua, Costa Rica and Uruguay, among others. However, the Mexico-Venezuela free trade agreement was terminated in November 2006.

On February 9, 2010, the Mexican Government issued a decree reducing the tariffs on several steel product groups. The tariff for finished flat and long products was set at 0% for 2012 (from 3% in 2011, 5% in 2010 and 7% in 2009). The tariff for semi-finished products was set at 0% in 2012 (from 3% in 2011 and 2010, and 5% in 2009) and the tariff for welded pipe products was set in a range from 0% to 5% since 2012 (from 7% in 2011 and 2010, and 10% in 2009).

Argentina.

The Argentine government has imposed various antidumping measures on certain steel imports that compete directly with Ternium’s sales in Argentina. The following measures are currently in effect:

Hot-rolled products: the Argentine government has imposed antidumping measures on hot-rolled steel imports from Kazakhstan (39.91%), Romania (40.48%), the Slovak Republic (62.09%) and South Africa (55.26%), effective since April 2002. In October 2008, following completion of a sunset review initiated in May 2007, Argentine authorities decided to continue these measures for five more years.

Galvanized products: since May 2003, Argentina has imposed antidumping duties on galvanized steel sheets from South Korea (49.67%), South Africa (27.90%), Australia (70.37%) and Taiwan (33.09%). The petitioners requested the initiation of a sunset review in May 2008 to determine whether the antidumping duties will be maintained for five more years. In November 2009, following completion of a sunset review initiated in May 2008, the Argentine government decided to renew measures for three years, replacing previous ad valorem rates by specific antidumping measures: USD243/ton for South Korea; USD286/ton for South Africa; USD247/ton for Australia; and USD223/ton for Taiwan.

 

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Argentina has signed free trade agreements with several countries or trade blocs aimed at liberalizing trade between them.

In early 1991, the Argentine government reduced import tariffs and eliminated most non-tariff restrictions on trade as part of an effort to open the Argentine economy to foreign competition. In March 1991, Argentina, Brazil, Uruguay and Paraguay entered into the Treaty of Asunción, creating the Mercado Común del Sur (Common Market of the South), or Mercosur, a common market organization that aimed to bring about the free movement of goods, capital, services and people among its member states. The Treaty of Ouro Preto, signed in 2004, formalized a customs union among Mercosur’s member states. Over time, Mercosur has eliminated or significantly reduced import duties, tariffs and other trade barriers among member states. In particular, zero tariffs have applied to steel products imported from other member states since January 1, 2000. The current tariff applicable to steel products imported from outside Mercosur ranges from 2% to 16%.

In 2005, Mercosur entered into a trade agreement with Chile, pursuant to which all tariffs on steel products have been eliminated. In 1996, Mercosur signed a free trade agreement with Bolivia, pursuant to which all steel products began receiving a 100% tariff preference on January 1, 2006. In 2004, Mercosur and the Comunidad Andina de Naciones (Andean Community), or CAN, currently including Bolivia, Colombia, Ecuador and Peru, signed a free trade agreement aimed at reducing and eventually eliminating tariffs on steel products traded among member countries over a period of 8 to 12 years. Mercosur is also negotiating free-trade agreements with the EU, Mexico, India and South Africa. In May 2006, Venezuela became a junior member of Mercosur and is currently seeking full membership in the group. Brazil, Argentina and Uruguay have already approved Venezuela’s membership. The matter is still pending before Congress in Paraguay.

In November 1993, Argentina and Mexico signed the ACE 6. See Item 4. “Information on the Company—B. Business Overview—Regulations—Trade Regulations— Mexico.”

Colombia.

No antidumping measures have been imposed in Colombia. Colombia has signed free trade agreements with several countries or trade blocs aimed at liberalizing trade between them.

CAN is a trading bloc, currently including Bolivia, Colombia, Ecuador and Peru, established during 1993 and approved during 1994 for the purpose of promoting trade relations among its members and between CAN and the rest of the world. The treaty formalized a customs union among CAN’s member states. Over time, CAN has eliminated or significantly reduced import duties, tariffs and other trade barriers among member states. In particular, zero tariffs have applied to steel products imported from other member states since January 1, 2000. The current tariff applicable to steel products imported from outside CAN is 5%. The CAN and Mercosur, signed a free trade agreement. See Item 4. “Information on the Company—B. Business Overview—Regulations—Trade Regulations—Argentina.”

During June 1994, Colombia and Mexico signed a free trade agreement. See Item 4. “Information on the Company—B. Business Overview—Regulations—Trade Regulations—Mexico.”

On August 9, 2007, Colombia, El Salvador, Guatemala and Honduras established the Triángulo Norte (North Triangle), or TN, free trade agreement. Members of the TN signed multilateral agreements related to funds transfers and local and most favored nation statuses, and signed bilateral agreements aimed at reducing trade duties. Colombia’s free trade agreement with Guatemala started on November 12, 2009; with El Salvador on February 1, 2010; and with Honduras on March 27, 2010. Under TN, zero tariffs apply to several steel products imported from other member states.

Colombia’s free trade agreement with United States became effective October 2011. Under this agreement, steel import tariffs from Colombia to the U.S. will remain at 0% and steel import tariffs from the U.S. to Colombia will decrease from a range of 5-10% in 2011 to 0% in one, five or ten years according to the product category. In particular, wire rods import tariffs will be zero beginning in 2012 and rebar import tariffs will decrease gradually, reaching zero in 2021.

 

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Colombia has also signed free trade agreements with Chile and Canada in effect since May 2009 and August 2011, respectively, and has signed a free trade agreement still not effective with the European Union.

Insurance

Our subsidiaries carry insurance policies covering property damage (including machinery breakdown and business interruption), general liability and other insurance such as, among others, automobile, marine cargo and life and workers’ compensation insurance. These insurance policies include coverage and contract amounts which are customary in the steel products industry and in line with legal and domestic market requirements. General liability coverage typically includes third party, employer, sudden and accidental seepage and pollution and product liabilities within limits up to USD100 million per occurrence.

 

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  C. Organizational Structure

Below is a simplified diagram of Ternium’s corporate structure as of March 31, 2012.

 

LOGO

On January 16, 2012, Ternium, together with its subsidiary Siderar, acquired a participation in the control group of Usiminas—Brazil (for further information on the Usiminas shares purchase transaction, see Item 5. “Operating and Financial Review and Prospects—G. Recent Developments — Acquisition of participation in Usiminas”). As of December 31, 2011, Usiminas’ share capital is represented by 505,260,684 ordinary shares (representing 49.8% of Usiminas’ aggregate share capital) and 508,525,506 preferred shares (representing 50.2% of Usiminas’ aggregate share capital). The Company (through Ternium Investments) and Siderar (directly and through Prosid) hold 84,741,296 and 30,000,000, respectively, of Usiminas’ ordinary shares (representing 16.9% and 6.0%, respectively, of the aggregate Usiminas’ ordinary shares). The Company and Siderar (directly and through Prosid) do not hold preferred shares.

Subsidiaries

Ternium operates entirely through subsidiaries. For a complete list of its subsidiaries and a description of its investments in other companies, see note 2 to our audited consolidated financial statements included elsewhere in this annual report.

Ternium Mexico. Ternium Mexico was formed, as result of the merger of Grupo Imsa, Hylsamex and Hylsamex’s major shareholder in March 2008. Ternium Mexico and its subsidiaries operate all of Ternium’s mining and steel production activities in Mexico and the United States. Ternium Mexico and its subsidiaries produce flat and long steel products, including value-added finished steel products for use mainly in the construction and industrial sectors. Ternium Mexico has finished steel annual production capacity of approximately 7.5 million tons.

Siderar. Siderar is the main integrated manufacturer of flat steel products in Argentina with total annual finished steel production capacity of approximately 2.6 million tons. The shareholders of Siderar as of March 31, 2012 are set out in the following table, together with the share percentage owned by each such shareholder as of that date:

 

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Siderar Shareholders

   Number      Percent  

Ternium

     2,752,808,188         60.94

ANSeS

     1,175,806,541         26.03

Inversora Siderurgia Argentina S.A. (employees)

     115,857,898         2.56

Public

     472,621,396         10.46
  

 

 

    

 

 

 

Total shares issued and outstanding

     4,517,094,023         100.00
  

 

 

    

 

 

 

Ferrasa. Ferrasa is a flat steel products processor and distributor in Colombia and a scrap-based long steel manufacturer, with finished steel annual production capacity of approximately 400,000 tons. Ternium holds, since August 25, 2010, a 54% ownership interest in Ferrasa. The former controlling shareholders have an option to sell to Ternium, at any time, all or part of their remaining 46% interest in Ferrasa, and Ternium will have an option to purchase all or part of that remaining interest from the former controlling shareholders, at any time after August 25, 2012.

