North American Steel Trade Committee

1
NAFTA Steel Industry Pulse

• North American Steel Trade Committee
• Laredo, Texas
• November 2007

2
Outline

• Preamble
• Industry Developments
• Market Trade Trends
• Intra-NAFTA Policy Issues
• Feature Topic Trade and Manufacturing
• Key Policy Imperatives

3

• Preamble

4
Putting Recent Performance In Context

• Earning the Cost of Capital Over Economic Cycles
• Over the past 25 years, the U.S. and Canadian
  industries after tax returns have averaged 0.95
  and 1.6, respectively
• Volatility
• From 1950-2006, the coefficient of volatility for
  the U.S. steel industry has been 266.7, vs.
  27.6 for all manufacturing
• Competitiveness
• Consolidation / restructuring
• Operational efficiencies / technology
• Cost structure dynamics
• Location

5
No Immunity

• Conditions Leading to Past Crises Are Still in
  Place
• World Overcapacity
• Governmental Ownership / Interventions
• Non-Market Behaviour
• Special Case of China (and India)
• No Immunity From Longstanding and Ongoing Threats

6
Proper Role of Governments

• Defending The Free Market From Abuse
• Eliminating market interventions and distortions
  by all governments
• Enforcing compliance with trade agreements and
  competition law
• Maintaining and enforcing trade remedy laws
• Assisting trading partners with understanding /
  adopting best practices
• Recognizing And Fostering The Steel Industrys
  Contribution To National Goals
• Economic Security
• National Security
• Staple of a Strong Manufacturing Sector

7

• Industry Developments

8
Steel Consolidating, But Still Fragmented
TOP 15 Represent 36 of Global Production
Source IISB
9
Consolidation China The Exception
Regional Top 5 Producer Market Share
ROW Market-Driven
China
2006 Chinese Steel Production By Facility Size
(in Million MT)
Total US / Canada
114
Total Japan
116
Source CISA
Source IISI 2006 Production in Million MT
10
China Worlds No. 1 Is Government Directed
Top 20 Chinese Steel Producers Government
Control Vs. Private Ownership
Top 20 Capacity 210 Million Tons
91
2007 Projected Global Production
Australian Government Predicting China Will Reach
1B Tons by 2015
11
Active Consolidation Within NAFTA

• Recent Key NAFTA Announcements
• ArcelorMittal-Dofasco
• USS-Stelco, USS-LoneStar
• Gerdau-Chaparral
• Ternium-Grupo Imsa
• SSAB-IPSCO
• Essar-Algoma, Essar-Minnesota
• Emerging Downstream Focus
• Nucor-Harris, Nucor-Barker, Gerdau-Enco
• Extending to Scrap
• Sims-Metal Management, Steel Dynamics-OmniSource

12
Consolidation Opportunities Risks

• Potential Benefits
• Access to Capital, Technology
• Deeper Customer Relationships
• Facility Optimization / Strategic Fit
• Industry Sustainability
• But Benefits Are Undermined By Prevailing Risks
• Global Overcapacity
• Subsidies and Other Trade and Market Distortions

13
New Capacity Outpaces Consumption Growth
Announced Steel Capacity Vs. Projected
Consumption 2007 2010 (Million Metric Tonnes)
Announced Steel Capacity Increases By Region
(2006 2012)
Compound Annual Growth Rates Capacity 6.83
Demand 4.65
Capacity Multiple Sources Nucor
Analysis Demand IISI projections thru 08 6
increase 09 10
14
China Worlds Most Subsidized Industry
More than 50 billion in subsidies
State-owned enterprises account for 91
percent of Chinas largest steel groups
7.5 billion in debt-to-equity swaps in 2000
Chinese steelmakers regularly obtain preferential
loans from state-owned banks
An additional 6 billion in announced
subsidies during 2000
2005 steel policy commits China to further
subsidies, micromanagement
Manipulation of key raw materials markets,
including coke and ferroalloys
Support from local and provincial governments unco
ntrolled by central government
Inadequate protection of workers rights and
enforcement of environmental standards
Chinese steel producers enjoy government assistanc
e with energy and other input costs
15
Raw Materials Governments Still Intervening

