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Steel – A Year Later

Concrete Reinforcing Steel Institute Fall Business Meeting - 2005. Steel – A Year Later. Thomas A. Danjczek, President Steel Manufacturers Association November 1, 2005. CRSI – Fall Business Meeting - 2005. Steel – A Year Later. SMA Review 2004 Presentation Highlights/Conclusions 2005

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Steel – A Year Later

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  1. Concrete Reinforcing Steel Institute Fall Business Meeting - 2005 Steel – A Year Later Thomas A. Danjczek, President Steel Manufacturers Association November 1, 2005

  2. CRSI – Fall Business Meeting - 2005 Steel – A Year Later • SMA • Review 2004 Presentation Highlights/Conclusions • 2005 • • World Steel Production/Operating Rate • • China • • Scrap, Ore, Steel, Gas Prices • • Consolidations • IV. Conclusion

  3. CRSI – Fall Business Meeting - 2005 • The Steel Manufacturers Association (SMA) • 39 North American companies: • 32 U.S., 4 Canadian, and 3 Mexican • 103 Associate members: • Suppliers of goods and services to the steel industry • SMA member companies • Operate 120 Steel plants in North America • Employ about 40,000 people • Minimill Electric Arc Furnace (EAF) producers • Produce nearly 100% of structural, wire rod, rebar, minimill plate and hot rolled, and a high percentage of SBQ products • Also represent several integrated steel producers and rerollers

  4. CRSI – Fall Business Meeting - 2005 • Production capability • SMA represents over half of U.S. steel production (app. 70%) • Recycling • SMA members are the largest recyclers in the U.S. • Last year, the U.S. recycled over 70 million tons of ferrous scrap • Growth of SMA members • Efficiency and quality due to low cost • Flexible organizations • EAF growth surpassed 53% in 2004, and anticipated to be 60% by 2010

  5. SMA Changes August 2003 Scrap Impact World Steel Production China, China, China… Key Statistics Steel Production SMA Mission Lessons Learned Currency Other Government Impacts Exchange Rates Value of the Dollar Scrap Imports/Exports US Overhead Costs TEA 21 Lunacy Steel Production Costs Key Issues Energy & Raw Material Costs Asset Values Bankruptcy/Restarts Conclusion LAST YEAR - 2004 Concrete Reinforcing Steel InstituteFall Business Meeting, 2004 Washington’s Impact on Steel

  6. Some things are the same… Courtesy – IMF

  7. Some things are worse… Technical Read on Crude Oil Prices Courtesy – JP Morgan

  8. LAST YEAR - 2004 Concrete Reinforcing Steel Institute Fall Business Meeting, 2004 Conclusion • Don’t count on Washington for help! i.e. TEA 21 • Uncertainty – Cycle has Changed (Shorter Term & Greater Peaks & Valleys) • Revenue vs. Costs – Not the Same Business Model • CHINA, CHINA, CHINA… • Bankruptcy Laws Unfair to Competitors • Investments – Earn Cost of Capital • Mini-Mills Must Compete in the World, as it is, and We Can! • Meaningful Optimism with Good Long Term Consumption, Relative Value, and Excellent Recyclability for Steel

  9. 2005

  10. WORLD CRUDE STEEL OPERATING RATE Operating rates recovered from 76 percent in 2000, to a peak of 87 percent in 2004, and have moved moderately downward since late 2004. World Crude Steel Operating Rate % Source: Metal Strategies

  11. 8-MONTHS YTD/YTD 2004 2005 % Change 6.9% 681,956 728,980 TOTAL 61 COUNTRIES 28.2% 175,390 224,850 CHINA REST OF WORLD -0.5% 506,566 504,130 EUROPEAN UNION (15) 111,399 109,531 -1.7% 10,839 10,444 -3.6% CANADA 65,593 61,787 -5.8% USA 11,118 11,117 0.0% MEXICO World Raw Steel Production8 Months 2005 (000 metric tonnes) …although total world steel production is increasing, Chinese production continues to increase, rest of the world production is flat, and North America production declines... Source: IISI

  12. U.S. Raw Steel Capability Utilization2000 – August 27, 2005 …US steel makers reduced production (and capability utilization) to support inventory drawdown, and undertook maintenance in early 2005 to be prepared for stronger demand in 2H 2005…

  13. CRSI – Fall Business Meeting - 2005 China’s Impact After 4 Trips in a Year… Key Questions: - When will Chinese steel production significantly exceed its own domestic consumption – I.e. 50/60 MMT? - Will the Chinese government shut down inefficient, excess capacity? (Has not done so with polluting facilities despite strong policy) - How can North American Steel Industry compete against Chinese government - - IT CAN’T!

