What

1
Whats Next in Steel ?

• Peter Warrian
• University of Toronto

2
Steel Industry 2004

• Best of Times ?
• Worst of Times ?

3
Its Pretty Punchy Out There !
The world steel markets gone mad Ive never
seen anything like this. Peter Fish,
MEPS Steel prices on the world market in the
future may be even more volatile than in the
past, with price peaks higher and price troughs
not as deep as in the past, Peter Markus, World
Steel Dynamics
4
Price Volatility
5
Punch Line

• There will be an unprecedented level of
  volatility in steel markets for the next five
  years.
• It has the potential to destabilize important
  sections of North American manufacturing

6
Steel Market Gone Wild

• Base prices plus surcharges
• CR 390 12/03 460 2/04 600 4/04 ?
• China Demand, Scrap
• Other Factors
• Greed Mills our turn !
• US Decline Who wants to supply USA? 3030
• 2.01 Duties Unanticipated Consequences Hello
• OEM Auction Supply Chain Hoarding

7
Steel Production Forecast
Steel Production Forecast Steel Production Forecast Steel Production Forecast Steel Production Forecast
Region (mil tonnes) 2003 2004 Change
EU 159.9 161.0 0.7
C E Europe 29.9 30.5 2.0
Ex-USSR 106.3 108.0 1.6
NAFTA 123 127 3.3
S. America 42.9 44.0 2.6
China 219.7 245.0 11.0
Japan 110.5 110.0 -0.5
Other Asia 108.3 112.0 3.4
Total 960.0 1,000.0 4.2
Source MEPS World Steel Outlook, Q4 2003
8
Financial Results for Steel Producers
US Integrateds 2001 2002 Change
Shipments 000 tons 32,755 33,612 2.6
Sales (/ton) 15,029 16,693 11.1
Oper. Cost (/ton) 512 516 0.8
Oper. Income (/ton) (53) (15) 71.7
Source Locker Associates, Steel Industry Update
176, June 2003
9
Financial Results for Steel Producers
Can Integrateds 2001 2002 Change
Shipments 000 tons 10,990 11,449 4.2
Sales (/ton) 6,435 7,399 15.0
Oper. Cost (/ton) 603 602 -0.2
Oper. Income (/ton) (18) 44 344.4
Source Locker Associates, Steel Industry Update
176, June 2003
10
Financial Results for Steel Producers
NA Minimills 2001 2002 Change
Shipments 000 tones 21,668 24,537 13.2
Sales (/ton) 7,654 8,736 14.1
Oper. Cost (/ton) 338 334 -1.2
Oper. Income (/ton) 15 22 46.7
Source Locker Associates, Steel Industry Update
176, June 2003
11
Price Trends in Raw Materials
(/metric tonne) Recent Price Previous Price
Coke 180 60 (early 2002)
Iron Ore 95 27 (2001)
Pig Iron 240 115 (late 2001)
Scrap 215 110 (2001)
Slab 270 145 (late 2001)
HR Band 350 175 (late 2001)
Source Locker Associates, Steel Industry Update
182, December 2003
12
Three Steel Stories
13
Integrateds

• Consolidation of Transnational Steel
• Innovation Gap

14
Minimills

• The Big Squeeze Scrap, Energy Prices
• Capital Restructuring

15
Service Centres Supply Chains

• Supply Chain Surges
• Intermediation Plus

16
Ten Questions About the Future
17
1998 The Tipping Point

• The 1998 Asia-Russian financial crisis was a
  Tipping Point for the global steel industry.
• Will the fault line of the hot ends implode the
  re-constituted mills?

18
Flat Rolled Prices 1989-2003
Source Locker Associates, Steel Industry Update
183, Jan 2004
19
Worlds Largest Steel Companies
Rank Company Capacity (mil tonnes)
1 Arcelor 44.0
2 LNM Group 34.8
3 Nippon Steel 29.8
4 POSCO 28.1
5 Shanghai Baosteel 19.5
6 Corus 16.8
7 Thyssen Krupp 16.4
8 NKK 15.2
9 Riva 15.0
10 US Steel 14.4
46 Stelco 4.7
51 Dofasco 4.4
? Algoma 2.5
Source IISI, Annual Report 2003
20
Critical Factors in the Implosion

• Crisis of spot market for flat-rolled and import
  surge leading to Trade Cases
• Blowing away of Reconstituted Mills with old Hot
  Ends
• Rise of China to set global spot prices and
  demand for inputs (ore, scrap, freight)

21
How Does the Industry Innovate?

• Innovation in North American steel is driven by
  the auto industry.
• How can the steel industry innovate for the
  future?

22
Two Poles of Innovation

• Nippon Steel (Stelco)
• Arcelor (Dofasco)

23
Networks of Innovation

• Ultra Light Steel Auto Body (ULSAB)
• Auto- Steel Partnership (ASP)

24
The Dofasco Advantage

• Dofasco has become the most profitable steel
  company in North America.
• How does it do this with such low levels of R D
  spending?

25
Dofasco Secrets to Success

• The Sweet Spot of Auto
• Vision Solutions in Steel
• Leadership
• Technology Alliances
• Learning Culture

26
Dofasco and Technology

• Technology
• Same 50 Engineers
• Alliances and Licensing
• Absorptive Capacities of the Firm
• Generic knowledge networks
• Implementation
• Tacit Knowledge Working in Steel

27
Steel Trade Wars

• Steel trade wars and protectionism dominated the
  industry from the 1970s to the 1980s, but the WTO
  has ruled out traditional US trade protectionism.
  
