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Virginia's steel mills reflect industry's new image
by
Brett Lieberman
for Virginia Business
April
2005
Plumes of smelly, toxin-filled smoke
waft from bellowing furnaces. Young men turn old before
their time as they turn iron ore and coke into girders,
steel beams and fenders. That’s the traditional
image of the steel industry — gritty steel mills
in Rust Belt states such as Ohio or Pennsylvania. It’s
not an industry that you would expect to find in Virginia,
a tobacco state now gaining a reputation as a high-tech
center.
But the industry is here — at
Roanoke Electric Steel Corp. in Roanoke and at TXI Chaparral
Steel in Dinwiddie County near Petersburg — and
the reality of modern steelmaking is very different
from its outdated image. “People don’t think
about Virginia as a steel state,” says Thomas
Danjczek, president of the Steel Manufacturers Association
and a 30-year industry veteran. “But in Virginia,
we make probably a million and a half tons of steel
a year.”
The quiet success of Virginia’s
steel sector proves a shining example of how the industry
has changed. Gone are the enormous, inefficient mills
that polluted the environment and consumed large amounts
of energy and raw materials. Taking their place are
smaller and more technically sophisticated “mini-mills,”
which manufacture steel bars used in construction.
Mini-mills were once bit players, but
they have become the industry standard in the United
States and Europe. They control 50.4 percent of the
U.S. market, up from 10 percent in the 1960s. Only in
countries like China, where labor and energy costs are
low and environmental impact is of less concern, are
old-style, integrated mills still being planned. “It’s
really a whole different paradigm from your father’s
steel mill,” Danjczek says.
Instead of using raw metals such as
iron ore or nickel, mini-mills are fed a diet of scrap
metal. The recycling of steel scrap plays an important
role in the conservation of energy because steel produced
from melted scrap requires much less energy than the
production of steel products from iron ore.
Mini-mills are more efficient, too.
New technology allows them to produce steel at less
than one man-hour per ton, compared to three man-hours
at traditional mills.
“The steel mini-mills were designed
to serve a more regional market, resulting in less volume
produced in a single location,” says T. Joe Crawford,
president and chief operating officer of Roanoke Electric
Steel, which turns scrap metal into angles, rounds,
flats, beams and other steel parts. “The process
of melting scrap metal in electric arc furnaces is a
much cleaner process than the blast furnace process.”
Such efficiencies are part of the success
story behind Roanoke Electric Steel, which posted its
185th consecutive quarterly dividend in February. The
company has invested in some of the newest equipment
in the industry despite recently weathering some of
the toughest times in its 50-year history. “We
have done everything we can to make sure our facilities
and equipment are state-of-the-art and as good as anybody
out there,” says Crawford, noting more than $170
million in capital expansion between 1986 and 2000.
Roanoke Electric Steel is poised to
spend even more money on upgrades in the next few years
thanks to a new five-year, $85 million credit arrangement
and an increasingly rosy outlook for an industry that
just a few years ago was struggling.
The renewed optimism at Roanoke Electric
Steel stems from a record-breaking year in 2004, when
the company turned the previous year’s $3 million
loss into a $30.4 million profit. “The market
consensus is that the steel industry will enjoy, at
the least, several more years of good results, and we
plan to enjoy them as well,” Crawford says.
The industry’s rebound was spurred
on by increased demand for steel for auto parts manufacturing
in China, which single-handedly absorbed much of the
worldwide glut. Last year, it imported 3 million tons
of steel. That drove up the cost of steel as well as
raw materials’ prices.
The parent company of TXI Chaparral,
which employs about 500 people at its Dinwiddie mini-mill,
apparently is taking advantage of the good times. Dallas-based
Texas Industries Inc. announced plans in December to
spin off its steel business by this summer. While company
officials could not be reached for comment, some industry
analysts speculated the new steel company could become
an acquisition target.
