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Drivers in the North American Steel Industry

Drivers in the North American Steel Industry. Thomas A. Danjczek President Steel Manufacturers Association June 27, 2012 São Paulo, Brazil. Brazilian Steel Conference- 2012. Outline. About th e SMA “Big Economic Picture” Steel “Picture” Drivers in North America’s Steel Industry

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Drivers in the North American Steel Industry

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  1. Drivers in the North American Steel Industry Thomas A. Danjczek President Steel Manufacturers Association June 27, 2012 São Paulo, Brazil

  2. Brazilian Steel Conference- 2012 Outline • About the SMA • “Big Economic Picture” • Steel “Picture” • Drivers in North America’s Steel Industry • Cooperation within the Americas • Final Thoughts

  3. Brazilian Steel Conference- 2012 About the SMA SMA -Composed of 35 North American electric arc furnace (“EAF”) steel producing Member Companies, and 123 Associate Member steel industry suppliers -Today, roughly two-thirds of North American steel production comes from the scrap-based EAF process, up from just 10% in the early 1970s -SMA Members account for approximately 80% of U.S. domestic steel capacity

  4. Brazilian Steel Conference- 2012 U.S., Canada, Mexico Real GDP Growth, Seasonally Adjusted at Annual Rate Mexico US Near Stagnation Source(s): U.S. Bureau of Economic Analysis, MAPI Canada 4

  5. Brazilian Steel Conference- 2012 U.S. Manufacturing Industrial Production Rebounding Source(s): Federal Reserve Board, MAPI

  6. Brazilian Steel Conference- 2012 Stronger Lately The U.S. Dollar Source(s): Federal Reserve Board, MAPI

  7. Brazilian Steel Conference- 2012 Big Picture U.S. Will it continue? NAM, May 2012

  8. Big Gap Brazilian Steel Conference- 2012 US GOOds $620 Billion Annual Deficit projected in 2012 is most significant barrier to U.S. economic recovery

  9. Changes Impacting Steel Brazilian Steel Conference- 2012 Skilled Jobs Shortages China Deeper Recession Foreign Ownership Transportation Costs Variable Cost Control Safety Consolidations Ore Availability Scrap Availability Customer Requirements Energy Costs High Unemployment Environmental Regulations Currency Labor Intensity Engineers State-Owned Enterprises Inventory Levels Other Factors…

  10. NAFTA demand remains below pre-recession levels. Following some weakening of demand in the 2H11, 1Q12 demand saw a modest rebound 2% higher than 1Q11. Still, 2012 demand will likely be 10-15 million MT lower than before the financial crisis. NAFTA steel production increased by 6% in 1Q ’12 to the highest level since 2008, but still well below peak. The utilization rate was 77% in 1Q ’12, which is at or slightly above most other world’s regions. Source: AISI, Statistics Canada, Canacero

  11. Despite Gains in Apparent Finished Steel Use (AFSU),Forecast NAFTA AFSU Still 13% Below Pre-Recession Average Spring 2012 Outlook* For NAFTA Region From 2004 to 2007 (last 4 full years before the economic crisis began), AFSU in the NAFTA region averaged 146 million MT/year. Should the outlook for 2013 be achieved, AFSU next year would still be 8% below that average. Apparent Finished Steel Use (ASU) * This was the outlook as of March 2012. The softening of NAFTA and world economies, together with higher than anticipated steel import levels, suggest more modest prospects for the NAFTA steel industry for the remainder of 2012. Source: worldsteel

  12. Brazilian Steel Conference- 2012 US Raw Steel Capacity Utilization was 75% in 2011, 79% in First 5 Months of 2012

  13. Brazilian Steel Conference- 2012 Approximately 2/3 of US Steel Production

  14. Brazilian Steel Conference- 2012 U.S .Steel Imports • Steel imports are surging into the U.S. market • U.S. steel imports increased significantly in 2011 and continued to increase in YTD 2012 (January-April), jumping by almost 30% from the same period in 2011 especially in slabs, plate and corrosion. • Particular areas of concern include • Turkey: From January-March 2012, rebar imports from Turkey surged by 365% YOY • China: While direct steel imports from China are increasing, indirect imports are increasing even more • The import surge is largely a result of government subsidies, irrational capacity expansion, and other anti-competitive behavior in certain foreign countries • Other countries are also increasing steel capacity without regard for market forces or comparative advantage

