North American Steel Industry Recent Market Developments, Future Prospects and Key Challenges OECD Steel Committee June 8-9, 29 Paris, France * American Iron and Steel Institute (AISI) Steel Manufacturers Association (SMA) Specialty Steel Industry of North America (SSINA) Canadian Steel Producers Association (CSPA) Mexican Steel Producers Association (CANACERO) Presentation Summary I. NAFTA Economic Conditions and Outlook II. NAFTA Steel Market Conditions and Outlook III. NAFTA Steel Trade Challenges and Concerns 2 1
Quarterly % change I. NAFTA Economic Conditions and Outlook 3 NAFTA Region Continues in Serious Recession NAFTA Real GDP Since 27 6 USA Canada Mexico 4 2-2 -4-6 -8 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1-1.8-6.3-5.4-5.7-5.9 27 28 29 Sources: Bureau of Economic Analysis (US), Statistics Canada, Canacero 4 2
Economic Analysis & Trends United States GDP declines to continue through at least 2Q9. Negative GDP this year for 1 st time since 1991. Rate of economic decline may be decelerating, but unemployment could hit double digits. Major drags on growth include financial system, business investment, consumer spending. Housing inventory overhang and automotive bankruptcies/uncertainties must be resolved. Canada Deep economic problems of late 28 have intensified in 29. Severe job losses slightly reversed in April, but unemployment still at 8%. Business credit availability remains tight. 29 budget deficit forecast at $5 billion, including $12 billion stimulus. Interest rates down sharply. Mexico 1Q9 GDP plunged 8.2%. Industry activity shrank 9.9%. Outlook has worsened due to impact of H1N1 virus. Government response to global economic crisis includes several fiscal stimulus policies. Stimulus actions have yet to translate into real economy. Sources: Bureau of Economic Analysis (US),CSSPA, Canacero 5 The U.S. Economy is Facing Its Worst Downturn Since the Great Depression Length and Depth of Selected Post-World War II Recessions Recession years Length in months 6 Peak-to-Trough Percent Change GDP Privatesector employment Manufacturing production 28-9* 18* -3.9-3.9-12.2 21 9 -.5-2.7-6.6 199-91 8-1.5-1.9-4.7 1981-82 16-2.9-3.5-9.5 1973-75 16-3.4-4.2-15.6 1957-58 8-3.7-5.3-14.5 * Data covers thru June 29; Full duration of 28-9 recession not available at time of presentation. Source: National Bureau of Economic Research, Bureau of Economic Analysis, Bureau of Labor Statistics, Federal Reserve Board and Manufacturers Alliance/MAPI 3
Q/Q Percent Change (January 24 = 1.) Q/Q Percent Change Despite Stimulus, U.S. Recovery Will Be Slow and Uncertain: Manufacturing Hit Hard $787 Billion Federal Stimulus Program Not Yet Boosting Steel Demand Stimulus will have greater effect in 21. Very little spent on infrastructure projects so far. Chief Economist for AGCA says 29 nonresidential spending could fall by as much as 9%, even with stimulus funds. Health Care, 17% (Includes incentives to computerize medical records and aid to states for Medicaid spending) Individual Aid, 7% (Includes extension of unemployment benefits for up to 33 weeks and COBRA subsidy) Infrastructure / Transportation, 8% U.S. Lost 539, Jobs in April, Including 149, in Manufacturing Lost 488, manufacturing jobs so far in 29; nearly 5 million since 21. Manufacturing employment, 12.2 million, at lowest level since June 1941 (population half of 29). Discretionary Spending, 31% Tax Cuts, 37% Uncertainty on When the Economy Will Return to Normal -- Or If We Will See a New Normal Some surveys show increases in consumer, housing and investor confidence, but hard data remains disappointing. Global Insight does not expect U.S. GDP