A Profile of the Steel Industry

Peter Warrian

• Publisher: Business Expert Press
• Year: 2016
• ISBN:
  9781631573842
• Topic: Business
• Subtopic: Manufacturing
• Index: Business

Steel companies were at the birth of the modern business corporation. The first billion dollar corporation ever formed was U.S. Steel in 1901. By the mid-twentieth century the steel mill and the automobile plant were the two pillars upon which the twentieth century industrial economy rested. Given the scale of capital and operations, vertical integration was seen to be pivotal, from the raw materials of iron ore and coal on one end of the supply chain to the myriad of finished products on the other. By the end of the twentieth century, however, things had dramatically changed. Take a look inside for a brilliant and concise history of the steel industry. The author presents a comprehensive account of the economics of the industry, with an overview of how the industry operates and the environment in which it operates. This book includes a detailed discussion of the regulation of the industry; a documentation of the reasons why a rejuvenated steel industry will be critical to the economic health of the modern economy; and a rationale for the reemergence of the steel industry in particular, and manufacturing in general, as a vital force in the North American economy of the new millennium. It is widely perceived that the United States is moving from an industrial age into an information age, driven by high technology. That image for steel is now being reversed. The steel industry has continuously been forced to remake itself, and this book describes those developments and dynamics. Information technology is pervasive across the industry and ecological improvement is steel intensive.

Chapter 1

Introduction

The steel mill and the auto plant were the icons of the 20th-century industrial economy. By the 21st century, many people viewed steel as Big, Ugly and Gone to China. An informed observer would have the picture that in the 1980s the traditional big steel mills were overtaken by the modern smaller “minimills.” Then, after 2000 the whole business shifted to China. Not so. In manufacturing, The World Is Not Flat! Public discourse about globalization is dominated by simple models such as the existence of Chinese low wages means all manufacturing will inevitably relocate there. The real world of industry is much more complicated and even hopeful. The steel industry has continuously been forced to remake itself, which it has done. This book describes those developments and dynamics.

Economic discourse in our time is dominated if not preoccupied with the issue of innovation. This is seen rightly to be the key to 21st-century competitiveness. The somewhat counterintuitive facts are that, notwithstanding the stunning accomplishments of modern biomedical technologies, over 80 percent of innovation in the economy takes place in manufacturing.1 Steel is the material backbone of manufacturing. So, in turn, the underpinning of manufacturing innovation lies in materials science and engineering, whose base is in steel.

The rise of China was “the” steel story of the past decade. It now has over half of the world’s capacity, and taking the Recession into account, China may have close to half the operating capacity currently producing. But the rise of China has not fundamentally changed how steel is produced. What it has done is dramatically change the input prices for producing steel, primarily for iron ore, coal, and scrap. This has had a destabilizing effect on how the industry operates comparable to the disruptive Steel Trade Wars of the 1980s and 1990s.

There has also been a more subtle but critical technical change. With the rise of China, integrated steelmaking has risen again to the forefront of innovation in steel. Instead of further eating into integrated market share, minimills are now faced with equally challenging cost pressures from the dramatic rise in scrap prices as well as escalating energy prices. Energy prices alone now equal or exceed labor costs in steel production. And, at the bottom end of the commodity food chain, new micromills are starting to do to minimills what minimills did to integrated mills 40 years ago.

The huge growth cycle in global steel set off by the rise of China has now come to an end. Steel demand in 2015 is less than in 2014 with a 25 percent decline in prices and capacity utilization levels of steel mills below levels for sustainable profitability. There may be a modest increase in 2016 but the cascading growth of steel demand and production in the last decade will not be matched in the coming decade. All national industries will have to adjust to the “new normal.” China itself faces a probable 10 year downward adjustment in steel capacity. India may be the exception. A low growth cycle means different industrial dynamics, though the pressure for innovation may increase.

Who Needs Steel?

We all need steel. It is the backbone material for manufacturing. We still live in a world where we primarily consume “stuff.” It is estimated that 80 percent of consumer goods contain steel. In addition, if you are concerned about the environment then there should be more steel in your life. It is the most recycled material in the economy; 70 percent of steel is recycled compared to about 12 percent of aluminum. Steel’s physical properties can withstand almost endless recycling.

Steel companies and national industries have also had to reconstruct themselves due to changing political, economic, and technology factors. For instance, the European Union was founded on the European Coal and Steel Community. Steel had been the cornerstone of modern warfare and Europe sought to put its troubled past behind it by seeking to unify this industry on a continental basis as a means to peace and prosperity.

There have been three major destabilizing forces in the past 50 years that have challenged steel companies and steel management around the world.

The first major postwar steel destabilization factor was trade. For the first half of the 20th century, steel was a stay at home industry. However, every emerging country wanted its own flag, airline, and steel mill. The rebuilt Japanese steel industry was the first that had a capacity that well exceeded domestic demand and required large volumes of exports in order to be profitable. This was the fundamental, though not the only, backdrop to the Steel Trade Wars of the 1970s and 1980s.

