Revenge Of The Rust Belt

Old-line manufacturers are humming as demand soars for commodities

When Wilbur L. Ross Jr. began poking around the steel industry three years ago for cheap assets to buy, the financier had the market pretty much to himself. For good reason: Why would anyone want a hulking relic of America's industrial past? Looks as if Ross got the last laugh, though. In late October, he signed a deal to sell the once-bankrupt properties, revived as International Steel Group Inc. (ISG ), to steel tycoon Lakshmi N. Mittal for $4.5 billion, pocketing $300 million himself. "I always wanted to be a paleontologist as a kid," Ross deadpans. "I love dinosaurs."

So do a lot of other people nowadays. For the past several years, old-line manufacturers were almost universally written off, as investors flocked to Internet stocks and then to nearly anything else -- while a global recession and falling commodity prices sucked the earnings out of the industrial sector. Now, these boring behemoths are raking it in, enriching shareholders who stuck by them. China's red-hot economy, which can't seem to get enough industrial commodities, is one reason for their comeback, of course. But demand is strengthening in the U.S., too, and that is pushing many plants to capacity.

Indeed, at many manufacturers today, the biggest issue for management is dealing with growth: training new employees after a long hiring drought, offsetting or passing along higher material costs, and ramping up capital spending for expansion. At others, it's simply what to do with the sudden embarrassment of riches. For instance, Lee R. Raymond, chairman and chief executive of Exxon Mobil Corp. (XON ), is sitting on $16.1 billion in cash, with $14 million being added every day.

Being hot, as Caterpillar Inc. (CAT ) Chairman and CEO James W. Owens can tell you, also makes it a lot easier to hit the numbers. Back in 1998, his predecessors set a goal of turning the heavy-equipment and engine maker into a $30 billion outfit in the next 10 years. But after four years of sales stuck at $20 billion, management quietly pushed its target date out to 2009 or later. Now, with orders pouring in as fast as the company can fill them, Owens says Caterpillar will easily top the $30 billion mark in 2005.

All that growth, in fact, is fueling a perpetual-motion machine of sorts. Steelmakers such as ISG and U.S. Steel Corp. (X ) are profiting because of demand from the likes of Caterpillar. Caterpillar, in turn, is profiting because of demand from Peabody Energy Corp. (BTU ) and other coal miners. And they, in turn, are profiting from American Electric Power Co. (AEP ), whose generators are gobbling up coal to meet demand from its busy industrial customers. "We're kind of like Mark Twain -- somebody called us dead before we were," says Michael G. Morris, AEP's chairman and CEO.

From the outside, the extraordinary performance of these mundane goods-makers might look easy. These are, of course, cyclical industries, so it's typical for them to come roaring back after a recession. But management deserves credit, too. Dow Chemical Co. (DOW ), for example, has closed or sold off dozens of inefficient plants and eliminated 7,000 jobs, or 14% of its global payroll, in the past two years. That helped lift utilization rates to over 90% in 2004, giving it leverage to jack up prices. "Productivity is in our DNA," says CEO Andrew N. Liveris. Investors got their cut: Dow's share price was up 22% through late December.

These highfliers will eventually drift back to earth. But after being dismissed for so long, many heavy-industry execs can't resist crowing a bit. "For most of us who had to earn money the hard way, we could never figure out this New Economy talk," says W. James Farrell, chairman and CEO of Illinois Tool Works Inc. (ITW ), a conglomerate that recorded 30% earnings growth, to $1.3 billion, last year. "There is some satisfaction in the role reversal." ITW is admittedly unexciting: It makes stuff like strapping bands, plastic rings for beverage six-packs, screws, and switches. But these days, nothing pays like being dull.

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