October 11, 2007

From NAFTA to an Integrated North American

Steel Market

Rafael RubioNASPD Fall Conference

Cancun , MexicoOctober 11, 2007

2October 11, 2007

Agenda

I. Economic Integration

II. Where do we come from?

III.Where are we now?

IV.Where are we heading for?

3October 11, 2007

I. Economic integration

● Integration is a process rather than a single act.

● The NAFTA steel sector can, and should, deepen its integration and movement toward the formation of

one regional market:

─ Increasingly interdependent.─ Enhance competitiveness.

─ Face common challenges form abroad.

4October 11, 2007

How can 3 markets can be integrated?

Two ways:

● Market Way:3 markets can become a single one when companies have investment or customers in the other markets and make no geographical distinctions in their operations.

● Institutional Way: When governments create the instruments and

institutions that drive 3 markets into become a single one.

● Steel sector has been moving along those two ways.

5October 11, 2007

II. Where do we come from?

● Fred Telmer – CEO Stelco. Chairman North American Steel Council (August 1992):

“We should be looking for open markets to increased trilateral steel trade: we agree that open markets should mean the elimination of steel tariff, non-tariff barriers and other trade-distorting practices”.

● His proposal: a North American Steel Sector Agreement as part of the NAFTA negotiations.

6October 11, 2007

NAFTA: timeline

● 1994:NAFTA was the first step in Mexico's globalization.For Mexico, It was more than a trade agreement.

● 1994 - 2004:Mexico orientation was to signed more FTA (44

countries)NAFTA was taken as “given”.

● 2005 (March):Security and Prosperity Partnership of North America (SPP):Work together more effectively and efficiently.

7October 11, 2007

NAFTA: has been a successful story …

Mexico – USA Trade

Trade Balance

Exports

Imports

-25

0

50

100

150

200

250

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07*

Trade Balance(Billion USD)

Source: Mexican Ministry of Economy Statistics with Mexican Central Bank Data* 2007 Estimated from January – June 2007 data ** 2006 Data up to September 2006.

Annual

Accumulated

5

10

15

20

25

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06**

20

40

60

80

100

120

140

US Investment in Mexico(Billion USD)

8October 11, 2007

Mexican Exports(%)

Source: BANXICO

1982

Oil & Oil & Mining Mining

70%70%

Manufacturing

25 %Agricultural

5%

2006

Oil & Mining16%

ManufacturingManufacturing81%81%

Agricultural

3%

… Changing our economy

9October 11, 2007

The Market Way in steel

● The steel trade between Mexico and the US has been growing over time.

● Mexico has a surplus in some products and a deficit in other. In some products, Mexico is the largest exporter to the US Market.

● The US, on the other hand, is the largest exporter to the Mexican market.

● BUT, there has been trade frictions. Less than in the past. Current cases are in pipe and tube.

10October 11, 2007

Mexico – USA Trade

Finished Steel Products(thousand metric tones)

Trade Balance

Exports

Imports

-1,000

-500

0

500

1,000

1,500

2,000

2,500

3,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007*

Source: Mexican Customs & CANACERO Statistics* 2007 Estimated from January – July 2007 data

11October 11, 2007

Trade Balance

Exports

Imports

-1,000

-500

0

500

1,000

1,500

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007+

Mexico – USA Trade

Flat Products(thousand metric tones)

Source: Mexican Customs & CANACERO Statistics* 2007 Estimated from January – July 2007 data

12October 11, 2007

Mexico – USA Trade

Weld Pipes(thousand metric tones)

Source: Mexican Customs & CANACERO Statistics* 2007 Estimated from January – July 2007 data

Trade Balance

Exports

Imports

0

50

100

150

200

250

300

350

400

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007*

13October 11, 2007

Mexico – USA Trade

Seamless Pipes(thousand metric tones)

Source: Mexican Customs & CANACERO Statistics* 2007 Estimated from January – July 2007 data

Trade Balance

Exports

Imports

-20

0

20

40

60

80

100

120

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007*

14October 11, 2007

Mexican ImportsUSA Share of Total Mexican Imports

(%)

Source: Canacero

* Estimated from January – July 2007 data

Finished Steel Products

Flat Products

Weld Pipes

Seamless Pipes

20%

30%

40%

50%

60%

70%

80%

90%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007*

15October 11, 2007

Mexican ExportsUSA Share of Total Mexican Exports

(%)

Source: Canacero * Estimated from January – July 2007 data

Finished Steel Products Flat Products

Weld Pipes

Seamless Pipes

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007*

16October 11, 2007

USA ExportsMexico & Canada Share in Total USA Exports

(%)

Source: AISI.

