The Refractories InstituteIssues Impacting U.S. Steel Producers – Update

“A Future for Steel”

Thomas A. DanjczekPresidentSteel Manufacturers AssociationNapa Valley, CAJune 2010

Outline

•SMA

•TRI Update – “Refractories and Steel” 2010 versus 2008

•Set the Stage - U.S. Steel Production- Global Steel Outlook- U.S. Steelmaking – Auto and Construction

• Trade Issues- Foreign Governments, Raw Materials, Scrap, China, Trade Activities

• Environmental / Safety Washington, DC Issues

•Is Enough Being Done?

•What does the U.S. need to do?

•Conclusion

TRI Spring 2010

• The Steel Manufacturers Association (SMA)– 34 North American companies:

29 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

SMATRI Spring 2010

US Capacity; Production & % EAF & Integrated – 2000-2009

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

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

TRI Spring 2010

Where SMA Member EAFs are located…

TRI Spring 2010

TRI Spring 2008 - Update for 2010 Refractories & Steel

Similar: (Spring 2008)-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

Update (Spring 2010)Anticipated it, not as big

No change, except Euro

Worse

Worse – scrap and ore

A few left

One market?

Worse

Worse

Worse

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

$1000???

100-140 million tons

2010

80 million tons, 63 in 2009

100,000

+

20%

Marginal

$600

TRI Spring 2008 - Update for 2010

  2007 2008 2008 2008 2009 2009 2009

  TotalJan-June

July-Dec Total

Jan-June

July-Dec Total

Deliveries 96.620 51.080 50.250 101.330 51.000 50.000 101.700

Imports 24.490 10.520 11.160 21.680 11.000 11.000 22.230

Exports 10.160 4.680 4.840 9.530 5.000 5.000 10.250

Steel industry receipts 2.720 1.380 1.330 2.720 1.000 1.000 2.720

Apparent steel use 108.230 55.540 55.000 110.760 56.000 55.000 110.960

TRI Spring 2008 - Update for 2010

U.S. Steel Market Projections

WRONG!Actual = 58 million tons total (half)

in 2009

TRI Spring 2008 - Update for 2010 Conclusions

- Unknown impact of rising raw material costs- Consolidations helping, but 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.

(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.

US Steel Production (All in Million Net Tons)

(Numbers are Approximate)PAST – From 1986 through 2008, U.S. steel production has been around 100 m tons – up &

down 10%

2009 1st Half 25m (45% utilization)2nd Half 36m (62% utilization) Now 1.5m/week vs. 2.1m/week Year 63m (Minimills at 63% of production)

2010 (from November 2009) World Steel 78m (up 19% over 2009), optimistic Peter Marcus 68m (Back to 75m in 2012)

US Poll 69m (up 10% over 2009)

2010 – Today (Through March 30) Capacity Utilization (67.7%); or approximately 80 million tons annual rate

42.9% in 2009

Set the StageTRI Spring 2010

United States

Million MT2009 (e) 2010(f) Change

(%)

Crude Steel Use 65.1 81.8 25.5%

Finished Steel Use 57.4 72.7 26.5%

Exports 8.5 11.3 32.9%

Imports 12.9 13.7 6.2%

Canada

Million MT2009 (e) 2010(f) Change

(%)

Crude Steel Use 10.6 13.1 23.9%

Finished Steel Use 9.5 11.8 23.9%

Exports 4.9 6.4 29.6%

Imports 6.0 7.7 28.3%

Mexico

Million MT2009 (e) 2010 (f) Change

(%)

Crude Steel Use 17.7 22.1 24.5%

Finished Steel Use 13.9 15.5 10.9%

Exports 2.0 2.4 20.0%

Imports 3.2 3.6 12.5%

Source: Worldsteel Economic Studies Committee, April 2010

The Worldsteel Short Range Outlook

TRI Spring 2010

Source: Worldsteel

World Crude Steel Capacity 2000-2012

1,062 1,062 1,0951,170

1,2451,356

1,4531,583

1,8161,917

1,997 2,055

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

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rent

Ave

rage

Gro

wth

Rat

e (C

AG

R)

World Crude Steel Capacity CAGR

2012(e)

Global Steel Capacity Continues to Increase

TRI Spring 2010

89

10111213141516171819

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

Mill

ion

Units

2009 Was Only the Second Year Since 1963 in Which North America Produced Fewer than 9 Million Cars and Trucks

North America Car & Truck Production, 1963-2009

Source: Ward’s Automotive.

