Thomas A. DanjczekPresidentSteel Manufacturers AssociationJanuary 13, 2010

Steel Orbis Webinar

Key Issues Affecting US Minimills

Outline

•SMA

•Today’s Concerns

•Today’s Deterioration – US Steel Production

•China, China, China

•Scrap

•Energy

•Climate Change

•Infrastructure

•Protectionism and Trade Issue

•Is Enough Being Done?

•Conclusion

Steel Orbis Webinar: Key Issues Affecting US Minimills

• The Steel Manufacturers Association (SMA)– 34 North American companies:

29 U.S., 3 Canadian, and 2 Mexican– 128 Associate members:

Suppliers of goods and services to the steel industry

• SMA member companies– Operate 125 steel recycling plants in North America– Electric Arc Furnace (EAF) steelmakers using recycled steel

SMASteel Orbis Webinar: Key Issues Affecting US Minimills

• Production capability– EAF steel producers accounted for 60% of U.S. production in 2008– 62% first half 2009– SMA represents over 70% of all U.S. steel production

• Recycling– SMA members are the largest recyclers in the U.S.– EAF steel producers are the largest recyclers in the world– Last year, the U.S. recycled over 75 million tons of steel

• Growth of SMA member companies– Highly efficient users of labor, energy, and materials – Modern plants producing world class quality products

SMASteel Orbis Webinar: Key Issues Affecting US Minimills

Steel Executive- 2009

The Obvious Concerns

-Our Jobs

-US Recession and financial meltdown

-Infrastructure Spending

-Value of the RMB

-Energy shortfalls and pricing

-China, China, China

-Global Steel Overcapacity

-Subsidies and other trade distortions

-US Legislation (111th Congress and the 44th President)

Steel Orbis Webinar: Key Issues Affecting US Minimills

US Steel Production (All in Million Net Tons)

(Numbers are Approximate)

PAST – From 1986 through 2008, U.S. steel production has been around 100 m tons – up & down 10%

PRESENT – 2009 1st Half 25m (45% utilization)2nd Half 36m (62% utilization) Now 1.5m/week vs. 2.1m/week Year 63m (57.6m net tons through 11 months - Minimills at

65% of production)

FUTURE – 2010 World Steel 78m (up 19% over 2009), optimistic Peter Marcus 68m (Back to 75m in 2012)

US Poll 69m (up 10% over 2009)

12-21-2009Steel Orbis Webinar: Key Issues Affecting US Minimills

Steel Orbis Webinar: Key Issues Affecting US Minimills

U.S.Raw Steel Production - 2008 & 2009

3

4

5

6

7

8

9

10

JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC

2008 2009

2008-2009 Monthly

Mill

ion

Ton

s

Production Tons

Steel Orbis Webinar: Key Issues Affecting US Minimills

U.S. Raw Steel Capability Utilization - 2008 & 2009

30

40

50

60

70

80

90

100

JAN FEB M AR APR M AY JUN JUL AUG SEP OCT NOV DEC JAN FEB M AR APR M AY JUN JUL AUG SEP OCT NOV DEC

2008 2009

2008-2009 Monthly

Util

izat

in P

erce

ntag

e

Monthly Utilization Percentage

N. America: -45.1Canada: -51.9U.S.: -47.0Mexico: -29.5

S. America: -30.3Brazil: -31.4

EU27: -39.3Turkey: -13.5Russia: -26.8Ukraine: -31.9

Asia: -2.2Japan: -34.0S. Korea: -14.9China: +7.5India : +1.6

Global Production: -16.4Excluding China: -30.9

NAFTA Production Declines More Than Other World RegionsGlobal Output Sharply Down, With Few Exceptions

Global Crude Steel Production2009 YTD vs. 2008 % Change

Source: Worldsteel

Source:Worldsteel

NAFTA Raw Steel Production - 2009 vs. 2008

0

5,000

10,000

15,000

20,000

JAN

UA

RY

FEBR

UA

RY

MA

RCH

APR

IL

MA

Y

JUN

E

JUL

Y

AU

GU

ST

SEPT

EM

BER

OCT

OB

ER

NO

VEM

BER

DEC

EM

BER

JAN

UA

RY

FEBR

UA

RY

MA

RCH

APR

IL

MA

Y

JUN

E

JULY

AU

GU

ST

2008 2009

Mon

thly

Ton

nage

(MT)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Util

izat

ion

perc

enta

ge

Production Tons - NAFTA NAFTA - Rate of Capability Utilization

China - Rate of Capability Utilization ROW ex China - Rate of Capability Utilization

• Several NAFTA facilities have been restarted, after having been offline for close to a year. Some facilities have no future return date.

• The NAFTA economic recovery is still very fragile, and a return to pre-crisis steel production levels remains years away.

• The NAFTA and rest of world (ROW) utilization rates have stayed well below China’s rate.

