locker associates/0 steel industry’s new comfort zone presented to isri september 19, 2007...
TRANSCRIPT
Locker Associates/1
Steel Industry’s New Comfort Zone
Presented to
ISRISeptember 19, 2007
Presented by:
Michael Locker, PresidentLocker Associates
225 Broadway Suite 2625, NYC 10007 212-962-2980 [email protected]
Copyright 2007 Locker Associates, Inc.
Locker Associates/2
Locker Associates: Client Service Business consultants with deep steel expertise
Over 25 years of experience 185 U.S. and Canadian engagements -- focus on steel & other
metals, as well as manufacturing and distribution
Emphasis on reorganizations requiring operating improvements• Identify & negotiate with buyers for distressed companies• Evaluate company business & market plans, as well as cap ex• Economic and industry analysis and forecasting•Joint labor-management efforts to enhance performance
Publisher of Steel Industry Update since 1985
• Highly respected steel industry expertise• Often quoted in general and trade press• Numerous presentations at industry conferences & events• Well-connected to Wall Street analysts, business consultants and
investors
Locker Associates/3
China has experienced extraordinary growth in last 6 years•Production & demand now account for more than a third of
world steel output•Raw material prices have soared due to explosive demand•China has absorbed excess imports, but balance is changing
Perfect storm of rapidly expanding market, cheap labor, solid infrastructure, focused investment & abundant capital
But many small, inefficient mills with high emissions remain•Top 10 mills comprise just 33% of total output, down from ‘05•Over 800 steelmakers •Brutal price competition
Far more growth to come: ‘07 production at 484 mil. tonnes•By 2010, forecast production is 580 million tonnes
China Exceeds All ExpectationsProduction up from 129 to 418 mil. tonnes since 2000
Locker Associates/4
China Steel Industry Statistics Freight train keeps coming
Source: AMM
(thousand tonnes) 2005 2006 2007*
Total Raw Steel Production….. 348,000 418,000 281,300
Total Exports…………………….…. 25,625 49,200 44,970
Total Imports……………………….. 24,600 18,600 10,240
Net Exports………………………….. 1,025 30,600 34,730
* Seven months ending July 30, 2007
In 2007 at the current rate of production, China will produce 482 million tonnes of steel, while exporting 77 million tonnes
Locker Associates/5
US-China Input Cost Comparison Excluding iron ore, China has input cost advantage
Notes: (1) No purch coke, 100% SS iron ore (2) Inland mill, 20% domestic raw materials * Cost per tonne of input + For tonne of hot-rolled band Data as of February 2006
Source: World Steel Dynamics, data as of February 2006
Integrated Mini-sheet
Costs/tonne* USA(1) China(2) USA China
Iron ore $47 $76 NA NA
Coking coal 88 75 NA NA
Coke 173 96 NA NA
Scrap $250 $209 $241 $214
Labor cost/hour $49 $2.76 $49 $2.76
Man hours/tonne + 1.74 5.44 0.51 7.00
Unit Labor Cost $85 $15 $25 $19
Locker Associates/6
US-China Process Cost Comparison for HRB Gap grows as steel is further processed
Source: World Steel Dynamics, data as of February 2006
Integrated Mini-sheet
Costs/tonne* USA(1) China(2) USA China
Labor Cost $85 $15 $25 $19
Material Cost 222 192 264 237
Other Cost 120 102 133 96
Operating Cost $427 $309 $422 $353
Blast Furnace $161 $148 NA NA
Liquid Steel 281 236 $331 $299
Slab 321 271 354 319
HRB 399 317 409 369
