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Current Drivers Impacting

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Title: Current Drivers Impacting


1
National Fluid Power Association
Current Drivers Impacting Steel Competitiveness
Thomas A. Danjczek, President Steel Manufacturers
Association August 17, 2004
2
Current Drivers ImpactingSteel Competitiveness
NFPA Economic Outlook Conference
  • SMA
  • I. Trade
  • 201 Real Impact
  • World Steel Production
  • China, China, China
  • II. Steel Production Costs
  • Key Issues
  • Asset Values
  • Exchange Rates
  • Steel Imports Value of U.S.
  • Bankruptcy/Restarts
  • III. Other Costs
  • Restrictive Scrap Exports
  • Freights
  • Coke
  • Energy
  • IV. Market
  • Overview
  • Public Works Construction
  • V. Conclusion

3
NFPA Economic Outlook Conference
  • The Steel Manufacturers Association (SMA)
  • 38 North American companies
  • 31 U.S., 5 Canadian, and 2 Mexican
  • 107 Associate members
  • Suppliers of goods and services to the steel
    industry
  • SMA member companies
  • Operate 120 Steel plants in North America
  • Employ about 40,000 people
  • Mini-mill Electric Arc Furnace (EAF) producers

4
NFPA Economic Outlook Conference
  • Production capability
  • SMA represents over half of U.S. steel production
  • Recycling
  • SMA members are the largest recyclers in the U.S.
  • Last year, the U.S. recycled over 70 million tons
    of ferrous scrap
  • Growth of SMA members
  • Efficiency and quality due to low cost
  • Flexible organizations
  • EAF growth surpassed 50 in 2002 2003, and
    anticipated to be 60 by 2010

5
In August 2003, The Times they were achanging
NFPA Economic Outlook Conference
Capital Constraints
Legacy Costs
Steel Demand Weakening
Consolidations
Public Policy
Pricing Volatility
201 Tariffs/ Exclusions
Bankruptcies
Increasing Imports
Mini-mill Industry Condition
Semi-Finished Imports
Exchange Rate Shifts
N.A. Economy
Perennial Problems
Plant Closures/ Restarts
Operating Costs Benefits Energy
US PBGC
ISGs Labor Contract
6
WORLD STEEL PRODUCTIONGlobal Production up 7.9
for first half, 2004 (503.3 million tonnes)
China Production up 21.1 (124.7 million tonnes).
World Total
Steel Production March 2004 Percent Change,
Year Ago Month 5.9
Year-to-Date 8.7
World Excluding China
In the five years from 1998 to 2003, China and
the former-USSR states increased production by a
cumulative 140 MT, equal to 70 of the combined
total output in 2003 of both the U.S. or Japan.
7
ANNUAL WORLD STEEL PRODUCTION OUTLOOKWorld steel
output looks set to rise 5 or 50 MT MT in 2004,
after gains of 62 MT and 53 MT in 2003 and 2002,
respectively, largely on the strength of China
coupled with the recent onset of rest-of-world
economic recovery.
Forecast
World Steel Production Forecast
Forecast (MT) 2005 1,075.0 2004
1,015.0 2003 964.7 2002 903.1 2001
850.2 2000 847.6 1999 789.0
EAF (Line, Right Scale)
Courtesy Metal Strategies
8
NFPA Economic Outlook Conference
Last Weeks Trip Impressions
Efficiency ? ? ? Management Methods ? ?
? Quality ? ? ? Costs ? ? ? Development ? ?
? Hard vs. Soft Landing ? ? ? Infrastructure ?
? ?
9
  • A few notes on China from 2003, 2004 and forward
  • Consumed 25 of world coke supply in 03
  • Coke production ramping up in 04 and 05
  • Consumed 25 of world iron ore supply in 03
  • Iron ore production ramping up in 04 and 05
  • Consumed 20 of world scrap supply in 03
  • Consumed 240M mtons of steel in 03
  • Produced 220M mtons of steel last year (est.
    240M mtons 04)
  • Consumed 40 of world concrete supply
  • VW will produce and sell 150M cars in China this
    year
  • GM will invest 6B in China by 2006 (rival VW as
    1 supplier)
  • Average income / year 1,200 US ( 5,000 for
    steelmakers)

10
CHINA IMPACT IN GENERALChina is changing the
dynamics of world regional steel production,
consumption and trade as well as steel and raw
material pricing.
  • China now accounts for nearly one out of every
    four tons of crude steel produced one out of
    every four tons consumed worldwide.
  • China was the largest importer of steel in 2003
    at 40 MT, nearly twice that of the U.S. (21.4
    MT). It was the second largest importer of steel
    in 2002 at 24.5 MT behind only the U.S. (29.7
    MT).
  • China now imports nearly one in five tons of
    traded steel scrap worldwide including pulling in
    between 30 and 40 of total U.S. scrap exports
    since 2001.
  • China now factors as the destination for roughly
    25 of world seaborne iron ore exports and may
    soon change the dynamics of annual world iron ore
    price negotiations.
  • Chinas fixed currency exchange rate (to the U.S.
    dollar) is under-valued by 25 to 40 thus acting
    as a significant draw on labor- and
    steel-intensive industrial production even from
    low-cost countries such as Mexico, Brazil and
    India.

