Steel-crazy after all these years

Representatives from the American Iron and Steel Institute (AISI, Washington, D.C.) and the top executives from five steel companies recently gathered in Penton Media's corporate offices to discuss the most critical issues facing the industry. The steel company leaders were generally upbeat, reflecting the healthy financial numbers being posted in the industry following many difficult years and painful restructuring. They said they hope to continue the current momentum and grow the more cooperative union relationships they’ve forged of late. Some of their current challenges include replacing an aging workforce, the dwindling supply of qualified engineering students from American universities and access to affordable energy.

Coming from one of the most global industries in a global economy, the steel company executives were extremely alarmed about the plight of other American manufacturers (their largest customers). Free trade, they said, is good if it’s free and fair, but it’s currently being distorted by the uneven enforcement of trade rules by U.S. trading partners.

The following executive opinions have been quoted and excerpted from a 3-hour roundtable discussion. In attendance were the editors of Penton's Supply Chain and Manufacturing groups, which includes Logistics Today, Material Handling Management, Industry Week, American Machinist, and Metal Producing and Processing.

Louis Schorsch, CEO, Mittal Steel USA

Ward Timken (Tim), Chairman of Board, The Timken Company

John P. Surma, president, CEO and chairman of the board, U.S. Steel Corp.

David Sutherland, President and CEO, IPSCO, Inc.

Dan DiMicco, President and CEO, Nucor Corp.

Andrew Sharkey, President and CEO, American Iron and Steel Institute

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Louis Schorsch, CEO, Mittal Steel USA

Schorsch is president and CEO of Mittal Steel USA (East Chicago, Ind.), a Division of Mittal Steel with headquarters in Rotterdam. Mittal Steel USA was formed out of several predecessor companies, many of which went through the bankruptcy process and ended up as part of International Steel Group. The company produces around 20 million tons of steel annually in the United States. Schorsch has been with Mittal Steel or a predecessor company since 2003. Before that, he was with consulting firm McKenzie & Company, where he focused on the steel industry. He started his career in 1979 at a U.S. Steel plant as a millwright apprentice.

Louis L. Schorsch

ISG acquisition and the aging workforce

Mittal Steel’s acquisition of International Steel Group (ISG) closed on April 15, 2005. CEO Louis Schorsch reports that the company is still very much in the throes of making one organization out of these two separate companies. They continue to work closely with union representatives to sustain and develop the new labor relationship forged by ISG that began at the former LTV steel plant in Cleveland. Today, the integrated steel plant in Cleveland employs around 1,300 people who produce 3.5 million tons of steel per year. Schorsch says such productivity compares favorably to minimills.

The company is now facing another workforce challenge. The average age of employees is around 48 years. In a very short period of time, the next five to eight years, the company will have to manage a massive turnover in staff, both in the salaried and hourly ranks.

“How do you take that challenge, which I am sure is the case for the entire manufacturing sector, how do you take that challenge and turn it into an advantage for you?” asks Schorsch.

On the recruiting front, he says it’s the industry’s job to tell the story of how much the work has changed, and that these are attractive jobs.

“It can be grueling work sometimes, and we are all trying to make the plant safer and so on, but they are very knowledge intensive,” he says. “They pay well, and they add a lot of value.”

Maintaining the steel industry’s momentum

At a broader level, the industry’s challenge is how to build on and maintain the positive momentum that steel companies have enjoyed over the past couple of years. He says steel producers need to leverage that success to develop and grow markets for steel versus other materials.

At recent conference panel with a number of automotive industry executives, Schorsch recalled thinking how grateful he was to be in the steel industry now, with all of the painful restructuring behind him, and not somewhere else.
“I think automotive is at the other end of that tunnel. You hate to think that the only way you reach those kind of resolutions is through the painful process that we went through, but hopefully, people will kind of look at that and say let’s learn that lesson without going through that process,” he says.

Ward Timken (Tim), Chairman of Board, The Timken Company

Tim Timken is chairman of the board of the Timken Company (Canton, Ohio), a 106 year-old manufacturer of highly engineered bearings, alloy steels and related products. The company has operations in 27 countries and 27,000 employees. It reported sales of $5.2 billion in 2005.

