UK: BRITISH STEEL ROLLS AHEAD.

UK: BRITISH STEEL ROLLS AHEAD. - 'Competitive on costs, on quality and on technology', British Steel looks set to realise its global ambitions. But in a cyclical industry where competition is intense and often unfair, it may be hard to go the distance.

by Robert Heller.
Last Updated: 31 Aug 2010

'Competitive on costs, on quality and on technology', British Steel looks set to realise its global ambitions. But in a cyclical industry where competition is intense and often unfair, it may be hard to go the distance.

British Steel is an epitome of Britain's industrial economy. Vastly reduced in size, far more efficient, the company has ambitions which, at first glance, are above its station. Its management aims to create a world-class steel company - not only in terms of competencies, but of spread. Five years down the line, chairman Brian Moffat envisages an 'internationally based steel company. There's no such thing in the world today.' That is fighting talk for a company which is, by value, a quarter the size of Nippon Steel, and half that of Krupps: though half the size again of a one-time US giant like Bethlehem Steel. Moreover, look at the five-year record like a man from Mars, without any knowl-edge of the circumstances, and the picture is of a once comfortably profitable company that has been running hard up the down escalator. As Moffat says, however, steel is not an easy business to be in. One of its basic difficulties helps explain the drive into other national and regional economies: the industry is highly cyclical.

On £5.1 billion of turnover, British Steel made an operating profit of £635 million in the year to end-March 1990. That collapsed, on a slightly lower sales value, to £170 million the next year: two loss-making periods followed, in which turnover slipped heavily to £4.3 billion. There was some recovery in 1993-94. Although turnover again drifted downwards, British Steel did produce a rare profit among world steelmakers. But the numbers were still far below respectability - £97 million, or a mere 15% of the level achieved four years before.

As a percentage of sales the operating profit of 2.3% was meagre, fully explaining a minute 1.8% return on shareholders' funds. British Steel was therefore a long way from what Moffat defines viability as: 'an operating profit before depreciation of around 13% of sales'. The company was equally far from covering the cost of its capital - so is there any real chance of achieving Moffat's strategic ambition?

The Martian would certainly be encouraged by the first half-year, which showed a nearly sixfold leap in pre-tax profit on turnover up by 11%. The mills are operating flat-out as the business cycle works in the group's favour, with further growth in UK demand enhanced by pick-up on the Continent. Exchange rates have also been helpful: strength of sterling against the dollar and weakness against the Deutschmark are a perfect combination. But these shifts of fortune, as Moffat knows full well, are short-term by nature.

The world-class strategy, however, is essentially long-term. Its chances rest first on staying internationally competitive on costs, and second on sustaining the major shift in mind-set from production-led to market-led. British Steel now works back from the market and adapts capacity accordingly, where once it created capacity and tried to fill it at all costs.

Third, capital expenditure (£410 million announced since September 1994) is tightly targeted: Moffat, a 56-year old British Steel veteran, is delighted with the new project at Llanwern which will add nearly a million tonnes of capability for £22 million. That's ridiculously cheap even by mini-mill standards. 'Just imagine the payback,' rejoices Moffat (he qualified as an accountant). The impact of closing Scotland's Ravenscraig plant has been economically and effectively surmounted. In all, British Steel is adding some 2 .5 million tonnes of capacity over the next two years for minimal outlay. Over half that capacity is in the US, which adds further credence to the company's world-class ambitions. The mini-mill in Tuscaloosa, already making plate primarily from British slabs, will provide a million tonnes of capacity for a capital cost of £97 million - with a cost advantage over the US competition of $100 a tonne. It will be fed with direct-reduced iron from a £65 million development on the Gulf Coast, equipped with production units now sitting in mothballs at Hunterston in Scotland - nobody can accuse British Steel of failing to seek maximum utilisation of its assets.

That is the key to the fourth leg of the strategy: a strong balance sheet. Moffat and his colleagues did not think the recession would be as long or as deep as it turned out to be: 'We got that wrong'. What they got right was the cash. Managers were enjoined to see cash as king. Determined to come through recession cash-neutral, Moffat achieved cash generation: 'We owe not one penny to the banks.' The tight control over stocks, working capital and capital investment is one major reason for Moffat's assertion that 'we're stronger than in 1989'.

Given that the profits of that year and the next were so high, that's a big claim. But today's British Steel is poised to extend its international reach to Asian and Pacific markets where demand for its product range is growing. In contrast, demand in the North American and European markets is flat and shows no sign of becoming anything else. With trading and selling organisations all over the world (14 in Asia Pacific alone), British Steel is getting to understand other markets which, like the US, should be able to support manufacturing plants.

