3 rd Annual China Summit Session V – China Trade Impact on North American Manufacturing Thomas A. Danjczek President Steel Manufacturers Association September 18, 2007 AMERICAN METAL MARKET CONFERENCE: How is China impacting U.S. manufacturing, and can North America compete?

From 1 st China Summit, 10/25/05 -Currency -Capacity (steel-making) -Concerns/Challenges -Compliance -Conclusion Update – Sept Still a “dirty float”, with only a minor change; U.S. Congress upset -Out of control government-subsidized growth -U.S. trade deficit grows; steel trade exports increase; loss of customer base -China’s trade policies and laws not enforced, regarding emissions and competitive facilities; arbitrary VAT’s -Trends worsen in 2006; trade disruption due to state subsidies and currency manipulation; when will China play by market rules? From 2 nd China Summit, 9/29/06 AMM 3 rd Annual China Summit

What’s New??? From SMA Presentation: 2 nd China Summit, 9/29/06 -Discussed China’s steel capacity growth (54mmt in 2006, projected 37mmt in 2007) -Reviewed China Syndrome: How Subsidies and government intervention created the world’s largest steel industry -Questioned who is receiving government assistance with export subsidies, import substitution subsidies, land grants, cash grants, energy reductions, debt to equity conversion, debt forgiveness, preferential loans, currency manipulation, and barriers to foreign investment -Commented on AIIS view “not to worry”; distortion of facts -Estimated China’s environmental impact -Asked when will China play by market rules? -Challenged that the growth of the Chinese steel industry has been at the expense of steel international competitors

AMM 3 rd Annual China Summit Conclusions in 2005, 2006, 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

U.S. Steel Industry, Then and Now THEN: Smoke pouring into the air from a Pittsburgh steel mill. Image by Corbis - Bettmann NOW: Electric Arc Furnace facility. AMM 3 rd Annual China Summit 21 st Century

Competitiveness 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 nearly 70 percent. AMM 3 rd Annual China Summit

Economic Competitiveness -Productivity is a key to competitiveness. Minimills (60 percent of U.S. production) are under one man-hour per ton (as low as 0.3 MH/ton). -In U.S., metallics comprise almost 60 percent of the total cost of producing a ton of steel; energy, transportation, and labor costs account for the rest. In the world, all costs are dollar denominated, except labor. -Freight costs for China (50 percent imported ore) are much greater than U.S. labor costs. -China is not a low-cost steel producer.

AMM 3 rd Annual China Summit 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.

What Harm U.S. Imports of Auto Parts and Vehicle Bodies from China, Value and Share AMM 3 rd Annual China Summit

Conclusion -Need aggressive policy measures to prevent China from causing a major crisis Groundhog Day