Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.  

Executive Summary

The outlook for the global economy is one of a gradual rally in the second half of 2014, mainly fueled by the recovery of growth in the developed countries, which performed poorly at the beginning of the year.

The IMF has reduced its 2014 global growth projection to 3.4%, 0.3 p.p. below its previous estimate, reflecting the weak first-quarter performance and the less optimistic prospects for some of the emerging nations. The institution maintained its 4% growth estimate for 2015. 

The global Purchasing Managers Index (PMI) recorded its 21^st consecutive monthly upturn, averaging 54.1 points in the second quarter.

USA

The U.S. economy shrank by 2.1% in 1Q14 due to the lower exports and a reduction in private investments. Nevertheless, despite the exceptionally rigorous winter having jeopardized economic performance at the beginning of the year, recent indicators are pointing to positive results. The first GDP estimate for 2Q14 points to growth of 4%, fueled by private investments, exports and personal spending on consumption.

Manufacturing PMI averaged 56.4 points in 2Q14, the best result for four years, signaling a recovery in activity. Unemployment reached 6.1% in June, the lowest figure for 15 years, with the creation of 1.4 million new jobs in the first half. Installed capacity in May remained flat over April and March at 79%, while industrial production moved up by 0.6%, giving 12-month growth of 4.3%.

At its last meeting in June, the FOMC (the FED’s Monetary Policy Committee), reduced its asset purchases by a further US$10 billion, maintaining its decision to wind up the program at the end of the current year. The base rate was maintained at between 0% and 0.25%, and the Committee signaled that this level would be preserved. The FED estimates GDP growth in 2014 between 2.1% and 2.3%.  

Europe

The first-quarter Eurozone numbers continued pointing to a gradual economic recovery. GDP in the region edged up by 0.2% over 4Q13, very close to the 0.3% recorded in the latter quarter. Hungary and Poland recorded the biggest growth, with 1.1% each, while the Netherlands recorded the biggest decline (-1.4%). The European Central Bank (ECB) expects growth of 1.0% in 2014 and 1.7% in 2015.

Manufacturing PMI fell from 53.1 points in March to 51.8 points in June, while the quarterly average declined from 53.4 to 52.4 points between 1Q14 and 2Q14.

In the 12 months through June 2014, Eurozone inflation came to 0.5%, below the long-term target of 2% established by the ECB.

As a result, the ECB has been adopting an expansionist monetary policy, reducing the banks’ overnight deposit rates and strengthening prospects of low interest rates for a lengthy period of time.

Although the job market has shown some signs of improvement, Eurozone unemployment remained flat at 11.6% in May, still high.

In the UK, preliminary estimates point to GDP growth of 0.8% in 2Q14, identical to the 1Q14 figure, pushed by the service sector which recorded period growth of 1.0%. Industrial output increased by 3.7% in the 12 months through May, while manufacturing PMI reached 57.5 points in June, indicating expansion over the last 16 months. Annualized inflation came to 1.9% in June, higher than the 1.5% recorded in May. According to the British Treasury, the consensus of estimates points to GDP growth of 3.0% in 2014.

Asia

Reacting to signs of a slowdown at the beginning of the year, the Chinese government implemented a series of new measures to stimulate the economy and recent indicators suggest that they have been effective. Preliminary 2Q14 figures from the National Bureau of Statistics point to Chinese GDP growth of 7.5% over the same period last year and 2% over the previous quarter. Industrial production moved up by 8.8% in June over the same month the year before. After reaching its 48.0 points in March, the lowest level of the year, manufacturing PMI, disclosed by HSBC, began to improve as of April and closed June at 50.7 points, the first expansion since December 2013.

 

 

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On the other hand, first-half investments in fixed assets grew by 17.3%, slightly less than the 17.6% recorded in 1Q14.

Given this scenario, the government maintained its 2014 GDP growth target at 7.5%.

The economic indicators in Japan point to an upturn in activity, even it is only a temporary one. Expectations of an increase in value added tax from 5% to 8% in April helped push up household consumption, which grew by 9.2% in the first quarter, resulting in annualized GDP growth of 6.7% in the same period, versus 0.3% in 4Q13.

