1 Drivers in the North American Steel Industry Thomas A. Danjczek President Steel Manufacturers Association June 27, 2012 São Paulo, Brazil.

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Drivers in the North American Steel Industry

Thomas A. DanjczekPresidentSteel Manufacturers AssociationJune 27, 2012São Paulo, Brazil

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Outline

•About the SMA

•“Big Economic Picture”

•Steel “Picture”

•Drivers in North America’s Steel Industry

•Cooperation within the Americas

•Final Thoughts

Brazilian Steel Conference- 2012

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About the SMA

-Composed of 35 North American electric arc furnace (“EAF”) steel producing Member Companies, and 123 Associate Member steel industry suppliers

-Today, roughly two-thirds of North American steel production comes from the scrap-based EAF process, up from just 10% in the early 1970s

-SMA Members account for approximately 80% of U.S. domestic steel capacity

Brazilian Steel Conference- 2012 SMA

U.S., Canada, Mexico Real GDP Growth, Seasonally Adjusted at Annual Rate

Source(s): U.S. Bureau of Economic Analysis, MAPI


Near Stagnation

US Mexico

Canada4

U.S. Manufacturing Industrial Production

Source(s): Federal Reserve Board, MAPI


Rebounding

The U.S. Dollar

Source(s): Federal Reserve Board, MAPI


Stronger Lately

7NAM, May 2012

Big PictureBrazilian Steel Conference- 2012

U.S.

Will it continue?

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US GOOds


$620 Billion Annual Deficit projected in 2012 is most significant barrier to U.S. economic recovery

Big Gap

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Brazilian Steel Conference- 2012 Changes Impacting Steel

Deeper Recession

Variable Cost Control

Engineers

Scrap Availability

High Unemployment

Labor Intensity

Inventory Levels

China

Safety Consolidations

Customer Requirements

Environmental Regulations

Foreign Ownership

Transportation Costs

Ore Availability

Energy Costs

Currency

State-Owned Enterprises

Other Factors…

Skilled Jobs Shortages

10Source: AISI, Statistics Canada, Canacero

NAFTA Apparent Demand

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

. . . . . . . . . . . . . . . . .

2008 2009 2010 2011 2012

Met

ric T

ons

('000

)

US Demand Mexico Demand Canada Demand NAFTA Capacity

NAFTA Crude Steel Production & Capacity

-

5,00010,000

15,00020,000

25,00030,000

35,00040,000

45,000

. . . . . . . . . . . . . . . . .

2008 2009 2010 2011 2012

Met

ric T

ons

('000

)

US Production Mexico Production Canada Production NAFTA Capacity

NAFTA demand remains below pre-recession levels. Following some weakening of demand in the 2H11, 1Q12 demand saw a modest rebound 2% higher than 1Q11. Still, 2012 demand will likely be 10-15 million MT lower than before the financial crisis.

NAFTA steel production increased by 6% in 1Q ’12 to the highest level since 2008, but still well below peak. The utilization rate was 77% in 1Q ’12, which is at or slightly above most other world’s regions.

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Despite Gains in Apparent Finished Steel Use (AFSU),Forecast NAFTA AFSU Still 13% Below Pre-Recession Average

United StatesMillion MT 2011 2012 chg

(%) 2013

Crude Steel Use 101.0 107.9 6.8% 113.8

Finished Steel Use 89.1 94.2 5.7% 99.5

CanadaMillion MT 2011 2012 chg

(%) 2013

Crude Steel Use 20.9 21.7 3.8% 22.7


MexicoMillion MT 2011 2012 chg

(%) 2013

Crude Steel Use 15.7 16.1 2.5% 16.6


Spring 2012 Outlook*For NAFTA Region

Apparent Finished Steel Use (ASU)

(Million MT) 2006 2007 2008 2009 2010 2011 2012f 2013f

Finished Steel 155.7 141.7 130.5 84.6 112.9 121.3 127.5 134.0

Source: worldsteel

From 2004 to 2007 (last 4 full years before the economic crisis began), AFSU in the NAFTA region averaged 146 million MT/year. Should the outlook for 2013 be achieved, AFSU next year would still be 8% below that average.

* This was the outlook as of March 2012. The softening of NAFTA and world economies, together with higher than anticipated steel import levels, suggest more modest prospects for the NAFTA steel industry for the remainder of 2012.

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1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 201155

65

75

85

95

105

U.S. Steel Production

Total Steel Production - US (Millions of Short Tons)

US Raw Steel Capacity Utilization was 75% in 2011, 79% in First 5 Months of 2012


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1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 201120.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

55.0%

60.0%

65.0%

U.S. EAF Share of Total Production

% of EAF Production


Approximately 2/3 of US Steel Production

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• Steel imports are surging into the U.S. market • U.S. steel imports increased significantly in 2011 and continued to

increase in YTD 2012 (January-April), jumping by almost 30% from the same period in 2011 especially in slabs, plate and corrosion.

