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March 1, 2010

GLASS HALF FULL, MARKET HALF EMPTY

The new boss of ThyssenKrupp's global stainless steel business has inherited some intensely complicated commercial problems that show no sign of abating quickly.

Clemens Iller comes to the top job at the world's largest producer of stainless steel at a particularly inopportune time.

Iller, whose headquarters are in Krefeld, Germany, has been CEO of ThyssenKrupp AG’s global stainless steel business just since September 2009. Last year, real European consumption of stainless steel fell 26%, says industry oracle SMR Research. Stainless demand in the Americas was off 23%, and was down 9% for the world as a whole. ThyssenKrupp’s own deliveries fell 20% in 2009, to 1.8 million metric tons; all of those tons sold at tumbling prices. Faced with precipitous declines in its major markets, wretched capacity utilization rates and a perversely rising value for the euro, ThyssenKrupp’s stainless business recorded a pretax loss of €946 million (or $1.29 billion at today’s exchange rates) in the 2009 fiscal year, ended September 30. Although deliveries improved 25% during the period, to 510,000 metric tons, the fiscal 2010 first-quarter ended with a €59 million ($80 million) pretax loss for the stainless business.

But wait, there’s more. Squeezed by the recession, ThyssenKrupp has been forced to delay startup of its ballyhooed new stainless plant near Mobile, Alabama. Originally projected to begin operations at the end of 2009, it will instead crank up in October with just one of three envisioned cold-rolling lines in operation. A vital part of the plant’s capabilities, a melt shop, already scheduled to start no sooner than early 2012, may now be delayed a further 24 months, ThyssenKrupp Executive Board Chairman Ekkehard D. Schulz announced at the company’s annual meeting in January.

Welcome to the top, Herr Iller.

“Even without the financial crisis, we would be in a difficult position. We have too much capacity in the market,” says Iller. But here’s the surprise: For ThyssenKrupp, the Alabama plant, whenever it is completed, will be the low-cost producer in a global system that now depends on costly, euro-based hot band shipments from Europe to sustain rolling mills in places like China and Mexico. Every major cost component in North America is less expensive than its counterparts in Europe, says Iller.

“At the end of the day, it sounds a little bit strange that Germans need to convince the Americans about the beauty that is here” for an industrial operation, he says. “Here, in the United States, is definitely a place where we can compete. We have the technology, the brand name and the reputation. There is definitely a good space for us here.”

A native of Bremen, Germany, who earned a degree in business administration from the University of Türbingen in 1988, Iller began his business career in 1989 as a junior project manager with Amphenol Tuchel, the German subsidiary of connector-maker Amphenol Corporation. He later joined a machinery company, working in marketing and sales management, before becoming general manager for export sales for ThyssenKrupp’s Rasselstein Hoesch GmbH in 1995. He became head of the company’s heavy carbon steel plate sales in 1999, and four years later he was named vice president for the Heavy Plate Profit Center. The next year, 2004, Iller was named to the executive board of ThyssenKrupp Electrical Steel GmbH, becoming its chairman late in 2005.

His formal title now is chairman of the management board of the ThyssenKrupp Stainless Global, which in turn is a semi-independent business area, as ThyssenKrupp styles the enterprise today. Forward talked with Iller, ThyssenKrupp Stainless USA’s president and CEO Ulrich Albrecht-Frueh and Stephan Lacor, vice president for North American stainless sales and marketing, during a visit to the Alabama plant.

You are relatively new to the stainless steel business. What are your impressions of the business?
ILLER: The stainless business is a completely new challenge for me. Although the business model, the customers and the production are very similar to those I’ve experienced in my previous positions, the stainless business has one additional and unique component: raw material volatility. The price of nickel is very unpredictable and greatly influences our business. It’s something that impacts all of us.

How does ThyssenKrupp view global overcapacity in stainless steel?
ILLER: The highest overcapacity that we see is in China; almost 45% these days. In Europe, we estimate overcapacity at something like 20%, perhaps. Here in the United States there is also overcapacity, but when we decided to make our investment in Alabama, the market included something like 350,000 tons a year of imports.

LACOR: On the sales side, we haven’t seen overcapacity in the North American market. That 30% import penetration that we saw, even in 2007–2008, points to the fact that domestic capacity was not necessarily coming forth. When we bring our plant on line, we’ll sell the product. It will give customers a choice.

ALBRECHT-FRUEH: We believe the real capacity here in the U.S. is in the range of 1.8 to 1.9 million tons a year. But even in a good market, the imports have flowed in.

LACOR: Look at the growing times of this market, in 2004, 2005 and 2006. Domestic shipments were pretty flat. The market was taken up by imports. So I always question what the real capacity might be. For our planning purposes, we take 2007 as a normalized market, at 1.5 million tons.

ILLER: Mexico has grown drastically as well. Half of the production of Mexinox goes into Mexico. We are lacking capacity there.

LACOR: The migration of manufacturing means that a lot of appliance makers have moved to Mexico. You’ve got Electrolux, Maytag and Whirlpool that moved facilities to Mexico. They picked Mexico and not China. For us, that’s good.

Why have you made this kind of large commitment to North America at a time when parts of our manufacturing base are moving away?
ILLER: There are many reasons. We are fighting a battle in Europe now on energy costs. Here, you have cheap energy, which is very important for our industry. If you look a little bit down the road, North America is the place that can be our most efficient and cost-effective location. It is a very competitive place.

