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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 2003
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 0-21719
Steel Dynamics, Inc.
(Exact name of registrant as specified in its charter)
Indiana 35-1929476
(State or other jurisdiction (IRS employer
of incorporation or organization) Identification No.)
6714 Pointe Inverness Way, Suite 200, Fort Wayne, IN 46804
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (260) 459-3553
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g)of the Act:
Common Stock, $0.01 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No|_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2. Yes |X| No|_|
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 30, 2003, was approximately, $461,665,000. Registrant had
no non-voting shares. For purposes of this calculation, shares of common stock
held by directors, officers and 5% stockholders known to the registrant have
been deemed to be owned by affiliates, but this should not be construed as an
admission that any such person possesses the power, direct or indirect, to
direct or cause the direction of the management or policies of the registrant or
that such person is controlled by or under common control with the registrant.
As of February 20, 2004, Registrant had outstanding 49,007,605 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant's definitive proxy statement referenced in Part III,
Items 10, 11 and 12 of this report, to be filed prior to April 29, 2004, which
are incorporated by reference herein.
STEEL DYNAMICS, INC.
Table of Contents
Page
----
Part I
Item 1. Business............................................................................... 3
Item 2. Properties............................................................................. 33
Item 3. Legal Proceedings...................................................................... 33
Item 4. Submission of Matters to a Vote of Security Holders ................................... 33
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................. 34
Item 6. Selected Financial Data................................................................ 35
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................... 37
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................. 44
Item 8. Consolidated Financial Statements...................................................... 45
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures................................................ 69
Item 9A. Controls and Procedures................................................................ 69
Part III
Item 10. Directors and Executive Officers of the Registrant..................................... 69
Item 11. Executive Compensation................................................................. 69
Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 69
Item 13. Certain Relationships and Related Transactions......................................... 70
Item 14. Principal Accountant Fees and Services................................................. 71
Part IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................... 71
1
PART I
Special Note Regarding Forward-Looking Statements
Throughout this report, or in other reports or registration statements
filed from time to time with the Securities and Exchange Commission under the
Securities Exchange Act of 1934, or under the Securities Act of 1933, as well as
in documents we incorporate by reference or in press releases or oral statements
made by our officers or representatives, we may make statements that express our
opinions, expectations, or projections regarding future events or future
results, in contrast with statements that reflect historical facts. These
predictive statements, which we generally precede or accompany by such typical
conditional words as "anticipate," "intend," "believe," "estimate," "plan,"
"seek," "project" or "expect," or by the words "may," "will," or "should," are
intended to operate as "forward looking statements" of the kind permitted by the
Private Securities Litigation Reform Act of 1995, incorporated in Section 27A of
the Securities Act and Section 21E of the Securities Exchange Act. That
legislation protects such predictive statements by creating a "safe harbor" from
liability in the event that a particular prediction does not turn out as
anticipated.
While we always intend to express our best judgment when we make statements
about what we believe will occur in the future, and although we base these
statements on assumptions that we believe to be reasonable when made, these
forward looking statements are not a guarantee of performance, and you should
not place undue reliance on such statements. Forward looking statements are
subject to many uncertainties and other variable circumstances, many of which
are outside of our control, that could cause our actual results and experience
to differ materially from those we thought would occur.
The following listing represents some, but not necessarily all, of the
factors that may cause actual results to differ from those anticipated or
predicted:
o cyclical changes in market supply and demand for steel; general economic
conditions; U.S. or foreign trade policy or adverse outcomes of pending and
future trade cases alleging unlawful practices in connection with steel
imports or exports, including the repeal, lapse or exemptions, from existing
U.S. tariffs on imported steel; and governmental monetary or fiscal policy in
the U.S. and other major international economies;
o increased competition brought about by excess global steelmaking capacity,
imports of low priced steel and consolidation in the domestic steel industry;
o risks and uncertainties involving new products or new technologies, such as
our Iron Dynamics ironmaking process, in which the product or process or
certain critical elements thereof may not work at all, may not work as well as
expected, or may turn out to be uneconomic even if they do work;
o changes in the availability or cost of steel scrap, steel scrap substitute
materials or other raw materials or supplies which we use in our production
processes, as well as periodic fluctuations in the availability and cost of
electricity, natural gas or other utilities;
o the occurrence of unanticipated equipment failures and plant outages or
incurrence of extraordinary operating expenses;
o actions by our domestic and foreign competitors, including the addition of
production capacity, the re-start of previously idled production capacity
resulting from bankruptcy reorganizations or asset purchases out of
bankruptcy;
o loss of business from one or more of our major customers or end-users;
2
o labor unrest, work stoppages and/or strikes involving our own workforce, those
of our important suppliers or customers, or those affecting the steel industry
in general;
o the effect of the elements upon our production or upon the production or needs
of our important suppliers or customers;
o the impact of, or changes in, environmental laws or in the application of
other legal or regulatory requirements upon our production processes or costs
of production or upon those of our suppliers or customers, including actions
by government agencies, such as the U.S. Environmental Protection Agency or
the Indiana Department of Environmental Management, on pending or future
environmentally related construction or operating permits;
o private or governmental liability claims or litigation, or the impact of any
adverse outcome of any litigation on the adequacy of our reserves, the
availability or adequacy of our insurance coverage, our financial well-being
or our business and assets;
o changes in interest rates or other borrowing costs, or the effect of existing
loan covenants or restrictions upon the cost or availability of credit to fund
operations or take advantage of other business opportunities;
o changes in our business strategies or development plans which we may adopt or
which may be brought about in response to actions by our suppliers or
customers, and any difficulty or inability to successfully consummate or
implement as planned any of our projects, acquisitions, joint ventures or
strategic alliances; and
o the impact of regulatory or other governmental permits or approvals,
litigation, construction delays, cost overruns, technology risk or operational
complications upon our ability to complete, start-up or continue to profitably
operate a project, an acquisition or a new business, or to operate it as
anticipated.
We also believe that you should read the many factors described in "Risk
Factors" to better understand the risks and uncertainties inherent in our
business or in owning our securities.
Any forward looking statements which we make in this report or in any of
the documents that are incorporated by reference herein speak only as of the
date of such statement, and we undertake no ongoing obligation to update such
statements. Comparisons of results between current and any prior periods are not
intended to express any future trends or indications of future performance,
unless expressed as such, and should only be viewed as historical data.
ITEM 1. BUSINESS
OUR COMPANY
Overview
We are a steel manufacturing company that owns and operates three
steelmaking mini-mills. We produce our steel principally from steel scrap, using
electric arc melting furnaces, continuous casting and automated rolling mills.
During 2003, our sales were $987 million and, at year-end, we had
approximately 1,400 employees. None of our employees are represented by labor
unions.
Flat Roll Division
We own and operate a flat-roll mini-mill located in Butler, Indiana, which
produces sheet steel and which we built and have operated since 1996. This mill
has an annual production capacity of 2.2 million tons of flat-rolled steel,
although we actually produced 2.4 million tons during 2003. We produce a broad
range of high quality hot-rolled, cold-rolled and coated steel products,
including a large variety of high value-added and high margin specialty products
such as thinner gauge rolled products and galvanized products. We sell our
flat-rolled products directly to end-users, intermediate steel processors and
service centers primarily in the Midwestern United States. Our products are used
in numerous industry sectors, including the automotive, construction and
commercial industries.
In May 2002, we announced plans to construct a new in-plant painting
facility at our Butler mini-mill, and we completed this facility and commenced
coating operations in November 2003. This $25 million facility has the capacity
to coat approximately 240,000 tons of steel.
In March 2003, we also purchased the assets of a coating facility formerly
owned by GalvPro II, LLC in Jeffersonville, Indiana for a purchase price of
$17.5 million plus a potential of an additional $1.5 million based on an
earn-out formula. We anticipate that this facility will be capable of producing
between 300,000 and 350,000 tons per year of light-gauge, hot-dipped cold-rolled
galvanized steel. We operate this new facility as a part of our Butler, Indiana
Flat Roll Division, which will also supply the Jeffersonville plant with steel
coils for coating. Production began at Jeffersonville in July 2003. Our new
Jeffersonville facility, together with our new coil-coating facility in Butler,
will enable us to further increase the mix of higher-margin value-added
downstream steel products. This value-added product mix, during 2002 and 2003,
was approximately 60% of our total flat-roll shipments.
3
Structural Steel and Rail Division
We also own and operate a new structural steel and rail mini-mill in
Columbia City, Indiana. We began construction in May 2001, completed plant
construction in April 2002 and commenced commercial structural steel operations
during the third quarter of 2002. Our Columbia City mini-mill is designed to
have an annual production capacity of up to 1.3 million tons of structural steel
beams, pilings and other steel components for the construction, transportation
and industrial machinery markets, as well as standard and premium grade rails
for the railroad industry. Through regular product introductions and continued
production ramp-up of structural steel products, we were able to begin to offer
a broad array of wide flange beams and H-piling structural steel products during
2003 and were able to commission most of the rest of our product line, save for
6 inch and 36 inch beams, which we hope to commission during the first quarter
of 2004. In addition, we performed casting trials for the production of standard
rail products during the first quarter of 2003, and, since that time have
successfully run product through the breakdown mill, tandem mill, cooling bed
and straightener. We anticipate having finished rail product during the second
quarter of 2004, which we will provide to the railroad companies to be tested
and monitored for product evaluation. This evaluation process may take between
six and nine months.
Bar Products Division
On September 6, 2002, we purchased the special bar quality mini-mill assets
in Pittsboro, Indiana formerly owned by Qualitech Steel SBQ LLC. We paid $45
million for these assets, worked during 2003 to upgrade, redesign and retrofit
the facility for the production of a variety of merchant bar quality, or MBQ
products such as angles, flats, rounds and other merchant bars and shapes, as
well as reinforcing bar, or rebar, products and also for the production of some
special bar quality, or SBQ products. When fully complete, we expect to have
invested between $75 and $80 million of additional capital in this facility. We
started melting and casting operations in mid-December and began shipping
limited products by year-end 2003. Currently, we are producing bigger bars, both
MBQ and SBQ, and expect equipment to arrive during the first quarter of 2004
which will enable us, during the second quarter, to produce the smaller rounds,
angles, flats, channels and products of that nature. We expect the Pittsboro
facility to have a capacity of approximately 500,000 to 600,000 tons per year.
Iron Dynamics Scrap Substitute Facility
On February 24, 2003, we announced our intention to restart ironmaking
operations at our wholly-owned Iron Dynamics facility adjacent to our Butler,
Indiana mini-mill. Since 1997, we have tried to develop and commercialize a
pioneering process for the production of a virgin form of iron that could serve
as a lower cost substitute for a portion of the metallic raw material mix that
goes into our electric arc furnaces to be melted into new steel. Since initial
start-up in August 1999, we encountered a number of equipment, design and
process difficulties, and on several occasions during 1999 and 2000 shut the
facility down for redesign, re-engineering and retrofitting. In July 2001, we
suspended operations because of higher than expected start-up and process
refinement costs, high energy costs prevailing at that time, low production
quantities, and historically low steel scrap pricing existing at that time.
These factors made the cost of producing and using our Iron Dynamics scrap
substitute as a source of metallics for the melt mix at our Flat Roll Division
higher than our cost of purchasing and using steel scrap.
