Thomas A. Danjczek

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AWPA Annual Meeting
Steel Producers Issues in Todays Economy
Thomas A. Danjczek President Steel Manufacturers
Association February - 2009
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AWPA Steel Producers Issues in Todays Economy
Outline

• SMA
• Todays Concerns
• Todays Deterioration
• China, China, China
• Other Issues (Energy, GHG, Infrastructure
  Spending, Mercury)
• Product Data 2008
• Protectionism and Trade Issue
• Is Enough Being Done?
• Conclusion

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SMA
AWPA Steel Producers Issues in Todays Economy

• The Steel Manufacturers Association (SMA)
• 36 North American companies
• 31 U.S., 3 Canadian, and 2 Mexican
• 125 Associate members
• Suppliers of goods and services to the steel
  industry
• SMA member companies
• Operate 125 steel recycling plants in North
  America
• Electric Arc Furnace (EAF) steelmakers using
  recycled steel

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SMA
AWPA Steel Producers Issues in Todays Economy

• Production capability
• EAF steel producers accounted for 60 of U.S.
  production in 2007
• SMA represents over 70 of all U.S. steel
  production
• Recycling
• SMA members are the largest recyclers in the U.S.
• EAF steel producers are the largest recyclers in
  the world
• Last year, the U.S. recycled over 75 million tons
  of steel
• Growth of SMA member companies
• Highly efficient users of labor, energy, and
  materials
• Modern plants producing world class quality
  products

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Steel-Wire Executive-4th Quarter 2008
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AWPA Steel Producers Issues in Todays Economy
The Obvious Concerns

• Our Jobs
• US Recession and financial meltdown
• Infrastructure Spending
• Value of the RMB
• Energy shortfalls and pricing
• Federal Bailouts
• China, China, China
• Global Steel Overcapacity
• Subsidies and other trade distortions
• US Legislation (111th Congress and the 44th
  President)

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NAFTA Economic Growth Is Decelerating
AWPA Steel Producers Issues in Todays Economy
Sources Bureau of Economic Analysis, Statistics
Canada, Bloomberg
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AWPA Steel Producers Issues in Todays Economy
The United States Is in a Recession
Source Federal Reserve Board
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U.S. Business Activity Has Fallen Sharply
AWPA Steel Producers Issues in Todays Economy
Lowest level since 1982
Source ISM
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AWPA Steel Producers Issues in Todays Economy
The U.S. Housing Market Is Plummeting
Source US Dept of Commerce
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AWPA Steel Producers Issues in Todays Economy
North American Light Vehicle Production
US LV SALES
1.18
2007
0.74
2008
-37
NOV
NOV
Millions of Units
Millions of Units
AMRC Data Fall 08
Actual
Actual
Actual
13.0
12.8
Source Automotive Market Research Council, Fall
2008
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Steel Production in the U.S. Has Fallen
Dramatically
AWPA Steel Producers Issues in Todays Economy
Production (Thous. Metric Tons)
Source Dow Jones Industrial Index, AISI
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AWPA Steel Producers Issues in Todays Economy
After Years of Growth, Global Steel Consumption
Has Fallen
Source World Steel Dynamics, Global Alert
31 (Oct. 1, 2008) at 12.
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AWPA Steel Producers Issues in Todays Economy
Global Steel Capacity Through 2008

• World Steel Capacity Grew by Over 50 in the Past
  Eight Years.

90

• Additions to Capacity

Source German Steel Federation and IISI
verifications
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AWPA Steel Producers Issues in Todays Economy
Crude Steel Supply in China, 2005-2009 (million
metric tons)
2005 2006 2007 2008 2009 (e)
Capacity 450.0 530.0 599.0 640.0 (e) 660.0
Production 352.0 416.0 489.0 498.0 470.0
Net Exports 0.5 29.7 41.7 51.0 49.0
Source Growell Research, China Steel Capacity
Forecast for 2006-2010 and CISA Presentation at
OECD, December 15, 2008.
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Imports from China into NAFTA are Rising
AWPA Steel Producers Issues in Todays Economy
Source AISI
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AWPA Steel Producers Issues in Todays Economy
Chinas Capacity Now Exceeds Chinese Demand For
Many Key Steel Products
2008 Difference Between Chinese Capacity and
Chinese Demand
35
30
25
Million Metric Tons
20
15
10
5
0
Hot-rolled steel
Plate
OCTG
Wire rod
Rebar
Cold-rolled steel
Galvanized sheet
Source World Steel Dynamics, Global Steel
Alert 31 (Oct. 1, 2008) at 17, 25.
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AWPA Steel Producers Issues in Todays Economy
China Steel Comments

