Troubled Steel Series

I wrote the following pieces for the op-ed page of The Evening Sun. Editor Mike Bowler had asked me what I thought of the then-popular theory, advanced by Lester Thurow of MIT’s Sloan School of Management and others, that steel was a “sunset” industry whose troubles needn’t worry us as we bask in a post-industrial age.

To pitch a business grossing $40 billion a year into the ash pit of academic theory was not only foolish but absurd given that many smaller companies were thriving at the same time that U.S. Steel and Bethlehem were springing leaks like the Titanic. I decided to take the assignment as an opportunity to examine two new types of steel companies – Geneva, a breakaway mill, and Nucor, a mini mill.

Getting a feel for Nucor’s Ken Iverson was instructive. One of the first things I discovered was that he was engaged in his leisure hours “reading a nifty book called The Romance of Steel.” Ah, Herbert Casson, 1907, a reporter’s foray into the dark, satanic mills of Pittsburgh and South Chicago. I came to realize that Ken was a romantic as well as a fine mechanical engineer. I mentally put him in the category of Frederick Wood as that rare steel master who gives more than he takes. –MR

Part 1:  Why Big Steel Has a Case of the Hurts

Baltimore Evening Sun
Originally published April 27, 1992
© 2006 Mark Reutter

America’s steelmakers are in trouble again. After shutting down dozens of mills since 1980 and throwing 250,000 people out of work, the industry was supposed to be ready for a rebound in the 1990s. “We’re back,” a senior executive declared.

They’re back all right, awash in red ink. Bethlehem Steel, the nation’s No. 2 producer, lost $767 million last year. That’s on top of more than $400 million in losses in 1990. In all, the five companies grouped under the once-goldplated moniker of Big Steel (Inland, National, USX-U.S. Steel, Bethlehem, and LTV) have hemorrhaged almost $3 billion in the past 18 months.

For many workers, the current downturn has been eerily reminiscent of the last time that Big Steel melted down. “Restructuring,” the code name for plant closings and cutbacks, again reverberates along the shores of Lake Michigan and the Ohio River, through the mill towns of Pennsylvania, in blue-collar Cleveland and Baltimore, sending shock waves to areas already beset by job losses and unemployment.

Earlier this month, USX closed the sprawling South Works in Chicago (first opened in 1881), and Bethlehem has announced the future shutdown or sale of important divisions at Johnstown, Pa., Buffalo, N.Y., and Sparrows Point, Md.

With sales exceeding $40 billion a year, there’s money to be made in steel. But resources need to be used wisely and well. Big Steel, to be sure, did part of the job in the 1980s. USX and Bethlehem retired grizzled equipment, some of it dating back to World War II. Inland and LTV teamed up with Japanese companies in joint ventures and modernized some of their mills.

But steel executives did not take the other essential steps for renewal, and that’s beginning to haunt them. In a competitive economy, it is imperative for a business to link its future to new products, expanded markets, and advanced technology. Big Steel’s managers seldom have faced up to this reality. They have cut back and laid off instead of pinpointing a strategy for growth and success.

To understand what’s gone wrong, it’s important to separate the short-term forces hurting the industry from longer-term factors that are at work. Americans at the moment aren’t buying many cars, and the commercial real estate market is in the doldrums. As a result, orders for flat-rolled steel used in cars, and beams and plate used in construction, two of steel’s principal markets, are down and prices are very low.

The current recession, however, masks deeper changes in the marketplace. After raising prices at nearly twice the rate of inflation between 1955 and 1979, steel opened the door to competitive materials. Imports never were Big Steel’s primary problem; aluminum and plastics and concrete were. Steelmakers couldn’t imagine a world of aluminum beer cans or plastic coffee makers or cellophane-wrapped fruits or concrete buildings. By the time they did, it was too late.

As markets came under attack from competing materials in the 1960s and 1970s, steelmakers developed the dangerous habit of becoming highly dependent on a few core buyers, such as the auto industry, which makes a protracted downswing in auto sales financially menacing to all but the strongest firms.

To counter these trends, steel must strike out in new directions. In Europe, French and German steel companies are preparing for the renaissance of high-speed rail travel with new alloyed steels for Bullet trains, tracks, and stations. They expect a rich bounty of orders, with spin-off applications for consumer and industrial products. The Japanese are equally ambitious. Nippon Steel is capitalizing on environmental worries. From waste management to office-building construction, steel is being targeted for various “green” technologies.

Where does this leave U.S. producers? Few industries have allocated less for research and development (under 2 percent of 1990 sales), few have complained louder about environmental regulations, and few have been so sluggish in targeting new markets.

What’s especially sad is that while steel lags, America’s infrastructure sags.

