Tuesday, May 13, 2008

In hard times, steel firms forge ahead

An interesting article here by David Greising, correspondent for the Chicago Tribune.

The economy is struggling. The auto industry is on its back. Housing starts are at historic lows.
If it seems there is no relief in sight from the bad economic data, just take a look along the southern shore of Lake Michigan. From East Chicago to Gary, in the heart of the old Midwestern steel belt, a fragile boomlet is taking shape.
The U.S. steel industry, which has spent much of the decade trying to keep its head above water, is swimming upstream against a tide of worrisome economic data. The steel mills are hiring. And they're humming at nearly 90 percent of capacity, a pace they have rarely seen since the late 1970s.
They are also raising prices—as much as 50 percent since the beginning of the year in some product categories. And a jump in hiring, of 2 percent so far this year, reverses a yearslong trend of 4 percent annual employment declines.

"It's not glory times for the steel industry, but it's a big improvement from what it's been," said Don Coffin, a professor at Indiana University Northwest in Gary.
The weak dollar and a lack of competition from foreign producers are contributing to the surge. For foreign steelmakers, the weak dollar makes their products more expensive in the U.S. They also continue to find ready buyers in India and China.
With no low-cost imports to worry about, U.S. steelmakers can get their price increases through despite the economic weakness in the auto and construction sectors that are key to their business.
"Suppliers are tight. The market is strong despite all the economic weakness," said Aditya Mittal, chief financial officer of ArcelorMittal, the world's largest steel company.
Earlier this year ArcelorMittal, which owns Indiana's Burns Harbor and Indiana Harbor plants, told automakers and other big customers that it plans to add a 25 percent price surcharge to existing contracts, according to industry sources.

ArcelorMittal declined to confirm the price hikes. But price surcharges by U.S. steelmakers are all the talk among major steel consumers. Truckmaker Oshkosh Corp. and appliance manufacturer Whirlpool are among companies that have dealt with price hikes introduced by their steel suppliers as surcharges to existing contracts.
"We've been approached by the steel guys, and we're in the middle of, let's just say, very deep negotiations regarding steel pricing," said Tim Manganello, chief executive of auto parts-maker BorgWarner Corp., in a recent conference call. "They're coming at us with surcharges."
ArcelorMittal, along with United States Steel Corp., dominates the northern Indiana steel industry, which amounts to about one-fifth of U.S. production.
Jaishankar Raman, economics professor at Valparaiso University, said it's not just the steel mills that are flush. Steel fabricators in northwest Indiana and throughout the Midwest are seeing a boom in demand that could translate into new jobs too.
One point of interest: When industrial giant Tata Motors of India bought Ford Motor Co.'s Land Rover and Jaguar divisions for $2.3 billion, Tata insisted that Ford continue supplying the automakers with metal stampings and other parts made in the U.S.
"The U.S. has established itself as the supplier of high-quality machinery and parts," said Raman. "That's important, because now we will see jobs growth."
So far, companies in the steel belt seem able to absorb the price hikes or pass them along to customers.

Dominic Vitucci Jr., chief executive of Vitco Inc., a family-owned maker of lawn and garden supplies, tubes and auto parts, said prices for steel have jumped 50 percent since the beginning of the year.
"There's just no relief" from the steel price hikes, Vitucci said. Raw material and fuel prices are going up too.
In the past, Vitco bought as much as 20 percent of its steel from foreign suppliers. Today, there is virtually no foreign steel to be found.
"Right now I am 100 percent domestic sourced," Vitucci said. "There are no foreign sources coming in."
Vitucci used to think the prices would begin sliding back by mid-year. Not anymore. Now he is raising prices each time his steel costs increase. "What are you going to do? You either have to stop making your product, or pass prices along," Vitucci said. "I'd like to stop gas prices from rising, too, but I just can't."

Sandra Westlund-Deenihan, president of Quality Float Works Inc., said her company has tried to adapt by eliminating inefficiencies in manufacturing of the spherical steel products used for everything from measuring the level of liquids to storing high-pressure gases.
"The cost of raw materials has affected our bottom line," she said.
Quality Float's most effective response: selling more aggressively overseas, where the weak dollar gives it a competitive advantage. Foreign sales will comprise 20 percent of its business this year, up from 3 percent in 2003.

The relatively flush times for Indiana's steel mills come as the industry is in the midst of bargaining with steelworkers. For the first time in memory the unions believe they have a relatively strong bargaining position, going up against an industry that is faring relatively well, thanks in large part to productivity gains made possible by union concessions over the years.
In 1980, 4.8 employees were needed to produce 1,000 tons of steel. Last year only 1.2 employees were needed to ship 1,000 tons, according to figures from the American Iron and Steel Institute.
"We helped make them successful with all the changes we've agreed to over the years," said Jim Robinson, director of District 7 of the United Steelworkers of America. "Now it's time for us to get to share in that success."

The Help Wanted signs will be up for a while, Robinson said. Beyond the increases in production, the industry also will have to adjust to a significant number of retirements over the next few years.
"There is a major generational turnover in progress, and it's going to speed up," Robinson said.

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