1. Current Drivers Impacting Steel Competitiveness Thomas A. Danjczek, President Steel Manufacturers Association October 15, 2004 Valve Manufacturers Association of America Annual Meeting

2. VMAA – Annual Meeting 1.SMA 2.Changes –August 2003 –Scrap Impact –World Steel Production 3.China, China, China… –Key Statistics –Steel Production –SMA Mission –Lessons Learned –Currency 4.Steel Production Costs –Key Issues –Energy & Raw Material Costs –Asset Values –Exchange Rates –Bankruptcy/Restarts –Scrap Costs 5.Other Costs –Restrictive Scrap Exports –Freights –Coke –Energy 6.Market –Overview –Public Works Construction 7.Conclusion Current Drivers Impacting Steel Competitiveness

3. VMAA – Annual Meeting The Steel Manufacturers Association (SMA) –37 North American companies: 30 U.S., 5 Canadian, and 2 Mexican –107 Associate members: Suppliers of goods and services to the steel industry SMA member companies –Operate 120 Steel plants in North America –Employ about 40,000 people –Mini-mill Electric Arc Furnace (EAF) producers

4. VMAA – Annual Meeting Production capability –SMA represents over half of U.S. steel production Recycling –SMA members are the largest recyclers in the U.S. –Last year, the U.S. recycled over 70 million tons of ferrous scrap Growth of SMA members –Efficiency and quality due to low cost –Flexible organizations –EAF growth surpassed 50% in 2002 & 2003, and anticipated to be 60% by 2010

5. In August 2003, The Times they were a’changing… VMAA – Annual Meeting Steel Demand Weakening 201 Tariffs/ Exclusions Increasing Imports Bankruptcies Semi-Finished Imports N.A. Economy Plant Closures/ Restarts Perennial Problems Consolidations US PBGC Mini-mill Industry Condition Pricing Volatility ISG’s Labor Contract Exchange Rate Shifts Public Policy Legacy Costs Operating Costs Benefits & Energy Capital Constraints

6. VMAA – Annual Meeting Up $130 since June 2004!

7. ANNUAL WORLD STEEL PRODUCTION OUTLOOK World steel output looks set to rise 5% or 50 MT MT in 2004, after gains of 62 MT and 53 MT in 2003 and 2002, respectively, largely on the strength of China coupled with the recent onset of rest-of-world economic recovery. China steel production rose by 20%. Increases continue… Forecast… Forecast (MT) 2005: 1,075.0 2004: 1,015.0 2003: 964.7 2002: 903.1 2001: 850.2 2000: 847.6 1999: 789.0 Forecast (MT) 2005: 1,075.0 2004: 1,015.0 2003: 964.7 2002: 903.1 2001: 850.2 2000: 847.6 1999: 789.0 EAF % (Line, Right Scale) EAF % (Line, Right Scale) World Steel Production Forecast World Steel Production Forecast

8. A few notes on China from 2003, 2004 and forward: Consumed ≈ 25% of world coke supply in ’03 Coke production ramping up in ’04 and ‘05 Consumed ≈ 25% of world iron ore supply in ’03 Iron ore production ramping up in ’04 and ’05 Consumed ≈ 20% of world scrap supply in ‘03 Consumed ≈ 240M mtons of steel in ‘03 Produced ≈ 220M mtons of steel last year (est. 240M mtons ’04) Consumed ≈ 40% of world concrete supply VW will produce and sell 150M cars in China this year GM will invest $6B in China by 2006 (rival VW as #1 supplier) Average income / year $1,200 US (≈ $5,000 for steelmakers) VMAA – Annual Meeting China China China…

9. CHINA STEEL PRODUCTION China produced 220 MT of crude steel in 2003 – double the next largest producer Japan at 110.5 MT and 2.4 times the U.S. (92.2 MT, shown) – and will produce as much as 275 MT, 350 MT, and 425 MT by 2005, 2010, and 2015, respectively. China United States Courtesy – Metal Strategies

10. VMAA – Annual Meeting TeamNine member steel company representatives (3 presidents; 3 V.P. – operations; 3 experts - melting, rolling & engineering) PurposeGain First Hand Knowledge in mills & mill builders Major Concern Given high degree of Chinese Government subsidies provided, loss of US steel customer base Key QuestionWhen will capacity & production exceed domestic demands SMA Study Mission to China – August 2004

