Why Steel Is Looking Sexyby
Back in 1987, Matt Botsford, then 52, took the gamble of his life: He quit his job, got a second mortgage, and set out to finance a startup--in steel, of all things. Four years later, his savings gone and the bank threatening to take his house, he raised $35 million and launched World Class Processing in a defunct U.S. Steel plant. In eight months, World Class broke into the black by serving a market--for acid cleaning of finished steel--that big steelmakers were abandoning. Today, Botsford is considering opening four more U.S. plants and one in Mexico. "There's a bonanza out there," he says.
Keith Busse knows bonanzas, too. He guided Nucor Corp.'s gamble on experimental steelmaking at its pathbreaking minimill in Crawfordsville, Ind. Plant manager Busse quit Nucor last August, rounded up partners such as General Electric Capital Corp., and secured $200 million in debt financing. The new company, Steel Dynamics Inc., will break ground this summer on a $354 million minimill in the cornfields near Butler, Ind. When it starts up in late 1995 with 400 to 500 workers, it will make 600,000 tons of flat-rolled steel a year.
TOUGH GUERRILLAS. Who would have thought it? Entrepreneurs are racing into steel, not long ago one of America's sorriest industries. Using modern equipment and lean, flexible workforces motivated by a chance for a share of the take, innovators are proving that size no longer rules supreme. Wall Street loves it: Stocks of companies such as Nucor, Birmingham, and Oregon Steel have surged, and financiers and state and local governments have poured $20 billion into steel in five years.
These guerrillas are even forcing old-line companies--the U.S. Steel division of USX, Bethlehem Steel, LTV, and National Steel--to change their ways. Decades ago, they grew fat as an oligopoly, controlling everything from Minnesota ore fields to coal mines, railroads, barges--even state legislatures. Now, they and their partner, the United Steelworkers, are trying to become nimble niche marketers, too.
The battle in the $42 billion U.S. steel market is often drawn two-dimensionally, with the minimills, which melt scrap for steel, pitted against the older, integrated companies, which make steel by smelting iron ore, limestone, and processed coal in a furnace. But the war is much messier than that. Nucor is fast becoming a full-line producer. Newcomers such as Oregon Steel Mills Inc. are picking off markets--such as rails--where their quality wasn't supposed to match up. Bethlehem Steel Corp. is building minimills. U.S. Steel has opened a nonunion joint venture with Japan's Kobe Steel Ltd. in Leipsic, Ohio. "The very nature of the business is changing," says Donald Barnett, president of consultants Economic Associates Inc. in McLean, Va.
By turning the U.S. into a Darwinian testing ground, this fragmentation is paying off. Despite myriad handicaps such as enormous investment in old mills, Big Steel now surpasses Europe and Japan in productivity. And U.S. minimills are the world's low-cost producers. The niche drive is also fueling technological advances that turn commodity steel into an engineered product. Hundreds of new alloys and coatings are fending off plastics and aluminum in cars, and steel is inching into home construction. U.S. steelmakers are running at 90% of capacity. Their shipments should rise 3%, to 90 million tons, this year, the best since 1981. Steelmakers are holding imports at bay--at about 18% of shipments. And after three years of losses, the industry should be solidly in the black in 1994.
VAST CATHEDRALS. There are some downsides, of course. Sooner or later, the scads of new capacity will come back to haunt someone. And forget about any job bonanza: Minimills have helped raise U.S. steel-industry employment to 176,000, up from 167,000 in 1987, but it's still way below the 1980 level of 399,000. What's more, survival means automating and staying lean. At facilities such as a $1 billion joint venture between Inland Steel Industries Inc. and Nippon, four workers sitting before computer controls and TV monitors preside over a section of the mill as vast as a French cathedral. A gleaming band of steel passes automatically through immense rolling mills, qhich dwarf the three workers on the plant floor. Robotic vehicles whir past, carrying 20-ton coils of coated steel to the warehouse.
The upheaval in steel began in the '70s and '80s, as foreign competitors, buoyed by cheap currencies, hammered Big Steel. Plants closed down along steel's Main Street--the Monongahela River--which devastated such cities as Youngstown, Ohio, and Aliquippa, Pa. In the Sunbelt, meanwhile, nonunion mills were springing up to make the rudimentary reinforcement bars used for concrete construction. As Big Steel stumbled, the minimills moved up steel's food chain: from re-bar to plate to beams to rails. Big Steel, meanwhile, contracted out vast amounts of work, opening markets for niche players.
Perhaps the biggest market that the minimills conquered was Wall Street. New York's AEA Investors Inc., which included the Mellon Fund, Henry Kissinger, Duke University, and a number of corporate leaders, started Birmingham Steel Corp. in 1984 with $4 million in equity and $45 million in debt. The idea was to buy failing mills cheaply, refurbish them, and run them lean. It worked: Birmingham has grown from 219,000 tons in 1985 to 1.6 million last year, while stockholder equity has shot up to $225 million.