Compound PMI reached 51.5 points in June, above the 49.9 points recorded in May, signaling an improvement in business conditions for the first time since February. Unemployment recorded 3.5% in May, the lowest rate since July 2007.

The Bank of Japan expects inflation to reach 1.25% p.a. in the midterm and 2% p.a. in the long term and is projecting GDP growth of 1.0% in 2014.

Brazil

May’s seasonally-adjusted Central Bank Economic Activity Index (IBC-Br), used as a reference for GDP, fell by 0.18% in May over April after remaining flat since the beginning of the year. In the last 12 months, however, the IBC-Br moved up by 1.95%. The Central Bank’s FOCUS report expects GDP growth of 0.90% in 2014 and 1.5% in 2015.

Inflation recorded by the IPCA consumer price index recorded 0.4% in June, giving 3.75% for the first half and 6.52% in the previous 12 months, exceeding the 6.5% ceiling of the annual inflationary target. The FOCUS report expects 2014 inflation of 6.41%, with a Selic base rate of 11.0% at year-end.

Given this scenario, and despite high inflation, the Central Bank’s Monetary Policy Committee (COPOM) interrupted the series of hikes in the Selic, maintaining it at 11.0% p.a. at its last two meetings.

Industrial output in May fell by 0.6% over April and 3.2% over the same month last year, giving a decline of 1.6% in the first five months. Most of the downward pressure in May came from consumer durables production, which fell by 3.6%.

On the foreign exchange front, the Brazilian real appreciated by 2.7% against the U.S. dollar in 2Q14, closing June at R$2.2025, reflecting higher market liquidity and the difference between real domestic and international interest rates.

Macroeconomic Projections

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CSN posted consolidated net revenue of R$4,052 million in 2Q14, in line with the R$4,060 million recorded in 2Q13, and 7% down on the R$4,371 million reported in 1Q14, basically due to the reduction in revenue from steel and mining operations.  

COGS totaled R$2,747 million in 2Q14, 9% down on the R$3,020 million posted in 2Q13, basically due to lower COGS from steel operations, partially offset by the upturn in mining COGS. In comparison with the RS3,034 million registered in the previous quarter, COGS also fell by 9%.

Consolidated SG&A expenses totaled R$358 million in 2Q14, 6% less than the R$380 million reported in 2Q13, chiefly due to the reduction in selling expenses, and 22% up on the R$294 million registered in the previous  quarter, essentially due to higher freight and administrative expenses.

Other Operating Revenue/Expenses totaled R$31 million in 2Q14, versus R$145 million in 2Q13 and R$177 million in 1Q14, mainly due to the reversal of provisions.

The Company uses Adjusted EBITDA to measure the segments' performance and operating cash flow capacity. It comprises net income before the net financial result, income and social contribution taxes, depreciation and amortization, results from investees and other operating revenue (expenses), plus the proportional EBITDA of the jointly-owned subsidiaries, Namisa, MRS Logística and CBSI.   Second-quarter adjusted EBITDA amounted to R$1,303 million, 19% up on the R$1,095 million posted in 2Q13, basically due to the contribution from steel and mining operations, accompanied by an EBITDA margin of 30%, up by 6 p.p.

In comparison with 1Q14, adjusted EBITDA fell by 9%, chiefly influenced by the mining segment result, partially offset by the increase in EBITDA from steel, while the adjusted EBITDA margin remained at 30%.

In 2Q14, CSN’s consolidated net financial result was negative by R$815 million, mainly due to the following factors:  

·         Interest on loans and financing totaling R$691 million;  

·         Expenses of R$40 million with the monetary restatement of tax payment installments;  

·         Other financial expenses totaling R$76 million;

·         Monetary and foreign exchange variations amounting to R$61 million;

These negative effects were partially offset by consolidated financial revenue of R$53 million.

Gross debt, net debt and the net debt/EBITDA ratio presented below reflect the Company’s proportional interest in Namisa, MRS Logística and CBSI, as well as the impact from the partial spin-off of Transnordestina Logística S/A.