11. VMAA – Annual Meeting Government- Control capital through state banks - Control growth through land availability - Control output through electrical power and planning assets - Steel ownership – 90% SUBSIDIZED! - Government shutting down less efficient operation measured by energy consumption & environmental pollution Infrastructure- Massive construction – Vacant office space? - Significant power outages – building nuclear plants - Organized approach to Growth - Water transportation is a major asset Quality - Qualified personnel with enthusiasm and pride - Observed both world class & marginal facilities Lessons Learned

12. VMAA – Annual Meeting Cost- Capital construction est. @ 40% of US costs - Manpower est. a magnitude 10 to 1 vs. US (Objective is to employ people) - Power cost similar to US @ 6¢/KwH except little difference between peak – non-peak (2¢) Scrap- 40% tariffs on scrap exports - China est. to import 10 million tons of scrap in 2004 Miscellaneous- Rebar usage disproportionately high - Limited personnel safety procedures - Huge automotive growth - Difficult to understand success of private steel facilities - 80% of exports from Coastal zone - Duck tongue tastes like pencil erasers! Lessons Learned

13. Courtesy – IMF

16. CHINA CONCLUSIONS Currency Manipulations  For eight and one-half years, China has maintained a fixed exchange rate of 8.3 Yuan to the dollar. China has printed any amount of yuan necessary to purchase dollars to maintain a fixed artificial rate, giving it enormous export advantage, and creating a China trade surplus with the US reaching $124 billion in 2003.  In the two-year period, 2002-2003, US imports of manufactured goods from China accounted for 56 percent of the total growth in US imports of manufactured goods during the period. The US trade deficit in manufactured goods with China was $128 billion in 2003. The overall US trade deficit with China is now the largest bilateral trade imbalance ever seen in the history of world trade.  The United States should insist that China change its exchange rate regime which allows it to sell undervalued goods in export markets at costs denominated in undervalued yuan. Simultaneously, China must relax its tight capital controls, which have resulted in an accumulation of foreign exchange acquired from export sales, amounting to $420 billion in 2003, about one-third of China’s GDP. China must stop excessive issuance of undervalued yuan, and pay for its imports with foreign exchange.  Today, China can absorb a revaluation without an economic collapse, versus a token one which would respond to the problem in form only, rather than a needed significant revaluation. If inadequate US policy causes a delay for another five years, however, China, the US, and the world economy are in for a very hard landing. At that point, an inevitable huge revaluation of the yuan will occur, which it must, when US policy officials then confront US trade, current account, and capital account deficits of disastrous proportions. US policy must effectively address this problem, now. So far, it has not. May 12, 2004 SMA Press Release

17. Summary of Key Issues Relative operating costs in the U.S. steel industry have changed dramatically over the past 12 months: First with the introduction of the ISG-style restructuring which took out $40- $50 per of hot band costs as a result of labor contract changes, and a further $25-$50 per ton with the removal of past legacy costs. Secondly, with the surge in metallics and energy prices and this development’s far greater relative impact on sheet minimills until the successful implementation of surcharges. Third, ore, coal, and coke prices have risen significantly. US Steel Production Costs VMAA – Annual Meeting

18. Scrap now around $400 VMAA – Annual Meeting Steel Energy and Raw Material Costs

19. In the 28 months from January 2002 to May 2004, raw material and energy input costs for U.S. steelmakers have increased dramatically. +65% +110% +450% +155% +82% Courtesy – Metal Strategies VMAA – Annual MeetingSteel Energy and Raw Material Costs (cont.)

