SeverCorr’s ambitious plan to make automotive-quality steel in an electric arc furnace environment has drawn the watchful eye of the entire steel industry. But it isn’t the only way North America’s newest producer is changing the steel game.

The Columbus, Miss. steel mill is developing a new strategy of distribution, one that starts with two hand-picked service centers that will be the only processors in the neighborhood.

While SeverCorr is in the middle of launching its 1.7-million-ton capacity facility, Heidtman Steel Products Inc. and New Process Steel are getting ready for a 2008 opening of their own processing and distribution centers directly adjacent to the mill. The two were tabbed by SeverCorr as dedicated, though not captive, distributors, and to serve as the starting point for the mill’s distribution network in the South.

Long before it opened, SeverCorr invited a handful of service center companies to Mississippi to discuss the possibility of building processing and distribution centers on-site. Initially, Heidtman Steel and Kenwal Steel Corp. were chosen as the company’s service center partners, though Kenwal opted out of the project and was replaced by New Process.

While other companies may ultimately locate a service center within miles of the SeverCorr facility, Heidtman and New Process will be the only distributors to sit side-by-side with the mill in the Mississippi Steel Technology Center (MSTC), says Mike Wagner, SeverCorr’s chief commercial officer. “When we set up the industrial park, we considered not just the needs of SeverCorr, but of the service center side, as well. If people were going to come down here and invest $20 million to $40 million in capital, they should get something for that. They shouldn’t have competitors on either side of them.”

Heidtman will serve as the primary processor of SeverCorr’s heavy-gauge products, while New Process will concentrate on the lighter-gauge material, thus posing little competitive conflict.

“The overlap is very, very small,” says Wagner. “New Process is going to be predominantly slitting and cut-to-length lines, cold-rolled and coated. Heidtman will be primarily hot-rolled and pickled and oiled.”

With few areas of competition, the companies will be expected, though not required, to work cooperatively. “They are strongly encouraged to work together. They will do processing for each other,” Wagner says.

The partnership philosophy resonates throughout SeverCorr, starting at the top. SeverCorr is a venture between its primary owner, Russian steelmaker Severstal, and steel industry veteran John Correnti. It formed in 2003 with the idea of delivering wide, automotive-quality flat-rolled to the growing southern market.

 “We believe in the low-cost hot-band cost structure, which is why we went with the CSP [thin-slab] caster. But to get into the higher-end markets, we needed to use more sophisticated finishing equipment typically found in integrated mills,” Wagner says. “We’re the first mill of its kind to take an electric-furnace hot side and marry it with integrated-type finishing equipment.”

Since the company’s desire was to produce the highest quality steel, the kind used in exposed automotive, it chose the equipment that could meet that goal, including a combination galvanized/galvannealed line, a caster cable of producing 74-inch wide coils, and a continuous pickle line coupled to a five-stand tandem cold mill to produce the best possible surface finish.

Perhaps most important, the company designed the mill with the flexibility to run different mixes of inputs. “Electric furnace mills typically run 80 percent scrap. We have the ability, when we’re running certain products, to run 75 to 80 percent virgin iron and 20 percent scrap,” Wagner explains.

“It’s never been done before because nobody has invested in it,” he adds. “None of what we have out there is necessarily a technology flight. It’s an evolution of the technology. We’ve taken the best of everything and molded it together.”

Once fully operational, SeverCorr will have 1.7 million tons of capacity, with future expansion possible to 3.4 million tons.

Adding expertise to the mix
Crucial to developing a world-class steel facility in virgin territory was finding the right people. SeverCorr received applications from steel industry veterans  all over the country. Many of its business and administrative staff were found locally, including several from a recently closed BASF facility nearby.

Attracting them to a mostly rural area of Mississippi could have been a challenge, but it wasn’t. “The days of someone moving for a job and living just anywhere are gone. You’ve got to have something to attract them,” Wagner says, pointing out the nearby Mississippi State University and its business and engineering programs, attractive weather and relative proximity to the Gulf.

But for many of the steel industry vets, the chance to get started on the ground floor was the most enticing factor.

