Drivers in the North
American Steel Industry
Thomas A. Danjczek
President
Steel Manufacturers Association
June 27, 2012
São Paulo, Brazil
1
Brazilian Steel Conference- 2012
Outline
•About the SMA
•“Big Economic Picture”
•Steel “Picture”
•Drivers in North America’s Steel Industry
•Cooperation within the Americas
•Final Thoughts
2
Brazilian Steel Conference- 2012
SMA
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 North American steel production
comes from the scrap-based EAF process, up from just 10% in
the early 1970s
-SMA Members account for approximately 80% of U.S.
domestic steel capacity
3
Brazilian Steel Conference- 2012
U.S., Canada, Mexico Real GDP Growth, Seasonally Adjusted at Annual Rate
US
Mexico
Near Stagnation
Source(s): U.S. Bureau of Economic Analysis, MAPI
Canada
4
Brazilian Steel Conference- 2012
U.S. Manufacturing Industrial Production
Rebounding
Source(s): Federal Reserve Board, MAPI
Brazilian Steel Conference- 2012
The U.S. Dollar
Source(s): Federal Reserve Board, MAPI
Stronger Lately
Brazilian Steel Conference- 2012
Big Picture
U.S.
Will it continue?
NAM, May 2012
7
Brazilian Steel Conference- 2012
Big Gap
US GOOds
$620 Billion Annual Deficit projected in
2012 is most significant barrier to U.S.
economic recovery
8
Changes
Impacting Steel
Brazilian Steel Conference- 2012
Deeper
Recession
Variable
Cost Control
Scrap
Availability
High
Unemployment
Labor
Intensity
Inventory
Levels
Skilled Jobs
Shortages
China
Safety
Consolidations
Customer
Requirements
Environmental
Regulations
Engineers
Foreign
Ownership
Transportation
Costs
Ore
Availability
Energy
Costs
Currency
State-Owned
Enterprises
Other Factors…
9
NAFTA Apparent Demand
US Demand
45,000
Mexico Demand
Canada Demand
NAFTA Capacity
Metric Tons ('000)
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
-
.
.
.
.
.
.
2008
.
.
.
.
.
2009
.
.
.
2010
.
.
2011
.
2012
Metric Tons ('000)
NAFTA Crude Steel Production & Capacity
US Production
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
.
.
.
2008
Source: AISI, Statistics Canada, Canacero
.
Mexico Production
.
.
.
2009
.
Canada Production
.
.
.
2010
.
NAFTA demand
remains below
pre-recession
levels. Following
some weakening
of demand in the
2H11, 1Q12
demand saw a
modest rebound
2% higher than
1Q11. Still, 2012
demand will
likely be 10-15
million MT lower
than before the
financial crisis.
NAFTA Capacity
.
.
.
2011
.
.
NAFTA steel
production
increased by 6%
in 1Q ’12 to the
highest level since
2008, but still
well below peak.
The utilization
rate was 77% in
1Q ’12, which is
at or slightly
above most other
world’s regions.
2012
10
Despite Gains in Apparent Finished Steel Use (AFSU),
Forecast NAFTA AFSU Still 13% Below Pre-Recession Average
United States
Million
MT
Canada
2011
2012
chg
(%)
2013
Million
MT
2011
2012
Crude
Steel Use
101.0
107.9
6.8%
113.8
Crude
Steel Use
20.9
21.7
Finished
Steel Use
89.1
94.2
5.7%
99.5
Finished
Steel Use
14.2
14.5
Mexico
chg
(%)
2013
Million
MT
2011
2012
3.8%
22.7
Crude
Steel Use
15.7
16.1
2.5%
16.6
2.1%
14.9
Finished
Steel Use
18.0
18.8
4.4%
19.6
Spring 2012 Outlook*
For NAFTA Region
Apparent Finished Steel Use (ASU)
(Million MT)
2006
2007
2008
2009
2010
2011
2012f
2013f
Finished Steel
155.7
141.7
130.5
84.6
112.9
121.3
127.5
134.0
chg
(%)
2013
From 2004 to 2007 (last
4 full years before the
economic crisis began),
AFSU in the NAFTA
region averaged 146
million MT/year. Should
the outlook for 2013 be
achieved, AFSU next year
would still be 8% below
that average.
* This was the outlook as of March 2012. The softening of NAFTA and world
economies, together with higher than anticipated steel import levels, suggest more
modest prospects for the NAFTA steel industry for the remainder of 2012.
