Steel – 2005/2006/Beyond

Steel – 2005/2006/Beyond

Thomas A. Danjczek, PresidentSteel Manufacturers AssociationMay 5, 2006

The Hot Briquetted Iron AssociationSpring Meeting

Steel – 2005/2006/Beyond

I. SMA

II. 2005

- World Steel Production/Operating Rate; China; Prices; Consolidations

III. 2006

- China’s Challenges; Trade; Energy; Environment

IV. Key Issues Beyond 2006 (Wild Cards)

V. Conclusion

HBIA – Spring Meeting

HBIA – Spring Meeting

•The Steel Manufacturers Association (SMA)

–39 North American Companies:

33 U.S., 3 Canadian, and 3 Mexican

–111 Associate Members:

Suppliers of goods and services to the steel industry

•SMA member companies

–Operate 120 steel plants in North America

–Employ about 40,000 people

–Minimill Electric Arc Furnace (EAF) producers

–Produce nearly 100% of structural, wire rod, rebar, minimill plate and hot rolled, and a high percentage of SBQ products

–Also represent several integrated steel producers and rerollers

HBIA – Spring Meeting

•Production capability

–SMA represents over two-thirds of U.S. steel production (app. 70%)

•Recycling

–SMA members are the largest recyclers in the U.S.

–Last year, the U.S. recycled over 70 million tons of ferrous scrap

•Growth of SMA members

–Efficiency and quality due to low cost

–Flexible organizations

–EAF growth surpassed 56% in 2005, and anticipated to be 60% by 2010, if not before!

2005

WORLD CRUDE STEEL OPERATING RATE

75%

80%

85%

90%

Cap Util % 76.1% 77.2% 80.3% 84.2% 86.8% 85.3% 85.0% 84.1%

2000 2001 2002 2003 2004 2005 2006 2007

World Crude SteelOperating Rate %World Crude SteelOperating Rate %

Operating rates recovered from 76 percent in 2000, to a peak of 87 percent in 2004, and have moved moderately downward since late 2004.

Source: Metal Strategies

HBIA – Spring Meeting China’s Impact

After 4 Trips in a Year…

Key Questions:

- When will Chinese steel production significantly exceed its own domestic consumption – i.e. 50/60 MMT?

- Will the Chinese government shut down inefficient, excess capacity? (Has not done so with polluting facilities despite strong policy)

- How can North American Steel Industry compete against Chinese government - - - IT CAN’T!

HBIA – Spring Meeting

Chart 2: The Exploding Trade Deficit with China

HBIA – Spring Meeting

Chart 3: China’s Foreign Exchange Reserves

HBIA – Spring Meeting

HBIA – Spring MeetingSTEEL CAPACITY

CONCERNS 

Steel Item Comment•North American steel industry CANNOT Currency, banks, land, environment,compete against Chinese steel companies consolidations, policiesfinanced and controlled by theirgovernment

• In 2005, compared to 2004, China steel Trend worsens in 2006 with newimports are projected to drop by 6.1 capacity on line, and China’smillion tons, while exports are projected slowdownto increase by 12.3 million tons 

• North American steel industry loss of a Government de facto subsidiessignificant increment of its customer (industrial parks, infrastructure,base to relocation to Chinese factory space, loans)production sites

Steel Making Raw Material Prices

Prices of key steel making cost inputs have more than doubled in 2004 and 2005. The outlook for 2006 is for continuing cost pressures...

Steel Making Raw Material Prices Indices 1990 = 100%

0%

50%

100%

150%

200%

250%

300%

Ind

ex

19

90

= 1

00

CoalIron OreScrap - Chicago #1 BundlesSlabs - Brazil Export

AMM – 4/24/06

Source: Iron and Steel Statistics Bureau

Rebar Prices, 1990-2005(Midwest, $ per ton)

Source: Purchasing Magazine

June 2005 = $470

July 2005 = $450

Aug. 2005 = $435

Sept. 2005 = $485

Oct. 2005 = $494

Nov. 2005 = $486

Dec. 2005 = $481

Wide-Flange Beam Prices, 1990-2005(Midwest, 8 x 8, $ per ton)

Source: Purchasing Magazine

June 2005 = $516

July 2005 = $506

Aug. 2005 = $496

Sept. 2005 = $545

Oct. 2005 = $560

Nov. 2005 = $574

Dec. 2005 = $587

U.S. Oil and Natural Gas Prices

Natural Gas Cost Impact

0

10

20

30

40

50

60

2000 2001 2002 2003 2004 Aug-05

$ p

er t

on

Integrated Mills

Flat Rolled Mini-Mills

Long Product Mini-Mills

…sharp gains in natural gas prices have more than doubled steel mill gas costs per ton since 2000. Costs for integrated mills have risen over $30 per ton…

U.S. STEEL INDUSTRY CONSOLIDATION(Percent Change, 2000 compared to 2005)

