The Refractories Institute Issues Impacting U.S. Steel Producers – Update A Future for Steel Thomas A. Danjczek President Steel Manufacturers Association Napa Valley, CA June 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 SMA TRI Spring 2010

US Capacity; Production & % EAF & Integrated – Year Total 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 Source – U.S. Geological Survey – Iron & Steel Statistics and Information web page = TRI Spring 2010

Where SMA Member EAFs are located… TRI Spring 2010

TRI Spring 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

1970s2008 Production Employment Technology Location Imports Profitability Average Price Approx. 700, MH/ton (1978 – 449,000) <20% casters <10% EAF Primarily Rust Belt & a few scattered Approx. 15% Poor $ million tons <120,000 60% - approx. 40,000, <2MH/ton) 95% casters 60% EAF NW, SE, Rust Belt (near customers, and cheap power) Approx. 25% 35%) Good $1000??? million tons million tons, 63 in , % Marginal $600 TRI Spring Update for 2010

TotalJan-JuneJuly-DecTotalJan-JuneJuly-DecTotal Deliveries Imports Exports Steel industry receipts Apparent steel use TRI Spring Update for 2010 U.S. Steel Market Projections WRONG! Actual = 58 million tons total (half) in 2009

TRI Spring 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. -Its 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) -Dont 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% st Half25m(45% utilization) 2 nd Half36m(62% utilization) Now 1.5m/week vs. 2.1m/week Year63m(Minimills at 63% of production) 2010 (from November 2009) World Steel78m(up 19% over 2009), optimistic Peter Marcus68m(Back to 75m in 2012) US Poll69m(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 Stage TRI Spring 2010

United States Million MT 2009 (e)2010(f) Change (%) Crude Steel Use % Finished Steel Use % Exports % Imports % Canada Million MT 2009 (e)2010(f) Change (%) Crude Steel Use % Finished Steel Use % Exports % Imports % Mexico Million MT 2009 (e) 2010 (f) Change (%) Crude Steel Use % Finished Steel Use % Exports % Imports % Source: Worldsteel Economic Studies Committee, April 2010 The Worldsteel Short Range Outlook TRI Spring 2010

Source: Worldsteel World Crude Steel Capacity ,062 1,095 1,170 1,245 1,356 1,453 1,583 1,816 1,917 1,997 2,055 1, ,100 1,350 1,600 1,850 2, (e)2011(e) Steel Capacity (million metric tonnes) Current Average Growth Rate (CAGR) World Crude Steel CapacityCAGR 2012(e) Global Steel Capacity Continues to Increase TRI Spring 2010

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, Source: Wards Automotive. 9 million cars and trucks produced 1982 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.

The U.S. Construction Market Remains Weak U.S. Single-Family Housing Starts, Q through Q 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 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

U.S. Scrap Consumption and Exports 2009 – Exports 22.3mt Imports (e)3.0mt U.S. Consumption48.0mt TRI Spring 2010

Chinas Trade Surplus with the U.S. YearChinas 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 Update ItemPlusMinusSMA Action OECDOnly Global ForumNo Measured OutcomeParticipate in China in October – Raw Materials NASTCHangtime w/NAFTA Officials; Governments see value 5 years = BureaucraticPress NAFTA competitiveness Issues w/industry and Governments ITAC 12Influence to DOC & USTR Confidentiality; needs more US producers TAD Vice Chair US China DialogueCards on the TableEven God does not know next meeting date Participate w/members Buy AmericaRelatively unchanged since 1932 Negative PressHold Course ITCSupport MembersLawyersContinue Support China Steel TradeElephant in RoomPotential ThreatCases, Press U.S. Govt. TRI Spring 2010

Trade Update ItemPlusMinusSMA Action Customs FraudBig Deal in Circumvention, mislabeling, duty avoidance, etc. Time LagParticipate in Customs Training and CSUSTL Chinese CurrencyNow National Issue7 yearsContinue Raise Money FTZ – Alabama2 nd FilingDuty Avoidance including raw materials Oppose Partial Approval Retrospective / Prospective AD/CVD Duty System Support RetrospectiveProspective Less Accurate SMA Testified VAT TaxesSome NoiseNot Tax IncreaseReduce Personal and Corporate Tax accordingly Trade LegislationNoiseNot TodaySupport Activity; No Action TRI Spring 2010

Trade Update ItemPlusMinusSMA Action Trade StatisticsSIMA HelpfulAIIS CommentsContinue Comments, press surge component; Jobs, Jobs, Jobs WTO Raw Materials Case International SupportNegotiated Solution?Principle is important Doha NegotiationsNo ProgressItll be backThrough ITAC Climate ChangeNot 2010Waxman, etc.Press no Global Exceptions American Scrap Coalition Not just steel% scrap exportsWhite Paper underway TRI Spring 2010

U.S. Steel Industry, Then and Now Smoke pouring into the air from a Pittsburgh steel mill, Image by Corbis - Bettmann Electric Arc Furnace facility Image by SMA.

U.S. Steel Industry – Energy / TON Source: Dr. John Stubbles TRI Spring 2010

HistoryProjection Electricity Prices nominal cents per kilowatthour – Projected to reflect impact of climate change legislation TRI Spring 2010

SMA Climate Change Policy – 2010 Federal Legislation Needs to Address the Following: 1.Reward Recycling 2.Recognize Steel Industry Improvement Limitations 3.Include Global Participation and Monitoring with No Exemptions Available for Any Nation 4.Prevent Double Counting of Carbon Costs 5.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

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 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 Barriers continue Lack of policy continues Currency manipulation, Subsidies, Not playing by the rules Distortions continue, Whos 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

Conclusion The decline in U.S. Manufacturing has been so severe, policy incrementalism is not sufficient. ITs 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 Wont 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