We continued to make refinements to our systems and processes, and began
experimental production trials in the fourth quarter of 2002. After an
evaluation of these production trials, we concluded that improved production
technology, coupled with our new ability to recycle waste materials as a raw
material input, and the increasingly higher price of scrap, made the restart of
this production facility feasible. During 2003, we spent approximately $13
million of additional capital for modifications and refinements to the Iron
Dynamics operation. We restarted the rotary hearth furnace or "front end" of the
process in November 2003, and, during December 2003, produced 15,100 tonnes of
direct reduced iron, which we then compacted or briquetted to form hot
briquetted iron, or HBI. We anticipate ramping HBI production up to
approximately 30-35,000 tonnes of HBI per month by the end of the second quarter
of 2004, all of which we plan to use at our Butler flat-roll mill. We have not
yet restarted the smelting end of the Iron Dynamics process, the conversion of
HBI into liquid pig iron, but we anticipate restarting the submerged arc furnace
by the end of the first quarter or the beginning of the second quarter of 2004.
Mesabi Nugget Project
In March 2002, we formed a joint venture with certain entities owned by
Kobe Steel, Ltd., Cleveland-Cliffs Inc., and Ferrometrics, Inc., to assist in
the development of a proprietary process owned by Kobe, known as "ITmK3," for
the production of a fully metallized iron nugget product suitable as an
alternative iron or scrap substitute feedstock in electric arc furnace
steelmaking. We hold an approximate 18% equity interest in a pilot plant in
operation in Minnesota that is working to validate and refine the technology,
which consists of superheating direct reduced iron pellets, liquefying the
material, separating the slag and the iron, and chilling the resulting material
to produce a highly pure iron nugget.
4
New Millennium Building Systems
During the first quarter of 2003, we increased our ownership in our
consolidated New Millennium Building Systems subsidiary from 46.6% ownership
interest to 100%, through the acquisition of the 46.6% interest in New
Millennium previously held by New Process Steel Corporation, a privately held
Houston, Texas steel processor and the purchase of the remaining 6.8% stake held
by some of New Millennium's managers. We consummated the 46.6% New Process
acquisition, at a cost of $3.5 million, plus the purchase of New Process Steel's
portion of New Millennium's subordinated notes payable, including accrued
interest, for $3.9 million, and we also consummated the purchase of the
remaining 6.8% minority interest at a purchase price of $900,000.
The New Millennium facility, which began production in June of 2000,
produces steel building components, including joists, girders, trusses and steel
roof and floor decking, which we sell primarily in the upper Midwest
non-residential building components market. Our Flat Roll Division supplies a
majority of the hot-rolled steel utilized in New Millennium's manufacturing
operations.
We were incorporated in August 1993, in Indiana, and maintain our principal
executive offices at 6714 Pointe Inverness Way, Suite 200, Fort Wayne, Indiana
46804. Our telephone number is (260) 459-3553.
Financing
In March 2002, we consummated a $350.0 million senior secured credit
agreement, consisting of a five year $75.0 million revolving credit facility, a
$70.0 million term A loan, with a term of five years, and a $205.0 million term
B loan, with a term of six years. This senior secured facility is secured by
liens and mortgages on substantially all of our personal and real property
assets and by liens and mortgages on substantially all of the personal and real
property assets of our wholly-owned subsidiaries, excluding New Millennium,
which have also guaranteed our obligations under that facility.
Also in March 2002, we issued $200.0 million of 9 1/2% unsecured senior
notes due 2009, and in November 2003 we issued an additional $100.0 million of
the same 9 1/2% unsecured senior notes due 2009, in offerings exempt from
registration under the Securities Act of 1933. Approximately $50.0 million of
the net proceeds from this offering were used to prepay a portion of our senior
secured term B loan. Pursuant to a registration rights agreement between us and
the initial purchasers of the notes, who resold the notes in offerings exempt
from registration under Rule 144A under the Securities Act, we registered an
exchange offer on Form S-4 to enable the holders of the initial $200.0 million
of unregistered notes, and we are also obligated to register an exchange offer
for the $100.0 million add-on as well.
During December 2002 and January 2003, we also issued $115.0 million of our
4% convertible subordinated notes due 2012, in an offering exempt from
registration under the Securities Act of 1933. Pursuant to a registration rights
agreement between us and the initial purchasers of the notes, who resold the
notes in offerings exempt from registration under Rule 144A under the Securities
Act, we filed a registration statement on Form S-3 on March 7, 2003, effective
June 11, 2003, to permit registered resales by the selling securityholders of
the notes, as well as the approximately 6,762,874 shares of common stock
initially issuable upon conversion of the notes. Approximately $110.0 million of
the net proceeds from this offering were used to prepay in full our $70.0
million senior secured term A loan and $40.0 million of our senior secured term
B loan in December 2002 and January 2003, as described herein. Under the terms
of the convertible note offering, holders of the notes have the right to convert
their notes into shares of our common stock at a conversion rate of 58.8076
shares per $1,000 principal amount of notes (equivalent to an initial conversion
price of approximately $17.0046 per share), subject to adjustment, if, among
other designated circumstances, during any fiscal quarter commencing after
December 31, 2002, the closing sale price of our common stock exceeds $120% of
the conversion price ($20.4055) for at least 20 trading days in the 30
consecutive trading days ending on the last trading day of any fiscal quarter.
Competitive Strengths
We believe that we have the following competitive strengths:
5
One of the Lowest Cost Producers in the United States; State-of-the-Art
Facilities
We believe that our facilities are among the lowest-cost steel
manufacturing facilities in the United States. Operating profit per ton shipped
at our facilities, which we define as consolidated operating income before
start-up costs and minority interest adjustments divided by consolidated net ton
shipments, was $23, $74 and $37 in 2001, 2002 and 2003, respectively, which we
believe compares favorably with our competitors. Our low operating costs are
primarily a result of our efficient plant designs and operations, our high
productivity rate of between 0.3 to 0.4 man hours per ton at our Flat Roll
Division's mini-mill, low ongoing maintenance cost requirements and strategic
locations near supplies of our primary raw material, scrap steel.
Experienced Management Team and Unique Corporate Culture
Our senior management team is highly experienced and has a proven track
record in the steel industry, including pioneering the development of thin-slab
flat-rolled technology. Their objectives are closely aligned with our
stockholders through meaningful stock ownership positions and performance-based
compensation programs. Our corporate culture is also unique for the steel
industry. We emphasize decentralized decision-making and have established
incentive compensation programs specifically designed to reward employee teams
for their efforts towards enhancing productivity, improving profitability and
controlling costs.
Diversified Product Mix
Our current products include hot-rolled and cold-rolled steel products,
galvanized sheet products, light gauge steel products, structural steel and
rails, and joists and deck materials. We have broadened our offering of painted
and coated products with the commencement of production at our recently
completed coil coating facility and at our recently acquired galvanizing
facility, and we have entered the merchant bar, or MBQ market with an array of
angles, flats, rounds, reinforcing bar and other shapes, as well as various
special bar quality, or SBQ market, as our Bar Products Division becomes fully
operational. This diversified mix of products should enable us to access a
broader range of end-user markets, serve a broader customer base and mitigate
our exposure to cyclical downturns in commodity grade flat-rolled products or in
any one product or end-user market.
Strategic Geographic Locations
The strategic locations of our facilities near sources of scrap materials
and our customer base allow us to realize significant pricing advantages due to
freight savings for inbound scrap as well as for outbound steel products
destined for our customers. Our mini-mills are located in the Upper Midwest, a
region which we believe accounts for a majority of the total scrap produced in
the United States. Our new Jeffersonville, Indiana galvanizing facility, on the
Ohio River, will also provide us with an expanded geographic reach to Southern
markets.
Business Strategy
Expand Product Offerings
The completion of our Structural and Rail Division and the commencement of
production at that facility, the completion of our Flat Roll Division coating
facility and the expansion of production of coated products at that facility, as
well as our recent acquisitions of the Pittsboro, Indiana bar mill and the
Jeffersonville, Indiana galvanizing facility, are important steps in pursuing
our strategy of product line expansion. The Structural and Rail Division is
strategically located to serve the Upper Midwest, Northeast and Canadian
markets, which we believe are attractive and under-served markets. Our strategy
to expand our flat-rolled steel product offerings is to focus on the production
of high value-added thinner gauge products, galvanized products and various
coated products. The margins on high value-added products typically exceed those
of the commodity grade and the number of producers that make them is more
limited. Our Pittsboro, Indiana bar mill is likewise strategically located to
position ourselves to cost-effectively serve our product markets. We will
continue to seek additional opportunities to further expand our range of high
value-added products through the expansion of existing facilities, greenfield
projects and acquisitions of other steel manufacturers or steelmaking assets
that may become available through the continuing consolidation of the domestic
steel industry.
Enter New Geographic Markets
We may seek to enter new steel markets in strategic geographic locations
such as the Southeastern or Western United States that offer attractive growth
opportunities. Due to the ongoing restructuring of the domestic steel industry,
we believe there are attractive opportunities to grow our business
geographically either through acquisitions of existing assets or through
strategic partnerships and alliances. We may also consider growth opportunities
through greenfield projects.
6
Continue to Maintain Low Production Costs
We are focused on continuing to maintain one of the lowest operating cost
structures in the North American steel industry based upon operating cost per
ton. We will continue to optimize the use of our equipment, enhance our
productivity and explore new technologies to further improve our unit cost of
production at each of our facilities.
Foster Entrepreneurial Culture
We intend to continue to foster our entrepreneurial corporate culture and
emphasize decentralized decision-making, while rewarding teamwork, innovation
and operating efficiency. We will also continue to focus on maintaining the
effectiveness of our incentive bonus-based plans that are designed to enhance
overall productivity and align the interests of our management and employees
with our stockholders.
Risk Factors
Our profitability is subject to the risks described under "Risk Factors"
described elsewhere in this report. The following is a summary of some of the
most significant risks that may adversely affect our future financial
performance and our ability to effectively compete within our industry:
o excessive imports of steel into the United States that depress U.S. steel
prices;
o intense competition and excess global capacity in the steel industry that
depress U.S. steel prices;
o reduction of demand for steel or downturn in the industries we serve,
including the automotive industry;
o technology, market, operating and start-up risks associated with our Iron
Dynamics scrap substitute project;
o inability to secure a stable supply of steel scrap, and the escalating
cost of steel scrap, our primary raw material, to historic highs;
o start-up and operating risks associated with the retrofitting of our Bar
Product Division's bar mill; and
o unexpected equipment failures that could lead to production curtailments
or shutdowns.
For additional information on these factors and others, we refer you to "Risk
Factors."
Industry Segments
Under Statement of Financial Accounting Standards No. 131 "Disclosures
About Segments of an Enterprise and Related Information," we have two reportable
segments: Steel Operations and Steel Scrap Substitute Operations.
Available Information
Our internet website address is http://www.steeldynamics.com. We make
available on our internet website, under "Investor Relations--SEC Filings," free
of charge, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and amendments to those reports, press releases,
ownership reports pursuant to Section 16(a) of the Securities Act of 1933, as
well as our Code of Ethics for Principal Executive Officers and Senior Financial
Officers, and any amendments to or waivers of our Code of Ethics, filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act, as
soon as reasonably practicable after such materials are electronically filed
with, or furnished to, the SEC.
