AMM Mexican Steel Conference

Monterrey, Mexico

January 29, 2008

Thomas A.Danjczek

Steel Manufacturers Association

NAFTA Steel Roundtable

Outline

• SMA

• Consolidations

• China

• NAFTA

• Policy Implications

• Unknowns

• Conclusion

AMM Mexican Steel Conference

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

30 U.S., 3 Canadian, and 2 Mexican– 126 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

AMM Mexican Steel Conference SMA

• Production capability– EAF steel producers accounted for over 60% of U.S. production in 2007– SMA represented over 70% of all U.S. steel production in 2007

• 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

AMM Mexican Steel Conference SMA

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

AMM Mexican Steel Conference

Active Consolidation Within NAFTA

• Recent Key NAFTA Announcements:– ArcelorMittal-Dofasco– USS-Stelco, USS-LoneStar– Gerdau-Chaparral, Gerdau-MacSteel– Ternium-Grupo Imsa– SSAB-IPSCO– Essar-Algoma, Essar-Minnesota, Evarz-Claymont

• Emerging Downstream Focus:– Nucor-Harris, Nucor-Barker, Gerdau-Enco

• Extending to Scrap:– Sims-Metal Management, Steel Dynamics-OmniSource

AMM Mexican Steel Conference

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

AMM Mexican Steel Conference

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%

AMM Mexican Steel Conference

China: World’s Most Subsidized Industry

More than $50 billion in subsidies$7.5 billion in

debt-to-equityswaps in 2000

An additional $6 billion in

announced subsidiesduring 2000

2005 steel policycommits China

to further subsidies,micromanagement

Support from localand provincialgovernmentsuncontrolled

by central government Chinese steel producersenjoy government

assistance with energyand other input costs

Inadequate protectionof workers’ rights and

enforcement of environmental

standards

Manipulation of keyraw materials

markets, includingcoke and ferroalloys

Chinese steelmakersregularly obtain

preferential loansfrom state-owned

banks

State-owned enterprises

account for 91 percentof China’s largest

steel groups

AMM Mexican Steel Conference

China: World’s No. 1 Is Government Directed

Privately OwnedGovernment Owned or

Controlled

191 million tonnes

19 million tonnes

Source: Money for Metal (2007)

Top 20 Chinese Steel Producers:Government Control Vs. Private Ownership

Top 20 Capacity: 210 Million Tons

-

100,000

200,000

300,000

400,000

500,000

600,000

China Asia other thanChina

European Union(25)

North America C.I.S. (6) South America Other Europe Africa Middle East Oceania

Metr

ic t

on

s p

rod

uced

(in

'000s)

Source: World crude production through 9/07 annualized; IISI

2007 Projected Global Production

Australian Government Predicting China Will Reach 1B Tons by 2015,

CISA says 2020.

AMM Mexican Steel Conference

China Is the World’s Largest Exporter

China Finished Steel

Exports By Destination

2005 – 2007 (000 MT)Country / Region 2005 2006 2007

EU 25/27 1,367 7,393 12,650

S. Korea 5,526 8,817 11,844

NAFTA 3,092 7,047 5,970

Iran 185 5,180 3,096

Vietnam 865 1,721 2,994

United Arab Emirates

211 885 2,773

India 417 1,574 2,447

Others 8,86115,052

25,848

TOTAL20,524

43,007

67,622

Source: CISA, 2007 Data Annualized

China Finished Steel

Trade Balance

2006 – 2007 (000 MT)Im

po

rts

Exp

orts

Trad

e B

alance

200616,761

43,007

26,246

200715,400

67,622

52,222

% Change

-8.1 +57.2 +98.9

Source: China Customs, 2007 Data Annualized

AMM Mexican Steel Conference

AMM Mexican Steel Conference China “Bashing”

-China has NOT become the world’s largest steel producer by accident, or by operation of free markets, or comparative advantage

-China is NOT a low-cost steel producer

-China has reached its position through a combination of subsidies, mandates, and planned intervention

-In finished goods containing steel, China’s exports are expanding by approximately 30 percent per year

-Imbalance cannot go on forever

-Chinese steel market is still reliant on exports to absorb overproduction

-Chinese steel industry is overbuilt and underdemolished

0.0

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

2002 2003 2004 2005 2006

Mil

lion

s of

Dol

lars

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Sh

are

of U

.S. I

mp

orts

Imports from China China's Share of Imports

Data cover NAICS codes 33621, 33631-33639.Source: USITC Trade Dataweb at http://dataweb.usitc.org.

