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1
Challenges and Opportunitiesfor the NAFTA Steel Industry
and Governments
North American Steel Trade Committee (NASTC) MeetingOttawa, Canada − May 20, 2004
2
The inaugural NASTC meeting set the stage for promoting further openness in the North American steel
market, and addressing more effectively the common challenges facing the NAFTA steel industry.
Areas of mutual interest include:
• Understanding market developments through trade/market data exchange
• Identifying intra-NAFTA competitiveness problems and solutions/synergies
• Identifying common external trade concerns and developing collective NAFTA responses
• Cooperating on trade policy in multilateral fora (OECD, FTAA, WTO)
• Further exploring, consistent with antitrust regulations, the integration of the North American steel market through appropriate government policies
• Promoting the health and financial stability of the North American steel sector through appropriate government policies
3
The NAFTA steel industry has identified key steel industry fundamentals and proposes
several NASTC opportunities.
•Non-NAFTA imports are diverse, and characterized by a propensity to injure.
StrategicIndustry
NAFTA FinancialSustainability
Trade Flows
NAFTA Steel Strategies
• The steel industry is a strategic and progressive force.
•The NAFTA has resulted in greater openness of the N.A. steel market and has drawn the three industries and governments together for common purposes.
•Recent tight market conditions must be put into the context of long-term industry trends.
•The NAFTA steel industry proposes several NASTC opportunities.
4
The steel industry is a strategic and progressive force in the NAFTA region.
•Strategic industry
•Economic/social contribution
•Market/productivity growth
•Labor efficiency
•Investment/innovation
•Environmental management
StrategicIndustry
NAFTA FinancialSustainability
Trade Flows
NAFTA Steel Strategies
5
Steel is a strategic material for North American manufacturing.
• It is a critical input in all major industrial activities.
─ Construction• Infrastructure• Commercial/Industrial• Residential
─ Automobile and auto parts─ Shipbuilding─ Electrical equipment─ Heavy machinery─ Appliance─ Oil and gas
• It is also vital to national defense and homeland security including the steel that goes into our energy, transportation security and health and public safety infrastructures and our commercial, industrial and institutional complexes.
6
• It directly employs 200,000 people.• It indirectly employs over 1 million people.• It provides a healthy, safe and environmentally
responsible workplace. • It provides highly skilled jobs with above average pay. • It is a significant consumer of natural gas and electricity,
and has demonstrated a commitment to energy conservation.
• It is a strategic link to any successful effort to preserve and strengthen the manufacturing base, and directly impacts many other economic sectors, including the railroad/transportation industries.
The NAFTA steel industry is significant to the three domestic economies in North America – and a strong
steel industry is critical to a strong manufacturing base.
7
The NAFTA industry has been successful in growing steel demand...
NAFTA Steel Demand
Source: U.S. Bureau of Census, Statistics Canada, CANACERO
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 20030
50
100
150
200
Million Net Tons
Series 1Finished Steel Products (shipments + imports - exports)
8
...and has improved its competitiveness by increasing productivity at a faster rate than the economy…
Average Annual Increase in Productivity (1992-2002)
1.4%
3.2%
6.8%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
CanadianEconomy
Manufacturing Steel
Per
cen
tag
e Steel highly efficient, outperforms other sectors and economy
Source: Canadian Steel, CSPA (January 2004)
9
…enhancing labor efficiency to world class levels…
Steel Industry Labor Efficiency
0
5
10
15
20
25
30
35
40
Italy
Germ
any
Japan
USA
Belgiu
m
France UK
Austria
Nether
lands
Sweden
Spain
Finlan
d
Canad
a
S. Kor
ea
Australi
a
Taiwan
Brazil
Argen
tina
N. Zea
land
Saudi A
rabia
S. A
frica
Mex
icoChile
Greec
e
Poland
Hungary
Colum
bia
Thailan
d
Slovak
ia
Turkey
Venez
uela
Czech
Rep
ublicPer
u
Roman
iaIr
an
Indon
esia
Bulgaria
Egypt
Algeria
Ukrain
eC.I.
S.
China
N. Kor
eaIn
dia
man
hou
rs/M
T t
hrou
gh c
old
rolli
ng
Source: World Steel Dynamics 2001 Cost Curve.
10
… and investing more than $3 billion in consolidation and innovation...
