Association of Women in the Metal Industries Carolinas Chapter Charlotte, NC

Steel – 2005/2006

Thomas A. Danjczek, President Steel Manufacturers Association January 26, 2006

AWMI – Carolinas Chapter Steel – 2005/2006 I.

II.

SMA 2005 • World Steel Production/Operating Rate • China • Scrap, Ore, Steel, Gas Prices • Consolidations III. 2006 • China’s Challenges • Trade • Energy & Environment • Other IV. Conclusion

AWMI – Carolinas Chapter •The Steel Manufacturers Association (SMA) –39 North American Companies: 33 U.S., 3 Canadian, and 3 Mexican –109 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

AWMI – Carolinas Chapter •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 53% in 2004, and anticipated to be 60% by 2010

2005

WORLD CRUDE STEEL OPERATING 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.

90% 85%

World Crude Steel Operating Rate %

80% 75% 2000 Cap Util % 76.1% 2001 77.2% 2002 80.3% 2003 84.2% 2004 86.8% 2005 85.3% 2006 85.0% 2007 84.1%

Source: Metal Strategies

AWMI – Carolinas Chapter After 4 Trips in a Year… China’s Impact 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!

Chart 2: The Exploding Trade Deficit With China

Chart 3: China’s Foreign Exchange Reserves

CONCERNS

Steel Item

• North American steel industry CANNOT compete against Chinese steel companies financed and controlled by their government • In 2005, compared to 2004, China steel imports are projected to drop by 6.1

million tons, while exports are projected to increase by 12.3 million tons • North American steel industry loss of a significant increment of its customer base to relocation to Chinese production sites

Comment

Currency, banks, land, environment, consolidations, policies Trend worsens in 2006 with new capacity on line, and China’s slowdown Government de facto subsidies (industrial parks, infrastructure, factory space, loans)

Steel Making Raw Material Prices

300% Prices of key steel making cost inputs have more than doubled in 2004 and 2005. The Steel Making Raw Material Prices Indices outlook for 2006 is for continuing cost pressures...

1990 = 100% 250%

Coal Iron Ore Scrap - Chicago #1 Bundles Slabs - Brazil Export

200% 150% 100% 50% 0% 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 E

Source: Iron and Steel Statistics Bureau

Source: Purchasing Magazine

Rebar Prices, 1990-2005

(Midwest, $ per ton)

June 2005 = $470 July 2005 = $450 Aug. 2005 = $435 Sept. 2005 = $485 Oct. 2005 = $494 Nov. 2005 = $486 Dec. 2005 = $481

Source: Purchasing Magazine

Wire Rod Prices, 1990-2005

(Midwest, $ per ton)

June 2005 = $505 July 2005 = $472 Aug. 2005 = $469 Sept. 2005 = $523 Oct. 2005 = $492 Nov. 2005 = $503 Dec. 2005 = $503

Wide-Flange Beam Prices, 1990-2005

(Midwest, 8 x 8, $ per ton)

June 2005 = $516 July 2005 = $506 Aug. 2005 = $496 Sept. 2005 = $545 Oct. 2005 = $560 Nov. 2005 = $574 Dec. 2005 = $587

Source: Purchasing Magazine

U.S. Oil and Natural Gas Prices

…oil prices are the major uncertainty in the outlook for 2006, with forecasts ranging from thirty-five to seventy five US$ per bbl…

Natural Gas Cost Impact

30 20 10 0 …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… 60 50 40 Integrated Mills Flat Rolled Mini-Mills Long Product Mini-Mills 2000 2001 2002 2003 2004 Aug-05

U.S. STEEL INDUSTRY CONSOLIDATION

(Percent Change, 2000 compared to 2005)

75% 50% 25% Flat Rolled Long, Other 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

Source: Metal Strategies

Capacity / Company No. Plants / Company

2006

AWMI – Carolinas Chapter 2006 China Area

•

Environment

CHINA’S CHALLENGES

Comment

Trade policy and laws are not enforced regarding emissions and effluents; Province versus Beijing; employment rules, not environment •

Consolidations

State-owned facilities; only non-controlling foreign ownership allowed; antiquated facilities; policy is 20 large producers, push small producers out •

Technology/Quality

Quality in flat rolled will affect export capabilities.

Switch from long to flat not easy •

Inventories

•

Capital

•

Personnel

Run full out. Not always market-oriented Will not always be free; could lose state credit Some “unrest” expressed toward elite class.

Internet is politically uncontrollable

2006 China China’s Steel Trade Balance Year Imports Exports (Semi’s) Steel Trade Balance 2004 33.1

20.2

6.2

-12.9

2005 27.0

32.5

9.0

+5.5

2006 22.0

36.0

5.0

+14

2006 China

COMPLIANCE WITH THE WTO

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 imbalance 2. Continued currency manipulation 3. Arbitrary VAT taxes and rebates 4. Massive counterfeiting and piracy 5. Discriminatory standards 6. Inadequate regulatory transparency

2006 China

Chinese steel industry expansion continues in a region that is deficient in resources (supply and quality) and environmental compliance…

2006 Prices

2006 Trade • 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 Energy • No National Energy Policy • For EAFs, Demand Response is “Perfect Peaker” • Need for Nuclear • After Metallic Exports, Number One Threat for Competitiveness

2006 Environment • 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 Other • Metallics Exports Concerns • Transportation Challenges • Congressional “Gridlock” • TEA 21 $$$ - Finally • U.S. Government Financial Policies (Trade & Budget Deficit) • Need for Border Adjustable Tax

AWMI – Carolinas Chapter

Conclusions

• Hell, it’s still a cyclical business • Fundamental shift in both demand and supply due to China and its appetite for raw materials – China is still the “wild card” • 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) • Still reasons for meaningful optimism