washington’s impact on steel thomas a. danjczek, president steel manufacturers association...

Washington’s Impact on Steel

Thomas A. Danjczek, PresidentSteel Manufacturers AssociationNovember 2, 2004

Concrete Reinforcing Steel InstituteFall Business Meeting, 2004


1. SMA

2. Changes– August 2003– Scrap Impact– World Steel Production

3. China, China, China…– Key Statistics– Steel Production– SMA Mission– Lessons Learned– Currency

4. Other Government Impacts– Exchange Rates– Value of the Dollar– Scrap Imports/Exports– US Overhead Costs– TEA 21 Lunacy

5. Steel Production Costs– Key Issues– Energy & Raw Material

Costs– Asset Values– Bankruptcy/Restarts

6. Conclusion

Washington’s Impact on Steel


•The Steel Manufacturers Association (SMA)

–35 North American companies:

31 U.S., 2 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

Evaluate Washington’s Impact?Concrete Reinforcing Steel InstituteFall Business Meeting, 2004

Steel DemandWeakening

201 Tariffs/ExclusionsIncreasing

Imports

Bankruptcies

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


Up $130 since June 2004!

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. China steel production rose by 20%. Increases continue…

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35.0%

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F S

hare of Production, %

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

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

EAF %(Line, Right Scale)

EAF %(Line, Right Scale)

World Steel ProductionForecast

World Steel ProductionForecast

A few notes on China from 2003, 2004 and forward:•Consumed ≈ 25% of world coke supply in ’03

•Coke production ramping up in ’04 and ‘05

•Consumed ≈ 25% of world iron ore supply in ’03

•Iron ore production ramping up in ’04 and ’05

•Consumed ≈ 20% of world scrap supply in ‘03

•Consumed ≈ 240M mtons of steel in ‘03

•Produced ≈ 220M mtons of steel last year (est. 240M mtons ’04)

•Consumed ≈ 40% of world concrete supply

•VW will produce and sell 150M cars in China this year

•GM will invest $6B in China by 2006 (rival VW as #1 supplier)

•Average income / year $1,200 US (≈ $5,000 for steelmakers)

Concrete Reinforcing Steel InstituteFall Business Meeting, 2004 China China China…

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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United States

Courtesy – Metal Strategies


Team Nine member steel company representatives(3 presidents; 3 V.P. – operations; 3 experts -

melting, rolling & engineering)

Purpose Gain First Hand Knowledge in mills & mill builders

Major Concern Given high degree of Chinese Governmentsubsidies provided, loss of US steel customer base

Key Question When will capacity & production exceed domestic demands

SMA Study Mission to China – August 2004


Government - Control capital through state banks- Control growth through land availability- Control output through electrical power andplanning assets- Steel ownership – 90% SUBSIDIZED!- Government shutting down less efficient

operation measured by energy consumption &environmental pollution

Infrastructure - Massive construction – Vacant office space? - Significant power outages – building nuclear plants

- Organized approach to Growth- Water transportation is a major asset

Quality - Qualified personnel with enthusiasm and pride- Observed both world class & marginal facilities

Lessons Learned


Cost - Capital construction est. @ 40% of US costs- Manpower est. a magnitude 10 to 1 vs. US (Objective is to employ people)- Power cost similar to US @ 6¢/KwH except little difference between peak – non-peak (2¢)

Scrap - 40% tariffs on scrap exports- China est. to import 10 million tons of scrap in

2004

Miscellaneous - Rebar usage disproportionately high - Limited personnel safety procedures

- Huge automotive growth- Difficult to understand success of private steel

facilities- 80% of exports from Coastal zone- Duck tongue tastes like pencil erasers!

Lessons Learned


SMA Mission # 2

Next Mission – November 5 – 13, 2004

Objectives

• Observe First-hand Current Chinese MarketConditions & Developments

• Interact Directly with Government & AssociationChinese Steel Industry

• Build on First Mission with Goal of ImprovedStrategic Understanding of Long-Term

Impact to US Industry

Courtesy – IMF

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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x 19

90 =

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Broad Currency GroupBroad Currency Group

Major CurrenciesMajor Currencies

Data through April 2004US$ Real Trade-Weighted IndexUS$ Real Trade-Weighted Index


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

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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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ish

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mp

ort

s -

MT

Source: AISI, Federal Reserve

Finished Steel Imports(12-Month Moving Avg)

Dollar Index


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


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


Concrete Reinforcing Steel Institute

Fall Business Meeting, 2004

From MAPI’s Study, “How Structural Costs Imposed on US Manufacturers Harm Workers and Threaten Competitiveness.”

•External overhead costs from taxes, health care, pension costs,

tort litigation add 22% to US unit labor costs ($5/hours)

Total Burden of Cost Pressures on U.S. Manufacturing’s Raw Cost Competitiveness

(% difference relative to U.S. manufacturers)

Cost pressure Foreign Advantage

Corporate tax rates -5.6

Employee benefits -5.5

Litigation costs -3.2

Pollution abatement -3.5

Natural gas prices -0.5

Total cost advantage of nine largest trading partners

-18.3



Needs:

- Reduce Corporate Tax Burden

- Re-do Treatment of Foreign Source Revenue

- Reduce Health Care Burden by Consumer Responsibility

- Reform Pension Plan Funding Rules

- Undertake Serious Legal Reform by Curtailing Frivolous

Law Suits, Placing Large Class Actions in Federal Court,

and Negotiating Legitimate Asbestos Claims



2005 Transportation

Spending Bill

TEA 21 NOT Reauthorized

• Interim Stop Gap Approval at Current Rate

• Senate Passed $318 Billion, plus (over 6 years)

• House Passed $284 Billion (over 6 years)

• President will veto above $256 Billion

• Probably will be Rolled into an Omnibus Appropriations Bill

• NUTZ!!! (Lunacy)

Summary 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.

US Steel Production CostsConcrete Reinforcing Steel Institute


Scrap now around $400

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$100$150$200$250$300$350$400$450$500

No.1 HM

Scrap

No.1

Busheling

MPI DRI Coke

Jan-02 Apr-04 May-04


Steel Energy and RawMaterial Costs

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%



Steel Energy and Raw

Material Costs (cont.)

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.


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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Brazil-China Australia-China


Technical Read on Crude Oil Prices

Courtesy – JP Morgan

Technical Read on Natural Gas Prices

Courtesy – JP Morgan

Concrete Reinforcing Steel InstituteFall Business Meeting, 2004 Conclusion

•Don’t count on Washington for help! i.e. TEA 21

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

•Revenue vs. Costs – Not the Same Business Model

•CHINA, CHINA, CHINA…

•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

washington’s impact on steel thomas a. danjczek, president steel manufacturers association...

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