Tenigal. Tenigal is a company established in November 2010 for the manufacturing and sale of hot-dip galvanized and galvannealed steel sheets to serve the Mexican automobile market. Ternium and Nippon Steel hold 51% and 49% participations in Tenigal, respectively. The company started work for the construction of its facilities and expects to commence production of high-grade and high-quality galvanized and galvannealed automotive steel sheets, including outer-panel and high-strength qualities, in 2013, with finished steel annual production capacity of approximately 400,000 tons.

Ternium Guatemala. Ternium Guatemala was formed as result of the merger of two subsidiaries of Grupo Imsa with assets located in Central America, Industria Galvanizadora S.A. and Industrias Monterrey S.A. Ternium Guatemala and its subsidiaries operate all of Ternium’s steel processing activities in Guatemala, Honduras, El Salvador, Nicaragua and Costa Rica. Ternium Guatemala and its subsidiaries produce hot-dip galvanized steel sheets and other value-added finished steel products for use mainly in the construction and industrial sectors. Ternium Guatemala has finished steel annual production capacity of 150,000 tons.

Ferrasa Panama. Ferrasa Panama is a small long steel products processor and distributor in Panama. Ternium holds, since August 25, 2010, a 54% ownership interest in Ferrasa Panama. The former controlling shareholders have an option to sell to Ternium, at any time, all or part of their remaining 46% interest in Ferrasa Panama, and Ternium will have an option to purchase all or part of that remaining interest from the former controlling shareholders, at any time after August 25, 2012.

Ternium Internacional. Ternium Internacional comprises a network of companies in Uruguay, Colombia, Ecuador, the Netherlands and the United States that, together with our offices in Panama and Spain, market and provide services in relation to the sales of Ternium’s products to several markets other than Mexico and Argentina. The headquarters of the network are located in Uruguay. Office staff is dedicated to export sales and trading, technical assistance, commercial back office and credit analysis.

Other Investments

Lomond Holdings. Lomond Holdings comprises a network of companies under the brand “Exiros” that provides our subsidiaries with purchase agency services in connection with purchases of raw materials and other products or services. Exiros’s objectives are to procure better purchase conditions and prices by exercising the improved bargaining power that results from combining the demand for products and services by Ternium, Tenaris and Techint Engineering and Construction, a company controlled by San Faustin engaged in large-scale projects globally. We have a 50% share ownership and Tenaris has the remaining 50% share ownership in Lomond Holdings. Exiros offices are strategically located in nine countries: Argentina, Brazil, Canada, China, Colombia, Italy, Mexico, Romania and the United States.

 

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Usiminas. Usiminas is the largest flat steel producer in Brazil with annual crude steel production capacity of approximately 9.5 million tons and it has iron ore mines in the Serra Azul region. Usiminas is the leader in the Brazilian flat steel market, with strategically located facilities near the main consumers of steel in the country. Usiminas is organized under four main business units: Mining, Steel, Steel Processing and Capital Goods. On January 16, 2012, Ternium together with its subsidiary Siderar acquired a participation in the control group of Usiminas. For further information on the Usiminas shares purchase transaction, see Item 5. “Operating and Financial Review and Prospects—G. Recent Developments—Acquisitions of participation in Usiminas.”

 

  D. Property, Plants and Equipment

See “—B. Business Overview—Production Facilities and Processes” and ““—B. Business Overview—Capital Expenditure Program.”

Item 4A. Unresolved Staff Comments

None

Item 5. Operating and Financial Review and Prospects

The following discussion and analysis of our financial condition and results of operations is based on, and should be read in conjunction with, our audited consolidated financial statements and the related notes included elsewhere in this annual report. This discussion and analysis presents our financial condition and results of operations on a consolidated basis. We prepare our consolidated financial statements in conformity with IFRS, which differ in certain significant respects from U.S. GAAP.

Certain information contained in this discussion and analysis is presented elsewhere in this annual report, including information with respect to our plans and strategies for our business, and includes forward-looking statements that involve risks and uncertainties. See “Cautionary Statement Concerning Forward-Looking Statements.” In evaluating this discussion and analysis, you should specifically consider the various risk factors identified in this annual report and others that could cause results to differ materially from those expressed in such forward-looking statements.

Overview

Ternium is a leading steel company in Latin America, manufacturing and processing a wide range of flat and long steel products for customers active in the construction, automotive, home appliances, capital goods, container, food and energy industries. Ternium has production facilities in Mexico, Argentina, Colombia, the southern United States and Guatemala, as well as a network of service and distribution centers in Latin America which provide it with a strong position from which to serve its core markets. In addition, through our recently-acquired participation in the control group of Usiminas, Ternium expects to strengthen its association in Latin America with Nippon Steel, one of the leading steelmakers in the world, and Usiminas, a leader in the Brazilian flat steel market and the largest flat steel producer in the country. For further information on the Usiminas shares purchase transaction, see Item 5. “Operating and Financial Review and Prospects—G. Recent Developments—Acquisition of participation in Usiminas.”

Ternium primarily sells its flat and long steel products in the regional markets of the Americas. Ternium provides specialized products and delivery services through its network of manufacturing facilities and service centers. We believe that Ternium is a leading supplier of flat steel products in Mexico and Argentina, a significant supplier of steel products in Colombia and in various other countries in South and Central America, and a competitive player in the international steel market for flat and long steel products. Through its network of commercial offices in several countries in Latin America, the United States and Spain, Ternium maintains an international presence that allows it to reach customers outside its local markets, achieve improved effectiveness in the supply of its products and in the procurement of semi-finished steel, and maintain a fluid commercial relationship with its customers by providing continuous services and assistance.

Ternium’s revenues are affected by general global trends in the steel industry and more specifically by the economic conditions in the countries in which it has manufacturing operations and where its customers are located. Ternium’s revenues are also impacted by events that affect the price and availability of raw materials, energy and other inputs needed for its operations. Furthermore, due to the highly cyclical nature of the steel industry, recent results may not be indicative of future performance, and historical results may not be comparable to future results. Investors should not rely on the results of a single period, particularly a period of peak prices, as an indication of Ternium’s annual results or future performance. The variables and trends mentioned below could also affect the results of its investments in steel related companies. See Item 4. “Information on the Company—B. Business Overview—Our Business Strategy.”

 

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Ternium’s primary source of revenue is the sale of flat and long steel products. Management expects sales of flat and long steel products to continue to be Ternium’s primary source of revenue. The global market for such steel products is highly competitive, with the primary competitive factors being price, cost, product quality and customer service. The majority of Ternium’s sales are concentrated in the Americas. Specifically, Ternium’s largest markets are Mexico, Argentina and Colombia, where its main manufacturing facilities are located.

Ternium’s results are sensitive to economic activity and steel consumption. Ternium’s results of operations, which primarily depend on economic conditions in Mexico and Argentina, are also influenced by economic conditions in international and regional markets such as NAFTA, Mercosur and the Andean Community. Historically, annual steel consumption in the countries where Ternium operates has varied at a rate that is linked to the annual change in each country’s gross domestic product and per capita disposable income. The 2008 – 2009 global economic downturn resulted in an overall decreased demand for Ternium’s products. For example, apparent consumption of finished steel products decreased in 2009 by 15% in Mexico and 33% in Argentina. This economic downturn had a pronounced negative effect on Ternium’s business and results of operations. Subsequently, in 2010 – 2011, apparent steel consumption increased by 21% in Mexico, due mainly to the recovery of the industrial sector, and by 67% in Argentina, due to a broad recovery of economic activity. A protracted global recession or a depression would have a material adverse effect on the steel industry and Ternium.

Ternium’s results are also sensitive to prices in the international steel markets. Steel prices are volatile and are sensitive to trends in cyclical industries, such as the construction, automotive, appliance and machinery industries, which are significant markets for Ternium’s products. Steel prices in the international markets, which had been rising fast during the first half of 2008, fell sharply beginning in the second half of 2008 as a result of collapsing apparent demand and the resulting excess capacity in the industry. The fall in prices during this period adversely affected the results of steel producers generally, including Ternium, as a result of lower revenues and writedowns of finished steel products and raw material inventories. For example, in the second half of 2008 Ternium recorded a valuation allowance in an amount of USD200 million and in the first half of 2009 it recorded an additional valuation allowance in an amount of USD127.6 million. Beginning in the second half of 2009, steel prices in the international markets rebounded mainly as a result of the increase in the demand for steel in China and other emerging markets, and the subsidence of the worldwide de-stocking process. This positive trend in international steel prices partially reversed during the second half of 2010 as the increase in demand for steel products was more than offset by new capacity additions and idled capacity restarts. A more balanced market and the increase in steel demand by year-end 2010 supported a steel price rally during the first quarter of 2011. During 2011 and beginning in 2012, steel prices followed a pattern similar to that witnessed during the previous year. Historically, however, the length and nature of business cycles affecting the steel industry have been unpredictable. A protracted fall in steel prices would have a material adverse effect on Ternium’s results, as could price volatility.

