A Global Future?

Dec. 21, 2004
U.S. steelmakers are intrigued -- at least by joint-venture possibilities.

By its nature, steelmaking is a highly capital-intensive business. Over the years that reality has fostered parochial thinking -- and a reluctance by American steel companies to sink huge investments into foreign production facilities. Nationalistic attitudes and protectionist policies around the world, coupled with assorted political risks, also have dampened their enthusiasm for global expansion. But perhaps the biggest deterrent for American steelmakers has been the simple fact that the U.S. is the largest, and most inviting, market for steel in the world. In fact, from 1991 to 1997 U.S. demand for finished steel swelled by nearly 50% -- from about 82 million net tons to more than 120 million net tons, reports the American Iron & Steel Institute. That growing appetite, coupled with slumping demand in Asia and other regions, helps to explain why imports to the U.S. surged last year -- triggering a frantic call for government antidumping sanctions. The lure of the U.S. market is understandable, contends Raj Aggarwal, Mellen professor of finance at John Carroll University in Cleveland. "Once you become a certain size, you cannot avoid the U.S. market. It is the largest market in the world -- the big gorilla, so to speak. You've got to feed the big gorilla." While many U.S. steelmakers remain content to concentrate on the domestic market, others have begun to adopt a more global perspective -- one that goes beyond simply looking for opportunities to export products from the U.S. Clearly, there is growing interest in the concept of globalization, whether that means building steelmaking facilities in other parts of the world, pursuing mergers and acquisitions, or expanding global market reach through joint ventures and other alliances with foreign partners. Steel-industry executives tend to disagree about the importance of globalization as a strategic imperative, but two events in 1998 helped to focus their attention on the subject. First, General Motors Corp. announced a global purchasing strategy that would require its steel suppliers to bid on contracts to supply GM plants around the world. The implication is that suppliers with global capabilities -- perhaps in combination with foreign partners -- will get a larger share of GM's business, while those unable to do business in other parts of the world may risk losing their domestic sales to GM. Meanwhile, Ford Motor Co. and other large U.S. multinational firms also have urged their domestic steel suppliers to develop plans to follow them abroad. Second, Ispat International NV, the world's most globalized steel company, acquired Chicago-based Inland Steel Co., an integrated producer, in a deal valued at $888 million. It was the first U.S. acquisition for Ispat, a unit of London-based LNM Group, which owns steel mills and related operations in 10 countries. Some analysts interpreted the acquisition as a portent of future consolidation in the industry, which is troubled by excess capacity worldwide. Robert Darnall, former chairman and CEO of Inland Steel Industries Inc. -- which included Inland Steel as well as a majority stake in Ryerson Tull Inc., a service-center operation -- is inclined to agree. "It is my belief that 20 or 25 years from now, there will be a handful of global steel companies -- whether they are [single] ownership firms or marketing alliances," says Darnall, now president and CEO of Ispat North America Inc., which includes facilities in Canada, Mexico, and Trinidad, along with the Ispat-Inland operations in the U.S. "Whatever the arrangement, I believe that to serve global customers, there is a compelling reason for global companies." Increasingly, he notes, steel consumers -- in the automotive, appliance, and consumer durables industries -- have been becoming more global. "The lexicon in the automotive industry the last few years has been 'global sourcing,'" Darnall points out. "Everybody means something different. Everybody has a little different twist on it. But certainly the purchasing departments of the major auto companies are trying to figure out a way to simplify their purchasing strategy. They want to get the products they need, when they need them, with the right kind of quality, and obviously at competitive prices. At the same time, they want to simplify the process, rather than having purchasing organizations in every corner of the earth doing the same kinds of things." Thus, from a marketing standpoint, he sees a clear advantage in having the ability to satisfy global sourcing requirements -- which is one reason he championed the creation of Ryerson Tull steel service centers on a joint venture basis in India, Mexico, and Shanghai, prior to the acquisition by Ispat. (Ryerson