Hardly steel industry looks to exports and domestic energy projects
Late last year an analyst at Gordon Securities, a Toronto brokerage house, issued a report that was extremely bullish on Stelco, Canada's largest steel company. It was too bullish, in fact, and the management of Stelco went to the Ontario Securities Commission to get it to review the report.
Stelco acted, notes John D. Allan, its president and chief operating officer, because it didn't want investors to be buying the stock for the wrong reasons and become disappointed.
The report -- despite some of its problems -- underscores an important point, however: The Canadian steel companies are not in the same boat as the US companies. This nation's steel industry, for the most part, is efficient, modern, and profitable.
For example, Canadian steel competes on the world market with Japanese and West German steel. Mr. Allan, in an interview, recalled that in the third quarter of 1980 the order books at Stelco were thin. But rather than shut down its blast furnaces, the company, which produces about 33 percent of Canada's steel, decided to sell its output on the world market. Stelco shipped steel to projects in China, Venezuela, and Egypt, among other places. Not only did it sell a lot of steel but it made money as well.
Since then the Canadian economy has improved enough that Stelco can go back to supplying steel for the domestic market. But even with the better markets, the companies' executives are looking at some potential "rusty" spots down the track a bit. Specifically, there is the uncertainty caused by the debate over the national energy policy.
"What we fear the most," Mr. Allan said, is an impasse between the provinces and the federal government. This might make the energy companies defer some of their plans." Since steel is a basic ingredient for pipelines, tar-sands plants, or oil rigs, such a delay could hurt the steel industry. And he noted that the longer the projects are held up, the less attractive they look because of inflation. (In fact, the national energy debate has already resulted in the Alsands Group announcing a postponement of its capital spending plans until June. If the debate is not resolved by then, it says, it will cancel the entire project.)
Stelco estimates that if all the energy projects that have been announced are undertaken, it will require 17 million tons of steel over the next 10 years.
"Canada always has had large megaprojects that require a lot of steel," Mr. Allan said, "and the current projects are energy megaprojects. In one tar sands plant, for example, there are 225,000 tons of steel."
For the steel companies, the energy projects have come at a time when the auto and agricultural-equipment businesses, both major steel users, are stuttering. Mr. Allan believes it is going to be hard for the auto companies "to get back to the great numbers of the mid-'70s." Fortunately for the Canadians, a US-Canadian auto pact assures them of a certain amount of Canadian-made content in some of the cars produced by Detroit. Often this is steel.
Another factor for the steel companies, notes Greg Liddy, an analyst with Merrill Lynch Royal Securities Ltd., is that the capital spending boom in Ontario has entered a "mature phase." And the construction market, particularly in Alberta, which has been booming, will probably be slowed by higher interest rates.
Because of these uncertainties, some of the securities analysts in Toronto are predicting a flat year for the industry this year. Mr. Liddy of Merrill Lynch forecasts that both Stelco and Dominion Foundries & Steel Ltd., the second-largest Canadian steel company, will show basically unchanged earnings from 1980. Last year, Stelco was expected to earn $4.90 per share and Dominion
Over the longer term, the outlook for the companies seems brighter.
Stelco is in the process of completing a new $1.2 billion steel plant on Lake Erie that initially will produce 1.17 million tons annually. This plant, combined with Stelco's Hilton works in Hamilton, southwest of here, will give Stelco some of the best and most modern facilities in North America.
The plant was built because Stelco was a net importer of steel in Canada. Its rolling mills could produce more product than its blast furnaces. With the Lake Erie plant partly on stream, its blast furnaces now produce more raw steel than its rolling mills. Thus, its next area of expansion will be a new rolling mill.
Because of the recession here, Stelco produces more steel than it can currently sell. So about 12 to 15 percent of its production is exported worldwide.Such exports into the United States have prompted David Roderick, the chairman of US Steel, to complain of "dumping" by Canadian companies. Mr. Allan denies this charge, however, saying, "We have very legitimate prices."
One of the reasons for the competitive nature of Canadian steel is the shrinking Canadian dollar. Mr. Allan expects it to stay at these low levels over the short term. Another reason for the cheaper production is the lower cost of energy. Finally, Canada's steel mills are newer -- since steel production in Canada did not become important until after World War II.