While NAFTA Production Has Risen Recently, Capacity Utilization Is 30% Below 2008 Levels

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN JUL AUG

Met

ric T

ons

('000

)

Source: World Steel Association, NAFTA Steel Trade Monitor

NAFTA Demand for Steel, Aug 2008 – August 2009

Steel Orders Collapsed After The Financial MeltdownAnd Still Have Not Recovered

• In the U.S., steel purchases were cut in half within 7 months (Aug. ’08 -Mar. ’09), and 50% of U.S. output was shuttered.

• In Canada, August 2009 shipments were 39% lower than a year earlier. A number of facilities remain idled or operating at reduced rates.

•In Mexico, ASC for 2009 (Jan – Sept) is 25% below 2008 levels. The September figure is 31% below the last peak (June 2008).

U.S. Housing Permits, Starts and Completions

0.25

0.5

0.75

1

1.25

1.5

1.75

2

2.25

2.5

Mill

ion

Uni

ts

Permits Starts Completions

• The residential housing market has bottomed in the past 6 months – to 40-year lows.

• Home foreclosures are continuing to rise. Government incentives (e.g., a tax credit for first-time buyers) are helping, but limited. Tighter credit standards are reducing the pool of available new buyers.

• An uptick in the non-residential, commercial market is not expected until late next year.

Source: U.S. Department of Commerce.

The U.S. Construction Market Is Still Weak

0

500

1000

1500

2000

2500

thou

sand

uni

ts p

rodu

ced

2009YTD

2008YTD

Detroit 3 Production Jan-September 2009 vs. 2008

Chrysler

Ford

GM

While the “cash for clunkers” program has helped increase production and sales, “Detroit 3” production has declined by over 50% YTD vs. 2008.

With the end of this incentive program and with unemployment likely to stay high for several years, automotive production and sales are unlikely to return to pre-crisis levels for the medium term.

Source: Ward’s Automotive. * 2009 Annualized based on September year-to-date.

NAFTA Light Vehicle Production 1999-2009

17.0

17.2

15.5 16

.4

15.9

15.8

15.8

15.3

15.1

12.8

7.7

10.1

11.8

0

2

4

6

8

10

12

14

16

18

20

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010f 2011f

Millio

ns o

f Uni

ts

The NAFTA Automotive Production Remains Deeply Depressed

MSCI Average Daily Shipments & InventoryFor U.S. & Canada Metric Tonnes (000)

2,000

2,500

3,000

3,500

4,000

4,500

5,000

5,500

2006JAN

JUL 2007JAN

JUL 2008JAN

JUL 2009JAN

JUL

Dai

ly S

hipp

ing

Rat

e

02,0004,000

6,0008,00010,00012,000

14,00016,00018,000

Inve

ntor

y

Daily Shipping Rate Inventory

Source: Metals Service Center Institute

NAFTA Service Center Inventories At Multi-Year Lows, But Reduced Demand Delaying Restocking

• Service center demand has fallen in line with overall steel demand.

• NAFTA service center shipments are off 30% vs. 1 year ago.

• As of October 2009, U.S. and Canadian service center inventories (2.3 months each) are at 5-year lows, but a lack of consumer confidence and low end-use demand are preventing restocking.

World Crude Steel Capacity 2000-2011

1,062 1,062 1,0951,170

1,2451,356

1,4531,583

1,8161,917

1,997

1,654

588

677

740783

804

0

250

500

750

1,000

1,250

1,500

1,750

2,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Wor

ld S

teel

Cap

acity

/Dem

and

(thou

sand

met

ric to

nnes

)

0

100

200

300

400

500

600

700

800

900

Chin

ese

Capa

city

(tho

usan

d m

etric

tons

)

World Crude Steel CapacityFinished steel useChinese Capacity

…While World Capacity Continues to Grow

Source: Worldsteel Association

Source: NAFTA Steel Trade Monitor, US Department of Commerce, Canacero and World Trade Atlas.

NAFTA Imports During Crisis Period

NAFTA Imports 2008 & 2009 - Monthly

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN JUL AUG

Met

ric T

onne

s

NAFTA External Imports NAFTA Internal Imports

• Steel imports from other regions exceeded intra-NAFTA steel trade when the market collapsed.

• Non-NAFTA imports at first surged, and then declined but have maintained a relatively high market share.

• Imports from China peaked in October 2008.

Source: US Department of Commerce and World Trade Atlas

NAFTA Exports During Crisis Period

NAFTA Exports 2008 & 2009 - Monthly

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2,000,000

JAN2008

FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN2009

FEB MAR APR MAY JUN JUL AUG

Met

ric T

onne

s

NAFTA External Exports NAFTA Internal Exports • NAFTA producers send only a small portion of steel produced outside the region.

• During 4Q ‘08, intra-NAFTA steel trade declined sharply, more or less in line with the steep decline in market demand.

