1. Whats Next in Steel ? Peter Warrian University of Toronto

2. Steel Industry 2004 Best of Times ? Best of Times ? Worst of Times ? Worst of Times ?

3. Its Pretty Punchy Out There ! The world steel markets gone mad… Ive never seen anything like this. Peter Fish, MEPS Steel prices on the world market in the future may be even more volatile than in the past, with price peaks higher and price troughs not as deep as in the past, Peter Markus, World Steel Dynamics

4. Price Volatility $260 $320 $420 $525 $800 $625 $470

5. Punch Line There will be an unprecedented level of volatility in steel markets for the next five years. There will be an unprecedented level of volatility in steel markets for the next five years. It has the potential to destabilize important sections of North American manufacturing It has the potential to destabilize important sections of North American manufacturing

6. Steel Market Gone Wild Base prices plus surcharges Base prices plus surcharges –CR $390 12/03; $460 2/04; $600 4/04 ? China: Demand, Scrap China: Demand, Scrap Other Factors Other Factors –Greed: Mills – our turn ! –US $ Decline: Who wants to supply USA? 30:30 –2.01 Duties Unanticipated Consequences: Hello –OEM Auction: Supply Chain Hoarding

7. Steel Production Forecast Region (mil tonnes) 20032004% Change EU159.9161.00.7 C & E Europe 29.930.52.0 Ex-USSR106.3108.01.6 NAFTA1231273.3 S. America42.944.02.6 China219.7245.011.0 Japan110.5110.0-0.5 Other Asia108.3112.03.4 Total960.01,000.04.2 Source: MEPS World Steel Outlook, Q4 2003

8. Financial Results for Steel Producers US Integrateds20012002% Change Shipments 000 tons32,75533,6122.6 Sales ($/ton)15,02916,69311.1 Oper. Cost ($/ton)5125160.8 Oper. Income ($/ton)(53)(15)71.7 Source: Locker Associates, Steel Industry Update 176, June 2003

9. Financial Results for Steel Producers Can Integrateds20012002% Change Shipments 000 tons10,99011,4494.2 Sales ($/ton)6,4357,39915.0 Oper. Cost ($/ton)603602-0.2 Oper. Income ($/ton)(18)44344.4 Source: Locker Associates, Steel Industry Update 176, June 2003

10. Financial Results for Steel Producers NA Minimills20012002% Change Shipments 000 tones21,66824,53713.2 Sales ($/ton)7,6548,73614.1 Oper. Cost ($/ton)338334-1.2 Oper. Income ($/ton)152246.7 Source: Locker Associates, Steel Industry Update 176, June 2003

11. Price Trends in Raw Materials ($/metric tonne)Recent PricePrevious Price Coke18060 (early 2002) Iron Ore9527 (2001) Pig Iron240115 (late 2001) Scrap215110 (2001) Slab270145 (late 2001) HR Band350175 (late 2001) Source: Locker Associates, Steel Industry Update 182, December 2003

12. Three Steel Stories

13. Integrateds –Consolidation of Transnational Steel –Innovation Gap

14. Minimills –The Big Squeeze: Scrap, Energy Prices –Capital Restructuring Ispat Sidbec

15. Service Centres & Supply Chains –Supply Chain Surges –Intermediation Plus

16. Ten Questions About the Future

17. 1998 The Tipping Point The 1998 Asia-Russian financial crisis was a Tipping Point for the global steel industry. The 1998 Asia-Russian financial crisis was a Tipping Point for the global steel industry. Will the fault line of the hot ends implode the re-constituted mills? Will the fault line of the hot ends implode the re-constituted mills?

18. Flat Rolled Prices 1989-2003 Source: Locker Associates, Steel Industry Update 183, Jan 2004

19. Worlds Largest Steel Companies RankCompanyCapacity (mil tonnes) 1Arcelor44.0 2LNM Group34.8 3Nippon Steel29.8 4POSCO28.1 5Shanghai Baosteel19.5 6Corus16.8 7Thyssen Krupp16.4 8NKK15.2 9Riva15.0 10US Steel14.4 46Stelco4.7 51Dofasco4.4 ?Algoma2.5 Source: IISI, Annual Report 2003

20. Critical Factors in the Implosion Crisis of spot market for flat-rolled and import surge leading to Trade Cases Crisis of spot market for flat-rolled and import surge leading to Trade Cases Blowing away of Reconstituted Mills with old Hot Ends Blowing away of Reconstituted Mills with old Hot Ends Rise of China to set global spot prices and demand for inputs (ore, scrap, freight) Rise of China to set global spot prices and demand for inputs (ore, scrap, freight)

21. How Does the Industry Innovate? Innovation in North American steel is driven by the auto industry. Innovation in North American steel is driven by the auto industry. How can the steel industry innovate for the future? How can the steel industry innovate for the future?

