A Matter of Survival

It seems a week doesn’t go by where there isn’t a report of a steel producer in North America taking some type of draconian measure to stay afloat. Some steelmakers are shuttering unprofitable mills; other steel companies have filed for bankruptcy protection. Other companies are considering selling off assets as a way to stave off greater financial difficulties.

Bethlehem Steel Corp., Bethlehem, Pa., the third largest steel company in the U.S., is selling off its interests in a number of ancillary companies. The goal is to sell marginal assets worth up to $170 million to raise cash. Some of the assets include an iron ore producer and a short line railroad.

A GROWING CLUB

The list of troubled steel companies, many industry watchers feel, could grow this year. LTV Corp., Cleveland, and Wheeling-Pittsburgh Steel Corp, Wheeling, W. Va., filed for Chapter 11 bankruptcy protection late last year.

The electric arc furnace (EAF) segment, consisting of consumers of large amounts of ferrous scrap, has not been immune from the shakeout. Recently, CSC Steel Co., Warren, Ohio, announced its bankruptcy and is reportedly liquidating assets (including scrap) at its Warren plant.

Other EAF steelmakers are either teetering on bankruptcy or are shuttering steel operations. Recently Qualitech Steel Corp., Pittsboro, Ind., announced plans to close its Indiana mill; an EAF steelmaking operation in Kansas City, Mo., has closed, and several other high profile concerns have idled parts of their operations.

While other mills are closing, many operations have opted to reduce production schedules, another ominous sign for the hard-pressed North American steel industry.

As the hard times have continued, there has been a call from many steelmakers for both greater government attention to trade barriers and for government assistance to struggling companies.

However, some question whether this strategy is the wisest move. In the view of many North American steel companies, any financial bailout by the government runs counter to free market enterprise.

CAPACITY GLUT

In the wake of these problems that have hammered the steel industry, a question is arising as to whether the dynamics of the steel industry is changing. Can the integrated steel operations survive in this new environment? Will EAFs continue to eat away at the market share enjoyed by integrated operations? And, would the steel industry be better if some older, less efficient mills are closed permanently?

What is generally agreed to at the present time is there is a significant overcapacity of steel on the world market.

One consultant to the steel industry attaches a 30% over capacity figure to steelmaking globally. This huge surplus is resulting in steel prices that have dropped precipitously over the past year. At the same time there are reports that a number of countries have been shipping steel to the U.S. at prices so low some allege these countries are selling the product just for the hard currency, even if the price fetched is below production cost.

North American steel companies have been combating this move by filing anti-dumping complaints with the U.S. Commerce Department and the International Trade Commission, with mixed results.

Filers of these complaints allege various steel products produced outside North America are being shipped into the U.S. at prices far below fair market value.

TIGHTENING THE BELT

While many allege integrated steel companies, with their more labor intensive methods, would be the first to see the inevitable slide into oblivion, the reality is both integrated steel mills and EAF operators are closing down

For integrated producers, one of the biggest problems is the high cost of facility operation. Capital investment in an integrated mill is huge. And, with a return on investment only sketchy right now, it is unlikely a significant amount of capital will be available for these operations.

Charles Bradford, principal of Bradford Research Inc., New York, a consulting firm for the steel industry, cites the cost to build an integrated steel mill: To build an integrated steel mill may cost around $5 billion, while a mini-mill may cost as little as $500 million.

Competing in this new dynamic requires more flexibility. Steve Filips, executive vice president of operations for North Star Steel Inc., Edina, Minn., points out that one advantage for EAFs is the flexibility of the operations. “You can adjust the capacity to meet the demands. For integrateds, you have to shut down the furnaces.”

Bradford points out integrated steel mills use roughly three times more energy than mini-mills, creating a huge disadvantage for these operations.

Although integrated steel companies typically use much more gas than their EAF counterparts, the reliance on electricity at EAFs is also creating major problems right now. Soaring electricity rates are causing tremendous stress for many mini-mills. In fact, North Star Steel has opted to switch off its Arizona melt furnace due to the soaring electricity costs in that region. In the meantime, the company will be sending steel slabs from other North Star operations, as well as from competitors, for rolling at the site until it is able to find a more affordable electricity rate.

While soaring natural gas and electricity costs are affecting all segments of the steel industry, Bradford saves much of his criticism for the inherent cost structure of many integrated steel mills. “The biggest product is the cost structure. The less that is produced, the more the cost per unit goes up.”

High wage scales and more workers per ton produced can cause another competitive disadvantage. Bradford notes that LTV Steel, one of the largest integrated steel companies, has an employment cost structure that is roughly 30% of its steel price. Meanwhile, Nucor Corp., Charlotte, N.C., a much more fiscally healthy steelmaker that has been able to withstand the pummeling being taken by the domestic steel industry, typically sees 10% of its steelmaking price go toward employment costs.

