Integrated Steel CEOs Warned: Reinvent Or Die

By Tonya Vinas Integrated steel producers in North America need to drastically reinvent their business model in order to survive, according to the chairman of the UK's Corus plc. Sir Brian Moffat, speaking to steel executives at the annual American Iron and Steel Institute convention in Chicago May 22, said the integrated model -- in which producers make steel from scratch, the industry's dominant business structure -- is no longer viable and attempts to fix it "have not attained the desired results." The world has changed dramatically from political and economic perspectives in the past 15 years, Moffat said, and steel executives today must respond with more drastic change. "As we all know, despite its size and the importance of steel in the world, [the industry] is progressively finding it more difficult to make a return on capital employed." Moffat, also chairman of the International Iron and Steel Institute, said on a global basis, the steel industry has averaged return on capital of just 6% from 1974 to 2000, well below the cost of capital. Despite efforts to improve labor productivity, reduce capacity, develop new technologies and make other changes, the industry has not dramatically improved that measure. Moffat pointed to the aluminum industry as one model integrated steel could emulate. Aluminum has become "disintegrated" to the point that more than 99% of aluminum transactions today entail a transfer of information, not product. The industry also has increased collaboration. "It's a much healthier industry. It can deal with the imbalances between supply and demand by a network of aluminum warehouses." Corus itself, a result of the 1999 merger of British Steel and Koninklijke Hoogovens, is not as far along in this reinvention as Moffat would like, but he said the global US$400 billion steel industry is full of potential because of its size and possible growth. It will take drastic changes at all levels, though. "The integrated model is dead, and fundamental innovation is required."

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