Thomas A. Danjczek President Steel Manufacturers Association April 6, 2011 Washington’s Impact on Steel American Galvanizers Association Annual Conference State of Steel 2011

Outline SMA Set The Tone – Washington “Stuff” US Macro Issues What Does the U.S. Need To Do Steel Recent History (Capacity; Demand; Shipments; Imports) Steel Specific Issues (Trade; Raw Materials; Scrap) Steel Trends Conclusion AGA: Annual Conference 2

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 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 – Governance – i.e. vast majority SMA AGA: Annual Conference 3

Where SMA Member EAFs are located… AGA: Annual Conference 4

Factors in the 2010 Election It’s the economy, stupid… The economy was the number one issue for the American public in 2010— frustrations with high and stagnant unemployment figures, struggling housing markets, and persistently tight credit drove voter sentiment Dissatisfaction/perception that government is not tackling the right issues Frustrations augmented by the belief that the government has done more for Wall Street than for Main Street during the current economic crisis That sentiment, coupled with increasing public concern/skepticism regarding the role of government in the private economy and the growing deficit and long-term national debt, has resulted in a general perception that lawmakers aren’t listening and are overreaching AGA: Annual Conference 5

Return to divided government – Control of the Senate remains with the Democrats New breakdown: 53 Democrats (including 2 Independents who caucus with the Democrats), 47 Republicans – The House of Representatives is now controlled by the Republicans New breakdown: 242 Republicans, 193 Democrats – The majority of state Governorships are now held by Republicans New breakdown: 29 Republicans, 20 Democrats, 1 Independent Set the Tone AGA: Annual Conference 6

-Economy -War in Iraq -War in Afghanistan -Health Care -Deficit Reduction -Size of Government, Government Spending -Homeland Security -Taxes -Financial Oversight -International Trade -Energy and Environment -Transportation and Infrastructure -Labor -Middle East Tensions -Japan Earthquake “Havoc” -Continuing Resolutions – Funding the Government Big U.S. Gov’t Issues/Priorities AGA: Annual Conference 7

While the recession officially ended in June 2009, the sluggish pace of the recovery remains a top concern for both the public and policymakers – “Official” Unemployment remains at close to 9.5% and consumer income and spending are fairly stagnant According to a recent Bloomberg News survey of economists, the unemployment rate will stay high for the next year, averaging 9.3% – In early November, the Federal Reserve announced plans to purchase an additional $600 billion of longer-term Treasury debt over the next eight months to loosen credit conditions in order to speed the economic recovery and boost job creation Interest rates are expected to remain low for the foreseeable future – Facing a new political dynamic and skepticism regarding “stimulus” spending efforts, the White House reached out to Congressional Republicans to forge a deal on extending tax breaks during the lame duck session of the 111th Congress President Obama agreed to a 2-year extension of income tax rates for all income levels, while Republicans acquiesced to several Democratic priorities aimed at stabilizing the economy, including a long-term extension of unemployment insurance – Impact of Japanese Earthquake ? ? ? Economy AGA: Annual Conference 8

 The need for policies to promote economic growth in the short-run is complicated by the need/desire for longer-term austerity measures to address the nation’s deficit and long-term debt  Reducing government spending is a top priority of the new 112 th Congress  The continuing resolution for FY11 extended from March 18, 3 weeks at a time — House Republicans had initially called for a return to FY08 spending levels, which would require about $100 billion in cuts—while cuts that large may be difficult, significant reductions are likely  The conservative Republican Study Committee has proposed a plan to reduce spending by $2.5 trillion over the next decade  House Republicans’ rules package replaced “pay-go” with “cut-go”—any new mandatory spending must be offset with spending cuts, but NOT with tax increases  Rules package also gave Budget Committee Chairman Ryan (R-WI) the authority to set spending targets for appropriators if the House and Senate fail to agree on a final budget  Republicans have instituted a party-wide ban on earmarks  The vote to increase the debt limit may prove particularly challenging for the Republican caucus, with many pledging on the campaign trail to vote against it  Opponents likely to use votes as leverage to secure commitments for longer-term deficit reduction measures  President Obama has signaled that addressing the deficit and long-term debt is an area ripe for compromise with Congressional Republicans Deficit AGA: Annual Conference 9