7
Our Business
Our Operations
Flat Roll Division
Flat-Roll Mini-Mill
Our Butler flat-roll steel mini-mill manufactures hot-rolled, cold-rolled
and coated steel products. It currently has an annual capacity of 2.2 million
tons, although during 2003 we actually produced approximately 2.4 million tons.
We commenced construction of our flat-roll mini-mill in October 1994 and began
production of commercial quality steel in January 1996 with an initial annual
capacity of 1.4 million tons. At the end of 1997, we completed construction of a
cold finishing mill contiguous to the hot mill with an annual capacity of 1.0
million tons. In July 1998, we completed construction, installation and start-up
of a second twin-shell melting furnace battery, thin-slab caster, tunnel furnace
and coiler, thus increasing our mini-mill's annual production capacity to its
current level of 2.2 million tons. This additional production capacity of
hot-rolled steel also enables us to take full advantage of the 1.0 million ton
rolling and finishing capacity of our cold mill. Our products are characterized
by high quality surface characteristics, precise tolerances and light gauge. In
addition, our mini-mill was one of the first U.S. flat-roll mini-mills to
achieve ISO 9002 and QS 9000 certifications. We believe that these
certifications have enabled us to serve a broader range of customers and
end-users which historically have been almost exclusively served by integrated
steel producers.
The Hot Mill
Our hot mill's electric arc furnace melting process begins with the
charging of a furnace vessel with scrap steel, carbon and lime, or with a
combination of scrap and a scrap substitute or alternative iron product. The
furnace vessel's top is swung into place, electrodes are lowered into the
furnace vessel through holes in the top of the furnace, and electricity is
applied to melt the scrap. The hot briquetted iron that our Iron Dynamics
subsidiary began to produce during 2003 or the liquid pig iron that we hope to
begin producing during 2004 are examples of scrap substitutes that would be
introduced directly into the melt mix at this stage.
We have two Fuchs twin-shell electric arc melting furnaces, designed to
substantially reduce both power-off time and tap-to-tap time (the length of time
between successive melting cycles or heats). When melting is being done in one
vessel, we can tap the other vessel and refill it with scrap and steel scrap
substitute to make it ready for the next melt. This results in more heats and
greater productivity per shift. An additional advantage of our twin-shell design
is that if there is a maintenance problem requiring work on one vessel, melting
can proceed in the other vessel without interruption.
After exiting the furnaces, the liquid steel is transported in a ladle by
overhead crane to an area commonly known as the ladle metallurgy station. At
each metallurgy station, the steel is kept in a molten state while metallurgical
testing, refining, alloying and desulfurizing takes place. We have three
separate ladle metallurgy stations consisting of three furnaces and two
desulfurization stations. Having a separate metallurgy station apart from the
furnaces allows us to maximize the time that the furnaces can be used for
melting scrap.
The liquid steel is then transported to one of our two continuous thin-slab
casters where it is emptied into a tundish, or reservoir. This reservoir
controls the flow of the liquid steel into a water-cooled copper-lined mold from
which it then exits as an externally solid slab. Our casters were built by SMS
Schloemann-Siemag AG. We have also designed a special nozzle, which transfers
the liquid steel from the reservoir into the mold, that results in increased
productivity and product quality. The slab from the continuous caster is less
than two inches thick and proceeds directly into one of our two tunnel furnaces.
The tunnel furnaces maintain and equalize the slab's temperature. The slab
leaves the tunnel furnace and is descaled to remove surface scale prior to its
rolling.
In the hot-rolling operation, the slab is progressively reduced in
thickness. Our hot-rolling mill consists of a seven-stand rolling mill built by
SMS Schloemann-Siemag AG. The mill is equipped with the latest electronic and
hydraulic controls to control such things as gauge, shape, profile and exit
speeds of the steel strip as it moves along the run-out table to help prevent
thinner steel strip from cobbling. The seventh rolling stand which we added
allows us to further roll our sheet steel to even thinner gauges, down to 1.0
mm, with excellent surface quality, and enables us to access markets previously
available only to more costly cold finished material.
After exiting the hot-rolling mill, the rolled sheet steel is cooled and
wound into coils. The coil form allows the strip to be easily handled and
transported. We sell a portion of our hot band coil production directly to
end-users or to intermediate steel processors or service centers, where they may
be pickled, cold-rolled, annealed, tempered or galvanized by those customers. To
an ever increasing extent, the rest of our hot band coil production is directed
to our cold mill, where we add value to this product through our own pickling,
cold-rolling, annealing, tempering or galvanizing processes, including the
additional coating capacity provided by our recently completed paint line. We
also now supply our new Jeffersonville, Indiana galvanizing facility with
cold-rolled material.
8
Throughout the hot-rolling process, laser optical measuring equipment and
multiple x-ray devices measure all strip dimensions, allowing adjustments to
occur continuously and providing feedback information to the mill process
controls and computers. The entire production process is monitored and
controlled by both business and process computers. Production schedules are
created based on order input information and transmitted to the mill computers
by the plant business system. As the material is processed, operating and
quality data are gathered and stored for analysis of operating performance and
for documentation of product parameters to the customer. The system then
coordinates and monitors the shipping process and prints all relevant paper work
for shipping when the coil leaves the plant.
The Cold Mill
Our cold mill is located adjacent to our hot mill and produces products
that require gauges, properties or surfaces that cannot be achieved in our hot
mill. Cold-rolled sheet is hot-rolled sheet that has been further processed
through a continuous pickle line and then successively passed through a rolling
mill without reheating until the desired gauge and other physical properties
have been achieved. Cold-rolling reduces gauge, hardens the steel and, when
further processed through an annealing furnace and temper mill, improves
uniformity, ductility and formability. Cold-rolling can also add a variety of
finishes and textures to the surface of the steel.
Our cold-rolled mill process begins with hot-rolled product from our
hot-rolling mill entering our continuous pickle line. At the entry end of the
continuous pickle line, we have two reels to unwind coils and a welder to join
the coils together. We unwind the coils on alternate reels and attach them end
to end by the welder, creating a continuous strip through the pickle tanks. The
center section of the 700-foot pickle line consists of a scale breaker/tension
leveler, pickling tanks where the strip moves through a bath of hydrochloric
acid that thoroughly cleans the strip in preparation for galvanizing and rolling
operations, and rinse tanks. At the delivery end of the line there is a reel for
recoiling the pickled product. After recoiling, each coil is stored in a central
coil storage area. The design of the continuous pickle line allows for the
production of a wide combination of gauges and widths on the light gauge steel
supplied by the hot mill.
From the central coil storage area, we move our coils in one of three
directions. We can (1) ship pickled and oiled coils directly to customers from
the continuous pickle line as finished product; (2) immediately galvanize some
coils on the hot-rolled galvanizing line which is then sold as finished product;
or (3) process coils through our cold-reversing mill.
Pickled and oiled coils that are not intended for immediate shipment or
hot-rolled galvanizing are processed in our cold reversing mill. Our cold
reversing mill was built by SMS Schloemann-Siemag AG and is one of only two
semi-tandem two-stand reversing cold-rolling operations in the world. This
configuration provides considerably higher throughput than a conventional
single-stand reversing mill, yet also takes advantage of considerably lower
equipment costs than the conventional four to six-stand tandem cold-rolling
mill. The rolling mill is configured with multiple x-ray gauges, hydraulic
bending systems, rolling solution controls, gauge controls and strip flatness
controls used to produce an extremely high level of product quality parameters.
The cold-rolling mill also uses a process control computer using sophisticated
mathematical models to optimize both quality and throughput.
Product that exits the cold reversing mill can then be shipped as finished
product, transported to our cold-rolled galvanizing line or transported to our
batch annealing furnaces. In the cold-rolled galvanizing line, cold-rolled coils
are heated in an annealing furnace and coated while still hot in a pot of molten
zinc. As the coil leaves the pot, various coating controls ensure that the
product matches the customer's requirements. The coils are then shipped as
finished product. The cold-rolled galvanizing line and the hot-rolled
galvanizing line are very similar, but the cold-rolled galvanizing line has a
more elaborate and larger strip heating furnace that is required to anneal
cold-rolled product. We designed our continuous pickle line and the two
galvanizing lines concurrently and procured the equipment from the same
manufacturer. As a result, the equipment of our three lines share a commonality
of parts and we have been able to realize a high degree of flexibility and cost
savings in the management of our spare parts.
Cold-rolled coils that do not require galvanizing proceed to our batch
annealing furnaces. The batch annealing furnaces heat and then cool the coils in
a controlled manner to reduce the hardness of the steel that is created in the
cold-rolling process. The batch annealing furnaces heat the steel in a hydrogen
environment that optimizes the efficiency of the heating process and produces a
product that is superior to conventional batch annealing with regard to
cleanliness and uniform metallurgical characteristics. Computer models determine
and control the heating and cooling the coils based on current knowledge of heat
transfers and steel characteristics.
Coils from the annealing furnaces are then temper-rolled and shipped as
finished product. The temper mill consists of a single stand four-high rolling
mill designed for relatively light reduction of the product. The temper mill
introduces a small amount of hardness into the product and further enhances the
overall flatness and surface quality of the product. The temper mill also has an
x-ray gauge to monitor strip thickness. This mill was purchased concurrently
with the two-stand cold-rolling mill from SMS Schloemann-Siemag AG, enabling us
to realize a high degree of flexibility and cost savings with regard to
management of spare parts.
9
As with our hot mill, our cold mill is linked by means of business and
process computers. We expanded our computer systems to comprehend order entry of
the additional cold mill products, and we accomplish all of our line scheduling
in the computer systems through schedules transmitted to the appropriate process
related computers. We collect operating and quality data for analysis and
quality control purposes, and for reporting product data to customers.
New On-Site Coating Facility
Our new $25 million on-site paint line expansion, located immediately
adjacent to our existing cold mill building, was completed during 2003 and has
an estimated coating capacity of 240,000 tons per year, in gauges from .010 to
..070 inches and in widths ranging from 36 to 64 inches. The paint line receives
material directly from our other processing lines and is capable of painting hot
rolled galvanized coil, cold rolled coil and cold rolled galvanized coil. The
line incorporates state-of-the-art coil coating equipment with quick color
change capability and on-line color matching, in-line tension leveling, direct
heat clean air catenary ovens and a thermal recuperative oxidizer.
We believe that we are the only mill in North America with an on-site paint
line, which should not only enable us to realize substantial savings in
overhead, maintenance, engineering, sales and marketing, capital cost and
infrastructure, but will eliminate the typical cost of transfer freight,
approximately $10-15 per ton, that a customer must otherwise pay to transport
coils to other remote coating facilities. These advantages will further enable
us to continue to be a low cost supplier of coated products. The addition of our
new paint line further expands our high margin value added product offerings.
New Galvanizing Facility
Our new Jeffersonville, Indiana cold rolled galvanizing facility, which we
purchased in March 2003 from GalvPro II, LLC, for $17.5 million plus up to an
additional $1.5 million based on an earn-out formula, is located within the
Clark Maritime Center on the Ohio River. The galvanizing line has an estimated
capacity of between 300,000 and 350,000 tons per year and is capable of coating
cold rolled steel in gauges from .008 to .045 inches and in widths between 24
and 60 inches. This gauge range is lighter than that available from our Butler
facility and, therefore, creates a further expansion of our value added product
offerings, particularly in the light gauge building products arena.
