The Changing Steel Industry and Stelco's Prospects
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The Empire Club of Canada Addresses (Toronto, Canada), 22 Apr 2004, p. 350-361
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Pratt, Courtney, Speaker
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Text
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Speeches
Description
Some of the speaker's own observations about the nature and consequences for Canadians of changes in the steel industry around the world, across North America and at Stelco itself. Dispelling some notions. Steel as a global industry, second only to oil in the commodity sector. The increase in the pace of growth and change. The China factor. Restructuring in te North American industry. The factor of investment capital. The court-supervised restructing of Stelco. The CCAA process. The goal of a viable Stelco. An analysis of the situation and the risks Stelco faces. Discussion, review, a restructuring plan to be developed. Significant intangible problsm that Stelco faces. The result of some poor business decisison over the years. Questions from some observers. The challenge. Changing the culture and mistrust that has developed. An optimistic view.
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22 Apr 2004
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English
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The speeches are free of charge but please note that the Empire Club of Canada retains copyright. Neither the speeches themselves nor any part of their content may be used for any purpose other than personal interest or research without the explicit permission of the Empire Club of Canada.
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Full Text
Courtney Pratt President and CEO, Stelco Inc.
THE CHANGING STEEL INDUSTRY AND STELCO'S PROSPECTS
Chairman: John C. Koopman
President, The Empire Club of Canada
Head Table Guests

Heather Ferguson, Director, Development and Alumni Relations, Faculty of Nursing, University of Toronto and Director, The Empire Club of Canada; Ben Crocker, Grade 12 Student, North Toronto Collegiate Institute; Rev. Canon Kimberley Beard, BA, BEd, M.Div, Rector, Christ Church, Brampton and Director, The Empire Club of Canada; Richard Fahey, Vice-President, Quebec, Canadian Federation of Independent Business; His Worship Mayor Larry Di Ianni, Mayor, City of Hamilton; Catherine S. Swift, President and CEO and Chair of the Board, Canadian Federation of Independent Business and Director, The Empire Club of Canada; Wayne K. Bassett, President and CEO, Samuel, Son & Company Ltd.; and Blair Cowper-Smith, Senior Partner, McCarthy Tetrault LLP, Corporate Secretary and Special Counsel, Stelco Inc.

Introduction by John Koopman

The history of iron is as old as the history of recorded time. Genesis 4:22 speaks of the appropriately named Tubalcain who was an instructor of forgers of brass and iron instruments.

A Hebrew legend says that when the temple in Jerusalem was completed Solomon invited the temple's artisans to a feast: the stonecutters, the goldsmiths, the silversmiths and the carpenters. At the seat of honour, at Solomon's right hand, sat an ironworker. The other artisans filed the Judaic equivalent of a grievance and Solomon responded that the iron worker deserved the seat of honour. He had made the tools that all the other artisans had used.

The ancients considered iron a precious metal. As Alexander the Great's legions marched east, he ordered his generals to seize any iron found. Plinius writes that Romans considered iron more valuable than silver.

Warriors (and Rudyard Kipling) always understood the power of iron.

Gold is for the mistress--silver for the maid--Copper for the craftsman cunning at his trade. "Good!" said the Baron, sitting in his hall, "But Iron--Cold Iron--is master of them all."

It is uncanny how often iron and steel have played a role in history's key inflection points.

Iron guns and armour allowed Francisco Pizarro's 200 Spaniards to defeat an Inca army 100 times its size.

In 1750 Britain passed the Iron Act, which forbade building mills in the colonies. This was the first of the Trade and Navigation Acts that ultimately sparked the American Revolution. The same act applied to Canada, but we did not seem to mind.

Ironically it was also iron that saved the revolution in the uprising's darkest days. In the winter of 1777 George Washington retired with his exhausted, ill-equipped troops not to Valley Forge but to the "Valley of the Forges"--and at these forges the insurrectionist Washington refurbished his armaments.

Good steel policy was at the origin of the European Union which was founded in 1951 as the European Coal and Steel Community. Its purpose was to pool the steel resources of the member states, which the union's founders believed, correctly it seems, would prevent another European war.

Bad steel policy resulted in the 1930 U.S. Smoot-Hawley Act, which raised U.S. tariffs on iron and steel to 60 per cent. One thousand economists signed a letter pleading with then--President Hoover not to sign Smoot-Hawley but Hoover ignored their advice. Smoot-Hawley set off rounds of retaliation from other nations that savaged world trade and dramatically exacerbated the Great Depression.

