Developments in Steel Minimills

Thomas A. DanjczekSteel Manufacturers AssociationOctober 3, 2006

SMA Meetings – Indianapolis

Plant Operations DivisionAssociate Members

Environment CommitteeHuman Resources Committee

Safety Committee

Developments in Steel Minimills

I. SMA

II. 2006 Developments

• World Steel Production/Operating Rate

• China (Growth, Questions, Concerns, Challenges)

• Raw Material Pricing

• 2006 U.S. Market Outlook

• Consolidations

III. Impact of Mercury in Scrap

IV. Conclusion

SMA Meetings – Indianapolis

SMA Meetings – Indianapolis

•The Steel Manufacturers Association (SMA)

–38 North American companies:

32 U.S., 3 Canadian, and 3 Mexican

–118 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

–Minimill Electric Arc Furnace (EAF) producers

SMA Meetings – Indianapolis

•Production capability

–SMA represents approximately 70% 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 53% in 2004, 56% in 2005, and anticipated to be 58% in 2006

Projected Worldwide Crude Steel Capacity vs. Demand (2006 – 2010)

Mill

ion

Met

ric T

ons

1,400

1,055

1,487

1,118

1,608

1,185

1,653

1,257

1,761

1,332

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2006 2007 2008 2009 2010

Capacity Demand**Demand growth estimated at 6%/yr

0

20

40

60

80

100

120

140

2006 2007 2008 2009 2010 2011 2012

China CIS EU-25

India NAFTA Other Asia

Other Europe Africa & Middle East Central & South America

Worldwide Announced Steel Capacity AdditionsBy Region

Mill

ion

Met

ric T

ons 110 106

139

51

120

45 44

SMA Meetings – Indianapolis China’s Impact

After 5 Trips in the Past Two Years…

Key Questions:

- When will Chinese steel production significantly exceed its own domestic consumption – i.e. 50/60 MMT?

- Will the Chinese government shut down inefficient, excess capacity? (has not done so with polluting facilities, despite strong policy)

- How can North American steel industry compete against Chinese government - - IT CAN’T!

SMA Meetings – Indianapolis China’s Subsidies

-Export subsidies

-Import substitution subsidies

-Grants (land, cash, energy, raw materials

-Tax incentives & reductions

-Debt to equity conversion

-Debt forgiveness

-Environmental non-enforcement & weak regulation

-Non-performing loans at state banks

-Preferential loans

-RMB manipulation

-Barriers to foreign investment

WHO IN THE ROOM IS RECEIVING ANY OF THE ABOVE???

CHINA’S CHALLENGES

Area Comment

•Environment Trade policy and laws are not enforced regardingemissions and effluents; Province versusBeijing; employment rules, not environment; 20% of particulate matter in Los Angeles can be traced to China 

•Consolidations State-owned facilities; only non-controlling foreignownership allowed; antiquated facilities; policy is20 large producers, push small producers out 

•Technology/Quality Quality in flat rolled will affect export capabilities.Switch from long to flat not easy 

•Inventories Run full out. Not always market-oriented 

•Capital Will not always be free; could lose state credit 

•Personnel Some “unrest” expressed toward elite class.Internet is politically uncontrollable

RAW MATERIALSIn the four years from Q1-2002 to Q1-2006, raw material and

energy input costs for U.S. steelmakers have increased dramatically.

0

100

200

300

400

500

600

Jan-02 100 100 100 100 100

Oct-04 357 443 111 567 130

May-05 180 146 231 347 223

May-06 343 310 213 187 267

No.1 HM Scrap No.1 Busheling Metellurgical Coal Coke Iron Ore

January 2002 = 100

Courtesy of Chris Plummer, Metal Strategies

2006 U.S. MARKET OUTLOOKWe project apparent consumption growth in the 7-10% range for 2006, driven by the energy, construction and industrial capital

equipment sectors.