Trends in the steel industry may also have an impact on Ternium’s results. In addition to economic conditions and prices, the steel industry is affected by other factors such as worldwide production capacity and fluctuations in steel imports/exports and tariffs. Historically, the steel industry has suffered, especially on downturn cycles, from substantial overcapacity. Currently, as a result of the 2008 – 2009 global downturn and the increase in steel production capacity in recent years, there are signs of excess capacity in all steel markets. It is possible that the industry’s excess capacity will result in depressed margins and industry weakness. Furthermore, there has been a trend in recent years toward steel industry consolidation among Ternium’s competitors, and current smaller competitors in the steel market could become larger competitors in the future. Intense competition could cause Ternium to lose its share in certain markets and adversely affect its sales and revenue.

Ternium’s production costs are generally sensitive to the international prices of raw materials, slabs and energy, which reflect supply and demand factors in the global steel industry. Ternium purchases substantial quantities of raw materials (including iron ore, coal, ferroalloys and scrap) and slabs for use in the production of its steel products. The availability and price of these and other inputs vary, sometimes significantly, according to general market and economic conditions. In addition to raw materials and slabs, natural gas and electricity are both important components of Ternium’s cost structure. Ternium generally purchases these inputs at market or market based prices; accordingly, price fluctuations in these inputs, which may also vary according to general market and economic conditions, necessarily impact Ternium’s production costs.

 

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Ternium’s export revenues could be affected by trade restrictions and its domestic revenues could be affected by unfair competition from imports. During 2001, a period of strong oversupply, several antidumping measures were imposed in several countries in which Ternium operates (including Mexico and Argentina) to prevent foreign steel producers from dumping certain steel products in local markets. The recovery in global economic conditions during the 2003 – 2008 period helped normalize international steel trade conditions and, eventually, several countries reduced or eliminated protective measures established in prior years. However, a number of trade restrictions, both in Ternium’s local and export markets, remain in place. In the face of a protracted period of oversupply, countries may reestablish antidumping duties and/or other safeguards to protect their domestic markets. Ternium’s ability to profitably access the export markets may be adversely affected by trade restrictions, including antidumping duties and countervailing measures, in those markets. In addition, Ternium’s ability to sell some steel products in its principal markets could be affected by unfair competition from imports of those steel products from certain countries, if applicable trade regulations were not in force.

Prevailing exchange rates have had an impact on Ternium’s results in the past and could impact results again in the future. In accordance with IFRS, during the years ended December 31, 2011, 2010 and 2009, Ternium’s subsidiaries in Mexico, Argentina and Colombia prepared financial statements in their local currencies and recorded foreign exchange results on their net non-local currency positions when their local currencies revaluated or devaluated to other currencies. However, effective as of January 1, 2012, the functional currency of our Mexican subsidiaries changed to U.S. dollars. Fluctuations in the local currencies against the U.S. dollar had, and in the case of the Argentine subsidiary, may also have in the future, an impact on Ternium’s results. In 2008, net foreign exchange result was a loss of USD632.7 million, which was primarily due to the impact of the Mexican peso’s 25% devaluation on Ternium Mexico’s U.S. dollar denominated debt. In 2011, net foreign exchange result was a loss of USD236.4 million, which was primarily due to the impact of the Mexican peso’s 13% devaluation on Ternium Mexico’s U.S. dollar denominated debt. These non-cash results when measured in U.S. dollars were offset by changes in Ternium’s net equity position in the currency translation adjustment, or CTA, line, as the value of Ternium Mexico’s U.S. dollar-denominated debt was not affected by the Mexican peso fluctuation when stated in U.S. dollar terms in Ternium’s consolidated financial statements. For information on the change in the functional currency of the Mexican subsidiaries, see “—Overview — Change in functional currency of Mexican subsidiaries.”

Ternium’s cash flows for 2009 and 2010 were strongly affected by the non-recurring payments received in connection with the transfer of our interest in Sidor to Venezuela. On May 7, 2009, we completed the transfer of our entire 59.7% interest in Sidor to CVG. Ternium agreed to receive an aggregate amount of USD1.97 billion as compensation for its Sidor shares. Of that amount, CVG paid USD400 million in cash at closing, and the balance was divided into two tranches: the first tranche of USD945 million to be paid in six equal installments beginning in August 2009 until November 2010, and the second tranche due in November 2010 and subject to quarterly mandatory prepayment events based on the increase of the West Texas Intermediary, or WTI, crude oil price over its May 6, 2009 level. CVG made all payments required to be made under the agreements governing the transfer of Sidor to Venezuela except for a payment due on November 8, 2010. On December 18, 2010, Ternium reached an agreement with CVG on the rescheduling of the unpaid balance, which amounted to USD257.4 million. As provided in such refinancing agreement, CVG paid USD7 million to Ternium in January 2011, and CVG was required to pay the remainder in five quarterly installments, beginning on February 15, 2011 and ending on February 15, 2012. In connection with the December 18, 2010 refinancing agreement Ternium received as security for the payment of the outstanding balance, duly endorsed in its favor, promissory notes issued by Energía Argentina S.A., or Enarsa, and Compañía Administradora del Mercado Mayorista Eléctrico S.A., or Cammesa, (both companies owned by the Argentine government) to PDVSA Petróleo S.A. (a company owned by the Venezuelan government). While the first three installments were paid, the final two installments were not satisfied when due, and, as of the date of this annual report, a total principal amount of USD130.3 million remains outstanding. Ternium is pursuing the payment of the outstanding amounts and has reserved all of its rights under contracts, investment treaties and Venezuelan and international law with respect to such amounts. For more information on the Sidor nationalization process, see note 27 to our audited consolidated financial statements included elsewhere in this annual report.

 

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Change in functional currency of Mexican subsidiaries.

For all periods prior to December 31, 2011, the functional currency for the Company’s Mexican subsidiaries was the Mexican peso.

Due to changes in the primary economic environment in which its Mexican subsidiaries operate and in accordance with IFRS, the Company performed a functional currency review and concluded that the functional currency of its Mexican subsidiaries should change prospectively to the U.S. dollar, effective as of January 1, 2012. The main indicators of such change in economic environment are:

 

   

an increase of revenues determined and denominated in U.S. dollars (which is expected to continue increasing);

 

   

the elimination of Mexican import duties on steel products effective 2012;

 

   

an increase in the weight of raw material costs with U.S. dollar-denominated prices; and

 

   

a determination that capital expenditures in Mexico (which are made to increase supply capabilities in connection with growing automobile exports to the U.S. market) are mainly incurred in U.S. dollars.

Critical accounting estimates. This discussion of our operating and financial review and prospects is based on our audited consolidated financial statements included elsewhere in this annual report, which have been prepared in accordance with IFRS. The use of IFRS has an impact on our critical accounting policies and estimates.

The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its accounting estimates and assumptions, including those related to doubtful accounts, obsolescence of inventory, impairment of long-term investments, goodwill, and other assets and contingencies, and revises them when appropriate. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Although management believes that its estimates and assumptions are reasonable, they are based upon information available when the estimates and assumptions are made. Actual results may differ significantly from these estimates under different assumptions or conditions.

Our most critical accounting estimates are those that are most important to the portrayal of our financial condition and results of operations, and which require us to make our most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Changes in these assumptions and estimates could have a material impact on our consolidated financial statements. Our most critical accounting estimates and judgments are set forth below.

Useful lives and impairment of property, plant and equipment and other long-lived assets. In determining useful lives, management considered, among others, the following factors: age, operating condition and level of usage and maintenance. Management conducted visual inspections for the purpose of (i) determining whether the current conditions of such assets are consistent with normal conditions of assets of similar age; (ii) confirming that the operating conditions and levels of usage of such assets are adequate and consistent with their design; (iii) establishing obsolescence levels and (iv) estimating life expectancy, all of which were used in determining useful lives. Management believes, however, that it is possible that the periods of economic utilization of property, plant and equipment may be different than the useful lives so determined. Furthermore, management believes that this accounting policy involves a critical accounting estimate because it is subject to change from period to period as a result of variations in economic conditions and business performance.

When assessing whether an impairment indicator may exist, the Company evaluates both internal and external sources of information, such as the following:

• whether significant changes with an adverse effect on the entity have taken place during the period, or will take place in the near future, in the technological, market, economic or legal environment in which the entity operates or in the market to which an asset is dedicated;

• whether market interest rates or other market rates of return on investments have increased during the period, and those increases are likely to affect the discount rate used in calculating an asset’s value in use and decrease the asset’s recoverable amount materially;

• whether the carrying amount of the net assets of the entity is more than its market capitalization;

• whether evidence is available of obsolescence or physical damage of an asset;

 

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• whether significant changes with an adverse effect on the entity have taken place during the period, or are expected to take place in the near future, in the extent to which, or manner in which, an asset is used or is expected to be used. These changes include the asset becoming idle, plans to discontinue or restructure the operation to which an asset belongs, plans to dispose of an asset before the previously expected date, and reassessing the useful life of an asset as finite rather than indefinite; and

• whether evidence is available from internal reporting that indicates that the economic performance of an asset is, or will be, worse than expected.

