1 Drivers in the North American Steel Industry Thomas A. Danjczek President Steel Manufacturers Association June 27, 2012 São Paulo, Brazil

Outline About the SMA “Big Economic Picture” Steel “Picture” Drivers in North America’s Steel Industry Cooperation within the Americas Final Thoughts Brazilian Steel Conference

About the SMA -Composed of 35 North American electric arc furnace (“EAF”) steel producing Member Companies, and 123 Associate Member steel industry suppliers -Today, roughly two-thirds of North American steel production comes from the scrap-based EAF process, up from just 10% in the early 1970s -SMA Members account for approximately 80% of U.S. domestic steel capacity Brazilian Steel Conference SMA

U.S., Canada, Mexico Real GDP Growth, Seasonally Adjusted at Annual Rate Source(s): U.S. Bureau of Economic Analysis, MAPI Brazilian Steel Conference Near Stagnation US Mexico Canada 4

U.S. Manufacturing Industrial Production Source(s): Federal Reserve Board, MAPI Brazilian Steel Conference Rebounding

The U.S. Dollar Source(s): Federal Reserve Board, MAPI Brazilian Steel Conference Stronger Lately

NAM, May 2012 Big Picture Brazilian Steel Conference U.S. Will it continue?

US GOOds Brazilian Steel Conference $620 Billion Annual Deficit projected in 2012 is most significant barrier to U.S. economic recovery Big Gap 8

Brazilian Steel Conference Changes Impacting Steel Deeper Recession Variable Cost Control Engineers Scrap Availability High Unemployment Labor Intensity Inventory Levels China Safety Consolidations Customer Requirements Environmental Regulations Foreign Ownership Transportation Costs Ore Availability Energy Costs Currency State-Owned Enterprises Other Factors… Skilled Jobs Shortages 9

Source: AISI, Statistics Canada, Canacero NAFTA demand remains below pre-recession levels. Following some weakening of demand in the 2H11, 1Q12 demand saw a modest rebound 2% higher than 1Q11. Still, 2012 demand will likely be million MT lower than before the financial crisis. NAFTA steel production increased by 6% in 1Q ’12 to the highest level since 2008, but still well below peak. The utilization rate was 77% in 1Q ’12, which is at or slightly above most other world’s regions. 10

Despite Gains in Apparent Finished Steel Use (AFSU), Forecast NAFTA AFSU Still 13% Below Pre-Recession Average United States Million MT chg (%) 2013 Crude Steel Use %113.8 Finished Steel Use %99.5 Canada Million MT chg (%) 2013 Crude Steel Use %22.7 Finished Steel Use %14.9 Mexico Million MT chg (%) 2013 Crude Steel Use %16.6 Finished Steel Use %19.6 Spring 2012 Outlook* For NAFTA Region Apparent Finished Steel Use (ASU) (Million MT) f2013f Finished Steel Source: worldsteel From 2004 to 2007 (last 4 full years before the economic crisis began), AFSU in the NAFTA region averaged 146 million MT/year. Should the outlook for 2013 be achieved, AFSU next year would still be 8% below that average. * This was the outlook as of March The softening of NAFTA and world economies, together with higher than anticipated steel import levels, suggest more modest prospects for the NAFTA steel industry for the remainder of

US Raw Steel Capacity Utilization was 75% in 2011, 79% in First 5 Months of 2012 Brazilian Steel Conference

Brazilian Steel Conference Approximately 2/3 of US Steel Production 13

Steel imports are surging into the U.S. market U.S. steel imports increased significantly in 2011 and continued to increase in YTD 2012 (January-April), jumping by almost 30% from the same period in 2011 especially in slabs, plate and corrosion. Particular areas of concern include – Turkey: From January-March 2012, rebar imports from Turkey surged by 365% YOY – China: While direct steel imports from China are increasing, indirect imports are increasing even more The import surge is largely a result of government subsidies, irrational capacity expansion, and other anti- competitive behavior in certain foreign countries Other countries are also increasing steel capacity without regard for market forces or comparative advantage Brazilian Steel Conference- 2012U.S.Steel Imports 14

