At June’s Steel Success Strategies XXII, delegates and speakers discovered a wondrous new continent—North America.

While China remains at the forefront of all worldwide steel discussions, the renewed interest in North America, and in particular the United States, was one of the key themes of the two-day conference sponsored by World Steel Dynamics and American Metal Market.

One panel of North American executives was titled “Age of the Americas.” But more indicative of the continent’s renewed place on the steel landscape was the list of speakers earlier in the day.

The morning presentation was delivered by Prashant Ruia, managing director of Indian steelmaker Essar Steel, which in the span of three days in April agreed to acquire Canada’s Algoma Steel and Minnesota Steel, along with its 1.4 billion tons of iron ore. Ruia declined to answer questions about his company’s reported interest in another Canadian steelmaker, Stelco.

Following Ruia’s remarks, a panel of global steel company executives took to the podium for a discussion on international steel. Of those five executives—Georgy Eliseev of Russia’s Evraz Group, Karl-Ulrich Kohler of ThyssenKrupp Steel, Antonio Marcegaglia of Italy’s Marcegaglia, Alexei A. Mordashov of OAO Severstal, and Regulo Salinas of Mexico’s Termium Hylsa—only one did not have a significant and growing presence in North America.

“We believe the United States has a lot of advantages,” said Evraz’s Eliseev, whose company entered the U.S. market with its purchase of Oregon Steel Mills. “It is a good, growing market.”

Even Marcegaglia, the lone representative of a company without North American ambitions, recognized the appeal of the NAFTA countries. “The main reason [North America is appealing] is market sophistication; it is relatively protected and it is more dynamic than other economies in general.”

Such thoughts were echoed later in the afternoon by a panel of heavyweights from the domestic steel industry: Jim Bouchard of Esmark and Wheeling-Pittsburgh Steel Corp., Keith Busse of Steel Dynamics Inc., Dan DiMicco of Nucor Corp., Vadim Makov of Severstal NA and Lou Schorsch of ArcelorMittal.

Busse outlined four reasons why the new North American steel industry differs from the pre 21st century model. Busse said the new era is characterized, first of all, by a new age of management.

“We see a rationalized North American steel industry that is more efficient. The industry is in a better position to adjust supply to more accurately track demand,” Busse said.

North America is also in a better position globally, with modernized facilities and work rules in both unionized and non-union facilities that make it more cost-competitive.

While the continent has always been resource rich, with abundant supplies of iron ore and coking coal, North America is also well ahead of countries later to the industrial world in its supply of scrap, he said.

Additionally, North America’s steel companies have taken full advantage of new technologies, automated processes, computerized controls and other techniques that allow for the production of steel with “substantially less manpower.”

Finally, North America has “new opportunities for growth, which a number of foreign investors have figured out as well.”

Makov’s company is one of them. Besides its involvement in Severstal North America, the parent company is also the primary investor in the new SeverCorr mill in Mississippi. Makov said the lure of North America is pretty apparent.

“I believe the North American market remains one of the most attractive due to high concentration, market discipline, growing economy and investment cycle,” said Makov, chairman of Severstal North America. “And steel prices are very high relative to the rest of the world.”

Though now a steel producer himself, Bouchard delivered his presentation from the view of a service center operator. He gave high marks to the four other mill executives on the podium for their performance over the last few years.

“The steel producers in America have demonstrated intelligence, patience and consistency to create a better steel industry for the industry as a whole, for the service centers and distribution network, and most importantly for our customers,” said Bouchard, the CEO of Chicago-based Esmark.

Bouchard said the mills’ new discipline was evident this year when the U.S. steel market slowed. “Had mills been running to market share as they did in the past, or getting an order and not making money on those orders, the inventory pipeline would be flush with steel everywhere. We’d have an unprofitable service center network. We’d have an unprofitable mill network. That has not happened.”

Despite the raves, Schorsch, the CEO of Flat Carbon Americas for Arcelor Mittal, said there are some concerns. Heading the list of worrisome issues is the potential for excess capacity. “Everybody looks at the dire periods of the past, and one of the drivers was the fact we had too much capacity in the marketplace.”

Integrating China into the world economy is also a worry for North American steelmakers. “We aspire to do this in a way that leverages the opportunity provided by growth in China to bring supply in China more in line with demand,” Schorsch said.

Global warming and the environment is an issue that concerns all industries, including steel, Schorsch said. To that end, leading steelmakers have to convey the importance of the steel industry as a solution to the problem.

The final presenter of the American steelmakers was Nucor Chairman, President and CEO Dan DiMicco, who said the new era of the American steel industry is rather simply defined. “This age of American steelmaking is all about profits.”

DiMicco feels it is imperative for all players in the business to continue to focus on low-cost, high-quality products. And, more importantly, the industry must never stray from the profit-driven business model. “The last thing any of us needs is a return to the good old days,” he added.

Economist Gives Balanced Look
at China’s Need for Rebalancing

For 21 years, delegates to the Steel Success Strategies conference simply listened to the viewpoints of industry leaders. At this year’s conference in New York, they were also able to express their own opinions.