HRB (with overhead) ** 427 333 422 376Notes: (1) No purch coke, 100% SS iron ore (2) Inland mill, 20% domestic raw materials * Cost per tonne of HRB ** Includes overhead cost, but excludes VAT tax rebate of $24/tonne
Locker Associates/7
Capacity currently exceeds demand Government seeks to curb production and balance supply
and demand•Government goal: Raise market share of Top 10 to 50% by
2010, and 70% by 2020 •Eliminate smaller, inefficient mills•But resistance from regional authorities
New export taxes on semi-finished, long and hot-roll•Cut or eliminated VAT rebates on many other steel products
Factors arguing against large scale exporting•Steady growth in internal demand•Lacking cheap raw materials, China is unlikely to export
products made with expensive imported inputs•Pollution concerns could limit future expansion
Will China Flood the World Market?2006: China becomes a net exporter of steel
Locker Associates/8
U.S. Carbon Steel MarketPrices sag in 2007 so far, but recovery by yearend likely
Demand will grow by late third/early fourth quarter, prices to rise• Non-residential construction growth – still healthy
• Heavy equipment and infrastructure remain strong
• Automotive should improve later in the year
Consolidation has reduced price volatility, but how much?• Mills successfully adjusted production to tough market in 2006
• Despite high import levels and growing inventory, no price collapse
• However, in 2007 mills have been slower to pull back and prices fell to $500 again despite lower import levels
• With HR costs of $475 - $500/ton, carbon mills break even
• BUT not a good sign for mills ability to maintain pricing discipline
Imports down in 2007• Higher prices and demand in Europe, elsewhere in world
• Chinese moves to reduce exports have an impact also
Locker Associates/9
Global Pricing Trends and U.S. Price Outlook
World prices stay robust, U.S. prices bounce back Credit crisis has roiled markets, but should not derail steel
Strong world economy has driven demand and prices• Construction is booming worldwide -- Asia, Middle East, Russia• Infrastructure, non-residential and residential• Lifts demand for plate, beam, bar, SBQ and sheet
Global supply-demand crunch• World export prices, before freight, are higher than U.S. prices
Healthy U.S. demand also supports high spot prices
U.S. Prices rebound by early fourth quarter of 2007• Hot-rolled band: $600/ton• Cold-rolled: $725/ton• SBQ: $850/ton
Locker Associates/10 Source: Purchasing Magazine
Massive Price Fluctuations Carbon prices stagnant in 2007 so far
HR Sheet
Car
bo
n s
hee
t/C
F S
BQ
Stain
less #304
200
300
400
500
600
700
800
900
1000
2000
3000
4000
5000
6000
HR Sheet
Galvanized
CR Sheet
Stainless Steel #304
US$/net ton
CF SBQ
Locker Associates/11
Raw Material Costs Have SoaredRetreated in 2005/2006, but holding steady in 2007
($/metric tonne)
Source: World Steel Dynamics
2000 2001 2002 2003 2004 2005 Q106 Q206 Q107
Met coke (FOB China)…. $77 $71 $82 $153 $298 $195 $123 $150 NA
#1 Heavy Melt (US)…… 96 75 92 120 210 192 221 240 250
Auto bundles (US)……. 128 115 130 163 332 264 279 332 340
DRI (FOB, S. America)….. 100 78 101 142 253 235 202 282 310
Pig iron (FOB, S.A.)……. 113 107 119 170 290 244 227 308 325
Slab (FOB, Tier 1)………. 206 164 200 247 463 388 357 487 450
Locker Associates/12
U.S. Carbon Steel Market DataImports drop in 2007, shipments down also
(thousand tons) 2004 2005 20066 mos.
