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Thomas A. Danjczek President Steel Manufacturers Association September 13, 2010

Steel Founders’ Society of America. Steel Producers Issues in Today’s Economy – An Update. Thomas A. Danjczek President Steel Manufacturers Association September 13, 2010. SFSA – An Update. SMA. The Steel Manufacturers Association (SMA) 34 North American companies:

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Thomas A. Danjczek President Steel Manufacturers Association September 13, 2010

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  1. Steel Founders’ Society of America Steel Producers Issues in Today’s Economy – An Update Thomas A. Danjczek President Steel Manufacturers Association September 13, 2010

  2. SFSA – An Update SMA • The Steel Manufacturers Association (SMA) • 34 North American companies: 29 U.S., 3 Canadian, and 2 Mexican • Operate 125 steel recycling plants in North America • Electric Arc Furnace (EAF) steelmakers using recycled steel • EAF steel producers accounted for nearly 2/3 of U.S. production in 2009 • SMA represents approximately 90 million of U.S. 120 million ton capacity (75%) • 128 Associate members - Suppliers of goods and services to the steel industry

  3. SFSA – An Update Where SMA Member EAFs are located…

  4. SFSA – An Update Outline • SMA • 2009 Review (Concerns, Infrastructure, China, GHGs, Scrap, Conclusion) • 2010 Update • US Steel Production/Capacity Utilization • Steel Usage • Jobless Claims & Steel Production • Cars & Construction Market • World Steel Outlook • Steel Capacity Growth • Export Restrictions & Scrap • Subsidies • Mercury Collection Status • Inflation/Deflation • What does the US need to do? • Conclusion

  5. 2009 Review

  6. (From 2009) SFSA – Steel Issues in Today’s Economy Outline • SMA • Today’s Concerns • Today’s Deterioration • China, China, China • Other Issues (Energy, GHG, Infrastructure Spending) • Consolidation • Scrap • Protectionism and Trade Issue • Legislative Items (Cap & Trade, Infrastructure, Card Check, Trade) • Is Enough Being Done? • Conclusion

  7. (From 2009) SFSA – Steel Issues in Today’s Economy The Obvious Concerns • Our Jobs • US Recession and financial meltdown • Infrastructure Spending • Value of the RMB • Energy shortfalls and pricing • Federal Bailouts • China, China, China • Global Steel Overcapacity • Subsidies and other trade distortions • US Legislation (111th Congress and the 44th President)

  8. (From 2009) SFSA – Steel Issues in Today’s Economy Other Issues – Energy

  9. (From 2009) SFSA – Steel Producers Issues in Today’s Economy Other Issues – GHG

  10. (From 2009) SFSA – Steel Producers Issues in Today’s Economy Infrastructure Stimulus • US aging infrastructure is functionally obsolete and structurally deficient • FHWA estimates $78.8 billion per year for the next 20 years to maintain infrastructure, $131.7 billion to improve • Gas tax at 18.54/gallon generates app. $40 billion • Current gas tax woefully insufficient, only half of maintenance

  11. (From 2009) SFSA – Steel Producers Issues in Today’s Economy U.S. Steel Scrap (Millions NT) Domestic Demand Export Total Demand Average Shredded $ Dom. Scrap Production Dom. Pig & DRI Import Scrap, Pig & DRI Balance Market Clears Source: SteelOrbis “Trade Conference and Trading Workshop.” Presented by David D. Hodory, The David J. Joseph Company June 30, 2009.

  12. (From 2009) SFSA – Steel Producers Issues in Today’s Economy Is Enough Being Done? Raw Materials No Barriers continue Lack of policy continues Energy No Currency manipulation, Subsidies, Not playing by the rules No China Distortions continue, Who’s the protectionist Trade No No long term structural policy changes are being proposed in Washington for taxes, trade imbalance, and energy.

  13. (From 2009) SFSA – Steel Producers Issues in Today’s Economy Conclusion • U.S. Steel Industry in Better Position Today to Manage the Down Cycle • (but what a down cycle!) • Improved Economics From Consolidations, i.e. “Reacted Quicker in October”; • Improved Control of Variable Costs • Scrap-Based Metallics (In 2009, U.S. will be nearly 2/3 EAF-based • Energy Costs • Transportation Costs • Labor Efficiency (U.S. at Below 2MH/Ton; Minimills Often Below 1MH/Ton) • Improved Inventory Control (Inbound Materials, Steel, and Customer Products). NOT THE OLD INVENTORY OVERHANG! • Improved Debt and Equity; Balance Sheet Position • Still Challenging – But Reasons for Meaningful Long-Term Optimism!

  14. An Update - 2010 (O’Bummer)

  15. SFSA – An Update US Steel Production (All in Million Net Tons)(Numbers are Approximate) PAST –From 1986 through 2008, U.S. steel production has been around 100 m tons – up & down 10% 2009 1st Half 25m (45% utilization) 2nd Half 36m (62% utilization) Now 1.5m/week vs. 2.1m/week Year 63m (Minimills at 63% of production) 2010 – Today Capacity Utilization (70.4%); or approximately 83 million tons annual rate

  16. In 2010, Apparent Steel Use in the NAFTA Region Will Be More than 30 Percent Below Pre-Crisis Levels Apparent Steel Use in NAFTA Region (millions of MT) Even if apparent steel use in the NAFTA region recovers to 107 million MT by 2011, as currently projected by the World Steel Association, it would still only match the 1993 consumption level – and be only 76% of the level in 2007. Source: Worldsteel

  17. 2009 Was Only the Second Year Since 1963 in Which North America Produced Fewer than 9 million Cars and Trucks North America Car & Truck Production, 1963-2009 Recent gains in North American car and truck production notwithstanding, it is projected that it will take up to five years to return to pre-crisis ”normal” levels. 9 million cars and trucks produced 1982 Source: Ward’s Automotive.

