Challenges and Opportunities for the NAFTA Steel Industry and Governments

1. Challenges and Opportunities for the NAFTA Steel Industry and Governments North American Steel Trade Committee (NASTC) Meeting Ottawa, Canada − May 20, 2004

2. The inaugural NASTC meeting set the stage for promoting further openness in the North American steel market, and addressing more effectively the common challenges facing the NAFTA steel industry. Areas of mutual interest include: • Understanding market developments through trade/market data exchange • Identifying intra-NAFTA competitiveness problems and solutions/synergies • Identifying common external trade concerns and developing collective NAFTA responses • Cooperating on trade policy in multilateral fora (OECD, FTAA, WTO) • Further exploring, consistent with antitrust regulations, the integration of the North American steel market through appropriate government policies • Promoting the health and financial stability of the North American steel sector through appropriate government policies

3. The NAFTA steel industry has identified key steel industry fundamentals and proposes several NASTC opportunities. StrategicIndustry Trade Flows FinancialSustainability NAFTA Steel Strategies NAFTA • The steel industry is a strategic and progressive force. • Recent tight market conditions must be put into the context of long-term industry trends. • The NAFTA has resulted in greater openness of the N.A. steel market and has drawn the three industries and governments together for common purposes. • Non-NAFTA imports are diverse, and characterized by a propensity to injure. • The NAFTA steel industry proposes several NASTC opportunities.

4. The steel industry is a strategic and progressive force in the NAFTA region. Trade Flows FinancialSustainability StrategicIndustry NAFTA Steel Strategies NAFTA • Strategic industry • Economic/social contribution • Market/productivity growth • Labor efficiency • Investment/innovation • Environmental management

5. Steel is a strategic material for North American manufacturing. • It is a critical input in all major industrial activities. • ─ Construction • Infrastructure • Commercial/Industrial • Residential • ─ Automobile and auto parts • ─ Shipbuilding • ─ Electrical equipment • ─ Heavy machinery • ─ Appliance • ─ Oil and gas • It is also vital to national defense and homeland security including the steel that goes into our energy, transportation security and health and public safety infrastructures and our commercial, industrial and institutional complexes.

6. The NAFTA steel industry is significant to the three domestic economies in North America – and a strong steel industry is critical to a strong manufacturing base. • It directly employs 200,000 people. • It indirectly employs over 1 million people. • It provides a healthy, safe and environmentally responsible workplace. • It provides highly skilled jobs with above average pay. • It is a significant consumer of natural gas and electricity, and has demonstrated a commitment to energy conservation. • It is a strategic link to any successful effort to preserve and strengthen the manufacturing base, and directly impacts many other economic sectors, including the railroad/transportation industries.

7. The NAFTA industry has been successful in growing steel demand... Finished Steel Products (shipments + imports - exports)

8. ...and has improved its competitiveness by increasing productivity at a faster rate than the economy… Average Annual Increase in Productivity (1992-2002) 10.0% 8.0% 6.8% Steel highly efficient, outperforms other 6.0% sectors and economy Percentage 4.0% 3.2% 1.4% 2.0% 0.0% Canadian Manufacturing Steel Economy Source: Canadian Steel, CSPA (January 2004)

9. Steel Industry Labor Efficiency 40 35 30 25 man hours/MT through cold rolling 20 15 10 5 0 UK Iran Italy India USA Peru Egypt C.I.S. Chile Japan Spain China Poland France Canada Taiwan Brazil Finland Mexico Sweden Greece Turkey Austria Algeria Romania Ukraine Germany S. Korea N. Korea Thailand Slovakia Belgium Hungary Columbia Indonesia Bulgaria S. Africa Australia N. Zealand Venezuela Argentina Netherlands Saudi Arabia Czech Republic Source: World Steel Dynamics 2001 Cost Curve. …enhancing labor efficiency to world class levels…

10. … and investing more than $3 billion in consolidation and innovation... Industry Consolidation Steel Innovation • 60% of advanced high-strengthsteels for automobiles didn´t exist 5 years ago. • $44 million invested in UltraLight Steel Auto Body (ULSAB) initiatives. U. S. Steel: $1.05 billion ISG: $1.807 billion Nucor: $767 million Other: Ameristeel, Delaware Steel Capital

11. 18 16 14 12 1990 2001 ...the industry has also shown strong voluntary environmental performance improvement, in advance of environmental regulations. CO Reductions 2 20% reduction since 1990 – substantially better than Kyoto target 2 C0 tonnes Million Source: Canadian Steel, CSPA (January 2004)

12. The steel industry is a strategic and progressive force in the NAFTA region. • The industry has, and continues to develop, strong economic/social fundamentals. • The industry is succeeding in maintaining steel as the material of choice for North American manufacturers. • The industry remains critical to a strong NAFTA manufacturing base – including the automotive, construction and energy sectors.

