Steel Founders' Society of America “Changes, …Steel Founders' Society of America “Changes, Challenges, Unknowns and Optimism” Thomas A. Danjczek SMA Senior Advisor September

Steel Founders' Society of America“Changes, Challenges, Unknowns

and Optimism”

Thomas A. Danjczek SMA Senior AdvisorSeptember 9, 2014Montreal, Canada

, :

21st Century Steelmakers

Outline

• About the SMA• Safety • U.S. and Global Production• Cost Drivers – Raw Materials, Energy,

Labor, Transportation, Capital, Regulations• Forecasts, “Wild Cards”, and Concerns• Conclusions and Questions

2


About the SMA• 34 Member Companies, accounting for 75% of

domestic steelmaking capacity• 118 Associate Members


Reasons for EAF Growth• Economic: “To be cost-competitive, one needs to be

either where the market is, or where the raw materials are.” (Paul O’Neil, Alcoa)

• Scrap availability: U.S. has the scrap and infrastructure, with over 2000 scrap processors. Steel recycling rate is over 75 percent.

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•Capital cost to build a scrap-based EAF minimill, versus an integrated ore-based mill, is less than half per ton of capacity.

•Productivity is a key to competitiveness. Minimills are under one man-hour per ton (as low as 0.3 MH/ton), versus three times that for an integrated ore-based mill. The minimill culture makes a difference.

•Metallics comprise almost 60 percent of the total cost of producing a ton of steel; energy, transportation, and labor costs account for the rest. Energy costs are 75 percent less than for ore-based; transportation costs are lower, both inbound and outbound, due to proximity to markets; labor costs are 33 percent lower.

EAF Growth


Question-Growth

What say you SFSA about growth?

Wednesday, September 3, 2014 6


SMA Safety Overview

• Safety Statistics • Fatality Prevention Initiative • Safety Surveys • SMA Annual Awards • My impressions of Priorities

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SMA Safety Statistics

8

Year RecordableRate

Lost Workday Rate

SeverityRate

# Facilities:Zero LTAs

# Fatalities(EE only) Hours Worked

2013 2.78 0.74 28.60 29 1 80,035,977

2012 2.82 0.60 23.30 24 1 93,708,852

2011 4.91 0.79 32.21 16 5 82,492,464

2010 4.18 0.75 30.12 14 4 76,549,539

2009 3.19 0.69 29.05 11 2 72,374,632

2008 3.97 0.90 38.73 10 7 93,721,705

2007 4.33 1.24 49.34 3 3 81,754,844


Fatality Prevention

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• Written guides, videos and audit tools to address critical areas

• First DVDs published in 2009 – still widely used by steelmakers and other manufacturers (shared free-of-charge)

• Critical areas covered: confined space, fall protection, lockout-tagout-tryout, mobile equipment/material handling, rail, cranes

• Current projects: contractor fatality prevention and falls


Safety Surveys• Regular questionnaires distributed

by member request, anonymous results shared with all members

• Recent topics: high-heat hard hats; firefighting response units; crane modifications; metatarsal boots; engineering controls for noise level reduction; hazard recognition and critical thinking; NFPA 70E; cleaning EAF and caster; flame-retardant undergarments

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• 2014 Don Daily SMA Achievement in Safety Award– Nucor Steel Decatur

Tornado Shelter Installation

• 2014 SMA Achievement in Innovation Award– Steel Dynamics, Inc.

Roanoke Bar Division Fall Protection Program

SMA Annual Awards

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My Impression Top Safety

• Dedicated to employee safety as top priority

• Significant proactive measures• Drives activities to excellence• It’s Culture!

( We have a significant fatality problem; are we focused on correct items?)

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Question-Safety?

How is SFSA and its membership performing on safety improvements?



U.S. and Global Production



Annual U.S. Steel Production

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Year U.S. Production(mmt)

2013 87.0 (2014 up .6%)2012 88.62011 86.22010 80.52009 58.22008 91.42007 98.1

Source: worldsteel.org


Global Apparent Steel Use



Global steel 2003 (972mmtons versus 2013 (1606mmtons)



Global Steelmaking Capacity & ConsumptionM

illio

n m

etric

tons

Sources: worldsteel.org, OECD


Major Net Exporters and Importers of Steel (2012)

Rank Net Exports (exports-imports)

mmt

1 China 40.62 Japan 35.73 Ukraine 22.34 Russia 19.85 European Union (27) 17.66 South Korea 9.87 Turkey 7.28 Brazil 5.99 Italy 4.310 Belgium 3.9

Rank Net Imports (imports-exports)

mmt

1 United States 17.92 Thailand 13.63 Indonesia 11.34 Saudi Arabia 7.85 Vietnam 6.56 UAE 6.07 Iran 5.38 Algeria 5.09 Mexico 4.310 Philippines 4.3



Question- Capacity/Production

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For Antitrust reasons, Answer only to yourself: How is Production/Capacity trending?

• Impact of Imports?


Challenges

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Deeper Recession

Variable Cost Control

Engineers

Scrap Availability

High Unemployment

Labor Intensity

Inventory Levels

China

SafetyConsolidations

Customer Requirements

Environmental Regulations

Foreign Ownership

Transportation Costs

Ore Availability

Energy Costs

Currency

State-Owned EnterprisesOther

Factors…

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Imports of Major Steel Producing Nations(2012)

Producer Import ShareUnited States 30.27%Russia 14.21%India 12.12%Japan 8.33%China 2.05%

Steel Imports as a Percentage of Consumption


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U.S. Steel Production: 88.7mmtU.S. Steel Consumption: 102.0mmt

∆13.3mmt

• Since 2003, imports have accounted for an average of 26% of U.S. steel consumption

Message: Significant amount of imports should have been replaced with

domestically produced steel.

