Session 6 – China the Reality: Currency, Trade, Investment & Steel

A U.S. Minimill Perspective

Thomas A. Danjczek, PresidentSteel Manufacturers AssociationMarch 11, 2008

SBB Steel Markets North America 2008

• The Steel Manufacturers Association (SMA)– 36 North American companies:

30 U.S., 4 Canadian, and 2 Mexican– 125 Associate members:– Suppliers of goods and services to the steel industry– Operate 125 steel recycling plants in North America– Electric Arc Furnace (EAF) steelmakers using recycled steel– EAF steel producers accounted for over 60% of U.S. steel production in

2007– SMA represents over 70% of all U.S. steel production, with similar

numbers in Canada and Mexico

SBB – A U.S. Minimill Perspective SMA

SBB – A U.S. Minimill Perspective Similarities to Last Year

Similar:

-U.S. dollar exchange rate (China still a dirty float)

-China’s steel growth and rising exports

-China’s finished goods vs. raw materials

-China’s subsidies

-China’s compliance (environmental, emissions, arbitrary VAT’s, quotas)

-Consolidations (access to capital, industry sustainability)

-No U.S. policy actions

-Energy and transportation costs

-China, China, China (imbalances cannot go on forever)

In March 2007, I spoke to SBB – “Times they are a’changing”

SBB – A U.S. Minimill Perspective Different & Unknown

Different

-Recession impact?

-Raw material price squeeze

-Weaker dollar

-Lower steel imports

-China’s steel exports to E.U.

Unknown

-JCCT Dialogue

-E.U. trade cases

-Impact of sovereign wealth funds

-Changing freight rates

-VAT rebate changes

-China’s rate of steel closures

Steel Consolidating, But Still Fragmented

Top 15 Global Steel Producers - September 2007Based on 2006 Production: 1240 Million MT

Baosteel (26 mt)

Tata (incl. Corus) (24 mt)

USS (incl. Stelco) (26 mt)

POSCO (31 mt)

JFE (32 mt)

Anben (23 mt)

Shandong (22 mt)

Nucor (20 mt)

Wuhan (19 mt)

Tangshan (19 mt)

Evraz (19 mt)

Riva (18 mt)

Severstal (18 mt)

Nippon (34 mt)

Rest of World 64%

(794 mt)Arcelor Mittal - 9.5%

(118 mt)

Automotive OEM Global Market Share(Based on 2006 Production)

Top 1068%

All Others32%

Iron Ore Supplier Market Share

Top 375%

All Others25%

TOP 15 Represent 36% of Global Production

Source: IISB

SBB – A U.S. Minimill Perspective

New Capacity Outpaces Consumption Growth

Capacity – Multiple Sources; Nucor Analysis

Demand – IISI projections thru ’08; 6% increase “09 – ‘10

EU-251%

India23%

NAFTA2%Other Asia

15%

Other Europe3%

CIS6%

Africa & Middle East5%

Central & South America

12%

China33%

Announced Steel Capacity Increases By Region

(2006 – 2012)

Announced Steel Capacity Vs. Projected Consumption 2007 – 2010

(Million Metric Tonnes)

Compound Annual Growth Rates:Capacity: 6.83% Demand: 4.65%

SBB – A U.S. Minimill Perspective

China: World’s No. 1 Is Government Directed

Privately OwnedGovernment Owned or

Controlled

191 million tonnes

19 million tonnes

Source: Money for Metal (2007)

Top 20 Chinese Steel Producers:Government Control Vs. Private Ownership

Top 20 Capacity: 210 Million Tons

-

100,000

200,000

300,000

400,000

500,000

600,000

China Asia other thanChina

European Union(25)

North America C.I.S. (6) South America Other Europe Africa Middle East Oceania

Metr

ic t

on

s p

rod

uced

(in

'000s)

Source: World crude production through 9/07 annualized; IISI

2007 Projected Global Production

Australian Government Predicting China Will Reach 1B Tons by 2015,

CISA says 2020.

SBB – A U.S. Minimill Perspective

China Is the World’s Largest Exporter

China Finished Steel

Exports By Destination

2005 – 2007 (000 MT)

Country / Region 2005 2006 2007E

EU 25/27 1,367 7,393 12,650

S. Korea 5,526 8,817 11,844

NAFTA 3,092 7,047 5,970

Iran 185 5,180 3,096

Vietnam 865 1,721 2,994

United Arab Emirates 211 885 2,773

India 417 1,574 2,447

Others 8,861 15,052 25,848

TOTAL 20,524 43,007 67,622

Source: CISA, 2007 Data Annualized

SBB – A U.S. Minimill Perspective

SBB – A U.S. Minimill Perspective China Comments

-China has NOT become the world’s largest steel producer by accident, or by operation of free markets, or comparative advantage

-China is NOT a low-cost steel producer

-China has reached its position through a combination of subsidies, mandates, and planned intervention

-In finished goods containing steel, China’s exports are expanding by approximately 30 percent per year

-Chinese steel market is still reliant on exports to absorb overproduction

-Chinese steel industry is overbuilt and underdemolished

SBB – A U.S. Minimill Perspective China’s Trade Surplus

Year China’s Trade Surplus

2001 $22 billion(year China joined WTO)

2006 $177 billion

2007 $262 billion (up 47.7%)

The U.S. has lost 3.3 million manufacturing jobs The U.S. has lost 3.3 million manufacturing jobs since 2000… imbalances cannot go on forever.since 2000… imbalances cannot go on forever.

SBB – A U.S. Minimill Perspective Impact of AD/CVD

Percent of the value of Chinese imports covered by US

AD/CVD duties?

2004 – 0.13%

2006 – 0.10%

What protectionism?

International Trade Commission, based on U.S. DOC and Customs official statistics

SBB – A U.S. Minimill Perspective Competitiveness

U.S. - China Steel Future Competitiveness Drivers

Driver U.S. China Comment1. Metallics •Weak $ •1/2 imported •Technological

(Availability/Price) •Scrap exports •Freight developments

+ to U.S.

2. Energy •Gas/electricity + to China •Climate change

(Availability/Price) constraints policy

•Limited nuclear

3. Labor •Lack of technical + to China

•Health care costs

4. Transportation + to U.S.

5. Trade + to China •Growth of steel-

intensive goods

6. Environment + to U.S. •Enforcement?

SBB – A U.S. Minimill Perspective Resolving Tensions

1. Investments

2. Transparency

3. Currency

4. Exchange Information

5. Environment

6. Savings

A few suggestions…

-Increase cross-foreign ownership - remove artificial restraints, i.e. 38%; reduce subsidies

-(Obvious) - i.e. VAT adjustments; U.S. to use CVD against NME’s; eliminate market interventions (market will correct itself – but will rigged markets correct?)

-Mutual assured destruction is not acceptable

-“We’ll send you lawyers, you send us engineers”; JCCT is worthwhile

-Improve enforcement; expedite shutdown rate

-China’s saving rates maybe too high, U.S. needs to save more

SBB – A U.S. Minimill Perspective Conclusions

-Trade distortion still a problem

-Consolidations helping, but overcapacity still a risk

-Finished goods containing steel are a major concern

-China, China, China… everything else is still only an embellishment

-Unknowns (recession, imports, interest rates, costs)

-Resolve tensions by investments, transparency, currency correction, etc.

-Still reasons for meaningful optimism, due to North American steel industry resiliency; North American steel facilities, for the most part, are technologically advanced, cost competitive, environmentally acceptable, and are a key component of the North American infrastructure.