“You come into an organization like this and you feel like you can make an impact,” says Tom Marchak, general manager of sales for the company. “It’s very refreshing, having been around integrated mills with all of their signoffs.”

“We were pleasantly surprised at the interest and qualifications of the talent we saw here in all aspects of the hiring process,” Wagner says. “People recognized we are a brand new company. We don’t have a corporate office that tells us what to do. We really are a blank sheet of paper for those who wanted to come in and start up an operation, start up a piece of equipment, train people to do it the way they want it done.”

And the South shall rise
The attraction of the South to the steel industry is much easier to understand. The region has become home to a growing manufacturing presence, particularly in the automotive arena. And while there is steelmaking capacity in some southern states, automotive grade steel is not produced there. “We bring a product to this region that’s not readily available, the wide, high-quality flat-rolled,” Wagner says.

SeverCorr anticipates its new mill will supply steel in a 400- to 450-mile radius around its northeast Mississippi location and into Mexico. Within that radius are 19 of the South’s 25 auto plants. Ultimately, SeverCorr hopes to become one of the prime suppliers to those carmakers. Company projections call for 30 percent of its product to go into automotive.

SeverCorr has assurances from SMS Demag, its chief equipment supplier, that the mill will indeed be able to produce the flaw-free steel required for exposed automotive applications. “We’ve had lots of conversations with the automotive guys,” Wagner says, though SeverCorr has no firm supply agreements with them yet. “Once things are fully operational, the rest of the discussions will go forward.”

Others in the steel industry are confident that SeverCorr can successfully deliver on its promise. “I know a number of people who believe SeverCorr can put in a high-quality, cold-rolling facility,” says Chuck Bradford, the respected industry analyst from Bradford Research/Soleil Inc. in New York.

Service center executives with facilities in the region say they are confident the experienced management team at SeverCorr will be able to deliver a quality product, though some doubt the market needs the additional capacity and worry about its effect on prices if demand for steel softens.

Expressing the common attitude among service center executives, Bill Jones, president of O’Neal Steel in Birmingham, Ala., says, “As long as they’re going to be there, we welcome them to the South. I’m sure we’ll get product from them.”

Since the company announced its plans to construct the mill several years ago, more than 2.6 million tons of new consumption has been announced for the area SeverCorr will serve, including expansion plans from Toyota, Isuzu and National Steel Car Co. SeverCorr expects to have significant advantages in supplying these and other manufacturers in the South.

Obviously, its close proximity gives it a decided advantage over integrated mills in the North and foreign mills that supply higher-quality steel. In addition, SeverCorr expects to be one of the low-cost leaders. “When you look at the production range and the markets we’re going after, all of our competitors are typically higher-cost producers. We should have a production cost advantage and a logistics cost advantage,” Wagner says.

New concept in cooperation
In many ways, SeverCorr’s courtship with the South is a marriage of big ideas. It joins an international steel company with a veteran of the North American steel industry. It couples the low-cost structure of EAF mills with the superior steel of the integrated producers. And on the distribution front, it unites the strengths of the North American supply chain with a touch of European distribution.

“We’re a combination of the European model and the North American model,” Wagner says. With New Process and Heidtman on-site, the model borrows a bit from the adjacent distributorships prevalent in Europe. But unlike in Europe, the mill does not own or control its distribution partners and has no plans to in the future.

SeverCorr opted to stick with a modified North American model of independent distribution for a few important reasons, Wagner says. Chief among them is the fact that other companies are more qualified for that work.

“We’re good at making big coils and moving those coils out the back,” says Wagner, whose mill can produce 88,000-pound coils. “They’re the experts in distribution, and we want to tap into that.”

SeverCorr’s other reason is driven by competitive realities. “If you own some distribution, then how do you sell to the other service centers? You compete with them. Once you cross that line, there are issues,” Wagner says.

SeverCorr’s projections call for 65 to 70 percent of its output to move through service centers, with the rest going directly to OEMs. Of the steel that moves through service centers, less than 25 percent will be processed and sold by its MSTC partners. Thus despite its joint-venture-like relationship with Heidtman and New Process, SeverCorr is counting on the traditional supply chain to get the bulk of its product to market.

