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SHOWTIME One-on-one with No. 1 at World Steel Dynamics

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From the outside, 456 Sylvan Ave. doesn't look much different than any other two-story, commercial brick building flanking one of the thoroughfares weaving its way through the leafy green suburbs of Englewood Cliffs, N.J.

It's not until you pull into the parking lot and get a closer look at the license plate on the rear bumper of a black Ford F-150 pickup truck parked in slot No. 1 that you begin to get the idea that 456 has something very special going on under its roof. The license plate-4STEEEL (sic)-is an understatement.

Follow the stairs up to the second floor and there's no hiding the fact that steel is central to the business at hand in the suite of offices and conference rooms. Framed photos and paintings of blast furnaces, hot-strip mills, steel coils and girders line the walls. And in an unexpected tour de force, a trio of carefully cut-and-polished electrodes double as end tables in the reception area.

Welcome to the offices of World Steel Dynamics Inc. (WSD) and home away from home of Peter F. Marcus, who in early 1999, together with staffers and associates at PaineWebber Inc., formed their own separate and independent company. And they've been going strong ever since.

On this particular morning, Marcus is busy putting some finishing touches to Steel Success XXII, the 22nd edition of an annual conference cosponsored by AMM that over the years has evolved into the global steel industry's biggest name, premiere information-gathering and networking event.

Marcus takes a moment-before fielding questions from AMM editor Jo Isenberg-O'Loughlin on subjects ranging from steel futures to the emergence of China-to lower the volume on an aria that threatens to drown out his voice (an opera aficionado, he admits being partial to Strauss) then quickly gets down to business.

AMM Last year, Steel Success Strategies drew 1,200 attendees and so far this year's event is running ahead of last year's. How do you explain its continued success?

Marcus  The conference is showtime. That is the first principal. It's show business. After that, our conferences tend to give people who attend them a huge amount of conceptual information. As a result, a lot of ideas are going through their heads and by the time the conference is over they are beginning to see the issues examined with new eyes. That is what it is about.

AMM As maestro and ringmaster of the SSS conferences, your public persona is high profile across the global steel industry. Is there a different, more private side to Peter Marcus and how comfortable are you talking about it?

Marcus  I think by definition a researcher is both an internal and an external person. I think I am good at creating concepts and good at selling them. How private am I? I have great relationships, I know a lot of people and obviously I am quite egotistical. Security analysts have to be. I believe a security analyst is an industrial economist who must understand under what conditions a firm has pricing power. World Steel Dynamics was built on that foundation. And as a sub-point, economics is also a study of the human equation in the marketplace. I am a 68-year-old guy who is well-to-do financially, who loves his work, loves the people who work with me and thinks we are in great shape as a private entity. And World Steel Dynamics-knock on wood-seems to be remarkably beloved everywhere. People give us information and trust us.

AMM Over the years, many of the concepts you have coined have worked their way into the global steel lexicon. Is that a deliberate strategy and what drives it?

Marcus  I enjoy looking at and inventing concepts to describe what's happening and what might be happening. I decided pretty early in my career to try to invent words or phrases that describe developments in the steel industry. Concepts like the death spiral and volcano, which were among the better ones. You have to be able to put a spin on things, to titillate people to make the information and idea always relevant to them. I also think you have to have some humor in what you write. And to keep things interesting, every report has to be new in a flexible format. In WSD's early warning system, we have five reports-Global Steel Alert, Inside Track, Truth and Consequences, Thermometer and Cyclone-all of which are free form. You'll notice they have pretty good names.

AMM WSD executives and staff generate a wide variety of steel-related information products. Are there any among the organization's many offerings that you personally take sole responsibility for?

Marcus  Putting together our early warning system action-oriented reports requires, I think, one person to speak to everybody, assemble all the information and make up one's mind what is going to happen. So it's my responsibility, roughly every two weeks, to speak to people all over the world, read like crazy and ponder what might happen. For a number of years now, I have been predicting with a fair lead time what was going to happen. It has been working for quite a while.

AMM One area of the world U.S. mills are extremely interested in is China, which is viewed as a wild card and, in some circles, a major threat to North American producers. What's your take?