Finished steel demand drivers in US ActualFitted Three variables drive demand: NA auto build Non-residential construction Appliance shipments R² = 85% Source: First River Brazilian Steel Conference

U.S. finished steel demand forecast Actual ADC Forecast Source: CSM, FW Dodge, AHAM, First River Brazilian Steel Conference Assumes no second recession 16

Auto build & non-res construction are recovering, but not to previous peak NA Auto Build (Million Units) Source: CSM Worldwide, FW Dodge Forecast Non-Res Construction (Million Sq. Feet) Forecast Brazilian Steel Conference Non-Res up 26% YTD 2012 over

Excellent Indicator Source: Steel Market Update Brazilian Steel Conference- 2012Lead times Maybe Today 2.5 Weeks 18

Underlying Weak Economy, with less than 3% GDP and estimates downward. Recovery underway, but very slow – Fragile North American steel market under pressure with unused capacity Increased import percentages YOY, Impact of currency changes Not normal cycle of recession, overcapacity; new supply coming on Relative strong demand in auto; construction lagging Raw material costs, energy, and variable cost controls are major drivers Scrap prices down $60 early June Economic growth turning point is always two quarters away Market cap values at historic lows – Opportunities to buy? Comments on Current N.A. Steel Industry Brazilian Steel Conference

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 including scrap: – 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 Three Challenges – Export Restraints – EAF Capacity Expansion – Long Lead Time for Recycling Network Scrap Brazilian Steel Conference

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Scrap Volatility Continues Global Demand and the relative value of the US dollar to other currencies determine the volume of exported material. Ferrous scrap exports exceeded 24 million tons in 2011 Export restrictions on ferrous scrap have been enacted by 26 countries. With global steel output on the rise, prices for ferrous scrap in the US have decoupled from US mill demand. Steel production should be based on comparative advantage (raw materials, energy, capital). Need reciprocity Brazilian Steel Conference Scrap 22

Abundant Domestic Natural Gas is a Game Changer in U.S. Brazilian Steel Conference- 2012Energy 23

Gas Will Remain the Dominant Fuel For Electric Generation Coal Technologies are Struggling – Coal Gasification (Duke) – Carbon Capture and Storage (AEP) No Supply Technologies are Remotely Competitive with Gas- Fired Generation Nuclear, Wind and Solar are Heavily Dependent on Federal Subsidies Shift in Clean Energy Mandates & Infrastructure Costs from Federal Budget to Industrial Utility Ratepayer Brazilian Steel Conference- 2012Energy 24

On May 22, 2012, Jorge Gerdau Johannpeter, Chairman of Gerdau, received the Americas Society’s outstanding leadership award. During his acceptance he communicated four vision points: – Need for partnerships/cooperation/collaboration among the players in the Americas – Need to significantly invest in infrastructure within the Americas – Need for meaningful tax reform for improved competitiveness within the Americas – Need for educational initiative for a trained workplace We agree! Brazilian Steel Conference- 2012Cooperation within the Americas 25

Final Thoughts Volatile times continue, Maybe between recessions U.S. is in a traffic jam, moving slightly forward, but don’t know other consequences. Don’t look to Washington, DC for help. Gridlock continues Uncertainty will continue especially in U.S. industry until economic fundamentals are in equilibrium. Limited visibility… Early June Troubling Current status of scrap restrictions is unsustainable Cooperation within Americas is critically important Reasons for optimism in steel in North America: – Favorable gains with reemerging manufacturing base – Scrap-based, 75% of cost – local supply – Low cost on global basis (energy is positive, labor less than 10%, others have higher transportation costs) – Relatively strong market and resiliency – Better company balance sheets Brazilian Steel Conference