NAFTA Manufacturing Employment Since 2007

13

13.5

14

14.5

15

15.5

16

16.5

2007 2008 2009

Mill

ions

Source: U.S. Bureau of Labor Statistics, Statistics Canada

Nearly 3 Million More Lost NAFTA Manufacturing Jobs During the Economic Crisis (2007-2009)

+1.2

-50

-40

-30

-20

-10

0

10

China

Perc

ent

Source: WorldSteel Association

Percentage Change in Crude Steel Output, 1H 2008 to 1H 2009

TurkeyS. KoreaRussiaUkraineBrazilJapanEUNorth

America

While the Rest of the World Cuts Steel Production, Chinese Production Continues to Grow

0

100

200

300

400

500

600

mill

ions

of M

T

0

5

10

15

20

25

30

35

40

45

50

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

(e)

perc

ent

China’s crude steel productionChinese crude steel production as a percentage of total world production

Source: World Steel Dynamics, Inside Track # 77 (May 30, 2007); World Steel Dynamics, Truth & Consequences # 44 (Nov. 15, 2007); World Steel Dynamics, Inside Track # 87 (June 12, 2008); World Steel Dynamics, Truth & Consequences # 50 (Feb. 9, 2009); World Steel Dynamics, Inside Track # 97 (Oct. 2, 2009).

This Year, China Will Account for Almost Half of Total World Crude Steel Production

China Steel 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 to absorb overproduction

•Chinese steel industry is overbuilt and under-demolished

Steel Orbis Webinar: Key Issues Affecting US Minimills

China’s Trade Surplus with the U.S.

Year China’s Trade Surplus

2001 $22 billion(year China joined WTO)

2006 $177 billion2007 $262 billion (up 47.7%)

2008 $290 billon 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.

Steel Orbis Webinar: Key Issues Affecting US Minimills

RMDAS Ferrous Scrap Price IndexEffective 12/20/09

Steel Orbis Webinar: Key Issues Affecting US Minimills

Steel Orbis Webinar: Key Issues Affecting US MinimillsOther Issues - Energy

U.S. needs to address energy needs, availability, reliability, and competitive costs

D R A F T8

T h e U . S . S t e e l I n d u s t r y H a s O n e o f t h e L o w e s t P r o c e s s E m is s i o n s I n t e n s i t i e s

in t h e W o r ld

0 .4 9 0 .4 6

0 .9 3 0 .9 6

1 .0 51 .1 2

1 .3 6

0 .0 0

0 .2 0

0 .4 0

0 .6 0

0 .8 0

1 .0 0

1 .2 0

1 .4 0

1 .6 0

Un ite d S ta te s Can a d a Me x ic o G e rma n y A us tr a lia Ru s s ia Jap a n

Metr

ic T

on

s C

O2/

Met

ric T

on

of

Ste

el

Other Issues - GHGSteel Orbis Webinar: Key Issues Affecting US Minimills

• US aging infrastructure is functionally obsolete and structurally deficient

• FHWA estimates $78.8 billion per year for the next 20 years to maintain infrastructure, $131.7 billion to improve

• Gas tax at 18.54/gallon generates app. $40 billion

• Current gas tax woefully insufficient, only half of maintenance

Steel Orbis Webinar: Key Issues Affecting US Minimills

Free Trade vs. Protectionism

Protectionism -Predatory Pricing -Trade distorting subsidies -Government Ownership-National power by protecting our industries and state -Piling up currency measures -One way trade

Need “Balanced” Trade over “Mercantilism”

Who’s the Protectionist?

Is “Protectionism” the enemy of “Free Trade”

1. Taken in part from C. Blum

Steel Orbis Webinar: Key Issues Affecting US Minimills

Is Enough Being Done?

Raw Materials

Energy

China

Trade

No

No

No

No

Barriers continue

Lack of policy continuesCurrency manipulation, Subsidies, Not playing by the rules

Distortions continue, Who’s the protectionist

No long term structural policy changes are being proposed in Washington for taxes, trade imbalance, and energy.

Steel Orbis Webinar: Key Issues Affecting US Minimills

Conclusion

U.S. Steel Industry in Better Position Today to Manage the Down Cycle (but what a down cycle!)

― Improved Economics From Consolidations, i.e. “Reacted Quicker”;― Improved Control of Variable Costs

― Scrap-Based Metallics (In 2009, U.S. will be nearly 2/3 EAF-based― Energy Costs― Transportation Costs― Labor Efficiency (U.S. at Below 2MH/Ton; Minimills Often Below 1MH/Ton)

― Improved Inventory Control (Inbound Materials, Steel, and Customer Products). NOT THE OLD INVENTORY OVERHANG!― Concerns with Scrap, Climate Change, Energy, U.S. Debt, Taxes, Currency, but especially Climate for Investment

― Still Challenging – But Reasons for Meaningful Long-Term Optimism!

Steel Orbis Webinar: Key Issues Affecting US Minimills