Hand-held electronic devices were distributed to attendees so they could answer questions posed during several segments of the conference. The electronic polling provided instant feedback on the wider industry’s view of important issues of the day.

Not surprising in a conference of steel men and women, a few of the questions concerned the growing steel behemoth that is China. The answers were illuminating.

When asked if the Chinese government would be successful at holding down steel exports, exactly two-thirds of the delegates answered “No.” The results were even more definitive when the delegates were asked if they believed the Chinese government would be successful at holding down steel-containing exports. To that question, almost 90 percent of the delegates again responded in the negative.

According to one of the day’s speakers, Louis Kuijs, the delegates answered correctly. At least in the short term.

Kuijs, a senior economist for the World Bank, was the luncheon speaker at the conference sponsored by World Steel Dynamics and American Metal Market. Though he doesn’t focus on steel, Kuijs works on macroeconomic issues at the World Bank’s China office, giving him an intimate working knowledge of China’s economy and government. He has watched the incredible explosion of the Chinese economy over the past 10 years and sees no reason it will begin to slow any time soon. Nor does he see any indication the Chinese government will take serious steps to slow it.

Kuijs says China’s growth is not just historic in its size and speed, but also in the way it has developed. Three characteristics of China’s economy make it stand apart from most other developing countries.

First, Kuijs says, is the amount of investment that has taken place, up to 44 percent of gross domestic product. “All this investment makes the pattern of growth very capital intensive, which is a bit odd for a country that’s supposed to have low labor costs as its main comparative advantage and is supposed to have a labor-intensive kind of growth.”

Another differentiating factor is the weight of industry in the overall economy. Industry makes up almost 50 percent of China’s production. “There are no other countries with such a large industrial sector.” Additionally, the growth in industry has taken the form of increased productivity as opposed to new jobs.

The final reason is the one that most concerns steel executives—China’s large trade surplus. Most rapidly growing countries have deficits. The surplus stands out even more considering the heavy amount of investment.

Kuijs said China has achieved such a rare state through specific policies that emphasize industrialization over all else.

“Local governments in China care about growth, growth, growth. Policies in China have been favorable to industry. In some ways it is good, in some senses it has gone too far,” Kuijs said.

The government’s policies include an investment in infrastructure to a degree that exceeds many more-developed countries. In the pursuit of industrialization, the government has allowed the underpricing of the inputs that go into industry.

“If you want to build a factory in China, everything you need is cheap. You have subsidized energy. You have cheap land. Environmental impact—you don’t worry about it,” he said.

State-owned enterprises, which still comprise a heavy portion of industry, need not pay dividends back to the state on profits, allowing the companies to plow the money back into investment.

The Chinese government has been able to provide such favorable conditions for industry by ignoring other aspects of public spending. “The bottom line, when you look at spending, a lot of the money has been spent on capital goods, as opposed to the kind of spending we are used to such as health care and education.”

These policies, combined with entrance into the WTO, have led to China’s tremendous growth. Moreover, “all of this economic growth, in contrast to what most economists always thought, turns out to be pretty sustainable. China has grown by about 10 percent, and there is no obvious reason why that growth can’t be 10 percent this year and 10 percent next year.”

Another misconception, Kuijs said, is that China’s economy is somewhat fragile because banks have heavily financed it. The banks have had a far smaller role than imagined, he said, with the companies themselves doing the bulk of the investing.

These factors, coupled with China’s ability to keep supply and demand in balance, tell Kuijs that fears about China’s economy overheating are largely unfounded. “The government is quite happy with the way things are going right now.”

Naturally, there are downsides to China’s development, which are increasingly getting the attention of Chinese policy makers.

Though savings are sound at the moment, the amount of investment is likely not sustainable in the long-term. Additionally, industry-based economies are heavily dependent on energy and natural resources and can cause a strain on the environment. There are signs that some in China are starting to take notice of those issues.

“There is an increasingly assertive local press that is pointing out the problems China is facing, from local spills of poisonous materials in a lake to global issues like climate change. The environment is increasingly on the agenda,” Kuijs said.

Unfortunately, it takes more than just the attention of the central government to tackle the problem. Two years ago, the Chinese government issued an edict banning subsidies to industries that are heavy users of electricity, but 14 of the provinces have ignored it and are still pursuing the strategy.

Other downsides include a widening economic gap between business and labor, resulting in low levels of domestic consumption, he said. “Household income’s share of the overall economic pie has been declining over time as business has been doing so well. A lot of the demand for goods produced in China is not coming from China.”

Finally, the boom has not created enough jobs in the cities, and China’s demographics remain too heavily skewed to the countryside and agriculture.

Though conceding the Chinese economy does need rebalancing, Kuijs does not believe any dramatic actions will or should be taken by the Chinese government. “We think there will be a gradual alignment of policies in China behind the objective of rebalancing the economy,” he said.

Though he acknowledged that the Chinese exchange rate needs to be revalued—as U.S. steel executives have argued—Kuijs cautioned the industry about expecting either a sizable increase or a dramatic effect from any repegging of the yuan.

“A stronger exchange rate by itself is not going to take away China’s large current account surplus,” Kuijs said. “Other measures are needed. In our view, a whole array of more structural measures are needed to change the way has China has grown.”