Management By Fiasco

In LTV's rush to blame foreigners, it conveniently ignores its own bumbling.

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In the spring of 1985, a little less than a year after Jones & Laughlin and Republic Steel merged to form the nation's second-largest steel producer, Raymond A. Hay, CEO of the company's corporate parent, LTV, announced that much of its huge mill in Aliquippa, Pennsylvania, would be shut down. More than 1,200 workers would lose their jobs.

The decision wasn't due to missteps by LTV, Hay assured investors. Rather, it was "testimony to the havoc wrought by unfairly traded foreign steel."

The foreigners, it seems, had made him do it.

Over the next 15 years, this explanation would ring strikingly familiar to anyone following the exploits of LTV. In 1986, when the company declared bankruptcy for the first time, it took out a full-page ad in The Plain Dealer to explain how "an unprecedented and sustained level of imports" had pushed it into Chapter 11.

In 1992, when the company lost $178 million, CEO David Hoag offered a simple explanation to shareholders: "unfairly traded imported steel."

In 1996, Hoag's successor, J. Peter Kelly, quickly established his view of the challenges LTV faced: "The source of our trouble is clearly imports."

So at the end of December 2000, when LTV announced its latest bankruptcy filing, it wasn't hard to guess where the finger would be pointed. The blame, wrote general counsel Glenn J. Moran in an affidavit, rested with declining prices "caused primarily by the improper dumping of cheaper imported steel in the U.S. marketplace."

LTV certainly isn't the only company to employ a blame-the-foreigners strategy. Over the last quarter-century, Big Steel has consistently cried out against unfairly traded imports as the source of its woes.

The charge is not without merit. During the last 30 years, the industry has periodically been deluged with steel from abroad. In 1998 and 2000, those surges became flash floods, depressing the prices to levels not seen in decades. By the time the market bottomed out, a ton of hot-rolled steel went for around $200. Just a year before, the same ton cost more than $300.

Prices were so poor, says LTV spokesman Mark Tomasch, that even foreign producers went looking for other markets. "It's gotten to the point they don't even want to sell it here."

Even so, fixing on the role of foreign steel in LTV's current quandary is to ignore other trends -- some temporary, some cyclical, some that have been radically transforming the industry for more than a decade. "To say that dumping is not a factor is whitewashing; to say that dumping is the main factor -- I don't think that's accurate," says John Anton, an analyst with the economic forecasting branch of Standard & Poor's.

Others are less generous. "To say it's imports is a crock," analyst Charles Bradford recently told The Detroit News. "The ones who complain the most about dumping are the ones who are the least efficient."

In Cleveland, the ad hominem indictment of imports and the emotional stir caused by LTV's financial implosion have only served to gloss over more complicated details of the company's situation. Though LTV is increasingly affected by the behavior of markets and manufacturers around the world, many of its most significant competitors aren't located in Japan, Russia, or Brazil. They're in places like Indiana, South Carolina, and Toledo.

"The reason for screaming about imports," explains Robert Crandall, an economist for the Brookings Institution, "is that LTV can't restrict imports from Kentucky."

Indeed, stuck on the wrong side of history, bound by obligations promised years ago, and snagged by poorly timed decisions, LTV, it turns out, is largely responsible for its own mess.

Outside the Trico steel mill in Decatur, Alabama, there are no signs announcing the plant's owners. Besides the street name -- Trico Boulevard -- nothing hints of the operation inside. It sits a few miles west of town, where factory after factory line up along the shore of the Tennessee River like a roll call for corporate America: BP, 3M, Boeing.

With its boxy mishmash of blue and gray corrugated metal, the Trico plant isn't much to look at, even as far as steel mills go. There's no blast furnace, no flame shooting into the sky -- none of the romantic hugeness or sense of industrial flex associated with the glory days of places like Gary or Youngstown.

Yet in many ways, Trico epitomizes both the future and the failure of the U.S. steel industry -- and of LTV.

Six years ago, LTV and two foreign partners, Sumitomo Heavy Industries of Japan and British Steel (now Corus Group), came to Decatur to build this $450 million high-tech marvel. LTV's stake would be 50 percent; Sumitomo and British Steel would each own 25 percent.

Technically, the new operation was known as a "mini-mill." Unlike integrated mills such as LTV's Cleveland Works, which employ huge blast furnaces fed by iron ore, coke, and limestone to make steel, mini-mills use a far more streamlined process. They make steel by melting scrap metal in highly efficient electric arc furnaces.

For many years, the drawback for mini-mills had been quality. Because scrap contains impurities, steel made from iron and coke in old-line mills had a far smoother surface -- and was far more suitable for flat-rolled steel, which accounts for nearly half the domestic market. Trico was among a wave of mini-mills in the mid-'90s that sought to change that. By using high-grade scrap and the newest technology, these mills sought to capitalize on the savings of electric furnaces while offering products that could compete with integrated producers.

