North American Steel Industry:Recent Market Developments and
Key Challenges Going ForwardOECD Steel Committee
May 6-7, 2010 Paris, France
*American Iron and Steel Institute (AISI)Steel Manufacturers Association (SMA)
Specialty Steel Industry of North America (SSINA)Canadian Steel Producers Association (CSPA)
Mexican Steel Producers Association (CANACERO)
2
Presentation Summary
I. NAFTA Economic Conditions and Outlook
II. NAFTA Steel Market Conditions and Outlook
III. Major NAFTA Industry Concerns Going Forward
3
I. NAFTA Economic Conditions and Outlook
4
The NAFTA Economies: A Hesitant Recovery
• In 2008 and 2009, the NAFTA economies experienced the deepest recession since the Great Depression
• It appears that the NAFTA economies are now beginning to grow, but at a modest rate
• GDP and employment are still well below their pre-recession levels
• A number of factors could slow or even reverse growth in all three countries
5
The NAFTA Region Is Starting to Recover from An Unusually Deep Recession
Source: OECD
NAFTA GDP By Quarter, 2007 - 2009(Seasonally Adjusted Annual Rates)
13.2
13.3
13.4
13.5
13.6
13.7
13.8
13.9
14.0
14.1
14.2
Q1-2007 Q2-2007 Q3-2007 Q4-2007 Q1-2008 Q2-2008 Q3-2008 Q4-2008 Q1-2009 Q2-2009 Q3-2009 Q4-2009
Tri
llio
ns
of
U.S
. D
oll
ars
66Sources: Bureau of Economic Analysis (US) ,CSSPA, Canacero
United States• GDP recovery has begun, but 4Q09 growth was inventory-driven, and 2010-11 will average 3% at best.• Slow, extended recovery is underway, but unemployment is at 26-year high and will be slow to decline.• Credit remains constrained. Capital construction continues to drag. Equipment and machinery positive.• Housing is improving from abysmal levels while automotive has shown some improvement.
Canada• Economic recovery has clearly begun, but pace is expected to slow down in 2H10.• Government and consumer spending will lead 2010, but unemployment remains a concern at 8%.• Non-res construction and machinery remain weak and will decline in 2H10 as stimulus effect slows.• Canadian dollar has strengthened significantly in past year, creating competitiveness challenges.
Mexico• Emerging recovery driven by manufacturing exports.• Outlook somewhat improved on gains in industrial production, exports, investment.• Recession-induced low trade gap in 2009 is rising again. • Uncertainties (including higher taxes, inflationary pressure, weak consumer credit) limit GDP recovery.
Economic Analysis & Trends
7
Easier
Tighter
Canada: Economic Conditions Moderating
Canada: Manufacturing Inventories Through February 2010 Canada: Manufacturing Sales Through February 2010
Sources: Bank of Canada, Richard Ivey School of Business, Statistics Canada
20
30
40
50
60
70
80
90
Ja
n-0
7
Ma
r-0
7
Ma
y-0
7
Ju
l-0
7
Se
p-0
7
No
v-0
7
Ja
n-0
8
Ma
r-0
8
Ma
y-0
8
Ju
l-0
8
Se
p-0
8
No
v-0
8
Ja
n-0
9
Ma
r-0
9
Ma
y-0
9
Ju
l-0
9
Se
p-0
9
No
v-0
9
Ja
n-1
0
Ma
r-1
0
Ivey Purchasing Managers IndexSince January 2007
Expanding
Contracting
-40
-20
0
20
40
60
80
19
99
:Q2
19
99
:Q4
20
00
:Q2
20
00
:Q4
20
01
:Q2
20
01
:Q4
20
02
:Q2
20
02
:Q4
20
03
:Q2
20
03
:Q4
20
04
:Q2
20
04
:Q4
20
05
:Q2
20
05
:Q4
20
06
:Q2
20
06
:Q4
20
07
:Q2
20
07
:Q4
20
08
:Q2
20
08
:Q4
20
09
:Q2
20
09
:Q4
Bank of Canada Senior Loan Officer Survey: Q1 2010
8
Mexico: Recovery Driven by Industrial Production
Mexico: Gross Domestic Product, 2005 - 2009(Annual rate of growth - %)
Mexico: Gross Domestic Product, Quarterly, 2008 - 2009(Annual rate of growth - %)
Mexico: Industrial Production, Monthly, 2009 - 2010(Annual rate of growth - %)
Mexico has started to emerge from an historical crisis.