• China has NOT become the worlds Largest steel
  producer by
• accident, or by operation of free markets, or
  comparative advantage
• China is NOT a low-cost steel producer
• China has reached its position through a
  combination of
• subsidies, mandates, and planned intervention
• In finished goods containing steel, Chinas
  exports to absorb overproduction
• Chinese steel industry is overbuilt and
  under-demolished

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AWPA Steel Producers Issues in Todays Economy
Chinas Trade Surplus with the U.S.
Year Chinas Trade Surplus 2001 22
billion (year China joined WTO) 2006 177
billion 2007 262 billion (up 47.7)
The U.S. has lost 3.3 million manufacturing jobs
since 2000 imbalances cannot go on forever.
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AWPA Steel Producers Issues in Todays Economy
China Conclusions
Its About Competitiveness
US producers have a competitive advantage in
metallics due to US scrap and Chinas need to
import over half its ore US producers are on par
with China on availability and price of energy,
while labor is much lower in China Chinas
labor savings do not equal US efficiency and
Transportation cost from China. US is
competitive!!!
North American steel industry CANNOT compete
against Chinese steel companies that are financed
and controlled by their government.
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AWPA Steel Issues in Todays Economy
Other Issues - Energy
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AWPA Steel Producers Issues in Todays Economy
Other Issues - Energy
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AWPA Steel Producers Issues in Todays Economy
Other Issues - Energy
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AWPA Steel Producers Issues in Todays Economy
Other Issues - Energy
Energy Summary

• US power generation industry is at a critical
  juncture, with social
• pressures and pending legislation demanding
  massive changes.
• Competing demands for reliable, low-cost energy
  and climate change
• mitigation appear incongruent.
• Our Nations liquid fuel dependence on foreign
  resources continue to
• grow.
• Uncertainty of regulatory outcomes and rising
  costs impact industrys
• willingness to commit capital investments,
  endangering near-term
• production capacity.
• The United States must foster new processes that
  address conflicting
• energy objectives simultaneously.

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AWPA Steel Producers Issues in Todays Economy
Other Issues - GHG

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AWPA Steel Producers Issues in Todays Economy
Other Issues - GHG
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AWPA Steel Producers Issues in Todays Economy
Other Issues - GHG
Climate Change Legislation

• Steel Manufacturers Association
• Supports the safety valve concept for limiting
  allowance pricing, in any cap trade program
• Recognizes the international component of the
  climate change issue, and would support the the
  use of industrial offsets, regardless of locale,
  as one way to respond to greenhouse gas
  emissions and
• Believes that the cost associated with any cap
  and trade program must avoid double charging
  emissions (ie- The electricity generator and EAF
  mill consumer each must only be counted once on
  emissions).

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AWPA Steel Producers Issues in Todays Economy
Globalization and Consolidation Developments Have
Dramatically Changed the NAFTA Steel Landscape
Acquiring Company
Acquiring Company
Acquiring Company
Acquired Company
Acquired Company
Acquired Company
Arcelor Mittal
Nucor
Duferco/NLMK
Arcelor
Connecticut Steel
Winner Steel
Dofasco
Trico
Mittal
Birmingham
Evraz
Ispat Inland
Corus Tuscaloosa
Oregon Steel
Bethlehem
ISG
Worthington-Decatur
Claymont Steel
Marion
Ipsco Canada
LTV
Nelson Steel
US Steel Plate Weirton
Severstal
Harris Steel
Auburn Steel
Arcelor Mittal-Sp. Pt.
Acme-Riverdale
North Star Arizona
Rouge WCI
Georgetown
American Iron Reduction
Sicartsa Bayou
LMP Steel Wire
Wheeling Pitt
The David J. Joseph Co. (Scrap)
CSN
US Steel
Gerdau Ameristeel
Heartland
Lone Star
Sheffield
Essar
National
Chaparral
Algoma
LTV Tin
Co-Steel
Minnesota Steel
ISG IH2 Pkl.
North Star
Stelco
Sidetul Tultitlan
Quanex Macsteel
BlueScope
Corsa
IMSA Steelscape
SSAB
OAO TMK
ICH/Grupo Simec
Ipsco Plate (U.S.)
Ipsco Tubular (U.S.)
Republic
Tenaris
Steel Dynamics
Ternium
GalvPro-Jeffersonville
Maverick Tube (U.S.)
Hylsa
The Techs
Prudential Canada
IMSA
Roanoke Steel
Hydril Company
Steel of West Virginia
Omnisource (Scrap)
1/1/09
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AWPA Steel Producers Issues in Todays Economy
Infrastructure Stimulus