Ward J. Timken

Top concerns: Energy and U.S. manufacturing

As he looks out to the next couple of years, Tim Timken, chairman of the board, The Timken Company, says his first concern is access to raw material and affordable energy. Despite the efforts of legislators in Washington, he thinks the country has failed to guarantee a viable supply of affordable electricity and natural gas to manufacturing industries.

Another priority—because 90% of the steel produced in North America is consumed here—is the plight of American manufacturing. He says a lot can be done in Washington that hasn’t been done.

“We are not going to stop globalization, but I think there are a number of things that we can do as a country to make sure that we maintain a quorum manufacturing base, whether it is addressing a pension situation, whether it is a tax policy, whether it is making sure that you have a level playing field from a trade point of view,” says Timken.

On government’s role

Timken says the steel industry must continue to work with legislators in Washington as well as on an international basis to make sure that the industry remains competitive. When it comes to anti-dumping laws, he says international trade is a complex issue with conflicting points of view. Many of his customers would love to buy cheap bearings and steel that is dumped in the U.S. market.

“It would be great if we could get every single manufacturer lined up around certain issues and drive them. The fact of the matter is people have different interests,” he says. As a global company, Timken operates close to 80 facilities in 27 countries around the world. It has manufacturing facilities in China, India, Poland, and Romania. He believes trade ought to be fair, but manufacturing will go where manufacturing will go.

“There are certain products I cannot make in the United States any more, but at the same time, I am reinvesting in the United States, making sure that we are pushing research and development, pushing the innovation of products we serve so we can remain competitive and strong,” says Timken.

“Unfortunately, the concerns of ‘buy American’ tend to ebb and flow with supply and demand balances. The Defense Department gets very concerned about their supply of aerospace steel when they can’t get any. When there is plentiful supply in the marketplace, you begin to hear the debate about whether buy American is a good thing,” he says. “That’s not the way it should be. Ultimately, they should be taking the long-term view and say we want to make sure you have a viable supply chain for the type of materials that we need.”

The shakeout in automotive will be as bad as it was in the steel industry

“If [the auto] industry is ever going to return to any acceptable level of profitability, there has to be a shakeout; same way there was a shakeout with the steel industry and other industries,” says Timken. He reports that his company’s business is growing faster with the transplants, the newer American auto factories, than with the U.S.-headquartered automakers. That’s the reality that the industry and suppliers have to accept. He thinks the industry is paying the price—in supply-chain problems and warranty costs—for the purchasing mindset that squeezed suppliers for annual price reductions.

“If you go in and sit down with Toyota or Honda or Nissan, they are hard negotiators, no doubt about it. They will drive you to deliver the best product you can, but at the end of the day, they recognize the value, and you get paid for it,” he says.

“So I am sitting here today looking at resources, figuring out whether I want to send a sales engineer into Toyota or GM. Who is going to pay me for the delivery of the technology?” He asks. “That’s the question that all of us who have exposure to the automotive industry are asking ourselves in addition to the credit issues.”

Where are tomorrow’s engineers?

Like Mittal, Timken is beginning to struggle with the generational shift taking place in the industry. People hired back in the 1960s, 1970s and 1980s are retiring.

“As we look at the American academic system today, there is a lack of qualified engineering students coming out of colleges,” he says. “For this industry, [the] particular focus is metallurgists, but for our company, it is engineering in general. If you look at the students graduating out of India and China, there is about a 10 to 1 ratio on the number of engineers we graduate versus [those who are] graduating in those places, and that’s a very significant concern of ours.”

Finding qualified people to hire, who see the steel industry as an attractive place to work and live, where they can make a career and support a family, is critical. The industry is beginning to address the problem at the university level, but the need for engineering talent is a problem that needs more focus. If the U.S. loses its manufacturing and engineering knowledge, he says, it will be in big trouble.

“Part of the problem, though, is you have a whole generation of educators, economists, and accountants who have been sold on the fact that American manufacturing is dead,” says Timken. Everyone thinks the country is moving toward a service economy.

