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Thomas A. DanjczekPresidentSteel Manufacturers AssociationSeptember 7, 2011
Changing Times – U.S. Minimill Competitiveness
CANACERO: La Competitividad en la Cadena Productiva del Acero
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Outline
•SMA
•NAFTA Support
•Changes
•Steel Demand Drivers & Forecasts
•Raw Materials
•What the U.S. Needs to Do
•Final Thoughts
CANACERO Conference
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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 account for nearly 2/3 of U.S. production today– 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
SMACANACERO Conference
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CANACERO Conference NAFTA Support
-SMA and its North American members have long supported an open trade policy based on comparative advantage; NAFTA producers have strengthened themselves through competition and open markets.
-SMA members have enhanced work with their NAFTA partners through OECD, NASTC, WTO, AISI, CANACERO, and CSPA in areas including:
• Chinese Mercantilism• Predatory Trade in Ferrous Scrap• NAFTA Prosperity• NAFTA Security• Infrastructure, Energy, and Transportation• Customs• Environmental Issues• Removal of Subsidies (“Enemy of Free Trade”), and Other Market-Distorting
Mechanisms
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CANACERO Conference Changes from the Past
Deeper Recession
Variable Cost Control
Engineers
Scrap Prices
High Unemployment
Labor Intensity
Inventory Levels
China
Safety
Consolidations
Customer Requirements
Environmental Regulations
Foreign Ownership
Transportation Costs
Ore Prices
Energy Costs
Currency
State-Owned Enterprises
Other Factors…
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CANACERO Conference Steel Changes
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2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011F40%
50%
60%
70%
80%
90%
100%
Capacity Utilization (%)
Raw steel capacity utilization may reach 75% in 2011
CANACERO Conference
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Finished steel demand drivers in US
Actual Fitted
Three variables drive demand:• NA auto build• Non-residential construction• Appliance shipmentsR² = 85%
Source: First River
CANACERO Conference
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US finished steel demand forecast
Actual ADC
Forecast
Source: CSM, FW Dodge, AHAM, First River
CANACERO Conference
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Auto build & non-res construction expected to recover, but not to previous peak NA Auto Build (Million Units)
10Source: CSM Worldwide, FW Dodge
ForecastNon-Res Construction
(Million Sq. Feet) Forecast
CANACERO Conference
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CANACERO Conference
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US net imports expected to remain lowerUS Imports & Exports
(Million Tons)
12Source: AISI, First River
Net Imports & US Dollar
Net Imports as % of demand(3 year rolling average)
$ IndexImports (%)
CANACERO Conference
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• Recovery underway, but slow
• Increased exports and imports (5mmt of semi’s imports) YOY
• Not normal cycle of recession, overcapacity
• Relative strong demand in auto; construction lagging
Comments on Current U.S. ProductionCANACERO Conference
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Raw Material Cost and Availability is #1 Issue for NAFTA 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 MaterialsCANACERO Conference
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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
Mill
ion
Met
ric T
ons
Domestic SupplyApparent Consumption
Source: World Steel Association
CANACERO Conference
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0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
Tota
l Qua
ntity
Exp
orte
d (M
etric
Ton
s)
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
CANACERO Conference
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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
CANACERO Conference
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Final Thoughts
• Ultimately, the world needs greater total supply of scrap and steel• U.S. is in a traffic jam, moving slightly forward, but don’t know other consequences.
Don’t look to Washington, DC for help• Environment of uncertainty and volatility will continue in U.S. industry until economic
fundamentals are in equilibrium• In U.S., dissatisfaction/perception that U.S. Government is not tackling the right
issues (i.e. “It’s the economy, stupid.”)• Reasons for optimism in steel in U.S.:
– 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
CANACERO Conference
• North American Free Trade Agreement works, but has not changed since 1994