None of Ternium’s CGUs (cash generating units) were tested for impairment, other than the goodwill test (see note 4 e (4) to our consolidated financial statements included elsewhere in this annual report), in 2011 and 2010, as no impairment indicators were identified. Furthermore, based on information currently available, management believes that the recognition of a future impairment charge is not reasonably possible. Any such impairment charges could have a material adverse effect on Ternium’s results of operations, financial condition and net worth.

Impairment and recoverability of goodwill and other assets, including identifiable intangible assets. Assets that have an indefinite useful life (including goodwill) are not subject to amortization and are tested annually for impairment or sooner if events or changes in circumstances indicate that the carrying amount may not be recoverable. Assets that are subject to amortization and investments in affiliates are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less cost to sell and the value in use.

To carry out these tests, assets are grouped at the lowest levels for which there are separately identifiable cash flows (each, a CGU). When evaluating long-lived assets for potential impairment, the Company estimates the recoverable amount based on the value in use of the corresponding CGU. The value in use of each CGU is determined on the basis of the present value of net future cash flows which will be generated by the assets tested.

Determining the present value of future cash flows involves highly sensitive estimates and assumptions specific to the nature of each CGU’s activities, including estimates and assumptions relating to amount and timing of projected future cash flows, expected changes in market prices, expected changes in the demand of Ternium’s products and services, selected discount rate and selected tax rate.

Ternium uses cash flow projections for the next five years based on past performance and expectations of market development; thereafter, it uses a perpetuity rate with no growth increase. Application of the discounted cash flow (DCF) method to determine the value in use of a CGU begins with a forecast of all expected future net cash flows. Variables considered in forecasts include the GDP growth rates of the country under study and their correlation with steel demand, level of steel prices and estimated raw material costs as observed in industry reports.

Cash flows are discounted at post-tax rates that reflect specific country and currency risks associated with the cash flow projections. The discount rates used are based on Ternium’s weighted average cost of capital (WACC), which is considered to be a good indicator of cost of capital. As of December 31, 2011, the discount rate used to test goodwill allocated to Mexico CGU for impairment was 11.4%.

As a result of the above factors, actual cash flows and values could vary significantly from the forecasted future cash flows and related values derived using discounting techniques. Based on the information currently available, however, Ternium believes that it is not reasonably possible that the variation would cause the carrying amount to exceed the recoverable amount of the CGUs.

At December 31, 2009, an impairment provision over the agreement with Corus recognized as intangible assets, was recorded for the amount of USD27.0 million. For more information, see note 25 (ii) to our consolidated financial statements included elsewhere in this annual report. At December 31, 2011 and 2010, no impairment provisions were recorded.

Although we believe our estimates and projections are appropriate based on currently available information, the actual operating performance of an asset or group of assets which has been tested for impairment may be significantly different from current expectations. In such an event, the carrying value of goodwill, investments in associated companies and deferred taxes may be required to be reduced from the amounts currently recorded. Any such reductions may materially affect asset values and results of operations.

 

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Allowances for doubtful accounts. Management makes estimates of the uncollectibility of our accounts receivable. Management analyzes the trade accounts receivable on a regular basis and, when aware of a third party’s inability to meet its financial commitments to Ternium, management impairs the amount due by means of a charge to the allowance for doubtful accounts. Management specifically analyzes accounts receivable and historical bad debts, customer creditworthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts.

Allowances for doubtful accounts are adjusted periodically in accordance with the aging of overdue accounts. For this purpose, trade accounts receivable overdue by more than 90 days, and which are not covered by a credit collateral, guarantee or similar surety, are fully provisioned. As of December 31, 2011 and 2010, allowance for doubtful accounts totaled USD16.1 million and USD17.2 million, respectively.

Historically, losses due to credit failures, aging of overdue accounts and customer claims have been within expectations and in line with the provisions established. If, however, circumstances were to materially change (e.g., higher than expected defaults), management’s estimates of the recoverability of amounts due to us could be materially reduced and our results of operations, financial condition and net worth could be materially and adversely affected.

Allowance for obsolescence of supplies and spare parts and slow-moving inventory. Management assesses the recoverability of its inventories ,considering their selling prices or whether they are damaged or have become wholly or partly obsolete.

Net realizable value is the estimated selling price in the ordinary course of business, less the costs of completion and selling expenses.

The Company establishes an allowance for obsolete or slow-moving inventory in connection with finished goods and goods in process. The allowance for slow-moving inventory is recognized for finished goods and goods in process based on management’s analysis of their aging. In connection with supplies and spare parts, the calculation is based on management’s analysis of their aging, the capacity of such materials to be used based on their levels of preservation and maintenance, and their potential obsolescence due to technological change.

As of December 31, 2011 and 2010, the Company recorded USD60.5 million and USD68.2 million, respectively, as allowance for obsolescence.

During 2011 and 2010, no charges were recorded in connection with net realizable value allowance. Charges to mark the inventory to net realizable value in 2009 were USD127.6 million. Of this amount, USD82.8 million corresponded to inventories for shipments to the North America region, while USD44.8 million corresponded to inventories for exports within the South and Central America region.

The additions to the allowance for net realizable value recorded during 2009 responded to the steep fall of steel prices as a result of the global financial crisis that began in 2008. Beginning in the second half of 2008 up to the first half of 2009 average prices of flat steel products decreased 41%. Accordingly, inventory values were compared to their estimated net selling prices and written down when the selling prices were lower than historical costs. This was the case of inventories produced from third-party slabs in Mexico and certain raw materials in Argentina that had been acquired at market prices in force prior to the beginning of the global financial crisis.

Historically, losses due to obsolescence and scrapping of inventory have been within expectations and the provisions established. If, however, circumstances were to materially change (e.g. significant changes in market conditions or in the technology used in the mills), management’s estimates of the recoverability of these inventories could be materially reduced and our results of operations, financial condition and net worth could be materially and adversely affected.

 

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Loss Contingencies. Ternium is subject to various claims, lawsuits and other legal proceedings that arise in the ordinary course of business, including customer claims in which a third party is seeking reimbursement or indemnity. Ternium’s liability with respect to such claims, lawsuits and other legal proceedings cannot be estimated with certainty. Periodically, management reviews the status of each significant matter and assesses potential financial exposure. If the potential loss from the claim or proceeding is considered probable and the amount can be reasonably estimated, a liability is recorded. Management estimates the amount of such liability based on the information available and the assumptions and methods it has concluded are appropriate, in accordance with the provisions of IFRS. Accruals for such contingencies reflect a reasonable estimate of the losses to be incurred based on information available, including the relevant litigation or settlement strategy, as of the date of preparation of these financial statements. As additional information becomes available, management will reassess its evaluation of the pending claims, lawsuits and other proceedings and revise its estimates. The loss contingencies provision amounts to USD15.3 million and USD16.1 million as of December 31, 2011 and 2010, respectively.

Valuation Allowance of Deferred Tax Assets. Management calculates current and deferred income taxes according to the tax laws applicable to our subsidiaries in the countries in which such subsidiaries operate. However, certain adjustments necessary to determine the income tax provision are finalized only after the financial statements are issued. In cases in which the final tax outcome is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made. When assessing the recoverability of deferred tax assets, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. As of December 31, 2011, the recognized tax losses amounted to USD15.9 million and the net unrecognized deferred tax assets amounted to USD17.9 million. According to the tax law in force in the jurisdictions in which the tax losses are generated, these amounts do not have a certain expiration date.

Although we believe our estimates are appropriate, significant differences in actual performance of the asset or group of assets may materially affect our asset values and results of operation.

Sidor financial asset. As further described in note 27 to our audited consolidated financial statements included elsewhere in this annual report, on May 7, 2009, Ternium reached an agreement with CVG for the transfer of its entire 59.7% interest in Sidor in exchange for an aggregate amount of USD1.97 billion, out of which USD400 million were paid in cash on that date. The initial measurement of the receivable and its subsequent measurements until November 8, 2010, were performed on the basis of its discounted amount using an annual discount rate of 14.4%. This discount rate was estimated on the basis of the yield (13.3%) of Venezuelan sovereign debt with maturities similar to that of the receivable held by Ternium against CVG; however, as the Venezuelan sovereign debt with similar maturities was governed by New York law, while the receivable with CVG was governed by Venezuelan law, the discount rate was further adjusted to adequately reflect the specific risk of Ternium’s receivable. After the rescheduling of the last unpaid installment agreed on December 18, 2010, the annual discount rate used to measure the receivable was estimated at 6.3%, on the basis of the specific risks associated with the third-party promissory notes received as guarantee for full payment of CVG obligations.