Compounding these problems are the “legacy” costs affiliated with many integrated steel companies. Many of the benefits accorded to union steel workers, found at most integrated steel mills, are creating significant ongoing costs.

Getting down even further, Bradford cites basic production levels. He says Nucor, with about 4,400 employees, produced 11.3 million tons of steel last year.

Meanwhile, U.S. Steel Group, Pittsburgh, with 19,266 employees, produced about 11.4 million tons of steel last year. This, Bradford points out, demonstrates more than anything else the inherent disadvantage older, union-based steel companies have.

With shrinking margins for the finished product, this is the difference between staying profitable and losing market share, according to some industry watchers.

Mark Millett, vice president and general manager of the flat rolled division of EAF steelmaker Steel Dynamics Inc. (SDI), Butler, Ind., echoes many of these statements. He points out quality levels achieved at EAFs continue to grow. As an example, he says that 35% of SDI’s product already goes toward the automobile industry.

“The quality is there,” Millett says. Further, while much of the steel SDI sells to the auto industry is not for the exterior portion of vehicles, he feels it is inevitable that EAFs will be able to move further up the quality chain to make many of the steel products required.

THE COST OF DOING BUSINESS

According to Bradford, the costliest part of steelmaking is the raw material. This is one advantage EAFs now possess. With the price of ferrous scrap at a low point, the cost to make a ton of steel in an EAF continues to decline (given fixed electricity costs). The question posed over the past several years regards the availability of high-quality ferrous scrap, especially as EAFs continue to make higher grades of steel.

This concern continues to be repudiated by many EAF operators. Jon Ruth, executive vice president, commercial activities, for North Star Steel, feels the quality issue is moot. “We have not had any difficulty. There is lots of DRI (direct reduced iron), HBI (hot briquetted iron). And pricing is at reasonable levels.”

As for the concern that EAFs are able to develop markets only for lower grades of finished steel, Ruth feels there is no limit to the opportunities for mini-mills. He notes some mini-mills have gone to making slabs.

On the integrated side, AK Steel Corp., Middletown, Ohio, continues to be a profitable operation, despite relying on basic oxygen furnaces for its steel making.

Another North American steel company able to avoid many of the pitfalls seen with the steel industry is Dofasco Inc. Based in Hamilton, Ontario, the company has benefited from using both basic oxygen furnaces and electric arc furnaces to operate.

PROTECTIONISM OR SOCIAL DARWINISM?

The dire situations of many U.S. steel companies has generated calls for action by the U.S. Congress. Suggestions range from slapping tariffs on steel entering the country to financial support for domestic steel mills. Placing import quotas on steel from other companies and enforcing outright bans on steel suspected of being shipped to the U.S. at below production costs have also been called for.

While states such as Ohio, the headquarters of LTV and CSC Steel, are putting together financial packages to assist steelmakers, some other steel industry executives are not necessarily looking upon this move as beneficial to the industry.

A crescendo of voices from Capitol Hill and from local and state governments are calling for steps to be taken to preserve steel production in the U.S. Ohio Governor Robert Taft recently announced a $110 million plan to help the steel industry in Ohio.

The plan calls for $30 million to assist steel companies to expand or restructure their operations, $60 million in tax exempt bonding authority to finance pollution control equipment, $15 million to help upgrade workers’ skills, and $5 million in grants for infrastructure improvements or for the acquisition of key equipment.

Similar plans or strategies are being floated in various states as well as at the federal government level. What has been causing public opinion pressure as of late are the number of mills that have announced either bankruptcy protection or closed down operations.

Some steel company executives feel moves such as these may help a particular company in the short term, but in the long term it does more damage to the overall U.S. steel industry. “Companies that can’t compete shouldn’t be bailed out by the Federal Government,” says one steel executive.

North Star’s Ruth feels that while the government’s move is inherently good- protecting jobs-in the long term it hurts not only the company it aims to help, but other steel companies that face many of the same market conditions.

SOMETHING HAS TO CHANGE

It is readily acknowledged there is a significant overcapacity of global steel production. Some peg the figure to be as much as 30%. As foreign steel producers continue to produce steel for hard currency, all steel companies will suffer from slumping prices.

While it often appears competition between integrated steel companies and EAF operations mandate one winner and one loser, not everyone feels draconian measures need to be taken. Bill Heenan, with the Steel Recycling Institute (SRI), Pittsburgh, says in a normal market both types of steel producers are needed. “In normal markets we need both. So they will co-exist.”

Nowhere is this issue more readily seen than with Dofasco. The company has had success with both basic oxygen and EAFs at its Hamilton, Ontario, complex. At the present time, roughly one-third of steel produced at the facility comes from its EAF.