• What happens now that the stealth protectionism
  of bankruptcy procedures (USA) and the low dollar
  (Canada) have been removed?

28
Steel Trade Wars

• 70s-80s Steel Protectionism
• NAFTA steel but no Secure Access
• Disinvestment Dofasco, Co-Steel, Ipsco, Ivaco
• 2001 NAFTA Joint Cases
• Safeguard No Canada Yes USA, EU, Japan
• 2003 WTO Ruling

29
Stealth Protectionism

• USA Chapter 11 Steel Companies
• Canada Medicare 7.95 Advantage
• 2004
• Non-renewal of 2.01 protection
• Canadian dollar surge

30
No Industry is an Island Steel-Auto Supply Chains

• Steel is no longer an industrial island to
  itself, it is a strategic part of the materials
  sector of the new economy.
• How are steel supply chains to the auto industry
  functioning?

31
Ontario Steel

• Steel-Auto Interdependence
• Changing Interface
• Auto Supply Chain

32
Traditional Steel-Auto Link

• Big 3 Steel
• Stelco
• Dofasco
• Algoma

• Big 3 Auto
• GM
• Ford
• Chrysler

33
Steel-Auto Parts New Links

• Traditional linkage
• Subsidiary parts Divisions of Auto companies
• 75 internal, 25 outsourced, now reversed
• Central purchasing of Steel
• GM-US Steel yearly contracts
• New parts company players Magna, Ventra

34
Steel 2002 New steel, old players

• New steel
• 60 new steel for autos in 5 years
• New materials science Research Chairs
• USLAB project
• Investment
• Foreign partners France, Mexico, Brazil
• Steel auto divisions Dofasco, Algoma
• Dofasco goes laser Boundaries between steel and
  manufacturing

35
Steel 2002 New steel, new players

• Steel players
• Minimills Ipsco
• Service Centres Russell, Samuels, Venture Steel
• Independent parts companies
• Value added processing
• Contract manufacturing

36
Traditional Steel Processing Line
37
Value-Added Steel Processing Line
38
Steel Contract Manufacturing
39
Inventory Management
40
Shipping and Logistics
Functional Overview
41
Shipping and Logistics
Functional Overview
42
Protectionism by Stealth Ended

• The low dollar and socialized medicare gave
  Canadian manufacturing a 20-30 cost advantage.
• How do labour and management make up the gap?

43
Steel Wagnerism

• The Wagner Postwar Model
• Adversarialism
• Work Rules
• USWA
• US industry Contract
• Stelco Contract

44
USWA ISG Deal

• Wagnerism Rating 1
• Contract Provisions
• Six year term
• Job Classes 32 to 5
• Contracting Out
• Profit sharing
• Training
• Investment Plan

45
Stelco Right Deal in Wrong Place ?

• LEW Local USWA 8782
• Wagnerism rating 5
• Hilton Works USWA Local 1005
• Wagnerism rating 9
• Algoma USWA Local 2251
• Wagnerism rating 3

46
Labour Management Bargaining New Deals ?

• Steel industry wages and benefits are among the
  highest in the economy.
• What does the steel case tell us about how
  difficult is it to maintain high wage jobs in a
  gobalized economy?

47
Iterations of New Deals

• 1980s
• Legacy Costs for Governance
• 1990s
• Work teams, multi-skilling
• 2003
• ISG Complete Overhaul
• Offloading Legacy Costs

48
What Do You Do When Youve Given Everything on
the Table?

• ISG the last deal
• Drastic moves towards the High Performance Goal
• Make the deal with Minimill Management
• Industry Restructuring
• Overwhelm Best Efforts
• Who do you Negotiate With Industry ?

49
Labour-Management Bargaining Pensions

• Pension costs at Stelco are cited as the major
  financial burden for the companys survival.
• Did pension bargaining in the last decade become
  a lazy mans option in union-management
  bargaining?
• PBGF and Moral Hazard

50
Stelco Pension Bargaining

• A Tale of Two Pensions
• 2000 LEW Local 8782
• 42 to 58
• 2002 Hilton Local 1005
• Me too 58
• Same Deal Different demographic economics

51
Pension Bargaining Moral Hazard

• Temptation of Pension Bargaining
• Tradeoff for Wage Increases
• Postpones costs cash impact
• Danger
• Pensions carry whole weight of adjustment
• PBGF A moral hazard for management

52
Steel Infrastructure and the Next Wave of Auto
Investment

• The vital synergies between the auto and steel
  industries are clear to all policy makers.
• How does Ontarios steel infrastructure stack up
  in the competition for the next wave of auto
  industry investment?

53
Hamilton, ON Markets Served by Plant
Numbers represent plant capacities.
54
Alabama/Georgia Markets Served by Plant
Numbers represent plant capacities.
55
Key Comparisons
56
Future Outlook Five Year Scenario
57
Summary

• Integrateds
• Consolidation of Transnational Steel
• Innovation Gap
• Minimills
• The Big Squeeze Scrap, Energy Prices
• Capital Restructuring
• Service Centres Supply Chains
• Value Added Processors
• Intermediation Plus