  18. SFSA – An Update The Worldsteel Short Range Outlook Source: Worldsteel Economic Studies Committee, April 2010

  19. Global Steel Capacity Continues to Increase World Crude Steel Capacity 2000-2012 World Crude Steel Capacity CAGR 2,055 2,100 20 1,997 1,917 1,816 1,850 1,654 1,583 1,600 1,453 15 1,356 1,350 1,245 1,170 1,095 1,062 1,062 1,100 Current Average Growth Rate (CAGR) 10 Steel Capacity (million metric tonnes) 850 600 5 350 100 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010(e) 2011(e) 0 SFSA – An Update 2012(e) Source: Worldsteel

  20. “Some countries simply prohibit scrap exports. Others, like China, impose export taxes to impede the flow of their domestic scrap overseas. Not one of them would countenance the export of up to one-third of their available supply.” -AMM, July, 2010

  21. “Some countries simply prohibit scrap exports. Others, like China, impose export taxes to impede the flow of their domestic scrap overseas. Not one of them would countenance the export of up to one-third of their available supply.” AMM, July 2010

  22. SFSA – An Update Raw Material Export Restrictions are Continuing to Disadvantage NAFTA Steel and Other Manufacturers • Many countries continue to impose a variety of restrictions on exports of vital raw materials • Export prohibitions • Export duties • Export quotas • Other measures • Trade-distorting restrictions on exports of raw materials • Give domestic producers in the exporting country an unfair advantage • Increase worldwide costs of production • Place a heavy burden on steel industries in developing countries that do not have substantial iron ore reserves or steel scrap supplies

  23. SFSA – An Update Meanwhile, Foreign Government Subsidies to Steel and Steel-Related Industries Remain a Particular Concern… • Foreign government subsidies are a major cause of overcapacity in the global steel industry and steel-related industries • Subsidies to steel and steel-related industries that (1) support inefficient and excess capacity and/or (2) distort trade are continuing, and remain a particular concern • Examples include: • Fundamental currency misalignment/undervalued currencies • Preferential financing to add new capacity • Loan forgiveness/equity infusions to prop up obsolete capacity

  24. SFSA – An Update Mercury in Scrap Issue • Program is performing as the collection point for all convenience mercury switches removed from domestic automobiles; fully implemented in first quarter 2007 • All US EAF Carbon Steel Facilities are operating under EAF Area Source Rule mercury source control plan option, and depend upon ELVS as the national program to collect mercury convenience switches • Implementation Fund ($2 million from domestic auto makers & $2 million from US steel industry) exhausted in July 2009 • Last statistics supplied by NVMSRP Stakeholder Group (October 2009) shows performance in retorting of switches similar to previous years – switches continue to be submitted to ELVS, regardless of lack of Implementation Fund payouts • Performance of program continues to lag, compared to EAF Area Source Rule “Goal” of 80% collection • Need for emphasis or supplier audits on mercury collection • EPA’s 114 Requests for Information

  25. SFSA – An Update • Probably Deflation Initially Inflation Deflation - Government Subsidies - Lower Demand - Printing Currency - Discretionary items (furniture, clothing, etc.) - Medical Costs - Real Estate - Energy - High Unemployment • Growing Trade Deficit Reduces US Supply • Deflation equates to Economic Decline Inflation/Deflation* *Taken in part from Dr. Peter Morici

  26. SFSA – An Update Is Enough Being Done? Raw Materials No Barriers continue Lack of policy continues Energy No Currency manipulation, Subsidies, Not playing by the rules No China Distortions continue, Who’s the protectionist Trade No No long term structural policy changes are being proposed in Washington for taxes, trade imbalance, and energy.

  27. SFSA – An Update What does the US need to do? • Assume a Pro-Manufacturing Agenda • Business Tax Reform • Border Adjustable Taxes • Currency Adjustments • Energy Independence • Reasonable regulatory measures (Environment/Labor) • Climate for investments (Jobs, Jobs, Jobs) and Infrastructure • Solve the structural problems that caused the recession- Real Foundation • Bad loans and securities on bank balance sheets • Reduce huge trade deficits • Policy incrementalism is not sufficient

  28. SFSA – An Update • This 70% world is the new “norm” (Construction, Auto, Government driven) • The economy will come back as jobs are created President Coolidge: “When more and more people lose their jobs, unemployment results.” • We’re in a traffic jam, moving slightly forward, but don’t know other consequences • Don’t look to Washington for help. Pendulum moves slowly. • Reasons for optimism in steel • Scrap based • Low Cost on global bases • Relatively strong US market and US resiliency • Better US company balance sheets • Impact of Currency long term Conclusion

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