What’s Next in Steel ?
Peter Warrian
University of Toronto
Steel Industry 2004
• Best of Times ?
• Worst of Times ?
It’s Pretty Punchy Out There !
The world steel market’s gone mad… I’ve never seen anything like this.
Peter Fish, MEPS
Steel prices on the world market in the future may be even more volatile
than in the past, with price peaks higher and price troughs not as deep as
in the past,
Peter Markus, World Steel Dynamics
Price Volatility
$800
$625
$525
$420
$320
$260
$470
Punch Line
• There will be an unprecedented level of
volatility in steel markets for the next five
years.
• It has the potential to destabilize
important sections of North American
manufacturing
Steel Market Gone Wild
• Base prices plus surcharges
– CR $390 12/03; $460 2/04; $600 4/04 ?
• China: Demand, Scrap
• Other Factors
–
–
–
–
Greed: Mills – our turn !
US $ Decline: Who wants to supply USA? 30:30
2.01 Duties Unanticipated Consequences: Hello
OEM Auction: Supply Chain Hoarding
Steel Production Forecast
Steel Production Forecast
Region (mil
tonnes)
2003
2004
% Change
EU
159.9
161.0
0.7
C&E
Europe
29.9
30.5
2.0
Ex-USSR
106.3
108.0
1.6
NAFTA
123
127
3.3
S. America
42.9
44.0
2.6
China
219.7
245.0
11.0
Japan
110.5
110.0
-0.5
Other Asia
108.3
112.0
3.4
Total
960.0
1,000.0
4.2
Source: MEPS World Steel Outlook, Q4 2003
Financial Results for Steel
Producers
US Integrateds
2001
2002
% Change
Shipments 000 tons
32,755
33,612
2.6
Sales ($/ton)
15,029
16,693
11.1
Oper. Cost ($/ton)
512
516
0.8
Oper. Income ($/ton)
(53)
(15)
71.7
Source: Locker Associates, Steel Industry Update 176, June 2003
Financial Results for Steel
Producers
Can Integrateds
2001
2002
% Change
Shipments 000 tons
10,990
11,449
4.2
Sales ($/ton)
6,435
7,399
15.0
Oper. Cost ($/ton)
603
602
-0.2
Oper. Income ($/ton)
(18)
44
344.4
Source: Locker Associates, Steel Industry Update 176, June 2003
Financial Results for Steel
Producers
NA Minimills
2001
2002
% Change
Shipments 000 tones
21,668
24,537
13.2
Sales ($/ton)
7,654
8,736
14.1
Oper. Cost ($/ton)
338
334
-1.2
Oper. Income ($/ton)
15
22
46.7
Source: Locker Associates, Steel Industry Update 176, June 2003
Price Trends in Raw Materials
($/metric tonne)
Recent Price
Previous Price
Coke
180
60 (early 2002)
Iron Ore
95
27 (2001)
Pig Iron
240
115 (late 2001)
Scrap
215
110 (2001)
Slab
270
145 (late 2001)
HR Band
350
175 (late 2001)
Source: Locker Associates, Steel Industry Update 182, December 2003
Three Steel Stories
Integrateds
– Consolidation of
Transnational Steel
– Innovation Gap
Minimills
– The Big Squeeze:
Scrap, Energy Prices
– Capital Restructuring
Ispat Sidbec
Service Centres & Supply Chains
– Supply Chain Surges
– Intermediation Plus
Ten Questions About the Future
1998 The Tipping Point
• The 1998 Asia-Russian financial crisis was
a Tipping Point for the global steel
industry.
• Will the fault line of the hot ends implode
the ‘re-constituted’ mills?
Flat Rolled Prices 1989-2003
Source: Locker Associates, Steel Industry Update 183, Jan 2004
World’s Largest Steel Companies
Rank
Company
Capacity (mil
tonnes)
1
Arcelor
44.0
2
LNM Group
34.8
3
Nippon Steel
29.8
4
POSCO
28.1
5
Shanghai Baosteel
19.5
6
Corus
16.8
7
Thyssen Krupp
16.4
8
NKK
15.2
9
Riva
15.0
10
US Steel
14.4
46
Stelco
4.7
51
Dofasco
4.4
?
