More competition on the homefront for U.S. Steel
One in an occasional series.
Deep in a Moon office park, a group of engineers and draftsmen is busier than it has been in years, dreaming up the future of steelmaking — things like developing a system for running a mill on hydrogen instead of coal and creating environmentally friendly melt shops.
On the North Shore, another team of Pittsburgh-area experts has helped build Arkansas-based Big River Steel, a self-described “technology company that happens to make steel.” Big River Steel’s $2 billion high-tech plant along the Mississippi River is the largest private investment in Arkansas state history.
In Mingo Junction, Ohio, a former Wheeling-Pittsburgh Steel mill has been restarted as part of a $1 billion investment in American steel by JSW Group, an Indian conglomerate.
Headline-grabbing investments are remaking the American industry — reopening mills, boosting profits and creating jobs. Such projects were given an assist last year by President Donald Trump’s tariffs imposed on foreign imports that sent American steel prices soaring.
Yet the American steel industry’s renaissance carries a darker, unintended threat for some of the same U.S. producers that fought successfully to limit the flood of imports from China, South Korea and Europe — more competition on the homefront.
Many of the advancements announced over the past year can be seen as the hip, young millennials of the industry — pests to the aging curmudgeon’s blast furnace, the traditional steel-making method that built Pittsburgh into a global economic powerhouse in the 20th century.
U.S. Steel — which led the charge to impose tariffs and has pushed hard against manufacturers’ attempts to skirt them — is now facing a new generation of American steel plants driven more by computers and artificial intelligence than the time-honored Mon Valley ethos of grit and hard work, according to industry analysts, technology firms and steel executives.
The Pittsburgh steelmaker is spending $2 billion over several years to upgrade its aging fleet of plants, including the Mon Valley Works.
Last month, the company restarted construction on a long-delayed electric arc furnace in Alabama. But U.S. Steel, committed to its blast furnaces, has resisted a more dramatic overhaul that some say is needed to help it compete in the long run.
Meanwhile, Tenova Inc., an Italian steel engineering company with offices in Moon, has fielded requests for its high-tech equipment and services at a pace not seen in the United States since before the steel market crash in the 1980s.
“It’s not what the ‘old guys’ have done,” said Francesco Memoli, executive vice president of Tenova, although he didn’t name companies. “Many of the historic steelmakers have not been as aggressive in investing as some of the more modern players have done, and that could be a problem.”
Many of the orders coming into Tenova are being fueled by the window of opportunity created by Mr. Trump’s tariffs.
SMS Group, on the North Shore, has picked up some of that work, as well, sending equipment to Big River Steel’s new plant among others.
“Whenever the tariffs fade away — it can happen one day to the other, they can go out right away, they can fade away slightly — the most cost-efficient steelmakers, who have adopted the newest technologies first, will be better positioned in a more challenging market,” Mr. Memoli said.
A great tech divide
Steel technology is a broad term covering every step of production: the mixing of ingredients; the molding of the steel; the cooling, rolling and shipping.
One of the biggest evolutions has been seen in the furnace.
For decades, blast furnaces have reigned. The massive pieces of equipment date back centuries and combine iron ore, limestone and coking coal under intense heat and pressure to create steel.
A much smaller portion of American steel was derived from electric arc furnaces, known as minimills, which recycle scrap metal by melting it in electrically charged furnaces.
Blast furnaces produced high grades of steel for the automotive and infrastructure industries, while electric arc furnaces could muster only lower grades, like rebar and wire products.
But as more steel products reach the end of their useful life and are turned into scrap metal, electric arc furnaces have steadily become more advanced. Today, about two-thirds of American-produced steel is made at minimills. The largest U.S. producer, Charlottebased Nucor Corp., operates minimills that send steel to virtually every industry.
“Little by little, [electric arc furnaces] have come up the food chain to produce more advanced steel grades,” said Ronald E. Ashburn, executive director for the Association for Iron and Steel Technology, a trade group of steel engineering firms based in Warrendale.
“The great technological divide between the blast furnace and the electric arc furnace has really narrowed,” he said.
Investing in electric
Electric arc furnaces — more cost-effective and environmentally sustainable — have been central to many of the recent investments.
In January, Nucor Corp. announced a new $1.4 billion mill in the Midwest to produce 1.2 million tons each year. Steel Dynamics, a producer based in Fort Wayne, Ind., plans to build a $1.8 billion mill with an electric arc furnace in the southwestern U.S. with an annual capacity of 3 million tons.
GFG Alliance, a British conglomerate, announced plans in January to expand its U.S. steel production by 800,000 tons a year and restart a second electric arc furnace at a South Carolina plant.
“There is a growing desire to buy American-made rather than imported steel,” GFG Alliance executive chairman Sanjeev Gupta said in a news release at that time.
“The USA is the largest exporter of scrap and the largest importer of steel in the world, so clearly there is an opportunity to produce more steel in the U.S. for the local market from domestic scrap, and we intend to seize this opportunity.”
