Overcoming Steel Challenges Going Forward
The steel industry is at a crossroads. With competition, sluggish pricing and changing consumer habits, there is a great deal of uncertainty about the short- and long-term future of the integrated steel companies. To get a better understanding of the challenges and opportunities, Becky E. Hites, the founder of the consulting firm Steel-Insights LLC will give a no-holds outlook for the steel industry. In advance of her presentation, she sat for a short interview about what to expect from the domestic steel industry.
Question: Electric arc furnaces (EAFs) have been ratcheting up quality levels to compete with integrated steel mills. What steps can/should integrated steel companies do to strengthen their position?
Becky E. Hites (BH): The steel industry is a highly capital-intensive industry, and it has never been a “one-and-done” type investment requirement. Even EAFs built in the late 1980 have continually reinvented themselves with a shift in the melting process to incorporate alternative metallics to supplement scrap due to copper contamination in the scrap inventory. EAFs also are using more chemical energy, rather than relying strictly on electricity; replacing rolling mill drives with more powerful motors; and almost continuously adding incremental finishing capacity to supply new markets.
Meanwhile, integrated mills have been slow to make investments due to the duress in the market caused by imports, which impacted profits and cash flow generation. But, with the increased trade protections, all three domestic integrated producers have announced significant capital investments to not only reline their blast furnaces, but add capability, power and improved tolerance controls to their downstream rolling operations.
The blast furnace/basic oxygen furnace steelmaking process is highly efficient, but is disadvantaged by large, inflexible production volumes. In North America, the raw material supply chain for integrated mills is relatively stable and generally predictable. On the other hand, EAF metallics costs have been increasing in recent years as most sheet steel mills today no longer rely solely on scrap as their feedstock, but must supplement with DRI (direct reduced iron), pig iron or other alterative metallics. This move has given rise to Nucor’s Louisiana DRI plant and Cliffs Natural Resources’ new HBI (hot briquetted iron) plant in Ohio coming on-line in the first half of next year (2020).
All three domestic integrated producers have been aggressively and diligently making investments and adjustments to their asset portfolios to position themselves to compete in the future.
AK Steel purchased the Dearborn, MI assets for $707 million in 2014 to protect its automotive markets. The company also has built a $36 million state-of-the-art “research and innovation center,” which it unveiled in 2017.
ArcelorMittal, in partnership with Nippon Steel, purchased the state-of-the-art TK Calvert steel processing plant in Alabama for $1.55 billion in 2013. It has invested an additional $1.5 billion in the past 36 months to improve and expand its quality and finishing operations at five operations.
US Steel is investing $1.2 billion in its Pennsylvania mills, $2.0 billion in its asset revitalization program started in 2018 and earlier this month (October 2019) announced a $750 million 49.9% acquisition of Arkansas-based Big River Steel, the U.S.’s newest domestic steel mill.
There are some high operating cost assets that need to be removed from production and the steel company management teams (and boards) have not been very disciplined in making those tough decisions.
Q:There have been tariffs imposed on several steel-related products coming out of China. In return, China has hit some U.S. sectors with tariffs. How will this play out over the next several years?
BH: Everyone focuses on the tariffs, but the question should be more encompassing than that. For decades, the United States allowed foreign entities to abuse our markets and did not enforce laws put in place to facilitate a “fair” trading place. This began to change about a decade ago when the definition of “harm” was re-evaluated and the theft of intellectual property began to attract more attention.
The most recent round of tariffs accomplished the steel industry goal of an 80% utilization rate until just recently and allowed the executive teams (and boards) to make reinvestment plans based on anticipated increased profitability.
I personally think the industry shot itself in the foot last year by hiking prices too much too fast relative to the global market in 2018. The result caused a consumption chill in the second half of 2018 that was extended into 2019 by the Fed’s rate hike in December 2018.
Also, the slowdown in global economic markets has had an exacerbated impact on the steel industry, which remains in severe overcapacity. The tariffs are a means to an end, which is the re-negotiation of trade agreements with the United States’ trading partners for all products. In my opinion, they will eventually be reduced as we are successful in obtaining our goals. There will be on-going efforts within the WTO to compel China to live up to its obligations, and I believe that eventually negotiations will be completed with a rebalancing of the power to more adequately require responsibility from trading partners that have been abusing the openness of the system. But then, I’m generally an optimist.
Q: There have been concerns by some industry watchers over a significant shakeout in the steel industry that could be coming soon (next couple of years). Where do you stand on this? And if you had the ear of a steel company CEO what would you tell them to do to prepare?
BH: The domestic steel industry goes through cycles of “growing young” as new state-of-the art capacity displaces older, high-cost capacity that eventually is shuttered and dismantled. Younger commentators on the industry have reacted with hyperbole, but this round of capacity additions is just a repeat of the cycle that began in sheet in the late 1980s and is necessary for the overall health of the industry.
Things need to evolve and change. That’s not to say I think management teams should abdicate their leadership to outside consultants, but I think the tribal knowledge contained in steelmaking teams unfortunately doesn’t get tapped as effectively as it should.
Q: What is one of the biggest upsides you see for the integrated steel sector over the next 3-5 years? How about biggest challenges?
BH: The biggest upside is the natural barrier to entry from the EAFs not having enough finishing capacity to take all the integrated mills’ customers. They also haven’t wanted to take some markets due to thin margins integrated mills have been willing to accept.
The biggest challenge is that every year EAFs expand and add more finishing capacity. The integrated mills will increasingly be required to compete head to head with EAFs on the higher product grades, at least for products that have reasonable margins for the EAFs given their lower cost structure. EAFs will leave the margin-losing products for integrated mills. So, my biggest suggestions for integrated mill CEOs is to modernize their operating systems to reduce their unplanned maintenance outages, improve their yields and lower their costs, and to properly price their products to generate the required ROI to invest capital into their assets.
To hear Becky E. Hites’ presentation, make sure to register for the annual MetCoke World Summit, which will be held Nov. 5-7 in Nashville, TN. Click here (https://www.metcokemarkets.com/metcoke-summit/metcoke_agenda) to learn more about the conference or to register.