Washington

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Concrete Reinforcing Steel Institute Fall
Business Meeting, 2004
Washingtons Impact on Steel
Thomas A. Danjczek, President Steel Manufacturers
Association November 2, 2004
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Concrete Reinforcing Steel InstituteFall
Business Meeting, 2004
Washingtons Impact on Steel

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

• Other Government Impacts
• Exchange Rates
• Value of the Dollar
• Scrap Imports/Exports
• US Overhead Costs
• TEA 21 Lunacy
• Steel Production Costs
• Key Issues
• Energy Raw Material Costs
• Asset Values
• Bankruptcy/Restarts
• Conclusion

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Concrete Reinforcing Steel Institute Fall
Business Meeting, 2004

• The Steel Manufacturers Association (SMA)
• 35 North American companies
• 31 U.S., 2 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

4
Concrete Reinforcing Steel Institute Fall
Business Meeting, 2004

• 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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Evaluate Washingtons Impact?
Concrete Reinforcing Steel Institute Fall
Business Meeting, 2004
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
6
Concrete Reinforcing Steel InstituteFall
Business Meeting, 2004

• 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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Concrete Reinforcing Steel Institute Fall
Business Meeting, 2004
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
10
Concrete Reinforcing Steel InstituteFall
Business Meeting, 2004
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

11
Concrete Reinforcing Steel InstituteFall
Business Meeting, 2004
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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Concrete Reinforcing Steel InstituteFall
Business Meeting, 2004
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
Concrete Reinforcing Steel InstituteFall
Business Meeting, 2004
SMA Mission 2

• Next Mission November 5 13, 2004
• Objectives
• Observe First-hand Current Chinese Market
• Conditions Developments
• Interact Directly with Government Association
• Chinese Steel Industry
• Build on First Mission with Goal of Improved
• Strategic Understanding of Long-Term Impact to
• US Industry

14
Courtesy IMF
15
Courtesy IMF
16
Courtesy IMF
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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
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VALUE OF THE U.S. DOLLARScrap prices are
inversely related to the dollar
Scrap Price
Dollar Index
Source AMM, Federal Reserve
Courtesy Metal Strategies
19
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
20
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
21
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
22
Concrete Reinforcing Steel Institute Fall
Business Meeting, 2004

• From MAPIs Study, How Structural Costs Imposed
  on US Manufacturers Harm Workers and Threaten
  Competitiveness.
• External overhead costs from taxes, health care,
  pension costs,
• tort litigation add 22 to US unit labor costs
  (5/hours)

Total Burden of Cost Pressures on U.S. Manufacturings Raw Cost Competitiveness ( difference relative to U.S. manufacturers) Total Burden of Cost Pressures on U.S. Manufacturings Raw Cost Competitiveness ( difference relative to U.S. manufacturers)
Cost pressure Foreign Advantage
Corporate tax rates -5.6
Employee benefits -5.5
Litigation costs -3.2
Pollution abatement -3.5
Natural gas prices -0.5
Total cost advantage of nine largest trading partners -18.3
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Concrete Reinforcing Steel Institute Fall
Business Meeting, 2004

• Needs
• Reduce Corporate Tax Burden
• Re-do Treatment of Foreign Source Revenue
• Reduce Health Care Burden by Consumer
  Responsibility
• Reform Pension Plan Funding Rules
• Undertake Serious Legal Reform by Curtailing
  Frivolous
• Law Suits, Placing Large Class Actions in
  Federal Court,
• and Negotiating Legitimate Asbestos Claims

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Concrete Reinforcing Steel Institute Fall
Business Meeting, 2004
2005 Transportation Spending Bill

• TEA 21 NOT Reauthorized
• Interim Stop Gap Approval at Current Rate
• Senate Passed 318 Billion, plus (over 6 years)
• House Passed 284 Billion (over 6 years)
• President will veto above 256 Billion
• Probably will be Rolled into an Omnibus
  Appropriations Bill
• NUTZ!!! (Lunacy)

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Summary of Key Issues
Concrete Reinforcing Steel Institute Fall
Business Meeting, 2004
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
Concrete Reinforcing Steel Institute Fall
Business Meeting, 2004
Steel Energy and Raw Material Costs
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In the 28 months from January 2002 to May 2004,
raw material and energy input costs for U.S.
steelmakers have increased dramatically.
Concrete Reinforcing Steel Institute Fall
Business Meeting, 2004
Steel Energy and Raw Material Costs (cont.)
110
450
65
82
155
Courtesy Metal Strategies
28
(No Transcript)
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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
30
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
31
Technical Read on Crude Oil Prices
Courtesy JP Morgan
32
Technical Read on Natural Gas Prices
Courtesy JP Morgan
33
Concrete Reinforcing Steel Institute Fall
Business Meeting, 2004
Conclusion

• Dont count on Washington for help! i.e. TEA 21
• 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