Steel Orbis: Steel Trade Conference (Session 1 – Economy and Markets) North American Steel Industry Challenges Thomas A. Danjczek President Steel Manufacturers Association San Diego, CA July 11, 2008

Outline SMA U.S. steel industry, 1970’s vs. today U.S. steel production Steel market conditions Consolidation and capacity Raw material issues Greenhouse gas emissions Unknowns Conclusion Steel Orbis 2008

The Steel Manufacturers Association (SMA) –35 North American companies: 30 U.S., 3 Canadian, and 2 Mexican –130 Associate members: Suppliers of goods and services to the steel industry SMA member companies –Operate 125 steel recycling plants in North America –Electric Arc Furnace (EAF) steelmakers using recycled steel Steel Orbis 2008 SMA

Production capability –EAF steel producers accounted for 60% of U.S. production in 2007 –SMA represents over 70% of all U.S. steel production Recycling –SMA members are the largest recyclers in the U.S. –EAF steel producers are the largest recyclers in the world –Last year, the U.S. recycled over 75 million tons of steel Growth of SMA member companies –Highly efficient users of labor, energy, and materials –Modern plants producing world class quality products Steel Orbis 2008 SMA

Steel Orbis 2008 Obvious Items -Recession impact -U.S. dollar exchange rate -China finished goods vs. raw materials -Raw material price squeeze -Consolidations -NAFTA issues -Environmental regulations -Energy and transportation costs -China, China, China

1970’s2008 Production Employment Technology Location Imports Profitability Average Price Approx. 700, MH/ton (1978 – 449,000) <20% casters <10% EAF Primarily Rust Belt & a few scattered Approx. 15% Poor $ million tons <120,000 60% - approx. 40,000, <2MH/ton) 95% casters 60% EAF NW, SE, Rust Belt (near customers, and cheap power) Approx. 25% 35%) Good $1200??? million tons U.S. Steel Industry Steel Orbis 2008

Differences -U.S. has become one of the world’s low cost steel producers, due to metallics availability, transportation, labor and energy efficiencies, and high utilization -China, which was approx. 70mmt in 1970’s, today over 500mmt -Many large integrated producers eliminated legacy costs in period through bankruptcies (30 companies) -World demand for all raw materials has changed supplies from excesses to shortages -Last integrated mill built, Burns Harbor, was (Nucor?) -Growth in U.S. lost to foreign producers (1970 – U.S. approx. 20% of world; today, less than 10%) -U.S. steel capacity has been reduced from approx. 170 million tons in the 1970’s, to 130 million tons today, while production has been around 100 million tons -Profitability: net income as a % of sales was only.5 to 2.5% (1974) in the 1970’s. Insufficient to cover down cycles -Significant quality improvements -Metallics yields have improved from 75% in 1970 to over 90% today -The next challenges are availability of scrap, scrap substitutes, energy, people, and customers Steel Orbis 2008

U.S. Raw Steel Production: Largest Recyclers in the Nation ~ 100 million tons of steel produced each year Steel Orbis 2008U.S. Steel Production

Steel Orbis 2008 U.S. Current Steel Situation Real steel usage down 4.4% in 2007 from 2006 Overall, all steel consumption projected to be down 2.2% in 2008 vs might replenish steel inventories 2009 expect better than 2008 Raw material & steel prices continue to surge up with market support Impact of weak dollar, less imports, U.S. recession? Margin squeeze???

Steel Consolidating, But Still Fragmented TOP 15 Represent 36% of Global Production Source: IISB Steel Orbis 2008

Globalization and Consolidation Developments Have Dramatically Changed the NAFTA Steel Landscape Acquiring Company Acquired Company Arcelor MittalNucorDuferco/NLMK ArcelorConnecticut SteelWinner Steel DofascoTrico MittalBirmingham Evraz Ispat Inland Corus TuscaloosaOregon Steel ISG Worthington-DecaturClaymont Steel Bethlehem Marion LTV Nelson Steel Severstal US Steel Plate Harris Steel Arcelor Mittal-Sp Pt Weirton Auburn Steel Rouge Acme-Riverdale North Star Arizona Georgetown American Iron Reduction CSN Sicartsa LMP Steel & Wire Heartland US SteelGerdau Ameristeel Essar Lone StarSheffield AlgomaNationalChaparral Minnesota SteelLTV TinCo-Steel ISG IH#2 PklNorth Star StelcoSidetul Tultitlan Quanex Macsteel BlueScope Corsa IMSA Steelscape SSAB ICH/Grupo Simec IPSCO Republic Steel Dynamics Ternium GalvPro-Jeffersonville HylsaThe Techs IMSARoanoke Steel Steel of WV WCI WPSC David Joseph OMNI IPSCO-Canada Bayou

