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Thomas A. Danjczek President Steel Manufacturers Association February 29, 2012

AIST – St. Louis Chapter. Minimill Drivers in the North American Steel Industry. Thomas A. Danjczek President Steel Manufacturers Association February 29, 2012. AIST - St. Louis Chapter. Outline. About th e SMA Chan ges Steel Demand Drivers & Comments Raw Materials Drivers

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Thomas A. Danjczek President Steel Manufacturers Association February 29, 2012

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  1. AIST – St. Louis Chapter Minimill Drivers in the North American Steel Industry Thomas A. Danjczek President Steel Manufacturers Association February 29, 2012

  2. AIST - St. Louis Chapter Outline • About the SMA • Changes • Steel Demand Drivers & Comments • Raw Materials Drivers • Energy Drivers • Final Thoughts

  3. AIST - St. Louis Chapter 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. AIST - St. Louis Chapter Where SMA Member EAFs are located…

  5. Changes AIST - St. Louis Chapter 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. AIST - St. Louis Chapter 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. AIST - St. Louis Chapter In USA, raw steel capacity utilization was 75% in 2011

  8. AIST - St. Louis Chapter 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. AIST - St. Louis Chapter 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 AIST - St. Louis Chapter NA Auto Build (Million Units) Non-Res Construction (Million Sq. Feet) Forecast Forecast Source: CSM Worldwide, FW Dodge

  11. AIST - St. Louis Chapter 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. AIST - St. Louis Chapter 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. AIST - St. Louis Chapter Scrap Demand Forecasts Scrap demand (mt) – 2017

  14. Scrap Exports as a Percentage of Steel Production, 2010 AIST - St. Louis Chapter

  15. AIST - St. Louis Chapter • Scrap 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.

  16. AIST - St. Louis Chapter • Energy Drivers Abundant Domestic Natural Gas is a Game Changer

  17. Energy Drivers Natural Gas Price Projections Remain Low AIST - St. Louis Chapter

  18. AIST - St. Louis Chapter • 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

  19. AIST - St. Louis Chapter • 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

  20. Gas Will Remain the Dominant Fuel For Electric Generation AIST - St. Louis Chapter • 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

  21. AIST - St. Louis Chapter • 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

  22. Final Thoughts AIST - St. Louis Chapter • 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 • Uncertainty and volatility will continue in U.S. industry until economic fundamentals are in equilibrium. Limited visibility… • Comment on Don Daily AIST-SMA Project • Environmental Overregulation getting worse • 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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