Chapter 4

How the Steel Industry Operates

Many people view the steel industry as the equivalent of a medieval fortress beset with the economic equivalent of siege warfare. In fact, the industry has been and continues to be in constant motion. The steel industry underwent two major reorganizations at the national level in the 20th century. It is now undergoing a third at the global level in the early 21st century.

Previously, because steel was mostly a stay-at-home industry, the steel industry story was primarily told as a series of national industry narratives, perhaps now supplemented by the new global aspect. However, based on the most recent scholarship in the area, this is to miss the major point. This time it is different, but we have been here before. The postwar steel story, least for the leading countries of the USA, Germany, and Japan, was from the beginning a story that was one of global restructuring around a central theme of how the industry was best organized. Therefore, the new world steel industry should be thought of as entering but a new chapter in an ongoing global restructuring storyline.

The Organization and Reorganization
of Steel Industries

The birthing form of the steel industry in the early 20th century saw dominant national firms emerge along the lines of the U.S. Steel model. In all leading industrial countries, huge organizations grew up around a tight vertical integration, owning and controlling all of the inputs from the mines through steelmaking to processing and distribution. What this meant at the industry level was a system where one or two dominant firms controlled production and prices across the economy. Oligopoly, if not monopoly, was the order of the day. The so-called Pittsburgh Price system, in turn was the central pricing mechanism in support of this system. The price of all steel products would be set by U.S. Steel in Pittsburgh and those prices plus transportation costs would be applied in all local markets across the country. It was also a means to keep steel production centralized so that new and regional competitors could not and did not emerge.

It was actually the New Deal economic model of how industries should work. It quite consciously set out to organize industries into oligopolistic companies with competition taking place within well-regulated rules of the game set by government. This was seen as a change from the destructive competition that led to the Depression and would also provide the base for sustained economic growth based on high wages, mass consumption, and continual high employment. In steel it would survive for 50 years.

To follow the developments and stages in the industry, it is best seen in historical perspective. Therefore, the following chapter follows the major themes in historical order. Three developments gave the industry its modern shape: the imposition of the New Deal industry model on the steel industries of the USA, Germany, and Japan. The Japanese steel technical revolution. And, the Nucor minimill revolution.

Big Steel in the USA, Germany, and Japan

U.S. Steel personified Big Steel. It dominated the American industry and overshadowed the rest of the industry in the postwar period, producing the entire range of steel products. At the industry level, the primary actors were a limited set of integrated producers—Bethlehem, Inland, National—producing steel largely for a mass domestic market, engaging in oligopolistic competition and counter-balanced by active trade unions and regulatory government. For the first 30 years of the postwar period, it was largely successful though the seeds of its future implosion were in sight.

Within the industry, in the 1970s and 1980s, it was common parlance among steel industry managers to say that the hard-pressed American steel industry was being destroyed by Japanese and European imported steel from producers whose major competitive advantage was that their steel industries had been bombed out in World War II then completely rebuilt with new plants.

Recent scholarship has turned this story on its head. Gary Herrigel’s historical account1 puts a whole new perspective on postwar steel developments. The New Deal Steel model was not only a model for the USA, but it was also exported, imposed by the Occupying Powers in Germany and Japan though these industries and cultures retained critical features determining how it was implemented. The overall model was the same but it did not lead to convergence, it led to variety so that in the 1970s, the American New Deal Steel companies would come under severe pressure by imports arriving from its supposed offspring.

The leading steel industries of the interwar years in the USA, Germany, and Japan had a remarkably similar structure. In each case, there was a large, deeply integrated, diversified producer of relatively high-volume standardized steel products accounting for half of the total output of the industry. In America it was U.S. Steel; in Germany, Vestag; and in Japan, Yahata. Around these lead producers there were a larger number of smaller, more specialized companies accounting for the rest of the industry’s domestic output. Exports played a relatively minimal role.

In 1901, the year that U.S. Steel was established, the Japanese government incorporated Yahata Steel as the flagship for the emerging Japanese steel industry. The government had tried in vain to persuade the existing Zaibatsu industrial groups to enter steel, but the latter viewed the risks of large startup costs to be too much in terms of the expected returns. Yahata therefore took the lead in integrated Japanese steel production, largely using German technology. The Zaibatsu gradually moved into specialized steel production for machinery, shipbuilding, engineering, and trade aligned with their other industrial conglomerate activities. This established the backbone of the bifurcated steel industry so common in the interwar years.

