Thomas A. Danjczek President Steel Manufacturers Association February 23, 2012 London, England Minimill Drivers in the North American Steel Industry CRU World Steel Conference

Outline About the SMA Changes Steel Demand Drivers & Comments Raw Materials Drivers Energy Drivers Final Thoughts CRU World Steel

About the SMA -Composed of 35 North American electric arc furnace (EAF) steel producing Member Companies, and 123 Associate Member steel industry suppliers -Today, roughly two-thirds of U.S. steel production comes from the scrap-based EAF process, up from just 10% in the early 1970s -SMA Members account for approximately 80% of total domestic steel capacity CRU World Steel

Where SMA Member EAFs are located… CRU World Steel

5 Changes Deeper Recession Variable Cost Control Engineers Scrap Availability High Unemployment Labor Intensity Inventory Levels China Safety Consolidations Customer Requirements Environmental Regulations Foreign Ownership Transportation Costs Ore Availability Energy Costs Currency State-Owned Enterprises Other Factors…

6 CRU World Steel Steel Changes Comment World Steel Production Growth in developing World (mmt) EAF Production <10%(e)27%28% (World - % of Production) EAF Production <10%(e)63%64%Minimill Growth (U.S. - % of production)

7 In USA, raw steel capacity utilization was 75% in 2011 CRU World Steel

8 Finished steel demand drivers in US ActualFitted Three variables drive demand: NA auto build Non-residential construction Appliance shipments R² = 85% Source: First River CRU World Steel

9 U.S. finished steel demand forecast Actual ADC Forecast Source: CSM, FW Dodge, AHAM, First River CRU World Steel

Auto build & non-res construction are recovering, but not to previous peak NA Auto Build (Million Units) 10 Source: CSM Worldwide, FW Dodge Forecast Non-Res Construction (Million Sq. Feet) Forecast CRU World Steel

Underlying Weak Economy, with less than 3% GDP and estimates downward Recovery underway, but very slow North American steel market under pressure with unused capacity Increased exports and percent imports (5mmt of semis imports) YOY, Impact of currency changes Not normal cycle of recession, overcapacity; new supply coming on Relative strong demand in auto; construction lagging Raw material costs, and variable cost controls are major drivers Scrap prices trends unknown with developing world demand lower next two months – too early to call a trend Economic growth turning point is always two quarters away Market cap values at historic lows Comments on Current N.A. Steel Industry CRU World Steel

Raw Material Cost and Availability is #1 Issue for NAFTA Producers Many countries continue to impose a variety of restrictions on exports of vital raw materials including scrap: – Export prohibitions – Export duties – Export quotas – Other measures Trade-distorting restrictions on exports of raw materials – Give domestic producers in the exporting country an unfair advantage – Increase worldwide costs of production – Place a heavy burden on steel industries in developing countries that do not have substantial iron ore reserves or steel scrap supplies Three Challenges – Export Restraints – EAF Capacity Expansion – Long Lead Time for Recycling Network Scrap CRU World Steel

13 Scrap demand (mt) – 2017 Scrap Demand Forecasts CRU World Steel

14 CRU World Steel

Scrap Exports as a Percentage of Steel Production, 2010 CRU World Steel

16 Scrap Pricing Volatility Continues Global Demand and the relative value of the US dollar to other currencies determine the volume of exported material. Ferrous scrap exports exceeded 20 million tons in 2010 for the third consecutive year and will set a new annual record in 2011 (estimate - 24 million tons) Export restrictions on ferrous scrap have been enacted by 26 countries. With global steel output on the rise, prices for ferrous scrap in the US have decoupled from US mill demand. Steel production should be based on comparative advantage (raw materials, energy, capital). Need reciprocity. CRU World Steel

Abundant Domestic Natural Gas is a Game Changer CRU World Steel Energy Drivers 17

Natural Gas Price Projections Remain Low CRU World Steel Energy Drivers 18

EPA Mandates and Coal Plant Retirements: An Orderly Transition or Big Trouble? Coal Plant Retirements: How Much? How Soon? – Estimates Range from 20, ,000 MWs by 2018 – Announced Retirements 8,700 MWs by ,000 MWs by 2018 Retiring Units On Average Began Commercial service in 1956 Average Unit Size = 166 MWs 23 units Are Smaller less than 100 MWs CRU World Steel Energy Drivers 19

Near Term Impacts Output From Coal Fired Generation has declined slightly, but Still Accounts for 45% of Electricity Generated Gas Demand From the Electric Sector Continues to Increase Energy Produced By Renewable Sources (Mostly Wind) has Increased Substantially, but Remains Less than 2% of Generation Supply CRU World Steel Energy Drivers 20

Gas Will Remain the Dominant Fuel For Electric Generation Coal Technologies are Struggling – Coal Gasification (Duke) – Carbon Capture and Storage (AEP) No Supply Technologies are Remotely Competitive with Gas- Fired Generation Nuclear, Wind and Solar are Heavily Dependent on Federal Subsidies CRU World Steel Energy Drivers 21

Gas Will Remain the Dominant Fuel For Electric Generation Energy Drivers CRU World Steel

Energy Concerns Utility Rate Increases Driven by Coal Retirements, Environmental Compliance Costs, Building Gas-Fired Units, Grid Upgrades, Clean Energy and Smart Grid Investments Increasing Intermittent Generation (Wind and Solar) Will Present Reliability Questions Federal Dominance of Grid Expansion and Cost Allocation Shift in Clean Energy Mandates From Federal Budget to Utility Ratepayers Energy DriversCRU World Steel

Final Thoughts Status quo of scrap restrictions is unsustainable. U.S. is in a traffic jam, moving slightly forward, but dont know other consequences. Dont look to Washington, DC for help. Gridlock continues Environment of uncertainty and volatility will continue in U.S. industry until economic fundamentals are in equilibrium. Limited visibility… Reasons for optimism in steel in U.S.: – Scrap-based, 75% of cost – local supply – Low cost on global basis (energy is neutral, labor less than 10%, others have higher transportation costs) – Relatively strong U.S. market and U.S. resiliency – Better U.S. company balance sheets CRU World Steel