North American Steel Industry: Recent Market Developments and Key Challenges Going Forward OECD Steel Committee May 6-7, 21 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)
Presentation Summary I. NAFTA Economic Conditions and Outlook II. NAFTA Steel Market Conditions and Outlook III. Major NAFTA Industry Concerns Going Forward 2
I. NAFTA Economic Conditions and Outlook 3
The NAFTA Economies: A Hesitant Recovery In 28 and 29, the NAFTA economies experienced the deepest recession since the Great Depression It appears that the NAFTA economies are now beginning to grow, but at a modest rate GDP and employment are still well below their pre-recession levels A number of factors could slow or even reverse growth in all three countries 4
The NAFTA Region Is Starting to Recover from An Unusually Deep Recession NAFTA GDP By Quarter, 27-29 (Seasonally Adjusted Annual Rates) 14.2 14.1 14. Trillions of U.S. Dollars 13.9 13.8 13.7 13.6 13.5 13.4 13.3 13.2 Q1-27 Q2-27 Q3-27 Q4-27 Q1-28 Q2-28 Q3-28 Q4-28 Q1-29 Q2-29 Q3-29 Q4-29 Source: OECD 5
Economic Analysis & Trends United States GDP recovery has begun, but 4Q9 growth was inventory driven, and 21 11 will average 3% at best. Slow, extended recovery is underway, but unemployment is at 26 year high and will be slow to decline. Credit remains constrained. Capital construction continues to drag. Equipment and machinery positive. Housing is improving from abysmal levels while automotive has shown some improvement. Canada Economic recovery has clearly begun, but pace is expected to slow down in 2H1. Government and consumer spending will lead 21, but unemployment remains a concern at 8%. Non res construction and machinery remain weak and will decline in 2H1 as stimulus effect slows. Canadian dollar has strengthened significantly in past year, creating competitiveness challenges. Mexico Emerging recovery driven by manufacturing exports. Outlook somewhat improved on gains in industrial production, exports, investment. Recession induced low trade gap in 29 is rising again. Uncertainties (including higher taxes, inflationary pressure, weak consumer credit) limit GDP recovery. Sources: Bureau of Economic Analysis (US),CSSPA, Canacero 6
Canada: Economic Conditions Moderating 8 Bank of Canada Senior Loan Officer Survey: Q1 21 9 Ivey Purchasing Managers Index Since January 27 6 4 8 7 Expanding 2-2 -4 1999:Q2 1999:Q4 2:Q2 2:Q4 Easier 21:Q2 21:Q4 22:Q2 22:Q4 23:Q2 23:Q4 24:Q2 24:Q4 Tighter 25:Q2 25:Q4 26:Q2 26:Q4 27:Q2 27:Q4 28:Q2 28:Q4 29:Q2 29:Q4 6 5 4 3 2 7 - n a J 7 r - a M Contracting 7 - y a M 7 l- u J 7 - p e S 7 - v o N 8 - n a J 8 r - a M 8 - y a M 8 l- u J 8 - p e S 8 - v o N 9 - n a J 9 r - a M 9 - y a M 9 l- u J 9 - p e S 9 - v o N - 1 n a J r -1 a M Canada: Manufacturing Inventories Through February 21 Canada: Manufacturing Sales Through February 21 Sources: Bank of Canada, Richard Ivey School of Business, Statistics Canada 7
Mexico: Recovery Driven by Industrial Production Mexico: Gross Domestic Product, 25-29 (Annual rate of growth - %) Mexico: Gross Domestic Product, Quarterly, 28-29 (Annual rate of growth - %) Mexico: Industrial Production, Monthly, 29-21 (Annual rate of growth - %) Mexico has started to emerge from an historical crisis. Industrial production (IP) has started to grow after 21 consecutive months of negative growth. IP has now seen positive growth rates for 3 straight months. 8 Source: INEGI
