What to make of steel in 2009

1. What to make of steel in 2009 Presentation to SMA Annual Members Conference Washington DC May 19, 2009

2. What to make of steel in 2009 • A dangerous place for forecasting • Plenty to worry about • Pursuing unhappiness • Some confident predictions www.first-river.com

3. A dangerous place for forecasting

4. Last year’s message…Black swan events are: • Rare (highly improbable) • Hard to predict (except in retrospect) • Consequential www.first-river.com

5. Missed 2008 – in September! Recalibrated 2009 several times Q1 6 reasons why it won’t be so bad this time (October 2008) Global economic growth (3% to -2.8%) Industrialization Capacity management Chinese industry rationalization Renewed consolidation Growth, Environment & Energy Other forecasting miseries A man who predicts the future is lying – even if he’s rightArab proverb www.first-river.com

6. Avoid too much emotional commitment to one outcome Avoid to much organizational commitment to one outcome Consider all outcomes equally possible Be ready What to do/think? www.first-river.com

7. Plenty to Worry About

8. World steel forecastApparent steel use forecast & y-o-y change 2008 to 2009 -8% -27% 2008: 1,197MT to 2009: 1,019MT ~15% decline Developed world consumption from 36% to 31% of total www.first-river.com

9. 2009 in a long term contextGlobal steel annual production changes Source: worldsteel, First River www.first-river.com

10. 2009 in a long term contextUS steel industry production changes Source: AISI, First River www.first-river.com

11. GDP forecast indicates 20-25% drop in US finished steel demand IMF World Economic Outlook April 2009 US 2009 GDP Forecast: -2.8% 2008 2009 1980 1982 1975 www.first-river.com Sources: AISI, US BEA, IMF, First River

12. Finished steel demand drivers in US Actual Fitted Two drivers matter most: - NA automotive production - US non-residential construction R² = 70% www.first-river.com Source: First River

13. NA automotive production forecastBelow 15 million thru 2013 35% drop this year Average 11.8 2009-2013 www.first-river.com Source: CSM Worldwide (March 2009)

14. Big 3 participation in car productionBig 3, Others units & share 1985-2008, US only Source: Ward’s automotive, FRC www.first-river.com

15. US non-residential construction No return to level of late 1990s thru 2013 22% drop 2008 to 2010 Average 1,300 2009-2013 www.first-river.com Source: FW Dodge (Spring 2009)

16. US finished steel demand forecastWeak throughout forecast period Forecast 110 Actual ADC 68 (WSA) 30-40% drop this year www.first-river.com Source: CSM, FW Dodge, WSA, First River

17. Operating rates for rest of 2009 Risk is to the downside www.first-river.com Source: AISI, MSCI, First River

18. Average US demand & production2009-2013 ~20% average decline Recovery by 2015? www.first-river.com

19. US raw steel capacity utilizationLong-term average is 78%, stable level is 85% 63% 48% 61% 65% Average Utilization Rates Periods of adjustment (red bars): 60% Periods of relative stability: 85% Source: AISI, First River www.first-river.com

20. Future raw steel capacity requirementA 30 MT issue? Source: First River www.first-river.com

21. 2009 – Part of a notable recession Thru May 2009 GDP Loss (%) Thru Q1 2009 2007-2009? 2001 1973-1975 1980 1981-1982 1990-1991 Source: NBER, First River www.first-river.com

22. Big 5 financial crises & current US recession August 2009? March 2011? GDP Loss (%) Thru Q1 2009 US 2007-2009 “Big 5” Financial Crises Source: IMF, Reinhart & Rogoff, First River www.first-river.com

23. Pursuing unhappiness

24. THE YEAR THE BOTTOM FELL OUT FOR STEEL UNUSUAL ALLIANCE SEEKING TO POSTPONE POLLUTION CURBS ON STEEL INDUSTRY STEEL MILLS COMPLAIN ON EXPORTS OF SCRAP Industry economists who had predicted as recently as January that steel shipments would equal last year's level of 87 million tons, have scaled back those forecasts to about 80 million tons - the low reached in the severe sales slump that developed after the 1974-75 recession. Some even say that shipments will drop below 80 million tons for the first time since 1963, when the industry shipped 75.5 million tons. Not since 1959, when the steel industry was in the middle of a 15-month slump, have steel executives gathered… for their annual meeting under worse circumstances. Seven out of 10 steel companies operated in the red during the first quarter, and losses are expected to mount in the second quarter. Nearly 30 percent of the nation's steelworkers have been laid off, and industry analysts, who just a month ago were quibbling over whether shipments for the year would slide below 80 million tons, now expect them to be under 70 million tons… FORECASTS WORSENING FOR STEEL www.first-river.com

25. THE YEAR THE BOTTOM FELL OUT FOR STEEL UNUSUAL ALLIANCE SEEKING TO POSTPONE POLLUTION CURBS ON STEEL INDUSTRY STEEL MILLS COMPLAIN ON EXPORTS OF SCRAP 1982 Industry economists who had predicted as recently as January that steel shipments would equal last year's level of 87 million tons, have scaled back those forecasts to about 80 million tons - the low reached in the severe sales slump that developed after the 1974-75 recession. Some even say that shipments will drop below 80 million tons for the first time since 1963, when the industry shipped 75.5 million tons. Not since 1959, when the steel industry was in the middle of a 15-month slump, have steel executives gathered… for their annual meeting under worse circumstances. Seven out of 10 steel companies operated in the red during the first quarter, and losses are expected to mount in the second quarter. Nearly 30 percent of the nation's steelworkers have been laid off, and industry analysts, who just a month ago were quibbling over whether shipments for the year would slide below 80 million tons, now expect them to be under 70 million tons… FORECASTS WORSENING FOR STEEL www.first-river.com

26. No déjà vu all over again • No functional union agreement or relationship • Unconsolidated industry • Poorly invested, inefficient facilities • Unfocused industry diversified outside steel • Lots of government ownership around the world • No prospects for industrialization among 2Bn+ people • Little transparency in prices, inputs, costs, production & demand Far fewer prospects for recovery in 1982 than 2009 www.first-river.com

27. The pursuit of unhappinessThe situation is hopeless, but not serious • Glorification of the past • Nothing worthy in the present • Obsession with precedents for unprecedented times • Nothing worth learning from the present • The Fatal Glass of Beer • No escaping the sins of too much leverage • General paranoia & fatalism • They’re out to get us • Nothing we do will make any difference www.first-river.com

28. Some confident predictions! • Growing population will want • places to work • places to live • ways to get between the two • We will find new applications, new markets in the process of: • Reducing carbon in the environment • Switching energy sources • Manufacturing will grow in NAFTA as developing nations move towards satisfying domestic demand • The automotive industry will emerge stronger than at any time in the last 30 years • Average steel industry returns in the next 20 years better than 20 years following 1982 www.first-river.com

29. What to make of steel in 2009? • A scary ride to the bottom? • A turning point • A wake-up call for the developed world • Strategies reconsidered • Some retrenchment www.first-river.com