"We are competitive."
That is how steel trade association leader Thomas Gibson describes the economic prospects of the domestic steel industry in the next five to 10 years.
Steel company executives and industry observers say the competitive landscape is tough now, and it's going to get more difficult to be successful. Concerns about production overcapacity, price volatility, environmental regulations and international trade make forecasts for the next quarter difficult, and the next year is just as impossible to assess.
But all participants in the industry — from maintenance technicians in Gary to steel industry officials in Pittsburgh — say steel is too important to the United States economy and manufacturing to fail. With this special report, The Times analyzes what makes the domestic steel industry competitive and the industry's potential to remain viable.
"From engines to the assembly lines, from fuel tanks to metal warehouses, from rails to bridges and high-rises, steel is critical for all aspects of modern life," wrote University of Wyoming professor Timothy Considine in a study published in 2005.
Doing business in the U.S.
Companies have been producing steel in the United States since the second half of the 19th century.
And it shouldn’t stop now, said Thomas Modrowski, CEO of Esmark Steel. He said the Midwest is poised to benefit from the "re-shoring" of manufacturing – returning production from other countries — in the United States because of the infrastructure, physical assets and human capital in the region.
Executives also are starting to recognize the cost of doing business in other locales may be more expensive over the long haul, especially as it relates to protecting intellectual capital, he said.
Andy Harshaw, vice president of operations at ArcelorMittal, said making U.S. manufacturing competitive is a team effort. He said workers, employers, unions and government should be encouraged to share responsibility for improving the nation’s manufacturing base. Then, the parties can share the gains from those improvements.
Northwest Indiana union official Jim Robinson worries about the concept of "competitiveness." It’s not because he doesn’t like the word, but because it could be used as a justification to lower wages, which isn’t palatable to workers. He said it is much more important to focus on productivity, which drives business performance and survival.
Robinson, who leads District 7 of the United Steelworkers union, representing 85,000 active and retired workers in Indiana and Illinois, said he expects companies to move toward regional economic production models instead of rushing to plunk down operations in locales around the world.
"Because manufacturing is dependent on just-in-time, the more miles and oceans you have in your supply chain, the more likely it is to be disrupted," Robinson said.
China, Japan and India are among the largest producers in the world, and the ability of countries to boost production will continue to shift the global steel landscape.
But international competition and trade are tricky subjects to tackle for any presidential administration, steel producers and steel users, said Roy Berlin, president of Hammond-based Berlin Metals. He said presidential administrations have to maintain relationships with businesses that import products yet also have significant U.S. operations. At the same time, these administrations serve as a cheerleader for domestically produced goods.
Tariffs on several steel products President George W. Bush’s administration initiated more than 10 years ago did not do a lot for manufacturers, Berlin said. He said, for instance, a maker of tomato garden stakes imported steel from China but made the product at a U.S. facility. The tariffs helped raise the price of steel, but it changed his ability to buy steel competitively, Berlin said. As a result, the production facility closed and the company adjusted to serve as a distributor of Chinese-made steel garden stakes.
Donald Fosnacht, who is with the Natural Resources Research Institute at the University of Minnesota at Duluth, said falling natural gas costs are making it possible for U.S. companies to improve their standing in the global manufacturing network. Shale gas finds have helped; companies describe the development as a “game changer” for the domestic steel industry.
Fosnacht, a former Crown Point resident who worked for Inland Steel for more than 20 years, said companies searching for answers to their cost equations could turn to direct reduced iron or substitutes for blast furnace inputs.
The process to create direct reduced iron can yield a pellet containing more than 90 percent of its weight in iron. That quantity is significant because the purer the iron fed in steelmaking on the front end, the fewer the impurities that have to be extracted from the process later. This reduces the cost and need to enrich iron. The technology, as well as other alternatives such as hot-briquette iron, could serve as a substitute for scrap in electric arc furnaces, since large markets such as China are soaking up scrap supplies.
Direct reduced iron is created using iron ore pellets and natural gas. It takes energy -- a lot of it -- to make steel, and existing companies continue to search for ways to reduce their energy use in production.
This development is critical for operators of large-footprint steel mills that produce steel from iron, coke and limestone, said Charles Bradford, a New York-based steel analyst and head of Bradford Research. Those mills are called integrated mills. Retrofits and upgrades to existing equipment at facilities are needed to comply with environmental rules that reduce pollution.
As a result, Bradford expects production of new steelmaking equipment in the United States will focus on electric arc furnaces, which burn natural gas to help melt steel. That development follows a trend a few decades in the making, Bradford said.
