On the upswing: has the domestic steel industry learned its lessons?For anyone looking at the stock market throughout the past year, it may come as a surprise, but US Steel has been one of the big gainers. Throughout the past five years, Pittsburgh-based US Steel has posted a return of around 200 percent, far greater than Dell Computer, Microsoft and Cisco Systems “Cisco” redirects here. For other uses, see Cisco (disambiguation).
Cisco System,Inc. (NASDAQ: CSCO, HKSE: 4333 ) is an American multinational corporation with 54,000 employees and annual revenue of US $28.48 billion as of 2006. , three of the high-tech darlings of the 1990s.
What gives? Has the steel industry--and not only the steel industry, but the integrated steel industry--become a growth industry?
Maybe, maybe not.
But what is becoming apparent is that some steel companies learned a number of lessons during the domestic steel industry's most recent downturn.
NEW ATTITUDE. Internal and external reasons account for the improving landscape within the domestic steel industry. Probably the most significant boon has been the overall improvement in the world economy. Additionally, the flurry of consolidation has put the world steel industry into fewer and more fiscally solvent hands.
The question now is whether the industry will maintain its new business philosophy when the industry does turn downward.
According to according to
1. As stated or indicated by; on the authority of: according to historians.
2. In keeping with: according to instructions.
3. several consultants to the steel industry, the answer is, "Yes."
Michael Locker, president of Locker Associates, a New York New York, state, United States
New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of City-based steel consulting firm Noun 1. consulting firm - a firm of experts providing professional advice to an organization for a fee
business firm, firm, house - the members of a business organization that owns or operates one or more establishments; "he worked for a , says that one big change is that integrated steel mills have decided to hold the line on production. According to a report by Locker Associates, U.S. producers have been able to respond to softening softening /sof·ten·ing/ (sof´en-ing) malacia.
a change of consistency, with loss of firmness or hardness. demand for finished steel by reducing production volumes instead of by reducing prices.
Locker Associates reports that the consolidated integrated mills are now able to adjust their blast furnaces blast furnace, structure used chiefly in smelting. The principle involved in this means of extracting metals is that of the reduction of the ores by the action of carbon monoxide, i.e., the removal of oxygen from the metal oxide in order to obtain the metal. to meet declining demand in the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. .
According to the American Iron & Steel Institute, basic oxygen furnace A basic oxygen furnace, also known as an LD converter, is the place within an integrated steel mill where molten iron from the blast furnace is changed into liquid steel. (BOF) steel production in the United States fell by nearly 11 percent last year. Each of the top BOF steel producers took significant action to curb production, with US Steel idling its largest blast furnace for a good part of the year to complete a rebuild. At the same time, Mittal Steel, one of the three top steel producers in the United States, idled its Weirton Steel hot end last May, ultimately deciding to permanently close the mill. Neither of the mills built up inventory to make up for their hot-end outages.
According to the Locker Associates report, while integrated and electric arc furnaces An electric arc furnace (EAF) is a furnace that heats charged material by means of an electric arc.
Arc furnaces range in size from small units of approximately one ton capacity (used in foundries for producing cast iron products) up to about 400 ton units used for secondary reduced their outputs when demand softened, integrated mills reacted more aggressively to weaker flat-roll demand, which marked a major shift in their overall strategy. In the past, integrated mills were primarily driven by volume.
The result of this output reduction was a higher pricing floor than in prior cycles. Hot roll prices, which topped out in late 2004 at more than $700 per ton, declined to only as low as $435 per ton in August of 2005, before bouncing back to $550 per ton by the end of the year.
The ability to control their production has allowed U.S. steel The United States Steel Corporation (NYSE: X) is an integrated steel producer with major production operations in the United States and Central Europe. The company is the world's seventh-largest steel producer ranked by sales (see list of steel producers). mills to remain much healthier than in the prior downward cycle. By controlling their production levels, integrated steel mills were able to keep prices from dropping to levels that were seen in previous down cycles, which wiped out a number of steel mills.