9 million cars and trucks produced1982

Recent gains in North American car and truck production notwithstanding, it is projected that it will take up to five years to return to pre-crisis ”normal” levels.

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Sta

rts

The U.S. Construction Market Remains Weak

U.S. Single-Family Housing Starts, Q1 2004 through Q4 2009

Source: U.S. Census Bureau.

• Foreclosures remain a problem for both residential and non-residential construction.

• While residential construction is projected to increase, it is not expected to regain its 2008 level until 2013.

• The value of non-residential construction put in place fell by 9% from 2008 to 2009, and is projected to continue falling through 2011.

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

TRI Spring 2010

Raw Material Export Restrictions are Continuing to Disadvantage NAFTA Steel and Other Manufacturers

• 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

TRI Spring 2010

0

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Mill

ion

Ton

s

Exports

U.S. Consumption

U.S. Scrap Consumption and Exports

2009 – Exports 22.3mtImports (e) 3.0mtU.S. Consumption 48.0mt

TRI Spring 2010

China’s Trade Surplus with the U.S.

Year China’s Trade Surplus

2001 $22 billion(year China joined WTO)

2006 $177 billion

2007 $262 billion (up 47.7%)

2008 $290 billon

2009 $196 billion The U.S. has lost 3.3 million manufacturing jobs since 2000… imbalances cannot go on forever.

TRI Spring 2010

Trade UpdateItem Plus Minus SMA Action

OECD Only Global Forum No Measured Outcome Participate in China in October – Raw Materials

NASTC Hangtime w/NAFTA Officials; Governments see value

5 years = Bureaucratic Press NAFTA competitiveness Issues w/industry and Governments

ITAC 12 Influence to DOC & USTR

“Confidentiality”; needs more US producers

TAD Vice Chair

US China Dialogue Cards on the Table Even God does not know next meeting date

Participate w/members

Buy America Relatively unchanged since 1932

Negative Press Hold Course

ITC Support Members Lawyers Continue Support

China Steel Trade Elephant in Room Potential Threat Cases, Press U.S. Govt.

TRI Spring 2010

Trade UpdateItem Plus Minus SMA Action

Customs Fraud Big Deal in Circumvention, mislabeling, duty avoidance, etc.

Time Lag Participate in Customs Training and CSUSTL

Chinese Currency Now National Issue 7 years Continue Raise Money

FTZ – Alabama 2nd Filing Duty Avoidance including raw materials

Oppose Partial Approval

Retrospective / Prospective AD/CVD Duty System

Support Retrospective Prospective Less Accurate

SMA Testified

VAT Taxes Some Noise Not Tax Increase Reduce Personal and Corporate Tax accordingly

Trade Legislation Noise Not Today Support Activity; No Action

TRI Spring 2010

Trade Update

Item Plus Minus SMA Action

Trade Statistics SIMA Helpful AIIS Comments Continue Comments, press surge component;Jobs, Jobs, Jobs

WTO Raw Materials Case

International Support Negotiated Solution? Principle is important

Doha Negotiations No Progress It’ll be back Through ITAC

Climate Change Not 2010 Waxman, etc. Press no Global Exceptions

American Scrap Coalition

Not just steel % scrap exports White Paper underway

TRI Spring 2010

U.S. Steel Industry, Then. . . . . . . . .and Now

Smoke pouring into the air from a Pittsburgh steel mill, 1890. Image by Corbis - Bettmann

Electric Arc Furnace facilityImage by SMA.

U.S. Steel Industry – Energy / TON

Source: Dr. John Stubbles

01020304050

1950 1960 1970 1980 1990 2000 2010

MIL

LIO

NS

BTU

/TO

N

B.F BURDEN PREPARATIONBOF STEELMAKING

MINIMILLS

CONTINUOUS CASTING

EAF/ THIN SLAB CASTING

TRI Spring 2010

0

3

6

9

12

15

1970 1980 1990 2000 2010 2020 2030

History Projection

Electricity Pricesnominal cents per kilowatthour – Projected to reflect impact of climate change legislation - 2009

TRI Spring 2010

SMA Climate Change Policy – 2010Federal Legislation Needs to Address the Following:

1. Reward Recycling2. Recognize Steel Industry Improvement Limitations3. Include Global Participation and Monitoring with No Exemptions

Available for Any Nation4. Prevent Double Counting of Carbon Costs5. Promote GHG Emissions Reductions From Efficiency and

Technology Improvements and Not Demand Destruction of North American Steel Production

6. Preempt Competing State Carbon Regulation Policies with a Single Federal GHG Policy, to Ensure a Level Playing Field within the U.S.