“If you look at the ripple effect American manufacturing has versus service jobs, there is no comparison, and yet, you have this mindset driven by—unfortunately—the media that asks, Why do we want dirty jobs? All they do is pollute the environment.” It’s up to industry leaders get out and help people understand what American manufacturing is today.

John P. Surma, president, CEO and chairman of the board, U.S. Steel Corp.

Based in Pittsburgh, United States Steel Corp. manufactures a wide variety of steel sheet, tubular and tin products; coke and taconite pellets. The company has a worldwide annual raw steel capability of 26.8 million net tons.

John P. Surma

On China’s rise

China is top of mind for John Surma, president and CEO of U.S. Steel Corp. (Pittsburgh). He says the country’s growth has been extraordinary, and estimates that China produces and consumes 350 million tons of steel annually, about 35% of the world’s total output. That has placed enormous pressure on the entire supply chain, from iron ore to coal, natural gas and transportation.

“The impact has really changed the cost structure of the world industry,” says Surma. The steel production cost curve around the world has flattened, setting the industry up for a relatively stable and good period.

But whenever one country accounts for 35% of a global industry, it’s a source of concern. He says trade laws need to remain strong if large excess capacity develops in China (or India or Brazil). Given a level playing field, he believes steel companies in the United States can compete with anybody in the world.

“There is really only one [steel] company in China theoretically, if you put it at the highest area of control,” he says. “When large portions of the world industry are either controlled by or affected by decision makers who are doing things on other than market-based terms, that’s basically disconcerting to us.”

China’s primary advantage is a large, relatively inexpensive and unsafe labor force. But labor only accounts for 9-10% of making steel in China, says Surma. They are at a disadvantage when it comes to other costs, such as materials and energy.

“Yet, they would be glad to sell here at any cost, at any price just to get the product to the market,” he says. “Without the antidumping countervailing duty laws I don’t know where we would be.”

The steel industry restructuring

Surma says that the labor restructuring in 2003 was the largest leap forward on the labor front in the steel industry over the past 50 years. While integrated steel companies like U.S. Steel did manage to negotiate new labor contracts that cut off new pension plan entrants, and limited some retirement healthcare, he says the negotiations were not a concessionary process. What they did was release the productivity in the workforce that the labor contracts had deprived the industry of and got rid of a system that just didn’t work.

For example, when U.S. Steel acquired National Steel in May 2003, it had 26,500 hourly and salaried employees. Today, Surma reports, they are making the same amount of better quality steel, and doing it safer, with less 20,000 people. Also, in the third quarter, the company operated at 80% capacity, but it was still profitable. That could not have happened before.

“We had productivity in our employees, great people, but we just didn’t let them express it. The deal was higher productivity, competitive benefits, companies which are stable and provided employment and a very reasonable profit sharing plan,” he says.

David Sutherland, President and CEO, IPSCO, Inc.

IPSCO (Lisle, Ill.) operates steel mills at three locations and pipe mills at six locations in the United States and Canada. The company's tubular facilities produce a wide range of tubular products including line pipe, oil and gas well casing and tubing, standard pipe and hollow structurals. IPSCO's sales increased 20% in 2005 to $3.03 billion compared to $2.53 billion in 2004. Average selling price per ton increased 23% while customer shipments of 3.46 million tons declined 3%.

David S. Sutherland

U.S. competitiveness

“There is no one on the planet as far as we are concerned that can out-produce us from the standpoint of steel manufacturing,” says David Sutherland, president and CEO of IPSCO, Inc. “There are lots of metrics to be examined and that we can look at globally that can support that.”

The steel industry, Sutherland notes, may be competitive globally, but its North American customers are having a tougher time because they are often much more labor intensive. Steel executives are spending more and more time addressing the trade issues that are having a negative impact on their customers. “If we don’t deal with it, we will be in tremendous trouble,” he says.

“Manufacturing jobs tend to be well paying. They do support the families and allow families to send kids to college,” says Sutherland. “I think we have to do our best to make sure that we support that and not allow any more of it to be hollowed out as has been happening.”