 

  A. Results of Operations

The following discussion and analysis of our financial condition and results of operations are based on our audited consolidated financial statements included elsewhere in this annual report. Accordingly, this discussion and analysis present our financial condition and results of operations on a consolidated basis. See “Presentation of Certain Financial and Other Information—Accounting Principles” and notes 2 and 4 to our audited consolidated financial statements included elsewhere in this annual report. The following discussion should be read in conjunction with our audited consolidated financial statements and the related notes included elsewhere in this annual report.

 

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In thousands of U.S. dollars    For the year ended December 31,  
(except number of shares and per share data)    2011     2010     2009     2008     2007  

Selected consolidated income statement data

          

Continuing operations

          

Net sales

     9,157,198        7,382,004        4,958,983        8,464,885        5,633,366   

Cost of sales

     (7,094,252     (5,665,254     (4,110,370     (6,128,027     (4,287,671
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     2,062,946        1,716,750        848,613        2,336,858        1,345,695   

Selling, general and administrative expenses

     (786,161     (665,306     (531,530     (669,473     (517,433

Other operating (expenses) income, net

     (11,566     2,493        (20,700     8,662        8,514   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     1,265,219        1,053,937        296,383        1,676,047        836,776   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

     (100,712     (72,969     (105,810     (136,111     (133,109

Interest income

     28,689        27,347        21,141        32,178        41,613   

Interest income – Sidor financial asset

     11,390        61,012        135,952        —          —     

Other financial (expenses) income, net

     (239,997     115,112        81,639        (693,192     (38,498

Equity in earnings of associated companies

     1,293        1,688        1,110        1,851        434   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

     965,882        1,186,127        430,415        880,773        707,216   

Income tax expense, benefit

          

Current and deferred income tax expense

     (315,974     (406,657     (91,314     (258,969     (291,345

Reversal of deferred statutory profit sharing

     —          —          —          96,265        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     649,908        779,470        339,101        718,069        415,871   

Discontinued operations

          

Income from discontinued operations

     —          —          428,023        157,095        579,925   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit for the year

     649,908        779,470        767,124        875,164        995,796   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Attributable to:

          

Equity holders of the Company

     513,541        622,076        717,400        715,418        784,490   

Non-controlling interest

     136,367        157,394        49,724        159,746        211,306   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     649,908        779,470        767,124        875,164        995,796   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization

     405,842        383,300        385,105        413,541        355,271   

Weighted average number of shares (1)

     1,968,327,917        2,004,743,442        2,004,743,442        2,004,743,442        2,004,743,442   

Basic earnings per share (expressed in USD per share) for profit: (2) (3)

          

From continuing operations attributable to the equity holders of the Company

     0.26        0.31        0.15        0.27        0.15   

From discontinued operations attributable to the equity holders of the Company

     —          —          0.21        0.09        0.24   

For the year attributable to the equity holders of the Company

     0.26        0.31        0.36        0.36        0.39   

Dividends per share (4)

     0.075 (4)      0.075        0.05        —          0.05   

 

(1) Of the 2,004,743,442 shares issued, as of December 31, 2011, Ternium held 41,666,666 through its wholly-owned subsidiary Ternium International Inc. and such shares were not considered outstanding. For further information related to the repurchase of shares in 2011, see note 30 to our consolidated financial statements include elsewhere in this annual report.
(2) International Accounting Standard N° 1 (IAS 1) (Revised) requires that income for the year as shown in the income statement includes the portion attributable to non-controlling interest. Basic earnings per share, however, continue to be calculated on the basis of income attributable solely to the equity holders of the Company.
(3) Diluted earnings per share (expressed in USD per share) equals basic earnings per share.
(4) Reflects dividend proposal submitted to the shareholders’ meeting to be held on May 2, 2012.

 

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In thousands U.S. dollars    At December 31,  

(except number of shares and per share data)

   2011      2010      2009      2008      2007  

Selected consolidated balance sheet data

              

Non-current assets

     5,181,973         5,579,438         5,250,135         5,491,408         8,553,123   

Property, plant and equipment, net

     4,032,675         4,262,896         4,040,415         4,212,313         6,776,630   

Other non-current assets (1)

     1,149,298         1,316,542         1,209,720         1,279,095         1,776,493   

Current assets

     5,564,601         5,532,893         5,042,538         5,179,839         5,095,959   

Cash and cash equivalents

     2,158,591         1,779,416         2,095,798         1,065,552         1,125,830   

Other current assets (2)

     3,395,637         3,743,516         2,937,494         4,108,954         3,200,987   

Non-current assets classified as held for sale

     10,373         9,961         9,246         5,333         769,142   

Total assets

     10,746,574         11,112,331         10,292,673         10,671,247         13,649,082   

Capital and reserves attributable to the Company’s equity holders (3)

     5,756,372         5,880,740         5,296,342         4,597,370         4,452,680   

Non-controlling interest

     1,084,827         1,135,361         964,897         964,094         1,805,243   

Non-current liabilities

     1,934,775         2,540,594         2,872,667         3,374,964         5,401,549   

Borrowings

     948,495         1,426,574         1,787,204         2,325,867         3,676,072   

Deferred income tax

     748,999         877,742         857,297         810,160         1,327,768   

Other non-current liabilities

     237,281         236,278         228,166         238,937         397,709   

Current liabilities

     1,970,600         1,555,636         1,158,767         1,734,819         1,989,610   

Borrowings

     1,041,550         513,083         539,525         941,460         406,239   

Other current liabilities

     929,050         1,042,553         619,242         793,359         1,369,608   

Liabilities directly associated with non-current assets classified as held for sale

     —           —           —           —           213,763   

Total liabilities

     3,905,375         4,096,230         4,031,434         5,109,783         7,391,159   

Total equity and liabilities

     10,746,574         11,112,331         10,292,673         10,671,247         13,649,082   

Number of shares (3)

     1,963,076,776         2,004,743,442         2,004,743,442         2,004,743,442         2,004,743,442   

 

(1) As of December 31, 2011, 2010, 2009, 2008 and 2007, includes goodwill mainly related to the acquisition of our Mexican subsidiaries for a total amount of USD663.8, USD750.1, USD708.6, USD683.7 and USD850.7 million, respectively.
(2) As of December 31, 2011, 2010, 2009, 2008 and 2007, includes deposits with maturity of more than three months for a total amount of USD281.7, USD848.4, USD46.8, USD90.0 and USD65.3 million, respectively.
(3) The Company’s share capital as of December 31, 2011, 2010, 2009, 2008 and 2007 was represented by 2,004,743,442 shares, par value USD1.00 per share, for a total amount of USD2,004.7 million. Of the 2,004,743,442 shares, as of December 31, 2011, Ternium held 41,666,666 through its wholly-owned subsidiary Ternium International Inc.

Fiscal Year Ended December 31, 2011 compared to Fiscal Year Ended December 31, 2010

Overview

Ternium’s operating income in 2011 was USD1.3 billion, compared to USD1.1 billion in 2010. This USD211.3 million year-over-year increase mainly reflects a 769,000 ton increase in shipments and a USD126 higher revenue per ton, partially offset by a USD109 higher flat and long steel operating cost per ton1, which increased mainly due to higher raw material costs. Ternium’s net income was USD649.9 million, a decrease of USD129.6 million year-over-year mainly due to a USD431.1 million lower net financial result, partially offset by the above mentioned USD211.3 million higher operating income and a USD90.7 million lower income tax expense. The year-over-year change in net financial results included a USD360.1 million lower net foreign exchange result primarily due to the impact of the Mexican peso’s 13.1% depreciation on Ternium’s Mexican subsidiary’s U.S. dollar denominated debt in 2011, compared with a 5.4% Mexican peso appreciation in 2010, and a USD49.6 million lower interest income on the Sidor financial asset.

 

 

1 

Operating cost per ton is equal to cost of sales plus selling, general and administrative expenses, divided by shipments.

 

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In 2011, steel consumption in the North American market increased 9.1% year-over-year. The economies in the North America Region expanded more gradually during 2011. GDP in Mexico grew an estimated 4.0% in the year, consolidating the 2010 recovery, while the U.S. economy grew an estimated 1.8% in 2011, a deceleration from the 3.0% expansion rate in 2010. Mexico showed a broad-based increase in activity in 2011, featuring an expansion in key steel consuming sectors such as construction and automotive.

The steel markets in Central and South America showed a 2.2% year-over-year increase in apparent steel use during 2011. The economic activity in the region continued to grow during 2011, including an estimated 9.0% GDP expansion in Argentina and an estimated 5.5% GDP growth in Colombia. Construction activity consolidated its growth pace and the automotive sector, which significantly expanded in 2010, showed healthy growth rates in 2011.

