Steel Industry Outlook Georgia State University May 2009 Agenda - - PowerPoint PPT Presentation

Steel Industry Outlook Georgia State University

May 2009

5/20/2009 Confidential 1

Agenda

• Company Profile
• Market Indicators
• Steel consuming markets
• Risks
• Summary

5/20/2009 Confidential 2

The world’s number one steel company

• The largest steel company in the world
• 320,000 employees
• Operations in more than 60 countries
• Manufacturing facilities in 20 countries
• 2008 revenue of almost $125 billion
• 1500 scientists and 14 research centers in Europe and the Americas
• Products include

– Flat rolled steel – Bars and Structurals – Plate – Stainless steel – Electrical steels – Pipe and tube

• Our Vision: “To be the World’s Most Admired Steel

Company”

• Our Slogan: “Transforming Tomorrow”.

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No 1 in North America No 1 in South America No 1 in Western Europe No 1 in Eastern Europe and CIS No 1 in Africa

Leading position in the most attractive markets

Market position and market share estimates by region*

*Source ArcelorMittal estimates based on IISI crude steel production

23% 77% 24% 76% 26% 74% 47% 53% 11% 89%

Number 1 in 5 regions and 4 continents

ArcelorMittal Other

A global steel production of 116 million tonnes (2007)

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North American Operations

• The largest steel company in North America
• 20,000 employees in USA
• North American legacy companies include:

– Bethlehem Steel – LTV Steel – Inland Steel – Acme Steel – Weirton Steel – Dofasco, Canada

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Steel Market Outlook

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Industrial Production Manufacturing Only

Manufacturing Production Index and Capacity Utilization –U.S. Federal Reserve

95 100 105 110 115 120

'00 '01 '02 '03 '04 '05 ,06 '07 '08 Jan

Production Index

65 67 69 71 73 75 77 79 81 83

% Utilization

Index Utilization

Recession of 2001 Through April 2009

U.S. manufacturing activity fell precipitously beginning in late 3Q’08.

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ISM Manufacturing Index

2006 through April 2009

32% 37% 42% 47% 52% 57%

2006 2007 2008 J-09

Manufacturing index drops to 32.4% in November. Recession zone of ISM is 40-45%. The New Orders component of the index is the lowest since 1948. This index is usually predictive of manufacturing activity across the next ~6 months.

Future Expansion Future Contraction

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Weekly US Raw Steel Production Capacity Utilization (Capacity reduction as demand falls)

30% 40% 50% 60% 70% 80% 90%

Jan-08 Mar-08 May-08 Jul-08 Sep-08 Oct-08 Dec-08 Feb-09 Apr-09 33.5% Dec 27 42.1% May 1

Source: American Iron & Steel Institute

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Raw Steel Production 2008 and 2009

• 1st Quarter: 27.5m tons, 2.1m tons / wk
• 2nd Quarter: 27.6m tons 2.1m tons / wk
• 3rd Quarter: 27.2m tons 2.0m tons / wk
• 4th Quarter: 18.5m tons 1.5m tons / wk
• 1st Quarter 2009: 13.6m tons 1.03m tons / wk

Source: American Iron and Steel Institute

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Scrap

$300 $310 $332 $322 $300 $340 $420 $430 $290 $125 $220 $170 $195 $260 $255 $785 $890 $850 $410 $720 $600

$570

J- 07 A- 07 S- 07 O- 07 N- 07 D- 07 J- 08 F- 08 M- 08 A- 08 M- 08 J- 08 J- 08 A- 08 S- 08 O- 08 N- 08 D- 08 J- 09 F- 09 M- 09 A- 09

2007 2008

Flat scrap prices with no significant change expected in short term.

2009

Source: American Metal Market

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Pig Iron

$297 $304 $306 $306 $316 $341 $358 $796 $613 $417 $290 $241 $227 $214 $250

$789

$510 $653 $377 $740 $395 $731

J- 07 A- 07 S- 07 O- 07 N- 07 D- 07 J- 08 F- 08 M- 08 A- 08 M- 08 J- 08 J- 08 A- 08 S- 08 O- 08 N- 08 D- 08 J- 09 F- 09 M- 09 A- 09

2007 2008

Pig iron prices will not recover until scrap demand improves.

