Domestic progress overwhelmed by global difficulties Presentation to The Association of Women in the Metal Industries 2015 Annual Conference Tucson, AZ November 13, 2015
Domestic progress overwhelmed by global difficulties Global economy continues to struggle as commodity bust and developed world stagnation dampen growth prospects Global steel industry was caught off-guard by the slowdown in demand growth and is now overwhelmed by excess capacity US economy is recovering, albeit much more slowly than we might have hoped US steel industry has made tremendous progress Consolidating and rationalizing Maintaining production discipline Deploying efficient technology Strengthening balance sheets 2
Real GDP Growth Advanced economies have grown at 1% since the financial crisis, down from 3% 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% Source: IMF WEO 3
Why declining growth in advanced economies? Economic downturns resulting from financial crises are deeper and more prolonged than pure cyclical recessions Three drivers of economic growth are moving in the wrong direction for most developed economies Population growth is slowing or falling (US is an exception) Investment as % of GDP is down from 24% before the crisis to 20% since 2009 Productivity growth since 2008 has slowed to under 1% per year from over 2% 4
Real GDP Growth Developed economy GDP growth forecast remains below long-term average 3.5% 3.0% 3.0% Developed economies average GDP growth 2.5% 2.0% 2.1% 1.5% 1.0% 1.0% 0.5% 0.0% 1985-2007 2008-2015 2016-2020 Source: IMF WEO 5
Real GDP Growth Emerging economies expected to grow @5% but account for only 40% of global GDP 6.0% 5.0% 4.7% Emerging economies average GDP growth 5.2% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 1985-2007 2008-2015 2016-2020 Source: IMF WEO 6
And the nature of growth in developing economies is expected to change Large, fast-growth developing economies, especially China and India, will drive continued 5% growth China s growth, however, is expected to shift from being investment led to being consumption led Commodity exporters are hurt if Chinese demand for metals has in fact stopped growing Commodity importers benefit from lower prices 7
MT Steel demand growth slowing down assuming China has stalled 1,800 1,600 1,400 1,200 1,000 CAGR China RoW Total 1998-2008 15.0% 2.9% 5.8% 2008-2014 8.0% 1.0% 3.9% 1,221 + 523 MT 1,150 + 319 MT 1,540 800 698 600 400 200 0 RoW China Source: worldsteel, First River 8
MT Global growth is expected to fall thru 2016 then resume growing (+200 MT by 2020?) 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 1,540 1,523 1,513 1,665 1,780 RoW China Source: worldsteel, Rio Tinto First River 9
Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Billion Tons Million Tons Slower steel demand growth will not be adequate to absorb excess capacity 2.4 2.2 2.0 1.8 85% 80% 75% 70% 700 600 500 Excess Melt Capacity 1.6 65% 400 1.4 60% 300 1.2 55% 200 1.0 50% 100 2009 2010 2011 2012 2013 2014 0 Capacity Production Utilization Source: worldsteel, First River 10
Half of the excess global capacity is in China Share of global excess capacity 5% 12% 15% 18% 50% China Dev'd Asia W.Europe NAFTA Other Source: SteelOrbis, Shanghai Metals Market, McKinsey, First River 11
Net Exports (Million Tons) China has become a major net exporter of finished steel products 120 China Net Exports 100 80 60 40 20 - (20) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 P Source: First River 12
China s share of world steel trade may be reaching its limit (2014 was 32%) 32% 13
Iron ore producers seem to have adopted the OPEC strategy 14
Iron ore ($/tonne) Global iron ore prices have fallen over $100 per ton since peaking in 2011 $200 $175 62% Fe fines CFR Tianjin $150 $125 $100 $75 $50 $25 $0 Source: IMF 15
Met Coal ($/Ton) Met coal prices have followed a similar trajectory since 2011 $400 $350 $300 Australian HCC export price $250 $200 $150 $100 $50 $0 Source: SBB 16