• US aging infrastructure is functionally obsolete
  and structurally deficient
• FHWA estimates 78.8 billion per year for the
  next 20 years to maintain infrastructure, 131.7
  billion to improve
• Gas tax at 18.54/gallon generates app. 40
  billion
• Current gas tax woefully insufficient, only half
  of maintenance

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AWPA Steel Producers Issues in Todays Economy
U.S. Steel Scrap (Data in million metric tons)
Salient StatisticsUnited States 2003 2004 2005 2006 2007(e) 2008(e)1
Production Home Scrap 17 14 15 13 13 12
Production Purchased Scrap 56 59 58 58 58 52
Imports for Consumption 4 5 4 5 5 4
Exports 11 12 13 15 15 23
Consumption, reported 65 67 66 66 66 59
Source US Geologic Survey, January 2008 1.
2008 is a rough estimate based on 3 normal
quarters 4th Quarter _at_ 60 steel production

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AWPA Steel Producers Issues in Todays Economy
US Long Product Data 2008
For rebar, wire rod, merchant bar, light shapes,
parallel flange sections, structural products1

• Through September 2008, domestic shipments plus
  exports were 4.1 higher than 2007, at 18,918,329
  short tons, or roughly 2.1 mmt per month.
• Data shows domestic shipment decline of 16 in
  October from Septembers level.
• Data shows domestic shipment decline of another
  27 in November from Octobers level.
• Total domestic produced shipments have fallen
  approximately 50 in the 4th quarter, compared to
  the first 9 months of 2008.

1 December 2008 SMA Market Report (Moss/Taccone)
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Wire Rod Product Data 2008
AWPA Steel Producers Issues in Todays Economy

• Total Mill Shipments of Wire Rod were unchanged
  YOY
• (2008 3,182,008 tons 2007 3,178,027
  tons)
• First 9 months of 2008, mill shipments
  Quarterly Rate 903,604 tons/qtr
• Last Quarter of 2008 mill shipments Quarterly
  Rate 471,196 tons/qtr
• Off 47.8 in 4th Quarter 2008, compared to 1st
  Quarter 2008

December 2008 SMA Market Report (Moss/Taccone)
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AWPA Steel Producers Issues in Todays Economy
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AWPA Steel Producers Issues in Todays Economy
Free Trade vs. Protectionism
Is Protectionism the enemy of Free Trade

• Protectionism
• Predatory Pricing
• Trade distorting subsidies
• Government Ownership
• National power by protecting our industries and
  state
• Piling up currency measures
• One way trade
• Need Balanced Trade over Mercantilism
• Whos the Protectionist?

1. Taken in part from C. Blum
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AWPA Steel Producers Issues in Todays Economy
Is Enough Being Done?
Raw Materials
No
Barriers continue
Lack of policy continues
Energy
No
Currency manipulation, Subsidies, Not playing by
the rules
No
China
Distortions continue, Whos the protectionist
Trade
No
No long term structural policy changes are being
proposed in Washington for taxes, trade
imbalance, and energy.
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AWPA Steel Producers Issues in Todays Economy
Conclusion

• U.S. Steel Industry in Better Position Today to
  Manage the Down Cycle
• (but what a down cycle!)
• Improved Economics From Consolidations, i.e.
  Reacted Quicker in October
• Improved Control of Variable Costs
• Scrap-Based Metallics (In 2009, U.S. will be
  nearly 2/3 EAF-based
• Energy Costs
• Transportation Costs
• Labor Efficiency (U.S. at Below 2MH/Ton
  Minimills Often Below 1MH/Ton)
• Improved Inventory Control (Inbound Materials,
  Steel, and Customer Products). NOT THE OLD
  INVENTORY OVERHANG!
• Improved Debt and Equity Balance Sheet Position
• Still Challenging But Reasons for Meaningful
  Long-Term Optimism!