2009

Source: American Metal Market

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In 2008 Steel Markets Outperformed the Overall Economy

• Weakening Markets
• Non-residential construction
• Energy (line pipe, OCTG)
• Machinery
• Mining
• Farming
• Infrastructure (highways, roads, bridges)
• Exports
• Weak Markets
• Auto
• Banking and Financial
• Residential Housing

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Idled capacity

• 33 Blast Furnaces in the U.S. and Canada
• 20 are idled

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U.S. GDP Forecast

0.0% 4.8% 4.8% 0.9%

• 6.3% -6.1%
• 2.5%

0.2% 0.7% 2.8%

• 0.2%
• 0.5%

1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09

Actual Forecast

GDP growth forecast = 2008: 1.1% / 2009: -3.5% Source: Global Insight

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Housing Starts

1.60 1.71 1.85 1.95 2.07 1.81 1.34 0.927 0.715 1.082 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Actual Forecast

Millions of units

Source: Global Insight

Forecast has housing market hitting bottom in 2Q09 . Regardless of when the bottom hits, a very slow recovery will proceed.

1.Housing Starts at 791,000 2.Building Permits at 708,000 October 2008 (Nov. 19 release) has the following SAAR:

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Investment - USA Fixed

Non-Residential and Residential (% change in $)

• 25%
• 20%
• 15%
• 10%
• 5%

0% 5% 10%

2001 2002 2003 2004 2005 2006 2007 2008 2009 Non-Residential Residential

Forecast

Residential investment (housing, remodeling, etc) is having another very tough year while non-residential investment (plants, equipment, computers, etc) began to decline in 2009 after 6 years of strong growth.

Source: Global Insight, May 2009

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Non-Residential Construction Demand

Non Residential Steel Consumption

US Non-Residential Building - Floor Area (Millions of Square Feet)

1670 1428 1333 1443 1517 1606 1668 1368 1063

200 400 600 800 1000 1200 1400 1600 1800 2001 2002 2003 2004 2005 2006 2007 2008 2009F Floor Area (Millions of Square Feet)

Assumptions:

• Actual data for square footage per McGraw-Hill Spring 2009 Outlook.
• Steel consumption based on average steel weight developed by ArcelorMittal USA.
• Degree of accuracy for model is unknown, for estimation purposes only.

Estimated Non-Residential Building Steel Consumption (in Tons)

11,424,000 10,664,000 11,544,000 12,136,000 12,848,000 13,344,000 10,944,000 8,504,000 13,360,000 2,000,000 4,000,000 6,000,000 8,000,000 10,000,000 12,000,000 14,000,000 16,000,000 2001 2002 2003 2004 2005 2006 2007 2008 2009F Tons

• 22%

5/20/2009 Confidential 18

Automotive Sales

• In 2009 the auto market will continue to buck

serious headwinds. Cyclical downturn, economic uncertainty, and structural changes contribute to depressed sales outlook.

• High gas prices in 2008 started to change the

vehicle mix that consumers want. Auto companies did not respond fast enough to the

• change. Small cars gained market share and

demand for large trucks and SUVs has not come back.

• Tightness in consumer credit is now cutting off

sales.

• Residual values for gas guzzlers is low.

Consumers are choosing to delay purchase decisions.

• The continuing slump in housing is depressing

pickup truck sales.

• 2008 4th quarter sales rate (10.3 million units)

was below the replacement rate (about 13 million units/yr).

• With severe sales declines from 2008 to 2010

pent up demand offers some upside potential in the next decade.

USA Sales

(millions of units)

Source: JD Power & Associates Last update: March 2009 10.2 12.2 14.2 16.2 18.2 2 2 1 2 2 2 3 2 4 2 5 2 6 2 7 2 8 2 9 2 1 2 1 1 2 1 2 2 1 3

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Automotive Production

• 2009 forecast is the lowest production

total since the early 1980’s.

• We will see production cuts by all

manufacturers and nearly all segments. Detroit 3 will be 1.7 million units lower in 2009 vs 2008. Honda, Toyota, and Nissan will be 260,000 units lower in 2009 vs 2008.

• Detroit 3 to account for 54% of production

in 2009, down from 63% in 2007 & 58% in 2008.

• Pass car will account for 53% of

production.

• Total imports dropped in 2008, 4.2 million,

but gain in share, 33% vs 30%, vs 2007. Imports will gain marginal share in 2009, due to mix change from trucks to cars.

• No inventory rebuild in 2009. OEMs

remain vigilant.