2007
Raw Steel Production…….… 109,879 102,830 108,640 53,438
Capacity Utilization….…… 94.6% 85.8% 87.9% 85.7%
Mill Shipments………….……. 111,384 103,474 108,609 53,151
Exports…………………….….. 7,933 9,393 9,728 5,424
Total Imports…………………. 35,808 32,108 45,272 17,822
Finished Imports……………… 28,389 25,192 35,953 14,519
Apparent Steel Supply*…….. 131,840 119,273 134,834 62,246
Imports as % of Supply*……. 21.5 21.1 26.7 23.3
Total Employment (000’s)….… 123 122 122 NA
Hourly Emp Cost/Hour…….. $44.16 $45.05 $43.54 NA
Average Spot Price**($/ton) $612 $626 $658 $649
Average Scrap Price # ($/ton) $323 $252 $281 $295
*Excludes semi-finished imports **Composite price of 8 carbon steel products # Auto bundles
Source: AISI and Purchasing Magazine
Locker Associates/13
U.S. Imports Fluctuated at High Levels ‘92 -‘06Imports down in 2007 so far
14.7
2.4
22.1
7.9
21.6
7.5
34.7
6.8
27.2
8.6
29.4
8.6
23.6
6.4
23.8
8.8
18.3
4.8
28.4
7.4
25.2
6.9
35.9
9.3
29
6.6
0
10
20
30
40
1992 1994 1996 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007F #
Finished Semi-Finished
Source: AISI, LA
(million tons)
%ASC* 15.9 19.5 18.4 26.4 21.2 22.3 20.3 20.4 15.8 21.4 22.0 26.7 na
*Imports in ASC calculation exclude semi-finished # 2007 forecast based on first six months actual imports annualized
Locker Associates/14
Most Analysts See Healthy 2007With high production levels continuing through 2010
U.S. Steel Shipment Forecasts
Firm/Forecaster (mil tons) '06 '07 '08 '09
CRT Capital/NA ................ 107 109 -- --
E&E Corp/Rhody............... 110 108 108 105
GMP/Wu ........................... 109 110 -- --
Purchasing Mag/Stundza.. 112 112 106 104
TN Consulting/Mueller ...... 108 104 110 --
Locker Associates............. 109 113 108 112
Average............................ 109 109 108 107
Source: LA, forecast as of 7-07
U.S. Steel Shipment Forecasts Firm/Forecaster (mil tons) '07 '08 '09 '10
AIIS/von Bulow ................. 108 108 -- -- CIBC/Novak ...................... 107 110 109 109 CRT Capital ...................... 108 109 111 110 E&E Corp/Rhody .............. 108 109 110 110 TN Consulting/Mueller ...... 107 108 108 -- Locker Associates ............ 107 110 106 110 Consensus Forecast…… 108 109 109 110
Locker Associates/15
Industry Consolidation Moves ForwardRecent lower stock prices could spur more mergers
Market concentration has increased, but room for more• Top 5 U.S. players had 39% share in 1995, up to 65% by 2005• Market far less concentrated internationally – Top 5 players have less than 20%
Arcelor-Mittal merger creates new world scale, foreign mills seek partners and entry into North America
World carbon industry moving to 5-10 mega players, each with 50-100 million tons of capacity
Remaining integrated orphans in North America like AK, WCI and Stelco will find partners
• USW favors present players to buy orphans• In our opinion, foreign newcomers are more likely, like Essar at Algoma
Further consolidation to come for minimills, especially long producers• Still less concentrated • Looking for higher value, downstream capacity• Nucor continues to purchase small-medium players -- Harris, Magnatrax, LMP
Locker Associates/16
Significant Minimill Consolidation in 2006-07
Both domestic and international players are buying
Source: AMM and LA
Note: Does not include acquisitions by financial buyers *Capacity in million tons; price in $ millions
Major Deals
Date Acquirer Target Capacity* Price*
August 2007 Nucor LMP Steel & Wire 0.1 $28
August 2007 Nucor Magnatrax na $280
July 2007 SSAB Ipsco 4.3 $7,700
June 2007 US Steel Lone Star 1.0 $2,100
March 2007 Nucor Harris na $1,020
January 2007
Evraz Oregon 2.9 $2,300
Dec 2006 Ipsco NS Group 1.0 $1,460
October 2006
Tenaris Maverick Tube 2.0 $3,200
June 2006 Gerdau Sheffield 0.6 $187
May 2006 Nucor Connecticut 0.3 $43
April 2006 Steel Dyn Roanoke 1.0 $240
Locker Associates/17
Steel Far Less Consolidated Than Other MetalsMajor customers and suppliers also have more leverage
Source: Forward Magazine Jan-Feb/2007
81%
70%
67%
54.2%
46.8%
39.1%
28%
19%
0% 20% 40% 60% 80% 100%
Iron Ore
Coking Coal
Glass
Auto
Aluminum
Copper
Paper
Carbon Steel
% of production by top five producers
Worldwide Industrial Concentration by Sector
Locker Associates/18
