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Washington’s Impact on Steel

Concrete Reinforcing Steel Institute Fall Business Meeting, 2004. Washington’s Impact on Steel. Thomas A. Danjczek, President Steel Manufacturers Association November 2, 2004. SMA Changes August 2003 Scrap Impact World Steel Production China, China, China… Key Statistics

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Washington’s Impact on Steel

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  1. Concrete Reinforcing Steel Institute Fall Business Meeting, 2004 Washington’s Impact on Steel Thomas A. Danjczek, President Steel Manufacturers Association November 2, 2004

  2. SMA Changes August 2003 Scrap Impact World Steel Production China, China, China… Key Statistics Steel Production SMA Mission Lessons Learned Currency Other Government Impacts Exchange Rates Value of the Dollar Scrap Imports/Exports US Overhead Costs TEA 21 Lunacy Steel Production Costs Key Issues Energy & Raw Material Costs Asset Values Bankruptcy/Restarts Conclusion Washington’s Impact on Steel Concrete Reinforcing Steel InstituteFall Business Meeting, 2004

  3. Concrete Reinforcing Steel Institute Fall Business Meeting, 2004 • The Steel Manufacturers Association (SMA) • 35 North American companies: • 31 U.S., 2 Canadian, and 2 Mexican • 107 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 • Mini-mill Electric Arc Furnace (EAF) producers

  4. Concrete Reinforcing Steel Institute Fall Business Meeting, 2004 • Production capability • SMA represents over half of U.S. steel production • 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 50% in 2002 & 2003, and anticipated to be 60% by 2010

  5. Evaluate Washington’s Impact? Concrete Reinforcing Steel Institute Fall Business Meeting, 2004 Capital Constraints Legacy Costs Steel Demand Weakening Consolidations Public Policy Pricing Volatility 201 Tariffs/ Exclusions Bankruptcies Increasing Imports Mini-mill Industry Condition Semi-Finished Imports Exchange Rate Shifts N.A. Economy Perennial Problems Plant Closures/ Restarts Operating Costs Benefits & Energy US PBGC ISG’s Labor Contract

  6. Concrete Reinforcing Steel InstituteFall Business Meeting, 2004 Up $130 since June 2004!

  7. ANNUAL WORLD STEEL PRODUCTION OUTLOOKWorld steel output looks set to rise 5% or 50 MT MT in 2004, after gains of 62 MT and 53 MT in 2003 and 2002, respectively, largely on the strength of China coupled with the recent onset of rest-of-world economic recovery. China steel production rose by 20%. Increases continue… Forecast… World Steel Production Forecast Forecast (MT) 2005: 1,075.0 2004: 1,015.0 2003: 964.7 2002: 903.1 2001: 850.2 2000: 847.6 1999: 789.0 EAF % (Line, Right Scale)

  8. Concrete Reinforcing Steel Institute Fall Business Meeting, 2004 China China China… • A few notes on China from 2003, 2004 and forward: • Consumed ≈ 25% of world coke supply in ’03 • Coke production ramping up in ’04 and ‘05 • Consumed ≈ 25% of world iron ore supply in ’03 • Iron ore production ramping up in ’04 and ’05 • Consumed ≈ 20% of world scrap supply in ‘03 • Consumed ≈ 240M mtons of steel in ‘03 • Produced ≈ 220M mtons of steel last year (est. 240M mtons ’04) • Consumed ≈ 40% of world concrete supply • VW will produce and sell 150M cars in China this year • GM will invest $6B in China by 2006 (rival VW as #1 supplier) • Average income / year $1,200 US (≈ $5,000 for steelmakers)

  9. CHINA STEEL PRODUCTIONChina produced 220 MT of crude steel in 2003 – double the next largest producer Japan at 110.5 MT and 2.4 times the U.S. (92.2 MT, shown) – and will produce as much as 275 MT, 350 MT, and 425 MT by 2005, 2010, and 2015, respectively. China United States Courtesy – Metal Strategies

  10. SMA Study Mission to China – August 2004 Concrete Reinforcing Steel InstituteFall Business Meeting, 2004 Team Nine member steel company representatives (3 presidents; 3 V.P. – operations; 3 experts - melting, rolling & engineering) Purpose Gain First Hand Knowledge in mills & mill builders Major Concern Given high degree of Chinese Government subsidies provided, loss of US steel customer base Key Question When will capacity & production exceed domestic demands

  11. Lessons Learned Concrete Reinforcing Steel InstituteFall Business Meeting, 2004 Government - Control capital through state banks - Control growth through land availability - Control output through electrical power and planning assets - Steel ownership – 90% SUBSIDIZED! - Government shutting down less efficient operation measured by energy consumption & environmental pollution Infrastructure - Massive construction – Vacant office space? - Significant power outages – building nuclear plants - Organized approach to Growth - Water transportation is a major asset Quality - Qualified personnel with enthusiasm and pride - Observed both world class & marginal facilities

  12. Lessons Learned Concrete Reinforcing Steel InstituteFall Business Meeting, 2004 Cost - Capital construction est. @ 40% of US costs - Manpower est. a magnitude 10 to 1 vs. US (Objective is to employ people) - Power cost similar to US @ 6¢/KwH except little difference between peak – non-peak (2¢) Scrap - 40% tariffs on scrap exports - China est. to import 10 million tons of scrap in 2004 Miscellaneous - Rebar usage disproportionately high - Limited personnel safety procedures - Huge automotive growth - Difficult to understand success of private steel facilities - 80% of exports from Coastal zone - Duck tongue tastes like pencil erasers!

