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Steel – 2005/2006/Beyond

The Hot Briquetted Iron Association Spring Meeting. Steel – 2005/2006/Beyond. Thomas A. Danjczek, President Steel Manufacturers Association May 5, 2006. Steel – 2005/2006/Beyond. HBIA – Spring Meeting. SMA 2005 - World Steel Production/Operating Rate; China; Prices; Consolidations

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Steel – 2005/2006/Beyond

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  1. The Hot Briquetted Iron Association Spring Meeting Steel – 2005/2006/Beyond Thomas A. Danjczek, President Steel Manufacturers Association May 5, 2006

  2. Steel – 2005/2006/Beyond HBIA – Spring Meeting • SMA • 2005 • - World Steel Production/Operating Rate; China; Prices; Consolidations • III. 2006 • - China’s Challenges; Trade; Energy; Environment • IV. Key Issues Beyond 2006 (Wild Cards) • V. Conclusion

  3. HBIA – Spring Meeting • The Steel Manufacturers Association (SMA) • 39 North American Companies: • 33 U.S., 3 Canadian, and 3 Mexican • 111 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

  4. HBIA – Spring Meeting • 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 56% in 2005, and anticipated to be 60% by 2010, if not before!

  5. 2005

  6. 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. World Crude Steel Operating Rate % Source: Metal Strategies

  7. HBIA – Spring Meeting China’s Impact After 4 Trips in a Year… 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!

  8. HBIA – Spring Meeting

  9. HBIA – Spring Meeting Chart 2: The Exploding Trade Deficit with China

  10. HBIA – Spring Meeting Chart 3: China’s Foreign Exchange Reserves

  11. STEEL CAPACITY HBIA – Spring Meeting

  12. CONCERNS Steel ItemComment •North American steel industry CANNOT Currency, banks, land, environment, compete against Chinese steel companies consolidations, policies financed and controlled by their government • In 2005, compared to 2004, China steel Trend worsens in 2006 with new imports are projected to drop by 6.1 capacity on line, and China’s million tons, while exports are projected slowdown to increase by 12.3 million tons • North American steel industry loss of a Government de facto subsidies significant increment of its customer (industrial parks, infrastructure, base to relocation to Chinese factory space, loans) production sites

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

  14. AMM – 4/24/06

  15. Source: Iron and Steel Statistics Bureau

  16. 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

  17. 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

  18. U.S. Oil and Natural Gas Prices

  19. Natural Gas Cost Impact …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…

  20. U.S. STEEL INDUSTRY CONSOLIDATION(Percent Change, 2000 compared to 2005) • 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

  21. 2006

  22. HBIA – Spring Meeting 2006 China CHINA’S CHALLENGES AreaComment •EnvironmentTrade policy and laws are not enforced regarding emissions and effluents; Province versus Beijing; employment rules, not environment •ConsolidationsState-owned facilities; only non-controlling foreign ownership allowed; antiquated facilities; policy is 20 large producers, push small producers out •Technology/QualityQuality in flat rolled will affect export capabilities. Switch from long to flat not easy •InventoriesRun full out. Not always market-oriented •CapitalWill not always be free; could lose state credit •PersonnelSome “unrest” expressed toward elite class. Internet is politically uncontrollable

  23. HBIA – Spring Meeting 2006 China China’s Steel Trade Balance Year 2004 2005 2006 Imports 33.1 27.0 22.0   Exports 20.2 32.5 36.0 (Semi’s) 6.2 9.0 5.0 Steel Trade Balance -12.9 +5.5 +14

  24. HBIA – Spring Meeting 2006 China China’s Steel Trade Balance Year 2004 2005 2006 Imports 33.1 27.0 22.0   Exports 20.2 32.5 36.0 (Semi’s) 6.2 9.0 5.0 Steel Trade Balance -12.9 +5.5 +14

  25. HBIA – Spring Meeting 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

  26. 2006 China Chinese steel industry expansion continues in a region that is deficient in resources (supply and quality) and environmental compliance…

  27. HBIA – Spring Meeting 2006 Prices

  28. HBIA – Spring Meeting 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?”

  29. HBIA – Spring Meeting 2006 Energy • No National Energy Policy • For EAFs, Demand Response is “Perfect Peaker” • Need for Nuclear • After Metallic Exports, Number One Threat for Competitiveness

  30. HBIA – Spring Meeting 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

  31. HBIA – Spring Meeting 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

  32. HBIA – Spring Meeting Key Issues Beyond 2006 (Wild Cards – Competitiveness) Rough EAF Cost Model @ $400 Product ItemImpacts -Metallics 55% -Ore Cartel, Scrap Exports, Global Demand -Energy 15% -Lack of Generation, Transmission, Limited Nuclear, Offshore Gas, Off-Peak Future??? -Labor 10% -Health Care, USWA, Mittal Contract, Gerdau Ameristeel -Transportation 10% -Congestion, Lack of Investment -Other Inc. Financial 10% 100%

  33. Other Key Issues Beyond 2006 HBIA – Spring Meeting ItemImpact -Capital Costs -Coke, Blast Furnaces, China@40%, New Facilities & Capacity -Market -China, India, Brazil, Russia Automotive Situations -Consolidations -Current Prices -Environmental -Greenhouse Global Gases -Role of Governments -U.S. Financial Situation, Role of Currencies, Trade Flows

  34. HBIA – Spring Meeting Conclusions • 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 • 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) • Significant changes ahead in trade, metallics, energy, and consolidation • Still reasons for meaningful optimism

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