Steel Success Strategies XVI

Session Highlights

Co-Sponsored by World Steel Dynamics and

American Metal Market

Tuesday, June 20, 2000

 

Keynote Speakers: E-Commerce in Steel: Electrifying Some, Electrocuting Others

In their opening presentation, Peter F. Marcus and Karlis M. Kirsis, Managing Partners of World Steel Dynamics, forecasted that steel sales on the Internet will grow at a 55 percent annual compounded rate through the next decade, reaching $160 billion per year, but not without a serious consolidation of e-commerce marketers starting within the next two years.

By 2010, steel transactions may amount to 400 million tonnes per year compared with just 5 million tonnes this year. The growth of steel scrap transactions via e-commerce should be even better, leaping to 300 million tonnes by 2010 from no more than 1 million tonnes this year.

Marcus and Kirsis also predicted that a period of "significant consolidation" would begin ó possibly as early as 2002 - and would result in only two or three e-commerce companies dominating the industry.

The most likely survivors, they said, would be vertical e-commerce companies specializing in steel sales that carried "the best potential for sustained high profits," as opposed to horizontal firms that offered their services across a number of industries.

Who stands to be the biggest winners from the e-commerce revolution in steel? Among those in the winnerís circle would be medium-sized and small buyers able to offset the advantage traditionally enjoyed by major buyers through the "aggregation" of smaller customersí purchasing power.

Moreover, mills in the developing world ó China, Russia and Ukraine ó may boost their price realization through access to more customers. Large service centers, which gain market share via the Internet, also could increase their buying clout.

But there also will be some losers, the analysts predicted. Among them would be large buyers, whose size advantage over their smaller counterparts would be diminished, as well as large steel mills. Medium-sized and small service centers selling to similar-sized buyers also were likely to face more intense competition.

 

Panel I: The Internet: Good for Whom? Will the Internet Become Another Potent Destabilizing Force?

Michelle G. Applebaum, Managing Director, Salomon Smith Barney. She sees one of the impacts of e-commerce as changing the fairly opaque pricing in the steel industry. The steel industry is suited to e-commerce since 40% of steel transactions are handled by middlemen. E-commerce can enhance realizations and efficiency of producers. It will level the playing field. It will lower the cost of procurement.

David Centner, Co-Founder and President, MaterialNet.com. His company is not spending as much as others. It was founded 1 _ years ago. It is buyer-centric and deals in all raw materials for the metals industry. It has every type of metal represented. It is an RFQ system, which is a downward pricing format. It is a new platform that keeps existing suppliers. A feature is the ability to upload excess. The company has 60 employees.

Kevin Deliman, National Account Executive, Metals, FreeMarkets, Inc. FreeMarkets went public in 1995. This company is different because it works for the buyer by creating custom on-line auctions for steelmaking supplies. Since it is a downward auction, it can save the buyer 10-15% over negotiated prices.

Michael S. Levin, Founder, CEO and Chairman, e-STEEL Corporation. Levin commented on the drop in value of internet stocks and the loss of possibility to go public. He said his company was not in danger of running out of money. It started out with $40 million of funding. Over the last 14 months, they raised $12 million. Therefore, their company was prepared for the shakeout. He said e-Steel was the only B2B company that was worth more now than in February of 2000, when the B2B stocks were at their peak. He said that e-Steel has formed alliances with the auto companies and steel companies, most recently Rouge Steel. Regarding the competition between the independent sites and the gorillas, Levin pointed out that e-Steel has a capacity of 100 million tonnes, which makes them bigger than any gorilla.

John E. Lichtenstein, Associate Partner, Andersen Consulting, sees significant consolidation among e-commerce players within the next 18 months. E-commerce in the steel industry is in a rapid take-off phase in North America. This is facilitated by a low degree of integration among customers and suppliers in the metals industry. Key reasons for the take off: 1) the right tools are becoming available; 2) buyers are becoming more proactive; and 3) the learning process is gaining momentum. There is still seller resistance mainly because of fear of near-term price erosion. But he stresses that producers will need to adopt e-commerce quickly to take advantage of the performance differentials that will emerge. However, e-commerce could drive the industry restructuring in North America. He looks for a shakeout among e-commerce players because: 1) the correction in tech stocks makes growth more difficult except for the clear winners; 2) the land grab phase is ending and there will be more merging and partnering; 3) players must commit to a platform; and 4) investors will push companies into solutions. By 2005, he believes over 40% of transactions in North America will be on an e-commerce exchange, and even higher in some regions.