The galvanizing line was built in 1999, has been well maintained and is
almost identical to the cold rolled galvanizing line at our Butler mill. This
familiarity helped us to facilitate a rapid start-up in July 2003. This facility
enables us to continue to serve existing cold rolled galvanized customers, whose
needs we might have otherwise been unable to meet. The Ohio River location of
this facility also creates opportunities for market expansion into other
geographic regions. Our Butler cold mill provides the new Jeffersonville
facility with cold rolled material.
Structural and Rail Division
Structural Steel and Rail Mini-Mill
We began construction of our new structural steel and rail mini-mill in
Columbia City, Indiana in May 2001, completed plant construction in April 2002
and commenced commercial structural steel operations during the third quarter of
2002. Our mini-mill is designed to have an annual production capacity of up to
1.3 million tons of structural steel beams, pilings and other steel components
for the construction, transportation and industrial machinery markets, as well
as standard and premium grade rails for the railroad industry. Through regular
product introductions and continued production ramp-up of structural steel
products, we were able to begin to offer a broad array of wide flange beams and
H-piling structural steel products during 2003, and, during 2003, we were also
able to commission most of the rest of our structural steel product line, except
for 6 inch and 36 inch beams which we hope to commission during the first
quarter of 2004. In addition, we performed casting trials for the production of
standard rail products during the first quarter of 2003, and, since that time
have successfully run product through the breakdown mill, tandem mill, cooling
bed and straightener. We anticipate having finished rail product during the
second quarter of 2004, which we will provide to the railroad companies to be
tested and monitored for product evaluation. This evaluation process may take
between six and nine months.
Mill Operation
Our structural steel and rail mini-mill melts scrap and scrap substitutes
in an electric arc furnace much the same way as in our flat-roll mini-mill. We
use a single shell furnace but have purchased and installed a second furnace,
which provides us with back-up melting capability in case of a furnace breakdown
or during one of our periodic maintenance outages. At present, our operating
permit only enables us to use one furnace at a time. While we plan to use 100%
scrap as the primary raw material, the type of scrap required for the production
of structural steel and rail products is generally of a cheaper and less
expensive grade than that required for the production of flat-rolled steel. The
furnace was built by SMS Demag AG and includes features that permit us to employ
more thermally efficient melting practices. The furnace features a removable
shell that enables us to do off-line repair and refractory relining, comes
equipped with a unique quick-change roof configuration, and also features a fast
tap hole tube change configuration that shortens the time required for periodic
replacement.
10
From the furnace the molten metal is transported to a separate ladle
metallurgy furnace where, as in the flat-roll mini-mill, we adjust the mix for
temperature and chemistry. We then take the liquid steel to a continuous caster,
where, unlike our Butler mini-mill that produces a single strand of flat stock,
our structural steel caster casts three strands, expandable to four, of blooms
and beam blanks. The caster utilizes a curved mold that produces five sizes of
material--one bloom, which is rectangular shaped, and four beam blanks, which
are dog bone shaped, in varying lengths of 17 to 48 feet. The caster design
accommodates a quick-change tundish nozzle system designed to optimize the
continuous casting process and to achieve a low operational cost per ton. The
tundish bottoms are also designed to change from a bloom opening to any of four
beam blank sizes to allow greater flexibility in product choice. The caster was
built by SMS Concast.
After exiting the mold, the multiple strands continue through a series of
sprays and roller supports to precisely cool and contain the cast shapes.
Straightener rolls then unbend the curved strands onto a horizontal pass-line,
where they are cut to length by automatic torches. We then weigh the cast pieces
and transport them either directly through a reheat furnace, built by A.C.
Leadbetter, to a hot-rolling mill, or into a storage area for rolling at a later
time. In the hot-rolling mill, the product passes through a breakdown stand
where it is rolled into either a structural steel product or a rail product,
depending on the roll-configuration and number of passes. The product is then
transferred to a 3-stand tandem mill, which consists of a universal rougher, an
edger and a universal finisher. The hot-rolling mill is an advanced four-stand,
all reversing mill built by SMS Demag AG. The mini-mill is capable of producing
wide flange beams from 6" x 4" to 36" x 12", standard beams, piling sections,
M-shape sections, sheet piling, channels, car building shapes, bulb angles and
zee's and rail sections.
Downstream of the hot-rolling mill, a hot saw cuts the structural steel to
a maximum 246-foot length before it enters a cooling bed. After cooling, the
structural steel product is straightened on a roller straightener and cut to
length as required by a particular order. The product is then piled and bundled
and shipped as finished product.
For the production of rail products, we have fitted our caster with new
molds and segments to cast the new 13" x 10" blooms required for rail
production. We have also added electro magnetic stirring within the caster to
improve surface quality and reduce internal cracking. The reheat furnace, which
heats the blooms to the proper rolling temperature, is also fitted with
automation changes for the charging and discharging machines. We also operate
additional descaling equipment prior to the rolling process, as well as a rail
stamper and manipulator. Both vertical and horizontal straighteners are used to
produce a rail that is true along all axes. After straightening, the rail
product is tested, cut to length and drilled. In our testing center, we provide
ultrasonic testing for the detection of internal defects, an eddy current
machine to spot surface cracks, a profile gauge for dimensional accuracy, and a
straightness/waviness measurement machine. We are also in the process of
installing additional cooling and handling equipment to manufacture highly
desirable 320-foot rail lengths, which no one else produces in or imports into
the U.S. or Canadian rail markets.
Iron Dynamics Steel Scrap Substitute Facility
Since 1997, Iron Dynamics has tried to develop and commercialize a
pioneering process of producing a virgin form of iron that might serve as a
lower cost substitute for a portion of the metallic raw material mix that goes
into our electric arc furnaces to be melted into new steel. Historically, the
price of steel scrap, as a commodity, has tended to be volatile, rising and
falling with supply and demand and not always in lock step with or in proportion
to the market price of new steel. More recently, and increasingly so during the
last half of 2003 and thus far during 2004, with no immediate prospects for
prices to abate, scrap costs have accelerated to historic highs, threatening one
of the principal elements of the mini-mills' traditional lower cost
structure--the cost of its metallic raw material. Therefore, having a lower cost
alternative source of virgin iron for a portion of a mini-mill's melt mix, if
realizable, would partially buffer the effects of high scrap prices and scrap
price volatility. With the growing proportion of electric furnace steelmaking,
both worldwide and domestically, we believe that the benefits of developing a
cost-effective alternate iron source to augment scrap, our primary raw material,
makes good economic sense in the long run.
Direct reduced iron is a metallic product made from iron ore or iron ore
"fines" that have been treated in a "direct reduction" furnace, such as a rotary
hearth furnace, with either natural gas or coal to reduce the iron oxide to
metallic iron. The method selected by Iron Dynamics is one that uses coal as the
reducing agent. The direct reduced iron, or DRI, is then compacted by
briquetters to form hot briquetted iron, or HBI, which is stable and can be
immediately used in our melting furnaces or stockpiled for later use. Liquid pig
iron, the ultimate end product intended to be produced by Iron Dynamics, is a
pure metal product produced by smelting the direct reduced iron in a submerged
arc furnace. Our Iron Dynamics facility was designed and built for the
production of direct reduced iron and its conversion into liquid pig iron. We
planned to use all of Iron Dynamics' liquid pig iron in our Flat Roll Division's
steelmaking operations at Butler.
11
The plant commenced initial start-up in August 1999. During this
preliminary start-up, however, we encountered a number of equipment and design
deficiencies, which required Iron Dynamics to undertake some costly and
time-consuming redesign, re-engineering and equipment replacement work and to
operate this new facility at greatly reduced output levels. A design and
retrofit program began in late 1999 and continued throughout 2000. In July 2000,
Iron Dynamics suspended operations to effect certain pre-planned repairs,
including the installation of a new submerged arc furnace and a number of
additional capital projects, including the installation of two hot briquetters,
a new off-gas system for the submerged arc furnace, a sludge reclamation system,
and a hot pan conveyance system. In March 2001, Iron Dynamics restarted the
facility. However, in July 2001, we suspended operations because of higher than
expected start-up and process refinement costs, then high prevailing energy
costs, low production quantities and historically low steel scrap pricing that
existed at that time. These factors, during that period, made the cost of
producing and using Iron Dynamics' scrap substitute product at our flat-roll
mini-mill higher than the cost of purchasing and using steel scrap.
We continued to make refinements to our systems and processes,
notwithstanding the shut-down, and began experimental production trials again
during the fourth quarter of 2002. After an evaluation of these production
trials, we concluded that improved production technology, coupled with our
ability to recycle waste materials as part of our raw material mix, and the then
increasingly higher price of scrap, made the restart and operation of this
production facility feasible. During 2003, we spent approximately $13 million to
further modify and refine the process, including the installation of three
briquetting machines, which enable us to stockpile iron briquettes or hot
briquetted iron (HBI), after reduction in the rotary hearth furnace, for use
directly as an alternate metallic feed stock in our Flat Roll Division's
steelmaking operations. In connection with the liquid pig iron conversion
process, the briquettes would first be liquefied and the hot liquid pig iron
would then be transferred in ladles to the flat-roll mill's meltshop and
combined with scrap steel in the mill's electric arc furnaces. During February
2003, we announced a restart of ironmaking operations at Iron Dynamics and,
during December 2003, we produced 15,100 tonnes of HBI. We anticipate ramping up
production of HBI to approximately 30-35,000 tons per month, by the end of the
second quarter of 2004, all of which we intend to use at our Flat Roll Division.
We have not yet restarted the smelting end of the Iron Dynamics process, the
conversion of HBI into liquid pig iron, but we anticipate restarting the
submerged arc furnace by the end of the first quarter or the beginning of the
second quarter of 2004.
As of December 31, 2003, our equity investment in the Iron Dynamics project
was $185 million.
Bar Products Division
Pittsboro, Indiana Bar Mill
We purchased our Pittsboro, Indiana bar mini-mill from Qualitech Steel SBQ
LLC in September 2002, and we are in the final phase of a $75 to $80 million
program to upgrade and retrofit the mill to produce a broad array of merchant
quality, or MBQ, bars and shapes and reinforcing bar products, as well as
special bar quality, or SBQ, products. The mill was originally constructed in
1997 as an SBQ mill and consists generally of a 100 ton single shell AC melting
furnace by SMS Demag, a three strand SMS Demag continuous caster capable of
casting both a 7" x 7" billet and a 14" x 10" bloom, a reheat furnace, and a
rolling mill consisting of a Pomini roughing mill and intermediate mill, and
Kocks reducing and sizing blocks used in the production of SBQ rounds. The
meltshop is also equipped with a separate ladle metallurgy facility, or LMF,
where metallurgical testing, refining, alloying and desulfurizing takes place,
and a vacuum tank degasser, which is used to degas steel to produce ultra low
carbon and ultra high purity products.
We have added an eight stand finishing mill, together with ancillary
equipment such as abrasive saws, shears, a straightener and magnetic stacking
equipment, which will enable us to produce merchant bars and shapes, as well as
reinforcing bar products.
We began melting and casting operations in mid-December and began shipping
some limited products by year-end 2003. We are currently producing larger sizes
MBQ and SBQ bars and expect the arrival and installation of equipment during the
first quarter of 2004 which will enable us, during the second quarter, to begin
production of the smaller rounds, angles, flats, channels and similar products.
We expect that the Pittsboro facility will have a capacity of approximately
500,000 to 600,000 tons per year.