U.S. Steel Trade Data(2012)


Annual Trade Deficit – Most Significant Factor

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Annual Trade Deficit with China

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0.00

50,000.00

100,000.00

150,000.00

200,000.00

250,000.00

300,000.00

350,000.00

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012


Other Key Challenges• Budgetary/Funding Issues• Regulatory Uncertainty• Persistently High Unemployment• Taxation• Indirect Steel Trade – Loss of Customer Base• Scrap Exports/Foreign Barriers• Skilled Workforce Shortage

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Aluminum in Cars?

GM’s stated concerns with potential increased aluminum usage in trucks:• Durability• Customer value (taking something away)• Current focus on high strength steels• Steel’s proven track record (know what you

have 20 years down the road)• Galvanic corrosion where steel and aluminum

are joined

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Remember the Steel Beverage Can?

In early ‘70s, steel producers were convinced that aluminum would not replace steel…

• U.S. steel producers were complacent with costs, quality, rejects, product development, and required capital investments

• Today, globally 75% aluminum, 25% tin plate

Steel must NOT make that same mistake again!

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Why Steel May Be Better…

• Existing supply chain• Manufacturing equipment/tooling exists• Lower expense• Quality improvements• Repair aftermarket exists!• Durability• Ease of recycling• Ease of manufacture

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Question-Challenges

For SFSA what are the Key Challenges?



Environment & Energy

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Environment & Energy• Recycling of steel scrap plays an important role in the

conservation of energy.

• Energy required to make steel from ore is 3 to 4 times greater than from recycled scrap.

• Resource conservation plays an important role.

• For U.S. steel, Kyoto target reduction of GHG exceeded by over 400 percent, primarily due to the growth of EAFs. U.S. is 37 percent below 1990 Kyoto levels. EAFs generate 1/3 to 1/4 the GHG, versus integrated production.

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2010 2011 2012Total US Iron & Steel Sector 68,991,417 76,395,750 72,700,054BOF 57,673,728 64,361,874 60,012,708EAF 11,317,689 12,033,876 12,687,346

5,000,000

15,000,000

25,000,000

35,000,000

45,000,000

55,000,000

65,000,000

75,000,000

85,000,000

95,000,000

Mill

ions

Met

ric T

ons

CO

2 Eq

uiva

lent

Total GHG Emissions* - US Iron and Steel Sector Reported by US EPA Greenhouse Gas Reporting

Program - 2014

* Cumulative data as reported to USEPA – emissions incl. CO2; CH4; N2O; SF6; NF3; HFCs; PFCs; and HFEs


Impact of Abundant Domestic Natural Gas

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Shale/Oil Gas Resources

36


U.S. Natural Gas Spot Price (Henry Hub)20

10 U

.S. $

per

mill

ion

Btu

Source: U.S. Energy Information Administration


Electricity Generation from Coal and Natural Gas in Two Cases, 2008-2040

Bill

ion

kilo

wat

thou

rs

Source: U.S. Energy Information Administration


Raw Materials Natural gas price/availability has spurred interest in raw material investments:

• Nucor Louisiana – 2.5mmt DRI pellet capacity• VoestAlpine – 2mmt DRI/HBI in Texas•Discuss impact of $90 ore today versus $140


Question-Raw Material& Energy

For SFSA:

Impact of raw material costs?Impact of natural gas changes?

Impact of EPA?



Products

41


U.S. Steel Shipments by Classification

42


U.S. Finished Steel Demand Driven by Three Variables

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Source: First River


Auto Build Already Above Pre-Crisis and Poised to Keep Going

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Sources: First River, Wards and PWC Autofacts (April 2014)


Construction Activity

45

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

2007 2008 2009 2010 2011 2012 2013 2014 2015

Squa

re F

oota

ge (0

00)

Residential (1 & 2 family dwellings) Non-Residential

Non-building structures not included


Appliance Shipments Recovering, but Likely to Remain Below Previous Peak

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Sources: First River, Appliance Magazine (2014)


U.S. Finished Steel Demand Could Return to 125-130mt Range

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Source: First River


Steel Intensity Model Also Supports a Return to 130mt

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Source: First River


U.S. Raw Steel Capacity Utilization Could Get Back Around 90 Percent in a Few Years

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Source: First River


Question-Growth

For SFSA:

Do you “mirror” steel production forecasts?



Personal ConcernsI worked for three ‘successful’ companies that went bankrupt…Four personal comments:• Arrogance• Complacency• Bureaucracy• Lack of continuous improvement

IT’S A WAR!51


Optimism

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Reasons for Optimism

North America is a competitive place to make steel:

• Self-sufficient in steelmaking raw materials (especially scrap)• Relatively low energy prices• High labor productivity• Access to world’s largest capital market• Proximity to domestic market


Concluding Thoughts for North America • North American markets resilient, relatively

strong• Global overcapacity continues to pose major

threat• EAF share of production likely to increase• Increased transparency, better information• Companies have stronger balance sheets• Positive developments in alternate iron units• Huge potential exists in energy development


Final Question?

For SFSA:

Are you as optimistic?



• G

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Documents

Steel Founders' Society of America “Changes, …Steel Founders' Society of America “Changes, Challenges, Unknowns and Optimism” Thomas A. Danjczek SMA Senior Advisor September