The industry has been equally timid about seizing technology that promises to reshape steel production from the old batch system to continuous streaming. Hobbled by a bean-counting mentality that dates back at least to Andrew Carnegie (“pioneering don’t pay,” said the sage of Pittsburgh), executives wait until new technology is proven to be risk-free before daring to examine it.

A recent example was computer-driven mill machinery designed to make steel shapes directly from motel metal. After spending about $10 million in taxpayers’ money, USX concluded that this process was not “practical.”

Every other large producer followed USX’s lead and passed on the equipment. Only Nucor Corp. decided to take a chance. Today Nucor can produce a ton of rolled steel in 0.8 work-hours, while Big Steel takes five hours.

Indeed, quick-stepping Nucor has consistently out-maneuvered the plodding conglomerates. Its success punctures the myth that America can’t make steel anymore and offers a prescription for how the industry can regain its prominence and profits.

Part 2: Technology-Driven Mills Strike Gold

Originally published April 28, 1992

The cornfields of Indiana might seem to be an unlikely place for a steel mill, but then the gleaming oblong buildings rising at Crawfordsville, 45 miles northwest of Indianapolis, don’t look much like a steel mill, either.

But a steel mill this is, and one that has revolutionized production. Inside the oblong buildings, raw material is melted, refined, cast, flattened, and rolled into coils of steel in a continuous process. Known as thin-slab casting, the process slices the time needed to turn scrap iron into finished steel from a week or so in a standard integrated mill to a matter of hours.

Crawfordsville is the latest triumph of F. Kenneth Iverson, chairman of Nucor Corp., a maverick steelmaker that specializes in defying the “can’t do” philosophy of the Big Steel companies.

The heart of Iverson’s strategy is the compact steel mill. Nucor has seven mills that are small and very efficient. Each is equipped with state-of-the-art machinery. Each is run by local management responsible for its own costs, sales, research, hiring, and results.

“Mini-mills can do the same thing a big steel mill can – and do it quicker,” says Iverson, an amiable straight talker trained in aeronautical and mechanical engineering. “And you don’t have seven layers of management above the mill supervisors, so you make decisions fast.”

Under Iverson’s leadership, Nucor has grown from insignificance to a $1.5 billion-a-year enterprise, enough in sales to qualify as a member of the Big Steel fraternity. The success of his company flies straight in the face of common wisdom about the American steel industry and its problems. For example:

• Isn’t steel simply a money-losing “sunset” industry? Nucor has been profitable in every quarter since it began making steel in 1969, has grown organically through astounding increases in employee productivity, and has not closed a single plant – nor laid off a single employee – in 20 years.
  
  
• How can U.S. firms compete with foreign steel? Nucor drove Japan out of the steel bolt business not by hiring lawyers and filing unfair trade suits in Washington, but by improving manufacturing and making bolts for less. Now the company is crafting the same pricing strategy to gain markets at the expense of Korea-made steel.
  
  
• Aren’t labor costs to blame for the industry’s problems? At $16 to $20 an hour with productivity bonuses added on, hourly wages at Nucor are higher than those in Big Steel. The difference is that Nucor employs 424 people to make 1 million tons of steel at Crawfordsville, while Bethlehem Steel employs 6,000 people at Sparrows Point to make 3.5 million tons. (Sparrows Point admittedly produces a wider range of steel products, but the inefficiencies of its big-batch production system are apparent from many types of comparisons.)

The bottom line is that Nucor made a profit of $65 million in the face of last year’s recession, while Bethlehem and USX-U.S. Steel ran up losses of $1.5 billion.

According to Iverson, Big Steel has itself mostly to blame for its dismal showing in 1991. Despite superior size and technical capabilities, the producers are still too opposed to risk-taking to marshal the forces necessary to stage a sustained comeback. “They got complacent and arrogant and didn’t concentrate on the business,” Iverson says simply.

He notes that Big Steel’s strong profits in the late 1980s – hailed in some quarters as a rebirth – were largely the result of introducing processes that were already known and closing plants, which had the effect of tightening supply and increasing prices. Technological progress, defined as new processes and products, played only a minor role.

Iverson mapped out a different course.  In 1985, he decided to expand his company into flat-rolled steel, the longtime preserve of the integrated mills. Building a standard integrated mill would cost more than $1 billion, so Iverson looked for alternatives.

After a worldwide search, Nucor’s engineers found an experimental machine that might work. The machine contained a combined melting and rolling process that eliminated the intermediate steps of making slabs from molten steel and then re-heating and re-rolling the slabs into blooms and coils.

Iverson ordered the machine from Germany, and Nucor broke ground at Crawfordsville in 1987. To save time, the plant was designed as it was being built, and the machine, endowed with thousands of parts and a roomful of computers, had to be debugged. There were explosions of scalding metal and other setbacks before the thin-slab caster began producing steel of acceptable quality in 1990.