The cost of the tax package came in at just under $1 trillion and is being viewed by many as a second stimulus, with some economists suggesting it could increase 2011 GDP by 0.5 to 1.25 percentage points Taxes AGA: Annual Conference 10

Ways and Means Committee Chairman Dave Camp (R-MI) and Trade Subcommittee Chairman Kevin Brady (R-TX) are avowed free-traders Items for consideration include: – Consideration of the stalled free trade agreements with South Korea, Panama, and Colombia Administration is supportive of ratification and must work with Republicans to ensure passage of the agreements— could this be an example of early cooperation? The Democratic Caucus remains divided on the issue of trade – Customs reauthorization legislation likely to emphasize trade facilitation – Export control reform could see some legislative action, although, for the most part, it will be done administratively – Addressing China’s trade practices Last Fall, the House passed the Currency Reform for Fair Trade Act—Sen. Schumer (D-NY) has pressed for a Senate currency vote, but prospects for action this year are unclear Last October, U.S. Trade Representative Ron Kirk announced that the United States has initiated an investigation of China’s practices affecting trade and investment in green technologies—will Congress enter the debate? More generally, the effect of the Tea Party is unknown—the movement has an anti- government, free market strain, but there is also a populist, anti-Wall Street component and it is unclear how this cuts on any particular issue, particularly trade International Trade AGA: Annual Conference 11

Vigorous oversight of EPA will be a general theme throughout the 112 th Congress – Oversight and Government Reform Committee Chairman Issa is soliciting responses from over 150 trade associations and businesses on regulations that have harmed job-growth—many expected to emphasize environmental regulations, i.e. Mercury Prospects for comprehensive climate legislation are weak—will see continued Congressional efforts to slow down EPA’s regulation of carbon emissions Impact of US EPA regulations on power plant emissions Energy & Environment AGA: Annual Conference 12

Piecemeal approach to energy policy presents opportunities for cooperation—as demonstrated by bipartisan legislation approved by the Senate Energy and Natural Resources Committee in the last Congress under Chairman Bingaman (D-NM) – Republicans in both chambers will place a greater emphasis on increasing domestic production of traditional energy sources (i.e., oil and natural gas)—and continue to focus on domestically- produced renewable fuels Comprehensive offshore drilling safety legislation in response to the April Deepwater Horizon explosion/oil spill is unlikely to be revived under Republican leadership in the House—even in the wake of recommendations by the President’s spill commission – Potential Renewable Energy Standard (RES), but Republicans were likely to push for inclusion of nuclear energy and clean coal technology, a “clean energy standard” – Proposals for increased energy efficiency in industrial facilities and buildings (Home Star) as well as financing for green technologies also on the table, but finding pay-fors will be difficult Energy & Environment AGA: Annual Conference 13

Pending or planned Democratic labor-related legislative initiatives are very unlikely to move forward in 112 th Congress – “Card-check” legislation (Employee Free Choice Act) – Mine safety reform – Legislation to allow all firefighters and police officers to unionize In fact, legislative efforts moving in the opposite direction have been proposed previously – Anti-card check legislation (Secret Ballot Protection Act) – Campaign finance reforms to regulate use of union dues to support union political activity Some Democratic priorities can be pursued through administrative efforts of the Department of Labor or the National Labor Relations Board Labor AGA: Annual Conference 14

