What’s Next in Steel ?What’s Next in Steel ?

Peter WarrianPeter Warrian

University of TorontoUniversity of Toronto

Steel Industry 2004Steel Industry 2004

• Best of Times ?Best of Times ?

• Worst of Times ?Worst of Times ?

It’s Pretty Punchy Out There It’s Pretty Punchy Out There !!

The world steel market’s gone mad… I’ve never seen anything like this.

Peter Fish, MEPS

Steel prices on the world market in the future may be even more volatile than in the past, with price peaks higher and price troughs not as deep as in the past,

Peter Markus, World Steel Dynamics

Price VolatilityPrice Volatility

$260

$320

$420

$525

$800

$625

$470

Punch LinePunch Line

• There will be an unprecedented level There will be an unprecedented level of volatility in steel markets for the of volatility in steel markets for the next five years.next five years.

• It has the potential to destabilize It has the potential to destabilize important sections of North American important sections of North American manufacturingmanufacturing

Steel Market Gone WildSteel Market Gone Wild

• Base prices plus surchargesBase prices plus surcharges– CR $390 12/03; $460 2/04; $600 4/04 ?CR $390 12/03; $460 2/04; $600 4/04 ?

• China: Demand, ScrapChina: Demand, Scrap

• Other FactorsOther Factors– Greed: Mills – our turn !Greed: Mills – our turn !– US $ Decline: Who wants to supply USA? 30:30US $ Decline: Who wants to supply USA? 30:30– 2.01 Duties Unanticipated Consequences: Hello2.01 Duties Unanticipated Consequences: Hello– OEM Auction: Supply Chain HoardingOEM Auction: Supply Chain Hoarding

Steel Production ForecastSteel Production Forecast

Steel Production Forecast

Region (mil tonnes)

2003 2004 % Change

EU 159.9 161.0 0.7

C & E Europe

29.9 30.5 2.0

Ex-USSR 106.3 108.0 1.6

NAFTA 123 127 3.3

S. America 42.9 44.0 2.6

China 219.7 245.0 11.0

Japan 110.5 110.0 -0.5

Other Asia 108.3 112.0 3.4

Total 960.0 1,000.0 4.2

Source: MEPS World Steel Outlook, Q4 2003

Financial Results for Steel Financial Results for Steel ProducersProducers

US Integrateds 2001 2002 % Change

Shipments 000 tons 32,755 33,612 2.6

Sales ($/ton) 15,029 16,693 11.1

Oper. Cost ($/ton) 512 516 0.8

Oper. Income ($/ton) (53) (15) 71.7

Source: Locker Associates, Steel Industry Update 176, June 2003

Financial Results for Steel Financial Results for Steel ProducersProducersCan Integrateds 2001 2002 % Change

Shipments 000 tons 10,990 11,449 4.2

Sales ($/ton) 6,435 7,399 15.0

Oper. Cost ($/ton) 603 602 -0.2

Oper. Income ($/ton) (18) 44 344.4

Source: Locker Associates, Steel Industry Update 176, June 2003

Financial Results for Steel Financial Results for Steel ProducersProducersNA Minimills 2001 2002 % Change

Shipments 000 tones 21,668 24,537 13.2

Sales ($/ton) 7,654 8,736 14.1

Oper. Cost ($/ton) 338 334 -1.2

Oper. Income ($/ton) 15 22 46.7

Source: Locker Associates, Steel Industry Update 176, June 2003

Price Trends in Raw Price Trends in Raw MaterialsMaterials($/metric tonne) Recent Price Previous Price

Coke 180 60 (early 2002)

Iron Ore 95 27 (2001)

Pig Iron 240 115 (late 2001)

Scrap 215 110 (2001)

Slab 270 145 (late 2001)

HR Band 350 175 (late 2001)

Source: Locker Associates, Steel Industry Update 182, December 2003

Three Steel StoriesThree Steel Stories

IntegratedsIntegrateds

– Consolidation of Consolidation of Transnational SteelTransnational Steel

– Innovation GapInnovation Gap

MinimillsMinimills

– The Big Squeeze: The Big Squeeze: Scrap, Energy Scrap, Energy PricesPrices

– Capital Capital RestructuringRestructuring

Ispat Sidbec

Service Centres & Supply Service Centres & Supply ChainsChains

– Supply Chain Supply Chain SurgesSurges

– Intermediation Plus Intermediation Plus

Ten Questions About the Ten Questions About the FutureFuture

1998 The Tipping Point1998 The Tipping Point

• The 1998 Asia-Russian financial crisis The 1998 Asia-Russian financial crisis was a Tipping Point for the global was a Tipping Point for the global steel industry. steel industry.

• Will the fault line of the hot ends Will the fault line of the hot ends implode the ‘re-constituted’ mills?implode the ‘re-constituted’ mills?

