Steel Success Strategies Report
Industry’s Challenge:
Prolong Prosperity

The domestic steel industry is healthy, though it remains challenged on many fronts.

It’s hard to believe that just six years ago, the popular annual steel conference sponsored by World Steel Dynamics and American Metal Market was known as Steel Survival Strategies.

Today, the steel industry is no longer concerned with mere survival, but with prolonging its incredible prosperity. With demand for steel products outpacing supply around the globe and prices soaring to record heights, the steel industry is as healthy as ever. Yet industry leaders who spoke at the Steel Success Strategies conference in New York June 23-25 warned of major challenges that remain on the horizon, such as worker safety, global warming and an energy shortfall that could constrain future economic growth.

“Theoretically, I should be feeling good, pleased, happy or relaxed. But I’m deeply concerned about the safety of our employees,” said keynoter John Surma, U.S. Steel chairman and CEO. Surma pointed to the deaths of 200 steel industry employees worldwide in the past year, including 15 in North America in 2008, as numbers that are simply unacceptable.

“We have to have a safety-first mindset that rigidly says accidents will not happen,” Surma said. “Steelmaking incidents are not inevitable.”

Moreover, he said, compromising safety standards does not lead to greater profitability; in fact, just the opposite. “Safety is the path to greater productivity and better financial performance. We don’t need to choose between safety and performance.”

Today is the perfect time to recommit to safety, he added. “So much is going right for our industry, this is the best possible moment to get things right on safety. I challenge all of you to return next year with a better safety story to tell.”

In a separate presentation, ArcelorMittal Chairman and CEO Lakshmi Mittal expanded on Surma’s topic in a discussion of the steel industry’s natural obligations as one of the world’s leading industries. Mills must lead the way on health and safety, while continuing to develop safe, sustainable steel, he said, adding, “There are no excuses for failing to live up to our responsibilities.”

Acknowledging the “very real climate threats,” Mittal said the steel industry needs to increase production of these sustainable steels while reducing harmful air emissions at the same time. Still, many executives fear the burden of reducing greenhouse gas emissions will fall disproportionately on mills in North America if cap and trade legislation is passed.

Cap and trade, a regulatory approach that would place restrictions on emissions but allow companies to buy and sell emission credits, did not make it through Congress in 2008, though it remains a possibility going forward. The domestic steel industry is fairly unanimous in its opposition. Most emphasize that only a worldwide commitment to reduce carbon emissions stands any chance of genuine success.

“Cap and trade is a flawed approach,” said Keith Busse, chairman and CEO of Steel Dynamics Inc. during a panel discussion at the conference.

Surma noted that if the U.S. industry is hit with tighter restrictions but the world does not follow suit, the end result would be more emissions, as production would shift to countries with more lax environmental policies. “We need a global solution to a global problem,” he said.

The United States is also in dire need of a better solution for meeting its future energy requirements, Busse said. “Energy is probably the greatest challenge facing our industry.”

To the SDI chairman, the answer is simple. “There is no chance we’re going to solve our energy problems through windmills or growing corn or soybeans. If you want energy independence, you have to look at nuclear.”

Another crucial issue facing mills is the procurement of raw materials, and their cost. As the hunger for steel grows in China, India and other developing countries, securing long-term sources of raw materials becomes even more urgent for steelmakers. With worldwide steel consumption forecast to grow at an annual rate of 6 percent, Surma said, the industry may have to double the current capacity for some steel inputs within the next three to five years. Finding and extracting these finite resources takes time, he added.

With steelmakers focusing their acquisition efforts on procuring sources of iron ore, coking coal and scrap, discussion of mills acquiring downstream distributors is largely off the table right now. “I think there’s much more of an urgency upstream than downstream,” said analyst Aldo Mazzaferro, a vice president at Goldman Sachs & Co., who joined Busse, AK Steel President James Wainscott, Gerdau CEO Andre Gerdau Johannpeter and Esmark CEO Jim Bouchard on the North American steel panel.

Demand for raw materials is part of the driving force behind the rising steel prices. While mills can command record prices for their products today, the price levels are not without risk, Surma noted. “At what point does the price of steel affect long-term demand?” he asked. “It would be tremendously cynical and risky to think steel is insensitive to price.”

Despite these concerns, experts at the conference presented an overall picture that remains quite positive for the U.S. steel industry. They are encouraged by the production discipline of the mills, envision the lower dollar fueling exports and domestic manufacturing, and believe the U.S. will emerge from its automotive and construction doldrums.

Moreover, there is evidence that the entire supply chain is behaving rationally, said Bouchard, who focused his comments on the distribution side of the industry. The executive, whose company was still the target of competing foreign mills at the time of the conference, said domestic manufacturers have flushed excess inventory out of the pipeline, and that the service center industry is following suit.

Service centers’ inventory management “has not been this good since I started in the business 28 years ago,” Bouchard said. Such discipline will help eliminate the vicious price swings of the past, he added.