Steel Industry Outlook Federal Reserve Bank of Chicago December 5, 2008 Robert J. DiCianni ArcelorMittal USA
Agenda • 2008 Review • 2009 USA Steel Forecast • Global Outlook • Key Issues • Risks for 2009 Confidential 1
In the first half of 2008 Steel Markets Outperformed the Overall Economy • Strong Markets • Non-residential construction • Energy (line pipe, OCTG) • Machinery • Mining • Farming • Infrastructure (highways, roads, bridges) • Exports • Weak Markets • Auto • Banking and Financial • Residential Housing Confidential 2
Industrial Production Manufacturing Only Recession of 2001 115 83 113 81 111 Production Index % Utilization 109 79 107 77 105 103 75 101 73 99 97 71 '00 '01 '02 '03 '04 '05 ,06 '07 '08 Through September 2008 Index Utilization Manufacturing Production Index and Capacity Utilization – U.S. Federal Reserve Confidential 3
ISM Manufacturing Index 2006 through September 2008 58% Future Expansion 53% 48% Future Contraction 43% 38% 2006 2007 2008 Manufacturing index drops to 38.9% in October. Recession zone of ISM is 40-45%. This is the lowest reading of the ISM Index since September 1982. This index is usually predictive of manufacturing activity across the next ~6 months. Confidential 4
Raw Steel Capacity Utilization 89% 84% 79% 74% Capacity utilization starts to fall as mills begin to cut production in order 69% to more closely match demand. 64% Last significant production cuts were in 4Q06-1Q07. 59% 54% Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jun-08 Aug-08 Oct-08 Capacity reduction as demand falls Source: American Iron and Steel Institute 5 Confidential
Raw Steel Production 2008 • 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: 19.7m tons 1.6m tons / wk (AM projection) Source: American Iron and Steel Institute 6 Confidential
2008 Steel Prices CRU Monthly Base Prices 2008: Midwest ($/ton) $1,500 HR CR $1,400 HDG Plate $1,300 $1,200 $1,100 $1,000 $900 $800 $700 $600 Confidential 7
Scrap Prices: #1 Busheling - Chicago $890 $280 drop in premium scrap in Oct (following $280 drop in Sept $785 $850 too) as export activity continues to slide and domestic production cuts limit demand. $720 $570 $600 $430 $420 $410 $340 $300 $310 $332 $322 $300 -$765 since July $290 $125 2007 2008 J-07 A-07 S-07 O-07 N-07 D-07 J-08 F-08 M-08A-08M-08 J-08 J-08 A-08 S-08 O-08 N-08 Source: American Metal Market Magazine Confidential 8
2009 Steel Outlook Confidential 9
GDP Growth Forecast U.S. continues period of very weak growth in 2009. 5.0% • Recession is deepening. 4 quarters of real GDP decline are anticipated. Actual Forecast 4.0% • The housing bottom (in terms of starts) has been pushed out from 4Q08 to 2Q09. 3.0% • Non-residential construction will decline in 2009. • Unemployment is quickly rising. 2.0% • Credit conditions will ease only slowly. • The weak $ will continue to provide opportunities 1.0% for U.S. exports. However, global growth is slowing which and limit export opportunities. 0.0% 1Q'07 2Q'07 3Q'07 4Q'07 1Q'08 2Q'08 3Q'08 4Q'08 1Q'09 2Q'09 3Q'09 4Q'09 2.8% 2.8% -1.0% 2.0% 2.0% 1.3% 1.3% -2.0% -3.0% 2006 2006 2007 2007 2008 2008 2009 2009 Source: Global Insight, Aug 2008 + Sept 2008 Alternate + Nov 2008 -1.0% 1.0% Confidential 10
Housing Starts Millions of units 2.07 2.07 Actual 1.95 1.95 Forecast 1.85 1.85 1.81 1.81 1.71 1.71 1.60 1.60 October 2008 (Nov. 19 1.34 1.34 release) has the following SAAR: 1.082 1.082 1.Housing Starts at 0.927 0.927 791,000 0.715 0.715 2.Building Permits at 708,000 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010 Source: Global Insight Forecast has housing market hitting bottom in 2Q09 . Regardless of when the bottom hits, a very slow recovery will proceed. Confidential 11
Investment - USA Fixed Non-Residential and Residential (% change in $) 10% Forecast 5% 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 -5% -10% -15% Non-Residential Residential -20% -25% Source: Global Insight, Aug 2008 + Sept 2008 Alternate Residential investment (housing, remodeling, etc) will have another very tough year in 2009, while non-residential investment (plants, equipment, computers, etc) will cease to grow in 2009 after 6 years of strong growth. Non- residential growth potential has been reduced due to economic and financial fallout. Confidential 12
