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					Concrete Reinforcing Steel Institute Fall Business Meeting, 2004

Washington‟s Impact on Steel

Thomas A. Danjczek, President Steel Manufacturers Association November 2, 2004

Concrete Reinforcing Steel Institute Fall Business Meeting, 2004 1. 2. SMA Changes – August 2003 – Scrap Impact – World Steel Production China, China, China… – Key Statistics – Steel Production – SMA Mission – Lessons Learned – Currency 5. 4.

Washington‟s Impact on Steel

Other Government Impacts – Exchange Rates – Value of the Dollar – Scrap Imports/Exports – US Overhead Costs – TEA 21 Lunacy Steel Production Costs – Key Issues – Energy & Raw Material Costs – Asset Values – Bankruptcy/Restarts Conclusion

3.

6.

Concrete Reinforcing Steel Institute Fall Business Meeting, 2004

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

31 U.S., 2 Canadian, and 2 Mexican
–107 Associate members: Suppliers of goods and services to the steel industry •SMA member companies –Operate 120 Steel plants in North America –Employ about 40,000 people –Mini-mill Electric Arc Furnace (EAF) producers

Concrete Reinforcing Steel Institute Fall Business Meeting, 2004

•Production capability –SMA represents over half of U.S. steel production •Recycling –SMA members are the largest recyclers in the U.S. –Last year, the U.S. recycled over 70 million tons of ferrous scrap •Growth of SMA members –Efficiency and quality due to low cost –Flexible organizations –EAF growth surpassed 50% in 2002 & 2003, and anticipated to be 60% by 2010

Concrete Reinforcing Steel Institute Fall Business Meeting, 2004 Capital Constraints

Evaluate Washington‟s Impact?

Steel Demand Weakening

Public Policy

Consolidations

Legacy Costs

Pricing Volatility
Increasing Imports

201 Tariffs/ Exclusions

Bankruptcies

Mini-mill Industry Condition Perennial Problems

N.A. Economy Plant Closures/ Restarts

Exchange Rate Shifts Operating Costs Benefits & Energy

Semi-Finished Imports

ISG‟s Labor Contract

US PBGC

Concrete Reinforcing Steel Institute Fall Business Meeting, 2004

Up $130 since June 2004!

ANNUAL WORLD STEEL PRODUCTION OUTLOOK World steel output looks set to rise 5% or 50 MT MT in 2004, after gains of 62 MT and 53 MT in 2003 and 2002, respectively, largely on the strength of China coupled with the recent onset of rest-of-world economic recovery. China steel production rose by 20%. Increases continue…
1100 1050
Forecast (MT) 2005: 1,075.0 2004: 1,015.0 2003: 964.7 2002: 903.1 2001: 850.2 2000: 847.6 1999: 789.0

World Steel Production Forecast

Forecast… 40.0%
35.0%

EAF Share of Production, %

Million Metric Tonnes

1000 950 900 850 800 750 700

30.0%

EAF %
(Line, Right Scale)

25.0%

20.0%

15.0% 1985 1990 1995 2000 2005

Concrete Reinforcing Steel Institute Fall Business Meeting, 2004

China China China…

A few notes on China from 2003, 2004 and forward:
•Consumed ≈ 25% of world coke supply in ‟03 •Coke production ramping up in ‟04 and „05

•Consumed ≈ 25% of world iron ore supply in ‟03
•Iron ore production ramping up in ‟04 and ‟05 •Consumed ≈ 20% of world scrap supply in „03 •Consumed ≈ 240M mtons of steel in „03 •Produced ≈ 220M mtons of steel last year (est. 240M mtons ‟04) •Consumed ≈ 40% of world concrete supply •VW will produce and sell 150M cars in China this year •GM will invest $6B in China by 2006 (rival VW as #1 supplier) •Average income / year $1,200 US (≈ $5,000 for steelmakers)

CHINA STEEL PRODUCTION China produced 220 MT of crude steel in 2003 – double the next largest producer Japan at 110.5 MT and 2.4 times the U.S. (92.2 MT, shown) – and will produce as much as 275 MT, 350 MT, and 425 MT by 2005, 2010, and 2015, respectively.
400 350
Million Tonnes
China

300 250 200 150 100 50 0 1980 1985 1990
United States

1995

2000

2005

2010

2015

Courtesy – Metal Strategies

Concrete Reinforcing Steel Institute Fall Business Meeting, 2004

SMA Study Mission to China – August 2004

Team

Nine member steel company representatives (3 presidents; 3 V.P. – operations; 3 experts melting, rolling & engineering) Gain First Hand Knowledge in mills & mill builders

