The Age of Discontinuity at Steel's Primary End

World Steel Dynamics has embarked on a multi-client study titled The Age of Discontinuity at Steel's Primary End. The first chapter of this study – "Steel Slab Shortfall?" – was completed in November. In this study, we investigated questions such as:

"Where will the supply of new slab for third-party purchases come from in the future?"
"Will the slab market be suppressed by supply constraints for years to come?"
"What is the expected price of steel slab over the steel cycle?"
"Who are the likely buyers and sellers?"
"What are the operating costs, in detail, for slab producers the world over?"

WSD's price for the slab study is $20,000.

The price for the entire 13-chapter "Age of Discontinuity at Steel's Primary End," which includes the slab study, is $50,000. Should you purchase the slab study for $20,000, but decide at a later date to purchase the entire study, your price for the remaining 12 chapters of the study would be $30,000.

In this work, we are seeking to identify the profound changes that are likely to occur at the primary end of the steel business in the next five to 10 years. In order to see the industry with "new eyes," we have decided to assess the current and expected state of affairs for all of the products that are crucial to the primary side of the steel business (with iron ore being the principal exception). For each product, we will consider the additions to supply, the demand outlook, shifts in international trading patterns, trends in production cost, capital expenditure requirements, the impact of new technologies, price variations over the cycle, the impact of foreign exchange rate swings and other items.

WSD thinks that, in order to obtain special insights into possible developments for any one of the products, we need to know all of them. The products to be investigated are:

1. Steel scrap (including home, new and obsolete scrap).
2. Steel scrap substitutes (including DRI, Corex and HIsmelt).
3. Metallurgical coke.
4. Blast furnace pig iron.
5. Steel slab and billet (with a greater emphasis on slab).
6. Hot-rolled band.

Some of the macro themes that we will explore in The Age of Discontinuity include:

• The steel industry's capital shortfall is so substantial that it already is creating profound changes in the nature of the steel business.

• Demand for steel is unrestrained, but the supply of steelmakers' metallics is constrained.

• Except for China, blast furnace output is destined to decline in the next decade.

• Many integrated steelmakers in the West are under siege because of high costs, a product mix that does not match up with the local market and production inflexibilities.

• Pricing "death spirals" for steel sheet products on the world steel export market are sure to recur in the future.

• Given many steelmakers' needs to repair badly damaged balance sheets, capital outlays in the steel business will lag the recovery of cash flows in the next decade.

• Due to the growth of protectionism, not many new plants will be built to sell much of their product on the world steel export market.

• Reflecting the steel industry's slow rate of capacity expansion and the positive steel demand outlook, there may be a higher proportion of "good" years for steelmakers in the next decade.

Our partner in the study is Donald F. Barnett, president of Economics Associates Inc. Don is a well-known consultant to the steel industry with great expertise in assessing steel mill costs. He is also expert at building information systems that portray the changing relationships in the steel industry.

We will be delivering the study on a chapter-by-chapter basis. The final study will include all of the chapters, including revisions or updates of the chapters that have already been sent to you. A description of the contents of the 13 chapters that make up the study follows.

- Appendix -

Contents of "The Age of Discontinuity"

1. Key findings. This chapter will summarize our findings, raise "wild card" possibilities, and provide answers to key questions.

2. What implications for which players? We will discuss, herein, the consequences of our findings for different players in the steel industry and those that are tied to it. The categories of players includes iron ore companies, steel scrap processors and traders, steel scrap substitute producers, pig iron sellers, slab producers for the world steel export market, producers of hot-rolled band and steel buyers. We will also explore how strategies may vary by region of the world.

3. Assumptions, scenarios and wild cards. This chapter will detail, to the year 2012, our assumptions for global and regional steel demand, steel trade scenarios, blast furnace and crude steel production scenarios, steel production by furnace type, steel scrap generation, hot-rolled band production via the conventional, thin-slab and direct casting routes, and other items.

4. The Chinese freight train. What can stop it? Based on WSD's continuing visits to China, this chapter will examine in depth the impact of the explosive growth in the Chinese steel industry on steel producers and metallics' suppliers in China and elsewhere.

