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NAFTA Steel Industry ‘Pulse’. North American Steel Trade Committee Laredo, Texas November 2007. Outline. Preamble Industry Developments Market & Trade Trends Intra-NAFTA Policy Issues Feature Topic: Trade and Manufacturing Key Policy Imperatives. Preamble.

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NAFTA Steel Industry ‘Pulse’

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Nafta steel industry pulse

NAFTA Steel Industry ‘Pulse’

North American Steel Trade Committee

Laredo, Texas

November 2007


Outline

Outline

  • Preamble

  • Industry Developments

  • Market & Trade Trends

  • Intra-NAFTA Policy Issues

  • Feature Topic: Trade and Manufacturing

  • Key Policy Imperatives


Nafta steel industry pulse

Preamble


Putting recent performance in context

Putting Recent Performance In Context

  • Earning the Cost of Capital Over Economic Cycles:

    • Over the past 25 years, the U.S. and Canadian industries’ after tax returns have averaged 0.95% and 1.6%, respectively

  • Volatility:

    • From 1950-2006, the coefficient of volatility for the U.S. steel industry has been 266.7%,vs. 27.6% for all manufacturing

  • Competitiveness:

    • Consolidation / restructuring

    • Operational efficiencies / technology

    • Cost structure dynamics

    • Location


No immunity

No Immunity

  • Conditions Leading to Past Crises Are Still in Place:

    • World Overcapacity

    • Governmental Ownership / Interventions

    • Non-Market Behaviour

    • Special Case of China (and India)

  • No Immunity From Longstanding and Ongoing Threats


Proper role of governments

Proper Role of Governments

  • Defending The Free Market From Abuse:

    • Eliminating market interventions and distortions by all governments

    • Enforcing compliance with trade agreements and competition law

    • Maintaining and enforcing trade remedy laws

    • Assisting trading partners with understanding / adopting best practices

  • Recognizing And Fostering The Steel Industry’s Contribution To National Goals:

    • Economic Security

    • National Security

    • Staple of a Strong Manufacturing Sector


Nafta steel industry pulse

Industry Developments


Steel consolidating but still fragmented

Steel Consolidating, But Still Fragmented

TOP 15 Represent 36% of Global Production

Source: IISB


Consolidation china the exception

Total CIS

119

Total Europe

173

Total China

419

Total Others Asia

113

Total Latin America

63

Consolidation: China The Exception

Regional Top 5 Producer Market Share

ROW: Market-Driven

China

2006 Chinese Steel

Production By Facility Size

(in Million MT)

Total US / Canada

114 *

Total Japan

116

Source: CISA

Source: IISI*2006 Production in Million MT


China world s no 1 is government directed

China: World’s No. 1 Is Government Directed

Top 20 Chinese Steel Producers:

Government Control Vs. Private Ownership

Top 20 Capacity:

210 Million Tons

91%

2007 Projected Global Production

Australian Government Predicting China Will Reach 1B Tons by 2015


Active consolidation within nafta

Active Consolidation Within NAFTA

  • Recent Key NAFTA Announcements:

    • ArcelorMittal-Dofasco

    • USS-Stelco, USS-LoneStar

    • Gerdau-Chaparral

    • Ternium-Grupo Imsa

    • SSAB-IPSCO

    • Essar-Algoma, Essar-Minnesota

  • Emerging Downstream Focus:

    • Nucor-Harris, Nucor-Barker, Gerdau-Enco

  • Extending to Scrap:

    • Sims-Metal Management, Steel Dynamics-OmniSource


Consolidation opportunities risks

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 and Market Distortions


New capacity outpaces consumption growth

New Capacity Outpaces Consumption Growth

Announced Steel Capacity Vs.

Projected Consumption 2007 – 2010

(Million Metric Tonnes)

Announced Steel Capacity Increases By Region

(2006 – 2012)

Compound Annual Growth Rates:

Capacity: 6.83% Demand: 4.65%

Capacity – Multiple Sources; Nucor Analysis

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


China world s most subsidized industry

China: World’s Most Subsidized Industry

More than $50 billion

in subsidies

State-owned

enterprises

account for 91 percent

of China’s largest

steel groups

$7.5 billion in

debt-to-equity

swaps in 2000

Chinese steelmakers

regularly obtain

preferential loans

from state-owned

banks

An additional

$6 billion in

announced subsidies

during 2000

2005 steel policy

commits China

to further subsidies,

micromanagement

Manipulation of key

raw materials

markets, including

coke and ferroalloys

Support from local

and provincial

governments

uncontrolled

by central government

Inadequate protection

of workers’ rights and

enforcement of

environmental

standards

Chinese steel producers

enjoy government

assistance with energy

and other input costs


Raw materials governments still intervening

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


Consolidation key takeaways

Consolidation: Key Takeaways

  • Consolidation is Creating a Stronger Global Industry

    • NAFTA companies now competing for capital on a global basis

    • China, the dominant producer, not participating in the trend

  • Level Playing Field Necessary to Ensure NAFTA Benefits from Market-Driven Consolidation

