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Thomas A. Danjczek President Steel Manufacturers Association February 23, 2012 London, England

CRU World Steel Conference - 2012. Minimill Drivers in the North American Steel Industry. Thomas A. Danjczek President Steel Manufacturers Association February 23, 2012 London, England. CRU World Steel - 2012. Outline. About th e SMA Chan ges Steel Demand Drivers & Comments

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Thomas A. Danjczek President Steel Manufacturers Association February 23, 2012 London, England

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  1. CRU World Steel Conference - 2012 Minimill Drivers in the North American Steel Industry Thomas A. Danjczek President Steel Manufacturers Association February 23, 2012 London, England

  2. CRU World Steel - 2012 Outline • About the SMA • Changes • Steel Demand Drivers & Comments • Raw Materials Drivers • Energy Drivers • Final Thoughts

  3. CRU World Steel - 2012 About the SMA -Composed of 35 North American electric arc furnace (“EAF”) steel producing Member Companies, and 123 Associate Member steel industry suppliers -Today, roughly two-thirds of U.S. steel production comes from the scrap-based EAF process, up from just 10% in the early 1970s -SMA Members account for approximately 80% of total domestic steel capacity

  4. CRU World Steel - 2012 Where SMA Member EAFs are located…

  5. Changes CRU World Steel - 2012 China Deeper Recession Foreign Ownership Consolidations Transportation Costs Variable Cost Control Safety Ore Availability Scrap Availability Customer Requirements Energy Costs High Unemployment Environmental Regulations Currency Labor Intensity Engineers State-Owned Enterprises Inventory Levels Other Factors…

  6. CRU World Steel - 2012 Steel Changes 1970 2010 2011 Comment World Steel Production 595 1414 1550 Growth in developing World (mmt) EAF Production <10%(e) 27% 28% (World - % of Production) EAF Production <10%(e) 63% 64% Minimill Growth (U.S. - % of production)

  7. CRU World Steel - 2012 In USA, raw steel capacity utilization was 75% in 2011

  8. CRU World Steel - 2012 Finished steel demand drivers in US Actual Fitted • Three variables drive demand: • NA auto build • Non-residential construction • Appliance shipments • R² = 85% Source: First River

  9. CRU World Steel - 2012 U.S. finished steel demand forecast Forecast Actual ADC Source: CSM, FW Dodge, AHAM, First River

  10. Auto build & non-res construction are recovering,but not to previous peak CRU World Steel - 2012 NA Auto Build (Million Units) Non-Res Construction (Million Sq. Feet) Forecast Forecast Source: CSM Worldwide, FW Dodge

  11. CRU World Steel - 2012 Comments on Current N.A. Steel Industry • Underlying Weak Economy, with less than 3% GDP and estimates downward • Recovery underway, but very slow • North American steel market under pressure with unused capacity • Increased exports and percent imports (5mmt of semi’s imports) YOY, Impact of currency changes • Not normal cycle of recession, overcapacity; new supply coming on • Relative strong demand in auto; construction lagging • Raw material costs, and variable cost controls are major drivers • Scrap prices trends unknown with developing world demand lower next two months – too early to call a trend • Economic growth turning point is always two quarters away • Market cap values at historic lows

  12. CRU World Steel - 2012 Scrap Raw Material Cost and Availability is #1 Issue for NAFTA Producers • Many countries continue to impose a variety of restrictions on exports of vital raw materials including scrap: • Export prohibitions • Export duties • Export quotas • Other measures • Trade-distorting restrictions on exports of raw materials • Give domestic producers in the exporting country an unfair advantage • Increase worldwide costs of production • Place a heavy burden on steel industries in developing countries that do not have substantial iron ore reserves or steel scrap supplies • Three Challenges • Export Restraints • EAF Capacity Expansion • Long Lead Time for Recycling Network

  13. CRU World Steel - 2012 Scrap Demand Forecasts Scrap demand (mt) – 2017

  14. CRU World Steel - 2012

  15. Scrap Exports as a Percentage of Steel Production, 2010 CRU World Steel - 2012

  16. CRU World Steel - 2012 • Scrap Pricing Volatility Continues • Global Demand and the relative value of the US dollar to other currencies determine the volume of exported material. • Ferrous scrap exports exceeded 20 million tons in 2010 for the third consecutive year and will set a new annual record in 2011 (estimate - 24 million tons) • Export restrictions on ferrous scrap have been enacted by 26 countries. • With global steel output on the rise, prices for ferrous scrap in the US have decoupled from US mill demand. • Steel production should be based on comparative advantage (raw materials, energy, capital). • Need reciprocity.

  17. CRU World Steel - 2012 • Energy Drivers Abundant Domestic Natural Gas is a Game Changer

  18. Energy Drivers Natural Gas Price Projections Remain Low CRU World Steel - 2012

  19. CRU World Steel - 2012 • Energy Drivers EPA Mandates and Coal Plant Retirements: An Orderly Transition or Big Trouble? • Coal Plant Retirements: How Much? How Soon? • Estimates Range from 20,000- 60,000 MWs by 2018 • Announced Retirements • 8,700 MWs by 2015 • 13,000 MWs by 2018 • Retiring Units On Average Began Commercial service in 1956 • Average Unit Size = 166 MWs • 23 units Are Smaller less than 100 MWs

  20. CRU World Steel - 2012 • Energy Drivers Near Term Impacts • Output From Coal Fired Generation has declined slightly, but Still Accounts for 45% of Electricity Generated • Gas Demand From the Electric Sector Continues to Increase • Energy Produced By Renewable Sources (Mostly Wind) has Increased Substantially, but Remains Less than 2% of Generation Supply

  21. Gas Will Remain the Dominant Fuel For Electric Generation • CRU World Steel - 2012 • Energy Drivers • Coal Technologies are Struggling • Coal Gasification (Duke) • Carbon Capture and Storage (AEP) • No Supply Technologies are Remotely Competitive with Gas-Fired Generation • Nuclear, Wind and Solar are Heavily Dependent on Federal Subsidies

  22. Energy Drivers Gas Will Remain the Dominant Fuel For Electric Generation • CRU World Steel - 2012

  23. CRU World Steel - 2012 • Energy Drivers Energy Concerns • Utility Rate Increases Driven by Coal Retirements, Environmental Compliance Costs, Building Gas-Fired Units, Grid Upgrades, Clean Energy and “Smart Grid” Investments • Increasing Intermittent Generation (Wind and Solar) Will Present Reliability Questions • Federal Dominance of Grid Expansion and Cost Allocation • Shift in Clean Energy Mandates From Federal Budget to Utility Ratepayers

  24. Final Thoughts CRU World Steel - 2012 • Status quo of scrap restrictions is unsustainable. • U.S. is in a traffic jam, moving slightly forward, but don’t know other consequences. Don’t look to Washington, DC for help. Gridlock continues • Environment of uncertainty and volatility will continue in U.S. industry until economic fundamentals are in equilibrium. Limited visibility… • Reasons for optimismin steel in U.S.: • Scrap-based, 75% of cost – local supply • Low cost on global basis (energy is neutral, labor less than 10%, others have higher transportation costs) • Relatively strong U.S. market and U.S. resiliency • Better U.S. company balance sheets

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