Thomas A. DanjczekPresidentSteel Manufacturers AssociationFebruary 8, 2011

New Government & the Impact on Steel

American Metal MarketState of Steel 2011

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Outline

•SMA

•Set The Tone – Factors Influencing the Election

•US Macro Issues (thanks Kelley Drye!)

•Steel Specific Issues

•Conclusion

AMM State of Steel 2011

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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

SMAAMM State of Steel 2011

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State of the Union:Win the Future!

A m e r i c a n I n n o v a ti o n

• Are we targeting What’s Important NOW?

Some of the Items Focused on:-Greater Internet Access-Renewable Energy (Wind and Solar)-One Million Electric Vehicles by 2015-80% American Access to High Speed Rail (75 Years)-Tax Loopholes-Public Schools Lagging

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Factors Influencing 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

• Those concerns were confirmed in exit polls on November 2, where over 60% of voters ranked the economy as the nation’s top problem and almost 90% expressed concern about the state of the economy over the next year (Associated Press)

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

In exit polling, 75% of voters “expressed negative views about how the federal government is working” while over half said “the government should let business and individuals handle more things on their own” (Associated Press)

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• Return to divided government

– Control of the Senate will remain with the Democrats

• New breakdown: 53 Democrats (including 2 Independents who caucus with the Democrats), 47 Republicans

– The House of Representatives is now controlled by the Republicans

• New breakdown: 242 Republicans, 193 Democrats

– The majority of state Governorships are now held by Republicans

• New breakdown: 29 Republicans, 20 Democrats, 1 Independent

Set the ToneAMM State of Steel 2011

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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 Tr 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

Big US Gov’t Issues/PrioritiesAMM State of Steel 2011

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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

– “Official” Unemployment remains at close to 9.5% and consumer income and spending are fairly stagnant

• According to a recent Bloomberg News survey of economists, the unemployment rate will stay high for the next year, averaging 9.3%

– 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

• Interest rates are expected to remain low for the foreseeable future

– Facing a new political dynamic and skepticism regarding “stimulus” spending efforts, the White House reached out to Congressional Republicans to forge a deal on extending tax breaks during the lame duck session of the 111th Congress

• President Obama agreed to a 2-year extension of income tax rates for all income levels, while Republicans acquiesced to several Democratic priorities aimed at stabilizing the economy, including a long-term extension of unemployment insurance

EconomyAMM State of Steel 2011

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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 Reducing government spending is a top priority of the new 112 th Congress

The continuing resolution for FY11 runs through March 4—House Republicans had initially called for a return to FY08 spending levels, which would require about $100 billion in cuts—while cuts that large may be difficult, significant reductions are likely

The conservative Republican Study Committee has proposed a plan to reduce spending by $2.5 trillion over the next decade

House Republicans’ rules package replaced “pay-go” with “cut-go”—any new mandatory spending must be offset with spending cuts, but NOT with tax increases

Rules package also gave Budget Committee Chairman Ryan (R-WI) the authority to set spending targets for appropriators if the House and Senate fail to agree on a final budget

Republicans have instituted a party-wide ban on earmarks Spring vote to increase the debt limit may prove particularly challenging for the Republican caucus,

with many pledging on the campaign trail to vote against it Opponents likely to use votes as leverage to secure commitments for longer-term deficit reduction

measures

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

DeficitAMM State of Steel 2011

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• The cost of the tax package came in at just under $1 trillion and is being viewed by

many as a second stimulus, with some economists suggesting it could increase

2011 GDP by 0.5 to 1.25 percentage points

TaxesAMM State of Steel 2011

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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

• Items for consideration include:

– Consideration of the stalled free trade agreements with South Korea, Panama, and Colombia

• Administration is supportive of ratification and must work with Republicans to ensure passage of the agreements—could this be an example of early cooperation?

