Steel – Two Years Later

Thomas A. Danjczek, PresidentSteel Manufacturers AssociationAugust 24, 2006

National Fluid Power Association

Economic Outlook Conference

Steel – Two Years Later

I. SMA

II. Review 2004 Presentation Highlights/Conclusions

III. Review 2005 Presentation Highlights/Conclusions

IV. 2006

• World Steel Production/Operating Rate

• China (Growth, Questions, Concerns, Challenges)

• Oil Costs & Pricing

• 2006 U.S. Market Outlook

• Consolidations

V. Conclusion

NFPA – Economic Outlook Conference

NFPA – Economic Outlook Conference

•The Steel Manufacturers Association (SMA)

–38 North American companies:

32 U.S., 3 Canadian, and 3 Mexican

–115 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

NFPA – Economic Outlook Conference

•Production capability

–SMA represents approximately 70% 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, 56% in 2005, and anticipated to be 58% in 2006

Year 2004

Current Drivers Impacting Steel Competitiveness

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August 17, 2004

I. Trade

•201 Real World Impact

•World Steel Production (up 7.1%)

•China, China, China… (up 21.1%)

(Its Impact)

II. Steel Production Costs

•Key Issues (Scrap $100 to $285)

•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

•Uncertainty

•Optimistic

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

NFPA – Economic Outlook Conference

Year 2005NFPA – Economic Outlook Conference

August 16, 2005Steel – A Year Later

I. Trade

• Some things are the same (China exchange rate, high scrap prices)

• Some things are worse (China trade imbalance, escalating energy prices, interest rates, and steel imports)

II. Steel

• World production up 6.5%

• Operating rate down slightly

III. Costs/Prices

• Down slightly from peak

• Pressure in metallics, energy, & transportation

IV. Other

• Consolidations continue

• Inventories decline modestly

V. Conclusion

• Positive outlook

• Healthy demand

NFPA – Economic Outlook Conference

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 – China is still the “wild card”

• 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

2006

WORLD STEEL PRODUCTIONChina accounted for 32.4% of world output and over 93% of the

y-t-d worldwide net gain.

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

Jan-06

Mill

ion

Met

ric

Ton

nes

Steel Production: March 2006Percent Change, Year AgoMonth: 7.0% Year-to-Date: 5.4%

Steel Production: March 2006Percent Change, Year AgoMonth: 7.0% Year-to-Date: 5.4%

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% of the combined total output in 2003 of both the U.S. or Japan.

Courtesy of Chris Plummer, Metal Strategies

WORLD STEEL PRODUCTION SHARES BY REGIONThe Asian share of world crude steel production has increased

from 14% in 1960 to a projected 62% by 2020. Shares for every other region have been roughly cut in half except for the “All

Other” developing country category.

14%21% 26% 32%

40%

58% 62%32%27% 23%

21%

21%

13% 11%

25%26% 29% 27%

15%12% 11%

7%8%

11% 10% 11%10% 11%23% 17% 12% 12% 12% 7% 6%

0%

25%

50%

75%

100%

1960 1970 1980 1990 2000 2010 2020

Asia West Europe East Eur./CIS All Other U.S.

“Asia” includes Oceania (Australia, New Zealand etc.)“West Europe” = EU 15, Turkey, Norway, Switzerland.“All Other” = Canada, Mexico, South and Central America, Africa, and the Middle East

Courtesy of Chris Plummer, Metal Strategies

NFPA – Economic Outlook Conference China’s Impact

After 5 Trips in the Past Two Years…

Key Questions:

- When will Chinese steel production significantly exceed its own domestic consumption – I.e. 50/60 MMT?

- Will the Chinese government shut down inefficient, excess capacity? (Has not done so with polluting facilities despite strong policy)

- How can North American Steel Industry compete against Chinese government - - IT CAN’T!

CONCERNS WITH CHINA 

Steel Item Comment•North American steel industry CANNOT Currency, banks, land, environment,compete against Chinese steel companies consolidations, policiesfinanced and controlled by theirgovernment

• In 2005, compared to 2004, China steel Trend worsens in 2006 with newimports are projected to drop, while capacity on line, and China’swhile exports are projected to increase slowdownsignificantly 

• North American steel industry loss of a Government de facto subsidiessignificant increment of its customer (industrial parks, infrastructure,base to relocation to Chinese factory space, loans)production sites

CHINA’S CHALLENGES Area Comment

•Environment Trade policy and laws are not enforced regardingemissions and effluents; Province versusBeijing; employment rules, not environment 

•Consolidations State-owned facilities; only non-controlling foreignownership allowed; antiquated facilities; policy is20 large producers, push small producers out 

•Technology/Quality Quality in flat rolled will affect export capabilities.Switch from long to flat not easy 

•Inventories Run full out. Not always market-oriented 

•Capital Will not always be free; could lose state credit 

•Personnel Some “unrest” expressed toward elite class.Internet is politically uncontrollable

RAW MATERIALSIn the four years from Q1-2002 to Q1-2006, raw material and

energy input costs for U.S. steelmakers have increased dramatically.

0

100

200

300

400

500

600

Jan-02 100 100 100 100 100

Oct-04 357 443 111 567 130

May-05 180 146 231 347 223

May-06 343 310 213 187 267

No.1 HM Scrap No.1 Busheling Metellurgical Coal Coke Iron Ore

January 2002 = 100

Courtesy of Chris Plummer, Metal Strategies

2006 PricesNFPA – Economic Outlook Conference

2006 U.S. MARKET OUTLOOKWe project apparent consumption growth in the 7-10% range for 2006, driven by the energy, construction and industrial capital

equipment sectors.

Market Growth Share Wtd GrowthAutos 0% 23% 0.0%Construction 7% 35% 2.5%Industrial Capital Equipment 7% 23% 1.6%Energy 23% 7% 1.6%

Sub-Total ---- 87% 5.6%All Other 5% 13% 0.7%Inventory Change ---- ---- 3.0%

Total ---- 100% 9.3%

Courtesy of Chris Plummer, Metal Strategies

Individual Domestic Demand Sectors

- Automotive is high, but dipping slightly

- Residential construction is falling, but still high

- Industrial machinery production rising

- Non-residential growing, but not back to 2000 level

- Heavy machinery is strong

- Energy is the best sector

• Plate, pipe, and specialty

Courtesy of Global Insight, Inc.

TOP-THREE MARKET SHARES2000 compared to 2005

0%

25%

50%

75%

100%

Hot Rolled Plate Cold Rolled CoatedSheet

Tin Mill SBQ Rebar HeavyStructural

Wire Rod

Flat RolledWeighted Average

2005: 65%2000: 47%

Long ProductsWeighted Average

2005: 68%2000: 51%

Courtesy of Chris Plummer, Metal Strategies

NFPA – Economic Outlook Conference

Conclusions - 2006• Hell, it’s still a cyclical business, but enjoy today!

• Fundamental shift in both demand and supply due to China & its appetite for raw materials – China is still the “wild card”. Risk near term is auto’s; long term is China – “China is the story, the rest is embellishment”

• Consolidations and discipline have had an impact to reduce volatility

• Role of inventories affecting pricing and production

• Demand still healthy and growing

• Unknowns (Oil, interest rates, auto sector, energy, freight rates, federal spending, China, China, China)

• Significant changes ahead in trade, metallics, energy, and consolidation

• Still reasons for meaningful optimism; positive outlook, despite China, energy costs, and interest rates