Consolidation among the U.S. steel industry was a factor enabling steel companies to hold down their production. Mittal Steel, based in the Netherlands, and US Steel were able to take capacity off line to keep from cutting into finished product prices too deeply. Also, by eliminating excess capacity, the steel industry was able to more quickly rebound with stronger prices.
EAFs also were able to better control their production levels to compensate for a decline in demand last year. However, unlike in years past, according to the report from Locker Associates, the EAF EAF - Effort Adjustment Factor segment was more successful because of its strength in the long-products market, which was more robust last year.
A factor that has previously put integrated steel companies at a distinct disadvantage to electric are furnaces was the cost of raw materials. While companies such as Nucor were able to produce steel at far lower per-ton costs because of relatively low ferrous ferrous (fĕr`əs), iron in the +2 valence state.
Containing or having to do with iron. The difference between ferrous and ferric is the number of valence electrons they contain (ferrous contains two and ferric contains three), which scrap prices earlier this decade, the climb in ferrous scrap prices has tipped the balance back toward the integrated steel companies, according to Charles Bradford, principal with Bradford Research of New York City New York City: see New York, city.
New York City
City (pop., 2000: 8,008,278), southeastern New York, at the mouth of the Hudson River. The largest city in the U.S. , a consulting group to the steel industry.
Concerning the changing outlook for steel, Bradford says, "If you are a steel company right now and you aren't making money, you shouldn't be in business."
Integrated steel companies, which, by percentage, use far less ferrous scrap as a raw material, have been able to more successfully weather the higher ferrous scrap prices recorded in the last couple of years.
RAW MATERIAL COSTS. Companies that purchase ferrous scrap are now seeing their per-ton costs climb far higher than those who have a more captive raw material market. US Steel, which controls much of its raw material, on the other hand, has been able to keep its production costs much lower.
Additionally, mergers and bankruptcy plans are reducing legacy costs Legacy costs is a term formed by analogy with the computer industry's legacy systems. Legacy costs are those incured by an organization in prior years under different leadership or when the entity's priorities and resources were different. for integrated mills, lessening the disadvantage that these companies have been operating under relative to EAF mills and giving them more flexibility.
However, while basic oxygen furnace steel mills rely more on iron pellets and pig iron pig iron: see iron.
Crude iron obtained directly from the blast furnace and cast in molds (see cast iron). The crude ingots, called pigs, are then remelted along with scrap and alloying elements and recast into molds to produce than on ferrous scrap for their raw materials, iron pellets have also increased sharply in price.
According to Tony Taccone, a steel industry consultant with First River Consulting, Pittsburgh, three iron ore producers--Companhia Vale do Rio Doce, BHP Billiton BHP Billiton is the world's largest mining company. Its origin is in the 2001 merger of Australia's Broken Hill Proprietary Company (BHP) and the UK's Billiton, which has a South African background. The result is a dual-listed company. and Rio Tinto--control around 70 percent of the world iron ore market. Even with the goal of strengthening the steel industry's pricing power Pricing Power
An economic term referring to the effect that a change in a firm's product price has on the quantity demanded of that product. Pricing power ties in with the "Price Elasticity of Demand. through mergers, the stranglehold stran·gle·hold
1. Sports An illegal wrestling hold used to choke an opponent.
2. A force, influence, or action that restricts or suppresses freedom or progress. Also called throttlehold. that iron ore producers have on the market makes integrated steel producers' ability to drive down raw material prices only partly successful.
These iron ore producers have been pushing through several aggressive price hikes. However, for the most part, U.S. steel makers have been able to avoid these price increases because they own much of their own raw material infeed.
In North America North America, third largest continent (1990 est. pop. 365,000,000), c.9,400,000 sq mi (24,346,000 sq km), the northern of the two continents of the Western Hemisphere. , many integrated steel companies are finding it helpful that they already have sizable siz·a·ble also size·a·ble
Of considerable size; fairly large.
siza·ble·ness n. stakes in their own raw material network. Tacone notes that Dofasco recently purchased an iron mine while US Steel also owns its own iron ore mining facilities. He says that steel companies are attacking yields and trying to keep raw material costs under control.
