Steel – 2005/2006/Beyond Thomas A. Danjczek, President Steel Manufacturers Association May 5, 2006 The Hot Briquetted Iron Association Spring Meeting

Steel – 2005/2006/Beyond I.SMA II World Steel Production/Operating Rate; China; Prices; Consolidations III China’s Challenges; Trade; Energy; Environment IV.Key Issues Beyond 2006 (Wild Cards) V.Conclusion HBIA – Spring Meeting

The Steel Manufacturers Association (SMA) –39 North American Companies: 33 U.S., 3 Canadian, and 3 Mexican –111 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 –Minimill Electric Arc Furnace (EAF) producers –Produce nearly 100% of structural, wire rod, rebar, minimill plate and hot rolled, and a high percentage of SBQ products –Also represent several integrated steel producers and rerollers

HBIA – Spring Meeting Production capability –SMA represents over two-thirds of U.S. steel production (app. 70%) 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 56% in 2005, and anticipated to be 60% by 2010, if not before!

2005

WORLD CRUDE STEEL OPERATING RATE World Crude Steel Operating Rate % World Crude Steel Operating Rate % Operating rates recovered from 76 percent in 2000, to a peak of 87 percent in 2004, and have moved moderately downward since late Source: Metal Strategies

HBIA – Spring MeetingChina’s Impact After 4 Trips in a Year… Key Questions: - When will Chinese steel production significantly exceed its own domestic consumption – i.e. 50/60 MMT? - Will the Chinese government shut down inefficient, excess capacity? (Has not done so with polluting facilities despite strong policy) - How can North American Steel Industry compete against Chinese government IT CAN’T!

HBIA – Spring Meeting

Chart 2: The Exploding Trade Deficit with China HBIA – Spring Meeting

Chart 3: China’s Foreign Exchange Reserves HBIA – Spring Meeting

STEEL CAPACITY

CONCERNS Steel ItemComment North American steel industry CANNOTCurrency, banks, land, environment, compete against Chinese steel companiesconsolidations, policies financed and controlled by their government In 2005, compared to 2004, China steelTrend worsens in 2006 with new imports are projected to drop by 6.1capacity on line, and China’s million tons, while exports are projectedslowdown to increase by 12.3 million tons North American steel industry loss of aGovernment de facto subsidies significant increment of its customer(industrial parks, infrastructure, base to relocation to Chinesefactory space, loans) production sites

Steel Making Raw Material Prices Prices of key steel making cost inputs have more than doubled in 2004 and The outlook for 2006 is for continuing cost pressures...

AMM – 4/24/06

Source: Iron and Steel Statistics Bureau

Rebar Prices, (Midwest, $ per ton) Source: Purchasing Magazine June 2005 = $470 July 2005 = $450 Aug = $435 Sept = $485 Oct = $494 Nov = $486 Dec = $481

Wide-Flange Beam Prices, (Midwest, 8 x 8, $ per ton) Source: Purchasing Magazine June 2005 = $516 July 2005 = $506 Aug = $496 Sept = $545 Oct = $560 Nov = $574 Dec = $587

U.S. Oil and Natural Gas Prices

Natural Gas Cost Impact …sharp gains in natural gas prices have more than doubled steel mill gas costs per ton since Costs for integrated mills have risen over $30 per ton…

U.S. STEEL INDUSTRY CONSOLIDATION (Percent Change, 2000 compared to 2005) Mittal Steel weighted average share of all markets served = ~33% (major product range-15-40%+) -FRP acquisition price ($/ton, going-concern basis) 2002= $110…… ’04=$170……2005=$225 Source: Metal Strategies

2006

CHINA’S CHALLENGES Area Comment EnvironmentTrade policy and laws are not enforced regarding emissions and effluents; Province versus Beijing; employment rules, not environment ConsolidationsState-owned facilities; only non-controlling foreign ownership allowed; antiquated facilities; policy is 20 large producers, push small producers out Technology/QualityQuality in flat rolled will affect export capabilities. Switch from long to flat not easy InventoriesRun full out. Not always market-oriented CapitalWill not always be free; could lose state credit PersonnelSome “unrest” expressed toward elite class. Internet is politically uncontrollable HBIA – Spring Meeting2006 China

China’s Steel Trade Balance Year Imports Exports (Semi’s) Steel Trade Balance ChinaHBIA – Spring Meeting

China’s Steel Trade Balance Year Imports Exports (Semi’s) Steel Trade Balance ChinaHBIA – Spring Meeting

The National Association of Manufacturers (NAM) recently reviewed China’s compliance with its WTO commitments in the accession protocol. While progress has been made in certain areas, there are serious concerns and problems with effective compliance relating to: 1. Huge U.S. trade imbalance 2. Continued currency manipulation 3. Arbitrary VAT taxes and rebates 4. Massive counterfeiting and piracy 5. Discriminatory standards 6. Inadequate regulatory transparency COMPLIANCE WITH THE WTO 2006 ChinaHBIA – Spring Meeting

Chinese steel industry expansion continues in a region that is deficient in resources (supply and quality) and environmental compliance… 2006 China

2006 Prices HBIA – Spring Meeting

Section 421 Disappointment – No Relief Wire Rod Case – No Import Injury Solicit Congressional Assistance & Action - Ryan/Hunter - Graham/Schumer - Other??? Doha Agenda “only lose?” 2006 Trade HBIA – Spring Meeting

No National Energy Policy For EAFs, Demand Response is “Perfect Peaker” Need for Nuclear After Metallic Exports, Number One Threat for Competitiveness 2006 Energy HBIA – Spring Meeting

Mercury “End of Pipeline” Regulation Risk (Area Source Rule vs. Negotiated Settlement) TOSCA – Not Recognizing Benefits of Recycling i.e. Automotive Scrap, Fluff, & Slag Trend Toward “Measure – Monitor – Control”, vs. “Under the Bar” Compliance Continued Risk With Lost Radioactive Sources, TRI Reporting, and GGG 2006 Environment HBIA – Spring Meeting

Metallics Exports Concerns Transportation Challenges Congressional “Gridlock” TEA 21 $$$ - Finally U.S. Government Financial Policies (Trade & Budget Deficit) Need for Border Adjustable Tax 2006 Other HBIA – Spring Meeting

Key Issues Beyond 2006 (Wild Cards – Competitiveness) Rough EAF Cost $400 Product Item Impacts -Metallics 55%-Ore Cartel, Scrap Exports, Global Demand -Energy 15%-Lack of Generation, Transmission, Limited Nuclear, Offshore Gas, Off-Peak Future??? -Labor 10%-Health Care, USWA, Mittal Contract, Gerdau Ameristeel -Transportation 10%-Congestion, Lack of Investment -Other Inc. Financial 10% 100%

HBIA – Spring Meeting Other Key Issues Beyond 2006 ItemImpact -Capital Costs-Coke, Blast Furnaces, New Facilities & Capacity -Market-China, India, Brazil, Russia Automotive Situations -Consolidations-Current Prices -Environmental-Greenhouse Global Gases -Role of Governments-U.S. Financial Situation, Role of Currencies, Trade Flows

HBIA – Spring Meeting Conclusions Hell, it’s still a cyclical business, but enjoy today! Fundamental shift in both demand and supply due to China & its appetite for raw materials – China is still the “wild card”. Risk near term is auto’s; long term is China Consolidations and discipline have had an impact to reduce volatility Role of inventories affecting pricing and production Demand still healthy, construction solid Unknowns (Oil, interest rates, auto sector, energy, freight rates, federal spending, China, China, China) Significant changes ahead in trade, metallics, energy, and consolidation Still reasons for meaningful optimism