NAFTA Steel Roundtable

1. NAFTA Steel Roundtable AMM Mexican Steel Conference Monterrey, Mexico January 29, 2008 Thomas A.Danjczek Steel Manufacturers Association

2. AMM Mexican Steel Conference Outline • SMA • Consolidations • China • NAFTA • Policy Implications • Unknowns • Conclusion

3. SMA AMM Mexican Steel Conference • The Steel Manufacturers Association (SMA) • 35 North American member companies: 30 U.S., 3 Canadian, and 2 Mexican • 126 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

4. SMA AMM Mexican Steel Conference • Production capability • EAF steel producers accounted for over 60% of U.S. production in 2007 • SMA represented over 70% of all U.S. steel production in 2007 • 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

5. AMM Mexican Steel Conference Steel Consolidating, But Still Fragmented TOP 15 Represent 36% of Global Production Source: IISB

6. AMM Mexican Steel Conference Active Consolidation Within NAFTA • Recent Key NAFTA Announcements: • ArcelorMittal-Dofasco • USS-Stelco, USS-LoneStar • Gerdau-Chaparral, Gerdau-MacSteel • Ternium-Grupo Imsa • SSAB-IPSCO • Essar-Algoma, Essar-Minnesota, Evarz-Claymont • Emerging Downstream Focus: • Nucor-Harris, Nucor-Barker, Gerdau-Enco • Extending to Scrap: • Sims-Metal Management, Steel Dynamics-OmniSource

7. AMM Mexican Steel Conference Consolidation: Opportunities & Risks • Potential Benefits: • Access to Capital, Technology • Deeper Customer Relationships • Facility Optimization / Strategic Fit • Industry Sustainability • But Benefits Are Undermined By Prevailing Risks: • Global Overcapacity • Subsidies and Other Trade Distortions

8. AMM Mexican Steel Conference 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

9. AMM Mexican Steel Conference China: World’s Most Subsidized Industry More than $50 billion in subsidies State-owned enterprises account for 91 percent of China’s largest steel groups $7.5 billion in debt-to-equity swaps in 2000 Chinese steelmakers regularly obtain preferential loans from state-owned banks An additional $6 billion in announced subsidies during 2000 2005 steel policy commits China to further subsidies, micromanagement Manipulation of key raw materials markets, including coke and ferroalloys Support from local and provincial governments uncontrolled by central government Inadequate protection of workers’ rights and enforcement of environmental standards Chinese steel producers enjoy government assistance with energy and other input costs

10. AMM Mexican Steel Conference 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.

11. AMM Mexican Steel Conference China Is the World’s Largest Exporter Source: CISA, 2007 Data Annualized Source: China Customs, 2007 Data Annualized

12. China “Bashing” AMM Mexican Steel Conference • 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 • Imbalance cannot go on forever • Chinese steel market is still reliant on exports to absorb overproduction • Chinese steel industry is overbuilt and underdemolished

13. AMM Mexican Steel Conference What Harm U.S. Imports of Auto Parts and Vehicle Bodies from China, Value and Share

14. AMM Mexican Steel Conference Raw Materials: Governments Still Intervening • Governments (e.g. China, India) Continue to Intervene in Key Raw Materials Markets For Steel: • Iron Ore • Coke • Ferroalloys • Refractory Materials • Export Tax Manipulations / Restrictions • Distortions Created; NAFTA Competitiveness Negatively Impacted

15. AMM Mexican Steel Conference China Central To Current NAFTA Cases Key NAFTA Steel Trade Cases (Ch. 72 & Ch. 73) May–November 2007 *Finding renewed against China on October 10, 2007

16. AMM Mexican Steel Conference Example - Canada: China Growing Value, Market Share Source: World Trade Atlas / AISI.

17. AMM Mexican Steel Conference NAFTA -Came into effect on Jan. 1, 1994 -One of the most significant trade events of the 90’s -A trade agreement between three nations -United States, Canada, and Mexico -Population: 426 million -Total GDP: $13 trillion -Total Trade: $700 billion

18. AMM Mexican Steel Conference Potential Effects of NAFTA -Prices and wages -Labor markets and jobs -Imports and exports -State and the local economy

19. AMM Mexican Steel Conference NAFTA Conclusion -General consensus that NAFTA had negligible effect on U.S. employment -Trade may lead to wage inequality through an increase in earnings gap between skilled and the unskilled -Little evidence that NAFTA-induced trade liberalization -Evidence more in favor of net trade correction due to NAFTA

20. AMM Mexican Steel Conference Role of NAFTA Governments Defending the Market From Abuse: • Eliminating market interventions and distortions by all governments • Enforcing compliance with trade agreements and competition law • Maintaining and enforcing trade remedy laws • Assisting trading partners with understanding / adopting best practices

21. AMM Mexican Steel Conference Immediate Focus: • Treat China as NME in AD Cases, and Fully Apply CVD Law to NMEs • Promote NAFTA Manufacturing in FTAs • Enhanced Government Information Sharing Across Jurisdictions on Trade Remedy Practice and Experience

22. AMM Mexican Steel Conference Unknowns -Value of the RMB??? -JCCT Steel Dialogue – where goal is to promote transparency with better decisions??? -European Union antidumping investigation and targets??? -Energy cost and interest rate impacts??? -Rising freight costs??? -China’s restrictive policy of foreign ownership participation??? -China’s enforcement of environmental regulations??? -U.S. legislation??? -Trade actions??? -When will China play by market rules???

23. AMM Mexican Steel Conference Conclusion • Consolidations helping ,overcapacity still a risk • Trade distortion still a problem, U.S. Congress disappointed • Need aggressive policy measures to prevent China from causing a major crisis. To date, only trade cases have had an impact. • It’s still a cyclical business with demand, scrap, freight, inventories, etc. • Finished goods containing steel are a major concern • China, China, China… everything else is still only an embellishment • 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.