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Steel Orbis: Steel Trade Conference(Session 1 – Economy and Markets)
North American Steel Industry Challenges
Thomas A. DanjczekPresidentSteel Manufacturers AssociationSan Diego, CAJuly 11, 2008
Outline• SMA
• U.S. steel industry, 1970’s vs. today
• U.S. steel production
• Steel market conditions
• Consolidation and capacity
• Raw material issues
• Greenhouse gas emissions
• Unknowns
• Conclusion
Steel Orbis 2008
• The Steel Manufacturers Association (SMA)– 35 North American companies:
30 U.S., 3 Canadian, and 2 Mexican– 130 Associate members:
Suppliers of goods and services to the steel industry
• SMA member companies– Operate 125 steel recycling plants in North America– Electric Arc Furnace (EAF) steelmakers using recycled steel
Steel Orbis 2008 SMA
• Production capability– EAF steel producers accounted for 60% of U.S. production in 2007– SMA represents over 70% of all U.S. steel production
• Recycling– SMA members are the largest recyclers in the U.S.– EAF steel producers are the largest recyclers in the world– Last year, the U.S. recycled over 75 million tons of steel
• Growth of SMA member companies– Highly efficient users of labor, energy, and materials – Modern plants producing world class quality products
Steel Orbis 2008 SMA
Steel Orbis 2008 Obvious Items
-Recession impact
-U.S. dollar exchange rate
-China finished goods vs. raw materials
-Raw material price squeeze
-Consolidations
-NAFTA issues
-Environmental regulations
-Energy and transportation costs
-China, China, China
1970’s 2008
Production
Employment
Technology
Location
Imports
Profitability
Average Price
Approx. 700,00012 MH/ton(1978 – 449,000)
<20% casters<10% EAF
Primarily Rust Belt & a few scattered
Approx. 15%
Poor
$605
100 million tons
<120,000(Minimills @ 60% - approx. 40,000, <2MH/ton)
95% casters60% EAF
NW, SE, Rust Belt (near customers, and cheap power)
Approx. 25% (peak @ 35%)
Good
$1200???
100-140 million tons
U.S. Steel IndustrySteel Orbis 2008
Differences
-U.S. has become one of the world’s low cost steel producers, due to metallics availability, transportation, labor and energy efficiencies, and high utilization
-China, which was approx. 70mmt in 1970’s, today over 500mmt
-Many large integrated producers eliminated legacy costs in 1998-2003 period through bankruptcies (30 companies)
-World demand for all raw materials has changed supplies from excesses to shortages
-Last integrated mill built, Burns Harbor, was 1964-1970 (Nucor?)
-Growth in U.S. lost to foreign producers (1970 – U.S. approx. 20% of world; today, less than 10%)
-U.S. steel capacity has been reduced from approx. 170 million tons in the 1970’s, to 130 million tons today, while production has been around 100 million tons
-Profitability: net income as a % of sales was only .5 to 2.5% (1974) in the 1970’s. Insufficient to cover down cycles
-Significant quality improvements
-Metallics yields have improved from 75% in 1970 to over 90% today
-The next challenges are availability of scrap, scrap substitutes, energy, people, and customers
Steel Orbis 2008
U.S. Raw Stee l Production
0
20
40
60
80
100
120
Year
To
nn
age
(in
mill
ion
s o
f to
ns)
0%
10%
20%
30%
40%
50%
60%
70%
% -
EA
F P
rod
uct
ion
Tonnage - Integrated Total Tonnage - U.S. Steel Industry Tonnage - EAF % - EAF Production
U.S. Raw Steel Production: Largest Recyclers in the Nation ~ 100 million tons of steel produced each year
Steel Orbis 2008 U.S. Steel Production
Steel Orbis 2008 U.S. Current Steel Situation
•Real steel usage down 4.4% in 2007 from 2006
•Overall, all steel consumption projected to be down 2.2% in 2008 vs. 2007
•2008 might replenish steel inventories
•2009 expect better than 2008
•Raw material & steel prices continue to surge up with market support
•Impact of weak dollar, less imports, U.S. recession? Margin squeeze???
