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U.S. integrated steelmaking could be endangered
Thursday August 28, 1:38 pm ET
By Michael Erman

NEW YORK, Aug 28 (Reuters) - U.S. steel companies that make the metal the old-fashioned way -- from scratch -- could soon be an endangered species, hurt by antiquated and expensive technology, outdated labor deals and environmental regulations, industry experts say.

Tariffs imposed by the Bush administration to limit imported steel have been credited by many insiders for propping up the struggling industry. But the White House is weighing whether to repeal the tariffs much earlier than expected, which could turn up the heat on the so-called integrated steelmakers.

Companies that make steel straight from iron ore "have no future," said Robert Crandall, a senior economic fellow at the Brookings Institution, a Washington, D.C., think tank. "We are now up to about 50 percent of our steel being produced by mini-mills, and that will just keep growing," he said.

Integrated steelmakers -- such as United States Steel Corp. (NYSE:X - News), AK Steel Holding Corp. (NYSE:AKS - News) and International Steel Group -- use an intricate process to make steel from its base materials, melting iron ore and other minerals in huge furnaces, known as "blast furnaces."

Meanwhile, mini-mills, best exemplified by Nucor Corp. (NYSE:NUE - News), make steel by recycling scrap steel and other materials and melting them in electric furnaces.

For most of the 20th century, integrated steelmakers were the backbone of American industry, supplying basic materials for the railroad, construction and automotive industries.

However, the companies struggled during the 1980s and '90s with cheap imports as well as high retiree benefits and health-care expenses that forced many producers into bankruptcy and pushed others to experiment with different steelmaking processes.

The labor agreements historically struck by integrated steelmakers also make it difficult for them to compete with low cost mini-mills, which require significantly fewer workers and, for the most part, do not use union labor.

John Lichtenstein, a partner at Accenture's Global Metals and Mining unit, said the number of blast furnaces operating in North America has fallen nearly 30 percent since 1990 to about 42 furnaces. He sees the trend continuing -- by 2010, Lichtenstein estimates there will only be 30 to 35 blast furnaces still running in North America.


Expensive equipment is also a problem in the industry.

"It has been impossible for several decades to build new integrated steelmaking facilities," Crandall said. "The economics for building (them) is just dreadful."

Crandall said that there hasn't been a new blast furnace built in the United States in 25 years and periodic maintenance of an old furnace can cost more than $100 million.

Environmental controls have burdened the industry too. AK Steel is considering shutting down its carbon steelmaking operations because the cost of complying with new emission standards could run up to $80 million at one of its mills.

Charles Bradford of Bradford Research/Soleil Securities said the survival of integrated steelmaking in the United States depends on whether President George W. Bush's eventual successor decides to participate in the Kyoto Protocols, which would require the United States to limit carbon emissions.

"If (former Vice President Al) Gore had won, (integrated steel making) would have been over," Bradford said, noting that integrated producers emit three times more carbon dioxide per ton of steel than mini-mills.

Nevertheless, some experts see a place for integrated steelmaking in the future of American industry.

"There will still be integrated steel companies, and those will be strong and globally competitive," Lichtenstein said.

Some point to the automobile industry as the saving grace of integrated steel. Mini-mills have yet to provide sheet steel for outside panels on cars, and many doubt they can produce steel of a high enough quality in electric furnaces.

"In the end, you'll probably have three large integrated steelmakers," Longbow Research analyst Chris Olin said. "I've always assumed that U.S. Steel rolls up a part of the industry, ISG takes care of the rest and then the little players ... are likely to try and form something."

Still, several integrated steelmakers are already exploring alternative methods of production, including importing semi-finished steel to be rolled in their mills or attempting to emulate mini-mills by building their own electric furnaces.

"The integrated companies themselves have talked for years about building their own mini-mills," Crandall said. "With their engineering staffs, their overhead and their labor agreements they can't possibly compete."

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