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Concrete Reinforcing Steel Institute Fall Business Meeting, 2004. Washington’s Impact on Steel. Thomas A. Danjczek, President Steel Manufacturers Association November 2, 2004. SMA Changes August 2003 Scrap Impact World Steel Production China, China, China… Key Statistics - PowerPoint PPT Presentation

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  • Washingtons Impact on SteelThomas A. Danjczek, PresidentSteel Manufacturers AssociationNovember 2, 2004Concrete Reinforcing Steel InstituteFall Business Meeting, 2004

  • Concrete Reinforcing Steel InstituteFall Business Meeting, 2004SMA

    ChangesAugust 2003Scrap ImpactWorld Steel Production

    China, China, ChinaKey StatisticsSteel ProductionSMA MissionLessons LearnedCurrency

    Other Government ImpactsExchange RatesValue of the DollarScrap Imports/ExportsUS Overhead CostsTEA 21 Lunacy

    Steel Production CostsKey IssuesEnergy & Raw Material CostsAsset ValuesBankruptcy/Restarts

    ConclusionWashingtons Impact on Steel

  • Concrete Reinforcing Steel InstituteFall Business Meeting, 2004The Steel Manufacturers Association (SMA)35 North American companies:31 U.S., 2 Canadian, and 2 Mexican107 Associate members:Suppliers of goods and services to the steel industry

    SMA member companiesOperate 120 Steel plants in North AmericaEmploy about 40,000 peopleMini-mill Electric Arc Furnace (EAF) producers

  • Concrete Reinforcing Steel InstituteFall Business Meeting, 2004Production capabilitySMA represents over half of U.S. steel production

    RecyclingSMA 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 membersEfficiency and quality due to low costFlexible organizationsEAF growth surpassed 50% in 2002 & 2003, and anticipated to be 60% by 2010

  • Evaluate Washingtons Impact?Concrete Reinforcing Steel InstituteFall Business Meeting, 2004Steel DemandWeakening201 Tariffs/ExclusionsIncreasingImportsBankruptciesSemi-Finished ImportsN.A. EconomyPlant Closures/RestartsPerennial ProblemsConsolidationsUS PBGCMini-mill IndustryConditionPricing VolatilityISGs Labor ContractExchange RateShiftsPublic PolicyLegacy CostsOperating Costs Benefits& EnergyCapital Constraints

  • Concrete Reinforcing Steel InstituteFall Business Meeting, 2004

    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 continueForecast Forecast (MT)2005: 1,075.02004: 1,015.02003: 964.72002: 903.12001: 850.22000: 847.61999: 789.0EAF %(Line, Right Scale)World Steel ProductionForecast

  • A few notes on China from 2003, 2004 and forward:Consumed 25% of world coke supply in 03Coke production ramping up in 04 and 05Consumed 25% of world iron ore supply in 03Iron ore production ramping up in 04 and 05 Consumed 20% of world scrap supply in 03Consumed 240M mtons of steel in 03 Produced 220M mtons of steel last year (est. 240M mtons 04)Consumed 40% of world concrete supplyVW will produce and sell 150M cars in China this yearGM 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, 2004China 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.ChinaUnited StatesCourtesy Metal Strategies

  • Concrete Reinforcing Steel InstituteFall Business Meeting, 2004TeamNine member steel company representatives(3 presidents; 3 V.P. operations; 3 experts - melting, rolling & engineering)

    PurposeGain First Hand Knowledge in mills & mill builders

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

    Key QuestionWhen will capacity & production exceed domestic demands SMA Study Mission to China August 2004

  • Concrete Reinforcing Steel InstituteFall Business Meeting, 2004Government- 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 facilitiesLessons Learned

  • Concrete Reinforcing Steel InstituteFall Business Meeting, 2004Cost- 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 2004Miscellaneous- 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

  • Concrete Reinforcing Steel Institute Fall Business Meeting, 2004SMA Mission # 2Next 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

  • Courtesy IMF

  • 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).Broad Currency GroupMajor CurrenciesData through April 2004US$ Real Trade-Weighted IndexCourtesy Metal Strategies

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

    Source: AMM, Federal ReserveScrap PriceDollar IndexCourtesy Metal Strategies

  • 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.

    Source: AISI, Federal ReserveFinished Steel Imports(12-Month Moving Avg)Dollar IndexCourtesy Metal Strategies

  • 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)Courtesy Metal Strategies

  • 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 Courtesy Metal Strategies

  • Concrete Reinforcing Steel InstituteFall Business Meeting, 2004From MAPIs 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. Manufacturings Raw Cost Competitiveness(% difference relative to U.S. manufacturers)Cost pressure Foreign Advantage Corporate tax rates -5.6 Employee benefits -5.5Litigation costs -3.2Pollution abatement -3.5Natural gas prices-0.5Total cost advantage of nine largest trading partners -18.3

  • Concrete Reinforcing Steel InstituteFall Business Meeting, 2004Needs:

    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 FrivolousLaw Suits, Placing Large Class Actions in Federal Court, and Negotiating Legitimate Asbestos Claims

  • Concrete Reinforcing Steel InstituteFall Business Meeting, 20042005 Transportation Spending BillTEA 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 IssuesRelative 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 developments 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 InstituteFall Business Meeting, 2004

  • Scrap now around $400Concrete Reinforcing Steel InstituteFall Business Meeting, 2004Steel 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.+65%+110%+450%+155%+82%Courtesy Metal StrategiesConcrete Reinforcing Steel InstituteFall Business Meeting, 2004Steel Energy and RawMaterial 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.Liquidated Compa

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