(Note: These comments were made by Peter Marcus as part of his participation on the technology panel at the Steel Success Strategies conference held in Istanbul, Turkey on February 18-20, 2014.)
View from Outer Space
The adaption of breakthrough steel technologies, at least from the viewpoint of the outsider looking down at the world, is about the feelings of great pleasure on the part of those who invent the machines, install them and operate them to the benefit of the firm - i.e., adding to the firm's "economic rent." It's an endeavor that brings out the endorphins in all of those involved in the process.
Might one say that the implementation of breakthrough steelmaking technologies is better than sex? The answer, most definitely, is "yes." As we all know, the difference between the man and the boy is the price of the toy. And, there is nothing as expensive as a breakthrough technology.
Key steel industry technological breakthroughs
Looking back to the 1800s, we list four:
1. The invention of the Bessemer converter steelmaking (1856) and Siemens Martin (1865) steelmaking processes. Subsequently, the cost to produce steel fell dramatically.
2. The creation of the hot strip mill. The American Rolling Mill Company (ARMCO) - based on the ingenuity of John Butler Tytus - in 1921 started up the first hot strip mill at Ashland, Kentucky. Output using the existing hand-mill process was about 520 tons per month. The new14-stand mill at first produced 9,000 tons per month and was boosted to 40,000 tons per month three years later. (Note: This mill was superseded by a rolling mill built in 1926 at Columbia Steel in Butler, Pennsylvania by United Engineer and Foundry Company - owned today by Danieli).
Consider these factoids:
- The oldest highly productive HSM that's operating in the world today is probably located at the Zaporizhstal plant in Ukraine. It was designed in 1935 and started up in April 1938. When I saw it about four years ago, it was producing more than three million tonnes per year with a typical coil size of about 9 tonnes.
- In the early 1930s, so many wide hot strip mills were under construction in the USA, at about $30 million each, that they accounted in one year for about 1/12th of total private investment in the country. In comparison, in China today, the combined spending by the iron ore and steel industries is about $110 billion, or about 2% of 2013's fixed asset investment of about $7.2 trillion.
3. Continuous casting of liquid steel into billet and slab.
- Billet casting started in 1952 at Barrow Steel in England. Subsequently, especially in the United States, continuous casting of rebar took off in the 1960s due to the availability of cheap electricity for the EAF, low steel scrap prices and far lower operating costs than for an integrated mill because the ingot-breakdown billet mill was eliminated.
- Thin-slab casting to feed the finishing train of a hot strip mill started up in late 1988 at Nucor's facility in Crawfordsville, Indiana. Interestingly, at that time, the price of steel scrap was about $100 per gross ton versus about $375 - 400 per gross ton today.
4. Computer controls that precisely control steelmaking-related and steel rolling processes. The start-up of Nucor's thin-slab/HRB plant in Indiana in late 1988, symbolically to WSD, is the start of this era. As a consequence, the "cost above" to produce steel sheet products has been sharply reduced due to the decreased usage of energy, raw materials and man power.
WSD issued a breakthrough report in 1992 titled "Nuking the Competition" that estimated Crawfordsville's cost to produce hot-rolled band in 1991 at $221 per net ton versus $266 per net ton for a low-cost integrated steel plant - an advantage of 17% for Nucor. As of January 2014, based on our monthly World Cost Curve data, a typical thin-slab/flat-rolled plant in the USA had an operating cost of about $557 per net ton versus only $455 per net ton for the low cost integrated steel plant with its own iron ore supply - a disadvantage of 18% (excluding depreciation and interest expense). The main cause of the violent swing in the cost comparison is the cost of steel scrap and other metallics: For the EAF-based mill, these amounted to $105 per net ton in 1992 and about $395 per net ton in January 2014 (although down sharply in price in February 2014).
The steelmaking technology revolution tied to computer controls has included:
- Amazingly precise controls for virtually all phases of the steelmaking and steel rolling process.
- A lessened proportion of secondary and off-grade steel that's produced.
- Significant cost reduction. Labor productivity is much improved. Energy and other materials are used far more efficiently (as noted above).
- Less pollution.
- More tonnes produced from the same unit.
- Lessened capital intensity - i.e., investment per tonne of capacity. Also, same smaller-sized units have achieved good economies of scale.
- The breakdown of the last barriers of entry for mini-mills to produce hot-rolled band.
Who's winning the war?
However, the steel industry can't sit back on its hands and rest on its laurels. Today, the industry is facing a serious challenge, which is the use of aluminum body sheet on the new 2015 Ford F-150 truck - with a weight savings of 700 pounds per truck.
Aluminum is about a 1/3 of the weight of steel; although, it's not as strong, weldable or formable as steel (because aluminum sheet tends to snap back after it is formed). Also, it's also probably more expensive to repair when it's damaged, including a significant investment by body shops that don't have the repair equipment. But, it's probably just as strong and perhaps even more dent resistant than steel. (Note: Ford is offering a $20,000 contribution for body shops that install equipment to repair aluminum.)
Interestingly, about two decades ago, aluminum won the beverage can war even though the liquid in an aluminum can warms up far faster than in a steel can. Currently, there's a continued shift to the use of aluminum car wheels that are lighter and perhaps more shock resistant than steel wheels.
The challenge for steel companies that produce automotive sheet is to provide off-the-shelf advanced high-strength steel (AHSS) solutions for designers of new cars that are far better and/or far less expensive than the aluminum alternative - which is a critical requirement since newly-designed models are being launched at a far faster pace than in the past.
The invisible hand is moving at warp speed.
The Information Revolution, of course, is an amplifier of the Industrial Revolution. Let's consider how it's impacting the competitiveness of manufacturers in different parts of the world.
- In the period from the 1960s to the 1980s, before the current Information Revolution was in effect, the Japanese were the biggest winners. Since then, they've become the biggest losers.
What happened? About 20 years ago, Japan was the undisputed winner when it came to global manufacturing prowess. In the period from the 1960s through the early 1990s, Japan had by far the world's best workers. And, its product quality and product innovation was unrivaled.
The country was zapped by the Information Revolution. The application of the computer to manufacturing processes permitted Japan's workers, who were paid a high wage, to be replaced by more numerous workers that were paid far lower wages. The new factories in China often produced products that about matched the Japanese when it came to quality. Computer controls were increasingly adapted in China to make ever-better products.
- Who's the biggest winner now and, potentially, the biggest loser in the future? It's China. In the period from 2000 to 2013, fixed asset investment in China rose from one-third to 50% of GDP. Manufacturing costs fell and GDP on a current dollar basis grew more than 10% per year.
But, we are now in a new era in which the advancement in the use of computers to control the manufacturing process, along with a phenomenon called "global sourcing," is benefitting those who seek to build a new factory in the USA perhaps even more than those in China because the labor content of the product is sharply reduced (due to the lessened man hours needed to manufacture the product).
Key Question: Are the greatest benefits from the Information Revolution now leapfrogging - i.e., bypassing - the Developing World including China and benefitting new factories in the Advanced Countries the most? What's your opinion?
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