The concept of a mill partnering with select service centers to share in the production and logistical benefits of occupying the same manufacturing site was a powerful incentive for Heidtman. Based in Toledo, Ohio, Heidtman has a history of locating its processing facilities near producers, and was enticed by the opportunity to grab a foothold in a previously untapped region.

“We have a model at Heidtman Steel of mill-adjacent strategies. We have partnerships with other mills, like the ones at Steel Dynamics in Butler, Ind., and with Nucor at Crawfordsville. Our relationship with Mike [Wagner] actually started at Crawfordsville,” says Heidtman President Tim Berra. “When we heard Mike was going to be involved, along with John Correnti, in a region where we don’t have much business currently, we thought it was a great opportunity to expand our current mill-adjacent strategy in the southern part of the United States.”

Heidtman expects to have its 230,000-square-foot facility up and running by July 2008. Its original schedule was a bit delayed by its decision to install a new SMS Demag slitter. “It’s got every bell and whistle you can imagine on it to accommodate 80,000-pound coils—all the features that will allow us to have the highest productivity rates,” Berra says.

“We could have moved some slitters from other facilities that are being underutilized, but it would have been a patch or bridge to get us there. We chose to go ahead and purchase the slitter we think will be the best for us long-term,” he adds.

In addition to the slitter, Heidtman will install a temper mill cut-to-length line in December 2008, as well as an SCS coil-brushing line and lasers. Another heavy-gauge slitter will follow in Phase 2 of construction.

Houston-based New Process joined the mix a little later, though the timetable to get its facility up and running is about the same as Heidtman’s. The companies are already familiar, operating nearby facilities in other areas of the country.

“We don’t have a lot of common areas, so it seemed like a good fit,” says New Process Steel Chief Operating Officer Robert L. Proch. “If you add things together, it’s a total sum of more than its parts.”

New Process will do both slitting and blanking at the Columbus facility, with two slitters and one blanking line planned for installation. The company will construct a 150,000-square-foot processing center and warehouse, with room to expand if necessary.

To supply their new Columbus facilities, both Heidtman and New Process will source nearly all of their steel from their neighbor SeverCorr, to maximize the transportation and logistics benefits. The mill will deliver oversized coils by pallet carrier directly into the two processing centers with no need for truck or rail. “We can deliver all day long, morning, noon and night,” Wagner says.

With transportation and logistics costs becoming a greater burden, the potential savings is substantial. “I think people will start looking at who has the tightest supply chain, who has the least cost,” says Proch. “Those are the things that are going to differentiate us down the road.”

Ultimately, the idea behind the MSTC is to attract steel-using manufacturers who will locate there to share in the logistical economies, as well.

But it isn’t just proximity to the mill that excites executives from Heidtman and New Process. It’s their relationship with SeverCorr, and each other, that is appealing. “If we could choose a processor to partner with, someone that is good at light gauge, good at coated products, we’d choose them,” Berra says of New Process, whose executives expressed similar respect in return.

But the partnership begins with SeverCorr.

“What makes this unique is that it’s driven by the producer, by the hand that feeds you,” Berra says. “When you walk in as a processor with the mill backing you, you don’t have to worry about the mill coming in behind you the next week. SeverCorr took the trouble up front to define their principals.”

Mississippi Minimill Has Integrated Aspirations

In a steel market that’s been consolidating for the past decade, shaking out excess production capacity, it seems counterintuitive that anyone would place a billion-dollar bet on a major new mill. But ask executives at SeverCorr, and they’ll tell you the timing was just right.

Majority owned by Russia’s Severstal, and spearheaded by American steel veteran John Correnti, the fledgling mill began construction in October 2005 in Columbus, Miss. Using the latest steel production technology from SMS Demag to create a sort of hybrid minimill with integrated mill aspirations, SeverCorr produced its first pickled and oiled coil on Dec. 21, 2006, and its first full hard coil on May 30 of this year.

In addition to CEO Correnti, SeverCorr’s senior management team includes Chief Commercial Officer Mike Wagner, Chief Financial Officer Eddie Lehner, Executive Vice President and Manager of Operations John Bell, Vice President of Steel Technology and Engineering LeRoy Pritchard, Vice President of Construction Richard Painter, and Vice President of Regulatory Affairs Wynn Calland.