Bradford said electric arc furnace-based steel production at so-called minimils, which uses scrap metal to produce new steel, emits about a third of the carbon dioxide as integrated steelmakers. He said the nation’s share of steel production via minimills could rise to 70 percent in the next few years, up from about 60 percent currently.
Nicholas Tolomeo, associate editor, raw materials, for Platts, a steel industry media company, said electric arc furnace production forecasts will be driven more by economics than environmental rules.
Tolomeo said Charlotte, N.C.-based Nucor plans to start up an operation this year with an annual production capacity of 2.5 million metric tons. U.S. Steel and India's Essar Steel have received permits to build direct reduced iron production operations in Minnesota, but have yet to announce final plans. It is a major decision to spend millions of dollars to build and install the needed equipment, and there has to be certainty the market will support it.
"Yes natural gas is low now, but if you're investing in (direct reduced iron), you're investing in the very long term," Tolomeo said. "You want to see if natural gas (prices) stay where they are at. It's more about capital investment concerns (than) permitting concerns."
Tolomeo said domestic steel mills will continue to move away from buying raw materials on the open market. Nucor and Fort Wayne-based Steel Dynamics recently buying companies that own scrap yards reflect the interest companies have in securing those resources.
"Ever since China has done what it has done in the last decade, we see how volatile raw materials can get on the open market," he said. "Mills are saying, 'We need to secure a certain percentage of this.' "
History repeating itself?
John Surma, U.S. Steel chairman and CEO, warned the country could negatively harm the steel industry if it mismanages policy decision. He said in a Jan. 29 conference call with analysts that the European Union’s emissions trading system has been disastrous for the steel industry and other manufacturing enterprises.
"So I think all we have to do is look at what Europe's done where they're into no nuclear, no coal and all wind, and try running a steel mill on that,” Surma said. “And then see what result that's gotten, and by the way, U.S. carbon emissions have been far better controlled than European emissions.
“The program there is virtually no good. If that's what we want, I can't figure out why. We have perfect example of what that looks like, and I'm not sure who would choose that."
Prof. Considine, of the University of Wyoming, noted in his 2005 report that if growth in world steel demand were to slow down, "excess capacity could re-emerge and North American steel producers could once again face an onslaught of unfairly traded steel imports."
Bradford said history appears to be repeating itself. Tin-plated steel was the material of choice in beverage cans until aluminum entered the segment in the 1960s. He said steel company executives didn't believe aluminum could beat steel, but eventually it gained market share and by the 1980s became a dominant player in packaging. Now, company executives are fighting the battle in automobile production and are taking the same approach as they did decades earlier.
“They didn't understand the competition, and they still don't," Bradford said. "They're taking it much, much too cautiously and comfortably."
For instance, automobile companies are eyeing not only aluminum, but also the use of carbon fiber and magnesium in vehicles. Plastics also play a key role in vehicle structures. The aluminum content in vehicles today is a lot higher than it was 20 years ago, Bradford said.
But ArcelorMittal's Harshaw said steel isn’t resting on its market position. He said companies are working on their own and through research partnerships to provide sophisticated products to several industries.
"They know that we are uniquely positioned to provide them with those differentiated products when they need them," he said.
Steel companies will have to continue to prove they are adept at reducing their cost structures, especially on energy, materials and labor, Considine said. He said centralizing transportation costs also will be critical to future competitiveness.
Natural gas to the south, iron to the north, major manufacturing in the Midwest and the region's transportation infrastructure continue to make Northwest Indiana a viable place to produce steel, said Larry Davis, an ArcelorMittal Burns Harbor electrical maintenance technician.
Davis said companies have to find efficiencies within operations, and the union and management need to work together to ensure they can withstand the changing competitive landscape.
"This is going to decide whether we have a steel mill on the shores of Lake Michigan in the next 10 to 20 years," Davis said.
Modrowski of Esmark Steel expects consolidation among the nation's steelmakers, but also steel distributors and processors. In his ideal scenario, price stability could be created by the largest service centers buying product directly from the steel mills, and the smaller service centers buying from their larger counterparts. The volatility and changes in market conditions have made it difficult for the smaller service centers that distributed only low-value steel products.
Steelmakers also are expected to continue developing the next generation of steel products. For the automotive industry, advanced high-strength steel products offer the potential for higher margins for producers, but they also combine strength, formability and dent resistance for automakers.
Modrowski said the nation's manufacturing base has to continue to support entrepreneurship and a spirit of ingenuity to remain competitive with other countries.
"If the country ever kills that, then we have a problem," Modrowski said.