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Ohio's steely AK forges ahead

12/28/01

Stories by
Sandra Livingston

Photographs by

Dale Omori

The Plain Dealer

Middletown - While most of the domestic steel industry is reeling from self-inflicted wounds and the hammer blows of foreign competitors, AK Steel Holding Corp. is looking for acquisitions and plunking down dollars for projects that may take several years to bear fruit.

"We're sitting in the catbird seat in some regards," said Richard M. Wardrop Jr., AK's chairman and chief executive.

Wall Street analysts credit AK for standout management and a solid business strategy that kept it from the problems that flattened some competitors like steel slabs in a caster.

"The business model AK has set is far superior to any other company," said Christopher Olin, an analyst with Midwest Research in Cleveland. "They'll be able to withstand a prolonged period of weakness."

In 1995, AK predicted that prices for hot-rolled carbon steel, a basic "commodity" product, would collapse from an oversupply.

To prepare, it reduced its presence in that steel and moved up the chain to more profitable value-added steel, which is cold-rolled or coated to add strength and corrosion protection.

The company also put more emphasis on stainless, a higher-grade steel that fetches a premium price.

Today, AK's steel business has seven plants in Ohio, Pennsylvania, Indiana and Kentucky.

That includes its $1.1 billion Rockport Works in southwest Indiana, which began running in 1998. The finishing operations are at the heart of AK's move up the value chain.

"We changed the face of our steel. We did the strategic thing five years ago that the industry needs to do today," said Wardrop, a blunt-spoken, Winston-smoking executive whose Middletown office has a hunting lodge motif and is filled with the mounted deer, geese and quail he has killed during hunting trips.

AK didn't escape unscathed this year. While prices plummeted and rivals rushed to bankruptcy court, AK posted losses in the first and third quarters.

It reduced its quarterly stock dividend in January, dropped its common-stock dividend in the second quarter and dropped its preferred-stock dividend as well in the third quarter.

Steel shipments fell nearly 9 percent in the first nine months. AK did have lower demand, particularly from the automakers that account for about half of its sales. But the shipment decline was mostly because of the steel maker's decision to turn down some sales at low prices on the spot market, where steel is sold without long-term supply contracts.

Despite the troubles, AK boasts that for more than seven years it has outpaced other major integrated companies, which make steel from scratch with raw materials such as iron ore. Its third-quarter operating profits per ton were $15, compared with a loss of $45 on average for other big integrated steel makers. And although analysts expect AK to report a loss for the year, several are predicting a return to the black in 2002.

A look at the possibilities

The company's history begins in 1900 with the American Rolling Mill Co. in Middletown. Eventually renamed Armco, it spun off its hometown steel-making and a mill in Ashland, Ky., in 1989 to focus on stainless steel.

Ten years later, the spinoff, AK Steel - originally jointly owned by Armco and Kawasaki Steel Corp. of Japan - acquired its former parent.

Looking to the future, AK has several options:

Small asset acquisitions. Wardrop said AK has all the steel-making capacity it needs but would take a serious look at the coating lines of LTV Corp., which has idled them.

He wouldn't talk specifics but said LTV officials "know what we're interested in." Others have speculated that AK's main interest would be in Columbus Coatings, an LTV-Bethlehem Steel Corp. joint venture in Columbus.

AK is selling one operation, its Sawhill Tubular Division. The unit, which has operations in Warren, didn't fit the company's long-range strategy, AK said.

Remain independent. While U.S. Steel, Bethlehem and other steel makers are talking about consolidation, Wardrop said AK considered leading a merger a year ago but decided that would have too many liabilities.

He expressed belief that AK could compete against a megarival, and New York analyst Charles Bradford agrees, saying big customers would not want to rely on a single big steel maker.

Be bought by a foreign company. Wardrop himself notes his company's lures: a strong position in the auto market, lots of contract business to shield it from the volatile spot market, high-quality products and more flexibility because there isn't one union representing all its workers.

"For the right price, anybody's for sale," he said.

But no suitor has come calling, and Wardrop said he "would not go and try to shop the company at this time."

But he is shopping for investments. In July AK bought Alpha Tube Corp., a maker of welded steel tubing in Walbridge, Ohio, which immediately made money for the company. AK also spent $5 million to become a founding investor in Build-To-Order Inc., the first auto company that plans to deliver built-to-order vehicles to customers starting in 2004.

AK sees that as a way to showcase its ideas for using a stainless steel frame, stronger but lighter than the standard frame.

It also has an exclusive license to coat stainless and carbon steels with a compound called AgION, which inhibits the growth of bacteria and other microorganisms. AgION's application to steel is still in the early stages, but Wardrop sees it in everything from heating systems to fast-food restaurant counters.

The projects haven't paid off yet, but industry consultant Michael Locker gives AK credit for trying.

"At least they have the imagination to take the plunge," he said. "You've got to take risks in business to get rewards."

Taking on opponents

While AK gets accolades from analysts for its foresight and ability to change, it also is known for outspoken views and protracted battles.

In August 1999, the company locked out union workers at its Mansfield plant and hired replacement workers, a fight with the United Steelworkers of America that continues today.

Midwest Research's Olin gives AK management credit for not being afraid to stand up to the union in Mansfield. But Locker, who has worked with the Steelworkers, said that if AK tried to build a partnership with labor, the company could be even more cost competitive.

"That's their biggest negative," he said.

Given that the Steelworkers have limited representation in his steel plants - the Middletown plant is represented by the Armco Employees Independent Federation - Wardrop was skeptical.

"What would they offer me that would enhance my profitability so much?" he asked.

AK also is battling federal and state environmental agencies over alleged violations of air and water pollution laws at its Middletown mill. AK insists that it has complied with permits, and it has said it might end steel making there if it is ordered to pay steep penalties on top of about $80 million in pollution controls.

While both sides have won rounds in court, AK said the most significant claims of air pollution violations have been dismissed.

Even within its own industry AK is critical. Earlier this year it quit the American Iron and Steel Institute, the main communications and lobbying trade group. The company has said its increasing emphasis on stainless steel made the group's focus on other products less relevant.

And there's another reason.

"All they wanted to do was go beat up on Congress and lobby, which is costly," Wardrop said. "It didn't make any sense. What did I gain from that? I don't believe in all this tariffs and quota crap anyway."

AK imports - in the form of slabs - about 10 percent or less of the steel it ultimately ships.

The company favors tariffs when there's specific proof of illegal trade, but it opposes broad restrictions like those proposed by the U.S. International Trade Commission after an investigation. It also opposes government aid to prop up ailing steel makers, saying that keeps too much steel capacity in a global glut.

Tony Montana, a Steelworkers spokesman, accused the company of hypocrisy because it recently got $3.7 million from the federal government under a new law that steers anti-dumping penalties levied against foreign competitors to injured U.S. companies. AK spokesman Alan McCoy said the company's position is consistent. AK got the money because of a specific finding of illegal trade, he said.

Wardrop offers reasons for every stand the company takes, but he also gives a general defense.

"I'm not afraid to be outspoken for the right issues," he said, "And I really try to do what I consider to be the right thing."

Contact Sandra Livingston at:

slivings@plaind.com, 216-999-4453


2001 The Plain Dealer. Used with permission.
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