Washington’s Impact on Steel Thomas A. Danjczek, President Steel Manufacturers Association November 2, 2004 Concrete Reinforcing Steel Institute Fall Business Meeting, 2004

Concrete Reinforcing Steel Institute Fall Business Meeting, SMA 2.Changes –August 2003 –Scrap Impact –World Steel Production 3.China, China, China… –Key Statistics –Steel Production –SMA Mission –Lessons Learned –Currency 4.Other Government Impacts –Exchange Rates –Value of the Dollar –Scrap Imports/Exports –US Overhead Costs –TEA 21 Lunacy 5.Steel Production Costs –Key Issues –Energy & Raw Material Costs –Asset Values –Bankruptcy/Restarts 6.Conclusion Washington’s Impact on Steel

Concrete Reinforcing Steel Institute Fall Business Meeting, 2004 The Steel Manufacturers Association (SMA) –35 North American companies: 31 U.S., 2 Canadian, and 2 Mexican –107 Associate members: Suppliers of goods and services to the steel industry SMA member companies –Operate 120 Steel plants in North America –Employ about 40,000 people –Mini-mill Electric Arc Furnace (EAF) producers

Concrete Reinforcing Steel Institute Fall Business Meeting, 2004 Production capability –SMA represents over half of U.S. steel production Recycling –SMA members are the largest recyclers in the U.S. –Last year, the U.S. recycled over 70 million tons of ferrous scrap Growth of SMA members –Efficiency and quality due to low cost –Flexible organizations –EAF growth surpassed 50% in 2002 & 2003, and anticipated to be 60% by 2010

Evaluate Washington’s Impact? Concrete Reinforcing Steel Institute Fall Business Meeting, 2004 Steel Demand Weakening 201 Tariffs/ Exclusions Increasing Imports Bankruptcies Semi-Finished Imports N.A. Economy Plant Closures/ Restarts Perennial Problems Consolidations US PBGC Mini-mill Industry Condition Pricing Volatility ISG’s Labor Contract Exchange Rate Shifts Public Policy Legacy Costs Operating Costs Benefits & Energy Capital Constraints

Concrete Reinforcing Steel Institute Fall Business Meeting, 2004 Up $130 since June 2004!

ANNUAL WORLD STEEL PRODUCTION OUTLOOK World steel output looks set to rise 5% or 50 MT MT in 2004, after gains of 62 MT and 53 MT in 2003 and 2002, respectively, largely on the strength of China coupled with the recent onset of rest-of-world economic recovery. China steel production rose by 20%. Increases continue… Forecast… Forecast (MT) 2005: 1, : 1, : : : : : Forecast (MT) 2005: 1, : 1, : : : : : EAF % (Line, Right Scale) EAF % (Line, Right Scale) World Steel Production Forecast World Steel Production Forecast

A few notes on China from 2003, 2004 and forward: Consumed ≈ 25% of world coke supply in ’03 Coke production ramping up in ’04 and ‘05 Consumed ≈ 25% of world iron ore supply in ’03 Iron ore production ramping up in ’04 and ’05 Consumed ≈ 20% of world scrap supply in ‘03 Consumed ≈ 240M mtons of steel in ‘03 Produced ≈ 220M mtons of steel last year (est. 240M mtons ’04) Consumed ≈ 40% of world concrete supply VW will produce and sell 150M cars in China this year GM will invest $6B in China by 2006 (rival VW as #1 supplier) Average income / year $1,200 US (≈ $5,000 for steelmakers) Concrete Reinforcing Steel Institute Fall Business Meeting, 2004 China China China…

CHINA STEEL PRODUCTION China produced 220 MT of crude steel in 2003 – double the next largest producer Japan at MT and 2.4 times the U.S. (92.2 MT, shown) – and will produce as much as 275 MT, 350 MT, and 425 MT by 2005, 2010, and 2015, respectively. China United States Courtesy – Metal Strategies

Concrete Reinforcing Steel Institute Fall Business Meeting, 2004 TeamNine member steel company representatives (3 presidents; 3 V.P. – operations; 3 experts - melting, rolling & engineering) PurposeGain First Hand Knowledge in mills & mill builders Major Concern Given high degree of Chinese Government subsidies provided, loss of US steel customer base Key QuestionWhen will capacity & production exceed domestic demands SMA Study Mission to China – August 2004

Concrete Reinforcing Steel Institute Fall Business Meeting, 2004 Government- Control capital through state banks - Control growth through land availability - Control output through electrical power and planning assets - Steel ownership – 90% SUBSIDIZED! - Government shutting down less efficient operation measured by energy consumption & environmental pollution Infrastructure- Massive construction – Vacant office space? - Significant power outages – building nuclear plants - Organized approach to Growth - Water transportation is a major asset Quality - Qualified personnel with enthusiasm and pride - Observed both world class & marginal facilities Lessons Learned

Concrete Reinforcing Steel Institute Fall Business Meeting, 2004 Cost- Capital construction 40% of US costs - Manpower est. a magnitude 10 to 1 vs. US (Objective is to employ people) - Power cost similar to 6¢/KwH except little difference between peak – non-peak (2¢) Scrap- 40% tariffs on scrap exports - China est. to import 10 million tons of scrap in 2004 Miscellaneous- Rebar usage disproportionately high - Limited personnel safety procedures - Huge automotive growth - Difficult to understand success of private steel facilities - 80% of exports from Coastal zone - Duck tongue tastes like pencil erasers! Lessons Learned

