Thomas A. DanjczekPresidentSteel Manufacturers AssociationApril 6, 2011

Washington’s Impact on Steel

American Galvanizers AssociationAnnual ConferenceState of Steel 2011

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Outline

•SMA

•Set The Tone – Washington “Stuff”

•US Macro Issues

•What Does the U.S. Need To Do

•Steel Recent History (Capacity; Demand; Shipments; Imports)

•Steel Specific Issues (Trade; Raw Materials; Scrap)

•Steel Trends

•Conclusion

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

30 U.S., 3 Canadian, and 2 Mexican– Operate 125 steel recycling plants in North America– Electric Arc Furnace (EAF) steelmakers using recycled steel– EAF steel producers accounted for nearly 2/3 of U.S. production in 2009– SMA represents approximately 90 million of U.S. 120 million ton capacity

(75%)– 128 Associate members - Suppliers of goods and services to the steel industry– Governance – i.e. vast majority

SMAAGA: Annual Conference

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Where SMA Member EAFs are located…AGA: Annual Conference

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Factors in the 2010 Election

It’s the economy, stupid…• The economy was the number one issue for the American public in 2010—

frustrations with high and stagnant unemployment figures, struggling housing markets, and persistently tight credit drove voter sentiment

Dissatisfaction/perception that government is not tackling the right issues• Frustrations augmented by the belief that the government has done more for Wall

Street than for Main Street during the current economic crisis• That sentiment, coupled with increasing public concern/skepticism regarding the

role of government in the private economy and the growing deficit and long-term national debt, has resulted in a general perception that lawmakers aren’t listening and are overreaching

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• Return to divided government

– Control of the Senate remains with the Democrats

• New breakdown: 53 Democrats (including 2 Independents who caucus with the Democrats), 47 Republicans

– The House of Representatives is now controlled by the Republicans

• New breakdown: 242 Republicans, 193 Democrats

– The majority of state Governorships are now held by Republicans

• New breakdown: 29 Republicans, 20 Democrats, 1 Independent

Set the ToneAGA: Annual Conference

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- E c o n o m y- War in Iraq- War in Afghanistan- Health Care- D e fi c i t R e d u c ti o n- Size of Government, Government Spending- Homeland Security- Ta x e s- Financial Oversight- I n t e r n a ti o n a l T r a d e- E n e r g y a n d E n v i r o n m e n t- Transportation and Infrastructure- L a b o r- Middle East Tensions- Japan Earthquake “Havoc”- Continuing Resolutions – Funding the Government

Big U.S. Gov’t Issues/PrioritiesAGA: Annual Conference

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• While the recession officially ended in June 2009, the sluggish pace of the recovery remains a top concern for both the public and policymakers

– “Official” Unemployment remains at close to 9.5% and consumer income and spending are fairly stagnant

• According to a recent Bloomberg News survey of economists, the unemployment rate will stay high for the next year, averaging 9.3%

– In early November, the Federal Reserve announced plans to purchase an additional $600 billion of longer-term Treasury debt over the next eight months to loosen credit conditions in order to speed the economic recovery and boost job creation

• Interest rates are expected to remain low for the foreseeable future

– Facing a new political dynamic and skepticism regarding “stimulus” spending efforts, the White House reached out to Congressional Republicans to forge a deal on extending tax breaks during the lame duck session of the 111th Congress

• President Obama agreed to a 2-year extension of income tax rates for all income levels, while Republicans acquiesced to several Democratic priorities aimed at stabilizing the economy, including a long-term extension of unemployment insurance

– Impact of Japanese Earthquake

• ? ? ?

EconomyAGA: Annual Conference

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The need for policies to promote economic growth in the short-run is complicated by the need/desire for longer-term austerity measures to address the nation’s deficit and long-term debt Reducing government spending is a top priority of the new 112 th Congress

The continuing resolution for FY11 extended from March 18, 3 weeks at a time — House Republicans had initially called for a return to FY08 spending levels, which would require about $100 billion in cuts—while cuts that large may be difficult, significant reductions are likely

The conservative Republican Study Committee has proposed a plan to reduce spending by $2.5 trillion over the next decade

House Republicans’ rules package replaced “pay-go” with “cut-go”—any new mandatory spending must be offset with spending cuts, but NOT with tax increases

Rules package also gave Budget Committee Chairman Ryan (R-WI) the authority to set spending targets for appropriators if the House and Senate fail to agree on a final budget

