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Thomas A. Danjczek

President

Steel Manufacturers Association

February 8, 2011

New Government & the Impact on Steel

American Metal Market

State of Steel 2011

Outline


SMA


Set The Tone


Factors Influencing the Election


US Macro Issues





(
thanks Kelley Drye!)


Steel Specific Issues


Conclusion






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State of Steel 2011

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The Steel Manufacturers Association (SMA)


35 North American companies:


30 U.S., 3 Canadian, and 2 Mexican


Operate 125 steel recycling plants in North America


Electric Arc Furnace (EAF) steelmakers using recycled steel


EAF steel producers accounted for nearly 2/3 of U.S. production in 2009


SMA represents approximately 90 million of U.S. 120 million ton capacity
(75%)


128 Associate members
-

Suppliers of goods and services to the steel industry


Governance


i.e. vast majority

SMA

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State of the Union:

Win the Future!

Amer i can I nnovat i on











Are we targeting What’s Important
NOW
?

Some of the Items Focused on:

-
Greater Internet Access

-
Renewable Energy (Wind and
Solar)

-
One Million Electric Vehicles by
2015

-
80% American Access to High
Speed Rail (75 Years)

-
Tax Loopholes

-
Public Schools Lagging


4

Factors Influencing the 2010 Election

It’s the economy, stupid…


The economy was the number one issue for the American public in 2010

frustrations with high and
stagnant unemployment figures, struggling housing markets, and persistently tight credit drove voter
sentiment


Those concerns were confirmed in exit polls on November 2, where over 60% of voters ranked the
economy as the nation’s top problem and almost 90% expressed concern about the state of the economy
over the next year (Associated Press)

Dissatisfaction/perception that government is not tackling the right issues


Frustrations augmented by the belief that the government has done more for Wall Street than for Main
Street during the current economic crisis


That sentiment, coupled with increasing public concern/skepticism regarding the role of government in
the private economy and the growing deficit and long
-
term national debt, has resulted in a general
perception that lawmakers aren’t listening and are overreaching


In exit polling, 75% of voters “expressed negative views about how the federal government is
working” while over half said “the government should let business and individuals handle more
things on their own” (Associated Press)

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Return to divided government



Control of the Senate will remain with the Democrats


New breakdown: 53 Democrats (including 2 Independents who caucus with the Democrats),
47 Republicans



The House of Representatives is now controlled by the Republicans


New breakdown: 242 Republicans, 193 Democrats



The majority of state Governorships are now held by Republicans


New breakdown: 29 Republicans, 20 Democrats, 1 Independent

Set the Tone

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-
Ec onomy

-
War in Iraq

-
War in Afghanistan

-
Health Care

-
Def i c i t Reduc t i on

-
Size of Government, Government Spending

-
Homeland Security

-
Taxes

-
Financial Oversight

-
I nt er nat i onal Tr ade

-
Ener gy and Envi r onment

-
Transportation and Infrastructure

-
L abor

-
Middle East Tensions

Big US
Gov’t

Issues/Priorities

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While the recession officially ended in June 2009, the sluggish pace of the recovery
remains a top concern for both the public and policymakers


“Official” Unemployment remains at close to 9.5% and consumer income and spending are fairly
stagnant


According to a recent Bloomberg News survey of economists, the unemployment rate will stay high for the
next year, averaging 9.3%


In early November, the Federal Reserve announced plans to purchase an additional $600 billion of
longer
-
term Treasury debt over the next eight months to loosen credit conditions in order to speed
the economic recovery and boost job creation


Interest rates are expected to remain low for the foreseeable future


Facing a new political dynamic and skepticism regarding “stimulus” spending efforts, the White
House reached out to Congressional Republicans to forge a deal on extending tax breaks during the
lame duck session of the 111th Congress


President Obama agreed to a 2
-
year extension of income tax rates for all income levels, while Republicans
acquiesced to several Democratic priorities aimed at stabilizing the economy, including a long
-
term
extension of unemployment insurance

Economy

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The need for policies to promote economic growth in the short
-
run is
complicated by the need/desire for longer
-
term austerity measures to
address the nation’s deficit and long
-
term debt


Reducing government spending is a top priority of the new 112
th

Congress


The continuing resolution for FY11 runs through March 4

House Republicans had initially called
for a return to FY08 spending levels, which would require about $100 billion in cuts

while cuts that
large may be difficult, significant reductions are likely


The conservative Republican Study Committee has proposed a plan to reduce spending by $2.5
trillion over the next decade


