UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

Commission File Number 1-14732

COMPANHIA SIDERÚRGICA NACIONAL
(Exact Name of Registrant as Specified in its Charter)

NATIONAL STEEL COMPANY
(Translation of Registrant’s name into English)

THE FEDERATIVE REPUBLIC OF BRAZIL
(Jurisdiction of incorporation or organization)

Paulo Penido Pinto Marques, Chief Financial Officer
Phone:  +55 11 3049-7100   Fax:  +55 11 3049-7212

invrel@csn.com.br
Av.  Brigadeiro Faria Lima, 3,400 – 20^th floor
04538-132, São Paulo-SP, Brazil

(Address of principal executive offices)

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

____________________

*  Not for trading purposes, but only in connection with the registration of American Depositary Shares pursuant to the requirements of the Securities and Exchange Commission.

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 period covered by the annual report:

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

R  Yes    1  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.

1  Yes    R  No

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.

R  Yes   1  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).

R  Yes    1  No

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  R                Accelerated Filer  1                 Non-accelerated Filer   1 

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

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  1   Item 18  1  

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).

1  Yes     R  No

TABLE OF CONTENTS

Introduction

Unless otherwise specified, all references in this annual report to:

·         “we,” “us,” “our” or “CSN” are to Companhia Siderúrgica Nacional and its consolidated subsidiaries;

·         “Brazilian government” are to the federal government of the Federative Republic of Brazil;

·         “real,” “reais” or “R$” are to Brazilian reais, the official currency of Brazil;

·         “U.S. dollars,” “$,” “US$” or “USD” are to United States dollars;

·         “billions” are to thousands of millions, “km” are to kilometers, “m” are to meters, “mt” or “tons” are to metric tons, “mtpy” are to metric tons per year and “MW” are to megawatts;

·         “TEUs” to twenty-foot equivalent units;

·         “consolidated financial statements” are to the consolidated financial statements of Companhia Siderúrgica Nacional and its consolidated subsidiaries reported in International Financial Reporting Standards as issued by the IASB – IFRS as of December 31, 2009 and 2010 and for the years ended December 31, 2009 and 2010, together with the corresponding Report of Independent Registered Public Accounting Firm;

·           “ADSs” are to CSN’s American Depositary Shares and “ADRs” are to CSN’s American Depositary Receipts; and

·         “Brazil” is to the Federative Republic of Brazil.

Forward-Looking Statements

This annual report includes forward-looking statements, within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act, principally under the captions “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 have based these forward-looking statements largely on our current expectations and projections about future events, industry and financial trends affecting our business.  Many important factors, in addition to those discussed elsewhere in this annual report, could cause our actual results to differ substantially from those anticipated in our forward-looking statements, including, among other things:

·         general economic, political and business conditions in Brazil and abroad, especially in China;

·         the ongoing effects of the recent global financial markets and economic crisis;

·         changes in competitive conditions and in the general level of demand and supply for our products;

·         management’s expectations and estimates concerning our future financial performance and financing plans;

·         our level of debt;

·         availability and price of raw materials;

·         changes in international trade or international trade regulations;

·         protectionist measures imposed by Brazil and other countries;

·         our capital expenditure plans;

·         inflation, interest rate levels and fluctuations in foreign exchange rates;

·         our ability to develop and deliver our products on a timely basis;

·         lack of infrastructure in Brazil;

·         electricity and natural gas shortages and government responses to them;

·         existing and future governmental regulation; and

·         other risk factors as set forth under “Item 3D.  Risk Factors.”

The words “believe,” “may,” “will,” “aim,” “estimate,” “forecast,” “plan,” “continue,” “anticipate,” “intend,” “expect” and similar words are intended to identify forward-looking statements.  Forward-looking statements speak only as of the date they were made, and we undertake no obligation to publicly update or to revise any forward-looking statements after we distribute this annual report because of new information, future events or other factors.  In light of the risks and uncertainties described above, the forward-looking events and circumstances discussed in this annual report might not occur and are not an indication of future performance.  As a result of various factors, such as those risks described in “Item 3D.  Risk Factors,” undue reliance should not be placed on these forward-looking statements.

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Presentation of Financial and Other Information

Our consolidated financial statements as of December 31, 2010 and 2009 and for the years ended December 31, 2009 and 2010 contained in “Item 18.  Financial Statements” have been presented in thousands of reais (R$) and prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).  See Note 2(a) to our consolidated financial statements.

For certain purposes, such as providing reports to our Brazilian shareholders, filing financial statements with the Brazilian Securities Commission (Comissão de Valores Mobiliários), or CVM, and other distributions and tax liabilities in Brazil, we have prepared and will continue to be required to prepare financial statements in accordance with the accounting principles required by Brazilian laws No. 6,404, dated December 15, 1976, as amended, and No. 11,638 dated December 28, 2007, as amended, or the Brazilian Corporate Law, and the rules and regulations of the CVM, or Brazilian GAAP.

Changes on Regulatory Requirements for Presentation of Financial Statements – Convergence to International Financial Reporting Standards (“IFRS”)  

Starting with the year ended December 31, 2010, Brazilian listed companies are required to publish their consolidated financial statements in accordance with IFRS.  Those consolidated financial statements must be prepared based on IFRS as issued by the IASB.

Consequently, the financial statements and other financial information for the years ended December 31, 2010 and 2009 included elsewhere in this Form 20-F, unless otherwise indicated, were prepared and presented in accordance with IFRS.

Previously published consolidated financial statements in our annual report on Form 20-F for our financial year ended December 31, 2009, as well as all prior financial periods, were prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). IFRS differs in certain material respects from U.S. GAAP and, accordingly, the consolidated financial statements for our financial years ended December 31, 2010 and 2009 prepared in accordance with IFRS are not comparable to our consolidated financial statements prepared in accordance with U.S. GAAP for 2009 and prior years presented in our reports on Form 20-F.  See “Item 5. Operating and Financial Review and Prospects—Change in Accounting from U.S. GAAP to IFRS” and Note 4 to our consolidated financial statements included elsewhere in this Form 20-F.

Certain figures included in this annual report have been subject to rounding adjustments.  Accordingly, figures shown as totals in certain tables may not be an arithmetic aggregation of the figures which precede them.

PART I

Item 1. Identity of Directors, Senior Management and Advisors

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Not applicable.

Item 3. Key Information

3A.  Selected Financial Data

We present in this section the summary financial and operating data derived from our audited consolidated financial statements as of and for the year ended December 31, 2009 and 2010.

The consolidated financial statements included in this annual report have been prepared in accordance with IFRS, as issued by the IASB, in reais. However, we have translated some of the real  amounts contained in this annual report into U.S. dollars.  The rate used to translate such amounts in respect of the year ended December 31,  

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2010 was R$1.6662 to US$1.00, which was the commercial rate for the purchase of U.S. dollars in effect as of December 31, 2010, as reported by the Central Bank. The U.S. dollar equivalent information presented in this annual report is provided solely for the convenience of investors and should not be construed as implying that the real  amounts represent, or could have been or could be converted into, U.S. dollars at such rates or at any other rate.  See “Exchange Rates” for more detailed information regarding the translation of reais  into U.S. dollars.

IFRS Summary and Financial Data

The following tables present summary historical consolidated financial and operating data for us for each of the periods indicated.  Solely for the convenience of the reader, real  amounts as of and for the year ended December 31, 2010 have been translated into U.S. dollars at the commercial market rate in effect as of December 31, 2010 as reported by the Brazilian Central Bank of R$1.6662 to US$1.00 The selected financial data below should be read in conjunction with “Item 5. Operating and Financial Review and Prospects.”    

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3B.  Capitalization and Indebtedness

Not applicable.

3C.  Reasons for the Offer and Use of Proceeds

Not applicable.

3D.  Risk Factors

An investment in our ADSs or common shares involves a high degree of risk.  You should carefully consider the risks described below before making an investment decision.  Our business, financial condition and results of operations could be materially and adversely affected by any of these risks.  The trading price of our ADSs could decline due to any of these risks or other factors, and you may lose all or part of your investment.  The risks described below are those that we currently believe may materially affect us.

Risks Relating to Brazil

The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy.  This involvement, as well as, Brazilian political and economic conditions, could adversely affect our business and the trading prices of our ADSs and common shares.

The Brazilian government frequently intervenes in the Brazilian economy and occasionally makes significant changes in policy and regulation.  The Brazilian government’s actions, policies and regulations to control inflation have often involved, among other measures, increases in interest rates, changes in tax policies, price controls (such as those imposed on the steel sector prior to privatization), currency devaluations, capital controls and limits on imports.  Our business, financial condition and results of operations may be adversely affected by political, social, and economic developments in or affecting Brazil, and by changes in policy or regulations involving or affecting factors, such as:

·         interest rates;

·         exchange controls;

·         currency fluctuations;

·         inflation; 

·         lack of infrastructure in Brazil;

·         energy shortages and rationing programs;

·         liquidity of the domestic capital and lending markets;

·         environmental policies and regulations;

·         tax policies and regulations; and

·         other political, social and economic developments in or affecting Brazil.

Uncertainty over whether the Brazilian government will make changes affecting these and other factors may create instability. This may also adversely affect our business, financial condition and results of operations.

7 

Exchange rate instability may adversely affect our financial condition,  results of operations and the market price of our common shares and ADSs.

The Brazilian currency has long experienced frequent and substantial variations in relation to the U.S. dollar and other foreign currencies.  Between 2000 and 2002, the real  depreciated significantly against the U.S. dollar, reaching an exchange rate of R$3.53 per US$1.00 at the end of 2002.  Between 2003 and mid-2008, the real  appreciated significantly against the U.S. dollar due to the stabilization of the macroeconomic environment and a strong increase in foreign investment in Brazil, with the exchange rate reaching R$1.56 per US$1.00 in August 2008.  In the context of the crisis in the global financial markets after mid-2008, the real  depreciated 31.9% against the U.S. dollar over the year 2008 and reached R$2.34 per US$1.00 at year end.  Since 2009, the real appreciated  againts the U.S. dollar, mainly due to the strong economic recovery of Brazil and high domestic real interest rate, and on December 31, 2010 the exchange rate was R$1.66 per US$1.00.  On June 14, 2011, the exchange rate was R$1.58 per US$1.00.

Depreciation of the real  against major foreign currencies could create inflationary pressures in Brazil and contribute to Central Bank increases in interest rates, which could negatively affect the growth of the Brazilian economy as a whole and harm our financial condition and results of operations, may curtail access to foreign financial markets and may prompt government intervention, including recessionary governmental policies.  Depreciation of the real  against the U.S. dollar can also, as in the context of the global economic and financial crisis in 2008 and 2009, lead to decreased consumer spending and reduced growth of the economy as a whole.