Purpose

Major Concern

Given high degree of Chinese Government subsidies provided, loss of US steel customer base
When will capacity & production exceed domestic demands

Key Question

Concrete Reinforcing Steel Institute Fall Business Meeting, 2004

Lessons Learned

Government

- Control capital through state banks - Control growth through land availability - Control output through electrical power and planning assets - Steel ownership – 90% SUBSIDIZED! - Government shutting down less efficient operation measured by energy consumption & environmental pollution - Massive construction – Vacant office space? - Significant power outages – building nuclear plants - Organized approach to Growth - Water transportation is a major asset - Qualified personnel with enthusiasm and pride - Observed both world class & marginal facilities

Infrastructure

Quality

Concrete Reinforcing Steel Institute Fall Business Meeting, 2004

Lessons Learned

Cost

- Capital construction est. @ 40% of US costs - Manpower est. a magnitude 10 to 1 vs. US (Objective is to employ people) - Power cost similar to US @ 6¢/KwH except little difference between peak – non-peak (2¢) - 40% tariffs on scrap exports - China est. to import 10 million tons of scrap in 2004 Rebar usage disproportionately high Limited personnel safety procedures Huge automotive growth Difficult to understand success of private steel facilities - 80% of exports from Coastal zone - Duck tongue tastes like pencil erasers! -

Scrap

Miscellaneous

Concrete Reinforcing Steel Institute Fall Business Meeting, 2004

SMA Mission # 2

Next Mission – November 5 – 13, 2004
Objectives
• • • Observe First-hand Current Chinese Market Conditions & Developments Interact Directly with Government & Association Chinese Steel Industry Build on First Mission with Goal of Improved Strategic Understanding of Long-Term Impact to US Industry

Courtesy – IMF

Courtesy – IMF

Courtesy – IMF

EXCHANGE RATES – INDEX
The real trade-weighted US$ index for major currencies has dropped 22% from the recent 2-’02 peak (115.8) and 30% from the all-time record high in 1-‘85 (124.9), but was still up 10% from the 7-’95 record low (80.4).
US$ Real Trade-Weighted Index
Data through April 2004

130 120
Index 1990 = 100

Broad Currency Group

110 100 90 80 70 Jan-75 Jan-80 Jan-85 Jan-90 Jan-95 Jan-00
Courtesy – Metal Strategies

Major Currencies

VALUE OF THE U.S. DOLLAR
Scrap prices are inversely related to the dollar

150

$250

Major Currencies Dollar Index

$150 100 $100 75

Dollar Index

$50

50 1990

$0 1992 1994 1996 1998 2000 2002 2004
Courtesy – Metal Strategies

Source: AMM, Federal Reserve

Scrap Price - $/GT

125

Scrap Price

$200

VALUE OF THE U.S. DOLLAR
The strong relationship between steel imports and the dollar is even more clear when a 12-month moving average is used.

150

4.0

Major Currencies Dollar Index

125

3.0 2.5

100 2.0 75
Dollar Index

1.5 1.0

50 1990

1992

1994

1996

1998

2000

2002

0.5 2004
Courtesy – Metal Strategies

Source: AISI, Federal Reserve

Finished Steel Imports - MT

Finished Steel Imports (12-Month Moving Avg)

3.5

U.S. SCRAP CONSUMPTION AND EXPORTS
Demand for U.S. scrap increased by 3 MT in 2003, driven by a 15% surge in exports and a slight gain in domestic demand (EAF and BOF production down 3% and up 1%, respectively)
80

70

Million Tons

60

50

40 1980 1985 1990 Consumption 1995 Exports
Courtesy – Metal Strategies

2000

RUSSIA AND UKRAINE SCRAP EXPORTS
Partial export bans, restrictions and duties designed to protect local steelmakers have restricted the flow of exports to the world market
8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0

1994

1995

1996

1997

1998 Russia

1999

2000

2001

2002

2003

Ukraine
Courtesy – Metal Strategies

Concrete Reinforcing Steel Institute

Fall Business Meeting, 2004

From MAPI‟s Study, “How Structural Costs Imposed on US

Manufacturers Harm Workers and Threaten Competitiveness.”
•External overhead costs from taxes, health care, pension costs, tort litigation add 22% to US unit labor costs ($5/hours)

Total Burden of Cost Pressures on U.S. Manufacturing’s Raw Cost Competitiveness
(% difference relative to U.S. manufacturers)

