UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

(Mark One)

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

or

þ		Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2008

or

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

or

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

Commission file number: 001-32734

TERNIUM S.A.

(Exact Name of Registrant as Specified in its Charter)

N/A
(Translation of registrant’s name into English)

Grand Duchy of Luxembourg
(Jurisdiction of incorporation or organization)

46a, Avenue John F. Kennedy — 2^nd floor
L-1855 Luxembourg
(Address of registrant’s registered office)

Beatriz Rodriguez Salas
46A, Avenue John F. Kennedy — 2^nd floor
L-1855 Luxembourg
Tel. +352 26 68 31 52, Fax. +352 26 68 31 53, e-mail: luxembourg@ternium.com
(Name, Telephone, E-Mail and/or Facsimile number and Address of Company Contact Person)

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

Title of Each Class		Name of Each Exchange On Which Registered
American Depositary Shares		New York Stock Exchange
Ordinary Shares, par value USD1.00 per share		New York Stock Exchange*

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

None

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

None

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

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

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

Yes þ       No o

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes o       No þ

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ       No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o       No o

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 þ       Accelerated Filer o       Non-accelerated filer o

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

U.S. GAAP o		International Financial Reporting Standards as issued by the International Accounting Standards Board þ		Other o

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 o       Item 18 o

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o       No þ

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

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

 

 

TABLE OF CONTENTS

PART I			6
Item 1. Identity of Directors, Senior Management and Advisers			6
Item 2. Offer Statistics and Expected Timetable			6
Item 3. Key Information			6
Item 4. Information on the Company			23
Item 4A. Unresolved Staff Comments			56
Item 5. Operating and Financial Review and Prospects			57
Item 6. Directors, Senior Management and Employees			82
Item 7. Major Shareholders and Related Party Transactions			91
Item 8. Financial Information			96
Item 9. The Offer and Listing			97
Item 10. Additional Information			99
Item 11. Quantitative and Qualitative Disclosures About Market Risk			109
Item 12. Description of Securities Other Than Equity Securities			113
PART II			114
Item 13. Defaults, Dividend Arrearages and Delinquencies			114
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds			114
Item 15. Controls and Procedures			114
Item 16A. Audit Committee Financial Expert			115
Item 16B. Code of Ethics			115
Item 16C. Principal Accountant Fees and Services			115
Item 16D. Exemptions from the Listing Standards for Audit Committees			116
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers			116
Item 16F. Change in Registrant’s Certifying Accountant			117
Item 16G. Corporate Governance			117
PART III			119
Item 17. Financial Statements			119
Item 18. Financial Statements			119
Item 19. Exhibits			119
Exhibit 4.3
Exhibit 8.1
Exhibit 12.1
Exhibit 12.2
Exhibit 13.1
Exhibit 13.2

CERTAIN DEFINED TERMS

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

•		References to “the Company” refer exclusively to Ternium S.A., a Luxembourg joint stock corporation (société anonyme holding);
•		References in this annual report to “Ternium”, “we”, “us” or “our” refer to Ternium S.A. and its consolidated subsidiaries;
•		References to “Amazonia” are to Consorcio Siderurgia Amazonia, S.L. Unipersonal, a Spanish holding company and a subsidiary of the Company that, prior to the nationalization of Sidor, held a 59.73% interest in Sidor;
•		References to “Sidor” are to Sidor, C.A., a Venezuelan corporation and formerly a subsidiary of the Company. See note 29 to our audited consolidated financial statements included elsewhere in this annual report and Item 4. “Information on the Company—A. History and Development of the Company—Sidor Nationalization Process”;
•		References to “the Ternium companies” are to the Company’s manufacturing subsidiaries, namely Siderar S.A.I.C., an Argentine corporation (“Siderar”), and Ternium México, S.A. de C.V., a Mexican corporation (“Ternium Mexico”), and their respective subsidiaries.
•		References to “Ylopa” are to Ylopa — Serviços de Consultadoría Lda., a company organized under the laws of Portugal and registered in the Madeira Free Zone;
•		References to “Usiminas” are to Usinas Siderurgicas de Minas Gerais S/A—USIMINAS, a company organized under the laws of Brazil and an indirect shareholder of the Company;
•		References to “Tenaris” are to Tenaris S.A., a Luxembourg joint stock corporation (société anonyme holding) and a shareholder of the Company;
•		References to “San Faustín” are to San Faustín N.V., a Netherlands Antilles corporation and the Company’s indirect controlling shareholder;
•		References to the “Ternium network” or “Ternium Internacional” are to an international group of companies that market and provide worldwide distribution services for products offered primarily by Ternium.
•		References to “ADSs” are to the American Depositary Shares which are evidenced by American Depositary Receipts;
•		References to “tons” are to metric tons; one metric ton is equal to 1,000 kilograms, 2,204.62 pounds or 1.102 U.S. (short) tons; and
•		References to “billions” are to thousands of millions, or 1,000,000,000.

PRESENTATION OF CERTAIN FINANCIAL AND OTHER INFORMATION

Accounting Principles

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

Currencies

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

•		“dollars”, “U.S. dollars” or “USD” each refers to the United States of America dollar;
•		“Argentine pesos” or “ARP” each refers to the Argentine peso;
•		“Venezuelan bolívares fuertes “ or “VEF” each refers to the Venezuelan bolívar fuerte; and
•		“Mexican pesos” or “MXN” each refers to the Mexican peso;

On December 31, 2008, the exchange rate between the Argentine peso and the U.S. dollar (as published by Banco Central de la República Argentina, or the Argentine Central Bank), was ARP3.4537=USD1.00; the noon buying rate for the Venezuelan bolívar fuerte as certified for customs purposes by the Federal Reserve Bank of New York was VEB2.1446=USD 1.00; and the noon buying rate for the Mexican peso as published by the Federal Reserve Bank of New York was MXN13.8320=USD1.00. Those rates may differ from the actual rates used in preparation of the Company’s consolidated financial statements. We do not represent that any of these currencies could have been or could be converted into U.S. dollars or that U.S. dollars could have been or could be converted into any of these currencies.

Rounding; Comparability of Data

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

Our Internet Site is Not Part of this Annual Report

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

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

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

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

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

	•		the impact of the global economic crisis currently underway;
	•		uncertainties about the degree of growth in the number of consumers in the markets in which Ternium operates and sells its products;
	•		changes in the pricing environments in the countries in which Ternium operates;
	•		the impact in the markets in which Ternium operates of existing and new competitors, including competitors that offer less expensive products and services, desirable or innovative products, or have extensive resources or better financing, and whose presence may affect Ternium’s customer mix, revenues and profitability;
	•		increases in the prices of raw materials, other supplies or energy or difficulties in acquiring raw materials or other supplies or energy supply cut-offs;
	•		the policies of, and the economic, political and social conditions in, the countries in which Ternium operates or other countries which have an impact on Ternium’s business activities or investments;
	•		inflation or deflation and foreign exchange rates in the countries in which Ternium operates;
	•		volatility in interest rates;
	•		the performance of the financial markets globally and in the countries in which Ternium operates;
	•		changes in domestic and foreign laws, regulations and taxes;
	•		regional or general changes in asset valuations;
	•		our ability to successfully implement our business strategy or to grow through acquisitions, greenfield projects, joint ventures and other investments; and
	•		other factors or trends affecting the flat and long steel industry generally and our financial condition in particular.

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

PART I

Item 1. Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Not applicable.

Item 3. Key Information

A.

Selected Financial Data

The selected consolidated financial data (or selected combined consolidated financial data, as applicable) set forth below have been derived from our audited consolidated financial statements (or combined consolidated financial statements, as applicable) for each of the years and at the dates indicated. Our consolidated financial statements were prepared in accordance with IFRS, as issued by IASB, and were audited by Price Waterhouse & Co. S.R.L., Argentina, an independent registered public accounting firm that is a member firm of PricewaterhouseCoopers.

The audited consolidated financial statements of Ternium as of December 31, 2007, and for the years ended December 31, 2007 and 2006, and the audited consolidated financial data of Ternium as of December 31, 2007, 2006 and 2005, and for the years then ended, included in this annual report, vary significantly from the results and other financial data shown in the financial statements and financial data included in prior annual reports as a result of the de-consolidation of Sidor as from April 1, 2008. As from that date, Ternium ceased consolidating Sidor’s results and other financial data and classified its investment in Sidor as an available-for-sale financial asset, with Sidor’s results and cash flows during each period prior to April 1, 2008 being presented as discontinued operations. For more information on the Sidor nationalization process and its accounting treatment, see note 29 to our audited consolidated financial statements included elsewhere in this annual report and Item 4. “Information on the Company—A. History and Development of the Company—Sidor Nationalization Process.”

Ternium obtained control over Grupo Imsa (as defined below) on July 26, 2007. The audited consolidated financial statements of Ternium as of December 31, 2008, and for the year then ended, included in this annual report consolidate the results and other financial data of Grupo Imsa for the entire year, and the audited consolidated financial statements of Ternium as of December 31, 2007, and for the year then ended, included in this annual report consolidate the results and other financial data of Grupo Imsa beginning July 26, 2007. Accordingly, Ternium’s results and other financial data for the year ended December 31, 2008 varied significantly from the results and other financial data for the year ended December 31, 2007, and the results and other financial data of each such year varied significantly from the results and other financial data for the years ended December 31, 2006, 2005 and 2004.

Ternium acquired Hylsamex (as defined below) on August 22, 2005. The audited consolidated financial statements of Ternium as of December 31, 2008 and 2007, and for the years ended December 31, 2008, 2007 and 2006, included in this annual report consolidate the results and other financial data of Hylsamex for such years, and the audited consolidated financial data of Ternium as of December 31, 2005, and for the year then ended, included in this annual report consolidate the results and other financial data of Hylsamex beginning August 22, 2005. Accordingly, Ternium’s results and other financial data for the years ended December 31, 2008, 2007 and 2006 varied significantly from the results and other financial data for the year ended December 31, 2005, and the results and other financial data of each such year varied significantly from the results and other financial data for the year ended December 31, 2004.

The audited combined consolidated financial data of Ternium as of December 31, 2004 and for the year then ended combine and consolidate the results and other financial data of each of Siderar, Ylopa and Ternium Internacional, and recognize the investment in Amazonia (which at that time consolidated Sidor) under the equity method, as of each such dates and for each of the years then ended, on the basis that such companies were under the common control of San Faustín as of each such dates and for each such years. The effect of this presentation is to show the combined historical results, financial condition and other data of the flat and long manufacturing, processing and distribution businesses of various companies under the common control of San Faustín as though these companies had been our subsidiaries at the dates and during the years presented.

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

In thousands of U.S. dollars		For the year ended December 31,
(except number of shares and per share data)		2008				2007(2)				2006(2)				2005(1) (2)				2004(1) (2)
Selected consolidated income statement data
Continuing operations
Net sales			8,464,885				5,633,366				4,484,918				2,690,450				1,615,181
Cost of sales			(6,128,027	)			(4,287,671	)			(3,107,629	)			(1,787,848	)			(965,004	)
Gross profit			2,336,858				1,345,695				1,377,289				902,602				650,177
Selling, general and administrative expenses			(669,473	)			(517,433	)			(370,727	)			(243,993	)			(132,882	)
Other operating income (expenses), net			8,662				8,514				(4,739	)			(57,338	)			(3,124	)
Operating income			1,676,047				836,776				1,001,823				601,271				514,171
Interest expense			(136,111	)			(133,109	)			(96,814	)			(60,686	)			(18,257	)
Interest income			32,178				41,613				33,903				17,786				8,911
Other financial income (expenses), net			(693,192	)			(38,498	)			(40,432	)			33,514				211,635
Equity in earnings (losses) of associated companies			1,851				434				671				153				209,201
Income before income tax expense			880,773				707,216				899,151				592,038				925,661
Income tax (expense) benefit
Current and deferred income tax expense			(258,969	)			(297,838	)			(353,044	)			(233,113	)			(177,486	)
Reversal of deferred statutory profit sharing			96,265				—				—				—				—
Income from continuing operations			718,069				415,871				546,107				358,925				748,175
Discontinued operations
Income from discontinued operations			157,095				579,925				444,468				715,900				—
Net income for the year(3)			875,164				995,796				990,575				1,074,825				748,175
Attributable to:
Equity holders of the Company			715,418				784,490				795,424				706,418				457,339
Minority interest			159,746				211,306				195,151				368,407				290,836
			875,164				995,796				990,575				1,074,825				748,175
Depreciation and amortization			413,541				355,271				251,371				160,145				99,192
Weighted average number of shares outstanding(4)			2,004,743,442				2,004,743,442				1,936,833,060				1,209,476,609				1,168,943,632
Basic earnings per share for profit attributable to the equity holders of the Company (4)			0.36				0.39				0.41				0.58				0.39
Diluted earnings per share for profit attributable to the equity holders of the Company			0.36				0.39				0.41				0.54				0.39
Dividends per share declared			—				0.05				0.05				—				—
Income from continuing operations per share (3)			0.36				0.21				0.28				0.30				0.39

In thousands of U.S. dollars		At December 31,
(except number of shares and per share data)		2008				2007(2)				2006(2)				2005(1) (2)				2004(1) (2)
Selected consolidated balance sheet data
Non-current assets			5,491,408				8,553,123				6,029,383				6,029,823				1,728,410
Property, plant and equipment, net			4,212,313				6,776,630				5,335,030				5,377,831				1,244,691
Other non-current assets(3)			1,279,095				1,776,493				694,353				651,992				483,719
Current assets			5,179,839				5,095,959				2,628,870				2,518,958				918,220
Cash and cash equivalents			1,065,552				1,125,830				643,291				765,506				194,875
Other current assets			4,108,954				3,200,987				1,978,537				1,750,292				723,345
Non-current assets classified as held for sale			5,333				769,142				7,042				3,160				—
Total assets			10,671,247				13,649,082				8,658,253				8,548,781				2,646,630
Capital and reserves attributable to the Company’s equity holders(4)			4,597,370				4,452,680				3,757,558				1,842,454				1,026,725
Minority interest			964,094				1,805,243				1,626,119				1,633,881				745,126
Non-current liabilities			3,374,964				5,401,549				1,867,892				3,683,755				359,510
Borrowings			2,325,867				3,676,072				546,601				2,396,807				1,008
Deferred income tax			810,160				1,327,768				982,091				1,047,038				337,473
Other non-current liabilities			238,937				397,709				339,200				239,910				21,029
Current liabilities			1,734,819				1,989,610				1,406,684				1,388,691				515,269
Borrowings			941,460				406,239				507,241				510,820				121,998
Other current liabilities			793,359				1,369,608				899,443				877,871				393,271
Liabilities directly associated with non-current assets classified as held for sale			—				213,763				—				—				—
Total liabilities			5,109,783				7,391,159				3,274,576				5,072,446				874,779
Total equity and liabilities			10,671,247				13,649,082				8,658,253				8,548,781				2,646,630
Number of shares outstanding(5)			2,004,743,442				2,004,743,442				2,004,743,442				1,396,551,886				1,168,943,632

B.

Capitalization and Indebtedness

Not applicable.

C.

Reasons for the Offer and Use of Proceeds

Not applicable.

D.

Risk Factors

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

Risks Relating to the Steel Industry

The downturn in the global economy that accelerated during the second half of 2008 has caused a sharp reduction in worldwide demand for steel, and a protracted global recession or a depression would have a material adverse effect on the steel industry and Ternium.

Ternum’s activities and results are affected by international economic conditions, as well as by national and regional economic conditions in the markets where Ternium operates and/or sells its products. Starting in September 2008, a steep downturn in the global economy, sparked by uncertainty in credit markets and deteriorating consumer confidence, has sharply reduced demand for steel products. This has had, and continues to have, a pronounced negative effect on Ternium’s business and results of operations.

If global macroeconomic conditions continue to deteriorate, the outlook of steel producers will worsen further. In particular, a significant and prolonged recession or depression in the United States and Europe, or significantly slower growth or the spread of recessionary conditions to emerging economies that are substantial consumers of steel (such as China, Brazil, Russia and India, as well as emerging Asian markets, the Middle East and the Commonwealth of Independent States (“CIS”) regions) would exact a heavy toll on the steel industry. Continued financial weakness among substantial consumers of steel products, such as the automotive industry and the construction industry, or the bankruptcy of any large companies in such industries, would exacerbate the negative trend in market conditions.

Protracted declines in steel consumption caused by poor economic conditions in one or more of our major markets or by the deterioration of the financial condition of our customers would have a material adverse effect on the demand for our products and on our results. Ternium has announced and is implementing a number of measures in response to the market downturn and the worldwide collapse in the demand for steel products, which measures include the postponement of target completion dates for previously announced investments and projects, temporary cuts in steel production to accelerate inventory reduction, and other measures aimed at reducing costs and improving productivity. These initiatives may not prove sufficient—in terms of cost-reduction or in realigning Ternium’s production levels with reduced demand—to maintain Terium’s profitability going forward.

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

Steel prices are volatile and are sensitive to trends in cyclical industries, such as the automotive, construction, appliance and machinery industries, which are the significant markets for Ternium’s products. In the past, substantial price decreases during periods of economic weakness have not always been offset by commensurate price increases during periods of economic strength. After rising during 2007 and through the boreal summer of 2008, steel prices in global markets fell sharply beginning in the late boreal summer of 2008 as a result of collapsing demand and the resulting excess supply in the industry. The fall in prices during this period adversely affected the results of steel producers generally, including Ternium, as a result of lower revenues and writedowns of finished steel products and raw material inventories. For example, in the second half of 2008, Ternium wrote down inventories in an amount of USD200 million, and in the first quarter of 2009, it recorded an additional USD123.1 million inventory writedown. Although prices are expected to stabilize at some point, the timing and extent of price recovery or return to prior levels cannot be predicted. An eventual rebound in steel prices will likely depend on a broad recovery from the current global economic downturn, although the length and nature of business cycles affecting the steel industry have historically been unpredictable.

In addition, the steel industry is highly competitive with respect to price, product quality, customer service and technological advances, and competition has frequently limited the ability of steel producers to raise the price of finished products to recover higher raw material and energy costs. Moreover, in some cases, the governments of some countries are reluctant to accept price increases of products which are used as raw materials for the manufacture of other goods, as such increases could ultimately impact the inflation rate and in the prices paid by end consumers of those goods (e.g., tinplate for cans); in some other cases, governments restrict the ability of companies to pass on to the domestic markets any increases in international prices. Accordingly, any increased purchase costs of raw materials and energy might not be recoverable through increased product prices.

A protracted downturn in steel prices would materially and adversely affect Ternium’s revenues and profitability.

Excess capacity, resulting in part from expanded production in China and other developing economies in recent years, may hamper the steel industry’s recovery and prolong the downward cycle.

In addition to economic conditions and prices, the steel industry is affected by other factors such as worldwide production capacity and fluctuations in steel imports/exports and tariffs. As demand for steel has surged in China, India, the CIS and other emerging markets, steel production capacity in these markets has also surged, and China is now the largest worldwide steel producing country by a significant margin. In 2006, China became a net exporter of steel, exerting downward pressure on steel prices in the European and U.S. markets in that year, though its exports then slowed in 2007. In the second half of 2008, capacity expansion in the Chinese mills slowed and capacity utilization rates declined, resulting in decreased exports.

Historically, the steel industry has suffered from substantial over-capacity. Currently, as the economic crisis widens, there are signs of excess capacity in all steel markets, which is impacting steel prices across all of our markets. Accordingly, it is possible in the context of the current downturn that the industry’s excess capacity will result in an extended period of depressed prices and industry weakness.

Ternium has already made significant production cuts in response to the current economic crisis, as have other steel producers. Ternium also expects that consolidation in the steel sector in recent years should, as a general matter, help producers maintain a more consistent performance through the down cycle by preventing investment overlaps and increasing producers’ efficiency, economies of scale and bargaining power with customers and suppliers. These actions and trends, however, may not suffice to address the adverse consequences of an extended over-capacity scenario.