Iverson is not satisfied. He is opening a second mill using the same technology in Blytheville, Ark., later this year. And he is thinking of ways to avoid dependence on scrap metal by developing a process to refine iron directly from iron ore known as direct-reduction.

Already experts from Big Steel have lined up to say that direct-reduction won’t be practical for another five years or longer. Ken Iverson is eager to prove them wrong.

Part 3: How to Save Sparrows Point and Other Struggling Mills

Originally published April 29, 1992

Geneva Steel was considered a loser when it was cast off by USX, the nation’s largest steelmaker, to a group of Utah businessmen in 1987. The equipment was decrepit, customers unhappy, and employees openly rebellious.

Today the plant near Salt Lake City is not so easily dismissed. Geneva was one of two integrated steel companies to report a profit in 1991. And employing 3,000 people and pumping $400 million a year into local businesses, the steel plant contributes to a strong Utah economy.

A pattern has emerged in the industry. Plants that have shut down are generally units of Big Steel companies, while plants that have broken away from the corporate apron strings have had a better record of success.

“Independent plants are more flexible; it’s a different mindset,” says Dick Clayton, Geneva’s executive vice president. The Utah mill has found a way to profitably make and market its products by unlocking its human capital and seizing new market opportunities.

Workers represented by the United Steelworkers of America (USWA) agreed to work-rule changes that streamlined production in return for a greater say over their jobs and incentive pay. Clayton’s management team met with suppliers to hammer out ways to lower raw material costs and to increase working capital.

Equal effort was paid to targeting new markets. Prior to its spin-off, Geneva was a captive supplier for USX, shipping more than half of its product to a USX plant in Pittsburg, Calif. Now as much as 30 percent of its output goes east of Denver into the Midwest. The firm has also secured customers overseas and shipped more than $150 million in pipe and coils to Mexico, Argentina, and Japan.

“We originally viewed Geneva as a reasonable business, not a home run,” Clayton says. “Then we found a lot of market niches and moved into them faster than the USX people would ever have dreamed of.”

The success of Geneva and other breakaways (known as “reconstituted” mills) has revived the argument that Big Steel is still too centralized and bloated for today’s fiercely competitive metals market.

Many of today’s steel mills, in fact, were once independent companies, with owner-managers, community ties, and often-vigorous bouts of competition. The greater merger movement ended that. U.S. Steel became the world’s biggest corporation not by satisfying customers or ushering in new technology, but by taking care of the converging Midwest interests of Andrew Carnegie, John “Bet-A-Million” Gates, Daniel Gray Reid, and John D. Rockefeller.

Established on April Fool’s Day 1901, U.S. Steel represented the greatest aggregation of business properties in history. But U.S. Steel didn’t actually operate anything; instead, it held the stock of a phenomenal number of companies – 190 in all – that manufactured everything from bridge plate to steel springs. As Louis Brandeis noted in his book, The Curse of Bigness, the purse strings at “The Corporation” were pulled by financiers on Wall Street rather than by engineers and businessmen responding to local market conditions.

Charlie Schwab, U.S. Steel’s first president, went on to construct Bethlehem Steel in a similar way. He gobbled up Sparrows Point and every other major steel plant east of Pittsburgh, along with coal mines, overseas iron ore fields, railroads, and real estate.

For years, Big Steel’s sheer bulk insulated it from the workings of the marketplace. U.S. Steel and Bethlehem could announce price increased in the 1950s secure in the knowledge that no individual buyer could force a change. The illusions bred by such power created a smug, insular, and ultimately self-destructive culture.

Steelmaking became infested with bureaucracy. Corporate advancement demanded conformity — and many hours on the company golf links. New ideas were discouraged. Resentful workers squabbled with tough-guy managers who played office politics with aloof senior executives. Waste and inefficiency prevailed.

Only in the 1980s, under the pressure of huge financial losses, did these attitudes begin to change. But only in part. The big companies were willing to amputate mills in Chicago, Youngstown, Buffalo, Birmingham, and Pittsburgh in order to protect their own headquarter fiefdoms.

Once again in the current downtown, senior steel officers solemnly say that the only answer is “restructuring,” or the closing of more mills, with the sacking of more employees and the concurrent loss of jobs and contracts among companies that supply the industry.

Geneva was on the same downward slope five years ago when local business people, employees, suppliers, and community leaders united to take responsibility for their industrial fate.

The lesson of the Utah mill, says Dick Clayton, is that communities no longer can depend on big corporations to keep them alive. It’s a lesson that civic leaders and residents of Baltimore need to learn before the last steelworker punches out.