Market Growth Share Wtd GrowthAutos 0% 23% 0.0%Construction 7% 35% 2.5%Industrial Capital Equipment 7% 23% 1.6%Energy 23% 7% 1.6%

Sub-Total ---- 87% 5.6%All Other 5% 13% 0.7%Inventory Change ---- ---- 3.0%

Total ---- 100% 9.3%

Courtesy of Chris Plummer, Metal Strategies

Individual Domestic Demand Sectors

- Automotive is high, but dipping slightly

- Residential construction is falling, but still high

- Industrial machinery production rising

- Non-residential growing, but not back to 2000 level

- Heavy machinery is strong

- Energy is the best sector

• Plate, pipe, and specialty

SMA Meetings – Indianapolis

TOP-THREE MARKET SHARES2000 compared to 2005

0%

25%

50%

75%

100%

Hot Rolled Plate Cold Rolled CoatedSheet

Tin Mill SBQ Rebar HeavyStructural

Wire Rod

Flat RolledWeighted Average

2005: 65%2000: 47%

Long ProductsWeighted Average

2005: 68%2000: 51%

Courtesy of Chris Plummer, Metal Strategies

History: 2001 – Partnership for Mercury-Free Vehicles (PMFV) is formedMembers: Automotive Recyclers Association (ARA); Clean Car

Campaign; Clean Product Network; Ecology Center; Environmental Defense; Great Lakes United; Institute of Scrap Recycling Industries (ISRI); Mercury Policy Project;Steel Manufacturers Association (SMA); Steel RecyclingInstitute/American Iron & Steel Institute (SRI/AISI)

PMFV, through memberships, lobbies several state legislatures to pass a measure toinstitute a state vehicle mercury switch removal program, with costs associated to be paid by US automotive companies.

States with legislatively enacted switch removal programs: Maine; Arkansas; Rhode Island; North Carolina; South Carolina;Texas; and New Jersey

Mid-2005 – US EPA calls stakeholders meeting to bring all major actors to negotiation table

March 2006 – Compromise reached in negotiations to form a fund (paid

for by US auto co.s and US steel industry) to create a national switch removal program.

August 2006 – Signing Ceremony planned for enactment of National Vehicle Mercury Switch Removal Program MOU

Signatories: Vehicle Manufacturers; iron & steel industry trade associations on behalf of member companies (SMA; ISRI; ARA; SRI/AISI); Environmental Defense,on behalf of the environmentalist community; Environmental Council of theStates (ECOS)

Elements – 1. Education and outreach2. Removal, collection and management of switches3. Recordkeeping and accountability of mercury recovery4. Scrap Selection and corroboration5. Review and improvement of program performance goal (80% target), with expectation of removing about 12-16 tons of mercury in first three years (2007-

2010)

Responsibilities (of all signatories):1.The obligation to carry out responsibilities under the agreement in good faith, and work continuously to improve the performance of the NVMSRP; 2. Help formulate and implement an outreach strategy 3. To forego the initiation of new State legislative activities4. To support existing state programs, and to implement the NVMSRP in states without existing programs.

Responsibilities of steel companies:1) Issue a public statement; 2) Develop a plan; 3) Document communications to appropriate company staff of requirements to suppliers; 4) Strongly encourage suppliers to participate, and communicated to suppliers the need to further promote the program; 5) Utilize the ELVS database to verify supplier participation on a routine basis; 6) Conduct periodic site visits, spot checks, or other means to verify supplier participation; 7) Cooperate with ELVS in the development of education, training materials and outreach

SMA Meetings – Indianapolis

Conclusions - 2006• Hell, it’s still a cyclical business, but enjoy today!

• Fundamental shift in both demand and supply due to China & its appetite for raw materials – China is still the “wild card”. Risk near term is auto’s; long term is China… “China is the story, the rest is embellishment”

• Continued North American steel industry resiliency; North American mills, for the most part, are technologically advanced, highly competitive, and environmentally acceptable

• Consolidations and discipline have had an impact to reduce volatility

• Role of inventories affecting pricing and production

• Demand still healthy and growing

• Unknowns (oil, interest rates, auto sector, energy, freight rates, federal spending, China, China, China)

• Significant changes ahead in trade, metallics, energy, and consolidation

• Still reasons for meaningful optimism; positive outlook, despite China, energy costs, and interest rates