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American Gear Manufacturers Association Steel Consumption Update

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Presentation on theme: "American Gear Manufacturers Association Steel Consumption Update"— Presentation transcript:

1 American Gear Manufacturers Association Steel Consumption Update
Cengiz Kurkcu President - Industrial Engineered Steel Solutions The Timken Company March 9, 2011

2 Agenda The Timken Company Market Outlook Current Business Cycle
Business Strategy New Business Development Raw Material Trends Green Trends & Steelmaking U.S. Manufacturing

3 Bearings & Power Transmission $2.8 Billion Excludes intersegment sales
The Timken Company Our History Founded in St. Louis in 1899 by Henry Timken after receiving patents for a tapered roller bearing Relocated to Canton, Ohio, in 1901 Began steel production in 1917 $1 billion in revenue – 1978 $2.2 billion in revenue – 1995 2010 Total Sales: $4.1 Billion Steel $1.3 Billion Bearings & Power Transmission $2.8 Billion Excludes intersegment sales

4 Power Transmission Group
The Timken Company Our Business Structure Bearings and Power Transmission Group Steel Group Mobile Industries Light Vehicle Off Highway Rail Auto Aftermarket Heavy Truck Process Industries Heavy Industries Industrial Processes Gear Drives Energy Industrial Distribution Aerospace & Defense Commercial General Aviation Positioning Control Health Alloy Steel & Value-added Solutions Oil & Gas Mobile On-Highway Industrial

5 Steel Group Oil & Gas Heavyweight Drill Pipe Drill Bits Drill Collars
Mud Motors Tool Joints Supply Chain Management Value-Added Machining Mobile On-Highway Passenger Car Light Truck Medium/Heavy Truck Industrial Agriculture, Bearing Construction Equipment Distribution Industrial Machinery Mining, Rail Power Transmission Wind Energy

6 Steel Group 2010 Net Sales Market Selection Mobile On-Highway 35%
Industrial Bearing Steels Rail Mobile On-Highway 35% Passenger Car Industrial 48% Industrial Machinery Light Truck Heavy Truck Vehicle Bearing Steels Drilling Equipment Farm & Mining Equipment Aerospace & Defense Off-Highway & Transportation Oil & Gas 17% Production Equipment Wind & Power Generation

7 Steel Group Our Products 450 grades of carbon and alloy steels
Special bar quality steel Seamless mechanical steel tubing Well-boring and finishing products Precision steel components Steel Group

8 Agenda The Timken Company Market Outlook Current Business Cycle
Business Strategy New Business Development Raw Material Trends Green Trends & Steelmaking U.S. Manufacturing

9 Key Economic Indicators
Purchasing Manager’s Index (PMI) Weekly Leading Index (WLI) Executive Summary Manufacturing made impressive gains in January, with its employment component of the PMI reaching 61.7, the highest reading since 1973. Construction continues its weak performance in both residential and non-residential components. Unrest in the Middle East is beginning to spread outside of Egypt which could roil currency and commodity markets. Of particular concern would be threats to regime stability in Saudi Arabia. Unrest has temporarily disrupted oil production in Libya. PMI (Institute for Supply Management) An indicator for economic activity and is considered the best indicator of factory production. Roughly speaking it reflects the percentage of purchasing managers in a certain economic sector that reported better business conditions than in the previous month. A PMI index over 50 indicates that the economy is expanding while anything below 50 means that the economy is contracting. IPI (Industrial Production Index) An economic indicator maintained by the Federal Reserve Board which measures real production output. It is expressed as a percentage of real output with base year currently at Production indexes are computed mainly as fisher indexes with the weights based on annual estimates of value added. This index, along with other industrial indexes and construction, accounts for the bulk of the variation in national output over the duration of the business cycle. ECRI (Economic Cycle Research Institute) Weekly Leading Index An independent institute dedicated to economic cycle research, with a mission to "advance the tradition of business cycle research”. Part of Peter Navarro’s “Always a Winner” forecasting framework. The index contains money supply data, stock prices, an industrial markets price index developed by the organization, mortgage applications, bond quality spread, bond yields, and initial jobless claims. An advantage of the index is that it is very timely. However, it is relatively new and its predictive ability is relatively untested. Industrial Production Index (IPI) PMI up 0.6 points from February and the highest since May 2004 WLI up from January Industrial production highest since August 2008

