North American Steel Industry Recent Market Developments, Future Prospects and Key Challenges OECD Steel Committee December 1-11, 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 Trade Situation III. Growing Concerns About NAFTA Manufacturing 2 1
I. NAFTA Economic Conditions And Outlook 3 NAFTA Production Declines More Than Other World Regions Global Output Sharply Down, With Few Exceptions Global Crude Steel Production 29 YTD vs. 28 % Change N. America: -45.1 Canada: -51.9 U.S.: -47. Mexico: -29.5 S. America: -3.3 Brazil: -31.4 EU27: -39.3 Turkey: -13.5 Russia: -26.8 Ukraine: -31.9 Asia: -2.2 Japan: -34. S. Korea: -14.9 China: +7.5 India : +1.6 Global Production: -16.4 Excluding China: -3.9 Source: Worldsteel 4 2
Quarterly % change JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST Monthly Tonnage (MT) Utilization percentage While NAFTA Production Has Risen Recently, Capacity Utilization Is 3% Below 28 Levels 2, 15, 1, 5, NAFTA Raw Steel Production - 29 vs. 28 Production Tons - NAFTA NAFTA - Rate of Capability Utilization China - Rate of Capability Utilization ROW ex China - Rate of Capability Utilization 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% Several NAFTA facilities have been restarted, after having been offline for close to a year. Some facilities have no future return date. The NAFTA economic recovery is still very fragile, and a return to pre-crisis steel production levels remains years away. The NAFTA and rest of world (ROW) utilization rates have stayed well below China s rate. % Source:Worldsteel 28 29 5 The Great Recession of 28-29 Affected the Entire NAFTA Region 6 4 2-2 -4-6 -8-1 -12 NAFTA Real GDP Since 27 USA Canada Mexico 2.8.3-6.2 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 27 28 29 Sources: Bureau of Economic Analysis (US), Statistics Canada, Canacero 6 3
Percent Metric Tons (') Steel Orders Collapsed After The Financial Meltdown And Still Have Not Recovered 16, 14, 12, 1, 8, 6, 4, 2, NAFTA Demand for Steel, Aug 28 August 29 AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN JUL AUG In the U.S., steel purchases were cut in half within 7 months (Aug. 8 - Mar. 9), and 5% of U.S. output was shuttered. In Canada, August 29 shipments were 39% lower than a year earlier. A number of facilities remain idled or operating at reduced rates. In Mexico, ASC for 29 (Jan Sept) is 25% below 28 levels. The September figure is 31% below the last peak (June 28). Source: World Steel Association, NAFTA Steel Trade Monitor 7 The Great Recession Has Technically Ended, But The U.S. Economy Still Faces Major Challenges Since the statistical start of the Great Recession in December 27, the U.S. Department of Commerce reported negative GDP for 5 of 6 Quarters (with 1Q 9 being the worst, at -6.4%). Due to government stimulus funds, cash for clunkers and a first-time home buyers tax credit, 3Q U.S. GDP grew 2.8%. But consumer spending fell.5% in September, and the unemployment rate now stands at 1.%,in what many economists are calling a jobless recovery. 1 8 6 Quarterly Change in U.S. Gross Domestic Product, 1997-29 4 2-2 -4-6 -8 1997 1998 1998 1999 1999 2 2 21 21 22 22 23 Source: U.S. Department of Commerce, Bureau of Economic Analysis 8 23 24 24 25 25 26 26 27 27 28 28 29 4