Net Sales

Net sales were USD9.2 billion in 2011, 24% higher than net sales in 2010. Shipments of flat and long products were 8.8 million tons in 2011, up 10% compared to shipments in 2010, reflecting higher demand for steel products and Ternium’s increased participation in the Colombian steel market. Revenue per ton shipped was USD1,021 in 2011, a 14% increase compared to 2010, mainly as a result of higher prices.

The following table shows Ternium’s total consolidated net sales, shipments and revenue by product and geographical region for the years ended December 31, 2011 and 2010:

 

     Net Sales (million USD)     Shipments (thousand tons)     Revenue /ton (USD/ton)  
     2011      2010      Dif.     2011      2010      Dif.     2011      2010      Dif.  

North America

     4,989.1         4,105.6         22     5,118.6         4,826.3         6     975         851         15

South & Central America

     3,995.6         3,050.1         31     3,670.0         3,135.7         17     1,089         973         12

Europe & other

     25.2         53.9           34.9         92.6           721         582      

Total flat and long products

     9,009.9         7,209.5         25     8,823.6         8,054.6         10     1,021         895         14

Other products (1)

     147.3         172.5         (15 %)                 

Total Net Sales

     9,157.2         7,382.0         24                

 

(1) 

Primarily includes iron ore, pig iron and pre-engineered metal buildings.

Sales of flat and long products in the North America Region were USD5.0 billion in 2011, an increase of 22% versus 2010 mainly due to higher revenue per ton. Shipments in the region totaled 5.1 million tons in 2011, a 6% increase compared to 2010, reflecting increased demand for steel products and a wider product range. Revenue per ton shipped in the region increased 15% to USD975 in 2011 over 2010, mainly due to higher prices.

Flat and long product sales in the South & Central America Region were USD4.0 billion in 2011, an increase of 31% versus 2010, due to higher shipments and revenue per ton. Shipments in the region totaled 3.7 million tons in 2011, or 17% higher than 2010, mainly due to higher demand for steel products and Ternium’s increased participation in the Colombian steel market. Revenue per ton shipped was USD1,089 in 2011, an increase of 12% compared to 2010, mainly due to higher prices.

Sales of other products totaled USD147.3 million in 2011, compared to USD172.5 million in 2010. Shipments of iron ore were lower in 2011 versus 2010 while pig iron shipments increased.

Cost of sales

Cost of sales was USD7.1 billion in 2011, an increase of USD1.4 billion, or 25%, compared to 2010. This was due to a USD1.2 billion, or 29%, increase in raw material costs and consumables used, reflecting a 10% increase in sales volumes and higher raw material and purchased slab costs, and a USD179.5 million, or 13%, increase in other costs, including a USD80.1 million increase in labor and a USD48.5 million increase in services expenses (reflecting higher activity levels and labor costs) and a USD27.7 million increase in depreciation of property, plant and equipment.

Selling, general and administrative expenses

Selling, general & administrative (SG&A) expenses in 2011 were USD786.2 million, or 9% of net sales, compared with USD665.3 million, or 9% of net sales, in 2010. The USD120.9 million increase in SG&A was mainly due to a USD21.5 million increase in freight expenses and a USD23.2 million increase in taxes related to increased activity levels and a USD12.9 million increase in labor costs. In addition, SG&A increased USD52.0 million year-over-year as a result of the consolidation of Ferrasa from August 25, 2010.

 

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Other operating income (expenses), net

Other operating results in 2011 were a loss of USD11.6 million, compared with a gain of USD2.5 million in 2010. The 2011 loss included a non-recurring charge of USD24.5 million related to the settlement of arbitration proceedings with Tata Steel. For more information, see note 25 to our audited consolidated financial statements included elsewhere in this annual report.

Operating income

Operating income in 2011 was USD1.3 billion, or 14% of net sales, compared to operating income of USD1.1 billion, or 14% of net sales, in 2010. The USD211.3 million year-over-year increase reflects improvements, mainly in the flat and long steel product segments.

 

00000000 00000000 00000000 00000000 00000000 00000000 00000000 00000000
     Flat steel products     Long steel products     Other products     Total  
In thousands of U.S. dollars    2011     2010     2011     2010     2011     2010     2011     2010  

Net Sales

     7,792,045        6,376,380        1,217,877        833,137        147.276        172.487        9,157,198        7,382,004   

Cost of sales

     (6,138,685     (4,932,551     (864,522     (633,958     (91,045     (98,745     (7,094,252     (5,665,254

SG&A expenses

     (673,363     (585,746     (96,832     (62,419     (15,966     (17,141     (786,161     (665,306

Other operating results

     (14,912     2,887        3,247        (506     99        112        (11,566     2,493   

Operating income

     965,085        860,970        259,770        136,254        40,364        56,713        1,265,219        1,053,937   

Flat steel products segment

The flat steel products segment operating income was USD965.1 million in 2011, an increase of USD104.1 million compared to 2010, reflecting higher sales partially offset by higher operating cost. Sales of flat products in 2011 increased 22% compared to 2010, reflecting an 8% increase in shipments, mainly due to higher demand for steel products and Ternium’s increased participation in the Colombian steel market, and a 13% increase in revenue per ton shipped, mainly due to higher steel prices in Ternium’s main steel markets.

 

000000. 000000. 000000. 000000. 000000. 000000. 000000. 000000. 000000.
     Net Sales (million USD)     Shipments (thousand tons)     Revenue /ton (USD/ton)  
     2011      2010      Dif.     2011      2010      Dif.     2011      2010      Dif.  

North America

     4,108.8         3,464.9         19     4,014.7         3,852.1         4     1,023         899         14

South & Central America

     3,658.1         2,886.2         27     3,285.7         2,877.0         14     1,113         1,003         11

Europe & other

     25.2         25.3           34.9         42.6           721         594      

Flat products

     7,792.0         6,376.4         22     7,335.3         6,771.7         8     1,062         942         13

Operating cost increased 23%, reflecting an 8% increase in shipments and a 14% increase in operating cost per ton mainly from higher raw material and purchased slab costs, as well as higher labor costs, services expenses and depreciation of property, plant and equipment.

Long steel products segment

The long steel products segment operating income was USD259.8 million in 2011, an increase of USD123.5 million compared to 2010, reflecting higher sales and operating costs. Sales of long products in 2011 increased 46% compared to 2010, reflecting a 16% increase in shipments mainly due to the consolidation of Ferrasa from August 25, 2010 and a wider product range, and a 26% increase in revenue per ton shipped, mainly as a result of higher prices.

 

000000. 000000. 000000. 000000. 000000. 000000. 000000. 000000. 000000.
     Net Sales (million USD)     Shipments (thousand tons)     Revenue /ton (USD/ton)  
     2011      2010      Dif.     2011      2010      Dif.     2011      2010      Dif.  

North America

     880.3         640.7         37     1,104.0         974.2         13     797         658         21

South & Central America

     337.5         163.9         106     384.3         258.7         49     878         634         39

Europe & other

     —           28.6           —           50.0           1,507         571      

Long products

     1,217.9         833.1         46     1,488.3         1,282.9         16     818         649         26

 

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Operating cost increased 38%, reflecting a 16% increase in shipments and a 19% increase in operating cost per ton mainly from higher raw material costs, as well as higher labor costs, services expenses and depreciation of property, plant and equipment.

Other products segment

The other products segment operating income was USD40.4 million in 2011, a decrease of USD16.3 million compared to 2010, mainly reflecting the impact of lower revenues.

Net financial results

Net financial results were a USD300.6 million loss in 2011, compared with a USD130.5 million gain in 2010.

In 2011, Ternium’s net interest results totaled a USD72.0 million loss, higher than the USD45.6 million loss in 2010, mainly reflecting higher net indebtedness and average interest rates.

Net foreign exchange result was a loss of USD236.4 million in 2011 compared to a gain of USD123.7 million in 2010. The loss in 2011 was primarily due to the impact of the Mexican peso’s 13.1% depreciation on Ternium’s Mexican subsidiary’s U.S. dollar denominated debt. This result is non-cash when measured in U.S. dollars and is offset by changes in Ternium’s net equity position in the currency translation adjustments line, as the value of Ternium Mexico’s U.S. dollar denominated debt is not altered by the Mexican peso’s fluctuation when stated in U.S. dollars in Ternium’s consolidated financial statements. During the periods covered in this annual report, Ternium Mexico prepared its financial statements in Mexican pesos and registered foreign exchange results on its net non-Mexican pesos positions when the Mexican peso revaluated or devaluated relative to other currencies.

Interest income on the Sidor financial asset was USD11.4 million in 2011, compared to USD61.0 million in 2010. These results are attributable to the Sidor financial asset in connection with the transfer of Sidor shares on May 7, 2009. The decrease reflects the reduction in the notional amount of the Sidor financial asset over time.