• Governments (e.g., China, India) Continue to
  Intervene in Key Raw Materials Markets For Steel
• Iron Ore
• Coke
• Ferroalloys
• Refractory Materials
• Export Tax Manipulations / Restrictions
• Distortions Created NAFTA Competitiveness
  Negatively Impacted

16
Consolidation Key Takeaways

• Consolidation is Creating a Stronger Global
  Industry
• NAFTA companies now competing for capital on a
  global basis
• China, the dominant producer, not participating
  in the trend
• Level Playing Field Necessary to Ensure NAFTA
  Benefits from Market-Driven Consolidation
• Continued overcapacity threat, led by China
• Subsidies government interventions driving
  export growth and potential for continued trade
  distortions
• Successful Consolidation Outcomes Require
• Working to address effectively root causes of
  trade distortions
• Ensuring NAFTA trade remedies are fair,
  accessible, enforceable and able to respond
  effectively to market distortions as they occur

17

• Market Trade Trends

18
Global Growth, But Non-NAFTA
Source IISI 2007 Data Annualized From 9 Months
19
China Is the Worlds Largest Exporter
Source CISA, 2007 Data Annualized
Source China Customs, 2007 Data Annualized
20
World Market And Trade Flows Are Dynamic

• NAFTA Faces a Potential Significant Import Surge
  Risk
• Concerns about the Combined Effects of
• Unrelenting Chinese Export Expansion
• Effect of Other Nations (e.g., EU) Taking Actions
  Against China
• No Immunity for the NAFTA Market Despite Industry
  Consolidation and Enhanced Competitiveness
• Need for NAFTA Governments to Counter Adverse
  Spillover Effects from Chinese Non-Market
  Behaviour

21
NAFTA Apparent Steel Demand Fell in 2007
22
Imports From China Dominant, Growing
Consolidated NAFTA Imports From China 2006 /
2007(China Import Share By Product Group)
Source AISI, Statistics Canada,
CANACERO January-July
23
China Value-Added Export Focus
Selected Value-Added NAFTA Imports From China,
2005 - 2007
China Export Growth 1H 2006 Vs. 1H 2007
11 mt
20 mt
1H 2006 Capacity Increase 31 million tons (mt)
7 mt
31 mt
1H 2007 Capacity Increase 38 million tons (mt)
Source IISI, 2007 Data Annualized from 6 months
Source NASTC Steel Monitor 2007 annualized
24
China Unfulfilled Commitments

• All the measures taken by the Chinese
  governments to curb exports have been without
  effect so farIf China wishes to avoid
  long-running trade conflicts, the rules of the
  market have to be obeyed.
• -Ekkehard D. Schulz, Chairman, ThyssenKrupp AG
• September 30, 2007

25
China Central To Current NAFTA Cases

• Key NAFTA Steel Trade Cases (Ch. 72 Ch. 73)
• MayNovember 2007

Finding renewed against China on October 10, 2007
26
Intra-NAFTA Policy Issues
27
Steel Remains a Strategic NAFTA Sector

• Recent Developments (August 2007)
• Montebello SPP Leaders Summit
• NAFTA Commission / Trade Ministers Meeting
• North American Competitiveness Council (NACC)
  Report

28
Context NAFTA Economic Uncertainties

• Economic Concerns in All NAFTA Countries
• U.S. Weakening
• Mexico Tracking U.S. Performance
• Canada Uneven Performance, Slowing Growth,
  Currency Appreciation (CDN gt USD)
• Rising Input Costs and Uncertainties (e.g.,
  Energy)
• Potential Negative Impacts on Both Steel
  Producers and Customers

29
Effective Trade Policies Remain Essential

• WTO NAFTA Governments Coordination
• Subsidies Case
• Rules Negotiations
• Expanding Focus from Doha to Bilaterals
• US Korea, Columbia, Peru, Panama
• Canada Korea, Columbia/Peru, EFTA
• Mexico Korea, Peru
• Key Industry Priorities on FTAs
• Remedies
• Steel Customer Impacts / Incentives for
  Value-Added in North America
• NAFTA Policy Coordination
• AD/CVD Applicability to NMEs
• Need to Adopt Best Practices / Highest Level of
  Enforcement