While benefiting from advantages on both sides, the biggest advantage the steel company is establishing a high-end niche. “We have targeted high end steel markets,” says Bill Gair, manager of communications for the Canadian steel producer.

As for the calls for the U.S. government to protect steel interests, Gair says the Dofasco line is, “Our belief is that everyone should be on an even playing field.”

John Armstrong, with U.S. Steel, makes a similar statement. While readily admitting imports from outside the U.S. have put a significant amount of negative pressure on markets, it is still unfair for either state or federal government agencies to assist individual companies during these tough times, he remarks.

Mark Millett of Steel Dynamics echoes these sentiments. “Maintaining old facilities is not the best use of taxpayer money.”

While the reality is EAFs have a number of advantages, Armstrong points out that as an integrated steel operation, U.S. Steel continues to innovate and remain up-to-date with new equipment.

In the short term, however, Armstrong acknowledges that difficult markets have forced U.S. Steel, one of the two largest steel producers in the U.S., along with Nucor, to slow production at a number of its mills. This includes taking one of its furnaces in Gary, Ind., off line during these tough times.

Thomas Danjczek, president of the Steel Manufacturers Association (SMA), Washington, an association of companies involved in the steel mini-mill industry, points out the mini-mill sector continues to grow as a segment of the overall steel industry. The most recently reported figures show the amount of steel produced [globally? nationally?] by mini-mills is presently 43% per year.

This figure continues to grow as an overall component of the steel industry. Further, Danjczek notes, there are some forecasts that this segment will continue to grow to make up as much as 60% of the overall steel industry.

However, the growth has a limit. Despite the opportunities afforded by mini-mills, there will always be a need for integrated steel mills that use iron ore to produce steel. Without this, there would be a shrinking supply of steel available.

Danjsczek adds that while the pressure to assist some of the struggling steel companies is being exerted, his group also is coming out against some forms of assistance by the government.

MINI-MILLS AS MAJOR PLAYERS

In 1970, EAF carbon steel companies accounted for only 15% of U.S. steel production, compared to today’s 40%+ figure.

According to the SMA, in 1999, while total U.S. steel production decreased almost one and a half million tons, EAF production actually increased by a half a million tons.

Further, while many supporters of integrated steel operations note high-end steel finished products are the bailiwick of integrated steel mills, Danjczek says by adding iron units in various forms to their scrap melting furnaces, mini-mills have continued to penetrate the markets for higher quality, higher value-added products such as special bar quality steel, heavy structurals, and flat-rolled sheet.

While the SMA, an association of steel mini-mills, feels mini-mills are able to make nearly any type of high-end steel, Armstrong feels integrated steel mills have a number of advantages. The biggest advantage is the ability to make high quality steel. “High value-added steel, coated steel, and steel used for automobiles, appliances and the tubular steel industry all help integrated steel mills.”

Danjczek rattles off key advantages mini-mills have. Labor costs are much less. “Mini-mills are less labor intensive. It takes less than one-man hour to make a ton of steel at a mini-mill. In an average integrated steel mill it takes up to three man-hours to make a ton of steel.

SDI’s Millett also ticks off some of the advantages enjoyed by EAFs: EAF technology is the lowest cost for flat-rolled steel; EAFs typically use around 25% of the energy required by integrated mills; EAFs use scrap metal, making it a sustainable industry; EAFs are more environmentally friendly; and have more labor efficiency.

Fred Warner, a spokesman for SDI, says the cost differences to produce a ton of steel at an EAF and at an integrated steel mill are significant. For SDI, the labor needed to produce one ton is roughly .37 hours per ton. At the same time it ranges between two to three man-hours at an integrated mill to produce one ton of steel.

Legacy costs also are much steeper at integrated steel mills. Pension plans, medical and health plans and other costs paid to former employees adds to the overall fixed costs required at an integrated steel mill.

Finally, the soaring cost of energy, including natural gas and electricity, is crimping profitability at all manufacturing plants, including both integrated steel mills and EAFs. However, Danjczek says that mini-mills require around one-third less energy than integrated steel mills.

All the advantages of mini-mills come while there is a massive global overcapacity of steel, with some sources saying that between 200 million to 300 million tons of excess steel capacity is now available. With the federal government still debating which types of action to be taken, it may be several more months before any changes take place.

According to U.S. Steel’s Armstrong, one step being taken is filing suits against importers in many instances. While U.S. Steel has won some cases, the company has not won all of them.

Regardless, U.S. Steel and other steel producers feel that steel markets will continue to slump through much of the year. While a brave face is put forward, most steel industry watchers feel that it is inevitable that some steel producers will end up going by the wayside. RT

The author is Internet Editor for the Recycling Today Media Group.