U. S. Steel: $1.05 billion
ISG: $1.807 billion
Nucor: $767 million
Other: Ameristeel, Delaware Steel Capital
Industry Consolidation•60% of advanced high-strength steels for automobiles didn´t exist 5 years ago.
•$44 million invested in UltraLight Steel Auto Body (ULSAB) initiatives.
Steel Innovation
11
12
14
16
18
1990 2001
20% reduction since 1990 – substantially better than Kyoto target
CO2 Reductions
Mil
lion
ton
nes
C
0 2
...the industry has also shown strong voluntary environmental performance improvement, in advance
of environmental regulations.
Source: Canadian Steel, CSPA (January 2004)
12
The steel industry is a strategic and progressive force in the NAFTA region.
•The industry has, and continues to develop, strong economic/social fundamentals.
•The industry is succeeding in maintaining steel as the material of choice for North American manufacturers.
•The industry remains critical to a strong NAFTA manufacturing base – including the automotive, construction and energy sectors.
13
NAFTA has resulted in greater openness of the North American steel market and has drawn the three industries
and governments together for common purposes.
• Significant growth in NAFTA steel and steel-related trade
• Closer government/industry link on common challenges
StrategicIndustry NAFTA Sustainability
Trade Flows
NAFTA Steel Strategies
14
Increased, Balanced and Flexible Trade
Source: U.S. Bureau of Census, Statistics Canada, CANACERO Canada/Mexican trade = 2% of total
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 20030
2
4
6
8
10
12
14
Million Net Tons (Thousands)
Can to US US to Can Mex to US US to Mex
Finished Steel Mill Products (million net tons)
The NAFTA has resulted in a significant increase in steel trade among NAFTA countries.
NAFTA
15
Increasingly, steel users of various market segments and sizes are locating in two or more NAFTA countries.
• Automotive
•Ford, General Motors, Daimler-Chrysler, Honda, Toyota, Magna, Blue Bird Coach, Borg Warner, Veltri…
•Service Centres
•Samuel Son, Kenwal, Namasco, Russel Metals, Taylor Steel, ThyssenKrupp/Budd, Kasle, Nissho-Iwai…
•Pipe and Tube
•Copperweld, Bullmoose, NovaAmerican Steel, Maverick…
•Wire and Wire Products
•Michelin Tire, Lincoln Electric, Ivaco, Associated Spring…
•General Manufacturing
•General Electric, TYCO, Masonite, Stanley Works, Butler Manufacturing (Blue Scope)…
16
Also, there is a growing number of steel companies with facilities in more than one NAFTA country.
Canada U.S. Mexico
Dofasco X X X
Gerdau Ameristeel X X
Imsa X X
IPSCO X X
Ispat X X X
Republic Engineered X X
Tenaris - TAMSA X X
Villacero X X
17
The NAFTA reinforces common challenges and opportunities.
•Both industry and governments have recognized the benefits of close consultation and cooperative approaches.
•North American Steel Council (NASC)/North American Steel Industry Coalition (NASIC)
•NASTC
•OECD
•WTO
•FTAA
18
Non-NAFTA imports are diverse, and characterized by a propensity to injure.
• Imports
•Trade Cases
StrategicIndustry NAFTA
Trade Flows
NAFTA Steel Strategies
FinancialSustainability
19
The NAFTA steel market is the most open market in the world. Non-NAFTA originating imports represent a
significant volume in the NAFTA region.
Imports into NAFTA Countries
2001 -- 2003
2001 2002 2003 0
2
4
6
8
10
12
Million Net Tons
US CANADA MEXICO KOREA JAPAN TURKEY GERMANY BRAZIL
us can mex us can mex us can mex
Source: U.S. Bureau of Census, Statistics Canada, CANACERO
20
While Korea, Japan and Germany are the largest steel exporters into the NAFTA region, many other countries
export their excess steel to North America.