  14. China’s Steel Trade Balance Year 2004 2005 2006 Imports 33.1 27.0 22.0   Exports 20.2 32.5 36.0 (Semi’s) 6.2 9.0 5.0 Steel Trade Balance -12.9 +5.5 +14

  15. CONCERNS Steel ItemComment •North American steel industry CANNOT Currency, banks, land, environment, compete against Chinese steel companies consolidations, policies financed and controlled by their government • In 2005, compared to 2004, China steel Trend worsens in 2006 with new imports are projected to drop by 6.1 capacity on line, and China’s million tons, while exports are projected slowdown to increase by 12.3 million tons • North American steel industry loss of a Government de facto subsidies significant increment of its customer (industrial parks, infrastructure, base to relocation to Chinese factory space, loans) production sites

  16. CHALLENGES AreaComment •EnvironmentTrade policy and laws are not enforced regarding emissions and effluents; Province versus Beijing; employment rules, not environment •ConsolidationsState-owned facilities; only non-controlling foreign ownership allowed; antiquated facilities; policy is 20 large producers, push small producers out •Technology/QualityQuality in flat rolled will affect export capabilities. Switch from long to flat not easy •InventoriesRun full out. Not always market-oriented •CapitalWill not always be free; could lose state credit •PersonnelSome “unrest” expressed toward elite class. Internet is politically uncontrollable

  17. Chinese steel industry expansion continues in a region that is deficient in resources (supply and quality) and environmental compliance…

  18. COMPLIANCE WITH THE WTO The National Association of Manufacturers (NAM) recently reviewed China’s compliance with its WTO commitments in the accession protocol. While progress has been made in certain areas, there are serious concerns and problems with effective compliance relating to: 1. Huge U.S. trade imbalance 2. Continued currency manipulation 3. Arbitrary VAT taxes and rebates 4. Massive counterfeiting and piracy 5. Discriminatory standards 6. Inadequate regulatory transparency

  19. Steel Making Raw Material Prices Prices of key steel making cost inputs have more than doubled in 2004 and 2005. The outlook for 2006 is for continuing cost pressures...

  20. 9/26/05

  21. Source: Iron and Steel Statistics Bureau

  22. Rebar Prices, 1990-2005 (Midwest, $ per ton) June 2005 = $470 July 2005 = $450 Aug. 2005 = $435 Sept. 2005 = $485 Source: Purchasing Magazine

  23. Wire Rod Prices, 1990-2005 (Midwest, $ per ton) June 2005 = $505 July 2005 = $472 Aug. 2005 = $469 Sept. 2005 = $523 Source: Purchasing Magazine

  24. Wide-Flange Beam Prices, 1990-2005 (Midwest, 8 x 8, $ per ton) June 2005 = $516 July 2005 = $506 Aug. 2005 = $496 Sept. 2005 = $545 Source: Purchasing Magazine

  25. Global Price Spreads Versus N.A. Spot Price Hot Rolled Sheet …the U.S. market had become less attractive to offshore steel with lower prices and lower spreads versus the rest of the world in 2005. However, price rebounds and increases in overcapacity may encourage imports to return… Incentives for imports to increase Incentive for import to fall

  26. U.S. Oil and Natural Gas Prices …oil prices are the major uncertainty in the outlook for 2006, with forecasts ranging from thirty-five to seventy-five US$ per bbl…

  27. Natural Gas Cost Impact …sharp gains in natural gas prices have more than doubled steel mill gas costs per ton since 2000. Costs for integrated mills have risen over $30 per ton…

  28. U.S. STEEL INDUSTRY CONSOLIDATION(Percent Change, 2000 compared to 2005) • Mittal Steel weighted average share of all markets • served = ~33% (major product range-15-40%+) • FRP acquisition price ($/ton, going-concern basis) • 2002= $110……..2003-’04=$170……2005=$225 Source: Metal Strategies

  29. CRSI – Fall Business Meeting - 2005 Conclusions • Hell, it’s still a cyclical business • Fundamental shift in both demand and supply due to China and its appetite for raw materials – China is still the “wild card” • Consolidations and discipline have had an impact to reduce volatility • Role of inventories affecting pricing and production • Demand still healthy, construction solid • Unknowns (Oil, interest rates, auto sector, energy, freight rates, federal spending, China, China, China) • Still reasons for meaningful optimism

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