Mexico: Manufactured Exports Key to Recovery Mexico: Exports, 25-29 (Annual rate of growth - %) TOTAL NON - OIL OIL MANUFACTURED For nearly a year, exports had negative growth rates. Now, they are growing at + 29 % Manufactured exports: + 25 % Non-automotive exports: + 12 % and represent 75 % of total Automotive exports: +84 % and represent 25 % of total Exports to the US account for 8% of total But exports to the US are still below 28 peak levels. Source: INEGI 9
Mexico: Investment and Employment Still Lagging Behind Mexico: Investment, 26 21 (February) (Index: 23 = 1) Machinery & Equipment Construction Employment in Manufacturing Sector, 26 21 (Ene) Index 23 = 1 In annual real terms, investment in January was still registering negative growth: - 4.8 % Machinery and equipment: -9.4% Construction: -1.9 % Capital good imports: - 9.9 % 1 Source: INEGI
II. NAFTA Steel Market Conditions and Outlook 11
The NAFTA Steel Industry: An Equally Hesitant Recovery The NAFTA steel industry experienced a sharp drop in production in 29 as a result of the Great Recession Production has begun to grow again, but capacity utilization is still well below historic levels Weakness in construction (especially non-residential) and other end-use sectors could limit the recovery Import market share remains significant, in the context of substantial unused capacity in the NAFTA steel industry 12
Stock Prices for American Steel Producers Continue to Show the Effects of the Economic Crisis Closing Price of Dow Jones U.S. Iron and Steel Index, Jan. 27-March 21 6 5 4 3 2 1 Jan-7 Mar-7 May-7 Jul-7 Sep-7 Nov-7 Jan-8 Mar-8 May-8 Jul-8 Sep-8 Nov-8 Jan-9 Mar-9 May-9 Jul-9 Sep-9 Nov-9 Jan-1 Mar-1 Source: Google Finance. 13
North American Steel Production Remains Far Below Historic Norms 14 Monthly Crude Steel Production Million Metric Tons 12 1 8 6 4 After falling to below 5%, NAFTA capacity utilization has recovered to around 7%, but is still well below historic levels 2 Jan-6 Apr-6 Jul-6 Oct-6 Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 Apr-8 Jul-8 Oct-8 US MX Can Jan-9 Apr-9 Jul-9 Oct-9 Jan-1 Source: Worldsteel 14
29 Was Only the Second Year Since 1963 in Which North America Produced Fewer than 9 Million Cars and Trucks North America Car & Truck Production, 1963-29 19 Million Units 18 17 16 15 14 13 12 11 1 9 8 1963 1965 Source: Ward s Automotive. 1967 1969 1971 1973 1975 1977 1979 1981 1983 1982 9 million cars and trucks produced 1985 1987 1989 1991 15 1993 1995 1997 1999 21 23 25 27 29 Recent gains in North American car and truck production notwithstanding, it is projected that it will take up to five years to return to pre-crisis normal levels.
The U.S. Construction Market Remains Weak U.S. Single-Family Housing Starts, Q1 24 through Q4 29 5 45 Foreclosures remain a problem for both residential and nonresidential construction. ' Starts 4 35 3 25 2 15 1 5 Q1 24 Q2 24 Q3 24 Source: U.S. Census Bureau. Q4 24 Q1 25 Q2 25 Q3 25 Q4 25 Q1 26 Q2 26 Q3 26 Q4 26 Q1 27 Q2 27 Q3 27 16 Q4 27 Q1 28 Q2 28 Q3 28 Q4 28 Q1 29 Q2 29 Q3 29 Q4 29 While residential construction is projected to increase, it is not expected to regain its 28 level until 213. The value of nonresidential construction put in place fell by 9% from 28 to 29, and is projected to continue falling through 211.
