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Steel Industry OutlookFederal Reserve Bank of ChicagoNovember 30, 2007
Robert J. DiCianniArcelorMittal USA
1
2008 Steel Industry Outlook
• General Economic Indicators• Some Key Steel Consuming Markets• Overall USA Steel Demand Forecast• Global Steel Demand, Input Costs and other Steel Industry
Factors
2
Industrial ProductionManufacturing Only
105.0107.0109.0111.0113.0115.0117.0119.0121.0123.0
'99 '00 '01 '02 '03 '04 '05
Prod
uctio
n In
dex
71
73
75
77
79
81
83
% U
tiliz
atio
n
Index Utilization
Manufacturing Production Index and Capacity Utilization
3
Industrial ProductionManufacturing Only
99.0101.0103.0105.0107.0109.0111.0113.0115.0117.0
'03 '04 '05 '06 '07
Prod
uctio
n In
dex
71
73
75
77
79
81
83
% U
tiliz
atio
n
Index Utilization
Manufacturing Production Index and Capacity Utilization
Note that on November 7, 2005 the Federal Reserve changed the base year to 2002
4
USA GDP Growth
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08
Growth will slow as housing furtherdeteriorates in 2008 and impacts other parts
of the economy. Growth projections are backloaded in 2nd Half of 2008.
Advanced Estimate
5
ISM Manufacturing Index
47%
49%
51%
53%
55%
57%
59%
J-06 J-07
Manufacturing growth slowed in 3Qand into 4Q. Value at risk of falling below 50% over the next few months.
6
Some Key Steel Consuming Markets
7
Residential Housing Building PermitsSAAR
1,200
1,400
1,600
1,800
2,000
2,200
J-06
F-06
M-06
A-06
M-06
J-06
J-06
A-06
S-06
O-06
N-06
D-06
J-07
F-07
M-07
A-07
M-07
J-07
J-07
A-07
S-07
Building permits continue to slide and economists think the bottom may be about 20% below the current rate. 2008 housing start forecast has been reduced to 1.02M.
8
Investment - USA FixedNon-Residential and Residential (% change in $)
-20%
-15%
-10%
-5%
0%
5%
10%
15%
2000 2001 2002 2003 2004 2005 2006 2007 2008
Non-Residential Residential
Forecast
Global Insight: Sept 2007
Residential investment (housing, remodeling, etc) will have another very tough year in 2008, while non-residential investment (plants, equipments, etc) will see continued growth in 2008. Non-residential growth potential has been
reduced due to the impact of the residential market.
9
Highways and Bridges% change y-o-y in value of construction work
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
'00 '01 '02 '03 '04 '05 '06 '07(f) '08 (f)
Highway and bridge construction is expected to grow partially in response to increased funding under the Federal transportation bill (SAFETEA-LU). This
bill provides a 38% increase in funding over a 6 year period.
AISI Commercial Research Consensus Forecast
10
Office Furniture Consumption
$0
$2
$4
$6
$8
$10
$12
$14
$16
Bill
ions
of D
olla
rs
'94 '96 '98 '00 '02 '04 '06 '08(f)
Office Furniture Consumption
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
'94 '96 '98 '00 '02 '04 '06 '08(f)
Change in Consumption
BIFMA History and Forecast
Although slight, growth in consumption of office furniture is anticipated in 2008.
11
U.S. Railcar ProductionFreight Car Deliveries
55.8
34.3
17.7
32.2
46.3
68.674.9
62.0 63.0
2000 2001 2002 2003 2004 2005 2006 2007 2008
Thousands of Units
Rail freight car demand has softened since late last year with reduced carload volumes being recorded in 2007. The forecast calls for the building of new rail cars to stabilize during the next 4-5 years unlike the wide swings experienced recently.
The current backlog is 72K units with ethanol tank cars leading in backlog. The forecast is constrained by facility capabilities (type of car produced).
AISI Commercial Research Consensus Forecast
12
Energy: Pipeline Demand
• 72% of global pipeline projects are related to natural gas.
• U.S. is 2nd largest builder of pipelines in the world; #1 is the Far East.
• 16,750 miles of pipeline projects are planned or under construction in the U.S. (18.4% of global total).
• Soaring energy prices have made more projects feasible due to high costs, i.e. Canada’s oil sands
+30%91,10069,850
Miles of pipeline projects planned
or under construction
∆20072006
Global Pipeline Projects
Source: Bruce Beaubouef, Pipeline and Gas Technology; AMM 9/12/07
13
North American Pipeline Forecasts
0
1,000
2,000
3,000
4,000
5,000
6,000
20072008
20092010
20112012
20132014
2015
Mile
s
Replacement New Alaska
U.S. LNG Imports
0
1000
2000
3000
4000
5000
6000
7000
'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20
Year
Ann
ual B
cf
Source: Energy and Environmental Analysis, Inc.
