Association of Women in the Metal Industry (AWMI) Issues Impacting U.S. Steel Producers

Association of Women in the Metal Industry (AWMI)

Issues Impacting U.S. Steel Producers

Thomas A. DanjczekPresidentSteel Manufacturers AssociationColumbus, OhioNovember 13, 2007

Outline

• SMA

• U.S. steel production

• Economic competitiveness and scrap demand

• Steel market conditions-Consolidations -Raw material prices-Capital spending -Consumption-New capacity -Imports-Price trends

• Chinese government subsidies to its steel/auto industries

• Washington issues for steel-Environmental-Energy-Trade-Other

•Conclusion

AWMI – Columbus Chapter

• The Steel Manufacturers Association (SMA)– 36 North American companies:

30 U.S., 4 Canadian, and 2 Mexican– 125 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

AWMI – Columbus Chapter SMA

• Production capability– EAF steel producers accounted for 59% of U.S. production in 2006– SMA represents over 70% of all U.S. steel production

• 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

AWMI – Columbus Chapter SMA

U.S. Raw Stee l Production

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Tonnage - Integrated Total Tonnage - U.S. Steel Industry Tonnage - EAF % - EAF Production

U.S. Raw Steel Production: Largest Recyclers in the Nation – 100 million tons of steel produced each year

AWMI – Columbus Chapter U.S. Steel Production

U.S. Steel Industry, Then. . . . . . . . .and Now

EAF’s are 21st Century Steelmakers

THEN: Smoke pouring into the air from a Pittsburgh steel mill. Image by Corbis - Bettmann

NOW: Electric Arc Furnace facility.

AWMI – Columbus Chapter 21st Century

Reasons

Economics: “To be cost competitive, one needs to be either where the market is, or

where the raw materials are.” (Paul O’Neil, Alcoa)

Scrap Availability: U.S. has the scrap and infrastructure, with over 2000 scrap processors. Steel

recycling rate is over 75 percent.


Steel Markets

In U.S., EAF’s have steadily expanded their range of products, approaching 60 percent overall:

EAF Production

Heavy Structurals100%

Light Structurals 100%

Reinforcing Bar 100%

Rail 100%

Plate* 33%

SBQ 90%

Hot Rolled* 33%

Cold Rolled* 33%

Galvanized* 33%

Stainless Sheet 100%

Overall 60%

*U.S. minimills produce 1/3 of U.S. flat rolled, with 24 out of 72 million tons of capacity

Estimated that 90% of market specifications can be made cost effectively from scrap (i.e. not tin plate, deep draw auto, etc.), with limit on pig iron usage


AWMI – Columbus Chapter Market Conditions

Steel Industry Consolidations

• Raw steel capacity in U.S. is approximately 110-120 million tonnes

• Due to a number of consolidations, the top 10 companies are approx. 90 million tonnes; top 3 companies are approx. 60 million tonnes

• Worldwide, the top company is only 10 percent

Capital Spending is Expected to Double in 2007 for Major U.S. Producers

2002 2006 20070

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$ B

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0.77

1.58

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Capital Spending (in billions) 2002, 2006 and forecasted 2007

Source: Bank of America Survey; includes six steel companies: Allegheny Technologies, Inc., CMC Steel Group, Ipsco Inc., Nucor Corporation, Steel Dynamics Inc. and United States Steel Corporation.


Investment/Financing of New Capacity in the U.S. Steel Industry*

The U.S. Steel industry will see several new complete production facilities come online in the next 2-3 years for the 1st time in decades.

• SeverCorr will produce 1 million tonnes of coated sheet annually from its Columbus, Mississippi location starting in the Fall of 2007, with plans for a capacity of 3.1 million tonnes when the full project is completed in several years. Cost is $ 880 million.

• ThysenKrupp AG is planning a large project also in Mobile, Alabama to supply the transplant auto industry with 3.6 million tonnes of flat rolled carbon and stainless steel. Cost is $3.7 billion. Shipments are to begin in 2010. Slabs will be supplied from Brazil to complement the EAF furnace on site.

•Nucor is reopening a bar mill site in Memphis, Tennessee to supply the SBQ market with up to 750 thousand tonnes annually. Cost is $230 million. Steel production is scheduled for the 1st Quarter of 2008.

•Essar Steel Holdings of India will take over the project started by Minnesota Steel to build a 2.3 million tonne slab and hot-rolled coil project in Minnesota that includes a taconite mine. Start is scheduled in 2009 at a cost of $1.6 billion.

•Commercial Metals Corporation (CMC) is planning a micro mill to supply the West Coast rebar market with a 275 thousand tonne capability at a location outside of Phoenix, Arizona that is situated to serve the immediate area’s supply needs starting in 2009. Cost is $130 million.

*Aside from mainly state (mostly locational, small, generally available) incentives, virtually all new investment is being financed by private sources. During the Steel Subsidies Agreement (SSA) negotiation, the U.S. steel industry opposed all steel-specific subsidies, other than for closure assistance. This remains our position.


