Steel industry's better times, profits may ease a bit
By C.m. Mortimer
Published: Sunday, Feb. 27, 2005
The steel industry posted substantial profits in 2004 from increased demand, ongoing consolidation and China's voracious appetite for steel.
Experts and industry players say 2005 won't be a carbon copy, but they agree the same fundamentals remain in place and hold promise for a year of continued stability in a traditionally cyclical industry.
But the new year could prove challenging, as steelmakers face rising raw materials and energy costs, increased imports of foreign steel and a potential drop in demand from China, resulting from government policies to cool an economy at risk of overheating.
"We're seeing a new business model in the steel industry. We're seeing larger and stronger players," said Andrew G. Sharkey III, chief executive officer of the American Iron & Steel Institute, a Washington, D.C.-based trade group. "This is a bedrock industry we almost lost a couple of years ago."
The domestic steel industry produced about 110 million tons of steel last year, up from 103.3 million tons in 2003 and 101 million tons in 2002, reflecting strong demand, both in the United States and globally, and the heightened efficiency and productivity of the mills, according to the Institute.
A few key events set the stage for today's prosperity -- bankruptcies, protective tariffs, a weaker U.S. dollar, restructured labor agreements and consolidation, said Daniel A. Roling, a securities analyst for Merrill Lynch.
Pittsburgh-based U.S. Steel Corp., the biggest steelmaker in the Americas, rode a tidal wave of favorable global steel markets, acquisitions and cost reductions to post record profits during 2004. U.S. Steel earned $1.08 billion versus a loss of $463 million in 2003.
"We dramatically improved the position of the company. ... (And) we remain optimistic about the outlook for steel demand and our company," John P. Surma Jr., CEO of U.S. Steel, told securities analysts in January.
U.S. Steel employs about 48,000 workers, including roughly 22,000 in the United States and 26,000 overseas. The steelmaker's Mon Valley Works employs about 3,000 workers, and includes the company's Edgar Thompson and Irwin plants, Clairton Coke Works and Fairless Hills, an automotive grade, hot dip galvanizing operation located near Philadelphia.
U.S. Steel took a big step in May 2003 by acquiring the assets of bankrupt National Steel Corp. for $850 million in cash and $200 million in assumed debt. In September of 2003, U.S. Steel purchased Serbian steelmaker Sartid a.d., Serbia's largest steel company, for about $23 million. In November 2000, U.S. Steel purchased the former Kosice Iron Works in the Slovak Republic, considered by analysts at that time as a bargain, for $60 million in cash and assumed debt of about $325 million.
"Demand for steel is increasing, primarily due to Chinese demand. We need more capacity in America. At one point, there was too many steel companies and not enough workers. Today, demand for steel is at an all-time high, but imports are also at an all-time high. It's a good market, but we need to look at expanding capacity ... and pushing back imports," said Leo W. Gerard, president of the United Steelworkers union.
Foreign steel imports were expected to total about 36 million tons in 2004, up about 53 percent from the 23 million tons imported in 2003, reflecting both a robust demand for steel and the removal of Section 201 steel tariffs in December 2003.
Gerard, 57, said there is still a lot of illegally subsidized steel coming into the United States. "It's something when you have to fight your own government to enforce their own trade laws," he said.
The latest blockbuster deal in the steel industry occured in October, when Mittal Steel Co., formed from the recent merger of Dutch companies Ispat International and LNM Holdings and announced plans to acquire Cleveland-based International Steel Group for $4.5 billion -- elevating Mittal Steel as the world's biggest steelmaker -- eclipsing Luxembourg-based Arcelor SA.
If the deal is consummated in April as expected, the merged entity will have roughly 70 million to 75 million tons of steelmaking capacity -- big, but small in terms of an expected 1 billion tons of worldwide demand, according to Jerry Nelson, vice president of marketing for ISG.
"Consolidation brings stability to the market, and we see further consolidation globally. There are still some domestic independents out there there who will be aligning with somebody," Nelson predicted.
Charles Bradford, an independent steel industry analyst based in New York, doesn't see it that way.
"There aren't that many steel companies left. The industry has been pretty well picked over," Bradford said.
Last month, U.S. Steel's Surma told analysts the company has interest in Erdemir, Turkey's largest steelmaker.
"It's a terrific company. We've known it for a long time, and it's in a big steel-consuming market," he said. Surma said the company remains interested in VAT Kryvorizhstal, the largest steelmaker in the Republic of Ukraine.
Pittsburgh-based Allegheny Technologies Inc., a maker of stainless steel and other metal alloys, became significantly larger last June by acquiring rival J&L Specialty Steel LLC from Arcelor for about $67 million. The acquisition of J&L was significant in that Allegheny Technologies, along with North American Stainless of Ghent, Ky., and AK Steel Corp. of Middletown, Ohio, claimed responsibility for about 80 percent of the stainless steel used in the United States.
As part of the deal, unionized steelworkers at Allegheny Technologies and J&L ratified a new three-year contract in late May, a move that all but guaranteed the deal but eliminated 220 jobs at J&L. There were also voluntary retirement offers tendered to 775 hourly workers, including 125 at J&L operations and 650 union steelworkers at Allegheny Ludlum operations.
The new labor agreement should allow the company to save about $70 million, John C. Tumazos, a secuities analyst for Prudential Equity Group, LLC in New York, said in a recent report.
Allegheny Technologies reported 2004 net income of $19.8 million compared to a loss of $314.6 million in 2003. Sales for 2004 totaled $2.7 billion, up 41 percent from $1.9 billion, a year ago. Allegheny Technologies Inc. employs about 9,000 workers companywide, including about 4,000 workers at its Allegheny Ludlum unit.
Tumazos also said Allegheny Technologies' sales to China should improve as markets such as power generation and aerospace develop.
"Very little stainless capacity is in China, and the government is heavily depending on imports to satisfy its stainless steel and metal alloy demand," he wrote.
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