On the other hand, appreciation of the real  relative to major foreign currencies could lead to a deterioration of the Brazilian foreign exchange current accounts, as well as dampen export-driven growth.  Depending on the circumstances, either depreciation or appreciation of the real  could materially and adversely affect the growth of the Brazilian economy and our business, financial condition and results of operations.

In the event the real  depreciates in relation to the U.S. dollar, the cost in reais  of our foreign currency-denominated borrowings and imports of raw materials, particularly coal and coke, will increase.  To the extent that we do not succeed in promptly reinvesting the funds received from such borrowings in dollar-denominated assets, we are exposed to a mismatch between our foreign currency-denominated expenses and revenues.  On the other hand, if the real appreciates in relation to the U.S. dollar, it will cause real-denominated production costs to increase as a percentage of total production costs and cause our exports to be less competitive.  We had total U.S. dollar-denominated or –linked indebtedness of US$5,804 million, or 48% of our total indebtedness, at December 31, 2010. 

Depreciation of the real  may also reduce the U.S. dollar value of distributions and dividends on the ADSs and the U.S. dollar equivalent of the market price of our common shares and, as a result, the ADSs.

Government efforts to combat inflation may hinder the growth of the Brazilian economy and could harm our business.

Brazil has in the past experienced extremely high rates of inflation and has therefore followed monetary policies that have resulted in one of the highest real interest rates in the world.  Since the implementation of the Real Plan in 1994, the annual rate of inflation in Brazil has decreased significantly, as measured by the National Broad Consumer Index (Índice Nacional de Preços ao Consumidor Amplo, or IPCA). Inflation measured by the IPCA index was 4.31 and 5.91 in 2009 and 2010, respectively.

Between 2004 and 2010, the base interest rate, or SELIC rate, in Brazil varied between 19.25% p.a. and 8.75% p.a.. Inflation and the Brazilian government’s measures to fight it, principally through the Central Bank, have had and may have significant effects on the Brazilian economy and our business.  Tight monetary policies with high interest rates may restrict Brazil’s growth and the availability of credit.  Conversely, more lenient government and Central Bank policies and interest rate decreases may trigger increases in inflation, and, consequently, growth volatility and the need for sudden and significant interest rate increases, which could negatively affect our business.  In addition, we may not be able to adjust the price of our products in the export markets to offset the effects of inflation in Brazil on our cost structure, given that most of our costs are incurred in reais. 

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9 

Our activities depend on authorizations from and concessions by governmental regulatory agencies of the countries in which we operate.  If related laws and regulations change, modifications to our technologies and operations could be required, and we could be required to make unexpected capital expenditures.  The loss of any such authorization or changes in the regulatory framework we operate in may materially and adversely affect us.

Mining is subject to government regulation in the form of taxes and royalties, which can have an important financial impact on our operations.  In the countries where we operate, governments may impose new taxes, raise existing taxes and royalties, or change the basis on which they are calculated in a manner unfavorable to us.

Furthermore, in response to the increased production and export of steel by many countries, anti-dumping, countervailing duties and safeguard measures were imposed in the late 1990s and early 2000s by governments of the principal foreign markets for our steel exports in that period.  Some of these restrictions are still in force, such as the restrictions on exports of hot-rolled products from Brazil to the United States, Canada and Argentina and the restrictions imposed by the European Union on exports of certain chemical substances contained either in products used to protect the steel products or in products used to pack them, effective as of January 2009.  These and other restrictions could materially and adversely affect us, especially to the extent we rely on exporting our iron ore and steel production.

10 

Malfunctioning equipment or accidents on our premises, railways or ports may decrease or interrupt production, internal logistics or distribution of our products.  Our insurance policies may not be sufficient to cover all our losses.

The steel and iron ore production processes depend on certain critical equipment, such as blast furnaces, steel converters, continuous casting machines, drillers, crushing and screening equipments and shiploaders, internal logistics and distribution channels, such as railways and seaports.  This equipment and infrastructure may be affected in the case of malfunction or damage.  In 2006, there was an accident involving the gas cleaning system adjacent to Blast Furnace No. 3 at the Presidente Vargas steelworks, which prevented us from operating this blast furnace for approximately six months and resulted in losses of approximately US$520 million, all of which was reimbursed by our insurers.  Similar or any other significant interruptions in our production process, internal logistics or distribution channels (including our ports and railways) could materially and adversely affect us.

We maintain several types of insurance policies in line with our view to managing risk, but the coverage obtained in these may not be sufficient to cover all our risks which may adversely affect our financial position. We have an operational risks policy for the Presidente Vargas Steelworks and some other branches and subsidiaries, but for an insured value of R$ 850 million out of a total risk amount of R$ 25.1 billion. Despite this coverage, CSN remains responsible for the first tranche of R$ 170 million in losses (material damages and loss of profits), in excess to the deductibles, and shall be responsible for 64% of the losses above this first tranche.

We may not be able to successfully contract or renew our insurance policies in terms satisfactory to us, which may adversely affect our financial position.

Our projects are subject to risks that may result in increased costs or delay or prevent their successful implementation.

We are investing to further increase our steel, mining and cement production capacity, as well as our logistics capabilities.  Our expansion and projects are subject to a number of risks that may adversely affect our growth prospects and profitability, including the following:

·         we may encounter delays or higher than expected costs in obtaining the necessary equipment or services to build and operate a project;

·         our efforts to develop projects according to schedule may be hampered by a lack of infrastructure, including a reliable power supply;

·         we may fail to obtain, or experience delays or higher than expected costs in obtaining the required permits and/or regulatory approvals to build a project; and

·         changes in market conditions or regulations may make a project less profitable than expected at the time we initiated work on it.

Any one or a combination of factors described above may materially and adversely affect us.  

New or more stringent environmental and health regulations imposed on us may result in increased liabilities and increased capital expenditures.

Our governance and compliance processes may fail to prevent regulatory penalties and reputational harm.

We operate in a global environment, and our activities straddle multiple jurisdictions and complex regulatory frameworks with increased enforcement activities worldwide.  Our governance and compliance processes may not prevent future breaches of law, accounting or governance standards.  We may be subject to breaches of our Code of Ethics, business conduct protocols and instances of fraudulent behavior and dishonesty by our employees, contractors or other agents.  Our failure to comply with applicable laws and other standards could subject us to fines, loss of operating licenses and reputational harm, which may materially and adversely affect us.

11 

Some of our operations depend on joint ventures, consortia and other forms of cooperation, and our business could be adversely affected if our partners fail to observe their commitments.

We currently operate parts of our business through joint-ventures with other companies.  We have established a joint-venture with an Asian consortium at our 60% consolidated investee Nacional Minérios S.A., or Namisa, to mine iron ore; a joint-venture with other Brazilian steel and mining companies at MRS Logística S.A., or MRS, to explore railway transportation in the Southeastern region of Brazil, a joint-venture with Tractebel and Itambe at Itá Energética S.A., or ITASA and a consortium with Vale, Votorantim Metais, CEMIG and Anglo Gold Ashant at Igarapava Hydroelectric Power Plant to produce electricity.

Our forecasts and plans for these joint-ventures and consortia assume that our partners will observe their obligations to make capital contributions, purchase products and, in some cases, provide managerial personnel or financing.  In addition, many of the projects contemplated by our joint-ventures or consortia rely on financing commitments, which contain certain preconditions for each disbursement.  If any of our partners fails to observe their commitments or we fail to comply with all preconditions required under our financing commitments, the affected joint-venture, consortium or other project may not be able to operate in accordance with its business plans, or we may have to increase the level of our investment to implement these plans.  Any of these events may have a material adverse effect on us.

Our mineral reserve estimates may materially differ from mineral quantities that we may be able to actually recover; our estimates of mine life may prove inaccurate; and market price fluctuations and changes in operating and capital costs may render certain ore reserves uneconomical to mine.

Our reported ore reserves are estimated quantities of ore and minerals that we have determined can be economically mined and processed under present and anticipated conditions to extract their mineral content.  There are numerous uncertainties inherent in estimating quantities of reserves and in projecting potential future rates of mineral production, including many factors beyond our control.  Reserve engineering involves estimating deposits of minerals that cannot be measured in an exact manner, and the accuracy of any reserve estimate is a function of the quality of available data and engineering and geological interpretation and judgment.  As a result, no assurance can be given that the indicated amount of ore will be recovered or that it will be recovered at the rates we anticipate.  Estimates of different engineers may vary, and results of our mining and production subsequent to the date of an estimate may lead to revision of estimates.  Reserve estimates and estimates of mine life may require revision based on actual production experience and other factors.  For example, fluctuations in the market prices of minerals and metals, reduced recovery rates or increased operating and capital costs due to inflation, exchange rates or other factors may render proven and probable reserves uneconomic to exploit and may ultimately result in a restatement of reserves.

We may not be able to adjust our mining production volume in a timely or cost-efficient manner in response to changes in demand.

Revenues from our mining business represented in 2009 and 2010, respectively, 17% and 24% of our total net revenues.  Our ability to rapidly increase production capacity is limited, which could render us unable to fully satisfy demand for our products.  When demand exceeds our production capacity, we may meet excess customer demand by purchasing iron ore from unrelated parties and reselling it, which would increase our costs and narrow our operating margins.  If we are unable to satisfy excess customer demand in this way, we may lose customers.  In addition, operating close to full capacity may expose us to higher costs, including demurrage fees due to capacity restraints in our logistics systems.

Conversely, operating at significant idle capacity during periods of weak demand may expose us to higher unit production costs since a significant portion of our cost structure is fixed in the short-term due to the high capital intensity of mining operations.  In addition, efforts to reduce costs during periods of weak demand could be limited by labor regulations or existing labor or government agreements.

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Adverse economic developments in China could have a negative impact on our revenues, cash flow and profitability.

China has been the main driver of global demand for minerals and metals over the last few years.  In 2010, Chinese demand represented 60% of global demand for seaborne iron ore.  The percentage of our mining operating revenues attributable to sales to consumers in China was 47% in 2010. A contraction of China’s economic growth could result in lower demand for our products, leading to lower revenues, cash flow and profitability.  Poor performance in the Chinese real estate sector, one of the largest consumers of carbon steel in China, could also negatively impact our results.

Drilling and production risks could adversely affect the mining process.