Industrial production (IP) has started to grow after 21 consecutive months of negative growth.
IP has now seen positive growth rates for 3 straight months.
Source: INEGI
9
Mexico: Manufactured Exports Key to Recovery
Mexico: Exports, 2005 - 2009(Annual rate of growth - %)
For nearly a year, exports had negative growth rates. Now, they are growing at + 29 %
Manufactured exports: + 25 %
Non-automotive exports: + 12 % and represent 75 % of total
Automotive exports: +84 % and represent 25 % of total
Exports to the US account for 80% of total
But exports to the US are still below 2008 peak levels.
Source: INEGI
TOTAL
MANUFACTUREDNON - OIL
OIL
10
Mexico: Investment and Employment Still Lagging Behind
Mexico: Investment, 2006 – 2010 (February)(Index: 2003 = 100)
In annual real terms, investment in January was still registering negative growth: - 4.8 %
Machinery and equipment: -9.4%
Construction: ‑1.9 %
Capital good imports: - 9.9 %
Machinery & Equipment Construction
Employment in Manufacturing Sector, 2006 – 2010 (Ene)Index 2003 = 100
Source: INEGI
11
II. NAFTA Steel Market Conditions and Outlook
12
The NAFTA Steel Industry: An Equally Hesitant Recovery
• The NAFTA steel industry experienced a sharp drop in production in 2009 as a result of the “Great Recession”
• Production has begun to grow again, but capacity utilization is still well below historic levels
• Weakness in construction (especially non-residential) and other end-use sectors could limit the recovery
• Import market share remains significant, in the context of substantial unused capacity in the NAFTA steel industry
13
0
100
200
300
400
500
600
Jan-0
7
Mar
-07
May
-07
Jul-0
7
Sep-0
7
Nov-0
7
Jan-0
8
Mar
-08
May
-08
Jul-0
8
Sep-0
8
Nov-0
8
Jan-0
9
Mar
-09
May
-09
Jul-0
9
Sep-0
9
Nov-0
9
Jan-1
0
Mar
-10
Stock Prices for American Steel Producers Continue to Show the Effects of the Economic Crisis
Closing Price of Dow Jones U.S. Iron and Steel Index, Jan. 2007-March 2010
Source: Google Finance.
14
0
2
4
6
8
10
12
14
Jan-0
6Apr
-06Ju
l-06
Oct-06
Jan-0
7Apr
-07Ju
l-07
Oct-07
Jan-0
8Apr
-08Ju
l-08
Oct-08
Jan-0
9Apr
-09Ju
l-09
Oct-09
Jan-1
0
Mill
ion
Met
ric
Tons
USA Mexico Canada
North American Steel Production Remains Far Below Historic Norms
Monthly Crude Steel Production
Source: Worldsteel
After falling to below 50%, NAFTA capacity utilization has recovered to around 70%, but is still well below historic levels
15
8
9
10
11
12
13
14
15
16
17
18
19
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
Mill
ion
Uni
ts
2009 Was Only the Second Year Since 1963 in Which North America Produced Fewer than 9 Million Cars and Trucks
North America Car & Truck Production, 1963-2009
Source: Ward’s Automotive.
9 million cars and trucks produced1982
Recent gains in North American car and truck production notwithstanding, it is projected that it will take up to five years to return to pre-crisis ”normal” levels.
16
0
50
100
150
200
250
300
350
400
450
500
Q1 200
4
Q2 200
4
Q3 200
4
Q4 200
4
Q1 200
5
Q2 200
5
Q3 200
5
Q4 200
5
Q1 200
6
Q2 200
6
Q3 200
6
Q4 200
6
Q1 200
7
Q2 200
7
Q3 200
7
Q4 200
7
Q1 200
8
Q2 200
8
Q3 200
8
Q4 200
8
Q1 200
9
Q2 200
9
Q3 200
9
Q4 200
9
'000
Sta
rts
The U.S. Construction Market Remains Weak
U.S. Single-Family Housing Starts, Q1 2004 through Q4 2009
Source: U.S. Census Bureau.
•Foreclosures remain a problem for both residential and non-residential construction.
•While residential construction is projected to increase, it is not expected to regain its 2008 level until 2013.
