The U.S. Steel Industry
Where We Have Been and
Where We Are Going
Keith Busse
President and CEO
Steel Dynamics, Inc.
National Association of Pipe Distributors
Las Vegas, February 26, 2005
The U.S. Steel Industry
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Historical Perspective: 1950-2000
Global Perspective
The 1990s
The Recent Past: 2000-2004
The Future
– 2005
– Longer term
Domestic Steel Production by Type of Steel
Semi-finished
1%
Other 5%
Flat-rolled sheet
54%
Rod & Wire 4%
Structural 6%
Plate 8%
Coated Sheet
Rebar 7%
19%
Other Bar
10%
Cold Rolled
14%
Pipe 5%
Hot Rolled 21%
Source: American Iron and Steel Institute
1950 through 2000
• High concentration of large, integrated
producers, but many regional and
specialty players emerged
• Very little growth in domestic steel production
over the period
• Domination by large integrated producers
finally gave way to EAF-based mini-mills
• Periods of intense competition from offshore
Large integrated producers dominated
through the 1970s
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U.S. Steel
Bethlehem Steel
National Steel
LTV
Wheeling-Pittsburgh Steel
Very little growth in domestic steel production…
Domestic Steel Production, 1950-2000
160
peak about 150 million tons
140
120
100
80
60
110 million tons
40
20
0
1950
1960
1970
Source: American Iron and Steel Institute
1980
1990
2000
Changes in steel production technology …
Domestic Steel Production by Furnace Type
Millions of Tons
Total U.S Production
160
140
120
100
80
Basic Oxygen
Open Hearth
60
40
Electric
20
0
1950
1960
1970
Source: American Iron and Steel Institute
1980
1990
2000
Electric-arc furnace production gained parity…
Integrated and EAF Production
Percent of U.S. Steel Production
100
90
Integrated
80
70
60
50%
50
40
Electric
30
20
10
0
1950
1960
1970
Source: American Iron and Steel Institute
1980
1990
2000
From 1980 to 2000, the new EAF
producers gained substantially
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Nucor
Birmingham Steel
Commercial Metals
Ipsco
Steel Dynamics
Gerdau Ameristeel
… and the U.S. began to see intense
competition from offshore
Global Perspective, 1950-1980s
• Post WW II, U.S. steel industry was strong,
but complacent.
• Japan and Germany rebuilt.
• The U.S. became an attractive steel market.
• Around the world, governments invested in
national steel companies.
• Imported steel became a big issue in the U.S.
Global Perspective, 1980-2000
• Japan and Western Europe became more
industrialized, like the U.S.
• The U.S. became a very attractive market to an
increasing number of the world’s steel
producers.
• Imported steel became a bigger issue in the
U.S.
• Nationalized steel companies did not work out–
governments started privatizing them.
(Examples: Great Britain, USSR, Eastern Europe, India–
China is the exception, but moving strongly to privatize)
In the 1990s
• Global factors and past management “sins”
converged on the U.S. steel industry.
• U.S. producers were dramatically affected by
currency manipulation.
• The U.S. became the world’s steel “dumping
ground.”
U.S. Annual Apparent Steel Supply
(Use of steel in the U.S.)
Millions of Tons
Apparent “Consumption”
160
140
120
100
U.S. Domestic
Shipments
80
1998: Peak Imports
of 40+ million tons
60
40
Imports
20
0
Exports
-20
1986
1990
1995
Source: American Iron and Steel Institute
2000
2004
Domestic Steel Production
1950-2000
peak about 150 million tons
Millions of Tons
160
140
100 million tons
120
100
80
1990s
60
40
20
0
1950
1960
1970
Source: American Iron and Steel Institute
1980
1990
2000
During the 1990s U.S. integrated steel
producers fell on hard times
• They had not adapted well to lower-cost
technologies.
• They carried extremely high employee
obligations
• They required strong steel prices to stay
afloat
• They were increasingly vulnerable to
economic downturn
Leading into 2000…
2000-2001 recession hits steel markets…
Millions of Tons
Apparent “Consumption”
160
140
120
100
80
Recession causes decline in
domestic demand for steel
60
40
20
0
1986
1990
Source: American Iron and Steel Institute
1995
2000-2001 2004
Capacity utilization sinks…
Percent
U.S. Raw Steel Capacity Utilization
100%
90%
80%
70%
60%
50%
2000
2001
Source: American Iron and Steel Institute
2002
2003
2004
Steel prices drop to a 20-year low…
Hot-rolled Sheet Selling Price
Dollars per Ton
$800
$700
$600
$450
$500
$390
$400
$300
$225
$200
1980
Source: Purchasing Magazine
1988
1994
2000 2001
More than 35 steel companies filed
for bankruptcy from 1998 to 2002
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Bethlehem Steel
National Steel
LTV
Wheeling-Pittsburgh Steel
Geneva
Gulf States
Northwestern Wire and Steel
Birmingham Steel
Republic Technologies
GS Industries
Acme Metals
Trico
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Qualitech Steel
J&L Structural Steel
Laclede Steel
Erie Forge & Steel
CSC Ltd.
Freedom Forge Corp.