New Millennium Facility
In the first quarter of 2003, we increased our ownership percentage in our
consolidated New Millennium Building Systems subsidiary from our pre-existing
46.6% ownership interest to 100%, through our acquisition of the 46.6% interest
in New Millennium previously held by New Process Steel Corporation, a privately
held Houston, Texas steel processor and our purchase of the remaining 6.8% stake
owned by some of New Millennium's managers. After completion of the final
purchases, and including our original investment, we have invested approximately
$14 million in our New Millennium subsidiary.
New Millennium produces steel building components for the construction
industry, including joists, girders, trusses and steel roof and floor decking.
These products are sold primarily in the Upper Midwest non-residential building
components market. Our Flat Roll Division supplies a majority of the hot-rolled
steel utilized in New Millennium's manufacturing operations.
12
Products and Customers
Flat Roll Division
Products. Our Butler mini-mill produces hot-rolled products that include a
variety of high quality mild and medium carbon and high strength low alloy
hot-rolled bands in 40 inch to 62 inch widths and in thicknesses from .500 inch
down to .080 inch. We also produce an array of lighter gauge hot-rolled
products, ranging in thickness from .080 inch and thinner, including high
strength low alloy 80,000 minimum yield and medium carbon steels made possible
by the addition of our seventh hot-rolling stand. These products are suitable
for automobile, truck, trailer and recreational vehicle parts and components,
mechanical and structural steel tubing, gas and fluid transmission piping, metal
building systems, rail cars, ships, barges, and other marine equipment,
agricultural equipment and farm implements, lawn, garden, and recreation
equipment, industrial machinery and shipping containers.
We believe that our basic production hot band material has shape
characteristics that exceed those of the other thin-slab flat-roll mini-mills
and compares favorably with those of the integrated mills. In addition, as a
result of our lighter gauge hot-rolling capabilities, we are now able to produce
hot-rolled hot-dipped galvanized and galvannealed steel products. These products
are capable of replacing products that have traditionally only been available as
more costly cold-rolled galvanized or cold-rolled galvannealed steel. During
2002 and 2003, we produced 849,000 tons and 1.1 million tons of these lighter
gauge hot-rolled products, respectively. Our new galvanizing facility will also
further enable us to add to our mix of higher margin value added products
through our ability to coat additional material that would otherwise not be
coated due to the galvanizing capacity limitations at our Butler mill. During
2003, approximately 60% of our flat-roll shipments consisted of value-added
products.
In our cold mill, we also produce hot-rolled pickled and oiled, hot-rolled
hot dipped galvanized, hot-rolled galvannealed, cold-rolled hot dipped
galvanized, cold-rolled galvannealed and fully processed cold-rolled sheet. Our
new paint line will paint hot rolled galvanized coil, cold rolled coil and cold
rolled galvanized coil in gauges from .010 to .070 inches and widths ranging
from 36 inches to 64 inches. This material will typically be used in
transportation products, building products such as raised garage door panels,
heating and cooling products, appliances, furniture and lighting equipment.
Customers. The following tables show information about the types of
products we produced and the types of customers we sold to in 2002 and 2003:
2002 2003
---- ----
Products:
Hot band .............................................................. 43% 48%
Pickled and oiled...................................................... 11% 10%
Cold-rolled............................................................ 13% 8%
Hot-rolled galvanized.................................................. 17% 16%
Cold-rolled galvanized................................................. 12% 14%
Post anneal............................................................ 4% 4%
--- ---
Total............................................................. 100% 100%
=== ===
Customers:
Service center (including end-user intermediaries)..................... 88% 84%
Pipe and tube.......................................................... 4% 5%
Original equipment manufacturer........................................ 8% 11%
--- ---
Total............................................................. 100% 100%
=== ===
During 2003, we sold our products to approximately 190 customers. In 2003,
our largest customers were Heidtman Steel, New Process Steel and Straightline,
which in the aggregate accounted for approximately 23% of our total net sales.
Heidtman accounted, individually, for approximately 18%, 17% and 13% of our net
sales in 2001, 2002 and 2003, respectively.
Steel processors and service centers typically act as intermediaries
between primary steel producers, such as us, and the many end-user manufacturers
that require further processing of hot bands. The additional processing
performed by the intermediate steel processors and service centers include
pickling, galvanizing, cutting to length, slitting to size, leveling, blanking,
shape correcting, edge rolling, shearing and stamping. Notwithstanding the
completion of our cold mill and our increased utilization in our own cold
finishing facility for a considerable portion of our hot band production, we
expect that our intermediate steel processor and service center customers will
remain an integral part of our customer base. Our sales outside the continental
United States accounted for approximately 7% of our total net sales in 2003.
13
Structural and Rail Division
Products. We produce various structural steel products such as wide flange
beams, American Standard beams, miscellaneous beams, "H" Piling material, sheet
piling material, American Standard and miscellaneous channels, bulb angles, and
"zee's." The following listing shows each of our structural steel products and
their intended markets:
Products Markets
-------- -------
Wide flange, American Standard and Framing and structural girders, columns, bridge
miscellaneous beams................................... stringers, ribs or stiffeners, machine bases or
skids, truck parts, and construction equipment,
parts
"H" Piling............................................ Foundational supports
Sheet Piling.......................................... Temporary or permanent bulkhead walls,
cofferdams, shore protection structures, dams and
core walls
Channel sections...................................... Diaphragms, stiffeners, ribs and components in
built-up sections
Bulb angles and zee's................................. Steel building components
We have gradually been ramping up production of different structural
products, in various sizes and foot weights, since we commenced initial
production in July 2002. During February 2004, we rolled approximately 55,000
tons and shipped approximately 67,000 tons of product. We have also initiated
certain value added services for the Midwestern fabricator market, including
exact length and exact piece count capabilities.
Customers. The principal customers for our structural steel products are
steel service centers, steel fabricators and various manufacturers. Service
centers, though not the ultimate end-user, provide valuable mill distribution
functions to the fabricators and manufacturers, including small quantity sales,
repackaging, cutting, preliminary processing and warehousing. A majority of our
structural steel products are sold to service centers.
The marketplace for steel rails in the United States and Canada is
relatively small, approximately 800,000 tons in 2002, and is also specialized,
with only approximately six Class 1 railroad purchasers: Burlington
Northern/Santa Fe, Union Pacific, Canadian Pacific Railway, Norfolk Southern,
CSX Transportation and Canadian National Railway. These purchasers account for
approximately 600,000 tons of annual production. Rail contractors, transit
districts and short-line railroads purchase the rest of the rail products.
We intend to produce rail in standard and premium or head-hardened grades,
in a range of weights from 115 lbs. per yard to 141 lbs. per yard, in lengths
from the traditional 80 feet up to 240 feet initially and, ultimately, to 320
feet. We also intend to weld these 240/320 foot rails into 1,600 foot strings
for delivery to the installation site. Such long strings offer substantial
savings both in terms of initial capital cost and through reduced maintenance.
In contrast, current production of rail in the United States, and available
imported rail, is limited to 80-foot lengths, as a result of existing plant
layout restrictions and the physical limitations of ocean freight. The more
welded joints there are in a mile of track, the greater the maintenance cost to
the railroad due to excessive wear and fatigue cracking at the welds.
Bar Products Division
Products. We expect to be able to produce a broad line of merchant bar
products such as angles, flats, channels, T's and rounds, as well as rebar
products in sizes from #3 to #18. We also plan to produce various SBQ products.
Merchant bar products are used in a wide variety of applications, including
automotive, fasteners, conveyor assemblies, rack systems, transmission towers,
gratings, safety walkways, stair railings, farm and lawn and garden equipment,
light steel fabrication, machinery, ornamental iron projects and construction
equipment. SBQ alloyed steel bars are predominantly used in automotive parts
such as crankshafts and drive shafts, aerospace products, and in various types
of machinery, construction and transportation equipment.
Rebar is used principally for strengthening concrete. Approximately half of
rebar consumption is in construction projects involving the private sector,
including commercial and industrial buildings, apartments and hotels, utility
construction, agricultural projects, and various repair and maintenance
applications. The other half of rebar consumption is accounted for by public
works projects, such as highway and street construction, public buildings,
bridges, municipal water and sewer treatment facilities and similar projects.
14
Customers. Merchant bar products are generally sold to fabricators, steel
service centers and original equipment manufacturers. Rebar is generally sold to
fabricators and manufacturers, who cut, bend, shape and fabricate the steel to
meet engineering, architectural and end-product specifications. SBQ products are
principally consumed by fabricators, intermediate processors, and steel service
centers.
New Millennium Facility
Products. New Millennium fabricates trusses, girders, steel joists and
steel decking for the construction industry. Specifically, New Millennium
manufactures a complete line of joist products, including bowstring, arched,
scissor, double-pitched and single-pitched joists. Decking products include a
full range of roof, form, and composite floor decks.
Customers. New Millennium's primary customers are non-residential
contractors. Significant portions of New Millennium's sales are to customers
from outside Indiana, with a concentration in the Upper Midwest area of the
United States. We believe that the Upper Midwest presently enjoys the highest
non-residential building spending in the country.
Competition
Flat Roll Division
Our hot-rolled products compete with many North American integrated
hot-rolled coil producers, such as U.S. Steel's plants near Detroit, Michigan,
Granite City, Illinois, Gary, Indiana, Dravosburg, Pennsylvania and Fairfield,
Alabama; Ispat Inland Inc.'s plant in East Chicago, Indiana; and AK Steel
Corporation's plant in Middletown, Ohio. We also compete with International
Steel Group, or ISG, which has purchased out of bankruptcy LTV Steel
Corporation's former steelmaking facilities at Cleveland, Ohio and Indiana
Harbor, Indiana, Acme Steel's rolling facility in Chicago and the former
Bethlehem Steel plants in Burns Harbor, Indiana and Sparrow's Point, Maryland.
We also compete with companies that convert steel slabs into sheet steel, such
as Duferco Steel in Farrell, Pennsylvania. As a result of the integrated mills'
lesser dependence on steel scrap as a raw material than mini-mills, and as a
result of the consolidations that have occurred over the past year in the U.S.
steel industry, including the emergence of relaxed union work rules and lower
capital structures, many of these integrated mills are beginning to have cost
structures closer to those of the mini-mills, rendering them more competitive
than traditionally so.
Our hot-rolled products also compete with the products of a number of
hot-rolled mini-mills, such as Nucor Corporation's 1.6 million ton capacity
plant in Crawfordsville, Indiana, its 1.7 million ton capacity plant in Hickman,
Arkansas and its 2.0 million ton capacity plant in Berkeley, South Carolina;
Gallatin Steel Company's 1.2 million ton capacity plant in Ghent, Kentucky; and
North Star BHP Steel LLC's 1.2 million ton capacity plant in Delta, Ohio.
With the exception of Gallatin Steel, we compete with these same producers
for the sale of our cold-rolled and coated products. We also compete with a
number of companies, such as Worthington Steel of Columbus, Ohio, Winner Steel
of Youngstown, Ohio and Metaltech of Pittsburgh, Pennsylvania, which buy their
hot-rolled or cold-rolled bands from other producers and then convert them into
products that are competitive with ours.
Structural and Rail Division
Sales of structural steel products are sensitive to the level of
construction activity, which is in turn affected by such cyclical factors as
general economic conditions, interest rates, inflation, consumer spending and
employment.
