Academic journal article The McKinsey Quarterly

Why Minimills Give the US Huge Advantages in Steel

Academic journal article The McKinsey Quarterly

Why Minimills Give the US Huge Advantages in Steel

Article excerpt

Performance, not overcapacity, has been the real cause of industry problem

Full costs for mini-sheet hot band? $275 per net ton

Look for another wave of restructuring

Without doubt, the minimill revolution has had profound and lasting effects on the world steel industry. Minimills - small-scale steel plants embodying a superior technology and, more importantly, more streamlined management processes - emerged more or less simultaneously in the United States, Southern Europe, and Japan in the 1950s. Despite a limited product range, minimills grew to more than 20 percent of production in all these regions by 1990.

Such plants were still, however, precluded for technical reasons from participating in steel's largest market - the sheets used in automobiles, containers, and other major markets. This changed with the commissioning of Nucor's Crawfordsville, Indiana plant in 1989. The success of this facility initiated a surge of new ones that are revitalizing the US steel industry. By the end of this decade, world-class mini-sheet plants will represent more than 25 percent of US hot-band capacity. By 2000, almost 60 percent of American sheet capacity will be highly competitive by international standards, up from less than 20 percent in the early 1980s - an extraordinary turnaround.

In stark contrast, Europe and Japan have adopted this new production process at a glacial pace. All told, there are around 10 million net tons of mini-sheet capacity operating in North America, Europe, and Japan, most of it representing the "compact strip production" (CSP) technology used by Nucor and developed by the German equipment supplier SMS. More than three-quarters of this capacity around 8 million tons - is in North America [ILLUSTRATION FOR EXHIBIT 1 OMITTED]. Of this, roughly 6 million tons have been installed within the past two years. By comparison, the sole facility in Europe, Finarvedi's Cremona plant, began operations in 1992, as did Japan's only facility, Tokyo Steel's Okayama plant.

The North American lead in this technology is likely to persist for at least the rest of the 1990s. Firm announcements - investments that are either already under way or apparently backed by sound financing - suggest that at least another 8 million tons of mini-sheet capacity will have been installed in North America by the end of the decade. This compares with 2 million additional tons in Europe and none in Japan. North America will thus be home to more than 80 percent of the developed world's mini-sheet capacity until at least the end of the century [ILLUSTRATION FOR EXHIBIT 2 OMITTED]. Given the competitive advantages enjoyed by such facilities, slow adoption by European and Japanese producers is bound to create problems for those industries in the future.

A seminal technology

The fundamental benefits of the thin-slab process used in mini-sheet plants over conventional integrated steel production are undeniable. It offers tremendous savings in capital, overwhelmingly the most critical challenge facing traditional steelmaking technology. It reduces operating costs by at least as much as the two other seminal steel innovations of the postwar era, the basic oxygen process and continuous casting. And it creates incentives for further innovation, thus helping to revamp steel production processes.

Saving capital and operating costs

Thin-slab casting solves the principal problem facing integrated production techniques: investment requirements that are not supported by market prices. Underlying this problem is sustained and substantial excess capacity, which has plagued the world's steel industry for the past 20 years. Low prices and profits over that period have in effect signalled that capacity should exit the industry. Traditional producers have responded by cutting capacity to bring it more in line with consumption and thus boost prices. Higher prices, however, encourage market entry, which in turn revives the excess capacity problem. …

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