Courtesy Metal Strategies
11
CHINA STEEL PRODUCTIONChina produced 220 MT of
crude steel in 2003 double the next largest
producer Japan at 110.5 MT and 2.4 times the U.S.
(92.2 MT, shown) and will produce as much as
275 MT, 350 MT, and 425 MT by 2005, 2010, and
2015, respectively.
China
United States
Courtesy Metal Strategies
12
CHINA IMPORTSChinas imports of steel and
related raw materials continued to surge through
February 2004 with imports of iron ore up 37,
metallics up 94, semifinished steel up 211 and
finished steel up 21.
Courtesy Metal Strategies
13
Courtesy IMF
14
Courtesy IMF
15
Courtesy IMF
16
CHINA CONCLUSIONS Pricing Conclusions
  • The odds are relatively low (less than 10-20)
    but still possible that the current steel and raw
    materials decline seen since March will be very
    slight, short lived and quickly reversed.
  • The odds are also low (about 25-30) that the
    recent pricing declines seen to date will be
    severe (hot rolled sheet prices bottoming out in
    the 275 to 300/ton range) and prolonged (over
    6-12 months).
  • The odds are greatest (50-60) that the recent
    pricing declines
  • (1) will be somewhat more significant than seen
    to date
  • (2) will last two to four months
  • (3) will result in hot rolled sheet prices
    bottoming out at levels below peaks in April 2004
    but still well above prior 10-year trend
    averages, somewhere on the order of 400 to under
    500 per ton.

Courtesy Metal Strategies
17
CHINA CONCLUSIONS Currency Manipulations
  • For eight and one-half years, China has
    maintained a fixed exchange rate of 8.3 yuan to
    the dollar. China has printed any amount of yuan
    necessary to purchase dollars to maintain a fixed
    artificial rate, giving it enormous export
    advantage, and creating a China trade surplus
    with the US reaching 124 billion in 2003.
  • In the two-year period, 2002-2003, US imports
    of manufactured goods from China accounted for 56
    percent of the total growth in US imports of
    manufactured goods during the period. The US
    trade deficit in manufactured goods with China
    was 128 billion in 2003. The overall US trade
    deficit with China is now the largest bilateral
    trade imbalance ever seen in the history of world
    trade.
  • The United States should insist that China
    change its exchange rate regime which allows it
    to sell undervalued goods in export markets at
    costs denominated in undervalued yuan.
    Simultaneously, China must relax its tight
    capital controls, which have resulted in an
    accumulation of foreign exchange acquired from
    export sales, amounting to 420 billion in 2003,
    about one-third of Chinas GDP. China must stop
    excessive issuance of undervalued yuan, and pay
    for its imports with foreign exchange.
  • Today, China can absorb a revaluation without
    an economic collapse, versus a token one which
    would respond to the problem in form only, rather
    than a needed significant revaluation. If
    inadequate US policy causes a delay for another
    five years, however, China, the US, and the world
    economy are in for a very hard landing. At that
    point, an inevitable huge revaluation of the yuan
    will occur, which it must, when US policy
    officials then confront US trade, current
    account, and capital account deficits of
    disastrous proportions. US policy must
    effectively address this problem, now. So far,
    it has not.

May 12, 2004 SMA Press Release
18
STEEL PRODUCTION COSTSSummary of Key Issues
  • Relative operating costs in the U.S. steel
    industry have changed dramatically over the past
    12 months
  • First with the introduction of the ISG-style
    restructuring which took out 40-50 per of hot
    band costs as a result of labor contract changes,
    and a further 25-50 per ton with the removal of
    past legacy costs.
  • Secondly, with the surge in metallics and energy
    prices and this developments far greater
    relative impact on sheet minimills until the
    successful implementation of surcharges.
  • Third, ore, coal, and coke prices have risen
    significantly.

19
STEEL ENERGY AND RAW MATERIAL COSTS (1 of 2)In
the 28 months from January 2002 to May 2004, raw
material and energy input costs for U.S.
steelmakers have increased dramatically.
275
200
190
195
165
Courtesy Metal Strategies
20
STEEL ENERGY AND RAW MATERIAL COSTS (2 of 2)In
the 28 months from January 2002 to May 2004, raw
material and energy input costs for U.S.
steelmakers have increased dramatically.
110
450
65
82
155
Courtesy Metal Strategies
21
WIDE VARIATION IN COSTSThere are three key areas
in which North American mills differ widely on in
respect to ultimate unit product costs and profit
margin position
  • Spot market exposure for raw materials and energy
    (a big negative at the moment)
  • Example ISG-Sparrows Point and ISG-Burns Harbor
    are on the complete opposite end of the spectrum
    here
  • Contract market exposure for steel product sales
    (a big negative at the moment)
  • Companies such as AK Steel who normally benefit
    from such protection, are now being negatively
    impacted
  • General ability to most effectively manage base
    price and surcharge adjustments
  • There are much bigger variations here than one
    might think