30
Climate Change Trade Impacts

• Emerging Legislative Regulatory Issues in
  NAFTA
• U.S. Congress Debating Cap Trade, Border
  Adjustability
• Canada New Plan Technical Compliance Issues
• Mexico Government Open to Discussion of IISI /
  Sectoral Model
• The Pressure For Stringent Regulation Could Have
  Significant Trade Consequences
• Decoupling / Production Loss and Migration
• Increased Import Penetration
• Next Generation Trade Policy Green Content
• Bottom Line Need to Avoid Creating Trade
  Distortions or Reducing NAFTA Competitiveness

31
Feature Topic Trade and Manufacturing
32
NAFTA Manufacturing at Risk
Source AISI Indirect Steel Trade Report, Global
Trade Atlas
33
US Domestic Manufacturing Share Falling
United States Domestic Vs. Import Manufacturing
Share 1998 - 2006
Source US Census Bureau
34
US 3m Jobs Lost Trade Deficits Growing
Trade Deficit 123 Since 2000
Estimated 1m Jobs Lost Due to China Trade
Sources US Census Bureau (trade data), US Labor
Dept. (employment data) Dr. Peter
Morici, former Chief Economist of ITC (estimate
of lost mfg. jobs due to China trade)
35
US China Drives Indirect Steel Trade Deficit
Source AISI Indirect Steel Trade Report
36
Canada Manufacturing Jobs Are Disappearing
All Employment 9.3
Manufacturing Employment -14.0
Source Statistics Canada
37
Canada Steel-Related Trade Deficit Persists
Canadas Projected 2007 Deficit With China
Represents 71 of the Total
Source Statistics Canada 2007 Data Annualized
from January-July Actuals
Steel-containing goods includes all HS Sections
for Base Metals and articles of Base Metals (Sec.
XV), Machinery, Appliances and Equipment (Sec.
XVI), and Vehicles, Aircraft, Vessels and
Transportation Equipment (Sec. XVII).
38
Canada China Growing Value, Market Share
Source World Trade Atlas / AISI.
39
Mexico Imports Gaining Market Share
Mexico Real Manufacturing GDP Imports 1994 -
2007
40
Mexico Significant Employment Loss
Mexico Real Manufacturing GDP Employment 1994 -
2007
41
Mexico Steel Related Trade
42
Trade And Manufacturing Initial Conclusions

• Manufacturing Remains Critical to NAFTA Economies
• Significant source of wealth creation and
  innovation
• Factory Employment is Down, While Imports of Key
  Steel-Containing Products Are Up
• Trade imbalances are having an effect
• Manufacturing jobs transforming into service
  jobs?
• Persistent Imbalances Have Wider Supply Chain
  Ramifications
• Diminishing customer base is a top concern for
  NAFTA steel producers
• NAFTA Manufacturing Policies Must Include A
  Strong Trade Component

43

• Overall Conclusions
• NAFTA Policy Implications

44
Strategic Government Actions Required

• Ensure Rules-Based Trade For Manufacturing
  Industries
• Achieve Highest Level Of AD/CVD Practice
  Enforcement
• Prevent Market Distortions Before They Impact The
  NAFTA Region
• Strengthen Intra-NAFTA Trade Facilitation

45
Immediate Focus

• Treat China As NME In AD Cases, And Fully Apply
  CVD Law To NMEs
• Promote NAFTA Manufacturing In FTAs
• Enhance Government Information-Sharing Across
  Jurisdictions On Trade Remedy Practice And
  Experience

46
With Sustained Emphasis On

• Joint Efforts To Challenge Chinas Subsidies,
  Currency Manipulation and Other Distortions
• WTO / Multilateral Not allowing China to impose
  a non-market model on the WTO
• Political / Diplomatic / Economic Recognition
  of Chinas growing alliances with Latin American
  countries, with both backward linkages (mines,
  ports, raw materials, energy) and forward
  linkages (customers)
• NAFTA-Wide Pro-Manufacturing Policies
• Reducing Intra-NAFTA Logistical / Border Costs
• Incorporating Trade Impacts In Any Climate Change
  Policies