AMM Mexican Steel Conference

1
NAFTA Steel Roundtable

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

2
Outline
AMM Mexican Steel Conference

• 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

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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

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Steel Consolidating, But Still Fragmented
AMM Mexican Steel Conference
TOP 15 Represent 36 of Global Production
Source IISB
6
Active Consolidation Within NAFTA
AMM Mexican Steel Conference

• 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

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Consolidation Opportunities Risks
AMM Mexican Steel Conference

• 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
New Capacity Outpaces Consumption Growth
AMM Mexican Steel Conference
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
China Worlds Most Subsidized Industry
AMM Mexican Steel Conference
More than 50 billion in subsidies
State-owned enterprises account for 91
percent of Chinas 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 unco
ntrolled by central government
Inadequate protection of workers rights and
enforcement of environmental standards
Chinese steel producers enjoy government assistanc
e with energy and other input costs
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China Worlds No. 1 Is Government Directed
AMM Mexican Steel Conference
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.
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China Is the Worlds Largest Exporter
AMM Mexican Steel Conference
Source CISA, 2007 Data Annualized
Source China Customs, 2007 Data Annualized
12
China Bashing
AMM Mexican Steel Conference

• China has NOT become the worlds 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, Chinas
  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
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Raw Materials Governments Still Intervening
AMM Mexican Steel Conference

• 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

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China Central To Current NAFTA Cases
AMM Mexican Steel Conference

• Key NAFTA Steel Trade Cases (Ch. 72 Ch. 73)
• MayNovember 2007

Finding renewed against China on October 10, 2007
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Example - Canada China Growing Value, Market
Share
AMM Mexican Steel Conference
Source World Trade Atlas / AISI.
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AMM Mexican Steel Conference
NAFTA
-Came into effect on Jan. 1, 1994 -One of the
most significant trade events of the 90s -A
trade agreement between three nations -United
States, Canada, and Mexico -Population 426
million -Total GDP 13 trillion -Total Trade
700 billion
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AMM Mexican Steel Conference
Potential Effects of NAFTA
-Prices and wages -Labor markets and
jobs -Imports and exports -State and the local
economy
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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
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Role of NAFTA Governments
AMM Mexican Steel Conference

• 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

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Immediate Focus
AMM Mexican Steel Conference

• 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

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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??? -Chinas restrictive policy of foreign
ownership participation??? -Chinas enforcement
of environmental regulations??? -U.S.
legislation??? -Trade actions??? -When will China
play by market rules???
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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.
• Its 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.