Sunday, January 07, 2001

Steel makers off track

Tristate manufacturers feel pinch

By Mike Boyer
The Cincinnati Enquirer

        These are tough times in the nation's steel mills

        • Open-market prices for hot-rolled steel — a basic commodity used in other steel products and accounting for about half of all steel sold — have fallen to around $200 a ton, from about $300 a ton a year ago.

        • LTV Corp. in Cleveland, the nation's third-largest steel maker, last week became the latest in a string of steel industry bankruptcies this year. LTV sought court protection from creditors for the second time in 14 years after threatening to close and put 18,000 employees out of work.

        • In the face of a surge of imports, a group of U.S. steel producers — including Gallatin Steel near Ghent, Ky. — last week won U.S. International Trade Commission support for a new round of tariffs on imports of hot-rolled steel from 11 nations after arguing those low-price imports were unfairly hurting them.

        “We've been saying for years there was a train wreck coming in the hot-rolled steel market. Guess what? The train wreck is here,” said Alan McCoy, spokesman for AK Steel, which employs more than 5,000 in Middletown.

        Even AK Steel, which has been one of the most profitable U.S. steel makers for six years, isn't immune. Last month the company warned investors that while it expects to lead the industry in profitability again in 2000 when results are reported this month, earnings for the just-completed fourth quarter will be considerably lower than the $41.3 million, or 38 cents a share, in the third quarter. The company blamed falling spot market prices, higher energy costs and the costs of previously planned maintenance shutdowns.

        Mr. McCoy said AK Steel hasn't laid off any employees, but some in its steel melting operations are working fewer shifts as the company tries to bring production into balance with expected shipments and inventories.

        “What surprised many people is how fast and how far the prices have fallen in the spot market,” Mr. McCoy said. “Virtually everyone predicted that with the surge in imports, prices were going to soften. What surprised a lot of people is how far and how low they've continued to go.”

        Automotive customers account for more than half of AK Steel's business.

        “We're seeing some slowdown there,” Mr. McCoy said. “That market is still in better shape than some of the others,” such as appliances. “Now that could change and we're watching that very closely.”

        Likewise, Gallatin Steel, a 5-year-old joint venture of Canadian steel makers Dofasco Inc. and Co-Steel Inc., hasn't laid off any of its 370 employees, said Don B. Dailey, vice president and general manager.

        But the company has assigned some employees to nonproduction jobs such as working out process improvements and solving problems as the market has softened.

        In November, Gallatin produced about 75,000 tons of steel, about 60 percent of its 125,000 tons a month capacity, Mr. Dailey said. While production improved last month to around 95,000 tons, Mr. Dailey said, “We're concerned. We don't think anybody's making money in the steel sheet market right now. ... I think it could get worse before it gets better.”

        The Federal Reserve's action last week cutting interest rates by half a percentage point won't have any impact on the steel market until at least mid-year, analysts think.

        “Hopefully, over a six-month horizon, it will improve the demand picture somewhat,” said Michael Gambardella, steel analyst with J.P. Morgan Chase & Co. in New York. “But short term it won't have much of a benefit.”
       Glut on the market

        Although LTV officials have blamed a flood of foreign imports, a weaker economy and higher energy prices for its problems, analysts said the industry's problems underscore more fundamental issues

        • Too much steel-making capacity globally.

        • The high value of the U.S. dollar against other currencies, which makes America an attractive market.

        • Misguided steel management and government policies.

        Analysts estimate global steel capacity exceeds demand by as much as 100 million tons or more.

        Many developing nations see a new steel plant as a quick way to build their economies.

        “When things slow down, they just target that capacity to markets where they can generate a hard currency. And use that export market as a means of generating cash to pay debt and whatever other obligations they have,” said David MacGregor, steel analyst with Midwest Research in Cleveland.

        The strong dollar and U.S. economic growth have made the United States the biggest target for that steel production.

        Independent steel analyst Chuck Bradford said ill-advised efforts by state governments to lure new steel plants with tax incentives have aggravated the problem of too much capacity.

        “They give money to various steel companies to build new mills,” he said. “It is the most outrageously bad concept I've ever seen.”
       Too many companies

        In the case of LTV, Mr. Gambardella said the problems aren't solely due to excessive imports.

        “The company overpaid for major acquisitions over the last several years and that leveraged its balance sheet up and the company wasn't able to withstand the severe downturn we've had in pricing,” he said.

        What the U.S. steel industry needs, Mr. Gambardella said, is a consolidation in the number of players who can then rationalize production, eliminating excess capacity and costs.

        “This industry is too fragmented in its ownership,” he said. “You have too many steel companies in the United States and they need to be consolidated.”

        LTV's bankruptcy sparked a flurry of calls by public officials for using public funds to prop up the company and prevent job losses.

        “There was a huge civic reaction,” Mr. MacGregor said.

        “People in (Cleveland) called upon the mayor and Congress people to do something. Well, where were all those people during the years that management was driving the company into the ground?”

        Some of LTV's competitors, while they say they are concerned about illegal steel imports, aren't keen on government stepping in to aid the company.

        “We get very nervous when our competitors — and there are now nearly a dozen in some form of bankruptcy or another — start lining up at the public dole,” said AK Steel's Mr. McCoy. “That, unfortunately, further distorts the marketplace.”
       AK has been there

        AK Steel, then known as Armco Steel, was in much the same situation as LTV about eight years ago.

        The company's costs were too high, it was losing business to competitors and officials acknowledge the company started in Middletown at the turn of the century was on the brink of bankruptcy.

        Instead, in 1992, the company hired legendary steel executive Thomas Graham, who along with current chairman Richard Wardrop transformed the company into one of the industry's most profitable producers.

        Last year, AK Steel reported operating profit per ton of $56 while all the other integrated producers lost money on a per-ton basis.

        The company, which was recapitalized in 1994 through a public stock offering that raised more than $650 million to reduce debt, refocused its business on producing more profitable coated and galvanized steels, which are highly prized by the automobile and appliance markets.

        The company also cut costs by eliminating unprofitable businesses and trimming hundreds of jobs, while dramatically improving quality and delivery to its customers.

        The steps, while painful, reduced AK Steel's cost structure by about two-thirds. In the early 1990s, the company required around eight or nine man-hours to produce a ton of steel, Mr. McCoy said. Today, it requires three man-hours or less.

        “We think that's globally competitive,” he said. “If we hadn't taken those costs out, you can imagine how long we would have survived.”
       Demand falling

        While a flood of steel imports was a problem earlier last year — total U.S. imports are expected to be near a record 40 million tons this year — analysts say they aren't the problem now.

        “Now the problem has turned to demand,” Mr. Gambardella said. “Demand is falling significantly, particularly automotive, which is very important to the steel industry.

        “The price of steel in the United States is lower now than the price overseas by as much as 10 percent, so it's no longer attractive for foreigners to flood the (U.S.) market.”


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