•The value of non-residential construction put in place fell by 9% from 2008 to 2009, and is projected to continue falling through 2011.
17
MSCI Average Daily Shipments & InventoryFor United States and Canada
Metric Tonnes (000)
100
150
200
250
300
350
400
2006JAN
APR JUL OCT 2007JAN
APR JUL OCT 2008JAN
APR JUL OCT 2009JAN
APR JUL OCT 2010JAN
Da
ily S
hip
pin
g R
ate
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
Inve
nto
ry
Daily Shipping Rate Inventory
Source: Metals Service Center Institute
NAFTA Service Center Inventories Remain at Their Lowest Levels in Many Years, but Reduced Demand is Keeping Restocking from Taking Place
•Service center demand has begun to rise, but is still well below previous levels.
• Daily shipments have returned to the levels of late-2008, but remain far below peak 2008 levels.
• Inventories are less than 65% of their historical averages.
18Source: AISI, World Steel Association
NAFTA Import Market Share Has Remained Significant Despite Substantial Available Capacity in North America
NAFTA Demand and External Imports
0.0
5,000.0
10,000.0
15,000.0
20,000.0
25,000.0
30,000.0
35,000.0
40,000.0
45,000.0
1Q 2008 2Q 2008 3Q 2008 4Q 2008 1Q 2009 2Q 2009 3Q 2009 4Q 2009
Th
ousa
nd
Ton
s
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
External Imports
Apparent Demand
Import Market Share
•NAFTA steel demand and domestic shipments have fallen by 34% and 29%, respectively, since peak levels in mid-2008.
•Non-NAFTA import market share actually increased in 4Q ‘09.
•NAFTA steel producers have more than adequate net capacity to meet home market demand in 2010.
19
(Million MT) 2004 2005 2006 2007 2008 2009 e 2010 f
Finished Steel 149.0 138.3 155.7 141.2 129.7 80.9 99.9
Apparent Steel Use (ASU)
Survey of the Short Range OutlookSpring 2010 NAFTA Region
United States
Million MT2009 (e) 2010(f)
Change (%)
Crude Steel Use
65.1 81.8 25.5%
Finished Steel Use
57.4 72.7 26.5%
Exports 8.5 11.3 32.9%
Imports 12.9 13.7 6.2%
Canada
Million MT2009 (e) 2010(f)
Change (%)
Crude Steel Use 10.6 13.1 23.9%
Finished Steel Use 9.5 11.8 23.9%
Exports 4.9 6.4 29.6%
Imports 6.0 7.7 28.3%
Mexico
Million MT2009 (e) 2010 (f)
Change (%)
Crude Steel Use 17.7 22.1 24.5%
Finished Steel Use
13.9 15.5 10.9%
Exports 2.0 2.4 20.0%
Imports 3.2 3.6 12.5%
From 2004 to 2007 (the last four full years before the economic crisis began), apparent steel use in the NAFTA region averaged 146 million MT/year. This year’s forecast of 100 million MT is 32 percent below that average.
Source: Worldsteel Economic Studies Committee
The Worldsteel Short Range Outlook Shows that, Despite an Improvement from 2009 to 2010, Market Conditions Remain Poor
20
0
20
40
60
80
100
120
140
160
Average from 2004 to 2007 2010 (est.)
In 2010, Apparent Steel Use in the NAFTA Region Will Remain More than 30 Percent Below Pre-Crisis Levels
Apparent Steel Use in NAFTA Region (millions of MT)
Source: Worldsteel
Even if apparent steel use in the NAFTA region recovers to 107 million MT by 2011, as currently projected by the World Steel Association, it would still only match the 1993 consumption level – and be only 76% of the level in 2007.
