1. How Will Trade Law Developments in 2007 Affect Steel Exports from China William H. Barringer Vinson & Elkins April 17, 2007 William H. Barringer Vinson & Elkins April 17, 2007

2. 2 Factors Affecting Likelihood of Steel Trade Remedy Cases Against China 1.Continued high volume of exports of steel from China: 2005 finished steel exports were 22 million metric tons; 2006 finished steel exports were 45 million metric tons; In roughly 4 years China has gone from being a net importer of steel to being among the largest net exporters; China’s steel exports to the U.S. doubled between 2005 and 2006, making it, after Canada, the second largest supplier to a market that is addicted to use of trade remedies to block imported steel;

3. 3 Factors Affecting Likelihood of Steel Trade Remedy Cases Against China (cont’d) Other countries with significant increases in imports of steel from China include the European Union, Canada, Mexico, and Japan; With the exception of Japan, all of these countries are frequent users of trade remedies against steel imports; Steel industries in all countries experiencing surges in imports of steel from China have publicly indicated concerns with these imports and intentions to use trade remedy laws to address these imports.

4. 4 Factors Affecting Likelihood of Steel Trade Remedy Cases Against China (cont’d) 2.Effectiveness of Government of the PRC in implementing policies which would have the effect of restricting exports: Reduction of rebates on VAT upon export; Elimination and closure of inefficient and outdated capacity of between 50 and 100 million tons; Consolidation of industry which would lead to additional discipline in the market; Focusing new investment on technology and efficient upgrades rather than expansion of overall steel capacity; Other proposed actions to limit exports.

5. 5 Factors Affecting Likelihood of Steel Trade Remedy Cases Against China (cont’d) 3.Comparative Pricing While many attribute the surge in steel exports from China to the fact that capacity has been growing faster than demand, this does not appear to be the primary force driving export increases. Rather, the primary force appears to be the most capitalist of motivations, namely the fact that prices in major export markets are significantly higher, and therefore more profitable, than the prices in China.

6. 6 Coated Steel Sheet Source: SBB

7. 7 Hot-Rolled Steel Source: SBB

8. 8 Cold-Rolled Sheet Source: SBB

9. 9 Plate Source: SBB

10. 10 Factors Affecting Likelihood of Steel Trade Remedy Cases Against China (cont’d) 4.For Antidumping Measures, the ability to demonstrate that the Chinese product is being sold in the export market at less than normal value. –Given the higher prices in most export markets, it will be difficult at present and until there is a broad drop in prices globally to demonstrate dumping by Chinese companies in conventional price-to-price terms; –Given profits of major Chinese producers, it will be difficult at present to show sales below cost and to apply constructed value; –Given access to relatively low input prices, even using a non-market methodology it will be difficult to demonstrate dumping at present. –Failure of U.S. standard pipe industry to follow rejection of section 421 relief is evidence of the absence of dumping.

11. 11 5.The necessity to demonstrate injury to the importing country industry to succeed in antidumping, countervailing duty, and sector specific safeguard investigations. –With only a few exceptions, it is difficult for an importing industry to demonstrate injury from imports from China or imports from China cumulated with imports from other sources. –For example, overall imports of cold rolled sheet and coil into the United States doubled between 2005 and 2006, but without any appreciable effect on prices, profits, capacity utilization, or production by the U.S. industry. –The recent plate Sunset Review in the U.S. that resulted in a negative determination and revocation of the antidumping duty order is illustrative of the performance being enjoyed by the U.S. and other flat rolled producers. Factors Affecting Likelihood of Steel Trade Remedy Cases Against China (cont’d)

12. 12 Operating Profit/Net Sales Sources: (2000-2006) Prehearing Report at CTL-III-16, (1990-1992, 1997-1999) Prehearing Report at CTL-I-5, (1993) USTIC Pub. 3009 at III-2, (1994-1995) USITC Pub. 3076 at C-4, (1996) Pub.3273 at III-5 The Plate Example: Domestic Industry Profits Surged After Restructuring

