NAFTA Steel Industry ‘Pulse’

1. NAFTA Steel Industry ‘Pulse’ North American Steel Trade Committee Laredo, Texas November 2007

2. Outline • Preamble • Industry Developments • Market & Trade Trends • Intra-NAFTA Policy Issues • Feature Topic: Trade and Manufacturing • Key Policy Imperatives

3. Preamble

4. 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

5. 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

6. 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

7. Industry Developments

8. Steel Consolidating, But Still Fragmented TOP 15 Represent 36% of Global Production Source: IISB

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. Market & Trade Trends

18. Global Growth, But Non-NAFTA Source: IISI *2007 Data Annualized From 9 Months

19. China Is the World’s Largest Exporter Source: CISA, 2007 Data Annualized Source: China Customs, 2007 Data Annualized

20. 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

21. NAFTA Apparent Steel Demand Fell in 2007

22. 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

23. 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

24. 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

25. 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

26. Intra-NAFTA Policy Issues

27. 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

28. 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

29. 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

30. 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

31. Feature Topic: Trade and Manufacturing

32. NAFTA Manufacturing at Risk Source: AISI Indirect Steel Trade Report, Global Trade Atlas

33. US: Domestic Manufacturing Share Falling United States Domestic Vs. Import Manufacturing Share 1998 - 2006 Source: US Census Bureau

34. 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)

35. US: China Drives Indirect Steel Trade Deficit Source: AISI Indirect Steel Trade Report

36. Canada: Manufacturing Jobs Are Disappearing All Employment: +9.3% Manufacturing Employment: -14.0% Source: Statistics Canada

37. 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).

38. Canada: China Growing Value, Market Share Source: World Trade Atlas / AISI.

39. 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

40. 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

41. Imports of Manufacturing Products (Million Dollars)January 2006- September 2007 Mexico: Steel Related Trade

42. 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

43. Overall Conclusions – NAFTA Policy Implications

44. 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

45. 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

46. 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