Steel Prices: Past, Present and Future

1
Steel PricesPast, Present and Future
What about the recession?

• Thomas J. Prusa
• Rutgers University and NBER

2
What is Going On?

• Much has changed
• Steel prices may not seem that important now!

3
Plan for talk

• Review steel market
• The past, the present, and looking to the future
• Thoughts on the Macro-economy
• Recession ? deep but normal
• Financial Crisis
• Debt Issues
• How to deal with the tsunami
• Opportunity to re-think your strengths
• QA

4
Let's begin by talking about steel market
5
Info on State of Steel Market

• Steel Business Briefing (www.steelbb.com)
• American Metal Market (www.amm.com)
• Purchasing (www.purchasing.com)
• U.S. International Trade Commission
  (www.usitc.gov)

6
Big Picture / Major Themes

• 1984 1998 (good old days)
• Stability
• 1998 2003 (shake-out)
• Transition to new market structure
• USW shareholders
• 2004 mid-2008 (sellers market)
• Price Volatility Shortages
• Present

7
Price Volatility
8
(No Transcript)
9
Hot-Rolled - Prices(/s.ton SBB)
10
Historical Volatility(std.dev./mean)
11
304 SS - Prices(/CWT, AMM)
12
The Role of Imports
13
Role of Imports

• Small role
• Experience over last decade
• Steel Safeguard failure
• Post safeguard boom
• Current situation
• Academic research
• Small impact

14
Imports SS All Sources(tons, USITC)
Steel Safeguard Action (mid-2001 to late-2003)
15
State of the Industry(circa mid-2008)
16
Depends on where you sit(World Steel Dynamics)

• Profound change for the better
• steel companies their surviving workers
• those selling raw materials to the industry
• steel mill equipment manufacturers (due to the
  surge in orders)
• Time of shock and dismay for steel buyers
• steel prices have risen greatly
• variability creates huge challenge for pricing
  downstream products
• supply tight, shortages delays common

17
Age of Discontinuity(World Steel Dynamics)

• Current pattern of events is no longer similar to
  those in the past
• Concentration (antitrust waivers in EU US)
• Pricing and Production Discipline
• Emergence of China
• Change in business orientation
• Cost push via demand for raw materials

18
State of the Industry(present)
19
Today's steel industry

• By late-2008, change in emphasis
• risks for steel buyers suppliers
• Steel Suppliers
• Over-leveraged
• Concentration built on debt
• Refinance / cheap money

20
Today's steel industry

• Output Down (year-over-year, Jan-Jan)
• North American 51
• EU-27 46
• Latin American 41
• Sept 2008 was first time output fell in 87
  months!
• Service Center sales down 43
• Capacity Utilization about 50

21
304 SS - Prices(/CWT, AMM)
22
Attention Grabbing Headlines

• Collapsed US sheet market continues to drift
• won't chase orders
• ArcelorMittal idles Indiana Harbor bar mill
• at least three weeks, probably longer
• US Steel hot-idling 25 of Clairton's capacity
  (indefinite)
• Severstal Warren blast furnace down indefinitely

23
More Headlines

• January US stainless imports below license
  applications
• Stockist distributors fist-fight to dump plate
  inventories
• Price recovery driven by speculative stock
  building
• US sentiment turns more negative, says The Steel
  Index
• US market may not return to normal until 2012

24
What to Expect?

• Extended downturn
• may not return to normal until 2012 (SMA)
• 80 capacity utilization
• Many major downstream steel users forecast
  double-digit production falls in 09 and 10
• Prices
• Unlikely to fall much further
• perhaps another 10
• Financial mkts unstable ? Prices stable/low

25
What does this mean for you and your business?
26
An Opportunity

• What makes you special?
• Size alone?
• Costs?
• Market niche?
• Customer relations support?
• premium on dependability and honest communication
• According to USITC studies price matters,
  but rarely is it the 1 factor

27
A few minutes on the economy
28
Macroeconomics

• Recessions come, Recessions go
• Length Depth
• Consensus emerging that this crisis is worst
  since 1930s
• IMF, World Bank, Fed Reserve
• Global scope
• Bad in U.S., worse elsewhere
• Best case tepid growth in 2010

29
Macroeconomics

• Banking/Finance Issues Greatly Complicate Policy
  Response
• Whos to blame?
• Japan lost decade
• Very slow growth
• Financial Crisis is the great policy failure
• Patient is still bleeding

30
Debt Issues

• Since 1990
• Federal Debt by 6.9/year
• Consumer Debt by 8.1/yr