Once mineral deposits are discovered, it can take a number of years from the initial phases of drilling until production is possible, during which the economic feasibility of production may change.  Substantial time and expenditures are required to:

·         establish mineral reserves through drilling;

·         determine appropriate mining and metallurgical processes for optimizing the recovery of metal contained in ore;

·         obtain environmental and other licenses;

·         construct mining, processing facilities and infrastructure required for greenfield properties; and

·         obtain the ore or extract the minerals from the ore.

If a project proves not to be economically feasible by the time we are able to exploit it, we may incur substantial write-offs.  In addition, potential changes or complications involving metallurgical and other technological processes arising during the life of a project may result in cost overruns that may render the project not economically feasible.

We may not be able to consummate proposed acquisitions successfully or integrate acquired businesses successfully.

From time to time, we may evaluate acquisition opportunities that would strategically fit our business objectives.  If we are unable to complete acquisitions, or integrate successfully and develop these businesses to realize revenue growth and cost savings, our financial results could be adversely affected.  In addition, we may incur asset impairment charges related to acquisitions, which may reduce our profitability.  Finally, our acquisition activities may present financial, managerial and operational risks, including diversion of management attention from existing core businesses, difficulties integrating or separating personnel and financial and other systems, adverse effects on existing business relationships with suppliers and customers, inaccurate estimates of fair value made in the accounting for acquisitions and amortization of acquired intangible assets which would reduce future reported earnings, potential loss of customers or key employees of acquired businesses, and indemnities and potential disputes with the buyers or sellers.  Any of these activities could affect our product sales, financial condition and results of operations.

We have experienced labor disputes in the past that have disrupted our operations, and such disputes may recur.

A substantial number of our employees and some of the employees of our subcontractors are represented by labor unions and are covered by collective bargaining or other labor agreements, which are subject to periodic renegotiation.  Strikes and other labor disruptions at any of our facilities or labor disruptions involving third parties who may provide us with goods or services, have in the past and may in the future materially and adversely affect the operation of facilities, or the timing of completion and the cost of our projects.

13 

Our controlling shareholder has the ability to direct our business and affairs and its interests could conflict with yours.

Our controlling shareholder has the power to, among other things, elect a majority of our directors and determine the outcome of any action requiring shareholder approval, including transactions with related parties, corporate reorganizations, dispositions, and the timing and payment of any future dividends, subject to minimum dividend payment requirements imposed under the Brazilian corporation law.  Our controlling shareholder may have an interest in pursuing acquisitions, dispositions, financings or similar transactions that could conflict with your interests as a holder of our common shares and ADSs.

If you surrender your ADSs and withdraw common shares, you risk losing the ability to remit foreign currency abroad and certain Brazilian tax advantages.

As an ADS holder, you benefit from the electronic certificate of foreign capital registration obtained by the custodian for our common shares underlying the ADSs in Brazil, which permits the custodian to convert dividends and other distributions with respect to the common shares into non-Brazilian currency and remit the proceeds abroad.  If you surrender your ADSs and withdraw common shares, you will be entitled to continue to rely on the custodian’s electronic certificate of foreign capital registration for only five business days from the date of withdrawal.  Thereafter, upon the disposition of or distributions relating to the common shares, you will not be able to remit abroad non-Brazilian currency unless you obtain your own electronic certificate of foreign capital registration or you qualify under Brazilian foreign investment regulations that entitle some foreign investors to buy and sell shares on Brazilian stock exchanges without obtaining separate electronic certificates of foreign capital registration.  If you do not qualify under the foreign investment regulations you will generally be subject to less favorable tax treatment of dividends and distributions on, and the proceeds from any sale of, our common shares.

If you seek to obtain your own electronic certificate of foreign capital registration, you may incur expenses or suffer delays in the application process, which could delay your ability to receive dividends or distributions relating to our common shares or the return of your capital in a timely manner.  The depositary’s electronic certificate of foreign capital registration may also be adversely affected by future legislative changes.

Holders of ADSs may not be able to exercise their voting rights.

Holder of ADSs may only exercise their voting rights with respect to the underlying common shares in accordance with the provisions of the deposit agreement.  Under the deposit agreement, ADS holders must vote by giving voting instructions to the depositary.  Upon receipt of the voting instructions of the ADS holder, the depositary will vote the underlying common shares in accordance with these instructions.  Otherwise, ADS holders will not be able to exercise their right to vote unless they surrender the ADS for cancellation in exchange for our common shares.  Pursuant to our bylaws, the first call for a shareholders’ meeting must be published at least 15 days in advance of the meeting, the second call must be published at least eight days in advance of the meeting.  When a shareholders’ meeting is convened, holders of ADSs may not receive sufficient advance notice to surrender the ADS in exchange for the underlying common shares to allow them to vote with respect to any specific matter.  If we ask for voting instructions, the depositary will notify ADS holders of the upcoming vote and will arrange to deliver the proxy card.  We cannot assure that ADS holders will receive the proxy card in time to ensure that they can instruct the depositary to vote the shares.  In addition, the depositary and its agents are not liable for failing to carry out voting instructions or for the manner of carrying out voting instructions.  As a result, holders of ADSs may not be able to exercise their voting rights.

The relative volatility and illiquidity of the Brazilian securities markets may substantially limit your ability to sell the common shares underlying the ADSs at the price and time you desire.

Investing in securities that trade in emerging markets, such as Brazil, often involves greater risk than investing in securities of issuers in the United States, and such investments are generally considered to be more speculative in nature.  The Brazilian securities market is substantially smaller, less liquid, more concentrated and can be more volatile than major securities markets in the United States.  Accordingly, although you are entitled to withdraw the common shares underlying the ADSs from the depositary at any time, your ability to sell the common shares underlying the ADSs at a price and time at which you wish to do so may be substantially limited.  There is also significantly greater concentration in the Brazilian securities market than in major securities markets in the United States.  The ten largest companies in terms of market capitalization represented 55.3% of the aggregate market capitalization of the BM&FBOVESPA as of December 31, 2010.  The top ten stocks in terms of trading volume accounted for 43.4% and 49.7% and 53.2%  of all shares traded on the BM&FBOVESPA in 2010, 2009 and 2008, respectively.

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Holders of ADSs may be unable to exercise preemptive rights with respect to our common shares.

We may not be able to offer our common shares to U.S. holders of ADSs pursuant to preemptive rights granted to holders of our common shares in connection with any future issuance of our common shares unless a registration statement under the Securities Act is effective with respect to such common shares and preemptive rights, or an exemption from the registration requirements of the Securities Act is available.  We are not obligated to file a registration statement relating to preemptive rights with respect to our common shares, and we cannot assure you that we will file any such registration statement.  If such a registration statement is not filed and an exemption from registration does not exist, The JP Morgan Chase Bank, N.A., as depositary, will attempt to sell the preemptive rights, and you will be entitled to receive the proceeds of such sale.  However, these preemptive rights will expire if the depositary does not sell them, and U.S. holders of ADSs will not realize any value from the granting of such preemptive rights.

Substantial sales of our ADSs could cause the price of our ADSs to decrease significantly.

The sale of a substantial number of common shares, or the belief that this may occur, could decrease the trading price of our common shares and our ADSs.  Holders of our common shares and/or ADSs may not be able to sell their securities at or above the price they paid for them.

Item 4. Information on the Company

4A.  History and Development of the Company

History

     Companhia Siderúrgica Nacional is a Brazilian corporation (sociedade por ações) incorporated in 1941 pursuant to a decree of Brazilian President at the time, Getúlio Vargas. The Presidente Vargas steelworks, located in the city of Volta Redonda, in the State of Rio de Janeiro, started production of coke, pig iron castings and long products in 1946.

     Three major expansions were undertaken at the Presidente Vargas steelworks during the 1970s and 1980s. The first, completed in 1974, increased installed annual production capacity to 1.6 million tons of crude steel. The second, completed in 1977, increased annual production capacity to 2.4 million tons of crude steel. The third, completed in 1989, increased annual production capacity to 4.5 million tons of crude steel.

     We were privatized through a series of auctions held in 1993 and early 1994, through which the Brazilian government sold its 91% ownership interest in us.

     From 1993 through 2002, we implemented a capital improvement program aimed at increasing our annual production of crude steel, improving the quality of our products and enhancing our environmental protection and cleanup programs. As part of the investments, since February 1996, all our production has been based on the continuous casting process, rather than ingot casting, an alternative method that results in higher energy use and metal loss. From 1996 through 2002, we spent the equivalent of US$2.4 billion under the capital improvement program and on maintaining our operational capacity, culminating with the renovation in 2001 of Blast Furnace No. 3 and Hot Strip Mill No. 2 at the Presidente Vargas steelworks. These measures resulted in the increase of our annual production capacity to 5.6 million tons of crude steel and 5.1 million tons of rolled products.

General

     We are one of the largest fully integrated steel producers in Brazil and in Latin America in terms of crude steel production. Our current annual crude steel capacity and rolled product capacity is 5.6 million and 5.1 million tons, respectively. Production of crude steel and rolled steel products, increased in 2010 by 12% to 4.9 million tons and finished steel production increased in 2010 by 14% to 4.7 million tons, as compared to 2009, due to a recovery from the global economic and financial crisis in 2008 and 2009. In addition to our steel business, we operate in the mining and cement businesses, which have become increasingly important to our operations and growth.

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Steel

     Our fully integrated manufacturing facilities produce a broad line of steel products, including slabs, hot- and cold-rolled, galvanized and tin mill products for the distribution, packaging, automotive, home appliance and construction industries. In 2010, we accounted for approximately 46% of the coated steel products market share in Brazil. We are also one of the world’s leading producers of tin mill products for packaging containers. In 2010, we accounted for approximately 98% of the tin mill products market share in Brazil.

     Our production process is based on the integrated steelworks concept. Below is a brief summary of the steel making process at our Presidente Vargas steelworks, located in the city of Volta Redonda, in the State of Rio de Janeiro:

• iron ore produced from our own mines is processed in continuous sintering machines to produce sinter;
• sinter and lump ore direct charges are smelted with lump coke and injected powdered coal in blast furnaces to produce pig iron;
• pig iron is then refined into steel by means of basic oxygen converters;
• steel is continuously cast in slabs; and
• slabs are then hot rolled, producing hot bands that are coiled and sent to finishing facilities.

     We currently produce all of our requirements of iron ore, limestone and dolomite, and a portion of our tin requirements from our own mines. Using imported coal, we produce approximately 75% of our coke requirements, at current production levels, in our own coke batteries at Volta Redonda. Imported coal is also pulverized and used directly in the pig iron production process. Zinc, manganese ore, aluminum and a portion of our tin requirements are purchased in local markets. Our steel production and distribution also require water, industrial gases, electricity, rail and road transportation, and port facilities.