Meanwhile, EAFs, which are confronted with volatile ferrous scrap prices, are look ing to reduce their dependency on openmarket ferrous scrap by extending their raw materials supply lines.
Commercial Metals has extended its scrap buying network as a way to offset the uncertainty within the market. Schnitzer Steel also has developed a fairly substantial network of scrap suppliers to smooth out the volatility.
For other companies without the network of scrap suppliers, many are looking to become more active in using pig iron, direct reduced iron Direct reduced iron is produced from iron ore powder through heating and chemical reduction by natural gas.
While this is in general a more expensive process than reducing the ore in a blast furnace, there are several factors which can make it economical:
However, while owning or operating a DRI See Digital Research. plant may be an alternative, Bradford says these operations require a significant amount of natural gas, which is also a volatile commodity.
THE NAME OF THE GAME. Most industry observers feel that consolidation will continue to take place among the steel industry and that a number of domestic steel companies will be added to the mix.
One of the biggest beneficiaries of the recent improvement in steel markets has been Mittal Steel. After snapping up International Steel Group (which acquired the bankrupt LTV LTV
See: Loan-to-value ratio ), Mittal has been on an acquisition binge, taking over large integrated steel operations without having to deal with legacy costs. At press time the company was in negotiations with Arcelor, based in Luxembourg, one of the top steel producers in the world.
While a few of the major acquisitions have been garnering a majority of the attention in the world market, Bradford estimates that in the United States there are probably 20 other deals that should be done to further consolidate the North American North American
named after North America.
North American blastomycosis
see North American blastomycosis.
North American cattle tick
see boophilusannulatus. steel industry.
The consolidation bug could expand to include both upstream and downstream operations as well. "No one in the United States is big enough to not be consolidated," Bradford adds.
While consolidation has been a driving trend, a related issue is whether the steel industry can and should become more vertically integrated, which would allow for better control of their raw material prices.
In a presentation recently given at a conference on steel and ferroalloys, Frank McGrew, with the research firm Morgan Joseph, based in New York City, noted that significant changes are taking place in the steel and scrap metal industries. For instance, transactions are now driving downstream consolidation to maintain pricing leverage and the scale needed to attract adequate supply. The recent consolidation in the steel industry is helping to maintain pricing discipline, and industry stability appears intact in the near-term, according to McGrew.
McGrew also predicted in his presentation that the attempts by producers to vertically integrate will fail, Russians will become more active in the acquisition market and domestic steel companies and foreign firms will look to joint ventures with increasing interest.
Other analysts say that the steel industry is seeing significant interest from companies based in India and Russia, which are both becoming greater players in the steel industry, in addition to China.
But what about acquiring scrap facilities as a way to guarantee that enough raw material can be obtained? Most consultants say that this is a less likely scenario. Locker says that most scrap companies are too fragmented to have any major impact on a steel company's business.
"There isn't a lot of traction for acquiring scrap yards scrap yard n → depósito de chatarra;
(for cars) → cementerio de coches
scrap yard n → parc m à ferrailles;
( ," Taccone says.
However, a flurry of activity is expected in the steel service centers. This part of the steel industry is highly fragmented, and more steel companies are looking to become more fully integrated by taking a stake in or by outright purchasing service centers to "get closer to the market," one industry watcher notes.
Outside North America a number of steel mills own or operate steel service centers. The North American steel industry, as one consultant puts it, is more the exception and not the rule when it comes to service centers and steel mills.
However, there is greater interest in forward integration into the steel service centers. "It is very clear that is the steel mills' strategy right now," says Locker.
While the steel industry has been enjoying its strong run, the hike in interest rates, as well as the potentially cooling economy, will again pose many of the same questions for the steel producers, whether they operate EAFs or integrated mills. If higher interest rates bring slower growth, or if commercial construction cools down, how mills adjust will be key.
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