Sheffield Steel
Calumet Steel
Edgewater Steel Ltd.
Galvpro
Metals USA
Action Steel … and others
Steel prices recover in 2002
under supply constraints
• Prices recover sharply from their 2001 lows,
improving the health of remaining steelmakers.
• Some mills are shut down permanently, but
capacity utilization rebounds in the second half.
– International Steel Group, begins restarting
idled LTV mills.
– Nucor buys and restarts Trico.
• With the return of capacity, prices moderate by
year-end 2002
• Most integrated mills continue to lose money.
Hot-rolled sheet selling price climbs
Dollars per Ton
2002
$800
$700
$600
$400
$500
$400
$300
$200
1980
Source: Purchasing Magazine
1988
1994
2000
2004
2003 presents new challenges
• The U.S. economy begins to rebound, but pace
of steel demand is slow.
• With some shut-down mills coming back on
line, industry capacity recovers and capacity
utilization falls.
• In the second half, signs of raw material
shortages appear, causing steel scrap prices to
rise at a rapid rate.
• Steel producers bump up selling prices to
recover increased costs.
• Most integrated steel companies continue to
lose money.
In 2004 the steel markets
“Kick it up a notch”
• Steel scrap costs (and now coke and
iron ore costs) accelerate to historical
highs.
• Due to historically high input costs,
steelmakers institute raw-materials
surcharges.
• Inflation-adjusted steel prices reach
historical highs.
2004: Scrap costs reach historical highs
Steel Scrap Pricing
2003
$250/ton
Dollars per Ton
2004
$450/ton
$500
$400
$300
Auto-Bundles
$200
$100
1980
Source: Purchasing Magazine
1988
No. 1 Heavy Melt
1994
2000
2004
Steel prices reach historical highs
Hot-Rolled Sheet Selling Price
$760/ton
Dollars per Ton
2004
$800
$700
$600
$400
$450
$500
$390
$400
$300
$200
1980
Source: Purchasing Magazine
1988
1994
2000
2004
Steel mills again run near full capacity
Percent
U.S. Raw Steel Capacity Utilization
100%
90%
80%
70%
60%
50%
2000
2001
Source: American Iron and Steel Institute
2002
2003
2004
Reflections on the 2004 Steel Market
• Mini-mills vs. integrated steelmakers–
Who’s winning?
• Concerns about higher steel prices
• As a result of consolidation, the health
of the U.S. steel industry vastly improved
• Is it sustainable?
“Where do we go from here?” – 2005
• Raw materials costs, while lower than 2004
peak levels, will not likely fall back to
previous levels.
• Selling prices likewise are not expected to
fall precipitously.
• The “steel short” supply-demand imbalance
is likely to recur in much of 2005, assuming
steel demand stays firm and imports
continue at a moderate pace.
Imports surged in 2004, but are now slowing
4,500
Monthly Steel Imports
(thousands of tons)
2004
4,000
3,500
3,000
2,924
2,500
2,000
Average = 2,747 tons
1,500
96
97
98
99
00
01
02
03
04
Source: US Census Bureau, graphic courtesy of Goldman Sachs Global Investment Research
“Where do we go from here?” – 2005
• Moderately strong world steel demand and
higher global steel prices, a weak dollar, high
ocean freight rates– all act as a disincentive for
excessive imports.
• Continued economic expansion suggests
demand will remain strong and possibly
improve in some steel markets.
• Another good year is likely for steel companies.
“Where do we go from here?” – Beyond
• Consolidation of the U.S. steel industry has
been good for the industry, and may continue.
– It has closed down antiquated production
capacity, improving the cost competitiveness
of the industry.
– It has resulted in better workplace practices
and better union agreements for the
unionized companies.
– By eliminating weak companies, it has
increased steel-company managements’
focus on profitability.
(continued)
“Where do we go from here?” – Beyond
• Our competitiveness globally is essential to
keeping our domestic industry strong
– We CAN BE the lowest cost steel producers
in the world.
– U.S. competitiveness will depend on
currencies, with a weaker dollar helping the
steel industry
– China will continue to be the 800-pound
gorilla, in terms of its market size, its growing
steel industry, and how it deals with its
currency valuation.
China’s steel production has surged
31
Monthly Production
(millions of metric tons)
26
China
(300 Mt/yr)
21
US
EU
(85 Mt/yr)
Japan
(150 Mt/yr)
(120 Mt/yr)
16
11
6
1994
1996
1998
2000
2002
2004
Source: II&SI, graphic courtesy of Goldman Sachs Global Investment Research
“Where do we go from here?” – Beyond
• Overall, we are optimistic about the U.S. steel
industry over the next ten years.
– Demand for steel in the U.S. will remain
strong, with some cyclical variability.
– Domestic supply will grow slowly as “new
steel management” is more cautious than in
the past about adding capacity.
– U.S. likely will continue to require imports of
25-30% to meet demand.
– Excessive imports remain a risk, but can be
dealt with.
The U.S. Steel Industry
Where We Have Been and
Where We Are Going
Keith Busse
President and CEO
Steel Dynamics, Inc.
National Association of Pipe Distributors
Las Vegas, February 26, 2005