Minimills Ponder Tomorrow

Si Wakesberg is New York bureau chief for Scrap Processing and Recycling.


Minimills, while generally doing better than the larger steel companies, have not escaped tough times brought on by the economic recession in the United States. These mills, many of which were planning to expand in the 1990s after experiencing a flourishing and profitable period during the second half of the 1980s, have witnessed a decline in demand for their products, a steep rise in costs, and a drop in their selling prices. Suddenly, their rosy and gleaming future has taken a backseat to a tarnished present. Minimill executives, while still confident about the prospects for tomorrow, are deeply concerned about the difficulties of today.

What has happened to the steel industry overall in recent months--a worldwide dip in demand, heightened competitiveness, and the concomitant rise in costs--has affected minimills throughout the United States. "The steel industry decline during this recession has been sharp," says one industry spokesperson, "and recovery from it will be slow." Steel's overcapacity certainly won't speed things up, several steel officials emphasize, nor will the buildup of inventory that has taken place. "Steel is sitting just about everyplace," says one company representative.

"Many of us operated on the assumption of pretax earnings of 6 to 8 percent per annum, with some estimating even higher," says one company official. But with selling prices of minimill products down approximately 10 percent, the official notes, "even with scrap prices receding somewhat, we are facing serious and challenging problems. ... Though we are still doing better than the integrated mills, our game is changing as costs mount and demand for our products lags."

Some executives are more optimistic. "We're still coming out pretty well," says a minimill manager, "though admittedly not as well as last year." While the summer may have been slow, he points out, that's a time of year "when business in our industry generally falls off anyway." Furthermore, he predicts, improvements should be evident by the close of the third quarter.

A steel industry analyst seems to support this forecast: "Earnings in the second half of 1991 are expected to be better," he reports, noting that "the downtrend in steel scrap prices will give the mills somewhat of a cushion."

Minimills are no longer a market phenomenon, as they were only a decade or two ago. Today, in the United States, they are an accepted factor in the steel industry, a group of more than 30 companies with 50 melting plants that employ electric-arc furnaces to produce steel, primarily from scrap.

In their relatively short history, however, minimills have changed with the times. While one U.S. minimill plant--Hawaii Western Steel (Ewa, Hawaii)--reportedly has a raw steel capacity of only 60,000 tons per year, at least three U.S. companies--Chaparral Steel Co. (Midlothian, Texas), Nucor Corp. (Charlotte, N.C.), and Northwestern Steel & Wire Co. (Sterling, Ill.)--are said to operate plants that have annual capacities of more than a million tons, indicating that “mini” may no longer be the most appropriate term to describe these mills.

Minimill product capabilities have also grown over the years, moving through three general stages of development. Early minimill technology focused on producing rebar, merchant bar, and light structural shapes. More recently, capabilities have expanded to wire rod, special bar quality, and medium and heavy structural shapes. Today, new technologies that will allow minimills to manufacture flat-rolled products are being developed.

Many minimills seem to be examining the steel landscape and waiting for the recession's end before attempting to move into new fields. A few mills, however, have already begun manufacturing new product lines. Nucor, says Chief Executive Officer F. Kenneth Iverson, is "expanding modestly," with a total capacity "not much greater than it was two years ago." Nevertheless, he adds, the company has "definitely expanded into new products." Meanwhile, according to a recent published statement by Gordon Forward, chief executive officer of Chaparral Steel, "the commissioning of a large section mill has progressed well" for the company and is expected to demonstrate "favorable" results in fiscal year 1992.

Asked whether there are any limits beyond which s can't go, company officials seem to agree that there are no definable limits, but that a great deal depends on manufacturing technology improvements currently under development. "There's new technology corning-some of which has already shown up in Europe--that will certainly help to stretch present limits, " asserts one mill executive.

With these changes and potential changes come new and nagging questions: Will minimills be able to compete effectively with the larger integrated mills into the next century? Will they be able to muster the financial strength to develop new and higher-capacity operations? Will they be able to hold their own against potential imports? Will they seek new sources of raw material or continue to rely mainly on scrap?

If there's any one thing that holds the answer to these questions, it's cost. In fact, the word "costs" crops up with dramatic regularity in every business discussion with minimill officials. In any expansion plan, these officials say, the entry costs are high and the potential return must be such as to guarantee profitability. Furthermore, they point out, cost factors not only intrude on future plans, but also put the squeeze on present day-to-day operations.

In fact, according to one executive, his company must operate 168 hours a week "in order to survive." Another mill's spokesperson points out that "although minimills still have a price advantage over integrated mills, the former are now facing critical cost problems that require them to tighten operations."

Since much of what the minimills produce--rebars--is tailored to the construction market, a market in a state of disarray, it is not difficult to come up with an explanation for sharply down first-quarter profit statements at many U.S. minimills. "Our sales have declined and we are working on a narrow margin," says one industry member. "It's a battle in which the survivor will be the low-cost producer."

Electric-arc furnaces account for 35 percent of the steel produced in the United States today, with a large proportion of that share produced by minimills. Some integrated mills also use electric furnaces in their operations. A large proportion of the raw materials consumed by electric furnaces is scrap, producing an undeniable link between minimills and the scrap industry.

Recently, however, some minimills have made moves that indicate a possible partial shift in their sources of supply in the future. A number of minimills, in fact, are now using direct reduced iron (DRI) as a supplement to their scrap intake. Others are reportedly using the Corex method, a kind of coal-based ironmaking, and a few are said to be exploring the iron carbide process, which makes use of a sand-like substance. All of these methods reportedly can be used with scrap.

Despite the talk about expanded use of alternate supplies, minimill executives seem confident that scrap supplies have been adequate for their needs and will continue to be so. At the same time, however, they voice concern about scrap prices.

"While scrap prices have come down this year," remarks one executive, "they have not receded fast enough to match the fall in our product prices. And that puts us in a virtual cost-squeeze." Another explains that "when steel was formerly at its present price level, scrap was in the $80-per-ton range. Today, scrap is higher and that puts pressure on us."

Looking ahead, most minimill officials foresee little price improvement until, possibly, the fourth quarter of this year; some doubt that it will come before second-quarter 1992. Whenever that time comes, it will likely allow a number of minimills to further explore their plans to move into new products. And when that happens, says a steel industry analyst, "Minimills will be in sharp competition, not only with major integrated mills, but also with other minimills throughout the 1990s. It will be a battle for survival." The result, he predicts, is that "the integrated mills will have to scramble to meet the technology threat of the minimills" and "minimills will definitely be getting a larger share of the market in the next decade."

A minimill spokesperson offers a similar optimistic forecast: "10 years from now, when we look back on the minimills, we will find that the decade of the 1990s was more exciting than the preceding 20 years.”•

Steel minimills have experienced a variety of changes over the years that evoke questions about the directions they’ll take in the years to come. Current economic conditions, however, have caused some minimills to put their future plans on hold while they concentrate on current survival.