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# North American Steel Industry Recent Market Developments, Future 

# Prospects and Key Challenges

OECD Steel Committee June 8 - 9, 2009 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)

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# Presentation Summary I. NAFTA Economic Conditions and Outlook II. NAFTA Steel Market Conditions and Outlook III. NAFTA Steel Trade Challenges and Concerns

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# I. NAFTA Economic Conditions and Outlook

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# NAFTA Region Continues in Serious Recession

Sources: Bureau of Economic Analysis (US) , Statistics Canada, Canacero

## 3 5 Sources: Bureau of Economic Analysis (US) ,CSSPA, Canacero 

### United States • GDP declines to continue through at least 2Q09. 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 2008 have intensified in 2009. • Severe job losses slightly reversed in April, but unemployment still at 8%. • Business credit availability remains tight. • 2009 budget deficit forecast at $50 billion, including $12 billion stimulus. Interest rates down sharply. 

### Mexico • 1Q09 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.



# Economic Analysis & Trends

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### Length and Depth of Selected Post- World War II Recessions 

### Recession years Length in months Peak-to -Trough Percent Change

GDP Privatesector employment Manufacturing

production 

### 2008 - 09* 18* - 3.9 - 3.9 - 12.2 2001 9 - 0.5 - 2.7 - 6.6 1990 - 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



# The U.S. Economy is Facing Its Worst Downturn Since the Great Depression

* Data covers thru June 2009; Full duration of 2008 - 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

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# 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 2010. • Very little spent on infrastructure projects so far. • Chief Economist for AGCA says “2009 nonresidential spending could fall by as much as 9%, even with stimulus funds.” U.S. Lost 539,000 Jobs in April, Including 149,000 in Manufacturing • Lost 488,000 manufacturing jobs so far in 2009; nearly 5 million since 2001. • Manufacturing employment, 12.2 million, at lowest level since June 1941 (population half of 2009).

Sources: Various Media Articles 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 2008 level until 2011.

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# Canada: Economic Downturn Intensifies

Sources: Bank of Canada, Statistics Canada Credit Availability: Loan Officer Surveys Since 2000 Non- Gov Construction Expenditures - Quarterly

Steel Manufacturing Relative GDP Share Manufacturing Production Growth - Quarterly

(Chained 2002 Dollars) Easie r Tighter

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## Mexico: Economic and Financial Update Strongly Linked To U.S. Economy, Macro Indicators Turn Sharply Negative Mexico: Industrial Production I - 09 (%)

Mexico: Inflation Up (Var %) Mexico: Gross Domestic Product I – 09 (%)

Mexico: Unemployment I - 09 (Var %)

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# II. NAFTA Steel Market Conditions and Outlook

## 6 11 “Improvement in steel consumption

for the second half of 2009 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, 26/4/09 

### Estimated 2009 Fall in NAFTA Apparent Steel Use ( - 32.2%) More Than Twice World Average ( - 14.9%) and Greatest Among All Regions

(mil. MT) 2004 2005 2006 2007 2008 2009 f Finished Steel 149.0 138.3 155.7 141.2 129.7 88.0 Apparent Steel Use 

## Survey of the Short Range Outlook Spring 2009 NAFTA Region United States* 2009 Million MT % Change Crude Steel Use 70.3 - 35.6 % Finished Steel Use 61.8 - 35.7 % Exports 7.3 -40. 2% Imports 16.8 - 28.6 % 

### Canada 2009 Million

MT % Change Crude Steel Use 13.8 - 21.6% Finished Steel Use 11.6 - 22.4 % Exports 6.0 - 27.3% Imports 5.2 - 31.6% 

### Mexico 2009 Million

MT % Change Crude Steel Use 19.8 - 16.5 % Finished Steel Use 14.6 - 15.5 % Exports 3.1 - 32.3 % Imports 1.6 - 25.9 % * Annualizing from 1Q „09, 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).

12 Source: AISI, World Steel Association 

### NAFTA Steel Production Has Been Below 50% of Capability for Half a Year –

2009 Production Will Be the Lowest in 30 Years
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 (2009 - 11) steel capacity additions, according to Worldsteel estimates based on public announcements.

## 7 13 Source: Metals Service Center Institute 

### NAFTA Service Center Inventories are at the Lowest Levels in Many Years, But

Reduced Demand is Keeping Restocking from Taking Place 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 2008, but reduced market demand has made current inventories large enough to last 3 months (vs. a 2 -month normal supply).

14 Source: Federal Reserve Board (US), Statistics Canada, Canacero 

# NAFTA Industrial Production Continues to Decline in 2009

• Industrial production in the NAFTA region has fallen steeply during this recession which, for the U.S., began in December 2007. •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 2009, 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 2007 alone.

## 8 15 • There are 40 -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. 10% 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% 1Q09 vs. 1Q08. U.S. Residential Construction Market 

# The U.S. Housing Market Struggles to Rebound

Source: U.S. Department of Commerce Units (millions )

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# NAFTA Automotive Market Remains In Crisis

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 60 - 90 days to reorganize financial matters and reduce inventory to match much lower demand. 2009 annualized based on April YTD Source: Ward‟s Automotive

## 9 17 Source: NAFTA Steel Trade Monitor, US Department of Commerce, Canacero and World Trade Atlas. 

# NAFTA Imports During Crisis Period NAFTA imports from other regions exceed intra-NAFTA steel trade. Non-NAFTA imports in 4Q 2008 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.

18 Source: US Department of Commerce and World Trade Atlas 

# NAFTA Exports During Crisis Period NAFTA producers send only a small 

### portion (usually 5% or less) of steel outside the region. During 4Q 2008, intra-NAFTA steel trade declined sharply, more or less in line with the steep decline in NAFTA market demand.

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# III. NAFTA Steel Trade Challenges and Concerns

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# 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

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### Global Apparent Steel Consumption (Annualized)

Source: World Steel Dynamics 

# Global Steel Consumption Is Declining ...

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### World Steel Capacity Continues to Grow, Even as Economic Crisis Has Delayed 64 Million MT Scheduled for 2009 - 10

Source: World Steel Association 

# ... While Global Steel Capacity Continues to Increase

134* *2008 - 9 Additions to Capacity 79*

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### Total Steel Production

Source: World Steel Association 

## Steel Production Outside of China is Falling Dramatically, While Steel Production in China is Actually Increasing

• 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 2009

24 Source: AISI, World Steel Association 

## NAFTA Import Market Share Has Increased During Crisis Period NAFTA steel demand and domestic shipments 

### have fallen by 48% and 40%, respectively since peak levels in mid- 2008. 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 2009.

## 13 25 Source: US Department of Commerce, Statistics Canada, Banco de Mexico



### NAFTA Manufacturing (Not Just Steel) is in Crisis – Huge Trade Deficits With the Rest of the World Threaten to Retard Recovery

The U.S. (non-NAFTA) manufacturing trade deficit declined n 1Q ‟09 vs. 1Q „08, but China‟s share of this 1Q ‟09 deficit increased to 70%.

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# 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