Steel – A Year Later

Thomas A. Danjczek, PresidentSteel Manufacturers AssociationJune 27, 2005

American Boiler Manufacturers AssociationAnnual Meeting 2005

Steel – A Year Later

I. SMA

II. Review 2004 Presentation Highlights/Conclusions

III. 2005

• World Steel Production/Operating Rate

• China

• Scrap, Ore, Steel Prices

• Consolidations

IV. Expert Views

V. Conclusion

AMBA – Annual Meeting 2005

AMBA – Annual Meeting 2005

•The Steel Manufacturers Association (SMA)

–38 North American companies:

31 U.S., 5 Canadian, and 2 Mexican

–103 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

AMBA – Annual Meeting 2005

•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 53% in 2004, and anticipated to be 60% by 2010

Last Year

Current Drivers Impacting Steel Competitiveness

AMBA – Annual Meeting June 28, 2004

•SMAI. Trade

•201 Real World Impact

•World Steel Production

•China, China, China…

II. Steel Production Costs

•Key Issues

•Asset Values

•Exchange Rates

•Steel Imports – Value of U.S. $

•Bankruptcy/Restarts

III. Other Costs

•Restrictive Scrap Exports

•Freights

•Coke

•Energy

IV. Market

•Overview

•Public Works Construction

V. Conclusion

Courtesy – IMF

Some things are the same…

Courtesy – IMF

Courtesy – IMF

CHINA CONCLUSIONS Currency Manipulations

For eight and one-half years, China has maintained a fixed exchange rate of 8.3 yuan to the dollar. China has printed any amount of yuan necessary to purchase dollars to maintain a fixed artificial rate, giving it enormous export advantage, and creating a China trade surplus with the US reaching $124 billion in 2003.

In the two-year period, 2002-2003, US imports of manufactured goods from China accounted for 56 percent of the total growth in US imports of manufactured goods during the period. The US trade deficit in manufactured goods with China was $128 billion in 2003. The overall US trade deficit with China is now the largest bilateral trade imbalance ever seen in the history of world trade.

The United States should insist that China change its exchange rate regime which allows it to sell undervalued goods in export markets at costs denominated in undervalued yuan. Simultaneously, China must relax its tight capital controls, which have resulted in an accumulation of foreign exchange acquired from export sales, amounting to $420 billion in 2003, about one-third of China’s GDP. China must stop excessive issuance of undervalued yuan, and pay for its imports with foreign exchange.

Today, China can absorb a revaluation without an economic collapse, versus a token one which would respond to the problem in form only, rather than a needed significant revaluation. If inadequate US policy causes a delay for another five years, however, China, the US, and the world economy are in for a very hard landing. At that point, an inevitable huge revaluation of the yuan will occur, which it must, when US policy officials then confront US trade, current account, and capital account deficits of disastrous proportions. US policy must effectively address this problem, now. So far, it has not.

May 12, 2004 SMA Press Release

Some things are different…

IRON ORE PRICES - ANNUALThe 2004 iron ore price-increase benchmark of 18.5% was established in early-January by CVRD, following a 9% gain in 2003. China now accounts for over 25% (110 MT) of world sea-borne demand, while three producers (CVRD, RTZ

and BHP) now control over 80% of the supply.

$15

$20

$25

$30

$35

$40

1980 1985 1990 1995 2000

US

$/T

onne

@ 6

2.4%

Fe

PelletsPellets

LumpLump

FinesFines

Prices shown are from CVRD (Brazil) to Western European steel customers (fob)

Courtesy – Metal Strategies

Some things got worse…

Technical Read on Crude Oil Prices

Courtesy – JP Morgan

ABMA – Annual Meeting 2005

2004 Conclusions

•Uncertainty – Cycle has Changed (Shorter Term & Greater Peaks & Valleys)

•Revenue vs. Costs – Not the Same Business Model

•Bankruptcy Laws Unfair to Competitors

•Investments – Earn Cost of Capital

•Minimills 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

2005

WORLD STEEL PRODUCTIONWorld steel production was up 6.5 percent through March, following increases of 8.9

percent and 6.8 percent in 2004 and 2003, respectively. China accounted for 92 percent of the y-t-d worldwide net gain and 25 percent of total world production.