Million Units From Q3 27 to Q1 29, U.S. Net Worth Fell by Over $13 Trillion, Or 2 percent 7 Net Worth of U.S. Household and Nonprofit Organizations (Trillions of $) 65 6 55 5 45 4 35 3 Q3 27 Q1 29 Source: U.S. Federal Reserve, Flow of Funds Accounts of the United States (March 12, 29 and Sept. 17, 29). 9 The U.S. Construction Market Is Still Weak 2.5 2.25 2 U.S. Housing Permits, Starts and Completions The residential housing market has bottomed in the past 6 months to 4-year lows. 1.75 1.5 1.25 1.75.5 Home foreclosures are continuing to rise. Government incentives (e.g., a tax credit for first-time buyers) are helping, but limited. Tighter credit standards are reducing the pool of available new buyers..25 21 22 23 24 25 26 27 Permits Starts Completions 28 29 An uptick in the nonresidential, commercial market is not expected until late next year. Source: U.S. Department of Commerce. 1 5
Daily Shipping Rate Inventory Millions of Units 7.7 1.1 12.8 11.8 15.5 17. 17.2 16.4 15.9 15.8 15.8 15.3 15.1 thousand units produced The NAFTA Automotive Production Remains Deeply Depressed 2 18 16 14 12 1 8 6 4 2 NAFTA Light Vehicle Production 1999-29 1999 2 21 22 23 24 25 26 27 28 29 21f 211f 25 2 15 1 5 Detroit 3 Production Jan-September 29 vs. 28 29 YTD 28 YTD Chrysler Ford GM While the cash for clunkers program has helped increase production and sales, Detroit 3 production has declined by over 5% YTD vs. 28. With the end of this incentive program and with unemployment likely to stay high for several years, automotive production and sales are unlikely to return to pre-crisis levels for the medium term. Source: Ward s Automotive. * 29 Annualized based on September year-to-date. 11 NAFTA Service Center Inventories At Multi-Year Lows, But Reduced Demand Delaying Restocking 5,5 5, 4,5 4, 3,5 3, 2,5 2, 26 JAN MSCI Average Daily Shipments & Inventory For U.S. & Canada Metric Tonnes () JUL 27 JAN Daily Shipping Rate JUL 28 JAN Inventory JUL 29 JAN JUL 18, 16, 14, 12, 1, 8, 6, 4, 2, Service center demand has fallen in line with overall steel demand. NAFTA service center shipments are off 3% vs. 1 year ago. As of October 29, U.S. and Canadian service center inventories (2.3 months each) are at 5-year lows, but a lack of consumer confidence and low end-use demand are preventing restocking. Source: Metals Service Center Institute 12 6
Canada: Economic Indicators Moderating From Extremely Low Levels Bank Of Canada Senior Loan Officer Survey: 3Q 29 Ivey Canadian Purchasing Managers Index Since January 27 8 9 6 8 4 7 Expanding 2 Tighter 6 5-2 Easier 4 3 Contracting -4 2 Jan-7 Sep-7 May-8 Jan-9 Sep-9 Canada: Manufacturing Inventories Through August 29 Canada: Manufacturing Sales Through August 29 Sources: Bank of Canada, Richard Ivey School of Business, Statistics Canada 13 Mexico Economic Indicators: Worst In Latin America Mexico: Gross Domestic Product Index Oct. 29 (%) Mexico: Gross Fixed Investment (July 29 / Var %) 2Q (9): 1.1 % (The worst since 193) -14 % 3Q(9): - 6.2 % Mexico: Credit to consumers (June 29 / Var %) Non-Oil Exports (September 29 / Var % (annual) January September 29-29 % TOTAL EXPORTS - 23. 5 % To United States - 23.4 % - Autos - 32.3 % To Rest of the World - 23.7 % 14 7
