Steel Orbis: Steel Trade Conference

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Steel Orbis Steel Trade Conference (Session 1
Economy and Markets) North American Steel
Industry Challenges
Thomas A. Danjczek President Steel Manufacturers
Association San Diego, CA July 11, 2008
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Outline
Steel Orbis 2008

• SMA
• U.S. steel industry, 1970s vs. today
• U.S. steel production
• Steel market conditions
• Consolidation and capacity
• Raw material issues
• Greenhouse gas emissions
• Unknowns
• Conclusion

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SMA
Steel Orbis 2008

• The Steel Manufacturers Association (SMA)
• 35 North American companies
• 30 U.S., 3 Canadian, and 2 Mexican
• 130 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
Steel Orbis 2008

• 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 Orbis 2008
Obvious Items
-Recession impact -U.S. dollar exchange
rate -China finished goods vs. raw
materials -Raw material price squeeze -Consolida
tions -NAFTA issues -Environmental
regulations -Energy and transportation
costs -China, China, China
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U.S. Steel Industry
Steel Orbis 2008
1970s
2008
Production Employment Technology Location Imports
Profitability Average Price
100 million tons
100-140 million tons
Approx. 700,000 12 MH/ton (1978 449,000)
lt120,000 (Minimills _at_ 60 - approx. 40,000,
lt2MH/ton)
lt20 casters lt10 EAF
95 casters 60 EAF
NW, SE, Rust Belt (near customers, and cheap
power)
Primarily Rust Belt a few scattered
Approx. 25 (peak _at_ 35)
Approx. 15
Poor
Good
605
1200???
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Differences
Steel Orbis 2008

• U.S. has become one of the worlds low cost steel
  producers, due to metallics availability,
  transportation, labor and energy efficiencies,
  and high utilization
• China, which was approx. 70mmt in 1970s, today
  over 500mmt
• Many large integrated producers eliminated legacy
  costs in 1998-2003 period through bankruptcies
  (30 companies)
• World demand for all raw materials has changed
  supplies from excesses to shortages
• Last integrated mill built, Burns Harbor, was
  1964-1970 (Nucor?)
• Growth in U.S. lost to foreign producers (1970
  U.S. approx. 20 of world today, less than 10)
• U.S. steel capacity has been reduced from approx.
  170 million tons in the 1970s, to 130 million
  tons today, while production has been around 100
  million tons
• Profitability net income as a of sales was
  only .5 to 2.5 (1974) in the 1970s.
  Insufficient to cover down cycles
• Significant quality improvements
• Metallics yields have improved from 75 in 1970
  to over 90 today
• The next challenges are availability of scrap,
  scrap substitutes, energy, people, and customers

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Steel Orbis 2008
U.S. Steel Production
U.S. Raw Steel Production Largest Recyclers in
the Nation 100 million tons of steel produced
each year
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Steel Orbis 2008
U.S. Current Steel Situation

• Real steel usage down 4.4 in 2007 from 2006
• Overall, all steel consumption projected to be
  down 2.2 in 2008 vs. 2007
• 2008 might replenish steel inventories
• 2009 expect better than 2008
• Raw material steel prices continue to surge up
  with market support
• Impact of weak dollar, less imports, U.S.
  recession? Margin squeeze???

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Steel Consolidating, But Still Fragmented
Steel Orbis 2008
TOP 15 Represent 36 of Global Production
Source IISB
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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
Evraz
Mittal
Birmingham
Corus Tuscaloosa
Oregon Steel
Ispat Inland
Worthington-Decatur
Claymont Steel
ISG
IPSCO-Canada
Marion
Bethlehem
Nelson Steel
LTV
Severstal
Harris Steel
US Steel Plate
Arcelor Mittal-Sp Pt
Auburn Steel
Weirton
Rouge
North Star Arizona
Acme-Riverdale
WCI
American Iron Reduction
Georgetown
WPSC
LMP Steel Wire
Sicartsa
David Joseph
CSN
Bayou
Heartland
US Steel
Gerdau Ameristeel
Essar
Lone Star
Sheffield
Algoma
National
Chaparral
Minnesota Steel
LTV Tin
Co-Steel
ISG IH2 Pkl
North Star
Stelco
Sidetul Tultitlan
Quanex Macsteel
Corsa
BlueScope
IMSA Steelscape
SSAB
ICH/Grupo Simec
IPSCO
Republic
Steel Dynamics
Ternium
GalvPro-Jeffersonville
Hylsa
The Techs
IMSA
Roanoke Steel
Steel of WV
OMNI
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Steel Orbis 2008
Steel Industry Consolidations
Steel Industry Consolidations
Raw steel capacity in U.S. is approximately
110-120 million tonnes Due to a number of
consolidations, the top 10 companies are approx.
90 million tonnes top 3 companies are approx. 60
million tonnes Worldwide, the top company is
only 10 percent
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Consolidation Opportunities Risks
Steel Orbis 2008

