MEMO TO PRESIDENT OBAMA

To: Barack Obama
From: Mark Reutter
Date: 5/28/09
Subject: How to get steel back on solid footing

America’s steel industry last truly dazzled the world when two men with big ideas made parallel breakthroughs. John Butler Tytus of Middletown, Ohio, solved the riddle of forming steel into very thin and wide coils, while Edward G. Budd of Philadelphia, Pa., developed the perfect use for such a product – the all-steel automobile body.

The twin inventions propelled American steel to world dominance in the 1920s. Tytus’ machine, for example, could produce 40,000 tons of strip coil a month – fully 800 times more steel than the old process – while Budd’s metal bodies were a quantum leap over wood-framed cars in terms of safety, reliability, and manufacturing cost.

This ”yes, we can” spirit must be rekindled if the industry, which you saw decline and disappear with agonizing results in South Chicago, is to survive and thrive in the 21st century.

In many respects, steel has been trapped in the 1970s, bogged down in arguments over “cheap” foreign steel and “Buy America” programs that should have been settled years ago. There is little credible evidence that foreign steel has economically injured the industry other than to force down prices on low-value items that should have been discontinued anyway. However, there is a great deal of evidence that steel lost out to domestic competitors by its inability or unwillingness to develop new markets.

Now the industry is experiencing the worst drubbing since the Great Depression, a situation made worse by its overdependence on the auto and oil industries.

As you have forcefully noted on many occasions, all signs point to a tectonic shift away from fossil-fuel manufacturing and energy-intensive transportation to green technologies that deal squarely with global warming. As a recyclable commodity, steel has the potential to compete effectively against nonrenewable plastics and other materials. What’s more, the world’s biggest-volume industrial product could be a valuable partner in reducing pollution and creating new markets if the industry embraced the future.

But first steel has to clean up its own act. This should start by mandating the end of all traditional blast-furnace production in the U.S. over the next 10 years. (This measure would be in addition to the Waxman-Markley bill before Congress that would cap carbon emissions and require steel and other businesses to buy or trade permits to pollute.)

The continued reliance on this dirty 19th-century technology is scandalous. ArcelorMittal’s plant in Cleveland is one of the Midwest’s worst polluters, raining down iron particulates and CO2 across a major urban area. Steel mini-mills that re-melt scrap in electric-arc furnaces emit 65 percent less carbon dioxide in the production process. Direct reduction of iron (DRI) has been successfully developed abroad.

While some steel companies will say that change is too hard or too costly, rest assured that it is not only technically feasible, but economically desirable. Blast furnaces are enormously expensive and, worse, are only really efficient when running at full blast. Both electric-arc furnaces and DRI lower capital costs and offer greater flexibility in economic downturns, easing the burden of this highly cyclical industry.

Which gets us to a major challenge you will face if the industry’s fundamentals keep deteriorating in 2009 – calls for a government bailout. Blanket federal aid is untenable, but loans to steel companies to finance blast-furnace conversion and underwrite energy-saving products for buildings, power-producing wind turbines, and high-speed train sets could be a wise use of taxpayer money.

But let’s rely mostly on private initiative to develop the products that best suit the marketplace. General Electric and Siemens, among others, are committed to developing green technologies across a wide spectrum of industries.

What’s more, there is a great deal of untapped inventiveness among family-owned companies that form the backbone of the metal processing and finishing sectors. It was out of one such company, with originally only 12 employees, that Edward Budd pioneered the all-steel auto.

Too much time has been spent in Washington coddling major steel companies at the expense of steel end-users and mini-mills that make steel from scrap. North Carolina-based Nucor Corp. is the most successful mini-mill company in the world. Nucor’s late founder, Ken Iverson, provided a roadmap of how innovation could produce profits and growth in a stodgy industry, while his successor, Dan DiMicco, has made environmental performance a key part of the company’s ethos. 

In short, give American steel a vision and specific goals – namely, greatly reduced manufacturing emissions by 2019 and new metals to help curb and control global warming – and you will have laid the foundation for a world-class business for years to come.