• Particular areas of concern include– Turkey: From January-March 2012, rebar imports from Turkey surged by

365% YOY– China: While direct steel imports from China are increasing, indirect

imports are increasing even more• The import surge is largely a result of government subsidies,

irrational capacity expansion, and other anti-competitive behavior in certain foreign countries

• Other countries are also increasing steel capacity without regard for market forces or comparative advantage

Brazilian Steel Conference- 2012 U.S .Steel Imports

Finished steel demand drivers in US

Actual Fitted

Three variables drive demand:• NA auto build• Non-residential construction• Appliance shipmentsR² = 85%

Source: First River


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U.S. finished steel demand forecast

Actual ADC

Forecast

Source: CSM, FW Dodge, AHAM, First River


Assumes no second recession

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Auto build & non-res construction are recovering,but not to previous peak

NA Auto Build (Million Units)

Source: CSM Worldwide, FW Dodge

ForecastNon-Res Construction

(Million Sq. Feet) Forecast


Non-Res up 26% YTD 2012 over 2011

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Excellent Indicator

Source: Steel Market Update

Brazilian Steel Conference- 2012 Lead times

Maybe Today 2.5 Weeks

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• Underlying Weak Economy, with less than 3% GDP and estimates downward.

• Recovery underway, but very slow – Fragile• North American steel market under pressure with unused capacity

• Increased import percentages YOY, Impact of currency changes

• Not normal cycle of recession, overcapacity; new supply coming on

• Relative strong demand in auto; construction lagging

• Raw material costs, energy, and variable cost controls are major drivers

• Scrap prices down $60 early June

• Economic growth turning point is always two quarters away

• Market cap values at historic lows – Opportunities to buy?

Comments on Current N.A. Steel IndustryBrazilian Steel Conference- 2012

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Raw Material Cost and Availability is #1 Issue for

NAFTA Producers• Many countries continue to impose a variety of restrictions on exports of vital raw

materials including scrap:– Export prohibitions

– Export duties

– Export quotas

– Other measures

• Trade-distorting restrictions on exports of raw materials– Give domestic producers in the exporting country an unfair advantage

– Increase worldwide costs of production

– Place a heavy burden on steel industries in developing countries that do not have substantial iron ore reserves or steel scrap supplies

• Three Challenges– Export Restraints

– EAF Capacity Expansion

– Long Lead Time for Recycling Network

ScrapBrazilian Steel Conference- 2012

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Scrap Volatility Continues

• Global Demand and the relative value of the US dollar to other currencies determine the volume of exported material.

• Ferrous scrap exports exceeded 24 million tons in 2011

• Export restrictions on ferrous scrap have been enacted by 26 countries.

• With global steel output on the rise, prices for ferrous scrap in the US have decoupled from US mill demand.

• Steel production should be based on comparative advantage (raw materials, energy, capital).

• Need reciprocity

Brazilian Steel Conference- 2012 Scrap

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Abundant Domestic Natural Gas is a Game Changer in U.S.

Brazilian Steel Conference- 2012 Energy

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Gas Will Remain the Dominant Fuel For Electric Generation

• Coal Technologies are Struggling– Coal Gasification (Duke)– Carbon Capture and Storage (AEP)

• No Supply Technologies are Remotely Competitive with Gas-Fired Generation

• Nuclear, Wind and Solar are Heavily Dependent on Federal Subsidies

• Shift in Clean Energy Mandates & Infrastructure Costs from Federal Budget to Industrial Utility Ratepayer

Brazilian Steel Conference- 2012 Energy

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• On May 22, 2012, Jorge Gerdau Johannpeter, Chairman of Gerdau, received the Americas Society’s outstanding leadership award. During his acceptance he communicated four vision points:– Need for partnerships/cooperation/collaboration among the players in

the Americas– Need to significantly invest in infrastructure within the Americas– Need for meaningful tax reform for improved competitiveness within

the Americas– Need for educational initiative for a trained workplace

We agree!

Brazilian Steel Conference- 2012 Cooperation within the Americas

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Final Thoughts

• Volatile times continue, Maybe between recessions• U.S. is in a traffic jam, moving slightly forward, but don’t know other

consequences. Don’t look to Washington, DC for help. Gridlock continues

• Uncertainty will continue especially in U.S. industry until economic fundamentals are in equilibrium. Limited visibility…

• Early June Troubling• Current status of scrap restrictions is unsustainable• Cooperation within Americas is critically important• Reasons for optimism in steel in North America:

– Favorable gains with reemerging manufacturing base– Scrap-based, 75% of cost – local supply– Low cost on global basis (energy is positive, labor less than 10%, others have

higher transportation costs)– Relatively strong market and resiliency– Better company balance sheets


1 Drivers in the North American Steel Industry Thomas A. Danjczek President Steel Manufacturers Association June 27, 2012 São Paulo, Brazil.

Documents

nafta steel industry

crude steel use

nafta steel production

us steel production

direct steel imports

finished steel demand

sma slide

rebounding slide