13. 13 Total 2004 Cash Flow: $887,060 Depreciation, 2000-2004: $590,832 "Repayment" of Negative Cash Flows, 2000-2003: $270,545 CapEx 2004: $23,063 “Excess” Cash 2004: $2,620 Source: Prehearing Report at III-16 and III-22 * 2000 and 2001 CapEx data were treated as BPI in Prehearing Report Thousands of Dollars The Plate Example: Cash Flow in 2004 Alone Was Sufficient to Cover Depreciation from 2000-2004 and Recover Negative Cash Flows from 2000- 2003 0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 1,000,000 2004

14. 14 Factors Affecting the Likelihood of Steel Trade Remedy Cases Against China (cont’d) –AD (or CVD) requires that imports cause injury to U.S. industry – 45 million tons of imports in 2006 (record) But Condition of U.S. industry key: –Consolidation: 3 U.S. companies = 70% U.S. production (and globalized) –EAF about 55% U.S. raw steel production –U.S. Steel + National Steel = $400 million in annual savings –$13.8 billion is subsidies (pensions $9.2 billion; healthcare $4.6 billion) –New labor agreements (Mittal USA $500 million in annual savings) –High prices (HRC $400/st higher than 4 years ago, 200% increase) –Operating margins 2004-2006, 10% to 18% (U.S. Steel and Nucor) –Exports = almost 10% U.S. production –U.S. flat-rolled producers = over half of flat-rolled imports (primarily slab)

15. 15 Factors Affecting the Likelihood of Steel Trade Remedy Cases Against China (cont’d) 6.Changes in the legal environment. –U.S. Congress likely to add countervailing duties and sector specific safeguards against Chinese imports as additional trade remedies, thereby avoiding the need to demonstrate dumping and adding an additional layer of potential import relief. –If the U.S. Department of Commerce finds significant subsidies in a case against Chinese steel, it is likely that many other countries will follow the U.S. lead and use countervailing duties to discourage imports from China.

16. 16 Evaluation: Will Chinese Steel Exports Continue Their Rapid Increase - Unlikely Chinese Government appears to be more serious about implementing policies which discourage exports (i.e. limiting value added tax rebate) and address potential excess capacity (i.e. forcing the closure of inefficient facilities and channeling investment into upgrading rather than expansion of capacity). Industry organizations (e.g. CISA, CCCMC) are increasingly aware of the dangers of continuing rapid increases in exports and provide a mechanism to inform and educate producers about these dangers. Major steel producers appear to be moderating their export expectations and intentions.

17. 17 Evaluation: Pricing Unlikely to Support Injury/Causation in the Short Term Injury cases can seldom be successful if prices are stable and/or rising. While there were price declines at the end of 2004 into 2005 and again in late 2007, these declines were modest, were not sustained, and were quickly followed by a recovery, a pattern which seems likely to continue. There are some projections that prices may decline in the second half of 2007, which could create opportunities for trade remedy petitions, but normally at least 2 quarters of declining prices are necessary to make a credible case

18. 18 Evaluation: Pricing There are few signs of a weakening of the global economy which could lead to a sustained decline in steel prices.

19. 19 Evaluation: There Is Little Evidence of Injury to Steel Producers Steel producers enjoyed record or near record revenues and profits in 2006, with expectations for continuing strong performance in 2007. Notwithstanding record imports into the U.S., for example, virtually all indicia of performance were positive, as was the case in Europe and Japan. Consolidation of industries in the U.S., the EU, Japan, and globally has facilitated the ability of mills in these markets to adjust production to avoid any significant deterioration in their operations, even when markets appear to be weakening.

20. 20 Evaluation: Injury Producers in industries that are less concentrated (e.g. standard pipe) and in secondary markets where the industry and/or market are less developed (e.g. Southeast Asia) are more vulnerable to imports from China and more likely to be able to demonstrate injury.

21. 21 Wild Cards Significant capacity expansion, actual or planned, in Brazil, India, China (without closures of inefficient capacity) and even the U.S. (Thyssen-Krupp) could upset the global supply-demand equilibrium and cause a deterioration in pricing globally, although this is not imminent. Countries with less discipline in application of trade remedies could apply trade remedies in violation of WTO obligations. Political pressure on authorities could lead to less stringent standards in application of trade remedy laws (e.g. U.S. steel safeguards).