Mexico Economic Indicators: Strongly Related To U.S. Economy Mexico: Remittancess (July 29Var %) Rate of growth Mexican Exports vs US Imports (July 29Var %) - 15 % Very sensible Mex Exports: % var US Imports: % var Source: Oxford Economic & CAPEM and INEGI 15 29-21 NAFTA Region Steel Use Expected To Remain Far Below 24-28 Levels Forecast Million MT Crude Steel Use Finished Steel Use United States 29 21 % Ch. 9/1 % Ch. vs.1982* 67.7 79.9 18.% 4.9% 6.3 71.7 18.8% 3.7% Exports 8.8 9.9 12.5% 492% Imports 12.9 15.5 2.2% 4.4% Forecast Million MT Crude Steel Use Finished Steel Use Canada 29 21 % Change 12.2 13.7 12.8% 1.3 11.7 13.6% Exports 4.7 6.4 36.2% Imports 6.1 6.6 8.2% Forecast Million MT Mexico 29 21 % Change Crude Steel Use 17.5 19.7 12.7% Finished Steel Use 12.1 13.6 12.3% Exports 1.7 1.3-23.6% Imports 2.5 3.8 52.% * The lowest annual steel demand in the U.S. in the post-wwii period was recorded in 1982, at 68.6 million MT. Survey of the Short Range Outlook Fall 29 NAFTA Region Apparent Steel Use (ASU) (mil. MT) 24 25 26 27 28 29 f 21 f Finished Steel 149. 138.3 155.7 141.2 129.7 82.7 97. While Global Insight is forecasting that U.S. ASU will return to pre-crisis levels by 212, key metrics in the U.S. economy -- including unemployment levels and manufacturing production -- leave doubt that steel demand in the United States will recover fully to pre-crisis levels even in 3 years time. Source: Worldsteel Association Economic Studies Committee 16 8
Steel Capacity (thousand metric tonnes) NAFTA Steel Demand World Steel Capacity/Demand (thousand metric tonnes) Chinese Capacity (thousand metric tons) While World Capacity Continues to Grow 2, 1,75 1,5 1,25 1, 1,62 1,62 1,95 1,17 World Crude Steel Capacity 2-211 1,245 World Crude Steel Capacity Finished steel use Chinese Capacity 1,356 1,453 1,583 588 1,654 677 1,816 74 1,917 783 1,997 84 9 8 7 6 5 4 75 3 5 2 25 1 2 21 22 23 24 25 26 27 28 29 21 211 Source: Worldsteel Association 17 And NAFTA Capacity Additions Are on Hold NAFTA capacity growth slows due to reduced demand during economic crisis 75 million tons of underutilized capacity in 29 NAFTA Crude Steel Capacity and Demand 25-29 2 NAFTA Crude Steel Capacity NAFTA APPARENT DEMAND 2 175 15 149 156 155 158 16 175 15 125 125 1 1 75 75 5 5 25 25 25 26 27 28 29 Source: World Steel Association 18 9
Metric Tonnes II. NAFTA Steel Trade Situation 19 NAFTA Steel Mill Products Trade Balance: A Fundamentally Different Situation For The Medium Term 5,, 4,, 3,, 2,, 1,, - (1,,) NAFTA Imports and Exports of Steel Mill Products NAFTA Imports NAFTA Exports Balance of Trade 24-25- 26-27- 28-29* The NAFTA market is open to fairly traded steel, and the NAFTA region has historically been a net steel importing region. YTD in 29 -- given the depressed market conditions and the low capacity utilization rate -- the NAFTA steel trade deficit is the lowest it has been for many years. (2,,) (3,,) (4,,) (27,775,535) (23,99,952) (38,622,92) (21,571,987) (18,296,95) (9,387,57) For the medium term, the NAFTA steel industry has more than ample capacity to meet the needs of both domestic and offshore customers. Source: NASTA Monitor, US Dept. of Commerce, Global Trade Atlas 2 * 29 Annualized based on 8 months. 2 1
Metric Tonnes Metric Tonnes NAFTA Imports During Crisis Period NAFTA Imports 28 & 29 - Monthly NAFTA External Imports NAFTA Internal Imports 3,, 2,5, 2,, 1,5, 1,, 5, Steel imports from other regions exceeded intra- NAFTA steel trade when the market collapsed. Non-NAFTA imports at first surged, and then declined but have maintained a relatively high market share. Imports from China peaked in October 28. - JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN JUL AUG Source: NAFTA Steel Trade Monitor, US Department of Commerce, Canacero and World Trade Atlas. 21 NAFTA Exports During Crisis Period 2,, 1,8, 1,6, 1,4, 1,2, 1,, 8, 6, 4, 2, - NAFTA Exports 28 & 29 - Monthly NAFTA External Exports NAFTA Internal Exports NAFTA producers send only a small portion of steel produced outside the region. JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN JUL AUG 28 29 During 4Q 8, intra-nafta steel trade declined sharply, more or less in line with the steep decline in market demand. Source: US Department of Commerce and World Trade Atlas 22 11