Steel Orbis 2008Steel Industry Consolidations Raw steel capacity in U.S. is approximately million tonnes Due to a number of consolidations, the top 10 companies are approx. 90 million tonnes; top 3 companies are approx. 60 million tonnes Worldwide, the top company is only 10 percent

Consolidation: Opportunities & Risks Potential Benefits: –Access to Capital, Technology –Deeper Customer Relationships –Facility Optimization / Strategic Fit –Industry Sustainability But Benefits Are Undermined By Prevailing Risks: –Global Overcapacity –Subsidies and Other Trade Distortions Steel Orbis 2008

Global Steel Capacity During , world crude steel capacity increases by 499 mmt to 1,564 mmt (46.9% over 2000) World Crude Steel Capacity 2000~07 Source: German Steel Federation and IISI verifications

During , world steel capacity will grow by 322 mmt, 21% increase over 2007, CAGR of 6.4% World Crude Steel Capacity 2000~10 Global Steel Capacity Source: German Steel Federation and IISI verifications

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% Steel Orbis 2008

Strong Growth Areas ∆ ( )∆ ( ) mmtsharemmtshare World1,0651,5641, % % BRIC % % China % % Russia %309.3% India %195.8% Brazil %92.9% ME & N Africa %319.7% S Korea %134.1% Ukraine %113.4% SE Asia %103.3% Turkey %103.1% ROW %329.8% Steel Orbis 2008

Raw Materials Raw material prices are soaring Higher raw material prices have placed substantial cost pressures on NAFTA steel producers China (and other foreign) interference in raw material markets is unfairly helping their steel industries while driving up the cost of steel production worldwide Steel Orbis 2008

Since Last Year, Prices for Key Raw Materials Have Soared Source: World Steel Dynamics and JP Morgan Steel Orbis 2008

In True Market Competition, NAFTA Mills Would Have a Significant Cost Advantage Over Asian Mills Hot-rolled sheet cash costs ($/ton) Source: JP Morgan Securities, Inc.

Raw Materials: Governments Still Intervening Governments (e.g. China, India) Continue to Intervene in Key Raw Materials Markets For Steel: –Iron Ore –Coke –Ferroalloys –Refractory Materials Export Tax Manipulations / Restrictions Distortions Created; NAFTA Competitiveness Negatively Impacted Steel Orbis 2008

Growth in EAF steelmaking has allowed the steel industry to reduce energy usage: Lower energy usage equals lower greenhouse gas emissions Steel Orbis 2008GHG Emissions

Scrap-based Steelmaking (EAF-recycling) Ore-based Steelmaking 8.4 million Btu of Energy per ton of steel produced EAF Steelmaking Is Energy Efficient Steel Info – US Dept. of Energy 19.1 million Btu of Energy per ton of steel produced Steel Orbis 2008EAF Efficiency

Steel Orbis 2008 Unknowns -Raw material price impact??? -Impact of recession??? -Value of the RMB??? (Most recent number – still 35% off) -JCCT Steel Dialogue – where goal is to promote transparency with better decisions??? -European Union antidumping investigation and targets??? -Energy cost and interest rate impacts??? -Rising freight costs??? -China’s restrictive policy of foreign ownership participation??? -China’s enforcement of environmental regulations??? -U.S. legislation (111 th Congress) and 44 th President??? -Trade actions??? -When will China play by market rules???

Steel Orbis 2008Conclusions -Unknown impact of rising raw material costs -Don’t ignore “wild cards” -Consolidations helping, but overcapacity still a risk -Trade distortion still a problem - U.S. Congress disappointed -Foreign ownership positive impact on trade friction -Need aggressive policy measures to prevent China from causing a major crisis. To date, only trade cases have had an impact. -It’s still a cyclical business with demand, scrap, freight, inventories, etc. (fasten your seat belt) -Finished goods containing steel are a major concern -China, China, China… everything else is still only an embellishment -Unknowns (recession, imports, interest rates, costs) -Don’t expect help from Washington… 2009 may bring increased environmental and labor legislation. -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.