The new mill’s strategy is three-pronged: to follow the U.S. automotive industry as it migrates to the South, to be the first to produce automotive-quality steel in a minimill-style electric arc furnace, and to establish a new model of distribution that includes close partnerships with select service centers.

SeverCorr’s principal products include hot-rolled, cold-rolled, galvanized and galvannealed sheet. U.S. consumption exceeds 54 million tons and is growing at an annual rate of 1.5 percent. Economic growth in the South is outpacing the U.S. average as automakers and supporting industries relocate to states such as Mississippi, Alabama, Tennessee, Georgia and the Carolinas to take advantage of cheaper nonunion labor.

SeverCorr officials claim their new mill fills a void in the southern market, where there is limited steel production, except for Nucor’s Hickman, Ark., Decatur, Ala., and Berkeley, S.C., mills, and U.S. Steel’s Fairfield, Ala., mill.

SeverCorr’s market area will range up to 450 miles, roughly from the Gulf of Mexico to the south, Central Illinois and Indiana to the north, Oklahoma and Texas to the west, and Georgia and the Carolinas to the east. Rail service is readily accessible to all those areas, as well as deep into Mexico. Importantly, 19 of the South’s 25 auto plants fall within that 450-mile radius.

Setting SeverCorr apart from older mills is its modern production equipment with all the latest bells and whistles, executives say. The melt shop houses a 265-ton electric arc furnace with twin-station metallurgy ladle that will allow the company to widely vary the ratio of scrap to virgin iron in each melt. For steel destined for exposed automotive applications, the recipe will be light on scrap and heavy on virgin metal, they note.

The mill’s Compact Strip Process caster will produce thin, 2 1/2-inch slabs, to be rolled into coils on a six-stand hot mill. The CSP can produce 74-inch coils, the widest caster in the southern U.S. In addition, the mill facility features a five-stand, four-high tandem cold mill, a single-stand, four-high temper mill, and a 780-foot-long tunnel furnace, the longest in North America, for buffering and heating the slabs before rolling.

The mill can produce coils weighing as much as 88,000 pounds. Gauges will range from 0.054 to 0.500 inch for hot-rolled, from 0.054 to 0.197 inch for pickled and oiled, from 0.014 to 0.075 inch for cold-rolled, and from 0.014 to 0.059 inch for galvanized and galvannealed.

The mill is currently rated at 1.7 million tons, to include 350,000 tons of hot-rolled black, 250,000 tons of hot-rolled pickled and oiled, 650,000 tons of cold-rolled and 450,000 tons of galvanized and galvannealed. At a future production rate forecast at 3.4 million tons, that will break down as 700,000 tons of hot-rolled black, 700,000 tons of pickled and oiled, 950,000 tons of cold-rolled and 1,050,000 tons of galvanized and galvannealed.

Besides automotive, SeverCorr’s key target markets include: appliance, agriculture, building products, construction, containers, fasteners, furniture, hardware, heavy truck, trailer, HVAC, lawn and garden, metal buildings, pipe and tube, power distribution and service centers.

Indeed, company officials estimate that 70 percent of their output will pass through service centers, including about 15 percent through their distribution partners Heidtman Steel and New Process Steel. The two service centers have committed to building new processing and distribution facilities on site adjacent to the mill to share in sizeable logistical advantages that stem from their close proximity and partnership (see main story for details).

SeverCorr’s ambitious plans have run up against some obstacles along the way (one of its original service center partners, Kenwal Steel, unexpectedly opted out of the project earlier this year, for example). And the jury is still out on whether the company can successfully produce steel that will meet the rigid quality standards for exposed automotive applications.

In 2010, Germany’s ThyssenKrupp plans to join the party with a new mill of its own. Work has begun on the $3.7 billion carbon and stainless mill nearby in Alabama. SeverCorr officials say they are confident they can compete with anyone and are better positioned to face a new player than older mills in other parts of the country.

In the meantime, service centers and end-users in the region will no doubt welcome SeverCorr as a new high-quality, low-cost source of steel—as long as the economy staves off a recession and demand continues to head up down South.