13. NAFTA has resulted in greater openness of the North American steel market and has drawn the three industries and governments together for common purposes. StrategicIndustry Trade Flows NAFTA Steel Strategies NAFTA Sustainability • Significant growth in NAFTA steel and steel-related trade • Closer government/industry link on common challenges

14. Increased, Balanced and Flexible Trade Finished Steel Mill Products (million net tons) Million Net Tons (Thousands) 14 12 10 8 6 4 2 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Can to US US to Can Mex to US US to Mex Source: U.S. Bureau of Census, Statistics Canada, CANACERO Canada/Mexican trade = 2% of total The NAFTA has resulted in a significant increase in steel trade among NAFTA countries. NAFTA

15. Increasingly, steel users of various market segments and sizes are locating in two or more NAFTA countries. • Automotive • Ford, General Motors, Daimler-Chrysler, Honda, Toyota, Magna, Blue Bird Coach, Borg Warner, Veltri… • Service Centres • Samuel Son, Kenwal, Namasco, Russel Metals, Taylor Steel, ThyssenKrupp/Budd, Kasle, Nissho-Iwai… • Pipe and Tube • Copperweld, Bullmoose, NovaAmerican Steel, Maverick… • Wire and Wire Products • Michelin Tire, Lincoln Electric, Ivaco, Associated Spring… • General Manufacturing • General Electric, TYCO, Masonite, Stanley Works, Butler Manufacturing (Blue Scope)…

16. Also, there is a growing number of steel companies with facilities in more than one NAFTA country.

17. The NAFTA reinforces common challenges and opportunities. • Both industry and governments have recognized the benefits of close consultation and cooperative approaches. • North American Steel Council (NASC)/North American Steel Industry Coalition (NASIC) • NASTC • OECD • WTO • FTAA

18. Non-NAFTA imports are diverse, and characterized by a propensity to injure. StrategicIndustry Trade Flows FinancialSustainability NAFTA Steel Strategies NAFTA • Imports • Trade Cases

19. Imports into NAFTA Countries 2001 -- 2003 Million Net Tons 12 BRAZIL 10 GERMANY TURKEY 8 JAPAN KOREA 6 MEXICO 4 CANADA US 2 0 2001 2002 2003 us can mex us can mex us can mex The NAFTA steel market is the most open market in the world. Non-NAFTA originating imports represent a significant volume in the NAFTA region. Source: U.S. Bureau of Census, Statistics Canada, CANACERO

20. While Korea, Japan and Germany are the largest steel exporters into the NAFTA region, many other countries export their excess steel to North America. Source: U.S. Bureau of Census, Statistics Canada, CANACERO

21. NAFTA governments repeatedly have found that imports from various countries have injured the NAFTA steel industry. CURRENT NAFTA STEEL TRADE ORDERS - SOURCE COUNTRIES BRAZIL TAIWAN 6% 4% SOUTH AFRICA INDIA 7 4% 10 CASES 5% CASES 7 ROMANIA CASES 8 4% CASES 7 JAPAN CASES 7% CHINA 4% 7 CASES 11 CASES KOREA 6% 10 CASES 9 CASES RUSSIA 6% 9 CASES 79 CASES UKRAINE (26 COUNTRIES) 6% OTHER 48% Source: U.S., Canadian and Mexican Governments 164 total cases involving 36 countries

22. Non-NAFTA imports are diverse, and characterized by a propensity to injure. • The NAFTA steel industry supports fairly traded imports. • However, offshore dumped and subsidized imports lead to downward price movements and injury to the NAFTA market. • This injury negatively impacts access to capital for customer-driven investments and innovation.

23. Recent tight market conditions must be put into the context of long-term industry trends. Trade Flows FinancialSustainability NAFTA Steel Strategies StrategicIndustry NAFTA • Declining prices/return on equity (ROE) • Overcapacity and trade-distorting practices • China concerns

24. The NAFTA steel industry has been affected by a historical long-term decline in steel prices. Historic Volatility of Spot Prices for Ht-Rolled Steel Source: Purchasing Magazine

25. Steel Industry Return on Equity 20 15 10 Canadian Companies Return on Equity 5 US Companies 0 1998 1999 2000 2001 2002 2003 -5 -10 YEAR This long-term decline in steel prices has resulted in eroded ROE… Source: DBRS

26. ...and the inability to raise capital, in a very capital-intensive industry. Steel Industry Capital Expenditures 3000 2500 Canadian Companies 2000 US Companies 1500 Capex ($US MM) 1000 Mexican Companies 500 0 1998 1999 2000 2001 2002 2003 Year Source: DBRS, Mexican industry