Robert Mann, President, Cargill Ferrous International. Cargill formed an on-line exchange with seven other groups in May 2000. They saw the need to be global as the key. Internet trading can shrink the supply chain. The seven groups invested capital and promised a certain amount of tonnes of volume. The exchange has 4-5 times liquidity.

Patrick B. Stewart, President & CEO, MetalSite. The company provides supply chain solutions. He is not worried about his company running out of money. His company has many investors. It has 20,000 users and has completed 6-7,000 sales transactions. This exchange has the highest liquidity. The company is at a $1 billion per year run rate.

Andrew Yao, Founder, Chairman and CEO, iSteelAsia.com. This company had an IPO in Hong Kong. It gets its business from handling inefficiencies and excess inventories. The company has 25 members and many alliances. Its goal is to provide a smooth transaction. One of its advantages is that it knows the Chinese market. Being a public company is also a competitive advantage.

 

Question: When will e-commerce start to affect pricing?

Applebaum feels it depends on what percent of the market e-commerce takes. In the spot market, maybe 10% penetration will have an effect. In the secondary market, there is already some impact in the Midwest.

Levin believes there wonít be any affect for the next two years. Early use for e-commerce will be between known players. Negotiating a price will be a small part. E-commerce will create value in other ways, such as less manhours devoted to sales and other savings for buyers.

Stewart thinks the affect will depend on geography and market shares. This will take 1-2 years. He says the jury is still out on pricing effects. He says savings flow to buyer, especially over time. The main question is how to get 15% of the HRB market to flow to an exchange.

Lichtenstein sees a 20% price risk. But he also stressed that the exchange is not about price. It drives costs out. Efficiency gains pass to the customer. However, this is a negative for pricing power.

Deliman sees dramatic, hard and quick price erosion. Their company (FreeMarkets) has facilitated $5.4 billion of purchases with average savings of 18%. Metals sales have made up $3 billion of the purchases. Auto companies have made hundreds of millions dollars of investment in an exchange to take money away from steel companies.

Levin disagrees. He believes auto companies do not want to drive down prices to hurt the steel mills.

Centner sees a fragile relationship between steel buyers and the mills. E-commerce is a powerful tool for the buyer and can create an adversarial relationship. The e-commerce company needs a complete suite of mechanisms to serve clients, not just reverse auctions.

Stewart views e-commerce as a tool to better understand supply and demand. More information will be available. For example, there may be a daily Black Sea quote. This will make prices more volatile. The remedy will be the futures market, but this is far in the future.

Stewart went on to say that the web is not needed to do some of the cost cutting. For example, the goal of the Ford/Daimler exchange is to cut supply chain carrying costs. GM is already getting the last drop of blood from the mills. E-commerce is most useful for purchasing MRO and indirect materials. Most are buyer-centric sites ó there are none to buy steel.

Yao says the point of e-commerce is not just to lower steel costs, which represents only 70% of the manufacturersí total costs. Users can cut 30% of costs by inventory reduction.

Lichtenstein sees the focus on price as only half the question. There is a need to look at margins. This should make the market more efficient and find a better match between buyer and seller. There is the potential to broaden markets.

 

Question: When will concentration in the industry take place?

Centner thinks consolidation will be good for the industry. It will be based on real business and will happen sooner than most people think. He thinks this will happen before there are more IPOs.

Stewart believes consolidation will depend on the market and could occur in perhaps 6-12 months. The questions will be: Who has transactions? Does an acquisition add value? Companies will focus on the need to be profitable.

Yao reported that his company did an IPO at $200 million. Now it is worth $80 million. He sees acquisitions to form trading company alliances ó not just with dot.com companies. Not every acquisition is good. There has to be synergy, management compatibility. Consolidation will depend on the participation of the liquidity drivers ó i.e., trading companies. But these players should not be on the board of directors. There should be some neutrality.