In Japan, as in Europe, steel industries dealing with the slowdown of the 1920s followed by the contraction of the 1930s, resorted to industry cartels. By collectively setting prices, they sought to stabilize the industry. But there were persistent problems about inclusion of all producers in all markets. In the Japanese case, participation in cartels, while originally private, became compulsory and mandated by the government under the Major Industries Control Law of 1931. These set boundaries on product markets, prices in the industry, sales quotas, allocation of orders, and so on.

However, cartelization was still not enough to stabilize the Japanese industry. So, in 1933, the Japan Steel Manufacturing Company Law was passed to privatize Yahata and merge five integrated steel companies into the Japan Steel company. This was the entity that would dominate the industry. In wartime conditions, the collective governance of the industry was tightened to guarantee that Japanese steel supported military objectives through the Japanese Steel Association.

The interwar German steel industry had a similar macrostructure, but ultimately with different relations to the state. The dominant producer was Vestag but unlike Yahata it was a private company, the outcome of a merger in 1926 of the four largest producers with both integrated steel and coal facilities. It accounted for over 50% of German production. Around this core there were a set of specialized producers, the Konzerne, who had strong linkages downstream to engineering, shipbuilding, and machinery industries. However, unlike Japan, these were also integrated producers. Vestag focused on standardized, high-volume markets, while the latter focused on more specialized product markets.

The German industry responded to the pressures of the 1920s and 1930s with cartel organizations. However, these were private associations and never resorted to government compulsion for membership compliance like the Japanese Control Association.

As war approached, the German steel industry insisted on retaining its presence and autonomy in private markets and accommodated military demands only as a secondary priority. The Nazis responded by state-sponsorship of their own steel capacity in the form of the huge Herman Goring Works (HGW), which expanded to become the second largest producer. Vestag and others were not above taking advantage of orders for the Nazi state, but they maintained the boundaries of the private firm. HGW was joined by several smaller opportunistic ventures with a closer relationship to the militaristic state from within the Konzerne membership. Overall, the German steel industry was not as closely aligned with the state as was the wartime industry in Japan.

However, as the Allies looked to postwar reconstruction, they used their occupation powers to reorganize the industries in German and Japan to more closely resemble the American New Deal Steel model. The postwar objective of the USA was to dismantle the centralized steel regimes which were seen as major contributors to the Nazi and Japanese militarist regimes. The monopolistic steel firms were disbanded along with their related cartel organizations. A decentralized oligopolistic, mass production regime was seen as a significant economic and political contributor to postwar democracy. The key factors were breaking linkages to the state, decentralizing into a set of oligopolistic firms, and instituting trade union collective bargaining into decision making in steel.

The irony was that this new structure in the context of German and Japanese labor market policies, local institutions, and business practices became a platform for new technology, for example, the continuous caster and a more innovative, entrepreneurial steel industry that would emerge over the 1950s and 1960s into a superior competitor in the steel trade wars to that of its US point of origin.

It was this New Deal version of the steel industry that started to unravel in the 1970s. Between 1980 and 1994, US integrated producers wrote off $15B in underperforming assets.

Overcapacity in the global integrated industry became a chronic problem by the 1980s. All industries had to restructure. The Europeans and Japanese did it by cartelization through which they organized adjustment at the industry level. The American mechanism was protectionism in which price relief was given with the explicit understanding that individual companies would rationalize operations. In both approaches, government was given a major role in guiding the restructuring process.

In 1984, the Steel Import Stabilization Act gave the US Trade Representative the authority to negotiate wide-ranging voluntary restraint agreements (VRAs) to dramatically limit steel imports from 20 countries. The steel companies were to use the revenues to reinvest in plants and worker training. However, it never quite happened that way. Later, even the Bush administration extended the system. At its best, this was a form of negotiated restructuring. The forum was principally through Chapter 11 bankruptcy proceedings.

Steel operations in Germany and Japan also underwent wholesale processes of consolidation and rationalization. Germany and Japan would each eventually be left with two consolidated steel producers. Between 1980 and 1986 in the US, 24 of 47 steel plants were closed. The Asian Financial Crisis of 1997–1998 subsequently took the floor out from under global flat-rolled steel prices and precipitated a further restructuring not only in the USA but also in Europe and Japan.