Our structural steel products compete with a sizable number of electric arc
furnace structural steelmakers, some of which have cost structures and flexible
management cultures similar to our own. Notable competitors include Nucor Steel
in Berkeley, South Carolina; Nucor-Yamato Steel in Blytheville, Arkansas; and
TXI-Chaparral Steel in Midlothian, Texas and Petersburg, Virginia. There are
also a number of smaller competitors, including Ameristeel in Cartersville,
Georgia; and Bayou Steel in Laplace, Louisiana. The Nucor mini-mills and the
TXI-Chaparral mini-mills accounted for approximately 89% of the tons produced in
North America in 2001. We also believe, however, that both geography and product
choice will play significant roles. There are currently no other structural
mills located in the Midwest, one of the largest structural steel consuming
regions in the United States, and we believe we will be able to provide
freight-saving and customer service benefits to end users, service centers and
fabricators located in the region. We also believe that most of Canada's
structural steel consumption is located in Canada's eastern provinces, closer to
us than to either of our two largest competitors. Moreover, we intend to provide
a broad product mix, focusing on the mid-range and larger section served only by
Nucor-Yamato Steel and TXI-Chaparral from locations more remote than our
mini-mill.
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At present, the rail market is principally served by two producers: Rocky
Mountain Steel, a division of Oregon Steel Mills, Inc. in Pueblo, Colorado, and
Pennsylvania Steel Technologies, formerly a subsidiary of Bethlehem Steel
Corporation, now ISG, in Steelton, Pennsylvania. Each of these producers has the
capability to produce either standard or premium rail, although neither is
equipped to produce rail in 240-foot or 320-foot lengths as we will do. Our rail
products will also compete with similar products from a number of high quality
integrated and electric furnace steel producers in Europe and Asia, including
British Steel, Voest-Alpine Schienen, Nippon Steel and NKK.
Bar Products Division
We anticipate that our major competitors for merchant bar, shapes and
reinforcing bar product sales, generally within a 500 mile radius of Pittsboro,
Indiana, will include Ameristeel plants in Knoxville and Jackson, Tennessee,
Marion Steel in Marion, Ohio, North Star Steel plants in St. Paul, Minnesota,
Calvert City, Kentucky, and Wilton, Iowa, Nucor Corporation plants in Kankakee,
Illinois (formerly Birmingham Steel) and Darlington, South Carolina, and SMI
Steel in Cayce, South Carolina.
We expect that our major competitors for SBQ product sales, likewise within
a 500 mile radius of Pittsboro, will include Republic Technologies International
of Akron, Ohio, The Timken Company of Canton, Ohio, Quanex/Macsteel in Jackson,
Michigan, North Star Steel in Monroe, Michigan and Ispat/Inland Steel in East
Chicago, Indiana.
New Millennium Facility
New Millennium's main competitors on a national level in the joist business
are Vulcraft, a division of Nucor; Canam; and SMI, a division of Commercial
Metals. In the steel decking business, New Millennium's main competitors on a
national level are Vulcraft; Wheeling Corrugating Co., a division of Wheeling-
Pittsburgh Steel Corp.; and United Steel Deck, Inc. New Millennium also has a
number of competitors on a regional basis, located in the Upper Midwest,
including Canam, Socar and Gooder-Henderson, as well as several local suppliers
with facilities located in Pittsburgh, Cleveland, Detroit, Indianapolis, Chicago
and Milwaukee.
Sources, Availability and Cost of Scrap and Scrap Substitute
Our principal raw material is scrap metal derived from, among other sources
"home scrap," generated internally at steel mills themselves; industrial scrap,
generated by excess steel trimmed or produced during manufacturing; and
"obsolete" scrap such as railroad cars and railroad track materials,
agricultural machinery and demolition scrap from obsolete structures, containers
and machines.
Scrap
Scrap is the single most important raw material used in our mini-mill
steelmaking process, traditionally comprising approximately 80-85% of the
metallic melt mix in electric arc furnace steelmaking, in contrast to integrated
mill steelmaking, where the proportion of scrap has traditionally been
approximately 20%. Depending upon the carbon content of scrap substitute
material that may be available from time to time, and the relative cost of such
material, the percentage of scrap used in our steelmaking operations could be
reduced to the range of 60% or less.
As it relates to final product quality, electric arc furnace steel
producers can normally only tolerate a maximum .2% level of residual materials
such as non-ferrous metallic contamination from copper, nickel, tin, chromium,
and molybdenum, which, once having been dissolved into steel cannot be refined
out. In order for the scrap melt to provide this level of quality under present
circumstances, the mill must use approximately 60% of "low residual" scrap or an
equivalent material. Such low residual scrap is generally more expensive and
takes the form of No. 1 dealer bundles, No. 1 factory bundles, busheling, and
clips. Such low residual scrap is generally more expensive. The balance of the
melt mix can then consist of various grades of higher residual, and thus less
expensive, scrap, which can be blended with low residual scrap to keep within
impurity tolerances.
Many variables can impact scrap prices, the most critical of which, until
recently, was the level of U.S. steel production. The U.S. has generally been a
net scrap exporter. Generally, as domestic steel demand increased, so did scrap
demand and resulting scrap prices. The reverse was also normally but not always
true, with scrap prices following steel prices downward where supply exceeded
demand. During late 2000, the flood of imported steel, much of it unfairly
traded, resulted in sharply reduced new steel production with corresponding
decreases in the need for, and thus the price of scrap. This corresponding
decrease in the price of scrap mitigated somewhat the impact of sharply
declining prices for new steel products during 2000 and 2001 and enabled us to
maintain some modest profit margins despite the severe market dislocation. The
precipitous decline in scrap prices in 1999 and 2000, however, caused dealers to
retain their inventories and to withhold them from sale, thus causing some
short-term supply shortages even in the face of a supply/demand inversion at the
consumer levels. On the other hand, starting during the latter part of 2002 and
continuing through 2003 and into 2004, the price of scrap has risen sharply
upward, largely as a result of foreign scrap demand, particularly from China, a
weak U.S. dollar that makes U.S. scrap exports more attractive, and relatively
static if not limited scrap availability in the U.S. due to a weak economy and
the shrinking domestic manufacturing base. Scrap exports from the U.S. were
approximately 12 million metric tons in 2003, up 35% from 8.9 million tons in
2002. These factors have driven scrap prices to their highest levels in decades.
In September 2003, the price of No. 1 factory bundles, a key scrap commodity,
was approximately $166 per ton. The same commodity cost $280 per ton in February
and $310 in early March 2004.
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We believe that the demand for low residual scrap will continue to rise
more rapidly than the supply in the coming years, especially with the increased
number of electric arc furnace mini-mills, both here and abroad, that have been
built or commenced operations in recent years, and especially due to foreign
scrap demand. As a result, in order to maintain an available supply of scrap at
competitive market prices, we seek to maintain multiple strong and dependable
sources through which to competitively purchase scrap of all grades, including
low residual scrap, and have also been attempting to develop our own "captive"
scrap substitutes supply.
Since our inception, we were able to ensure a stable scrap supply for our
Flat Roll and Structural and Rail Divisions through a scrap supply agreement
with OmniSource Corporation, one of the largest suppliers of scrap in the
nation. However, we have determined that in the current scrap environment we
would be better off with multiple available sources of supply, including the
development of our own scrap purchasing capability, and with the flexibility to
develop new relationships and supply agreements with third parties and certain
scrap generators. Accordingly, we and OmniSource have amicably terminated our
scrap supply agreement, effective March 31, 2004. We intend, however, to
continue purchasing scrap from OmniSource as one of our major suppliers.
Scrap Substitutes
Direct reduced iron, hot briquetted iron and pig iron can substitute for a
limited portion of the steel scrap used in electric furnace mini-mill steel
production. Historically, we have used a relatively small percentage of scrap
substitutes in our melt mix. Historically, we have used approximately 15% by
weight of scrap substitutes in our melt mix, mainly solid and generally imported
pig iron. During 2003, we consumed approximately 364,000 tons of scrap
substitutes, of the 3.4 million tons of metallics that we melted in our electric
arc furnaces. We also bought minimal quantities of direct reduced iron and hot
briquetted iron. All of these scrap substitute purchases were made on the spot
market at prevailing market prices.
We anticipate that we will utilize all of Iron Dynamics' scrap substitute
product output, whether HBI or liquid pig iron, which, at full production we
estimate to be approximately 360,000 tonnes of liquid pig iron per year.
Our Industry
Overview
The U.S. steel industry has historically been and continues to be highly
cyclical in nature, influenced by a combination of factors, including periods of
economic growth or recession, strength or weakness of the U.S. dollar, worldwide
production capacity, worldwide steel demand, and levels of steel imports. The
steel industry has also been affected by various company-specific factors, such
as a company's ability or inability to adapt to and deal with technological
change, plant inefficiency and high labor costs. The U.S. is a net steel
importer, requiring that approximately 17% of its domestic steel consumption be
imported.
During the second half of 2000 and throughout 2001, the U.S. steel industry
experienced a severe downward cycle, largely as a result of increased imports of
steel at depressed prices, the effect of a strong dollar, weak economic
conditions and excess global steel production capacity. On the other hand,
during the first half of 2002, domestic flat-rolled steel prices increased
dramatically from historical cyclical lows in 2001. This increase resulted from
a number of factors, including (1) a temporary reduction in domestic steel
production capacity as a result of certain bankruptcies and shutdowns of other
U.S. steel producers, (2) a reduction in imports, driven in part by certain
favorable rulings and executive actions with respect to tariffs and quotas on
foreign steel, and (3) a brief strengthening of the overall U.S. economy and the
need for end-users of steel products to replenish their depleted inventories.
The cycle began to turn downward again toward the end of 2002 and into early
2003, however, largely as a result of softening product demand brought about by
a still weak economy and war concerns. The shortness of the previous up cycle,
poor cost controls and high fixed costs for many steel producers, an absence of
any supply or pricing discipline by individual producers, and the strength of
the U.S. dollar that brought exports streaming into the country created the
conditions for more than 30 bankruptcies among U.S. steel producers, mainly
integrated producers, between 2001 and 2003.
These economic dislocations, rationalization of production capacity and
supply due to steel industry consolidation, a weakened U.S. dollar, high ocean
freight rates and strong foreign, mainly Chinese and Asian, steel demand and
scrap demand, combined during 2003 to substantially reduce steel imports into
the U.S., thus constraining the supply of new steel for domestic consumption.
Moreover, by rendering exports of steel abroad more attractive, this has also
acted to constrain the U.S. supply of scrap for domestic consumption. The result
has not only been a dramatic increase in U.S. steel pricing toward the end of
2003 and into 2004, but it has also led to unprecedented increases in the cost
of steel scrap.
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The U.S. steel industry experienced many changes during 2003 as a result of
consolidation. In 2001, the top three U.S. producers of flat-rolled sheet had a
32% market share. For 2003, the top three (U.S. Steel, ISG and Nucor) had a
market share of 55%. International Steel Group added to its acquisition of the
bankrupt steel assets of LTV Steel with its acquisition of Acme Steel's assets
and its acquisition of the assets of Bethlehem Steel. All three of these
acquisitions resulted from the prior bankruptcies of the predecessor steel
companies. Similarly, U.S. Steel acquired the bankrupt assets of National Steel.