21
III. Major NAFTA Industry Concerns Going Forward
22
1,000
1,050
1,100
1,150
1,200
1,250
1,300
1,350
1,400
1,450
1,500
1Q2005
2Q2005
3Q2005
4Q2005
1Q2006
2Q2006
3Q2006
4Q2006
1Q2007
2Q2007
3Q2007
4Q2007
1Q2008
2Q2008
3Q2008
4Q2008
1Q2009
2Q2009
3Q2009
4Q2009
Mill
ions
of M
T
Global Apparent Steel Consumption (Annualized)
Source: World Steel Dynamics
Global Steel Consumption Has OnlyBegun to Recover
23
World Steel Capacity Continues to Grow, Even Though the Economic Crisis
Delayed Some Projects Scheduled for 2009-12
Source: Worldsteel
… While Global Steel Capacity Continues to Increase
2012(e)
World Crude Steel Capacity 2000-2012
1,062 1,062 1,0951,170
1,2451,356
1,4531,583
1,8161,917
1,9972,055
1,654
0
250
500
750
1,000
1,250
1,500
1,750
2,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010(e) 2011(e) 2012(e)
Ste
el C
apac
ity (m
illio
n m
etri
c to
nnes
)
World Crude Steel Capacity
24
300
350
400
450
500
550
Q1 200
8
Q2 200
8
Q3 200
8
Q4 200
8
Q1 200
9
Q2 200
9
Q3 200
9
Q4 200
9
Q1 201
0(e)
Q2 201
0(e)
Q3 201
0(e)
Q4 201
0(e)
Q1 201
1(e)
Q2 201
1(e)
Q3 201
1(e)
Q4 201
1(e)
Q1 201
2(e)
Q2 201
2(e)
Q3 201
2(e)
Q4 201
2(e)
In Advanced Economies, Apparent Steel Consumption Is Not Forecast to Return to Q2 2008 Levels at Least Through 2012
Advanced Countries’ Apparent Steel Consumption on an Annualized Basis (in millions of MT)
Source: World Steel Dynamics, “Inside Track # 104” (March 29, 2010) at 12.
Q2 2008: 503 million MT/year
25
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
26
… And Raw Material Export Restrictions are Continuing to Disadvantage NAFTA Steel and Other Manufacturers
• 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
27Source: U.S. Census Bureau.
U.S. Manufacturing Trade Balance with Non-NAFTA Countries
-$700
-$600
-$500
-$400
-$300
-$200
-$100
$0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Tra
de
Def
icit
(B
illi
on
s o
f D
oll
ars
)
China Non-NAFTA Other Than China
27% 29% 31% 33% 36% 39% 42% 49% 54% 66%•Manufacturing trade balance trends parallel indirect steel trade balance trends.
•NAFTA steel strongly supports a rebalancing of global structural imbalances (with a significant increase in NAFTA exports of manufactured goods).
•These huge, unsustainable trade imbalances have caused millions of manufacturing job losses in the North America, and contributed to the recent world economic crisis.
28
The NAFTA Share of World Exports of Manufactured Goods Has Declined Sharply
4
6
8
10
12
14
01 02 03 04 05 06 07 08 09 10
Shares of World Exports of Manufactured Goods
USA
China
Germany
Pe
rce
nt
of
Wo
rld
Man
ufa
ctu
red
Go
od
s E
xp
ort
s
Sosurce: Global Trade Inf ormation Sy stem, SITC 5-9
Data for 2009 and 2010 are not available yet, but preliminary indications are that the negative trend for NAFTA that we experienced in 2001-2008 is continuing.
29
• Overall steel demand conditions have improved somewhat from 2009, but demand remains far below pre-crisis levels, and some experts believe it could remain poor for years to come
• Global steel consumption is growing again, but so is world excess capacity
• NAFTA producers are in no position to deal with significant volumes of dumped and subsidized imports
• Trade-distorting government market interventions (to maintain undervalued currencies, subsidize steel and steel-related capacity and limit vital raw material exports) are continuing
• Manufacturing is critical to the NAFTA steel industry and our economies – and manufacturing in North America requires urgent policy attention.
Major NAFTA Industry Concerns Going Forward
30
Key Policy Messages for Steel Committee
With the recovery still fragile throughout the developed world, the NAFTA steel industry has the following key policy messages for the proposed 2011-12 Steel Committee budget and work program:
• We remain especially concerned about subsidies that contribute to excess and
inefficient capacity and/or distort trade, and believe the issue of government supports for steel should stay a part of any future Steel Committee work program.
• Two other trade-distorting practices that we would like to see remain on the Committee agenda are (1) enhanced work with the OECD Trade Committee on approaches to trade restrictions on raw materials and (2) differential or discriminatory fiscal policies.
• We believe it could be useful for the Committee to continue to analyze steel and technology and the steel trade dimensions of steel and the environment.
• Because of their importance to the global economy and the world steel industry, we would also support putting additional focus on analysis of developments in the “BRIC” countries.