Miles of Pipeline Additions in North America
Sources of N.A. Natural Gas
05000
100001500020000250003000035000
'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20
Year
Annu
al B
cf
Traditional Rockies GOM Slope E.Canada Alaska Makenzie
Increased demand and new sources of natural gas supply are driving NG
pipeline growth
14
USA Energy Market Steel Demandmillion of tons
0
1
2
3
4
5
6
line pipe OCTG
200620072008
Source: Preston Pipe & Tube Report; Oct 2007
OCTG forecast assumes $70/barrel oil for 2008
15
Wind PowerU.S. Installed Capacity
0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000
2000
2001
2002
2003
2004
2005
2006
2007
2008(f)
MegawattsSource: AWEA
Plate consumption of 125 tons per wind turbine or over
375,000T in 2007
16
Major* Appliance Annual ShipmentsHistory and Forecast
20
25
30
35
40
45
50
Mill
ions
of U
nits
'94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07(f)'08 '09
* Washers, Dryers, Dish Washers, Refrigerators, Freezers, Free-Standing Ranges, Built-in Ranges
2007 YTD appliance
shipments are down 7% vs
2006. Recovery
expected in 08
17
Automotive Production
• Market has underperformed for seven straight years.
• Imports continued to rise; from 3.2 million in 2002 to 4.2 million in 2005, 4.5 million in 2006, and 4.6 million in 2007.
• NAFTA Production recovery starts after 2008.
• Big 3 become more competitive • Economy recovers from housing
slump. Gas prices stabilize.• No major shock from CAFÉ• New capacity; Toyota –Indiana,
Woodstock, San Antonio, & Midwest; Honda -Greensburg 13.5
14
14.5
15
15.5
16
16.5
17
17.5
2000 2003 2005 2007
NA production(millions of units)
Source: JDPower & Associates
18
Service Center InventoryMonths on Hand
2.0
2.5
3.0
3.5
4.0
4.5
5.0
J-05 J-06 J-07
Source: MSCI
19
Service Center Inventory
2,000
2,200
2,400
2,600
2,800
3,000
3,200
3,400
3,600
J-05
M-05
M-05
J-05
S-05
N-05
J-06
M-06
M-06
J-06
S-06
N-06
J-07
M-07
M-07
J-07
S-07
6,5007,0007,5008,0008,5009,0009,50010,00010,50011,000Monthly Shipments
Month End Inventory
Monthly shipments, 000 tons Ending inventory, 000 tons
20
Apparent Steel Consumption: USA & NAFTA
100
105
110
115
120
125
130
135
'95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07(f) '08(f)Apparent consumption = AISI shipments + finished imports – exports – non raw steel producers
U.S. inventories were drawn down in 2005 and then replenished during 2006. After
inventories peaked in October 2006, stock levels continue to be reduced in 2007. 2007
apparent steel consumption in the USA is 6% less than 2006 due to the inventory correction
and weaker demand. 2008 is expected to bring a small increase to steel demand and
inventories at stable levels.
(Millions of Tons) – TOTAL STEEL: USA
Source: AISI, IISI, with ArcelorMittal forecast3.2%-4.9%11.6%168.5163.3171.6NAFTA
5.3%4.0%11.4%21.720.619.8Mexico
2.8%-5.8%6.9%18.518.019.1Canada
2.9%-6.1%12.3%128.3124.7132.8USA
2007-2008
2006-2007
2005-2006200820072006
Change % per YearMillion Tons Finished Steel
21
Weekly US Raw Steel Production Capacity Utilization
68%
72%
76%
80%
84%
88%
92%
N-06
D-06
J-07
F-07
M-07
A-07
M-07
J-07
J-07
A-07
S-07
O-07
N-07
Source: AISI
22
Monthly Imports: flat rolled steel
600700800900
1,0001,1001,2001,3001,4001,5001,600
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
200520062007
000s/MT
23
Higher steel prices in other markets will depress USA imports for the rest of this year
0100200300400500600700800900
1000
USA EU CIS Far East
HRCRHDG
US$/s ton
Source: CRU November Steel Monitor
24
Baltic Dry Index
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
8/26/2
0032/2
6/2004
8/26/2
0042/2
6/2005
8/26/2
0052/2
6/2006
8/26/2
0062/2
6/2007
8/26/2
007
The Baltic Dry Index represents a daily index of the price of ocean shipment of bulk raw materials. The cost of shipping iron ore has risen by 300% since 2003.
Ocean Freight Costs
Ocean freight for iron ore has doubled since beginning of year
25
Euros to 1 USD2002 – May 2007
0.73
0.83
0.93
1.03
1.13
1.23
J'02
J'03
J'04
'05
2006
2007
103
113
123
133
143
J'02
J'03
J'04
'05
2006
2007
1
1.2
1.4
1.6
1.8
2
J'02
J'03
J'04
'05
2006
2007
Canadian Dollar to 1 USD2002 – May 2007
The weakening of the U.S. dollar has increased the cost of imports into the USA from most countries. This includes automobiles & steel. The dollar is expected to weaken an additional 5% vs. the USA’s major trading partners in 2008. Due to political pressure, the Chinese Yuan is also expected to finally strengthen.