One advantage is the good, educated labor force. The people here are flexible, far more flexible. The lead times are very short if we want to supply Mexico from here, as well.

ALBRECHT-FRUEH: If you just look at the main costs, the true costs of operations all over the world, we have an advantage here from energy costs, some advantage from personnel costs and reduced risk from transportation and inventory costs. On hot band, for example, we will probably save more than 10% over the average from elsewhere in the world.

Right now to serve the Americas we have to ship hot band from Italy. That adds about $70 a ton to our costs. But that’s not all. If you produce here, you keep your overall stocks lower because cycle time is shorter. It takes seven weeks now, just for transportation time.

ILLER: Remember, we are comparing ThyssenKrupp Stainless in Europe with our operations here. I don’t say that we are the most cost-effective in Europe. Italy and Germany (ThyssenKrupp Nirosta) are the two most expensive energy countries in Europe, while our competition, companies like Outokumpu, sit in Finland with nuclear power. The disadvantage is huge. (Editor’s Note: The average price per kilowatt hour of electricity in Germany is 18.87 cents. In Italy, it’s 23.19 cents. In Finland, home of Outokumpu, electricity averages 10.24 cents per kilowatt hour. The average price in Alabama is 4.83 cents.)

Then remember, when we have to transport the hot band from Europe with the high euro against the U.S. dollar, we are not very competitive.

Despite all the apparent advantages, you have delayed major portions of the project. Why?
ILLER: We reacted to the crisis. What we did was completely right. We were flexible to move the investment forward. People say that by 2011 or 2012, we’ll reach the old level of business again. By then, we’ll be ready. We’ll look back at that point and recognize that, really, we didn’t have any problems. That’s because this place can only win.

ALBRECHT-FRUEH: There has never been a question about whether we should complete the project. The question was always the timing of construction phases. We begin with cold-rolling on one line this year. We’ll also take the next part, a hot annealing and pickling line, into operation as soon as possible. You have to make that decision now to be ready a year and a half from now.

ILLER: The logic behind our new Alabama facility remains the same, to build a fully integrated stainless steel manufacturing and processing facility. We do not intend to rely on hot band from Europe any longer than is necessary, which confirms our commitment to build the melt shop as soon as is practicable. Dr. Schulz has made it clear that a faster ramp-up is possible. His intention is to look at all options for completing the melt shop as early as 2012.

What kinds of products do you hope to produce in the future that you don’t have available now?
Lacor: We have always positioned ourselves as a 430 supplier. We’re niched. The new mill will give us standard 304 and 316 material. We don’t think we need to find new customers. We need to give them a broader scope of product in the volume segment of the market.

ALBRECHT-FRUEH: Right now, we are probably the second biggest supplier of 64-inch wide cold-rolled products. But in the future, we will go to 72- inch, which makes us one of only two North American suppliers of larger widths. We’ll start here with 64-inch, then add 72-inch after that.

You have customers who are ready for that?
ILLER: Yes.

Looking a little longer term, what do you see as the economic outlook?
ILLER: Our expectation is that for the next year, the dollar will stay weak. So you can’t go wrong if you make things here. Some analysts are saying that the U.S. could actually become a net exporter of stainless steel.

We think that the steel industry could come back to what we had in the 2006–2007 period by 2013 or 2014, another three of four years from now. If you talk with customers these days, everybody hesitates to give an outlook. They look out a half year at the most…We believe we will slowly improve from year to year, and, for our industry, it will still be another two or three years where we definitely will not run at full capacity.

Many observers believe that North America’s future as a manufacturing center is in doubt. Yet ThyssenKrupp is investing heavily here. Are you not concerned about the loss of manufacturing to other regions of the world?
ILLER: Look at the auto industry. Mercedes Benz has just decided to build a C-class vehicle here in the United States. It is clear that we have a completely oversaturated market for cars here, yet companies like Mercedes-Benz and Volkswagen plan to build more here.

If you look around Europe, yes, we see customers that are leaving us to build in other places. They are going to Eastern Europe. But if you look at our competition, in places like France or Finland, none of us is better off trying to serve those companies. If they go to China, then, yes, with the degree of overcapacity in China, that would cause trouble for us.

It’s true that manufacturing moves to find cost advantage. But don’t you also see that people go back to stable countries and reliable conditions?
ALBRECHT-FRUEH: Stability, good infrastructure, low delivery times…no one wants to build a startup and then be out of stock. In this crisis, everyone is taught to keep inventories low because no one knows what’s going to happen next. So if you have a ship that’s full of parts running for four weeks, you are at risk. Personnel costs are not the only driver. Overall economics, environmental aspects…goals are higher than they used to be.

ILLER: At the end of the day, you have to go industry by industry. For many, many years, the American steel industry was suffering, and why? Because over many years it suffered from corrosion where the companies didn’t invest, really, into new technologies. But now people are coming back. If you have the right technology, a brand name and good surroundings where you have a good labor force and high flexibility, you will see more and more people that come back. Maybe not those that make the cheap stuff. Those cheap things will stay, maybe, in China. But when you have quality problems and other issues, companies will come back. The competence is still here in the U.S.