Mining

     The first step to our entry into the international iron ore market was taken in February 2007, with the completion of the first phase of the expansion of our solid bulks seaport terminal in the city of Itaguaí, in the State of Rio de Janeiro, which enabled the terminal to also handle and export iron ore and to load from its facilities the first shipment of our iron ore products.

    CSN owns a number of high quality iron ore mines, all located within the Quadrilátero Ferrífero, in the State of Minas Gerais. Casa de Pedra Mining, located in Congonhas – MG, produces high quality iron ore. As far as it concerns quality, the previous statement is also applicable to Namisa – Nacional Minérios S.A. In addition to that, the company’s mining assets also include TECAR (two deep-sea water terminals), located in Porto de Itaguai (RJ), Mineração Bocaina, located in Arcos (MG), which produces dolomite and limestone, and Estanho de Rondônia SA - ERSA, which mines and casts tin.

Logistics

     The verticalization strategy and intense synergies among the Company's business units are strongly dependent on the logistics created to guarantee the transportation of the inputs at a low operating cost.

     A number of railroads and port terminals make up the logistics system integrating CSN's mining and steelmaking units.

     CSN manages two port terminals at Itaguaí, in Rio de Janeiro — bulk solids (Tecar) and Containers (Sepetiba Tecon).

     CSN has interests in two railroad companies: MRS Logística, which operates the former Southeast Network of the Federal Railroad Network, along the Rio de Janeiro-São Paulo-Belo Horizonte axis, and the Transnordestina Logística S/A. With 1,728km of track, Nova Transnordestina railway, when completed, will connect the northeastern cerrado to Pecém and Suape Ports.

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     Thoroughly developed transport infrastructure. We have a thoroughly developed transport infrastructure, from our iron ore mine to our steel mill to our ports. The location of our steelworks facility is next to railroad systems and port facilities, facilitating the supply of raw material, the shipment of our production and easy access to our principal clients. The concession for the main railroad used and operated by us is owned by MRS, a company in which we hold, directly and indirectly, a 33.27% ownership interest. The railway connects the Presidente Vargas steelworks to the container terminal at Itaguaí Port, which handles most of our steel exports. Since we obtained the concession to operate MRS’ railway in 1996, we have significantly improved its tracks and developed its business, with strong cash generation. We also own concessions to operate two deep-sea water terminals from which we export our products and also import coal and small amounts of coke, which are the only important raw materials that we need to purchase from third-parties.

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Our goal is to increase value for our shareholders by further benefiting from our competitive cost advantages, maintaining our position as one of the world’s lowest-cost steel producers, becoming an important iron ore global player, growing our cement business and optimizing our infrastructure assets (including ports, railways and power generating plants). To achieve this goal we have developed specific strategies for each of our business segments as described below.

Steel

Our strategy for our steel business involves:

ü focus on domestic markets, in which we have historically recorded higher profit margins and better competitiveness, by expanding our market-share in flat steel and by entering in the long steel market as a relevant player;

ü constant pursuit of operational excellence, by implementing cost reduction projects (eg. pellet plant, coque battery revamp, energy efficiency) and programs (eg, internal logistic optimization, inventories reduction, project development and implementation disciplines);

ü emphasis on high value-added steel products, such as galvanized, pre-painted and tin-coated, in addition to enhancing service centers and finished goods offering;

ü explore synergic markets and profitability, by employing flat steel distribution units and portfolio complementarily to accelerate entrance in longs market, capturing synergies with cement and others products; and

ü gain market-share in services and distribution network, via new deposits and service centers regions.

For information on our planned investments relating to our steel activities, see “Item 4D. Property, Plant and Equipment – Capital Expenditures – Planned Investments”.  

Mining

In order to strengthen our position as a player in the iron ore market, we plan to expand our mining assets, Casa de Pedra and Namisa, and search for investment opportunities, primarily in mining operations and advanced projects.

We expect to reach an annual production level of approximately 89 mtpy of iron ore products in the next years, including third parts purchases, which represents roughly 3 times the volume observed in 2010, by increasing capacity to 50 mtpy in Casa de Pedra and 33 mtpy in Namisa, thereby strengthening CSN’s position as an important player in the iron ore worldwide market.  

In order to maximize the profitability of our product portfolio and resources, we will also focus on pellet and pellet-feed, by using Itabiritos resources, investing with strategic partners and clients in pellet capacity and seeking strategic partnerships towards captive consumption of pellet feed.

Regarding our infrastructure to sustain this growth, we will increase capacity in TECAR (our private port in the State of Rio de Janeiro) from 30 mtpy to 84 mtpy in the next years, and we are analyzing other capacity additions. In addition to the port expansion, we are also studying seaborne shipping opportunities, focused on gaining competitiveness in the Asian market.

For information on our planned investments relating to our mining activities, see “Item 4D. Property, Plant and Equipment – Capital Expenditures – Planned Investments”.  

 Logistics 

We expect to take advantage of and expand our logistics capabilities, including our integrated infrastructure operations of railways and ports.

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We have substantially improved the infrastructure that supports the Presidente Vargas steelworks by investing in projects such as railways and port facilities in order to increase our ability to control production costs and delivery services.

In addition to investments in TECAR (iron ore and coal), we will strengthen STSA (container terminal) in order to operate larger ships, increasing its capacity and competitiveness by aggregating services to facilitate client loyalty.

In railways, we plan to accelerate implementation of our Transnordestina project and explore its logistic potential through terminals and regional cargo, focusing on iron ore, agricultural, gypsum and fuel volumes. We also plan to invest in increasing our efficiency and capacity in the southern region of Brazil, through our interest in MRS.

Cement

Our strategy for cement business includes greater utilization of by-products by continuing construction of our cement grinding and the clinker facility that we expect will produce 2.4 million tons per year of cement in the next years. We are evaluating other organic growth initiatives to expand our capacity in additional 3 million tons per year, in order to capture the strong growth expected with the Soccer World Cup of 2014 and the Olympic Games in 2016, besides the strong pace of construction of new housing units, commercial and infrastructure projects. For information on our planned investments relating to our cement activities, see “Item 4D. Property, Plant and Equipment – Capital Expenditures – Planned Investments”.  

Additional Investments

In addition to the currently planned investments and capital expenditures, we continue to consider possible acquisitions, joint ventures and brownfield or greenfield projects to increase or complement our steel, cement, mining producing and logistics capabilities, in addition to logistics infrastructure and energy generation.

Our Steel Segment

We produce carbon steel, which is the world’s most widely produced type of steel, representing the vast bulk of global steel consumption.  From carbon steel, we sell a variety of steel products, both domestically and abroad, to manufacturers in several industries.

The following chart reflects our production cycle in general terms.

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Our Presidente Vargas steelworks produces flat steel products — slabs, hot-rolled, cold-rolled, galvanized and tin mill products.  For further information on our production process, see “—Product Process.”

Slabs

Slabs are semi-finished products used for processing hot-rolled, cold-rolled or coated coils and sheet products.  We are able to produce continuously cast slabs with a standard thickness of 250 millimeters, widths ranging from 830 to 1,600 millimeters and lengths ranging from 5,250 to 10,500 millimeters.  We produce high, medium and low carbon slabs, as well as micro-alloyed, ultra-low-carbon and interstitial free slabs.

Hot-Rolled Products

Hot-rolled products comprise heavy-gauge hot-rolled coils and sheets, and light-gauge hot-rolled coils and sheets.  A heavy gauge hot-rolled product, as defined by Brazilian standards, is a flat-rolled steel coil or sheet with a minimum thickness of 5.01 millimeters.  We are able to provide coils of heavy gauge hot-rolled sheet having a maximum thickness of 12.70 millimeters.  Heavy gauge sheet steel is used to manufacture automobile parts, pipes, mechanical construction and other products.  Light gauge hot-rolled coils and sheets produced by us have a minimum thickness of 1.20 millimeters and are used for welded pipe and tubing, automobile parts, gas containers, compressor bodies and light cold-formed shapes, channels and profiles for the construction industry.

Cold-Rolled Products

Cold-rolled products comprise cold-rolled coils and sheets.  A cold-rolled product, as defined by Brazilian standards, is a flat cold-rolled steel coil or sheet with thickness ranging from 0.30 millimeters to 3.00 millimeters.  Compared to hot-rolled products, cold-rolled products have more uniform thickness and better surface quality and are used in applications such as automotive bodies, home appliances and construction.  In addition, cold-rolled products serve as the base steel for our galvanized and tin mill products.  We supply cold-rolled coils in thicknesses of 0.30 millimeters to 2.99 millimeters.

Galvanized Products

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Galvanized products comprise flat-rolled steel coated on one or both sides with zinc or a zinc-based alloy applied by either a hot-dip or an electrolytic process.  We use the hot-dip process, which is approximately 20% less expensive than the electrolytic process.  Galvanizing is one of the most effective and low-cost processes used to protect steel against corrosion caused by exposure to water and the atmosphere.  Galvanized products are highly versatile and can be used to manufacture a broad range of products, such as:

·         bodies for automobiles, trucks and buses;

·         manufactured products for the construction industry, such as panels for roofing and siding, dry wall and roofing support frames, doors, windows, fences and light structural components;

·         air ducts and parts for hot air, ventilation and cooling systems;

·         culverts, garbage containers and other receptacles;

·         storage tanks, grain bins and agricultural equipment;

·         panels and sign panels; and

·         pre-painted parts.

Galvanized sheets, both painted and bare, are also frequently used for gutters and downspouts, outdoor and indoor cabinets, all kinds of home appliances and similar applications.  We produce galvanized sheets and coils in continuous hot-dip processing lines, with thickness ranging from 0.30 millimeters to 3.00 millimeters.  The continuous process results in products with highly adherent and uniform zinc coatings capable of being processed in nearly all kinds of bending and heavy machinery.

In addition to standard galvanized products, we produce Galvanew®, galvanized steel that is subject to a special annealing process following the hot-dip coating process.  This annealing process causes iron to diffuse from the base steel into the zinc coating.  The resulting iron-zinc alloy coating allows better welding and paint performance.  The combination of these qualities makes our Galvanew® product particularly well suited for manufacturing automobile and home appliance parts including high gloss exposed parts.

At CSN Paraná, one of our branches, we produce galvalume, a cold-rolled material coated with a zinc-aluminum alloy.  The production process is similar to hot-dip galvanized coating, and galvalume has at least twice the corrosion resistance of standard galvanized steel.  Galvalume is primarily used in outdoor construction applications that may be exposed to severe acid corrosion environments like marine uses.

The added value from the galvanizing process permits us to price our galvanized products with a higher profit margin.  Our management believes that our value-added galvanized products present one of our best opportunities for profitable growth because of the anticipated increase in Brazilian demand for such high margin products.