LEAPFROG. Alongside AEA climbed other minimill companies, such as Chaparral Steel, Florida Steel, Oregon Steel, and North Star Steel. Most successful was F. Kenneth Iverson, who in 1965 turned a small steel-joist company into a lab for entrepreneurs--with each plant manager running his own show. By the late '80s, Iverson's Nucor was growing by double digits, while integrateds such as LTV Corp. and Wheeling-Pittsburgh Steel Corp. were filing for Chapter 11.
The minis' edge is technology. That began with the electric furnace, which costs a fraction of what a blast furnace does. Next have come thin-slab casters, a cheap passage into flat-rolled steel for cars and appliances, still Big Steel's best market. Nucor built its Crawfordsville plant for $300 per ton of annual capacity, just one-sixth of what an integrated mill would cost. Seeing that, look-alikes are popping up. IPSCO, a Canadian company, is negotiating for a site in Iowa. Mexican steelmaker Hylsa is putting a plant in Monterrey, while Nucor is planning two new ones in the U.S. Keith Busse has acquired the latest thin-slab caster from Germany's SMS, and he believes he can chip $10 per ton off Nucor's price--and still ship higher-quality, higher-margin products.
Such leapfrogging hardly ever occurs in Europe or Japan, where the steel trusts that grew with the postwar economies are owned or protected by governments. Even so, with capacity outstripping demand, both markets have too many players. In February, the European Union ordered steel companies to cut capacity by April or face fines. Brussels also fined 16 steelmakers a total of $117 million for fixing prices and trading market data. The Japanese and Germans see their salvation in better technology: They're experimenting with converting molten steel not into a two-inch slab but directly into sheet. That could bypass U.S. thin-slab casters, though not for a decade or more.
"WE RUN SWEATSHOPS." In the meantime, America's small players are creating a new manufacturing culture. At Birmingham Steel's re-bar plant in Kankakee, Ill., the parking lot is full of Toyotas and Nissans. Inside, the workers are young and disdainful of unions. "I think if minimills are going to move on, they're going to have to stay nonunion," says Tim Metcalf, 31, son of a Ford Motor Co. production worker. "We don't make any bones about it," says Chairman James A. Todd Jr. "We run sweatshops. But we don't pay sweatshop wages." Birmingham draws bonuses for its workers and managers from the same pool--and bonuses are up to two-thirds of average pay of $45,000 a year. The payback is productivity: "We're at 1.28 man-hours per ton now," says Todd--and aiming for 1.2
In Middletown, Ohio, a quiet town of old brick buildings and shade trees, such numbers have a frightening ring. Armco Corp., the smallest of the Big Six, bolstered its finances in 1989 by forming a 50-50 joint venture with Japan's Kawasaki Steel Corp. Then in 1992, it hired Thomas Graham, the former president of U.S. Steel: The Barracuda, as he is known on the shop floor, trimmed the workforce, sliced hours per ton from 5.9 to 4, and nudged Armco into the black. Still, the company faces trouble. Just 70 miles south, in Kentucky, Canadian producers Dofasco Inc. and Co-Steel are building a plant that could make 2.5 million tons a year with 400 employees--less than one work hour per ton. "They're eyeing our lunch," says Armco Vice-President Dick Wardrop.
So how can Big Steel survive? To outflank the minis, it is developing coated and galvanized steels and customizing them. This is work, executives say, that the minis can't do. Big Steel couldn't either, alone. The Americans have had to team up with the Japanese, who were flush with yen in the '80s and eager to establish beachheads. Japan's NKK Corp. bought control of National Steel, and most others did joint ventures: Kobe with U.S. Steel, Sumitomo Metal Industries with LTV, Kawasaki Heavy Industries with Armco, and Nippon with Inland. The Japanese spent $7 billion upgrading the mills and pushing into niches for customers they know well: carmakers.
The joint ventures are Big Steel's chance to experiment with its workforce. When Inland revealed plans for its Nippon deal, 5,000 workers applied for 129 jobs. This let the company test and choose those best suited for teamwork and high-tech machinery. The result was a mixture of Japan Inc. and Nucor. Unionized workers pick their own jobs and all earn the same. They are their own supervisors--and they're tough bosses. "You see guys running through this plant sometimes," says Talbot Dorr, a tandem mill operator who trained six weeks in Japan for his job.
Yet for all their strengths, the Japanese-American plants suffer from a traditional approach. Having cost billions, they'll take years to recoup their investment. And most are rushing into the same niche: coated steels for cars. So it's tough to raise prices, and most joint ventures are still losing money. "They're at the mercy of the three gorillas," chortles Iverson, referring to Detroit's Big Three.
Indeed, the trend is clear: Cheaper technology is the future. To survive, Big Steel must emulate its toughest rivals. This time, those aren't Japanese and European Goliaths but America's own fast-moving entrepreneurs.