AWPA – Annual Meeting
Steel Producers Issues in
Today’s Economy
Thomas A. Danjczek
President
Steel Manufacturers Association
February - 2009
AWPA – Steel Producers Issues in Today’s Economy
Outline
•SMA
•Today’s Concerns
•Today’s Deterioration
•China, China, China
•Other Issues (Energy, GHG, Infrastructure Spending, Mercury)
•Product Data 2008
•Protectionism and Trade Issue
•Is Enough Being Done?
•Conclusion
AWPA – Steel Producers Issues in Today’s Economy
SMA
• The Steel Manufacturers Association (SMA)
– 36 North American companies:
31 U.S., 3 Canadian, and 2 Mexican
– 125 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
AWPA – Steel Producers Issues in Today’s Economy
SMA
• Production capability
– EAF steel producers accounted for 60% of U.S. production in 2007
– SMA represents over 70% of all U.S. steel production
• 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
Steel-Wire Executive-4th Quarter 2008
AWPA – Steel Producers Issues in Today’s Economy
The Obvious Concerns
-Our Jobs
-US Recession and financial meltdown
-Infrastructure Spending
-Value of the RMB
-Energy shortfalls and pricing
-Federal Bailouts
-China, China, China
-Global Steel Overcapacity
-Subsidies and other trade distortions
-US Legislation (111th Congress and the 44th President)
AWPA – Steel Producers Issues in Today’s Economy
NAFTA Economic Growth Is Decelerating
NAFTA Real GDP Since 2006
USA
7
Canada
Mexico
Real GDP
(Quarterly % Change, SAAR)
6
5
4
3
2
1
0
-1
-2
2006Q1
2006Q3
Sources: Bureau of Economic Analysis, Statistics Canada, Bloomberg
2007Q1
2007Q3
2008Q1
2008Q3
AWPA – Steel Producers Issues in Today’s Economy
The United States Is in a Recession
U.S. Gross Domestic Product
%
4
3.9
3.5
3
3.2
3.3
2.5
2.5
2
2.2
2.0
1.5
1
1.3*
thru
9 mo.
0.5
Source: Federal Reserve Board
20
08
20
07
20
06
20
05
20
04
20
03
20
02
0
AWPA – Steel Producers Issues in Today’s Economy
U.S. Business Activity Has Fallen Sharply
U.S. Purchasing Managers Index (PMI) Since 2003
70
EXPANDING
65
60
55
50
CONTRACTING
45
40
35
2003
Source: ISM
Lowest level since 1982
2004
2005
2006
2007
2008
AWPA – Steel Producers Issues in Today’s Economy
The U.S. Housing Market Is Plummeting
Residential Construction Market
Permits
Starts
Completions
2.4
2.2
2.0
1.8
1.6
1.4
1.2
1.0
0.8
2001
Source: US Dept of Commerce
2002 2003
2004
2005 2006
2007 2008
AWPA – Steel Producers Issues in Today’s Economy
North American Light Vehicle Production
US LV SALES
18
1.18
0.74
Millions of Units
Millions of Units
17
17.0
17.2
2007 -37%
2008
16.4
16
NOV
15
15.4
15.2
15.6
NOV
15.9 15.8 15.8
15.4
15.5
15.3
15.1
14.9
AMRC Data
Fall ‘08
14
13.9
13
Actual
Actual
13.0
12.8
12
'93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
Source: Automotive Market Research Council, Fall 2008
AWPA – Steel Producers Issues in Today’s Economy
Steel Production in the U.S. Has Fallen
Dramatically
Production
(Thous. Metric Tons)
Dow Jones Index - 2008
13,000
2,300
2,100
12,000
Dow Jones Value
2,500
1,900
11,000
1,700
1,500
10,000
1,300
9,000
1,100
900
8,000
700
500
7,000
h
h
y
y
y
rc
rc
ar
ar
ar
a
a
u
u
u
r
n
n
M
M
b
Ja
Ja
Fe
ri l
Ap
y
Ma
Dow Jones Daily Closing Value
Source: Dow Jones Industrial Index, AISI
y
Ma
ne
Ju
ly
Ju
2008 Weekly
ly
Ju
r
r
r
r
r
t
us
be mbe
be mbe obe
g
m
m
t
e
e
e
e
Au
Oc
pt
pt
ov Nov
e
e
N
S
S
U.S. Weekly Raw Steel Production
AWPA – Steel Producers Issues in Today’s Economy
After Years of Growth,
Global Steel Consumption Has Fallen
Global Apparent Steel Consumption (Annualized)
1,500
1,450
1,400
Millions of MT
1,350
1,300
1,250
1,200
1,150
1,100
1,050
1,000
1Q
2005
2Q
2005
3Q
2005
4Q
2005
1Q
2006
2Q
2006
3Q
2006
Source: World Steel Dynamics, “Global Alert # 31” (Oct. 1, 2008) at 12.