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

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

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

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

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

The Ternium companies depend on certain key suppliers for their requirements of raw materials and energy. The Ternium companies have entered into long-term contracts for the supply of a substantial portion of their principal inputs, and it is expected that they will maintain and, depending on the circumstances, renew these contracts. However, if any of the key suppliers fails to deliver or there is a failure to renew these contracts, the Ternium companies could face limited access to raw materials and energy, higher costs and delays resulting from the need to obtain their raw material and energy requirements from other suppliers. As an example, in 2007 CVRD, our main supplier of iron ore, was unable to provide Siderar with the quantities or iron ore that it required, forcing Siderar to import iron ore from our Mexican subsidiary.

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

The market for Ternium’s steel products is highly competitive, particularly with respect to price, quality and service. In both the global and regional markets, Ternium competes against other global and local producers of flat and long steel products, which in some cases have greater financial and operating resources. Competition from global and regional steel manufacturers with expanded production capacity such as Arcelor Mittal and new market entrants, especially from China and the CIS, could result in significant price competition, declining margins and reductions in sales volumes and revenues.

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

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

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

Risks Relating to our Business

Following the completion of the Sidor nationalization process, Ternium is exposed to credit concentration risk with Venezuela.

On May 7, 2009, the Company completed the transfer of its entire 59.7% interest in Sidor to Corporación Venezolana de Guayana, or CVG, a Venezuelan state-owned entity. The Company agreed to receive an aggregate amount of US$1.97 billion as compensation for its Sidor shares. Of that amount, CVG paid US$400 million in cash on that date. The balance was divided in two tranches: the first tranche, of US$945 million, will be paid in six equal quarterly installments (the first such installment being due on August 7, 2009), while the second tranche will be paid at maturity in November 2010, subject to quarterly mandatory prepayment events based on the increase of the WTI crude oil price over its May 6, 2009 level. For more information on the Sidor nationalization process, see note 29 to our audited consolidated financial statements included elsewhere in this annual report and Item 4. “Information on the Company—A. History and Development of the Company—Sidor Nationalization Process.” These receivables are unsecured. Accordingly, we have significant credit concentration risk related to these receivables with Venezuela.

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

Ternium plans to continue implementing its business strategy of further integrating the operating and marketing activities of the Ternium companies, developing value-added products, providing services to a wider range of clients in the local and export markets, gain further access to iron ore and other inputs, increasing its steel production and continuing to pursue strategic acquisition opportunities. Any of these components or Ternium’s overall business strategy could be delayed or abandoned or could cost more than anticipated, any of which could impact its competitive position and reduce its revenue and profitability. For example, Ternium could fail to develop its commercial network and lose market share in its export markets. Even if Ternium successfully implements its business strategy, it may not yield the desired goals.

Recent and future acquisitions, greenfield projects, significant investments and strategic alliances could disrupt Ternium’s operations and adversely affect its profits. Ternium may not realize the benefits it expects from these business decisions.

A key element of Ternium’s business strategy is to identify and pursue growth-enhancing strategic opportunities. As part of this growth strategy, Ternium has acquired interests in various companies, including Hylsamex, one of the main steel producers in Mexico; and Grupo Imsa, another leading producer with operations in Mexico, the United States and Guatemala.

We will continue to consider other capital investments, strategic acquisitions, greenfield projects and alliances from time to time. However, any such project will depend upon market and financing conditions. We must necessarily base any assessment of potential capital investments, acquisitions, greenfield projects and alliances on assumptions with respect to operations, profitability and other matters that may subsequently prove to be incorrect. Our recent and future acquisitions, investments and alliances may not perform in accordance with our expectations and could adversely affect our operations and profitability. Furthermore, we may fail to find suitable acquisition targets or fail to consummate our acquisitions under favorable conditions, or could be unable to successfully integrate any acquired businesses into our operations. Moreover, we may also acquire, as part of future acquisitions, assets unrelated to our business, and we may not be able to integrate them or sell them under favorable terms and conditions.

These risks, and the fact that integration of any acquired businesses will require a significant amount of the time and resources of Ternium’s management and employees, could disrupt Ternium’s ongoing business and could have a material adverse effect on its business, financial condition and results of operations.

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

In accordance with IFRS, management must test all of Ternium’s goodwill, intangible assets with an indefinite useful life and intangible assets not yet available for use annually for impairment, or more frequently if there are indicators of impairment, and recognize a non-cash charge in an amount equal to the impairment. We recorded goodwill in connection with the acquisition of our Mexican subsidiaries, the balance of which, as of December 31, 2008, amounted to USD683.7 million. If Ternium’s management were to determine in the future that the goodwill from the acquisition of our Mexican subsidiaries was impaired, Ternium would be required to recognize a non-cash charge to write down the value of this goodwill, which would adversely affect Ternium’s financial condition and results of operations.

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

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

In Argentina, in early 2009, following a decrease in the level of activity since the last quarter of 2008 due to the global economic downturn, Siderar downsized contractor and subcontractor activities and temporary personnel, triggering adverse reactions from the construction workers’ union and the steelworkers’ union. More recently, negotiations between Siderar and the steelworkers’ union regarding the annual bonuses related to results have been in progress for over three months, and the unions have called for work stoppages and other measures. For more information on the collective bargaining agreement applicable to most of Siderar’s employees in Argentina, see Item 6. “Directors, Senior Management and Employees—D. Employees—Argentina.” In Mexico, even though the various measures that Ternium’s Mexican subsidiaries have taken in order to become more competitive have not resulted in significant labor unrest thus far, Ternium could suffer plant stoppages or strikes as a result of future workforce reductions in connection with its productivity improvement and cost reduction plans. Ternium may not be able to maintain a satisfactory relationship with its employees, and any future stoppage, strike, disruption of operations or new collective bargaining agreements could result in lost sales and could increase Ternium’s costs. For more information on labor relations, see Item 6. “Directors, Senior Management and Employees—D. Employees.”

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

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

The global economic downturn may affect our ability to comply with some covenants under our principal financing facility, triggering a need to modify or replace our loan agreements on less favorable terms.

As of March 31, 2009, our outstanding debt balances totaled USD2.94 billion, consisting of USD863 million of short-term indebtedness (including the current portion of long-term debt) and USD2.07 billion of long-term indebtedness. The main covenants in our principal financing facility are limitations on liens and encumbrances, limitations on the sale or other dispositions of certain material assets, and compliance with financial ratios (e.g., leverage ratio and interest coverage ratio). As of December 31, 2008, we were in compliance with all covenants under our loan agreements. The current global recession and the resulting decline in the demand for steel and steel products, coupled with fluctuations in foreign currency exchange rates and other regulatory, business, economic and other factors (some of which are at least partially outside of our control), may affect our ability to comply with some covenants in the future, mainly due to their impact on our earnings. Such circumstances could trigger a need to modify or replace those loan agreements on less favorable terms, which could adversely affect our flexibility, cash flow and results. There can be no assurance that we would be able to modify or replace those loan agreements on satisfactory terms or at all. If we were unable to accomplish those actions, our loan agreements could become immediately due and payable.

A significant rise in interest rates or any limitation in the Ternium companies’ ability to hedge against interest rate fluctuations and other financial risks could adversely affect Ternium’s business and results.

Changes in interest rates affect the amount of Ternium’s interest payments as well as the value of its fixed rate debt. Most of Ternium’s long-term borrowings are at variable rates, and accordingly, Ternium is exposed to the risk of increased interest expense in the event of a significant rise in interest rates. As of March 31, 2009, Ternium’s total indebtedness was USD2.94 billion and, as stated above, most of it has variable rates.

In addition, a substantial rise in interest rates in developed economies such as the United States of America could adversely affect the economies in the countries where Ternium conducts its operations and markets its products.

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

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

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

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

Risks Relating to our Mining Activities

Iron ore is one of the principal raw materials used by Ternium’s operating subsidiaries. Ternium has equity interests in two iron ore mining companies in Mexico: a 100% interest in Las Encinas and a 50% interest in Peña Colorada, which operates Mexico’s largest iron ore mine. In addition, Ternium may expand its mining activities if and when market conditions show signs of improvement. Our present and future mining activities are or would be subject to particular risks, as follows:

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

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

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

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

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

We may be subject to increased costs or delays in the acquisition of adequate equipment for the exploration and exploitation activities and/or involving metallurgical and other technological processes arising during the mine’s exploitation. We may also fail to obtain any necessary permits, or experience significant delays in connection with the issuance of such permits. Adverse mining conditions, whether permanent or temporary, may lead to a significant increase on our costs and/or affect our ability to produce the expected quantities of mineral. Communities living near areas where we operate may take actions to oppose and interfere with our activities. All of the above may adversely hamper our ability to conduct our mining activities as planned and affect our expected results.

Risks Relating to the Structure of the Company

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

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

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

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

As of May 29, 2009, San Faustín beneficially owned 60.64% and Tenaris, which is also controlled by San Faustín, held 11.46% of our outstanding voting stock. Rocca & Partners controls a significant portion of the voting power of San Faustín and has the ability to influence matters affecting, or submitted to a vote of, the shareholders of San Faustín. As a result, Rocca & Partners is indirectly able to elect a substantial majority of the members of the Company’s board of directors and has the power to determine the outcome of most actions requiring shareholder approval, including, subject to the requirements of Luxembourg law, the payment of dividends. The decisions of the controlling shareholder may not reflect the will or best interests of other shareholders. For example, the Company’s articles of association permit the board of directors to waive, limit or suppress preemptive rights in certain cases. Accordingly, our controlling shareholder may cause our board of directors to approve an issuance of shares for consideration without preemptive rights, thereby diluting the minority interest in the Company. See “—Risk Factors—Risks Relating to our ADSs—Holders of our shares and ADSs in the United States may not be able to exercise preemptive rights in certain cases.”

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

We do not own one hundred percent of the interests in certain of our subsidiaries. As of March 31, 2009, approximately 25.97% of Siderar was held by the Administración Nacional de la Seguridad Social (“ANSeS”), Argentina’s governmental social security agency, approximately 8.78% was publicly held, and approximately 4.31% was held by certain Siderar employees. ANSeS became a shareholder of Siderar in the last quarter of 2008 as a result of the nationalization of Argentina’s private pension system, which caused assets under administration of Argentina’s private pension funds—including significant interests in publicly traded companies, such as Siderar, held by such funds—to be transferred to ANSeS.

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

The Company’s tax-exempt status will terminate on December 31, 2010. If we are unable to mitigate the consequences of the termination of the preferential tax regime applicable to the Company, in the future we may be subject to a higher tax burden and holders of our shares or ADSs may be subject to tax withholdings.

The Company was established as a société anonyme holding under Luxembourg’s 1929 holding company regime and the “billionaire” provisions relating thereto. 1929 holding companies are exempt from Luxembourg corporate income tax over income derived from low tax jurisdictions and withholding tax over dividends distributions to holders of our shares and ADSs. Following a decision by the European Commission, the Grand-Duchy of Luxembourg terminated its 1929 holding company regime, effective January 1, 2007. However, under the implementing legislation, pre-existing publicly-listed companies —including the Company— are entitled to continue benefiting from their current tax regime until December 31, 2010. If we are unable to mitigate the consequences of the termination of the preferential tax regime, in the future we may be subject to a higher tax burden and holders of our shares or ADSs may be subject to tax withholdings.

Risks Relating to the Countries in Which We Operate

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

The results of Ternium’s operations are subject to the risks of doing business in emerging markets, principally in Argentina and Mexico, and have been, and could in the future be, affected from time to time to varying degrees by political developments, events, laws and regulations, such as forced divestiture of assets; restrictions on production, imports and exports; interruptions to essential energy inputs; exchange and/or transfer restrictions; inflation; devaluation; war or other international conflicts; civil unrest and local security concerns that threaten the safe operation of company facilities; direct and indirect price controls; tax increases; changes in interpretation or application of tax laws and other retroactive tax claims or challenges; expropriation of property; changes in laws or regulations; cancellation of contract rights; delays or denial of governmental approvals; and environmental regulations. Both the likelihood of such occurrences and their overall effect upon Ternium vary greatly from country to country and are not predictable. Realization of these risks could have an adverse impact on the results of operations and financial condition of Ternium’s subsidiaries located in the affected country. For example, in April 2008, the Venezuelan government announced its intention to nationalize Sidor. For more information on the Sidor nationalization process, see Item 4. “Information on the Company—A. History and Development of the Company—Sidor Nationalization Process.”

Argentina

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

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

Our business and results of operations in Argentina have closely followed macroeconomic conditions. Domestic sales of our Argentine subsidiary were severely affected by Argentina’s recession during 2001 and 2002. The domestic economic recovery over the 2003 — 2008 period, with sustained growth in industrial activity, agriculture, construction and a significant improvement in the automobile industry, increased our Argentine domestic sales. During the last quarter of 2008, however, the downturn in the global economy reached the Argentine economy and had a significant adverse impact on the sales of our Argentine subsidiary in its domestic market.

The Argentine economy is currently facing significant challenges. As further discussed below, inflation increased significantly since 2005, and the economy has been affected by supply constraints. Capital investment in general has lagged due to political uncertainties and governmental actions, including price controls, export taxes, the nationalization of Argentina’s private pension system and other measures limiting the conduct of business in the private sector. Declining capital investment may affect growth and, accordingly, cause the demand for our local subsidiary’s products in the domestic market to drop. While the Argentine government has announced a number of measures with the purpose of softening the downturn’s impact on the economy’s activity level while maintaining the employment level, Argentina’s economy may suffer if such measures are not successfully implemented or otherwise fail to attain their stated objectives. In addition, if the current economic downturn continues, Argentina’s lack of financing alternatives could significantly impair the country’s ability to sustain the economy’s activity level, foster economic growth and/or avert a new sovereign default.

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

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

In the past, inflation has undermined the Argentine economy and the government’s ability to stimulate economic growth. During 2002, the Argentine Consumer Price Index (“CPI”) increased by 41%, and the Wholesale Price Index (“WPI”) increased by 118.2%. According to official inflation data published by the Instituto Nacional de Estadística y Censos (“INDEC”), Argentina’s national statistics institute, inflation slowed in 2003, with a 3.7% increase in the CPI and a 2% increase in the WPI. Beginning in 2004, both indexes began showing significant year-over-year increases in local prices, signaling a trend characteristic of an inflationary economy. According to the INDEC, CPI increased by 6.1% in 2004, 12.3% in 2005, 9.8% in 2006, 8.5% in 2007 and 7.2% in 2008, whereas WPI went up by 7.9% in 2004, 10.6% in 2005, 7.1% in 2006, 14.4% in 2007 and 9.4% in 2008. As noted above, Argentina’s inflation indicators have been subject to changes in calculation in recent years and may not be consistent with the past or may not adequately reflect increases in cost. Moreover, since such changes were implemented, the official inflation figures published by the INDEC have been disputed by independent economists.

In the absence of a corresponding increase in prices received by our Argentine subsidiary from the sale of their products, sustained inflation in Argentina would negatively impact its results of operations and financial position. In addition, a return to a high inflation economy could undermine Argentina’s cost competitiveness abroad if not offset by an Argentine peso devaluation, while also negatively affecting the economy’s activity and employment levels. Uncertainty about future inflation may contribute to slow the economic activity level by reducing the economy’s growth. Argentine inflation rate volatility makes it impossible to estimate with reasonable certainty the extent to which activity levels and results of operations of our Argentine subsidiary could be affected by inflation in the future.

Measures implemented by the Argentine government could negatively affect the liquidity of the local capital markets, thereby limiting our ability to obtain local financing for our Argentine operations.

On November 20, 2008, Argentina overhauled its social security system, eliminating the dual pension system implemented in 1994 and replacing it by an integrated public pension system administered by the ANSeS. Under the former system, employees could opt to continue making social security contributions to the government-administered pension system or have such contributions deposited in individual, separate accounts managed by private funds known as Administradoras de Fondos de Jubilaciones y Pensiones, or AFJPs. The AFJPs were required to invest such funds in different types of financial instruments, such as government bonds, mutual funds, corporate stocks, and other securities, subject to certain limitations and requirements set forth in applicable regulations. The new law mandated that all funds and investments under the AFJPs’ administration be transferred to the ANSeS for such entity to administer them as a single public pension fund, and ordered that all future social security contributions be made to such public pension fund. The AFJPs had approximately USD23 billion in assets under their administration, and were the largest investors in the country’s capital markets.

The Argentine government’s decision to nationalize the private pension funds has negatively affected the liquidity of the local capital markets, thereby limiting the ability of Argentine companies—including our Argentine subsidiary—to obtain local financing for their operations. Moreover, this measure may discourage future investments in the country, which could have an adverse impact on the economy’s activity level and growth and thus affect our sales and results of operations. We cannot give any assurances that the Argentine government will not take other, similar measures in the future, nor can we predict the impact that any such measures may have on our results of operations or financial condition.

The Argentine Central Bank has imposed restrictions on the transfer of funds outside of Argentina and other exchange controls in the past and may do so in the future, which could prevent Ternium from paying dividends or other amounts from cash generated by its Argentine operations.

In 2001 and 2002 and until February 7, 2003, the Argentine Central Bank restricted Argentine individuals and corporations from transferring U.S. dollars abroad without its prior approval. In 2003 and 2004, the government reduced some of these restrictions, including those requiring the Argentine Central Bank’s prior authorization for the transfer of funds abroad in order to pay principal and interest on debt obligations. Nevertheless, significant government controls and restrictions remain in place. Increasingly during 2008 and into 2009, the Argentine government has been imposing new restrictions on foreign exchange outflows, including through certain transactions on securities traded locally. Recently, the Argentine government has prohibited one regulated company from paying dividends overseas. The existing controls and restrictions, and any additional restrictions of this kind that may be imposed in the future, could impair Ternium’s ability to transfer funds generated by Ternium’s Argentine operations in U.S. dollars outside Argentina to fund the payment of dividends or other amounts and to undertake investments and other activities that require payments in U.S. dollars.

On June 10, 2005, the Argentine government issued Decree No. 616/2005 establishing certain restrictions on capital inflows into Argentina, including by requiring that any principal payment obligation on external financial debt—excluding, subject to compliance with certain requirements, export financings and debt securities publicly traded in Argentina—of Argentine residents (including private Argentine entities) have a maturity of at least 365 days from the date of receipt of the proceeds thereof, and that 30% of the amount of such proceeds be deposited in a non-transferable, non-interest bearing account with an Argentine bank for 365 days. These restrictions could affect Ternium’s ability to finance its investments and operations in Argentina. In addition, our Argentine subsidiary is currently required to repatriate U.S. dollars collected in connection with exports from Argentina (including U.S. dollars obtained through advance payment and pre-financing facilities) into Argentina and convert them into Argentine pesos at the market-based floating exchange rate applicable on the date of repatriation. In October 2008, the time periods for the repatriation of export revenues credited in foreign currency overseas were, in practice, substantially shortened.

The above restrictions and requirements, and any additional restrictions or requirements that may be imposed in the future, expose Ternium to the risk of losses arising from fluctuations in the exchange rate of the Argentine peso. For additional information on current Argentine exchange controls and restrictions, see Item 10. “Additional Information—D. Exchange Controls.”

The Argentine government has increased taxes on Ternium’s operations in Argentina and could further increase the fiscal burden on its operations in Argentina in the future.

Since 1992, the Argentine government has not permitted the application of an inflation adjustment on the value of fixed assets for tax purposes. Since the substantial devaluation of the Argentine peso in 2002, the amounts that the Argentine tax authorities permit Ternium to deduct as depreciation for its past investments in plant, property and equipment have been substantially reduced, resulting in a higher effective income tax charge. In addition, in 2002, the Argentine government imposed a 5% tax on the export of manufactured products. If the Argentine government continues to increase the tax burden on Ternium’s operations in Argentina, Ternium’s results of operation and financial condition could be adversely affected.