Through our branch CSN Paraná, we also produce pre-painted flat steel, which is manufactured in a continuous coating line.  In this production line, a layer of resin-based paint in a choice of colors is deposited over either cold-rolled or galvanized base materials.  Pre-painted material is a higher value-added product used primarily in the construction and home appliance markets.

Tin Mill Products

Tin mill products comprise flat-rolled low-carbon steel coils or sheets with, as defined by Brazilian standards, a maximum thickness of 0.45 millimeters, coated or uncoated.  Coatings of tin or chromium are applied by electrolytic process.  Coating costs place tin mill products among the highest priced products that we sell.  The added value from the coating process permits us to price our tin mill products with a higher profit margin.  There are four types of tin mill products, all produced by us in coil and sheet forms:

·         tin plate - coated on one or both faces with a thin metallic tin layer plus a chromium oxide layer, covered with a protective oil film;

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·         tin free steel - coated on both faces with a very thin metallic chromium layer plus a chromium oxide layer, covered with a protective oil film;

·         low tin coated steel - coated on both faces with a thin metallic tin layer plus a thicker chromium oxide layer, covered with a protective oil film; and

·         black plate - uncoated product used as the starting material for the coated tin mill products.

Tin mill products are primarily used to make cans and other containers.  With six electrolytic coating lines, we are one of the biggest producers of tin mill products in the world and the sole producer of coated tin mill products in Brazil.

Production

Production Process

The principal raw materials for steel production in an integrated steelworks are iron ore, coal, coke, and fluxes like limestone and dolomite.  The iron ore consumed at the Presidente Vargas steelworks is extracted, crushed, screened and transported by railway from our Casa de Pedra mine located in the city of Congonhas, in the State of Minas Gerais, 328 km from the Presidente Vargas steelworks.  The high quality ores mined and sized at Casa de Pedra, with iron content of approximately 60%, and their low extraction costs are major contributors to our low steel production costs.

Because Brazil lacks quality coking coals, we import all the coal required for coke production.  The coal is then charged in coke batteries to produce coke through a distillation process.  See “—Raw Materials and Suppliers—Raw Materials and Energy Requirements.”  This coal distillation process also produces coke oven gas as a byproduct, which we use as a main source of fuel for our thermoelectric co-generation power plant.  After being screened, coke is transported to blast furnaces, where it is used as a combustion source and as a component for transforming iron ore into pig iron.  In 2010, we produced approximately 75% of our coke needs and imported the balance.  At sintering plants, fine-sized iron ore and coke or other fine-sized solid fuels are mixed with fluxes (limestone and dolomite) to produce sinter.  The sinter, lump iron ore, fluxing materials and coke are then loaded into our two operational blast furnaces for smelting.  We operate a pulverized coal injection, or PCI, facility, which injects low-cost pulverized coal directly into the blast furnaces as a substitute for approximately one-third of the coke otherwise required.

The iron ore is reduced to pig iron through successive chemical reactions with carbon monoxide (from the coke and PCI) in two blast furnaces that operate 24 hours a day.  The ore is gradually reduced, then melts and flows downward.  Impurities are separated from the iron to form a liquid slag with the loaded fluxes (limestone and dolomite).  From time to time, white-hot liquid iron and slag are drawn off from the bottom of the furnace.  Slag (containing melted impurities) is granulated and now is being used to produce cement.

The molten pig iron is transported to the steelmaking shop by 350-ton capacity torpedo cars and charged in basic oxygen furnaces together with scrap and fluxes.  In the basic oxygen furnaces, oxygen is blown onto the liquid burden to oxidize its remaining impurities and to lower its carbon content, thus producing liquid steel.  The molten steel is conveyed from the basic oxygen furnaces to the secondary refining equipment (degasser, ladle furnace and Argon Stirring Station).  After adjusting the chemical composition, the molten steel is transferred to the continuous casting machines from which crude steel (i.e., rectangular shaped slabs) is produced.  A portion of the slab products is sold directly in the export market.

The hot-rolling, reheated slabs from the continuous casting machines are fed into hot strip mills to reduce the thickness of the slabs from 250 millimeters to a range between 1.2 and 12.7 millimeters.  At the end of the hot strip mill, the long, thin steel strip from each slab is coiled and conveyed to a cooling yard.  Some hot-rolled coils are dispatched directly to customers in the as-rolled condition.  Others are further processed in the pickling line, in a hydrochloric bath, to remove surface oxides and improve surface quality.  After pickling, the hot-rolled coils selected to produce thinner materials are sent to be rolled in cold strip mills.  The better surface characteristics of cold-rolled products enhance their value to customers as compared to hot-rolled products.  Additional processing related to cold-rolling may further improve surface quality.  Following cold-rolling, coils may be annealed, coated (by a hot dip or electrolytic tinning process) and painted, to enhance medium-and long-term anti-corrosion performance and to add characteristics that will broaden the range of steel utilization.  Coated steel products have higher profit margins than bare steel products.  Of our coated steel products, tin mill and galvanized products are our highest margin products.

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Steel plant equipment regularly undergoes scheduled maintenance shutdowns.  Typically the rolling mills and coating lines are maintained on a weekly or monthly basis whereas the blast furnaces and other special equipment are scheduled for routine maintenance on a semi-annual or annual basis.

Our business encompasses operations and commercial activities.  Our operations activities are undertaken by our production sector, which is composed of the following two units:

·  the operations unit is responsible for steel production operations, repair shops, in-plant railroad, and process development at Volta Redonda;

·  the support unit is responsible for production planning, management of product stockyards, energy and utility facilities and work force safety assistance at the Presidente Vargas steelworks.

The production sector is also responsible for environment and quality consultancy, new products development, capital investment implementation for steel production and processing, as well as the supervision of CSN Porto Real’s and CSN Paraná’s operations.

Quality Management Program

We practice Total Quality Management, a set of techniques that have been adopted by many leading companies in our industry.  We also maintain a Quality Management System that has been certified to be in compliance with the ISO 9001 standards set forth by the International Standardization Organization, or ISO.  In October 2003, we were awarded the ISO 9000:  2000 certificate for the design and manufacture of hot-rolled, pickled and oiled products, cold-rolled, galvanized and tin mill products, which replaced the ISO 9001 Certificate that we were awarded in December 1994.  In October 2003, we were also awarded the automotive industry’s Technical Specification - 16949:  2002, for the design and manufacture of hot-rolled, pickled and oiled, cold-rolled and galvanized products, which replaced the QS 9000 standards that we were awarded in 1997.  Some important automotive companies, like Volkswagen, General Motors and Ford, require their suppliers to satisfy the QS 9000 standards.

Production Output

The following table sets forth, for the periods indicated, the annual production of crude steel within Brazil and by us and the percentage of Brazilian production attributable to us.

The following table contains some of our operating statistics for the periods indicated.

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Raw Materials and Suppliers

The principal raw materials we use in our integrated steel mill include iron ore, coke, coal (from which we make coke), limestone, dolomite, aluminum, tin and zinc.  In addition, our production operations consume water, gases, electricity and ancillary materials.

Raw Materials and Energy Requirements

In light of the global economic and financial crisis, which resulted in lower economic activity in 2009 as compared to 2008 and decrease demand for various commodity type industrial segments, coal and iron ore miners, and coke producers charged customers lower prices.  At the end of 2009 we noticed a recovery in the economy of certain countries, including Brazil.  Consequently, there was a pressure for increase in prices of certain raw materials.

In 2010, prices of main raw materials increased due to increased post crisis demand and a strengthening of steel industry worldwide.      

These commodity segments are highly concentrated in the hands of a few global players and there can be no assurance that price increases will not be imposed on steel producers in the future.

 Iron Ore

We are able to obtain all of our iron ore requirements from our Casa de Pedra mine located in the State of Minas Gerais.  For a description of our iron ore segment see “– Our Mining Segment.”

Coal

In 2010, our coal consumption totaled 2.9 million tons and accounted for 22% of our production cost.

After the post-crisis demand recovery in the end of 2009, 2010 was a year of consolidation in terms of coal demand, especially from Asia.  Because of the cyclical and volatile nature of the coal industry, price negotiation of coking coal and PCI coal switched from an annual to a quarterly basis, as of April 2010.  CSN’s coking coal and PCI coal costs during 2010 increased significantly compared with previous year due to a demand recovery.  The prices in 2010 varied from quarter to quarter, following the benchmark price settled between BHP Billiton and Japanese Steel producers prior to the beginning of each quarter.

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In addition the 2010 average spot prices of coking coal and PCI Coal increased significantly compared to 2009, affected by demand fluctuation and unexpected heavy rains in Australia during fourth quarter, when some major exporters started to face serious operational issues at their mines as well as logistics constraints.

CSN uses a PCI system that allows its production area to use less coke in the blast furnaces during the process, substituting a portion of the coke with lower grade coal.  The PCI system has reduced our need for imported coking coal and imported coke, thereby reducing production costs.  In 2010, we used 710,940 tons of imported PCI coal.

Coke

In 2010, in addition to the approximately 1.6 million tons of coke we produced, we also consumed 440,696 tons of coke bought from third parties in China, India, Colombia and in the domestic market.  This figure represents an increase of 47% as compared to our consumption in 2009 and is similar to our historical level of consumption.  The market for coke has been very competitive since 2002, because China, a major player in the sea-borne trade, has increased its internal consumption and adopted restrictive export quotas.  In addition, India has become a major consumer of coke, considerably increasing its consumption in the past years.  Due to logistical reasons, China supplies most of India’s coke and this increase in consumption tightened even more the worldwide supply-demand balance of metallurgical coke.

Limestone and Dolomite

Our Bocaina mine is located in the town of Arcos in the State of Minas Gerais and it has been suppling, since the early '70s, limestone (calcium carbonate) and dolomite (dolomitic limestone) to  our Presidente Vargas Steelworks in Volta Redonda.  These products are used in the process of sintering and calcination.  Arcos has one of the biggest and best world’s reserves of limestone, and it’s used for the production of various products, including cement.

The annual production of limestone and dolomite to our steelworks is approximately 2 million tons.

The main products obtained from limestone and dolomite that are transferred to our steelworks in Volta Redonda are:

·         limestone and dolomite calcination:  they have  granulometry between 32 and 76 mm, and they are used in the lime plant in Volta Redonda to produce calcitic and dolomitic lime, for further use, in the steelmaking process and sintering.  At the steelworks, lime is used for chemical controlling of liquid slag, in order to preserve the refractory of the converters and assist in the stabilization of the chemical reactions that occur during the manufacturing process of steel.  In the sintering, the purpose of lime is to increase the performance of this process and final quality of the sinter that is produced.