Equity in earnings of associated companies

Ternium’s share in the results of associated companies (mainly Exiros) during 2011 was a gain of USD1.3 million, compared to a gain of USD1.7 million in 2010.

Income tax expense

Income tax expense in 2011 was USD316.0 million, or 33% of income before income tax and non-controlling interest, compared with an income tax expense of USD406.7 million in 2010, or 34% of income before income tax and non-controlling interest.

Net result of discontinued operations

There were no results of discontinued operations in 2011 and in 2010.

Net income attributable to non-controlling interest

Net income attributable to non-controlling interest in 2011 was USD136.4 million, compared to USD157.4 million in 2010, mainly due to a lower result attributable to non-controlling interest in Siderar and Ternium Mexico.

 

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Fiscal Year Ended December 31, 2010 compared to Fiscal Year Ended December 31, 2009

Overview

Ternium’s operating income in 2010 was USD1.1 billion, compared to USD296.4 million in 2009. The USD757.6 million year-over-year increase mainly reflects the improvement in the flat steel products segment and shows a recovery from the 2009 global economic downturn, with higher sales volumes and improved margins. Revenue per ton increased USD137 and shipments increased by 1.7 million tons while operating cost per ton2 increased USD57. Net income was USD779.5 million in 2010, compared to USD767.1 million in 2009. Although the net income variation was slight in nominal terms, the drivers for net income in each of these years were significantly different. There were no discontinued operations results in 2010, whereas there was a USD428.0 million discontinued operations gain in 2009 related to the transfer of the Sidor shares to Venezuela. The year-over-year change in net income also included the above mentioned USD757.6 million increase in operating income and a USD315.3 million increase in income tax expense.

In 2010, steel consumption in the North American market increased 31% year-over-year. The economies in the NAFTA region expanded gradually during the year with a 4.0% GDP growth in Mexico and a 2.9% GDP growth in the U.S. Mexican export-oriented industries were particularly favored by the recovery of economic activity in the United States. In contrast, the construction sector in the country remained subdued during most of 2010 and only showed evidence of improvement by year-end.

Likewise, the steel markets in Central and South America showed an estimated 28% year-over-year increase in apparent steel use during 2010. The economic activity in the region expanded during 2010, including a 7.5% GDP growth in Argentina and a 4.7% GDP growth in Colombia. Construction activity in the region returned to solid growth rates and the automotive sector, which was among the most affected sectors in 2009, significantly expanded in 2010.

Net Sales

Net sales in 2010 were USD7.4 billion, 49% higher than net sales in 2009. Shipments of flat and long products were 8.1 million tons in 2010, up 27% compared to shipments in 2009. Revenue per ton shipped was USD895 in 2010, an 18% increase compared to 2009, mainly as a result of higher prices.

The following table shows Ternium’s total consolidated net sales, shipments and revenue by product and geographical region for the years ended December 31, 2010 and 2009:

 

     Net Sales (million USD)     Shipments (thousand tons)     Revenue /ton (USD/ton)  
     2010      2009      Dif.     2010      2009      Dif.     2010      2009      Dif.  

North America

     4,105.6         2,883.9         42     4,826.3         4,045.7         19     851         713         19

South & Central America

     3,050.1         1,774.5         72     3,135.7         2,022.0         55     973         878         11

Europe & other

     53.9         164.5           92.6         293.1           582         561      

Flat and long products

     7,209.5         4,822.9         49     8,054.6         6,360.8         27     895         758         18

Other products (1)

     172.5         136.1         27                

Total Net Sales

     7,382.0         4,959.0         49                

 

(1) 

Primarily includes iron ore, pig iron and pre-engineered metal buildings.

Sales of flat and long products in the North America Region were USD4.1 billion in 2010, an increase of 42% versus 2009 due to higher shipments and prices. Shipments in the region totaled 4.8 million tons in 2010, or 19% higher than 2009, as a result of higher demand. Revenue per ton in the North Region increased 19% to USD851 in 2010 over 2009, mainly due to higher prices.

Flat and long product sales in the South & Central America Region were USD3.1 billion in 2010, an increase of 72% versus 2009, due to higher shipments and prices. Shipments in the region totaled 3.1 million tons in 2010, or 55% higher than in 2009, mainly due to a recovery from the 2009 global economic downturn. Revenue per ton shipped was USD973 in 2010, an increase of 11% compared to 2009.

Sales of other products totaled USD172.5 million in 2010, compared to USD136.1 million during 2009, an increase of 27%. The increase includes the impact of higher iron ore prices.

 

2 

Operating cost per ton is equal to cost of sales plus selling, general and administrative expenses, divided by shipments.

 

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Cost of sales

Cost of sales was USD5.7 billion in 2010, an increase of USD1.6 billion, compared to USD4.1 billion in 2009. This 38% increase was due to a USD1.2 billion, or 41%, increase in the costs of raw material and consumables (reflecting in part a 27% increase in sales volumes and in part higher raw material and purchased slab prices), and a USD313.4 million, or 28%, increase in other costs (including a USD118.4 million increase in labor, a USD121.4 million increase in maintenance and a USD71.5 million increase in services expenses), reflecting higher activity levels.

Selling, general and administrative expenses

SG&A expenses in 2010 were USD665.3 million, or 9% of net sales, compared with USD531.5 million, or 11% of net sales, in 2009. The USD133.8 million increase in SG&A was mainly due to higher freight expenses (up USD75.7 million), higher taxes related to increased activity levels (up USD23.5 million) and the impact of the consolidation of Ferrasa on August 25, 2010. In addition, higher wages, salaries and social security costs were mostly offset by lower personnel reduction charges.

Other operating income (expenses), net

Net other operating income in 2010 was USD2.5 million, compared with net other operating expenses of USD20.7 million in 2009. The year-over-year difference was mainly due to a USD27.0 million full impairment in 2009 of the remaining intangible asset value of a contract related to the purchase of steel slabs from Corus’ Teeside facility. For more information, see note 25 to our audited consolidated financial statements included elsewhere in this annual report.

Operating income

Operating income in 2010 was USD1.1 billion, or 14% of net sales, compared to an operating income of USD296.4 million, or 6% of net sales, in 2009. The USD757.6 million year-over-year increase mainly reflects the improvement in the flat steel products segment.

 

     Flat steel products     Long steel products     Other products     Total  
In thousands of U.S. dollars    2010     2009     2010     2009     2010     2009     2010     2009  

Net Sales

     6,376,380        4,249,979        833,137        572,900        172.487        136.104        7,382,004        4,958,983   

Cost of sales

     (4,932,551     (3,634,854     (633,958     (392,983     (98,745     (82,533     (5,665,254     (4,110,370

SG&A expenses

     (585,746     (477,067     (62,419     (40,739     (17,141     (13,724     (665,306     (531,530

Other operating results

     2,887        (21,303     (506     414        112        189        2,493        (20,700

Operating income

     860,970        116,755        136,254        139,592        56,713        40,036        1,053,937        296,383   

Flat steel products segment

The flat steel products segment operating income was USD861.0 million in 2010, an increase of USD744.2 million compared to 2009, reflecting higher sales, partially offset by higher operating cost. Sales of flat products in 2010 increased 50% compared to 2009, reflecting a 28% increase in shipments and an 18% increase in revenue per ton shipped, mainly due to a recovery from the 2009 global economic downturn and higher steel prices in Ternium’s main steel markets.

 

     Net Sales (million USD)     Shipments (thousand tons)     Revenue / ton (USD/ton)  
     2010      2009      Dif.     2010      2009      Dif.     2010      2009      Dif.  

North America

     3,464.9         2,371.9         46     3,852.1         3,114.5         24     899         762         18

South & Central America

     2,886.2         1,717.1         68     2,877.0         1,903.6         51     1,003         902         11

Europe & other

     25.3         161.0           42.6         287.0           594         561      

Flat products

     6,376.4         4,250.0         50     6,771.7         5,305.2         28     942         801         18

Operating cost increased reflecting higher shipments and higher cost per ton mainly from higher raw material and purchased slab prices, as well as higher wages, salaries and social security, services and maintenance costs, partially offset by lower personnel reduction charges.

 

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Long steel products segment

The long steel products segment operating income was USD136.3 million in 2010, relatively stable compared to 2009 reflecting higher sales and operating costs. Sales of long products in 2010 increased 45% compared to 2009 reflecting a 22% increase in shipments and a 20% increase in revenue per ton shipped, mainly due to a recovery from the 2009 global economic downturn and higher prices.

 

     Net Sales (million USD)     Shipments (thousand tons)     Revenue /ton (USD/ton)  
     2010      2009      Dif.     2010      2009      Dif.     2010      2009      Dif.  