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

As a result of several years of recession, the forced “pesification” of U.S. dollar-based tariffs into Argentine pesos at a one-to-one exchange rate and the subsequent freeze of gas and electricity tariffs, there has been a lack of investment in gas and electricity supply and transport capacity in Argentina in recent years. Over the course of the last several years, demand for natural gas has increased substantially, driven by a recovery in economic conditions and low prices in comparison with alternative fuel sources. Although the Argentine government is taking a number of measures to alleviate the short-term impact of supply restrictions on residential and industrial users and has taken several measures intended to address the situation in the medium- and long-term, supply restrictions and shortages may continue in the future. Two new power plants became operational during 2008 and are expected to increase system capacity by 8%. These plants are currently still under construction and operating at 50% of their capacity, and are expected to be completed in 2009. If the measures that the Argentine government is taking to alleviate the short-term impact of the crisis prove to be insufficient, or if the investment that is required to increase natural gas generation, energy production and transportation capacity and power generation capacity over the medium and long term fails to materialize on a timely basis, Ternium’s production in Argentina (or that of its main suppliers), could be curtailed, and Ternium’s sales and revenues could decline. Although Ternium is taking measures, such as the purchase of alternative fuels such as fuel oil, to limit the effect of supply restrictions on its operations in Argentina, such efforts may not be sufficient to avoid any impact on Ternium’s production in Argentina (or that of its main suppliers) and Ternium may not be able to similarly limit the effect of future supply restrictions. See “—Risks Relating to the Steel Industry—Price fluctuations or shortages in the supply of raw materials and energy could adversely affect Ternium’s profits” above.

Mexico

Ternium has significant manufacturing operations and assets located in Mexico and a majority of its sales are made in Mexico. Ternium’s main revenues derived from its Mexican operations, therefore, are indirectly related to market conditions in Mexico and to changes in its GDP and per capita disposable income. Ternium’s business could be materially and adversely affected by economic, political and regulatory developments in Mexico.

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

In the past, Mexico has experienced several periods of slow or negative economic growth, high inflation, high interest rates, currency devaluation and other economic problems. Furthermore, the Mexican national economy tends to reflect changes in the economic environment in the United States. If problems such as the current deterioration in Mexico’s economic conditions continue, or social instability, political unrest, reduction in government spending or other adverse social developments reemerge in the future, they could lead to continued volatility in the foreign exchange and financial markets, and, depending on their severity and duration, could adversely affect the business, results of operations, financial condition, liquidity or prospects of Ternium. Moreover, adverse economic conditions in Mexico could result in higher interest rates accompanied by reduced opportunities for refunding or refinancing, increased raw materials and operating costs, reduced domestic consumption of Ternium’s products, decreased operating results and delays in capital expenditures dependent on U.S. dollar purchases of equipment.

Further devaluation of the Mexican peso could have a negative impact on Ternium’s results.

Ternium has Mexican peso-denominated revenues from domestic sales in Mexico, which represent a considerable portion of Ternium’s overall revenues. In addition, a significant portion of our Mexican subsidiaries’ costs are denominated in U.S. dollars. As a result, a major portion of Ternium’s income is affected by the fluctuation of the Mexican peso against the U.S. dollar. If the Mexican peso depreciates, as occurred in Mexico during the fourth quarter of 2008 and the beginning of 2009, the results from our Mexican operations, when measured in U.S. dollar terms, will be lower, thus affecting our operating margin and financial condition.

Changes in the Mexican tax system could have an adverse effect on Ternium’s Mexican operations.

On September 14, 2007, the Mexican Congress passed a tax reform act, which created a new flat tax (the “impuesto empresarial a tasa única” or IETU) which, effective January 1, 2008, replaced the Mexican assets tax (the “impuesto al activo” or IMPAC.) The act also established certain temporary and operational limits for the recoverability of assets tax credits. The IETU works as a corporate income tax supplement and is levied on income received. Ternium Mexico consolidates its various subsidiaries for purposes of determination and payment of Mexican corporate income tax. However, consolidation is not permitted for purposes of determination and payment of the new flat tax, nor is it possible to apply corporate income tax credits against IETU liabilities. These changes in the Mexican tax system may affect our Mexican subsidiaries’ tax burden and the application or recoverability of certain of their tax credits. For more information, see note 3 to our audited consolidated financial statements included elsewhere in this annual report.

Certain Regulatory Risks and Litigation Risks

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

International trade-related legal actions and restrictions pose a constant risk for Ternium’s international operations and sales throughout the world. Additionally, increased global trade liberalization, with many countries forming free trade blocs or otherwise reducing restrictions on imported goods, including flat steel products, and excess global steel capacity have increased competition in many markets in which Ternium sells flat steel products. Such risks and increased competition are likely to continue into the foreseeable future. Also, since we obtained control over Grupo Imsa we have become a significant consumer of slabs, which we buy from various suppliers in Mexico and overseas. Imports of slabs into Mexico are, subject to certain conditions, brought under lower import duties or through a temporary import regime. Should slabs imports into Mexico grow, we may not be able to make such imports under the lower duty regime, or the Mexican government may increase the applicable duties or impose restrictions in the quantities allowed to be imported.

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

Countries can impose restrictive import duties and other restrictions on imports under various national trade laws. The timing and nature of countries’ imposition of trade-related restrictions potentially affecting Ternium’s exports are unpredictable. Ternium’s international operations are vulnerable to such trade actions or restrictions that surface in any country to which Ternium exports or potentially could export. Trade restrictions on Ternium’s exports could adversely affect Ternium’s ability to sell products abroad and, as a result, Ternium’s profit margins, financial condition and overall business could suffer.

One significant source of trade restrictions results from countries’ imposition of so-called “antidumping” and “countervailing” duties, as well as “safeguard measures.” These duties can severely limit or altogether impede an exporter’s ability to export to important markets. In several of Ternium’s major export destinations, such as the United States of America or Europe, safeguard duties and other protective measures have been imposed against a broad array of steel imports in certain periods of excess global production capacity, as is currently the case. Furthermore, certain domestic producers have filed antidumping and/or countervailing duty actions against particular steel imports. Some of these actions have led to restrictions on Ternium’s exports of certain types of steel products to some steel markets. As domestic producers’ filing of such actions is largely unpredictable, additional antidumping, countervailing duty or other such import restrictions could be imposed in the future, limiting Ternium’s export sales to and potential growth in those markets. See Item 4. “Information on the Company—B. Business Overview—Regulation—Trade regulations.”

Potential environmental, product liability and other claims could create significant liabilities for Ternium that could adversely affect its business, financial condition, results of operations and prospects.

Some of the activities for which the Ternium companies supply products, such as canning for consumption, construction and the automotive industry are subject to inherent risks that could result in death, personal injury, property damage or environmental pollution. Furthermore, Ternium’s products are also sold to, and used in, certain safety-critical appliances. Correspondingly, defects in Ternium’s products or an inconsistency with the specifications of an order or the requirements of an application, could result in death, personal injury, property damage, environmental pollution, damage to equipment or disruption to a customer’s production lines. Actual or claimed defects in the products of the Ternium companies could give rise to claims against Ternium or its subsidiaries for losses and expose it to claims for damages, including significant consequential damages. In addition, the Ternium companies are subject to a wide range of local, provincial and national laws, regulations, permits and decrees relating to the protection of human health and the environment, and remediation or other environmental claims could be asserted against Ternium. The insurance maintained by Ternium may not be adequate or available to protect it in the event of a claim or its coverage could be canceled or otherwise terminated. A major claim for damages related to products sold could have a material adverse effect on Ternium’s business, financial condition, results of operations or prospects.

Risks Relating to our ADSs

The market price for our ADSs could be highly volatile.

Volatility in the price of our ADSs may be caused by factors outside of our control and may be unrelated or disproportionate to Ternium’s operating results. In particular, announcements of potentially adverse developments, such as proposed regulatory changes, new government investigations or the commencement or threat of litigation against Ternium, as well as announced changes in Ternium’s business plans or those of its competitors could adversely affect the trading price of our ADSs, regardless of the likely outcome of those developments or proceedings. Broad market and industry factors could adversely affect the market price of our ADSs, regardless of its actual operating performance. As an example of this volatility, the price of our ADSs reached USD45.99 on June 6, 2008, before falling to USD4.55 on November 20, 2008, and then recovering to a closing price of USD 17.42 on June 18, 2009.

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

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

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

Holders of our ADSs may encounter difficulties in the exercise of dividend and voting rights.

You may encounter difficulties in the exercise of some of your rights as a shareholder if you hold ADSs rather than shares. If we make a distribution in the form of securities, the depositary is allowed, at its discretion, to sell that right to acquire those securities on your behalf and instead distribute the net proceeds to you. Also, under certain circumstances, such as our failure to provide the depositary with voting materials on a timely basis, you may not be able to vote by giving instructions to the depositary. In the circumstances specified in the deposit agreement, if the depositary does not receive voting instructions from the holder of ADSs or the instructions are not in proper form, then the depositary shall deem such holder to have instructed the depositary to give, and the depositary shall give, a proxy to a person designated by the Company with respect to that amount of shares underlying such ADSs to vote that amount of shares underlying such ADSs in favor of any proposals or recommendations of the Company (including any recommendation by the Company to vote that amount of shares underlying such ADSs on any issue in accordance with the majority shareholders’ vote on that issue) as determined by the appointed proxy. No instruction shall be deemed given and no proxy shall be given with respect to any matter as to which the Company informs the depositary that (x) it does not wish such proxy given, (y) substantial opposition exists, or (z) the matter materially and adversely affects the rights of the holders of ADSs.

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

Pursuant to Luxembourg corporate law, existing shareholders of the Company are generally entitled to preemptive subscription rights in the event of capital increases and issues of shares against cash contributions. Under the Company’s articles of association, the board of directors has been authorized to waive, limit or suppress such preemptive subscription rights until October 26, 2010. The Company, however, may issue shares without preemptive rights only if the newly-issued shares are issued:

	•		for, within, in conjunction with or related to, an initial public offering of the shares of the Company on one or more regulated markets (in one or more instances);
	•		for consideration other than cash;
	•		upon conversion of convertible bonds or other instruments convertible into shares of the Company; provided, however, that the pre-emptive subscription rights of the then existing shareholders shall apply in connection with any issuance of convertible bonds or other instruments convertible into shares of the Company for cash; and
	•		subject to a certain maximum percentage, as compensation to directors, officers, agents or employees of the Company, its direct or indirect subsidiaries or its affiliates, including without limitation the direct issuance of shares or the issuance of shares upon exercise of options, rights convertible into shares or similar instruments convertible or exchangeable into shares issued or created to provide compensation or incentives to directors, officers, agents or employees of the Company, its direct or indirect subsidiaries or its affiliates.

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

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

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

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

Item 4. Information on the Company

Overview

Ternium is a leading steel company in Latin America, manufacturing and processing a wide range of flat and long steel products for customers active in the construction, home appliances, capital goods, container, food, energy and automotive industries. Ternium has a production capacity of finished steel products of approximately 9.6 million tons per year, and produced nearly 6.4 million tons of crude steel in 2008. The Company believes that it is a low-cost steel producer due to its integrated operations, state-of-the-art steel production facilities, access to diversified sources of raw materials and other production inputs and operating efficiencies.

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

Ternium primarily sells its steel products in the regional markets of North, Central and South America, where its manufacturing facilities are located, allowing it to provide specialized products and delivery services to its clients. We believe that Ternium is the leading supplier of flat steel products in Argentina, a leading supplier of flat steel products in Mexico and a significant competitor in the Mexican market for long steel products, and a competitive player in the international steel market for flat and long steel products. Ternium maintains a presence in Europe through its network of commercial offices, which allows it to reach clients outside its regional markets and place products in case of slower demand in domestic economies, achieve improved effectiveness in the supply of its products and in the procurement of steel for its manufacturig facilities, and maintain a fluid commercial relationship with its clients by providing continuous services and assistance.

In 2008, approximately 61.8% of Ternium’s sales were made to North America, 36.7% to South and Central America, and 1.5% to Europe and other markets. Ternium’s net sales were USD8,464.9 million, gross profit was USD2,336.9 million, and net income attributable to equity holders was USD715.4 million, which amounts reflect the de-consolidation of Sidor since April 1, 2008, and the consolidation of all the other subsidiaries for the full fiscal year.

A.

History and Development of the Company

The Company

Our legal and commercial name is Ternium S.A. The Company was organized as a joint stock corporation (societé anonyme holding) under the laws of the Grand-Duchy of Luxembourg on December 22, 2003. Our registered office is located at 46a, Avenue John F. Kennedy, L-1855 Luxembourg, telephone number +352 2668 31 52. Our agent for U.S. federal securities law purposes is Ternium International U.S.A. Corporation, located at 2200 West Loop South, 8^thfloor, Houston, TX 77027, United States of America.

Ternium

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

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

As a part of a multiple-step corporate reorganization in 2005, San Faustín reorganized its investments in flat and long steel manufacturing, processing and distribution businesses by contributing its controlling interests in Siderar, Sidor (through Amazonia and Ylopa) and Ternium Internacional to the Company. On August 22, 2005, we acquired, together with Siderar, an indirect 99.3% interest in the Mexican company Hylsamex, S.A. de C.V. (“Hylsamex”) and its subsidiaries and the equity stakes owned by Hylsamex’s former controlling shareholder, Alfa, S.A. de C.V., in Amazonia and Ylopa. We subsequently purchased additional shares of Hylsamex in the open market, subject to applicable law, thereby increasing our and Siderar’s direct and indirect interest in Hylsamex to 99.8%. In 2005, each of Tenaris and Usiminas exchanged its interests in Amazonia, Ylopa and, in the case of Usiminas, Siderar for shares of the Company, and Sivensa exchanged its interest in Amazonia for shares of the Company.

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

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

On April 29, 2007, the Company entered into an agreement with Grupo Imsa, S.A.B. de C.V. (“Grupo Imsa”), a steel manufacturer with operations in Mexico, the United States and Guatemala, and Grupo Imsa’s controlling shareholders pursuant to which Grupo Imsa came under our control on July 26, 2007. Under the agreement, the Company, through a wholly owned subsidiary, made a cash tender offer under applicable Mexican law for all of the issued and outstanding share capital of Grupo Imsa. Pursuant to the tender offer, we acquired 25,133,856 shares representing 9.3% of the issued and outstanding capital of Grupo Imsa. Concurrently with the consummation of the tender offer, on July 26, 2007, all the shares of Grupo Imsa that were not tendered into the tender offer (including the shares owned by Grupo Imsa’s majority shareholders), representing 90.7% of Grupo Imsa’s issued and outstanding share capital were redeemed for cash pursuant to a capital reduction effected at the same price per share. Accordingly, we now own all of Grupo Imsa’s issued and outstanding share capital.

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

Sidor Nationalization Process

On March 31, 2008, the Company controlled approximately 59.7% of Sidor, while CVG, and Banco de Desarrollo Económico y Social de Venezuela, or BANDES (a bank owned by the Venezuelan government), held approximately 20.4% of Sidor and certain Sidor employees and former employees held the remaining 19.9% interest.

Further to several threats of nationalization and various adverse interferences with management in preceding years, on April 8, 2008, the Venezuelan government announced its intention to take control over Sidor. On April 29, 2008, the National Assembly of Venezuela passed a resolution declaring that the shares of Sidor, together with all of its assets, were of public and social interest, and authorizing the Venezuelan government to take any action it deemed appropriate in connection with any such assets, including expropriation.

On May 11, 2008, Decree Law 6058 of the President of Venezuela regulating the steel production activity in the Guayana region in Venezuela (the “Decree”), dated April 30, 2008, was published. The Decree ordered that Sidor and its subsidiaries and associated companies be transformed into state-owned enterprises (“empresas del Estado”), with Venezuela owning not less than 60% of their share capital. The Decree required the Venezuelan government to create two committees: a transition committee to be incorporated into Sidor’s management and to ensure that control over the current operations of Sidor and its subsidiaries and associated companies was transferred to the government on or prior to July 12, 2008, and a separate technical committee, composed of representatives of the government and the private shareholders of Sidor and its subsidiaries and associated companies, to negotiate over a 60-day period (extendable by mutual agreement) a fair price for the shares to be transferred to Venezuela. The Decree also stated that, in the event the parties failed to reach agreement by the expiration of the 60-day period, the Venezuelan Ministry of Basic Industries and Mining would assume control and exclusive operation of, and the Executive Branch would order the expropriation of the shares of, the relevant companies.

Upon expiration of the term contemplated under the Decree, on July 12, 2008, Venezuela, acting through CVG, assumed operational control and complete responsibility for Sidor’s operations, and Sidor’s board of directors ceased to function. However, negotiations between the Venezuelan government and the Company regarding the terms of the compensation continued over several months, and the Company retained formal title over the Sidor shares during that period.

On May 7, 2009, the Company completed the transfer of its entire 59.7% interest in Sidor to CVG. The Company agreed to receive an aggregate amount of US$1.97 billion as compensation for its Sidor shares. Of that amount, CVG paid US$400 million in cash on that date. The balance was divided in two tranches: the first tranche, of US$945 million, will be paid in six equal quarterly installments (the first such installment being due on August 7, 2009), while the second tranche will be paid at maturity in November 2010, subject to quarterly mandatory prepayment events based on the increase of the WTI crude oil price over its May 6, 2009 level.

B.

Business Overview

Our Business Strategy

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

The main elements of this strategy are:

•		Further integrate Ternium’s operations. We have changed our functional organization from independent companies to one company organized under business units with specific functional responsibilities. Integrating the operations of our subsidiaries has allowed Ternium to better serve our clients, to increase the diversification of our products, to benefit from enhanced flexibility and operative synergies and to rationalize our cost structure.
•		Enhance Ternium’s position as a low cost steel producer. We believe that further integration of Ternium’s operating facilities should improve utilization levels of its plants, increase efficiency and further reduce production costs from levels that we already consider to be among the most competitive in the steel industry;
•		Implementing Ternium’s best practices. We believe that the implementation of Ternium’s commercial and production best practices in acquired new businesses should generate additional benefits and savings. For example, the implementation of Ternium’s cost control procedures and performance analysis in Hylsamex improved control over its production variables and led to cost savings;
•		Focus on higher margin value-added products. We intend to continue to shift Ternium’s sales mix towards higher margin value-added products, such as cold rolled sheets and coated and tailor-made products, and services, such as just-in-time delivery and inventory management. In this regard, our Mexican acquisitions in 2005 and 2007 allowed Ternium to expand its offerings of value-added products, such as galvanized products and panels;
•		Maximize the benefits arising from Ternium’s broad distribution network. We intend to maximize the benefits arising from Ternium’s broad network of distribution, sales and marketing services to reach clients in major steel markets with a comprehensive range of value-added products and services and to continue to expand its customer base and improve its product mix. For example, the acquisition of Hylsamex in 2005 allowed us to increase Ternium’s participation in the North American market, and the Grupo Imsa transaction in 2007 further increased such participation; and
•		Pursue strategic growth opportunities. We have a history of strategically growing our businesses through acquisitions. In addition to strongly pursuing organic growth, we intend to identify and pursue growth-enhancing strategic opportunities to consolidate Ternium’s presence in its markets, gain further access to iron ore and other inputs, expand its offerings of value-added products, increase its steel production and increase its distribution capabilities.