10 U.S. Vehicle Sales Rates - SAAR
Mid-Month Forecast Sustained recovery with slow growth into 2011 Source: Ward’s Automotive Weekly & IHS (forecast) 10 10 10 10 10 10 10 10 10 10 10 10 10

11 N.A. Medium & Heavy Truck Production
7% 21% 24% 37% Estimate over 500,000 tons of future SBQ demand

12 Key Industrial Indicators
Industrial Machinery Durable Goods Railroad Equipment Mining (excluding Oil & Gas) Construction Machinery Agricultural Machinery Utilities 2011 vs. 2010 18% 9% -4% 3% 4% 1%

13 Global Drilling vs. Timken Steel Supply

14 Key Oil & Gas Indicators
Natural Gas: Henry Hub Crude Oil: WTI Cushing Natural Gas Storage Level US Rigs Drilling for Oil Approaching 50%

15 Market Segment Outlook - 2011
Mobile On- Highway Oil & Gas Industrial Sustained market recovery for light vehicle market 2011 production forecast at 12.9 million vehicles, 9% above 2010 Initial stage recovery for medium and heavy truck market Higher oil prices drive 11% world rig count growth Exploration & Production budgets increase 11% in 2011 Horizontal Drilling continues to grow Strong demand expected through 2011 Customer inventory replenishment continues Healthy orders in most end-markets & products

16 Agenda The Timken Company Market Outlook Current Business Cycle
Business Strategy New Business Development Raw Material Trends Green Trends & Steelmaking U.S. Manufacturing

17 World Apparent Steel Use
New record (2010) Percent Change Growth slowing

18 NAFTA Apparent Steel Use

19 U.S. SBQ Apparent Consumption
AMM 2/28/11: A significant amount of SBQ production capacity was shut down in late 2008 and still remained idle at the start of last year. Mills felt reasonably comfortable that their facilities would be able to meet anticipated 2010 demand, but misread the automotive industry. The automotive industry is the single largest market for SBQ bar, accounting for around 55 to 60 percent of total usage. Most of the mills brought back some of their idled capacity, but they did so slowly and cautiously and still left much capacity idle because they simply did not believe the business levels were sustainable. The auto industry proved everyone wrong, increasing production of cars and light trucks by 36.1 percent in Increased demand from the agricultural industry and the capital good markets further aggravated the problem. Producers desperately hoped for the market to hiccup or slow, but it just did not happen. Today, buyers are faced with lead times, depending on product, stretching anywhere from July 2011 to February In the past, lead times and delivery promises were suspect. Mills often booked orders and quoted deliveries to secure orders but were less concerned about delivery reliability. It seems today that most SBQ bar mills are taking their lead times more seriously and closing order books as necessary. The problem of extended lead times is not likely to be resolved in the near future. Demand for SBQ bars is expected to continue its strong growth in 2011, with estimated U.S. production of light vehicles up another 10 percent this year and agricultural equipment demand some 5 to 10 percent higher. The mills are all working to maximize the capacity utilization and operating efficiencies of their facilities, but more is needed. Source: AISI & Timken Data

20 Bar & Tube Lead-times Weeks Hot Roll Bar Hot Roll Tube Month Timken
Domestic Jan-10 8 9 7 Mar-10 14 12 Apr-10 19 15 Jul-10 30 26 22 Mar-11 Allocation(1) 40 29 7(2) July 2011 If billets available

21 Agenda The Timken Company Market Outlook Current Business Cycle
Business Strategy New Business Development Raw Material Trends Green Trends & Steelmaking U.S. Manufacturing