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On June 30, 2014, the Company’s gross debt totaled R$28.6 billion, almost identical to the figure on March 31, 2014, while net debt amounted to R$16.7 billion, R$900 million more than at the close of 1Q14. On the other hand, the net debt/EBITDA ratio based on LTM adjusted EBITDA closed the second quarter at 2.71x, virtually flat over the 2.66x recorded at the end of the previous quarter. Net debt was impacted by the following factors:

·         Investments of R$0.6 billion in fixed assets;

·         A R$0.6 billion effect related to the cost of debt;  

·         A R$0.2 billion increase in working capital;

·         Disbursements of R$0.4 billion on the share buyback program;

·         Foreign exchange variation of R$0.1 billion;

·         Other effects totaling R$0.3 billion;

These negative effects were partially offset by 2Q14 EBITDA of R$1.3 billion.

Indebtedness (R$ million) and Net Debt /Adjusted EBITDA ratio

CSN’s equity result was negative by R$67 million in 2Q14, basically due to the result of the jointly-owned subsidiary Namisa.

CSN posted consolidated net income of R$19 million in 2Q14, for the reasons mentioned above.

Investments reflect the Company’s proportional interest in Namisa, MRS Logística and CBSI. The Company has ceased consolidating its interest in Transnordestina Logística S/A, due to the latter’s partial spin-off on December 27, 2013 and the consequent entry into effect of the new shareholders’ agreement.

CSN invested R$560 million in 2Q14, R$418 million of which in the parent company. Of this total, R$207 million went to the Casa de Pedra mine and the Port of Itaguaí, R$109 million to increasing cement production capacity, and R$99 million to the steel segment, with scheduled maintenance programs.

The remaining R$142 million went to subsidiaries or joint subsidiaries, mostly as follows:

ü  MRS: R$67 million;

ü  Sepetiba Tecon: R$22 million.

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Working capital allocated to the Company’s businesses closed 2Q14 at R$2,732 million, R$222 million more than at the end of 1Q14, chiefly due to the increase in inventories  and accounts receivable, partially offset by the upturn in the suppliers line. The average supplier payment period increased by six days, the receivables period widened by three days and the average inventory turnover period increased by 11 days.

The Company maintains integrated operations in five business segments: steel, mining, logistics, cement and energy. The main assets and/or companies comprising each segment are presented below:

The information on CSN’s five business segments is derived from the accounting data, together with allocations and the apportionment of costs among the segments. Results by segment reflect the Company’s proportional interest in Namisa, MRS Logística and CBSI, as well as the full consolidation of FTL.

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Net revenue by segment (R$ million)  

Adjusted EBITDA by segment (R$ million)

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Scenario

According to the World Steel Association (WSA), global crude steel production totaled 821 million tonnes in the first half of 2014, 2.5% higher than in 2H13, with China, responsible for 411 million tonnes, recording growth of 3.0%. Global capacity use reached 78% in June, 1 p.p. down on March, which was the highest monthly figure of the year so far. The WSA expects global apparent steel consumption to grow by 3.1% in 2014, with apparent consumption in China moving up by 3%.

According to the Brazilian Steel Institute (IABr), domestic crude steel production came to 16.7 million tonnes in 1H14, 1.5% down on 1H13, while rolled flat output totaled 7.0 million tonnes, down by 6.3%. 

Apparent domestic flat steel consumption amounted to 6.2 million tonnes in the first half, 1.4% more than in 1H13, while domestic sales fell by 4.3% to 5.8 million tonnes. On the other hand, flat steel imports climbed by 45.6% to 1.1 million tonnes in the 1H14, while exports fell by 26.5% to 0.7 million tonnes.

The IABr estimates domestic sales of 23.7 million tonnes in 2014, with apparent consumption of 27.2 million tonnes.

Automotive

According to ANFAVEA (the Auto Manufacturers’ Association), light vehicle production totaled 1.5 million units in 1H14, 17% down on the same period last year, with sales of 1.6 million units, fell by 7%. The association estimates annual light vehicle production and sales growth of 10% and 5.4%, respectively, over  2013.