  15. Brazilian Steel Conference- 2012 Finished steel demand drivers in US Actual Fitted • Three variables drive demand: • NA auto build • Non-residential construction • Appliance shipments • R² = 85% Source: First River

  16. Brazilian Steel Conference- 2012 U.S. finished steel demand forecast Forecast Actual ADC Assumes no second recession Source: CSM, FW Dodge, AHAM, First River

  17. Auto build & non-res construction are recovering,but not to previous peak Brazilian Steel Conference- 2012 NA Auto Build (Million Units) Non-Res Construction (Million Sq. Feet) Forecast Forecast Non-Res up 26% YTD 2012 over 2011 Source: CSM Worldwide, FW Dodge

  18. Brazilian Steel Conference- 2012 Lead times Excellent Indicator Source: Steel Market Update Maybe Today 2.5 Weeks

  19. Comments on Current N.A. Steel Industry Brazilian Steel Conference- 2012 • Underlying Weak Economy, with less than 3% GDP and estimates downward. • Recovery underway, but very slow – Fragile • North American steel market under pressure with unused capacity • Increased import percentages YOY, Impact of currency changes • Not normal cycle of recession, overcapacity; new supply coming on • Relative strong demand in auto; construction lagging • Raw material costs, energy, and variable cost controls are major drivers • Scrap prices down $60 early June • Economic growth turning point is always two quarters away • Market cap values at historic lows – Opportunities to buy?

  20. Brazilian Steel Conference- 2012 Scrap Raw Material Cost and Availability is #1 Issue for NAFTA Producers • Many countries continue to impose a variety of restrictions on exports of vital raw materials including scrap: • Export prohibitions • Export duties • Export quotas • Other measures • Trade-distorting restrictions on exports of raw materials • Give domestic producers in the exporting country an unfair advantage • Increase worldwide costs of production • Place a heavy burden on steel industries in developing countries that do not have substantial iron ore reserves or steel scrap supplies • Three Challenges • Export Restraints • EAF Capacity Expansion • Long Lead Time for Recycling Network

  21. Scrap Brazilian Steel Conference- 2012 • Scrap Volatility Continues • Global Demand and the relative value of the US dollar to other currencies determine the volume of exported material. • Ferrous scrap exports exceeded 24 million tons in 2011 • Export restrictions on ferrous scrap have been enacted by 26 countries. • With global steel output on the rise, prices for ferrous scrap in the US have decoupled from US mill demand. • Steel production should be based on comparative advantage (raw materials, energy, capital). • Need reciprocity

  22. Brazilian Steel Conference- 2012 • Energy Abundant Domestic Natural Gas is a Game Changer in U.S.

  23. Gas Will Remain the Dominant Fuel For Electric Generation Brazilian Steel Conference- 2012 • Energy • Coal Technologies are Struggling • Coal Gasification (Duke) • Carbon Capture and Storage (AEP) • No Supply Technologies are Remotely Competitive with Gas-Fired Generation • Nuclear, Wind and Solar are Heavily Dependent on Federal Subsidies • Shift in Clean Energy Mandates & Infrastructure Costs from Federal Budget to Industrial Utility Ratepayer

  24. Brazilian Steel Conference- 2012 • Cooperation within the Americas • On May 22, 2012, Jorge Gerdau Johannpeter, Chairman of Gerdau, received the Americas Society’s outstanding leadership award. During his acceptance he communicated four vision points: • Need for partnerships/cooperation/collaboration among the players in the Americas • Need to significantly invest in infrastructure within the Americas • Need for meaningful tax reform for improved competitiveness within the Americas • Need for educational initiative for a trained workplace We agree!

  25. Brazilian Steel Conference- 2012 Final Thoughts • Volatile times continue, Maybe between recessions • U.S. is in a traffic jam, moving slightly forward, but don’t know other consequences. Don’t look to Washington, DC for help. Gridlock continues • Uncertainty will continue especially in U.S. industry until economic fundamentals are in equilibrium. Limited visibility… • Early June Troubling • Current status of scrap restrictions is unsustainable • Cooperation within Americas is critically important • Reasons for optimismin steel in North America: • Favorable gains with reemerging manufacturing base • Scrap-based, 75% of cost – local supply • Low cost on global basis (energy is positive, labor less than 10%, others have higher transportation costs) • Relatively strong market and resiliency • Better company balance sheets

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