50

60

70

80

90

100

Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05

Mill

ion

Met

ric

Ton

nes

Steel Production: March 2005Percent Change, Year AgoMonth: 6.5% Year-to-Date: 6.5%

Steel Production: March 2005Percent Change, Year AgoMonth: 6.5% Year-to-Date: 6.5%

WorldExcluding China

WorldExcluding China

World TotalWorld Total

In the five years from 1998 to 2003, China and the former-USSR states increased production by a cumulative 140 MT, equal to 70 percent of the combined total output in 2003 of both the U.S. or Japan.

Source: Metal Strategies

WORLD CRUDE STEEL OPERATING RATE

75%

80%

85%

90%

Cap Util % 76.1% 77.2% 80.3% 84.2% 86.8% 85.3% 85.0% 84.1%

2000 2001 2002 2003 2004 2005 2006 2007

World Crude SteelOperating Rate %World Crude SteelOperating Rate %

Operating rates recovered from 76 percent in 2000, to a peak of 87 percent in 2004, and have moved moderately downward since late 2004.

Source: Metal Strategies

Source: American Metal Market

Source: Iron and Steel Statistics Bureau

Hot-Rolled Sheet Prices, 1990-2005(Midwest, $ per ton)

Source: Purchasing Magazine

Wide-Flange Beam Prices, 1990-2005(Midwest, 8 x 8, $ per ton)

Source: Purchasing Magazine

Rebar Prices, 1990-2005(Midwest, $ per ton)

Source: Purchasing Magazine

Wire Rod Prices, 1990-2005(Midwest, $ per ton)

Source: Purchasing Magazine

U.S. STEEL INDUSTRY CONSOLIDATION(Percent Change, 2000 compared to 2005)

-50%

-25%

0%

25%

50%

75%

No. ofCompanies

No. of Plants

Capacity Capacity /Company

No. Plants /Company

Flat Rolled Long, Other

Mittal Steel weighted average share of all markets served = ~33% (major product range-15-40%+)

-FRP acquisition price ($/ton, going-concern basis) 2002= $110……..2003-’04=$170……2005=$225

Source: Metal Strategies

AMBA Annual Meeting 2005 Expert Views

Plummer – Metal Strategies - May 18, 2005

- Eight months of downward market correction, focused in sheet

- Auto market under pressure, especially SUV’s

- Positive outlook despite current conditions (Supply moving in balance with demand; imports are down; inventories coming down by inventory liquidation and mill shutdown)

- Demand still healthy (industrial equipment up by 7 percent; now residential recovering; auto transplants are strong

AMBA Annual Meeting 2005 Expert Views

Michelle Applebaum – June 2, 2005

- Sheet prices showed decline reflecting automotive

- Plate and long products sideways (Cut to length plate unchanged in May 2005; rebar unchanged)

- Minimills more disciplined

AMBA Annual Meeting 2005 Expert Views

SBB Global Market Outlook – May, 2005

- Production cuts too little, too late

- Buyers holding back

- Inventory draw down ends in the third quarter (For long products, some products are potentially in short supply due to de-stocking)

- Plate is still strong

AMBA Annual Meeting 2005 Expert Views

Peter Marcus – World Steel Dynamics – May 27, 2005

- Bottom of the “V” pricing for hot-rolled on the world export market may occur in third quarter

- “Prime” U.S. automotive scrap plummeted another $60 to about $170 in May (vs. high of $450 in November, 2004)

- Steel shipments in USA 5-10 percent projected below 2004

- Chinese steel production is likely to decline sharply in months ahead

AMBA Annual Meeting 2005 Expert Views

MEPS Steel News – June 1, 2005

- Flat products fell by 5.5 percent in May

- Long product price held up

Charles A. Bradford – Soleil – June 1, 2005

- Improvement in inventories

AMBA Annual Meeting 2005

Conclusions

• Hell, it’s still a cyclical business

• Fundamental shift in both demand and supply due to China and its appetite for raw materials

• Consolidations have had an impact to reduce volatility

• Role of inventories affecting pricing and production

• Unknowns (Oil, Interest rate, Auto sector, Energy, China, China, China)

• Still reasons for meaningful optimism