27. Long-term steel price declines are a result of global steel overcapacity, subsidies and other trade-distorting practices that make steel trade an area of persistent conflict. Global Excess Capacity 1200 Capacity 1000 Excess Capacity 800 Millions of Metric Tons 600 400 200 Demand Source: IISI 2003 0 50 54 58 62 66 70 74 78 82 86 90 94 98 03e Year

28. The root causes of the last steel crisis have not been resolved; enormous foreign steel capacity additions are planned or underway. • Large steel-producing and exporting countries outside the NAFTA region are currently engaged in significant steel capacity expansions, much of this with foreign government support. • China will increase capacity 62% in 2005 vs. 2002, climbing from 193 MT to 312 MT/year; capacity is expected to reach 385 MT by 2010 • India plans to produce 100 MT/year by 2020 (vs. current 34 MT) • Russia plans to build 10 new mini-mills over the next decade – they will produce at least 20 MT/year; two 1 MT/year plants will be online by the end of 2004 • Brazil plans to increase capacity by 30% by the end of 2008 • Indonesia is building a new hot strip mill to produce 2.2-2.4 MT/year • Korea is building new galvanizing lines, which will produce 1 MT/year • Along with subsidized steel capacity expansions abroad, subsidized foreign capacity growth in steel-containing goods contributes to the “disappearing North American customer.”

29. Currently, strong demand in China is mitigating and masking the effects of global overcapacity; it is driving world steel market conditions. Global China 29% Global 300 1200 Consumption 250 1000 Capacity Excess Capacity CAGR*: 11.1% 200 800 12% Global 600 150 400 100 CAGR*: 9.5% 200 50 China Demand Production 0 0 50 54 58 62 66 70 74 78 82 86 90 94 98 03e 92 93 94 95 96 97 98 99 00 01 02 03e Source: IISI 2003 Source: WSD, Core Report DDDD, “China’s Unstoppable Steel Industry” Aug 2003 *CAGR=China annual growth rate

30. 2003 % Share Global Demand 2003 % Share Global Growth Steel 27 90 Iron ore 34 66 Aluminium 19 51 Primary nickel 11 44 Copper 20 121 China, now the second largest economy* in the world, has enough market power to greatly affect global markets for steel, other metals and key raw materials. *At purchasing power parity exchange rates Source: CRU

31. China’s growth has contributed to unprecedented increases in the prices of main steel inputs… Iron Ore(dlls/ton) Pig Iron(dlls/ton) Coke(dlls/ton) 300 400 42 350 40 260 300 38 220 250 36 180 200 34 150 140 32 100 30 100 50 28 99 00 01 02 03 99 00 01 02 03 04 04 99 00 01 02 03 04 Tex Report: CVRD FOB Brazil WSD: FOB Brazil WSD: Export FOB China HM#1 USA(dlls/ton) Slab(dlls/ton) Ocean Freight(dlls/ton) 60 480 250 440 55 200 400 50 360 150 45 320 280 40 100 240 35 200 50 30 160 0 120 25 99 00 01 02 03 04 99 00 01 02 03 04 99 00 01 02 03 04 American Metal Market CRU: Export FOB Brazil WSD: China – USA

32. Steel Inputs vs. HR Prices (January 1999 = 100) 500 450 400 Coke 350 300 250 HM#1 Scrap(USA) 200 HR (USA) 150 Iron Ore 100 50 0 99 00 01 02 03 04 Source: AMM (HM#1), WSD (Iron Ore, Coke), CRU (HR Prices) …and steel price increases. Increasing prices do not necessarily translate fully into increased profit margins.

33. Steel demand in China continues to rise strongly, but the annual percent rate of change is declining… STEEL DEMAND RATE OF CHANGE (Year to Year) 30 25 20 China % 15 Rest of World World 10 5 0 2000 2001 2002 2003 2004e 2005e YEAR Source: IISI Spring 2004

34. …when Chinese demand softens, China’s exports will increase and major exporting countries will redirect their products to North America, as in the past...

35. …in a highly volatile world market, any slowing in China would negatively impact the NAFTA market. HR Steel Prices Remain Highly Volatile* *According to many outside analysts (e.g., JP Morgan, 4/23/04), world steel prices are likely to recede and margin pressures are likely to increase on global steel producers over the second half of 2004 due to a variety of factors, including a possible slowing of the Chinese economy.

36. Recent tight market conditions must be put into the context of long-term industry trends. • NAFTA and world steel markets remain highly volatile. • Global steel industry structural imbalances and worldwide steel trade-distorting practices persist. • No one knows for certain what will happen and when, but negative impacts from China’s unstable financial system, provincial/central government frictions and irrational commercial behavior – coupled with its size – are a cause of serious concern.