The United States considers steel-production capacity a critical part of homeland security and this has some implications for the mills of the rest of the world. Today's global steel industry is in a state of flux and the situation at Stelco today is a reflection of that. If history is any guide, we can be sure that the state of Canada's steel industry is of national concern.

Our guest today is the President and Chief Executive Officer of Stelco. Mr. Pratt's career started as a high school teacher in Montreal, he spent nearly a decade consulting with the former Touche Ross and he is also a former president and chairman of Noranda Mines.

Courtney Pratt

Thank you and good afternoon. For more than a century the Empire Club has been a platform of record for the discussion of economic, social, political, and other issues. Stelco, only seven years younger than the Empire Club, has been witness to many of the same ebbs and flows of history. And, as in the case of Canada itself, recent years have brought more profound change to the steel industry, and to Stelco, than just about any other period.

During the next few minutes I'd like to share my own observations about the nature and consequences for Canadians of these changes in the steel industry around the world, across North America and just down the lakeshore at Stelco itself. In so doing, I hope to leave you with several interrelated thoughts.

First, this supposedly "old-economy" industry is right at the heart of the "new-economy" paradigm shift that is changing the world in which Canada competes.

Second, and as a result of these global developments, the North American steel industry is undergoing the most profound transformation in its history.

And third, Stelco itself can emerge from this process and from its own current restructuring as a viable and successful steel producer if all parties want it to happen.

In recent years, to paraphrase the comedian Rodney Dangerfield, steel has received little respect. It has been portrayed as a relic of the past, an old smoke-stack industry in a young dotcom age, and somehow more of a drag on, than a contributor to, a modern economy.

Well, let's dispel those notions at the outset. The steel industry remains indispensable because it is essential to the world's automotive, construction, transportation, appliance, machinery, and other industries. it is a major part of the Canadian economy, representing $11 billion a year in sales and 150,000 direct and indirect jobs. Steel is also innovative because, thanks to extensive R&D investments, more than half of today's steel products didn't even exist a decade ago. And it is environmentally responsible. Steel is the world's most recycled product. It has a recycling rate that is higher than aluminum, paper, plastic and glass combined. On top of that, producing a ton of steel in Canada results in 80-per-cent less air, water and solid waste emissions than it did only 10 years ago.

The size, importance and vitality of the steel industry only increase when we look to the world stage. Steel is a $500-billion global industry, second only to oil in the commodity sector. Worldwide use of steel products is increasing at a healthy average rate each year, faster in developing countries. And the volume of international steel trade has increased by four times during the past 50 years.

With all that, the pace of growth and change is still increasing. Steel industry veterans say they've never seen anything like the trends of recent years. But then again, no one has ever seen the explosive economic growth we're seeing in a number of developing countries, including China in particular. These developments are transforming the steel industry from a regional business into a truly global marketplace in which events in one area have significant consequences for others.

Much has been made of China's massive economic liberalization, industrialization and the impact these developments are having on the entire world. As the journal Foreign Affairs has noted, China's emergence as a major trading nation is transforming world markets. Many observers have labelled China the world's workshop, but for today's purpose it can be labelled the world's steel mill as well. The numbers alone are staggering. China is the world's largest steel producer, accounting for nearly one-third of global output. It's the fastest-growing producer as well. The capacity it is adding each year is equivalent to Canada's entire annual production. And it is building the equivalent of four Stelcos each and every year.

But China isn't just producing steel at a record rate; it's consuming it at the same pace. It's the world's largest steel customer, with double-digit increases in annual demand. China is buying 20 per cent of total world exports and it is searching the world to buy up all the raw materials it can find. These materials are needed to fuel the mills that produce the steel that provides the infra-structure of China's massive construction boom. As a result, the prices of coal, iron ore, coke, and steel scrap have gone through the roof. These price increases have added significant costs to producers everywhere, including here in Canada.

These incredible developments are not just taking place within China. Other countries like Brazil, Japan, Korea, Russia and Ukraine, not to mention the European Community, have flourishing and cost-effective steel industries of their own. For many countries, steel is viewed like airlines; they want their own national steel producer just like they want a national flag carrier.

Some observers are questioning whether this heated activity can last. They are using the bubble word, wondering when Chinese demand for steel will fall, and asking what a flood of excess capacity will mean to global markets. But the fact is that this excess capacity will arise not only if Chinese demand actually falls, but if its current rate of growth just slows down a bit. If that happens, hundreds of millions of tons of excess steel will be looking for a place to call home. And the traditional destination for excess capacity is right here in North America.

So let's turn to the North American industry for a moment to see how it has fared and how it has organized itself to remain competitive in this new global marketplace.

