Thomas A. DanjczekPresidentSteel Manufacturers AssociationApril 11, 2011

Washington’s Impact on Steel

Association for Iron & Steel TechnologyPittsburgh Chapter

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Outline

•SMA

•Set The Tone – Washington “Stuff”

•US Macro Issues

•What Does the U.S. Need To Do

•Steel Recent History (Capacity; Demand; Shipments; Imports)

•Steel Specific Issues (Trade; Raw Materials; Scrap)

•Conclusion

AIST – Pittsburgh Chapter

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The Steel Manufacturers Association (SMA)– 35 North American companies:

30 U.S., 3 Canadian, and 2 Mexican– Operate 125 steel recycling plants in North America– Electric Arc Furnace (EAF) steelmakers using recycled steel– EAF steel producers accounted for nearly 2/3 of U.S. production in 2009– SMA represents approximately 90 million of U.S. 120 million ton capacity

(75%)– 128 Associate members - Suppliers of goods and services to the steel industry– Governance – i.e. vast majority

SMAAIST – Pittsburgh Chapter

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Where SMA Member EAFs are located…AIST – Pittsburgh Chapter

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Factors in the 2010 Election

It’s the economy, stupid…• The economy was the number one issue for the American public in 2010—

frustrations with high and stagnant unemployment figures, struggling housing markets, and persistently tight credit drove voter sentiment

Dissatisfaction/perception that government is not tackling the right issues• Frustrations augmented by the belief that the government has done more for Wall

Street than for Main Street during the current economic crisis• That sentiment, coupled with increasing public concern/skepticism regarding the

role of government in the private economy and the growing deficit and long-term national debt, has resulted in a general perception that lawmakers aren’t listening and are overreaching

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- E c o n o m y- War in Iraq- War in Afghanistan- Health Care- D e fi c i t R e d u c ti o n- Size of Government, Government Spending- Homeland Security- Ta x e s- Financial Oversight- I n t e r n a ti o n a l T r a d e- E n e r g y a n d E n v i r o n m e n t- Transportation and Infrastructure- L a b o r- Middle East Tensions- Japan Earthquake “Havoc”- Continuing Resolutions – Funding the Government

Big U.S. Gov’t Issues/PrioritiesAIST – Pittsburgh Chapter

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• While the recession officially ended in June 2009, the sluggish pace of the recovery remains a top concern for both the public and policymakers

– In early November, the Federal Reserve announced plans to purchase an additional $600 billion of longer-term Treasury debt over the next eight months to loosen credit conditions in order to speed the economic recovery and boost job creation

• Impact of Japanese Earthquake

• Impact of Libya oil costs ? ? ?

EconomyAIST – Pittsburgh Chapter

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• The need for policies to promote economic growth in the short-run is complicated by the need/desire for longer-term austerity measures to address the nation’s deficit and long-term debt

• President Obama has signaled that addressing the deficit and long-term debt is an area ripe for compromise with Congressional Republicans

• Will the Continuing Resolutions Continue ? ? ? (as of 4/1/11)

DeficitAIST – Pittsburgh Chapter

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• Ways and Means Committee Chairman Dave Camp (R-MI) and Trade Subcommittee Chairman Kevin Brady (R-TX) are avowed free-traders

– Addressing China’s trade practices

• Last Fall, the House passed the Currency Reform for Fair Trade Act—Sen. Schumer (D-NY) has pressed for a Senate currency vote, but prospects for action this year are unclear

• Last October, U.S. Trade Representative Ron Kirk announced that the United States has initiated an investigation of China’s practices affecting trade and investment in green technologies—will Congress enter the debate?

• More generally, the effect of the Tea Party is unknown—the movement has an anti-government, free market strain, but there is also a populist, anti-Wall Street component and it is unclear how this cuts on any particular issue, particularly trade

International TradeAIST – Pittsburgh Chapter

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• Vigorous oversight of EPA will be a general theme throughout the 112th Congress

• Prospects for comprehensive climate legislation are weak—will see continued Congressional efforts to slow down EPA’s regulation of carbon emissions

• Impact of US EPA regulations on power plant emissions

• Piecemeal approach to energy policy presents opportunities for cooperation—as demonstrated by bipartisan legislation approved by the Senate Energy and Natural Resources Committee in the last Congress under Chairman Bingaman (D-NM)

– Potential Renewable Energy Standard (RES), but Republicans were likely to push for inclusion of nuclear energy and clean coal technology, a “clean energy standard”

– Proposals for increased energy efficiency in industrial facilities and buildings (Home Star) as well as financing for green technologies also on the table, but finding pay-fors will be difficult

Energy & EnvironmentAIST – Pittsburgh Chapter

Infrastructure Spending

Good News• Early March, Congress passed legislation to extend Federal Highway & Transit Program

spending for 7 months• Funding through end of current fiscal year at 2009 level• Stable Funding – bipartisan effort

Bad News• Need long term reauthorization bill – NOT A STOPGAP• Need improvements• Gas tax woefully inadequate

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• Pending or planned Democratic labor-related legislative initiatives are very unlikely to move forward in 112th Congress

– “Card-check” legislation (Employee Free Choice Act)– Mine safety reform– Legislation to allow all firefighters and police officers to unionize

• In fact, legislative efforts moving in the opposite direction have been proposed previously

– Anti-card check legislation (Secret Ballot Protection Act)– Campaign finance reforms to regulate use of union dues to support union political activity

• Some Democratic priorities can be pursued through administrative efforts of the Department of Labor or the National Labor Relations Board

LaborAIST – Pittsburgh Chapter

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AIST – Pittsburgh Chapter 2012 Election

• In the House, Democrats hold few competitive districts and need 24 to retake the majority.

