Current Drivers Impacting

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Valve Manufacturers Association of America Annual
Meeting
Current Drivers Impacting Steel Competitiveness
Thomas A. Danjczek, President Steel Manufacturers
Association October 15, 2004
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VMAA Annual Meeting
Current Drivers ImpactingSteel Competitiveness

• SMA
• Changes
• August 2003
• Scrap Impact
• World Steel Production
• China, China, China
• Key Statistics
• Steel Production
• SMA Mission
• Lessons Learned
• Currency

• Steel Production Costs
• Key Issues
• Energy Raw Material Costs
• Asset Values
• Exchange Rates
• Bankruptcy/Restarts
• Scrap Costs
• Other Costs
• Restrictive Scrap Exports
• Freights
• Coke
• Energy
• Market
• Overview
• Public Works Construction
• Conclusion

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VMAA Annual Meeting

• The Steel Manufacturers Association (SMA)
• 37 North American companies
• 30 U.S., 5 Canadian, and 2 Mexican
• 107 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
• Mini-mill Electric Arc Furnace (EAF) producers

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VMAA Annual Meeting

• Production capability
• SMA represents over half of U.S. steel production
• 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 50 in 2002 2003, and
  anticipated to be 60 by 2010

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In August 2003, The Times they were achanging
VMAA Annual Meeting
Capital Constraints
Legacy Costs
Steel Demand Weakening
Consolidations
Public Policy
Pricing Volatility
201 Tariffs/ Exclusions
Bankruptcies
Increasing Imports
Mini-mill Industry Condition
Semi-Finished Imports
Exchange Rate Shifts
N.A. Economy
Perennial Problems
Plant Closures/ Restarts
Operating Costs Benefits Energy
US PBGC
ISGs Labor Contract
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VMAA Annual Meeting

• Up 130 since
• June 2004!

7
ANNUAL WORLD STEEL PRODUCTION OUTLOOKWorld steel
output looks set to rise 5 or 50 MT MT in 2004,
after gains of 62 MT and 53 MT in 2003 and 2002,
respectively, largely on the strength of China
coupled with the recent onset of rest-of-world
economic recovery. China steel production rose
by 20. Increases continue
Forecast
World Steel Production Forecast
Forecast (MT) 2005 1,075.0 2004
1,015.0 2003 964.7 2002 903.1 2001
850.2 2000 847.6 1999 789.0
EAF (Line, Right Scale)
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VMAA Annual Meeting
China China China

• A few notes on China from 2003, 2004 and forward
• Consumed 25 of world coke supply in 03
• Coke production ramping up in 04 and 05
• Consumed 25 of world iron ore supply in 03
• Iron ore production ramping up in 04 and 05
• Consumed 20 of world scrap supply in 03
• Consumed 240M mtons of steel in 03
• Produced 220M mtons of steel last year (est.
  240M mtons 04)
• Consumed 40 of world concrete supply
• VW will produce and sell 150M cars in China this
  year
• GM will invest 6B in China by 2006 (rival VW as
  1 supplier)
• Average income / year 1,200 US ( 5,000 for
  steelmakers)

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CHINA STEEL PRODUCTIONChina produced 220 MT of
crude steel in 2003 double the next largest
producer Japan at 110.5 MT and 2.4 times the U.S.
(92.2 MT, shown) and will produce as much as
275 MT, 350 MT, and 425 MT by 2005, 2010, and
2015, respectively.
China
United States
Courtesy Metal Strategies
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VMAA Annual Meeting
SMA Study Mission to China August 2004

• Team Nine member steel company representatives
• (3 presidents 3 V.P. operations 3 experts
  -
• melting, rolling engineering)
• Purpose Gain First Hand Knowledge in mills
  mill
• builders
• Major Concern Given high degree of Chinese
  Government
• subsidies provided, loss of US steel
  customer base
• Key Question When will capacity production
  exceed
• domestic demands

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VMAA Annual Meeting
Lessons Learned