NAFTA Service Center Inventories Remain at Their Lowest Levels in Many Years, but Reduced Demand is Keeping Restocking from Taking Place Daily Shipping Rate 4 35 3 25 2 15 1 26 JAN MSCI Average Daily Shipments & Inventory For United States and Canada Metric Tonnes () APR JUL OCT 27 JAN Daily Shipping Rate APR JUL OCT 28 JAN Inventory APR JUL OCT 29 JAN APR JUL OCT 21 JAN 18, 16, 14, 12, 1, 8, 6, 4, 2, Inventory Service center demand has begun to rise, but is still well below previous levels. Daily shipments have returned to the levels of late-28, but remain far below peak 28 levels. Inventories are less than 65% of their historical averages. Source: Metals Service Center Institute 17
NAFTA Import Market Share Has Remained Significant Despite Substantial Available Capacity in North America Thousand Tons 45,. 4,. 35,. 3,. 25,. 2,. 15,. 1,. 5,.. NAFTA Demand and External Imports External Imports Apparent Demand Import Market Share 1Q 28 2Q 28 3Q 28 4Q 28 1Q 29 2Q 29 3Q 29 4Q 29 3.% 25.% 2.% 15.% 1.% 5.%.% NAFTA steel demand and domestic shipments have fallen by 34% and 29%, respectively, since peak levels in mid-28. Non-NAFTA import market share actually increased in 4Q 9. NAFTA steel producers have more than adequate net capacity to meet home market demand in 21. Source: AISI, World Steel Association 18
The Worldsteel Short Range Outlook Shows that, Despite an Improvement from 29 to 21, Market Conditions Remain Poor Million MT Crude Steel Use Finished Steel Use United States 29 (e) 21(f) Change (%) 65.1 81.8 25.5% 57.4 72.7 26.5% Exports 8.5 11.3 32.9% Imports 12.9 13.7 6.2% Million MT Crude Steel Use Finished Steel Use Canada 29 (e) 21(f) Change (%) 1.6 13.1 23.9% 9.5 11.8 23.9% Exports 4.9 6.4 29.6% Imports 6. 7.7 28.3% Million MT Mexico 29 (e) 21 (f) Change (%) Crude Steel Use 17.7 22.1 24.5% Finished Steel Use 13.9 15.5 1.9% Exports 2. 2.4 2.% Imports 3.2 3.6 12.5% Survey of the Short Range Outlook Spring 21 NAFTA Region Apparent Steel Use (ASU) (Million MT) 24 25 26 27 28 29 e 21 f Finished Steel 149. 138.3 155.7 141.2 129.7 8.9 99.9 From 24 to 27 (the last four full years before the economic crisis began), apparent steel use in the NAFTA region averaged 146 million MT/year. This year s forecast of 1 million MT is 32 percent below that average. Source: Worldsteel Economic Studies Committee 19
In 21, Apparent Steel Use in the NAFTA Region Will Remain More than 3 Percent Below Pre-Crisis Levels 16 14 Apparent Steel Use in NAFTA Region (millions of MT) 12 1 8 6 4 2 Average from 24 to 27 21 (est.) Even if apparent steel use in the NAFTA region recovers to 17 million MT by 211, as currently projected by the World Steel Association, it would still only match the 1993 consumption level and be only 76% of the level in 27. Source: Worldsteel 2
III. Major NAFTA Industry Concerns Going Forward 21
Global Steel Consumption Has Only Begun to Recover 1,5 Global Apparent Steel Consumption (Annualized) 1,45 1,4 1,35 Millions of MT 1,3 1,25 1,2 1,15 1,1 1,5 1, 1Q 25 2Q 25 3Q 25 4Q 25 1Q 26 2Q 26 3Q 26 4Q 26 1Q 27 2Q 27 3Q 27 4Q 27 1Q 28 2Q 28 3Q 28 4Q 28 1Q 29 2Q 29 3Q 29 4Q 29 Source: World Steel Dynamics 22
While Global Steel Capacity Continues to Increase World Steel Capacity Continues to Grow, Even Though the Economic Crisis Delayed Some Projects Scheduled for 29-12 World Crude Steel Capacity 2-212 Steel Capacity (million metric tonnes) 2, 1,75 1,5 1,25 1, 75 5 25 1,62 1,62 1,95 1,17 1,245 World Crude Steel Capacity 1,583 1,453 1,356 1,654 1,816 1,917 1,997 2,55 2 21 22 23 24 25 26 27 28 29 21(e) 211(e) 212(e) 212(e) Source: Worldsteel 23
In Advanced Economies, Apparent Steel Consumption Is Not Forecast to Return to Q2 28 Levels at Least Through 212 Advanced Countries Apparent Steel Consumption on an Annualized Basis (in millions of MT) 55 5 Q2 28: 53 million MT/year 45 4 35 3 Q1 28 Q2 28 Q3 28 Q4 28 Q1 29 Q2 29 Q3 29 Q4 29 Q1 21(e) Q2 21(e) Q3 21(e) Q4 21(e) Q1 211(e) Q2 211(e) Q3 211(e) Q4 211(e) Q1 212(e) Q2 212(e) Q3 212(e) Q4 212(e) Source: World Steel Dynamics, Inside Track # 14 (March 29, 21) at 12. 24