Levin said that e-Steel has money in the bank and will be a survivor. Cash is king. Many others will disappear. Only the early IPOs still have money in the bank.

Stewart pointed out that market values are coming back to reality. Forward revenues to market value are in the 17-20 x range for the peer group. In February, ratios were 200-300x revenues.

Centner said that Steel Screen in Europe has a different structure and issues, such as how to work around the gorillas. Europe is more fragmented, and has more complex relationships. The companiesí strength is in their 1-to-1 relationships. Steel executives are managemet. The supply is in their hands.

 

Question: When will your companies be in the black?

Levin said that e-Steel will see a cash profit in 2002. The company will have significant revenue in 2001. Recently, they have been selling inventory ó the internet does this well but it is limited. A company needs to get the formula right ó it must provide customer solutions. It takes time for an e-commerce company to ramp up and get the business model and technology right.

Stewart said that MetalSite looks to break even in 2002. This has always been the plan, and the company is on track. It has taken a year to ramp up to $1 million/day in transactions. There are significant ancillary revenue opportunities that have not yet been addressed at all by the company.

Question: Do you agree with the WSD view that there will be 2-3 major e-companies with 200-250 mtpy in volume?

Lichtenstein agreed that there will be 2-3 "networks." He thinks no company has the breadth and geographical presence to do it all. There will be a handful of consortia. Those with complementary services will align. There will be no single gorilla.

Yao pointed out that steel is still a regional business. E-commerce is a high fixed cost business with the technology, marketing, and personnel requirements. Therefore, they need volume. He foresees 2-3 sites per country in regions such as China and India.

 

Luncheon Speaker

Eric J. Johnson, Norman Eig Professor of Business, Columbia University School of Business. Johnson said that an historical analogy to e-commerce is the radio. Lee DeForest, the inventor of radio, had 5 businesses but all failed because he didnít have the right business model. David Sarnoff was able to succeed by identifying the big cost in radio ó programming. He started the first "networks". Similarities between e-commerce and radio include: 1) the technology preceded a business model; and 2) the companies had no idea of what revenues would be.

Johnson said that the costs of business functions are changing by 10 times. In the channel, low costs may be good for the customer but are bad for the supplier.

E-commerce is a way to talk to customers. He cited VerticalNet, which puts trade journals on line. It created 56 communities. E-commerce is a way to change costs, follow the money, and keep customers happy.

He described E-bay as having a good business model. It has 4 million items for sale. It replaces flea markets and has lower costs. In addition, buyers give quality ratings of transactions. E-bay never takes possession of an item.

Another example of a company transforming itself by using the net is Chemdex, which sells scientific products. It had many catalogs serving 250,000 scientists. By selling on-line, its marketing costs went from 40% of sales to 19%. Chemdex charges a fee of 5% per transaction.

E-commerce is a threat to profitability. It is changing market structures, and bringing new competitors.

He said that a factor inhibiting growth of the internet is fear of disintermediation. This is what happened in the travel industry. Travel agents traditionally did very little. Now, the commission goes to the airlines. The Internet is a way to provide more value-added products and more information, and do it more cheaply.

At Dell, another leading e-commerce business, the customer takes over many of the functions such as order entry and service.

E-commerce can create channel conflict when the e-commerce company goes directly to the customer. An example of this is insurance agents. The industry found a new way to distribute its product.

There are consortia of buyers being formed ó for example, the car companies. Trust will be a key issue.

An exchange is an enabling mechanism. In an auction, in theory, prices could go to cost. But in actuality, e-companies get better prices because there is more customer competition.

Information becomes a companyís assets. Knowing what the customer wants will determine who controls a channel. A company must ask "Are customers happy? How can we solve their problems?"

 

Question: What about futures markets in steel?

Johnson said that a key requirement is the need to know the price of a good. This information needs to be shared and unbiased. Volatility lends to need for a futures, therefore it is suited to the steel industry. Futures will be a tool. Some player will make it happen.

If players share prices, there could be antitrust issues. Therefore, it should be a third party. This would not necessarily be collusion. There needs to be observed prices, especially from auctions.

Regulation would need to be global. A fundamental issue is "world government." At least steel is physical. Digital information is a big problem. Regulation needs to be done at the point of shipment.