III. Growing Concerns About NAFTA Manufacturing 23 NAFTA Manufacturing Capacity Utilization Remains Significantly Below Pre-Crisis Levels Canada & U.S. Manufacturing Utilizaton 85 8 US Manufacturing Utilization Canada Manufacturing Utilization 75 Utilization % 7 65 6 55 5 1st 2nd 3rd 4th 1st 2nd 3rd 28 29 Source: U.S. Federal Reserve Board, Statistics Canada 24 12
Millions Nearly 3 Million More Lost NAFTA Manufacturing Jobs During the Economic Crisis (27-29) NAFTA Manufacturing Employment Since 27 16.5 16 15.5 15 14.5 14 13.5 13 27 28 29 Source: U.S. Bureau of Labor Statistics, Statistics Canada 25 Mexico Manufacturing: 13 Months With Negative Growth México: Industrial Activity Index (August 29 / Annual % rate of growth) México: Manufacturing Employment Index (August 29 / Index: 23 = 1) - 1.8 % México: Manufacturing Activity Index (August 29 / Annual % rate of growth) Main affected sectors:. Transport equipment: -23.8%. Machinery -16.3%. Furniture: -14.5 %. Metal products: -13.1%. Steel: - 7.7 % Source: US Department of Commerce 26 13
Millions of Metric Steel Tons Equivalent $ BILLION $ (Billion) China Accounts For A Growing Share Of The U.S. Manufacturing Trade Deficit 6 US Trade Deficit - Manufacturing CHINA NON-NAFTA (excl. China) 25 2 U.S. Trade Deficit - Manufacturing 29 CHINA NON-NAFTA (excl. China) 5 15 95 4 3 277 297 289 237 178 1 5 33 18 124 2 1-166 26 24 267 279 24 25 26 27 28-6 MO. 29 6 MO. 28 While the U.S. manufacturing trade deficit has declined during the 28-9 recession, China s share has increased and, through the 1 st 6 months of 29, China accounted for 78% of this deficit. Source: US Department of Commerce 27 NAFTA Indirect Steel Trade Deficit Down But Remains Significant Area of Concern NAFTA Indirect Steel Trade Balance With The Rest Of The World (excluding intra-nafta trade) 2-29 United States Canada Mexico -5-9.9-11.2-12.8-1.8-11.5-12.6-13.9-11.8-11. -8. -1-15 -2-1.4-1.6-1.4-2 -1.7-2.2-1.9-2.2-2.2-3.2-2.6-3.7-3.1-4.2-2.8-4.4-2.94-4.18-3.5-3.52-25 2 21 22 23 24 25 26 27 28 29 Source: AISI estimates (29 annualized), based on U.S. Department of Commerce and Global Trade Atlas value data 28 14
Key Policy Messages Given the fundamental changes that have occurred in the NAFTA and global economies, North America s steel producers support: Restoring a policy commitment to North American manufacturing as a foundation for renewed economic growth and sustainable employment in the near and longer term Expanding trade based on internationally accepted rules and comparative advantage not government-supported mercantilism Ensuring strong and effective trade laws throughout the NAFTA region to deal with market-distorting practices Addressing currency misalignments that create artificial competitive advantages Ensuring that climate change policies are both environmentally and economically effective, and do not generate new trade and investment distortions due to regulatory differences 29 15