"I don't think there is any frontier, any limitation to what mini-mills can do," consultant Anthony Taccone told American Metal Market, estimating that it would take five years before the new mills would be able to consistently compete with the integrateds in terms of quality.

That was six years ago.

Even before Trico, LTV recognized the growing competition from mini-mills. In 1993, the company invested $312 million in new technology at the Cleveland Works: facilities that allowed it to save both time and energy costs in producing flat-rolled steel. The complex was dubbed the "mini-mill killer."

Trico was LTV's next major play toward increasing its competitiveness. Whatever its designation, there is very little that's "mini" about Trico. At full capacity, the mill is capable of producing 2.2 million tons of steel per year -- almost half as much as the Cleveland Works. At the same time, Trico employs about 300 workers, compared to more than 3,000 at the Cleveland plant.

For LTV, the rationale for investing in Trico is hardly a mystery. Over the last 30 years, mini-mills have become the fastest-growing sector of the U.S. steel industry. Though they accounted for just a tiny fraction of output in the early 1970s, today they claim nearly half of domestic capacity. And with a smaller, largely nonunionized workforce and lower fixed costs, mini-mills continue to be far cheaper to build and run than their integrated counterparts.

They are also far more efficient. Over the last two decades, integrated steelmakers' modernization efforts have drastically improved their effectiveness, reducing the average man-hours per ton -- the measure of a mill's efficiency -- to a fifth of what it was. Even so, the most economical old-line mills still can't come close to most mini-mills, where the man-hours needed to make a ton of steel are 75 percent fewer than at integrated plants.

That efficiency means profit, even in times of increased competition from imports. In 2000, as LTV was losing more than $700 million, Nucor, the largest mini-mill company, reported net earnings of $310 million. Steel Dynamics Inc., another mini-mill operator, reported net income of $53 million in its best year ever.

What were once niche players have essentially come to dominate the industry. Nucor is now the largest steel producer of any kind in the United States, bigger even than integrated giant U.S. Steel.

"What has happened is that, essentially, the demand for finished steel hasn't risen all that much in the last 20 years," says Crandall. "It's gone up a little bit, but the mini-mills have developed almost entirely in the last 20 to 25 years, taking away essentially half the market. As a result, the larger companies simply have to decline."

Trico was LTV's attempt to take advantage of the industry's changing reality, but it didn't exactly turn out as planned. From almost the day it launched operations, Trico was plagued with problems: Equipment didn't work; production was delayed. From 1997 through 1999, the plant often ran at less than 50 percent capacity, and it lost more than $200 million.

"A mini-mill is skipping a lot of the production stages, because it has continuous operations," says industry consultant Donald F. Barnett, president of Economic Associates Inc. "That's very good from an efficiency point of view, but it can be extremely nasty when you try to start the thing up, because any problem in any one of those facilities means you've got a problem in all those facilities."

By the final quarter of 1999, Trico finally broke even. In April 2000, LTV announced that Trico had made money for the first time in its history. In the second half of the year, however, as foreign steel poured into ports throughout the Southeast and prices plummeted, Trico's losses mounted. From April through September of 2000, Trico lost $24 million.

LTV blamed it on foreign imports.

LTV's problems didn't begin -- or end -- with Trico. Even as its mini-mill venture blundered through infancy, the company remained undaunted in its attempt to expand outside its core business. In April 1996, it announced it was partnering with Cleveland-Cliffs Inc. and Lurgi AG of Germany to build a $150 million plant in the island nation of Trinidad and Tobago. The new venture would produce directed reduced iron (DRI) briquettes, an alternative source of iron for electric arc furnaces used in mini-mills like Trico.

In the wake of LTV's bankruptcy, the tropical locale -- a two-island Caribbean nation with 1.2 million people and the largest source of natural asphalt on earth -- has offered delicious fodder for snickering.

At the time the venture was announced, however, it was anything but exotic. In the mid-'90s, as demand in the domestic steel market remained strong, high-grade scrap metal became more expensive. More than a few companies were trying to develop alternative sources of high-quality feedstock for mini-mills, and LTV executives thought the briquettes could be a new source of income.

"The rapidly growing demand for high-quality scrap substitutes creates a business opportunity that increases value for our shareholders," Hoag said at the time.

Because such ventures required huge volumes of natural gas, LTV's operation was located in Trinidad, which has an abundant supply of cheap natural gas and easy access to iron ore from Brazil.

