Industry officials debate capital spending on capacity

Staff -- Purchasing, 11/3/2005

The world's steel-industry executives spent their annual get-together debating whether increased capital spending and expanded steelmaking so far this decade will lead to another glut of steelmaking capacity. Market excess plagued the industry in the past two decades and has contributed to the industry's image problems.

World crude steel production for the 61 countries reporting to the International Iron and Steel Institute was 1.06 billion metric tons in 2004, a record that looks to be outpaced in 2005; through August, production is up almost 7%. At the International Iron and Steel Institute's annual meeting in October, industry executives questioned one another on the use of cash by their companies during a recent period of high prices and strong profits. "Has the world steel industry really secured sustainable growth? Unfortunately the answer is 'no,' "says Akio Mimura, president of Japan's Nippon Steel. "The steel industry has not been able to win the full trust of the financial markets."

Steel executives continue to insist they are focusing on cutting costs and improving technology; however, they keep selling "commodity products." In fact, several wire service stories report that steel executives at the meeting were critical of companies like Posco, which is building additional steel-making capacity in India. Posco, which has acknowledged concerns about world overcapacity, says it has run out of room to add new capacity in South Korea but still needs to meet demand, particularly from fast-growing China and India. The plant in India also could give Posco greater access to raw materials such as iron ore.

Capital spending by steel companies is growing rapidly as many of them, flush with cash, are planning to build new mills. Some executives are critical of that approach. "What people should be doing is investing capital in new technologies," suggests Dan Di-Micco, chief executive of Nucor in Charlotte, N.C. "People are more focused on building new plants rather than making existing plants more efficient." Nucor is investing in several new alternative iron-making and steel-production technologies and hopes to commercialize some of its technologies through joint ventures with other companies.

Many steel companies also are expanding the ownership stake in raw-material companies as iron-ore producers raised prices by 72% in 2005, which cut into steel makers' margins and could make steel products more expensive for end users. Mittal Steel, headquartered in London and Rotterdam, is pursuing iron-ore assets in Liberia. Canada's Dofasco Inc. purchased iron-ore assets in Canada this year.

While some view steel as an old-school smokestack industry with a track record of cyclical profits, the more well-managed companies are increasingly focusing on ways to improve their public image, industry analysts say. "Steel is not just a commodity," says Ian Christmas, secretary general of the Brussels-based IISI, echoing a message from North American steelmakers that has fallen largely on deaf ears among Wall Street investors. Still, the world steel group has developed a program for the world's steel makers to report on new-product development, new uses and environmental-quality and safety issues, including carbon emissions, recycling rates and employee-safety data.

IISI is developing joint marketing initiatives between the world's steelmakers in areas such as making lighter, more environmentally-friendly steels for the auto industry and better marketing and designing of steels for residential construction. "Steel is the most recycled material but the world does not know it," says Ian Christmas, secretary general of IISI. So, the "Living Steel" program launched this year with a $14 million annual budget funded by several steel companies and will involve a competition among architects to develop new house designs using steel. "Steel has not scratched the surface of what it can do in construction," he says. So, two winning home designs will be built, one in India and one in Poland.