POSCO: The Next Big SteelBy Mel Duvall | Posted 2002-06-17 Print
South Korea's POSCO has become the world's most-efficient steel producer, exploiting its geography and inventory management to pull ahead of U.S. competitors.
At the turn of the 20th century, steel magnate Andrew Carnegie made an observation that would portend the difficulties U.S. Steel would face at the turn of the 21st.
"Pittsburgh," Carnegie told a gathering of steelmakers in Cleveland in 1895, "is no longer the best point to manufacture iron and steel in the United States. The reason is easily given and will be obvious to the dullest comprehension."
At the time, Carnegie was arguing the best place to locate a steel plant was on Lake Erie or Lake Michigan. That would lower costs of shipping ore from Minnesota. Pittsburgh was closer to the coal deposits of West Virginia, but as Carnegie pointed out, it takes two tons of ore and only one ton of coke to make a ton of steel.
That simple equation remains a deciding factor in the global steel industry today.
"By far, the biggest cost factor in making steel, is the cost of getting ore into your blast furnace," says Patrick Cleary, a steel industry analyst with London-based research firm CRU Group. "Technology certainly plays a role, but most companies know what to do with the ore once they have it."
In fact, the largest steelmaking companies in the world today have built facilities directly on the ocean, with access to deep harbor berths. From there, raw materials can be moved in by huge container ships from the richest and most economical sources in the world, such as Australia, Venezuela, Brazil and Africa.
Access to cheap labor and energy resources are certainly factors in the cost of producing steel, but the biggest single factor is the cost of obtaining and transporting raw materials.
Look at Arcelor, recently formed from the merger of three European steel makers, Arbed, Arceralia, and Usinor. The Luxembourg-based steel giant estimates that purchasing and shipping raw materials makes up about half the cost of producing a typical $210 ton of steel, so it puts as many plants as it can on the Atlantic and Mediterranean coasts.
Energy sources, such as electricity and natural gas, make up 6% of the cost, labor 6%, and other costs such as maintenance, information technology and administration make up the remaining 38%.
The company commonly regarded as the most efficient steel producer in the world today, POSCO of South Korea, has exploited the advantage of geographic positioning to the fullest. Prior to 1966, the Republic of Korea barely had any steel-making capabilities at all. Its output was a mere 185,000 tons, produced from a collection of small, obsolete furnaces. Looking for a way to vault the largely agrarian country out of its Third-World status, the government of the day decided to build a world-class steelmaking facility, with $296 million in government funds and Japanese investment. Under the guidance of General Tae-Joon Park, a retired Korean army general who was already running a profitable tungsten mining company, a site for the project was selected at Pohang on Korea's Pacific coast line.
The advantage of the site wasn't its location near iron ore or coal deposits—Korea had none of any consequence—but the fact that its shore was next to deep water meant the largest container ships in the world could load and unload materials directly to and from the plant.
POSCO completed a second major integrated facility at Kwangyang Bay in 1987, and added a mini-mill, which uses a much more efficient electric arc furnace, in 1994. Last year POSCO, which went into private hands in October 2000, became the largest steelmaker in the world, producing 27 million tons of steel products at about $180 per ton; that's enough to manufacture about 100,000 compact cars a day.
POSCO, however, will not hold that title in 2002, as the combined operations of Arcelor will produce about 45 million tons. POSCO, though, is also one of the most profitable steelmakers, earning $634 million in 2001, a year in which few steel companies made money. The prior year, POSCO had a record profit of $1.6 billion.
At an estimated production cost of about $175-$180 for a ton of hot rolled coil, POSCO has a clear advantage over U.S. Steel, at about $240 per ton. U.S. Steel must absorb $30 to $40 a ton in healthcare benefits for long-time employees. POSCO also beats Arcelor, whose production costs are estimated by CRU Group, a London research firm, at $210 per ton, Corus (Britain) at $250, Nippon Steel (Japan) $240, and even innovative U.S. mini-mill operator Nucor, at $210 per ton.
"Their harbor facilities give them a tremendous advantage, but that isn't the only one," adds Frank Koelble, associate director of the Industrial Economic Research Institute at Fordham University. Koelble has followed the industry for more than 40 years, and helped research a book with the Rev. William Hogan, former director of the Fordham institute, called The POSCO Strategy: A Blueprint For World Steel's Future (Rowman and Littlefield, 2001).
"They were able to start fresh, so they could tightly interconnect every process, from the delivery of coke and ore, to the blast furnace, and on through casting and rolling. They've been able to wring out every inefficiency, because one piece of the puzzle is so closely connected to the next."
POSCO is also regarded as a front-runner in computer technology. In 1999, it launched what it called its Process Innovation initiative, which aimed to move all aspects of the company's interactions with customers onto the Internet, from sourcing raw materials to ordering steel.
Various aspects of the initiative, including the ability to book and monitor shipments on POSCO's fleet of 44 ships through a Web browser, have already been completed. The entire project, which is being built on top of Oracle's enterprise planning software and i2 Technologies' supply chain platform, won't be finished until 2004.
To date, POSCO has invested $159 million on the initiative, and Chairman Sang-Boo Yoo says it has generated $247 million in savings.
Understanding customer demand better also has allowed POSCO to reduce inventory from the one million tons on hand at the end of June 2001, to 510,000 tons as of April 17, 2002. POSCO has not escaped the toll on steel prices, however, with sales in the first quarter of 2002 slipping 3.3% to $2.08 billion (that's 2.66 trillion Korean won).
The Process Innovation initiative is self-admittedly a pet project of Sang-Boo Yoo, who told investors earlier this year that the initiatives would "improve the company's competitiveness so that it can endure all types of change."
Even so, few analysts give POSCO an edge over U.S. Steel, in technology. Frank Voelker, chief executive of Alstom Power Conversion, has done work upgrading systems inside POSCO, U.S. Steel, and most of the European mills. He rates U.S. Steel as high as POSCO and perhaps higher than most of its competitors.
"They're producing the product, as far as production levels and quality, that's as good as or better than their more modern counterparts," he says. Koelble, who has extensively toured both companies' facilities, agrees: "The Gary and Mon Valley (U.S. Steel) plants are second to none. But one thing that is clear about this industry, is that technology isn't always a savior."
U.S. Steel Chairman Thomas Usher, for instance, says there is little the company can do about the lack of a seaside plant. The capital investment that would be required can't be justified at today's steel prices. Even if it could, he's not so sure he would abandon the company's existing mills.
"I'd love to have a seaport, paid for by the government, just like POSCO," says Usher, sitting back in his spacious office overlooking the Pittsburgh skyline and the rolling Allegheny River valley. "But I'd rather be right where I am today—on the doorstep of my customers in Chicago and Detroit."
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