to return to 28 level until 211. Sources: Various Media Articles 7 Canada: Economic Downturn Intensifies Credit Availability: Loan Officer Surveys Since 2 Non-Gov Construction Expenditures - Quarterly 8 6 2 1 4-1 2 Tighter -2-3 -4-2 -4 1999:Q2 2:Q1 2:Q4 21:Q3 Easie r 22:Q2 23:Q1 23:Q4 24:Q3 25:Q2 26:Q1 26:Q4 27:Q3 28:Q2 29:Q1-5 -6-7 Q4:27 Q1:28 Q2:28 Q3:28 Q4:28 Q1:29 Manufacturing Production Growth - Quarterly (Chained 22 Dollars) Steel Manufacturing Relative GDP Share 1.2-1 -2-3 -4-5 1.1 1..9.8-6.7-7 Q4:27 Q1:28 Q2:28 Q3:28 Q4:28 Q1:29.6 Jan-4 Jan-5 Jan-6 Jan-7 Jan-8 Sources: Bank of Canada, Statistics Canada 8 4
Mexico: Economic and Financial Update Strongly Linked To U.S. Economy, Macro Indicators Turn Sharply Negative Mexico: Industrial Production I - 9 (%) Mexico: Gross Domestic Product I 9 (%) Mexico: Unemployment I - 9 (Var %) Mexico: Inflation Up (Var %) 9 II. NAFTA Steel Market Conditions and Outlook 1 5
JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER JANUARY FEBRUARY MARCH APRIL Monthly Tonnage (MT) Utilization percentage Estimated 29 Fall in NAFTA Apparent Steel Use (-32.2%) More Than Twice World Average (-14.9%) and Greatest Among All Regions United States* Canada Mexico 29 Million MT % Change 29 Million MT % Change 29 Million MT % Change Crude Steel Use 7.3-35.6 % Finished Steel Use 61.8-35.7 % Crude Steel Use 13.8-21.6% Finished Steel Use 11.6-22.4 % Crude Steel Use 19.8-16.5 % Finished Steel Use 14.6-15.5 % Exports 7.3-4. 2% Imports 16.8-28.6 % Survey of the Short Range Outlook Spring 29 NAFTA Region Apparent Steel Use Exports 6. -27.3% Imports 5.2-31.6% * Annualizing from 1Q 9, finished steel use would be 58.6 million MT (shipments of 47.3 million MT + 18.5 million MT of finished imports 7.2 million MT of exports). (mil. MT) 24 25 26 27 28 29 f Finished Steel 149. 138.3 155.7 141.2 129.7 88. Exports 3.1-32.3 % Imports 1.6-25.9 % Improvement in steel consumption for the second half of 29 will depend on the effects of government stimulation packages, the continued stabilization of financial systems and a return of some consumer confidence - Daniel Novegil, Chairman, Worldsteel Economic Committee, 26/4/9 11 NAFTA Steel Production Has Been Below 5% of Capability for Half a Year 29 Production Will Be the Lowest in 3 Years NAFTA Raw Steel Production - 29 vs. 28 12, 11, 1, 9, 8, 7, 6, 5, Production Tons Rate of Capability Utilization 1% 9% 8% 7% 6% 5% 4% 3% Yet another effect of the economic crisis has been that NAFTA producers have deferred or cancelled over 5 million MT of previously announced short range (29-11) steel capacity additions, according to Worldsteel estimates based on public announcements. 28 29 Source: AISI, World Steel Association 12 6
Percent change( m-o-m) Daily Shipping Rate Inventory NAFTA Service Center Inventories are at the Lowest Levels in Many Years, But Reduced Demand is Keeping Restocking from Taking Place 4 35 3 25 2 15 1 MSCI Average Daily Shipments & Inventory For United States and Canada Metric Tonnes () Daily Shipping Rate Inventory 26 APR JUL OCT 27 APR JUL OCT 28 APR JUL OCT 29 JAN JAN JAN JAN APR 18, 16, 14, 12, 1, 8, 6, 4, 2, Service Center Demand Has Fallen in Line with Overall Steel Demand - U.S./Canadian service center shipments are off 42% vs. 1 year ago. - Inventories are down 35% vs. August 28, but reduced market demand has made current inventories large enough to last 3 months (vs. a 2-month normal supply). Source: Metals Service Center Institute 13 NAFTA Industrial Production Continues to Decline in 29 4 2-2 -4-6 -8 NAFTA Industrial Production 28-29 UNITED STATES CANADA MEXICO JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR APR 28 29 Industrial production in the NAFTA region has fallen steeply during this recession which, for the U.S., began in December 27. The cumulative effect has been that operating rates at NAFTA factories producing steel-containing goods are some of the lowest on record. While the latest Institute for Supply Management data suggest that that the U.S. manufacturing slump may be easing, the U.S. manufacturing unemployment rate stood at 12.4% through April 29, which was 3.5% higher than the overall unemployment rate of 8.9%. 