NAFTA Finished Steel Mill Product Imports 2001-2003 Million net tons
Brazil 3,416.2
Korea 6,810.3
Japan 6,737.2Germany 5,584.9
Turkey 3,433.28
China 2,717.21Venezuela 1,074.5
Other 35,013.8
India 1,324.295%
10%
10%8%5%
4%2%
53%
2%
Brazil Korea Japan Germany Turkey
China Venezuela Other India
Source: U.S. Bureau of Census, Statistics Canada, CANACERO
21
CURRENT NAFTA STEEL TRADE ORDERS - SOURCE COUNTRIES
JAPAN7%
KOREA6%
RUSSIA6%
UKRAINE6%
OTHER48%
CHINA4%
INDIA5%
ROMANIA4%
SOUTH AFRICA4%
TAIWAN4%
BRAZIL6%
10 CASES
79 CASES
10 CASES
8CASES
11 CASES
9 CASES
9 CASES
(26 COUNTRIES)
7CASES
7CASES
7CASES
7CASES
NAFTA governments repeatedly have found that imports from various countries have injured the
NAFTA steel industry.
164 total cases involving 36 countriesSource: U.S., Canadian and Mexican Governments
22
Non-NAFTA imports are diverse, and characterized by a propensity to injure.
• The NAFTA steel industry supports fairly traded imports.
• However, offshore dumped and subsidized imports lead to downward price movements and injury to the NAFTA market.
• This injury negatively impacts access to capital for customer-driven investments and innovation.
23
Recent tight market conditions must be put into the
context of long-term industry trends.
StrategicIndustry
NAFTATrade Flows
NAFTA Steel Strategies
•Declining prices/return on equity (ROE)
•Overcapacity and trade-distorting practices
•China concerns
FinancialSustainability
24Source: Purchasing Magazine
Historic Volatility of Spot Prices for Ht-Rolled Steel
The NAFTA steel industry has been affected by a historical long-term decline in steel prices.
Hot Rolled Sheet Prices (U.S. Midwest)Purchasing Magazine
100
150
200
250
300
350
400
450
500
1983
1988
1993
1998
2003
Years (by Months)
Do
llars
per
Net
To
n
$Current$Current Trend$Constant 1982-84$Constant 1982-84 Trend
25
This long-term decline in steel prices has resulted in eroded ROE…
Steel Industry Return on Equity
-10
-5
0
5
10
15
20
1998
1999
2000
2001
2002
2003
YEAR
Ret
urn
on
Eq
uit
y
Canadian Companies
US Companies
Source: DBRS
26
...and the inability to raise capital, in a very capital-intensive industry.
Source: DBRS, Mexican industry
Steel Industry Capital Expenditures
0
500
1000
1500
2000
2500
3000
1998 1999 2000 2001 2002 2003
Year
Cap
ex
($U
S M
M) Canadian Companies
US Companies
Mexican Companies
27
Long-term steel price declines are a result of global steel overcapacity, subsidies and other trade-distorting practices
that make steel trade an area of persistent conflict.
Global Excess Capacity
Source: IISI 2003
200
400
600
800
1000
1200
03e050 54 58 62 66 70 74 78 82 86 90 94 98
DemandDemand
Capacity
Millions of Metric Tons
Year
Excess Capacity
28
The root causes of the last steel crisis have not been resolved; enormous foreign steel capacity
additions are planned or underway.•Large steel-producing and exporting countries outside the NAFTA region are currently engaged in significant steel capacity expansions, much of this with foreign government support.
–China will increase capacity 62% in 2005 vs. 2002, climbing from 193 MT to 312 MT/year; capacity is expected to reach 385 MT by 2010
–India plans to produce 100 MT/year by 2020 (vs. current 34 MT)
–Russia plans to build 10 new mini-mills over the next decade – they will produce at least 20 MT/year; two 1 MT/year plants will be online by the end of 2004
–Brazil plans to increase capacity by 30% by the end of 2008
–Indonesia is building a new hot strip mill to produce 2.2-2.4 MT/year
–Korea is building new galvanizing lines, which will produce 1 MT/year
•Along with subsidized steel capacity expansions abroad, subsidized foreign capacity growth in steel-containing goods contributes to the “disappearing North American customer.”
29
Currently, strong demand in China is mitigating and masking the effects of global overcapacity; it is driving
world steel market conditions.Global
Source: IISI 2003
200
400
600
800
1000
1200
03e050 54 5862 66 70 74 78 82 86 90 9498
DemandDemand
Capacity
0
50
100
150
200
250
300
92 93 94 95 96 97 98 99 00 01 02 03e
Production
Consumption
29% Global
12% Global CAGR*: 11.1%
CAGR*: 9.5%
ChinaChina
Source: WSD, Core Report DDDD, “China’s Unstoppable Steel Industry” Aug 2003
China
Excess Capacity
*CAGR=China annual growth rate
30
China, now the second largest economy* in the world, has enough market power to greatly affect global
markets for steel, other metals and key raw materials.