• The Democratic Caucus remains divided on the issue of trade

– Customs reauthorization legislation likely to emphasize trade facilitation

– Export control reform could see some legislative action, although, for the most part, it will be done administratively

– 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 TradeAMM State of Steel 2011

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• Vigorous oversight of EPA will be a general theme throughout the 112th Congress– Oversight and Government Reform Committee Chairman Issa is soliciting responses from over 150

trade associations and businesses on regulations that have harmed job-growth—many expected to emphasize environmental regulations, i.e. Mercury

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

– Numerous stand-alone bills to block or delay EPA action on GHGs have already been introduced in the House

– Senator Rockefeller (D-WV) plans to re-introduce his proposal (2-year delay of GHG rules for stationary source emissions) in the coming weeks

– Senator Barrasso (R-WY) plans to unveil a comprehensive measure to prevent federal agencies from regulating climate change

Energy & EnvironmentAMM State of Steel 2011

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• 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)

– Republicans in both chambers will place a greater emphasis on increasing domestic production of traditional energy sources (i.e., oil and natural gas)—and continue to focus on domestically-produced renewable fuels

• Comprehensive offshore drilling safety legislation in response to the April Deepwater Horizon explosion/oil spill is unlikely to be revived under Republican leadership in the House—even in the wake of recommendations by the President’s spill commission

– Potential Renewable Energy Standard (RES), but Republicans 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 & EnvironmentAMM State of Steel 2011

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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

LaborAMM State of Steel 2011

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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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Rules Associated with 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

Steel – Raw MaterialsAMM State of Steel 2011

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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

Steel – Raw MaterialsAMM State of Steel 2011

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• Currency Manipulation

• Market Forces – Compliance

– Expansion

– Government Intervention

– Exports on the Rise

• Trade Deficit

• State Owned Enterprise Distortions

• China’s Upcoming Steel Policy

Chinese MercantilismAMM State of Steel 2011

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• Need to reduce corporate tax rates

• Why not a VAT?

Steel – TaxesAMM State of Steel 2011

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• Challenge: Balance a slate of program reauthorizations with growing deficit concerns and limited revenue options

– Reauthorization of Surface Transportation Programs• SAFETEA-LU expired on September 30, 2009 and has operated under short term extensions since; last

extension expires March 4, 2011 (with the current FY11 CR)

• Obama Administration has proposed a six-year reauthorization with a $50 billion up-front investment for “roads, railways, and runways” and the establishment of an infrastructure bank

• May see a multi-year reauthorization this year—leaders in both chambers have expressed a desire to get it done

• Discussions likely to be dominated by the hunt for funding sources– Projected fall in gas tax revenues may mean cuts to the program (an increase in the tax is most-likely

a non-starter)– Likely forced to focus on alternative revenue streams, including creation of an “infrastructure bank”

or greater use of public/private partnerships

– Industry concerns regarding Republican House rules change to allow consideration of legislation that funds surface transportation programs at a lower level than authorized by law (prohibited since 1998)

Steel - Transportation and Infrastructure

AMM State of Steel 2011

Around the CurveAMM State of Steel 2011

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Things Around the CurveAMM State of Steel 2011

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Things Around the CurveAMM State of Steel 2011

Key Questions Ahead

• In the wake of Republican gains in both chambers, will the President move more to the middle and revive efforts to work with Republicans, following in the footsteps of President Clinton? Are the negotiations on tax policy a sign of things to come? Will we see cooperation on other major policy initiatives, such as the reauthorization/revamp of No Child Left Behind and stalled free trade agreements?

• How will President Obama’s new competitiveness agenda play out? And what can we expect from his recent Executive Order launching a government-wide review of federal regulations and their impact on economic growth and competitiveness?

• Will President Obama be able to “win back” the independent vote in 2012?• Will widespread concerns related to deficits and long-term debt remain at the forefront? How will

Members concerned with deficit spending vote on raising the debt limit this year?• What is the impact of the Tea Party movement on the Republican Caucus—will the Caucus be

divided on policy priorities or coalesce around opposition to the Administration? Will they show a willingness to cooperate with President Obama?

• In the wake of this year’s election and the loss of a Democratic majority, will we see some key retirements in the House?

• How will the current political climate affect the policy stances of moderate Senators over the next two years? What additional retirements can we expect?

• Will an already partisan atmosphere be strained ever further by the loss of moderates in both chambers? Will we see two years of legislative gridlock?

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AMM State of Steel 2011 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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Impact on Steel

Last Thoughts:• We’re in a traffic jam, moving slightly forward, but don’t know

other consequences• More Regulatory Oversight by Obama Administration (OSHA;

EPA; DOC; etc.)• Don’t look to Washington for much Help!

AMM State of Steel 2011