CAL (for Cliffs and Associates Ltd.) faced problems from the beginning. Its technology needed serious debugging, while proposed timelines and production estimates proved wildly optimistic. Originally slated to begin producing briquettes in late 1998, the plant didn't come on line until the spring of 1999 -- just in time for the crash of the alternative-iron market. The price of natural gas had skyrocketed, while the price of scrap iron -- the very material DRI was supposed to replace -- fell. Economically, the venture no longer made any sense, especially since the plant still wasn't operating properly.

When it was shut down last summer for modifications, the facility was losing $2.5 million a month and would need investments of around $30 million to ever reach capacity. In October, LTV announced it was bailing out of the venture and taking an $84 million write-down.

At best, LTV's ill-fated adventures with Trico and CAL were seen as errors of ambition, optimism, and inexperience. At worst, they would be perceived as examples of gross naïvet´, of spending money on projects far outside the company's realm of knowledge.

The company's move to diversify wouldn't go much better.

After LTV emerged from bankruptcy in 1993, executives made no secret of their desire to expand into other steel-related businesses. While they insisted they were committed to integrated steel -- pointing to investments made at their Indiana Harbor and Cleveland plants during bankruptcy -- they also knew what everybody else in the industry understood: Integrated steelmaking is too capital-intensive, too competitive, too cyclical to ever sustain much growth.

Instead, LTV thought the ticket to higher profits was metal fabrication -- making the finished products used in cars, machinery, and buildings. In 1997, LTV paid $187 million for Varco-Pruden Buildings, a Memphis maker of steel commercial buildings. The business produced steady profits (though a pittance, compared to the scale of profit and loss in steelmaking) and enabled LTV to expand into international markets.

The VP Buildings purchase was followed up two years later by two far more controversial acquisitions: In 1999, LTV bought Welded Tube Co. of America and Copperweld Corp. The move made LTV the largest producer of high-quality steel pipe and tube in North America.

But some analysts carped about the combined $770 million price tag. Nor were they pleased by how the company paid for the acquisitions, issuing $275 million in bonds with interest rates higher than many thought prudent.

Investors took notice. Shortly after the purchase announcement, LTV's stock fell by a third.

By the end of 1999, the company had incurred more than $1 billion in debt. LTV's timing could not have been worse. In a three-month period, energy prices skyrocketed, interest rates rose, steel inventories piled up, and automobile demand slowed. And after a respite in 1999, foreign steel once again poured into the United States in the second half of 2000, severely depressing prices.

"Even [mini-mills] aren't making a ton of money," says S&P analyst Anton. "But most of them are doing better than the integrated."

LTV, left cash-poor by its acquisitions, tried to halt the bleeding by unloading operations. In May, it announced the closing of LTV Steel Mining Co. in Minnesota. In July, it sold its share of limestone company Presque Isle Corp. In August, it unloaded its 40 percent share in GalvTech, a galvanizing business. In October, it agreed to sell its tin mills to U.S. Steel.

Even so, through the first nine months of 2000, the company reported losses of $368 million.

Industry consultant Barnett says LTV made the mistake a lot of companies make: It assumed the good times of 1996 and '97 would continue a lot longer than they did. "The fact is, a lot of producers got overly ambitious when the market was good," he says. "The tendency is to think the market will continue to be good. Nobody says there will be no downturn, but often you think it's not going to be two years away; you think it's going to be five years away, and you'll have time to absorb the changes. But the downturns are vicious in the steel industry."

Nobody, of course, understands this better than LTV.

"The steel company's been losing money for several years," says LTV's Tomasch. "Do you take valuable capital and invest it in a business that's losing money? . . . We decided to grow the company in another area, and that takes money. Then we got hit by another wave of imports."

Now the company is muddling through its second bankruptcy in 15 years, in much worse shape than it was the first time it found itself there. In 1986, LTV was a huge conglomerate, with both profitable businesses to sell and outmoded facilities to shed. Today, it has far fewer options.

Yet if anything can be predicted, it's that, if and when LTV emerges from bankruptcy, the company will look far different. "Competing will mean a fundamental change in the cost structure," says Tomasch. "If you can't make more money, the only thing for you to do is to remove some of the costs. So that's what we're going to do. That's what we have to do. That's what the whole industry will have to do."

But removing costs will mean confronting problems for which nobody has provided a whiff of a solution. For years, analysts have been predicting the consolidation of domestic steel. It hasn't happened, for one reason: It's too expensive. Because of the environmental costs, and health care and retirement obligations to workers, it is now more costly to shut down a mill -- $60,000 per employee, according to one industry estimate -- than to keep an inefficient one operating.

"We are in a new world," says Tomasch. "We are in a different world."

That new world may include a far bigger role for the very entities American producers say are so tied to their woes: foreign steel companies.

Few banks are willing to make capital available for restructuring. The only steelmakers ready to swallow this huge investment may well be foreign.

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