Solving the China Puzzle

Session II – Running the Numbers

Thomas A. DanjczekPresidentSteel Manufacturers AssociationSeptember 28, 2006

Rev. 9/1/06

AMERICAN METAL MARKET CONFERENCE:

American Metal Market Conference

China: Impact and Outlook

6 C’s for China-Currency-Capacity

-Concerns and Challenges-Compliance-Conclusion Thomas A. Danjczek

PresidentSteel Manufacturers AssociationOctober 25, 2005

Last Year

LAST YEAR - Oct. 2005

-Currency

-Capacity (steel-making)

-Concerns/Challenges

-Compliance

-Conclusion

UPDATE - Sept. 2006

-Still a “dirty float”, with only a minor change; U.S. Congress upset

-Out of control government-subsidized growth

-U.S. trade deficit grows; steel trade exports increase; loss of customer base

-China’s trade policies and laws not enforced, regarding emissions and competitive facilities; arbitrary VAT’s

-Trends worsen in 2006; trade disruption due to state subsidies and currency manipulation; when will China play by market rules?

AMM – Solving the China Puzzle

China’s Steel Production

-July 2006 Chinese steel production 2nd highest of all time - down 14% from June 2006

-2006 419 annualized million tons projected after 7 months; first half of 2006: 198.8 million tons vs. 163.8 million tons in first half of 2005 – 21.4% increase

-2005 349.4 million tons

-2004 280.5 million tons

-2000 126.3 million tons

Data from: MAR, Citigroup, Soleil

AMM – Solving the China Puzzle

Chinese Steel Trade-July 2006 Chinese steel exports dropped to 2.85 million tons

(mt) (Intolerable) from record June level of 3.76mt. However, steel exports from China to U.S. through July were over 2.64mt, up over 60% from the comparable

period in 2005, with .5mt in July alone. Finished Steel (in million tons)

Imports Exports

-2006 *18.75 (annualized) *35.4 (annualized)

-2005 25.82 20.52

-2004 29.26 14.22

-2003 37.16 6.95

*Imports at 10.54, exports at 20.67 through July 2006; 24% of exports to Korea, 13% to U.S.

Data from: MAR, Citigroup, Soleil, and U.S. Department of Commerce

AMM – Solving the China Puzzle

U.S. Trade Deficit

June 2006 -$64.8 billion trade deficit ($65.0 in May, $63.3 in April)

2006 Annual Rate -$800 billion U.S. trade deficit

Key Stats -Of the $64.8 billion in June 2006, $19.7 billion w/ China (up from $17.2

billion in May); $24.7 billion in petroleum

-Since Yuan “revalued” in July 2005, 8.28 to 8.11 in July 2005, to 7.96 today…

4% a year???

AMM – Solving the China Puzzle

Conclusion

-“Imbalances can’t go on forever.” –Ernesto Zedillo

- Business investments will stay healthy over the next six months (Business Roundtable)

- Chinese steel market is facing risk of reliance on export market to absorb domestic overproduction (Citigroup)

- Steel industry will remain cyclical, but the downturns will be shorter and the valleys of the cycle will be less extreme (J.P. Morgan Securities)