20. There are three key areas in which North American mills differ widely on in respect to ultimate unit product costs and profit margin position Spot market exposure for raw materials and energy (a big negative at the moment): –Example: ISG-Sparrows Point and ISG-Burns Harbor are on the complete opposite end of the spectrum here Contract market exposure for steel product sales (a big negative at the moment): –Companies such as AK Steel who normally benefit from such protection, are now being negatively impacted General ability to most effectively manage base price and surcharge adjustments: –There are much bigger variations here than one might think Courtesy – Metal Strategies Wide Variation in CostsVMAA – Annual Meeting

21. RECENT U.S. STEEL ASSET TRANSACTION VALUES Acquisition range has been $60 to $90/ton shipped for shuttered operations and $160 to $260/ton for ongoing businesses. Liquidated Companies Ongoing Businesses CSN disclosed in October 2003 that its acquisition price for Heartland was actually $175 million instead of the previously-report $69 million. Acquisition prices include all assumed liabilities. Courtesy – Metal Strategies

22. EXCHANGE RATES – INDEX The real trade-weighted US$ index for major currencies has dropped 22% from the recent 2-’02 peak (115.8) and 30% from the all-time record high in 1-‘85 (124.9), but was still up 10% from the 7-’95 record low (80.4). Broad Currency Group Major Currencies Data through April 2004 US$ Real Trade-Weighted Index Courtesy – Metal Strategies

23. VALUE OF THE U.S. DOLLAR Scrap prices are inversely related to the dollar Source: AMM, Federal Reserve Scrap Price Dollar Index Courtesy – Metal Strategies

24. VALUE OF THE U.S. DOLLAR The strong relationship between steel imports and the dollar is even more clear when a 12-month moving average is used. Source: AISI, Federal Reserve Finished Steel Imports (12-Month Moving Avg) Dollar Index Courtesy – Metal Strategies

25. July 2004 – Above $300 Again!

26. Back to the top in July! Courtesy - AMM

27. RUSSIA AND UKRAINE SCRAP EXPORTS Partial export bans, restrictions and duties designed to protect local steelmakers have restricted the flow of exports to the world market Courtesy – Metal Strategies

28. U.S. SCRAP CONSUMPTION AND EXPORTS Demand for U.S. scrap increased by 3 MT in 2003, driven by a 15% surge in exports and a slight gain in domestic demand (EAF and BOF production down 3% and up 1%, respectively) Courtesy – Metal Strategies

29. OCEAN FREIGHT RATES Ocean freight rates increased 4.5-fold from $10,000/day to $45,000/day between early-2003 and early-2004 and have recently declined by about $5 to $10 pr tonne since late-March. Courtesy – Metal Strategies

30. IRON ORE PRICES - ANNUAL The 2004 iron ore price-increase benchmark of 18.5% was established in early- January by CVRD, following a 9% gain in 2003. China now accounts for over 25% (110 MT) of world sea-borne demand, while three producers (CVRD, RTZ and BHP) now control over 80% of the supply. Pellets Lump Fines Prices shown are from CVRD (Brazil) to Western European steel customers (fob) Courtesy – Metal Strategies

31. Technical Read on Crude Oil Prices Courtesy – JP Morgan

32. Technical Read on Natural Gas Prices Courtesy – JP Morgan

33. STEEL END-MARKET OVERVIEW Three broad sectors – construction, autos, and industrial equipment – account for over 75% of total U.S. steel consumption by ultimate users. Construction 40-45% Autos 18-20% Ind. Equip. 15-18% Energy-4% Containers 4% Appliances, Office Furniture 2.5% All Other 15% 60% Non-Residential 30% Public Works 10% Residential 60% Non-Residential 30% Public Works 10% Residential 55% Light Trucks/ SUVs 30% Passenger Cars 5% Commercial Trucks, Buses 10% After Market 55% Light Trucks/ SUVs 30% Passenger Cars 5% Commercial Trucks, Buses 10% After Market Off-Highway Vehicles Freight Cars Barges, Ships Other Industrial Equip. Off-Highway Vehicles Freight Cars Barges, Ships Other Industrial Equip. Courtesy – Metal Strategies

34. VMAA – Annual Meeting Conclusion Uncertainty – Cycle has Changed (Shorter Term & Greater Peaks & Valleys) Revenue vs. Costs – Not the Same Business Model CHINA, CHINA, CHINA… Bankruptcy Laws Unfair to Competitors Investments – Earn Cost of Capital Mini-Mills Must Compete in the World, as it is, and We Can! Meaningful Optimism with Good Long Term Consumption, Relative Value, and Excellent Recyclability for Steel