Our Competitive Strengths

We believe that the following competitive strengths distinguish Ternium from its competitors and enhance its leading market position:

•

State-of-the-art, low cost producer. The combination of a portfolio of state-of-the-art, low cost steel production mills (one of which is fully integrated with iron ore mines), access to diversified sources of raw materials and cost-competitive labor sources and operating efficiencies makes Ternium a low cost producer of steel and a cost-competitve producer of value-added products;

•		Strong market position and extensive market reach. Ternium has a leading participation in the market for flat steel products in Argentina and in Mexico. The location of its production facilities gives Ternium favorable access to some of the most important regional markets in the Americas, including the North American Free Trade Agreement, or NAFTA, and Mercado Común del Sur, or Mercosur; and
•		Experienced and committed management team. Our management team has extensive experience in, and knowledge of, the steel industry, which enhances Ternium’s reputation in the global steel markets. A large percentage of our senior managers have spent their entire careers working within the steel businesses of San Faustin and its affiliates. Our management team has substantial experience in increasing productivity and reducing costs, as well as in identifying, evaluating and pursuing growth opportunities and integrating acquisitions.

Our Products

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

Flat steel products

Slabs: Slabs are semi-finished steel forms that are used as inputs for the production of flat steel products such as hot rolled coils, cold rolled coils, and the coated and tailor-made products described below. A slab is different from a billet (the semi-finished product used for long steel production) mainly in its dimensions. Both slabs and billets are generally continually casted. The use of slabs is determined by its dimensions and by its chemical and metallurgical characteristics.

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

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

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

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

Electrogalvanized and pre-painted sheets: Electro-galvanized and pre-painted sheets are sold not only to customers in the automotive and home appliance industries, but also to clients working in the construction of road-defenses, sewage systems, bridges and other infrastructure projects. Electro-galvanized and pre-painted sheets are produced from cold rolled coils by adding a layer of zinc that is attached by an electroplating continous process, in one or both sides. The electro-galvanized coils are subsequently cut and sold either as sheets or are further processed with a color coating to produce pre-painted sheets. Electro-galvanization provides products with a longer useful life and more resistance to corrosion.

Long steel products

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

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

Steel billets: Billets are semi-finished steel forms that are used as inputs in the production of long steel products such as bars, channels or other structural shapes. A billet is different from a slab mainly in its dimensions. Both billets and slabs are generally cast using the continuous casting method. Following the completion of the Sidor nationalization process, we will no longer produce significant volumes of billets. For more information on the recent developments relating to the Sidor nationalization process, see Item 4. “Information on the Company—A. History and Development of the Company—Sidor Nationalization Process.”

Other products

Steel pipes and tubular products: Welded steel pipe is typically used for the transport of water, air, gas and other liquids. Tubular products include galvanized pipes for liquid conduction, structural and industrial applications and light structural shapes which can be used for a variety of applications, including the transport of other forms of gas and liquids under high pressure, pipe for electrical cable conduits and also for oil and gas applications.

•		Tubes for general use. These are finished square or round cross-section tubes (uncoated or galvanized) mainly used in the automotive-part and automotive industries, bicycles, furniture, home accessories, hospital equipment, posts for wire mesh garden and poultry tools.
•		Structural tubes. These are high-quality and multi-purpose products, recommended for structures that need to withstand specific mechanical stress. Typical applications for these tubes are scaffolding, handrails and guard-rails.
•		Tubes for mechanical applications. These are round shaped tubes (uncoated or galvanized) mainly employed in assembled parts of agricultural machinery and industrial equipment.
•		Conduction tubes. These tubes, available without protective anti-rust covering (black) or galvanized, are used for conduction of water, air, gas and special fluids.
•		Conduction electrical tubes (conduit). These are electrical-resistant, welded, round-shaped tubes with coupling endings for either wall covered or uncovered internal building electrical installations.
•		Petrol tubes. Tubing of up to 6mm in thickness, in nominal interior diameters of 2 3/8” up to 6”, specially designed for oil conduction applications or high-pressure liquids.

Beams. Open and tubular section products obtained by roll forming of steel strips.

•		C section (purlins). These are open structural steel profiles with a “C” shape, utilized as window frames, stilts, mainstays, crossbeams and other elements in structures.
•		Z section (purlins). These are open structural steel profiles with a “Z” shape, utilized in the construction industry for building structures. Due to its shape it can be overlapped and stacked.
•		Tubular section. These are small metallic beams used as supports, guides and crossbars for installing windows, doors, frames and boards.

Rollformed products: These are products obtained from the mechanical transformation of flat steel and used mainly in the construction industry. Rollformed products include:

•		Insulated panels. Continuous-process-made panel, formed by a polyurethane foam layer between two steel painted sheets. Thermal isolation and easy installing joints are their most distinctive properties. There is a whole set of different shapes and sections for this product. Widely and successfully applied in warehouses, commercial and industrial refrigeration installations. Can also be used in grain storage, poultry and porcine confinement facilities.
•		Roofing and Cladding. Products made by roll-forming of pre-painted, galvanized and 55% aluminum-zinc coated steels, in sinusoidal, trapezoidal and standing seam profiles. They are mainly used for roofing and side walls for buildings of all kinds of constructions
•		Roof tiles. Product manufactured from galvanized prepainted steel. Its main advantages are that it is lighter, more resistant and waterproof and makes for a faster installation compared to similar systems. It is similar in appearance to traditional tiling but has the durability of coated steel.
•		Steel Deck. Galvanized structural steel flooring system for modern rapid-installation buildings. It optimizes construction times by eliminating the need for traditional framing, as it allows for the simultaneous molding of terraces and mezzanine floorings with significant savings in building time and costs.

Pre-engineered metal building systems: These are steel construction systems for low-rise, non-residential buildings. Include frames, secondary steel members, roofs and walls panels, as well as finishings and accessories. All are precisely manufactured to meet or exceed the highest standards of testing and certification.

We also produce pig iron and pellets.

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

Production Facilities and Processes

Ternium operates state-of-the-art steelmaking facilities. We consider Ternium to be among the lowest cost producers in the Americas, as a result of:

	•		strategically located plants;
	•		favorable access to raw materials, some purchased under long-term contracts and others available at proprietary mines, and access to cost competitive energy and labor sources;
	•		operating history of almost 40 years, which translates into solid industrial know-how;
	•		constant benchmarking and best-practices sharing among the different facilities; and
	•		intensive use of information technology in its production processes.

Our main steel production facilities are located in Argentina, Mexico, the United States and Guatemala. The following map shows Ternium’s manufacturing centers and commercial network offices around the world as of the date of this annual report.

Ternium’s aggregate production capacity of hot rolled steel products for the year ended December 31, 2008 was of approximately 9.6 million tons, of which 8.5 million tons correspond to flat steel products and 1.1 million tons correspond to long steel products (wire rod and rebar.) In this annual report, annual production capacity is calculated based on standard productivity, estimated product mix allocations and considering the maximum number of possible working shifts and a continued flow of supplies to the production process. These figures were significantly lower than in 2007 due to the loss of Sidor in our industrial system.

Argentina

Ternium’s subsidiary Siderar is located in Argentina and conducts its operations through production facilities at the seven locations described below. Each facility is owned by Siderar and located in the Province of Buenos Aires, Argentina.

The following table presents the annual production capacity of the major operational units of the facilities located in Argentina as of December 31, 2008:

						Capacity
						(Thousand tons)
	4			Coke Oven Batteries			1,270
	1			Sinter Plant			1,430
	2			Blast Furnaces			3,700
	1			Continuous Casting			2,850
	1			Hot Rolling Mill			2,750
	2			Cold Rolling Mills			1,610
	1			Tinning Mill			160
	2			Galvanizing Mills			530
	1			Electro-galvanizing Mill			120
	1			Painting Facility			65
	2			Welded Steel Tubes Facilities			190

Ramallo. Our principal manufacturing facility in Argentina is a fully integrated, strategically located plant on the banks of the Paraná River near the town of San Nicolás in the district of Ramallo, which is approximately 280 kilometers north of the city of Buenos Aires. This plant was acquired in the privatization of the state-owned company Somisa in 1992. The Ramallo facility produces all of Argentina’s operations crude steel and has an effective annual production capacity of 2.8 million tons per year (“tpy”). The Ramallo facility includes:

	•		four coke oven batteries;
	•		a continuous feed sinter plant;
	•		two blast furnaces;
	•		a steel making plant;
	•		a hot rolling mill;
	•		a cold rolling mill;
	•		an electrolytic tinning mill;
	•		two service centers: one for tin plated products, with a current capacity of 170 thousand tpy and another for hot rolled product with a capacity of 310 thousand tpy;
	•		a 27 feet deep, two-dock port on the Paraná river used for the reception of raw materials (mainly iron ore and coal) and for the shipment of finished products; and
	•		auxiliary services such as a thermo-electric plant, an oxygen, nitrogen and argon gas-separation plant, lime kilns, a maintenance shop and computer and training centers.

Ensenada. The Ensenada plant has a capacity of up to 1.0 million tpy of cold rolled uncoated sheets and coils. The hot rolled coils it uses come from the Ramallo facility, located at a distance of 330 kilometers by land and approximately 300 kilometers by river. The plant is located on the bank of the River Plate at Ensenada, approximately 70 kilometers south of Buenos Aires. The facility includes:

	•		a cold rolling mill; and
	•		a private port with one freight platform of 150 meters capable of unloading vessels of up to 35 thousand tons and other auxiliary installations for maintenance and administrative activities.

Florencio Varela. This facility is located in Florencio Varela, 30 kilometers south of Buenos Aires at a distance of 35 kilometers and 295 kilometers from Ensenada and Ramallo, respectively. This plant receives cold rolled coils from Ensenada and Ramallo as raw material for its own processes. The facility in this location includes:

	•		an electrolytic galvanizing plant; and
	•		two services centers that produce blanks, skelp and sheets, which are customized steel shapes cut from flat steel products for use by customers in the manufacture of finished products. The service centers have a production capacity of 500 thousand tpy of blanks and customized products.

Haedo. The Haedo plant is located at a distance of 90 kilometers from the Ensenada facility and 270 kilometers from Ramallo. Crude cold rolled sheets used at the plant are received from the Ramallo and Ensenada facilities. The Haedo plant includes a continuous hot dipped galvanizing line and a cut-to-length line and four rollforming machines.

Canning. This facility is located in Canning, approximately 40 kilometers south of the city of Buenos Aires. This facility includes:

	•		a galvanizing line used for the production of hot dipped galvanized steel and products under the trademark “CINCALUM;”
	•		a continuous painting line for coils fully dedicated to the construction and home appliance markets; and
	•		rollforming machines for the production of a variety of corrugated products.

Rosario. This facility is located in Rosario, Santa Fe province, approximately 300 kilometers north of the city of Buenos Aires. This facility provides steel tubes welded by electrical resistance with a capacity of 130 thousand tpy for structural used.

San Luis. This facility is located in San Luis, San Luis province approximately 800 kilometers north west of the city of Buenos Aires. This facility provides steel tubes welded by electrical resistance with a capacity of 60 thousand tpy for structural use.

Mexico

Ternium conducts operations through facilities located in the Mexican cities of Monterrey, Apodaca, Puebla, Monclova and San Luis Potosí. Furthermore, Ternium sources all of the iron ore used in its Mexican facilities from its mines located in Colima and Michoacán, and refines that iron ore into DRI using proprietary technology.

The following table presents the annual production capacity of the major operational units of the complex located in Mexico as of December 31, 2008:

						Capacity
						(Thousand tpy)
	3			Direct Reduction Plants			2,680
	1			Thin Slab Caster / Hot Rolling Mill			2,020
	2			Billet Steel Plants			1,460
	2			Flat Hot Rolling Mills			3,700
	2			Long Hot Rolling Mills			1,060
	7			Cold Rolling Mills			2,150
	7			Galvanizing Lines			1,460
	6			Painting Lines			690
	22			Tube and beam mills			620
	4			Panel Lines			80

Monterrey. Ternium’s facilities in Monterrey’s metropolitan area include:

	•		two DRI facilities;
	•		a steel making plant with a thin slab caster;
	•		three hot rolling mills;
	•		six reversing cold rolling mills and one tandem cold rolling mill;
	•		six pickling lines, annealing ovens, four temper mills, three skin-pass mills and tension leveling equipment;
	•		six galvanizing lines;
	•		five painting lines;
	•		twenty two tubing and beam mills;
	•		four panel lines; and
	•		three steel service centers that produce a variety of specialized products, with a total capacity of 2.3 million tpy.

The primary raw materials required for the Monterrey facilities’ production of steel include DRI, which Ternium produces in its own direct reduction facilities, and/or other iron material in combination with steel scrap that Ternium buys in the domestic or international markets. Ternium’s materials procurement policy is described in greater depth in the section entitled “—Raw Materials and Energy.”

Close to Ternium’s Monterrey facilities are the Nogalar and Apodaca service centers, dedicated to the processing of non-coated and coated steel to produce slitted, cut to length, rollformed products and shapes in various widths and lengths. The total processing capacity in Monterrey’s facilities is 2.3 million tpy.

The Monclova Plant—Coahuila. Located in Monclova, Coahuila, the Monclova Plant is dedicated exclusively to the production of coated steel. This plant purchases cold rolled coils in the domestic market and also receives cold rolled coils from Monterrey as raw material for its own processes. The facility in this location includes:

	•		a galvanizing line; and
	•		a painting line.

San Luis Service Center. This service center is located in San Luis Potosí State, south of the city of Monterrey. This facility processes coated steel to produce slitted and cut to length products in various widths and lengths. The San Luis service center’s total processing capacity is 190 thousand tpy.

The North Plant—Apodaca. Located in Apodaca, Nuevo León (near Monterrey, Mexico), the North Plant is dedicated exclusively to the production of rebar. This plant uses 100% steel scrap as metallic input for its operations, and includes an electric arc furnace, a continuous caster, a reheating furnace and a rolling mill.

The Puebla Plant—Xoxtla. Located in Xoxtla, Puebla (120 km from Mexico City), the Puebla Plant produces both rebar and wire rod, including high-carbon, low-carbon and micro-alloyed wire rod. The Puebla Plant has a direct reduction facility to produce DRI, one electric arc furnace, a ladle furnace, a vacuum degassing station, one continuous caster, a reheating furnace and rolling and finishing mills.

Las Encinas mines. Las Encinas is composed of three separate iron ore mines: Aquila, which is in operation, and Cerro Náhuatl and El Encino, which are currently idle. All of them are located near its pelletizing plant, in the Mexican State of Colima, with a maximum annual capacity of 1.9 million tons.

	•		Aquila is an open-pit mine in Michoacán, Mexico, which began operations in 1998 and is the largest mine at the Las Encinas site. Aquila has the highest percentage of iron content among the Las Encinas mines. Ore mined at Aquila is transported to the pelletizing facility by rail and truck.
	•		Cerro Náhuatl is an open-pit mine in Colima, Mexico, which began operations in 1988. During 2008, Cerro Náhuatl’s cost-effectively minable reserves were exhausted and the mine ceased operations. Industrial capabilities, including crushing equipment, are being relocated to the Aquila mine industrial facility.
	•		El Encino is an underground mine in Jalisco, Mexico, which began operations in 1998 and is not currently in use, as the Aquila mine is a less expensive option for supplying iron ore. An open-pit mine called El Encino was previously operated on the same site from 1970 to 1998.

Ternium’s mining operations at Las Encinas are flexible, giving Ternium the ability to halt production at one or more of its mines from month to month depending on market conditions. Annual production capacities for the different production lines of the Las Encinas mines are set forth in the following table:

Facility		Product		Capacity
				(Thousands tpy)
Crushing Plant		Crushed ore			4,800
Concentration Plant		Concentrated			1,920
Pelletizing Plant		Pellet			1,900

For further information please refer to “—Production Process—Mexico.”

Peña Colorada mine. The Peña Colorada mine consists of a single large mining site located in Minatitlán, Colima, Mexico. The mine is an open-pit mine which began operations in 1975, and has a production capacity of 8.5 million tons of crushed iron ore per year. There is a two-line pelletizing plant (located in Manzanillo, Colima) serving the Peña Colorada mine, with a total installed production capacity of 4.0 million tons of iron ore pellets per year plus and additional 0.4 million tons per year of pellet feed. Peña Colorada has convenient access to seaport and railroad facilities that enables the distribution of the iron ore pellets to the domestic and international markets.

The Peña Colorada mine is operated by Consorcio Minero Benito Juárez Peña Colorada, S.A. de C.V., which has two shareholders—Ternium Mexico and Mittal Steel Lazaro Cárdenas (“MSLC”), a subsidiary of the ArcelorMittal group. Through Ternium Mexico, Ternium holds 50% of Peña Colorada and MSLC holds the other half. Under the existing arrangements, Peña Colorada is required to sell half of the mine’s production to MSLC. See “—Raw Materials and Energy—Mexico—Iron ore.” Annual production capacities for the different production lines of the Peña Colorada mine are set forth in the following table:

Facility		Product		Capacity
				(Thousands tpy)
Crushing Plant		Crushed ore			8,500
Concentration Plant		Concentrated			4,400
Pelletizing Plant		Pellet			4,000

For further information please refer to “—Production Process—Mexico.”

United States of America

Ternium’s United States production facility is located in Shreveport, Louisiana on the bank of the Red River, approximately 550 kilometers north of New Orleans. This plant purchases cold rolled coils in the international markets as raw material for its own processes. The following table presents the annual production capacity of the major operational units of this facility as of December 31, 2008:

Facility		Product		Capacity
				(Thousands tpy)
1 Galvanizing Line		Galvanized and coated sheets			240
1 Painting Line		Pre-painted sheets			160

The facility also includes a slitter to produce customized products.

Central America

In connection with the Grupo Imsa transaction in July 2007, we acquired facilities in Central America. The operations include one coated steel production facility in Guatemala and service centers in Costa Rica, Nicaragua, Honduras and El Salvador. The production facilities receive cold rolled coils from the plant in Monterrey and also purchase them from the international market. The service centers receive galvanized sheets from the Guatemala plant.

Guatemala. This facility is located in Villa Nueva, in the metropolitan area of Guatemala City. The facility includes two galvanizing lines with a capacity of 125 thousand tpy, and processes coated sheets at its service center with one slitter, four cut-to-length lines and eight rollforming lines to produce customized products in various widths and lengths.

Costa Rica, Nicaragua, Honduras and El Salvador. The service centers located in these countries process coated sheets from the Guatemala plant and include cut-to-length and rollforming lines.

Production process

Ternium specializes in manufacturing and processing flat and long steel products. In the case of flat products, two different technologies are used: conventional slab casting and thin slab casting. Although in both cases slabs are reheated before entering the hot rolling mill, thin slab casting requires less energy than conventional slab casting, as it does not require a roughing section at the hot rolling mill. This treatment removes minor superficial defects and softens the steel to permit its transformation in the hot rolling mill to defined specifications. Hot rolled coils and sheets can be processed with or without scaling, according to the clients’ uses and needs.

Hot rolled products can also be put under a deformation process at normal temperature (cold rolling) to reduce their thickness and obtain cold rolled products. These products can be sold in crude form to the market (full hard) or processed in the reheating ovens, annealing bays and tempers lines, to modify their metallurgic and geometric characteristics. The tempered products can be sold as coils or sheets or processed with chromium or tin coverings.

In the production of long products, billets are reheated and taken to rolling temperature. As in the case of slabs, this treatment removes minor superficial defects and softens the steel to permit its transformation in the rolling trains to obtain wire rods and bars as final products.

The production processes in Ternium’s facilities in Argentina and Mexico differ in certain respects. We include a brief description of the different processes below.

Argentina

Ternium’s Argentine subsidiary Siderar is the primary integrated manufacturer of flat steel products in Argentina. Siderar produces crude steel through the use of blast furnaces, which are large chambers lined with refractory bricks used to make pig iron through the melting of pellets, sinter (a mixture of iron ore and limestone) and coke. The molten pig iron is then mixed with steel scrap and limestone in a basic oxygen furnace through a process that removes impurities from the pig iron by injecting pure oxygen at high pressure into the molten metal, burning-off carbon and other elements. The molten steel is then cast using the continuous casting method into slabs. The steel slabs are then sent to a hot rolling mill to be reheated and rolled into hot rolled coils.