According to FENABRAVE (the Vehicle Distributors’ Association), the number of vehicles licensed in 1H14 fell by 7.3% year-on-year. The association expects 2014 light vehicle sales to fall by 10.5% over last year.

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Construction  

According to ABRAMAT (the Construction Material Manufacturers’ Association), first-half sales of building materials increased by 3.7% year-on-year. The association is maintaining its 2014 sales growth estimate of 4.5%.

Home Appliances

According to the IBGE (Brazilian Institute of Geography and Statistics), home appliance production fell by 1.6% year-on-year in the first five months of 2014.

Distribution  

According to INDA (the Brazilian Steel Distributors’ Association), domestic flat steel sales by distributors totaled 2.2 million tonnes in 1H14, 3.5% up on 1H13. For 2014 as a whole, the association has revised its sales growth estimate to 1%.

First-half purchases by the associated network came to 2.1 million tonnes, 7.4% less than in the same period last year. On the other hand, inventories closed June at 1.06 million tonnes, representing 3.3 months of sales.

Sales Volume

In 2Q14, CSN’s steel sales totaled 1.26 million tonnes. Of this total, 73% went to the domestic market, 25% were sold by overseas subsidiaries and 2% went to exports.

Domestic Sales Volume

Domestic steel sales totaled 918,000 tonnes in 2Q14, 9% less than in 1Q14, basically due to the reduced pace of economic activity, impacted by the lower number of business days in the quarter.

Foreign Sales Volume  

Foreign sales amounted to 345,000 tonnes in 2Q14, 8% less than in the previous quarter. Of this total, the overseas subsidiaries sold 321,000 tonnes, 184,000 of which by SWT. Direct exports came to 24,000 tonnes.

Prices

Net revenue per tonne averaged R$2,214 in 2Q14, in line with 1Q14.

Net Revenue

Net revenue from steel operations totaled R$2,843 million in 2Q14, 9% down on the R$3,127 million recorded in 1Q14, essentially due to the reduction in sales volume.

Cost of Goods Sold (COGS)

Steel segment COGS came to R$2,083 million in 2Q14, 13% down on the previous quarter, basically due to lower production costs and sales volume.

Adjusted EBITDA

Adjusted steel segment EBITDA totaled R$793 million in 2Q14, 4% up on the R$761 million recorded in 1Q14, essentially due to the reduction in COGS and the highest quarterly figure since 3Q10. The adjusted EBITDA margin came to 28%, 4 p.p. up on 1Q14.  

Production

The Presidente Vargas Steelworks (UPV) produced 1.1 million tonnes of crude steel in 2Q14, 2% more than in 1Q14, while slab purchases from third parties remained in line with 1Q14. Second-quarter rolled steel output totaled 1.1 million tonnes, 4% up on the quarter before.

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Production Costs (Parent Company)

In 2Q14, the Presidente Vargas Steelworks’ total production costs came to R$1,643 million, 1% down on 1Q14, chiefly due to the reduced consumption of coke acquired from third parties and lower coal costs.

Scenario

In 2Q14, seaborne iron ore prices were negatively impacted by increased supply, chiefly fueled by Australian exporters. In regard to Chinese demand, the increased credit restrictions, the reduced pace of investments and the high level of iron ore stocks in the ports also contributed to the price slide.

In this scenario, the Platts Fe62% CFR China index averaged US$102.60/dmt in 2Q14, 14.8% down on the 1Q14 average. The iron ore quality premium varied between US$2.10/dmt and US$1.70/dmt per 1% of Fe content, while freight costs on the Tubarão/Qingdao route averaged US$20.31/wmt, 9% less than the previous quarter’s average.

Brazil exported 80 million tonnes of iron ore in the second quarter, 12% up on 1Q14. 