• Toyota Woodstock and Honda

Greensburg ramp up in 2009. Hyundai, Georgia, starts in late 2009.

NA production

(millions of units)

Source: JD Power & Associates

9.2 11.2 13.2 15.2 17.2 19.2

2 2 3 2 5 2 7 2 9 2 1 1 2 1 3

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NAFTA Auto Production

3.8 4.0 3.5 3.6 3.5 3.5 3.0 2.7 1.7 1.9 2.5 2.6

1st Qtr 2nd Qtr 3rd Qtr 4th Qtr

2007 2008 2009

Source: J.D. Power & Associates

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USA Energy Market Steel Demand million of tons

1 2 3 4 5 6 line pipe OCTG 2006 2007 2008 2009

Source: Preston Pipe & Tube Report

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Wind Power

U.S. Installed Capacity

5,000 MW new capacity expected in 2009

• 3,000

2,000 7,000 12,000 17,000 22,000 27,000

2000 2002 2004 2006 2008 Megawatts

Source: AWEA

Plate consumption of 125 tons per wind turbine or over 375,000T in 2007

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Appliance Market

Appliance sales are hurt by the housing market but replacement market keeps appliance sales running above housing drop. Jan-Aug ’08 sales are off 8% compared to housing starts being off by 31% over the same period. A further reduction in housing starts in 2009 will impact sales. Replacement market will be weaker than normal due to poor economic conditions.

41.7 43.5 47.2 48.1 47.8 45.1 35.5 40.5 30 35 40 45 50 2002 2003 2004 2005 2006 2007 2008 2009 Actual forecast

Millions of Units

Source: AHAM, ArcelorMittal forecast

USA Core Appliance Shipments*

Core appliances = washers, dryers, refrigerators, ranges, dishwashers, and freezers

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US Production of Office Furniture

$0.00 $2.00 $4.00 $6.00 $8.00 $10.00 $12.00 $14.00 ' ' 1 ' 2 ' 3 ' 4 ' 5 ' 6 ' 7 ' 8 ' 9 ( f ) ' 1 ( f )

Change in Production $ (y-o-y %)

• 20%
• 15%
• 10%
• 5%

0% 5% 10% 15% ' ' 1 ' 2 ' 3 ' 4 ' 5 ' 6 ' 7 ' 8 ( f ) ' 9 ( f ) ' 1 ( f )

Source: BIFMA History and Forecast

Following 4 years of growth, the value of U.S. office furniture production is dropping in 2008 and 2009 (along with consumption). Imports constitute approximately 15-20% of the market.

Office Furniture Production

Billions of Dollars

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• U. S. Steel Service Center

Number of Months Shipments on Hand

Based on a representative sample of the U.S. Service Center Industry

Carbon Flat Rolled

1.5 2 2.5 3 3.5 4

'02 A J O '03 A J O '04 A J O '05 A J O '06 A J O '07 A J O '08 A J O '09

Months-on-Hand

Actual Long Term Average

Source: MSCI

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• U. S. Steel Service Center

Total Shipments & Inventories

Carbon Flat Rolled

Based on a representative sample of the U.S. Service Center Industry

1400 1600 1800 2000 2200 2400 2600 2800 3000 3200 3400

' 2 A J O ' 3 A J O ' 4 A J O ' 5 A J O ' 6 A J O ' 7 A J O ' 8 A J O ' 9

4,000 4,500 5,000 5,500 6,000 6,500 7,000 7,500 8,000 8,500

Monthly Shipments 3 Mo Rolling Ave Month End Inventory

Monthly Shipments ,000 Tons Ending Inventory ,000 Tons

Source: MSCI

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Flat Roll Monthly Imports

400 500 600 700 800 900 1,000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2007 2008 2009 Source: DOC

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New Orders for Manufactured Durable Goods

New Orders, % Change from Previous Month (seasonally adjusted)

• 10%
• 8%
• 6%
• 4%
• 2%

0% 2% 4% Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09

New Orders, Seasonally Adjusted Value (in Millions of $)

120,000 130,000 140,000 150,000 160,000 170,000 180,000 190,000 200,000 210,000 220,000 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09

Feb was first increase in 7 months.

