Steel Orbis: Steel Trade Conference (Session 1 – Economy and Markets) North American Steel Industry Challenges Thomas A. Danjczek President Steel Manufacturers.

Steel Orbis: Steel Trade Conference(Session 1 – Economy and Markets)

North American Steel Industry Challenges

Thomas A. DanjczekPresidentSteel Manufacturers AssociationSan Diego, CAJuly 11, 2008

Outline• SMA

• U.S. steel industry, 1970’s vs. today

• U.S. steel production

• Steel market conditions

• Consolidation and capacity

• Raw material issues

• Greenhouse gas emissions

• Unknowns

• Conclusion

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

Steel Orbis 2008 SMA

• 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

Steel Orbis 2008 SMA

Steel Orbis 2008 Obvious Items

-Recession impact

-U.S. dollar exchange rate

-China finished goods vs. raw materials

-Raw material price squeeze

-Consolidations

-NAFTA issues

-Environmental regulations

-Energy and transportation costs

-China, China, China

1970’s 2008

Production

Employment

Technology

Location

Imports

Profitability

Average Price

Approx. 700,00012 MH/ton(1978 – 449,000)

<20% casters<10% EAF

Primarily Rust Belt & a few scattered

Approx. 15%

Poor

$605

100 million tons

<120,000(Minimills @ 60% - approx. 40,000, <2MH/ton)

95% casters60% EAF

NW, SE, Rust Belt (near customers, and cheap power)

Approx. 25% (peak @ 35%)

Good

$1200???

100-140 million tons

U.S. Steel IndustrySteel Orbis 2008

Differences

-U.S. has become one of the world’s low cost steel producers, due to metallics availability, transportation, labor and energy efficiencies, and high utilization

-China, which was approx. 70mmt in 1970’s, 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 1970’s, 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 1970’s. 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

Steel Orbis 2008

U.S. Raw Stee l Production

0

20

40

60

80

100

120

Year

To

nn

age

(in

mill

ion

s o

f to

ns)

0%

10%

20%

30%

40%

50%

60%

70%

% -

EA

F P

rod

uct

ion

Tonnage - Integrated Total Tonnage - U.S. Steel Industry Tonnage - EAF % - EAF Production

U.S. Raw Steel Production: Largest Recyclers in the Nation ~ 100 million tons of steel produced each year

Steel Orbis 2008 U.S. Steel Production

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???

Steel Consolidating, But Still Fragmented

Top 15 Global Steel Producers - September 2007Based on 2006 Production: 1240 Million MT

Baosteel (26 mt)

Tata (incl. Corus) (24 mt)

USS (incl. Stelco) (26 mt)

POSCO (31 mt)

JFE (32 mt)

Anben (23 mt)

Shandong (22 mt)

Nucor (20 mt)

Wuhan (19 mt)

Tangshan (19 mt)

Evraz (19 mt)

Riva (18 mt)

Severstal (18 mt)

Nippon (34 mt)

Rest of World 64%

(794 mt)Arcelor Mittal - 9.5%

(118 mt)

Automotive OEM Global Market Share(Based on 2006 Production)

Top 1068%

All Others32%

Iron Ore Supplier Market Share

Top 375%

All Others25%

TOP 15 Represent 36% of Global Production

Source: IISB

Steel Orbis 2008

Globalization and Consolidation Developments Have Dramatically Changed the NAFTA Steel Landscape

Acquiring Company Acquiring Company Acquiring CompanyAcquired Company Acquired Company Acquired Company

Arcelor Mittal Nucor Duferco/NLMKArcelor Connecticut Steel Winner Steel

Dofasco TricoMittal Birmingham EvrazIspat Inland Corus Tuscaloosa Oregon SteelISG Worthington-Decatur Claymont SteelBethlehem MarionLTV Nelson Steel SeverstalUS Steel Plate Harris Steel Arcelor Mittal-Sp PtWeirton Auburn Steel RougeAcme-Riverdale North Star ArizonaGeorgetown American Iron Reduction

