Current Drivers Impacting Steel Mini-Mill Competitiveness

Current Drivers Impacting

Steel Mini-Mill Competitiveness

Thomas A. Danjczek, PresidentSteel Manufacturers AssociationMay 21, 2004

MAPI – Public Affairs Council

On May 29, 2003, The Times They are a’changing…


Steel DemandWeakening

201 Tariffs/ExclusionsIncreasing

ImportsBankruptcies

Semi-Finished Imports

N.A. Economy

Plant Closures/Restarts

Perennial Problems

Consolidations

US PBGC

Mini-mill IndustryCondition

Pricing Volatility

ISG’s Labor Contract

Exchange RateShifts

Public Policy

Legacy Costs

Operating Costs Benefits& Energy

Capital Constraints

Current Drivers ImpactingSteel Mini-mill Competitiveness

•SMAI. Trade•201 Real Impact•World Steel Production•China, China, China…

II. Steel Production Costs

•Key Issues•Asset Values•Exchange Rates•Steel Imports – Value of U.S. $•Bankruptcy/Restarts


III. Other Costs•Restrictive Scrap Exports•Freights•Coke•Energy

IV. Market•Overview•Public Works Construction

V. Conclusion


•The Steel Manufacturers Association (SMA)–38 North American companies:

31 U.S., 5 Canadian, and 2 Mexican–107 Associate members:

Suppliers of goods and services to the steel industry

•SMA member companies–Operate 120 Steel plants in North America–Employ about 40,000 people–Mini-mill Electric Arc Furnace (EAF) producers


•Production capability–SMA represents over half of U.S. steel production

•Recycling–SMA members are the largest recyclers in the U.S.–Last year, the U.S. recycled over 70 million tons of ferrous scrap

•Growth of SMA members–Efficiency and quality due to low cost–Flexible organizations–EAF growth surpassed 50% in 2002 & 2003, and anticipated to be 60% by 2010

WORLD STEEL PRODUCTIONWorld steel production was up 8.7% through March following a 6.8% increase in 2003, with China accounting for 64% of the worldwide net gain and 23% of total world production.

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Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04

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Steel Production: March 2004 Percent Change, Year AgoMonth: 5.9% Year-to-Date: 8.7%

WorldExcluding China

World Total

In the five years from 1998 to 2003, China and the former-USSR states increased production by a cumulative 140 MT, equal to 70% of the combined total output in 2003 of both the U.S. or Japan. Courtesy – Metal Strategies

ANNUAL WORLD STEEL PRODUCTION OUTLOOKWorld steel output looks set to rise 5% or 50 MT MT in 2004, after gains of 62 MT and 53 MT in 2003 and 2002, respectively, largely on the strength of China coupled with the recent onset of rest-of-world economic recovery.

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15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

EAF Share of Production, %

Forecast… Forecast (MT)2005: 1,075.02004: 1,015.02003: 964.72002: 903.12001: 850.22000: 847.61999: 789.0

EAF %(Line, Right Scale)

World Steel ProductionForecast

Courtesy – Metal Strategies

CHINA IMPACT IN GENERALChina is changing the dynamics of world regional steel production, consumption and trade as well as steel and raw material pricing.

• China now accounts for nearly one out of every four tons of crude steel produced one out of every four tons consumed worldwide.

• China was the largest importer of steel in 2003 at 40 MT, nearly twice that of the U.S. (21.4 MT). It was the second largest importer of steel in 2002 at 24.5 MT behind only the U.S. (29.7 MT).

• China now imports nearly one in five tons of traded steel scrap worldwide including pulling in between 30% and 40% of total U.S. scrap exports since 2001.

• China now factors as the destination for roughly 25% of world seaborne iron ore exports and may soon change the dynamics of annual world iron ore price negotiations.

• China’s fixed currency exchange rate (to the U.S. dollar) is under-valued by 25% to 40% thus acting as a significant draw on labor- and steel-intensive industrial production even from low-cost countries such as Mexico, Brazil and India.