Depending on its final use, the hot rolled coil is then scaled, tempered and pickled, before being sent for sale as coil or cut into steel sheet. Alternatively, the hot rolled coils may be sent to a cold rolling mill for use as an input in the production of cold rolled coils. In certain cases, cold rolled coils are processed in an electrolytic cleaning line, an annealing line and a two-stand temper mill to produce thin steel used to produce tin plate.

Cold rolled coils can be further processed into galvanized or electro galvanized sheets (by adding a thin layer of zinc to the products through different processes), tin plate (by adding a thin layer of tin) or pre-painted products. Siderar can also process its production into cut-to-length and tailor made products according to its customers’ needs.

Mexico

In Mexico, Ternium’s subsidiaries manufacture a variety of steel products, including hot rolled coils and sheets, cold rolled coils and sheets, rebar and wire rod, tubular products, such as welded pipes, and processed steel products including galvanized steel, pre-painted steel, mechanical tubular products and insulated panels.

The production process begins with the sourcing of iron ore from Ternium’s own mines in Mexico. The extraction consists of drilling, loading and transporting the iron ore to a grinding facility in order to reduce it to a specified size and quality through the grinding process and the separation of ore with low iron content.

The ore is then shipped to the pelletizing plant, where is gradually fed into a grinding mill to be reduced to a certain size. After grinding, the ore goes through magnetic drums that separate the iron from the sterile material. The grinding and concentration processes are repeated two more times in order to eliminate all the possible sterile material, concentrate the iron to obtain a pellet with high iron content. These processes are carried out using water as an auxiliary element. Excess water is afterwards eliminated, leaving only the necessary humidity for the formation of pellets using pelletizing disks. Pellets are separated according to their size and are then hardened in ovens. The processed pellets are then shipped to the steel producing facilities for the DRI process. Next, the electric arc furnaces melt a combination of steel scrap and DRI to produce liquid steel.

For flat products, molten steel is casted into slabs using state-of-the-art technology that produces thin slabs, which then are rolled into hot and cold rolled coils. The steel is then further processed to higher value-added products such as galvanized and prepainted steels, as well as tubing, insulated panels andarchitectural panels, etc. We also purchase from third parties slabs for further processing.

Finally, for long products, molten steel is cast into steel billets that are rolled into rebar and wire rod, such as tire cord and cold heading qualities.

One of Monterrey’s DRI plants includes the latest DRI HYL^® technological advances, such as Hytemp^®, which permits the hot discharge of the DRI to the electric arc furnace generating significant energy savings and improving productivity. The use of state-of-the-art proprietary technology allows our subsidiaries’ production in Mexico to accommodate higher proportions of steel scrap and other metallic charge when high natural gas prices make DRI more expensive to produce.

Sales and Marketing

Net Sales

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

Our total net sales amounted to USD8.5 billion in 2008, USD5.6 billion in 2007 and USD4.5 billion in 2006. For further information on our net sales see Item 5. “Operating and Financial Review and Prospects—A. Results of Operations”.

The following table shows Ternium’s total consolidated net sales by product and geographical region in terms of U.S. dollars for the years indicated:

		For the year ended December 31,
In thousands of U.S. dollars		2008				2007				2006
Flat Steel Product Sales
South and Central America			2,782,543				2,036,967				1,648,897
North America			4,294,677				2,571,788				1,921,774
Europe and Other			47,466				122,960				22,382
Total Flat Steel Products Sales			7,124,687				4.731,715				3,593,053
Long Steel Product Sales
South and Central America			274,215				70,023				19,396
North America			791,755				695,953				720,523
Europe and Other			8,921				6,852				—
Total Long Steel Product Sales			1,075,090				772,829				739,919
Total Other Sales(1)			265,108				128,822				151,945
Total Sales			8,464,884				5,633,365				4,484,918

In thousands of tons		For the year ended December 31,
(unaudited)		2008				2007				2006
Flat Steel Product Sales Volume
South and Central America			2,604				2,499				2,310
North America			3,666				3,035				2,343
Europe and Other			55				185				39
Total Flat Steel Product Sales Volume			6,326				5,719				4,693
Long Steel Product Sales Volume
South and Central America			302				133				39
North America			901				1,113				1,196
Europe and Other			13				15				—
Total Long Steel Product Sales Volume			1,217				1,261				1,235
Total Sales Volume(1)			7,543				6,980				5,928

South and Central America

Sales to customers in South and Central America accounted for 36.7% of Ternium’s consolidated sales during 2008, 38.2% during 2007 and 38.5% during 2006. See Item 5. “Operating and Financial Review and Prospects—A. Results of Operations—Fiscal year ended December 31, 2008 compared to fiscal year ended December 31, 2007—Net sales” and “—Fiscal year ended December 31, 2007 compared to fiscal year ended December 31, 2006—Net sales.”

Ternium’s sales are oriented toward the construction and agriculture industry, the packaging and canning sector (especially for food, paints and sprays), the tube and pipe sector (related to liquids and gas transportation and distribution networks), the automotive industry, the home appliances sector and service centers that further process Ternium’s steel products to attend to particular requirements of steel users.

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

Ternium’s principal clients in the region are located in Argentina. Its sales in this country are sensitive to the general economic conditions and government actions and policies, such as the restrictions on certain foreign currency transfers. For further information on the risks related to an investment in Argentina please refer to Item 3. “Key Information—Risk Factors—Risks Relating to the Countries in Which We Operate—Argentina.” We also sell to clients in other South and Central American countries, including Colombia, Ecuador, Chile, Peru, Guatemala, Costa Rica and Honduras.

North America

Sales to customers in North America accounted for 61.8% of Ternium’s consolidated sales during 2008, 59.3% during 2007 and 59.9% during 2006. See Item 5. “Operating and Financial Review and Prospects—A. Results of Operations—Fiscal year ended December 31, 2008 compared to fiscal year ended December 31, 2007—Net sales” and “—Fiscal year ended December 31, 2007 compared to fiscal year ended December 31, 2006—Net sales.”

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

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

Clients in the United States of America are served directly through the Louisiana plant and through Ternium Internacional’s Houston office and distribution and service centers, which manage transport and logistics issues and provide local services and assistance. The Gulf Coast and a large portion of the West Coast, in particular, are fast growing regions in which our Mexican facilities are highly competitive. The main markets in the United States are the construction industry and the energy market and its related steel consumption.

Europe and Other

Sales to customers in Europe and other markets, which are generally made on a spot basis, accounted for 1.5% of Ternium’s consolidated sales during 2008, 2.5% during 2007 and 1.6% during 2006. See Item 5. “Operating and Financial Review and Prospects—A. Results of Operations—Fiscal year ended December 31, 2008 compared to fiscal year ended December 31, 2007—Net sales” and “—Fiscal year ended December 31, 2007 compared to fiscal year ended December 31, 2006—Net sales.”

Ternium’s largest markets in Europe are Spain and Italy. Clients in Europe are mainly independent, small- and medium-sized companies dedicated to steel processing. A large part of their purchases are of cold rolled coils and coated products, which are mainly produced in Argentina. Their production is generally directed toward the construction, furniture and appliance industries. Ternium’s sales to Europe are carried out through the Ternium commercial network.

Pricing

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

Marketing

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

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

In order to increase Ternium’s participation in regional markets and improve services provided to customers, Ternium consolidated its international sales and marketing activities through Ternium Internacional’s network of commercial offices. Ternium Internacional develops its services through branches, which are 100% fully owned by Ternium Internacional and are strategically located in the Ternium’s key markets. Ternium Internacional has a strong presence in the main steel markets such as the Americas and Europe and has extensive experience promoting steel products. Its marketing expertise helps Ternium to expand its position in current markets and in developing new ones.

South and Central America

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

In 2003, Siderar established a department focused on the development of small- and medium-sized companies (Propymes), under a program created by the Techint Group for the development of its clients and the local industry. The objective of the program is to improve the competitiveness of clients and suppliers, to increase their exports and allow them to substitute imports for local products. Nearly 340 companies are part of this program, which provides support for the commercial, financial, industrial and institutional requirements of these companies.

Ternium’s sales force in this region is oriented toward serving the specific needs of different market sectors, such as the construction industry, the packaging and canning sector (especially for food, paints and sprays), the tube and pipe sector (related to liquids and gas transportation and distribution), the automotive industry, the home appliances sector and steel processors. Through its service centers, Ternium can cut, paint or conform its products to specific client requirements. Customized products include metallic roofing, auto parts, steel for agricultural machinery, different types of tin used to produce sprays and food containers and cut-to-length products used in the home appliance and construction industries.

In addition to its offices located in Argentina, Venezuela and Guatemala, Ternium has commercial and administrative offices in, Colombia, Ecuador, Peru, Uruguay, and service centers in El Salvador, Honduras, Nicaragua and Costa Rica. These offices generally provide commercial services such as the development and maintenance of contacts with clients and end users, analysis of businesses opportunities, assistance to buyers before and after sales, participation in price negotiations, analysis of the market and competitors and assistance in the design and organization of the commercial and promotional strategy for sales in the respective countries. In addition in some of these locations we are able to provide customers with cut-to-length and other customized products locally.

North America

The North American steel market is highly competitive, since most major international steel producers’ direct part of their sales efforts to this region. The Hylsamex acquisition and the Grupo Imsa transaction significantly increased North America’s importance to Ternium’s overall sales.

In Mexico, where our main production facilities are located, we can provide customized services and deliveries. Ternium’s main steel customers in Mexico are in the construction and manufacturing industries (including steel furniture, automotive and electric and home appliances). Propymes was also implemented in Mexico in 2007, with the objective of promoting local industry and, as of December 31, 2008, aproximately 150 companies were part of the program

Mexico’s steel market is strongly oriented toward end users, representing 55% of our subsidiaries’ domestic sales in 2008, 51% in 2007, and 54% 2006. In addition, several Mexican steel producers compete with us in the flat and long steel markets, including AHMSA, Arcelor Mittal, DeAcero S.A. de C.V., or DeAcero, and Aceros San Luis S.A. de C.V., or Aceros San Luis. Ternium’s experienced sales force specializes in the needs of each market sector and focuses on value-added products and services. In this competitive and end-user oriented market, the extensive use of well-known commercial brands allows customers to clearly recognize Ternium’s products. Ternium seeks to increase its competitive advantage by providing value-added services, including the technical assistance related to steel use and production, and developing new steel products.

Ternium has a commercial presence in the United States, including a plant in Shreveport and an office in Houston. From these locations, Ternium provides steel products and related services: logistics, stock management and customer assistance.

Europe and Other

Sales to Europe and the other markets are carried out through a commercial office located in Spain. This office is focused on activities such as trading. It is also responsible for the development of commercial and marketing activities in order to expand Ternium’s client base, the organization of provision programs and activities to promote steel products and the assistance in the purchase process for slabs and semi-finished steel for Ternium. It also provides services related to other commercial requirements, such as credit risk analysis and credit risk insurance, follow up on orders and other customer support.

Competition

Global Market

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

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

There has been a trend in recent years toward steel industry consolidation among Ternium’s competitors. Below is a summary of the most significant transactions:

	•		June 2006: Mittal Steel and Arcelor merge to create ArcelorMittal, the world’s largest steel company.
	•		March 2007: Votorantim acquires Colombia’s Aceria Paz del Rio.
	•		April 2007: Tata Steel completes the acquisition of Corus.
	•		July 2007: Gerdau acquires Chaparral Steel.

Despite this trend, the global steel market remains highly fragmented. In 2008, 2007 and 2006, the four largest steel producers (ArcelorMittal, Nippon Steel, JFE and POSCO) accounted for 18%, 18% and 19%, respectively, of total worldwide steel production (compared to 15% in 2000). In 2008, the top five producers of Latin America accounted for aproximately 71% of the production in the region.

Steel prices in general, including for both flat and long products, have undergone significant volatility in recent years. From 2000 to 2002, the industry, especially in North America, experienced fluctuating capacity, low demand growth levels and other adverse conditions, which led to depressed steel prices and also adversely impacted many steel producers’ profitability. In 2003 and 2004, steel prices increased worldwide, due to higher economic growth in most regions, particularly China and other developing countries, as well as higher raw material prices (iron ore, ferroalloys and energy). Although prices in 2005 were below the 2004 peak, they remained well above the ones from 2000 to 2002. In 2006 prices remained on average above 2005 levels. In 2007, the construction and automotive industry’s activity in the United States of America experienced a slightly increase, which affected the international steel prices. During the first quarter of 2008, steel prices went up due to higher raw material and energy costs notwithstanding a decline in activity in the construction and automotive industries in the United States. However, this trend reversed beginning in the last quarter of 2008 due to the global economic downturn, with prices declining steeply, by aproximately 65% for some products. In addition, given the strong competition that characterizes the flat steel industry, several countries have imposed trade restrictions to protect their domestic steel industries from imports at below market conditions, commonly referred to as “dumping.” For a summary description of some of these regulations, see “—Regulation—Trade regulations.”

South and Central America

Ternium’s most significant market in South and Central America is Argentina. Other relevant markets in the region are Guatemala, Colombia, Ecuador and Chile.

Argentina. Siderar is the main producer in Argentina of flat rolled steel products and faces little competition from domestic steel producers across the majority of its product lines. Its main competition in the Argentine flat steel market is limited to imports, mainly from Brazil. The main Brazilian producers of flat steel value-added products are Usiminas, Companhía Siderúrgica Nacional and Companhia Siderúrgica de Tubarão (part of the ArcelorMittal).

We believe that Siderar has a competitive advantage over potential foreign competitors due to logistical and other advantages that allow it to offer value-added services and maintain strong relationships with domestic customers, together with its ability to customize products to customer specifications, including size and quality. In addition, we believe that the threat of new competitors entering the Argentine flat steel market is mitigated by:

	•		Ternium’s substantial domestic market share;
	•		the specialized service provided locally;
	•		the high capital investment required to construct an integrated manufacturing facility;
	•		the scarcity of good quality scrap in Argentina for use in an electric arc furnace “mini-mill”; and
	•		Ternium’s low production costs and its potential ability to expand capacity at a relatively low investment cost compared to the cost of building and installing an electric arc furnace “mini-mill.”

Although Siderar has been the principal flat steel provider in Argentina since its foundation, its market share has been affected by the economic and trade conditions in the country. During the 1990s, Siderar faced increased competitive challenges from outside Argentina as a result of the Argentine government’s trade liberalization policies. See “—Regulation—Trade regulations.”

Other South and Central American markets. In these markets, Ternium competes with Brazilian and U.S. producers and with Ternium’s former subsidiary Sidor.

North America

Mexico. Ternium has strong domestic competitors in the Mexican steel market and faces increasing competition from imports. Total imports of hot rolled products, cold rolled products and galvanized products have increased sharply in recent years and according to Canacero, the Mexican chamber of the iron and steel industry, accounted for approximately 33%, 27% and 33% of the Mexican market in 2008, 2007 and 2006, respectively.

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

In the rebar market, Ternium’s largest competitor is Siderúrgica Lázaro Cárdenas—Las Truchas S.A. de C.V. (“Sicartsa”), that is currently part of Arcelor Mittal. To a lesser extent, Ternium also faces competition from Aceros San Luis and Deacero. In the low-carbon wire rod market, Ternium’s main competitors are Deacero, Sicartsa and, to a lesser extent, Talleres y Aceros and Aceros San Luis.

The Mexican domestic market for small diameter welded pipe is regional. Orders are usually small and cover a wide range of product specifications. Ternium’s leading competitors in this market are Tubería Laguna, Maquilacero and imports.

The primary customers in the Mexican coated steel market are the construction sector and manufacturing companies (e.g. of air conditioners, home appliances and lighting fixtures). Ternium’s main competitors are imports.

We believe that the threat of new competitors entering the Mexican flat steel market is mitigated by:

	•		the specialized service provided locally;
	•		the scarcity of good quality scrap and high energy prices in Mexico for use in an electric arc furnace “mini-mill”;
	•		Ternium’s low production costs, including its supply of iron ore from its own mines; and
	•		Ternium’s ability to expand capacity at a relatively low investment cost compared to the cost of building and installing an electric arc furnace mini-mill.

United States of America. Ternium competes with U.S. manufacturers and distributors.

Capital Expenditure Program

Capital expenditures in Ternium’s facilities during 2008 amounted to approximately USD544 million. In light of the global economic downturn, we have delayed or canceled an important part of previously announced investment plans and projects. We currently expect that our capital expenditures for 2009 will amount to approximately USD250 million and that such amount will be financed with cash from operations.

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

	•		reduce production costs;
	•		improve product quality, equipment reliability and productivity;
	•		comply with applicable environmental standards; and
	•		provide enhanced customer services.

During 2008, we announced new investments in Argentina and Mexico. These investments were aimed at increasing steel production capacity through the construction of new facilities and the expansion of existing ones. While Ternium continues to work on the basic engineering design for its Mexican project, its scope, timetable and target completion dates are being revised due to the global economic downturn. Certain investments in Argentina were suspended in January 2009 and will resume if and when market conditions improve.

Argentina

During 2008, Siderar carried out a significant investment plan to increase its production capacity and improve the product quality of its facilities. The principal investments initiated or carried out were:

	•		Partial revamping of coke oven plant. The revamping of batteries No. 3 and No. 4 was launched during 2007 with the objective of improving performance and reducing gas emissions. The project’s first stage was completed in March 2008. The second stage (the relining and repair of 70 headers) began in October 2008; works in battery number 3 were completed in March 2009, while works in battery number 4 are currently suspended and will resume if and when market conditions improve.
	•		Relining of blast furnace No. 1. The preparatory works for this project began in 2007, and the relining work commenced in October 2008. We expect that this project will be completed during the first half of 2010.
	•		Construction of new continuous caster. This project mill was launched during October 2008 as part of a plan to increase our Argentine steel production capacity to 4 million tpy. While civil works started and the equipment was commissioned to the vendor, the project is currently suspended and will resume if and when market conditions improve.
	•		Modernization of facilities for storage and internal transportation of raw materials. This project, which was aimed at improving material handling and control, was launched during the first half of 2008; however, it is currently suspended and will resume if and when market conditions improve.

Siderar’s investment plan contemplates a significant increase in crude steel production capacity from the current 2.9 million tons to 4.0 million tons to facilitate growth of the manufacturing sector in Argentina, while allowing Ternium to continue to play an active role in international markets. Besides completing those investments initiated in 2004, the main objectives of the investment plan are the installation of a new continuous caster and metallurgy equipment and the increase of capacity in Siderar’s sinter plant from 4,000 to 5,000 tons per day. As of March 31, 2009, Siderar had invested USD 202.9 million in connection with its investment plan and had entered into several commitments to acquire new production equipment for a total consideration of USD 187.2 million. However, given the severe global economic downturn, its impact on the global steel market and the uncertainty about the evolution of steel demand, Siderar has rescheduled the execution of its investment plan and entered into a renegotiation process to reduce cash outflows.

Mexico

During 2008, our Mexican subsidiaries invested USD 214.8 million. The most significant investments and projects carried out or initiated were:

	•		Modernization of thin slabbing plant. This includes the installation of a liquid core reduction system that provides casting in variable thickness. The modernization was completed by the end of 2008, increasing the capacity of steel casting and hot rolled band production in approximately 85 million tpy; and
	•		Revamping of hot rolling mill No.3. This includes the installation of work-roll change system and the installation of new interstand equipment in the finishing mill. The project will be completed during 2009 and would provide an additional rolling capacity of 280 million tpy.