These and similar developments caused formerly idled or inefficient production
facilities to come back into the market with substantially lower capital costs,
with lower renegotiated labor costs and work rules, and shorn of many previously
burdensome health care and retirement legacy costs and other liabilities. The
result of this consolidation, which we expect to continue, is a more competitive
and more price sensitive U.S. steel market, with a narrowing of production cost
differentials between mini-mills and some of these integrated producers.
Moreover, with the integrated mills' lesser dependence on ever more expensive
scrap as a percentage of their metallics melt ix than the mini-mills, the
traditional mini-mill cost advantage of steel scrap over integrated mill
ironmaking has also begun to invert.
Anti-Dumping Initiatives
U.S. steel producers compete with many foreign producers. Competition from
foreign producers is typically strong, but is also substantially affected by the
relative strength of foreign economies and fluctuation in the value of the U.S.
dollar against foreign currencies, with steel imports tending to increase when
the value of the dollar is strong in relation to foreign currencies. During the
1990s, the situation was exacerbated by a weakening of certain economies,
particularly in Eastern Europe, Asia and Latin America. Because of the
ownership, control or subsidization of some foreign steel producers by their
governments, decisions by such producers with respect to their production, sales
and pricing decisions are often influenced to a greater degree by political and
economic policy consideration than by prevailing market conditions, realities of
the marketplace or consideration of profit or loss. Since 1998, when imports of
hot-rolled and cold-rolled products increased 43% compared to the prior year,
domestic steel producers, including us, have been adversely affected by
illegally "dumped" imported steel. Dumping involves selling a product below cost
or for less than in the exporter's home country and is a violation of U.S. trade
laws. Most foreign markets are less open than the U.S. market, allowing foreign
producers to maintain higher prices in their own markets, while dumping excess
production at lower and often subsidized prices into the U.S. market. A number
of steel industry anti-dumping initiatives, or trade cases, have been brought in
recent years in an attempt to stem the flow of these unlawful imports. Some have
been successful and some have not.
Hot-Rolled Sheet
In September 1998, eleven U.S. steel companies, including us, as well as
two labor unions, filed anti-dumping complaints with the ITC and the U.S.
Department of Commerce against hot-rolled steel imports from Japan, Russia and
Brazil, seeking determinations that those three countries were dumping
hot-rolled carbon steel in the U.S. market at below fair market prices. The
group also filed a subsidy, or countervailing duty, complaint against Brazil.
In April 1999, the Department of Commerce issued a final determination that
imports of hot-rolled steel from Japan were dumped at margins ranging from 17%
to 65%, and in June 1999, the ITC reached a final determination that imports of
hot-rolled sheet from Japan caused injury to the U.S. steel industry. As a
consequence, the Department of Commerce issued an anti-dumping order against
imports from Japan.
In July 1999, the Department of Commerce also issued suspension agreements
and final anti-dumping duty determinations as to imports of hot-rolled sheet
from Brazil and Russia. "Suspension" agreements generally impose price and/or
quantity restrictions on imports from the subject country for the purpose of
removing the injurious impact of the dumping or subsidies and are often
negotiated with the subject country either in lieu of the imposition of
anti-dumping or countervailing duties or as an alternate remedy to suspend a
previously imposed duty. In February 2002, the Department of Commerce, having
found violations of the suspension agreement by Brazilian producers, revoked the
agreement and reimposed dumping duties of 48%. In June 2004, the Department of
Commerce will conduct a required "sunset review" regarding the countervailing
duty orders and/or suspension agreements against Russia, Japan and Brazil to
decide whether in June 2005 these orders should be extended for an additional
five years or revoked.
While we and the U.S. steel industry benefited from these rulings, with
hot-rolled sheet imports from these three countries, which accounted for
approximately 70% of 1998's hot-rolled import tonnage, declining by
approximately 90%, the benefit was significantly thwarted by the shifting of
imports to hot-rolled sheet from countries other than Japan, Russia and Brazil,
which increased significantly during 2000. Therefore, in November 2000, we
joined three other mini-mills and four integrated producers and filed
anti-dumping cases against imports of hot-rolled sheet from 11 countries
(Argentina, India, Indonesia, Kazakhstan, The Netherlands, the People's Republic
of China, Romania, South Africa, Taiwan, Thailand and Ukraine) and
countervailing duty cases against five countries (Argentina, India, Indonesia,
South Africa and Thailand). On August 17, 2001, the ITC made final affirmative
injury determinations on imports of hot-rolled steel from Argentina and South
Africa, and the Department of Commerce imposed anti-dumping duty orders of
40-45% on hot-rolled steel imported from Argentina and 9.3% on hot-rolled steel
imported from South Africa. On September 23, 2001, the Department of Commerce
issued the following final dumping margins, although these margins are subject
to modification from pending litigation: on hot-rolled steel imported from India
- -- 29-43%, Indonesia -- 48%, Kazakhstan -- 243.5%, The Netherlands -- 3%, China
- -- 64-91%, Romania -- 17-80%, Taiwan -- 20-29%, Thailand -- 4-20% and Ukraine --
90%. In addition, the Department of Commerce issued the following final
countervailing duties on hot-rolled steel imported from the following countries:
India -- 8-32%, Indonesia -- 10%, South Africa -- 6.3% and Thailand -- 2.4%. The
ITC made final affirmative injury determinations on these remaining cases in
November 2001, and the Department of Commerce imposed anti-dumping duty orders.
These orders are supposed to remain in effect for at least five years, although
they are subject to annual administrative review and may be shortened. At the
end of five years, the ITC will conduct a sunset review, to the extent that any
of the foregoing duty orders remain in effect. Of the foregoing final orders by
the ITC, only one, involving The Netherlands, was appealed to the Court of
International Trade, and the ITC determination was recently upheld.
In June 2002, the U.S. granted "market economy" status to Russia, which may
enable Russia to more effectively defend itself against future dumping actions
on the basis of Russian production costs rather than on the basis of comparison
with surrogate country production costs.
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Cold-Rolled Sheet
In June 1999, we, together with other domestic producers and the United
Steel Workers of America, also filed a complaint with the ITC and the Department
of Commerce seeking a determination that cold-rolled steel products from
Argentina, Brazil, China, Indonesia, Japan, Slovakia, South Africa, Taiwan,
Thailand, Turkey, and Venezuela were being dumped in the U.S. market at below
fair market prices. On July 19, 1999, the ITC made unanimous affirmative
preliminary determinations of a reasonable indication of injury by reason of
such imports. The Department of Commerce announced preliminary dumping
determinations, which required the posting of dumping duties in November and
December of 1999. In January 2000, the Department of Commerce issued a
determination that imports of cold-rolled steel from six of the countries were
dumped at margins ranging from 17% to 81%. We were ultimately not successful in
these cold-rolled cases, however, and on March 3, 2000 and thereafter, the ITC
made negative final injury determinations against these eleven countries, ruling
that the industry was not being injured by these imports. These negative
outcomes resulted in a resurgence of dumped cold-rolled imports in the second
half of 2000 and depressed cold-rolled prices caused by these unfair practices.
As a consequence of the approximate 50% increase in imports of cold-rolled sheet
steel from 20 countries during the first half of 2001, at prices averaging $50
or more below their 1998 prices that the Department of Commerce had determined
at that time to have been dumped, we, and other steel manufacturers, brought
anti-dumping petitions on September 28, 2001 against imports from these 20
countries and countervailing duty petitions against five countries. These
countries, including Argentina, Australia, Belgium, Brazil, China, France,
Germany, India, Japan, South Korea, The Netherlands, New Zealand, Russia, South
Africa, Spain, Sweden, Taiwan, Thailand, Turkey and Venezuela, represented
nearly 80% of the imported cold-rolled sheet. In a preliminary ruling in
November 2001, the ITC found in favor of the petitioners, and, between March and
May 2002, the U.S. Department of Commerce found that these imports had been sold
in the United States at less than fair value and that those from Brazil, France
and South Korea had also been subsidized. Accordingly, the U.S. Department of
Commerce issued various preliminary anti-dumping duty or countervailing duty
margin orders directed at most of these countries.
However, on August 27, 2002, the ITC made a negative injury determination
on cold-rolled imports from Australia, India, Japan, Sweden and Thailand, and
these determinations were upheld on appeal in February 2004 by the Court of
International Trade, thus ending these cases. On October 17, 2002, the ITC
determined that no material injury or threatened injury resulted from
cold-rolled steel under investigation from Argentina, Belgium, Brazil, France,
Germany, South Korea, The Netherlands, New Zealand, Russia, South Africa, Spain,
Taiwan, Turkey and Venezuela. These negative injury determinations by the ITC
had the effect of reversing the U.S. Department of Commerce's imposition of
anti-dumping and countervailing duty margins on products of these countries. The
steel industry petitioners have appealed these negative injury determinations by
the ITC to the Court of International Trade, which remanded the cases to the ITC
for further determination. The ITC's response is due March 29, 2004.
Structural Steel and Rail
In addition to the various hot and cold flat-rolled steel cases, a number
of structural steel producers prosecuted anti-dumping cases against imports of
structural steel. In July 1999, Nucor-Yamato, TXI-Chaparral, and Northwestern
Steel and Wire filed anti-dumping cases on imports of structural steel products
from Germany, Japan, Korea and Spain. Germany and Spain were subsequently
dropped from these cases. In April 2000, the Department of Commerce found duties
of 32-65% on imports from Japan and 15-45% on imports from Korea. In June 2000,
in a 6-0 vote, the ITC found injury, or threat of injury, to the U.S. structural
steel industry and the Department of Commerce imposed anti-dumping duty orders.
These orders can remain in effect for at least five years, subject, however, to
annual administrative review. At the end of five years, the ITC will conduct a
sunset review. In May 2001, a coalition of U.S. structural steel beam producers
filed anti-dumping petitions with the Department of Commerce and the ITC,
alleging that imports of structural steel beams from eight other countries,
China, Germany, Italy, Luxembourg, Russia, South Africa, Spain and Taiwan, are
being sold at less than fair value and are causing or threatening to cause
material injury to the U.S. structural steel beam industry. While the Department
of Commerce found that these imports were being sold in the United States at
less than fair value, and, therefore, made affirmative dumping findings, the ITC
on June 17, 2002, determined that such imports did not materially injure or
threaten with material injury an industry in the United States. As a result, the
ITC made final negative injury determinations in all such cases, thus ending
these investigations without the imposition of duties.
There are anti-dumping duty and countervailing duty orders against imports
of rails from Canada. However, there are currently no Canadian steel makers
producing rails. There are no anti-dumping duty or countervailing duty orders
outstanding against imports of rails from any other country nor are there any
current investigations.
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Rebar
In July 2000, certain rebar manufacturers filed a petition with the ITC
against the dumping of rebar in certain United States markets. In August 2000,
the ITC issued a preliminary determination of injury or threatened injury,
resulting in an imposition of duties by the U.S. Department of Commerce ranging
from 17% to 133% on imports from eight countries. These orders will remain in
effect for five years, subject to sunset review as well as the normal annual
administrative review that could result in a shortening of the duty orders.
Although there are a number of additional trade cases pending before the
ITC, involving various groups of imported steel products, most rulings regarding
duties and tariffs, since the March 2002 imposition by President Bush of the
Section 201 tariffs described in the following section, have been against the
U.S. steel industry.