The boundaries of steel firms were redrawn in the process. Upstream activities such as iron ore and coal holdings were often sold off. Internal processes from finishing operations, casting, maintenance, mill services, and even sales and marketing often became contracted with outside entities.

Again at the industry level, there was an additional strategic shift. The industrial structure of the steel industry essentially was inverted. Under US leadership, from 1945 to 1974, the standard format had been a set of large integrated producers focused on standard product lines with large volumes and a second tier of smaller firms producing more specialized products. The pyramid inverted in the 30 years from 1974. A much reduced number of integrated producers focused on high value-added specialized products, while the second-tier minimills took over lower value-added, volume product lines. It should be added that the lower value-added markets were also being supplied by new Asian and BRIC (Brazil, Russia, India, and China) producers.

The U.S. Steel industry and market did not disappear; in fact, it remained critical for domestic and foreign producers. At the time when many people were thinking it had disappeared, in fact it became ground zero for radical restructuring of steel operations and commercialization of leading steel technologies from around the world.

The Japanese Steel Revolution

The next major piece of the complex puzzle shaping how the steel industry operates is to understand the nature and impact of the Japanese steel industry in the postwar period.2 Postwar Japan produced a different kind of steel, one that was directly linked to the Japanese quality revolution in manufacturing. The interface between steelmaking and manufacturing changed qualitatively. Major Japanese steel producers emerged in association with industrial groups (Keiretsu) that had their own auto companies and other engineering concerns.

Beyond the individual steel companies, there were trade associations, professional associations of engineers, and overseeing it all, the hand of government. The Ministry of International Trade and Industry (MITI) saw themselves as active players in the whole industrial development. This had a major impact on the direction and pace of change. For instance, the Japanese government negotiated site licenses for the newest technologies, including basic oxygen furnaces and continuous casters, thereby lowering the cost of technology acquisition for steel companies and standardizing the common technical platforms so that companies and engineers could accelerate down the learning curve. Specific technology issues are discussed in Chapter 9.

The Japanese miracle was remarkable for its ability to achieve international competitiveness in industries for which Japan did not have any natural competitive advantage. The steel industry was perhaps “the” leading case of Japanese success. There was no indigenous natural resource base to support the steel industry; however, it was able to creatively source raw materials thereby creating a competitive advantage, for example, locational advantage through its tidewater steel plants. Cooperation between industry and government was critical to this success. MITI played an important role, particularly in the early stages of development by coordinating expansion and development. Steel firms were required to submit their expansion plans to the government, and MITI helped ensure that the firms could borrow sufficient funds to carry out the plans. Priority for the loans was given to the firms that seemed best able to modernize, reinforcing the need to invest in new technology and equipment. The government persuaded private banks to make preferential loans to the steel industry at low interest rates and rearranged payment schedules for previous government loans. The government also gave favorable tax treatment to the steel industry, including accelerated depreciation rates, lower property taxes, and exemption from duties on imported machinery and equipment.

The result was that Japan rapidly became the technical leader in the world steel industry and ultracompetitive in costs. But it also produced an industry that had to export about 50% of its volume in order to be profitable. This became the lightning rod for steel trade disputes discussed in detail in Chapter 7. The imperfect outcome of the latter disputes is that there was an important transfer of technical expertise in the 1980s and 1990s between the Japanese and American industries through the somewhat forced embarking on joint ventures, particularly on the processing side of the industry such as galvanizing mills for auto steel.

The Nucor Revolution

The next game changer in how the steel industry operates came in the 1980s with the upstart US producer Nucor.

The rise of the minimill in the United States was not simply a steel production technology story. The underlying factor was the vulnerability of the traditional industry to imports during the 1960s. This is attributed to two key factors: the unreliability of the central price-setting mechanism in the industry and the loss of control over distribution.

At the heart of the price-setting mechanism was the collective bargaining relationship between the United Steelworkers and the major integrated producers (the story is told in detail in Chapter 8). The history was a series of long strikes, crucially in 1956, 1959, and 1969. But, even when strikes were avoided, the customer base in automotive and construction became wary about continuity of supply. Previously, imports played a marginal role, but in the 1960s the scene changed. Major steel consumers started to import steel to tide themselves over the strike period. But from 1969 onward, the imports never left after the labor settlement. By the 1970s, the level of imports reached 20% of U.S. Steel consumption, despite a series of protectionist interventions.