In 2008, Ternium announced a greenfield project to build a flat steel plant in Mexico, which was aimed at expanding its production capacity. In its initial phase, the project would involve the design and construction of a mini-mill in the Monterrey area, with an annual production capacity of two million tons of hot rolled coils, while its second phase would involve the construction of a cold rolled and galvanizing plant, including a pickling line and a cold rolled tandem mill, with an annual production capacity of one million tons of cold rolled coils and a hot-dipped galvanizing line with an annual production capacity of 300,000 tons of hot-dipped galvanized coils, to serve the industrial and commercial markets. While Ternium continues to work on the basic engineering design for this project, its scope, timetable and target completion dates are being revised due to the global economic downturn.

In addition to these investments, management is considering capital expenditures aimed at routine maintenance or replacement of equipment.

Information technology investments

Our information technology investments in 2008 focused on the following main projects:

	•		completion of the Unified SAP Project, including the integration of the administration, maintenance and supply processes;
	•		deployment of a new core business system for Siderar in Argentina; and
	•		technological integration of the operations of our Mexican facilities, including platform integration, datacenter revamping and consolidation and redesign of telecommunications and security systems and procedures.

We invested an aggregate of approximately USD30.2 million during 2008. In 2009, we expect to invest in information technology projects designed to facilitate the integration of and realize synergies among Ternium’s subsidiaries and improve the security measures over their information technology systems, and to continue developing the projects initiated in 2008.

Raw Materials and Energy

The principal raw materials consumed at Ternium’s integrated steel facilities in Argentina are iron ore and coal, while the principal raw materials for Ternium’s facilities in Mexico are pellets, scrap, slabs, hot and flat rolled coils, and energy. Below is a more complete description of the raw material and energy situation at Ternium’s integrated facilities in these countries. For a description of some of the risks associated with Ternium’s access to raw materials, see Item 3. “Key Information—D. Risk Factors—Risk Relating to the Steel Industry—Price fluctuations or shortages in the supply of raw materials and energy could adversely affect Ternium’s profits.”

Argentina

In Argentina, our subsidiary Siderar produces crude steel through the use of blast furnace technology. Siderar is the primary integrated manufacturer of flat steel products in the country, with an installed capacity of 2.9 million tons of crude steel. The principal raw materials used to produce steel are iron ore and coal. The manufacturing process also requires significant quantities of electricity and natural gas. In connection with the global steel industry downturn, Siderar engaged in several renegotiation processes regarding the pricing of certain iron ore, coal and other supply contracts, as Siderar considered that the contractual terms did not reflect current market conditions. As of the date of this annual report, negotiations in respect of a number of those contracts are still under way.

Iron ore. Iron ore is purchased under long-term agreements from suppliers in neighboring Brazil. Prices under these contracts are determined on an annual basis in accordance with market conditions and follow the prices agreed upon between the major iron ore exporters and their main steel industry clients. Our aggregate annual consumption of iron ore in Argentina ranges between 4.0 and 4.5 million tons. Approximately two thirds of Ternium’s local requirements for iron ore in different forms, such as pellets, lumps and sinter feed fines (iron ore fines smaller than 6 mm) is supplied by Brazil’s Companhia Vale Do Rio Doce, or CVRD. The remaining requirements consist mainly of lump ore (i.e., iron ore within certain size specifications ranging from 6 to 38 mm) from other suppliers located in Brazil, the most important of which are Mineração Corumbaense Reunida S.A., or MCR, a Rio Tinto subsidiary, and MMX Corumba (MMX). The main contracts for these raw materials are with CVRD, MCR and MMX. Our geographic location provides favorable access to high quality lump produced in Brazil’s iron ore mines which are located in the Pantanal Region (Mato Grosso do Sul state) through the Paraguay and Paraná Rivers. The use of barges to haul this lump ore reduces the raw material costs associated with the provision of iron ore since those mines are outside of the international seaborne trade. In 2008, steel-making costs were impacted by rising iron ore prices (ranging between 65% and 87%), due to an extremely tight supply-demand situation. During the first half of 2009, due to the effects of the global economic downturn on the demand for iron ore, prices have fallen approximately 40%.

Coal. Siderar obtains its coke through the processing of coking coal and petroleum coke in its coke ovens. Siderar requires different types of coal to produce coke. Coking coal is mainly purchased under annual renewable contracts with several major international suppliers based in Australia and the United States. Petroleum coke is sourced domestically from producers such as Exxon Mobil and Repsol YPF. The amount purchased from each supplier mainly depends on technical quality requirements of the blast furnace operations and to a lesser degree on commercial conditions. Estimated consumption of coal and petroleum coke is approximately 1.5 million tpy. The price of metallurgical coal has increased substantially during 2008 due to tightening conditions in the global market as demand for metallurgical coal in emerging economies has not been matched with production increases and supply restrictions due to the effects on the supply chain of climatic events (mainly floods in Western Australia but also harsh winter conditions in Canada and China). The price for metallurgical coal has gone up approximately 200-230% from USD 100 per ton to around USD 300-330 per ton during 2008. We expect coking coal prices to fall significantly in 2009, returning to levels closer to 2007.

Electricity. Siderar consumes large quantities of electricity (approximately 135 Mw) for its manufacturing activities, particularly in its Ramallo and Ensenada facilities. The electricity required to cover most of our facilities needs is self-generated by a wholly-owned thermoelectric plant with an installed capacity of 110 Mw located at the Ramallo facility. Most of the energy requirements of the thermoelectric plant are obtained from blast furnace and coke oven gases and from steam that is purchased from a power plant located at the Ramallo facility owned by Siderca S.A.I.C. (“Siderca”), a subsidiary of Tenaris, under a long-term steam sales agreement entered into in June 1995. Another subsidiary of Tenaris manages our subsidiary’s thermoelectric plant and the plant owned by Siderca in exchange for an administration fee. In 2008, we renegotiated the prices to be paid under the steam supply contract for steam purchased during the period from February 2003 to October 2008—following the forced “pesification” of the contract to Argentine pesos at a one-to-one U.S. dollar to Argentine peso exchange rate in 2002—and for steam purchased or to be purchased from October 2008 onwards, which resulted in an aggregate liability to Siderca of USD 10,980,987 for steam purchased during said period, and a price increase of 70% for steam purchased or to be purchased from October 2008 onwards. The rest of the requirements are covered through the purchase of natural gas from Repsol YPF and other market vendors, or with alternative sources of energy such as fuel oil.

Siderar covers electricity shortfalls or sells excesses, as the case may be, at spot prices in the wholesale market. In order to mitigate these shortfalls, it entered into an electricity supply contract with Genelba Power Plant, which is owned by Petrobras, to cover the Ramallo facilities shortfalls. In addition, it has also entered into a supply contract with Central Puerto Plant, which covers the Ensenada, Florencio Varela and Canning facilities shortfalls.

Natural gas. Siderar also consumes substantial volumes of natural gas in Argentina, particularly to operate its blast furnace and power generation facilities. The average daily consumption of its facilities is approximately 1,200 thousand cubic meters of natural gas.

The relative cost of natural gas in Argentina decreased substantially in 2002 following the Argentine peso devaluation and subsequent freezing of tariffs in local currency terms. However, since 2003, this cost gradually increased due to governmental and private tariff negotiations. Currently, the cost of gas and transportation is over 2001 levels, while the cost of distribution is still below the level of 2001. During the last five years, the continuing increase in natural gas demand in Argentina together with a substantial lack of investment in natural gas production and transportation have resulted in shortages of natural gas to industries and private consumers. See Item 3. “Key Information—D. Risk Factors—Risks Relating to the Countries in Which We Operate—Argentina—Restrictions on the supply of energy to Ternium’s operations in Argentina could curtail Ternium’s production and negatively impact Ternium’s results of operations.”

Siderar had a long-term supply arrangement with Repsol YPF until December 2006. From December 2006 and up to July 2007, Siderar purchased gas from Repsol YPF at spot prices and on spot terms and conditions. In August 2007, Siderar and Repsol YPF entered into a natural gas supply agreement covering the period from August 2007 to December 2008. In January 2009, after the agreement had expired without Siderar and Repsol YPF reaching a new mutually acceptable natural gas supply agreement, the Secretaría de Energia—the federal government’s department in charge of energy regulation—determined that, until such time as the parties have reached a new supply agreement, Repsol YPF should continue supplying natural gas to Siderar on the same terms provided in the expired agreement. To the date of this annual report, Siderar and Repsol YPF continue to negotiate a new natural gas supply agreement. Repsol YPF covers an important part of Siderar’s Ramallo facilities needs for natural gas while the rest are covered mainly by TOTAL Austral, a subsidiary of multinational energy company TOTAL, and other significant natural gas traders in Argentina, including Albanesi, Energy Consulting Services and Energy Traders.

Also, Siderar has a long-term supply agreement with Tecpetrol S.A. (“Tecpetrol”), a company controlled by San Faustin. In March 2003, Siderar entered into an agreement with Tecpetrol under which Siderar paid USD17.3 million for the advance purchase of a total of 725 million cubic meters (up to 400 thousand daily cubic meters) of natural gas to be delivered over a period of 5 years on pricing terms that would enable it to share through discounts the impact of any increase in natural gas prices over that period with Tecpetrol. Under the terms of the agreement, Siderar had a minimum guaranteed return on this advance payment equal to LIBOR plus 3.5%. In November 2006, the gas purchased from Tecpetrol covered the total amount paid in March 2003. Since then, no discount was applied to gas prices. In May 2007, Tecpetrol canceled the contract pursuant to a termination clause that allowed any party to terminate the contract after the USD17.3 million paid for the advance purchase of natural gas were exhausted, and continues to supply gas at spot prices and on spot terms and conditions. Siderar’s purchases from Tecpetrol in 2008, 2007 and 2006 amounted to USD1.3 million, USD7.1 million and USD8.9 million, respectively. Siderar covers any variation in its requirements for natural gas in the spot market.

Siderar also has separate transportation agreements with Transportadora de Gas del Norte S.A. (“TGN”), Transportadora de Gas del Sur S.A. (“TGS”), Camuzzi Gas Pampeana S.A. (“Camuzzi”), Gas Natural Ban S.A. (“Gasban”) and Metrogas. The main transportation contract is with TGN, a company partially owned by San Faustin, which expires in April 2013. For the final distribution phase, Siderar has several distribution contracts with Litoral Gas (a company partially owned by San Faustin), Camuzzi, Gasban and Metrogas. The principal contract is with Litoral Gas, which expires in December 2011.

Other raw materials. Ternium’s subsidiary in Argentina Siderar has an on site oxygen, nitrogen and argon separation plants in order to extract these gases for use in the steelmaking process. In December 1993, Siderar entered into a contract with Air Liquide Argentina S.A. for the operation and maintenance of an oxygen separation facility at Ramallo that supplies oxygen, nitrogen and argon. This contract initially had a term of 15 years and was renewable by mutual agreement. It was amended in 2000 and 2002, and its term was extended until 2021. Under the terms of the contract, Siderar is required to take or pay certain minimum daily amounts of oxygen, nitrogen and argon, which amounts are consistent with its production requirements in Argentina. Due to the Ramallo facility’s increasing needs, the contract has been renegotiated a number of times during the last two years to increase the minimum daily take-or-pay amounts of these gases, from 670 tons to 1,880. In September 2008, Siderar and Air Liquide entered into an amended and restated contract for the operation and maintenance of the Ramallo oxygen separation facility and the supply of oxygen, nitrogen and argon for a contracted amount of USD 176.1 million, which is due to terminate in 2025. Siderar and Air Liquide are currently renegotiating the terms of this agreement in light of current market conditions.

Mexico

In Mexico, Ternium’s process for producing steel relies on electric arc furnaces, which melt a combination of steel scrap and DRI to produce liquid steel, which is then further processed to make its steel products. Ternium’s production process requires extensive use of natural gas and electricity, and energy costs are one of the largest components of production costs.

Iron ore. As described under “—Production Process and Facilities—Mexico” above, Ternium’s subsidiaries own interests in two mining companies in Mexico: 100% of the equity of the Las Encinas mines, and a 50% equity stake in Consorcio Minero Benito Juárez Peña Colorada, S.A. de C.V., which operates Peña Colorada, Mexico’s largest iron ore mine. In 2008, Ternium’s Mexican facilities sourced 100% of their iron ore requirements from those mines. Under our arrangement with Consorcio’s other shareholder, MSLC, we are committed to offtake 50% of the annual production of the mine. From the combined iron ore output retained by us, approximately 81% went to our own direct reduction plants, while the remaining 19% was sold in the international markets, mainly in China and Malaysia. Most of the iron ore exports to China were made pursuant to an agreement to supply 2.9 million tons of pellets to China over a five-year period until March 2009.

DRI. Ternium’s vertical integration strategy in Mexico is centered on synergies created by mining its own iron ore and refining it to produce DRI with its proprietary HYL^® direct reduction process. We believe that over the long-term, DRI is the preferable metallic input for the production of steel because under ordinary circumstances it is a less expensive and a better quality input than steel scrap. Nonetheless, Ternium seeks to maintain flexibility in the mix of steel scrap and DRI that it uses in its electric arc furnaces in Mexico, in order to better respond to fluctuations in raw materials prices. Ternium has the ability to substitute alternative metallics for DRI in periods where economic conditions make DRI more expensive to produce.

Slabs. Ternium’s Mexican subsidiaries consume large quantities of slabs. Since Grupo Imsa came under our control, a portion of Ternium’s requirements for slabs is covered by third party suppliers. Currently, Ternium’s Mexican subsidiaries purchase slabs locally from an ArcelorMittal subsidiary, from Siderar and from various other sources, principally in Brazil, the CIS, Australia and Japan.

Scrap. In keeping with its vertical integration strategy, Ternium Mexico sources 100% of its steel scrap through its own steel scrap collecting and processing companies. In 2008, most of the scrap used was purchased domestically, with approximately 19% coming from the United States.

Electricity. Electric arc furnaces consume large quantities of electricity. During 2008, 57% of Ternium Mexico’s total consumption was supplied by the Comisión Federal de Electricidad (or “CFE,” Mexico’s state-owned electricity company). The remainder was purchased under long-term contracts from two other suppliers with power plants in the Monterrey area, namely, Iberdrola Energía Monterrey, S.A. de C.V., a subsidiary of a Spanish utility company, and Tractebel Energia de Monterrey, S. de R.L. de C.V., a subsidiary of a U.S. utility company. Our long-term contract with Iberdrola was for 143 megawatts of capacity and our long-term contract with Tractebel is for 64 megawatts of capacity. In December 2007 Iberdrola invoked the contract’s early termination clause to reduce contracted capacity from 143 megawatts to 111 megawatts beginning in April 2008. Since April 2008, we increased electricity purchases from CFE to cover electricity consumption requirements formerly covered by Iberdrola.

Natural gas. Natural gas is one of the largest cost components of Ternium’s Mexican production processes. Natural gas is used as a reducing agent for the production of DRI and for the reheating of slabs and billets before the hot rolling process. In Mexico, Ternium’s subsidiaries purchase all of their natural gas from Pemex, the Mexican state-owned oil and gas company that is Mexico’s sole producer of natural gas, and from three distributors: Gas Industrial de Monterrey S.A. de C.V. (GIMSA), Compañía Mexicana de Gas (CMG) and Gas Natural Mexico. Natural gas prices are set monthly based on the spot price in southern Texas, adding only the equivalent surcharge for transportation and service costs plus a margin that is generally less than 5%. Ternium subsidiaries often enter into derivatives contracts with the intention of reducing the effects of volatility on a portion of its natural gas requirements.

Product Quality Standards

Ternium develops its products and services with a philosophy of continuous improvement and seeks to excel in its internal quality oversight of its products and processes. Ternium’s products are manufactured in accordance with the specifications of the International Organization for Standardization, or ISO, and they also must satisfy proprietary standards and customer requirements.

Ternium has designed, developed and implemented the Ternium Quality Management System. Based on the ISO 9001:2000 and, in the case of areas related to the production of automotive supplies, ISO/TS 16949:2002 platforms, the Ternium Quality Management System is aimed at aligning quality management systems and criteria throughout the Ternium group, replacing the individual quality management systems formerly in place at each subsidiary. To obtain the ISO Multisite certification, the Ternium Quality Management System is regularly audited by Lloyd’s Register Quality Assurance.

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

In July 2008, the Amercian Petroleum Industry, or API, performed an audit under API Q1 ISO/TS 29001 at Planta Tuberia Guerrero, Ternium Mexico’s thick-walled tubes manufacturing facility, for the renewal of Ternium Mexico’s licence to use the API Monogram^® on its line pipe products under the conditions specified in API Spec 5L. In February 2009, the licence was renewed.

In addition, each Ternium subsidiary has obtained the accreditations required by domestic and international regulations on certain of its specific products.

Research and Development; Product Development

Product research and development activities at Ternium are conducted through a central product development department in coordination with local teams that operate in several of the Ternium facilities. The Company carries out its applied research efforts in house and in conjunction with universities and research centers, as well as through its participation in international consortia. Ternium has also developed new products and processes in cooperation with its industrial customers.

The Grupo Imsa transaction and its consolidation into Ternium’s operations opened up several opportunities for synergies and integration of processes. During 2008, new processing routes were developed for Ternium’s Mexican facilities, enabling certain products to be manufactured at several rolling, coating and customizing mills. In turn, this added ability increased the flexibility to allocate orders, specialize processing lines according to their technological strengths, and ultimately increase efficiency and reduce costs in the mid-term.

In addition, Ternium developed new cold rolled and hot rolled semi-finished steel products aimed at supplying its coating lines in Shreveport, Louisiana and Villanueva, Guatemala. These new products, which can be manufactured at Ternium’s Mexican mills, enhance the integration between those mills and the mentioned downstream lines.

In 2008, Ternium launched a new product portfolio of metal components for the construction industry, including roll-formed steels for roofing, cladding, decking and floor decking. All these components have been certified in accordance with international standards. Also in 2008, Ternium Mexico signed a technology and trademark license agreement with Varco Pruden Buildings, Inc, for the purpose of consolidating Ternium’s leadership in the Latin American metal building systems’ market. The agreement provides the rights to use Varco Pruden’s technology and software for the design, engineering, production and inspection of metal building systems and components.

During the past year, Ternium supported the automotive industry’s efforts to reduce automobile weight through the development of steel products with improved structural resistance that enables the usage of thinner steel sheets with similar resistance standards.

Additionally, Ternium has been actively participating in research consortia, the purpose of which has been to evaluate the feasibility of applying new steel coatings, both in galvanized and electro-galvanized products, in order to either increase corrosion resistance or reduce coating weight.

In 2008, Ternium developed boron-titanium bearing steels, through conventional and compact hot rolling mills, to serve its customers needs for quenched and tempered welded tubes for oil and gas industry applications. In addition, Ternium widened the dimensional range of high resistance API X65, for as-rolled line pipe applications, to meet the market demand.

Ternium has also completed joint developments with several first-tier home-appliance manufacturers. New products include structured surface coated steel for laundry; chrome-free coated galvanized steel for refrigeration, in compliance with ROHS (Restriction of Hazardous Substances) standards; and high-stability metallic finishing for various applications.

During 2008, developments for the electrical industry included a new ultra low-carbon silicon-alloyed cold rolled grade to further reduce magnetic losses for electric motor cores with improved energy efficiency.

New wire rods for forging and automatic welding have been developed. Also new manganese-chrome bearing steel billets for hot forging processes have been produced with excellent performance among our customers.

Ternium’s development of new steel products has been based on a deep metallurgical knowledge, which is the result of its basic and applied research activities. Several basic research efforts were conducted during 2008, with projects aimed mainly at improving processes, creating new steel products with superior performances and generating the basic knowledge for the design of certain steel products. These mid- to long-term efforts are being carried out in conjunction with several institutions, including the University of Pittsburg, the Steel Research Center — McMaster University, the French Corrosion Institute, the Tenaris Research Center and the Argentine Steel Institute.