-50%

-25%

0%

25%

50%

75%

No. ofCompanies

No. of Plants

Capacity Capacity /Company

No. Plants /Company

Flat Rolled Long, Other

Mittal Steel weighted average share of all markets served = ~33% (major product range-15-40%+)

-FRP acquisition price ($/ton, going-concern basis) 2002= $110……..2003-’04=$170……2005=$225

Source: Metal Strategies

2006

CHINA’S CHALLENGES Area Comment

•Environment Trade policy and laws are not enforced regardingemissions and effluents; Province versusBeijing; employment rules, not environment 

•Consolidations State-owned facilities; only non-controlling foreignownership allowed; antiquated facilities; policy is20 large producers, push small producers out 

•Technology/Quality Quality in flat rolled will affect export capabilities.Switch from long to flat not easy 

•Inventories Run full out. Not always market-oriented 

•Capital Will not always be free; could lose state credit 

•Personnel Some “unrest” expressed toward elite class.Internet is politically uncontrollable

HBIA – Spring Meeting 2006 China

China’s Steel Trade Balance

Year 2004 2005 2006 

Imports 33.1 27.0 22.0 

Exports 20.2 32.5 36.0 (Semi’s) 6.2 9.0 5.0

Steel Trade Balance -12.9 +5.5 +14  

2006 ChinaHBIA – Spring Meeting

China’s Steel Trade Balance

Year 2004 2005 2006 

Imports 33.1 27.0 22.0 

Exports 20.2 32.5 36.0 (Semi’s) 6.2 9.0 5.0

Steel Trade Balance -12.9 +5.5 +14  

2006 ChinaHBIA – Spring Meeting

The National Association of Manufacturers (NAM) recently reviewed China’s compliance with its WTO commitments in the accession protocol. While progress has been made in certain areas, there are serious concerns and problems with effective compliance relating to: 

1. Huge U.S. trade imbalance2. Continued currency manipulation3. Arbitrary VAT taxes and rebates4. Massive counterfeiting and piracy5. Discriminatory standards6. Inadequate regulatory transparency

COMPLIANCE WITH THE WTO

2006 ChinaHBIA – Spring Meeting

Chinese steel industry expansion continues in a region that is deficient in resources (supply

and quality) and environmental compliance…

2006 China

2006 PricesHBIA – Spring Meeting

• Section 421 Disappointment – No Relief

• Wire Rod Case – No Import Injury

• Solicit Congressional Assistance & Action

- Ryan/Hunter

- Graham/Schumer

- Other???

• Doha Agenda “only lose?”

2006 TradeHBIA – Spring Meeting

• No National Energy Policy

• For EAFs, Demand Response is “Perfect Peaker”

• Need for Nuclear

• After Metallic Exports, Number One Threat for Competitiveness

2006 EnergyHBIA – Spring Meeting

• Mercury “End of Pipeline” Regulation Risk (Area Source Rule vs. Negotiated Settlement)

• TOSCA – Not Recognizing Benefits of Recycling i.e. Automotive Scrap, Fluff, & Slag

• Trend Toward “Measure – Monitor – Control”, vs. “Under the Bar” Compliance

• Continued Risk With Lost Radioactive Sources, TRI Reporting, and GGG

2006 EnvironmentHBIA – Spring Meeting

• Metallics Exports Concerns

• Transportation Challenges

• Congressional “Gridlock”

• TEA 21 $$$ - Finally

• U.S. Government Financial Policies (Trade & Budget Deficit)

• Need for Border Adjustable Tax

2006 OtherHBIA – Spring Meeting

HBIA – Spring Meeting Key Issues Beyond 2006

(Wild Cards – Competitiveness)

Rough EAF Cost Model @ $400 Product

Item Impacts

-Metallics 55% -Ore Cartel, Scrap Exports, Global Demand

-Energy 15% -Lack of Generation, Transmission, Limited Nuclear, Offshore Gas, Off-Peak Future???

-Labor 10% -Health Care, USWA, Mittal Contract, Gerdau Ameristeel

-Transportation 10% -Congestion, Lack of Investment

-Other Inc. Financial 10%

100%

HBIA – Spring Meeting Other Key Issues Beyond 2006

Item Impact

-Capital Costs -Coke, Blast Furnaces, China@40%, New Facilities & Capacity

-Market -China, India, Brazil, Russia Automotive Situations

-Consolidations -Current Prices

-Environmental -Greenhouse Global Gases

-Role of Governments -U.S. Financial Situation, Role of Currencies, Trade Flows

HBIA – Spring Meeting

Conclusions

• Hell, it’s still a cyclical business, but enjoy today!

• Fundamental shift in both demand and supply due to China & its appetite for raw materials – China is still the “wild card”. Risk near term is auto’s; long term is China

• Consolidations and discipline have had an impact to reduce volatility

• Role of inventories affecting pricing and production

• Demand still healthy, construction solid

• Unknowns (Oil, interest rates, auto sector, energy, freight rates, federal spending, China, China, China)

• Significant changes ahead in trade, metallics, energy, and consolidation

• Still reasons for meaningful optimism