Iron ore sales

In 2Q14, sales of finished iron ore products totaled 7.2 million tonnes, 20% up on the 6.0 million tonnes sold in 2Q13 and 13% up on the 6.4 million tonnes recorded in the previous quarter. Of this total, 2.4 million tonnes were sold by Namisa¹. Virtually all iron ore sold in 2Q14 was exported.

Iron ore volume for own consumption reached 1.5 million tonnes in 2Q14.

¹ Sales volumes include 100% of the stake in NAMISA.

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Net Revenue

Net revenue from mining operations totaled R$1,117 million in 2Q14, 14% more than in 2Q13, primarily due to the upturn in sales volume.

In relation to the R$1,247 million posted in 1Q14, net revenue fell by 10%, due to lower market prices, partially offset by the upturn in sales volume.

Cost of Goods Sold (COGS)

Mining COGS came to R$740 million in 2Q14, 23% up on 2Q13, mostly due to the increase in iron ore sales volume, and 3% more than the R$716 million recorded in 1Q14, also due to higher sales volume.

Adjusted EBITDA

Adjusted EBITDA from mining operations totaled R$442 million in 2Q14, 11% up on the R$398 million reported in 2Q13, for the same reasons mentioned above, accompanied by an adjusted EBITDA margin of 39%. In relation to the R$585 million recorded in 1Q14, adjusted EBITDA fell by 25%.

Scenario

Railway Logistics

According to the ANTF (National Rail Transport Association), the Brazilian railways transported 115.3 million tonnes in 1Q14. The association expects rail cargo volume to move up by around 12% to 550 million tonnes between 2014 and 2016.

Port Logistics

According to ANTAQ (the National Waterway Transport Agency), Brazil’s port installations handled around 215 million tonnes in 1Q14, 5% up on the same period the year before.  

Also in 1Q14, bulk solids totaled 128 million tonnes, 5.7% more than in 1Q13, while container handling came to 2.1 million TEUs1, 10.5% up year-on-year.  

¹ TEU (Twenty‐Foot Equivalent Unit) – transportation unit equivalent to a standard 20-feet intermodal container

Analysis of Results

Railway Logistics

In 2Q14, net revenue from railway logistics totaled R$226 million, COGS came to R$156 million and adjusted EBITDA amounted to R$87 million, accompanied by an EBITDA margin of 39%.

Port Logistics

Net revenue from port logistics amounted to R$47 million in 2Q14, COGS totaled R$31 million and adjusted EBITDA came to R$18 million, with an adjusted EBITDA margin of 38%.

Scenario

Preliminary figures from SNIC (the Cement Industry Association) indicate local cement sales of 29 million tonnes in the first five months of 2014, 2.8% more than in the same period last year.

Analysis of Results

Cement sales reached the record level of 564,000 tonnes in 2Q14, with record net revenue of R$113 million, while COGS came to R$72 million, generating record EBITDA of R$34 million, with a  record margin of 30%.

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Scenario

According to the Energy Research Company (EPE), Brazilian electricity consumption increased by 4.4% year-on-year in the first five months of 2014, led by the commercial and residential segments, with respective growth of 9.3% and 8.1%.

Analysis of Results

In 2Q14, net revenue from electricity reached the record amount of R$87 million. COGS came to R$49 million, generating record adjusted EBITDA of R$37 million, with an adjusted EBITDA margin of 43%.

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CSN’s shares depreciated by 4% in 2Q14, while the Company’s ADRs fell by 2% on the NYSE.  

Daily traded volume in CSN’s shares averaged R$52 million in 2Q14, from 5.7 million shares traded. On the NYSE, daily traded volume in CSN’s ADRs averaged US$16 million, from 3.9 million ADRs traded.

In the first half of 2014, CSN’s Board of Directors approved four share buyback programs. By the end of the fourth program, the Company had acquired 70,205,661 shares.  

On July 18, 2014, the Board of Directors authorized:

·         The cancellation of sixty million (60,000,000) shares held in treasury. As a result, CSN’s capital stock is currently represented by 1,397,970,108 book-entry common shares;

·         The launch of a new share buyback program between July 18, 2014 and August 18, 2014, limited to the repurchase of up to 64,205,661 shares.

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