• Government - Control capital through state banks
• - Control growth through land availability
• - Control output through electrical power and
• planning assets
• - Steel ownership 90 SUBSIDIZED!
• - Government shutting down less efficient
• operation measured by energy consumption
• environmental pollution
• Infrastructure - Massive construction Vacant
  office space?
• - Significant power outages building
  nuclear
• plants
• - Organized approach to Growth
• - Water transportation is a major asset
• Quality - Qualified personnel with enthusiasm
  and pride
• - Observed both world class marginal
  facilities

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VMAA Annual Meeting
Lessons Learned

• Cost - Capital construction est. _at_ 40 of US
  costs
• - Manpower est. a magnitude 10 to 1 vs. US
• (Objective is to employ people)
• - Power cost similar to US _at_ 6/KwH except
  little
• difference between peak non-peak (2)
• Scrap - 40 tariffs on scrap exports
• - China est. to import 10 million tons of
  scrap in
• 2004
• Miscellaneous - Rebar usage disproportionately
  high
• - Limited personnel safety procedures
• - Huge automotive growth
• - Difficult to understand success of private
  steel
• facilities
• - 80 of exports from Coastal zone
• - Duck tongue tastes like pencil erasers!

13
Courtesy IMF
14
Courtesy IMF
15
Courtesy IMF
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CHINA CONCLUSIONS Currency Manipulations

• For eight and one-half years, China has
  maintained a fixed exchange rate of 8.3 Yuan to
  the dollar. China has printed any amount of yuan
  necessary to purchase dollars to maintain a fixed
  artificial rate, giving it enormous export
  advantage, and creating a China trade surplus
  with the US reaching 124 billion in 2003.
• In the two-year period, 2002-2003, US imports
  of manufactured goods from China accounted for 56
  percent of the total growth in US imports of
  manufactured goods during the period. The US
  trade deficit in manufactured goods with China
  was 128 billion in 2003. The overall US trade
  deficit with China is now the largest bilateral
  trade imbalance ever seen in the history of world
  trade.
• The United States should insist that China
  change its exchange rate regime which allows it
  to sell undervalued goods in export markets at
  costs denominated in undervalued yuan.
  Simultaneously, China must relax its tight
  capital controls, which have resulted in an
  accumulation of foreign exchange acquired from
  export sales, amounting to 420 billion in 2003,
  about one-third of Chinas GDP. China must stop
  excessive issuance of undervalued yuan, and pay
  for its imports with foreign exchange.
• Today, China can absorb a revaluation without
  an economic collapse, versus a token one which
  would respond to the problem in form only, rather
  than a needed significant revaluation. If
  inadequate US policy causes a delay for another
  five years, however, China, the US, and the world
  economy are in for a very hard landing. At that
  point, an inevitable huge revaluation of the yuan
  will occur, which it must, when US policy
  officials then confront US trade, current
  account, and capital account deficits of
  disastrous proportions. US policy must
  effectively address this problem, now. So far,
  it has not.

May 12, 2004 SMA Press Release
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Summary of Key Issues
VMAA Annual Meeting
US Steel Production Costs

• Relative operating costs in the U.S. steel
  industry have changed dramatically over the past
  12 months
• First with the introduction of the ISG-style
  restructuring which took out 40-50 per of hot
  band costs as a result of labor contract changes,
  and a further 25-50 per ton with the removal of
  past legacy costs.
• Secondly, with the surge in metallics and energy
  prices and this developments far greater
  relative impact on sheet minimills until the
  successful implementation of surcharges.
• Third, ore, coal, and coke prices have risen
  significantly.

