The steel mill and the auto plant were the icons of the 20th-century industrial economy. By the 21st century, many people viewed steel as Big, Ugly and Gone to China. An informed observer would have the picture that in the 1980s the traditional big steel mills were overtaken by the modern smaller “minimills.” Then, after 2000 the whole business shifted to China. Not so. In manufacturing, The World Is Not Flat! Public discourse about globalization is dominated by simple models such as the existence of Chinese low wages means all manufacturing will inevitably re-locate there. The real world of industry is much more complicated and even hopeful. The steel industry has continuously been forced to remake itself, which it has done. This book describes those developments and dynamics.
Economic discourse in our time is dominated if not preoccupied with the issue of innovation. This is seen rightly to be the key to 21st-century competitiveness. The somewhat counter-intuitive facts are that, notwithstanding the stunning accomplishments of modern biomedical technologies, over 80% of innovation in the economy takes place in manufacturing.1 Steel is the material backbone of manufacturing. So, in turn, the underpinning of manufacturing innovation lies in materials science and engineering, whose base is in steel.
The rise of China was “the” steel story of the past decade. It now has about 45% of the world’s capacity, and taking the Recession into account, China may have close to half the operating capacity currently producing. But the rise of China has not fundamentally changed how steel is produced. What it has done is dramatically change the input prices for producing steel, primarily for iron ore, coal, and scrap. This has had a destabilizing effect on how the industry operates comparable to the disruptive Steel Trade Wars of the 1980s and 1990s.
There has also been a more subtle but critical technical change. With the rise of China, integrated steelmaking has risen again to the forefront of innovation in steel. Instead of further eating into integrated market share, minimills are now faced with equally challenging cost pressures from the dramatic rise in scrap prices as well as escalating energy prices. Energy prices alone now equal or exceed labor costs in steel production. And, at the bottom end of the commodity food chain, new micro-mills are starting to do to minimills what minimills did to integrated mills 40 years ago.
Internationally, the Brazil story may overtake the China story in steel in the next decade. Brazil’s near monopoly on the highest grades of iron ore in addition to its policy agenda of controlling more of the value chain means that the boundary between steelmaking and raw materials may be redrawn at the slab stage. This could have a potentially greater impact globally on how steel is made and marketed than the rise of China.
Who Needs Steel?
We all need steel. It is the backbone material for manufacturing. We still live in a world where we primarily consume “stuff.” It is estimated that 80% of consumer goods contain steel. In addition, if you are concerned about the environment then there should be more steel in your life. It is the most recycled material in the economy; 70% of steel is recycled compared to about 12% of aluminum. Steel’s physical properties can withstand almost endless recycling.
Steel companies and national industries have also had to reconstruct themselves due to changing political, economic, and technology factors. For instance, the European Union was founded on the European Coal and Steel Community. Steel had been the cornerstone of modern warfare and Europe sought to put its troubled past behind it by seeking to unify this industry on a continental basis as a means to peace and prosperity.
There have been three major destabilizing forces in the past 50 years that have challenged steel companies and steel management around the world.
The first major postwar steel destabilization factor was trade. For the first half of the 20th century, steel was a stay at home industry. However, every emerging country wanted its own flag, airline, and steel mill. The rebuilt Japanese steel industry was the first that had a capacity that well exceeded domestic demand and required large volumes of exports in order to be profitable. This was the fundamental, though not the only, backdrop to the Steel Trade Wars of the 1970s and 1980s.
The second disruptive change was in technical steelmaking itself and the rise of the so-called minimills. These were small, more efficient mills making steel totally from scrap. The U.S. Steel industry became ground zero for commercialization of this new steelmaking technology. They started at the commodity end of the market, producing rod for the construction industry. At first this was a minor irritant for big existing steel companies. But, by the later 1980s technology development by the minimills allowed them to move into the higher value added and higher margin flat-rolled steel product markets such as automotive. Just prior to the 2008 Financial Crisis, minimills were producing half the steel in the United States.
The third impact involves the rise of China. Virtually no one in the traditional steel industry saw it coming. China, with a stunning level of growth in the past decade, now has the ability to determine the marginal price of flat-rolled products around the world and has emerged as a significant player in export markets. However, the real disruptive impact of China has been on raw material prices: iron ore and coal.
Why People Should Read This Book
People should read this book because steel continues to be a huge factor in the economy.