·         limestone and dolomite sintering:  used in the production of “sinter”, in our steelworks.  The sinter is composed by fine ores, solid fuel and flux, which enable the semi-melting and sintering ore.  The sinter is used in blast furnace as a source of Fe for the production of pig iron.

·         From 2009 on, with our entry in the cement market, Arcos’mine also became responsible for supplying limestone for the cement manufacturing process in Volta Redonda.

With the startup of clinker production in 2011, our Bocaina mining will also be in charge of providing non steel limestone (limestone with high silica content), in approximately 1.3 million tons / year for clinker production, the main raw material for cement production.

Aluminum, Zinc and Tin

Aluminum is mostly used for steelmaking.  Zinc and tin are important raw materials used in the production of certain higher-value steel products, such as galvanized and tin plate, respectively.  We purchase aluminum, zinc and tin typically from third-party domestic suppliers under one or two-year contracts.  We maintain approximately a 50-day reserve of such materials at the Presidente Vargas steelworks.

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Other Raw Materials

In our production of steel, we also consume, on an annual basis, significant amounts of spare parts, refractory bricks and lubricants, which are generally purchased from domestic suppliers.

We also consume significant amounts of oxygen, nitrogen, hydrogen, argon and other gases at the Presidente Vargas steelworks.  These gases are supplied by a third-party under long-term contracts from its gas production facilities located on the Presidente Vargas steelworks site.  In 2010, we used 786,746 tons of oxygen to produce 4.9 million tons of crude steel.

Water

Large amounts of water are also required in the production of steel.  Water serves as a solvent, a catalyst and a cleaning agent.  It is also used to cool, to carry away waste, to help produce and distribute heat and power, and to dilute liquids.  Our source of water is the Paraíba do Sul River, which runs through the city of Volta Redonda.  Over 80% of the water used in the steelmaking process is recirculated and the balance, after processing, is returned to the Paraíba do Sul River.  Since March 2003, the Brazilian government has imposed a monthly tax for our use of water from the Paraíba do Sul River, based on an annual fee of approximately US$1.6 million.

Electricity

Steelmaking also requires significant amounts of electricity to power rolling mills, production lines, hot metal processing, coking plants and auxiliary units.  In 2010, the Presidente Vargas steelworks consumed approximately 2.97 million MWh of electric energy or 664 kilowatt hours per ton of crude steel.  This consumption made us one of the largest consumers of electricity in Brazil, accounting for approximately 12% of the overall consumption of electricity in the State of Rio de Janeiro.

Our main current source of electricity is our 238 MW thermoelectric co-generation power plant at the Presidente Vargas steelworks, besides the Itá and Igarapava hydroelectric facilities held by us, from which we have a take capacity available of 167 MW and 22 MW, respectively.  In addition, we have approved the construction of a new turbine generator at the Presidente Vargas steelworks, which will increase 20 MW to our existing installed capacity.  This turbine will be allocated near to our Blast Furnace No. 3, using the outlet gases from the iron making process to generate energy.

Natural Gas

In addition to electricity, we consume natural gas, mainly in our hot strip mill.  Companhia Estadual de Gás do Rio de Janeiro S.A., or CEG Rio, which was privatized in 1997, is currently our major source of natural gas.  Variations in the supply of gas can affect the level of steel production.  We have not experienced any significant stoppages of production due to a shortage of natural gas.  We also purchase fuel oil from Petrobras.  See “Item 3D.  Risk Factors—Risks Relating to the Steel Industry and CSN—Interruptions in the supply of natural gas and power transmission over the government power grid may adversely affect our business, financial condition and results of operations.”

Diesel Oil

In mid-October 2006 and July of 2008, we entered into an agreement to receive diesel oil from the Companhia Brasileira de Petróleo Ipiranga, or Ipiranga, in order to supply our equipment in Casa de Pedra, Arcos and Namisa in the State of Minas Gerais, which are the plants responsible for our mining activity.  In 2009 and 2010, we had a consumption of 57,177 kiloliters and 66,237 kiloliters of diesel oil, respectively.  This increase was mainly due to the growth of our mining activity to support our growing iron ore production, which required us to enlarge our mining equipment fleet.  In 2009 and 2010, we paid US$60.4 million and US$37.8 million, respectively, for the diesel oil we consumed.

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We are importing Clinker  in order to supply our cement mill in Presidente Vargas steelworks in the state of Rio de Janeiro. Addionally, as from Abril 2011, we started producing our own clinker in our plant in Arcos, Minas Gerais.

Suppliers

We acquire the inputs necessary for the production of our products in Brazil and abroad, with aluminum, zinc, tin, spare parts, refractory bricks, lubricants, oxygen, nitrogen, hydrogen and argon being the main inputs acquired in Brazil.  Coal and coke are the only inputs acquired abroad.

Our main raw materials suppliers are set forth below:

Facilities

Steel Mill

The Presidente Vargas steelworks, located in the city of Volta Redonda, in the State of Rio de Janeiro, began operating in 1946.  It is an integrated facility covering approximately 4.0 square km and containing five coke batteries (three of which are currently in operation), three sinter plants, two blast furnaces, a basic oxygen furnace steel shop, or BOF shop, with three converters, three continuous casting units, one hot strip mill, three cold strip mills, two continuous pickling lines, one continuous annealing line, three continuous galvanizing lines, four continuous annealing lines exclusively for tin mill products and six electrolytic tinning lines.

Our major operational units and corresponding effective capacities as of December 31, 2010, including CSN LLC and Lusosider, are set forth in the following chart:

Effective Capacity

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Downstream Facilities

CSN Paraná

Our branch CSN Paraná produces and supplies plain regular galvanized, Galvalume® and pre-painted steel products for the construction and home appliance industries.  The plant has an annual capacity of 330,000 tons of galvanized products and Galvalume® products, 100,000 tons of pre-painted products, which can use cold-rolled or galvanized steel as substrate, and 220,000 tons of pickled hot-rolled coils in excess of the coils required for the coating process.

Metalic

We have a 99.99% ownership interest in Cia.  Metalic Nordeste, or Metalic.  Metalic is one of the few two-piece steel can producer in all the Americas.  It has approximately 48% of the packaging market for carbonated drinks in the Northeastern regions of Brazil.  Currently, we are the only supplier to Metalic of the steel used to make two-piece cans.  The development of drawn-and-wall-ironed steel for the production of two-piece cans is an important achievement in the production process at the Presidente Vargas steelworks.  In 2010, the company sold 831 million cans of 350 ml, 60 million cans of 250 ml and 1,284 million ends, and of these 13% were exported to Latin America.

Prada

We have a 99.99% ownership interest in Cia.  Matelúrgica Prada, or Prada.  Established in 1936, Prada is the largest Brazilian steel can manufacturer and has an annual production capacity of over one billion cans in its three industrial facilities located in the states of São Paulo, Rio Grande do Sul and Minas Gerais.  Currently, we are the only Brazilian producer of tin plate, Prada’s main raw material, which makes Prada one of our major customers of tin plate products.  Prada has important clients in the food and chemical industries, including packages of vegetables, fishes, dairy products, meat, aerosols, paints and varnishes, and other business activities.  On December 30, 2008, we merged one of our subsidiaries, Indústria Nacional de Aços Laminados S.A., or INAL, into Prada.  INAL was a distributor of laminated steel founded in 1957 and, after the merger, it became a branch of Prada responsible for distribution of Prada’s products, or Prada Distribuição.

Prada Distribuição is also the leader in the Brazilian distribution market, with 460,000 tons per year of installed processing capacity.  Prada Distribuição has two steel service centers and five distribution centers strategically located in Brazil.  Its main service center is located in the city of Mogi das Cruzes between the cities of São Paulo and Rio de Janeiro.  Its product mix also includes sheets, slit coils, sections, tubes, and roofing in standard or customized format, according to client’s specifications.  Prada Distribuição processes all range of products produced by us and services 4,000 customers annually from the civil construction, automotive and home appliances sectors, among others.

Inal Nordeste

Inal Nordeste, or INOR, is our subsidiary and a distributor of laminates located in Northeastern Region.  INOR has a service center located in the city of Camaçari, in the State of Bahia, to support sales in the Northeastern and North regions of Brazil, with 155,000 tons per year of installed processing capacity.  On May 30, 2011, INOR was merged into the Company, then allowing the optimization of processes and operations as well as reduction of costs.

Companhia Siderurgica Nacional, LLC

CSN LLC holds the assets of former Heartland Steel, a flat-rolled steel processing facility in Terre Haute, Indiana.  This facility has an annual production capacity of 180,000 tons of cold-rolled products and 315,000 tons of galvanized products.  Currently, CSN LLC is obtaining hot coils by buying slabs from CSN and then having them converted into hot coils by local steel companies or buying hot rolled coils directly from mills in the United States.  See “Item 4B.  Government Regulation and Other Legal Matters—Anti-Dumping Proceedings—United States” for a discussion about anti-dumping issues on Brazilian hot coils exports to the United States.

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Lusosider, Aços Planos, S.A.

We own 99.94% of Lusosider, a producer of hot-dip galvanized products and cold-rolled located in Seixal, near Lisbon, Portugal.  Lusosider produces approximately 240,000 tons of galvanized products and 50,000 tons of cold-rolled annually.  Its main customers include service centers and tube making industries.

Our Mining Segment

Our mining activities are one of the largest in Brazil and are mainly driven by exploration of one of the richest Brazilian iron ore reserves, Casa de Pedra, in the State of Minas Gerais.  We sell our iron ore products mainly in Asia, Europe and Brazil with sales and marketing taking place through our principal hubs of Minas Gerais, in Brazil, Madeira Islands, in Portugal, and Hong Kong.

Our Mines

Location, Access and Operation

Casa de Pedra

Casa de Pedra mine is an open pit mine located next to the city of Congonhas in the State of Minas Gerais, Brazil, approximately 80 km South of the city of Belo Horizonte and 360 km North of the city of Rio de Janeiro.  The site is approximately 1,000 meters above sea level and accessible from the cities of Belo Horizonte or Congonhas through mostly paved roads.

Casa de Pedra mine is a hematite-rich iron deposit of an early proterozoic banded iron formation in Brazil’s Iron Ore Quadrangle region (Quadrilátero Ferrífero), which is located in the central part of the State of Minas Gerais in the Southeastern region of Brazil and has been one of the most important iron producing regions for the last 50 years.