Boom-and-bust cycles are common in the
steel industry. While the stock price of Roanoke Electric
Steel is near historic highs, memories of times when
the industry was scraping bottom are still fresh in
the minds of company officials. The three years before
2004 were difficult, says Crawford, 49, who has been
with the company 27 years.
Indeed, the steel business saw one of
its weakest periods from 2000 to 2003. In addition to
a national recession and a decline in business after
the 9/11 terrorist attacks, the industry faced a flood
of cheap steel imports that led President Bush to approve
short-term tariffs. About 40 percent of the companies
in the industry went into bankruptcy, folded or consolidated
with other companies. (The consolidation trend is expected
to continue, leaving the industry in the hands of fewer
companies.) During this time the number of members in
the Steel Manufacturers Association shrank to 38 from
58 even as the industry continued to produce the same
tonnage of steel. “This one was more prolonged
and more severe than any we had ever seen,” says
Crawford.
Roanoke Electric Steel got through this
lean period without laying off any of its 1,600 workers,
550 of whom work in Roanoke. (The company has subsidiaries
in Salem, Montvale, Rocky Mount in Virginia, plus other
operations in West Virginia, South Carolina, Tennessee
and Ohio.) “We just hunkered down and tried to
do the best given the conditions that were out there,”
says Crawford.
The company cut production, reduced
shifts and delayed some capital investments, including
up to $12 million planned for pollution control and
waste disposal equipment at its Roanoke mill, according
to a Securities and Exchange Commission filing. Nonetheless,
the company still posted losses in 2002 and 2003, its
first losses since the company’s founding in 1955.
“Maintaining a strong financial condition, a conservative
growth strategy, continued investment in equipment and
technology, and selected strategic acquisitions have
enabled Roanoke Electric Steel to survive the bad times
and excel in the good times,” Crawford says.
A conservative management style that
demands a strong balance sheet has been a key part of
the company’s philosophy. Faced with competitors
such as industry giant Nucor Corp., which has $11.4
billion in revenue compared to Roanoke Electric Steel’s
$479.3 million, the smaller company can ill afford to
be overextended. “We have to be smarter…they
have more buying power,” Crawford says bluntly.
“We need to position ourselves to be able to weather
these ups and downs.
One way the company has done this is
by vertically integrating and creating a market for
its products. Two wholly-owned fabricating subsidiaries
purchase about 25 percent of the angles and rounds produced
by the company to manufacture floor and ceiling supports
for industrial buildings. About 65 percent of the company’s
production is sold to steel service centers, middlemen
that sell to steel users. The rest is sold to equipment
manufacturers for products that include truck trailers
and snow plows.
(A Roanoke Electric Steel competitor,
Gerdau Ameristeel, plans to build a fabrication plant
in King George County. The plant, which will employ
50 workers, will bend steel products to customers’
specifications.)
While Crawford and industry insiders
are optimistic about steel’s near-term future,
some Wall Street analysts are raising red flags about
uncertainties behind those projections. CIBC World Markets
downgraded the sector saying that steel pricing has
probably peaked and that 2004’s performances are
unlikely to be duplicated. Prudential dropped the industry
rating to unfavorable from neutral over concerns about
higher costs for raw materials.
But as Danjczek describes it, the biggest
worry on everybody’s mind is “China, China,
China.” The rebounding U.S. economy gets some
of the credit for last year’s stellar industry
performance. Yet the greatest influence was China’s
insatiable demand.
China’s demand continues to drive
up costs, for scrap and other raw materials as well
as steel. The country has gone from being a buyer of
steel to being a seller, exporting 1 million tons in
October. “If their demand lessens, it could cause
a flood of low-market steel to flood the world,”
Danjczek warns shortly before leaving on a trip to China.
“It’s not clear what’s going to happen
there.”
Whether it’s cheap Chinese exports,
a weak U.S. dollar or lack of domestic demand, even
the most bullish steel people know the next meltdown
may not be too far off. With no plans to sell out or
consolidate, Roanoke Electric Steel’s strategy
will be pretty much the same: stay lean, hunker down
and hope any downturn is brief.
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