Tull is being spun off as an independent public company.) But that's not the only competitive edge that a global strategy can deliver. A second major benefit, Darnall stresses, is the ability to take advantage of cost differences on the production side -- especially in the primary and semifinished segments. "It makes a lot of sense," he says, "to be able to manufacture steel in places where there are comparative [cost] advantages -- and ship product from there to wherever the market dictates." Latin America and South America offer "major cost advantages in terms of raw materials and energy," he points out. That's one reason why Ispat Mexicana SA de CV (Imexsa) in Mexico is one of the lowest-cost slab producers in the world. Slabs from Mexico are now being shipped to Inland facilities in the U.S. for final finishing operations. "The U.S. steel industry has its greatest comparative advantage in its downstream finished-product capabilities," Darnall says. "But the disadvantage in the U.S. is back in the primary end of the business -- which is a very capital-intensive and very labor-intensive part of the business. And raw-material and energy costs are relatively high in North America compared with other parts of the world. "If there are spots in the world where there are inherent major production cost efficiencies, you've got to be there. If you can make high-quality slabs at Imexsa for $100 a ton less than you can make them in the U.S., that is a pretty compelling production efficiency." One steel executive who is less enthusiastic about the imperative for globalization is John Correnti, CEO at Nucor Corp., the Charlotte-based electric-furnace "minimill" producer. He stresses that economics, rather than market access, is the primary incentive for developing global production capability -- but contends that it is often more economical to produce steel in the U.S. and ship it to overseas customers. "Basically," Correnti says, "you are looking at about $40 a ton [in shipping costs] to get it from here to over there. And if you can get the [production cost] differential down below $40 a ton, it is cheaper to produce the steel here and then ship it over there." Nucor's perspective, no doubt, is influenced by the fact that electric-furnace producers, which start with scrap steel and substitute materials such as direct-reduced iron, don't incur the upfront basic steelmaking costs that integrated producers bear. And their labor costs are lower, since they require fewer working hours per ton of steel. Still, until a few months ago, Nucor had been considering a joint-venture in northern Brazil, in partnership with that country's largest steelmaker, Companhia Siderurgica Nacional (CSN). "We thought it was an ideal place to go," Correnti says, in part because the workforce could have been drawn from "good, hard-working, agrarian people." However, the two companies had different timetables in mind. Nucor envisioned building the mill in stages, while CSN "wanted to do the whole thing at once." As a result, Nucor backed out of the deal -- and CSN is now proceeding on its own. Political factors often are a deterrent to expansion overseas -- especially in Third World countries, Correnti points out. "Some Third World countries don't want to produce a million tons of steel with 350 people. They want to produce a million tons with 3,500 people. They are looking to create employment." Such socialistic agendas tend to throw the economics out of whack. "We could put our Nucor mills anyplace where the pure laws of economics are going to dictate," Correnti contends. "The problem is that is not true in most of the world. It is the law of politics that dictates -- whether it is the politics of protecting jobs or something else. And you don't have a chance of being successful under those circumstances." Political risks associated with operations in foreign countries also give American steelmakers pause, observes Richard Freuhan, co-director of the Center for Iron & Steelmaking Research at Carnegie-Mellon University, Pittsburgh. Freuhan, who has directed a steel-industry competitiveness study for the last seven years, says the study team determined that "by far the cheapest place in the world to produce steel is Venezuela. It would make sense for somebody to go into a joint venture or produce slabs in Venezuela and ship them to America for further processing." But "political uncertainties" and workforce issues -- including education level and reliability -- are major drawbacks in that country. (Nonetheless, the sale of Venezuela's Sidor steel complex -- acquired by a Latin American consortium in late 1997 -- attracted a number of bidders, including Ispat and Brazil's CSN.) South Korea is another country where production costs are low, Freuhan says. "But Korea is really a closed steel