China’s unsustainable business model

“Everybody talks about this big price discrepancy between what steel is being sold for in America and [what] steel is being sold for over there. It is being sold over [in China] at an actual loss,” he says.

“So on top of this whole currency issue, which is 40 to 45% undervalued, they can’t make steel as well as we can.”

One of the issues, says Sutherland, is that most of the steel companies in China are losing money. Without the anti-dumping barriers, more of that steel would be coming to the United States. What’s happening instead is that subsidized steel, which is being produced below cash costs, is being put into steel-intensive products, which are then imported into the country. As this becomes more clear to people, he says, touching more and more voters in more and more Congressional districts, it will become an election issue and representation will change in Washington.

Dan DiMicco, President and CEO, Nucor Corp.

Dan DiMicco is president and CEO of Nucor Corp. (Charlotte). He has been at the company for over 23 years, starting out as a metallurgical engineer. Nucor is the largest steel producer in the United States. The company reported net sales of $12.7 billion in 2005. With operating facilities in sixteen states, Nucor produces: carbon and alloy steel; steel joists and joist girders; steel deck; cold finished steel; steel fasteners; metal building systems; and light gauge steel framing. The company is also the nation's largest recycler. In 2004, Nucor recycled approximately 17 million tons of scrap steel, 5 million tons of which came from automobiles.

Daniel R. DiMicco

Free trade vs. managed trade

“My pet peeve really has to do with the way that free trade—the concept of free trade—has been distorted in this country, distorted by the bureaucrats, distorted by a number of the economists at some of our Ivy-covered-wall universities,” says Dan DiMicco, president and CEO of Nucor Corp. “It really has been distorted to the point that free trade has been replaced by what is called—not called but really is—managed trade or overtrade. Free trade is really a misnomer in the way it is practiced in the world today, and we have to steal back that definition because free trade is good. Global trade is good….”

“Whether it [is] the WTO, or just our free trade supporters in Washington and elsewhere, there has to be rules associated with these things. Without rules, you have anarchy. Without rules, you don’t have a civilized society,” he continues. “The problem is that the rules are not A) enforced and B) not put out there fairly for everybody….”

“What we have been experiencing, what is called ‘free trade’ is anything but. There are no rules being applied to our trading partners. They are not being held accountable to play by the rules that they agreed to [in order] to have access to our market,” he says. “Some people might suggest that we are not supporters of free trade. Just the opposite. We are champions of free trade, and we recognize the benefits of it. We recognize the benefits of it to the global economy, but we have to have a set of rules that everybody plays by.”

What’s the point of zero tariffs, if we have nothing to sell?

DiMicco says the manufacturing sector is currently being decimated by our free trade position. NAFTA and CAFTA are good agreements, but the rules aren’t followed by many of the United States trading partners.

“If we don’t hold our trading partners accountable to play by the same rules, we may be successful on those agreements, but at the same time we will have lost our ability to manufacture, to produce for ourselves,” he says.

“The one thing we all want for our children that our parents wanted for us is the ability to take care of ourselves in this world,” he says. “As a nation, we should not lose the ability to take care of ourselves. And if you think that can’t happen, if you think that we are so great as a nation, so smart, so in control of things that it can’t happen, just look at history. There is not one great civilization that is still around today, not one. We are the latest generation of great civilizations in the world….”

High-paying manufacturing jobs

“We have to make sure that our politicians in Washington and our economists truly practice what they preach, and it is not happening. That’s why we lost over 3,000,000 high-paying manufacturing jobs. That’s why the middle and upper middle class in this country is disappearing, where you can’t find people with a high school education who can go out and get a job for $70,000 to $80,000 a year,” says DiMicco.

“We have our plants scattered in 16 different states in the country. We are not focused in one particular area,” he continues. “Most of our operations are in rural America. I guarantee you in those communities they know about the steel mills, they know about the jobs. Most people want to work there because the average salary is north of $70,000 a year without counting any benefits or profit sharing. It is something that not only the parents want their children to get into, but the children want to get into….”