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USA – leading indicators bottoming out (1/2)

US Purchasing Managers Survey (Headline)

30 35 40 45 50 55 60 65 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 US -New orders - manufacturing

300 325 350 375 400 425 450 475

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

USA registrations: Passenger cars and trucks

200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 2007M1 2007M5 2007M9 2008M1 2008M5 2008M9 2009M1 2009M5 2009M9

Light Trucks Passenger Cars

C ars 2007 average 630k Light truck 2007 average 476k

US Consumer Confidence (1985 = 100)

20 45 70 95 120 145 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Long term average 100

5/20/2009 Confidential 30

US Housing permits (Seasonally adjusted), 000's annual rate

500 700 900 1,100 1,300 1,500 1,700 1,900 2,100 2,300 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Daily Stock Indices - 2008/09

3,300 3,800 4,300 4,800 5,300 5,800 6,300 6,800 J A S O N D J F M A 6,000 8,000 10,000 12,000 14,000 16,000

FT 100 DAX 30 DJ 30(RHS)

USA – leading indicators bottoming out (2/2)

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Economic Stimulus Package

• Total package: $787 billion
• Tax cuts: $274 billion
• Infrastructure Projects: Over $85 billion
• Infrastructure Needs: $1.6 trillion

$1.2 billion Other (Economic Development Administration, Coast Guard, Maritime Administration, St. Lawrence Seaway $5.0 billion Rail $5.3 billion Aviation $7.0 billion Army Corps of Engineers $10.0 billion Federal Buildings $12.0 billion Transit $14.3 billion Environmental Infrastructure $30.3 billion Highways/Bridges Funding Projects

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American Reinvestment and Recovery Act

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• In China, ¾ of growth will come from government demand, particularly

infrastructure spending. The government has the cash and determination to prop up domestic spending.

• Many new Economies have been hit by the sudden fall in private cross

border capital flows (5% of GDP in 2007).

• Japan latest package of tax cuts and government spending will provide

the biggest fiscal boost of any OECD country. Then the public-debt stock will approach 200% of GDP. No room for more fiscal stimulus…

• Double-digit unemployment, years of weak investment and higher

public-debt burden will dent economies potential.

• Higher unemployment and rising bankruptcies could easily cause a

vicious new downward lurch.

• Despite some good news, the worst global slump since the Depression

is far from finished…

Conclusion A glimmer of hope? (2/2)

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* Developed world includes US, Canada, EU15, Japan and Korea Source IISI

World steel apparent demand from 1950 to 2006 – millions of tonnes

A new demand growth dynamic due to China and emerging economies

World steel market expected to grow by 3 to 5% per year for the next 10 years driven by continuing industrialisation from China and emerging economies

Steel consumption per capita in 2006 (kg)

200 400 600 800 1000 1200 1400 1 9 5 1 9 6 1 9 7 1 9 8 1 9 9 2 +5%/y +1%/y +7%/y 86 266 467 100 200 300 400 500 Emerging World China Developed World*

In December 2007 ArcelorMittal acquired an equity interest in China Oriental Group Company

• Ltd. ArcelorMittal is becoming the second largest

shareholder of the Group which produces steel products such as billets, strips, H-beams, cold rolled and galvanized strip.

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Risks

• Credit markets do not respond
• Government auto sales tax credit program freezes consumers
• Cap and trade

5/20/2009 Confidential 36

Energy efficiency must be a priority for steel producers in developing countries

0.0 0.5 1.0 1.5 2.0 2.5 3.0

China India USA

50 100 150 200 250 300 350 400

CO2 /ton generated by steel production (2005 estimate) 2005 crude steel production (millions of metric tons)

Total steel-industry CO2 generation in 2005 (millions of tons) 925.1 81.8 94.9

5/20/2009 Confidential 37

2009/2010 Market Outlook Summary

• The financial crisis continues to

weaken our outlook for 2009. Global growth is threatened too.

• Home values continue to erode.
• Real wages are falling. Disposable

income declines.

• Unemployment is rising.
• Credit availability is open issue.
• Energy sector weakens somewhat

with falling energy prices

• Agricultural and mining sectors

weaken in 2009 as a result of falling commodity prices.

• Auto production will be down from

the disappointing performance in 2008.

• Housing bottom is hopefully near and

we may see a marginal increase in in

• 2010. Housing prices will not recover

in 2009, however.

• Non-residential construction will

contract. 2009 will be a difficult year for U.S. manufacturing, but the combination of pent up demand, low inventories, and stimulus money could make for a sharp recovery.