Wall Street Journal, August 26, 1997, pp. A1, A11. Hot Metal Steelmakers Scramble In a Race to Become Global Powerhouses Now Flush With Funds, They Follow Customers, Flock Into Emerging Markets A Mill Moves Across the Sea By Chris Adams On a small island in southern Alabama the steel industry is going global, piece by piece. There, workers for British Steel PLC have nearly finished reassembling what had been a huge mill 4,243 miles away in Hunterston, Scotland. The mill had been cut into 27,000 pieces, loaded onto eight ships and carried across the Atlantic through the Gulf of Mexico and up Mobile Bay. Once up and operating, it will annually produce one million tons of an iron product that could feed one minimill that British Steel owns 200 miles away in Tuscaloosa, Ala., and another in Decatur, Ala., in which British Steel, LTV Corp. of Cleveland and Sumitomo Metal Industries Ltd. of Japan all have stakes. Although Alabama is hardly the cornerstone of British Steel's empire, it has become its U.S. base and a critical element in its bid to emerge as a global powerhouse in an industry that has never had one. Many Companies Active Other companies also are scrambling in a globalization drive broader than any in the past. Ispat International NV, a Netherlands-based steelmaker with roots in India and mills in a half-dozen countries, completed an initial public offering on the New York Stock Exchange earlier this month; it sold off a 20% stake and raised $675 million for acquisitions and other purposes. Luxembourg's Arbed SA beat out a French rival to buy a large interest in Spain's state-owned steelmaker. The steel division of Australia's Broken Hill Proprietary Co. recently announced or opened projects in Washington state and Ohio and has a big presence in Southeast Asia. And two U.S. steelmakers, Inland Steel Industries Inc. of Chicago and Nucor Corp. of Charlotte, N.C., say they are considering buying or building steel mills in South America - a rare departure because the U.S. industry has barely glanced overseas. "We are clearly casting our eyes much more broadly than we did just 10 years ago," says Robert J. Darnall, Inland's chief executive. The current wave of globalization is building on an earlier one, industry executives say. In the 1980s, Japanese auto makers were setting up shop in the U.S. and were being followed by their suppliers, including Japanese steelmakers. A few of the steelmakers established ventures with U.S. companies. A Broader Upheaval What is happening now is much broader; it involves steelmakers all over the world. After drastic cost-cutting in the 1980s, they have the money to buy or build overseas. Moreover, it isn't just auto makers they are following. Producers of appliances, heavy equipment and machine tools are globalizing their operations and challenging suppliers to come along or lose business. Whirlpool Corp., of Benton Harbor, Mich., is building a plant in India to make frost-free refrigerators, its second in that country. After deciding in the late 1980s that it had to go global, Whirlpool now is manufacturing in 13 countries. It has four joint ventures in China alone. At least as important are the structural and cultural changes in the steel industry. Government-run mills have been privatized and are being bought up by steelmakers seeking to operate world-wide. Moreover, tradition-bound steel executives, especially in the U.S., have been rudely awakened by minimills, such as Nucor's, which, rather than starting from scratch, remelt scrap metal to roll new steel products. Such executives have found they must innovate and find new markets to survive. Minimills, once dismissed as minor players, have gained respect by adopting new technology, and their share of the domestic market is expanding. They, too, are looking overseas. The Americans had better move quickly. Although the U.S. steel market remains the largest in the world, the fast growth will come elsewhere, in markets such as Asia and South America where U.S. steelmakers have little presence and are losing out. China, for example, is now the world's biggest steel producer, but much of the high-quality steel used to encase washing machines is imported. Changes Coming in China That will change, however: Japanese steelmakers are plunging into China, and Christopher Plummer, a steel-industry consultant in Exton, Pa., says big manufacturers have made it known they want their Chinese plants supplied by mills in China. "If U.S. companies want a piece of the action, they won't be able to do it from a U.S. base," he says. One of the steelmakers taking the changes seriously is Ispat International, which, in many respects, doesn't even have a home base. Ispat was founded in 1976 by Lakshmi N. Mittal, a native of Calcutta, India, who started his first mill in Indonesia. Today, from his base in London, the company owns mills in Mexico, Germany, Canada, Trinidad, Ireland and Kazakstan; when Ispat bought them, nearly all were decrepit, state-run facilities. Although Ispat was rebuffed in an earlier attempt to buy a U.S. mill when the company and the United Steelworkers failed to reach a labor agreement for a Bethlehem Steel Corp facility in Johnstown, Pa., Ispat is still on the prowl, running its North American operations from Charlotte. "The U.S. industry needs to start consolidating, and we expect to be there when it does," Mr. Mittal says. Just with existing operations, let alone any future acquisitions, Ispat expects to expand its annual shipments by the end of the decade to 10 million tons from the current six million. That growth would lift Ispat, now the world's 16th-largest steelmaker, into the top 10. "Every time I turn around, Ispat is doing something new," says David Phelps, executive director of the American Institute for International Steel, a trade group. "It's absolutely mind-boggling." The challenge to Ispat, of course, is making the old mills efficient; its Kazakstan plant already has run into problems. Ispat will also remain in the shadows of much-larger British Steel, which was the world's third-largest steelmaker last