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Scrap now around 400
VMAA Annual Meeting
Steel Energy and Raw Material Costs
19
In the 28 months from January 2002 to May 2004,
raw material and energy input costs for U.S.
steelmakers have increased dramatically.
VMAA Annual Meeting
Steel Energy and Raw Material Costs (cont.)
110
450
65
82
155
Courtesy Metal Strategies
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There are three key areas in which North American
mills differ widely on in respect to ultimate
unit product costs and profit margin position
Wide Variation in Costs
VMAA Annual Meeting

• Spot market exposure for raw materials and energy
  (a big negative at the moment)
• Example ISG-Sparrows Point and ISG-Burns Harbor
  are on the complete opposite end of the spectrum
  here
• Contract market exposure for steel product sales
  (a big negative at the moment)
• Companies such as AK Steel who normally benefit
  from such protection, are now being negatively
  impacted
• General ability to most effectively manage base
  price and surcharge adjustments
• There are much bigger variations here than one
  might think

Courtesy Metal Strategies
21
RECENT U.S. STEEL ASSET TRANSACTION
VALUESAcquisition range has been 60 to 90/ton
shipped for shuttered operations and 160 to
260/ton for ongoing businesses.
Ongoing Businesses
Liquidated Companies
CSN disclosed in October 2003 that its
acquisition price for Heartland was actually 175
million instead of the previously-report 69
million. Acquisition prices include all assumed
liabilities.
Courtesy Metal Strategies
22
EXCHANGE RATES INDEXThe real trade-weighted
US index for major currencies has dropped 22
from the recent 2-02 peak (115.8) and 30 from
the all-time record high in 1-85 (124.9), but
was still up 10 from the 7-95 record low (80.4).
US Real Trade-Weighted Index
Data through April 2004
Broad Currency Group
Major Currencies
Courtesy Metal Strategies
23
VALUE OF THE U.S. DOLLARScrap prices are
inversely related to the dollar
Scrap Price
Dollar Index
Source AMM, Federal Reserve
Courtesy Metal Strategies
24
VALUE OF THE U.S. DOLLARThe strong relationship
between steel imports and the dollar is even more
clear when a 12-month moving average is used.
Finished Steel Imports (12-Month Moving Avg)
Dollar Index
Source AISI, Federal Reserve
Courtesy Metal Strategies
25
July 2004 Above 300 Again!
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Back to the top in July!
Courtesy - AMM
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RUSSIA AND UKRAINE SCRAP EXPORTSPartial export
bans, restrictions and duties designed to protect
local steelmakers have restricted the flow of
exports to the world market
Courtesy Metal Strategies
28
U.S. SCRAP CONSUMPTION AND EXPORTSDemand for
U.S. scrap increased by 3 MT in 2003, driven by a
15 surge in exports and a slight gain in
domestic demand (EAF and BOF production down 3
and up 1, respectively)
Courtesy Metal Strategies
29
OCEAN FREIGHT RATESOcean freight rates increased
4.5-fold from 10,000/day to 45,000/day between
early-2003 and early-2004 and have recently
declined by about 5 to 10 pr tonne since
late-March.
Courtesy Metal Strategies
30
IRON ORE PRICES - ANNUALThe 2004 iron ore
price-increase benchmark of 18.5 was established
in early-January by CVRD, following a 9 gain in
2003. China now accounts for over 25 (110 MT) of
world sea-borne demand, while three producers
(CVRD, RTZ and BHP) now control over 80 of the
supply.
Pellets
Lump
Fines
Prices shown are from CVRD (Brazil) to Western
European steel customers (fob)
Courtesy Metal Strategies
31
Technical Read on Crude Oil Prices
Courtesy JP Morgan
32
Technical Read on Natural Gas Prices
Courtesy JP Morgan
33
STEEL END-MARKET OVERVIEWThree broad sectors
construction, autos, and industrial equipment
account for over 75 of total U.S. steel
consumption by ultimate users.
Appliances, Office Furniture 2.5
All Other 15
60 Non-Residential 30 Public Works 10
Residential
Containers 4
Construction 40-45
Energy-4
Ind. Equip. 15-18
Autos 18-20
Off-Highway Vehicles Freight Cars Barges,
Ships Other Industrial Equip.
55 Light Trucks/ SUVs 30 Passenger Cars 5
Commercial Trucks, Buses 10 After Market
Courtesy Metal Strategies
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VMAA Annual Meeting
Conclusion

• 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