Business review; Steel

From the national educational radio network here is a Business Review ASSOCIATE PROFESSOR ROSS Wilhelm of the University of Michigan Graduate School of Business Administration presents his views and comments of business and economic activity almost since its inception the way the steel industry has achieved economies has been by building bigger plants. Plants have grown bigger through both integration as well as in the sizes of the producing units. Steel plants have been integrated by bringing together at one point all of the steps in the production process from the blast furnaces through the rolling in finishing mills to realize economies and the utilization of the heat required each step in the making of steel. In addition savings in the making of steel also have been realized by building bigger blast furnaces and other types of units as well as a larger finishing capacity. Today however the trend toward bigger producing units in the steel industry seems to be reversing across the United States as well as in many underdeveloped countries tiny steel mills are being built which can and are

competing a fifth effectively with the industry giants. These new mini mills are highly specialized and while they do not have the versatility you know the flexibility of the great units they are in their areas especially able to produce finished steel products cheaper in many instances than can the Giants. The reason why the mini mills have been able to realize lower costs than the industry giants has are first because the mini mills depend upon low cost scrap iron and steel for their raw materials. Where is the industry giants depend upon the higher cost us iron ore for their raw material. Secondly many mills have specialized in products specialized in the products they produce and they have led the industry in adopting and developing cost saving methods for producing these products. Third the mini mills have been specializing in low cost products such as reinforcing rods for concrete construction as well as bar rod stock used

by fabricators of wire and similar items where the competition from both domestic and foreign producers is less. And lastly the mini mills a place great emphasis in their sales effort upon customer service and rapid delivery. The effectiveness of the many mills and competing can be seen in the return on their investment which they are earning for all of American manufacturing industry the return on investment in recent years has run about 12 and a half percent per year for the large integrated steel companies the return is run around seven and a half percent for the mini mills the return has been running at around 10 percent with the most efficient realizing a 15 percent return. The performance of the many mills has been astounding in view of the fact that their growth has occurred during the period when competition in the steel industry has been fierce. In recent years the proportion of total still consumed in our nation which is coming from foreign steel companies has risen from a level of around two to three percent prior to one thousand fifty eight

to approximately 18 percent in one thousand sixty eight. And yet despite this great competition from foreign steel companies the mini mills have been able not only to survive but they've been able to earn an excellent return on their investments. Probably the most important single reason why the mini mills have been able to perform so well is because they're equipped to use low cost scrap metal as a raw material. Since 1956 scrap metal prices have fallen sharply because the demand for scrap metal by the large steel firms is declined. The reason the large steel companies are using less scrap today is because of the development of the new oxygen furnaces the new basic oxygen furnaces are the principal means for producing steel today. However these furnace is only use one part of scrap steel or scrap iron to every three parts of iron ore in the form of pig iron to produce a ton of steel. The older open hearth furnace is which were far less efficient than the new oxygen for an Asus used one part

of scrap for each part of iron ore and making steel. This is the steel in the street Giants a switch to the more efficient oxygen converters or oxygen furnace. This is cause the Pratt price of scrap iron to fall and as the price of scrap iron has fallen the mini mills which have electric furnace is and consumes scrap exclusively in producing steel have acquired a great competitive advantage. This of course is a beautiful example of the importance of input prices in determining the production methods employed in an industry over the future however I believe we'll see the giant firms learning how to use more of the low cost scrap and their oxygen furnaces and the advantage of the many mills will disappear. That was Associate Professor Ross Wilhelm of the University of Michigan Graduate School of Business Administration. With his views and comments on business and economic activity Business Review is recorded by the University of Michigan Broadcasting Service. This is the national educational

radio network.