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CANACERO: Global Economic Environment Competitiveness and Challenges Changes, Drivers, and Challenges in the North American Steel Industry Thomas A. Danjczek President Steel Manufacturers Association September 26, 2012 Cancun, Mexico CANACERO - 2012 •About the SMA •Set the Tone - Economy •Set the Tone - Steel •Changes Impacting Steel •Drivers Impacting Steel •Challenges Impacting Steel •Final Thoughts Outline CANACERO - 2012 About the SMA SMA - Composed of 35 North American electric arc furnace (“EAF”) steel producing Member Companies, and 123 Associate Member steel industry suppliers - SMA Members account for approximately 80% of U.S. domestic steel capacity - Today, roughly two-thirds of North American steel production comes from the scrap-based EAF process, up from just 10% in the early 1970s U.S. EAF Share of Total Production 65.0% 60.0% 55.0% 50.0% 45.0% 40.0% Approximately 2/3 of U.S. Steel Production 35.0% 30.0% 25.0% 20.0% 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 % of EAF Production 3 CANACERO - 2012 • Set the Tone - Economy U.S. & Canada GDP Growth Around 2% NEAR STAGNATION • U.S. Manufacturing Production Rebounding STILL 6% BELOW PEAK & MAY BE DROPPING • Global Slowdown Weakens Demand ARE WE LOSING MOMENTUM? • U.S. Auto, Aerospace, Machinery Strong WILL IT CONTINUE? MAY BE DROPPING… • U.S. $ Stronger Lately • Second Recession in U.S.??? 4 Set the Tone - Economy CANACERO - 2012 UNSUSTAINABLE US GOOds $620 Billion Annual Deficit projected in 2012 is most significant barrier to U.S. economic recovery CANACERO - 2012 Set the Tone - Steel • Primary metal 6% growth YTD 2012 over 2011 in US • U.S. capacity utilization approx. 77.5% through August 2012 Up 6.4% over 2011, but…Recent weeks around 75% • Scrap price volatility (75% of minimill costs) $100/150 drop in 45 days – half back; maybe $20 down in September • Recent labor contracts • Inventories remains LOW • Changes in mill orders lead time from 6 weeks to 2.5 weeks, back to 5 weeks…all in 2 months – VOLATILE • Iron ore prices down 36% YTD (incl. 23% in August 2012) 6 CANACERO - 2012 Source: Gerdau NA, US Census Bureau & AISI 7 Changes Impacting Steel CANACERO - 2012 Skilled Jobs Shortages Safety Variable Cost Control Consolidations Transportation Costs Energy Costs High Unemployment Inventory Levels Customer Requirements Ore Availability Scrap Availability Labor Intensity Foreign Ownership Currency Union Contracts Engineers Other Factors… State-Owned Enterprises CANACERO - 2012 Drivers Impacting Steel • Underlying Weak Economy, with less than 3% GDP growth and estimates downward. • Recovery underway, but very slow – “Fragile” • North American steel market under pressure with unused capacity • Increased import percentages YOY, Impact of currency changes • Not normal cycle of recession, overcapacity; new supply coming on • Relative strong demand in auto; construction lagging • Raw material costs, energy, and variable cost controls are major drivers • Ore price evolution and recent developments-Platts graph • Scrap price impact, growth of EAFs, developing world slowing down • Economic growth turning point is always two quarters away • Company market cap values at historic lows CANACERO - 2012 Iron Ore Market 10 CANACERO - 2012 Challenges Impacting Steel WTO Disputes Health Care Costs Capital Scrap Price Volatility Tax Manipulation & Reforms SOEs Trained Workforce Labor Regulations Indirect Steel % CANACERO - 2012 NASTC Cooperation North American Steel Trade Committee NAFTA Governments & Industry – meet 2X Year (18 times) Associations: AISI, CPTI, CSPA, CANACERO, SSINA and SMA ― ― ― ― ― Cooperation & education on steel issues Customs training & seminars, fraud, circumvention Border efficiencies Trade data monitoring NAFTA competitiveness issues (energy; infrastructure; workforce; regulations; etc.) ― Issues outside NAFTA (China; OECD; WTO; TPP…) 12 CANACERO - 2012 NASTC Cooperation NASTC Future Priority Topics • Key developments in NAFTA and global steel market conditions and in the trade of raw materials and steel mill products; • A continental perspective on energy development and NAFTA region energy independence; • Existing and potential NAFTA region synergies to promote our region’s competitiveness; • Customs’ further integration into the work of the NASTC; collaborative efforts to address trade-distorting customs fraud; • A Trans-Pacific Partnership update focused on trade remedies; • State-owned enterprises; • China trade issues, including “China 2016”; and • Coordination of OECD efforts, focused on the December 2012 Steel Committee meeting. 13 CANACERO - 2012 • Volatile times continue, May Final Thoughts be between recessions • U.S. is in a traffic jam, moving slightly forward, but don’t know other consequences. Don’t look to Washington, DC for help. Gridlock continues • Uncertainty will continue especially in U.S. industry until economic • • • • fundamentals are in equilibrium. Limited visibility… Other countries increasing steel capacity without regard to market forces or comparative advantage. Current status of scrap restrictions is unsustainable Cooperation within NAFTA is critically important Reasons for optimism in steel in North America: – Favorable gains with reemerging manufacturing base – Scrap-based, 75% of cost – local supply – Low cost on global basis (energy is positive, labor less than 10%, others have higher transportation costs) – Relatively strong market and resiliency – Better & stronger company balance sheets