Transcript Prospects for 9% Nickel in the Global LNG Industry A

PERSPECTIVES
ON NORTH AMERICAN STEEL
INDUSTRY PROSPECTS
Joint AISI / SMA Conference
Washington, D.C.
Christopher Plummer
Managing Director
May 18, 2005
Metal Strategies Inc.
Brandywine Business Park, 1205 Ward Avenue / Suite #1, West Chester, PA 19380 USA
Tel: (610) 719-9800
Fax: (610) 719-9810
[email protected]
CURRENT SITUATION

Eight months of downward market correction, more focused in sheet

Spot prices down 30% since September, contract prices up 15-20%

Contract raw material prices up by 70% to 110% , spot moving down

China demand slowing following May 2004 fiscal policy initiative

Auto market under pressure – especially traditionals, and SUV
STEEL OUTLOOK SUMMARY
Positive outlook despite current conditions -- still plenty of life left in
this expansion – profits down for many, but earnings and cash flow
still very good

Supply moving in balance with demand:

Imports down consistently (-30%) v. month-ago, since peaking in August

Inventories coming down, aided by consolidation impact of selected shut-downs by
steel mills, and inventory liquidation by distributors in second quarter


Underlying demand still healthy (3 markets below account for two-thirds use):

Industrial equipment spending is still strong (+7%)

Non-residential construction just recovering - up 7% in 2005 and 10% in 2006.

Auto sector difficulties tempered by ongoing strong transplant sector output
Scrap, alternative iron, and spot iron ore, coke and coal prices moderating, while contract
steel prices up 15-20% (50-55% sheet, 10-15% all other, under contract)
WORLD STEEL PRODUCTION
World steel production was up 6.5% through March, following
increases of 8.9% and 6.8% in 2004 and 2003, respectively. China
accounted for 92% of the y-t-d worldwide net gain and 25% of total
world production.
100
World Total
Million Metric Tonnes
90
80
Steel Production: March 2005
Percent Change, Year Ago
Month:
6.5%
Year-to-Date:
6.5%
70
60
50
World
Excluding China
Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05
In the five years from 1998 to 2003, China and the former-USSR states increased production by a cumulative 140 MT,
equal to 70% of the combined total output in 2003 of both the U.S. or Japan.
WORLD CRUDE STEEL OPERATING RATE
Operating rates recovered from 76% in 2000, to a peak of 87% in
2004, and have moved moderately downward since late 2004.
90%
World Crude Steel
Operating Rate %
85%
80%
75%
2000
Cap Util % 76.1%
2001
2002
2003
2004
2005
2006
2007
77.2%
80.3%
84.2%
86.8%
85.3%
85.0%
84.1%
CHINA
Chinese fiscal policy actions since May 2004 have had a
moderately negative impact world steel market conditions, with
China posing the largest market risk now and in the coming years.

Chinese production up 24% through March – likely to reach >330 MT in 2005.

GDP growth stable at 9% in 2005, although reductions clearly showing in some
industrial investment sectors, non-residential construction and consumer
durables.

Output in Russia, Ukraine and Eastern Europe slowing since early-2004 at least
in part to reduced export opportunities in China.