None of this would have been possible, however, unless distribution and purchasing changed. In the first half of the 20th century, steel producers sold most of their product through their own distribution channels. From the 1950s, small steel distributors started to emerge as a new form of competition. They were usually regional firms who at first sold scrap and then second-tier steel products. During the strike periods, these small firms were encouraged to significantly increase their imports of steel. Eventually this became the major channel for imports to penetrate the U.S. Steel market. The cumulative impact was that domestic integrated producers lost control of their markets.

Even more importantly, the rise of the independent steel distributor opened the way for small independent minimill producers to selectively enter traditional steel product markets, often on a regional basis and creeping up the value chain from low-value bar products, eventually into the lucrative flat-rolled markets.

With pressure from both the imports and minimills using the regional distributor market, by the 1980s it was arguable that there was no longer a national steel industry as that would have been understood in the first half of the century, or even in the 1960s. For instance, the most famous of the new mills, Nucor, the second largest U.S. Steel producer by 2000, served regional markets from a set of small EAF plants.

Nucor began its life in steel production by producing low-end bar products primarily for the construction industry. It followed other minimills in pursuing the market for rod and wire products. By the mid-1980s this market was getting crowded and Nucor management bet the company on developing new technology, licensed from the Japanese and the Europeans. The key was to couple the highly efficient electric furnaces to new types of continuous casting machines. In a joint venture with Yamamoto of Japan, in 1988 they opened a new mill to produce wide flange beams, pilings, and heavy structural for construction applications. By producing a “near net shape” much closer to the shape of the final product than traditional methods, the new mill reduced costs and allowed Nucor both to break into a market at a new price point that traditional integrated mills could not match and to distinguish itself from other minimill producers. In 1989, Nucor gambled again on an untried technology for “thin slab” casting, a simplification of the process steps from hot metal to a rolled coil by reducing the number of stages from about 20 to 6. This allowed it to break into the flat-rolled market. The German engineering firm SMS Schloemann-Siegman had pitched the technology at numerous companies, large and small, but Nucor was the only taker. By the mid-1990s, Nucor was also producing cold-rolled and galvanized products. By the late 1990s, Nucor was building iron carbide capacity to reduce its vulnerability to scrap prices and supply. No one doubted that Nucor was the most innovative steel producer in North America in the last quarter of the 20th century. By early in the new decade it had overtaken U.S. Steel as the largest North American producer.

There was another underlying theme in the Nucor-EAF story, the liberation of steel company management’s right to manage. The new firms were mostly nonunion or union elimination situations. In other cases, it involved marginalization of the union, particularly the union at the nonlocal level. There is no doubt that there has been an infusion of new management into steel companies, along with new management vision and style. However, it is also the case that the majority of the problems in the traditional integrated steel industry has been the creation and inheritance of entrenched and overly conservative management.

In summary, scrap-based producers make lower quality steel, but with much simpler and cheaper processes. Because the input is already steel, the minimills use electric arc furnaces (EAFs) to simply transform the steel into more usable forms. Lower value-added steel, such as rebar for construction, can be produced with steel scrap alone. As EAF producers have pushed up the value-added chain into flat-rolled products, they have had to add high-quality scrap plus other iron products without the impurities contained in scrap. This includes pig iron, processed iron ore pellets, or briquettes of iron. Capital and labor costs for minimills are significantly lower than for integrated producers; however, EAF firms are very sensitive to the cost and availability of scrap. In recent years, the impact of demand from China for scrap has generated huge problems of both price and availability for EAF steel firms. Dozens have fallen into bankruptcy.

1980–1990s’ Continual Restructuring

As described elsewhere in this book, by the late 1950s and early 1960s, cracks were appearing in the Big Steel system, which by the 1980s unleashed a flood of disruptive change. Domestically, the rise of the minimill challenged the traditional industry in long products. By the late 1980s, the EAF producers were pushing into flat-rolled products.³ The long products were lower value-added and the big steel producers could not compete with the lower cost base of the minimills in terms of both capital cost per unit of capacity and production costs in operations. At the international level, oligopolistic steel pricing was undermined as imports flooded into the US market from Japanese producers in particular. Part of this was dumping of steel but fundamentally, for the reasons discussed in Chapter 9, the new Japanese superefficient BOF–Continuous Caster configurations simply had productivity advantages that could not be matched, even if the steel was not dumped.