Source: worldsteel
11
Brazilian Steel Conference- 2012
U.S. Steel Production
105
95
85
75
65
US Raw Steel Capacity Utilization was 75% in
2011, 79% in First 5 Months of 2012
55
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Total Steel Production - US (Millions of Short Tons)
12
Brazilian Steel Conference- 2012
U.S. EAF Share of Total Production
65.0%
60.0%
55.0%
50.0%
45.0%
40.0%
35.0%
30.0%
25.0%
Approximately
2/3 of US Steel
Production
20.0%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
% of EAF Production
13
Brazilian Steel Conference- 2012
U.S .Steel Imports
• Steel imports are surging into the U.S. market
• U.S. steel imports increased significantly in 2011 and
continued to increase in YTD 2012 (January-April), jumping
by almost 30% from the same period in 2011 especially in
slabs, plate and corrosion.
• Particular areas of concern include
– Turkey: From January-March 2012, rebar imports from Turkey
surged by 365% YOY
– China: While direct steel imports from China are increasing,
indirect imports are increasing even more
• The import surge is largely a result of government
subsidies, irrational capacity expansion, and other anticompetitive behavior in certain foreign countries
• Other countries are also increasing steel capacity without
regard for market forces or comparative advantage
14
Brazilian Steel Conference- 2012
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
15
Brazilian Steel Conference- 2012
U.S. finished steel demand forecast
Forecast
Actual ADC
Assumes no
second recession
Source: CSM, FW Dodge, AHAM, First River
16
Brazilian Steel Conference- 2012
Auto build & non-res construction are recovering,
but not to previous peak
NA Auto Build
(Million Units)
Forecast
Non-Res Construction
(Million Sq. Feet)
Forecast
Non-Res up 26%
YTD 2012 over 2011
Source: CSM Worldwide, FW Dodge
17
Brazilian Steel Conference- 2012
Lead times
Excellent Indicator
Source: Steel Market Update
Maybe Today 2.5 Weeks
18
Brazilian Steel Conference- 2012
Comments on Current N.A. Steel
Industry
• Underlying Weak Economy, with less than 3% GDP and estimates
downward.
• Recovery underway, but very slow – Fragile
• North American steel market under pressure with unused capacity
• Increased import percentages 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, energy, and variable cost controls are major
drivers
• Scrap prices down $60 early June
• Economic growth turning point is always two quarters away
• Market cap values at historic lows – Opportunities to buy?
19
Brazilian Steel Conference- 2012
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
20
21
Brazilian Steel Conference- 2012
Scrap
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 24 million tons in 2011
• 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
22
Brazilian Steel Conference- 2012
Energy
Abundant Domestic Natural Gas is a Game Changer in
U.S.
23
Brazilian Steel Conference- 2012
Energy
Gas Will Remain the Dominant Fuel For Electric
Generation
• Coal Technologies are Struggling
– Coal Gasification (Duke)
– Carbon Capture and Storage (AEP)
• No Supply Technologies are Remotely Competitive with GasFired Generation
• Nuclear, Wind and Solar are Heavily Dependent on Federal
Subsidies
• Shift in Clean Energy Mandates & Infrastructure Costs from
Federal Budget to Industrial Utility Ratepayer
24
Brazilian Steel Conference- 2012
Cooperation within the Americas
• On May 22, 2012, Jorge Gerdau Johannpeter, Chairman of
Gerdau, received the Americas Society’s outstanding
leadership award. During his acceptance he communicated
four vision points:
– Need for partnerships/cooperation/collaboration among the players in
the Americas
– Need to significantly invest in infrastructure within the Americas
– Need for meaningful tax reform for improved competitiveness within
the Americas
– Need for educational initiative for a trained workplace
We agree!
25
Brazilian Steel Conference- 2012
• Volatile times continue,
Final Thoughts
Maybe between recessions
• 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 will continue especially in U.S. industry until economic
fundamentals are in equilibrium. Limited visibility…
• Early June Troubling
• Current status of scrap restrictions is unsustainable
• Cooperation within Americas is critically important
• Reasons for optimism in steel in North America:
– Favorable gains with reemerging manufacturing base
– Scrap-based, 75% of cost – local supply
– Low cost on global basis (energy is positive, labor less than 10%, others have
higher transportation costs)
– Relatively strong market and resiliency
– Better company balance sheets
26