22 April 2004 20:37
Remarks by Courtney Pratt to the Empire Club of Canada - The Changing Steel Industry and Stelco`s
Prospects
TORONTO, April 22 /CNW/ - (TSX:STE) - 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 inter-related 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 dot.com 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 dollars 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 increases when we look to the world stage. Steel is a 500 billion dollar 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 labeled China the world's
workshop. But for today's purpose it can be labeled 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 percent 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 infrastructure of China's massive construction boom. As a result, the price 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, and I quote, 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, end quote. While just about everything else in the steel industry may have changed
since then, this principle, at least, seems as relevant today as it did 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 c's:
communication, cooperation, 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 and has 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 workforce, 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.
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ Stelco Inc. is Canada's largest and most
diversified steel producer. Stelco is involved in all major segments of the steel industry through its integrated steel
business, mini-mills, and manufactured products businesses. Stelco has a presence in six Canadian provinces and two
states of the United States. Consolidated net sales in 2002 were $2.8 billion. This news release may contain
forward-looking information with respect to the Corporation's business operations, financial performance and
conditions. Actual results may differ from expected results for a variety of reasons including factors discussed in the
Corporation's Management's Discussion and Analysis section of the Corporation's 2002 Annual Report. To
learn more about Stelco and its businesses, please refer to our Web site at www.stelco.ca. %SEDAR: 00001549E
VIEW ADDITIONAL COMPANY-SPECIFIC INFORMATION: http://www.newswire.ca/en/releases/orgDisplay.cgi?okey=23131 /For
further information: T. F. Huxley, Vice President - Corporate Affairs, (905) 528-2511, Extension 4070; Archived images
on this organization are available through CNW E-Pix at http://www.newswire.ca. Images are free to members of The
Canadian Press./ (STE.A. STE.B. STE.DB.)
[Canada Newswire] |
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