That is an exciting prospect for an industry which has suffered extreme pain from its dependence on the UK economy. Where once a quarter of a million people worked on 37 steelmaking sites and a host of other plants, only 41,000 work today - 35,000 excluding United Engineering Steels, where British Steel has just taken total control for £93 million. Bulk steel is now made on only four principal sites, managed, in effect, as two (Scunthorpe/Teesside and Llanwern/Port Talbot), in order to keep the fixed costs as low as possible.

The colossal shakeout has no real parallel in industry. It has left a significantly younger workforce of people who really want to work. The three-month strike in early 1980 lost some customers for keeps but British Steel has gained greatly since in productivity and flexibility. A quarter of white-collar labour costs and 35% of blue-collar are variable, thanks to bonus schemes - and that provides a competitive advantage. At least equally significant, the operatives have been given the necessary tools - not only the hardware, but the software. Almost unbelievably, the industry once failed to educate the men to operate the plants. At a price of 5% of employment costs, training has become universal. Workers who understand the plant and the process, and are backed up by on-line diagnostic equipment, can keep mills going without breakdowns.

That long overdue change is a 'reflection of what the Japanese have helped us with' - not Japan's steelmakers, but the automotive and other manufacturers who have become British Steel customers in Britain. Responding to their example and demands, British Steel has ceased to 'inspect out quality. Today we're building in quality.' That helps to explain a generally good showing on benchmarking comparisons with other steelmakers round the world. On some counts, the company is equal best or better: across the board, it is in the upper quartile, and (more important) still striving to improve.

One area where it dare not lag, but rather must lead, is technology - 'the core of the company', says Dr Jeff Edington. Coming from the technical director, that is scarcely surprising. But it is true. Technology will determine whether British Steel remains the low-cost producer, is central to its position in the market and is the basis of its plans to produce globally. For so old an industry, the pace of technological progress is extraordinary: process and products alike have undergone revolutionary change - and it is continuing apace.

Edington enthuses about the metallurgical properties of steel, which explain why 1,000 product specifications can be made at Scunthorpe alone. The differentiation generally lies in the properties of the product. New high-strength and zinc-coated steels have enabled the emergence of the modern car, with its sculpted lines, safer performance in collisions, rust-free body and greatly reduced weight: the thickness of sheet has come down from over 2mm in the 1960s to 0.8mm today. Such developments have been essential to defend steel against the challenge of alternatives, such as plastics and aluminium.

Edington, a 56-year old metallurgist, came from aluminium (Alcan) because British Steel 'provided a fantastic platform from which to move forward.' The company is 'world-competitive on costs, world-com-petitive on quality' (also within his remit) and 'world-competitive on technology'.This advance has thus gone beyond simply catching up on competition - which makes British Steel's prognosis considerably more encouraging. Further promise lies in management's evident determination to lead, not in the labs, but in the mills and the marketplace. Some 900 people operate in R&D and 1,500 others in technology, all working to a powerful philosophy: to develop products with customers, focused on technology and the marketplace, and to buy process technology and get more out of it than anybody else.

The electric arc furnace at Trico Steel in the US, a quarter-owned joint venture with LTV and Sumitomo, will therefore be 'the first of its type in the entire world', a mini-mill making sheet and strip, and designed to eliminate the cold mill entirely.

Already, by focusing product and process improvements on the marketplace, the company has won notable success. 'We're feared in some markets,' claims Edington, citing construction, where the British Steel strength in beams has won back business from concrete, doubling UK market share and greatly expanding exports. He also expects general market benefits to flow from advanced information technology (another of his responsibilities): 'IT combined with a realistic approach to business processes can have a gigantic effect.' Major projects are under way to eliminate paperwork and improve services in distribution in Britain and the wider European market.

The creation of a faster, more responsive and cheaper nexus between the plants, the stockholders and the customers will be especially valuable to Tony Pedder (46), the commercial and distribution director. The 30% market share in stockholding that belongs to British Steel itself would have been larger if the Walker acquisition had kept all its customers. Some left in what was 'a natural reaction', says Pedder. 'Walker was seen as a great independent.' After the initial setback, the businesses have been pulled together under one management, and market share has stabilised.

'Distribution,' says Pedder emphatically, 'is the route to the customer.' The emphasis on what the customer wants is by no means confined to his side of the house. On the contrary, after Sir Bob Scholey's massive drive to move British Steel from high-cost culture to low, the whole company was reoriented around a commercial approach. Which markets to serve and how to address them became the dominant theme, not of a revolution, emphasises Pedder, but an evolution.

Its progress lies in the hands of the individual businesses. Pedder's small team, which also looks after purchasing and transport, doesn't dictate to the heads of these product-based profit centres. But they are encouraged to think along sector lines and to apply continually the vital test: 'It suits us, but does it make sense to the market?' Twice a year, first in mid-March with their budgets, the managing directors of businesses like tubes and pipes, tinplate or special sections report on their plans and progress to the executive committee - including their direct bosses Harold Homer and John McDowall, Edington, Pedder, and Philip Hampton, finance director.