Question: Will there be 2-3 big dominant e-players in the steel industry?

There are many niches, some regional. Companies will seek economies of scale. There will be alliances to share information and technology because of the high fixed costs.

Question: Will the web force standardization?

Johnson said that if it means more customers/more business/more profit, companies would do it. A third party is needed to verify, describe, and compare the information.

Question: When will steel e-commerce take off?

Johnson pointed out that the current market is not that efficient. Since steel is a physical product, the industry can support the current channel and add a new e-commerce channel. A company will ask "Whatís the cost savings/benefit/value?" The more the benefit, the quicker it will happen.

 

 

 

 

 

Panel II: Steel in the Americas: Are Todayís Good Times just an Illusion?

Dr. Donald F. Barnett, President, Economic Associates Inc. Barnett provided an historical perspective of the U.S. millsí cost position. He compared current conditions to those in the mid-1980s. There have been major changes, especially in energy costs.

He likened the U.S. steel industry to a house of cards on a 3 legged stool.

The USA mills are high cost and would need to reduce costs by $50-75/ton to maintain their competitive position. Much has to do with the value of the dollar, which steelmakers canít affect. He pointed out it would be difficult to find enough savings to reach the needed level of costs. For example, use of the Internet could reduce overhead by $10-20/ton; labor efficiency could save $10-15/ton and improved usage of raw materials could save about $10 per ton.

However, he concluded that the "house of cards cannot stand". He predicted more bankruptcies, restructurings, and maybe eventually lower capacity for the U.S. steel industry.

Joseph A. Rutkowski, Executive Vice President, Nucor Corporation. Oversupply but robust economy. He reported Nucorís structural business is quite profitable at this time and the other businesses could be fairly profitable. The company is building a new plate mill because it will have some advantages and can be profitable.

At the Berkeley flat mill they have a new caster and cold-rolling mill. The Berkeley beam mill is operating at 120% of capacity and they are still getting productivity improvements.

They have a new buildings plant in Texas.

They are involved in 2 partnerships: strip casting with BHP and HIsmelt.

He pointed out that the equity market is now at an all time low. However, Nucor is in a good position since it has no debt or liabilities and good cash flow. The company will take advantage of acquisition opportunities.

Nucor views the internet as a tool that should make it easier to do business.

He said a successful company needs courage to make quick decisions. It should have a culture where people can take chances and make mistakes. It needs financial strength to take advantage of opportunities.

Louis L. Schorsch, Co-Leader, Metals and Mining Practice, McKinsey & Co. Schorsch questioned whether these are good times for the domestic steel industry. He painted a negative picture with no excuses or optimism left for the industry. He said radical thinking is needed to fix the industryís problems. He pointed out that steel has underperformed even other basic industries. For example, steel has 2-4% lower returns than other basic industries, a flatter cost curve, low entry barriers, and lower demand growth. If debottlenecking adds 1 _% per year to capacity, this is more than expected demand growth.

He recommends aggressive consolidation for the following reasons:

1. Direct synergy can save 10% of sales.
2. Customers and suppliers more concentrated.
3. Excess capacity (50+ mtpy globally) needs to be managed.

On the other hand, he said the integrated model is not efficient and should be dismantled. One radical solution he proposed was "Hot Metal Inc.", a utility-like company with 20 mtpy of capacity. He said that specialization was the key. A strategy of finding market niches may work for smaller US companies but is difficult to implement.

Andrew G. Sharkey III, President and CEO, American Iron and Steel Institute. Sharkeyís speech focused on opportunities. He noted that there has been dramatic growth in apparent steel consumption in the US and Canada in the past decade. Auto sales and construction are strong.

The AISI promotes and develops markets. He predicted domestic demand would grow by 25% in 5 years.

In autos, steel makes up 55% of the weight, which has been maintained over 30 years. New steel technology has contributed to a 33% weight reduction. The industry is now working on the ultra light vehicle that can get 80 mpg.

In construction, commercial framing has had 10% growth. It used 140,000 tons of steel in 1998. He said there were also opportunities for increased steel use in residential roofing and framing. Other areas that have seen growth include bridges and utility poles.