Even U.S. Steel is investing in the technology. In February, the company said it would begin construction on an electric arc furnace at its Fairfield plant near Birmingham, Ala.
The wave of investment has expanded American steel production by nearly 22 million tons annually — more than enough to make up for the drop in foreign steel imports, according to John Tumazos, an industry analyst for New Jersey-based Very Independent Research.
That annual capacity is also about equal to that of U.S. Steel, which can produce 17 million tons at U.S. mills and another 5 million tons in Europe.
A temporary reprieve?
Steel prices spiked in the weeks after the tariffs were imposed, bringing a windfall to manufacturers. U.S. Steel’s profits in 2018 reached $1.1 billion, up from $387 million in 2017. The company lost $440 million in 2016 and $1.5 billion in 2015.
U.S. Steel’s profitability could be temporary, Mr. Tumazos said, for a number of reasons.
Mr. Trump could reach a trade deal with China to ease tariffs, or he could be voted out of office next year. Meanwhile, residential home construction, auto sales and overseas economies all appear to be slowing.
Along with spending $2 billion in facility projects by 2020, U.S. Steel has shelled out for workers and investors, Mr. Tumazos pointed out.
In November, the company locked in a four-year labor contract with 15,000 members of the United Steelworkers that included a 14 percent wage hike, a generous deal negotiated in the context of a steel industry revival. Also in November, the company announced a $300 million share-buyback program
Meanwhile, prices have cooled since peaking in June 2018, Mr. Tumazos said, and U.S. Steel has to be wary of new capacity flooding the market and pushing prices further down.
American steel shipments rose by 6 percent annually in January, the American Iron and Steel Institute reported last week. Steel shipments are a key metric as they show the amount of steel actually sold to paying customers.
“There’s lots of steel capacity coming along, and probably more to come,” Mr. Tumazos said. “There’s room for great variation in price, [and] there are legitimate concerns of U.S. Steel that the tariff system does not last.”
U.S. Steel’s optimism
U.S. Steel is counting on the tariffs to stay in place.
“We don’t see it as negotiating tactic — we actually see these tariffs as being enduring for the foreseeable future,” Dave Burritt told a Fox News interviewer in December.
In a January earnings call, Mr. Burritt reiterated, “We’re optimistic [the tariffs] will continue. We don’t see the administration blinking on any of this.”
Investors are skeptical. Even as the company’s business improved, its share price has plummeted by nearly half since tariffs were announced.
U.S. Steel executives, during the January earnings call, faced questions from analysts about whether the company was ready for the next steel downturn.
The company disclosed spending at least $40 million to repair damage caused by a Dec. 24 mechanical fire at its coke plant in Clairton that triggered an air quality alert from Allegheny County health officials and criticism from the community.
One analyst asked whether shutting down Granite City, the Illinois plant that it restarted following tariffs last year to great fanfare, was on the table should prices fall more.
“I think we have very, very good track record ... matching our production to order book,” said Dan Lesnak, general manager of investor relations. “If we saw a change in the order book that said that we have to do something about our steelmaking levels, we would.”
U.S. Steel did not make an executive available for an interview for this story.
Foreign competition
For advocates of minimills, the newly built American steel mills are the future.
Minimills are “absolutely more financially sustainable” than blast furnaces, said Philip K. Bell, president of the Steel Manufacturers Association, the Washington, D.C.-based trade group that represents minimills.
“We are decarbonizing the steel industry,” Mr. Bell said. “I’m not saying that blast furnaces will go away, but the trend lines are undeniable.”
JSW Steel USA is perhaps the most striking example of the new American steel industry because it is a foreign operator.
The company, capitalized with $1 billion from the Indian conglomerate JSW Group, bought two aging American mills that had fallen on hard times. In Mingo Junction, Ohio, it restarted the electric arc furnace at the former Wheeling Pittsburgh Steel facility and has plans to build a second furnace.
In Baytown, Texas, the company is now running a U.S. Steel plate mill that was on the verge of being shut down.
To turn those plants around, CEO John Hritz needed to seek out both capital and equipment from abroad — a consequence of American steel’s decline, Mr. Hritz said in an interview.
“It’s really sad you can’t get this equipment in this country,” he said.
Bad memories
Just as Mr. Hritz started his career as an engineer for U.S. Steel in Youngstown, Ohio, the steel industry collapsed.
“I would argue that the reason that a lot of that occurred was because the [American] steel industry was not keeping up with the technological advancements that were happening all over the world,” he said.
The prospect of foreignowned steel giants like JSW Steel pouring money into American steel is an exciting development, he said.
“They have great buying power and then they put in the best technology that you can possibly get that does not exist in this country,” he said.
Mr. Burritt, the U.S. Steel CEO, told analysts in January he’s not worried about losing business to rival American steel mills in the long term.
“We welcome the competition, and we believe we’re up for it,” he said. “People shouldn’t count us out. We’re focused, we’re disciplined, and we’re going to focus on things we can control.”