Flat Rolled Prices 1989-2003Flat Rolled Prices 1989-2003

Source: Locker Associates, Steel Industry Update 183, Jan 2004

World’s Largest Steel World’s Largest Steel CompaniesCompanies

Rank Company Capacity (mil tonnes)

1 Arcelor 44.0

2 LNM Group 34.8

3 Nippon Steel 29.8

4 POSCO 28.1

5 Shanghai Baosteel 19.5

6 Corus 16.8

7 Thyssen Krupp 16.4

8 NKK 15.2

9 Riva 15.0

10 US Steel 14.4

46 Stelco 4.7

51 Dofasco 4.4

? Algoma 2.5

Source: IISI, Annual Report 2003

Critical Factors in the Critical Factors in the ImplosionImplosion

• Crisis of spot market for flat-rolled Crisis of spot market for flat-rolled and import surge leading to Trade and import surge leading to Trade CasesCases

• Blowing away of Reconstituted Mills Blowing away of Reconstituted Mills with old Hot Endswith old Hot Ends

• Rise of China to set global spot prices Rise of China to set global spot prices and demand for inputs (ore, scrap, and demand for inputs (ore, scrap, freight)freight)

How Does the Industry How Does the Industry Innovate?Innovate?

• Innovation in North American steel is Innovation in North American steel is driven by the auto industry. driven by the auto industry.

• How can the steel industry innovate How can the steel industry innovate for the future?for the future?

Two Poles of InnovationTwo Poles of Innovation

• Nippon Steel Nippon Steel (Stelco)(Stelco)

• Arcelor (Dofasco)Arcelor (Dofasco)

Networks of InnovationNetworks of Innovation

• Ultra Light Steel Ultra Light Steel Auto Body (ULSAB)Auto Body (ULSAB)

• Auto- Steel Auto- Steel Partnership (ASP)Partnership (ASP)

The Dofasco AdvantageThe Dofasco Advantage

• Dofasco has become the most Dofasco has become the most profitable steel company in North profitable steel company in North America.America.

• How does it do this with such low How does it do this with such low levels of R &D spending?levels of R &D spending?

Dofasco Secrets to SuccessDofasco Secrets to Success

• The Sweet Spot of AutoThe Sweet Spot of Auto

• Vision: “Solutions in Steel”Vision: “Solutions in Steel”

• LeadershipLeadership

• Technology AlliancesTechnology Alliances

• Learning CultureLearning Culture

Dofasco and TechnologyDofasco and Technology

• TechnologyTechnology– Same 50 EngineersSame 50 Engineers– Alliances and LicensingAlliances and Licensing

• ‘‘Absorptive’ Capacities of the FirmAbsorptive’ Capacities of the Firm– Generic knowledge networksGeneric knowledge networks– ImplementationImplementation– Tacit Knowledge: Working in SteelTacit Knowledge: Working in Steel

Steel Trade WarsSteel Trade Wars

• Steel trade wars and protectionism Steel trade wars and protectionism dominated the industry from the dominated the industry from the 1970s to the 1980s, but the WTO has 1970s to the 1980s, but the WTO has ruled out traditional US trade ruled out traditional US trade protectionism. protectionism.

• What happens now that the ‘stealth What happens now that the ‘stealth protectionism’ of bankruptcy protectionism’ of bankruptcy procedures (USA) and the low dollar procedures (USA) and the low dollar (Canada) have been removed?(Canada) have been removed?

Steel Trade WarsSteel Trade Wars

• 70s-80s Steel Protectionism70s-80s Steel Protectionism• NAFTA steel but no Secure AccessNAFTA steel but no Secure Access

– Disinvestment: Dofasco, Co-Steel, Ipsco, Disinvestment: Dofasco, Co-Steel, Ipsco, IvacoIvaco

• 2001 NAFTA Joint Cases2001 NAFTA Joint Cases– Safeguard: No – Canada; Yes – USA, EU, Safeguard: No – Canada; Yes – USA, EU,

JapanJapan

• 2003 WTO Ruling 2003 WTO Ruling

Stealth ProtectionismStealth Protectionism

• USA: Chapter 11 Steel CompaniesUSA: Chapter 11 Steel Companies

• Canada: Medicare $7.95 AdvantageCanada: Medicare $7.95 Advantage

• 20042004– Non-renewal of 2.01 protectionNon-renewal of 2.01 protection– Canadian dollar surgeCanadian dollar surge

No Industry is an Island: Steel-No Industry is an Island: Steel-Auto Supply ChainsAuto Supply Chains

• Steel is no longer an industrial island Steel is no longer an industrial island to itself, it is a strategic part of the to itself, it is a strategic part of the materials sector of the new materials sector of the new economy. economy.