The American steel industry directly employed more than 139,000 workers and contributed $17.5 billion in value added to gross domestic product in 2011. In addition, it contributed to household incomes by generating $121.4 billion in wages and salaries across the economy, the purchase of $20 billion in materials from other industries, $8 billion in services, $5 billion in energy products, $4.5 billion in machinery, $4.4 billion in wholesale and retail trade.
The total economic impact of steel in the economy is even larger. Its net contribution to the overall economy was $246 billion. Every job in steel creates seven jobs in the US economy. In total, the steel industry supports 1,022,009 jobs across the economy as of 2011.2
What kinds of other industries and jobs does the steel industry support? Economists use demand multipliers to estimate how much a change in one industry has on another industry, for example, how much an increase in the level of activity in the steel industry will have on demand in the machinery industry. Readers would not be surprised to learn that steel has important impacts on industries such as machinery and mining. They would be surprised to learn that steel has an even greater impact on jobs in professional, scientific and technical services, education and health care.
Total economic activity supported by steel, including things such as the impact of taxes paid by the steel industry, produces an 11.298 employment multiplier. For all these reasons, people who care about the economy and its future should try to understand the Steel Story.
There are two individual profiles for the kind of readers who would benefit from reading this book. First is a student in a managerial economics class to whom it might be assigned as a supplemental reading. The second is a person who is an investor who knows little about it and reads the book to get a better grasp on the steel industry. However, there is a much broader audience of people concerned about the implications of globalization of the economy. For them, learning about this specific industry may suggest lessons for a perspective on the future of many industries.
For instance, profit is critical to steel companies. Without it they would not be viable. At the same time, the challenges and decisions confronting decisionmakers in the industry are not driven by short-termism and simplistic “shareholder value” ideologies. Companies are facing on-going struggles to continue to exist, keeping up with technological and market changes, making better steel, improving quality and productivity. Even in the heyday of Big Steel, profit was a central but not exclusive issue for steel executives, albeit that they were riding a wave of postwar expansion, oligopolistic pricing and an absence of significant competition. All of this changed in the 1970s. New competitors, loss of price leadership, new regulatory challenges from the environmental and employee benefits side all hit the large integrated producers at once. The 1990s saw a selling off of assets and de-verticalization in the name of realizing short-term shareholder value. The rise of China and the impact on raw materials destabilized the reconstituted mills. The new steel ownership around the world understands that it will realize shareholder value only if it gets the business operations, technology, marketing and human resources right. This is a particular challenge for large, capital intensive, environmentally exposed companies like steel. However the lessons extend to all other industries in the new global economy.
The Perspective of This Book
It is the perspective of this book that the global steel industry in the past decade is undergoing its second great re-organization in the past 75 years.
The first was the post-World War II steel restructuring under the direction of the Allied Powers as described in Gary Herrigel, Manufacturing Possibilities (2010). He challenges the traditional view of the steel industry in the postwar period. The pre-World War II steel industries of Germany, the USA, and Japan were all characterized by a dominant integrated producer surrounded by smaller, specialized firms. Following the war, they were decentralized into an industry dominated by a small set of mass production, oligopolistic, large steel companies. But in the 1970s and 1980s, in all leading countries, traditional integrated operations have been rationalized and minimills deployed a radically disruptive steelmaking technology to gain a major market share. By the first decade of the 21st century, the postwar steel industry stood on its head. A limited number of highly specialized integrated firms were surrounded by standardized minimill producers.
The subject of this book is the next stage of these developments. The global restructuring of steel in the past decade has produced a new configuration of core specialized firms and secondary commodity firms. How are these core primary steel producers now being managed and coordinated after the global steel consolidation? And, how do steel companies learn? National steel industries have become merged into global supply chains. One’s position in a contingent collaborative supply chain is correlated with learning capabilities. New global steel companies are clearly embedded within this framework.
Globalization and the Steel Industry
We will be discussing steel as a globalized industry.
Three phenomena are at the heart of globalization. The first is the internationalization of ownership structures. This is most evident over the past several years, among steel-producing companies where there has been a change of ownership in virtually every steel-producing operation. This change in ownership in most cases involved a shift from domestic control to international control.
A direct consequence of the transformation of ownership structures is significantly increased international flows of not only capital and technology, but also managerial norms and talent. While attention most often focuses on capital and technology, the adoption of international managerial norms and the international flows of talent may have the most far-reaching impact on operations management. These include productivity benchmarking, new approaches to work organization and distinct strategies related to training and human resources development.
