What to make of steel in 2009 Presentation to SMA Annual Members Conference Washington DC May 19, 2009

2 What to make of steel in 2009  A dangerous place for forecasting  Plenty to worry about  Pursuing unhappiness  Some confident predictions

A dangerous place for forecasting

4 Rare (highly improbable) Hard to predict (except in retrospect) Consequential Last year’s message…Black swan events are:

5 Other forecasting miseries  Missed 2008 – in September!  Recalibrated 2009 several times Q1  6 reasons why it won’t be so bad this time (October 2008) –Global economic growth (3% to -2.8%) –Industrialization –Capacity management –Chinese industry rationalization –Renewed consolidation –Growth, Environment & Energy A man who predicts the future is lying – even if he’s right Arab proverb

6 What to do/think?  Avoid too much emotional commitment to one outcome  Avoid to much organizational commitment to one outcome  Consider all outcomes equally possible  Be ready

Plenty to Worry About

8 World steel forecast Apparent steel use forecast & y-o-y change 2008 to % -8% 2008: 1,197MT to 2009: 1,019MT ~15% decline Developed world consumption from 36% to 31% of total

in a long term context Global steel annual production changes YearDecline % % % % % % % % % F-15% % % % % % Source: worldsteel, First River

in a long term context US steel industry production changes YearDecline % % % % % % 72009F-30% % % % % % % % % Source: AISI, First River

11 GDP forecast indicates 20-25% drop in US finished steel demand Sources: AISI, US BEA, IMF, First River IMF World Economic Outlook April 2009 US 2009 GDP Forecast: -2.8% 2009

12 Finished steel demand drivers in US Actual Fitted Two drivers matter most: - NA automotive production - US non-residential construction R² = 70% Source: First River

13 NA automotive production forecast Below 15 million thru 2013 Source: CSM Worldwide (March 2009) 35% drop this year Average

14 Big 3 participation in car production Big 3, Others units & share , US only Source: Ward’s automotive, FRC

15 US non-residential construction No return to level of late 1990s thru 2013 Source: FW Dodge (Spring 2009) 22% drop 2008 to 2010 Average 1,

16 US finished steel demand forecast Weak throughout forecast period Actual ADC Forecast Source: CSM, FW Dodge, WSA, First River 30-40% drop this year (WSA)

17 Operating rates for rest of 2009 Million Tons Full Year 2009 Q1 Est.Q2-Q4 US ADC all steel products Net Imports Finished Steel Production Finished steel production as % of peak shipments (110 MT) 57%47%61% Source: AISI, MSCI, First River Risk is to the downside

18 Average US demand & production ~20% average decline Recovery by 2015?

19 US raw steel capacity utilization Long-term average is 78%, stable level is 85% Source: AISI, First River 63% 48% 65% 61% Average Utilization Rates Periods of adjustment (red bars): 60% Periods of relative stability: 85%

20 Future raw steel capacity requirement A 30 MT issue? Raw Steel Production85.0 Capacity utilization “stable periods”85% = Target raw steel capacity raw steel capacity incl. additions132 = “Excess” Capacity32 Source: First River

– Part of a notable recession Source: NBER, First River GDP Loss (%) ? Thru Q Thru May 2009

22 Big 5 financial crises & current US recession Source: IMF, Reinhart & Rogoff, First River GDP Loss (%) “Big 5” Financial Crises US August 2009? Thru Q March 2011?

Pursuing unhappiness

24 THE YEAR THE BOTTOM FELL OUT FOR STEEL STEEL MILLS COMPLAIN ON EXPORTS OF SCRAP Not since 1959, when the steel industry was in the middle of a 15-month slump, have steel executives gathered… for their annual meeting under worse circumstances. Seven out of 10 steel companies operated in the red during the first quarter, and losses are expected to mount in the second quarter. Nearly 30 percent of the nation's steelworkers have been laid off, and industry analysts, who just a month ago were quibbling over whether shipments for the year would slide below 80 million tons, now expect them to be under 70 million tons … FORECASTS WORSENING FOR STEEL Industry economists who had predicted as recently as January that steel shipments would equal last year's level of 87 million tons, have scaled back those forecasts to about 80 million tons - the low reached in the severe sales slump that developed after the recession. Some even say that shipments will drop below 80 million tons for the first time since 1963, when the industry shipped 75.5 million tons. UNUSUAL ALLIANCE SEEKING TO POSTPONE POLLUTION CURBS ON STEEL INDUSTRY

25 THE YEAR THE BOTTOM FELL OUT FOR STEEL STEEL MILLS COMPLAIN ON EXPORTS OF SCRAP Not since 1959, when the steel industry was in the middle of a 15-month slump, have steel executives gathered… for their annual meeting under worse circumstances. Seven out of 10 steel companies operated in the red during the first quarter, and losses are expected to mount in the second quarter. Nearly 30 percent of the nation's steelworkers have been laid off, and industry analysts, who just a month ago were quibbling over whether shipments for the year would slide below 80 million tons, now expect them to be under 70 million tons … FORECASTS WORSENING FOR STEEL Industry economists who had predicted as recently as January that steel shipments would equal last year's level of 87 million tons, have scaled back those forecasts to about 80 million tons - the low reached in the severe sales slump that developed after the recession. Some even say that shipments will drop below 80 million tons for the first time since 1963, when the industry shipped 75.5 million tons. UNUSUAL ALLIANCE SEEKING TO POSTPONE POLLUTION CURBS ON STEEL INDUSTRY 1982

26 No déjà vu all over again  No functional union agreement or relationship  Unconsolidated industry  Poorly invested, inefficient facilities  Unfocused industry diversified outside steel  Lots of government ownership around the world  No prospects for industrialization among 2Bn+ people  Little transparency in prices, inputs, costs, production & demand Far fewer prospects for recovery in 1982 than 2009

27 The pursuit of unhappiness The situation is hopeless, but not serious  Glorification of the past –Nothing worthy in the present  Obsession with precedents for unprecedented times –Nothing worth learning from the present  The Fatal Glass of Beer –No escaping the sins of too much leverage  General paranoia & fatalism –They’re out to get us –Nothing we do will make any difference

28 Some confident predictions!  Growing population will want –places to work –places to live –ways to get between the two  We will find new applications, new markets in the process of: –Reducing carbon in the environment –Switching energy sources  Manufacturing will grow in NAFTA as developing nations move towards satisfying domestic demand  The automotive industry will emerge stronger than at any time in the last 30 years  Average steel industry returns in the next 20 years better than 20 years following 1982

29 What to make of steel in 2009?  A scary ride to the bottom?  A turning point  A wake-up call for the developed world  Strategies reconsidered  Some retrenchment