• How are steel supply chains to the How are steel supply chains to the auto industry functioning?auto industry functioning?

Ontario SteelOntario Steel

• Steel-Auto InterdependenceSteel-Auto Interdependence

• Changing InterfaceChanging Interface

• Auto Supply ChainAuto Supply Chain

Traditional Steel-Auto LinkTraditional Steel-Auto Link

• Big 3 SteelBig 3 Steel– StelcoStelco– DofascoDofasco– AlgomaAlgoma

• Big 3 AutoBig 3 Auto– GMGM– FordFord– ChryslerChrysler

Steel-Auto Parts: New Links Steel-Auto Parts: New Links

• Traditional linkageTraditional linkage::– Subsidiary parts Divisions of Auto companiesSubsidiary parts Divisions of Auto companies– 75% internal, 25% outsourced, now reversed75% internal, 25% outsourced, now reversed

• Central purchasing of SteelCentral purchasing of Steel– GM-US Steel yearly contractsGM-US Steel yearly contracts

• New parts company players: Magna, New parts company players: Magna, VentraVentra

Steel 2002: New steel, old Steel 2002: New steel, old playersplayers

• New steelNew steel– 60% new steel for autos in 5 years60% new steel for autos in 5 years– New materials science: Research ChairsNew materials science: Research Chairs– USLAB projectUSLAB project

• InvestmentInvestment::– Foreign partners: France, Mexico, BrazilForeign partners: France, Mexico, Brazil– Steel auto divisions: Dofasco, Algoma Steel auto divisions: Dofasco, Algoma – Dofasco goes laser: Boundaries between steel Dofasco goes laser: Boundaries between steel

and manufacturingand manufacturing

Steel 2002: New steel, new Steel 2002: New steel, new playersplayers

• Steel playersSteel players– Minimills: IpscoMinimills: Ipsco– Service Centres: Russell, Samuels, Service Centres: Russell, Samuels,

Venture SteelVenture Steel

• Independent parts companiesIndependent parts companies– Value added processingValue added processing– Contract manufacturingContract manufacturing

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Value-Added Steel Value-Added Steel Processing LineProcessing Line

Steel Contract Steel Contract ManufacturingManufacturing

Inventory ManagementInventory Management

Shipping and LogisticsShipping and Logistics

Functional OverviewFunctional Overview

Shipping and LogisticsShipping and Logistics

Functional OverviewFunctional Overview

Protectionism by Stealth Protectionism by Stealth EndedEnded

• The low dollar and socialized The low dollar and socialized medicare gave Canadian medicare gave Canadian manufacturing a 20-30% cost manufacturing a 20-30% cost advantage. advantage.

• How do labour and management How do labour and management make up the gap?make up the gap?

Steel WagnerismSteel Wagnerism

• The Wagner Postwar ModelThe Wagner Postwar Model– AdversarialismAdversarialism– Work RulesWork Rules

• USWAUSWA– US industry ContractUS industry Contract– Stelco Contract Stelco Contract

USWA – ISG DealUSWA – ISG Deal

• Wagnerism Rating 1Wagnerism Rating 1• Contract ProvisionsContract Provisions

– Six year termSix year term– Job Classes 32 to 5Job Classes 32 to 5– Contracting OutContracting Out– Profit sharingProfit sharing– TrainingTraining– Investment Plan Investment Plan

Stelco: Right Deal in Wrong Stelco: Right Deal in Wrong Place ?Place ?

• LEW & Local USWA LEW & Local USWA 87828782– Wagnerism rating 5Wagnerism rating 5

• Hilton Works & Hilton Works & USWA Local 1005USWA Local 1005– Wagnerism rating 9Wagnerism rating 9

• Algoma & USWA Algoma & USWA Local 2251Local 2251– Wagnerism rating 3Wagnerism rating 3

Labour Management Labour Management Bargaining: New Deals ?Bargaining: New Deals ?

• Steel industry wages and benefits Steel industry wages and benefits are among the highest in the are among the highest in the economy. economy.

• What does the steel case tell us What does the steel case tell us about how difficult is it to maintain about how difficult is it to maintain high wage jobs in a gobalized high wage jobs in a gobalized economy?economy?

Iterations of New DealsIterations of New Deals

• 1980s1980s– Legacy Costs for GovernanceLegacy Costs for Governance

• 1990s1990s– Work teams, multi-skillingWork teams, multi-skilling

• 20032003– ISG: Complete OverhaulISG: Complete Overhaul– Offloading Legacy CostsOffloading Legacy Costs

What Do You Do When You’ve What Do You Do When You’ve Given Everything on the Table?Given Everything on the Table?