Marcus  I made my first trip to China in the '70s. The Cultural Revolution had ended about three years earlier. I started going twice a year about five years ago and I now have two people in China. We have coverage there, but it turns out China is an open information society. The amount of information you can get is unbelievable. I believe that in China the oversupply problem will be encapsulated and will not be a major destabilizing event to the global steel industry. It took three death spirals-1995, 1998 and 2001-in the Western World steel industry to change the behavior pattern of the non-Chinese industry. China has had one death spiral, in fall 2005, and might be heading into another at this moment. So the question becomes Will China need to experience three pricing death spirals, as was the case in the West, to change pricing power? Or given the fact that China is a command economy, in that companies there are permitted to speak to one another about pricing, will they find a unique Chinese solution to their problem? Traditionally, many players in a high fixed-cost industry means price drops to marginal cost. But why should the Chinese commit hara-kiri when they have the means to get together and set prices and cut production?

AMM The theme of this year's SSS conference is New World, New Opportunities, New Crises. In terms of crises, you have previously identified four events as having a destabilizing effect on the global steel industry. Two of those events-the devaluation of the dollar in 1971 and the revaluation of the Russian ruble in 1998-are currency-related. How do you see the current controversy over the Chinese renminbi sorting out?

Marcus  Currencies make a huge difference. One of the interesting things regarding the global cost system or cost curve is that many of the countries that are the lowest cost-Brazil, Ukraine, Russia, let's say-are now experiencing sizeable currency appreciation. I believe China, too, is in the midst of a quite sizeable currency appreciation. I basically believe it is fixed-asset investment spending, not household or government spending, that drives global steel demand. And in China, with all those poor people, I just don't see how they have the wherewithal to have a major rise in consumer durable spending. Wages are so low in both China and India that there is no way for the wage per hour in 10 years to become a very substantial number. So the key to China's growth in per-capita income and, therefore, spending power is to have a sizeable currency appreciation. When you get that, consumer durable spending can kick in. In China, we calculate that one renminbi spent on fixed-asset investment is 14 times more steel intensive than the equivalent in household and government spending.

AMM In December last year you signed a letter of intent with the New York Mercantile Exchange to offer the SteelBenchmarker price discovery system developed by WSD and AMM/Metal Bulletin on the exchange. What kind of traction is SteelBenchmarker getting?

Marcus  We have a sizeable number of inputs and I think people are feeling good about SteelBenchmarker, especially the U.S. numbers. I feel our system is the most robust and accurate since we're getting price opinions from buyers, middlemen and sellers. I am hoping the system will serve as a foundation for huge trading in futures. And I believe passionately and logically that steel futures transactions are a triple win for the mills, the middlemen and the buyers. The goal of World Steel Dynamics is to provide the benchmark prices that everybody uses.

AMM This time last year, there was almost as much drama and controversy offstage as there was on with the takeover battle for Arcelor SA building to a crescendo. Were you surprised by the outcome of the Mittal/Severstal/Arcelor battle?

Marcus  What we learned is that if you are a manager of a company with no major shareholders that can prevent you from being taken over and your stock is cheap, you run a major risk that someone is going to bid for you. We are now in the world of merger mania. A number of years ago, I put out a series of reports called The Urge to Merge that, at the time, were controversial basically because we consolidated the entire industry into about eight different hands. It never could happen but it was a way of making a point.

AMM It's been said that you're more passionate about steel than many of the executives leading the industry. What are your other passions?

Marcus  Well, I enjoy playing chess and sports such as golf. I have a tremendous love of the opera. And I like to get out in the woods. I get away when I can to a wonderful spot, a desolate place in the Adirondacks where I can camp out. In general, I am a person who on weekends tends to have solitude. I also am a person who enjoys looking at the global economy and the changes that are occurring. I love the work. I wake up many times in the middle of the night and call China and India or early in the morning and call Europe. I work night and day. There's a La-Z-Boy recliner in a small office on the other side of mine. Sometimes I take a nap three or four times a day to catch up on the sleep I lost because of how early I begin.


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