North America

     640.7         512.0         25     974.2         931.2         5     658         550         20

South & Central America

     163.9         57.3         186     258.7         118.4         118     634         484         31

Europe & other

     28.6         3.5           50.0         6.1           571         583      

Long products

     833.1         572.9         45     1,282.9         1,055.6         22     649         543         20

Operating cost increased reflecting higher shipments and higher cost per ton mainly from higher raw material prices, as well as higher wages, salaries and social security, services and maintenance costs, partially offset by lower personnel reduction charges.

Other products segment

The other products segment operating income was USD56.7 million in 2010, an increase of USD16.7 million compared to 2009, mainly reflecting the impact of higher iron ore prices.

Net financial results

Net financial results were a USD130.5 million gain in 2010, compared with a USD132.9 million gain in 2009.

In 2010, Ternium’s net interest expenses were USD45.6 million, compared to a net interest expense of USD84.7 million in 2009, mainly as a result of lower net indebtedness and cost of debt.

Net foreign exchange result was a gain of USD123.7 million in 2010 compared to a gain of USD83.1 million in 2009. The gain in 2010 was primarily due to the impact of the Mexican peso’s 5.4% revaluation on Ternium’s Mexican subsidiary’s U.S. dollar denominated debt. This result is non-cash when measured in U.S. dollars and is offset by changes in Ternium’s net equity position in the currency translation adjustments line, as the value of Ternium Mexico’s U.S. dollar denominated debt is not altered by the Mexican peso’s fluctuations when stated in U.S. dollars in Ternium’s consolidated financial statements. In accordance with IFRS, during the periods covered in this annual report, Ternium Mexico prepared its financial statements in Mexican pesos and registered foreign exchange results on its net non-Mexican peso positions when the Mexican peso revaluated or devaluated relative to other currencies.

Interest income on the Sidor financial asset was USD61.0 million in 2010, compared to USD136.0 million in 2009. These results are attributable to the Sidor financial asset in connection with the transfer of Sidor shares on May 7, 2009.

Equity in earnings of associated companies

Ternium’s share in the results of associated companies (mainly Exiros) during 2010 was a gain of USD1.7 million, compared to a gain of USD1.1 million in 2009.

Income tax expense

Income tax expense for 2010 was USD406.7 million, or 34% of income before income tax and non-controlling interest, compared with an income tax expense of USD91.3 million in 2009 or 21% of income before income tax and non-controlling interest. The 2009 result included a non-recurring gain of USD35.4 million due to a favorable resolution on a tax-related dispute in México. In addition, Mexican statutory tax rate was raised from 28% in 2009 to 30% in 2010. For additional information regarding changes in the Mexican tax system, see Item 3. “Key Information—D. Risk Factors—Risks Relating to the Countries in Which We Operate—Mexico.”

 

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Net result of discontinued operations

There were no results of discontinued operations in 2010, while 2009 included a USD428.0 million gain in connection with the transfer of Sidor shares on May 7, 2009.

Net income attributable to non-controlling interest

Income attributable to non-controlling interest in 2010 was USD157.4 million, higher than income attributable to non-controlling interest of USD49.7 million in 2009, mainly due to a higher result attributable to non-controlling interest in Siderar and Ternium Mexico.

Foreign Currency Fluctuations

See Item 11. “Quantitative and Qualitative Disclosures About Market Risk—Foreign Exchange Exposure Risk.”

Governmental Economic, Fiscal, Monetary or Political Policies or Factors

See Item 3. “Key Information—D. Risk Factors—Risks Relating to the Countries in Which We Operate.”

 

  B. Liquidity and Capital Resources

We obtain funds from our operations, as well as from short-term and long-term borrowings from financial institutions. These funds are primarily used to finance our working capital and capital expenditures requirements, and our acquisitions (for further information on capital expenditures, see Item 4. “Information on the Company—B. Business Overview—Capital Expenditure Program”). In addition, during 2009, 2010 and 2011, we had cash inflows of USD1.9 billion in connection with compensation payments for the nationalization of our participation in Sidor. For more information on the Sidor nationalization process, see note 27 to our audited consolidated financial statements included elsewhere in this annual report. We hold money market investments, time deposits and variable-rate or fixed-rate securities from investment grade issuers. During 2009, 2010 and 2011, we significantly decreased our financial indebtedness, from USD3.3 billion at the end of 2008 to USD2.0 billion at the end of 2011, using primarily cash provided by operating activities. For a description of the refinancing of Ternium Mexico’s 2007 syndicated loan facility, see note 24 to our audited consolidated financial statements included elsewhere in this annual report. During the first quarter of 2012, we invested USD2.2 billion in the purchase of Usiminas shares. For further information on the Usiminas shares purchase transaction, see Item 5. “Operating and Financial Review and Prospects—G. Recent Developments — Acquisition of participation in Usiminas.”

Management believes that funds from operations will be sufficient to satisfy our current working capital needs and service our debt in the foreseeable future. Although Ternium believes it has access to the credit markets, it has not negotiated additional credit facilities for these purposes. Management also believes that our liquidity and capital resources give us adequate flexibility to manage our planned capital spending programs and to address short-term changes in business conditions.

The following table shows the changes in our cash and cash equivalents, excluding funds placed in trust, for each of the periods indicated below:

 

     For the year ended December 31,  

In thousands of U.S. dollars

   2011     2010     2009  

Net cash provided by operating activities

     647,135        806,825        1,161,758   

Net cash provided by (used in) investing activities

     121,649        (470,128     791,233   

Net cash used in financing activities

     (364,570     (654,118     (922,588
  

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     404,214        (317,421     1,030,403   

Effect of exchange rate changes

     (25,039     1,039        (157

Cash and cash equivalents at the beginning of the year

     1,779,416        2,095,798        1,065,552   

Cash and cash equivalents at the end of the year (1)

     2,158,591        1,779,416        2,095,798   

 

(1) In addition, at December 31, 2010 and 2011, Ternium had USD848.4 and USD281.7 million of other investments with maturities of more than three months, respectively, and USD12.3 and USD0.2 million in restricted cash, respectively.

 

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Fiscal Year Ended December 31, 2011 compared to Fiscal Year Ended December 31, 2010

Overview

During 2011, Ternium’s primary source of funding was net cash provided by operating activities.

Cash and cash equivalents as of December 31, 2011 were USD2.2 billion, a USD379.2 million increase from USD1.8 billion at the end of the previous year. This increase is mainly attributable to net cash provided by operating activities of USD647.1 million and net cash provided by investing activities of USD121.6 million, partially offset by net cash used in financing activities of USD364.6 million.

In addition to cash and cash equivalents, as of December 31, 2011, we held other investments with maturities of more than three months for a total amount of USD281.7 million, decreasing USD566.7 million compared to December 31, 2010.

Operating activities

Net cash provided by operating activities was USD647.1 million in 2011 compared to USD806.8 million in 2010, a year-over-year decrease of USD159.7 million. The main reasons for the reduction were:

 

   

a decrease in net income from continuing operations of USD129.6 million; and

 

   

a negative income tax accruals less payments adjustment of USD255.9 million in 2011, compared to a positive income tax accruals less payments adjustment of USD226.8 million in 2010;

partially offset by

 

   

a positive net foreign exchange results and others adjustment of USD184.8 million in 2011, compared to a negative net foreign exchange results and others adjustment of USD77.6 million in 2010, mainly due to the fluctuation of the Mexican peso versus the U.S. dollar;

 

   

a negative interest income adjustment of the Sidor financial asset of USD11.4 million in 2011, compared to a negative interest income adjustment of the Sidor financial asset of USD61.0 million in 2010; and

 

   

an increase in working capital of USD397.8 million in 2011, compared to an increase in working capital of USD448.0 million in 2010.

The significant variation in working capital during 2011, as indicated above, was mainly attributable to an increase of USD413.3 million in inventory, reflecting higher costs as a result of higher input prices, as well as higher inventory volume of goods in process and raw materials partially offset by lower inventory volume of finished goods, as a result of increased operating activity (as shown in the table below).

 

     Change in inventory Dec’11 /Dec’10  
     (in millions of USD)  
     Price      Volume     Total  

Finished goods

     52.1         (10.6     41.5   

Goods in process

     96.7         25.7        122.4   

Raw materials, supplies and allowances

     191.6         57.8        249.4   
  

 

 

    

 

 

   

 

 

 

Total

     340.4         72.9        413.3   

 

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Investing activities

Net cash provided by investing activities in 2011 was USD121.6 million, compared to net cash used in investing activities of USD470.1 million in 2010. This change was primarily attributable to the following:

 

   

a decrease in net cash used in other investing activities of USD1.4 billion, consisting mainly of financial investments with maturities of more than three months, which decreased USD588.2 million in 2011, compared to an increase of USD820.7 million in 2010; and

 

   

a decrease in net cash used in acquisition of business of USD68.4 million, due to the acquisition of Ferrasa in 2010;

partially offset by

 

   

a decrease of USD634.3 mill