4Q
2006
1Q
2007
2Q
2007
3Q
2007
4Q
2007
1Q
2008
2Q
2008
3Q
2008
(e)
AWPA – Steel Producers Issues in Today’s Economy
Global Steel Capacity Through 2008
World Steel Capacity Grew by Over 50% in the Past Eight Years.
20
2,000
Steel Capacity (thousand metric tons)
1,564
90*
1,456
1,500
15
1,361
1,250
1,065
1,065
1,098
1,173
1,249
10
1,000
750
5
500
250
0
0
2000
2001
2002
2003
2004
2005
2006
World Crude Steel Capacity 2000-2008
CAGR *Additions to Capacity
World Crude Steel Capacity
Source: German Steel Federation and IISI verifications
2007
2008
Current Average Growth Rate (CAGR)
1,654
1,750
AWPA – Steel Producers Issues in Today’s Economy
Crude Steel Supply in China, 2005-2009
(million metric tons)
2005
2006
2007
2008
2009 (e)
Capacity
450.0
530.0
599.0
640.0 (e)
660.0
Production
352.0
416.0
489.0
498.0
470.0
Net Exports
0.5
29.7
41.7
51.0
49.0
Source: Growell Research, “China Steel Capacity Forecast for 2006-2010” and CISA Presentation at OECD,
December 15, 2008.
AWPA – Steel Producers Issues in Today’s Economy
Imports from China into NAFTA are Rising
CHINESE IMPORT SHARE OF U.S. APPARENT SUPPLY - 2008
30%
PERCENT 25%
OF U.S.
DEMAND 20%
15%
PERCENT OF
U.S. FINISHED10%
IMPORTS
5%
CHINESE % OF IMPORTS
BE
R
SE
PT
EM
AU
G
US
T
JU
LY
2008
CHINESE IMPORT SHARE OF TOTAL DEMAND
Source: AISI
JU
NE
AY
M
AP
RI
L
AR
CH
M
Y
AR
FE
BR
U
JA
NU
A
RY
0%
AWPA – Steel Producers Issues in Today’s Economy
China’s Capacity Now Exceeds Chinese Demand
For Many Key Steel Products
2008 Difference Between Chinese Capacity and Chinese Demand
35
Million Metric Tons
30
25
20
15
10
5
0
Hot-rolled
steel
Plate
OCTG
Wire rod
Source: World Steel Dynamics, “Global Steel Alert # 31” (Oct. 1, 2008) at 17, 25.
Rebar
Cold-rolled
steel
Galvanized sheet
AWPA – Steel Producers Issues in Today’s Economy
China Steel Comments
•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 to absorb overproduction
•Chinese steel industry is overbuilt and under-demolished
AWPA – Steel Producers Issues in Today’s Economy
China’s Trade Surplus with
the U.S.
Year
China’s Trade Surplus
2001
$22 billion
(year China joined WTO)
2006
$177 billion
2007
$262 billion
(up 47.7%)
The U.S. has lost 3.3 million manufacturing jobs
since 2000… imbalances cannot go on forever.
AWPA – Steel Producers Issues in Today’s Economy
China Conclusions
It’s About Competitiveness
US producers have a competitive advantage in metallics due to US
scrap and China’s need to import over half its ore; US producers are on par
with China on availability and price of energy, while labor is much lower in
China; China’s labor savings do not equal US efficiency and Transportation
cost from China.