22. 22 PRC Exports of Steel 2005 and 2006, Metric Tons - 5,000,000 10,000,000 15,000,000 20,000,000 25,000,000 30,000,000 35,000,000 40,000,000 45,000,000 Tons 20052006 Total Exports …

23. 23 PRC Exports of Steel by Country, 2005 and 2006, Metric Tons

24. 24 Absolute and Relative Changes in Export Volumes (Trading Partners in Top Ten for Both Years, 2006 over 2005) Absolute DifferenceDifference as % of 2005 Total Exports 22,484,387110% Korea 3,290,02060% EU(25) 6,019,483443% United States 3,024,507127% Vietnam 854,13798% Singapore 787,294100% Taiwan 461,99254% Canada 418,02971% Thailand 118,49215%

25. 25 PRC Exports of Steel by Product Type, 2005 and 2006, Metric Tons

26. 26 PRC Exports by Product Type, Absolute and Relative Differences, 2005 over 2006 Commodity Absolute Difference (Metric Tons) Difference as % of 2005 1.1 Plain Wire Rod 2,224,61972% 1.2 Other Plain Wire Rod 2,468,195114% 1.3 Stainless Steel Wire Rod 6,18919% 1.4 Alloyed Wire Rod 275,67735% 2.1 Plain Angle Bars 1,793,402214% 2.2 Stainless Steel Bars 14,70497% 2.3 Alloy Bars 4,02927% 3.1 Medium, Thick, and Extra Thick Plain Plates 5,275,350133% 3.2 Plain Hot Rolled Sheet Steel (Rolls) 1,795,171114% 3.3 Plain Cold Rolled Sheet Steel (Rolls) 1,020,791185% 3.4 Galvanized Plates (Strips) 2,286,314251% 3.5 Coated Plates (Strips) 416,948456% 3.6 Electrical Steel (Strips) 126,224124% 3.7 Stainless Steel Plates (Strips) 383,269156% 3.8 Alloy Plates (Strips) 45,06168% 3.9 Plain Narrow Strip 571,92660% 4.1 Seamless Pipe 1,112,79180% 4.2 Welded Pipe 1,718,700104% 4.3 Cast Iron Pipe 68,63015% 5. Rails 153,555182% 6. Other Steel Products 722,84048%

27. 27 Trade Remedy Investigations Against China: What to Expect in 2007 Whether or not trade remedy cases are filed against China in 2007 will depend on the ability of the industry in the importing country to demonstrate injury; Mexico, having filed on plate, obviously believes it can prevail on injury; U.S. and EU industries are hesitant because of the difficulty in demonstrating injury and, in the case of the EU, the fact the EU is importing mostly commodity grade products but producing higher grade products; Canada and Mexico are likely coordinating strategies with the U.S. through AISI;

28. 28 What to Expect in 2007 (cont’d) Continued high level of exports to Korea will eventually attract trade remedy petitions, but given strong industry performance cases not imminent; India, a heavy user of antidumping measures, may be positioned to file cases; Vietnam’s industry has expressed concern about imports from China, but lack of experience with trade remedies may deter them from filing cases. What is certain is that U.S., EU, Canada, Mexico, and India will file cases whenever conditions permit them to demonstrate injury and will include both antidumping and countervailing duty cases.

29. 29 What to Expect in 2007 (cont’d) Most likely cases in the U.S. in 2007: –Standard pipe: Wheatland Tube, the largest producer is struggling and laying off workers. –Wire rod: Continues to underperform the industry in the U.S., although cautious because of loss in early 2006. –Cold rolled sheet and coil: Although market is holding up well despite increasing imports, any downturn will certainly attract antidumping and countervailing duty petitions. –OCTG: Although market is extremely strong, Chinese prices are substantially below U.S. prices and will certainly attract antidumping and countervailing duty petitions if there is a market downtrun.

30. 30 What to Expect in 2007 (cont’d) Other Markets Where Antidumping and Countervailing Duties Are Frequently Used: –Wire rod –Plate –Hot rolled sheet and coil –Cold rolled sheet and coil –Galvanized sheet and coil s –Standard pipe

31. 31 What to Expect in 2007 (cont’d) Moderation in China’s steel export volume coupled with continued strong markets globally could avoid an explosion of antidumping and countervailing duty cases against China in 2007. Longer term, closure of inefficient facilities, balancing capacity growth with growth in demand, and consolidation of the Chinese industry will be essential to avoid major trade disputes between China and its trading partners.