22. Two Poles of Innovation Nippon Steel (Stelco) Nippon Steel (Stelco) Arcelor (Dofasco) Arcelor (Dofasco)

23. Networks of Innovation Ultra Light Steel Auto Body (ULSAB) Ultra Light Steel Auto Body (ULSAB) Auto- Steel Partnership (ASP) Auto- Steel Partnership (ASP)

24. The Dofasco Advantage Dofasco has become the most profitable steel company in North America. Dofasco has become the most profitable steel company in North America. How does it do this with such low levels of R &D spending? How does it do this with such low levels of R &D spending?

25. Dofasco Secrets to Success The Sweet Spot of Auto The Sweet Spot of Auto Vision: Solutions in Steel Vision: Solutions in Steel Leadership Leadership Technology Alliances Technology Alliances Learning Culture Learning Culture

26. Dofasco and Technology Technology Technology – Same 50 Engineers –Alliances and Licensing Absorptive Capacities of the Firm Absorptive Capacities of the Firm –Generic knowledge networks –Implementation –Tacit Knowledge: Working in Steel

27. Steel Trade Wars Steel trade wars and protectionism dominated the industry from the 1970s to the 1980s, but the WTO has ruled out traditional US trade protectionism. Steel trade wars and protectionism dominated the industry from the 1970s to the 1980s, but the WTO has ruled out traditional US trade protectionism. What happens now that the stealth protectionism of bankruptcy procedures (USA) and the low dollar (Canada) have been removed? What happens now that the stealth protectionism of bankruptcy procedures (USA) and the low dollar (Canada) have been removed?

28. Steel Trade Wars 70s-80s Steel Protectionism 70s-80s Steel Protectionism NAFTA steel but no Secure Access NAFTA steel but no Secure Access –Disinvestment: Dofasco, Co-Steel, Ipsco, Ivaco 2001 NAFTA Joint Cases 2001 NAFTA Joint Cases –Safeguard: No – Canada; Yes – USA, EU, Japan 2003 WTO Ruling 2003 WTO Ruling

29. Stealth Protectionism USA: Chapter 11 Steel Companies USA: Chapter 11 Steel Companies Canada: Medicare $7.95 Advantage Canada: Medicare $7.95 Advantage 2004 2004 –Non-renewal of 2.01 protection –Canadian dollar surge

30. No Industry is an Island: Steel-Auto Supply Chains Steel is no longer an industrial island to itself, it is a strategic part of the materials sector of the new economy. Steel is no longer an industrial island to itself, it is a strategic part of the materials sector of the new economy. How are steel supply chains to the auto industry functioning? How are steel supply chains to the auto industry functioning?

31. Ontario Steel Steel-Auto Interdependence Steel-Auto Interdependence Changing Interface Changing Interface Auto Supply Chain Auto Supply Chain

32. Traditional Steel-Auto Link Big 3 Steel Big 3 Steel –Stelco –Dofasco –Algoma Big 3 Auto Big 3 Auto –GM –Ford –Chrysler

33. Steel-Auto Parts: New Links Traditional linkage : Traditional linkage : –Subsidiary parts Divisions of Auto companies –75% internal, 25% outsourced, now reversed Central purchasing of Steel Central purchasing of Steel –GM-US Steel yearly contracts New parts company players: Magna, Ventra New parts company players: Magna, Ventra

34. Steel 2002: New steel, old players New steel New steel –60% new steel for autos in 5 years –New materials science: Research Chairs –USLAB project Investment : Investment : –Foreign partners: France, Mexico, Brazil –Steel auto divisions: Dofasco, Algoma –Dofasco goes laser: Boundaries between steel and manufacturing

35. Steel 2002: New steel, new players Steel players Steel players –Minimills: Ipsco –Service Centres: Russell, Samuels, Venture Steel Independent parts companies Independent parts companies –Value added processing –Contract manufacturing

36. Shear Slitter Traditional Steel Processing Line

37. Shear Slitter Robot Shear Laser Cutter Break Press Robot Shear Break Press Laser Cutter Stamping Laser Cutter Value-Added Steel Processing Line

38. Steel Contract Manufacturing

39. Inventory Management

40. Shipping and Logistics Functional Overview

41. Shipping and Logistics Functional Overview

42. Protectionism by Stealth Ended The low dollar and socialized medicare gave Canadian manufacturing a 20-30% cost advantage. The low dollar and socialized medicare gave Canadian manufacturing a 20-30% cost advantage. How do labour and management make up the gap? How do labour and management make up the gap?