Major Changes in Capacity New mills coming onstream, older capacity shut Existing U.S. mills are rounding out capacity
• Nucor re-opening Birmingham steel Memphis mill – 850k tons of SBQ
Some international players will build instead of buy• ThyssenKrupp – new carbon/stainless plant with 4.5 million tonnes of capacity, including up to 1.0 million tonnes of stainless
• SeverCorr – 1.5 million tons of finished steel starting later this year
• MMK announces 1.5 million ton per year cold rolled mill in Ohio SeverCorr and re-start of Birmingham Memphis mill put more pressure on high quality scrap supply Older BF hot ends are threatened
• Esmark purchase of W-P will result in eventual shutdown of W-P BF
• Weirton hot end unlikely to come back up• WCI hot end has uncertain future• Other integrated BFs could be threatened by consolidation, but little impact on minimills
Locker Associates/19
Continued Rise of EAF/Minimills Demand for EAF products strong, input prices are key
Scrap price will determine profitability; scrap will be high• Auto bundles at $280/ton and on the rise• Q4 demand rebound will support higher prices• At $300/ton for scrap, EAF costs are higher than integrated• Long term trend: higher prices across the cycle due to tight supplies• When scrap prices are up, DRI and pig iron rise as well
Mini mills investing in older facilities
• Some Nucor mills hitting 25-year mark
• Nucor upgrading EAF, casters and hot strip mills
• Continued commitment to EAF technology
Locker Associates/20
Mills Require Higher Quality Inputs Suppliers will need to respond
Steel production increasingly shifts to a continuous flow process• More capital intensive• Highly automated, less labor• Quality of scrap will be vital to efficient production flow – must have
precise and consistent scrap composition
EAF sheet width and quality continue to improve• SeverCorr mill will be first to produce 74” exposed auto sheet
• Quality nearly equals integrated output
But high quality product requires expensive iron units• Causing companies to backward integrate• DRI, Pig iron and scrap segmentation
Need for higher scrap quality will require premium service
Locker Associates/21
Buoyant Long Term Demand for ScrapStrong world appetite for metallics in next ten years
Growth in steel production drives need for more inputs
• Healthy growth in global economy and steel demand is forecast
• Metallics needs will soar
• Expansion in iron ore supply, but need for scrap substitutes will put pressure on supply
Insufficient reasonably-priced scrap to meet demand• Scrap is elastic to a point, but obsolete scrap reservoir is limited • Scrap demand by 2017 will meet or exceed obsolete supply• Will take time to develop scrap substitutes and build more pig iron
capacity
Scrap prices will stay relatively high, with intense price spikes
Locker Associates/22
Global Metallics Balances to 2017Both scenarios result in scrap crunch
Global Metallics Balances to 2017
(million tonnes) 2007e
High BF Growth
2017eCAGR 07-17
Moderate BF Growth
2017eCAGR 07-17
Apparent Steel Consumption 1,207.0 1,800.0 4.08% 1,800.0 3.77%
Crude Steel Production 1,342.0 1,973.0 3.93% 1,973.0 3.93%
BOF Production 942.0 1,379.0 3.88% 1,379.0 3.88%
EAF Production 400.0 592.0 4.00% 592.0 4.00%
Foundry Production 71.0 90.0 2.54% 90.0 2.54%
Metallics Requirement 1,718.4 2,453.0 3.60% 2,453.0 3.60%
Ore-based metallics 953.0 1,390.0 3.55% 1,300.0 3.15%
Scrap/hot metal substitutes 67.4 180.0 10.32% 155.0 8.68%
Scrap requirement 698.0 883.0 2.38% 998.0 3.64%
Home scrap 175.0 243.0 3.34% 243.0 3.34%
New Scrap 173.0 250.0 3.75% 250.0 3.75%
Obsolete Scrap 350.0 390.0 1.09% 505.0 3.19%
Obsolete Scrap Reservoir 340.9 410.0 1.86% 410.0 1.86%
Obs. Scrap as % of Reservoir 103% 95% 123%
Source: World Steel Dynamics, June 2007
Locker Associates/23
U.S. Tax System Undermines ManufacturingCompetitors with VAT have advantage over US players
Tax imports and provide rebate on exports• Compensates exporters for the tax they pay to foreign countries
• Raises cost of imported goods, making them less competitive
Canada, Mexico, Japan, Korea, China, India, Australia and most of Europe have VAT system; average tax is 18%
Impact: US exporters pay extra 18% on products sold abroad • While importers get 18% discount on U.S. sales
