BUSINESS

STEELING FOR A SHAKEOUT

POOR SALES AND DEPRESSED PRICES CONTINUE TO BATTER CANADA’S HARD-HIT STEEL INDUSTRY

DEIRDRE McMURDY September 2 1991
BUSINESS

STEELING FOR A SHAKEOUT

POOR SALES AND DEPRESSED PRICES CONTINUE TO BATTER CANADA’S HARD-HIT STEEL INDUSTRY

DEIRDRE McMURDY September 2 1991

STEELING FOR A SHAKEOUT

BUSINESS

POOR SALES AND DEPRESSED PRICES CONTINUE TO BATTER CANADA’S HARD-HIT STEEL INDUSTRY

From his 20th-floor office atop the Stelco Tower in downtown Hamilton, Frederick Telmer looks over Lake Ontario’s western shoreline. Dominating his panoramic view is Stelco Inc.’s sprawling Hilton Works steel mill, the source of some of Telmer’s biggest headaches. As chief executive officer of Canada’s second-largest steel producer, Telmer has spent $127 million in the past year modernizing the Hilton plant and maintaining its aging equipment. Even so, steel industry analysts say that the 1,100-acre facility remains relatively inefficient, with productivity levels well below North American standards. Despite his efforts, even Telmer acknowledges that huge infusions of cash are unlikely to solve Stelco’s problems. “The steel business has a voracious appetite,” he says. “But you cannot just throw money at a problem—you have to use ingenuity.”

The dilemma confronting Stelco is common in Canada’s steel industry. For almost two years, the country’s steelmakers have been battered by poor sales and depressed prices. Layoffs have reduced the industry’s workforce to an estimated 35,000 from 44,000 in 1984.

While some analysts have expressed hope that steel’s downward spiral may be over now that the North American economy is inching out of the recession, the current situation is still grim: in the first five months of 1991, steel demand in Canada was 13 per cent lower than in the same period a year earlier. Meanwhile, two of the three leading manufacturers are still trying to recover from lengthy strikes. As a result,

Canada’s major steelmakers face contradictory pressures.

They have to upgrade their operations in order to produce better grades of steel and to remain cost-competitive with U.S. steel producers. But they cannot afford to

spend heavily on modernization programs as long as sales and prices remain weak.

The immediate outlook is gloomy. Many consumers are heavily in debt and, as a result, will likely be reluctant to resume spending on major steel-content items, such as cars and household appliances. As well, large companies are also short of cash and have postponed plans to construct new facilities or purchase new equipment.

The litany of problems has left steel company executives cautious about evidence that the economy is poised to rebound sometime soon. Declared Paul Phoenix, chairman of Hamilton-based Dofasco Inc., Canada’s largest steel producer in revenues and the fourth largest in North America: “I don’t see us pulling out of this in the near future. Orders have definitely stabilized, and there are glimmers of light—but I’ll believe it only when I see it.” Roger Phillips, president and chief executive officer of Regina-based Ipsco Inc., the country’s fifth-ranked steel producer, is also skeptical about the strength of the recovery. He added: “Things are bouncing off the bottom and you get a few blips here and there, but most of it is

just short-lived inventory rebuilding.”

The widespread pessimism is firmly rooted in the balance sheets of the major steel companies. Stelco lost $79 million in the first half of this year on revenues of $910 million, following a $197-million loss on revenues of $2.1 billion in 1990. To finance new modernization programs and pay off some of its debts, Stelco last week announced the sale of $230 million in new shares. Dofasco, meanwhile, is still trying to recover from the problems caused by its 1988 acquisition of rival Algoma Steel Corp. Ltd., a Sault Ste. Marie, Ont.-based producer that has been suffering from operating difficulties, outof-date equipment and a history of poor labor relations. Unable to resuscitate the company, Dofasco wrote off its entire $713-million in-

vestment in January and is now trying to work out a survival strategy for the company with an array of federal and provincial officials, creditors and representatives of Algoma’s 7,850 unionized workers.

In the long run, the Canadian steel industry is facing a significant shakeout. Phillips notes that the strong Canadian dollar has made Canadian steel unattractive in export markets, burdening the industry with an overcapacity that will have to be eliminated. “Not all the players are in good shape and not all of them can be supported by the domestic market,” he adds. “They need to export. And if they can’t export, they will be driven out of business.” One

possible casualty is Algoma, whose managers are likely to seek a massive infusion of public money to enable the company to stay in business. Several other small steel-product manufacturers across Canada are also awash in red ink and may not survive.