22 Steel Group Strategic Focus Small bar mill Custom heat treat
Large bar UT inspection New high carbon furnace Forge press New products / customers Timken Boring Specialties Daido Steel Collaboration City Scrap & Salvage Our strategy is focused on growing and optimizing our businesses. That not only means creating products that are differentiated, but focusing in segments of the market where we have truly differentiated capabilities. Differentiation is the central theme of Timken's strategy. We make highly engineered alloy steels for diverse industries requiring superior performance. We have implemented a number of initiatives to continue to set ourselves apart in the high-value niche, including: Application engineering: engineered alloy steels for specific application conditions Technical services: performance analysis, testing, research and development Enhanced features and Value-added products: such as for oil drilling Supply chain services: such as inventory management It means expanding into industrial markets and geographies that are attractive, where we have the capability to generate real customer value. In those markets where we don’t have that capability, it means we will transform the company. We will either quickly fix it or we will no longer be in those businesses. Underlying all of these actions, and perhaps the most important focus of the company, is execution, delivering results for our customers, improving customer service, reducing costs and improving quality. The application of the model will vary, depending on the characteristics of the market and business. Value selling Market plan / market selection Global oil & gas supply chain International warehouses / supply chain Tube finishing line Lean6Sigma / continuous improvement Operational improvements Lay down yard

23 Strategic Plan Global diversity & leadership Differentiated solutions
Attractive, long-term risk-adjusted returns Effective business cycle management Small Bar Mill Tube Finishing Line In-line Forge Press Large Bar UT

24 Agenda The Timken Company Market Outlook Current Business Cycle
Business Strategy New Business Development Raw Material Trends Green Trends & Steelmaking U.S. Manufacturing

25 Inquiry Turnaround January 2011 80% 70% 60% 50% 40% 30% 20% 10% 0%
74% 72% 70% 70% 60% 50% 41% 40% 38% 30% 20% 18% 17% 16% 12% 10% 9% 10% 7% 5% 5% 4% 2% 0% Industrial Mobile On-Highway Oil & Gas Total 0-2 Days % 2-10 Days % 10-20 Days % Over 20 Days %

26 New Business Sales Ratio
35% 30% 25% 20% 15% 10% 5% 0% YTD 2010 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 2011 Fcst Actual Plan

27 Advanced Program Management
Stage-Gate Process PRODUCT DEVELOPMENT COMMERCIAL DEVELOPMENT Strategic Alignment Strategic Evaluation Feasibility Analysis Business Case Commercial Development Implement Strategy Product Life Cycle Idea Stage 1 Discovery Stage 2 Evaluation Stage 3 Concept Stage 5 Validation Stage 6 Launch G1 G2 G3 G4 G5 Stage 7 Control G6 Stage 4 Development Here is a listing of active projects. Having the cross-functional program teams to vet out all of the issues as we move thru the process, is critical to the success of these programs. As you can see from the listing, we have related our Stage-Gate process to the Decision/Execution agenda process. Our programs are not just tied to capital development but also Grade and Processes was well. Our definition is that these programs will expand our capabilities from what we have today and fit with multiple customer and/or markets. Within each group, the programs are categorized by project type of Equipment Capability, Grade Development, and Processing. Processing can be External Supply Chain or Internal Equipment Improvement. The intent of this portfolio is to provide our business with additional capabilities the sell and market. These products/process help to improve our differentiation within our market spaces. These programs also contribute to our APA metric of New Business Sales Ratio. Decision Agenda Execution Agenda Define Implement Realize Identify New Equipment Capability Radial Flow Forming Grade Development Iron Aluminum Platform API-6A Specification Processing Non-Ferrous Piercing Raise Bore Drill Rods New Equipment Capability In-Line Forge Press (<16”) Internal Green Machining Grade Development FSP Premium High Carbon Gear Steels Processing Large Sound Center Bar (<16”)

28 Gear Steels Clean steel Timken offers over 400 different grades
Longer bearing and gear life Power density Timken offers over 400 different grades Common gear grades 43xx (18CrNiMo7-6) and 41xx (42CrMo4) Demanding gear applications Rail (locomotive), mining, wind, off-highway vehicles