Key Questions Ahead In the wake of Republican gains in both chambers, will the President move more to the middle and revive efforts to work with Republicans, following in the footsteps of President Clinton? Are the negotiations on tax policy a sign of things to come? Will we see cooperation on other major policy initiatives, such as the reauthorization/revamp of No Child Left Behind and stalled free trade agreements? How will President Obama’s new competitiveness agenda play out? And what can we expect from his recent Executive Order launching a government-wide review of federal regulations and their impact on economic growth and competitiveness? Will President Obama be able to “win back” the independent vote in 2012? Will widespread concerns related to deficits and long-term debt remain at the forefront? How will Members concerned with deficit spending vote on raising the debt limit this year? What is the impact of the Tea Party movement on the Republican Caucus—will the Caucus be divided on policy priorities or coalesce around opposition to the Administration? Will they show a willingness to cooperate with President Obama? In the wake of this year’s election and the loss of a Democratic majority, will we see some key retirements in the House? How will the current political climate affect the policy stances of moderate Senators over the next two years? What additional retirements can we expect? Will an already partisan atmosphere be strained ever further by the loss of moderates in both chambers? Will we see two years of legislative gridlock? AGA: Annual Conference 15

AGA: Annual Conference 2012 Election In the House, Democrats hold few competitive districts and need 24 to retake the majority. In the Senate, Democrats will defend 24 Senate seats (including two Independents) to the Republicans 10. Republicans need four net wins to take control of Senate. Republicans currently have no clear frontrunner for the presidential nomination. President Obama’s race to lose. 16

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 AGA: Annual Conference 17

Addressing China’s trade practices U.S. Senators Sherrod Brown (D-OH) and Olympia Snowe (R-ME) and U.S. Representatives Sander Levin (D-MI), Tim Murphy (R-PA), and Tim Ryan (D-OH) introduced in February 2011 the Currency Reform for Fair Trade Act of Including Congressmen Levin, Murphy, and Ryan, the House bill was introduced with 101 original sponsors (27 R; 74 D). Last October, U.S. Trade Representative Ron Kirk announced that the United States had initiated an investigation of China’s practices affecting trade and investment in green technologies—will Congress enter the debate? China AGA: What Does the U.S. Need to Do? 18

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 AGA: Annual ConferenceWorld Steel Capacity 19

U.S. Capacity and Production Figures – 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 E Source – U.S. Geological Survey – Iron & Steel Statistics and Information web page = AGA: Annual Conference U.S. Minimill Growth 20

AGA: Annual Conference U.S. Minimill Growth 21

Global Steel Production by Process – 2009 BOFEAF World Total70.6%28.1% U.S.36.0%64.0% China (Est.)90%10% (EAFs Growing) *Remaining 1.3% of world total by open hearth process Global EAFs AGA: Annual Conference 22

23 Raw steel capacity utilization may reach 80% in 2011 Source: AISI, First River AGA: Annual Conference

Moderate Manufacturing Growth Industry Inflation-Adjusted Percent Change 2010(F)2011(F)2012(F)2013(F)2014(F)2015(F) Manufacturing - SIC Basis Food Textile Mills Textile Product Mills Apparel Wood Products Furniture & Related Products Paper & Products Printing Support Activities Petroleum & Coal Products Chemicals Rubber & Plastics Products Nonmetallic Mineral Products Primary Metals Fabricated Metal Products Machinery Computers & Electronic Products Elec. Eq., Appliances, & Components Aerospace Products & Parts Motor Vehicles & Parts Miscellaneous Non-High Tech Manufacturing Source: Manufacturers Alliance/MAPI simulation of the HIS Global Insight model, November, 2010 F=Forecast Manufacturers Alliance/MAPI Manufacturing Production Forecast 24

25 US finished steel demand forecast Actual ADC Forecast Source: CSM, FW Dodge, AHAM, First River AGA: Annual Conference

Auto build & non-res construction expected to recover, but not to previous peak NA Auto Build (Million Units) 26 Source: CSM Worldwide, FW Dodge Forecast Non-Res Construction (Million Sq. Feet) Forecast AGA: Annual Conference

US net imports expected to remain low US Imports & Exports (Million Tons) 27 Source: AISI, First River Net Imports & US Dollar Net Imports as % of demand (3 year rolling average) $ IndexImports (%) AGA: Annual Conference

28 AGA: Annual Conference

Recovery underway, but slow Increased exports and imports (5mmt of semi’s imports) Not normal cycle of recession, overcapacity Relative strong demand in auto; construction lagging Comments on U.S. Production AGA: Annual Conference 29

Raw Material Cost and Availability is #1 Issue for U.S. Steel 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 Materials AGA: Steel Issues 30