    • Continued overcapacity threat, led by China

    • Subsidies & government interventions driving export growth and potential for continued trade distortions

  • Successful Consolidation Outcomes Require:

    • Working to address effectively “root causes” of trade distortions

    • Ensuring NAFTA trade remedies are fair, accessible, enforceable and able to respond effectively to market distortions as they occur


Nafta steel industry pulse

Market & Trade Trends


Global growth but non nafta

Global Growth, But Non-NAFTA

Source: IISI

*2007 Data Annualized From 9 Months


China is the world s largest exporter

China Is the World’s Largest Exporter

Source: CISA, 2007 Data Annualized

Source: China Customs, 2007 Data Annualized


World market and trade flows are dynamic

World Market And Trade Flows Are Dynamic

  • NAFTA Faces a Potential Significant Import Surge Risk

  • Concerns about the Combined Effects of:

    • Unrelenting Chinese Export Expansion

    • Effect of Other Nations (e.g., EU) Taking Actions Against China

  • No Immunity for the NAFTA Market Despite Industry Consolidation and Enhanced Competitiveness

  • Need for NAFTA Governments to Counter Adverse Spillover Effects from Chinese Non-Market Behaviour


Nafta apparent steel demand fell in 2007

NAFTA Apparent Steel Demand Fell in 2007


Imports from china dominant growing

Imports From China Dominant, Growing

Consolidated NAFTA Imports From China 2006 / 2007(China Import Share By Product Group)

Source: AISI, Statistics Canada, CANACERO

**January-July


China value added export focus

China: Value-Added Export Focus

Selected Value-Added NAFTA Imports From China, 2005 - 2007

China Export Growth

1H 2006 Vs. 1H 2007

11 mt

20 mt

1H 2006 Capacity Increase: 31 million tons (mt)

7 mt

31 mt

1H 2007 Capacity Increase: 38 million tons (mt)

Source: NASTC Steel Monitor; 2007 annualized

Source: IISI, 2007 Data Annualized from 6 months


China unfulfilled commitments

China: Unfulfilled Commitments

“All the measures taken by the Chinese governments to curb exports have been without effect so far…If China wishes to avoid long-running trade conflicts, the rules of the market have to be obeyed.”

-Ekkehard D. Schulz, Chairman, ThyssenKrupp AG

September 30, 2007


China central to current nafta cases

China Central To Current NAFTA Cases

Key NAFTA Steel Trade Cases (Ch. 72 & Ch. 73)

May–November 2007

*Finding renewed against China on October 10, 2007


Intra nafta policy issues

Intra-NAFTA Policy Issues


Steel remains a strategic nafta sector

Steel Remains a Strategic NAFTA Sector

  • Recent Developments (August 2007):

    • Montebello SPP Leaders Summit

    • NAFTA Commission / Trade Ministers Meeting

    • North American Competitiveness Council (NACC) Report


Context nafta economic uncertainties

Context: NAFTA Economic Uncertainties

  • Economic Concerns in All NAFTA Countries

    • U.S. Weakening

    • Mexico: Tracking U.S. Performance

    • Canada: Uneven Performance, Slowing Growth, Currency Appreciation ($CDN > $USD)

  • Rising Input Costs and Uncertainties (e.g., Energy)

  • Potential Negative Impacts on Both Steel Producers and Customers


Effective trade policies remain essential

Effective Trade Policies Remain Essential

  • WTO: NAFTA Governments’ Coordination

    • Subsidies Case

    • Rules Negotiations

  • Expanding Focus from Doha to Bilaterals

    • US: Korea, Columbia, Peru, Panama

    • Canada: Korea, Columbia/Peru, EFTA

    • Mexico: Korea, Peru

  • Key Industry Priorities on FTAs:

    • Remedies

    • Steel Customer Impacts / Incentives for Value-Added in North America

  • NAFTA Policy Coordination

    • AD/CVD Applicability to NMEs

    • Need to Adopt Best Practices / Highest Level of Enforcement


Climate change trade impacts

Climate Change: Trade Impacts

  • Emerging Legislative & Regulatory Issues in NAFTA:

    • U.S.: Congress Debating Cap & Trade, Border Adjustability

    • Canada: New Plan – Technical & Compliance Issues

    • Mexico: Government Open to Discussion of IISI / Sectoral Model

  • The Pressure For Stringent Regulation Could Have Significant Trade Consequences

    • “Decoupling” / Production Loss and Migration

    • Increased Import Penetration

    • “Next Generation” Trade Policy: “Green Content”

  • Bottom Line: Need to Avoid Creating Trade Distortions or Reducing NAFTA Competitiveness


Feature topic trade and manufacturing

Feature Topic: Trade and Manufacturing


Nafta manufacturing at risk

NAFTA Manufacturing at Risk

Source: AISI Indirect Steel Trade Report, Global Trade Atlas


Us domestic manufacturing share falling

US: Domestic Manufacturing Share Falling

United States Domestic Vs. Import Manufacturing Share

1998 - 2006

Source: US Census Bureau


Us 3m jobs lost trade deficits growing

US: 3m Jobs Lost; Trade Deficits Growing

Trade Deficit: +123% Since 2000

Estimated 1m Jobs Lost Due to China Trade*

Sources: US Census Bureau (trade data), US Labor Dept. (employment data)

