Session 6 – China the Reality: Currency, Trade, Investment & Steel A U.S. Minimill Perspective

1. SBB Steel Markets North America 2008 Session 6 – China the Reality: Currency, Trade, Investment & Steel A U.S. Minimill Perspective Thomas A. Danjczek, President Steel Manufacturers Association March 11, 2008

2. SMA SBB – A U.S. Minimill Perspective • 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

3. SBB – A U.S. Minimill Perspective Similarities to Last Year In March 2007, I spoke to SBB – “Times they are a’changing” 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)

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

5. SBB – A U.S. Minimill Perspective Steel Consolidating, But Still Fragmented TOP 15 Represent 36% of Global Production Source: IISB

6. SBB – A U.S. Minimill Perspective New Capacity Outpaces Consumption Growth Announced Steel Capacity Vs. Projected Consumption 2007 – 2010 (Million Metric Tonnes) Announced Steel Capacity Increases By Region (2006 – 2012) Compound Annual Growth Rates: Capacity: 6.83% Demand: 4.65% Capacity – Multiple Sources; Nucor Analysis Demand – IISI projections thru ’08; 6% increase “09 – ‘10

7. SBB – A U.S. Minimill Perspective China: World’s No. 1 Is Government Directed Top 20 Chinese Steel Producers: Government Control Vs. Private Ownership Top 20 Capacity: 210 Million Tons 2007 Projected Global Production Australian Government Predicting China Will Reach 1B Tons by 2015, CISA says 2020.

8. SBB – A U.S. Minimill Perspective China Is the World’s Largest Exporter Source: CISA, 2007 Data Annualized

9. China Comments SBB – A U.S. Minimill Perspective • 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

10. China’s Trade Surplus SBB – A U.S. Minimill Perspective YearChina’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 since 2000… imbalances cannot go on forever.

11. 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

12. SBB – A U.S. Minimill Perspective Competitiveness U.S. - China Steel Future Competitiveness Drivers DriverU.S.ChinaComment 1. 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?

13. SBB – A U.S. Minimill Perspective Resolving Tensions 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 • Investments • Transparency • Currency • Exchange Information • Environment • Savings

14. 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.