The short answer is that we have rarely seen so much restructuring of a domestic industry in so short a time. The steel industry in Canada and the United States is still in the process of recovering from the effects of the Asian financial crisis of the late 1990s. Steel producers in Asia and in countries exporting to that region reacted to the crisis by diverting their excess capacity to our own markets.

Our industry is well acquainted with the unfair pricing and other practices that took place. Those who sell here for less than the cost of production, or at prices lower than in their home markets, not only defy international trade laws, they cost our economy jobs and investment as well.

And that's what happened as North America was flooded with too much steel at ridiculously low prices. As the U.S. Commerce Department reported, it appeared as though foreign producers were trying to beat each other in a race to the bottom. That bottom was reached and something had to give. Unfortunately, that something was the North American steel industry. Since 1998 more than 40 producers on both sides of the border have filed for bankruptcy protection. These include some of the pillars of the industrial economy of the past century, names like Algoma, Bethlehem, Ivaco, LTV, National, Slater, Weirton and, most recently, Stelco itself.

No less striking than the number of companies that have filed for protection is the way in which many of them have emerged from insolvency. We've seen incredible consolidation of companies and of production.

The catalyst for much of this change is a company that was born only two years ago this month. International Steel Group, or ISG, was formed to acquire and to restructure steel-making assets. Since then it has become a leading North American integrated steel producer through the purchase of the assets of LTV, Bethlehem Steel and other distressed companies.

These and other examples of consolidation have greatly changed the industry profile. It has also reshaped the playing field in terms of the size of the players, the market power they possess, and the assets they employ.

So industry consolidation is one phrase that summarizes how the North American industry has organized itself in a changing global marketplace. Another phrase that accounts for the success of companies like ISG is cost reduction. These companies have emerged from court protection with significantly fewer obligations and much lower overall cost structures than they had going in. In the United States we have seen a dramatic shedding of costs.

These dramatic developments have changed the structural and competitive landscape of the industry. The companies that have emerged from bankruptcy protection are lean, focused and operate at much lower cost.

This has made it difficult for other companies to compete with them on a cost-effective basis.

A third phrase that summarizes the state of the industry is investment capital. By revising their overall cost structure, successfully restructured steel companies have a greater ability to attract and then provide sufficient return on the capital needed to fund the capital projects that will keep them competitive.

I realize that this last point is not a new fact of business life. In fact one of my predecessors, Vince Scully, discussed this very issue in his remarks to the Empire Club in 1965.

He said, "The money to finance capital expenditures can only be attracted to those enterprises, which have demonstrated an ability to earn a satisfactory return on investment." While just about everything else in the steel industry may have changed since then, this principle, at least, seems as relevant today as it was 39 years ago.

So we see that industry consolidation, lower cost structures, and increased ability to attract capital have marked the recent past. Some observers believe it represents the future as well. Just last month, for example, the Dominion Bond Rating Service predicted that the inevitable slow down in Chinese demand for steel could trigger a new wave of industry consolidation. The report suggests that North American companies will have to address their uncompetitive cost structures in a changing international marketplace if they are to make the capital investments needed to remain viable.

That is exactly what Stelco is trying to do in the court-supervised restructuring process initiated nearly 90 days ago. We've been candid about the factors that led the court to pronounce the company insolvent for purposes of the Companies' Creditors Arrangement Act, or CCAA. These factors include a deteriorating cash position, an uncompetitive cost structure and the resulting inability to compete on a cost-effective basis, the increased cost of raw materials, an inability to make necessary capital investments, plus the fluctuation in the dollar exchange rate.

True, we have seen a recent and dramatic rise in steel prices. But that increase has not been, and is not expected to be, either sustainable or sufficient to offset the even more significant past and projected increase in our costs.

We initiated the CCAA process in order to address our problems, protect the groups that depend on us, develop a restructuring plan and become a viable steel producer. Our new senior management team took office in January.

We took on these new responsibilities in order to rebuild this great company, not wind it up.

Our new team is dedicated to doing that by improving the relationship with our employees, reducing our overall cost structure, improving productivity, focusing on key operations and products, and becoming more competitive.

Our goal is a viable Stelco that can continue to provide good and well-paying jobs to its employees, security to its retirees, and a range of economic and other benefits to the communities in which it operates. A Stelco that is "built to last."

We know the tangible problems we face and the process needed to address them. We're working to establish meaningful communication with the groups that will be involved. We've begun to share with them an analysis of our situation and the risks we face.

