Session 6 – China the Reality: Currency, Trade, Investment & Steel A U.S. Minimill Perspective Thomas A. Danjczek, President Steel Manufacturers Association March 11, 2008 SBB Steel Markets North America 2008

The Steel Manufacturers Association (SMA) –36 North American companies: 30 U.S., 4 Canadian, and 2 Mexican –125 Associate members: –Suppliers of goods and services to the steel industry –Operate 125 steel recycling plants in North America –Electric Arc Furnace (EAF) steelmakers using recycled steel –EAF steel producers accounted for over 60% of U.S. steel production in 2007 –SMA represents over 70% of all U.S. steel production, with similar numbers in Canada and Mexico SBB – A U.S. Minimill Perspective SMA

SBB – A U.S. Minimill Perspective Similarities to Last Year Similar: -U.S. dollar exchange rate (China still a dirty float) -China’s steel growth and rising exports -China’s finished goods vs. raw materials -China’s subsidies -China’s compliance (environmental, emissions, arbitrary VAT’s, quotas) -Consolidations (access to capital, industry sustainability) -No U.S. policy actions -Energy and transportation costs -China, China, China (imbalances cannot go on forever) In March 2007, I spoke to SBB – “Times they are a’changing”

SBB – A U.S. Minimill Perspective Different & Unknown Different -Recession impact? -Raw material price squeeze -Weaker dollar -Lower steel imports -China’s steel exports to E.U. Unknown -JCCT Dialogue -E.U. trade cases -Impact of sovereign wealth funds -Changing freight rates -VAT rebate changes -China’s rate of steel closures

Steel Consolidating, But Still Fragmented TOP 15 Represent 36% of Global Production Source: IISB SBB – A U.S. Minimill Perspective

New Capacity Outpaces Consumption Growth Capacity – Multiple Sources; Nucor Analysis Demand – IISI projections thru ’08; 6% increase “09 – ‘10 Announced Steel Capacity Increases By Region (2006 – 2012) Announced Steel Capacity Vs. Projected Consumption 2007 – 2010 (Million Metric Tonnes) Compound Annual Growth Rates: Capacity: 6.83% Demand: 4.65% SBB – A U.S. Minimill Perspective

China: World’s No. 1 Is Government Directed Top 20 Chinese Steel Producers: Government Control Vs. Private Ownership Top 20 Capacity: 210 Million Tons 2007 Projected Global Production Australian Government Predicting China Will Reach 1B Tons by 2015, CISA says SBB – A U.S. Minimill Perspective

China Is the World’s Largest Exporter China Finished Steel Exports By Destination 2005 – 2007 (000 MT) Country / Region E EU 25/271,3677,39312,650 S. Korea5,5268,81711,844 NAFTA3,0927,0475,970 Iran1855,1803,096 Vietnam8651,7212,994 United Arab Emirates ,773 India4171,5742,447 Others8,86115,05225,848 TOTAL20,52443,00767,622 Source: CISA, 2007 Data Annualized SBB – A U.S. Minimill Perspective

China Comments -China has NOT become the world’s largest steel producer by accident, or by operation of free markets, or comparative advantage -China is NOT a low-cost steel producer -China has reached its position through a combination of subsidies, mandates, and planned intervention -In finished goods containing steel, China’s exports are expanding by approximately 30 percent per year -Chinese steel market is still reliant on exports to absorb overproduction -Chinese steel industry is overbuilt and underdemolished

SBB – A U.S. Minimill Perspective China’s Trade Surplus YearChina’s Trade Surplus 2001$22 billion (year China joined WTO) 2006$177 billion 2007$262 billion (up 47.7%) The U.S. has lost 3.3 million manufacturing jobs since 2000… imbalances cannot go on forever.

SBB – A U.S. Minimill Perspective Impact of AD/CVD Percent of the value of Chinese imports covered by US AD/CVD duties? 2004 – 0.13% 2006 – 0.10% What protectionism? International Trade Commission, based on U.S. DOC and Customs official statistics

SBB – A U.S. Minimill Perspective Competitiveness U.S. - China Steel Future Competitiveness Drivers DriverU.S.ChinaComment 1. MetallicsWeak $1/2 importedTechnological (Availability/Price)Scrap exportsFreightdevelopments + to U.S. 2. EnergyGas/electricity+ to ChinaClimate change (Availability/Price)constraintspolicy Limited nuclear 3. LaborLack of technical+ to China Health care costs 4. Transportation+ to U.S. 5. Trade+ to ChinaGrowth of steel- intensive goods 6. Environment+ to U.S.Enforcement?

SBB – A U.S. Minimill Perspective Resolving Tensions 1.Investments 2.Transparency 3.Currency 4.Exchange Information 5.Environment 6.Savings A few suggestions… -Increase cross-foreign ownership - remove artificial restraints, i.e. 38%; reduce subsidies -(Obvious) - i.e. VAT adjustments; U.S. to use CVD against NME’s; eliminate market interventions (market will correct itself – but will rigged markets correct?) -Mutual assured destruction is not acceptable -“We’ll send you lawyers, you send us engineers”; JCCT is worthwhile -Improve enforcement; expedite shutdown rate -China’s saving rates maybe too high, U.S. needs to save more

SBB – A U.S. Minimill Perspective Conclusions -Trade distortion still a problem -Consolidations helping, but overcapacity still a risk -Finished goods containing steel are a major concern -China, China, China… everything else is still only an embellishment -Unknowns (recession, imports, interest rates, costs) -Resolve tensions by investments, transparency, currency correction, etc. -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.