Republicans have instituted a party-wide ban on earmarks The vote to increase the debt limit may prove particularly challenging for the Republican caucus, with

many pledging on the campaign trail to vote against it Opponents likely to use votes as leverage to secure commitments for longer-term deficit reduction

measures

President Obama has signaled that addressing the deficit and long-term debt is an area ripe for compromise with Congressional Republicans

DeficitAGA: Annual Conference

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• The cost of the tax package came in at just under $1 trillion and is being viewed by

many as a second stimulus, with some economists suggesting it could increase

2011 GDP by 0.5 to 1.25 percentage points

TaxesAGA: Annual Conference

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• Ways and Means Committee Chairman Dave Camp (R-MI) and Trade Subcommittee Chairman Kevin Brady (R-TX) are avowed free-traders

• Items for consideration include:

– Consideration of the stalled free trade agreements with South Korea, Panama, and Colombia

• Administration is supportive of ratification and must work with Republicans to ensure passage of the agreements—could this be an example of early cooperation?

• The Democratic Caucus remains divided on the issue of trade

– Customs reauthorization legislation likely to emphasize trade facilitation

– Export control reform could see some legislative action, although, for the most part, it will be done administratively

– Addressing China’s trade practices

• Last Fall, the House passed the Currency Reform for Fair Trade Act—Sen. Schumer (D-NY) has pressed for a Senate currency vote, but prospects for action this year are unclear

• Last October, U.S. Trade Representative Ron Kirk announced that the United States has initiated an investigation of China’s practices affecting trade and investment in green technologies—will Congress enter the debate?

• More generally, the effect of the Tea Party is unknown—the movement has an anti-government, free market strain, but there is also a populist, anti-Wall Street component and it is unclear how this cuts on any particular issue, particularly trade

International TradeAGA: Annual Conference

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• Vigorous oversight of EPA will be a general theme throughout the 112th Congress– Oversight and Government Reform Committee Chairman Issa is soliciting responses from over 150

trade associations and businesses on regulations that have harmed job-growth—many expected to emphasize environmental regulations, i.e. Mercury

• Prospects for comprehensive climate legislation are weak—will see continued Congressional efforts to slow down EPA’s regulation of carbon emissions

• Impact of US EPA regulations on power plant emissions

Energy & EnvironmentAGA: Annual Conference

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• Piecemeal approach to energy policy presents opportunities for cooperation—as demonstrated by bipartisan legislation approved by the Senate Energy and Natural Resources Committee in the last Congress under Chairman Bingaman (D-NM)

– Republicans in both chambers will place a greater emphasis on increasing domestic production of traditional energy sources (i.e., oil and natural gas)—and continue to focus on domestically-produced renewable fuels

• Comprehensive offshore drilling safety legislation in response to the April Deepwater Horizon explosion/oil spill is unlikely to be revived under Republican leadership in the House—even in the wake of recommendations by the President’s spill commission

– Potential Renewable Energy Standard (RES), but Republicans were likely to push for inclusion of nuclear energy and clean coal technology, a “clean energy standard”

– Proposals for increased energy efficiency in industrial facilities and buildings (Home Star) as well as financing for green technologies also on the table, but finding pay-fors will be difficult

Energy & EnvironmentAGA: Annual Conference

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• Pending or planned Democratic labor-related legislative initiatives are very unlikely to move forward in 112th Congress

– “Card-check” legislation (Employee Free Choice Act)– Mine safety reform– Legislation to allow all firefighters and police officers to unionize

• In fact, legislative efforts moving in the opposite direction have been proposed previously

– Anti-card check legislation (Secret Ballot Protection Act)– Campaign finance reforms to regulate use of union dues to support union political activity

• Some Democratic priorities can be pursued through administrative efforts of the Department of Labor or the National Labor Relations Board

LaborAGA: Annual Conference

Key Questions Ahead

• In the wake of Republican gains in both chambers, will the President move more to the middle and revive efforts to work with Republicans, following in the footsteps of President Clinton? Are the negotiations on tax policy a sign of things to come? Will we see cooperation on other major policy initiatives, such as the reauthorization/revamp of No Child Left Behind and stalled free trade agreements?

• How will President Obama’s new competitiveness agenda play out? And what can we expect from his recent Executive Order launching a government-wide review of federal regulations and their impact on economic growth and competitiveness?