Hot Band ($/Ton) Excess capacity and low raw material costs support marginal cost pricing $800 $700 E Asian marginal hot band cost $600 $500 $400 $300 $200 Chinese FOB export hot band price $100 $- 2010 2011 2012 2013 2014 2015 Source: SBB, First River 17
Hot band ($/ton) Driving down US hot roll prices $1,000 $900 $800 $700 US $600 $500 $400 $300 China Export Black Sea $390 $200 $100 $240 $- 2010 2011 2012 2013 2014 2015 Source: SBB 18
Net Imports (MT) Net Imports as % of Demand Driving net import market share to 20% of demand 35 Net imports tons (column) Net imports as % of demand (line) 25% 30 25 20 20% 15% 15 10 5 10% 5% 0 0% Source: AISI, First River *Net imports = Imports minus exports 19
US Raw Steel Capacity Utilization And putting pressure on US raw steel capacity utilization 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2008 2009 2010 2011 2012 2013 2014 2015 Source: AISI 20
US mills trying to deal with imports by filing trade cases Hot rolled: Australia, Brazil, Japan, Korea, Netherlands, Turkey, UK Filed: August 2015 Duty determination: Nov 2015 Jan 2016 Cold Rolled: Brazil, China, India, Japan, Korea, Russia, UK Filed: July 2015 Duty determination: Oct 2015 Jan 2016 Corrosion-resistant: China, India, Italy, Korea, Taiwan Filed: June 2015 Duty determination: Nov 2015 (CVDs imposed on 4 countries); anti-dumping duties due Dec 2015 21
Global environment will keep pressure on US steel industry Slower global GDP growth End of China-driven commodity boom? Excess iron ore capacity Excess steelmaking capacity and no obvious driver of rationalization Persistent low prices raw materials and finished goods 22
A recovering economy 23
Consumer Debt/Disposable Income US consumer balance sheet is recovering, although it s a slow process 150% 140% 130% 120% 110% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 126% Source: US Federal Reserve 24
Monthly Job Creations ( 000) Monthly job creation has been relatively strong 600 400 2010-2015 Created 13 million jobs 200 0-200 -400-600 2008-2009 Lost 9 million jobs -800-1,000 Source: Bureau of Labor Statistics 25
000 units US housing starts below new household formations since the financial crisis 2,250 2,000 Housing starts 1,750 1,500 1,250 1,000 750 500 New household formations (5 year moving average) 250 0 Source: US Census Bureau 26
New single family houses for sale ( 000 units) Inventory of new single family houses for sale is at a generational low 600 500 400 300 200 100 0 Source: US Census Bureau 27
000 units Forecasts expect growth in housing starts thru 2017, but diverge thereafter 2,250 2,000 1,750 1,500 Housing starts Forecasts PCA 1,250 1,000 750 500 250 0 Dodge Data & Analytics Source: US Census Bureau, PCA & Dodge Data & Analytics 28
Increased housing starts support growth in non-residential construction activity 2,250 2,000 Housing starts (prior year) ( 000 units) 1,750 1,500 1,250 1,000 750 Non-res Construction (Mln Square feet) 500 250 0 Source: US Census Bureau, Dodge Data & Analytics 29
ABI Monthly Index Architectural Billings Index also signaling construction growth 70 60 50 40 30 20 Source: AIA 30
Million Square Feet Non-res construction expected to rise through 2018 before falling back 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 - Sources: Dodge Data & Analytics 31
Million Units NA auto build on upward trajectory, heading towards 20 million units 22 20 18 16 14 12 10 8 6 4 2 0 Source: PWC Autofacts 32
WTI Crude oil Price ($/BBL) US Active Rig Count Rig count down 50% this year and unlikely to recover if oil stays below $60 $120 $110 2,500 $100 $90 2,000 $80 $70 1,500 $60 $50 $40 Rig Count 1,000 $30 $20 Oil Price 500 $10 $0 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 - Source: EIA, Baker Hughes, First River 33