The second phenomenon that defines globalization is the accelerated integration of international markets on a regional basis such as the North American Free Trade Agreement (NAFTA) steel market. The signature development that marks this integration is a sharp increase in both exports and imports of steel products. This process accelerated in the past decade and is the basis for many people’s perception that the industry has “disappeared”. In reality, one kind of industry disappeared. But it was replaced by another.
The merger wave in the industry resulted in major changes to facilities: some were closed, others expanded, many became more specialized. This is reflected in the increased export orientation of the industry. The rationalization of capacity drove a step-function increase in productivity that reduced overall employment and is also reshaping the skill needs of the steelworker of the future, as discussed in Chapter 11. Although globalization led to an increase in the steel industry’s export orientation, it would be a serious error to discount the continuing importance of the domestic market. Even with exports taking an increased share of output, the domestic market still accounts for at least half of industry shipments. As discussed in Chapter 7, the industry is still vulnerable to unfair trade practices, such as “dumping”.
The third phenomenon at the heart of globalization is a marked increase in the scope and reach of international supply chains. The logic driving the globalization of supply chains is the competitive advantage that derives from achieving an approximate symmetry between labor intensiveness and skill availability on the one hand and labor cost on the other. The migration of low-skill, labor-intensive production processes to lower cost jurisdictions is not a new story. What is new is the increase in the scope and reach of international supply chains to include production processes that were much less vulnerable to offshoring prior to this decade.
In summary, for steel production, the impact of globalization is most evident in the internationalization of ownership, the rationalization of production and the adoption of international performance benchmarking. These developments have fundamentally altered productivity conditions over the past five years and will reshape human resources requirements in the industry in the future. Labor costs have never been a static figure in the industry, they vary over time. Currently, owing to the relatively low share of labor in total production costs (approximately 15%), the industry is much less vulnerable to pressure to relocate production to low-cost jurisdictions. However, the internationalization of production has increased the intensity of competition for investment and technology within global companies. This puts new levels of pressure on workplace performance.
How this Book Is Organized
The book tells the story of a huge, complicated industry. It begins with an introduction to the making of steel, a brief history of the metal and its usage and then a quick summary of the history of the industry in the past century. As we proceed through the topical chapters, there is inevitably movement back and forth between historical periods and developments of companies and technologies. Unfortunately, it is not possible to do all of the history in one place. Often, a chapter will begin with a description of a current situation or fact that will strike the reader as unfamiliar or counter-intuitive. The chapter will then go back in time to give the history behind the facts to make the current situation more understandable for the reader. Utmost effort is made to make the context clear whenever there are such references.
Chapter 2 seeks to give the general reader an introduction to Steel Basics, the metal, its production and steel companies in a historical context.
Chapter 3 describes how steel companies operate, the objectives of executives, what global consolidation has meant in terms of benchmarking and coordination. Because steel is an intermediate product, it also describes steel supply chains, upstream to raw materials, and downstream to steel-consuming industries.
Chapter 4 talks about how steel industries operate and how they have been re-organized over time. It also describes how steel firms are positioned within regional markets and in the global economy.
Chapter 5 describes how steel product pricing has evolved and the new sources of competition, pressures from imports, and by the minimills. It also discusses the impact of surging raw material prices, principally coal and iron ore, on the costs and margins of steel companies.
Chapter 6 discusses the challenging history of steel industry labor relations, which have shown steel unions and management on their best and their worst days. It also identifies human resource issues including legacy health and pension costs, and the need to find new forms of employee engagement and leveraging of production knowledge on the shop floor.
Chapter 7 summarizes the troubling story of steel trade disputes, particularly the vexatious issues of foreign dumping and antidumping trade policies as applied to steel. It also discusses the rise of China as a new challenge for global steel and, as illustrated by the Chinese case, the continued role of the state in the steel industry.
Chapter 8 examines steel and external market forces. Is there a steel growth story? How does the industrial cluster associated with steel facilities work? It concludes with a discussion of new global steel and manufacturing supply chains.
Chapter 9 discusses steel technology developments and its evolution from company R&D facilities to traded knowledge to global consortia. It also situates steel in the future of materials competition.
Chapter 10 discusses regulation of the steel industry from antitrust policy to environmental policy. It also describes the importance of industrial standards such as SAE and ISO.
Chapter 11 discusses steel in the postindustrial, knowledge-based economy. Specifically, it looks at how steel companies learn and how knowledge networks arise between steel companies and their customers.
Chapter 12 concludes with some general observations about how further restructuring of the steel industry may unfold, its linkages to the future of manufacturing, materials competition in the new economy and the potential impact of public policy on the industry.