Solution: Restructure U.S. tax system • Shift from income to consumption tax (VAT)
• Must be revenue neutral to government authorities
• Some manufacturers are now pushing for change
Locker Associates/24
Asian Currency Manipulation Also a ThreatJapan and China Keep Currencies Artificially Low
China’s currency undervalued by 40%• Mainland manufacturing costs have a 40% subsidy
• Yen is also artificially weak with similar benefits for Japan
Japan & China buy Treasury bonds to keep dollar from declining against their currencies• WTO prohibits government subsidies for manufacturing• But US government does not view currency manipulation
as a subsidy• Federal government has pushed China to let market determine value of yuan -- with very limited success
US companies and labor should pressure our government to push harder
Locker Associates/25
But US Plants Can Compete Against China Tenneco Shanghai vs. UAW Tenneco shop in Michigan
Source: Fortune Magazine, LA
Tenneco Automotive - China vs. U.S. Plants, 2005 Shanghai Litchfield Employees (hourly/salaried)…….. 225/50 296/28 Yearly Wages (hourly)……….….. $2.5-$3K $22.5-$48.8K Wages, as % of Total Cost……. 1% 12% Production (# of units)………….... 400,000 1,400,000 Revenue ($ millions)…………….. $53 $171 Capacity, 2005 / 2006………….. 85%/100% 65%/85% Employee Turnover (hrly/slrd)….. 5%/13% Less than 1% Absenteeism…………………….. 1% 10% Average Age…………………….. 29 40 Output/Employee (# of units)…… 1,456 4,321 Revenues/Empl ($000).………… $194K $528K Unit Labor Cost…………………. $1.55 $7.54
Locker Associates/26
New Reality: Tougher Emissions Laws First movers have the advantage
Steel is a major source of carbon and other pollutants• Conventional iron-making releases one CO2 tonne per steel tonne
• Global steel industry responsible for 6% of man-made CO2
Some progress is being made
• Steel energy use decreased 28% over 20 years, emissions down• New technologies, more co-gen plants
Next administration will have stricter environmental regs• Carbon and other climate change emissions reduced• Possible carbon tax; widespread carbon trading in U.S.
Steel industry will face new benchmarks, profitability hurdles• Europe and Japan already dealing with this -- ThyssenKrupp• Those who change now will have a head start• Will require creative thinking and innovation
Locker Associates/27
China still drives the world market; India on the ascent
Steady U.S. demand in 2007, possible slowdown in 2008
Spike in U.S. steel prices in late 3rd, early 4th quarters
New capacity in the U.S.; some older hot ends threatened
Challenges facing U.S. mills: troubled customer base, globalization, and higher raw material costs
• Hollowing out of North American manufacturing • Bankruptcy & reorganization of customers -- especially auto• U.S. healthcare system is major competitive disadvantage• Other U.S. disadvantages: no VAT system and artificially low
Chinese and Japanese currencies
Major Steel Trends: What’s Next?Highlights I
Locker Associates/28
N.A. mergers and acquisitions peak, foreign players jockey for position in North America and Europe
• Very high asset values are coming down• Could fuel another round of consolidation
Steel pricing discipline not as strong as expected• Companies slow to cut production in ‘07
Minimills continue to take market share and move up the value chain -- at the expense of integrated mills
• EAF producers have reached 60% of total U.S. steel output
• Higher value production will require additional pure iron units
• Demand for EAF products strong, input prices are key
Major Steel Trends: What’s Next?Highlights II
Locker Associates/29
Major Steel Trends: What’s Next?Highlights III
Improved technology continues to foster higher quality, lower cost substitutes
• Hot vs. cold-rolled, hot dip vs. electro-galvanized, etc.• Increasingly replace higher priced items
Further moves toward automated, continuous steel production flow will require more predictable inputs
Major threats from imports of steel-containing goods• China and others have real currency and tax advantages
Challenged by stricter environmental regs • Europe has moved in this direction already• Regulations will tighten under next administration• Early movers will have the advantage