37. The NAFTA steel industry proposes several NASTC opportunities. FinancialSustainability NAFTA Steel Strategies StrategicIndustry Trade Flows NAFTA • Intra-NAFTA • External trade • Multilateral fora • Competitiveness

38. Intra-NAFTA trade opportunities • Streamline import permits • Currently import permits must be taken out on each individual shipment (20 tons/permit) vs. offshore boatloads (15,000 tons/permit). • Recommend that governments implement a WTO-consistent weekly summary permit for NAFTA partners. • Benefits: • Reduction in trade administrative costs for NAFTA industry and governments.

39. Intra-NAFTA trade opportunities (cont’d) • Explore Harmonized System (HS) code consistency • Currently all countries have same HS codes at 6-digit level, but differ at 7-10 digit level. • Recommend that governments explore extending the common codes to at least the 8-digit level, assuming we can maintain the historical continuity of worldwide data and the integrity of bilateral and regional trade agreements that rely on certain 8-digit numbers for specific rules of origin. • Benefits: • Consistent NAFTA statistics. • Same import/export categories • Facilitation of NAFTA-wide import reporting • Reduced administration costs of intra-company shipments across NAFTA borders.

40. Intra-NAFTA trade opportunities (cont’d) • Load limit improvements • Currently there are differing maximum load limits from country to country and state to state; this requires loads to be split during delivery, adding costs • Recommend standardized higher load limits • Benefits • Reduced transportation and administrative costs.

41. External trade opportunities • Develop common and transparent, web-based NAFTA-wide reporting on imports, including import prices (using import permits/data). • Consult with foreign governments to address trade-distorting practices at an early stage. • Work together to prevent injurious trade diversion into the NAFTA market from other countries’ restrictive steel trade agreements. • Oppose foreign government intervention in raw material markets.

42. External trade opportunities (cont’d) • Oppose government financing of projects that increase world steel overcapacity. • NAFTA governments, non-NAFTA governments and quasi-government agencies (e.g., IMF) should not be lending money for new steel capacity

43. One common NAFTA approach to international trade negotiations • OECD • Coordinate positions to (1) ensure positive result from steel subsidies agreement (SSA) negotiation and (2) maintain OECD Steel Committee after SSA negotiation ends. • WTO • Oppose strongly trade law weakening and support fundamental reform of dispute settlement (e.g., include trade counsel in proceedings). • FTAA • Oppose strongly trade law weakening.

44. One common NAFTA approach to international trade negotiations (cont’d) • China • Ensure that China is subject to WTO-consistent trade laws. • Encourage China to revalue and adopt a floating currency. • Engage industry in a cooperative assessment of the steel industry in China and ensure that Chinese market-distorting practices are eliminated before according “market economy” status to China in AD cases. • Work with industry to monitor, anticipate and mitigate the negative impacts from an economic slowdown in China.

45. The NAFTA steel industry wants to work together with NAFTA governments to develop pro-competitive policies to promote the health and financial stability of the North American steel sector. • Manufacturing • Implement and coordinate policies, where appropriate, to preserve and strengthen the manufacturing base. • Energy • Ensure reliable and cost-competitive energy supplies. • Raw Materials • Ensure a free flow of raw materials. • Access to capital • Promote policies to improve access. • Customs • Explore opportunities to enhance customs enforcement cooperation.

46. The NAFTA steel industry looks forward working with NAFTA governments in developing an “opportunities-oriented” action plan. Trade Flows FinancialSustainability StrategicIndustry NAFTA Steel Strategies NAFTA • The steel industry is a strategic and progressive force. • Recent tight market conditions must be put into the context of long-term industry trends. • The NAFTA has resulted in greater openness of the N.A. steel market and has drawn the three industries and governments together for common purposes. • Non-NAFTA imports are diverse, and characterized by a propensity to injure. • The NAFTA steel industry proposes several NASTC opportunities.

47. NAFTA Steel Strategies An Industry-Government Partnership to Achieve a Healthy and Financially Stable NAFTA Steel-Producing Industry • Promoting Distortion- • Free Markets: • Ensure positive OECD result. • Maintain strong, effective trade laws. • Develop an effective NAFTA-wide import monitoring, permitting and reporting system, including joint analysis/identification of distortions. • Use joint NAFTA government “jaw-boning” at first sign of import surges. • Prevent injurious diversion from interventions by non-NAFTA governments. • Support market forces – no currency manipulation, no subsidies, no export controls. • Facilitating NAFTA • Steel Trade: • Streamline import permits. • Explore HS code consistency. • Identify/define “integration” goals. • Improving Competitiveness and Creating Strong Fundamentals: • Access to capital. • Energy. • Consolidation and restructuring. • R&D – innovation. • Market development. • Customer base -- manufacturing. Close Consultation and Common NAFTA Approach to Multilateral Trade Negotiations, Where Possible — OECD, WTO, FTAA