Ternium signed long-term cooperation agreements with leading local universities. Under these agreements, signed in 2008, engineers, post-graduate students and teachers at these institutions are sponsored to conduct, along with Ternium’s steel product engineers, steel metallurgy and product research and development projects of academic and industrial interest.

In 2009, Ternium intends to further its industrial integration through the complementation of Argentina’s steel shop and Mexican hot rolling mills, with the design of slab chemistries that optimize processes in both facilities. We expect that these developments will enable higher flexibility and integration in this complex steel market situation.

In addition, Ternium intends to continue its flat, long and coated steel product development plans to enter new niches in its key industrial markets and to support new export opportunities.

We spent an aggregate of USD0.8 million for R&D in 2008, compared to USD1.1 million in 2007 and USD1.3 million in 2006.

Environmental Regulation

Ternium’s operations (including mining activities in Mexico) are subject to a broad range of environmental laws and regulations relating to land use, air emissions; wastewater treatment and discharges; the use, handling and disposal of hazardous or toxic materials and the handling and disposal of solid wastes and other aspects of the protection of human health and environment at its locations and operating subsidiaries.

As the environmental laws and regulations in Argentina, the United States, Mexico and Guatemala continue to become more stringent, Ternium expects to expend the necessary amounts to achieve and maintain ongoing compliance.

Ternium has established corporate environmental guidelines requiring each of its business units to comply with all applicable environmental laws and regulations. Compliance with environmental laws and regulations, and monitoring regulatory changes, is addressed primarily at the regional level.

Ternium has recently decided to report to the World Steel Association its CO2 emissions data on an annual basis as part of the association’s initiative to collect emissions data from member companies. We support the steel industry’s ongoing effort to develop innovative solutions to reduce greenhouse gas (GHG) emissions over the lifecycle of steel products. According to the Intergovernmental Panel on Climate Change (IPCC), the steel industry accounts for approximately 3% to 4% of total world GHG emissions.

Our steel production facilities in Mexico have achieved GHG-specific emission levels that are close to the theoretical minimum. In Argentina, Siderar’s GHG-specific emission levels are close to the industry average for blast furnace technology.

Ternium has not been subject to any material penalty for any environmental violations in 2008, and we are not aware of any current material legal or administrative proceedings pending against Ternium with respect to environmental matters which could have an adverse material impact on Ternium’s financial condition or results of operations.

Mining regulations in Mexico

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

A mining concession allows its holder to perform both exploration works (including indentifying mineral deposits and quantifying and evaluating economically minable reserves), and exploitation works (including detaching and extracting mineral products from such deposits). Mining concessions have a 50-year duration from the date of their recording in the Public Mining Registry and may be extended for an equal term, provided certain requirements are met.

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

	•		the right to dispose freely of mineral products obtained as a result of the exploitation of the concession;
	•		the right to obtain the expropriation of, or an easement with respect to, the land where the exploration or exploitation will be conducted; and
	•		the use of water in the mine to facilitate extraction.

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

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

Trade regulations

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

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

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

•		Argentina: The Argentine government has imposed various antidumping measures on certain steel imports that compete directly with Ternium’s sales in Argentina. Although, Ternium’s operations have not been materially affected by the anti-dumping duties imposed by the Argentine government, the following measures are currently in effect:
		Hot rolled products. Since December 1999, the Argentine government has imposed anti-dumping measures requiring a minimum import price for hot rolled steel imports from Brazil, the Russian Federation and Ukraine. Argentina accepted a price undertaking agreement from Brazilian exporters. In 2006 Argentine authorities conducted a sunset review of these measures and decided to continue them for five more years. In its decision, the Argentine government determined antidumping duties for Russian, Ukranian and Brazilian hot rolled steel exports to Argentina. A price undertaking for Brazilian exports was also accepted by Argentine authorities.
		Argentina has also imposed antidumping measures on hot rolled steel imports from Kazakhstan (39.91%), Romania (40.48%), Slovak Republic (62.09%) and South Africa (55.26%), effective since April 2002. In October 2008, following completion of a sunset review initiated in May 2007, Argentine authorities decided to continue these measures for five more years.
		Cold rolled products. Since January 2003, Argentina has also imposed antidumping measures on cold rolled steel imports from Korea (60.46%), South Africa (83.07%), Kazakhstan (80.61%) and Ukraine (71.22%). In January 2008, Argentine authorities initiated a sunset review for these measures, which—although originally expected to conclude in January 2009—is expected to be completed in June 2009.
		Galvanized products. Since May 2003, Argentina has imposed antidumping duties on galvanized steel sheets from South Korea (49.67%), South Africa (27.90%), Australia (70.37%) and Taiwan (33.09%). The petitioners requested the initiation of a sunset review in May 2008 to determine whether the antidumping duties will be maintained for five more years. A decision is expected by May 2009.
		Argentina has signed free trade agreements with several countries or trade blocs aimed at liberalizing trade between them:
		In early 1991, the Argentine government reduced import tariffs and eliminated most non-tariff restrictions on trade as part of an effort to open the Argentine economy to foreign competition. In March 1991, Argentina, Brazil, Uruguay and Paraguay entered into the Treaty of Asuncion, creating the Mercado Común del Sur (Common Market of the South), or Mercosur, a common market organization that aimed to bring about the free movement of goods, capital, services and people among its member states. The Treaty of Ouro Preto, signed in 2004, formalized a customs union among Mercosur’s member states. Over time, the Mercosur has eliminated or significantly reduced import duties, tariffs and other trade barriers among member states. In particular, zero tariffs have applied to steel products imported from other member states since January 1, 2000. The current tariff applicable to flat and long steel products imported from outside Mercosur ranges from 2% to 14%, while the tariff for tubular steel products imported from outside Mercosur generally ranges from 14% to 16%.
		In 2005, Mercosur entered into a trade agreement with Chile, pursuant to which all tariffs on steel products have been eliminated. In 1996, Mercosur signed a free trade agreement with Bolivia, pursuant to which all steel products began receiving a 100% tariff preference on January 1, 2006.
		Mercosur and the Andean Community (Bolivia, Colombia, Ecuador, Peru and, formerly, Venezuela), signed a free trade agreement aimed at reducing and eventually eliminating tariffs on steel products traded among member countries over a period of 8 to 12 years. Mercosur is also negotiating free-trade agreements with the EU, Mexico, India and South Africa.

		In May 2006, Venezuela became a junior member of Mercosur and is currently seeking full membership in the group. Argentina and Uruguay have already approved Venezuela’s membership. The matter is still pending before the Congresses in Brazil and Paraguay.
•		Mexico: The Mexican government has imposed certain anti-dumping measures on steel import products that are similar to the ones produced by Ternium Mexico. The following anti-dumping measures are currently in effect:
		Hot rolled products. On March 28, 2000, the Mexican government imposed anti-dumping duties on the Russian Federation and Ukraine of 30.31% and 46.66%, respectively. On March 25, 2005 the first sunset review was initiated by the Mexican authorities, and on March 17, 2006 a final resolution was issued, extending the anti-dumping duties for an additional five-year period.
		Furthermore, since September 2005, Mexico has imposed antidumping duties against Ukraine (60.1%), Romania (67.60%) and Russia (36.80%) on cut-to length plate in coils. Mexican authorities are expected to conduct a sunset review of these measures in 2010.
		In March 2008, the Mexican government imposed a provisional antidumping duty on cut-to-length plate imports from China. The measure was lifted in October 6, 2008, as the Mexican authorities concluded that their domestic industry was not suffering injury as a result of such imports and thus decided not to conduct any further investigations thereon.
		Cold rolled products. Since June 1999, Mexico has imposed antidumping duties on cold rolled steel sheets from Bulgaria (44%—45%), the Russian Federation (83%—88%) and Kazakhstan (33%—34%). On December 12, 2005, and as a result of the first sunset review, the Mexican authorities extended the anti-dumping duties for an additional five-year period until June 2009. As a result of the sunset review that will be initiated in June 2009, some or all those duties could be eliminated.
		Plate in coil. Since June 1996, an anti-dumping duty of 29.3% on imports from Russia has been imposed. In June 2003, the first sunset review resolution concluded the application of the antidumping duty. In June 2007, the Ministry of Economy issued the final resolution of the second sunset review, determining the continuation of the anti-dumping duties for an additional five-year period.
		Long products. Brazilian imports of reinforcing bars are currently subject to an antidumping duty of 57.69%. In June 2006, the first sunset review resolution determined the continuation of antidumping duties for an additional five-year period. Wire rod imports from Ukraine are subject to a duty of 30.52% since September 2000. In June 2006, the first sunset review resolution determined the continuation of antidumping duties for an additional five-year period
		Mexico has signed trade agreements with several countries or trade blocs aimed at liberalizing trade between them:
		NAFTA was signed among Canada, Mexico and the United States and came into effect on January 1, 1994. NAFTA provided for the progressive elimination over a ten-year period of duties on, among other things, steel products traded between or among Mexico, the United States and Canada. As a result, zero tariffs currently apply to steel products traded within NAFTA countries. As a result, Ternium has greater access to the U.S. and Canadian markets through Ternium Mexico, but also faces increased competition in Mexico from U.S. and Canadian steel imports. NAFTA provides that NAFTA member companies (including Mexican steel producers such as Ternium Mexico) can challenge trade restrictions imposed by other NAFTA countries before a bi-national dispute resolution panel.

		The Mexican-European Free Trade Agreement, or MEFTA, became effective on July 1, 2000. MEFTA provides for the phase-out and eventual elimination of Mexican and European duties on all industrial goods, including finished steel products. The European Union, or EU, eliminated all import duties on Mexican industrial goods, including finished steel products, as of January 1, 2003, while Mexico eliminated all import duties on European industrial goods, including finished steel products, as of January 1, 2007. Accordingly, Ternium has increased access to EU markets under MEFTA through Ternium Mexico, but also could face increased competition in Mexico from EU steel imports.
		In addition, the Mexican government has signed trade agreements with Venezuela, Colombia, the European Free Trade Association—an intergovernmental organisation set up by Liechtenstein, Norway, Iceland and Switzerland—, Japan, Chile, Bolivia, Nicaragua, Costa Rica and Uruguay, among others. However, the Mexico-Venezuela free trade agreement was terminated in November 2006.
•		United States: U.S. authorities have imposed a number of measures on flat and long steel import products from Argentina and Mexico, thereby restricting Ternium’s exports to that country. Below is a description of measures currently in effect:

Argentina. In August 2001, following an affirmative injury determination by the U.S. International Trade Commission (the “ITC”), the U.S. Department of Commerce (the “DoC”) imposed an antidumping duty of 44.59% and a countervailing duty of 41.69% on hot rolled steel products from Argentina. During 2007, the ITC conducted a sunset review concerning such measures and concluded that Argentine exports were not likely to continue to injure the U.S. domestic producers and, accordingly, revoked the measures effective as of October 2007.

In July 2005, sunset reviews concerning previously imposed duties on certain pipe and tube from various countries, including Argentina, were instituted. In June 2006, the ITC found that revoking the existing antidumping duty order on light-walled rectangular pipe and tube from Argentina would not be likely to lead to continuation or recurrence of material injury within a reasonably foreseeable time and, accordingly, revoked such measure.

Mexico. Since 1992, pursuant to an antidumping duty order on circular welded non-alloy steel pipe, or standard pipe, from various countries, including Mexico, standard pipes manufactured by Hylsa, S.A. de C.V. (“Hylsa”)—a wholly-owend subsidiary of Ternium Mexico—, are subject to an antidumping duty of 10.38%, and standard pipes manufactured by Ternium Mexico—formerly known as Grupo Imsa—are subject to an antidumping duty of 36.62%. In 2007, such measures were extended for five more years. In October 2008, at Ternium Mexico’s request, the DoC initiated a changed circumstances review of the antidumping duty order described above in order to determine whether Ternium Mexico is the successor-in-interest to Hylsa for purposes of determining antidumping duty liability. Although the review is not yet complete , the DoC has preliminarily found that Ternium Mexico is the successor-in-interest to Hylsa and, thus, should receive the same antidumping duty treatment with respect to steel wire rod from Mexico as Hylsa.

Hylsa’s wire rod exports are also subject to an antidumping duty of 17.94% pursuant to an antidumping duty order on carbon and certain alloy steel wire rod from Mexico. Following the most recent sunset review, such duty was extended for five more years from June 2008. In November 2008, at Ternium Mexico’s request, the DoC initiated a changed circumstances review of the antidumping duty order described above in order to determine whether Ternium Mexico is the successor-in-interest to Hylsa for purposes of determining antidumping duty liability. On May 13, 2009, the DoC determined that Ternium Mexico is the successor-in-interest to Hylsa and, thus, should receive the same antidumping duty treatment with respect to steel wire rod from Mexico as Hylsa.

Tubular products from Mexico have been subject to antidumping duties since August 1995. In particular, our subsidiaries’ Oil Country Tubular Goods, or OCTG, products were subject to a 1.48% antidumping duty until such duty was revoked following ITC’s May 31, 2007 determination that existing antidumping duty orders on imports of OCTG from, among other countries, Mexico would not be likely to lead to continuation or recurrence of material injury within a reasonably foreseeable time.

In 2007, the DoC initiated an antidumping investigation of light-walled rectangular pipe and tube (“LWRPT”) from, among other countries, Mexico. On June 13, 2008, the Department made a final determination of sales at less than fair value in the investigation of LWRPT from Mexico and, as a result, LWRPT from Mexico, including LWRPT manufactured by Hylsa, are now subject to antidumping duties. In particular, Hylsa’s exports of LWRPT are subject to either a 3.76% or an 11.5% duty, depending on the plant at which the relevant product was manufactured. In October 2008, at Ternium Mexico’s request, the DoC initiated a changed circumstances review of the antidumping duty order on LWRPT from Mexico in order to determine whether Ternium Mexico is the successor-in-interest to Hylsa for purposes of determining antidumping duty liability. Although the review is not yet concluded, the DoC has preliminarily found that Ternium Mexico is the successor-in-interest to Hylsa and, thus, should receive the same antidumping duty treatment with respect to steel wire rod from Mexico as Hylsa.

Insurance

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

C.

Organizational Structure

Below is a simplified diagram of Ternium’s corporate structure as of December 31, 2008.

Subsidiaries

Ternium operates entirely through subsidiaries. For a complete list of its subsidiaries and a description of its investments in other companies, see notes 1 and 2 to our audited consolidated financial statements included elsewhere in this annual report.

Siderar. Siderar is the main integrated manufacturer of flat steel products in Argentina with a current total annual production capacity of 2.9 million tons of crude steel. The shareholders of Siderar as of March 31, 2009 are set out in the following table, together with the share percentage owned by each such shareholder as of that date:

Siderar Shareholders		% Shares
Ternium			60.94	%
ANSeS			25.97	%
Inversora Siderúrgica Argentina (employees)			4.31	%
Public			8.78	%
Total			100.00	%

Siderar’s shares are listed on the Buenos Aires Stock Exchange (Bolsa de Comercio de Buenos Aires), or BASE, under the symbol “ERAR.” The Buenos Aires Stock Market (Mercado de Valores de Buenos Aires), which is affiliated with the BASE, is the largest stock market in Argentina. On June 23, 2009, the closing price of the Siderar shares on the BASE was ARP9.25 per share (approximately USD2.44 per share.)

Sidor. Sidor is the main flat steel producer and the main exporting private company in Venezuela. The shareholders of record of Sidor as of December 31, 2008 are set out in the following table, together with the share percentage owned by each such shareholder as of that date:

Sidor Shareholders		% Shares
Ternium (through Amazonia)			51.14	%
Siderar (through Amazonia)			8.59	%
CVG			20.27	%
Banco de Desarrollo Económico y Social de Venezuela			0.05	%
Employees			19.95	%
Total			100.00	%

On May 7, 2009, we completed the transfer of our entire 59.7% interest in Sidor to CVG as part of the nationalization of Sidor by the Venezuelan government. For more information on the Sidor nationalization process, please see Item 4. “Information on the Company—A. History and Development of the Company—Sidor Nationalization Process.”

Ternium Mexico. Ternium Mexico was formed as result of the merger of Grupo Imsa, Hylsamex and Hylsamex’s major shareholder in March 2008. Ternium Mexico and its subsidiaries operate all of Ternium’s mining and steel production activities in Mexico. Ternium Mexico and its subsidiaries produce flat and long steel products, including value-added finished steel products for use mainly in the construction, auto parts and appliance industries. Ternium Mexico has an annual crude steel production capacity of 3.5 million tons. Ternium Mexico is a wholly-owned subsidiary of the Company.

Ternium Internacional. Ternium Internacional comprises a network of companies in various jurisdictions around the world—including Colombia, Ecuador, Panama, Spain, Uruguay, the Netherlands and the United States—that market and provide services in relation to the sales of Ternium’s products worldwide. The headquarters of the network are located in Uruguay. Ternium Internacional’s services include sales and trading, communication systems, offices and human resources dedicated to export trading, technical assistance, commercial back office and credit analysis.

Other Investments

Exiros. Exiros, with presence in Argentina, Brazil, Canada, Italy, Mexico, Romania and the United States, provides our subsidiaries with purchase agency services in connection with Ternium’s purchases of raw materials and other products or services. Until September 2006, Exiros was a wholly-owned subsidiary of Tenaris. In October 2006, we acquired—through our wholly-owned subsidiary Ternium Procurement—a 50% interest in Exiros, while Tenaris retained the remaining 50%. Exiros’ objectives are to procure better purchase conditions and prices by exercising the improved bargaining power that results from combining the demand of products and services of both Ternium and Tenaris.

D.

Property, Plants and Equipment

See “—Business Overview—Production Process and Facilities.”

Item 4A. Unresolved Staff Comments

None

Item 5. Operating and Financial Review and Prospects

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

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

We note that the audited consolidated financial statements of the Company as of December 31, 2007, and for the years ended December 31, 2007 and 2006, included in this annual report vary significantly from the results and other financial data shown in the financial statements and financial data included in prior annual reports as a result of the deconsolidation of Sidor as from April 1, 2008. As from that date, the Company ceased consolidating Sidor’s results and other financial data and classified its investment in Sidor as an available-for-sale financial asset, with Sidor’s results and cash flows during each period prior to April 1, 2008 being presented as discontinued operations. For more information on the Sidor nationalization process and its accounting treatment, see note 29 to our audited consolidated financial statements included elsewhere in this annual report and Item 4. “Information on the Company—A. History and Development of the Company—Sidor Nationalization Process.”

Overview

Ternium is a leading steel company in Latin America, manufacturing and processing a wide range of flat and long steel products for customers active in the construction, home appliances, capital goods, container, food, energy and automotive industries. Ternium has operating facilities in México, Argentina, the United States and Guatemala, as well as a network of service centers which provide it with a strong position from which to serve its core markets. As of December 31, 2008, we were shareholders of record of approximately 59.7% of Sidor, the main flat steel producer and the main exporting private company in Venezuela. On May 7, 2009, we completed the transfer of our entire interest in Sidor to CVG. In addition, Ternium reaches customers outside its regional markets through its own network of distribution, sales and marketing offices.

Ternium primarily sells its steel products in the regional markets of North, Central and South America, where its manufacturing facilities are located, allowing it to provide specialized products and delivery services to its clients. We believe that Ternium is the leading supplier of flat steel products in Argentina, a leading supplier of flat steel products in Mexico and a significant competitor in the Mexican market for long steel products, and a competitive player in the international steel market for flat and long steel products. Ternium maintains a presence in Europe through its network of commercial offices, which allows it to reach clients outside its regional markets and place products in case of slower demand in domestic economies, achieve improved effectiveness in the supply of its products and in the procurement of steel for its manufacturig facilities, and maintain a fluid commercial relationship with its clients by providing continuous services and assistance.