In the 1996 book The Renaissance of American Steel, the two champions were U.S. Steel and Nucor.⁴ By 2006, both U.S. Steel and Nucor were the subjects of takeover speculation by the European steel multinational Arcelor. How had the steel world changed and why?

Minimills did not have a strong tradition of research and development. The reduction and the elimination of R&D capacity at virtually all the North American integrated producers produced a situation where innovation came either from joint ventures with offshore steel companies or from global equipment vendors. Innovation within the North American steel industry came from a limited number of consortia, mostly with government agency support.

Between 1949 and 1959, global steel capacity almost doubled. By the 1960s, production capacity exceeded demand and the US market became ground zero for imports. Dumping cases abounded. Inflation increased wage, energy and transportation costs by 40% while steel prices increased by 10%. The U.S. Steel companies fought back against foreign competition by seeking tax relief. With changes to the US Tax Code, American steel companies were able to invest more in BOFs.

However, by the 1970s and into the 1980s, the US companies had the worst on all sides. Lower profits reduced their stock values. But tax concessions resulted in higher cash flow than production levels alone would have generated. Together this made them takeover targets. As a defensive strategy, the steel companies diversified into other industries, i.e. U.S. Steel moving into oil and gas. The Accelerated Cost Recovery System of the Economic Recovery Tax Act of 1981 provided so generous tax write-offs for capital-intense industries that steel companies could not use them all and created a secondary market, that is, by selling depreciation allowances. By the late 1980s the companies had retired all of their OH furnaces but hugely reduced their overall steelmaking capacities. Imports and minimills took up the slack. Integrated steel companies became holding companies, with separate subsidiaries for flat products, bar, structural, and raw materials. The 1990s would see further spinoffs of these units. These in retrospect were simply tactical, survival actions that were the preliminaries to the great steel consolidation of the next decade. The process started earliest in the USA, but eventually spread across the world steel industry.

The Great Steel Industry Consolidation Movement

The list of steel company bankruptcies, mergers, and acquisitions has been presented previously. The birth of the new global steel industry, in everybody’s measure, has turned on the global wave of consolidation beginning in the late 1990s and lasting for a decade. Why did it happen? What was the trigger and what was the tipping point?

The OECD Steel Committee has given a broad summary of the major and sometimes competing theories for the dramatic consolidation of the global industry in recent years (OECD DSTI/SU/SC(2007)3/REV1).

The Fixed-Cost Hypothesis

According to this view, the steel industry, whose firms have a high proportion of fixed costs to total costs, are prone to periods of harmful price competition during market downturns. During periods of falling demand, if steel firms scaled back production to equal marginal revenue to marginal cost, they would quickly suffer profit losses since fixed costs per unit of output would rise sharply as production fell. To lower their unit costs, steel producers were tempted to lower their prices, produce more, and gain market share. As most producers faced the same incentive structure, the market price would fall, steeply at times, in response to the growing supply surplus on the market. This would result in detrimental profit losses, a situation that steelmakers would try to avoid by combining their companies. Thus, greater consolidation is a way to reduce price volatility and achieve higher profits.

This argument appears plausible if steel production were highly concentrated geographically with little or no trade internationally, as was the case a century ago. Production restraint in order to boost prices would thus not attract significant competition from steel imports. Today, steel production is dispersed across all parts of the globe and some 40% of it is exported. To a certain extent, price divergences can be sustained because imported steel is not a perfect substitute for domestic steel. Steel consumers may prefer locally produced steel due to, for example, the relatively short time needed to deliver it to customer manufacturing plants, and thus be willing to pay a premium over imported steel.

Economies of Scale

Related to the fixed-cost hypothesis is the idea that steel industry consolidation takes place because steel firms strive to take advantage of economies of scale. In other words, they achieve lower unit costs through higher production. If economies of scale are to be achieved, smaller steel plants have to be replaced by larger plants. However, consolidation in the steel industry often occurs through the acquisition of additional plants, which does not generate economies of scale in production. Therefore, economies of scale, alone, do not seem to be an important explanation of consolidation.