Algoma
2.5
Source: IISI, Annual Report 2003
Critical Factors in the Implosion
• Crisis of spot market for flat-rolled and
import surge leading to Trade Cases
• Blowing away of Reconstituted Mills with
old Hot Ends
• Rise of China to set global spot prices and
demand for inputs (ore, scrap, freight)
How Does the Industry Innovate?
• Innovation in North American steel is
driven by the auto industry.
• How can the steel industry innovate for
the future?
Two Poles of Innovation
• Nippon Steel (Stelco)
• Arcelor (Dofasco)
Networks of Innovation
• Ultra Light Steel Auto
Body (ULSAB)
• Auto- Steel
Partnership (ASP)
The Dofasco Advantage
• Dofasco has become the most profitable
steel company in North America.
• How does it do this with such low levels of
R &D spending?
Dofasco Secrets to Success
• The Sweet Spot of Auto
• Vision: “Solutions in Steel”
• Leadership
• Technology Alliances
• Learning Culture
Dofasco and Technology
• Technology
– Same 50 Engineers
– Alliances and Licensing
• ‘Absorptive’ Capacities of the Firm
– Generic knowledge networks
– Implementation
– Tacit Knowledge: Working in Steel
Steel Trade Wars
• Steel trade wars and protectionism
dominated the industry from the 1970s to
the 1980s, but the WTO has ruled out
traditional US trade protectionism.
• What happens now that the ‘stealth
protectionism’ of bankruptcy procedures
(USA) and the low dollar (Canada) have
been removed?
Steel Trade Wars
• 70s-80s Steel Protectionism
• NAFTA steel but no Secure Access
– Disinvestment: Dofasco, Co-Steel, Ipsco,
Ivaco
• 2001 NAFTA Joint Cases
– Safeguard: No – Canada; Yes – USA, EU,
Japan
• 2003 WTO Ruling
Stealth Protectionism
• USA: Chapter 11 Steel Companies
• Canada: Medicare $7.95 Advantage
• 2004
– Non-renewal of 2.01 protection
– Canadian dollar surge
No Industry is an Island: Steel-Auto
Supply Chains
• Steel is no longer an industrial island to
itself, it is a strategic part of the materials
sector of the new economy.
• How are steel supply chains to the auto
industry functioning?
Ontario Steel
• Steel-Auto Interdependence
• Changing Interface
• Auto Supply Chain
Traditional Steel-Auto Link
• Big 3 Steel
– Stelco
– Dofasco
– Algoma
• Big 3 Auto
– GM
– Ford
– Chrysler
Steel-Auto Parts: New Links
• Traditional linkage:
– Subsidiary parts Divisions of Auto companies
– 75% internal, 25% outsourced, now reversed
• Central purchasing of Steel
– GM-US Steel yearly contracts
• New parts company players: Magna,
Ventra
Steel 2002: New steel, old players
• New steel
– 60% new steel for autos in 5 years
– New materials science: Research Chairs
– USLAB project
• Investment:
– Foreign partners: France, Mexico, Brazil
– Steel auto divisions: Dofasco, Algoma
– Dofasco goes laser: Boundaries between steel and
manufacturing
Steel 2002: New steel, new
players
• Steel players
– Minimills: Ipsco
– Service Centres: Russell, Samuels, Venture
Steel
• Independent parts companies
– Value added processing
– Contract manufacturing
Slitter
Slitter
Shear
Traditional Steel Processing Line
Slitter
Slitter
Shear
Laser Cutter
Laser Cutter
Laser Cutter
Laser Cutter
Laser Cutter
Laser Cutter
Robot Shear
Robot Shear
Robot Shear
Break Press
Stamping
Stamping
Stamping
Break Press
Break Press
Robot Shear
Robot Shear
Value-Added Steel Processing
Line
Steel Contract Manufacturing
Inventory Management
Shipping and Logistics
Functional Overview
Shipping and Logistics
Functional Overview
Protectionism by Stealth Ended
• The low dollar and socialized medicare
gave Canadian manufacturing a 20-30%
cost advantage.
• How do labour and management make up
the gap?
Steel Wagnerism
• The Wagner Postwar Model
– Adversarialism
– Work Rules
• USWA
– US industry Contract
– Stelco Contract
USWA – ISG Deal
• Wagnerism Rating 1
• Contract Provisions
– Six year term
– Job Classes 32 to 5
– Contracting Out
– Profit sharing
– Training
– Investment Plan
Stelco: Right Deal in Wrong Place ?