The second disruptive change was in technical steelmaking itself and the rise of the so-called minimills. These were small, more efficient mills making steel totally from scrap. The U.S. steel industry became ground zero for commercialization of this new steelmaking technology. They started at the commodity end of the market, producing rod for the construction industry. At first this was a minor irritant for big existing steel companies. But, by the later 1980s technology development by the minimills allowed them to move into the higher value added and higher margin flat-rolled steel product markets such as automotive. Just prior to the 2008 Financial Crisis, minimills were producing half the steel in the United States.

The third impact involves the rise of China. Virtually no one in the traditional steel industry saw it coming. China, with a stunning level of growth in the past decade, now has the ability to determine the marginal price of flat-rolled products around the world and has emerged as a significant player in export markets. However, the real disruptive impact of China has been on raw material prices: iron ore and coal.

Why People Should Read This Book

People should read this book because steel continues to be a huge factor in the economy.

The American steel industry directly employed more than 139,000 workers and contributed $17.5 billion in value added to gross domestic product in 2011. In addition, it contributed to household incomes by generating $121.4 billion in wages and salaries across the economy, the purchase of $20 billion in materials from other industries, $8 billion in services, $5 billion in energy products, $4.5 billion in machinery, $4.4 billion in wholesale and retail trade.

The total economic impact of steel in the economy is even larger. Its net contribution to the overall economy was $246 billion. Every job in steel creates seven jobs in the U.S. economy. In total, the steel industry supports 1,022,009 jobs across the economy as of 2011.2

What kinds of other industries and jobs does the steel industry support? Economists use demand multipliers to estimate how much a change in one industry has on another industry, for example, how much an increase in the level of activity in the steel industry will have on demand in the machinery industry. Readers would not be surprised to learn that steel has important impacts on industries such as machinery and mining. They would be surprised to learn that steel has an even greater impact on jobs in professional, scientific and technical services, education and health care.

Total economic activity supported by steel, including things such as the impact of taxes paid by the steel industry, produces an 11.298 employment multiplier. For all these reasons, people who care about the economy and its future should try to understand the Steel Story.

There are two individual profiles for the kind of readers who would benefit from reading this book. First is a student in a managerial economics class to whom it might be assigned as a supplemental reading. The second is a person who is an investor who knows little about it and reads the book to get a better grasp on the steel industry. However, there is a much broader audience of people concerned about the implications of globalization of the economy. For them, learning about this specific industry may suggest lessons for a perspective on the future of many industries.

For instance, profit is critical to steel companies. Without it they would not be viable. At the same time, the challenges and decisions confronting decisionmakers in the industry are not driven by short-termism and simplistic “shareholder value” ideologies. Companies are facing ongoing struggles to continue to exist, keeping up with technological and market changes, making better steel, improving quality and productivity. Even in the heyday of Big Steel, profit was a central but not exclusive issue for steel executives, albeit that they were riding a wave of postwar expansion, oligopolistic pricing and an absence of significant competition. All of this changed in the 1970s. New competitors, loss of price leadership, new regulatory challenges from the environmental and employee benefits side all hit the large integrated producers at once. The 1990s saw a selling off of assets and deverticalization in the name of realizing short-term shareholder value. The rise of China and the impact on raw materials destabilized the reconstituted mills. The new steel ownership around the world understands that it will realize shareholder value only if it gets the business operations, technology, marketing and human resources right. This is a particular challenge for large, capital intensive, environmentally exposed companies like steel. However the lessons extend to all other industries in the new global economy.

The Perspective of This Book

It is the perspective of this book that the global steel industry in the past decade is undergoing its second great reorganization in the past 75 years.

The first was the post-World War II steel restructuring under the direction of the Allied Powers as described in Gary Herrigel, Manufacturing Possibilities (2010). He challenges the traditional view of the steel industry in the postwar period. The pre-World War II steel industries of Germany, the United States, and Japan were all characterized by a dominant integrated producer surrounded by smaller, specialized firms. Following the war, they were decentralized into an industry dominated by a small set of mass production, oligopolistic, large steel companies. But in the 1970s and 1980s, in all leading countries, traditional integrated operations have been rationalized and minimills deployed a radically disruptive steelmaking technology to gain a major market share. By the first decade of the 21st century, the postwar steel industry stood on its head. A limited number of highly specialized integrated firms were surrounded by standardized minimill producers.

The subject of this book is the next stage of these developments. The global restructuring of steel in the past decade has produced a new configuration of core specialized firms and secondary commodity firms. How are these core primary steel producers now being managed and coordinated after the global steel consolidation? And, how do steel companies learn? National steel industries have become merged into global supply chains. One’s position in a contingent collaborative supply chain is correlated with learning capabilities. New global steel companies are clearly embedded within this framework.

Globalization and the Steel Industry

We will be discussing steel as a globalized industry.

Three phenomena are at the heart of globalization. The first is the internationalization of ownership structures. This is most evident over the past several years, among steel-producing companies where there has been a change of ownership in virtually every steel-producing operation. This change in ownership in most cases involved a shift from domestic control to international control.

A direct consequence of the transformation of ownership structures is significantly increased international flows of...