Steel remains backbone of Canadian manufacturing

Posted By DAN BELLEROSE, THE SAULT STAR

Updated 1 hour ago

Despite fears of a potential "earthquake" impact to primary steel producers, such as Essar Steel Algoma, as a result of new billing procedures by essential raw material suppliers, the future is not all doom-and-gloom for the Canadian steel sector.

Peter Warrian, author of a recently-released extensive 47-page report on the state of the Canadian steel industry, told a sparse Sault Ste. Marie audience Thursday that "steel remains the backbone of advanced manufacturing in this country ... the industry was critical to Canada in the past

and should remain so moving forward."

The report, commissioned by the Canadian Steel Trade and Employment Congress, offers insight into foreign ownership and the forces currently impacting the industry both domestically and globally.

Seventeen of 18 primary Canadian steel facilities are controlled by global companies, said the acclaimed steel academic with the Munk Centre of International Studies at the University of Toronto, including Tenaris Algoma Tubes and Essar Algoma in Sault Ste. Marie.

India's Essar Group acquired then Algoma Steel Inc. three years ago in a nearly $2-billion cash transaction while

Argentina's Tenaris S.A., a global pipe giant, set up shop in the then idle ASI tube mill a decade ago.

Together, the two mills directly employ about 4,000 workers, including more than 3,000 at Essar Algoma.

There are three key global markets for major steel producers, said Warrian, former three-year chief economic officer for Ontario, 1992 through 1994, Asia, Europe and North America, "and all the major producers want a presence in all three markets."

Locally, Tenaris jumped first, in 2000, expanding its North American presence by acquiring Canada's only seamless tube producer, then seven years later Essar staked out its North American beachhead with the Algoma acquisition.

Essar's arrival came at a time of rapid foreign takeover of Canadian steelmaking icons such as Dofasco by London, England-headquartered giant ArcelorMittal, with more than 100 million tonnes of capacity in 60 countries, and Stelco by U.S. Steel Corp., with more than 30 million tonnes of capacity throughout Europe and North America.

The ownership change of Canada's primary steel producers began in 2006 -- Dofasco, Stelco and

Algoma were essentially big fish in a small pond.

"They were considered big players by Canadians but were small players globally ... Stelco was maybe the 52nd biggest, Dofasco 83rd, and Algoma didn't even crack the top 100," he said at the conclusion of his Marconi Club presentation.

Ownership transformation, globalization and big producers swallowing up smaller producers began in Europe, shifted to the Americas, and then focused on Canadian assets, he said.

The boardrooms of Canada's primary facilities knew in the 1990s,

although it was never said publicly, that it was doubtful they could survive unless they linked themselves to someone with at least 20 million tonnes of capacity, he said.

They were hampered by the cyclical nature of the business, hard-hit by more than a decade of dumping, where foreign steel was sold in Canada at less than the cost to produce it, "the only way to keep customers was low pricing -- a race to the bottom."

Foreign ownership of virtually all of Canada's primary steel facilities creates both "opportunity and challenge."

"Canadian producers have always been capital-starved, they struggled to raise money on the market or through private placements, and now (through global ownership) they have easier access to funds, but they may have fierce competition from within the organization (other mills within the parent company) to secure it," said Warrian.

Such access is usually accompanied by reaching or surpassing performance benchmarks in areas like production, where quality and output is compared on a weekly or monthly basis to international norms, and leads to better management, says the report.

The only Canadian primary takeover questioned by Warrian was U.S. Steel's acquisition of Stelco.

"U. S. Steel is using Stelco as a tier-two asset, a branch plant for supplying slabs to its core asset mills elsewhere," he said.

New ownership, according to the report, provides Canadian mills with access to a richer pool of technology, know-how, and expertise -- working with sister organizations generates both product and process efficiencies not previously accessible.

"If new ownership carries through on earlier plans there is opportunity for growth once the global economy fully recovers," he said.

Among expansion projects put on the back burner due to the economic downturn, according to the report, are Essar Algoma's vision of expanding production by more than 1 million tonnes and a third blast furnace for ArcelorMittal Dofasco.

While Warrian wouldn't get specific in regards to a company's future plans he did let it be known to local media after his presentation that a potential market for Essar Algoma's

increased production could be the energy sector, possibly pipe manufacturing and wind tower fabrication.

Talk of Essar Algoma's interest in a wide-diameter pipe mill, likely for energy-sector pipelines, initially surfaced two years ago but Jatinder Mehra, then CEO of Essar Steel Holdings, told local media in January, 2009, that "the time is not right," due to the economic climate.

He did say that the Sault was the "preferred location" for such a mill, which would create more than 200 jobs in a sector that Essar, despite its global reach, didn't have a presence, but Thunder Bay was also reportedly in the mix.

In regards to wind tower fabrication, Essar Algoma's predecessor, ASI, considered such a market in 2005 when it entered into a joint venture partnership with a German manufacturer.

Expectations were that the company, which hoped to go operational with 140 skilled workers, such as welders, fabricators and painters, would produce up to 180 towers annually for the North American market, each weighing in excess of 100 tonnes.

ASI, the minority partner, viewed it as a value-added opportunity with its contribution being a minimum 25,000 tonnes of plate annually.

The Germans, a leading supplier of wind towers for the European market, withdrew from the venture, which would have been established on ASI property, within a year of the announcement as it reorganized European operations.

The perception of

steel being an "old economy" industry is false, states the report, the industry, which

employs more than 100,000

Canadians in primary steel production, service centres, fabrication and foundries, is innovative, highly skilled and environmentally efficient.

For the sector to realize its full potential, the study concludes, there must be continuous investment -- into technology, innovation and workforce skills.

Canadian steel is also benefitting from recent consolidation of the North American Free Trade Agreement (NAFTA) market.

"Historically, Canada only exported 10 % of its steel production, in recent years it is more like 50-50 (domestic consumption and exports) and that's despite a Canadian dollar whose value has been through the roof at times," said Warrian.

The new billing procedures that the steel academic believes could be a "hurricane" for primary producers, he said, is the current practice of iron ore and coal suppliers wanting to rewrite contracts every three months, instead of locking into longer-term deals that allow for pricing certainty for the steel producers.