Courtesy Metal Strategies
22
RECENT U.S. STEEL ASSET TRANSACTION
VALUESAcquisition range has been 60 to 90/ton
shipped for shuttered operations and 160 to
260/ton for ongoing businesses.
Ongoing Businesses
Liquidated Companies
CSN disclosed in October 2003 that its
acquisition price for Heartland was actually 175
million instead of the previously-report 69
million. Acquisition prices include all assumed
liabilities.
Courtesy Metal Strategies
23
EXCHANGE RATES INDEXThe real trade-weighted
US index for major currencies has dropped 22
from the recent 2-02 peak (115.8) and 30 from
the all-time record high in 1-85 (124.9), but
was still up 10 from the 7-95 record low (80.4).
US Real Trade-Weighted Index
Data through April 2004
Broad Currency Group
Major Currencies
Courtesy Metal Strategies
24
VALUE OF THE U.S. DOLLARScrap prices are
inversely related to the dollar
Scrap Price
Dollar Index
Source AMM, Federal Reserve
Courtesy Metal Strategies
25
VALUE OF THE U.S. DOLLARThe strong relationship
between steel imports and the dollar is even more
clear when a 12-month moving average is used.
Finished Steel Imports (12-Month Moving Avg)
Dollar Index
Source AISI, Federal Reserve
Courtesy Metal Strategies
26
July 2004 Above 300 Again!
27
Back to the Top in July!
Courtesy AMM
28
MONTHLY U.S. SCRAP PRICESAfter climbing steadily
from early-2002, scrap prices have soared to new
heights in the last few months, due to the impact
of the weaker dollar, increased Chinese
purchasing, limited new alternative iron
capacity, and reduced Russian and Ukrainian scrap
and MPI exports.
Data through April 2004
No.1 Factory Bundles (AMM, Chicago)
No.1 Heavy Melt (AMM, 3-City Composite)
No.1 HM AMM 3-city composite No.1 Factory
Bundles AMM, Chicago market
Courtesy Metal Strategies
29
MERCHANT PIG IRON (MPI) PRICEThe estimated
average delivered price of MPI in the minimill
usage era (since 1992) was 155/ton with an
annual range of 122/ton to 194/ton. However,
the comparable April 2004 price was 270/ton.
Estimated Delivered Cost-1 Average 1992-03
145/ton Average 1993-97 162/ton April 2004
270/ton
1- Calculated as reported CIF per metric tonne
(Source Ryans Notes, Raw Material Advisory
Services) to Port of New Orleans, converted
to US/short ton, plus 5/ton barge transfer,
plus 10/ton Mississippi River shipping
Courtesy Metal Strategies
30
RUSSIA AND UKRAINE SCRAP EXPORTSPartial export
bans, restrictions and duties designed to protect
local steelmakers have restricted the flow of
exports to the world market
Courtesy Metal Strategies
31
U.S. SCRAP CONSUMPTION AND EXPORTSDemand for
U.S. scrap increased by 3 MT in 2003, driven by a
15 surge in exports and a slight gain in
domestic demand (EAF and BOF production down 3
and up 1, respectively)
Courtesy Metal Strategies
32
OCEAN FREIGHT RATESOcean freight rates increased
4.5-fold from 10,000/day to 45,000/day between
early-2003 and early-2004 and have recently
declined by about 5 to 10 pr tonne since
late-March.
Courtesy Metal Strategies
33
IRON ORE PRICES - ANNUALThe 2004 iron ore
price-increase benchmark of 18.5 was established
in early-January by CVRD, following a 9 gain in
2003. China now accounts for over 25 (110 MT) of
world sea-borne demand, while three producers
(CVRD, RTZ and BHP) now control over 80 of the
supply.
Pellets
Lump
Fines
Prices shown are from CVRD (Brazil) to Western
European steel customers (fob)
Courtesy Metal Strategies
34
Technical Read on Crude Oil Prices
Courtesy JP Morgan
35
Technical Read on Natural Gas Prices
Courtesy JP Morgan
36
STEEL END-MARKET OVERVIEWThree broad sectors
construction, autos, and industrial equipment
account for over 75 of total U.S. steel
consumption by ultimate users.
Appliances, Office Furniture 2.5
All Other 15
60 Non-Residential 30 Public Works 10
Residential
Containers 4
Construction 40-45
Energy-4
Ind. Equip. 15-18
Autos 18-20
Off-Highway Vehicles Freight Cars Barges,
Ships Other Industrial Equip.
55 Light Trucks/ SUVs 30 Passenger Cars 5
Commercial Trucks, Buses 10 After Market
Courtesy Metal Strategies
37
NFPA Economic Outlook Conference
Conclusion
  • Uncertainty Cycle has Changed (Shorter Term
    Greater Peaks Valleys)
  • Revenue vs. Costs Not the Same Business Model
  • Bankruptcy Laws Unfair to Competitors
  • Investments Earn Cost of Capital
  • Mini-Mills Must Compete in the World, as it is,
    and We Can!
  • Meaningful Optimism with Good Long Term
    Consumption, Relative Value, and Excellent
    Recyclability for Steel
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