Steel 27 90
Iron ore 34 66
Aluminium 19 51
Primary nickel 11 44
Copper 20 121
2003 % ShareGlobal Growth
2003 % ShareGlobal Demand
*At purchasing power parity exchange ratesSource: CRU
31
CRU: Export FOB Brazil
Slab(dlls/ton)
WSD: China – USA
Ocean Freight(dlls/ton)
00 01 02 03 0499WSD: Export FOB China WSD: FOB Brazil
Pig Iron(dlls/ton)
Coke(dlls/ton)
Tex Report: CVRD FOB Brazil
Iron Ore(dlls/ton)
HM#1 USA(dlls/ton)
American Metal Market
0
50
100
150
200
250
00 01 02 03 0499
00 01 02 03 049928
30
32
34
36
38
40
42
100
140
180
220
260
300
99 00 01 02 03 0450
100
150
200
250
300
350
400
25
30
35
40
45
50
55
60
00 01 02 03 0499120
160
200
240
280
320
360
400
440
480
00 01 02 03 0499
China’s growth has contributed to unprecedented increases in the prices of main steel inputs…
32
…and steel price increases. Increasing prices do not necessarily translate fully into increased profit margins.
Steel Inputs vs. HR Prices (January 1999 = 100)
0
50
100
150
200
250
300
350
400
450
500
Coke
HM#1 Scrap(USA)
HR (USA)Iron Ore
99 00 01 02 03 04Source: AMM (HM#1), WSD (Iron Ore, Coke), CRU (HR Prices)
33
Steel demand in China continues to rise strongly, but the annual percent rate of change is declining…
STEEL DEMAND RATE OF CHANGE (Year to Year)
0
5
10
15
20
25
30
2000 2001 2002 2003 2004e 2005e
YEAR
%
China
Rest of World
World
Source: IISI Spring 2004
34
Major World Steel Exporterssemi-finished & finished product (metric tons)
Source: IISI (est Bel,Turkey, Russia & Ukraiine for 2004)
1998 1999 2000 2001 2002 20030
50
100
150
200
250
BRAZIL JAPAN KOREA BELGIUM FRANCE
GERMANY ITALY TURKEY RUSSIA UKRAINE
…when Chinese demand softens, China’s exports will increase and major exporting countries will redirect their
products to North America, as in the past...
35
…in a highly volatile world market, any slowing in China would negatively impact the NAFTA market.
Spot Price: Hot-Rolled Sheet (midwest market average in US$ / per ton)
$150
$200
$250
$300
$350
$400
$450
$500
$550
(US
$/N
et t
on
)
2002 Q3: $387
2001 Q4: $213
1991 Q2: $280
1988 Q3: $443 2004 Mar: approx. $500+
2003 Q3: $273
HR Steel Prices Remain Highly Volatile*
*According to many outside analysts (e.g., JP Morgan, 4/23/04), world steel prices are likely to recede and margin pressures are likely to increase on global steel producers over the second half of 2004 due to a variety of factors, including a possible slowing of the Chinese economy.
36
Recent tight market conditions must be put into the context of long-term industry trends.
• NAFTA and world steel markets remain highly volatile.• Global steel industry structural imbalances and
worldwide steel trade-distorting practices persist.• No one knows for certain what will happen and when,
but negative impacts from China’s unstable financial system, provincial/central government frictions and irrational commercial behavior – coupled with its size – are a cause of serious concern.
37
The NAFTA steel industry proposes several NASTC opportunities.
•Intra-NAFTA
•External trade
•Multilateral fora
•Competitiveness
StrategicIndustry
NAFTA Trade Flows
NAFTA Steel Strategies
FinancialSustainability
38
Intra-NAFTA trade opportunities
• Streamline import permits– Currently import permits must be taken out on each
individual shipment (20 tons/permit) vs. offshore boatloads (15,000 tons/permit).
– Recommend that governments implement a WTO-consistent weekly summary permit for NAFTA partners.
– Benefits:• Reduction in trade administrative costs for NAFTA industry
and governments.