Japanese Yen to 1 USD2002 – May 2007
Currency
26
Global Demand, Input Costs and other Steel Industry Factors
11/30/2007 27
WORLD ECONOMIC PROSPECTSReal GDP Growth %: 2007-2008
Source: ArcelorMittal Commercial Coordination
Total Asia
Strong growth across all regions in 2008.Persistant high growth in Asia as China & India continue to grow rapidly.Middle East growth in 2008.Robust growth in Europe, particularly eastern Europe.
1.9
2.4
8.2
5.35.0
6.1
2.9
4.85.2
5.55.8
2.4
4.7
11.5 2.27.4
2008 3.6
11.0 2.0
2007 3.6
28
Global Apparent Steel Consumption
*IISI with ArcelorMittal Forecast
4.2%5.5%8.3%917.0880.1834.4W/O China10.7%11.9%9.0%486.1439.3392.6China6.3%7.5%8.5%1,403.11,319.31,227.1World-2.1%9.9%27.2%15.515.914.4Rest of World8.4%9.7%6.3%780.0719.8655.9Asia8.5%9.2%10.2%48.144.340.6Middle East8.2%7.9%9.6%27.825.723.8Africa5.3%10.3%11.5%46.143.839.7
Central & South America
8.5%24.0%12.8%71.866.153.4CIS6.4%6.8%18.4%27.425.824.1Turkey1.5%5.5%9.0%217.9214.7203.6EU 273.2%-4.9%11.7%168.5163.3171.6NAFTA
2007-2008
2006-2007
2005-2006200820072006
Change % per YearMillion Tons Finished Steel
29
Iron Ore Spot PricesBrazilian
$20$30$40$50$60$70$80$90
$100$110$120
2003
2004
2005
2006
2007
Global iron ore prices
have doubled since early 2006. Iron ore spot
prices are currently 40%
above contract prices.
Strong global demand for steel has pushed up spot prices. Negotiations for 2008 fiscal contracts will begin soon.
Source: CRU
30
China Export, Coke 10.5-12.5% ash $/t FOB (SBB Steel Prices, 2007)
245% Increase
China is the largest exporter of coke. China is considering imposing an export tax on coke in order to keep more supply inside the country. If this tax is imposed, coke prices would rise worldwide.
31
Silico-manganese US Free Market Pittsburgh $/lb(Copyright Metal Bulletin Pricing, 1993-2007)
271% increase
32
Zinc: LME AM 3 mo price & Stocks
Zinc prices have been extremely volatile for the last two years. For many years it had traded in a relatively tight range of $900-$1000 per mt. It is now about 4x that level as global demand outgrew supply. Supply is slowly increasing, but stocks remain very low. We expect continued significant volatility for zinc prices through 2008.
$1,800
$2,300
$2,800
$3,300
$3,800
$4,300
$4,800
1/3/
06
1/20
/06
2/8/
06
2/27
/06
3/16
/06
4/4/
06
4/25
/06
5/15
/06
6/2/
06
6/21
/06
7/10
/06
7/27
/06
8/15
/06
9/4/
06
9/21
/06
10/1
0/06
10/2
7/06
11/1
5/06
12/4
/06
12/2
1/06
1/12
/07
1/31
/07
2/19
/07
3/8/
073/
27/0
7
4/17
/07
5/4/
07
5/24
/07
6/13
/07
7/2/
07
7/19
/07
8/7/
07
8/24
/07
9/13
/07
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
3 mo ask price ($/mt)Stocks (mt)
Jan 2007 – Sept 2007 (-27%)
Jan 2006 – Sept 2007 (+59%)
33
Ferro-molybdenum 65/70% Pittsburgh $/lb(Copyright Metal Bulletin Pricing, 1992-2007)
1,145% increase
34
Nickel: LME spot ask priceUS$/metric ton
0
10
20
30
40
50
60
J M S J M S J M S
2005 2006 2007
000s/ton
35
Scrap: #1 Busheling – ChicagoUS$ per ton
$220$235
$265
$305
$370
$340
$285$300 $300
$310
$332$322
$300
$200$220$240$260$280$300$320$340$360$380
N-06
D-06
J-07
F-07
M-07
A-07
M-07
J-07
J-07
A-07
S-07
O-07
N-07
2007 Scrap are down $22 in Nov
36
Brazil Export, CVRD blast furnace pellet –Europe $ cent/t FOB Tubarao(SBB Steel Prices, 2007)
117.96112.05112.05112.05112.05112.05115.51115.51115.51115.5161.88
Q2, 2007Q1, 2007Q4, 2006Q3, 2006Q2, 2006Q1, 2006Q4, 2005Q3, 2005Q2, 2005Q1, 2005Q4, 2004
61.8861.8861.885252525247.3647.3647.3647.36
Q3, 2004Q2, 2004Q1, 2004Q4, 2003Q3, 2003Q2, 2003Q1, 2003Q4, 2002Q3, 2002Q2, 2002Q1, 2002
+145%
37
Summary
• Slower than expected GDP growth throughout 2007.• Significantly high inventories at the start of the year.• Low imports through 2007• 2008 will start with low inventory levels• 2008 imports expected to be low• Economic growth expected to improve in the second half of
2008 but overall yearly growth will be below trend.• Industrial markets and export markets will remain strong• Steel manufacturing cost inputs remain higher than historic
levels.