Meanwhile, Foreign Government Subsidies to Steel and Steel-Related Industries Remain a Particular Concern Foreign government subsidies are a major cause of overcapacity in the global steel industry and steel-related industries Subsidies to steel and steel-related industries that (1) support inefficient and excess capacity and/or (2) distort trade are continuing, and remain a particular concern Examples include: Fundamental currency misalignment/undervalued currencies Preferential financing to add new capacity Loan forgiveness/equity infusions to prop up obsolete capacity 25
And Raw Material Export Restrictions are Continuing to Disadvantage NAFTA Steel and Other Manufacturers Many countries continue to impose a variety of restrictions on exports of vital raw materials 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 26
U.S. Manufacturing Trade Balance with Non-NAFTA Countries Trade Deficit (Billions of Dollars) $ -$1 -$2 -$3 -$4 -$5 -$6 -$7 Source: U.S. Census Bureau. 2 21 22 23 24 25 26 27 28 29 27% 29% 31% 33% 36% 39% 42% 49% 54% 66% China Non-NAFTA Other Than China 27 Manufacturing trade balance trends parallel indirect steel trade balance trends. NAFTA steel strongly supports a rebalancing of global structural imbalances (with a significant increase in NAFTA exports of manufactured goods). These huge, unsustainable trade imbalances have caused millions of manufacturing job losses in the North America, and contributed to the recent world economic crisis.
The NAFTA Share of World Exports of Manufactured Goods Has Declined Sharply Percent of World Manufactured Goods Exports 14 12 1 8 6 Shares of World Exports of Manufactured Goods China Germany USA 4 1 2 3 4 5 6 7 8 9 1 Sosurce: Global Trade Inf ormation Sy st em, SITC 5-9 Data for 29 and 21 are not available yet, but preliminary indications are that the negative trend for NAFTA that we experienced in 21-28 is continuing. 28
Major NAFTA Industry Concerns Going Forward Overall steel demand conditions have improved somewhat from 29, but demand remains far below pre-crisis levels, and some experts believe it could remain poor for years to come Global steel consumption is growing again, but so is world excess capacity NAFTA producers are in no position to deal with significant volumes of dumped and subsidized imports Trade-distorting government market interventions (to maintain undervalued currencies, subsidize steel and steel-related capacity and limit vital raw material exports) are continuing Manufacturing is critical to the NAFTA steel industry and our economies and manufacturing in North America requires urgent policy attention. 29
Key Policy Messages for Steel Committee With the recovery still fragile throughout the developed world, the NAFTA steel industry has the following key policy messages for the proposed 211-12 Steel Committee budget and work program: We remain especially concerned about subsidies that contribute to excess and inefficient capacity and/or distort trade, and believe the issue of government supports for steel should stay a part of any future Steel Committee work program. Two other trade-distorting practices that we would like to see remain on the Committee agenda are (1) enhanced work with the OECD Trade Committee on approaches to trade restrictions on raw materials and (2) differential or discriminatory fiscal policies. We believe it could be useful for the Committee to continue to analyze steel and technology and the steel trade dimensions of steel and the environment. Because of their importance to the global economy and the world steel industry, we would also support putting additional focus on analysis of developments in the BRIC countries. 3