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 Raw Materials AGA: Steel Issues 31

32 China – Raw Materials The United States, the EU, and Mexico have challenged China’s application of a variety of restrictions to exports of key raw materials used in steelmaking, including: – Coke – Refractory bauxite – Fluorspar – Zinc The restrictions China applies include: – Export duties – Export quotas – Restrictive bidding procedures AGA: Steel Issues

33 China – Raw Materials China has argued that these measures are justified to prevent pollution and to preserve natural resources China has also claimed a “sovereign right to regulate” its raw material exports The panel will release its decision this year : – The interim report is due February 18, 2011 – The final report is due April 1, 2011 This decision could have a major impact on international trade in raw materials for steelmaking – “Careful what you wish for…” Many other countries also restrict exports of raw materials, especially steel scrap USTR is very interested in a potential case regarding China’s restrictions on exports of rare earths and other raw materials AGA: Steel Issues

34 Implications If these justifications are accepted, ever scrap producer could legitimately limit exports of steel scrap This would wreak havoc on the global steel industry Countries that are heavily dependent on scrap imports would be particularly affected AGA: Steel Issues

35 World Scrap Supply and Consumption, By Region Source: World Steel Association

While China Restricts Exports of Scrap, U.S. Exports to China Have Surged 36

World demand for steel scrap is likely to continue to increase: -Increased steel production in China, India, and Brazil -Economic recovery But a large number of countries still impose restrictions on exports of scrap and other raw materials Steel scrap is subject to more export restrictions than any other raw material There is a significant problem with transparency, because export restrictions change frequently, making supply even more problematic World Demand for Steel Scrap AGA: Steel IssuesScrap 37

Steel Trends (NOT in Priority Order) Raw Material Availability Minimill Growth Consolidations Foreign (Multinationals) Ownership Variable Cost Control Flat vs. Long (Auto vs. Construction) Trade Cases Quality and Weight/Strength/Value Government Spending OSHA, EPA, etc., Regulations Loss of Manufacturing “Climate” Sustainability Improvements in Safety AGA: Steel Issues 38

Steel Technology Issues Continuous Improvement, inc. Maintenance Reliability Gauge Control High Strength Low Alloy (HSLA) Lighter Hot Rolled Gauges Rebar Quenching Continuous Process & Automation Alternate Iron Units Green Costs (Metallics & Yield; Labor; Energy Efficiencies; Transportation; and Others) Cleanliness (Degassing; Sulfur) Measure and Control ENGINEERS ? ? ? ? AGA: Steel Issues 39

Technology Trends for AGA A few thoughts… Lead Content Concerns (EPA Rules; Prime Western Zinc) Steel Chemistry Applications (HSLA; Strength) Gauge Control Quality Challenges $ $ $ AGA: Steel Issues 40

Technology Trends Specifics -i.e. Rebar- Less alloys, more quench & tempering (Thermex) - Coiled Rebar Growth < 1960 Plain Mild Steel yield ≈ 250n/m 2 ; 1960’s Ribbed Mild Bar; today high strength yield ≈ 400n/m 2 w/loss of elongation - Seismic requirements going to 500n/m 2 - Epoxy coatings, stainless, 75 year bridge -Correlation between coatings & minimizing corrosion -Parking Structures -Castellated Beams -Galvanizing Use vs. Painting -Life Cycle Costs It’s all about Costs and Value AGA: Steel Issues 41

Infrastructure Spending Good News Early March, Congress passed legislation to extend Federal Highway & Transit Program spending for 7 months Funding through end of current fiscal year at 2009 level Stable Funding – bipartisan effort Bad News Need long term reauthorization bill – NOT A STOPGAP Need improvements Gas tax woefully inadequate AGA: Annual Conference 42

Final Thoughts Ultimately, the world needs greater total supply of scrap, steel and galvanized products U.S. is in a traffic jam, moving slightly forward, but don’t know other consequences. Don’t look to Washington, DC for help. Reasons for optimism in steel in U.S.A. – 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 AGA: Annual Conference 43