• Will President Obama be able to “win back” the independent vote in 2012?• Will widespread concerns related to deficits and long-term debt remain at the forefront? How will

Members concerned with deficit spending vote on raising the debt limit this year?• What is the impact of the Tea Party movement on the Republican Caucus—will the Caucus be

divided on policy priorities or coalesce around opposition to the Administration? Will they show a willingness to cooperate with President Obama?

• In the wake of this year’s election and the loss of a Democratic majority, will we see some key retirements in the House?

• How will the current political climate affect the policy stances of moderate Senators over the next two years? What additional retirements can we expect?

• Will an already partisan atmosphere be strained ever further by the loss of moderates in both chambers? Will we see two years of legislative gridlock?

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AGA: Annual Conference 2012 Election

• In the House, Democrats hold few competitive districts and need 24 to retake the majority.

• In the Senate, Democrats will defend 24 Senate seats (including two Independents) to the Republicans 10. Republicans need four net wins to take control of Senate.

• Republicans currently have no clear frontrunner for the presidential nomination.

• President Obama’s race to lose.

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What does the U.S. need to do?

• Assume a Pro-Manufacturing Agenda– Business Tax Reform– Border Adjustable Taxes– Currency Adjustments– Energy Independence– Reasonable regulatory measures (Environment/Labor)– Climate for investments (Jobs, Jobs, Jobs) and Infrastructure

• Solve the structural problems that caused the recession - Real Foundation

– Bad loans and securities on bank balance sheets– Reduce huge trade deficits

• Policy incrementalism is not sufficient

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Addressing China’s trade practices • U.S. Senators Sherrod Brown (D-OH) and Olympia Snowe (R-ME) and U.S.

Representatives Sander Levin (D-MI), Tim Murphy (R-PA), and Tim Ryan (D-OH) introduced in February 2011 the Currency Reform for Fair Trade Act of 2011. Including Congressmen Levin, Murphy, and Ryan, the House bill was introduced with 101 original sponsors (27 R; 74 D).

• Last October, U.S. Trade Representative Ron Kirk announced that the United States had initiated an investigation of China’s practices affecting trade and investment in green technologies—will Congress enter the debate?

ChinaAGA: What Does the U.S. Need to Do?

19Source: Worldsteel

World Crude Steel Capacity 2000-2012

1,062 1,062 1,0951,170

1,2451,356

1,4531,583

1,8161,917

1,9972,055

1,654

100

350

600

850

1,100

1,350

1,600

1,850

2,100

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010(e) 2011(e)

Stee

l Cap

acity

(mill

ion

met

ric to

nnes

)

0

5

10

15

20

Curr

ent A

vera

ge G

row

th R

ate

(CAG

R)

World Crude Steel Capacity CAGR

2012(e)

Global Steel Capacity Continues to Increase

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U.S. Capacity and Production Figures – 2000-2010

YearTotal

Capacity (mt)

% Capacity

Total Raw Steel

Production (mt)

Total Shipments

(mt)

EAF Based-Share (mt)

% EAF Share

Integrated Ore-Based Share (mt)

% Integrated Ore-Based

Share

2000 118 86.1 102.0 99 46.5 47 52.5 53

2001 114 79.2 90.1 92.6 43.9 47.4 48.7 52.6

2002 103 88.8 91.6 90.7 45.7 50.4 45 49.6

2003 110 84.9 93.7 96.1 49 51 47.1 49

2004 105 94.6 99.7 101 52.7 52.2 48.3 47.8

2005 108 87.5 94.9 102 56.1 55.7 45.9 44.3

2006 112 87.5 98.2 99.3 56.7 57.1 42.6 42.9

2007 113 87.0 98.1 96.5 56.2 58.2 40.3 41.8

2008 113 81.4 91.9 89.3 51.3 57.4 38 42.6

2009 113 49.6 56.0 52 33.3 64 18.7 36

2010E 113 70.0 86.0 - 48.0 64 22.0 36

Source – U.S. Geological Survey – Iron & Steel Statistics and Information web page = http://minerals.usgs.gov/minerals/pubs/commodity/iron_&_steel/

AGA: Annual Conference U.S. Minimill Growth

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19891990

19911992

19931994

19951996

19971998

19992000

20012002

20032004

20052006

20072008

20090.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

EAF Share of Total U.S. Production

% of EAF Production

AGA: Annual Conference U.S. Minimill Growth

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Global Steel Production by Process – 2009

BOF EAF

World Total 70.6% 28.1%

U.S. 36.0% 64.0%

China (Est.) 90% 10% (EAFs Growing)