“As we have grown, we had to get more involved in these issues of training and developing the people with the skill sets that we need to continue to fuel our growth and to keep our operation growing,” he says. Even in these rural communities, where there is a good work ethic and mechanical aptitude, Nucor has made a point of working with community colleges and local universities to help people in those organizations understand what type of skills they need in their steel plants. People who understand the current state-of-the-art technology, who are trained to weld, and who understand the intricacies of computer programming and process control systems.

“If you go into the hundred mile radius of where our plants are at, you won’t see a negative attitude towards working at a steel plant. You will see a very positive attitude,” he says.

Steel prices

DiMicco says that steel companies have had to use the anti-dumping laws in the past because the U.S. is the only market that is really open. “Historically what has happened is people have sold their tonnage in this marketplace on an incremental cost basis or zero cost basis and totally disregarded the fact that they were breaking the agreed upon international trade laws,” he explains.

“We were the place where, if there was any excess in the world, it came here. We had distribution channels. We had the open market, and if it came in to meet the needs of our market and stopped there, things would have been okay, but it didn’t. People got carried away. They flooded it in,” he says. “They drove the pricing down, not only to below our cost of production but to below their cost of production, and those are heavily subsidized areas of the world where costs are kind of a funny thing.”

Individual companies can’t compete against government-owned entities producing a 100% subsidized product that don’t have any shareholders or Wall Street to be held accountable to, he explains. The whole market gets out of whack.

“Things get out of balance, even when people are not doing stupid things like building more capacity than you really need and building capacity that doesn’t present a cost advantage or technology advantage or marketing advantage,” says DiMicco. “That’s not a good thing for any product, any market, any industry.”

Currency manipulation

DiMicco refers back to the mid-1980s when government negotiations lead to a revaluation of the Japanese yen that reflected the currency’s real value. That led to Japanese companies building factories over here to make cars and other goods because they realized they could not compete in the U.S. market without currency manipulation. Because pegging the yuan to the dollar is a government policy, with government-owned banks buying U.S. dollars on the open market to keep it where it is, the only solution to currency manipulation, says DiMicco, is for the U.S. government to step in.

“The currency issue has reared its ugly head since the mid ’90s and built up a momentum to the point now where it is out of control and creating a lot of damage, and the proof of that is in our massive trade deficit. It is going to be in excess of $700 billion next year. It is not going to come back. And it is coming on the backs of the U.S. manufacturers and now the U.S. service sector and some of the high tech sector,” he says.

“Our Government has not stood up and done what it should do to level the play field. They need to go back to what [Ronald] Reagan and [James] Baker did and say ‘Okay. Enough is enough. You have had this advantage for ten years now, going on eleven. All right. You need to back off from it now. You need to start playing by the rules of international trade.’” Says DiMicco. “They are not going to do it unless we force them to.

DiMicco characterizes China’s currency manipulation, tax rebates for exports, energy subsidies, and other policies that lower the price of production, as a giant invitation for U.S. manufacturers to pick up and move. The demand by many purchasing departments to match China prices has supported that flight. Recognizing the rules of the game, some companies have made the only choice they could make and moved to China. Others have gone out of business.

“Those that keep fighting it are not winning the game. They are the ones out there saying, ‘Give us a level playing field to compete on. Stop creating this massive incentive to move manufacturing to China,’” he says.

“The Chinese have done what they have to do to drive their economic growth. If I was the Chinese, I wouldn’t change a damn thing from what I was doing, and I would keep pleading with the U.S. give me time, give me time, give me time,” he says. U.S. government leadership is supposed to recognize that “it is time to start weaning them off this massive cocaine addiction that they have, the currency manipulation to our marketplace…. It is time for them to stand on their own two feet.”

“Do we expect them to go from a 40-50% undervaluation to zero overnight? Absolutely not, but it should happen over the next several years, and they are not even taking a baby step,” he says.

China’s two percent adjustment in July of 2005 and the talk about “flexibility” was just a cover for not talking seriously about revaluation, he says. It needs to happen sooner rather than later, for the good of the Chinese and the world economy.

