For those of you in the steel industry (or who watch the steel industry closely), a story has been brewing for a couple of months that we believe will have far-reaching implications for America’s steel industry. According to earlier press announcements, Anshan Iron & Steel Group, China’s fourth largest steel producer, has made a 15-20% investment in Steel Development Corp to build a rebar plant in Armory, Mississippi. Steel Development Corp is a private company backed by private equity will open a 300,000 ton steel rebar facility this year. The company has a world-class management team headed by former Nucor CEO John Correnti. And this is partially what makes this investment by Anshan so intriguing. [Ed. Note According to a May 24 AMM post, the investment will also go toward building four re-bar plants (not one) and one flat rolled product mini-mill, all based in the US)
The plant will sell its products through Japanese trading firm Marubeni as well as Anshan throughout the southeastern United States, according to a Bloomberg report. You’d think that this might be the end of the story, but it’s not. Dive under the surface a bit, and the investment by Anshan raises serious concerns not only among steel producers but also for any US manufacturing organization in general. The Chinese investment has also reached the highest levels of the US government, going all the way to US Treasury Secretary Tim Geithner. Why, you may ask? Because the US Congressional Steel Caucus has asked the Treasury Secretary to block the investment on economic and national security grounds. The concern, according to one news report, “The bipartisan group [Ed. Note: The Congressional Steel Caucus] said they were worried Anshan could gain Ëœaccess to new steel production technologies and information regarding American national security infrastructure projects’ through the investment.
Steel Development Corp defended its position, stating that the total investment by Anshan was less than 20% and, “With Steel Development projecting production of 350,000 tons of rebar per year in a 120-million-ton steel marketâ€less than three tenths of 1%â€the promotion of national-security fears due to the Anshan investment is, at best, difficult to rationalize,” one Steel Development spokesperson said.
But is it so difficult to rationalize? We can’t speculate on “national security concerns, as we have not researched what the criteria are for something to be elevated to that status. But from an economic perspective, we’d like to share the following facts that have been largely absent from all press accounts (particularly this very sarcastic Forbes piece from yesterday, mocking the Congressional Steel Caucus) Here are some facts that have not been associated with this story until now:
- Currently, China does not operate EAF mills. It relies nearly 100% on BOF production methods the question of technology transfer ought to be considered heavily
- Let’s re-examine the above-mentioned rebuttal comments from Steel Development Corp regarding the impact of this project at “less than three tenths of 1%. First, the last time the US steel market was at 120m tons of consumption was in 2006. The 2009 estimated steel consumption was 59m tons, data courtesy of the USGS. Prior to 2006, the only other year in which apparent steel consumption met or exceeded 120m tons was in 2005. The rest of this past decade, steel consumption hovered in the lower 100m ton range (e.g. less than 110m tons)
- Let’s examine rebar consumption. First, we’ll examine apparent consumption (apparent consumption is net domestic consumption plus imports) and then we’ll calculate capacity utilization:
- 2007 9.824m short tons
- 2008 8.374 m short tons
- 2009 5.359 m short tons
- 2010 based on current 2010 run rates, the industry will ship 5.1m short tons
If you compare the peak of the market (2007) with today, the US rebar industry operates at a 62% capacity utilization rate; the overall steel industry operates at a 72.9% capacity utilization rate as of June 26, 2010.
- Two rebar facilities are currently shut down, one in New Jersey and one in Oklahoma. Many of the other facilities that run both mixed merchant/rebar mills are also running at less than capacity
- If we were to develop a map of the United States and mark US rebar plant locations by geography (assuming each mill can ship up to a 300 mile radius), we’d see a glut of capacity in the US Southeast. The only argument one could make for building a rebar mill may be to move it somewhere out West, but even that may be a tenuous argument
- It is a widely held belief within the steel industry that 100m tons of domestic production represents full employment. Take a look at this link to see what the World Steel Association projects for US steel use (consumption):
- 2010 72.7 m tons
- 2011 78.1 m tons
- And we all know that US construction markets (the biggest application for rebar products) remain in troubled waters. Take a look at annual expenditures for both commercial and residential construction here. Incidentally, 2010 data is tracking 8% below 2009 numbers. In other words, rebar capacity utilization rates are even less than overall steel industry capacity utilization rates
So what can we conclude? We can’t see the business case to add rebar capacity in the US. Clearly the PE firm involved in Steel Development Corp is banking on the management team. At the very least, we don’t see the value in allowing a state-owned Chinese company to have access to the intellectual property and technology that will go into this facility. If our politicians think this is about jobs, we can assure them that this may be a short term win (in terms of new jobs in Mississippi) but they will result in a net loss for US manufacturing, as the current US domestic rebar industry has already laid off thousands of workers. And by giving this technology to the Chinese, well, we know what that will mean long termÂ¦.