*Remaining 1.3% of world total by open hearth process

Global EAFsAGA: Annual Conference

www.first-river.com23

Raw steel capacity utilization may reach 80% in 2011

Source: AISI, First River

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Moderate Manufacturing Growth

Industry

Inflation-Adjusted Percent Change

2010(F) 2011(F) 2012(F) 2013(F) 2014(F) 2015(F)

Manufacturing - SIC Basis 5.8 4.0 4.9 4.9 5.0 3.9 Food 5.7 2.8 1.9 1.5 1.5 1.6 Textile Mills 11.8 -1.9 -2.5 -2.9 -4.0 -4.5 Textile Product Mills 1.8 0.9 1.5 -1.0 -2.1 -2.8 Apparel 0.3 -6.6 -5.7 -4.4 -5.2 -5.7 Wood Products 0.9 4.3 21.8 10.2 3.2 1.2 Furniture & Related Products -1.6 3.7 6.0 3.3 1.8 1.3 Paper & Products 4.2 1.4 4.0 3.1 1.3 0.8 Printing Support Activities -3.4 -1.3 -1.2 -1.3 -1.4 -1.0 Petroleum & Coal Products 2.5 2.4 1.1 0.8 0.0 -0.4 Chemicals 2.9 1.5 3.3 3.1 3.6 3.8 Rubber & Plastics Products 8.2 2.4 3.3 3.2 2.4 1.9 Nonmetallic Mineral Products 1.1 2.7 8.1 7.4 4.2 2.7

Primary Metals 23.9 0.2 3.9 4.7 4.4 0.9 Fabricated Metal Products 6.6 3.2 2.4 3.7 3.6 2.4 Machinery 8.5 7.0 6.1 4.1 3.1 1.7 Computers & Electronic Products 13.6 12.3 14.7 16.4 17.9 15.4 Elec. Eq., Appliances, & Components 4.4 2.8 4.4 5.7 3.2 1.9 Aerospace Products & Parts -4.8 6.1 12.6 15.6 13.3 5.8 Motor Vehicles & Parts 25.4 8.5 9.6 6.5 2.4 0.0 Miscellaneous 2.4 2.8 5.7 5.0 5.2 4.1Non-High Tech Manufacturing 5.1 2.8 4.0 3.8 3.3 2.2

Source: Manufacturers Alliance/MAPI simulation of the HIS Global Insight model, November, 2010F=Forecast

Manufacturers Alliance/MAPI Manufacturing Production Forecast

www.first-river.com 25

US finished steel demand forecast

Actual ADC

Forecast

Source: CSM, FW Dodge, AHAM, First River

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Auto build & non-res construction expected to recover, but not to previous peak NA Auto Build (Million Units)

26Source: CSM Worldwide, FW Dodge

ForecastNon-Res Construction

(Million Sq. Feet) Forecast

www.first-river.com

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US net imports expected to remain lowUS Imports & Exports

(Million Tons)

27Source: AISI, First Riverwww.first-river.com

Net Imports & US Dollar

Net Imports as % of demand(3 year rolling average)

$ IndexImports (%)

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• Recovery underway, but slow

• Increased exports and imports (5mmt of semi’s imports)

• Not normal cycle of recession, overcapacity

• Relative strong demand in auto; construction lagging

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Raw Material Cost and Availability is #1 Issue for U.S. Steel Producers

• Many countries continue to impose a variety of restrictions on exports of vital raw materials

– Export prohibitions

– Export duties

– Export quotas

– Other measures

• Trade-distorting restrictions on exports of raw materials

– Give domestic producers in the exporting country an unfair advantage

– Increase worldwide costs of production

– Place a heavy burden on steel industries in developing countries that do not have substantial iron ore reserves or steel scrap supplies

Raw MaterialsAGA: Steel Issues

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Meanwhile, Foreign Government Subsidies to Steel and Steel-Related Industries Remain a Particular Concern…

• Foreign government subsidies are a major cause of overcapacity in the global steel industry and steel-related industries

• Subsidies to steel and steel-related industries that 1) support inefficient and excess capacity and/or 2) distort trade, are continuing and remain a particular concern

• Examples include:

– Fundamental currency misalignment/undervalued currencies

– Preferential financing to add new capacity

– Loan forgiveness/equity infusions to prop up obsolete capacity

Raw MaterialsAGA: Steel Issues

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China – Raw Materials

• The United States, the EU, and Mexico have challenged China’s application of a variety of restrictions to exports of key raw materials used in steelmaking, including:– Coke– Refractory bauxite– Fluorspar– Zinc