7. Avoid Unintended Consequences

TRI Spring 2010

Other Environmental Concerns Facing the U.S. EAF Industry Sector

• Mercury – EAF industry continues to require mercury-reduced scrap supply, per EAF Area Source Rule (Federal EPA rule governing EAF air emissions). If new EAF Area Source Rule is pursued, then the Agency is attempting to promulgate a rule upon a rule

• Slag Usage as Aggregate Replacement – State Issues with usage continues

• Combustible Dust – OSHA concerns over presence of “combustible dust” in industrial facilities across all sectors affects EAF industry

• Radioactive Scrap & “Orphan Sources” in Scrap – As consumers of scrap steel, facilities must be constantly aware of possibility of radioactive “orphan sources” from finding their way into the furnace – SMA continues to support the DOE embargo on release of materials from decommissioned nuclear facilities (since 2000)

TRI Spring 2010

SMA Safety Overview SMA Members are committed to continuous

improvement in safety performance:• SMA Safety Statistics• Safety Committee Meetings• Fatality Prevention Initiative• Safety Surveys• Upstream/Downstream Safety• Contractor Safety• SMA Safety Awards• SMA Safety Website• Relationship with OSHA

TRI Spring 2010

SMA Safety Statistics-SMA Members voluntarily report monthly data on number of recordable cases, lost workday cases, days lost, and hours worked

-Compiled data is circulated to members as a spreadsheet each month

-Year-end 2009 data demonstrates an across the board improvement over 2008 performance, which was already markedly improved over 2007

TRI Spring 2010

SMA OSHA Recordable Case Rate

0

1

2

3

4

5

2006 2007 2008 2009

Rat

e

TRI Spring 2010

SMA OSHA Lost Workday Case Rate

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

2006 2007 2008 2009

Rat

e

TRI Spring 2010

Safety Committee – Fall 2009 Meeting

-120 attendees, including member company safety professionals, plant managers, and upstream/downstream operators

-Agenda topics: Fatality Prevention Initiative; managing safety during economic downturn; near miss discussion; industrial hygiene record keeping; mobile equipment alarm devices; crane safety; supplier safety efforts; lead programs; NFPA 70E

-OSHA Update from Jeffry Carter, Deputy Commissioner, Indiana OSHA

TRI Spring 2010

Safety Committee – Spring 2010 Meeting

-115 attendees, including member company safety professionals and upstream/downstream operators

-Agenda topics: Fatality Prevention Initiative; crane safety; lead programs; addressing complacency in routine work; hands free safety; leak detection; PPE technology upgrades; Six Sigma Analysis; waterborne pathogens; preventing electrode breakage; mobile equipment hazards

-OSHA Update from Steve Hawkins, Assistant Administrator, Tennessee OSHA

TRI Spring 2010

Fatality Prevention Initiative-Written guide, internal audit tools, and videos

-Collaboration between members, and benchmarking against other industries

-Addresses five critical areas: Confined Space; Fall Protection; Lockout-Tagout-Tryout; Mobile Equipment/Material Handling; and Rail

-Sixth component, Cranes, currently under development

-Widely shared within plants, and with upstream/downstream operations

TRI Spring 2010

Fatality Prevention Initiative

After 12 employee and contractor fatalities at SMA member plants in 2008, there were two in 2009.

There is still plenty of work to be done, but early results from the Fatality Prevention Initiative have been promising.

TRI Spring 2010

Is Enough Being Done?

Raw Materials

Energy

China

Trade

No

No

No

No

Barriers continue

Lack of policy continuesCurrency manipulation, Subsidies, Not playing by the rules

Distortions continue, Who’s the protectionist

No long term structural policy changes are being proposed in Washington for taxes, trade imbalance, and energy.

TRI Spring 2010

What does the US 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

TRI Spring 2010

ConclusionThe decline in U.S. Manufacturing has been so severe, policy incrementalism is not sufficient. IT’s NOT 2008!

U.S. Steel Industry in Better Position Today to Manage the Down Cycle (but what a down cycle!)

― Improved Economics From Consolidations, i.e. “Reacted Quicker”;― Improved Control of Variable Costs―Energy Costs―Washington Won’t Help― Transportation Costs―World Trade Distortions Continue― Improved Inventory Control (Inbound Materials, Steel, and Customer Products). NOT THE OLD INVENTORY OVERHANG!― Concerns with Scrap, Climate Change, Energy, U.S. Debt, Taxes, Currency, but especially Climate for Investment

― Still Challenging – But Reasons for Meaningful Long-Term Optimism!

TRI Spring 2010