Synergies

Even though consolidating firms may not benefit from economies of scale in production, by coordinating the assets, know-how, and management skills of the merging firms, the combined steel firm is more efficient and thus enjoys superior output/cost combinations. Thus, synergies require the sharing of merging companies’ assets, which allow the combined company to produce as much or more for a given cost. In the recent large mergers, the synergies cited relate mostly to marketing and product development, R&D, and purchasing. Combined companies may benefit from lower raw material costs through greater negotiating power over suppliers, from managerial efficiencies that reduce corporate staffing needs, and lower costs of distributing steel if the various distribution systems can be integrated as well. Such synergies can be significant. In the case of Mittal Steel’s acquisition of Arcelor, Mittal expected cost reductions to reach USD 1 billion within three years’ time. Typically, the synergies targeted in steel company mergers are around 3% of costs.

Optimizing the Allocation of Production

Synergies are, at least in theory, relatively easy to achieve. However, whether management can properly identify and implement these synergies is another question. Even when synergies are not feasible, costs can be reduced by rationalizing production, that is, by shifting steel production from high-cost mills to more efficient mills following a merger, so long as the more efficient mills have excess capacity.

This type of efficiency gain is different from a synergy, since the merging partners’ assets essentially continue to be used separately following the merger. This rationale for merging has been cited in numerous recent cases. For example, Tata Steel’s offer to buy Corus was based, at least partly, on the cost-efficiencies of Tata providing slabs produced in India from captive iron ore at up to half the cost of UK-produced slab. In the Evraz–Oregon Steel Mills merger, costs could be lowered by Evraz supplying slabs produced in Russia at low cost using the company’s own iron ore at Oregon’s plate mill. This is envisaged to boost profit margins for Oregon’s plate-and pipe-making operations. Moreover, ThyssenKrupp, Baosteel, and Dongkuk are involved in slab production in Brazil, while Posco and Mittal Steel have projects in India.

Steelmaking raw material prices have surged in recent years. For example, the price of iron ore has been up almost 400% compared to its level in 2000. Coal prices have also increased noticeably. As a result, many mergers and acquisitions have been driven by the desire to produce basic steel in low-cost regions near raw materials, yet maintaining or accessing geographical proximity to major consuming markets. A prime example was the recent bid for Corus by CSN and Tata Steel. CSN’s rationale was that it could supply all of Corus’ iron ore needs through its own mine in Brazil.

Greater Flexibility in Labor Contracts

Other cost benefits from acquisitions can result when the acquiring firm is able to lower labor costs by renegotiating more flexible contracts with the employees of the acquired firm. This has been the case particularly in the United States, following the wave of bankruptcies in 1998–2001, which forced unions to accept lower wage costs. In the case of International Steel Group’s acquisitions of the LTV Corporation, the company negotiated a labor agreement with the United Steelworkers allowing for greater outsourcing activity and fewer job classifications, as well as a restructuring of compensation and pension plans. Allowing workers to perform a wider array of duties than before and for outsourcing during peak periods of demand ultimately boosted labor productivity and thus helped to reduce unit labor costs.

Attracting Capital

For a long time, capital markets were reluctant to commit resources to a steel industry suffering from chronically low profit rates, high costs, excess capacity, and at times bankruptcies. As a highly fragmented industry, the steel sector lacked the capital access to invest in new technology and in new products, to compete with alternative materials, to attract management and technical talent, and deliver what customers required when they required it. Thus, consolidation may be the means of permanently increasing profitability in the steel industry and help it attract capital for innovation and future growth.

Dynamic Efficiencies

Mergers in the steel industry could, in theory at least, give rise to so-called dynamic efficiencies. These relate to efficiencies that could be achieved through research and development or sharing knowledge and skills, which lead to the development of new products, production processes, or improved product quality and service. Consolidation may encourage steel companies to engage in more research and development activity, because there are fewer competitors to free ride on the benefits generated from their innovations.

The above prognosis by the OECD Steel Committee is plausible but probably a bit on the optimistic side.