43. Steel Wagnerism The Wagner Postwar Model The Wagner Postwar Model –Adversarialism –Work Rules USWA USWA –US industry Contract –Stelco Contract

44. USWA – ISG Deal Wagnerism Rating 1 Wagnerism Rating 1 Contract Provisions Contract Provisions –Six year term –Job Classes 32 to 5 –Contracting Out –Profit sharing –Training –Investment Plan

45. Stelco: Right Deal in Wrong Place ? LEW & Local USWA 8782 LEW & Local USWA 8782 –Wagnerism rating 5 Hilton Works & USWA Local 1005 Hilton Works & USWA Local 1005 –Wagnerism rating 9 Algoma & USWA Local 2251 Algoma & USWA Local 2251 –Wagnerism rating 3

46. Labour Management Bargaining: New Deals ? Steel industry wages and benefits are among the highest in the economy. Steel industry wages and benefits are among the highest in the economy. What does the steel case tell us about how difficult is it to maintain high wage jobs in a gobalized economy? What does the steel case tell us about how difficult is it to maintain high wage jobs in a gobalized economy?

47. Iterations of New Deals 1980s 1980s –Legacy Costs for Governance 1990s 1990s –Work teams, multi-skilling 2003 2003 –ISG: Complete Overhaul –Offloading Legacy Costs

48. What Do You Do When Youve Given Everything on the Table? ISG: the last deal ISG: the last deal –Drastic moves towards the High Performance Goal –Make the deal with Minimill Management Industry Restructuring Industry Restructuring –Overwhelm Best Efforts –Who do you Negotiate With: Industry ?

49. Labour-Management Bargaining: Pensions Pension costs at Stelco are cited as the major financial burden for the companys survival. Pension costs at Stelco are cited as the major financial burden for the companys survival. Did pension bargaining in the last decade become a lazy mans option in union- management bargaining? Did pension bargaining in the last decade become a lazy mans option in union- management bargaining? PBGF and Moral Hazard PBGF and Moral Hazard

50. Stelco Pension Bargaining A Tale of Two Pensions A Tale of Two Pensions 2000 LEW & Local 8782 2000 LEW & Local 8782 –$42 to $58 2002 Hilton & Local 1005 2002 Hilton & Local 1005 –Me too: $58 Same Deal: Different demographic & economics Same Deal: Different demographic & economics

51. Pension Bargaining & Moral Hazard Temptation of Pension Bargaining Temptation of Pension Bargaining –Tradeoff for Wage Increases –Postpones costs & cash impact Danger Danger –Pensions carry whole weight of adjustment –PBGF: A moral hazard for management

52. Steel Infrastructure and the Next Wave of Auto Investment The vital synergies between the auto and steel industries are clear to all policy makers. The vital synergies between the auto and steel industries are clear to all policy makers. How does Ontarios steel infrastructure stack up in the competition for the next wave of auto industry investment? How does Ontarios steel infrastructure stack up in the competition for the next wave of auto industry investment?

53. Hamilton, ON: Markets Served by Plant Numbers represent plant capacities.

54. Alabama/Georgia: Markets Served by Plant Numbers represent plant capacities.

55. Key Comparisons

56. Future Outlook: Five Year Scenario Ontario 2 Advantage Al/GA 2 Advantage Factor (Input) Conditions Ontario 2 Advantage Al/GA 1 Weak Advantage Related & Supporting Industries Ontario 2 Advantage Al/GA 2 Advantage Context for Firm Strategy & Rivalry Ontario 2 Advantage Al/GA 2 Advantage Demand Conditions

57. Summary Integrateds Integrateds –Consolidation of Transnational Steel –Innovation Gap Minimills Minimills –The Big Squeeze: Scrap, Energy Prices –Capital Restructuring Service Centres & Supply Chains Service Centres & Supply Chains –Value Added Processors –Intermediation Plus