House Republicans’ rules package replaced “pay
-
go” with “cut
-
go”

any new mandatory spending
must be offset with spending cuts, but NOT with tax increases


Rules package also gave Budget Committee Chairman Ryan (R
-
WI) the authority to set spending
targets for appropriators if the House and Senate fail to agree on a final budget


Republicans have instituted a party
-
wide ban on earmarks


Spring vote to increase the debt limit may prove particularly challenging for the Republican caucus, with
many pledging on the campaign trail to vote against it


Opponents likely to use votes as leverage to secure commitments for longer
-
term deficit reduction
measures


President Obama has signaled that addressing the deficit and long
-
term
debt is an area ripe for compromise with Congressional Republicans

Deficit

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The cost of the tax package came in at just under $1 trillion and is being viewed by
many as a second stimulus, with some economists suggesting it could increase
2011 GDP by 0.5 to 1.25 percentage points

Taxes

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Ways and Means Committee Chairman Dave Camp (R
-
MI) and Trade Subcommittee
Chairman Kevin Brady (R
-
TX) are avowed free
-
traders


Items for consideration include:


Consideration of the stalled free trade agreements with South Korea, Panama, and Colombia


Administration is supportive of ratification and must work with Republicans to ensure passage of the agreements

could this be an example of early cooperation?


The Democratic Caucus remains divided on the issue of trade


Customs reauthorization legislation likely to emphasize trade facilitation


Export control reform could see some legislative action, although, for the most part, it will be done
administratively


Addressing China’s trade practices


Last Fall, the House passed the
Currency Reform for Fair Trade Act

Sen. Schumer (D
-
NY) has pressed for a Senate
currency vote, but
prospects for action this year are unclear


Last October, U.S. Trade Representative Ron Kirk announced that the United States has initiated an investigation of
China’s practices affecting trade and investment in green technologies

will Congress enter the debate?


More generally, the effect of the Tea Party is unknown

the movement has an anti
-
government, free market strain, but there is also a populist, anti
-
Wall Street
component and it is unclear how this cuts on any particular issue, particularly trade

International Trade

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Vigorous oversight of EPA will be a general theme throughout the 112
th

Congress


Oversight and Government Reform Committee Chairman Issa is soliciting responses from over 150
trade associations and businesses on regulations that have harmed job
-
growth

many expected to
emphasize environmental regulations, i.e. Mercury


Prospects for comprehensive climate legislation are weak

will see continued
Congressional efforts to slow down EPA’s regulation of carbon emissions


Numerous stand
-
alone bills to block or delay EPA action on GHGs have already been introduced in
the House


Senator Rockefeller (D
-
WV) plans to re
-
introduce his proposal (2
-
year delay of GHG rules for
stationary source emissions) in the coming weeks


Senator Barrasso (R
-
WY) plans to unveil a comprehensive measure to prevent federal agencies
from regulating climate change

Energy & Environment

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Piecemeal approach to energy policy presents opportunities for cooperation

as
demonstrated by bipartisan legislation approved by the Senate Energy and Natural
Resources Committee in the last Congress under Chairman Bingaman (D
-
NM)


Republicans in both chambers will place a greater emphasis on increasing domestic production of
traditional energy sources (
i.e.,

oil and natural gas)

and continue to focus on domestically
-
produced renewable fuels


Comprehensive offshore drilling safety legislation in response to the April Deepwater Horizon explosion/oil
spill is unlikely to be revived under Republican leadership in the House

even in the wake of
recommendations by the President’s spill commission



Potential Renewable Energy Standard (RES), but Republicans likely to push for inclusion of nuclear
energy and clean coal technology, a “clean energy standard”



Proposals for increased energy efficiency in industrial facilities and buildings (Home Star) as well as
financing for green technologies also on the table, but finding pay
-
fors will be difficult

Energy & Environment

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Pending or planned Democratic labor
-
related legislative initiatives are very unlikely
to move forward in 112
th

Congress


“Card
-
check” legislation (Employee Free Choice Act)


Mine safety reform


Legislation to allow all firefighters and police officers to unionize


In fact, legislative efforts moving in the opposite direction have been proposed
previously


Anti
-
card check legislation (Secret Ballot Protection Act)


Campaign finance reforms to regulate use of union dues to support union political activity


Some Democratic priorities can be pursued through administrative efforts of the
Department of Labor or the National Labor Relations Board

Labor

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What does the U.S. need to do?