39
Intra-NAFTA trade opportunities (cont’d)
• Explore Harmonized System (HS) code consistency– Currently all countries have same HS codes at 6-digit level, but
differ at 7-10 digit level.– Recommend that governments explore extending the common
codes to at least the 8-digit level, assuming we can maintain the historical continuity of worldwide data and the integrity of bilateral and regional trade agreements that rely on certain 8-digit numbers for specific rules of origin.
– Benefits: • Consistent NAFTA statistics.
– Same import/export categories– Facilitation of NAFTA-wide import reporting
• Reduced administration costs of intra-company shipments across NAFTA borders.
40
• Load limit improvements– Currently there are differing maximum load limits from
country to country and state to state; this requires loads to be split during delivery, adding costs
– Recommend standardized higher load limits
– Benefits• Reduced transportation and administrative costs.
Intra-NAFTA trade opportunities (cont’d)
41
External trade opportunities
• Develop common and transparent, web-based NAFTA-wide reporting on imports, including import prices (using import permits/data).
• Consult with foreign governments to address trade-distorting practices at an early stage.
• Work together to prevent injurious trade diversion into the NAFTA market from other countries’ restrictive steel trade agreements.
• Oppose foreign government intervention in raw material markets.
42
External trade opportunities (cont’d)
• Oppose government financing of projects that increase world steel overcapacity.– NAFTA governments, non-NAFTA governments and
quasi-government agencies (e.g., IMF) should not be lending money for new steel capacity
43
One common NAFTA approach to international trade negotiations
• OECD– Coordinate positions to (1) ensure positive result from steel
subsidies agreement (SSA) negotiation and (2) maintain OECD Steel Committee after SSA negotiation ends.
• WTO– Oppose strongly trade law weakening and support
fundamental reform of dispute settlement (e.g., include trade counsel in proceedings).
• FTAA– Oppose strongly trade law weakening.
44
One common NAFTA approach to international trade negotiations (cont’d)
• China– Ensure that China is subject to WTO-consistent trade laws.
– Encourage China to revalue and adopt a floating currency.
– Engage industry in a cooperative assessment of the steel industry in China and ensure that Chinese market-distorting practices are eliminated before according “market economy” status to China in AD cases.
– Work with industry to monitor, anticipate and mitigate the negative impacts from an economic slowdown in China.
45
The NAFTA steel industry wants to work together with NAFTA governments to develop pro-competitive policies to promote the health and financial stability of
the North American steel sector.• Manufacturing
– Implement and coordinate policies, where appropriate, to preserve and strengthen the manufacturing base.
• Energy– Ensure reliable and cost-competitive energy supplies.
• Raw Materials– Ensure a free flow of raw materials.
• Access to capital– Promote policies to improve access.
• Customs– Explore opportunities to enhance customs enforcement cooperation.
46
The NAFTA steel industry looks forward working with NAFTA governments in developing an “opportunities-
oriented” action plan.
StrategicIndustry
NAFTATrade Flows
NAFTA Steel Strategies
•Non-NAFTA imports are diverse, and characterized by a propensity to injure.
• The steel industry is a strategic and progressive force.
•The NAFTA has resulted in greater openness of the N.A. steel market and has drawn the three industries and governments together for common purposes.
•Recent tight market conditions must be put into the context of long-term industry trends.
•The NAFTA steel industry proposes several NASTC opportunities.
FinancialSustainability
47
NAFTA Steel StrategiesAn Industry-Government Partnership to Achieve a Healthy and
Financially Stable NAFTA Steel-Producing Industry
Promoting Distortion-Free Markets:•Ensure positive OECD result.•Maintain strong, effective trade laws.•Develop an effective NAFTA-wide import monitoring, permitting and reporting system, including joint analysis/identification of distortions.•Use joint NAFTA government “jaw-boning” at first sign of import surges.•Prevent injurious diversion from interventions by non-NAFTA governments.•Support market forces – no currency manipulation, no subsidies, no export controls.
Facilitating NAFTASteel Trade:•Streamline import permits.•Explore HS code consistency.•Identify/define “integration” goals.
Improving Competitiveness and Creating Strong Fundamentals:•Access to capital.•Energy.•Consolidation and restructuring.•R&D – innovation.•Market development.•Customer base -- manufacturing.
Close Consultation and Common NAFTA Approach to Multilateral Trade Negotiations, Where Possible — OECD, WTO, FTAA