USA Energy Market Steel Demand million of tons 6 5 4 2006 2006 3 2007 2007 2008 2008 2 2009 2009 1 0 line pipe OCTG OCTG OCTG forecast assumes $xxxx/barrel oil for 2009 Source: Preston Pipe & Tube Report 13 Confidential
Wind Power U .S. Installed Capacity 8,586 MW currently under construction 2008(f) 2007 2006 Plate consumption of 125 2005 tons per wind turbine or over 375,000T in 2007 2004 2003 2002 2001 2000 -3,500 1,500 6,500 11,500 16,500 21,500 Megawatts Source: AWEA Confidential 14
Appliance Market USA Core Appliance Shipments* Millions of Units 50 50 48.1 48.1 47.8 47.8 Actual forecast 47.2 47.2 45.1 45.1 43.5 43.5 45 45 41.7 41.7 40.5 40.5 38.5 38.5 40 40 35 35 30 30 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 Source: AHAM, ArcelorMittal forecast 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. Core appliances = washers, dryers, refrigerators, ranges, dishwashers, and freezers 15 Confidential
Office Furniture Production US Production of Office Furniture Change in Production $ (y-o-y %) Billions of Dollars 15% $14.00 $12.00 10% $10.00 5% $8.00 0% '00 '01 '02 '03 '04 '05 '06 '07 '08(f) '09(f) $6.00 -5% $4.00 -10% $2.00 -15% $0.00 '00 '01 '02 '03 '04 '05 '06 '07 '08(f) '09(f) -20% Following 4 years of growth, the value of U.S. office furniture production is droping in 2008 and 2009 (along with consumption). Imports constitute approximately 15-20% of the market. BIFMA History and Forecast (11/17/08) Confidential 16
USA Infrastructure upgrade.. • Of 592,000 bridges in the USA, 26% are either structurally deficient or functionally deficient. • A high percentage of water systems, sewage systems, levees and roads are aged and near their end of life. Highway Bill Passes Congress “In September’2008, Congress approved an emergency infusion of $8 billion into a federal highway fund, a move that would prevent states from delaying or canceling hundreds of road projects. The $8 billion infusion is a substantial new public investment in highways and transit programs next year, with a healthy expected bump-up in funds allocated to the bridge program and various other steel consuming infrastructure related projects.” The current highway bill expires in 2009. The replacement bill next year is expected to come in at an authorization level of $286 to $500 billion over a six year period 17 Confidential
Automotive Sales • In 2009 the auto market will continue to buck USA Sales serious headwinds. Cyclical downturn, economic uncertainty, and structural changes (millions of units) contribute to depressed sales outlook. 18 • High gas prices are changing the mix that consumers want. Auto companies cannot respond fast enough to the change in consumer’s tastes. Small cars are now in demand and large trucks are not. 16 • Residual values for gas guzzlers is dropping, causing consumers to delay purchase decisions. Consumers are holding rather than buying new more fuel efficient vehicles. 14 • Auto OEMs will still work to reduce incentives and unprofitable fleet sales • Slump in housing is hurting pickup truck sales. • After 3 years of auto sales declines, pent up demand offers some upside potential in the 12 next decade. Source: JD Power & Associates Confidential 18
Automotive Production NA production • Big 3 cut truck production and (millions of units) capacity as demand shifts to small 19 cars. • Lack of capacity for small cars hurts production in 2008 and 2009. 17 • Growth of imports; 2002 - 3.2 million units to 2007 - 4.6 million. • Imports will continue to rise in 2008 15 and 2009 due to mix change from trucks to cars. • No inventory rebuild in 2008 and 13 2009. OEMs remain vigilant. • Toyota Woodstock and Honda Greensburg ramp up in 2009. 11 Hyundai, Georgia, starts in late 2009. Source: JD Power & Associates Confidential 19
Other Markets • Railcar • Electric Motors • Farming • Machinery Confidential 20
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 4 3.5 Months-on-Hand 3 2.5 2 1.5 '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 Actual Long Term Average Confidential 21
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