Assume a Pro
-
Manufacturing Agenda


Business Tax Reform


Border Adjustable Taxes


Currency Adjustments


Energy Independence


Reasonable regulatory measures (Environment/Labor)


Climate for investments (Jobs, Jobs, Jobs) and Infrastructure


Solve the structural problems that caused the recession
-

Real
Foundation


Bad loans and securities on bank balance sheets


Reduce huge trade deficits


Policy incrementalism is not sufficient

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Rules Associated with Raw Material Cost and
Availability is #1 Issue for U.S. Steel Producers


Many countries continue to impose a variety of restrictions on exports of vital raw
materials


Export prohibitions


Export duties


Export quotas


Other measures


Trade
-
distorting restrictions on exports of raw materials


Give domestic producers in the exporting country an unfair advantage


Increase worldwide costs of production


Place a heavy burden on steel industries in developing countries that do not have substantial iron
ore reserves or steel scrap supplies


Steel


Raw Materials

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Meanwhile, Foreign Government Subsidies to Steel and
Steel
-
Related Industries Remain a Particular Concern…


Foreign government subsidies are a major cause of overcapacity in the global steel
industry and steel
-
related industries


Subsidies to steel and steel
-
related industries that 1) support inefficient and excess
capacity and/or 2) distort trade are continuing, and remain a particular concern


Examples include:


Fundamental currency misalignment/undervalued currencies


Preferential financing to add new capacity


Loan forgiveness/equity infusions to prop up obsolete capacity

Steel


Raw Materials

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Currency Manipulation


Market Forces


Compliance


Expansion


Government Intervention


Exports on the Rise


Trade Deficit


State Owned Enterprise Distortions


China’s Upcoming Steel Policy


Chinese Mercantilism

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Need to reduce corporate tax rates


Why not a VAT?

Steel


Taxes

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Challenge: Balance a slate of program reauthorizations with growing
deficit concerns and limited revenue options


Reauthorization of Surface Transportation Programs


SAFETEA
-
LU expired on September 30, 2009 and has operated under short term extensions since; last
extension expires March 4, 2011 (with the current FY11 CR)


Obama Administration has proposed a six
-
year reauthorization with a $50 billion up
-
front investment for
“roads, railways, and runways” and the establishment of an infrastructure bank


May see a multi
-
year reauthorization this year

leaders in both chambers have expressed a desire to get it
done


Discussions likely to be dominated by the hunt for funding sources


Projected fall in gas tax revenues may mean cuts to the program (an increase in the tax is most
-
likely
a non
-
starter)


Likely forced to focus on alternative revenue streams, including creation of an “infrastructure bank”
or greater use of public/private partnerships


Industry concerns regarding Republican House rules change to allow consideration of legislation that
funds surface transportation programs at a lower level than authorized by law (prohibited since
1998)

Steel
-

Transportation and
Infrastructure

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Around the Curve

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Things Around the Curve

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Things Around the Curve

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Key Questions Ahead


In the wake of Republican gains in both chambers, will the President move more to the middle and
revive efforts to work with Republicans, following in the footsteps of President Clinton? Are the
negotiations on tax policy a sign of things to come? Will we see cooperation on other major policy
initiatives, such as the reauthorization/revamp of No Child Left Behind and stalled free trade
agreements?


How will President Obama’s new competitiveness agenda play out? And what can we expect from
his recent Executive Order launching a government
-
wide review of federal regulations and their
impact on economic growth and competitiveness?


Will President Obama be able to “win back” the independent vote in 2012?


Will widespread concerns related to deficits and long
-
term debt remain at the forefront? How will
Members concerned with deficit spending vote on raising the debt limit this year?


What is the impact of the Tea Party movement on the Republican Caucus

will the Caucus be
divided on policy priorities or coalesce around opposition to the Administration? Will they show a
willingness to cooperate with President Obama?


In the wake of this year’s election and the loss of a Democratic majority, will we see some key
retirements in the House?


How will the current political climate affect the policy stances of moderate Senators over the next
two years? What additional retirements can we expect?


Will an already partisan atmosphere be strained ever further by the loss of moderates in both
chambers? Will we see two years of legislative gridlock?

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State of Steel 2011

2012 Election


In

the House, Democrats hold few competitive districts and need 24 to
retake the majority.



In the Senate, Democrats will defend 24 Senate seats (including two
Independents) to the Republicans 10. Republicans need four net wins to
take control of Senate.



Republicans currently have no clear frontrunner for the presidential
nomination.



President Obama’s race to lose.


25

Impact on Steel

Last Thoughts:


We’re in a traffic jam, moving slightly forward, but don’t know
other consequences


More Regulatory Oversight by Obama Administration
(OSHA;
EPA; DOC; etc.)


Don’t look to Washington
for much
Help!


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