CSNSicartsa LMP Steel & Wire

HeartlandUS Steel Gerdau Ameristeel

EssarLone Star SheffieldAlgomaNational ChaparralMinnesota SteelLTV Tin Co-Steel

ISG IH#2 Pkl North StarStelco Sidetul Tultitlan

Quanex Macsteel

BlueScope Corsa

IMSA SteelscapeSSAB

ICH/Grupo Simec IPSCORepublic

Steel DynamicsTernium GalvPro-Jeffersonville

Hylsa The TechsIMSA Roanoke Steel

Steel of WV

WCIWPSC

David Joseph

OMNI

IPSCO-Canada

Bayou

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

Consolidation: Opportunities & Risks

• 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

Steel Orbis 2008

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 2000~07

Source: German Steel Federation and IISI verifications

0.7

10895

11276

7632

1.5%

7.3%

15641456

136112491173

10981065.31064.6

0

500

1000

1500

2000

2000 2001 2002 2003 2004 2005 2006 2007

mmt

0%

5%

10%

15%

20%

Additions

CAGR

CAGR

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

World Crude Steel Capacity 2000~10

Global Steel Capacity 2008-2010

Source: German Steel Federation and IISI verifications

90106

125

6.4%7.3%

1.5%

1064.61065.31098 1173

12491361

14561564

16541760

1886

0

500

1000

1500

2000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

mmt

0%

5%

10%

15%

20%Additions

CAGRCAGR

CAGR

New Capacity Outpaces Consumption Growth

Capacity – Multiple Sources; Nucor Analysis

Demand – IISI projections thru ’08; 6% increase “09 – ‘10

EU-251%

India23%

NAFTA2%Other Asia

15%

Other Europe3%

CIS6%

Africa & Middle East5%

Central & South America

12%

China33%

Announced Steel Capacity Increases By Region

(2006 – 2012)

Announced Steel Capacity Vs. Projected Consumption 2007 – 2010

(Million Metric Tonnes)

Compound Annual Growth Rates:Capacity: 6.83% Demand: 4.65%

Steel Orbis 2008

Strong Growth Areas

  2000 2007 2010∆ (2001-2007) ∆ (2008-2010)

mmt share mmt share

World 1,065 1,564 1,886 499100.0

% 321 100 %

BRIC 280 732 946 453 90.6% 214 66.6%

China 150 559 714 409 81.8% 156 48.5%

Russia 67 75 105 9 1.7% 30 9.3%

India 34 57 76 24 4.7% 19 5.8%

Brazil 30 42 51 12 2.3% 9 2.9%

ME & N Africa 24 38 69 15 2.9% 31 9.7%

S Korea 53 57 70 4 0.9% 13 4.1%

Ukraine 41 49 60 8 1.7% 11 3.4%

SE Asia 23 27 38 4 0.9% 10 3.3%

Turkey 20 32 42 12 2.4% 10 3.1%

ROW 625 628 660 4 0.7% 32 9.8%

Steel Orbis 2008

Raw Materials

• 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

Steel Orbis 2008

Since Last Year, Prices for Key Raw Materials Have Soared

0

50

100

150

200

250

300

350

Iron Ore Coking Coal Scrap (automotive bundle)

2007

= 1

00

2007 2008

Source: World Steel Dynamics and JP Morgan

Steel Orbis 2008

In True Market Competition, NAFTA Mills Would Have a Significant Cost Advantage Over Asian Mills

0

100

200

300

400

500

600

700

800

900

Japanese integratedsteel producers

Korean & Taiwaneseintegrated steel

producers

China integrated steelproducers

US flat-rolled minimillsteel producers

US integrated steelproducers

Hot-rolled sheet cash costs ($/ton)

Source: JP Morgan Securities, Inc.

Raw Materials: Governments Still Intervening

• 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

Steel Orbis 2008

Growth in EAF steelmaking has allowed the steel industry to reduce energy usage:

Lower energy usage equals lower greenhouse gas emissions

Energy Intens ity - Steel Industry in the U .S.

8

9

10

11

12

13

14

15

16

17

1990 1995 2000 2002 2003 2004 2005

Y ear

Millio

ns of

Btu/T

on of

Stee

l

E nergy U se

Steel Made in EA Fs in the U .S .

30%

40%

50%

60%

1990 1992 1994 1996 1998 2000 2002 2004 2006

Year

EAF Capacity Growth, US

Steel Orbis 2008 GHG Emissions

Scrap-based Steelmaking (EAF-recycling)

Ore-based Steelmaking

8.4 million Btu of Energy per ton of steel produced

EAF Steelmaking Is Energy Efficient

Steel Info – US Dept. of Energy

19.1 million Btu of Energy per ton of steel produced

Steel Orbis 2008 EAF Efficiency

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???

-China’s restrictive policy of foreign ownership participation???

-China’s enforcement of environmental regulations???

-U.S. legislation (111th Congress) and 44th President???

-Trade actions???

-When will China play by market rules???

Steel Orbis 2008 Conclusions

-Unknown impact of rising raw material costs

-Don’t 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.

-It’s 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)

-Don’t 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.