• ISG: the last dealISG: the last deal– Drastic moves towards the High Drastic moves towards the High

Performance GoalPerformance Goal– Make the deal with Minimill Make the deal with Minimill

ManagementManagement

• Industry RestructuringIndustry Restructuring– Overwhelm Best EffortsOverwhelm Best Efforts– Who do you Negotiate With: ‘Industry’ ?Who do you Negotiate With: ‘Industry’ ?

Labour-Management Labour-Management Bargaining: PensionsBargaining: Pensions

• Pension costs at Stelco are cited as Pension costs at Stelco are cited as the major financial burden for the the major financial burden for the company’s survival. company’s survival.

• Did pension bargaining in the last Did pension bargaining in the last decade become a lazy man’s option decade become a lazy man’s option in union-management bargaining?in union-management bargaining?

• PBGF and Moral HazardPBGF and Moral Hazard

Stelco Pension BargainingStelco Pension Bargaining

• A Tale of Two PensionsA Tale of Two Pensions

• 2000 LEW & Local 87822000 LEW & Local 8782– $42 to $58$42 to $58

• 2002 Hilton & Local 10052002 Hilton & Local 1005– Me too: $58Me too: $58

• Same Deal: Different demographic & Same Deal: Different demographic & economicseconomics

Pension Bargaining & Moral Pension Bargaining & Moral HazardHazard

• Temptation of Pension BargainingTemptation of Pension Bargaining– Tradeoff for Wage IncreasesTradeoff for Wage Increases– Postpones costs & cash impactPostpones costs & cash impact

• DangerDanger– Pensions carry whole weight of Pensions carry whole weight of

adjustmentadjustment– PBGF: A moral hazard for managementPBGF: A moral hazard for management

Steel Infrastructure and the Steel Infrastructure and the Next Wave of Auto Investment Next Wave of Auto Investment

• The vital synergies between the auto The vital synergies between the auto and steel industries are clear to all and steel industries are clear to all policy makers. policy makers.

• How does Ontario’s steel How does Ontario’s steel infrastructure stack up in the infrastructure stack up in the competition for the next wave of competition for the next wave of auto industry investment?auto industry investment?

Hamilton, ON: Hamilton, ON: Markets Served by PlantMarkets Served by Plant

Top Three Industries Serviced by Plant

Dofasco Hamilton

Lake Erie Steel Company

Hilton Works

Hamilton Specialty Bar Division

-Automotive-Transportation-Construction

-Automotive-Appliances-Food & Beverage Cans

-Automotive-Forging-Cold Finish

-Automotive-Transportation-Construction

4.5

2.6

2.5

0.5

Numbers represent plant capacities.

Alabama/Georgia: Alabama/Georgia: Markets Served by PlantMarkets Served by Plant

Top Three Industries Serviced by Plant

Fairfield Works

Trico

IPSCO AlabamaSteelworks

Cartersville

Corus Tuscaloosa

Nucor Steel Birmingham

SMI Steel Alabama

-99% Rebar-1% Misc.

-Construction-Industrial-Other

-Service Centers-Construction Equip.-Barge/Ship/Rail car Building

-Construction-Fabrication-Automotive

-Appliances-Pipes & Tubes-Automotive

-Structural Steel

-Construction Equip.-Service Centers-Pipe Manufacturers

2.4

0.50.9

1.25

2.2

0.50.8

Numbers represent plant capacities.

Key ComparisonsKey Comparisons

Category Ontario Alabama Competitiveness 0

Internationally Significant -1

Nationally Significant Diamond

Factor Conditions 2 Advantage

2 Advantage

Demand Conditions 2 Advantage

1 Weak Advantage

Related & Supported Industries 2 Advantage

-1 Weak Disadvantage

Firm Strategy & Rivalry 2 Advantage

1 Weak Advantage

Other Advantages 0 Neutral

0 Neutral

Evolution Developed

Critical Mass Present

Primary Reason Behind Competitiveness

Demand Conditions Factor Conditions

Future Outlook: Five Year Future Outlook: Five Year ScenarioScenario

Ontario

2

Advantage

Al/GA

2

Advantage

Factor (Input) Conditions

Ontario

2

Advantage

Al/GA

1

Weak Advantage

Related & Supporting Industries

Ontario

2

Advantage

Al/GA

2

Advantage

Context for Firm Strategy & Rivalry

Ontario

2

Advantage

Al/GA

2

Advantage

Demand Conditions

SummarySummary

• IntegratedsIntegrateds– Consolidation of Transnational SteelConsolidation of Transnational Steel– Innovation GapInnovation Gap

• MinimillsMinimills– The Big Squeeze: Scrap, Energy PricesThe Big Squeeze: Scrap, Energy Prices– Capital RestructuringCapital Restructuring

• Service Centres & Supply ChainsService Centres & Supply Chains– Value Added ProcessorsValue Added Processors– Intermediation Plus Intermediation Plus