year and seeks to become even bigger. Today, about 8% of British Steel's steelmaking capacity is outside the United Kingdom; within about five years, the company expects that figure to rise to 25% or more. Once a state-run, inefficient dinosaur, it has announced plans to build a steel plant in India and wants to expand further by building or buying in other Southeast Asian nations. British Steel, with more than $2 billion in the till and low long-term debt, has the money to make it happen. "Whenever anybody starts talking about somebody being sold, we're at the top of the list of possible buyers," says Sir Brian Moffat, its chief executive. British Steel is looking around, even though its mill in Mobile is a major undertaking. The plant was built in Scotland 20 years ago, but even before it was completed, it was uneconomic. The price of the natural gas to be used in it skyrocketed, pushing up its projected operating costs. Meanwhile, steel demand slackened in the U.K., cutting into potential sales. British Steel decided to close it before it ever produced a pound of its product direct-reduced iron. The plant was mothballed until last year, when the company discovered a new market: The American South, where several minimills that need direct-reduced iron have recently started up. Although moving the plant was expensive and difficult, the $100 million tab was half the cost of building a new one. Hugh Brown, the company's supervisor on the project, says his people snapped 3,000 photographs of the plant, dismantled it and loaded the pieces onto ships. They saved about 99% of the plant; just about the only parts left behind were electric motors, which run on different voltages in the U.S. U.S. producers have moved more slowly, after being burned in the past. In the 1950s and early 1960s, a few U.S. steelmakers, including U.S. Steel, had equity stakes in overseas markets. They pulled back, however, in the late 1960s and 1970s when the local companies were nationalized or the investments no longer made economic sense. Since then, the U.S. producers have developed a reputation for fearing to venture abroad. They traditionally viewed the world outside the U.S. only as a source of raw materials and not as a market, says Christopher Hall, a consultant who wrote a recent book, "Steel Phoenix: The Fall and Rise of the U.S. Steel Industry." But, he adds, "as foreign investors came into U.S. industry, a new generation of managers were exposed to global thinking in a way they never were on the golf courses of Bethlehem, Pa." The Minimill Challenge The new generation also came head-to-head with minimills. For the first time, they were competing with companies that made and sold steel a different way. Minimills didn't have the same high labor costs and were more aggressive and nimble on pricing and technology. Steel executives realized they were vulnerable to new competitive forces, initially those within the U.S. but increasingly those outside it. Now, going global is almost all they talk about. At a recent conference of the American Iron and Steel Institute, the audience at one panel discussion was asked what forces would drive the industry in the next two decades; tied for first on the list were the need to compete in a global environment and the closely linked threat of competition from foreign steel. "The market in the United States is what it is. It's 100 million tons now, and that will vary up and down," says Paul Wilhelm, president of the U.S. Steel Group of USX Corp., the nation's largest steelmaker. "But if you're really looking for growth opportunities, it's outside this country." Indeed, with trade restrictions easing around the world and emerging economies growing, steel trade - the percentage of steel crossing national borders - hit 37% in 1995, the latest year for which figures are available, according to the International Iron and Steel Institute. That is up from the mid-20% range in the 1980s and 10% in the 1950s. One of the primary benefits to running a mill in another country is that a producer can cut export shipping costs, which run $40 to $50 for a ton of steel that sells for $400 or $500. Labor costs are usually far lower, too. Even so, U.S. steelmakers say they will proceed Cautiously. A big risk in going overseas is dealing with a new culture; that is why most U.S. producers say they will go into a new country only with a local partner. Inland, the nation's No. 6 steelmaker, has dipped a toe in international waters but only to process and distribute steel, not make it. It is a 50% partner in an Indian processing and distribution center and a 49% partner in a similar Chinese venture. Yet Inland believes that the steel-distribution facilities, though small, give it an inside track in what could be some high-growth markets. Many Overtures Nucor has been approached several times in recent years about doing a joint venture with steel companies in Iran Egypt and Malaysia. Nucor led the way in low-cost minimills, and foreign steelmakers have long wanted its technology. But over the years, Nucor Chairman Kenneth Iverson says, the company has passed on the foreign overtures. He explains that many foreign companies, which were or remain an extension of the government, want a big mill that produces all kinds of steel and lots of jobs. "A lot of Third World countries aren't interested in a steel mill that produces 1.5 million tons but only employs 350 people," says John Correnti, Nucor's president and chief executive. "They want 3,500 jobs. So, the overall labor costs aren't going to be good, even if the labor is very cheap." But today, Nucor is contemplating building a mill in Brazil, in partnership with that country's largest steelmaker, Companhia Siderurgica Nacional. Although Nucor hasn't decided whether to proceed with the project, it says it has gone further on it than on any other foreign venture it has considered. Mr. Iverson indicates that eventually an overseas project will make sense. "We're interested in taking our technology and moving into other countries," he says. "But these things take time." [End]