  13. Concrete Reinforcing Steel InstituteFall Business Meeting, 2004 SMA Mission # 2 • Next Mission – November 5 – 13, 2004 • Objectives • Observe First-hand Current Chinese Market • Conditions & Developments • Interact Directly with Government & Association • Chinese Steel Industry • Build on First Mission with Goal of Improved • Strategic Understanding of Long-Term Impact to • US Industry

  14. Courtesy – IMF

  15. Courtesy – IMF

  16. Courtesy – IMF

  17. EXCHANGE RATES – INDEXThe real trade-weighted US$ index for major currencies has dropped 22% from the recent 2-’02 peak (115.8) and 30% from the all-time record high in 1-‘85 (124.9), but was still up 10% from the 7-’95 record low (80.4). US$ Real Trade-Weighted Index Data through April 2004 Broad Currency Group Major Currencies Courtesy – Metal Strategies

  18. VALUE OF THE U.S. DOLLARScrap prices are inversely related to the dollar Scrap Price Dollar Index Source: AMM, Federal Reserve Courtesy – Metal Strategies

  19. VALUE OF THE U.S. DOLLARThe strong relationship between steel imports and the dollar is even more clear when a 12-month moving average is used. Finished Steel Imports (12-Month Moving Avg) Dollar Index Source: AISI, Federal Reserve Courtesy – Metal Strategies

  20. U.S. SCRAP CONSUMPTION AND EXPORTSDemand for U.S. scrap increased by 3 MT in 2003, driven by a 15% surge in exports and a slight gain in domestic demand (EAF and BOF production down 3% and up 1%, respectively) Courtesy – Metal Strategies

  21. RUSSIA AND UKRAINE SCRAP EXPORTSPartial export bans, restrictions and duties designed to protect local steelmakers have restricted the flow of exports to the world market Courtesy – Metal Strategies

  22. Concrete Reinforcing Steel Institute Fall Business Meeting, 2004 • From MAPI’s Study, “How Structural Costs Imposed on US Manufacturers Harm Workers and Threaten Competitiveness.” • External overhead costs from taxes, health care, pension costs, • tort litigation add 22% to US unit labor costs ($5/hours)

  23. Concrete Reinforcing Steel Institute Fall Business Meeting, 2004 • Needs: • Reduce Corporate Tax Burden • Re-do Treatment of Foreign Source Revenue • Reduce Health Care Burden by Consumer Responsibility • Reform Pension Plan Funding Rules • Undertake Serious Legal Reform by Curtailing Frivolous • Law Suits, Placing Large Class Actions in Federal Court, • and Negotiating Legitimate Asbestos Claims

  24. Concrete Reinforcing Steel Institute Fall Business Meeting, 2004 2005 Transportation Spending Bill • TEA 21 NOT Reauthorized • Interim Stop Gap Approval at Current Rate • Senate Passed $318 Billion, plus (over 6 years) • House Passed $284 Billion (over 6 years) • President will veto above $256 Billion • Probably will be Rolled into an Omnibus Appropriations Bill • NUTZ!!! (Lunacy)

  25. Concrete Reinforcing Steel Institute Fall Business Meeting, 2004 US Steel Production Costs Summary of Key Issues • Relative operating costs in the U.S. steel industry have changed dramatically over the past 12 months: • First with the introduction of the ISG-style restructuring which took out $40-$50 per of hot band costs as a result of labor contract changes, and a further $25-$50 per ton with the removal of past legacy costs. • Secondly, with the surge in metallics and energy prices and this development’s far greater relative impact on sheet minimills until the successful implementation of surcharges. • Third, ore, coal, and coke prices have risen significantly.

  26. Concrete Reinforcing Steel Institute Fall Business Meeting, 2004 Steel Energy and Raw Material Costs Scrap now around $400

  27. Concrete Reinforcing Steel Institute Fall Business Meeting, 2004 Steel Energy and Raw Material Costs (cont.) In the 28 months from January 2002 to May 2004, raw material and energy input costs for U.S. steelmakers have increased dramatically. +110% +450% +65% +82% +155% Courtesy – Metal Strategies

  28. RECENT U.S. STEEL ASSET TRANSACTION VALUESAcquisition range has been $60 to $90/ton shipped for shuttered operations and $160 to $260/ton for ongoing businesses. Ongoing Businesses Liquidated Companies CSN disclosed in October 2003 that its acquisition price for Heartland was actually $175 million instead of the previously-report $69 million. Acquisition prices include all assumed liabilities. Courtesy – Metal Strategies

  29. OCEAN FREIGHT RATESOcean freight rates increased 4.5-fold from $10,000/day to $45,000/day between early-2003 and early-2004 and have recently declined by about $5 to $10 pr tonne since late-March. Courtesy – Metal Strategies

  30. Technical Read on Crude Oil Prices Courtesy – JP Morgan

  31. Technical Read on Natural Gas Prices Courtesy – JP Morgan

  32. Concrete Reinforcing Steel Institute Fall Business Meeting, 2004 Conclusion • Don’t count on Washington for help! i.e. TEA 21 • Uncertainty – Cycle has Changed (Shorter Term & Greater Peaks & Valleys) • Revenue vs. Costs – Not the Same Business Model • CHINA, CHINA, CHINA… • Bankruptcy Laws Unfair to Competitors • Investments – Earn Cost of Capital • Mini-Mills Must Compete in the World, as it is, and We Can! • Meaningful Optimism with Good Long Term Consumption, Relative Value, and Excellent Recyclability for Steel

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