Fat City For Big Steel

When Thomas C. Graham was president of U.S. Steel back in the mid-1980s, he spent most of his time ripping out excess mills--and devastating mill towns along the Monongahela and Ohio rivers. Graham blamed the U.S. steel industry's woes on the overvalued dollar. And he told friends, he recalls, that he wouldn't be happy until the dollar was chopped down to size. "I've always been a 100-yen man," he said. They laughed.

Today, Graham, now head of AK Steel Corp., based in Middletown, Ohio, and his fellow top steel executives are the ones who are laughing. Thanks to the dirty work done in the 1980s, the U.S. steel industry is lean, efficient, and primed to cash in on a newly exuberant market. What's more, with Graham's 100-yen dream come true, the Americans can jack up prices without worrying much about a flood of imports. Indeed, with economic recovery moving ahead in Europe and Japan, steel prices are rising fast--and the world seems to be solidly in the midst of a steel boom. "A revolution has taken place here," says one European trader in New York, pointing to demand outstripping supply. "If you hadn't followed the steel market for the last three months, you wouldn't recognize it."

INFLATION JITTERS. Feasting on these fears of a global shortage, big U.S. steel companies are hurrying to jack up prices, especially with their biggest and most eager customers, the steel-hungry auto makers. In early August, LTV Corp. says, it tentatively reached an agreement with Chrysler Corp. for a 10% price hike, though Chrysler Chairman Robert J. Eaton denies any deal has been signed. Reports of the possible pact fueled fears of inflation, sending the bond market lurching. But given the rising appetite for steel in global markets, a hike of only 10% may turn out to be a bargain for the auto makers. The increase, says LTV Chairman David H. Hoag, is "long overdue."

Decades back, steel strikes and price hikes brought executive action from Presidents Truman and Kennedy. But don't expect any crackdown this time around. "The impact on the consumer price index is minuscule," says Robert E. Rubin, the White House's chief economic adviser, of steel price increases.

Today, steel is no longer at the heart of the U.S. economy. It is dwarfed by goliaths such as health care and software. Even Detroit, which now spends an average of $600 per car for raw steel, has little fear that steel price hikes will spread to its other suppliers. "I still don't see any signs of inflation in the system," says Ford Motor Co.'s president of auto operations, Edward E. Hagenlocker.

"REINVENTED." Steel prices aside, that is. With the domestic market tight, steel companies have pushed up prices 7% so far this year, with 5% increases due on Jan. 1 from LTV, Bethlehem Steel, and others. These hikes have gone straight to the bottom line, where big steel companies such as U.S. Steel, Bethlehem, and LTV have moved from losses to fat profits in the past year.

PaineWebber Inc. analyst Peter Marcus expects Big Steel to earn operating profits of $21 per ton shipped this year and a mind-boggling $45 per ton in '95--up from $6 per ton in '93. Such rosy forecasts haven't escaped Wall Street's notice: Investors bid up steel stocks 20% in July.

Big Steel's renaissance really began as long as a decade ago, when, benefiting from the Reagan Administration's Voluntary Restraint Arrangements to limit imports, the U.S. industry pumped $28 billion into modernization. At the same time, it reduced its payroll by 260,000 workers, to just 133,000 today. The result, says Bethlehem Steel Chairman Curtis H. Barnette, is an industry that has "reinvented itself." Today, U.S. steel companies often surpass European and Japanese competitors in efficiency, and the cheap dollar is giving them an added edge.

One sign of how well U.S. steel companies are doing: They no longer feel foreign rivals breathing down their necks. Just last summer, Big Steel was angrily suing its global competitors, charging them with dumping cheap steel in the U.S. The International Trade Commission ruled against the industry in most cases. But the strong steel market eased the pain. Big Steel has to import massive quantities of steel made by foreign rivals just to meet demand.

Still, big integrated companies--those that make iron in a blast furnace from raw materials--need to invest every dollar they make as though their survival depends upon it. It does. Over the past two decades, a host of nimble minimills, which make their metal by melting steel scrap, have wrested away Big Steel's markets in everything from structural beams to rails. Their secret: state-of-the-art technology, nonunion labor, and flexible mills near their markets.

Now, following industry leader Nucor Corp., minimills are pushing into Big Steel's biggest and most profitable market, the flat-rolled steel that goes into cars, refrigerators, and washing machines. Nucor is doubling its flat-rolled capacity this year. Other plants are going up in Indiana and Kentucky. Eyeing U.S. rivals' plate steel market, British Steel PLC plans to expand its Tuscaloosa (Ala.) mill into a full-fledged minimill. And in Pittsburgh, the heart ef Big Steel country, fledgling World Class Steel is about to announce a new $300 million flat-rolled minimill using new U.S. technology. Ironically, the new mill will go up in one of the old U.S. Steel buildings that Tom Graham shuttered in the 1980s.

This wave of investment portends a vicious market-share war when the market turns south again. "Real blood's going to be shed next time we have a downturn," says Tuscaloosa Steel President David J. Tarasevich.

THE HUNT. Big Steel, moreover, has some sizable weaknesses that are being masked by the market's buoyancy. The downsizing of the 1980s pushed thousands of workers into early retirement, and companies such as U.S. Steel and Bethlehem now support five retired workers for each active worker they employ. LTV alone bears $3.7 billion in long-term pension and health-care liabilities.

Moreover, the big companies are still far too dependent on Detroit. Hunting for market niches the minimills aren't going after, Big Steel has invested with Japanese partners in state-of-the-art mills for automotive steel. With autos booming, that's paying off. But a drop-off in Detroit could stop Big Steel's rally in its tracks. Says Barnette: "As long as our customer's boom period lasts, that's how long our boom will last."

For now, the signs are positive for Big Steel. But veterans such as AK Steel's Graham know their companies' strength results from harsh measures taken in tough times. And they must be ready when tough times return.

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