Sharkey sees a steel alliance. He believes the companies will grow with the market.

Dr. Johannes Sittard, Managing Director, ISPAT International. Sittard described internal cost cutting at Ispat Inland. At Ispat Inland, they are replacing the BFs with EAFs. In the interim, they can use slabs from their plants in Mexico or Canada. IMEXSA in Mexico produces 4 mtpy of slabs. He said it was Ispatís intention to grow in the Americas.

 

 

 

 

Panel III: Global Steelmakers: Masters of - or Slave to - Their Universe?

Bruno Bolfo, Chairman, Duferco. Bolfo argued that structural fundamentals in the industry must change to get a better return on investment. He recommended that companies focus on global growth, management issues, and short-lead time projects. He noted that in the past when there was an easier availability of capital, this allowed for mistakes for the sake of market share. This is no longer the case. However, he believed that there are still good opportunities for companies even if money is tight.

Yuan-Cheng Chen, Executive Vice President, China Steel Corporation. Chen described the steel situation in Taiwan. CSC is the only integrated mill in the country and is one of the most efficient in the world, with a capacity of 10 mtpy. He said that crude steel production in Taiwan of 15.4 mtpy was less than demand of 24 mtpy, making Taiwan a large importer. In addition, Taiwanís location is ideal for exporting steel to East Asia and ASEAN countries. He said in the future, CSC would consider being a joint venture partner in new steel projects in ASEAN countries.

Roland Junck, Chief Executive Officer, Aceralia Corporacion Siderurgica SA. Junck touted globalization as the paradigm and vehicle for growth for the steel industry. He said that his company has redefined the traditional business model. He defined companies that were masters of their universe as market leaders, with core competencies, who provide steady growth of shareholder value. Key to this is being in attractive locations and a product mix that provides added value to customers. He cited that the companyís recent acquisition of Marcel Ucin has helped to stabilize margins. The company now produces wire rod on three continents and is able to supply the glove with tire cord. He described four different business models that could apply to steel companies: the pragmatic, the local champion, the crusader (which describes Arbed), and the king processor. He recommended companies follow a growth culture, with upstream and downstream affiliates helping to reduce the exposure to the business cycle.

Alexey A. Mordashov, General Director and Chairman of the Executive Board, the Joint Stock Company Severstal. According to Mordashov, the strategic choices for Russian mills depend on whether they believe the pessimistic or optimistic scenario for the domestic economy. If they believe the domestic market is not growing, they will try to export to maintain production. Mordashov does not see this as a long term solution. He believes the Russian steel industry could be more dynamic if it were restructured to eliminate inefficient companies. He subscribes to the optimistic view that radical restructuring can take place and the domestic market will grow 4-5% per year. There will be areas of growth such as in the automotive, energy and power industries. If so, he sees apparent consumption growing from about 17 million tonnes in 1999, to 23 million in 2005 and 27 million tonnes in 2010. The cold-rolled and coated sheet markets are expected to see the most growth. In the future, Severstal will change the management focus to project work.

Tadashi Takeuchi, Senior Vice President and General Manager, Kobe Steel USA, Inc. Takeuchi noted that the U.S. and global steel industries were not in a crisis. Mills in the U.S., Asia and Japan are operating near full capacity. Southeast Asia and China have been taking more of Japanís exports ó up to 80% in 1999. And Japan is involved in more investment in the Asia region. He stated that the U.S. has benefited from low priced steel imports and pointed out that Japan has an even higher import share than the U.S. in hot and cold rolled sheet. He reiterated that global trade helps everyone. Without it, there would be high inflation and less technology exchange, making the steel industry uncompetitive everywhere.

Wednesday, June 21, 2000

Panel IV: Minimills: Still the Panacea?

Keith E. Busse, President and CEO, Steel Dynamics Inc. Busse noted the difficulties in the merchant shapes sector is perhaps due as much to overcapacity as to foreign competition. He pointed out that the minimills are very low cost compared to the integrated mills. Now, the plate market is under attack by the minimills. In sheet, minimills have made serious inroads, capturing 20% of volume, with the possibility of reaching 33% to 50% of volume. Financially, he said the minis have outshined the integrateds. SDI has an average operating profit of $60 per ton compared to $20 on average for the integrated mills. In addition, the minimills are more productive, producing hot-rolled band with under one manhour per ton. One reason that minimills can do this is because they are non-union. He also attributes it to the culture of minimills where managers take risks.