CHINA STEEL PRODUCTIONChina produced 220 MT of crude steel in 2003 – double the next largest producer Japan at 110.5 MT and 2.4 times the U.S. (92.2 MT, shown) – and will produce as much as 275 MT, 350 MT, and 425 MT by 2005, 2010, and 2015, respectively.

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1980 1985 1990 1995 2000 2005 2010 2015

China

United States


CHINA IMPORTSChina’s imports of steel and related raw materials continued to surge through February 2004 with imports of iron ore up 37%, metallics up 94%, semifinished steel up 211% and finished steel up 21%.

Product Jan Feb YTD % ChangeIron Ore 12,902 18,696 31,598 36.7%Metallics 1,222 1,264 2,486 94.4%

Pig Iron 69 118 187 159.8%DRI 177 117 294 87.8%

Scrap 976 1,029 2,005 98.0%Semifinished Steel 451 566 1,017 211.0%Finished Steel 3,252 3,364 6,616 21.4%

Rod 114 153 267 80.5%Structurals 109 87 196 240.3%Flat Rolled 2,869 2,905 5,774 14.9%

Pipe and Tube 104 111 215 67.4%All Other 55 108 163 85.3%


Courtesy – IMF

Courtesy – IMF

Courtesy – IMF

CHINA CONCLUSIONS Pricing Conclusions

• The odds are relatively low (less than 10-20%) but still possible that the current steel and raw materials decline seen since March will be very slight, short lived and quickly reversed.

• The odds are also low (about 25-30%) that the recent pricing declines seen to date will be severe (hot rolled sheet prices bottoming out in the $275 to $300/ton range) and prolonged (over 6-12 months).

• The odds are greatest (50-60%) that the recent pricing declines:– (1) will be somewhat more significant than seen to date– (2) will last two to four months– (3) will result in hot rolled sheet prices bottoming out at levels below peaks in April

2004 but still well above prior 10-year trend averages, somewhere on the order of $400 to under $500 per ton.


CHINA CONCLUSIONS Currency Manipulations

For eight and one-half years, China has maintained a fixed exchange rate of 8.3 yuan to the dollar. China has printed any amount of yuan necessary to purchase dollars to maintain a fixed artificial rate, giving it enormous export advantage, and creating a China trade surplus with the US reaching $124 billion in 2003.

In the two-year period, 2002-2003, US imports of manufactured goods from China accounted for 56 percent of the total growth in US imports of manufactured goods during the period. The US trade deficit in manufactured goods with China was $128 billion in 2003. The overall US trade deficit with China is now the largest bilateral trade imbalance ever seen in the history of world trade.

The United States should insist that China change its exchange rate regime which allows it to sell undervalued goods in export markets at costs denominated in undervalued yuan. Simultaneously, China must relax its tight capital controls, which have resulted in an accumulation of foreign exchange acquired from export sales, amounting to $420 billion in 2003, about one-third of China’s GDP. China must stop excessive issuance of undervalued yuan, and pay for its imports with foreign exchange.

Today, China can absorb a revaluation without an economic collapse, versus a token one which would respond to the problem in form only, rather than a needed significant revaluation. If inadequate US policy causes a delay for another five years, however, China, the US, and the world economy are in for a very hard landing. At that point, an inevitable huge revaluation of the yuan will occur, which it must, when US policy officials then confront US trade, current account, and capital account deficits of disastrous proportions. US policy must effectively address this problem, now. So far, it has not.

SMA – May 12, 2004 Press Release

STEEL PRODUCTION COSTSSummary of Key Issues

• Relative operating costs in the U.S. steel industry have changed dramatically over the past 12 months:

• First with the introduction of the ISG-style restructuring which took out $40-$50 per of hot band costs as a result of labor contract changes, and a further $25-$50 per ton with the removal of past legacy costs.

• Secondly, with the surge in metallics and energy prices and this development’s far greater relative impact on sheet minimills until the successful implementation of surcharges.

• Third, ore, coal, and coke prices have risen significantly.

STEEL ENERGY AND RAW MATERIAL COSTS (1 of 2)In the 28 months from January 2002 to May 2004, raw material and energy input costs for U.S. steelmakers have increased dramatically.