2006 Jan

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2007 JanMarch

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Monthly spot-market price from purchasing magazineHot Rolled SheetHD Galvanized SheetCut Length PlateReinforcing Bar

Source: Purchasing Magazine

Average Price Trends – Steel Mill Products


Source: American Metal Market / Scrap and Zinc World Steel Dynamics / Coke (China Export); Iron Ore Fines (Brazil Export)

Raw Material Prices

2004 2005 2006 January March June0

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Spot prices for Raw MaterialsScrapZincCokeIron Ore fines


2007 consumption is behind the apparent 2006 level, but is expected to improve by the end of the year as inventories correct.

USA Million Mt % Change (’07 vs. ’06) Crude Steel 128.4 -4.6 Finished 114.3 -4.4Exports 8.8 -0.1 Imports 29.3 -11.4

Survey of the Short Range Outlook Fall 2007 United States

Apparent Steel Use (million metric tonnes)

2003

2004

2005

2006 2007

(f)2008 (f)

Crude Steel 109.0 127.8 117.4 134.7 128.4 132.2

Finished Steel 100.4 115.6 107.1 119.6 114.3 118.6

Source: IISI forecast for the United States


United States Statistics – Steel Trade

thou MTU.S. Finished Steel Mill Product Imports

2001 2002 2003 2004 2005 2006 20070

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10,000

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35,000

Other NAFTAOther Western HemisphereEUOther EuropeAsia w/o Ch.China

Source: U.S. Department of Commerce

(metric tonnes)

Total Finished

2007 32.2277 26.3991

2006 41.071 32.616

2005 29.1288 22.8538

2004 32.4845 25.7541

2003 20.9786 16.6096

2002 29.6522 21.6291

2001 27.2881 21.4458

U.S. Imports

(million metric tonnes)


Chinese Government Subsidies to its Steel Industry

China’s steel industry today is overbuilt and under-demolished

AWMI – Columbus Chapter Chinese Steel Industry

-Government ownership: 8 of the 10 largest Chinese steel groups are 100 percent owned by Chinese government; of the top 20, 91 percent state-owned production

-Subsidies: recent report on RMB 390 billion (US $52 billion) granted to Chinese steel producers

-RMB 141 billion in equity infusion, listing 37 Chinese companies

-RMB 130 billion in preferential loans

-RMB 71 billion due to currency manipulation

-RMB 39 billion in land used discounts

-RMB 10 billion in mandated mergers

-RMB 2 billion in direct cash grants

AWMI – Columbus Chapter China’s Subsidies

-China has NOT become the world’s 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

-China’s steel capacity will be 600 million tonnes by year end 2007

-China’s steel capacity is 5 times that of the U.S.

-China’s steel exports surged to 33.8 million tonnes in the first half of 2007, double the same period in 2006

AWMI – Columbus Chapter Auto Parts Summary

-China’s exports of auto parts and vehicles are expanding by approximately 30 percent per year

-China requires U.S. automakers with operations in China to buy in China and expand in China

-China has tripled its exports of parts between 2002-2006

-China has now obtained technology through massive subsidies to foreign producers to locate in China, i.e.:

-Income tax reductions, VAT exemptions, tariff exemptions, discounted lending rates, benefit exemptions, equipment refunds


- GM has committed to purchase $10 billion annually in Chinese-produced auto parts by 2009

-Ford has committed to buy at least $13 billion and export worldwide

-China’s undervalued exchange rate provides an incentive to export

Summary: U.S. automakers and auto part producers have made massive investments in China to take advantage of Chinese government subsidies and incentives. The rush to China has been driven by illegal subsidies.

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Imports from China China's Share of Imports

Data cover NAICS codes 33621, 33631-33639.Source: USITC Trade Dataweb at http://dataweb.usitc.org.


U.S. Imports of Auto Parts and Vehicle Bodies from China, Value and Share

Washington Issues

for Steel

Trade

Fair Currency Act (H.R.782, S.796) – Ryan-Hunter and Bunning; exchange-rate misalignment as a countervailable export subsidy; clarify definition of manipulation with respect to currency

Currency Reform for Fair Trade Act (H.R. 2942) – Ryan-Hunter; expand authority of ITC to impose countervailing duties on products from NMEs that have been provided a countervailable subsidy

Currency Exchange Rate Oversight Reform Act (S.1607) – Baucus-Grassley-Schumer-Graham; identification of misaligned currency and required action for correction; Finance Committee

Currency Reform and Financial Markets Access Act (S.1677) – Dodd-Shelby; exchange rates of major trading nations and U.S. dollar reflect market forces; Banking Committee

Non-Market Economy Trade Remedy Act (H.R.1229 & S.974) – Davis-English and Collins; applies CVD to NMEs; alters subsidy determination methodology; requires Congressional approval for NME status revocation; Finance Committee

Comments: concern over congestion in Senate – blocked flow of key legislation; Senate Banking & Finance Committees battling for ownership of “China issue”; omnibus Rockefeller bill has had trouble gaining traction (too large); Senate Finance bill has star power (Clinton, Obama, etc), but seems to lack teeth; weakening U.S. dollar impacting arguments on currency


Growth in EAF steelmaking has allowed the steel industry to reduce energy usage:

Lower energy usage equals lower greenhouse gas emissions

Energy Intens ity - Steel Industry in the U .S.