Steel Consolidating, But Still Fragmented
Top 15 Global Steel Producers - September 2007Based on 2006 Production: 1240 Million MT
Baosteel (26 mt)
Tata (incl. Corus) (24 mt)
USS (incl. Stelco) (26 mt)
POSCO (31 mt)
JFE (32 mt)
Anben (23 mt)
Shandong (22 mt)
Nucor (20 mt)
Wuhan (19 mt)
Tangshan (19 mt)
Evraz (19 mt)
Riva (18 mt)
Severstal (18 mt)
Nippon (34 mt)
Rest of World 64%
(794 mt)Arcelor Mittal - 9.5%
(118 mt)
Automotive OEM Global Market Share(Based on 2006 Production)
Top 1068%
All Others32%
Iron Ore Supplier Market Share
Top 375%
All Others25%
TOP 15 Represent 36% of Global Production
Source: IISB
Steel Orbis 2008
Globalization and Consolidation Developments Have Dramatically Changed the NAFTA Steel Landscape
Acquiring Company Acquiring Company Acquiring CompanyAcquired Company Acquired Company Acquired Company
Arcelor Mittal Nucor Duferco/NLMKArcelor Connecticut Steel Winner Steel
Dofasco TricoMittal Birmingham EvrazIspat Inland Corus Tuscaloosa Oregon SteelISG Worthington-Decatur Claymont SteelBethlehem MarionLTV Nelson Steel SeverstalUS Steel Plate Harris Steel Arcelor Mittal-Sp PtWeirton Auburn Steel RougeAcme-Riverdale North Star ArizonaGeorgetown American Iron Reduction
CSNSicartsa LMP Steel & Wire
HeartlandUS Steel Gerdau Ameristeel
EssarLone Star SheffieldAlgomaNational ChaparralMinnesota SteelLTV Tin Co-Steel
ISG IH#2 Pkl North StarStelco Sidetul Tultitlan
Quanex Macsteel
BlueScope Corsa
IMSA SteelscapeSSAB
ICH/Grupo Simec IPSCORepublic
Steel DynamicsTernium GalvPro-Jeffersonville
Hylsa The TechsIMSA Roanoke Steel
Steel of WV
WCIWPSC
David Joseph
OMNI
IPSCO-Canada
Bayou
Steel Orbis 2008 Steel Industry Consolidations
Steel Industry Consolidations
• Raw steel capacity in U.S. is approximately 110-120 million tonnes
• Due to a number of consolidations, the top 10 companies are approx. 90 million tonnes; top 3 companies are approx. 60 million tonnes
• Worldwide, the top company is only 10 percent
Consolidation: Opportunities & Risks
• Potential Benefits:– Access to Capital, Technology– Deeper Customer Relationships– Facility Optimization / Strategic Fit– Industry Sustainability
• But Benefits Are Undermined By Prevailing Risks:
– Global Overcapacity– Subsidies and Other Trade Distortions
Steel Orbis 2008
Global Steel Capacity 2001-2007
During 2001-2007, world crude steel capacity increases by 499 mmt to 1,564 mmt (46.9% over 2000)
World Crude Steel Capacity 2000~07
Source: German Steel Federation and IISI verifications
0.7
10895
11276
7632
1.5%
7.3%
15641456
136112491173
10981065.31064.6
0
500
1000
1500
2000
2000 2001 2002 2003 2004 2005 2006 2007
mmt
0%
5%
10%
15%
20%
Additions
CAGR
CAGR
During 2008-2010, world steel capacity will grow by 322 mmt, 21% increase over 2007, CAGR of 6.4%
World Crude Steel Capacity 2000~10
Global Steel Capacity 2008-2010
Source: German Steel Federation and IISI verifications
90106
125
6.4%7.3%
1.5%
1064.61065.31098 1173
12491361
14561564
16541760
1886
0
500
1000
1500
2000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
mmt
0%
5%
10%
15%
20%Additions
CAGRCAGR
CAGR
New Capacity Outpaces Consumption Growth
Capacity – Multiple Sources; Nucor Analysis
Demand – IISI projections thru ’08; 6% increase “09 – ‘10
EU-251%
India23%
NAFTA2%Other Asia
15%
Other Europe3%
CIS6%
Africa & Middle East5%
Central & South America
12%
China33%
Announced Steel Capacity Increases By Region
(2006 – 2012)
Announced Steel Capacity Vs. Projected Consumption 2007 – 2010
(Million Metric Tonnes)
Compound Annual Growth Rates:Capacity: 6.83% Demand: 4.65%
Steel Orbis 2008
Strong Growth Areas
2000 2007 2010∆ (2001-2007) ∆ (2008-2010)
mmt share mmt share
World 1,065 1,564 1,886 499100.0
% 321 100 %
BRIC 280 732 946 453 90.6% 214 66.6%
China 150 559 714 409 81.8% 156 48.5%
Russia 67 75 105 9 1.7% 30 9.3%
India 34 57 76 24 4.7% 19 5.8%