Stelco’s Telmer, meanwhile, is experimenting with a variety of new approaches in order to recover lost ground. Hoping to offset steel’s cyclical performance, company officials launched an unsuccessful diversification campaign in 1988. The strategy included a $15.5million investment in Clarus Corp. of Toronto, a now-bankrupt holding company, and the purchase of a 50-per-cent stake in Windsor-based

Kautex Canada, a manufacturer of plastic gasoline tanks. But now, the company is retrenching. Acknowledged Telmer: “It became apparent that we were a steel company, not a conglomerate. We are now consolidating.”

Another Telmer initiative is repairing relations with the company’s 10,000 unionized workers after last year’s bitter 93-day strike. To expedite the healing process, Stelco recently introduced a performance incentive program to reward workers for exceptional productivity. Telmer says that the 1990 strike was “a painful process.” He added:

“We’ve learned that we have to work together better, and that our employees have to take a stake in our business.”

But labor relations in the steel industry are unlikely to improve significantly as long as steelmakers continue to reduce their workforces.

Stelco, which had over 26,000 employees at the beginning of the 1980s, has since cut its ranks to about 13,700. For its part, Dofasco recently enticed 1,000 workers and managers to accept early retirement, leaving it with 9,300 employees, compared with 12,500 in 1980.

Ipsco’s Phillips is among those who argue that a reduction of the steel industry’s workforce is essential to its survival. “We all have to learn to work smarter, not just harder,” he adds. “But at the same time, you cannot just walk in and cut when you want. It has to be handled with humanity.” To ease the process, steel companies and labor groups across the country launched a co-operative program in 1988 to develop retraining and outplacement programs for laidoff workers. “We don’t want former steelworkers to end up flipping hamburgers,” said Leo Gerard, Canadian director of the United Steelworkers of America. In fact, he says, about half of the 6,000 people who have taken part in the program have found jobs that pay them close to a steelworker’s typical wage— § about $27 an hour. Gerard g adds that his union is braced * for further job losses. “It’s an 2 inevitable process in all man2 ufacturing industries,” he g says. u;

Leading U.S. steelmakers f have already successfully z made the transition to more ¿ efficient production. Cong fronted with a strong U.S. ^ dollar and increasing compe2 tition from steel producers in 2

such low-wage countries as Korea and Brazil in the mid-1980s, U.S. steel producers were forced to shrink their operations, increase productivity levels and invest an estimated $21 billion in new equipment and technology. In Canada, however, the decision was postponed because exchange rates in mid-decade favored Canadian exporters. Said David McCracken, a steel industry analyst with Sanwa McCarthy

Securities Ltd. in Toronto: “For years, the weak Canadian dollar masked our inefficiencies and fooled us into thinking we were competitive. Now, all of the flaws are coming to light.”

One of the strongest challenges to Canada’s steel producers comes from the highly efficient mini-mill segment of the industry. Mini-mills, which first appeared in the United States in

1989, melt reclaimed scrap metal in electricarc furnaces. That process is both cheaper and more efficient than the traditional steelmaking method, in which raw ingots are melted in a coal-fired blast furnace.

Although the quality of steel produced by mini-mills still lags behind that of large integrated firms, the cost is at least 20 per cent lower. Moreover, owners of the technology are constantly refining it. Declared Dofasco’s Phoenix: “The new mini-mill technology is developing rapidly— almost daily. You have to spend money all the time just to stand still.”

To offset the pressures of rapid and expensive changes in technology, both Stelco and Dofasco have formed joint ventures with Japaneseowned partners. Stelco has teamed up with Mitsubishi Canada to operate a $200million plant in Hamilton that upgrades the finish on steel sheets used to make automotive body panels. Dofasco, meanwhile, has entered into a similar arrangement as part o owner of a $240-million steelgalvanizing facility now under construction in Windsor, Ont., with NKK Corp. of Japan and National Steel Corp. of Pittsburgh.

But Dofasco and its domestic competitors are clearly waging an uphill struggle. According to a study that was released in May by the Canadian Steel Service Centre Institute, which represents steel producers and buyers, about 130 Ontario manufacturers who used to account for a combined demand of 400,000 tons of flat rolled steel a year have gone out of business or left the country in the past few years. In addition, the strong Canadian dollar and the disruption of supply because of strikes last year at Stelco and Algoma have allowed U.S. and other foreign competitors to make significant inroads in Canada. The share of the domestic market captured by imported steel jumped to 25 per cent in 1990 from 19 per cent in 1989. Said Phoenix: “Once you lose a customer, it’s hard to win him back. It can be done, but it’s tough.” Far from savoring a recovery, Phoenix and his competitors may have to fight even harder in the years ahead simply to hang on to their market share.

DEIRDRE McMURDY in Hamilton

SOURCE: LOEWEN, ONDAATJE, MCCUTCHEON & CO. LTD.