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EAF Capacity Growth, US

AWMI – Columbus Chapter GHG Emissions

Scrap-based Steelmaking (EAF-recycling)

Ore-based Steelmaking

8.4 million Btu of Energy per ton of steel produced

EAF Steelmaking Is Energy Efficient

Steel Info – US Dept. of Energy.

19.1 million Btu of Energy per ton of steel produced

AWMI – Columbus Chapter EAF Efficiency

Climate Change/Energy

Global Climate Change Security Oversight Act (H.R.1961 & S.1018) – Markey and Durbin; requires Director of National Intelligence to submit estimate on geopolitical effects of global climate change and implications on U.S. national security

Climate Stewardship Act (H.R.620 & S.280) – Lieberman-Warner; accelerate reduction of GHG emissions through tradable allowances limiting emissions in U.S. and reducing dependence on foreign oil

Safe Climate Act (H.R.1590) – Waxman; amends Clean Air Act to cap emissions in 2012 at 2005 levels and set targets for a 2% reduction in GHG emissions each year from 2010-2050 – caps on emissions of sources and sectors with largest emissions or best opportunities to reduce them

Low Carbon Economy Act (S.1766) – Bingaman-Specter; reduction of GHG emissions to 2006 levels by 2020, and 1990 levels by 2030

Comments: Handful of competing bills, most include cap-and-trade provisions; Lieberman bill likely to see mark-up in next month; Senate floor debate on cap-and-trade expected either late this year or early ’08; Senate bills could move through three separate committees


Climate Change/Energy, cont.

Dingell– proposal imposing tax on use of fossil fuels; 50 cents/gallon on gasoline and jet fuel phased in over 5 years; $50/ton tax on carbon released from burning coal, petroleum, or natural gas; cut GHG emissions by 60-80% by 2050

Renewable Energy and Energy Conservation Tax Act (H.R.3221) – Pelosi; Congress debating adopting national renewable portfolio standard (RPS); House energy bill contained RPS language for investor-owned utilities, Senate bill did not; concern over rate impacts of national program, especially among those with limited access to viable qualified resources; possible House-Senate conference bill would likely include national RPS requirement


Transportation

Railroad Competition and Service Improvement Act (H.R.2125 & S.953) – Oberstar and Rockefeller; promote competition and reliable rail service; alter process at Surface Transportation Board to facilitate more reasonable process for rate and service disputes

Railroad Antitrust Enforcement Act (H.R.1650 & S.772) – Baldwin-Baker and Kohl; amend Federal antitrust laws to provide expanded coverage and eliminate exemptions contrary to public interest

Freight Rail Infrastructure Capacity Expansion Act (H.R. 2116 & S.1125) – Meek and Lott; amend IRS code to encourage investment in expansion of freight rail infrastructure capacity; up to 25% in tax credit for building projects (excluding rail cars)

Hours of Service Regulations – seek stay on U.S. Court of Appeals ruling vacating 11-hour driving time and 34-hour restart provisions

Comments: Increased amount of hearings attest to growing strength of shipper concerns; railroads on defensive – tax credit bill currently an afterthought; initial preparations for next Highway Bill – will be larger – increased focus on bridge projects; fuel taxes and public-private partnerships as growing topics


Other Key Legislation

Employee Free Choice Act (H.R.800 & S.1041) – Miller and Kennedy; “Card Check” legislation, intended to amend National Labor Relations Act, allowing card check process for votes on unionization, rather than secret balloting; passed through House, initially narrowly defeated in Senate; heavily partisan voting; will return in 2009

Lobbying and Ethics Reform Act (H.Res.6 & S.1) – near total gift bans and travel restrictions – seek pre-approval of Ethics Committee (30 days); lobbying disclosure reports now due quarterly, with increased penalties for failure to report and random audits; “Sarbanes-Oxley for lobbyists”


AWMI – Columbus Chapter Conclusion

-Need aggressive policy measures to prevent China from causing a major crisis. To date, only trade cases have had an impact.

-It’s still a cyclical business with demand, scrap, inventories, etc.

-U.S. EAF growth will continue

-Massive subsidized growth continues

-Consolidations will continue

-China, China, China… everything else is only an embellishment

-Unknowns (interest rates, economic growth, imports, etc.)

-Don’t expect help from Washington. 2009 may bring increased environmental and labor legislation.

Documents

Association of Women in the Metal Industry (AWMI) Issues Impacting U.S. Steel Producers