Transcript some hints from history - Steel Manufacturers Association

Unanswered Questions
(& some hints from history)
Presentation to Steel Manufacturers Association
Annual Members Conference
Washington DC, May 16, 2006
Some unanswered questions
 Unanswered Questions
– Will it continue like this?
– Is bigger better?
– Will we be OK in a Mittal-Arcelor dominated industry?
 The Rumsfeld Conundrum
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Will it continue?
The economic argument
Steel Intensity
KT/$BLN GDP (Real 2000 $)
80
2004
70
60
50
Korea
Ukraine
China
USA 1930-2004
40
Turkey
30 Vietnam
Japan
Russia
20
Germany
10
India
USA
S. America
0
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
Economic Development
GDP per Capita (Real 2000$)
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Source: IISI, CIA World FactBook, First River
3
Yes…
The industrial precedent argument
USA
GDP $3-5K/cap
Japan
S. Korea
1878-1905 1941-60 1971-78
China
1995-2004
Number of years
25
19
7
9
Gross steel cons. (MT)
167
144
45
1,646
Population last year(M)
83.8
93.5
37
1,300
Total/cap cons (t/head)
1.99
1.54
1.2
GDP $3-15K/cap
Number of years
1878-1963 1941-77
Scenarios
GDP
Year
MT
1.3
7%
2020
820
1971-96
1995-2025
5%
2025
780
4%
2030
750
85
36
25
30
Gross steel cons. (MT)
3,198
1,209
427
13,146
Population last year (M)
189
114
46
1,300
Total/cap cons (t/head)
16.9
10.9
9.3
10.1
Source: China Metals
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Yes, a continuing story…
USA
Europe
Japan
20
04
?
19
80
19
63
19
53
UK
19
38
India
19
13
18
80
China
18
60
18
30
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
17
50
%
Shares of manufacturing output by country, 1750-2004
RoW
Source: Bairoch, 1982 & others, estimates
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But…
 In 1972…
– Father Hogan forecast 190MT capacity required by 1980
(liquid steel output 112MT)
 In 1975…
– AISI predictions called for 170MT liquid steel production by
1983 (actual output 84MT)
 In 1980…
– AISI wanted capacity to expand to 168MT of liquid steel by
1988 (liquid steel output 100MT)
 What am I wrong about today?
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Can bigger firms manage capacity?
5% reduction in global capacity, impact on “excess”
Output management examples
300
•Mittal reduced output 12% Q1 to Q2 05
•USS flat roll reduced output 15% vs 2004
40%
200
30%
150
20%
100
10%
50
0
Excess as % of Demand
•Arcelor reduced output 8% H1-04 to H1-05
250
Excess Capacity (MT)
50%
0%
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20
Source: CORUS, IISI, First River analysis
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Can it persist?
 US Steel first organized as much to ‘manage’ prices as achieve
competitive advantage – ‘the umbrella’
 But in managing US Steel’s operating level
– USS looked on as ‘easy mark’
– Operated at 50% of capacity
– Costs increased
– Idle works deteriorated
– ‘Men disheartened’ & apathy developed
 Companies or people will break ranks
– Charles Schwab left to form Bethlehem steel
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Is bigger better anyway?
The Mittal argument
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Performance data is less convincing
EBITDA/ton* vs Shipments 2005E
$300
EBITDA/Ton
$250
$200
$150
$100
$50
$0
0
10
20
30
40
50
60
MT shipments
*Estimated 2005
Source: World Steel Dynamics, First River
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And was size ever better?
Profits by major US company, 1909-1914, Index
300
Index, 1911 = 100
250
200
150
100
50
USS 50% of output throughout period
0
1909
1910
USS
1911
Bethlehem
1912
Republic
1913
1914
Cambria
Source: Big Steel – The First Century of the US Steel Corp, First River
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And it didn’t get better
Return on capital by major US company, 1927-1936
8.0%
Net Inc to Assets, %
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
J&
Be
L
th
le
he
Yo
m
un
gs
to
w
n
W
he
el
in
g
Ar
m
co
N
at
io
na
l
In
la
nd
U
S
St
ee
l
C
ru
cib
le
R
ep
ub
lic
0.0%
Source: Big Steel – The First Century of the US Steel Corp, First River
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Will we be OK with Mittal-Arcelor?
US Steel’s first 34 years, 1902-1936
18
70%
16
60%
14
50%
40%
12
MT
30%
10
20%
8
Negatives of Size
Complexity
Customer caution
Regulatory watch
Political interests
Visibility
Talent supply
10%
6
0%
-10%
2
-20%
0
-30%
19
02
19
04
19
06
19
08
19
10
19
12
19
14
19
16
19
18
19
20
19
22
19
24
19
26
19
28
19
30
19
32
19
34
19
36
4
US Steel
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Market Share
Net Margin
Source: Big Steel – The First Century of the US Steel Corp, First River
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Will a stable industry make it easier?
Managers matter more than industry to your performance
% of firm performance
due to…
Year of study
1985 1991A 1991B 1997 2002 2002 Mod
“5 Forces”
20%
8%
4%
19%
8%
17%
Managers
<1%
47%
46%
36%
36%
16%
Unexplained
80%
37%
45%
48%
52%
62%
Among
steel co.s
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Cashflow/Net Assets
Worst Best Spread
1991
-13%
22%
35%
2005
1.5%
44%
42.5%
Sources: Strategic Management Journal, January 2003. First River
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The Rumsfeld Conundrum
Change?
Certain
There are things we
know we know
Uncertain
Clear
We also know there
are known
unknowns…we know
there are some things
we do not know.
Unclear
But there are also
unknown unknowns the ones we don't
know we don't
know…
Form?
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Moving to a time of unclear change
Change?
Certain
Clear
e.g. continuous
casting, a new
mini-mill supplier,
more imports
Uncertain
e.g. thin slab
casting
Form?
Unclear
e.g. China steel
industry,
Mittal/Arcelor
e.g. less
available scrap?
no available
power? New
technologies?
When there are many & divergent possible futures – be ready for all of them…
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