29 Developing Local Presence
Role of agents and forwarders Local sales and service teams Local operating partners Ventures and agreements Need for operating presence Commitment of customers and suppliers Investment in plant and warehouse Sales Office Warehouse Plants Value Add Supplier Facilities Sales Agents New Asia collaboration model – high performance regional supply chain

30 Agenda The Timken Company Market Outlook Current Business Cycle
Business Strategy New Business Development Raw Material Trends Green Trends & Steelmaking U.S. Manufacturing

31 World Crude Steel Production
1,413.6 Million Metric Tons (2010) Europe 22% China 44% North America 8% South America 3% Africa 1% Other Asia 19% Middle East 2% Australia / New Zealand 1% Source: worldsteel

32 Supply Tensions Will Remain
China’s Iron Ore Purchases Source: JB Were, First River

33 1997-2010 (July) Annual / Monthly ($/ton)
China Iron Ore Drives US Scrap Price Monthly Source: Vale, AMM, First River analysis

34 Timken Metal Recycling Strategy
Raw Material Feedstock Shredder Auto Wreckers Ind. Accts. Other Scrap Yards We expect there will be sufficient availability of scrap metal for EAF steel producers in North America, but securing adequate supply well located to our mills has been an important focus. That is why we acquired a local scrap processor in Akron, City Scrap and Salvage, at the end of 2010. Fortunately, our facilities are located in regions where iron unit supply is available at relatively competitive costs. Regional feedstock comes from numerous sources: - Peddlers - Industrial accounts - Auto Wreckers - Small Yards Scrap in the form of feedstock is relatively expensive to transport Regarding processing technologies, we expect to maintain a focus on electric-arc furnace processes and continuous improvement of our capabilities to reduce input requirements and costs -- especially energy, iron units, and alloys. Key Approaches Regional scrap management Industrial accounts Scrap consulting & brokerage Supply agreements Objectives Reliable supply of iron units at a competitive cost Capture the return flow of scrap from the customers / suppliers

35 Agenda The Timken Company Market Outlook Current Business Cycle
Business Strategy New Business Development Raw Material Trends Green Trends & Steelmaking U.S. Manufacturing

36 Green Trends & Steelmaking
Continuous Improvement Electricity Consumption KWH per Ship Ton Natural Gas Consumption MCF per Ship Ton We are committed to reduce energy, raw material, and carbon intensity throughout our steel manufacturing processes because it is fundamentally good business, and we've made very good progress improving efficiency throughout our steelmaking processes. We've reduced the amount of electricity we use by nearly 40% since 1990, and we're employing new thermal treatment practices so our heat-treat furnaces consume only one-tenth of the energy they once used. Additional improvements in production yield, shorter cycle times and productivity as well as reduced rework all have contributed to our “greener” manufacturing footprint.

37 Green Trends & Steelmaking
Regenerative burner technology Waste heat recapture systems Automated scrap cutting Specific examples of three process improvements where we invested roughly $3 million have achieved a 15-million-pound reduction in annual carbon emissions, which is about a half a percent of our total. This is just part of our target to reduce emissions by 3% from 2005 to The three projects involved: Installation of new regenerative burner technology for our steel reheating furnaces (e.g. #5 tube mill rotary hearth furnace). New waste heat recapture systems to recycle heat from furnaces into a steam boiler system (#3 tube mill rotary furnace) Automated, efficient scrap cutting systems to reduce carbon emission from manual torch-cutting of scrap metal. Also, our scrap acquisition further complements our metal recycling practices, which have the dual benefit of reducing costs and improving the environment as we reclaim scrap materials from industrial users.

