December 3, 2008
Lessons Learned? The Steel Industry Hopes So

While domestic steel producers hope for the best in 2009, they're hunkered down now for a long, hard winter -- idling furnaces and plants, cutting back on spending and laying off workers as they try to ride out a nose-diving world economy.

"I think the surprising aspect of what's been happening in the marketplace is the suddenness with which demand dropped off," said Nancy Gravatt, vice president of communications for the American Iron & Steel Institute. "People in the industry, people who've been in steel for 20 or 30 years, say they've never seen it drop off this dramatically, this quickly."

How quickly?

After a strong third quarter that saw steel-sector companies posting big numbers, fallout from a financial crisis that started in the nation's sub-prime lending market torpedoed the global economy, causing demand for big-ticket items, such as cars, appliances and new construction to plummet.

With demand waning, so have orders. And with fewer orders coming in, steel producers are cutting back: Last week, Steel of West Virginia laid off 52 workers at its Huntington plant until the economy picks up, while AK Steel temporarily idled most operations and hundreds of workers at its plant in Ashland, Ky.

Russian steel giant Severstal, meanwhile, also made changes, keeping furnaces at its Wheeling operation offline and using voluntary layoffs to control costs until the economy recovers.

And while Luxembourg-based ArcelorMittal, the world's largest steelmaker, announced a 30 percent scale-back in operations worldwide, the bright spot in an otherwise gloomy picture is that workers at the company's Weirton plant will not face additional layoffs, voluntary or not, because its product line -- tin plate, used in food packaging -- historically is a big seller when consumers are anxious.

"Tin plate historically does well during a down economy, and this period does not seem to be an exception," ArcelorMittal spokesman Adam Warrington said.

Light at the End of the Tunnel

But Steel of West Virginia's Tim Duke insists it's just a matter of time until the pendulum swings the other way.

"When business comes back -- and it will come back -- it will come back very strong," said Duke, president and CEO of the company. He figures the order book will fatten up once steel buyers work through their inventories. In the meantime, if the federal government pushes a stimulus package through that includes money for infrastructure, "they're going to need steel," he said.

"But right now, we're in a winter slump. There's always light at the end of the tunnel," he added. "We just don't know how long the tunnel is. It's all part of business cycles -- we've been through many of them. This time, the economy is in a lot worse shape. We're still selling steel, just not as much as before."

AK Steel's Alan McCoy said the Ohio-based company hopes to resume normal production in early- to mid-January, though he admitted that no one can say with any degree of certainty that it will unfold that way.

"We're watching things hour by hour. We have to be prepared to adjust to it as quickly as possible either up or down," said McCoy, vice president of government and public relations. "It's a global downturn; it's affecting all facets of the economy. In my mind, it's no secret what's driving it -- it's the lack of credit and a lack of confidence among consumers, and consumers, ultimately, are the ones who buy things made out of steel."

Severstal isn't saying how many of its West Virginia workers have been impacted by the slowdown.

A Fluid Situation

In announcing the company's third-quarter results, CEO Alexey Mordashov said only that despite significant growth in the first nine months of 2008, the uncertain global economic outlook and its impact on the world's steel-consuming industries led them to take "strong management actions" that would allow the group to continue to operate profitably in a tougher environment -- including cuts in production and capital spending.

"It's a very fluid situation," Severstal spokesman John Dudzinsky said. "Right now, there's really not much visibility. We're doing everything we can to keep in close touch with our customers as well as suppliers, and at the same time we're speaking to the unions, being as open as we can. We're balancing volumes and production with customer needs."

How long the company will have to do the balancing act is anyone's guess, he said. He would not he say how the company might react if the downturn exceeds expectations.

"No firm decisions have been taken, but, obviously, we're trying to create a strong business for the future," he said. "We're trying to manage as prudently as possible, given what's going on."

A Cyclical Industry

And what's going on isn't all that unusual: Steel is a cyclical industry, and it's always been vulnerable to economic downturns. Until now, the worst was a decade ago, when Asian and European markets tanked, prompting foreign producers to flood U.S. markets with steel at what domestic producers characterized as cut-rate prices. The glut of cheap steel sent dozens of U.S. steelmakers sliding into bankruptcy -- among them the former Weirton Steel and Wheeling-Pittsburgh Steel -- and triggered a wave of plant closings and business consolidations the industry's critics said was long overdue.

While foreign steel isn't the problem this time around, most acknowledge that the import crisis of a decade ago prepared the steel industry to weather the current economic storm. Gravatt said one of the greatest lessons learned during the consolidation years "was the ability to respond rapidly to changing market conditions instead of lagging (behind)."

This time around, individual companies were quick to react to market forces.

"When I hear CEOs and industry leaders speak, they seem to think there may continue to be some more consolidation," Gravatt said. "But, generally speaking, a lot of that has already occurred."

Dudzinsky said the import crisis of the late 1990s "made the industry a lot stronger, consolidation helped make the market more rational, and companies are a little nimbler in terms of reacting" to market tics.

"I think everyone is saying the industry is in better shape now than during the last downturn," he said. "But at the same time, I don't want to paint a super rosy picture. Let's just say there were a lot of lessons learned."

Source: West Virginia State Journal, November 20, 2008




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