“Look at what happened to Japan. When the currency was revalued there, Japan went into a slowdown,” says DiMicco. “There is a price to pay for manipulating things in this world, and there are repercussions, and their economy went into a bit of stagnation….”

“For China revaluation will be a lot worse than [it]was for Japan. The longer that they are on that drug—currency manipulation—the tougher it is going to be to get off it some day, and they need to reduce in moderation,” he adds.

“If Japan had done that back in the ’70s instead of waiting to be forced to in the ’80s, they would have had a much more gradual transition and wouldn’t have had the ten years of stagnation. Now, they are coming out of that. People need to learn a lesson from history. Eventually, you have to pay a piper.”

“Wars get fought over things like this throughout history, and we can’t let it get to that point,” he argues.

The Bush Administration’s trade record

When we talked to DiMicco, he had recently been in Washington, talking to Senators and Congressmen who were furious about the President’s decision to deny Section 421 relief (part of the Trade Act of 1974) to the pipe and tube industry. The Administration denied relief in the face of an affirmative decision by the International Trade Commission that a surge in imports from China had resulted in market disruptions.

“They are furious for this one reason: They supported NAFTA. They supported CAFTA. They supported the President,” he says. They voted for trade promotion authority if the administration would “make sure to stand up and defend our laws when they are broken, when it is obvious countries are not playing by the rules they agreed to.”

“The Administration has demonstrated that they are not doing that,” says DiMicco. “421 was just the clearest case of it where they are not supporting U.S. manufacturing and U.S. businesses when our laws are being broken.” These representatives will reportedly not vote for CAFTA again, or renewal of free trade authority, which is too bad, says DiMicco. Because free trade is a good thing when it’s done in the right way and when countries play by the rules.

If the people in power in Washington don’t pay attention to such issues, he says, mainstream America will lose faith in ideas like free trade. “Whether it is a Democrat or a Republican heading up the Administration, we need leadership that recognizes that we should have a right to a level playing field in this country to compete on a global stage. That’s all we are asking for.

“We are not asking for subsidies. We are not asking for advantages. We will provide the advantage ourselves and compete on that level playing field, win or lose. What our government’s responsibility is, whoever is leading it, that responsibility is to provide that level playing field and to preserve and protect and defend our way of life,” he says.

Andrew Sharkey, President and CEO, American Iron And Steel Institute

The American Iron and Steel Institute (Washington, D.C., AISI) is comprised of 31 member companies, including integrated and electric furnace steelmakers, and 118 associate and affiliate members who are suppliers to or customers of the steel industry. AISI's member companies represent approximately 75% of both U.S. and North American steel capacity. AISI serves as the voice of the North American steel industry in the public policy arena. AISI also plays a lead role in the development and application of new steels and steelmaking technology.

Andrew G. Sharkey

Got steel?

“We may have some disagreements from time to time on some policy issues, but the one thing the industry is united on is advancing steel as a material and making steel for automotive construction and packaging [the] material of choice,” says Andrew Sharkey, president and CEO of the American Iron and Steel Institute.

“We have been engaged in about a 20-year effort to advance steel, both in traditional markets like automotive and packaging and in what we would call some newer growth markets such as residential framing, residential roofing, utility poles, and there are additional construction markets,” he says.

The AISI program to advance steel has been an effective way for the industry to work on a collaborative basis to advance its materials. The steel auto body project that focused on lightweight, high-strength steels in the late 1990s redefined the use of steel in automotive applications, says Sharkey.

Trade scorecard

“There are winners and losers in trade, and the market kind of naturally sorts that out,” says Sharkey. “We look at ourselves as winners in terms of what we have been through these last couple of years. Why you should put industries that have done all the right things and are globally competitive at risk because of bad trade policies makes no sense whatsoever,” he says.

The administration’s performance on the trade issue is unfortunate, says Sharkey, because it has been a very positive influence from a regulatory standpoint. Industry has been much better off with the approach to environmental and occupational safety regulations that have been more cooperative.

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