• LEW & Local USWA
8782
– Wagnerism rating 5
• Hilton Works & USWA
Local 1005
– Wagnerism rating 9
• Algoma & USWA
Local 2251
– Wagnerism rating 3
Labour Management Bargaining:
New Deals ?
• Steel industry wages and benefits are
among the highest in the economy.
• What does the steel case tell us about
how difficult is it to maintain high wage
jobs in a gobalized economy?
Iterations of New Deals
• 1980s
– Legacy Costs for Governance
• 1990s
– Work teams, multi-skilling
• 2003
– ISG: Complete Overhaul
– Offloading Legacy Costs
What Do You Do When You’ve
Given Everything on the Table?
• ISG: the last deal
– Drastic moves towards the High Performance
Goal
– Make the deal with Minimill Management
• Industry Restructuring
– Overwhelm Best Efforts
– Who do you Negotiate With: ‘Industry’ ?
Labour-Management Bargaining:
Pensions
• Pension costs at Stelco are cited as the
major financial burden for the company’s
survival.
• Did pension bargaining in the last decade
become a lazy man’s option in unionmanagement bargaining?
• PBGF and Moral Hazard
Stelco Pension Bargaining
• A Tale of Two Pensions
• 2000 LEW & Local 8782
– $42 to $58
• 2002 Hilton & Local 1005
– Me too: $58
• Same Deal: Different demographic &
economics
Pension Bargaining & Moral Hazard
• Temptation of Pension Bargaining
– Tradeoff for Wage Increases
– Postpones costs & cash impact
• Danger
– Pensions carry whole weight of adjustment
– PBGF: A moral hazard for management
Steel Infrastructure and the Next
Wave of Auto Investment
• The vital synergies between the auto and
steel industries are clear to all policy
makers.
• How does Ontario’s steel infrastructure
stack up in the competition for the next
wave of auto industry investment?
Hamilton, ON:
Markets Served by Plant
Top Three Industries Serviced by Plant
0.5
2.6
-Automotive
-Transportation
-Construction
-Automotive
-Forging
-Cold Finish
Dofasco Hamilton
Lake Erie Steel Company
Hilton Works
4.5
-Automotive
-Appliances
-Food & Beverage
Cans
2.5
Hamilton Specialty Bar Division
-Automotive
-Transportation
-Construction
Numbers represent plant
capacities.
Alabama/Georgia:
Markets Served by Plant
Top Three Industries Serviced by Plant
Fairfield Works
2.2
0.9
-Appliances
-Pipes & Tubes
-Automotive
2.4
0.5
-Construction
-Industrial
-Other
1.25
Trico
IPSCO Alabama
Steelworks
Cartersville
-99% Rebar
-1% Misc.
0.5
0.8
-Structural Steel
-Construction Equip.
-Construction -Service Centers
-Service Centers
-Fabrication -Construction Equip. -Pipe Manufacturers
-Automotive
-Barge/Ship/Rail car
Building
Corus Tuscaloosa
Nucor Steel Birmingham
SMI Steel Alabama
Numbers represent plant capacities.
Key Comparisons
Category
Competitiveness
Ontario
Alabama
0
Internationally Significant
-1
Nationally Significant
2
Advantage
2
Advantage
2
Advantage
2
Advantage
0
Neutral
Developed
2
Advantage
1
Weak Advantage
-1
Weak Disadvantage
1
Weak Advantage
0
Neutral
Critical Mass Present
Demand Conditions
Factor Conditions
Diamond
Factor Conditions
Demand Conditions
Related & Supported Industries
Firm Strategy & Rivalry
Other Advantages
Evolution
Primary Reason Behind
Competitiveness
Future Outlook: Five Year Scenario
Context for Firm Strategy & Rivalry
Ontario
Al/GA
2
2
Advantage
Advantage
Factor (Input) Conditions
Demand Conditions
Ontario
Al/GA
Ontario
Al/GA
2
2
2
2
Advantage
Advantage
Advantage
Advantage
Related & Supporting Industries
Ontario
Al/GA
2
1
Advantage
Weak
Advantage
Summary
• Integrateds
– Consolidation of Transnational Steel
– Innovation Gap
• Minimills
– The Big Squeeze: Scrap, Energy Prices
– Capital Restructuring
• Service Centres & Supply Chains
– Value Added Processors
– Intermediation Plus