Stepped-up growth in India, Russia and Eastern Europe will likely offset some of
the expected shift to slower steel demand growth in China in the next few years.
U.S. SPOT STEEL PRICES
U.S. spot hot rolled sheet steel prices have fallen back 30% from
the recent record high in October, while SBQ prices are still at
record levels despite falling scrap prices and auto output.
$800
US$ Per Ton
$700
$600
$500
HR SBQ Price
$400
$300
HR Sheet Price
$200
Jan95
Jan96
Jan97
Jan98
Jan99
Jan00
Jan01
Jan02
Jan03
Jan04
Jan05
3,000
40%
2,000
30%
1,000
000 Tons
20%
(Bars, Left)
Market Share %
(Line, Right)
0
Jan-03
10%
Jan-04
5-Jan
Percent of Net Apparent Consumption
Thousand Short Tons (Bars)
U.S. FINISHED STEEL IMPORTS
Finished steel imports were up 15% through February, but have
declined by a cumulative 31% since peaking in August 2004 at 2.9
MT; following 55% increase in 2004, and 23% decline 2003.
STEEL ENERGY AND RAW MATERIAL COSTS
In the 40 months from January 2002 to May 2005, raw material and
energy input costs for U.S. steelmakers have increased
dramatically.
Percent Change v. 2002
Top=
2004 (Peak or Avg.)
Bottom=2005
$500
$400
$300
+165%
+157%
+465%
+246%
+338%
+131%
$200
+3%
+114%
$100
+18%
+123%
$0
No.1 HM
Scrap
No.1
Busheling
Metellurgical
Coal
Jan-02
Oct-04
Coke
May-05
Iron Ore
STEEL TRANSPORTATION
Transportation equipment investment has not kept pace with steel
and related raw materials demands with freight-car builds shown
here, but same holding generally true for barges and ocean
shipping-1.
Index 1980 = 100
150
U.S. Steel Shipments
125
100
U.S. Scrap Demand
75
50
25
U.S. Railcar Builds
0
1980
1985
1990
1995
2000
1- Ocean shipping rates increased 4.5 fold between early 2003 and mid-2004
U.S. Scrap Demand = domestic consumption plus exports
2005
EXCHANGE RATES – INDEX
The real trade-weighted US$ index (major currencies) has
increased 2% y-t-d through April after the December trough
(reaching the lowest level since 1995), but is still some 27% below
the recent Feb. 2002 peak, 33% below the all-time record high in
Jan. 1985, and only 6% above the July 1995 record low.
US$ Real Trade-Weighted Index
Data through April 2005
130
Broad Currency Group
Index 1990 = 100
120
110
100
90
Major Currencies
80
70
Jan-75
Jan-80
Jan-85
Jan-90
Jan-95
Jan-00
Jan-05
STEEL END-MARKET OVERVIEW
Three broad sectors – construction, autos, and industrial equipment
– account for 75-80% of total U.S. steel consumption.
Appliances,
Office Furniture
2.5%
All Other
15%
Containers
4%
Construction
40%
Energy-4%
60% Non-Residential
30% Public Works
10% Residential
Ind. Equip.
15-20%
Off-Highway Vehicles
Freight Cars
Barges, Ships
Other Industrial Equip.
Autos
20%
55% Light Trucks/ SUVs
30% Passenger Cars
5% Commercial Trucks, Buses
10% After Market
AUTO PRODUCTION
NAFTA output looks to be down 2% to 4% in 2005, including
potential declines in light trucks-SUVs (not unusual--has declined 7
of last 25 years). Output still at high plateau (15-to-17 million units)
since 1994.
Forecast (M Units)
2005: 15.2
2004: 15.7
2003: 15.9
2002: 16.4
2001: 15.5
2000: 17.2
20,000
000 Units
15,000
10,000
Passenger Cars
5,000
Light Trucks
0
1975
1980
1985
1990
1995
2000
MSI estimates that the automotive sector accounts for approximately 20% of total U.S. steel consumption.
2005
EQUIPMENT SPENDING, MFG OPERATING %
Real U.S. industrial equipment spending through Q4-2004, which
was up 10% v. year-ago and 5.5% y-t-d, is now just 7% below the
recent highs of early-2001), while manufacturing capacity utilization
is moving back up toward the 80% level, with big gains in H2-2004.
$105
90%
Manufacturing
Capacity Utilization
Billion 1996$
$100
85%
(Line; Right Scale)
$95
80%
$90
75%
Industrial Equipment-1
$85
70%
(Bars, Left Scale)
$80
65%
'96-1
'99-1
'02-1
'05-1
1- Industrial Equipment excludes: (a) Computers (related); (b) Transportation; (c) “All Other”.
NON-RESIDENTIAL CONSTRUCTION
We look for good growth (5% to 10% per year) from 2005 to 2007.
The recent downturn was a bit steeper in magnitude compared to
the 1990-’93 and 1978-80 construction recessions, with investment
declining by a cumulative 33% between 2000 and 2004.
Forecast…
$200
Non-Residential Construction
(Real $ Value Put-in-Place)
Billion 1996 US$
$180
$160
$140
$120
$100
1980
1985
1990
1995
2000
2005
U.S. STEEL INDUSTRY CONSOLIDATION
(Percent Change, 2000 compared to 2005)
75%
50%
Flat Rolled
Long, Other
25%
0%
-25%
No. of
Companies
No. of
Plants
Capacity
-50%
Mittal Steel weighted average share of all markets
served = ~33% (major product range-15-40%+)
-FRP acquisition price ($/ton, going-concern basis)
2002= $110……..2003-’04=$170……2005=$225
Capacity /
Company
No. Plants /
Company