• In the Senate, Democrats will defend 24 Senate seats (including two Independents) to the Republicans 10. Republicans need four net wins to take control of Senate.

• Republicans currently have no clear frontrunner for the presidential nomination.

• President Obama’s race to lose.

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What does the U.S. need to do?

• Assume a Pro-Manufacturing Agenda– Business Tax Reform– Border Adjustable Taxes– Currency Adjustments– Energy Independence– Reasonable regulatory measures (Environment/Labor)– Climate for investments (Jobs, Jobs, Jobs) and Infrastructure

• Solve the structural problems that caused the recession - Real Foundation

– Bad loans and securities on bank balance sheets– Reduce huge trade deficits

• Policy incrementalism is not sufficient

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Addressing China’s trade practices • U.S. Senators Sherrod Brown (D-OH) and Olympia Snowe (R-ME) and U.S.

Representatives Sander Levin (D-MI), Tim Murphy (R-PA), and Tim Ryan (D-OH) introduced in February 2011 the Currency Reform for Fair Trade Act of 2011. Including Congressmen Levin, Murphy, and Ryan, the House bill was introduced with 101 original sponsors (27 R; 74 D).

• Last October, U.S. Trade Representative Ron Kirk announced that the United States had initiated an investigation of China’s practices affecting trade and investment in green technologies—will Congress enter the debate?

ChinaAIST – Pittsburgh Chapter

www.first-river.com16

Raw steel capacity utilization may reach 80% in 2011

Source: AISI, First River

AIST – Pittsburgh Chapter Steel Specific

Auto build & non-res construction expected to recover, but not to previous peak NA Auto Build (Million Units)

17Source: CSM Worldwide, FW Dodge

ForecastNon-Res Construction

(Million Sq. Feet) Forecast

www.first-river.com

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• Recovery underway, but slow

• Increased exports and imports (5mmt of semi’s imports)

• Not normal cycle of recession, overcapacity

• Relative strong demand in auto; construction lagging

Comments on U.S. ProductionAIST – Pittsburgh Chapter

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Raw Material Cost and Availability is #1 Issue for U.S. Steel Producers

• Many countries continue to impose a variety of restrictions on exports of vital raw materials

– Export prohibitions

– Export duties

– Export quotas

– Other measures

• Trade-distorting restrictions on exports of raw materials

– Give domestic producers in the exporting country an unfair advantage

– Increase worldwide costs of production

– Place a heavy burden on steel industries in developing countries that do not have substantial iron ore reserves or steel scrap supplies

Raw MaterialsAIST – Pittsburgh Chapter

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Meanwhile, Foreign Government Subsidies to Steel and Steel-Related Industries Remain a Particular Concern…

• Foreign government subsidies are a major cause of overcapacity in the global steel industry and steel-related industries

• Subsidies to steel and steel-related industries that 1) support inefficient and excess capacity and/or 2) distort trade, are continuing and remain a particular concern

• Examples include:

– Fundamental currency misalignment/undervalued currencies

– Preferential financing to add new capacity

– Loan forgiveness/equity infusions to prop up obsolete capacity

Raw MaterialsAIST – Pittsburgh Chapter

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China – Raw Materials

• The United States, the EU, and Mexico have challenged China’s application of a variety of restrictions to exports of key raw materials used in steelmaking, including:– Coke– Refractory bauxite– Fluorspar– Zinc

• The restrictions China applies include:– Export duties– Export quotas– Restrictive bidding procedures

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China – Raw Materials

• China has argued that these measures are justified to prevent pollution and to preserve natural resources

• China has also claimed a “sovereign right to regulate” its raw material exports

• The panel will release its decision this month:• This decision could have a major impact on international trade in

raw materials for steelmaking – “Careful what you wish for…”• Many other countries also restrict exports of raw materials,

especially steel scrap• USTR is very interested in a potential case regarding China’s

restrictions on exports of rare earths and other raw materials

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Implications

• If these justifications are accepted, ever scrap producer could legitimately limit exports of steel scrap

• This would wreak havoc on the global steel industry

• Countries that are heavily dependent on scrap imports would be particularly affected

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World Scrap Supply and Consumption, By Region

World Scrap Supply, 2008

0

20

40

60

80

100

120

EU Turkey CIS NAFTA Latin America China Japan Other Asia

Mil

lio

n M

etr

ic T

on

s

Domestic Supply

Apparent Consumption

Source: World Steel Association

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• World demand for steel scrap is likely to continue to increase:

-Increased steel production in China, India, and Brazil-Economic recovery

• But a large number of countries still impose restrictions on exports of scrap and other raw materials

• Steel scrap is subject to more export restrictions than any other raw material

• There is a significant problem with transparency, because export restrictions change frequently, making supply even more problematic

World Demand for Steel ScrapAIST – Pittsburgh Chapter Scrap

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Final Thoughts

• Ultimately, the world needs greater total supply of scrap, steel and galvanized products

• U.S. is in a traffic jam, moving slightly forward, but don’t know other consequences. Don’t look to Washington, DC for help.

• Reasons for optimism in steel in U.S.A.– Scrap-based, 70% of cost – local supply– Low cost on global basis (energy is neutral, labor less than 10%, others have higher transportation

costs)– Relatively strong U.S. market and U.S. resiliency– Better U.S. company balance sheets

• Comment on Steel Safety Performance & Don Daily AIST-SMA Project

AIST – Pittsburgh Chapter