5. A steel futures market in steel's future? We will consider the possibility of futures markets for steel products such as slab, hot-rolled band and rebar. Might such a development be a positive for the steel mills, or might a rise in "transparency" work to make the pricing structure even more volatile and unpredictable?

6. Sledgehammer techno toys. WSD defines a sledgehammer technology as a revolutionary development that profoundly changes the economics of the steel business. Such technologies, by definition, are threatening to established steel companies. One such technology was the development of thin-slab casting in the early 1990s, which permitted the minimills to get into the steel sheet business. Two possible "sledgehammer" developments are the HIsmelt process, which could become a low-cost alternative to the blast furnace, and the Castrip process, which seeks to cast thin-gauge hot-rolled band at a speed of about 150 meters per minute. Both of these technologies will be evaluated in this chapter.

7. Steel industry capital shortfalls: Good or bad news for whom? Granted that pricing "death spirals" on the world steel export market will continue to recur, WSD thinks that many steel companies will be perpetually short of the capital that is needed to upgrade and expand their equipment. Shortages of capital might force integrated mills to dis-integrate; i.e., to rely on third-party vendors for a rising portion of their need for steelmaking metallics and slab. This chapter will make use of our Global Steel Finance information system and our annual "Financial Dynamics of International Steelmakers."

8. The steel scrap conundrum. This chapter will evaluate the supply/demand outlook for home scrap, new scrap and obsolete scrap on an aggregated and regional basis. Here's the key question: Will steel scrap prices rise more sharply, and/or more frequently, in the future because of rising steel scrap demand, on the one hand, and limitation to the obsolete scrap reservoir, on the other hand? We will look at this question on a regional basis. Included will be steel scrap price forecasts over the steel cycle, possible new trading patterns and usage trends in scrap due to changes in EAF output versus BF/BOF output. This chapter will be, in effect, an update of WSD's Global Metallics Balances (GMB) system, which includes a 200-line metallics balances analysis for 54 countries for the years 1975 to 2010, inclusive. (Note: Chapters 8-13 will make extensive use of WSD's Global Steel Alert early warning system that contains monthly country and regional data on: a) metallics balances; b) steel slab and billet trade; and c) production, imports and exports of hot-rolled band and long products.)

9. Steel scrap substitute illusions, realities and opportunities. How long will it take for steel scrap substitute production to rise sufficiently to offset shortfalls in pig iron production? The dream and illusion for decades has been that SSS output would soar; however, sagging spot prices in bad times for the industry, along with the slower-than-expected development of new technologies that permit the use of coal, have slowed the advance. This chapter will also include WSD's World Cost Curve for about 90 actual and hypothetical steel scrap substitute facilities that have a gross capacity of 80 million tonnes per year.

10. Pig iron possibilities. We will consider the outlook for pig iron production in the years ahead in different regions of the world. Included will be our "World Cost Curve" operating cost results for most of the world's major blast furnaces.

11. Coke: The Chinese conundrum. Will the Chinese cokemaking industry be willing to supply its customers outside of China with 20-25 million tonnes of coke each year? Is there adequate coking coal capacity in China? WSD will investigate the supply/demand balance for coke after taking into account little growth of blast furnace output outside of China in the next 15 years and reduced coke consumption per tonne of pig iron. Included will be our "World Cost Curve" operating results for coke plants at most of the major steel mills the world over.

12. Steel slab shortfall? Where will the supply of new slab come from for third party purchases? Will slab remain supply constrained for years to come? Included will be our "World Cost Curve" operating results for most of the steel plants in the world that produce slab.

13. Hot-rolled band: The Most Critical Steel Sheet Product. We will include capacity and shipment estimates for most of the world's hot strip mills. Included will be our "World Cost Curve" operating results for hot strip mills the world over.

The individual chapters of the study will be delivered when completed. The final study, which may be finished about May 2003, will also be sent in its entirety to all study subscribers. The final study will include revisions and updates of the individual chapters that had been previously sent to you.