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Industry Outlook 1991: MANUFACTURING
LOW DEMAND, FLAT-ROLLED PROFITS
Weak. That's how John B. Corey, Armco Inc.'s director of corporate strategy, sizes up business for the U. S. steel industry this year. A continuing falloff in demand from auto and construction companies could cut total steel shipments by 7%, to 78 million tons. Meanwhile, rising costs for energy, materials, and labor may boost overall expenses by 4%--an increase steelmakers won't be able to offset by raising prices.
A few years ago, this might have led to bloodbaths in Pittsburgh, Gary, Ind., and Birmingham, Ala. But this time, there'll be no carnage. Gross profit margins for steel producers may narrow to razor-thin levels--perhaps 1.5% on total revenues of $34 billion, compared with 11% back in 1988. But since the steel depression of the early 1980s, producers have cut capacity by 27% and slashed their work forces in half. Even during four years of solid profits, starting in 1987, they stayed lean. This will help avoid what otherwise "would be a bad situation," says Walter F. Williams, chief executive of Bethlehem Steel Corp.
STOCKPILES. Some companies will suffer more than others in 1991. For instance, Armco, LTV, and National, which depend heavily on sales of flat-rolled steel, will struggle to stay profitable. Slumping auto sales will cut purchases of flat-rolled used in car bodies by about 14%, to 11.4 million tons, says one major producer. Other steel markets will be hurt by declines in commercial construction. Appliance makers, whose sales are drooping, may cut purchases of sheet steel by 10%, to 1.5 million tons. In December, in fact, decreasing demand for flat-rolled forced Armco, Rouge Steel, and LTV Steel to shut five furnaces and furlough 1,550 workers--their first big layoffs in four years.
But not every steel product will do as poorly as flat-rolled. There will be increased shipments of plate and pipe to the still-strong machine-tool and oil industries (pages 73 and 109). And the recession won't choke off sales to food and beverage makers. Producers of tinplate, including USX Corp. and Weirton Steel Corp., expect their shipments to these markets to grow by 1% to 2% in 1991. Because there could be a strike at USX when its contract with the United Steelworkers expires on Feb. 1, some of these customers are building inventory.
The most pressing problem steelmakers face in 1991 may be price increases--or lack of them. U. S. mills will probably run at 78% of capacity, vs. an 85% rate in 1990. That kind of falloff, while not devastating, may make it tough to recoup cost increases of as much as $20 a ton for primary steel.
Labor-cost increases will be a particular headache. Last year, major steelmakers agreed to restore the wage concessions they won from USW members in the early 1980s and signed their biggest labor settlements in nearly a decade. These agreements will raise steelworker wages and benefits by 7% to 10% in 1991. This will add at least 2% to production expenses, since labor costs are 34% of total costs. So far, steel buyers have been reluctant to pick up much of that tab. In December, Bethlehem led a group of producers in rolling back an 8% hike in flat-rolled prices planned for Dec. 30, to 4%. Even getting the full 4% will be chancy: In November, Ford Motor Co., a major flat-rolled buyer, demanded a 1% across-the-board price cut from its suppliers. If it succeeds, other customers will want the break, too.
With price levels so much in doubt, steelmakers are intent on raising productivity by continuing to install more efficient equipment in 1991. They'll have to scratch to keep capital spending at $1.9 billion--about the same level as in 1990, according to a BUSINESS WEEK survey. But the effort is well worth making. If the industry keeps modernizing, by the mid-1990s it will be producing more than 90% of its metal with continuous casters, vs. 66% today. Continuous casting, which Weirton and National Steel Corp. will use to make all their steel this year, transforms molten metal directly into slabs, bypassing several intermediate steps and boosting efficiency by 30%.
STAY VIGILANT. Such investments are the best defense against further invasion of the U. S. market by imported steel. The improved quality of U. S.-made steel, plus a weak dollar, will cap imports at about 17% of the market this year, says John K. Griffin, president of the American Institute for International Steel. That's the same as in 1990, and well below the 20.1% ceiling set by import restrictions. But U. S. producers will have to stay vigilant: They'll lose their import protection after March, 1992, the Bush Administration has warned.
That's one reason the U. S. is becoming a laboratory for perfecting new steel technology, says Peter F. Marcus, a steel analyst at PaineWebber Inc. One example is Nucor Corp., which thinks it has mastered a German continuous-casting technology that produces steel slabs 2 inches thick, vs. 10 inches for conventional continuous casting. This would cut energy costs by 20% to 40% and slash work hours per ton to 1.5, or about half what's used in conventional steel plants. And at a plant using Japanese technology in Blytheville, Ark., Nucor turns out steel beams for 14% less than its competitors worldwide. Since this factory opened in 1989, imports of all but the largest structurals have been halved to about 15%.
Nucor, based in Charlotte, N. C., will build a second thin-slab casting plant this year, and Geneva Steel, in Vineyard, Utah, plans a plant using similar technology. Such facilities are "essential for competitiveness," says F. Kenneth Iverson, Nucor's chief executive. That's what the steel industry has salvaged from the wreckage of a decade ago: the ability to compete, even in bad times.Michael Schroeder in Pittsburgh