Section 201 Investigation
On June 5, 2001, President Bush announced a three-part program to address
the excessive imports of steel that were depressing markets in the United
States. The program involved (1) negotiations with foreign governments seeking
near-term elimination of inefficient excess steel production capacity throughout
the world, (2) negotiations with foreign governments to establish rules that
will govern steel trade in the future and eliminate subsidies, and (3) an
investigation by the ITC under Section 201 of the Trade Act of 1974 to determine
whether steel is being imported into the United States in such quantities as to
be a substantial cause of serious injury to the U.S. steel industry. Therefore,
on June 22, 2001, the Bush Administration requested that the ITC initiate an
investigation under Section 201 of the Trade Act of 1974. Products included in
the request were in the following categories, subject to exclusion of certain
products:
(1) carbon and alloy flat products;
(2) carbon and alloy long products;
(3) carbon and alloy pipe and tube; and
(4) stainless steel and alloy tool steel products.
Hot-Rolled, Cold-Rolled and Coated Steel
On October 22, 2001, in the first step of the three-step Section 201
process, the ITC ruled that approximately 80% of the U.S. steel industry
suffered material injury due to imported steel products, including carbon and
alloy hot-rolled, cold-rolled, coated and semi-finished slab products, as well
as hot rolled bars, reinforcing bars and light shapes. Of the 33 steel products
included in the petition brought by the U.S. Trade Representative and President
Bush, 12 products, including the products we produce, were affirmed for injury
by unanimous 6-0 votes. On December 7, 2001, in the second step of the process,
the ITC recommended tariffs of approximately 20%-40% as well as tariff quotas in
some cases, and these recommendations were transmitted to President Bush for
final action. On March 5, 2002, in the third and final step of the Section 201
process, President Bush imposed a three year tariff of 30% for the first year,
24% for the second year and 18% for the third year on imports of hot-rolled,
cold-rolled and coated sheet. He also imposed a tariff of 15% for the first
year, 12% for the second year and 9% for the third year on imports of tubular
steel products, and a tariff on imported steel slabs of 30%, 24% and 18% in the
first, second and third years, respectively, on tons in excess of an annual
quota of 5.4 million in 2002, 5.9 million in 2003 and 6.4 million in 2004. North
American Free Trade Agreement partners of the United States, principally Canada
and Mexico, were excluded from the tariffs, as were "developing countries"
which, in the aggregate, account for less than 3% of imported steel. These
Section 201 remedies were to be cumulative with any existing tariffs or quotas
in the anti-dumping cases. They were also directed at products rather than the
countries that produce those products, thereby providing some import relief even
if some steel products find their way to exporting countries not covered by
anti-dumping margin or countervailing duty orders.
The President's decision to implement a Section 201 remedy was not
appealable to U.S. courts. However, foreign governments appealed to the World
Trade Organization, or WTO, and the European Union, Japan and other countries
prosecuted such appeals. President Bush rescinded the Section 201 tariffs,
however, in December 2003, after the WTO ruled that the tariffs violated
international law and various other nations threatened to impose retaliatory
tariffs on U.S. exports and exerted other political pressure. While the Section
201 tariffs, coupled with certain major steel mill closures related to pending
bankruptcies, may have caused steel prices to increase substantially in the
first three quarter of 2002, to approximately $400 per ton, from their depressed
levels in the low $200's per ton at the end of 2001, prices nonetheless eased
back into the $260-$270 per ton range by May 2003 as a result of post-bankruptcy
capacity restarts and weak U.S. steel demand. The negative impact of the
rescission of the Section 201 tariffs has been mitigated by a number of factors
that have independently led to a strengthening of U.S. steel pricing, including
a weakened U.S. dollar, substantial increases in ocean freight and an increase
in the global demand for steel, primarily in China.
20
The rescission of the Section 201 tariffs does not affect the anti-dumping
duties imposed through the ITC processes. In announcing its December 2003
rescission action, the Bush administration affirmed its commitment to monitor
steel imports and to file anti-dumping and countervailing duty petitions if it
determines that unfairly traded steel imports adversely impact, or threaten to
adversely impact, financial results. During 2004, the ITC will also commence a
required five-year review to determine whether to continue or modify
anti-dumping findings against hot-rolled steel from Japan, Brazil and Russia. In
addition, the existing Comprehensive Steel Trade Agreement with Russia, under
which Russia voluntarily limited its exports to the U.S. of steel not otherwise
covered by anti-dumping orders, will expire in July 2004.
The U.S. is also conducting discussions at the Organization of Economic
Cooperation and Development with the aim of reducing or eliminating the
subsidization of global inefficient steel production.
Structural Steel and Rail
By a vote of 4-2, the ITC determined on October 22, 2001, that structural
steel and rails were not being imported into the United States in such increased
quantities as to be a substantial cause of serious injury or the threat of
serious injury to the U.S. industry. The ITC determined that the U.S. structural
steel and rail industry was not seriously injured primarily because of its
"double-digit operating margins," and positive performance trends including,
increased capacity and shipments, higher employment and new investment. With
regard to threat of injury, the ITC found that the existing orders and the
pending investigations made future increases in imports unlikely.
Rebar, Merchant Bar and SBQ Products
President Bush's March 2002 Section 201 order granting tariff relief to
various categories of imported steel products included a 15% tariff on rebar and
a 30% tariff on various certain merchant and SBQ products. These have likewise
now been rescinded.
Integrated Mills Versus Mini-Mills
There are generally two kinds of primary steel producers, "integrated
mills" and "mini-mills." We are a mini-mill producer.
Steel manufacturing by an "integrated" producer involves a series of
distinct but related processes, often separated in time and in plant geography.
The process involves ironmaking followed by steelmaking, followed by billet or
slab making, followed by reheating and further rolling into steel plate or bar,
or flat-rolling into sheet steel or coil. These processes may, in turn, be
followed by various finishing processes (including cold-rolling) or various
coating processes (including galvanizing). In integrated producer steelmaking,
coal is converted to coke in a coke oven, then combined in a blast furnace with
iron ore (or pellets) and limestone to produce pig iron, and then combined with
scrap in a "basic oxygen" or other furnace to produce raw or liquid steel. Once
produced, the liquid steel is metallurgically refined and then either poured as
ingots for later reheating and processing or transported to a continuous caster
for casting into a billet or slab, which is then further shaped or rolled into
its final form. Typically, though not always, and whether by design or as a
result of downsizing or re-configuration, many of these processes take place in
separate and remote facilities.
In contrast, mini-mills, such as our Butler mini-mill, our Columbia City
mini-mill and our Pittsboro, Indiana mini-mill use an electric arc furnace to
directly melt scrap or scrap substitutes, thus entirely eliminating the
energy-intensive blast furnace. A mini-mill unifies the melting, casting and the
hot-rolling into a continuous process. The melting process begins with the
charging of a furnace vessel with scrap steel, carbon and lime, following which
the furnace vessel's top is swung into place, electrodes are lowered into the
furnace vessel through holes in top of the furnace, and electricity is applied
to melt the scrap. The liquid steel is then checked for chemistry and the
necessary metallurgical adjustments are made, typically while the steel is still
in the melting furnace or, if the plant has a separate staging area for that
process (as do our mini-mills), the liquid steel is transported to an area,
commonly known as a ladle metallurgy station. From there, the liquid steel is
transported to a continuous caster, which consists of a turret, a tundish (a
type of reservoir which controls the flow of liquid steel) and a water-cooled
copper-lined mold. The liquid steel passes through the continuous caster and
exits as an externally solid slab. The slab is then cut to length and proceeds
directly into a tunnel furnace, which maintains and equalizes the slab's
temperature. After leaving the tunnel furnace, the slab is descaled and then it
proceeds into the first stand of a rolling mill operation. In the rolling
process, the steel is progressively reduced in thickness. The final product is
wound into coil and may be sold either directly to end-users or to intermediate
steel processors or service centers, where it may be pickled, cold-rolled,
annealed, tempered or galvanized.
As a group, mini-mills have historically been characterized by lower costs
of production and higher productivity than integrated mills. This was due, in
part, to lower capital costs and to lower operating costs resulting from their
streamlined melting process and smaller, more efficient plant layouts. Moreover,
mini-mills tended to employ a management culture, such as ours, that emphasizes
flexible, incentive-oriented non-union labor practices and have tended to be
more willing to adapt to newer and more innovative management styles that
encourage decentralized decision-making. The smaller plant size of a mini-mill
also permits greater flexibility in the choice of location for the mini-mill in
order to optimize access to scrap supply, energy costs, infrastructure and
markets, as is the case with our Butler mini-mill. Furthermore, a mini-mill's
more efficient plant size and layout, which incorporates the melt shop,
metallurgical station, casting, and rolling in a unified continuous flow under
the same roof, have reduced or eliminated costly re-handling and re-heating of
partially finished product. They have also adapted quickly to the use of new and
cost-effective equipment, thereby translating technological advances in the
industry into efficient production. However, as a result of the movement toward
steel industry consolidation, coupled with the emergence from bankruptcy of
previously inefficient and high capital cost and high operating cost steelmaking
assets, under new ownership, with renegotiated and less burdensome labor
contracts, the cost differences between mini-mills and some integrated mill
consolidators have begun to narrow. Moreover, during periods of high scrap
material costs, such as at the present time, integrated mills that produce their
own blast furnace iron and are not as dependent as mini-mills upon scrap for the
bulk of their melt mix, actually experience lower raw material metallic costs
than mini-mills, thus further compressing the historical cost differentials
between integrated and mini-mill steelmaking.
21
The Flat-Roll Steel Market
The flat-roll steel market represents the largest steel product group.
Flat-rolled products consist of hot-rolled, cold-rolled and coated sheet and
coil.
The following table shows the U.S. shipments of flat-rolled steel, in net
tons, by hot-rolled, cold-rolled and coated production, as reported by the
American Iron and Steel Institute or AISA, for the five years from 1998 through
2002.
Years Ended December 31,
------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(millions of net tons)
U.S. Shipments:
Hot-Rolled(1)................................................. 25.3 27.7 29.3 27.8 28.1
Cold-Rolled(2)................................................ 15.8 16.8 18.0 14.8 15.1
Coated(3)..................................................... 22.8 24.3 23.9 22.2 22.8
---- ---- ---- ---- ----
Total.................................................... 64.0 68.8 71.2 64.8 66.0
==== ==== ==== ==== ====
Percentage of Total U.S. Steel Shipments...................... 62% 65% 65% 66% 66%
- --------------
(1) Includes pipe/tube, sheet, strip and plate in coils.
(2) Includes blackplate, sheet, strip and electrical.
(3) Includes tin coated, hot dipped, galvanized, electrogalvanized and all other
metallic coated.
Hot-Rolled Products
All coiled flat-rolled steel is initially hot-rolled, a process that
consists of passing a cast slab through a multi-stand rolling mill to reduce its
thickness to less than 1/2 inch. Hot-rolled steel is minimally processed steel
coil that is used in the manufacture of various non-surface critical
applications, such as automobile suspension arms, frames, wheels, and other
unexposed parts in auto and truck bodies, agricultural equipment, construction
products, machinery, tubing, pipe, tools, lawn care products and guard rails.
Cold-Rolled Products
Cold-rolled steel is hot-rolled steel that has been further processed
through a pickler and then successively passed through a rolling mill without
reheating until the desired gauge, or thickness, and other physical properties
have been achieved. Cold-rolling reduces gauge and hardens the steel and, when
further processed through an annealing furnace and a temper mill, improves
uniformity, ductility and formability. Cold-rolling can also impart various
surface finishes and textures. Cold-rolled steel is used