38 Agenda The Timken Company Market Outlook Current Business Cycle
Business Strategy New Business Development Raw Material Trends Green Trends & Steelmaking U.S. Manufacturing

39 U.S. Manufacturing American manufacturers start with a non-production cost disadvantage of 18% versus our major trading partners U.S. steel producers spend 18% more on taxes, energy, benefits, torts, and regulatory compliance than our foreign competitors Recent studies have indicated that American manufacturers start with a non-production cost disadvantage of 18% versus our major trading partners. That means a U.S. steel producers spend 18% more on taxes, energy, benefits, torts, and regulatory compliance than our foreign competitors. The new Congress and the Obama administration have signaled a willingness to tackle a number of policy challenges that have a significant potential impact on manufacturing competitiveness, including steelmaking. If elected officials are serious about restoring balance to ensure U.S. manufacturers can compete, there are three areas that demand urgent attention:

40 U.S. Manufacturing Tax Structure Regulatory Discipline Energy Policy
Restoring Balance Tax Structure Second highest among all OECD countries Double-taxing global revenues R&D tax credits Regulatory Discipline EPA regulations OSHA policies NLRB directives Energy Policy Investment in energy infrastructures Energy efficiency and conservation Diverse portfolio of fuel sources I. TAX STRUCTURE If we really expect domestic producers to compete in the global marketplace, the first, foremost problem we must address is the domestic tax structure. The U.S. corporate tax rate is the second highest among all OECD countries. In our industry, only Japanese steelmakers pay more in corporate tax. We also need to stop penalizing U.S.-based companies that manage to succeed in global markets by double-taxing their revenues when they bring that money back home. Those proceeds are vital to R&D investments in innovation. Toward that aim, the R&D tax credit should be retained as a permanent incentive, because it provides clear, competitive advantages for U.S.-developed products, with returns of economic growth and jobs. II. REGULATORY DISCIPLINE Over the past two years we have seen an explosion in new and proposed regulations adding billions of dollars of additional costs to already stressed manufacturers. While there is no doubt the flood of regulations impede economic and employment growth, there is plenty of question as to their efficacy otherwise. Examples such as EPA regulation of greenhouse gases, new ozone limits, and boiler MACT rules; OSHA noise regulations; NLRB directives and a host of other changes enacted without adequate scientific discipline and industry involvement are doomed to fail without standards of practical application in the real, working world. Because industries like ours lead the way in actual performance when it comes to such measures, we must work together toward workable standards of continuous improvement. III. ENERGY POLICY Finally, it is vital for the United States to develop and implement a comprehensive energy policy. We need a strategy that encourages investment in current energy infrastructures, pursues energy efficiency and conservation, and balances investment across a diverse portfolio of all fuel sources, including solar, wind and nuclear, while tapping critical U.S. assets in coal, natural gas and offshore oil. Other Political-Economic Threats to Steel Industry Trade: Political pressure may lead more restrictive trade laws that could result in trade wars with Europe and Asia, especially China. While trade inequities certainly exist a trade war with China would negatively affect SBQ producers like Timken that have more opportunities in China than threats. Health Care Law: The recently passed health care law has greatly increased uncertainty for employers like Timken with respect to health care costs and rules for both its active and retired associates. The case law and regulations are far from settled so this uncertainty will persist in the near term (1-2 years), if not beyond that. Sovereign Debt-Monetary Stability: Defaults on government debt would roil capital markets and possibly lead to insolvency of banks/investment funds that hold large amounts of shaky sovereign debt, similar to what happened with the mortgage-backed security crisis. Some nations may choose to inflate their way out of budget and debt problems by printing money. Euro-zone nations don’t have this option – yet. U.S. states and cities face similar budget problems. Debt defaults would similarly roil U.S. state and municipal bond markets, in which many pension funds are substantially invested. The U.S. Federal Reserve has or will have purchased since late 2008 about $1.2 trillion in mortgage-backed securities and government debt. This has created a huge liquidity overhang than may yet result in high inflation. Commodities: Monetary instability, political upheavals in resource rich nations, and rising world demand for resources, especially energy, will cause volatility in commodity prices that will come and go over the next 5 to 10 years. Oil price spikes in particular may choke off economic growth, similar to the late 1970’s and 2008, leading to economic volatility. Commodity price inflation also creates opportunities for Timken, particularly in energy markets. Demographics: Aging of U.S. population, as well as populations in Western Europe and Japan, will cause changes in consumer spending patterns that will affect markets that Timken customers participate in. This will create both opportunities and threats.

41 Collaboration – Vital to Future Success


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