Brazil 30 42 51 12 2.3% 9 2.9%
ME & N Africa 24 38 69 15 2.9% 31 9.7%
S Korea 53 57 70 4 0.9% 13 4.1%
Ukraine 41 49 60 8 1.7% 11 3.4%
SE Asia 23 27 38 4 0.9% 10 3.3%
Turkey 20 32 42 12 2.4% 10 3.1%
ROW 625 628 660 4 0.7% 32 9.8%
Steel Orbis 2008
Raw Materials
• Raw material prices are soaring
• Higher raw material prices have placed substantial cost pressures on NAFTA steel producers
• China (and other foreign) interference in raw material markets is unfairly helping their steel industries while driving up the cost of steel production worldwide
Steel Orbis 2008
Since Last Year, Prices for Key Raw Materials Have Soared
0
50
100
150
200
250
300
350
Iron Ore Coking Coal Scrap (automotive bundle)
2007
= 1
00
2007 2008
Source: World Steel Dynamics and JP Morgan
Steel Orbis 2008
In True Market Competition, NAFTA Mills Would Have a Significant Cost Advantage Over Asian Mills
0
100
200
300
400
500
600
700
800
900
Japanese integratedsteel producers
Korean & Taiwaneseintegrated steel
producers
China integrated steelproducers
US flat-rolled minimillsteel producers
US integrated steelproducers
Hot-rolled sheet cash costs ($/ton)
Source: JP Morgan Securities, Inc.
Raw Materials: Governments Still Intervening
• Governments (e.g. China, India) Continue to Intervene in Key Raw Materials Markets For Steel:– Iron Ore– Coke– Ferroalloys– Refractory Materials
• Export Tax Manipulations / Restrictions
• Distortions Created; NAFTA Competitiveness Negatively Impacted
Steel Orbis 2008
Growth in EAF steelmaking has allowed the steel industry to reduce energy usage:
Lower energy usage equals lower greenhouse gas emissions
Energy Intens ity - Steel Industry in the U .S.
8
9
10
11
12
13
14
15
16
17
1990 1995 2000 2002 2003 2004 2005
Y ear
Millio
ns of
Btu/T
on of
Stee
l
E nergy U se
Steel Made in EA Fs in the U .S .
30%
40%
50%
60%
1990 1992 1994 1996 1998 2000 2002 2004 2006
Year
EAF Capacity Growth, US
Steel Orbis 2008 GHG Emissions
Scrap-based Steelmaking (EAF-recycling)
Ore-based Steelmaking
8.4 million Btu of Energy per ton of steel produced
EAF Steelmaking Is Energy Efficient
Steel Info – US Dept. of Energy
19.1 million Btu of Energy per ton of steel produced
Steel Orbis 2008 EAF Efficiency
Steel Orbis 2008 Unknowns
-Raw material price impact???
-Impact of recession???
-Value of the RMB??? (Most recent number – still 35% off)
-JCCT Steel Dialogue – where goal is to promote transparency with better decisions???
-European Union antidumping investigation and targets???
-Energy cost and interest rate impacts???
-Rising freight costs???
-China’s restrictive policy of foreign ownership participation???
-China’s enforcement of environmental regulations???
-U.S. legislation (111th Congress) and 44th President???
-Trade actions???
-When will China play by market rules???
Steel Orbis 2008 Conclusions
-Unknown impact of rising raw material costs
-Don’t ignore “wild cards”
-Consolidations helping, but overcapacity still a risk
-Trade distortion still a problem - U.S. Congress disappointed
-Foreign ownership positive impact on trade friction
-Need aggressive policy measures to prevent China from causing a major crisis. To date, only trade cases have had an impact.
-It’s still a cyclical business with demand, scrap, freight, inventories, etc. (fasten your seat belt)
-Finished goods containing steel are a major concern
-China, China, China… everything else is still only an embellishment
-Unknowns (recession, imports, interest rates, costs)
-Don’t expect help from Washington… 2009 may bring increased environmental and labor legislation.
-Still reasons for meaningful optimism due to North American steel industry resiliency. North American steel facilities, for the most part, are technologically advanced, cost competitive, environmentally acceptable, and are a key component of the North American infrastructure.