Will the government turn Stelco’s ‘act of faith’into one of contrition?

Peter Brimelow September 6 1976

Will the government turn Stelco’s ‘act of faith’into one of contrition?

Peter Brimelow September 6 1976

Will the government turn Stelco’s ‘act of faith’into one of contrition?

Peter Brimelow

“The next six months will be decisive,” says John Allan, president of the Steel Company of Canada. He squints unhappily in the glaring Ontario sunlight at the fields surrounding the vast new plant his company is building at Nanticoke, 40 miles southwest of Hamilton on Lake Erie. Stelco is already committed to the massive capital spending involved, but its executives are deeply affected by the crisis of morale that has developed throughout Canadian business about its future and the government’s intentions. Canada’s corporate leaders have spent a lot of time commuting to Ottawa recently, in an unaccustomed effort to communicate with the government. Results are about due.

Allan is a shy, kindly looking man, who has to be prevented by his PR man from seeking the solitude of the seat next to the chauffeur when escorting a visiting journalist around the 6,600-acre Nanticoke site. Hard hat perched incongruously above grey suit and black oxfords, he often wanders off to commune privately with the girders and coke piles, a small penguin dwarfed by the half-built structures looming like marooned icebergs in the distance. Nanticoke, Allan’s primary responsibility, is a dramatic bid by Canada’s largest steelmaker to transcend the limitations of its cramped Hamilton works. The first phase, to be finished by 1978, will cost $ 1.2 billion (in 1975, Stelco’s total assets were only $1.75 billion). By 1990 the company will have more than doubled its steel-making capacity. Company spokesmen talk proudly of the ramparts and woods with which Stelco will shield the plant, the modem pollution controls which are adding 10% to costs. A more traditional imagination must be impressed by the fact that Nanticoke is one of the biggest steel mill projects in the world, the first of its kind in North America for years.

Stelco’s story is a microcosm of capital spending in this country. Nanticoke is ultimately an act of faith by management in the future and in its own abilities. Despite elaborate planning, businessmen live uneasily with the knowledge that the future is still capable of destroying them. This is why what economists call vaguely “business confidence” is so important in ensuring that investment and growth continue. It doesn’t take much to disturb the climate of hope. The creation of the AntiInflation Board was only the most recent in a series of government moves to alter the rules of the economic game, and when the press is told of the AIB’S rulings before the concerned parties—which happened to

Stelco recently—the future must seem all the more perilous. Even the project’s’first phase is straining Stelco’s financial resources to the limit. Allan says the company can no longer think of diversifying abroad or into other industries. Bob Wong, who advises Toronto stockbroker May, Mikkila & Co.’s clients on investing in steel companies, has projected that even if Stelco goes much deeper into debt than in the past it could fail to raise the necessary cash by $100 million. Companies face this sort of risk all the time, and Wong believes that with imagination and good luck Stelco will solve the problem. But Nanticoke remains a graphic reminder of the perils through which major capital projects must steer.

In fact, the uncertainties facing Stelco must be daunting, even without the threat of further government intervention and regulation of profits and prices. The steel market has gone from shortage to glut in three years. While some experts predict a worldwide steel famine by 1980, others argue that Stelco’s expansion cannot be economic without the nearer-term demand that would be created if Ottawa made up its mind about the Arctic Gas pipeline project, an event the Canadian business

community regards with the same piety as the liquefaction of St. Janarius’ blood. The combination of inflation and historic cost accounting has been making return on investment a debatable concept. It also raised Stelco’s own costs—in 1973 phase one was projected at only $490 million. (The company had delayed its original plans from 1970 because of poor markets and fear of Finance Minister Benson’s tax reforms.) Moreover, Nanticoke is being built on the technological frontier, with contributions from a veritable design Olympiad, including Russians. There are predictions of inevitable start-up troubles, lasting perhaps a year. Already, there have been hotly denied rumors of trouble on the hot strip mill, which has certainly been shelved until the early 1980s, after having absorbed disputed amounts of capital. It’s not surprising one Stelco executive told The Financial Post recently that if the company was doing it all again, it wouldn’t.

And yet other Stelco executives express incredulity that one of their number could have voiced such a thought. They take it as a slight on their high reputation as steelmakers. Stelco’s top management, under a very strong chief executive, chairman Peter Gordon, are mainly engineers in their fifties, who joined the company after war service and have been with it ever since. They have been working on Nanticoke for 14 years, and it is their child. Criticisms are noted personally. “Winograd!” they hiss spontaneously when confronted with the claim that Nanticoke will hurt 1979-1980 earnings, naming the Greenshields Inc. analyst (Charles Winograd) who is identified with the (admittedly outnumbered) pessimists on Bay Street. But with journalists, if not analysts, Allan can blandly deny the problems. “This plant leads the world; this is one place where Canadians don’t have to take a back seat,” he says. “You should write about that.”

Canadian steelmakers want to make steel in Canada: it’s a visceral reaction, and one which helps to keep the economy moving. But they aren’t blind, and they have options. Although Nanticoke is now underway, it could be slowed down, offering relief to shareholders and dispelling the dream of a new town growing up around the plant, to say nothing of Stelco’s ambitions in the big league of world steel. Hearing such speculation, however exaggerated, leads inevitably to the conclusion that either the government doesn’t know how the traditional organizers of economic growth work or it has plans to replace them.