Society for Mining, Metallurgy and Exploration – Washington, DC Section U.S. Minimill Competitiveness Thomas A. Danjczek President Steel Manufacturers Association September 11, 2007

Outline SMA U.S. steel production Economic competitiveness and scrap demand Chinese government subsidies to its steel/auto industries GHG issues for steel Conclusion SME Washington, DC Meeting 9/11/07

The Steel Manufacturers Association (SMA) –36 North American companies: 30 U.S., 4 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 SME Washington, DC Meeting 9/11/07 SMA

Production capability –EAF steel producers represent 59% of U.S. production in 2006 –SMA represents over 70% of all U.S. steel production in 2006 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 SME Washington, DC Meeting 9/11/07 SMA

U.S. Raw Steel Production: Largest Recyclers in the Nation – 100 million tons of steel produced each year SME Washington, DC Meeting 9/11/07U.S. Steel Production

U.S. Steel Industry, Then and Now EAF’s are 21 st Century Steelmakers THEN: Smoke pouring into the air from a Pittsburgh steel mill. Image by Corbis - Bettmann NOW: Electric Arc Furnace facility. SME Washington, DC Meeting 9/11/0721 st Century

Reasons Economics: “ To be cost competitive, one needs to be either where the market is, or where the raw materials are.” (Paul O’Neil, Alcoa) Scrap Availability:U.S. has the scrap and infrastructure, with over 2000 scrap processors. Steel recycling rate is over 75 percent. SME Washington, DC Meeting 9/11/07

Economic Competitiveness Capital costs to build a scrap-based EAF minimill, versus an integrated ore-based mill, is less than half per ton of capacity Productivity is a key to competitiveness. Minimills are under one man- hour per ton (as low as 0.3 MH/ton), versus three times that for an integrated ore-based mill. The minimill culture makes a difference. Metallics comprise almost 60 percent of the total cost of producing a ton of steel; energy, transportation, and labor costs account for the rest. Energy costs are 75 percent less than for ore-based; transportation costs are lower, both inbound and outbound, due to proximity to markets; labor costs are half

SME Washington, DC Meeting 9/11/07China’s Subsidies -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 -China’s steel capacity will be 600 million tonnes by year end China’s steel capacity is 5 times that of the U.S. -China’s steel exports surged to 33.8 million tonnes in the first half of 2007, double the same period in 2006

SME Washington, DC Meeting 9/11/07Auto Parts Summary U.S. Imports of Auto Parts and Vehicle Bodies from China, Value and Share

SME Washington, DC Meeting 9/11/07 What Harm -Chinese steel exports surged to 33.8 million metric tons in the first half of 2007, double the same period in In finished goods containing steel, i.e. auto parts and vehicles, China’s exports are expanding by approximately 30 percent per year. -The rush to China has been driven by illegal subsidies. -The U.S. steel industry has enjoyed robust financial performance over the past four years. However, over the past 50 years, iron and steel has a mean return on equity after taxes of approximately 5 percent, less than half of manufacturing at approximately 12 percent.

SME Washington, DC Meeting 9/11/07China Subsidies -Imbalances can’t go on forever -Chinese steel market is reliant on export market to absorb domestic overproduction -Chinese steel industry today is OVERBUILT AND UNDERDEMOLISHED

Growth in EAF steelmaking has allowed the steel industry to reduce energy usage: Lower energy usage equals lower greenhouse gas emissions SME Washington, DC Meeting 9/11/07GHG 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 million Btu of Energy per ton of steel produced SME Washington, DC Meeting 9/11/07EAF Efficiency

SME Washington, DC Meeting 9/11/07Conclusion -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, inventories, etc. -U.S. EAF growth will continue -Massive subsidized growth continues -Consolidations will continue -China, China, China… everything else is only an embellishment -Unknowns (interest rates, economic growth, imports, etc.)