Our iron ore at Casa de Pedra is currently excavated by a fleet composed of Marion 191M electric shovels, P&H 1900AL electric shovels, PC 5500 Demag hydraulic shovels, wheel loaders (different brands) and then hauled by a fleet of Terex MT3300AC (150 tons), Caterpillar CAT793 (240 tons) and Terex Unit Rig  MT4400 (240 tons).

Casa de Pedra mine is wholly-owned by us and accounts for all our iron ore supply, producing lump ore, sinter feed and pellet feed fines with high iron content.

The maps below illustrate the location of our Casa de Pedra mine:

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Namisa

We own additional iron ore assets through Namisa, our 60% consolidated investee, which acquired CFM in July, 2007.  CFM was incorporated in 1996 with the purpose of utilizing and enhancing the ore treatment facilities of the Itacolomy mines, for the beneficiation of crude ore extracted from its deposit, the Engenho mine.

The Engenho mine is located at the Southwestern region of the Iron Ore Quadrangle, 60 km South of the city of Belo Horizonte.

The maps below illustrate the location of our Engenho mine:

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The Fernandinho mine, an asset that we also hold through Namisa, is located in the city of Itabirito, in the State of Minas Gerais.  This town is located in the Middle-East region of the State of Minas Gerais and approximately 43 km from the city of Belo Horizonte.

The maps below illustrate the location of our Fernandinho mine:

Limestone and Dolomite Mine

Our extraction and preparation of limestone and dolomite is done at our Bocaína mining facility located in the city of Arcos, in the State of Minas Gerais.  This mining facility has an installed annual production capacity of approximately 4.0 million tons.  We believe this mining facility has sufficient limestone and dolomite reserves to adequately supply our steel production, at current levels, for more than 45 years.  The mining facility is located 455 km from the Presidente Vargas steelworks.

Tin

We own a tin mine and a smelter located in the State of Rondônia.  The inventory of the geological reserves has been prepared from a review of the major reports from the Santa Barbara Mine Document Center.  The majority of the deposits and/or target areas are within Mining Leases that have been consolidated into Mining Group (Grupamento Mineiro No. 131/92).  The reserves provided were recognized by the DNPM.  The reserves and resources presented are “in situ.”

Mineral Rights and Ownership

The Mining Code and the Brazilian Federal Constitution impose requirements on mining companies relating to, among other things, the manner in which mineral deposits are exploited, the health and safety of workers, the protection and restoration of the environment, the prevention of pollution and the promotion of the health and safety of local communities where the mines are located.  The Mining Code also imposes certain notifications and reporting requirements.

We hold concessions to mine iron ore, limestone and dolomite.  We purchase manganese in the local market.  Except for Namisa’s mines, in which we have a 60% ownership interest, we own 100% of each of our mines.  In addition, each mine is an “open pit” mine.  Iron ore extraction, crushing, screening and concentration are done in three different sites:  Casa de Pedra (CSN’s property), Pires Beneficiation Plant and Fernandinho Mine (both Namisa’s property).

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Casa de Pedra

Our mining rights for Casa de Pedra mine include the mine, beneficiation plant, roads, loading yard and railway branch and are duly registered with the Brazilian Department of Mineral Production (Departamento Nacional de Produção Mineral), or DNPM.  We have also been granted by DNPM easements in 15 mine areas located in the surrounding region, which are not currently part of Casa de Pedra mine, and hold title to all our proved and probable reserves.

We believe we have obtained and are in compliance with all licenses and authorizations for our operations and projects at Casa de Pedra mine.

The exploitation in Casa de Pedra mine is subject to mining lease restrictions, which were duly addressed in our iron ore reserve calculations.  Quality requirements (chemical and physical) are the key “modifying factors” in the definition of ore reserves at Casa de Pedra and were properly accounted for by the CSN mine planning department.

Mineral Reserves

The following table sets forth the type of each of our mines, period of operation, projected exhaustion dates and percentage of our interest:

The following table sets forth our estimates of proven and probable reserves and other mineral deposits at our mines reflecting the results of reserve study.  They have been calculated in accordance with the technical definitions contained in the SEC’s Industry Guide 7, and estimates of mine life described herein are derived from such reserve estimates.

Casa de Pedra

We have concluded an extensive, multi-year study of our iron ore reserves at Casa de Pedra.  The study consisted of three phases.  Phase one, which was completed in 1999, covered the ore bodies that are currently being mined or are close to the current operating open pits.  Phase two, which was completed in early 2003, covered the other iron ore deposits at Casa de Pedra site.  Phase three started in 2005 and involved a complete revaluation of our mineral reserves at Casa de Pedra.

We conducted extensive work throughout 2006 to document and classify all information related to both the current and future operations of the Casa de Pedra mine.

In 2006, we hired Golder Associates S.A., or Golder, to undertake an independent analysis of the Casa de Pedra iron ore reserves.  Golder carried out a full analysis of all available information and has independently validated our reported reserves.

Golder accepts as appropriate the estimates regarding proven and probable reserves made by us, totaling 1,631 million tons of iron ore (as of December 31, 2006) at a grade of 47.79% Fe and 26.63% SiO2.  This new estimate of our iron ore reserves at Casa de Pedra is significantly larger than our estimate of 444 million tons, reported on an appraisal report prepared in 2003.

In 2010, we had a total drilling of 8,489 meters.  We are extending our drilling campaign with additional 66,000 meters to increase and improve our knowledge about the iron ore deposits at Casa de Pedra. Of this total, we have already concluded 8,271 meters.  When this drilling campaign is concluded, we intend to conduct a new ore reserve audit.

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Namisa

An initial study was conducted at Fernandinho and Engenho mines to define the geological resources and final pits.  In 2008 and 2009, we extended our drilling campaign with additional 5,179 meters at Engenho mine and 2,771 meters at Fernandinho mine (totalizing a campaign of 7,950 meters) to increase and improve our knowledge about the iron ore deposits at these mines.  We expect that, as soon as a new model and final pit is finished, this reserve could be audited and incorporated in our mineral deposits.

Production

Casa de Pedra

The Casa de Pedra facilities are located in the city of Congonhas, in the State of Minas Gerais.  The Casa de Pedra mine is located 350 km from the Presidente Vargas steelworks and supplies iron ore products to our steel mill, as well as for export through the Itaguai Port.  Casa de Pedra’s equipment fleet and treatment facilities have an installed annual ROM capacity of approximately 85.0 million tons and 21.5 million tons, respectively. In 2010 Casa de Pedra produced 21.6 million tons of iron ore.

Namisa

The beneficiation plant at Pires also processed crude ore acquired from other companies, which along with its own ROM, generates final products such as: lump ore, small lump ore (hematitinha), sinter feed and concentrates.  The beneficiation plant at the Fernandinho unit generated 0.5 million tons of small lump ore and sinter feed products, in which the sinter feed practically corresponded to the total production.

Most of the ROM of the Pires Beneficiation Plant comes from Engenho mine (Namisa’s property), which is located at the northern border of the Casa de Pedra mine.  Pires Beneficiation Plant has the capacity to process 10.3 million tons per year.  From this total, approximately 3 million tons are currently provided by the Engenho mine and the balance is purchased from third parties.

Namisa complements our strategy to be a world leading producer of high quality iron ore.  Namisa remains fully integrated with our railway and port logistics corridor, through long-term contracts, which provide sufficient railway and port logistics capacity for Namisa’s current and future production.  Namisa is a leading company in iron ore mining and trading, with mining and processing operations in the State of Minas Gerais.  Trading iron ore is obtained from small mining companies in the neighborhood and other trading companies.  For information on the sale of 40% of our ownership interest in Namisa, see “Item 4. Information on the Company —A.  History and Development of the Company—Acquisitions and Dispositions.”

Our steelmaking operations consumed 6.9 million tons of iron ore during 2010, consisting of 5.1 million tons of sinter-feed material and 1.8 million tons of lump ore.  As we do not have pelletizing plants, the total amount of pellets has been acquired in the Brazilian market.

Distribution

Transportation costs are a significant component of our steel and iron ore production costs and are a factor in our price-competitiveness in the export market.  Railway transportation is the principal means by which we transport raw materials from our mines to the Presidente Vargas steelworks and steel and iron ore products to ports for shipment overseas.  Iron ore, limestone and dolomite from our two mines located in the State of Minas Gerais are transported by railroad to the Presidente Vargas steelworks for processing into steel.  The distances from our mines to the Presidente Vargas steelworks are 328 km and 455 km.  The distances from our mines to the ports are 440 km and 160 km.  Imported coal and coke bought from foreign suppliers are unloaded at the port of Itaguaí, 90 km west of the city of Rio de Janeiro, and shipped 109 km by train to the Presidente Vargas steelworks.  Our finished steel products are transported by train, truck and ships to our customers throughout Brazil and abroad.  Our principal Brazilian markets are the cities of São Paulo (335 km from the Presidente Vargas steelworks), Rio de Janeiro (120 km) and Belo Horizonte (429 km).

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Until recently, Brazil’s railway system (including railcars and tracks) was principally government-owned and in need of repair, but has now been largely privatized.  In an attempt to increase the reliability of our rail transportation, we indirectly hold concessions for the main railway systems we use.  For further information on our railway concessions, see “—Facilities—Railways.”

We export mainly through the ports of Itaguaí and Rio de Janeiro, and import coal and coke through the Itaguaí Port, all in the State of Rio de Janeiro.  The coal and container terminals have been operated by us since August 1997 and 1998, respectively.

Our Logistics Segment

Our logistics segment is comprised of railway and port facilities.

Railways

Southeastern Railway System

MRS has a concession to operate, through the year 2026, Brazil’s Southeastern railway system.  As of December 31, 2010, we held directly and indirectly 33.27% of MRS’ total capital.  The Brazilian Southeastern railway system, with 1,674 km of track, serves the São Paulo – Rio de Janeiro – Belo Horizonte industrial triangle in Southeast Brazil, and links our mines located in the State of Minas Gerais to the ports located in the states of São Paulo and Rio de Janeiro and to the steel mills of CSN, Companhia Siderúrgica Paulista, or Cosipa, and Gerdau Açominas.  In addition to serving other customers, the line transports iron ore from our mines at Casa de Pedra in the State of Minas Gerais and coke and coal from the Itaguaí Port in the State of Rio de Janeiro to the Presidente Vargas steelworks and transports our exports to the ports of Itaguaí and Rio de Janeiro.  The railway system connects the Presidente Vargas steelworks to the container terminal at Itaguaí Port, which handles most of our steel exports.  Our transport volumes represent approximately 28% of the Brazilian Southeastern railway system’s total volume.  While we are jointly and severally liable with the other principal MRS shareholders for the full payment of the outstanding amount (See “Item 5E.  Off-Balance Sheet Arrangements”) , we expect that MRS will make the lease payments through internally generated funds and proceeds from financing.