• 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 Distortions

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Global Steel Capacity 2001-2007

• During 2001-2007, world crude steel capacity
  increases by 499 mmt to 1,564 mmt (46.9 over
  2000)

World Crude Steel Capacity 200007
Source German Steel Federation and IISI
verifications
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Global Steel Capacity 2008-2010

• During 2008-2010, world steel capacity will grow
  by 322 mmt, 21 increase over 2007, CAGR of 6.4

World Crude Steel Capacity 200010
Source German Steel Federation and IISI
verifications
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New Capacity Outpaces Consumption Growth
Steel Orbis 2008
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
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Strong Growth Areas
Steel Orbis 2008
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Raw Materials
Steel Orbis 2008

• Raw material prices are soaring
• Higher raw material prices have placed
  substantial cost pressures on NAFTA steel
  producers
• China (and other foreign) interference in raw
  material markets is unfairly helping their steel
  industries while driving up the cost of steel
  production worldwide

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Since Last Year, Prices for Key Raw Materials
Have Soared
Steel Orbis 2008
Source World Steel Dynamics and JP Morgan
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In True Market Competition, NAFTA Mills Would
Have a Significant Cost Advantage Over Asian Mills
Hot-rolled sheet cash costs (/ton)
Source JP Morgan Securities, Inc.
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Raw Materials Governments Still Intervening
Steel Orbis 2008

• 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

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Steel Orbis 2008
GHG Emissions
Growth in EAF steelmaking has allowed the steel
industry to reduce energy usage Lower energy
usage equals lower greenhouse gas emissions
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Steel Orbis 2008
EAF Efficiency
EAF Steelmaking Is Energy Efficient
19.1 million Btu of Energy per ton of steel
produced
8.4 million Btu of Energy per ton of steel
produced
Scrap-based Steelmaking (EAF-recycling)
Ore-based Steelmaking
Steel Info US Dept. of Energy
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Steel Orbis 2008
Unknowns
-Raw material price impact??? -Impact of
recession??? -Value of the RMB??? (Most recent
number still 35 off) -JCCT Steel Dialogue
where goal is to promote transparency with better
decisions??? -European Union antidumping
investigation and targets??? -Energy cost and
interest rate impacts??? -Rising freight
costs??? -Chinas restrictive policy of foreign
ownership participation??? -Chinas enforcement
of environmental regulations??? -U.S. legislation
(111th Congress) and 44th President??? -Trade
actions??? -When will China play by market
rules???
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Steel Orbis 2008
Conclusions

• Unknown impact of rising raw material costs
• Dont ignore wild cards
• Consolidations helping, but overcapacity still a
  risk
• Trade distortion still a problem - U.S. Congress
  disappointed
• Foreign ownership positive impact on trade
  friction
• Need aggressive policy measures to prevent China
  from causing a major crisis. To date, only trade
  cases have had an impact.
• Its still a cyclical business with demand,
  scrap, freight, inventories, etc. (fasten your
  seat belt)
• Finished goods containing steel are a major
  concern
• China, China, China everything else is still
  only an embellishment
• Unknowns (recession, imports, interest rates,
  costs)
• Dont expect help from Washington 2009 may bring
  increased environmental and labor legislation.
• Still reasons for meaningful optimism due to
  North American steel industry resiliency. North
  American steel facilities, for the most part, are
  technologically advanced, cost competitive,
  environmentally acceptable, and are a key
  component of the North American infrastructure.