AMM Mexican Steel Conference What Harm

U.S. Imports of Auto Parts and Vehicle Bodies from China, Value and Share

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

AMM Mexican Steel Conference

China Central To Current NAFTA CasesKey NAFTA Steel Trade Cases (Ch. 72 & Ch. 73)

May–November 2007

Country New Cases Current Sunsets

Canada Seamless OCTG Plate

United States

Pipe x 2

Nails

Wire Hangers

Hot-Rolled*

Mexico

Plate

Seamless OCTG

Nails

Wire Hangers

Wire Mesh

*Finding renewed against China on October 10, 2007

AMM Mexican Steel Conference

Example - Canada: China Growing Value, Market Share

APPLIANCES

Source2005 Imports

(CDN$ Millions)

Import

Share(%)

2007 Imports

(CDN$ Millions)

Import

Share (%)

% Value Change

05 / 07

1. United States 1579.7 53.75 1560.9 48.6 -2.2

2. China 605.0 20.59 764.2 23.8 +26.3

3. Mexico 146.6 4.99 226.9 7.1 +54.7

CONSTRUCTION PRODUCTS / FURNISHINGS

Source2005 Imports

(CDN$ Millions)

Import

Share (%)

2007 Imports

(CDN$ Millions)

Import

Share (%)

% Value Change

05 / 07

1. United States 3677.93 65.12 3860.88 61.11 +5.0

2. China 509.04 9.01 776.47 12.29 +52.5

3. Mexico 212.0 3.75 212.78 3.37 +0.03

Source: World Trade Atlas / AISI.

DOMESTIC & COMMERCIAL EQUIPMENT

Source2005 Imports

(CDN$ Millions)

Import

Share (%)

2007 Imports

(CDN$ Millions)

Import

Share (%)

% Value Change

05 / 07

1. United States 1493.3 50.34 1467.1 45.49 -1.8

2. China 619.13 20.87 802.42 24.88 +29.6

3. Mexico 351.68 11.86 377.16 11.69 +7.24

AMM Mexican Steel Conference

NAFTA

AMM Mexican Steel Conference

-Came into effect on Jan. 1, 1994

-One of the most significant trade events of the 90’s

-A trade agreement between three nations

-United States, Canada, and Mexico

-Population: 426 million

-Total GDP: $13 trillion

-Total Trade: $700 billion

Potential Effects of NAFTA

AMM Mexican Steel Conference

-Prices and wages

-Labor markets and jobs

-Imports and exports

-State and the local economy

NAFTA Conclusion

-General consensus that NAFTA had negligible effect on U.S. employment

-Trade may lead to wage inequality through an increase in earnings gap between skilled and the unskilled

-Little evidence that NAFTA-induced trade liberalization

-Evidence more in favor of net trade correction due to NAFTA

AMM Mexican Steel Conference

Role of NAFTA Governments

Defending the Market From Abuse:– Eliminating market interventions and distortions by all

governments– Enforcing compliance with trade agreements and competition

law– Maintaining and enforcing trade remedy laws– Assisting trading partners with understanding / adopting best

practices

AMM Mexican Steel Conference

Immediate Focus:

• Treat China as NME in AD Cases, and Fully Apply CVD Law to NMEs

• Promote NAFTA Manufacturing in FTAs

• Enhanced Government Information Sharing Across Jurisdictions on Trade Remedy Practice and Experience

AMM Mexican Steel Conference

AMM Mexican Steel Conference Unknowns

-Value of the RMB???

-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???

-Trade actions???

-When will China play by market rules???

AMM Mexican Steel Conference Conclusion

-Consolidations helping ,overcapacity still a risk

-Trade distortion still a problem, U.S. Congress disappointed

-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.

-Finished goods containing steel are a major concern

-China, China, China… everything else is still only an embellishment

-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.