Steel Industry Forges Ahead
Investors frightened by a swooning stock market, volatile technology issues and shifting economic sands should take a moment to realize that change is not that sudden or final. Industries adapt and go on, providing fresh opportunity long after conventional wisdom has written them off for dead.
Witness the once-dominant global industry called steel.
That’s right, steel--the industry so important that it launched the European Coal and Steel Community, forerunner of the European Union, in 1950 and enraged President Kennedy in 1961 when a steel price rise threatened to disrupt the economy.
Nobody takes steel that seriously today. Bethlehem Steel was dropped from the Dow Jones industrial average recently to make way for computer maker Hewlett-Packard.
Steel now is a mature global industry with little growth and too many companies producing roughly 20% too much steel worldwide. The business is marked by price cutting, low profit margins--and frequent losses. Professional investors time most of their steel stock purchases for short-term gains in line with the business cycle.
Yet steel production continues to develop technologically, allowing the metal to compete with aluminum and engineered plastics in the making of cars and airplanes and in building construction.
And smart companies and individuals have a way of standing out in steel as in other businesses. A look at several such companies on three continents will tell you much about the changing world economy and how successful business people cope with it.
Mature industries are demanding. Success in steel depends on prudent investments in technology to lower costs and improve product.
In the United States right now, there is a surprising rush to invest in new kinds of small steel mills, costing $350 million to $1 billion apiece, that can turn out specialized steel for specific customers. A new process that allows efficient production of “thin slabs” of lighter, more flexible steel is slashing production costs and improving steel’s competitiveness, reports analyst Michael Gambardella of J.P. Morgan Securities.
AK Steel Holdings, a Middletown, Ohio-based public company that grew out of a joint venture of Armco Steel and Kawasaki Steel, is building a $1-billion thin-slab mill in Rockport, Ind., to supply Toyota’s new truck plant at Princeton, Ind.
AK, a company with $2.3 billion in annual sales, was a collection of failing steel operations until 1994, when veteran steel man Thomas Graham, onetime president of U.S. Steel, came out of retirement to whip it into shape. He made AK the most profitable U.S.-based steel company for the last three years and now, retiring again at 70, has set it on a new path with the Rockport mill.
The thin-slab process was introduced in 1989 by Nucor Corp., the Charlotte, N.C.-based company that pioneered the mini-mill and many other innovations that have allowed the U.S.-based industry to restructure and prosper amid global oversupply.
Thin-slab technology spread rapidly, with nine such mills built in this decade and more under construction. Nucor faces increasing competition, analysts note, explaining why its stock is near a three-year low. But Nucor is pushing ahead, building another new mill in Berkeley, S.C., and planning to be among the global leaders in steel.
In Asia, where steel is a growth industry, a leading company is Pohang Iron & Steel of South Korea. Pohang, with $10 billion in sales, will soon become the world’s largest steel company with the opening of another mill next year. But Pohang, even though one-third-owned by the South Korean government, is efficient.
“It has continually invested in technology to be the low-cost producer,” says Jeff Meyer, an investment manager at Brandes Investment Partners, a San Diego company that manages $8 billion and specializes in foreign securities.
Pohang, which has listed its shares on the New York Stock Exchange, manages with almost no debt in a country where major steelmakers, such as Hanbo Industries, have gone bankrupt amid political loan scandals. Pohang produces in the United States through a joint venture in Pittsburg, Calif., and has entered two joint ventures to build steel mills in China.
In Europe, steel remains in serious oversupply. Germany’s two largest producers, Krupp and Thyssen, are merging their steel operations and planning to close inefficient plants. But that’s politically difficult, with Germany suffering 13% unemployment, so the consolidation will proceed slowly.
The European Coal and Steel Community (ECSC) was formed in 1950 specifically to link German steelmakers in collaborative efforts with those in France, Belgium, Holland and Italy and so prevent the production of another war machine. But as the ECSC grew into the broader European Common Market, now the EU, companies remained unchanged even as world markets shifted.
Now, with cheap steel from Eastern Europe filtering into Western markets, restructuring in the West has become imperative. “The European industry will become interesting as its companies become shareholder-oriented,” says Meyer.
The U.S. industry’s adaptation over the decades has been dramatic. U.S.-based steel companies now employ 168,000 people, compared with 584,000 at the peak in 1965. But the industry produces almost as much steel--105 million tons, compared with 131 million in 1965. And at least some part of the workers’ higher wages--an average $34.56 an hour with benefits today, compared with $4.74 an hour in 1965--comes from productivity increases.
The lessons of steel? Technological development continues even in mature industries. And opportunities arise for smart companies and investors as older industries adapt to changing circumstances; Nucor’s stock grew sixfold in value from 1987 to 1994. It’s a thought to keep in mind as today’s high-tech chip makers, software producers and network providers sort themselves out and the stock market suffers daily attacks of anxiety.