market. POSCO [Pohang Iron & Steel Co. Ltd.] has 90% of it. So you really can't get into that market. So what do you do -- produce in Korea to export . . . back to America?" Steel-industry globalization is not a new phenomenon, he points out, although the U.S. industry has more often been a target -- especially for Japanese steelmakers -- than a pursuer. He notes that Japan's NKK Corp. acquired National Steel about 15 years ago and that Kobe took a half interest in U.S. Steel's Lorain (Ohio) Works -- now known as USS/Kobe Steel Co. In addition, Kawasaki owned AK Steel in Middletown until a few years ago, and Nippon Steel Corp. teamed up with Inland on two joint-venture steel finishing plants -- known as I/N TEK and I/N KOTE -- in New Carlisle, Ind. Many of the Japanese moves in the U.S. were undertaken as part of a strategy to enable Japanese producers to continue supplying steel to Japanese automakers who had established American transplant operations. Some of the best minds in the steel business have identified the U.S. as the best location to produce and sell steel, the Carnegie-Mellon professor asserts. "We have the freest economic system in the world," he says. "In Europe everything is tied to politics and social legislation -- so their costs of production or the amount you can produce is regulated. The same thing is true in Japan." If foreign producers weren't dumping more than 30 million tons of steel a year into the U.S. market, American steelmakers would have plenty of room for growth at home, Freuhan says. "It is glamorous to talk about globalizing, but when it comes down to it, with truly fair trade, there is enough growth potential in the American market alone for continued expansion of the steel industry." On the whole, he is skeptical that globalization is a viable strategy for most U.S. steelmakers, although he concedes that some joint ventures abroad may make sense. As an example, he cites U.S. Steel's joint venture in Kosice, Slovakia, with VSZ, the largest flat-rolled steel producer in Central Europe. Announced in late 1997, the deal involves production and marketing of tin mill products in that emerging market. U.S. Steel also has a stake in a three-way joint venture with Ferralloy and Intacero de Mexico to create a warehousing and slitting operation in Mexico to facilitate JIT deliveries to customers below the border. "A joint venture where you work with a local company on finishing operations may be a sound approach," Freuhan says, but he questions the wisdom of "grossly going in and taking over a steel plant" on foreign soil. John Carroll's Aggarwal, on the other hand, sees a combination of factors creating pressures to both globalize and grow in size. "I think the key issue is that you have to have a global reach because your customers are becoming global," he says. Steelmakers that supply automotive companies, for example, can take advantage of their understanding of customers' procurement systems and just-in-time requirements to establish business relationships with the auto companies' offshore operations. "Your two [information] systems have to talk to each other -- the supplier's system and the buyer's system," Aggarwal points out. "So you are not only selling steel to them, you are selling services, including a service called JIT. . . . The larger you are, the more global you can be -- and the more you can spend on information technology, which is becoming increasingly important in terms of distribution and logistics." Growth through globalization also promises economies of scale and can contribute to making production processes more efficient, Aggarwal says. "You learn how to do things efficiently in one place, and you can replicate that all over the world." Larger companies, with the resources to invest in advanced production technologies, also are in a better position to achieve the consistent quality performance that customers demand, he notes. Aggarwal concurs that joint ventures are an appealing path to globalization. "When you do a joint venture or a strategic alliance, you are not taking on all the risks," he says. "You share the risks, as well as the expertise. So it makes a lot of sense, especially if you are going to a foreign country where the risks are even higher."

Who's Behind The Import Surge?
Imports of steel mill products
Country 1998(10 mos.) % change from '97
Japan 5.5 million tons up 157%
Russia 4.4 million tons up 46%
South Korea 2.9 million tons up 105%
Australia 839,000 tons up 156%
Ukraine 790,000 tons up 65%
South Africa 553,000 tons up 107%
Indonesia 463,000 tons up 612%
India 344,000 tons up 90%
TOTAL *34.6 million tons up 30%
* Total includes imports from other nations with smaller increases or decreases.
Source: American Iron & Steel Institute

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