1.6 million U.S. manufacturing jobs have been lost since December 27 alone. Source: Federal Reserve Board (US), Statistics Canada, Canacero 14 7
Millions of Units 7.1 12.8 15.2 14.9 15.4 15.6 15.4 15.5 17. 17.2 16.4 15.9 15.8 15.8 15.3 15.1 thousand units produced Units (millions) The U.S. Housing Market Struggles to Rebound 2.4 2.2 2. 1.8 1.6 1.4 1.2 1..8.6 U.S. Residential Construction Market Permits Starts Completions There are 4-year lows for permits, starts and completions. Housing stock is at all-time highs. Vacancy rates remain above normal. It is still not clear that the market has hit bottom. 1% of mortgages are now in arrears or foreclosure. Economists expect 2 million more foreclosures this year. For those who can get loans, mortgage rates are low. While existing home sales rose 2.9% in April, home values are still declining -- down 19.1% 1Q9 vs. 1Q8..4 21 22 23 24 25 26 27 28 29 Source: U.S. Department of Commerce 15 NAFTA Automotive Market Remains In Crisis NAFTA Light Vehicle Production 1994-29 12 Detroit 3 Production Jan-April 29 vs. 28 2 18 16 14 1 8 6 4 Chrysler Ford GM 12 2 1 8 28 29 YTD YTD 6 4 2 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 29 annualized based on April YTD The financial crisis and deep recession have hit the Detroit 3 the hardest. Chrysler and GM have declared bankruptcy, and both have cancelled vehicle production for the next 6-9 days to reorganize financial matters and reduce inventory to match much lower demand. Source: Ward s Automotive 16 8
Metric Tonnes Metric Tonnes NAFTA Imports During Crisis Period 3,, 2,5, 2,, 1,5, 1,, 5, - NAFTA Imports 28 & Q1 29 NAFTA External Imports NAFTA Internal Imports NAFTA imports from other regions exceed intra-nafta steel trade. JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR Non-NAFTA imports in 4Q 28 continued at the same level as earlier in the year this, at a time when NAFTA domestic production and shipments were in a steep decline. Source: NAFTA Steel Trade Monitor, US Department of Commerce, Canacero and World Trade Atlas. 17 NAFTA Exports During Crisis Period 1,4, 1,2, 1,, NAFTA Exports 28 & Q1 29 NAFTA External Exports NAFTA Internal Exports NAFTA producers send only a small portion (usually 5% or less) of steel outside the region. 8, 6, 4, 2, - JAN 28 FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN 29 FEB MAR During 4Q 28, intra-nafta steel trade declined sharply, more or less in line with the steep decline in NAFTA market demand. Source: US Department of Commerce and World Trade Atlas 18 9
III. NAFTA Steel Trade Challenges and Concerns 19 Major Trade Concerns During Economic Crisis NAFTA steel producers key concerns include: Increased import market share, at a time when low-cost, efficient NAFTA steel producers have ample capacity to meet reduced domestic demand Threat of further surges of unfairly traded steel and manufactured goods imports into North America Subsidized capacity expansions offshore in the face of declining demand VAT rebate increases to promote direct and indirect steel exports Higher import tariffs unrelated to trade cases Steel quotas and more restrictive steel import licensing systems Increases in government transportation and energy subsidies Manipulation by governments of raw material markets Massive government interventions to keep currencies undervalued 2 1