Cost pressure Corporate tax rates Employee benefits Litigation costs Pollution abatement Natural gas prices Total cost advantage of nine largest trading partners

Foreign Advantage -5.6 -5.5 -3.2 -3.5 -0.5 -18.3

Concrete Reinforcing Steel Institute

Fall Business Meeting, 2004

Needs:
-

Reduce Corporate Tax Burden
Re-do Treatment of Foreign Source Revenue Reduce Health Care Burden by Consumer Responsibility Reform Pension Plan Funding Rules Undertake Serious Legal Reform by Curtailing Frivolous Law Suits, Placing Large Class Actions in Federal Court, and Negotiating Legitimate Asbestos Claims

Concrete Reinforcing Steel Institute

2005 Transportation

Fall Business Meeting, 2004

Spending Bill

TEA 21 NOT Reauthorized
• • • • • • Interim Stop Gap Approval at Current Rate Senate Passed $318 Billion, plus (over 6 years) House Passed $284 Billion (over 6 years) President will veto above $256 Billion Probably will be Rolled into an Omnibus Appropriations Bill NUTZ!!! (Lunacy)

Concrete Reinforcing Steel Institute Fall Business Meeting, 2004

US Steel Production Costs

Summary of Key Issues
• Relative operating costs in the U.S. steel industry have changed dramatically over the past 12 months: • First with the introduction of the ISG-style restructuring which took out $40$50 per of hot band costs as a result of labor contract changes, and a further $25-$50 per ton with the removal of past legacy costs.

• Secondly, with the surge in metallics and energy prices and this development’s far greater relative impact on sheet minimills until the successful implementation of surcharges.
• Third, ore, coal, and coke prices have risen significantly.

Concrete Reinforcing Steel Institute Fall Business Meeting, 2004

Steel Energy and Raw Material Costs

Scrap now around $400

$500 $450 $400 $350 $300 $250 $200 $150 $100 $50 $0
No.1 HM Scrap No.1 Busheling Jan-02 Apr-04 May-04 MPI DRI Coke

Concrete Reinforcing Steel Institute Fall Business Meeting, 2004

Steel Energy and Raw

Material Costs (cont.)

In the 28 months from January 2002 to May 2004, raw material and energy input costs for U.S. steelmakers have increased dramatically.
$90 $80 $70 $60 $50 $40 $30 $20 $10 $0
+110% +450% +65% +82%

+155%

Pellets

Coal

Ocean Freight
Jan-02 Apr-04

Gas

Fuel Oil

May-04
Courtesy – Metal Strategies

RECENT U.S. STEEL ASSET TRANSACTION VALUES
Acquisition range has been $60 to $90/ton shipped for shuttered operations and $160 to $260/ton for ongoing businesses.
300 250 200 150 100 50 0
G'twn $/Ton 20 LTV $60 Acme Kingm. Trico $68 $70 $79 Qual. Rouge $90 92 Weir $102 Beth $167 Nat'l $175 CoHeartl Steel $180 $194 Aubur Birmin LTV n g. HDG $230 $255 $265

Ongoing Businesses

Liquidated Companies

REP $225

CSN disclosed in October 2003 that its acquisition price for Heartland was actually $175 million instead of the previously-report $69 million. Acquisition prices include all assumed liabilities.

Courtesy – Metal Strategies

OCEAN FREIGHT RATES
Ocean freight rates increased 4.5-fold from $10,000/day to $45,000/day between early-2003 and early-2004 and have recently declined by about $5 to $10 pr tonne since late-March.
$70 $60

US$ Per Tonne

$50 $40 $30 $20 $10 $0 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04

Brazil-China

Australia-China

Courtesy – Metal Strategies

Technical Read on Crude Oil Prices

Courtesy – JP Morgan

Technical Read on Natural Gas Prices

Courtesy – JP Morgan

Concrete Reinforcing Steel Institute Fall Business Meeting, 2004

Conclusion

•Don‟t count on Washington for help! i.e. TEA 21

•Uncertainty – Cycle has Changed (Shorter Term & Greater Peaks & Valleys)
•Revenue vs. Costs – Not the Same Business Model

•CHINA, CHINA, CHINA…
•Bankruptcy Laws Unfair to Competitors •Investments – Earn Cost of Capital •Mini-Mills Must Compete in the World, as it is, and We Can! •Meaningful Optimism with Good Long Term Consumption, Relative Value, and Excellent Recyclability for Steel


				
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