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Operational woes hit Region steel mills
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Operational woes hit Region steel mills

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The steel mills that have lined the Lake Michigan shoreline in the Region have been plagued by operational woes over the last few months.

Gary Works suffered extensive flooding just before Thanksgiving, forcing U.S. Steel's flagship mill to take the rare and drastic step of temporarily shutting down all of its blast furnaces to prevent cold water from coming in contact with hot metal and sparking explosions. Then just after Christmas, an explosion rocked ArcelorMittal Indiana Harbor in East Chicago.

The blast at Indiana Harbor No. 4 Steel Producing damaged a basic oxygen furnace and control room at the former Inland steel mill, which is part of the largest integrated steel-making complex in North America.

KeyBanc steel industry analyst Philip Gibbs wrote in a note that the unexpected outage of ArcelorMittal's basic oxygen furnace, which forges steel by blowing oxygen into the pig iron created in a blast furnace, would benefit the domestic steel industry, which has been suffering from overcapacity and low prices. No. 4 Steel Producing can make up to 3 million tons of steel a year, or more than 3% of the nation's steelmaking capacity. 

Gibbs predicted the disruption in production could help lift the price of hot-rolled coil in the United States, which bottomed out at $510 a ton in October amid a slump in auto sales and record appliance imports. The steel pricing website SteelBenchmarker estimates hot-rolled band sold for $638 a ton in the week that ended Jan. 13, a 4% jump.

ArcelorMittal has been ramping back up operations at the furnace that transforms pig iron into steel for appliances, cars, and countless other uses.

"Production at ArcelorMittal Indiana Harbor Steel Producing No. 4 resumed Wednesday afternoon January 8th and operations are expected to continue progressing through the ramp-up curve. The company will make additional statements as warranted," ArcelorMittal spokesperson William Steers said. "The recovery from the Indiana Harbor Steel Producing No. 4 outage is on plan and will allow us to continue meeting customer demand as anticipated."

The Region's steel mills could be showing their age, said Anthony B. Sindone, a clinical assistant professor of finance and economic development at Purdue University Northwest.

"Many steel mills in the U. S. are more than a century old," Sindone said. "Much of the infrastructure at Gary Works and ArcelorMittal are rather aged. While some capital improvements have been made at these and other plants around the country, these improvements have not essentially replaced the century-old equipment in large numbers."

Steelmakers haven't been in the best financial position to make major capital investments since steel prices have been depressed, below the $600-a-ton threshold needed to make a profit.

"Steel traded at $550 per metric ton on 29 November, which was up 10.2% from the same day in October. However, the price was 23.7% lower on a year-to-date basis and was down 28.8% from the same day in 2018," Sindone said. "Based on these price pressures as well as competitive challenges, it is no surprise that steel production plant and equipment remains as old as they are."

Water pipes are aging and in need of replacement everywhere, not just at steel mills, said Charles Bradford, a New York City-based steel industry analyst with Bradford Research.

"I did a report at the White House 20 years ago on how we needed to replace pipe in the United States," he said. "Most of the pipe in the ground was 40 years old to 50 years old back then and it still hasn't been replaced since."

Integrated steel mills have made major investments in relining blast furnaces and other projects, but maintenance is often the first thing that gets deferred when cost-cutting is needed because of a downturn in market conditions, Bradford said.

"U.S. Steel even admitted it needed to do $2 billion to catch up on maintenance, which should never happen," he said. "They cut back on maintenance big-time, which caused all type of problems."

Maintenance at steel mills is costly, making it a frequent target for cost-cutting in the highly cyclical boom-and-bust business, Bradford said. U.S. Steel for instance responded to deteriorating market conditions last quarter by saying it would scale back on the $2 billion in announced maintenance projects, which includes $750 million in new investment at Gary Works.

"When you're an accountant running one of these companies, maintenance looks like an obvious place you want to cut, even though it might be deadly," Bradford said. "That's the way you kill people. Part of the problem is the difficulty in pinning down the exact cost, because it's recorded in different places. You can do your own maintenance, but if you call in an outside company you call it a service."

Northwest Indiana's steel mills may require some higher maintenance costs to remain in good running shape since they mostly date back to the early 1900s, said Indiana University Northwest Assistant Professor of Economics Micah Pollak said.

"If a plant or factory is properly maintained and modernized then there should be no reason it could not continue to operate far longer than a century," he said. "It is true in general that the older a plant is the more expensive it can be to continue to maintain and modernize it. However, provided these investments are made, there is no reason it cannot continue to operate safely."

Ongoing investment in the mills along Northwest Indiana's lakeshore, which is home to half the blast furnace capacity in the United States, is vital because of their out-sized importance in the Region's economy, given the ripple effect of the good wages steelworkers earn, Pollak said.

"The condition of the mills and their degree of modernization is something that the Region’s steelworkers and residents should certainly be aware of, as they represent an important part of our economy," he said. "While these recent shutdowns are unfortunate, without knowing further details we cannot say if age of equipment was a significant factor. However, the recent shutdowns may be a sign that we should pay closer attention to their condition."

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Business Reporter

Joseph S. Pete is a Lisagor Award-winning business reporter who covers steel, industry, unions, the ports, retail, banking and more. The Indiana University grad has been with The Times since 2013 and blogs about craft beer, culture and the military.

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