*Dr. Peter Morici, former Chief Economist of ITC (estimate of lost mfg. jobs due to China trade)


Us china drives indirect steel trade deficit

US: China Drives Indirect Steel Trade Deficit

Source: AISI Indirect Steel Trade Report


Canada manufacturing jobs are disappearing

Canada: Manufacturing Jobs Are Disappearing

All Employment: +9.3%

Manufacturing Employment: -14.0%

Source: Statistics Canada


Canada steel related trade deficit persists

Canada: Steel-Related Trade Deficit Persists

Canada’s Projected 2007 Deficit With China Represents 71% of the Total

Source: Statistics Canada

*2007 Data Annualized from January-July Actuals

^Steel-containing goods includes all HS Sections for Base Metals and articles of Base Metals (Sec. XV), Machinery, Appliances and Equipment (Sec. XVI),

and Vehicles, Aircraft, Vessels and Transportation Equipment (Sec. XVII).


Canada china growing value market share

Canada: China Growing Value, Market Share

Source: World Trade Atlas / AISI.


Mexico imports gaining market share

Mexico: Imports Gaining Market Share

130,000

Real

Manufacturing

GDP (LHS)

240,000

110,000

190,000

90,000

Million USD

Million USD

140,000

70,000

90,000

50,000

Manufacturing Imports (RHS)

40,000

30,000

3Q 2000

3Q 2004

3Q 1994

1Q 1995

3Q 1995

1Q 1996

3Q 1996

1Q 1997

3Q 1997

1Q 1998

3Q 1998

1Q 1999

3Q 1999

1Q 2000

1Q 2001

3Q 2001

1Q 2002

3Q 2002

1Q 2003

3Q 2003

1Q 2004

1Q 2005

3Q 2005

1Q 2006

3Q 2006

1Q 1994

1Q 2007

Source: BIE – Mexico’s Economic Statistics Data Bank

Mexico Real Manufacturing GDP & Imports

1994 - 2007


Mexico significant employment loss

Mexico: Significant Employment Loss

5,250

255,000

Real

Manufacturing

GDP

5,050

230,000

205,000

4,850

180,000

4,650

155,000

Million USD

Thousands

130,000

4,450

105,000

4,250

80,000

Manufacturing

Employment

55,000

4,050

30,000

3,850

3,650

1Q 2007

1Q 1994

3Q 1994

1Q 1995

3Q 1995

1Q 1996

3Q 1996

1Q 1997

3Q 1997

1Q 1998

3Q 1998

1Q 1999

3Q 1999

1Q 2000

3Q 2000

1Q 2001

3Q 2001

1Q 2002

3Q 2002

1Q 2003

3Q 2003

1Q 2004

3Q 2004

1Q 2005

3Q 2005

1Q 2006

3Q 2006

Source: BIE – Mexico’s Economic Statistics Data Bank

Mexico Real Manufacturing GDP & Employment

1994 - 2007


Mexico steel related trade

Imports of Manufacturing Products (Million Dollars)January 2006- September 2007

Mexico: Steel Related Trade


Trade and manufacturing initial conclusions

Trade And Manufacturing: Initial Conclusions

  • Manufacturing Remains Critical to NAFTA Economies

    • Significant source of wealth creation and innovation

  • Factory Employment is Down, While Imports of Key Steel-Containing Products Are Up

    • Trade imbalances are having an effect

    • Manufacturing jobs transforming into service jobs?

  • Persistent Imbalances Have Wider Supply Chain Ramifications

    • Diminishing customer base is a top concern for NAFTA steel producers

  • NAFTA Manufacturing Policies Must Include A Strong Trade Component


Nafta steel industry pulse

Overall Conclusions –

NAFTA Policy Implications


Strategic government actions required

Strategic Government Actions Required:

  • Ensure Rules-Based Trade For Manufacturing Industries

  • Achieve Highest Level Of AD/CVD Practice & Enforcement

  • Prevent Market Distortions Before They Impact The NAFTA Region

  • Strengthen Intra-NAFTA Trade Facilitation


Immediate focus

Immediate Focus:

  • Treat China As NME In AD Cases, And Fully Apply CVD Law To NMEs

  • Promote NAFTA Manufacturing In FTAs

  • Enhance Government Information-Sharing Across Jurisdictions On Trade Remedy Practice And Experience


With sustained emphasis on

With Sustained Emphasis On:

  • Joint Efforts To Challenge China’s Subsidies, Currency Manipulation and Other Distortions

    • WTO / Multilateral – Not allowing China to impose a non-market model on the WTO

    • Political / Diplomatic / Economic – Recognition of China’s growing alliances with Latin American countries, with both backward linkages (mines, ports, raw materials, energy) and forward linkages (customers)

  • NAFTA-Wide Pro-Manufacturing Policies

  • Reducing Intra-NAFTA Logistical / Border Costs

  • Incorporating Trade Impacts In Any Climate Change Policies


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