Northeastern Railway System

As of December 31, 2010, we hold 76.45% of the capital stock of Transnordestina Logística S.A. Transnordestina Logística S.A. has a 30-year concession granted in 1998 to operate Brazil’s Northeastern railway system.  The Northeastern railway system includes 4,238 km of track and operates in the states of Maranhão, Piauí, Ceará, Paraíba, Pernambuco, Alagoas and Rio Grande do Norte.  It also connects with the region’s leading ports, thereby offering an important competitive advantage through opportunities for intermodal transportation solutions and made-to-measure logistics projects. 

For more information on the merger and financings for Transnordestina, see “Item 4D. Property, Plant and Equipment – Capital Expenditures – Planned Investments”.  

Port Facilities

Solid Bulks Terminal

We hold the concession to operate TECAR, a solid bulks terminal, one of four terminals that form the Itaguaí Port, located in the State of Rio de Janeiro, for a term expiring in 2022 and renewable for another 25 years.  Itaguaí Port, in turn, is connected to the Presidente Vargas steelworks, Casa de Pedra and Namisa by the southeastern railway system.  Our imports of coal and coke are made through this terminal.  Under the terms of the concession, we undertook to load and unload at least 3.0 million tons of bulk cargo annually.  Among the approved investments that we announced is the development and expansion of the solid bulks terminal at Itaguaí to also handle up to 84 million tons of iron ore per year.  For further information, see “Item 4. Information on the Company —A.  History and Development of the Company —Planned Investments—Iron Ore Project.”

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Container Terminal

We own 99.99% of Sepetiba Tecon S.A., or TECON, which has a concession to operate, for a 25-year term that is renewable for another 25 years, the container terminal at Itaguaí Port.  As of December 31, 2010, US$183 million of the cost of the concession remained payable over the next 15 years of the lease.  For more information, see “Item 5E.  Off-Balance Sheet Arrangements”.  The Itaguaí Port is located in the heart of Brazil’s Southeast Region, with all major exporting and importing areas of the states of São Paulo, Minas Gerais and Rio de Janeiro within 500 km from the port.  This area represents more than 60% of the Brazilian gross domestic product, or GDP, according to the Brazilian Geography and Statistics Institute (Instituto Brasileiro de Geografia e Estatística).  The Brazilian Federal Port Agency spent US$48 million in port infrastructure projects such as expanding the maritime access channel and increasing the depth.  In addition, significant investments were made by the Brazilian federal government in adding two extra lanes to the Rio Santos road, and are being made in constructing the Rio de Janeiro Metropolitan Bypass, a beltway that will cross the Rio de Janeiro metropolitan area.  Also, MRS railway is investing in an extra rail track along the way to the Itaguaí Port.  These factors, combined with favorable natural conditions, like natural deep waters and low urbanization rate around port area, allow the operation of large vessels as well as highly competitive prices for all the services rendered, resulting in the terminal being a major hub port in Brazil.  For further information on our planned investments relating to our Itaguaí CSN Logistics Platform Project, see “Item 4. Information on the Company —A.  History and Development of the Company —Planned Investments—Itaguaí CSN Logistics Platform Project”.

The figures show the effect of investments made since 2007 in two Super Post Panamax Portainers and two Rubber Tired Gantry, or RTG, cranes.  These investments, along with a focused marketing and sales strategy, enabled the terminal to rank first in market share among the three terminals of the state of Rio de Janeiro, with 40% of the total moves in those terminals.

We plan to carry out new infrastructure and equipment investments in Sepetiba TECON, as the Berth 301 Equalization and the acquisition of two new Super Post Panamax Portainers and four new RTG cranes to yard operations.  These investments will increase TECON’s capacity from 320,000 containers (or 480,000 TEUs) to 410,000 containers (or 610,000 TEUs) a year and from 2.0 million tons to 6.0 million tons a year of steel products.  We intend to use this port to ship all our exports of steel products.  In 2010, 69% of the exported steel products (or 147,691 tons), was shipped from this port, as compared to 91.6% in 2009.

In 2010, the terminal has resumed the growth that had been affected by the global downturn.  Is achieved 196,313 units handled (or 298,417 TEUS), which represents an increase of 27% compared to 2009.

Our Energy Segment

Our energy segment is comprised of generation plants and is aimed at enabling us to maintain our self-sufficiency in energy, reducing our production cost and our exposure to fluctuations or availability of certain energy sources.

Our energy related assets include:

Thermoelectric Co-Generation Power Plant

We completed the construction of a 238 MW thermoelectric co-generation power plant at the Presidente Vargas steelworks in December 1999.  Since October 2000, the plant has provided the Presidente Vargas steelworks with approximately 60% of the electric energy needs for its steel mills.  Aside from operational improvements, the power plant supplies our strip mills with electric energy, processed steam and forced air from the blast furnaces, benefiting the surrounding environment through the elimination of flares that burn steel-processing gases into the atmosphere.

Itá Hydroelectric Facility

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Each of Tractebel and we own 48.75%, and Companhia de Cimento Itambé, or Itambé, owns the remaining 2.5% of ITASA, a special-purpose company formed for the purpose of owning and operating, under a 30-year concession, 60.5% of the Itá hydroelectric facility on the Uruguay river in Southern Brazil.  Tractebel directly owns the remaining 39.5% of the Itá hydroelectric facility.

The power facility was built under a project finance structure with an investment of approximately US$860 million.  The long-term financing for the project was closed in March 2001 and consisted of US$78 million of debentures issued by ITASA, a US$144 million loan from private banks and US$116 million of direct financing from BNDES, all of which are due by 2013.  The sponsors of the project have invested approximately US$306 million in this project.

Itá has an installed capacity of 1,450 MW, with a firm guaranteed output of 668 MW, and became fully operational in March 2001.

We and the other shareholders of ITASA have the right to take our pro rata share (proportionally to our ownership interest in the project) of Itá’s output pursuant to 30-year power purchase agreements at a fixed price per megawatt hour, adjusted annually for inflation.  Since October 2002, we have been using our entire Itá take internally.

Igarapava Hydroelectric Facility

We own 17.9% of a consortium that built and has the right to operate for 30 years the Igarapava hydroelectric facility.  Other consortium members are Vale, Companhia Mineira de Metais, Votorantim Metais Zinco, AngloGold Ashanti Mineração Ltda., and Companhia Energética de Minas Gerais, or CEMIG. The plant has  an installed capacity of 210 MW, corresponding to 136 MW of firm guaranteed output as of December 31, 2010.  We have been using part of our 22.8 MW take from Igarapava to supply energy to the Casa de Pedra and Arcos mines and to the Presidente Vargas steelworks.  From time to time, we also sell the excess energy in the spot energy market.

Marketing Organization and Strategy

Steel

Our steel products are sold both domestically and abroad as a main raw material for several different manufacturing industries, including the automotive, home appliance, packaging, construction and steel processing industries.

Our sales approach is to establish brand loyalty and achieve a reputation for quality products by developing relationships with our clients and focusing on their specific needs.

Our commercial area is responsible for sales of all of our products.  This area is divided into two major teams, one focused on international sales and the other on domestic sales.  The domestic market oriented sales team is divided into six market segments:  packaging, distribution, automotive, home appliances, original equipment manufacturer, or OEM, and construction.  Each one of these segments has a specific strategic goal to provide tailor-made steel solutions that meet the specific needs of each client they serve.

The distribution division is responsible for supplying large steel processors and distributors, as well as some industries that produce small diameter pipe and light profiles.  The packaging unit acts in an integrated way with suppliers, representatives of the canning industry and distributors to respond to customer needs for finished-products.  The automotive unit is supplied by a specialized mill, CSN Porto Real, and also by a portion of the galvanized material produced at Presidente Vargas steelworks, benefiting from a combined sales strategy.

In 2010, more than a half of our domestic sales were made through our own sales force directly to customers.  The remaining sales were to independent distributors for subsequent resale to smaller clients.

Historically, our export sales were made primarily through international brokers.  However, as part of our strategy to establish direct, longer-term relationships with end-users, we have decreased our reliance on such brokers.  We have focused our international sales to more profitable markets in order to maximize revenues and shareholder returns.

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All of our sales are on an order-by-order basis and have an average delivery time of 45 days.  As a result, our production levels closely reflect our order log book status.  We forecast sales trends in both the domestic and export markets based on the historical data available from the last two years and the general economic outlook for the near future.  We have our own data systems to remain informed of worldwide and Brazilian market developments.  Further, our management believes that one of the keys to our success is maintaining a presence in the export market.  Such presence gives to us the flexibility to shift between domestic and export markets, thereby allowing us to maximize our profitability.

Unlike classic commodity products, there is no exchange trading of steel, or uniform pricing, as wide differences exist in terms of size, quality and specifications.  In general, exports are priced based on international spot prices of steel at the time of sale in U.S. dollars or Euros, depending on the destination.  Sales are normally paid at sight, or within 14 or 28 days, and, in the case of exports, usually backed by a letter of credit and an insurance policy.  Sales are made primarily on cost and freight terms.

Sales by Geographic Region

In 2010, we sold steel products to customers in Brazil and 35 other countries.  The fluctuations in the portion of total sales assigned to domestic and international markets, which can be seen in the table below, reflect our ability to adjust sales in light of variations in the domestic and international economies, as well as steel demand and prices, domestically and abroad.

The four main export markets for our products are Europe, Latin America, Asia, and North America, representing 40%, 33%, 12% and 7%, respectively, of our export sales volume in 2010.

In North America, we take advantage of our subsidiary CSN LLC, which acts as a commercial channel for our products.  In order to gain a cost advantage among our U.S. competitors, CSN is able to export slabs to CSN LLC which are processed at third parties into hot-rolled coil and then transformed into more added value products at CSN LLC’s plant, such as cold-rolled coil and galvanized.  Moreover, we are able to export cold-rolled coils which can be directly sold or processed by CSN LLC in order to manufacture galvanized products.

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(1)  Sales to Mexico are included in North America.

(2)  Total net operating revenues presented above differ from amounts in our IFRS consolidated  financial statements because they do not include revenues from non-steel products (non-steel products include mainly by-products, iron ore, logistics services and cement), which in 2010 represented R$ 4,750  million and in 2009 represented R$ 3,044 million. .

Sales by Product

The following table sets forth our market shares for steel sales in Brazil of hot-rolled, cold-rolled, galvanized and tin mill products for the past three years.  The data of 2008 and 2009 were filled based on IABr (Instituto Aço Brasil) and 2010 considered internal data gathered by CSN.

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