US is competitive!!!
North American steel industry CANNOT compete against Chinese
steel companies that are financed and controlled by their government.
AWPA – Steel Issues in Today’s Economy
Other Issues - Energy
AWPA – Steel Producers Issues in Today’s Economy
Other Issues - Energy
AWPA – Steel Producers Issues in Today’s Economy
Other Issues - Energy
AWPA – Steel Producers Issues in Today’s Economy
Other Issues - Energy
Energy Summary
• US power generation industry is at a critical juncture, with social
pressures and pending legislation demanding massive changes.
•Competing demands for reliable, low-cost energy and climate change
mitigation appear incongruent.
•Our Nation’s liquid fuel dependence on foreign resources continue to
grow.
•Uncertainty of regulatory outcomes and rising costs impact industry’s
willingness to commit capital investments, endangering near-term
production capacity.
• The United States must foster new processes that address conflicting
energy objectives simultaneously.
AWPA – Steel Producers Issues in Today’s Economy
Other Issues - GHG
The U.S. Steel Industry Has One of the
Lowest Process Emissions Intensities
in the World
1.60
1.36
1.40
1.20
1.12
Metric Tons CO2/Metric Ton of Steel
1.05
1.00
0.93
0.96
Mexico
Germany
0.80
0.60
0.49
0.46
0.40
0.20
0.00
United States
Canada
DRAFT
Australia
Russia
Japan
8
AWPA – Steel Producers Issues in Today’s Economy
Other Issues - GHG
Process GHG Emissions Per Ton Have
Fallen By 48% Since 1990
1.20
Tons CO2/Ton Steel
1.00
0.80
0.60
0.40
0.20
0.00
1990
1995
2000
2001
2002
DRAFT
2003
2004
2005
20067
AWPA – Steel Producers Issues in Today’s Economy
Other Issues - GHG
Climate Change Legislation
Steel Manufacturers Association:
•Supports the safety valve concept for limiting allowance pricing, in any
cap & trade program;
•Recognizes the international component of the climate change issue,
and would support the the use of industrial offsets, regardless of locale,
as one way to respond to greenhouse gas emissions; and
•Believes that the cost associated with any cap and trade program must
avoid double charging emissions (ie- The electricity generator and EAF
mill consumer each must only be counted once on emissions).
AWPA – Steel Producers Issues in Today’s Economy
Globalization and Consolidation Developments Have Dramatically
Changed the NAFTA Steel Landscape
Acquiring Company
Acquired Company
Arcelor Mittal
Arcelor
Dofasco
Mittal
Ispat Inland
Bethlehem
ISG
LTV
US Steel Plate
Weirton
Acme-Riverdale
Georgetown
Sicartsa
Bayou
US Steel
Lone Star
National
LTV Tin
ISG IH#2 Pkl.
Stelco
BlueScope
IMSA Steelscape
Acquiring Company
Acquired Company
Nucor
Connecticut Steel
Trico
Birmingham
Corus Tuscaloosa
Worthington-Decatur
Marion
Nelson Steel
Harris Steel
Auburn Steel
North Star Arizona
American Iron Reduction
LMP Steel & Wire
The David J. Joseph Co. (Scrap)
Gerdau Ameristeel
Sheffield
Chaparral
Co-Steel
North Star
Sidetul Tultitlan
Quanex Macsteel
Corsa
SSAB
ICH/Grupo Simec
Republic
Ternium
Hylsa
IMSA
Ipsco Plate (U.S.)
Steel Dynamics
GalvPro-Jeffersonville
The Techs
Roanoke Steel
Steel of West Virginia
Omnisource (Scrap)
Acquiring Company
Acquired Company
Duferco/NLMK
Winner Steel
Evraz
Oregon Steel
Claymont Steel
Ipsco Canada
Severstal
Arcelor Mittal-Sp. Pt.
Rouge
WCI
Wheeling Pitt
CSN
Essar
Heartland
Algoma
Minnesota Steel
OAO TMK
Ipsco Tubular (U.S.)