John D. Correnti, Chairman and CEO, Birmingham Steel Corporation. Correnti believes minimills are the panacea for the industry because of cultural issues. It is because management and employees are communicating. They are striving for the same goal, which encourages bonding. The minimill culture also encourages decision-making at the local level.

Roger Phillips, President and CEO, IPSCO Inc. Phillips said he was "singing from the same song sheet" as the other panelists. He believes that it is not just technology or non-union workforces but a different way of thinking that defines a minimill. He recognized that the key to minimillsí higher productivity in flat products was fewer people after the hot-rolling. He described integrated mills as being in full paralysis. He noted that a big problem for the industry was the permanent infrastructure based on imported steel. He feels that it is too easy for trading companies to increase volume.

Marvin Selig, Chairman and CEO, CMC Steel Group. Selig sees no magic fix for the ills of the steel industry. He noted the objectives of a minimill should be 1) to make money, 2) to keep strong through capital spending and training, and 3) see that everyone has job satisfaction. Minimills have a forward-looking attitude and learn from failures. They should be driven by customer satisfaction and give the customer more than they expect. A company should be like a community where everyone cares for each other.

Panel V: Steel Service Centers: Are Only a Few Players Positioned to Implement a Winning Strategy?

Arnold W. Bradburd, Chairman of the Board, Metals USA. Bradburd said that Metals USA was not a leader in consolidation of the service center industry. They followed the proven strategy of other leaders such as Thyssen, Ryerson Tull, Rio Algom and many others. He sees consolidation being driven by a push/pull factor, with the push being the commoditization and globalization of the steel industry, and the pull being the customersí needs. He believes that there will be consolidation in the sector, with the number of top players going from 15 to 10 or less in the next 5-8 years. The strategy for Metals USA is summed up as "one name, one source, one mission.

Dan Ronchetto, Corporate Manager of Strategic Sourcing, Emerson Electric. Ronchetto reported that Emerson has sales of $14.2 billion annually and buys about $500 million worth of steel each year. Some of the products they use include cold-rolled motor lamination sheet, tubing, plate, bar, rod, wire and other products. The company has 60 divisions and 300 manufacturing facilities. He said characteristics that they look for in suppliers include quality and delivery performance, whether they have broad processing and location capabilities and whether they support lean manufacturing practices in terms of inventory, and have the latest technology. The company prefers to have long-term agreements (3-5 years) with the mills to get material price stability. He believes e-commerce will have an effect on the industry in terms of lead times, inventory management, and scheduling. E-commerce will raise the level of competition and effect economies of scale. He said the industry canít yet determine who will be the winners.

Neil S. Novich, Chairman, President and CEO, Ryerson Tull Inc. Novich described the evolution of the service center industry from just a distribution business to one that provides processing and more value added services for its customers. Customers are no longer ordering for inventory. In the future, he sees fully integrated information, business and manufacturing systems so that all parties can plan for their needs. This would require business practice changes. Ry-Tech, the companyís e-commerce system, is a contract pricing system. It has 400 customers, and represents 8% of the items sold and $100 million of sales. Another part of their e-commerce strategy has been their investment in MetalSite. Novich said that this is a more transactional type of business and has opened new markets for them.

Ralph V. Roberts, Group President, The Worthington Steel Co. Roberts reported that his company underwent a transformation about a year ago in which they changed their business plan to focus more on where their customers were heading. This meant the company needed to be more flexible to take advantage of opportunities. Also, the company had to provide more innovative solutions for their customers. Part of the refocusing had to do with increasing shareholder value and making money. This is reflected in their acquisitions of other businesses such as stamping, framing and cylinder manufacturing. The company has 23 value added processes yet intends to keep services specific and not try to be all things to all people. He sees B2B business as a vehicle to reduce transaction time and costs. He believes it will be 2 to 3 years before the ultimate configuration of the system is demonstrated.