Half the emphasis at these meetings is on the market and commercial aspects. That includes the tracking of customer service - again by each business, using a variety of options: such as delivery; response; lead-times; and quality. The latter, naturally, takes in rejections and complaints, of which, says Pedder, there are far fewer. The improvement is, however, not a matter for rightful pride: a metals company has no business being anything but high-technology and high-quality.

Pedder is emphatic that the old image of steel as a monopoly or oligopoly is as obsolete as that of heavy metal and reeking mills (the latter now reek far less, thanks to heavy investment in reducing emissions). 'We're selling against competition all the time.' Some of that competition is essentially unfair: stuck with 30 million tonnes of excess capacity (roughly 18%), European producers have been protected by what British Steel flatly describes as illegal state aid.

The result of intense competition from other Europeans, East Europeans and other parts of the world is that percentage share of the home market ranges from the mid-50s to the 60s. 'The market is very open to competitors,' says Pedder. 'The only restriction is their costs and marketing platforms.' Some research has indicated, however, that improved performance by previously state-owned industries has only flowed in conditions of genuine competition. Among other benefits, that sharpens the managerial reflexes.

'The whole management style has changed,' declares Moffat. Edington confirms that the style is very open, that management is more customer-oriented, and that people are very proactive, not only in reacting to customers, but in thinking through the implications of new technology. The stimulation is also reflected in British Steel's own vigorous export business: 47% of all turnover is outside the UK, some sourced from overseas production.

There is careful focus on exports to the best-return markets, with lower transport costs and wider margins. The company is now working hard on logistics, striving to speed up flow through the system. It already has a freight forwarding hub for Europe, and is looking for ways in which, working in partnership with customers, it can cut stocks, reduce costs and improve service all round. But there is a paradox about the huge export business: British Steel would rather it was smaller.

The most efficient and profitable way by far of exporting steel is in products manufactured by domestic customers. That is where the decline of Britain's manufacturing base has weakened British Steel's hand. The survivors may well be leaner and fitter, but in most steel-using industries the British contingent isn't world-class, and in some sectors (like consumer electronics) is strictly minor league.

The same view can not be taken of British Steel itself. The industry's renaissance, thanks partly to the relative sluggishness of several competitors, is neither too little nor too late - even though, as Pedder says, there is 'a lot to learn, a long way to go.' In some activities (for example, the beams that have stolen so much of the construction market by superior technology and innovative marketing) back-patting is in order. But, says Pedder, 'we haven't had the same class act in all sectors'.

For his part, Edington also has a large future agenda - including further reduction in the emission level above the current 92%: and there is 'lots and lots to do' on taking weight out of the product. The industry and its customers will not allow any let-up. As Moffat puts it, 'we're thinking forward in terms of technical change in the product - it's going to be remorseless.' This sense of forward movement, keeping pace with an industry advancing rapidly on every front, permeates British Steel. So does the feeling that, to emerge as the world's fourth largest steel company, and the most profitable, represents a substantial and encouraging victory over notably difficult circumstances.

Moffat tends to describe his company's mission in monetary terms. 'We're motivated by profit, not tonnes. We have a track record of reducing tonnes to make more money.' However, the share price, at 28% above the flotation level of 125p, is a modest reward for six years of privatisation. With equal irony, the financial results are only impressive by the steel industry's abysmally low standards: yet the physical improvements which underlie the financials are impressive by any standards.

They are the indispensable key to successful management of cyclical businesses. 'The only way to keep costs competitive is to try and be innovative,' says Moffat - and that is also the way to minimise the down-phase of the cycle, optimise the up-phase and achieve those world-class ambitions. In another irony, this global concept would become reality faster if British Steel's domestic customers had thought as ambitiously and performed as well. Not only would steel's profits be substantially higher: so would Britain's world economic ranking.

THE MAJOR STEEL PRODUCERS

Company Country Output*

1 Nippon Steel Japan 26.5

2 POSCO Rep. of Korea 22.5

3 Usinor Sacilor France 17.6

4 British Steel UK 12.3

5 NKK Japan 11.9

6 USX US 11.1

7 Kawasaki Japan 10.7

8 Sumitomo Japan 10.5

9 SAIL India 10.0

10 Magnitogorsk Russia 9.9

11 Thyssen Germany 9.6

12 Bethlehem Steel US 9.3

*million metric tons

Source: 'World Steel in Figures 1994', International Iron and Steel

Institute.

BRITISH STEEL: FINANCIAL FACTS

Turnover by region (£m)

UK 2,233

Other European 1,223

North America 336

Other areas 399

Total 4,191

Profit before tax (£m) 80

Shareholders' funds (£m) 3,324

Number of employees 41,000

Year to 2 April 1994.

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