Tenaris
Maverick Tube (U.S.)
Prudential Canada
Hydril Company
1/1/09
AWPA – Steel Producers Issues in Today’s Economy
Infrastructure Stimulus
• US aging infrastructure is functionally obsolete
and structurally deficient
• FHWA estimates $78.8 billion per year for the
next 20 years to maintain infrastructure, $131.7
billion to improve
• Gas tax at 18.54/gallon generates app. $40
billion
• Current gas tax woefully insufficient, only half of
maintenance
AWPA – Steel Producers Issues in Today’s Economy
U.S. Steel Scrap
(Data in million metric tons)
Salient
Statistics—
United States:
2003
2004
2005
2006
2007(e)
2008(e)1
Production
Home Scrap
17
14
15
13
13
12
Production
Purchased
Scrap
56
59
58
58
58
52
Imports for
Consumption
4
5
4
5
5
4
Exports
11
12
13
15
15
23
Consumption,
reported
65
67
66
66
66
59
Source: US Geologic Survey, January 2008
1. 2008 is a rough estimate based on 3 normal quarters; 4 th Quarter @ 60% steel production
AWPA – Steel Producers Issues in Today’s Economy
US Long Product Data 2008
For rebar, wire rod, merchant bar, light shapes, parallel flange sections, structural
products1
 Through September 2008, domestic shipments plus exports were
4.1% higher than 2007, at 18,918,329 short tons, or roughly 2.1 mmt
per month.
 Data shows domestic shipment decline of 16% in October from
September’s level.
 Data shows domestic shipment decline of another 27% in November
from October’s level.
 Total domestic produced shipments have fallen approximately 50% in
the 4th quarter, compared to the first 9 months of 2008.
1
December 2008 SMA Market Report (Moss/Taccone)
AWPA – Steel Producers Issues in Today’s Economy
Wire Rod Product Data 2008



Total Mill Shipments of Wire Rod were unchanged YOY
(2008 – 3,182,008 tons; 2007 – 3,178,027 tons)
First 9 months of 2008, mill shipments – Quarterly Rate –
903,604 tons/qtr
Last Quarter of 2008 mill shipments – Quarterly Rate –
471,196 tons/qtr
Off 47.8% in 4th Quarter 2008, compared to 1st Quarter 2008
December 2008 SMA Market Report (Moss/Taccone)
AWPA – Steel Producers Issues in Today’s Economy
AWPA – Steel Producers Issues in Today’s Economy
Free Trade vs. Protectionism
Is “Protectionism” the enemy of “Free Trade”
Protectionism
-Predatory Pricing
-Trade distorting subsidies
-Government Ownership
-National power by protecting our industries and state
-Piling up currency measures
-One way trade
Need “Balanced” Trade over “Mercantilism”
Who’s the Protectionist?
1. Taken in part from C. Blum
AWPA – Steel Producers Issues in Today’s Economy
Is Enough Being Done?
Raw Materials
No
Barriers continue
Energy
No
China
No
Lack of policy
continues
Currency manipulation,
Subsidies, Not playing by
the rules
Trade
No
Distortions continue,
Who’s the protectionist
No long term structural policy changes are being proposed in
Washington for taxes, trade imbalance, and energy.
AWPA – Steel Producers Issues in Today’s Economy
Conclusion
U.S. Steel Industry in Better Position Today to Manage the Down Cycle
(but what a down cycle!)
― Improved Economics From Consolidations, i.e. “Reacted Quicker in
October”;
― Improved Control of Variable Costs
― Scrap-Based Metallics (In 2009, U.S. will be nearly 2/3 EAF-based
― Energy Costs
― Transportation Costs
― Labor Efficiency (U.S. at Below 2MH/Ton; Minimills Often Below
1MH/Ton)
― Improved Inventory Control (Inbound Materials, Steel, and Customer
Products). NOT THE OLD INVENTORY OVERHANG!
― Improved Debt and Equity; Balance Sheet Position
― Still Challenging – But Reasons for Meaningful Long-Term Optimism!