SMA Meetings – Indianapolis

Plant Operations Division Associate Members Environment Committee Human Resources Committee Safety Committee

Developments in Steel Minimills

Thomas A. Danjczek Steel Manufacturers Association October 3, 2006

SMA Meetings – Indianapolis Developments in Steel Minimills I.

II.

SMA 2006 Developments • World Steel Production/Operating Rate • China (Growth, Questions, Concerns, Challenges) • Raw Material Pricing • 2006 U.S. Market Outlook • Consolidations III. Impact of Mercury in Scrap IV. Conclusion

SMA Meetings – Indianapolis •The Steel Manufacturers Association (SMA) –38 North American companies: 32 U.S., 3 Canadian, and 3 Mexican –118 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

SMA Meetings – Indianapolis •Production capability –SMA represents approximately 70% of U.S. steel production •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, 56% in 2005, and anticipated to be 58% in 2006

1,800

Projected Worldwide Crude Steel Capacity vs. Demand (2006 – 2010)

1,653 1,761 1,608 1,487

1,600

1,400 1,332

1,400

1,257 1,185 1,118

1,200

1,055

1,000 800 600 400 200 2006 2007 Capacity 2008 Demand* 2009 2010 *Demand growth estimated at 6%/yr

Worldwide Announced Steel Capacity Additions By Region

139

140

120

120

110 106

100 80 60 40

51 45 44

20 0 2006 China India Other Europe 2007 2008 2009 CIS NAFTA Africa & Middle East 2010 2011 2012 EU-25 Other Asia Central & South America

SMA Meetings – Indianapolis China’s Impact After 5 Trips in the Past Two Years… 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!

SMA Meetings – Indianapolis

China’s Subsidies -Export subsidies -Import substitution subsidies -Grants (land, cash, energy, raw materials -Tax incentives & reductions -Non-performing loans at state banks -Preferential loans -Environmental non-enforcement & weak regulation -RMB manipulation -Debt to equity conversion -Debt forgiveness -Barriers to foreign investment

WHO IN THE ROOM IS RECEIVING ANY OF THE ABOVE???

Area

•

Environment

CHINA’S CHALLENGES

Comment

Trade policy and laws are not enforced regarding emissions and effluents; Province versus Beijing; employment rules, not environment; 20% of particulate matter in Los Angeles can be traced to China •

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

RAW MATERIALS I n the four years from Q1-2002 to Q1-2006, raw material and energy input costs for U.S. steelmakers have increased dramatically.

January 2002 = 100

600 500 400 300 200 100 0

Jan-02 Oct-04 May-05 May-06 No.1 HM Scrap 100 357 180 343 No.1 Busheling 100 443 146 310 Metellurgical Coal 100 111 231 213 Coke 100 567 347 187 Iron Ore 100 130 223 267

Courtesy of Chris Plummer, Metal Strategies

2006 U.S. MARKET OUTLOOK We project apparent consumption growth in the 7-10% range for 2006, driven by the energy, construction and industrial capital equipment sectors.

Market Autos Construction Industrial Capital Equipment Energy All Other Inventory Change Sub-Total Total Growth 0% 7% 7% 23% --- 5% --- --- Share 23% 35% 23% 7% 87% 13% --- 100% Wtd Growth 0.0% 2.5% 1.6% 1.6% 5.6% 0.7% 3.0% 9.3%

Courtesy of Chris Plummer, Metal Strategies

SMA Meetings – Indianapolis

Individual Domestic Demand Sectors

-

Automotive is high, but dipping slightly - Residential construction is falling, but still high - Industrial machinery production rising - Non-residential growing, but not back to 2000 level - Heavy machinery is strong - Energy is the best sector • Plate, pipe, and specialty

100%

TOP-THREE MARKET SHARES

2000 compared to 2005

Flat Rolled Weighted Average 2005: 2000: 65% 47% Long Products Weighted Average 2005: 68% 2000: 51% 75% 50% 25% 0% Hot Rolled Plate Cold Rolled Coated Sheet Tin Mill SBQ Rebar Heavy Structural Wire Rod

Courtesy of Chris Plummer, Metal Strategies

History

:

2001

–

Partnership for Mercury-Free Vehicles (PMFV) is formed

Members:

Automotive Recyclers Association (ARA); Clean Car Campaign; Clean Product Network; Ecology Center; Environmental Defense; Great Lakes United; Institute of Scrap Recycling Industries (ISRI); Mercury Policy Project; Steel Manufacturers Association (SMA); Steel Recycling Institute/American Iron & Steel Institute (SRI/AISI)

PMFV

, through memberships, lobbies several state legislatures to pass a measure to institute a state vehicle mercury switch removal program, with costs associated to be paid by US automotive companies.

States with legislatively enacted switch removal programs

:

Maine; Arkansas; Rhode Island; North Carolina; South Carolina;Texas; and New Jersey

Mid-2005

– US EPA calls stakeholders meeting to bring all major actors to negotiation table

March 2006

– Compromise reached in negotiations to form a fund (paid for by US auto co.s and US steel industry) to create a national switch removal program.

August 2006

– Signing Ceremony planned for enactment of National Vehicle Mercury Switch Removal Program MOU

Signatories:

Vehicle Manufacturers; iron & steel industry trade associations on behalf of member companies (SMA; ISRI; ARA; SRI/AISI); Environmental Defense, on behalf of the environmentalist community; Environmental Council of the States (ECOS)

Elements –

1. Education and outreach 2. Removal, collection and management of switches 3. Recordkeeping and accountability of mercury recovery 4. Scrap Selection and corroboration 5. Review and improvement of program performance goal (

80% target

), with expectation of removing about 12-16 tons of mercury in first three years (

2007-2010

)

Responsibilities (of all signatories):

1.The obligation to carry out responsibilities under the agreement in good faith, and work continuously to improve the performance of the NVMSRP; 2. Help formulate and implement an outreach strategy 3. To forego the initiation of new State legislative activities 4. To support existing state programs, and to implement the NVMSRP in states without existing programs.

Responsibilities of steel companies:

1) Issue a public statement; 2) Develop a plan; 3) Document communications to appropriate company staff of requirements to suppliers; 4) Strongly encourage suppliers to participate, and communicated to suppliers the need to further promote the program; 5) Utilize the ELVS database to verify supplier participation on a routine basis; 6) Conduct periodic site visits, spot checks, or other means to verify supplier participation; 7) Cooperate with ELVS in the development of education, training materials and outreach

SMA Meetings – Indianapolis

Conclusions - 2006

• 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… “China is the story, the rest is embellishment” • Continued North American steel industry resiliency; North American mills, for the most part, are technologically advanced, highly competitive, and environmentally acceptable • Consolidations and discipline have had an impact to reduce volatility • Role of inventories affecting pricing and production • Demand still healthy and growing • 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; positive outlook, despite China, energy costs, and interest rates