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Washington’s Impact on Steel
Thomas A. Danjczek, PresidentSteel Manufacturers AssociationNovember 2, 2004
Concrete Reinforcing Steel InstituteFall Business Meeting, 2004
Concrete Reinforcing Steel InstituteFall Business Meeting, 2004
1. SMA
2. Changes– August 2003– Scrap Impact– World Steel Production
3. China, China, China…– Key Statistics– Steel Production– SMA Mission– Lessons Learned– Currency
4. Other Government Impacts– Exchange Rates– Value of the Dollar– Scrap Imports/Exports– US Overhead Costs– TEA 21 Lunacy
5. Steel Production Costs– Key Issues– Energy & Raw Material
Costs– Asset Values– Bankruptcy/Restarts
6. Conclusion
Washington’s Impact on Steel
Concrete Reinforcing Steel InstituteFall 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
Concrete Reinforcing Steel InstituteFall 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
Evaluate Washington’s Impact?Concrete Reinforcing Steel InstituteFall Business Meeting, 2004
Steel DemandWeakening
201 Tariffs/ExclusionsIncreasing
Imports
Bankruptcies
Semi-Finished Imports
N.A. Economy
Plant Closures/Restarts
Perennial Problems
Consolidations
US PBGC
Mini-mill IndustryCondition
Pricing Volatility
ISG’s Labor Contract
Exchange RateShifts
Public Policy
Legacy Costs
Operating Costs Benefits& Energy
Capital Constraints
Concrete Reinforcing Steel InstituteFall Business Meeting, 2004
Up $130 since June 2004!
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…
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nes
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25.0%
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35.0%
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EA
F S
hare of Production, %
Forecast… Forecast (MT)2005: 1,075.02004: 1,015.02003: 964.72002: 903.12001: 850.22000: 847.61999: 789.0
Forecast (MT)2005: 1,075.02004: 1,015.02003: 964.72002: 903.12001: 850.22000: 847.61999: 789.0
EAF %(Line, Right Scale)
EAF %(Line, Right Scale)
World Steel ProductionForecast
World Steel ProductionForecast
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)
Concrete Reinforcing Steel InstituteFall Business Meeting, 2004 China China China…
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.
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1980 1985 1990 1995 2000 2005 2010 2015
China
United States
Courtesy – Metal Strategies
Concrete Reinforcing Steel InstituteFall Business Meeting, 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 Governmentsubsidies provided, loss of US steel customer base
Key Question When will capacity & production exceed domestic demands
SMA Study Mission to China – August 2004
Concrete Reinforcing Steel InstituteFall Business Meeting, 2004
Government - Control capital through state banks- Control growth through land availability- Control output through electrical power andplanning 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
Lessons Learned
Concrete Reinforcing Steel InstituteFall Business Meeting, 2004
Cost - Capital construction est. @ 40% of US costs- Manpower est. a magnitude 10 to 1 vs. US (Objective is to employ people)- Power cost similar to US @ 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!
Lessons Learned
Concrete Reinforcing Steel InstituteFall Business Meeting, 2004
SMA Mission # 2
Next Mission – November 5 – 13, 2004
Objectives
• Observe First-hand Current Chinese MarketConditions & Developments
• Interact Directly with Government & AssociationChinese Steel Industry
• Build on First Mission with Goal of ImprovedStrategic Understanding of Long-Term
Impact to US Industry
Courtesy – IMF
Courtesy – IMF
Courtesy – IMF
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).
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Jan-75 Jan-80 Jan-85 Jan-90 Jan-95 Jan-00
Inde
x 19
90 =
100
Broad Currency GroupBroad Currency Group
Major CurrenciesMajor Currencies
Data through April 2004US$ Real Trade-Weighted IndexUS$ Real Trade-Weighted Index
Courtesy – Metal Strategies
VALUE OF THE U.S. DOLLARScrap prices are inversely related to the dollar
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jor
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Do
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$150
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Scr
ap
Pric
e -
$/G
T
Source: AMM, Federal Reserve
Scrap Price
Dollar Index
Courtesy – Metal Strategies
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.
50
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1990 1992 1994 1996 1998 2000 2002 2004
Ma
jor
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rre
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es
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2.5
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Fin
ish
ed
Ste
el I
mp
ort
s -
MT
Source: AISI, Federal Reserve
Finished Steel Imports(12-Month Moving Avg)
Dollar Index
Courtesy – Metal Strategies
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)
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1980 1985 1990 1995 2000
Mill
ion
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s
Consumption Exports
Courtesy – Metal Strategies
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
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1,000
2,000
3,000
4,000
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6,000
7,000
8,000
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Russia Ukraine
Courtesy – Metal Strategies
Concrete Reinforcing Steel Institute
Fall Business Meeting, 2004
From MAPI’s 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. Manufacturing’s 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
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
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)
Summary of Key Issues
• 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 development’s far greater relative impact on sheet minimills until the successful implementation of surcharges.
• Third, ore, coal, and coke prices have risen significantly.
US Steel Production CostsConcrete Reinforcing Steel Institute
Fall Business Meeting, 2004
Scrap now around $400
$0$50
$100$150$200$250$300$350$400$450$500
No.1 HM
Scrap
No.1
Busheling
MPI DRI Coke
Jan-02 Apr-04 May-04
Concrete Reinforcing Steel InstituteFall Business Meeting, 2004
Steel Energy and RawMaterial Costs
In the 28 months from January 2002 to May 2004, raw material and energy input costs for U.S. steelmakers have increased dramatically.
$0$10$20$30$40$50$60$70$80$90
Pellets Coal Ocean
Freight
Gas Fuel Oil
Jan-02 Apr-04 May-04
+65%
+110%
+450%
+155%
+82%
Courtesy – Metal Strategies
Concrete Reinforcing Steel InstituteFall Business Meeting, 2004
Steel Energy and Raw
Material Costs (cont.)
RECENT U.S. STEEL ASSET TRANSACTION VALUESAcquisition range has been $60 to $90/ton shipped for shuttered operations and $160 to $260/ton for ongoing businesses.
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$/Ton 20 $60 $68 $70 $79 $90 92 $102 $167 $175 $180 $194 $225 $230 $255 $265
G'twn LTV Acme Kingm. Trico Qual. Rouge Weir Beth Nat'lCo-Steel
Heartl REPAubur
nBirmin
g.LTV HDG
Liquidated Companies
Ongoing Businesses
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
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.
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Jan-00 Jan-01 Jan-02 Jan-03 Jan-04
US
$ P
er T
onne
Brazil-China Australia-China
Courtesy – Metal Strategies
Technical Read on Crude Oil Prices
Courtesy – JP Morgan
Technical Read on Natural Gas Prices
Courtesy – JP Morgan
Concrete Reinforcing Steel InstituteFall Business Meeting, 2004 Conclusion
•Don’t 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
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