Perspectives on the 21st Century Steel Industry

A new reorganization of the steel industry is now underway. While international steel trade and multinational steel company operations have been around for over a century, the industry is now organizing at the global level in a new way. Currently, steel companies are buying up coal and iron ore properties to reverticalize so that the tail does not wag the dog, that is, the monopolistic raw material producers do not hijack all the profit margins. Second, it is likely that steel producers will reacquire or reinstitute their own service center operations, principally so that they can get closer to the customers and increase the knowledge transfers that are critical to pushing out into the marketplace the new advanced steels that have been developed. These new service center operations, however, will not be a replay of the commodity broker role of the past but in fact become what academics call Knowledge Intensive Business Services (KIBS). To coordinate all of this activity, the reconstituted steel companies will be heavily dependent on IT and performance benchmarking as a new coordination platform in the industry. National steel industries as we have known them in their two previous iterations will be going away. The steel industry as a major contributor in national economies will not be going away. What we will have is national and regional configurations of steel facilities and capabilities operating within the new global steel supply chains.

Herrigel makes five points that differentiate his steel narrative from the conventional story of the American steel industry.

1. In the New Deal political economy of oligopolistic mass production, price setting was essentially a function of collective bargaining.

2. It was the minimills in combination with the service centers that put the integrated mills into the crisis situation with imports.

3. In responding to similar global pressures, in the USA, protectionism was the policy response of the integrated industry, different from the cartelization approaches in German and Japan.

4. The restructuring in the 1980s and 1990s was a negotiated restructuring, a non-market-based approach. Independent economic agents responding to price signals do not match the historical case.

5. The combined result of the process, in fact, has had the result of recasting the boundaries of the firm.

In the mid-1990s, at the height of the minimills-displace-integrateds enthusiasm, there was a very different story with different expectations for the outcome from the Herrigel account. It told a compelling story of the steel industry getting its act together in response to a dramatically changed economic and technological environment. However, the world of steel changed again in dramatic ways within 2 years. In 1997–1998, the Asia–Russian Financial Crisis tipped the scales in another direction for restructuring of the global steel industry. The sudden and huge drop in currencies took the floor out from under the world steel prices and undermined much of the reconstituting of the steel industry, which had taken place in the 1990s. Some of the most productive mills in the world, such as Korea, saw their costs drop by 60–70%. Steel prices fell and cheap imports surged, particularly as the US dollar rose significantly. What ensued was 5 years of dramatically lower steel prices, which had the effect by 2001–2003 of driving dozens of North American steel companies, both integrated and minimill producers into bankruptcy.

This was then followed, with the rise of China as a key market and huge consumer of raw materials inputs of the industry, into an unanticipated surge in steel prices from $250 to $750 a ton in North America from mid-2003 to the end of 2004. It also brought on the unprecedented wave of consolidation of steel companies, which we see unfolding to this day.

The period of steel restructuring discussed in the 1980–1995 period saw the global industry undergoing what the Europeans called a Manifest Crisis characterized by an overhang of world steel capacity of 100–200 million tons in excess of demand, declining prices below the cost of production for much of the period and steel priced entirely as a commodity. What a difference a decade makes. Taking into account the staggering growth in China and India, after chronic overcapacity since the 1980s, there was actually a shortage of steel capacity globally by 2005.

Current commentators on the steel industry speak of the reconstituting of global steel on regional lines.5 The three major steel markets in the world—Asia, Europe, and North America—and the new global steel companies needing to have an active presence in all of them.

The steel industries of the BRIC in the first decade of the new century have been destabilizing the previous global steel industry configuration dominated by the USA, Germany, and Japan. China already destabilized the position of raw material inputs. Now, Brazil is shifting the boundary between raw materials and steel processing at the slab stage. India as it brings on 100 million tons of capacity in the next 10 years could trigger a resurgent export-led trade war.

We can expect that within this next decade, there will be a half a dozen truly global steel companies, each producing 100 M tons of annual capacity, and technological innovation within the three dominant steel regions—Asia, Europe, and North America—will be key.

The next 10–20 years of steel innovation will be led by integrated steel producers using iron ore and coal inputs and conducting a forced march of higher value-added steel products to satisfy new customer needs. The so-called dual-phase, high-alloy, high-strength steels will become widely applied in the market place. Some materials and products will even combine steel with other materials into new composite materials such carbon fibre. The new global steel industry will not be an island.