• The restrictions China applies include:– Export duties– Export quotas– Restrictive bidding procedures

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China – Raw Materials

• China has argued that these measures are justified to prevent pollution and to preserve natural resources

• China has also claimed a “sovereign right to regulate” its raw material exports

• The panel will release its decision this year:– The interim report is due February 18, 2011– The final report is due April 1, 2011

• This decision could have a major impact on international trade in raw materials for steelmaking – “Careful what you wish for…”

• Many other countries also restrict exports of raw materials, especially steel scrap

• USTR is very interested in a potential case regarding China’s restrictions on exports of rare earths and other raw materials

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Implications

• If these justifications are accepted, ever scrap producer could legitimately limit exports of steel scrap

• This would wreak havoc on the global steel industry

• Countries that are heavily dependent on scrap imports would be particularly affected

AGA: Steel Issues

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World Scrap Supply and Consumption, By Region

World Scrap Supply, 2008

0

20

40

60

80

100

120

EU Turkey CIS NAFTA Latin America China Japan Other Asia

Mil

lio

n M

etr

ic T

on

s

Domestic Supply

Apparent Consumption

Source: World Steel Association

36

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

To

tal Q

ua

ntit

y E

xport

ed

(M

etr

ic T

ons)

2004 2005 2006 2007 2008 2009

Source: U.S. International Trade Commission - Dataweb

U.S. Scrap Exports to China - 2004 - 2009

While China Restricts Exports of Scrap, U.S. Exports to China Have Surged

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• World demand for steel scrap is likely to continue to increase:

-Increased steel production in China, India, and Brazil-Economic recovery

• But a large number of countries still impose restrictions on exports of scrap and other raw materials

• Steel scrap is subject to more export restrictions than any other raw material

• There is a significant problem with transparency, because export restrictions change frequently, making supply even more problematic

World Demand for Steel ScrapAGA: Steel Issues Scrap

Steel Trends

(NOT in Priority Order)

• Raw Material Availability• Minimill Growth• Consolidations• Foreign (Multinationals) Ownership• Variable Cost Control• Flat vs. Long (Auto vs. Construction)• Trade Cases• Quality and Weight/Strength/Value• Government Spending• OSHA, EPA, etc., Regulations• Loss of Manufacturing “Climate”• Sustainability• Improvements in Safety

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Steel Technology Issues

• Continuous Improvement, inc. Maintenance Reliability• Gauge Control• High Strength Low Alloy (HSLA)• Lighter Hot Rolled Gauges• Rebar Quenching• Continuous Process & Automation• Alternate Iron Units• Green• Costs (Metallics & Yield; Labor; Energy Efficiencies; Transportation; and Others)• Cleanliness (Degassing; Sulfur)• Measure and Control• ENGINEERS ? ? ? ?

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Technology Trends for AGA

A few thoughts…

• Lead Content Concerns (EPA Rules; Prime Western Zinc)• Steel Chemistry Applications (HSLA; Strength)• Gauge Control• Quality Challenges• $ $ $

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Technology Trends

Specifics

- i.e. Rebar - Less alloys, more quench & tempering (Thermex)- Coiled Rebar Growth< 1960 Plain Mild Steel yield ≈ 250n/m2; 1960’s Ribbed Mild Bar; today

high strength yield ≈ 400n/m2 w/loss of elongation- Seismic requirements going to 500n/m2

- Epoxy coatings, stainless, 75 year bridge

- Correlation between coatings & minimizing corrosion- Parking Structures

- Castellated Beams- Galvanizing Use vs. Painting- Life Cycle Costs

It’s all about Costs and Value

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Infrastructure Spending

Good News• Early March, Congress passed legislation to extend Federal Highway & Transit Program

spending for 7 months• Funding through end of current fiscal year at 2009 level• Stable Funding – bipartisan effort

Bad News• Need long term reauthorization bill – NOT A STOPGAP• Need improvements• Gas tax woefully inadequate

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Final Thoughts

• Ultimately, the world needs greater total supply of scrap, steel and galvanized products

• U.S. is in a traffic jam, moving slightly forward, but don’t know other consequences. Don’t look to Washington, DC for help.

• Reasons for optimism in steel in U.S.A.– Scrap-based, 70% of cost – local supply– Low cost on global basis (energy is neutral, labor less than 10%, others have higher transportation

costs)– Relatively strong U.S. market and U.S. resiliency– Better U.S. company balance sheets

AGA: Annual Conference