Steel Founders Society of America

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Steel Founders Society of America Steel A Year
Later
Thomas A. Danjczek President Steel Manufacturers
Association Charleston, SC September 9, 2008
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SMA
SFSA Annual Meeting

• The Steel Manufacturers Association (SMA)
• 35 North American companies
• 30 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
SFSA Annual Meeting

• 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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SFSA Annual Meeting
Outline

• SMA
• Conclusions from 2007
• Whats the same? 1 year later
• Whats different? 1 year later
• Raw Material Story
• Scrap Story
• Energy Issues
• GGG Issues
• Global Steel Capacity
• Consolidations
• U.S. Steel Market Projections
• China Bashing
• Unknowns
• Conclusions

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SFSA Annual Meeting
Conclusions From 2007

• 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, inventories, etc.
• U.S. EAF growth will continue
• Massive subsidized growth continues
• Consolidations will continue
• China, China, China everything else is only an
  embellishment
• Unknowns (interest rates, economic growth,
  imports, etc.)
• Between foundries and steel, similar issues in
  environment, energy, and trade

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SFSA Annual Meeting
Whats the Same? 1 Year Later

• Weak U.S. dollar
• Steel company consolidations continue
• No greenhouse gas legislation
• Strong U.S. steel industry profitability stock
  values
• Low steel inventories
• Worldwide steel capacity growing faster than
  consumption
• No significant energy supply developments
• China, China, China

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SFSA Annual Meeting
Whats Different? 1 Year Later

• U.S. economic conditions down
• Chinas steel exports down prices higher
  escalate here
• U.S. mills buying scrap
• Steel imports down
• Exploding new material prices (ore, scrap, coal,
  etc.)
• Flat rolled slowing down (automotive, outages
  ,etc.)

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SFSA Annual Meeting
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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Raw Materials and Competitiveness
SFSA Annual Meeting

• Raw material prices are soaring
• Higher raw material prices have placed
  substantial cost pressures on NAFTA steel
  producers
• At the same time, unfairly-traded imports make it
  more difficult to raise prices, creating a
  harmful cost-price squeeze
• 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
SFSA Annual Meeting
Source World Steel Dynamics and JP Morgan
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Other Metal Prices Are Soaring
SFSA Annual Meeting
Information obtained from the American Metal
Market website
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Other Metal Prices Are Soaring (cont.)
SFSA Annual Meeting
Information obtained from the American Metal
Market website
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Raw Materials Governments Still Intervening
SFSA Annual Meeting

• 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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SFSA Annual Meeting
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SFSA Annual Meeting
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SFSA Annual Meeting
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SFSA Annual Meeting
Energy Issues List

• Energy Availability and Cost
• Utility Infrastructure (Generation
  Transmission) Needs to Match Growth in Consumer
  Demand
• Diversity of Generation (Alternative Fuels
  Climate Change) Excess Reliance on Natural Gas
• NRC Expects up to 30 Applications for New
  Nuclear Generators Over Next Two Years
• Cost was estimated in a range of 2500-3500/KW
  Now Moodys estimates are above 5000/KW
• Floridas Progress Energy filed for twin 1,100
  MW generation units for 2016, at 14 Billion
  over 3 Billion of transmission upgrades
  6,400/KW of generation

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SFSA Annual Meeting
Climate Change Issues

• The Issue of Climate Change is one that the North
  American EAF Steel Industry have been engaged in
• Issues to Address
• Need a Domestic Coherent Energy Policy Which
  Will Provide for New Generation of Energy by
  Alternative Sources (wind nuclear ethanol
  hydrogen)
• Associated New Transmission Infrastructure Will
  Be Needed
• New Research, Development, and Implementation
  for Climate Change Capture Technologies
  Domestic and International
• Need to Engage Developing Nations to Commit
  to Binding Agreements on Greenhouse Gas
  Emissions Post-Kyoto
• Recognition for Industry Commitments to Address
  Climate Change Early Recycling of Raw
  Materials Process Gases Recapture

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SFSA Annual Meeting
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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SFSA Annual Meeting
GGG Emissions
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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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, a 21 increase over 2007, with a CAGR
  of 6.4

World Crude Steel Capacity 200010
Source German Steel Federation and IISI
verifications
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Capacity by Region2007 vs 2010
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Brazil, Russia, India, China Will Have 70 of
Capacity Additions Through 2010

• BRIC capacity will grow 29, by over 200 million
  tonnes, in the next three years, with China
  dominating.
• These four countries will represent 50 of world
  capacity by 2010.

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New Capacity Outpaces Consumption Growth
SFSA Annual Meeting
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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Chinese Steel Producers Benefit from Massive
Subsidies

• U.S. steel producers have identified at least 52
  billion in subsidies that have been provided to
  Chinese steel producers
• Chinas 2005 steel policy commits the government
  to further subsidies and micromanagement
• Chinese steel producers enjoy government
  assistance with energy costs
• Chinese steel producers regularly obtain
  preferential loans from state-owned banks
• Most steel production in China is carried out by
  state-owned enterprises
• NAFTA steel representatives recently raised the
  issue of China subsidies in a March 7, 2008
  letter to NAFTA Ministers

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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
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 (announced)
Georgetown
American Iron Reduction
Sicartsa
LMP Steel Wire
Wheeling Pitt
Bayou (announced)
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)
8/1/08
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Steel Consolidating, But Still Fragmented
SFSA Annual Meeting
TOP 15 Represent 36 of Global Production
Source IISB
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SFSA Annual Meeting
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
SFSA Annual Meeting

• 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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SFSA Annual Meeting
U.S. Steel Market Projections
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Chinas Trade Surplus with the U.S.
SFSA Annual Meeting
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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SFSA Annual Meeting
Impact of AD/CVD
Percent of the value of Chinese imports covered
by AD/CVD duties?
2004 0.13 2006 0.10
(TAD comment What Protectionism?)
International Trade Commission, based on U.S. DOC
and Customs official statistics
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SFSA Annual Meeting
Competitiveness
U.S. - China Steel Future Competitiveness Drivers
Driver U.S. China Comment 1.
Metallics Weak 1/2 imported Technological
(Availability/Price) Scrap exports Freight dev
elopments to U.S. 2. Energy Gas/electric
ity to China Climate change (Availability/Pric
e) constraints policy Limited
nuclear 3. Labor Lack of technical to
China Health care costs 4.
Transportation to U.S. 5. Trade to
China Growth of steel- intensive
goods 6. Environment to U.S. Enforcement?
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SFSA Annual Meeting
China 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 are expanding by approximately 30 percent
  per year
• Chinese steel market is still reliant on exports
  to absorb overproduction
• Chinese steel industry is overbuilt and
  under-demolished

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SFSA Annual Meeting
Unknowns
-Raw material price impact??? -Impact of
recession??? -Value of the RMB??? -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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SFSA Annual Meeting
Conclusions

• 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, inventories, etc.
• U.S. EAF growth will continue
• Massive subsidized growth continues
• Consolidations will continue
• China, China, China everything else is only an
  embellishment
• Unknowns (interest rates, economic growth,
  imports, etc.)
• Between foundries and steel, similar issues in
  environment, energy, and trade