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$100

$200

$300

$400

$500

No.1 HMScrap

No.1Busheling

MPI DRI Coke

Jan-02 Apr-04 May-04

+165%+200%

+195%

+275%

+190%


STEEL ENERGY AND RAW MATERIAL COSTS (2 of 2)In the 28 months from January 2002 to May 2004, raw material and energy input costs for U.S. steelmakers have increased dramatically.

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Pellets Coal Ocean Freight Gas Fuel Oil

Jan-02 Apr-04 May-04

+65%

+110%

+450%

+155%

+82%


WIDE VARIATION IN COSTSThere are three key areas in which North American mills differ widely on in respect to ultimate unit product costs and profit margin position

• Spot market exposure for raw materials and energy (a big negative at the moment):– Example: ISG-Sparrows Point and ISG-Burns Harbor are on the complete

opposite end of the spectrum here

• Contract market exposure for steel product sales (a big negative at the moment):– Companies such as AK Steel who normally benefit from such protection,

are now being negatively impacted

• General ability to most effectively manage base price and surcharge adjustments:– There are much bigger variations here than one might think


RECENT U.S. STEEL ASSET TRANSACTION VALUESAcquisition range has been $60 to $90/ton shipped for shuttered operations and $160 to $260/ton for ongoing businesses.

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$/Ton 20 $60 $68 $70 $79 $90 92 $102 $167 $175 $180 $194 $225 $230 $255 $265

G'twn LTV Acme Kingm. Trico Qual. Rouge Weir Beth Nat'lCo-Steel

Heartl REPAubur

nBirmin

g.LTV HDG

Liquidated Companies

Ongoing Businesses

CSN disclosed in October 2003 that its acquisition price for Heartland was actually $175 million instead of the previously-report $69 million.Acquisition prices include all assumed liabilities.


EXCHANGE RATES – INDEXThe real trade-weighted US$ index for major currencies has dropped 22% from the recent 2-’02 peak (115.8) and 30% from the all-time record high in 1-‘85 (124.9), but was still up 10% from the 7-’95 record low (80.4).

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Inde

x 19

90 =

100

Broad Currency Group

Major Currencies

Data through April 2004US$ Real Trade-Weighted Index


VALUE OF THE U.S. DOLLARScrap prices are inversely related to the dollar

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- $/G

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Source: AMM, Federal Reserve

Scrap Price

Dollar Index


VALUE OF THE U.S. DOLLARThe strong relationship between steel imports and the dollar is even more clear when a 12-month moving average is used.

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- M

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Source: AISI, Federal Reserve

Finished Steel Imports(12-Month Moving Avg)

Dollar Index


MONTHLY U.S. SCRAP PRICESAfter climbing steadily from early-2002, scrap prices have soared to new heights in the last few months, due to the impact of the weaker dollar, increased Chinese purchasing, limited new alternative iron capacity, and reduced Russian and Ukrainian scrap and MPI exports.

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/ G

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ed No.1 Factory Bundles(AMM, Chicago)

No.1 Heavy Melt(AMM, 3-City Composite)

No.1 HM = AMM 3-city compositeNo.1 Factory Bundles = AMM, Chicago market

Data through April 2004


COMMODITY SCRAP PRICEThe reported average delivered price of No.1 heavy melt scrap (3-city average) in the “minimill usage era” (since 1992) was $99/short ton with an annual range of $67/short ton to $124/short ton. However, the comparable April 2004 price was $220/short ton.

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$103$116 $124 $121 $120

$100$86 $89

$67$78

$111

$225

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$125

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$175

$200

$225

$250

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Delivered Price, AMM 3-City AverageAverage1992-’03 = $99/ton

Average 1993-’97 = $117/tonApril 2004 = $225/ton

1- Calculated as reported price (source: AMM) converted to $/short tons, three-city average – Pittsburgh, Philadelphia, ChicagoCourtesy – Metal Strategies

LOW-RESIDUAL SCRAP PRICEThe reported average delivered price of No.1 factory bundle scrap in the benchmark Chicago market in the “minimill usage era” (since 1992) was $141/short ton with an annual range of $96/ton to $156/ton. However, the comparable April 2004 price was $265/ton.