 

Bud Siegel, President and CEO, Russel Metals Inc. Segal reported that Russel Metals stock is on the Toronto stock exchange and had sales of C$1.4 billion in 1999. It has a different portfolio than U.S. service centers. Its main sectors of distribution are: 54% to other service centers, 20% to OCTG and 26% import and export. He said that 64% of their revenues in 1999 were Canadian and the rest from the U.S. The company had difficulties in 1997 and 1998. The main problems were with morale and the business model, followed by the Asian crisis in 1998. He said this gave the company a chance to test their business model. He said that a key factor for a cyclical business is the ability to deflate or inflate the balance sheet according to market conditions. They do not have a lot of fixed assets or goodwill on their balance sheet, which allows them to manipulate working capital. He said that market share was not that important to them. He said the key measure in the public capital markets is the return on capital in any part of the cycle. He cited several of the companyís recent financial achievements and why they are a leader in their peer group. He also said the company would consider acquisitions in a downturn. Siegel also feels that e-commerce is not a driving force for his company.

Josef von Riederer, Delegate of the Executive Board, Thyssen Krupp Materials & Services AG. Riederer described how the European service center industry was very different from that in the U.S. One difference is the concentrated nature of European steel production. Another is that the European service centers perform mainly simple processing of flat products for the automotive and appliance markets. In addition, the European service centers are mostly owned or closely linked to the steelmakers. Riederer sees no indication that this situation in Europe will change anytime in the near future.

Luncheon Speaker

Fred Bergsten, Director, Institute for International Economics. Although Bergsten noted many positive factors in the U.S. and global economy, he saw the main problem as the dramatically rising U.S. trade deficit. He contended that a situation of this magnitude was not sustainable. He predicted an outbreak of protectionist measures and a sharp decline in the U.S. dollar exchange rate. He said the dollar may be overvalued by 20-25% but that this will be corrected. However, this could be devastation to the U.S. economy in the short term with a sharp rise in inflation and interest rates. The optimistic scenario is that there could be a soft landing and a gradual correction. He feels that if the dollar fell too sharply that there would be G-7 intervention. However, the G-7 could fail and overshoot its targets causing a hard landing. Therefore, the steel industry should expect a realignment of the dollar.

Panel VI: Steel Scrap: As Valuable as Gold in the Next Decade?

I. Michael Coslov, Chairman and CEO, Tube City, Inc. He described the historical pricing situation for scrap and what has changed. He noted the astounding changes in the import/export situation in scrap. For example, steel imports add 4 million tons of scrap from steel that was not produced here. In addition, because of Russian scrap exports to Europe, there is now material from Europe coming into the U.S. Further, he deemed scrap exports from the east coast as non-existent and exports from the West Coast having to compete with Japan. He said that the scrap substitutes were also having an impact on pricing. But because of the low price of scrap, he thinks that there will be no DRI plants built in the next 10 years. He believes scrap will trade in a narrow range for the next few years until there are some changes. These could include rising EAF steel production and a change in the dollar exchange rate.

Albert A. Cozzi, Chairman and CEO, Metal Management Inc. Cozzi also presented a negative picture of the scrap industry, which he said has deteriorated for the past 3 years with nothing in the future to turn it around. He contended that no one in the business is getting adequate returns. This has been caused, as the previous speakers mentioned, by a huge supply of scrap and the strong dollar. Another factor he cited is a change in mentality of scrap shippers caused by consolidation. With larger players, there is less speculation which caps prices and more turning of inventory. Rather than seek import relief from Washington, he is asking customers to support the domestic suppliers first to have a vibrant supply chain. Possible positives for the industry are that the dollar has weakened a little and the rate of Russian exports canít be sustained.

Robert W. Philip, President, Schnitzer Steel Industries. He mentioned that he expects acquisitions in the industry to continue but not at such high prices and with more of a requirement to retain key personnel and management. He also noted there has been a disconnect in the relationship between scrap prices and steelmaking operating rates. He repeated some of the causes of low prices as an abundance of local scrap, high imports and a shift in suppliers in Asia. Predictions for the future call for a gradual increase in scrap prices as U.S. bar mills increase output, Chinaís construction market continues to grow, and traditional Asian scrap import markets continue to be strong. However, the U.S. will face export competition from Russia, the Ukraine, South Africa and Australia. Although Russia offers good quality scrap, there is a question about how it is controlled and, Russian exporters face several problems. Perhaps Russia will have an EAF boom and increased domestic scrap demand. He cited several environmental factors that could affect DRI production in the future. But he concluded that it is best to focus on factors that the industry can control such as customer relationships.