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

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

Ternium’s results are sensitive to economic activity, steel consumption, prices in the international steel markets and trends in the steel industry. Ternium’s results of operations primarily depend on economic conditions in Argentina and Mexico and, to a lesser extent, on economic conditions in international and regional markets such as Mercosur, the Andean Community and NAFTA. Historically, annual steel consumption in the countries where Ternium operates has varied at a rate that is linked to the annual change in each country’s gross domestic product and per capita disposable income. Recently, worldwide economic growth and favorable economic developments throughout the Americas resulted in increases in investments and in per capita disposable income, which in turn contributed to increased overall demand for Ternium’s products. For example, apparent consumption of finished steel products in Argentina increased by 20.5%, 14% and 5% during 2006, 2007 and 2008, respectively, due to the sustained recovery in the Argentine economy, mainly in the industrial activity, agriculture, construction and automotive sectors. However, starting in September 2008, a steep downturn in the global economy, sparked by uncertainty in credit markets and deteriorating consumer confidence, has sharply reduced demand for steel products. This economic downturn has had, and continues to have, a pronounced negative effect on Ternium’s business and results of operation, and a protracted global recession or a depression would have a material adverse effect on the steel industry and Ternium.

Moreover, steel prices are volatile and the global steel industry has historically been cyclical. After rising during 2007 and through the boreal summer of 2008, steel prices in global markets fell sharply beginning in the late boreal summer of 2008 as a result of collapsing demand and the resulting excess supply in the industry. The fall in prices during this period adversely affected the results of steel producers generally, including Ternium, as a result of lower revenues and writedowns of finished steel products and raw material inventories. For example, in the second half of 2008, Ternium wrote down inventories in an amount of USD200 million, and in the first quarter of 2009, it recorded an additional USD123.1 million writedown. Steel prices are sensitive to trends in cyclical industries, such as the automotive, construction, appliance and machinery industries, which are the significant markets for Ternium’s products. In the past, substantial price decreases during periods of economic weakness have not always been offset by commensurate price increases during periods of economic strength. Although prices are expected to stabilize at some point, the timing and extent of price recovery or return to prior levels cannot be predicted. An eventual rebound in steel prices will likely depend on a broad recovery from the current global economic downturn, although the length and nature of business cycles affecting the steel industry have historically been unpredictable. If the downturn in steel prices were to be protracted, this would materially and adversely affect Ternium’s revenues and profitability.

In addition to economic conditions and prices, the steel industry is affected by other factors such as worldwide production capacity and fluctuations in steel imports/exports and tariffs. Historically, the steel industry has suffered from substantial over-capacity. Currently, as the economic crisis widens, there are signs of excess capacity in all steel markets, which is impacting steel prices across all of our markets. It is thus possible in the context of the current downturn that the industry’s excess capacity will result in an extended period of depressed prices and industry weakness. Ternium has already made significant production cuts in response to the current economic crisis, as have other steel producers. Ternium also expects that consolidation in the steel sector in recent years should, as a general matter, help producers maintain a more consistent performance through the down cycle by preventing investment overlaps and increasing producers’ efficiency, economies of scale and bargaining power with customers and suppliers. These actions and trends, however, may not suffice to address the adverse consequences of an extended over-capacity scenario.

Furthermore, there has been a trend in recent years toward steel industry consolidation among Ternium’s competitors, and smaller competitors in the steel market today could become larger competitors in the future. For example, in June 2006, Mittal Steel and Arcelor merged to create the world’s largest steel company, Arcelor Mittal; in April 2007, Tata Steel completed the acquisition of Corus; and in July 2007, Gerdau acquired Chaparral Steel. Regional players in Ternium’s markets have also experienced consolidation through acquisitions; for example, Siderperu was acquired by Gerdau in 2006, Sicartsa of Mexico was acquired by Arcelor Mittal in December 2006 and Aceria Paz del Rio of Colombia was acquired by Votorantim in March 2007. Competition from global and regional steel manufacturers with expanded production capacity such as Arcelor Mittal and new market entrants, especially from China and the CIS, could result in significant price competition, declining margins and reductions in revenue.

Ternium’s production costs are generally sensitive to the international prices of raw materials, semi-finished products and energy, which reflect supply and demand factors in the global steel industry. Ternium purchases substantial quantities of raw materials and semi-finished products, including iron ore, slabs, coal, ferroalloys and scrap for use in the production of its steel products. The availability and price of these and other inputs vary according to general market and economic conditions and thus are influenced by industry cycles. In addition to raw materials, natural gas and electricity are both important components of Ternium’s cost structure. Since 2003, the recovery of the U.S. economy, an unprecedented demand for steel in China and shortage of shipping capacity resulted in a tight market for raw materials globally, which contributed to a strong boost in the prices of raw materials worldwide. Similarly, international energy prices rose substantially from the levels that had prevailed in the previous years, reflecting higher demand for energy. Beginning in September 2008, worsening global economic conditions have triggered a reduction in market prices of many of Ternium’s production costs components. However, due to the existence of prior supply contracts and existing inventories, reduction in market prices of some of our production inputs may not translate into an immediate and commensurate reduction in production costs.

Ternium’s revenues could be affected by competition from imports and dumping conditions. Ternium’s ability to profitably access the export markets varies with the value of the local currencies of the countries where it operates, the strength of the economies of the countries to which it exports and overall steel prices. Ternium’s ability to sell its products is influenced to varying degrees by trends in global trade for steel products, particularly trends in imports of steel products into its principal markets. During 2001, a period of strong over-supply, several anti-dumping measures were imposed in several countries in which Ternium operates (including Argentina and Mexico) to prevent foreign steel producers from “dumping” certain steel products in local markets. The recovery in global economic conditions since 2003 and strong Chinese demand reduced the previously strong competition in the international exports markets and, consequently, several countries reduced or eliminated protective measures established in prior years. However, a number of trade restrictions, both in Ternium’s local and export markets, remain in place. Beginning in September 2008, a steep downturn in the global economy, sparked by uncertainty in credit markets and deteriorating consumer confidence, has sharply reduced global demand for steel products. In the face of a protacted period of over-supply, countries may re-establish anti-dumping duties and/or other safeguards to protect their domestic markets.

Prevailing exchange rates have had an impact on Ternium’s results in the past and could impact results again in the future. In accordance with IFRS, Ternium’s subsidiaries in Mexico and Argentina prepare financial statements in their local currencies and record foreign exchange results on their net non-local currency positions when their local currencies revaluate or devaluate to other currencies. In 2008, net foreign exchange result was a loss of USD632.7 million, which was primarily due to the impact of the Mexican peso’s 25% devaluation on Ternium Mexico’s U.S. dollar denominated debt. This non-cash result when measured in U.S. dollars was offset by changes in Ternium’s net equity position in the currency translation adjustment, or CTA, line, as the value of Ternium Mexico’s U.S. dollar denominated debt was not affected by the Mexican Peso fluctuation when stated in U.S. dollar terms in Ternium’s consolidated financial statements.

In addition, Ternium has Mexican peso-denominated receivables from domestic sales in Mexico, which represent a considerable portion of Ternium’s overall receivables. If the Mexican peso depreciates, as occurred in Mexico during the fourth quarter of 2008 and the beginning of 2009, the results from our Mexican operations, when measured in U.S. dollar terms, will be adversely affected.

Ternium’s cash flows for 2009 and 2010 will be strongly affected by the amounts to be collected in connection with the transfer of our interest in Sidor to Venezuela. On May 7, 2009, we completed the transfer of our entire 59.7% interest in Sidor to CVG. The transfer was effected as a result of Venezuela’s Decree Law 6058, which ordered that Sidor and its subsidiaries and associated companies be transformed into state-owned enterprises and declared the activities of such companies of public and social interest. While CVG had assumed operational control of Sidor on July 12, 2008, Ternium had retained formal title over the shares until May 7, 2009. Ternium agreed to receive an aggregate amount of US$1.97 billion as compensation for its Sidor shares. Of that amount, CVG paid US$400 million in cash on May 7, 2009. The balance was divided in two tranches: the first tranche, of US$945 million, will be paid in six equal quarterly installments (the first such installment being due on August 7, 2009), while the second tranche will be paid at maturity in November 2010, subject to quarterly mandatory prepayment events based on the increase of the WTI crude oil price over its May 6, 2009 level.

Critical Accounting Estimates

This discussion of our operating and financial review and prospects is based on our audited consolidated financial statements, which have been prepared in accordance with IFRS, as issued by IASB. The use of IFRS has an impact on our critical accounting policies and estimates.

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

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

Useful Lives and Impairment of Property, Plant and Equipment and Other Long-lived Assets

As permitted under IFRS 1—“First Time Adoption of IFRS,” management has elected to use the fair value of its property, plant and equipment as at January 1, 2003, as its “deemed cost.” In determining useful lives and impairment estimates, management considered, among others, the following factors: age, operating condition and level of usage and maintenance. Management conducted visual inspections for the purpose of (i) determining whether the current conditions of such assets are consistent with normal conditions of assets of similar age; (ii) confirming that the operating conditions and levels of usage of such assets are adequate and consistent with their design; (iii) establishing obsolescence levels and (iv) estimating expectancy, all of which were used in determining useful lives and impairment estimates. Management believes, however, that it is possible that the periods of economic utilization of property, plant and equipment may be different than the useful lives so determined. Impairments may result from, among other factors, changes in usage level and maintenance capital expenditure policies, obsolescence and external factors (including increases in input prices that would affect the profitability of the selected fixed assets). Any such impairment charges could have a material adverse effect on Ternium’s results of operations, financial condition and net worth. Under IFRS, assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less cost to sell and the present value of estimated future cash flows. For purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Management believes that this accounting policy involves a critical accounting estimate because it is subject to change from period to period as a result of variations in economic conditions and business performance.

No impairment charge resulted from the impairment tests performed.

Impairment and recoverability of goodwill and other assets

Assessment of the recoverability of the carrying value of goodwill and other assets require significant judgment. We evaluate goodwill allocated to the operating units for impairment on an annual basis.

Goodwill is tested at the level of the cash generating units, or CGU. Impairment testing of the CGU is carried out and the value in use determined in accordance with the discounted cash flow method. In order to perform the test, we use projections for the next five years based on past performance and expectations of market development. After the fifth year a perpetuity rate with no grow up increase was utilized. The discount rates used for these tests are based on our weighted average cost of capital adjusted for specific country and currency risks associated with the cash flow projections. Discount rates used range from 12.4% to 18.3%.

No impairment charge resulted from the impairment tests performed.

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

Allowances for Doubtful Accounts

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

In addition, a charge to the allowance for doubtful accounts is recognized when a customer makes a claim in connection with an order that has been invoiced and management estimates that, despite its efforts, we are unlikely to collect the full amount of the invoice.

Allowances for doubtful accounts are adjusted periodically in accordance with the aging of overdue accounts. For this purpose, trade accounts receivable overdue by more than 90 days, and which are not covered by a credit collateral, guarantee or similar surety, are fully provisioned.

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

Allowance for Obsolescence of Supplies and Spare Parts, Inventory’s Net Realizable Value and Slow-Moving Inventory

Management makes estimates of the recoverability of our inventories of supplies and spare parts based on the following criteria:

	•		analysis of the aging of the supplies and spare parts; and
	•		analysis of the capacity of materials to be used according to their level of preservation and of their potential obsolescence due to technological changes in the mills.

In addition, in our manufacturing facilities an allowance for slow-moving inventory is made in relation to finished goods based on management’s analysis of their aging and market conditions. For this purpose, stocks of finished goods held in inventory for more than six months before the applicable reporting date are valued as scrap.

As explained in note 4 to our audited consolidated financial statements included elsewhere in this annual report, Ternium states inventories at the lower of cost—calculated using the first-in-first-out, or “FIFO,” method—or net realizable value—estimated sales price in the ordinary course of business, less the estimated costs of completion and selling expenses—. In estimating sales prices, costs of completion and selling expenses, management made assumptions as to, among others, product mix, destination markets and product route. As of December 31, 2008, Ternium established a valuation allowance for net realizable value of USD160.9 million.

Historically, losses due to obsolescence and scrapping of inventory have been within expectations and the provisions established. As of December 31, 2008, Ternium maintained an allowance for obsolescence of USD124.9 million. If, however, circumstances were to materially change (e.g., significant changes in market conditions or in the technology used in the mills), management’s estimates of the recoverability of these inventories could be materially reduced and our results of operations, financial condition and net worth could be materially and adversely affected.

Loss Contingencies

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

With respect to the loss contingencies described in our financial statements, we do not expect to incur any losses exceeding the amounts accrued as of December 31, 2008, that would be material relative to our consolidated financial position, results of operations or liquidity as of such date. However, if reserves prove to be inadequate and we incur a charge to earnings, such charge could have a material adverse effect on our results of operations, financial condition and net worth.

Impairment of Deferred Tax Assets

Management calculates current and deferred income taxes according to the tax laws applicable to our subsidiaries in the countries in which such subsidiaries operate. However, certain adjustments necessary to determine the income tax provision are finalized only after the balance sheet is issued. In cases in which the final tax outcome is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made. When assessing the recoverability of deferred tax assets, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. Based on those estimates, management did not record a valuation allowance at December 31, 2008.

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

Critical Accounting Estimates and Assumptions Relating to the Sidor Financial Asset

As discussed elsewhere in this annual report, on April 8, 2008, the Venezuelan government announced its intention to nationalize Sidor. On July 12, 2008, CVG assumed operational control and complete responsibility for Sidor’s operations. As from April 1, 2008, the Company ceased consolidating Sidor’s results of operations and cash flows and classified its investment in Sidor as an available-for-sale financial asset. For more information, see note 29 to our audited consolidated financial statements included elsewhere in this annual report and Item 4. “Information on the Company—A. History and Development of the Company—Sidor Nationalization Process.”

We believe that the most significant estimates and assumptions relevant to the valuation of the Sidor available-for-sale financial asset in our our audited consolidated financial statements included elsewhere in this annual report are the Company’s assessment of:

	•		the determination of the rate used to discount future cash flows,
	•		the assumptions used to estimate Sidor’s future cash flows at the time of the announcement of the nationalization, and
	•		the list of companies deemed comparable to Sidor for purposes of calculating the FV/EBITDA and capacity multiples valuation techniques. In the absence of other steel manufacturers of comparable size with operations expropriated by the Venezuelan government, the public steel companies used to calculate FV/EBITDA multiples were companies of comparable or larger size with strong presence in the Americas and/or emerging markets, as follows: AK Steel; ArcelorMittal; CSN Companhia Siderúrgica Nacional; Evraz; Gerdau; Nucor Corporation; Posco; Steel Dynamics; Usiminas, Usinas Siderúrgicas do Minas Gerais S.A.; and U.S. Steel.

Subsequently to the end of the year covered by our audited consolidated financial statements included elsewhere in this annual report, on May 7, 2009, we completed the transfer of our entire 59.7% interest in Sidor to CVG. The Company agreed to receive an aggregate amount of US$1.97 billion as compensation for its Sidor shares. Of that amount, CVG paid US$400 million in cash on that date. The balance was divided in two tranches: the first tranche, of US$945 million, will be paid in six equal quarterly installments (the first such installment being due on August 7, 2009), while the second tranche will be paid at maturity in November 2010, subject to quarterly mandatory prepayment events based on the increase of the WTI crude oil price over its May 6, 2009 level.

A. Results of Operations

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

In thousands of U.S. dollars		For the year ended December 31,
(except number of shares and per share data)		2008				2007				2006(2)				2005(1) (2)				2004(1)(2)
Selected consolidated income statement data
Continuing operations
Net sales			8,464,885				5,633,366				4,484,918				2,690,450				1,615,181
Cost of sales			(6,128,027	)			(4,287,671	)			(3,107,629	)			(1,787,848	)			(965,004	)
Gross profit			2,336,858				1,345,695				1,377,289				902,602				650,177
Selling, general and administrative expenses			(669,473	)			(517,433	)			(370,727	)			(243,993	)			(132,882	)
Other operating income (expenses), net			8,662				8,514				(4,739	)			(57,338	)			(3,124	)
Operating income			1,676,047				836,776				1,001,823				601,271				514,171
Interest expense			(136,111	)			(133,109	)			(96,814	)			(60,686	)			(18,257	)
Interest income			32,178				41,613				33,903				17,786				8,911
Other financial income (expenses), net			(693,192	)			(38,498	)			(40,432	)			33,514				211,635
Equity in earnings (losses) of associated companies			1,851				434				671				153				209,201
Income before income tax expense			880,773				707,216				899,151				592,038				925,661
Current and deferred income tax expense			(258,969	)			(291,345	)			(353,044	)			(233,113	)			(177,486	)
Reversal of deferred statutory profit sharing			96,265				—				—				—				—
Income from continuing operations			718,069				415,871				546,107				358,925				748,175
Discontinued operations
Income from discontinued operations			157,095				579,925				444,468				715,900				—
Net income for the year(3)			875,164				995,796				990,575				1,074,825				748,175
Attributable to:
Equity holders of the Company			715,418				784,490				795,424				706,418				457,339
Minority interest			159,746				211,306				195,151				368,407				290,836
			875,164				995,796				990,575				1,074,825				748,175
Depreciation and amortization			413,541				355,271				251,371				160,145				99,192
Weighted average number of shares outstanding(4)			2,004,743,442				2,004,743,442				1,936,833,060				1,209,476,609				1,168,943,632
Basic earnings per share for profit attributable to the equity holders of the Company (4)			0.36				0.39				0.41				0.58				0.39
Diluted earnings per share for profit attributable to the equity holders of the Company			0.36				0.39				0.41				0.54				0.39
Dividends per share declared(6)			—				0.05				0.05				—				—

In thousands of U.S. dollars		At December 31,
(except number of shares and per share data)		2008				2007				2006				2005(1) (2)				2004(1) (2)
Selected consolidated balance sheet data
Non-current assets			5,491,408				8,553,123				6,029,383				6,029,823				1,728,410
Property, plant and equipment, net			4,212,313				6,776,630				5,335,030				5,377,831				1,244,691
Other non-current assets(3)			1,279,095				1,776,493				694,353				651,992				483,719
Current assets			5,179,839				5,095,959				2,628,870				2,518,958				918,220
Cash and cash equivalents			1,065,552				1,125,830				643,291				765,506				194,875
Other current assets			4,108,954				3,200,987				1,978,537				1,750,292				723,345
Non-current assets classified as held for sale			5,333				769,142				7,042				3,160				—
Total assets			10,671,247				13,649,082				8,658,253				8,548,781				2,646,630
Capital and reserve attributable to equity holders(4)			4,597,370				4,452,680				3,757,558				1,842,454				1,026,725
Minority interest			964,094				1,805,243				1,626,119				1,633,881				745,126
Non-current liabilities			3,374,964				5,401,549				1,867,892				3,683,755				359,510
Borrowings			2,325,867				3,676,072				546,601				2,396,807				1,008
Deferred income tax			810,160				1,327,768				982,091				1,047,038				337,473
Other non-current liabilities			238,937				397,709				339,200				239,910				21,029
Current liabilities			1,734,819				1,989,610				1,406,684				1,388,691				515,269
Borrowings			941,460				406,239				507,241				510,820				121,998
Other current liabilities			793,359				1,369,608				899,443				877,871				393,271
Liabilities directly associated with non-current assets held for sale			—				213,763				—				—				—
Total liabilities			5,109,783				7,391,159				3,274,576				5,072,446				874,779
Total equity and liabilities			10,671,247				13,649,082				8,658,253				8,548,781				2,646,630
Number of shares outstanding(5)			2,004,743,442				2,004,743,442				2,004,743,442				1,396,551,886				1,168,943,632