Concrete Reinforcing Steel Institute Fall Business Meeting, 2004 SMA Mission # 2 Next Mission – November 5 – 13, 2004 Objectives Observe First-hand Current Chinese Market Conditions & Developments Interact Directly with Government & Association Chinese Steel Industry Build on First Mission with Goal of Improved Strategic Understanding of Long-Term Impact to US Industry

Courtesy – IMF

EXCHANGE RATES – INDEX The real trade-weighted US$ index for major currencies has dropped 22% from the recent 2-’02 peak (115.8) and 30% from the all-time record high in 1-‘85 (124.9), but was still up 10% from the 7-’95 record low (80.4). Broad Currency Group Major Currencies Data through April 2004 US$ Real Trade-Weighted Index Courtesy – Metal Strategies

VALUE OF THE U.S. DOLLAR Scrap prices are inversely related to the dollar Source: AMM, Federal Reserve Scrap Price Dollar Index Courtesy – Metal Strategies

VALUE OF THE U.S. DOLLAR The strong relationship between steel imports and the dollar is even more clear when a 12-month moving average is used. Source: AISI, Federal Reserve Finished Steel Imports (12-Month Moving Avg) Dollar Index Courtesy – Metal Strategies

U.S. SCRAP CONSUMPTION AND EXPORTS Demand for U.S. scrap increased by 3 MT in 2003, driven by a 15% surge in exports and a slight gain in domestic demand (EAF and BOF production down 3% and up 1%, respectively) Courtesy – Metal Strategies

RUSSIA AND UKRAINE SCRAP EXPORTS Partial export bans, restrictions and duties designed to protect local steelmakers have restricted the flow of exports to the world market Courtesy – Metal Strategies

Concrete Reinforcing Steel Institute Fall Business Meeting, 2004 From MAPI’s Study, “How Structural Costs Imposed on US Manufacturers Harm Workers and Threaten Competitiveness.” External overhead costs from taxes, health care, pension costs, tort litigation add 22% to US unit labor costs ($5/hours) Total Burden of Cost Pressures on U.S. Manufacturing’s Raw Cost Competitiveness (% difference relative to U.S. manufacturers) Cost pressureForeign Advantage Corporate tax rates-5.6 Employee benefits-5.5 Litigation costs-3.2 Pollution abatement-3.5 Natural gas prices-0.5 Total cost advantage of nine largest trading partners -18.3

Concrete Reinforcing Steel Institute Fall Business Meeting, 2004 Needs: - Reduce Corporate Tax Burden - Re-do Treatment of Foreign Source Revenue - Reduce Health Care Burden by Consumer Responsibility - Reform Pension Plan Funding Rules - Undertake Serious Legal Reform by Curtailing Frivolous Law Suits, Placing Large Class Actions in Federal Court, and Negotiating Legitimate Asbestos Claims

Concrete Reinforcing Steel Institute Fall Business Meeting, Transportation Spending Bill TEA 21 NOT Reauthorized Interim Stop Gap Approval at Current Rate Senate Passed $318 Billion, plus (over 6 years) House Passed $284 Billion (over 6 years) President will veto above $256 Billion Probably will be Rolled into an Omnibus Appropriations Bill NUTZ!!! (Lunacy)

Summary of Key Issues Relative operating costs in the U.S. steel industry have changed dramatically over the past 12 months: First with the introduction of the ISG-style restructuring which took out $40- $50 per of hot band costs as a result of labor contract changes, and a further $25-$50 per ton with the removal of past legacy costs. Secondly, with the surge in metallics and energy prices and this development’s far greater relative impact on sheet minimills until the successful implementation of surcharges. Third, ore, coal, and coke prices have risen significantly. US Steel Production Costs Concrete Reinforcing Steel Institute Fall Business Meeting, 2004

Scrap now around $400 Concrete Reinforcing Steel Institute Fall Business Meeting, 2004 Steel Energy and Raw Material Costs

In the 28 months from January 2002 to May 2004, raw material and energy input costs for U.S. steelmakers have increased dramatically. +65% +110% +450% +155% +82% Courtesy – Metal Strategies Concrete Reinforcing Steel Institute Fall Business Meeting, 2004 Steel Energy and Raw Material Costs (cont.)

RECENT U.S. STEEL ASSET TRANSACTION VALUES Acquisition range has been $60 to $90/ton shipped for shuttered operations and $160 to $260/ton for ongoing businesses. Liquidated Companies Ongoing Businesses CSN disclosed in October 2003 that its acquisition price for Heartland was actually $175 million instead of the previously-report $69 million. Acquisition prices include all assumed liabilities. Courtesy – Metal Strategies

OCEAN FREIGHT RATES Ocean freight rates increased 4.5-fold from $10,000/day to $45,000/day between early-2003 and early-2004 and have recently declined by about $5 to $10 pr tonne since late-March. Courtesy – Metal Strategies

Technical Read on Crude Oil Prices Courtesy – JP Morgan

Technical Read on Natural Gas Prices Courtesy – JP Morgan

Concrete Reinforcing Steel Institute Fall Business Meeting, 2004 Conclusion Don’t count on Washington for help! i.e. TEA 21 Uncertainty – Cycle has Changed (Shorter Term & Greater Peaks & Valleys) Revenue vs. Costs – Not the Same Business Model CHINA, CHINA, CHINA… Bankruptcy Laws Unfair to Competitors Investments – Earn Cost of Capital Mini-Mills Must Compete in the World, as it is, and We Can! Meaningful Optimism with Good Long Term Consumption, Relative Value, and Excellent Recyclability for Steel