We'll discuss each group's particular interests and issues. We'll review how each group might make its own contribution to achieve a successful outcome. A formal CCAA restructuring plan will then be developed. And that plan will be submitted to and voted on by affected creditors. Changes to collective agreements will require approval by the bargaining units affected.

As you can see by this process, the goal of a court-supervised restructuring is a consensual plan built on the three Cs: communication, co-operation, and common sense. With good will on all sides, we hope to find workable solutions to the tangible problems I've just discussed.

But it is clear that Stelco faces a significant intangible problem as well, one that must also be addressed if our restructuring is to succeed. That intangible issue is the atmosphere of mistrust that has developed over the years between Stelco management and its employees. As I've only been an executive of the company for less than four months I don't propose to point fingers or to criticize the past.

But it is clear that the company as a whole has made a number of poor business decisions over the years which have contributed to the mistrust with which our own employees view management and the CCAA process itself.

As a result, some observers have questioned the company's motivation in seeking protection under the CCAA process in the first place. In fact, it is a longstanding, proven, and widely used legal means of pursuing a restructuring. And we believe it is the only available alternative to preserve the company and protect the interests of the people that depend on it. Other companies have used this process successfully and we can do the same.

Some observers have asked whether our CCAA process is directed solely against our own workers or any other group. In fact, I've said from the outset that no one group can, or will, be singled out to bear an unfair share of any solution. No one is looking to devastate employment incomes or retiree pensions.

What has happened in various restructurings in the United States is not our objective and would not be an acceptable outcome to us. All interested groups have a role to play and will have a say in the outcome. That's how the process works because that's the law.

Some observers have asked whether the CCAA process will enable the company or the court or anyone else to impose a solution on our workers or on any other group. In fact, the solution will emerge from the discussions we will, and must have, with all interested groups. Every group will be invited to participate in that process and we hope they all will take part. But that process will proceed because it must if Stelco is to survive.

And some observers have asked whether the CCAA process is really just a variation on the adversarial dealings between management and labour during a collective bargaining process. In fact, a court-supervised restructuring bears no resemblance to traditional labour relations activity. It is different at law and in practice. The process involves many more groups than management and labour.

My colleagues and I are working hard to address these intangible concerns and to instill a new culture of open communication within the company. We've held meetings with the presidents of our union locals. We've issued a number of information letters to all personnel. We've visited the mill floor, and we've held information sessions for groups of employees.

Our challenge is to change the culture and mistrust that developed over many years in a matter of months, because the time period in which a CCAA process is conducted is not unlimited. In our case, it's crucial that substantive discussions begin, and begin soon. We don't have the luxury of time given the problems we face and the work that has to be done if we are to develop a restructuring plan in the time available to us. Failure would mean liquidation. Failure would mean the end of Stelco as we know it today. We have a one-time chance to succeed.

But, I believe we can achieve our goals and emerge as a viable and competitive steel producer if for no other reason than failure is unacceptable. There is too much at stake for us not to succeed because the consequences of failure would extend far beyond the sites of our operations in Hamilton and Nanticoke. At risk are thousands of direct and indirect jobs in Ontario and elsewhere, significant economic activity across Canada, and considerable tax revenue for each level of government.

I'm an optimist by nature, so I want to focus on the positive reasons why Stelco can and should succeed. Our problem lies in our cost structure, not in our business.

We have some world-class facilities, products that are valued by the marketplace, a skilled work force, and plans to invest the capital that will make us more competitive.

If everyone at the table works together and wants it to happen, we can achieve a positive outcome.

Given the extent to which that country's own progress has shaped this environment, perhaps we can take guidance on how to proceed from the ancient Chinese saying--the journey of a thousand miles begins with a single step. If we take that step together, and soon, we will go far towards achieving the successful restructuring that is our destination.

Thank you.

The appreciation of the meeting was expressed by Catherine S. Swift, President and CEO and Chair of the Board, Canadian Federation of Independent Business and Director, The Empire Club of Canada.

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The Changing Steel Industry and Stelco's Prospects


Some of the speaker's own observations about the nature and consequences for Canadians of changes in the steel industry around the world, across North America and at Stelco itself. Dispelling some notions. Steel as a global industry, second only to oil in the commodity sector. The increase in the pace of growth and change. The China factor. Restructuring in te North American industry. The factor of investment capital. The court-supervised restructing of Stelco. The CCAA process. The goal of a viable Stelco. An analysis of the situation and the risks Stelco faces. Discussion, review, a restructuring plan to be developed. Significant intangible problsm that Stelco faces. The result of some poor business decisison over the years. Questions from some observers. The challenge. Changing the culture and mistrust that has developed. An optimistic view.