Million Tons US steel demand should get back to 130 MT in the near future 150 125 100 Actual ADC 131 Forecast 130 130 130 130 117 120 112 75 50 25 10 years to reach previous peak 0 Source: PWC Autofacts, Dodge Data & Analytics, Appliance Magazine, First River 34
Improved industry structure 35
US steel industry has rationalized a painful but necessary process 36
Top 5 share (%) And the industry has consolidated 90% 80% Top 5 Share of Raw Steel Production 80% 85% 70% 60% 50% 50% 40% 30% 20% 25% 10% 0% China EU US Japan Source: worldsteel, First River 37
2001 2014 Top 3 Suppliers Market Share (%) A more concentrated industry... 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Top 3 producer s combined share of US mill shipments Rebar Plate Hot Roll Source: First River 38
Price spread ($/ton)... has the potential to behave more rationally across the cycle $600 $500 Rebar spread $400 Hot roll spread $300 $200 $100 $0 Source: AMM, SBB, First River 39
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 EAF Share of raw steel production Electric arc furnace share of US production has grown steadily for a generation 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% World: 30% Europe: 40% Japan: 15% China: 10% Source: AISI, First River 40
EAF share (%) And EAF production dominates in all products except flat rolled sheet 100% EAF Share of Raw Steel Production 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Rebar & rod MBQ & light shapes Structurals & rail SBQ & seamless Plate Flat rolled Source: First River 41
EAF/TSC finished flat roll shipments (MT) EAF share of raw steel EAF share of flat rolled sheet has been growing since 1988 20 40% 70% 18 35% 65% 16 14 30% 60% 12 10 Share 25% 20% 55% 50% 8 6 4 15% 10% 45% 40% 2 5% 35% 0 0% 30% Source: AISI, First River 42
1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 Crude steel production, MT EAF share - % MT DRI Share % EAF growth not just a US phenomenon (World ex-china) 600 EAF 50% 350 DRI 25% 500 45% 40% 300 20% 400 300 35% 30% 25% 250 200 15% 200 20% 15% 150 100 10% 100 10% 5% 50 5% - 0% - 0% BOF etc EAF Share % EAF Scrap based DRI Share % DRI based Sources: worldsteel, Midrex, First River 43
Why EAF process has taken share from BF/BOF process Less capital intensive < $500 per ton of capacity vs. > $1,000 per ton Less on-going maintenance capital requirements Proportional to initial capex Some BF/BOF capex comes in large chunks (BF reline, coke oven rebuild) More operationally flexible More environmentally friendly 1/4 to 1/3 of integrated process emissions Exploits a readily available recycled resource In developed economies with existing scrap pool 44
25 22 23 23 26 24 27 24 22 13 18 19 21 21 23 3 1 MT 4 5 2 5 5 6 5 5 4 2 6 7 6 3 3 6 2 2 3 3 7 3 7 4 3 3 3 3 But you need some virgin iron to offset the impurities in post-consumer scrap 40 35 30 25 20 15 10 5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Prompt Pig DRI HQ Demand Source: AISI, ITC, First River 45
Global challenges and uncertainty make it hard to be optimistic If China is truly done growing Excess ore and coal will keep pressure on raw material prices, including scrap Excess global steel capacity will be a persistent problem Finished steel prices will remain low Margins and ROC will be hard to sustain Traditional net exporting regions will face pressure to rationalize capacity and consolidate 46
But not all is gloom and doom The idea that Chinese steel demand has peaked is a theory, not an inevitability There are lots of people living in other countries that have yet to industrialize Low prices and margins will ultimately lead to asset closures and discourage new investment The market will rebalance at some point hopefully before your career is over The US steel industry is as well structured as any in the world and will eventually reap the rewards of decades of hard work 47
Thank you...questions? 700 River Avenue, Pittsburgh, PA; 412 231 6130 tonytac@first-river.com
And don t forget