* Estimated from January – July 2007 data

Canada

Mexico

10%

20%

30%

40%

50%

60%

70%

1995  1996  1997  1998  1999  2000  2001  2002  2003  2004  2005  2006  2007* 

17October 11, 2007

The Institutional Way …

NAFTA Negotiations

American Iron and Steel Institute

North American Steel Council

18October 11, 2007

… some examples

● North American Steel Council: a forum in which Directors from Producer Members located in Canada, Mexico and the United States can discuss public policy

issues relating to the North American Free Trade Agreement (NAFTA).

● Section 201: Temporary safeguard imposed by the US government in March 2002. Mexico and Canada were excluded because of NAFTA.

● OECD Steel Committee: NAFTA worked as a group on common issues.

19October 11, 2007

III. Where are we now?

● The Market Way: Trade + investments + consolidation = have increased market integration

Steel companies with Steel companies with facilities in 2/3 countriesfacilities in 2/3 countries

- Arcelor Mittal- Gerdau- US Steel- Ipsco (SSAB)- Timken- Essar- Tenaris- Ternium

Steel Users withfacilities in 2/3 countries

- Caterpillar- Auto companies- Magna International- Tyco International- Associated Spring- Lincoln Electric- Home Depot- Hubbell Electric- Palliser

20October 11, 2007

The Institutional Way …

North American Steel Council

North American Steel Trade Committee

In December 2002, the NAFTA governments pledged to identifyareas in which they might work together to promote more openness in the North American steelmarket and cooperation on steel trade and industry policies

October 7, 2003 ─ Mexico City, November 21, 2003.

21October 11, 2007

… Developments

North American Steel Trade Committee

Security and Prosperity Partnership of North America

- Economics and security are intertwined.- New economic rivals: China and India.- Work has to be strategic and realistic.

North American Competitiveness Council

22October 11, 2007

North America is losing market-share in world trade …

Share %

2000

Share %

2006

Growth

Rate (%)

North America

22.1 17.3 (21.8)

EU37.9 37.9 0.02

Asia Pacific18.3 21.3 16.4

South America

2.4 2.6 9.3

Region World Trade

23October 11, 2007

US imports1993-2006

China

Mexico10.6%

15.5%

6.8%

5.4%

19.1%

Canada16.3%

2

5

8

11

14

17

20

1993 1996 1999 2002 2005

… Loss of international competitiveness in the US market …

24October 11, 2007

BRICs vs. Mexico% Change (2000 – 2006)

Source: : WTO, IMF and UNCTAD

Exports GDP FDI

Brazil 150 19 229

Russia 131 44 946

India 124 50 310

China 289 75 72

Mexico 51 15 13.8

… As well as versus other competitors

25October 11, 2007

IV. Where are we heading for?

Market WayTrade, Investment

andConsolidation

Institutional WayNASC/NASTC

NACCSPP

Declaration of Governments (2006):Steel: A Strategic Partnership – A Strategic Industry

North American Steel Strategy

26October 11, 2007

North American Steel Strategy …

● Implement a North American Steel Strategy to benefit the North American steel industry by pursuing the

elimination of external trade distortions, reducing the costs and the risks on intra-NAFTA trade, and promoting

competitiveness and productivity.

● Sectoral approach: steel, pork, consumer electronics and chemicals.

● NAFTA Commission (August 14, 2007): the North American steel market is highly integrated and the

industry in all 3 NAFTA countries share common interest and concerns.

27October 11, 2007

… Next steps

● Areas of work:

─ External trade

─ Internal trade

─ Competitiveness and productivity

“We should be looking for open markets to increased trilateral steel trade: we agree that open markets should mean the elimination of steel tariff, non-tariff barriers and other trade-distorting practices”.

October 11, 2007

From NAFTA to an Integrated North American

Steel Market

Rafael RubioNASPD Fall Conference

Cancun , MexicoOctober 11, 2007

29October 11, 2007

China Trade in Pipe and Tube

Source: Mexican Customs & CANACERO Statistics

Seamless Pipes(thousand metric tones)

-1000

-500

0

500

1000

1500

2000

2500

3000

3500

4000

2002 2003 2004 2005 2006

Exports

Imports

Trade Balance

Weld Pipes(thousand metric tones)

Exports

Imports

-500

0

500

1000

1500

2000

2500

3000

2002 2003 2004 2005 2006

Trade Balance