Steel Capacity (thousand metric tonnes) Current Average Growth Rate (CAGR) Millions of MT Global Steel Consumption Is Declining 1,5 Global Apparent Steel Consumption (Annualized) 1,45 1,4 1,35 1,3 1,25 1,2 1,15 1,1 1,5 1, 1Q 25 2Q 25 3Q 25 4Q 25 1Q 26 2Q 26 3Q 26 4Q 26 1Q 27 2Q 27 3Q 27 4Q 27 1Q 28 2Q 28 3Q 28 4Q 28 1Q 29 Source: World Steel Dynamics 21 While Global Steel Capacity Continues to Increase World Steel Capacity Continues to Grow, Even as Economic Crisis Has Delayed 64 Million MT Scheduled for 29-1 World Crude Steel Capacity 2-29 World Crude Steel Capacity CAGR 2, 1,75 1,5 1,25 1,65 1,65 1,98 1,173 1,249 *28-9 Additions to Capacity 1,564 1,456 1,361 1,654 134* 1,82 79* 2 15 1, 1 75 5 5 25 2 21 22 23 24 25 26 27 28 29 Source: World Steel Association 22 11
Metric Tonnes Millions of metric tonnes Steel Production Outside of China is Falling Dramatically, While Steel Production in China is Actually Increasing Total Steel Production 25 216 China Rest of World 2 15 125 19 159 127 136 1 5 1st Qtr. 28 4th Qtr. 28 1st Qtr. 29 While steel production has declined steeply in North America, South America, Europe and Japan, China s production has increased in recent months Chinese global market share increased to 49% at the end of 1Q 29 Source: World Steel Association 23 NAFTA Import Market Share Has Increased During Crisis Period NAFTA Demand and External Imports 35,, 3,, NAFTA External Finished Imports NAFTA Shipments - External Import % of Apparent Demand 75.% 65.% NAFTA steel demand and domestic shipments have fallen by 48% and 4%, respectively since peak levels in mid-28. 25,, 2,, 15,, 1,, 5,, - 25% 25% 17% 13% 14% 1st Q - 28 2nd Q 3rd Q 4th Q 1st - 29 55.% 45.% 35.% 25.% 15.% 5.% -5.% Non-NAFTA import market share has increased over the last two quarters. NAFTA steel producers have more than adequate capacity to meet home market demand in 29. Source: AISI, World Steel Association 24 12
$ BILLION $ (Billion) NAFTA Manufacturing (Not Just Steel) is in Crisis Huge Trade Deficits With the Rest of the World Threaten to Retard Recovery NAFTA Trade Deficit - Manufacturing U.S. Trade Deficit - Manufacturing 7 CHINA NON-NAFTA (excl. China) 12 CHINA NON-NAFTA (excl. China) 1 6 8 44 5 4 3 318 342 329 266 211 6 4 2 19 53 58 2 1-32 342 285 241 193 24 25 26 27 28-1Q 29 1Q 28 The U.S. (non-nafta) manufacturing trade deficit declined n 1Q 9 vs. 1Q 8, but China s share of this 1Q 9 deficit increased to 7%. Source: US Department of Commerce, Statistics Canada, Banco de Mexico 25 Key Policy Messages When a meaningful recovery begins, the globally competitive, environmentally responsible NAFTA steel industry is poised to compete. Key policy messages are these: Regarding stimulus: Economic stimulus is good, but it should be driven towards promoting domestic demand and not targeted at increasing exports NAFTA stimulus programs should create strong opportunities for North America s manufacturers, including steel producers Regarding trade: WTO-consistent use of laws against unfair trade to counter dumped and subsidized imports is market-correcting -- not protectionism Unfairly traded imports in NAFTA markets are particularly insupportable at this time of exceptionally low domestic capacity utilization and massive layoffs in North America NAFTA trade laws must be strongly and effectively enforced Existing trade remedy laws must not be undermined through international negotiations or WTO litigation 26 13