Frederick J. Smith, President, Metals Services Group, Philip Metals Inc. Smith presented the userís point of view of scrap transactions and looked at how to get the most value out of this commodity. One way is better inventory management, which could save a mill $2-3 per ton. Another way is to even out the monthly scrap flow. Proper scrap segregation could also save money. Smith believed that it would be possible for their customers to reduce their scrap costs by $10 per ton. He sees developing trust and communication with the customer as a way of having a deeper relationship that will be mutually beneficial.

Panel VII: Steelís Technological Revolution: What Extraordinary New Developments Lie Just Ahead?

Wilfried Bald, Managing Board, SMS SMS Schloemann-Siemag Aktiengesellschaft. Bald focused on the evolution in flat products technology. He cited many examples of companies rolling to thinner and thinner gauges, and concluded that this trend will continue. Also casting speeds will continue to increase. The breakthrough for his company is in the direct casting of stainless steel. The target is 2mm thickness with one stage cold rolling. There are also developments in the finishing and processing areas. The company can offer customers may concepts to fit their needs.

Gianpietro Benedetti, President and CEO, Danieli & C.SpA. Benedetti discussed several of his companyís new technology offerings including the Danarex direct reduction technology, the Danarc EAF with scrap preheating, improvements in thin slab casting and rolling, a flexible section mill which can save $14 per ton over a traditional one, and their twin rolls strip caster which can reduce operating costs by $20 per ton and could be competitive in 4-5 years.

S.K. Gupta, Executive Vice Chairman, Jindal Vijayanagar Steel Ltd. Gupta described Jindalís startup of its Corex DRI project. Although there were startup problems, the plant is now producing 123 tonnes per hour, which is 54% above it rated capacity. Production costs are currently $194 per tonne compared with a 1997 prediction of $243 per tonne.

Mark D. Millet, Vice President, Steel Dynamics Inc. Millet reviewed the progress with Iron Dynamics. In the first two campaigns, they experienced refractory problems. In the third campaign, they created a freeze line that protected the sidewall that could be maintained up to 50% of the power level. In the fall, they will expand the shell diameter and make other modifications to maintain the freeze line at higher power levels to try to achieve full capacity of 45,000 tpm. The company has made about a $100 million investment in the process but is confident it can be done for $80-85 million, or $175 per ton. Liquid pig iron costs should be about $135 per ton, with liquid steel costs at $165 per ton. He feels this is competitive with integrated producers and compares to a scrap price of $110 per short ton when considering a $25 per ton credit for being in the molten state.

Joseph A. Rutkowski, Executive Vice President, Nucor Corporation. Rutkowski described how Nucor took a gamble on the thin slab compact strip mill technology which has since revolutionized the flat-rolled market. He said they are now looking to minimize the cost upstream and downstream from the casting-hot band stage. One way is to roller thinner hot band, but this adds cost and reduces productivity. Nucor has chosen a different route ó the direct strip caster. He believes that a thickness of 0.6mm can be achieved. A micromill with 500,000 tonnes of capacity could be built for $165 million, all in. The new technology will be implemented at Crawfordsville since they are width restricted and make stainless grades. Upstream, Nucor is looking to control raw materials costs and is investing in the HIsmelt process. The combining of these technologies with a converter will give a mill great flexibility. He also said that mills that could deal with the environmental issues of acid-less pickling and processing EAF dust would have an advantage.

Dr. Karl Schwaha, Executive Vice President and Member of the Managing Board of Voest Alpine Industrienanlagenbau. Using the example of the Russian steel industry, Schwaha pointed out that plants based on modern technology will be able to survive. The future trend will be in reducing throughput time, ultimately reaching 5 hours by combining direct steelmaking with strip casting. Another trend will be to increase yields and labor productivity through new technology. As a result, labor costs and location will be less important and plants will have smaller capacities but higher profits.