$103

$138$149 $156 $147 $150

$128$112 $111

$96

$113

$142

$265

$80

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$120

$140

$160

$180

$200

$220

$240

$260

$280

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Delivered Price, ChicagoAverage 1992-’03 = $128/tonAverage 1993-’97 = $148/ton

April 2004 = $265/ton

1- Calculated as reported price (source: AMM) converted to $/short tons in the benchmark Chicago marketCourtesy – Metal Strategies

MERCHANT PIG IRON (MPI) PRICEThe estimated average delivered price of MPI in the “minimill usage era” (since 1992) was $155/ton with an annual range of $122/ton to $194/ton. However, the comparable April 2004 price was $270/ton.

$148$155

$168$184

$156 $158

$130$122 $121

$112

$126

$171

$270

$100

$120

$140

$160

$180

$200

$220

$240

$260

$280

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Estimated Delivered Cost-1

Average 1992-’03 = $145/tonAverage 1993-’97 = $162/ton

April 2004 = $270/ton

1- Calculated as reported CIF per metric tonne (Source: Ryan’s Notes, Raw Material Advisory Services) to Port of New Orleans, converted to US$/short ton, plus $5/ton barge transfer, plus $10/ton Mississippi River shipping


RUSSIA AND UKRAINE SCRAP EXPORTSPartial export bans, restrictions and duties designed to protect local steelmakers have restricted the flow of exports to the world market

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Russia Ukraine


U.S. SCRAP CONSUMPTION AND EXPORTSDemand for U.S. scrap increased by 3 MT in 2003, driven by a 15% surge in exports and a slight gain in domestic demand (EAF and BOF production down 3% and up 1%, respectively)

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Consumption Exports


OCEAN FREIGHT RATESOcean freight rates increased 4.5-fold from $10,000/day to $45,000/day between early-2003 and early-2004 and have recently declined by about $5 to $10 pr tonne since late-March.

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IRON ORE PRICES - ANNUALThe 2004 iron ore price-increase benchmark of 18.5% was established in early-January by CVRD, following a 9% gain in 2003. China now accounts for over 25% (110 MT) of world sea-borne demand, while three producers (CVRD, RTZ and BHP) now control over 80% of the supply.

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/Ton

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4% F

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Pellets

Lump

Fines

Prices shown are from CVRD (Brazil) to Western European steel customers (fob)


Technical Read on Crude Oil Prices

Courtesy – JP Morgan

Technical Read on Natural Gas Prices

Courtesy – JP Morgan

STEEL END-MARKET OVERVIEWThree broad sectors – construction, autos, and industrial equipment – account for over 75% of total U.S. steel consumption by ultimate users.

Construction40-45%

Autos18-20%

Ind. Equip.15-18%

Energy-4%

Containers4%

Appliances,Office Furniture

2.5%All Other

15%

60% Non-Residential30% Public Works10% Residential

55% Light Trucks/ SUVs30% Passenger Cars 5% Commercial Trucks, Buses10% After Market

Off-Highway VehiclesFreight CarsBarges, ShipsOther Industrial Equip.


PUBLIC WORKS CONSTRUCTION – ANNUALState budget crises, new restrictive state balanced budget amendments are acting to dampen U.S. public works construction growth. After two temporary extensions, the carry-on to the TEA-21 program is finally being put in place during the first half of 2004.

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Bill

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1996

US$

Forecast

Public Works Construction(Real $ Value Put-in-Place)


MAPI – Public Affairs Council Conclusion

•Uncertainty – Cycle has Changed (Shorter Term & Greater Peaks & Valleys)

•Revenue vs. Costs – Not the Same Business Model

•Bankruptcy Laws Unfair to Competitors

•Investments – Earn Cost of Capital

•Mini-Mills Must Compete in the World, as it is, and We Can!

•Meaningful Optimism with Good Long Term Consumption, Relative Value, and Excellent Recyclability for Steel

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Current Drivers Impacting Steel Mini-Mill Competitiveness

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