You dont have to be born Brazilian or a member of the Gerdau steelmaking dynasty to know your way around a long products mill. But it cant hurt.
Almost any way you slice it, its tough denying the leg up that comes from sharing a gene pool shaped by more than a century of producing, fabricating and distributing steel and a bloodline marked by a strong sense of direction and a hearty appetite for growth. Over the years, those two traits have combined to transform Gerdau SA, which began life as a small nail factory in southern Brazil in 1901, into a global steel powerhouse with more than 45,000 employees worldwide.
At last count, Gerdaus North American business operation, now known as Gerdau Long Steel North America (GLSNA), accounted for just shy of 40 percent of its parent companys 25.3 million tonnes of annual crude steel production capacity and 43 percent of its 21.3 million tonnes of annual rolled product capacity. Behind those percentages is an acquisition drive that dates back to 1989 but accelerated significantly over the past decade, when Porto Alegre-based Gerdau almost single-handedly consolidated the North American steel long products sector.
Gerdau has invested almost $7 billion in North America in the past five years alone, Guilherme Gerdau Johannpeter, who was named president of GLSNA in June 2011, told AMM in an exclusive interview at the companys Tampa, Fla., headquarters. There is no other market outside Brazil where we have been so active or made such a large investment. We have taken a leadership position in consolidating long products in North America.
Johannpeter, who joined Gerdau in Brazil in 1985 and relocated to the United States in 2006 to serve as marketing manager for what was then known as Gerdau Ameristeel, is the son of Frederico Gerdau Johannpeter, a vice chairman of Gerdau SA and a nephew of Jorge Gerdau Johannpeter, chairman of the parent company. Prior to his appointment as president in a move that followed the earlier purchase by Gerdau SA of all the issued and outstanding common shares of Gerdau Ameristeel not already owned, Johannpeter earned his wings by serving successively as vice president of the Manitoba steel mill, bright bar and Duluth grinding ball facilities, vice president for SBQ and wire rod operations for GLSNA and vice president of Gerdau Special Steel North America.
Gerdau SA got its first taste of the North American market in 1989, when it purchased Canadas Courtice Steel. A decade later, the company began a series of acquisitionsstarting with the purchase of Ameristeel, then the second-largest rebar producer in the United States. In relatively rapid succession, Gerdau added the Birmingham Southeast mill in Cartersville, Ga. (2001); merged with Canadas Co-Steel (2002); acquired four mills from North Star Steel (2004); added Pacific Coast Steel, Sheffield Steel and Fargo Iron & Metal (2006); and acquired Chaparral Steel, a large Midlothian, Texas-based producer of structural and rebar steel, in a deal valued at $4.22 billion (2007). The company extended its reach to the West Coast in 2010, when it acquired Rancho Cucamonga, Calif.-based Tamco Steel, one of the largest rebar mills in the region.
At last count, Gerdau Long Steel North America, now the second-largest mini-mill producer and steel recycler in North America, carried a nameplate capacity of more than 10 million tons of finished steel products; was operating and growing a vertically integrated network of mini-mills, scrap recycling and downstream fabrication facilities across North America; and was supplying a diverse mix of merchant steel, rebar, structural shapes, fabricated steel and wire rod to a wide range of end markets.
Weve made 19 acquisitions since 1999, Johannpeter said. We basically focused our acquisition strategy in North America on mills, downstream operations and scrap. And I think we are going to continue to do that.
Asked about the rapid-fire timing of the acquisitions and factors prompting them, Johannpeter cited several considerations, beginning with Gerdaus deep roots in electric furnace steelmaking. We are a scrap-based steel company, he said. Our DNA is scrap. We are steelmakers who produce long products. And we clearly saw an opportunity to run these mills more efficiently. We asked ourselves if we were capable and had the resources to do that, and the answer was yes.
We never wanted to diversify our business in any other product line. We wanted to continue doing long products. And we sort of kept on growing because the opportunities came, Johannpeter said. All the businesses that we acquired in North America had one thing in common: They were all for sale. And I think we dont regret any of the acquisitions on the mill side, on the scrap side or downstream.
One of Gerdaus most recent and intriguing buysgiven the battered shape of the construction market on the West Coastwas the late-2010 acquisition of rebar producer Tamco Steel for an estimated $165 million. That transaction opens a window on the decision-making dynamics at work at Gerdau.
We really wanted to do it. So we did it, said Johannpeter, who holds a law degree from Unisinos University in Brazil and an MBA in marketing and finance from Northwestern Universitys Kellogg Graduate School of Management. The West Coast is absolutely the worst market in probably one of the worst periods in recent history. So in the worst market conditions in probably one of the worst short-term market scenarios out there, what do we do? Johannpeter asked rhetorically. We go in and buy a steel company. That is the advantage we have of taking a longer-term view.
We already had a very strong footprint in the downstream segment of the West Coast market, he said, referring to Gerdaus previous general partnership with Pacific Coast Steel, one of the largest reinforcing steel subcontractors in the United States. So we were poised to integrate the West Coast fabrication operations with a mill. And we did it. That is one of the segments we really want to be a player in and to be able to influence the market.
GLSNA assumed full ownership of Pacific Coast Steel last year after purchasing a controlling interest in the California fabricator in 2006. At the time, Johannpeter credited the acquisition of the Rancho Cucamonga mill with not only allowing Gerdau to supply rebar to customers from coast to coast but providing a ready and reliable source of steel for West Coast regional projects and more competitive bids due to lower freight costs.
The purchase of Tamco also added some exclusive geography to GLSNAs steelmaking real estate holdings. I dont think anyone is going to be allowed to build a steel mill in California any time soon, Johannpeter said, noting that Gerdau is the only company operating electric furnaces in Florida, Georgia and California. There are some markets that we could only get access to through acquisition. And thats the way we did it.
Today, after a decade of adding steel long product assets and capacity, Gerdau Long Steel North America is busy maximizing the performance of what it has purchased. A lot of our work now is focused around improving the efficiency of the mills that we acquired, Johannpeter said. From now on into the near future, our strategy here in North America is to grow organically. And we have room to continue to grow in this market as it recovers. Our strategy has always been acquiring capacity and running those mills more efficiently. And it is going to continue to be our game plan not only in North America but in other parts of the world.
To grow both capacity and efficiency, GLSNA, like other Gerdau SA operating units, uses a home-grown, standardized assessment methodology called the Gerdau Business System, or GBS, to evaluate internal best practices in all business processes and compare them to external benchmarks. Essentially a model for staying competitive, the GBS standardizes key process indicators at a global level and provides each operation a tool with which it can objectively measure, analyze and compare its performance and results.
As gauged by the GBS, the grades earned by the North American branch of Gerdaus global steelmaking family put GLSNA near the top of the class. I think our productivity rates in North America stand out as being the best, Johannpeter said. And it is very important we continue to stay that way, since we account for about 40 percent of (Gerdaus) total installed crude steel capacity. If you look at the way we do things here in North Americaat the mill level as well as at downstream operationsyoull see we have some of the best productivity numbers in terms of man-hours per tons of steel produced. He stopped short of sharing those statistics for outside consumption.
Gerdau Long Steel North America, which is vertically integrated from raw materials through fabrication, operates some 17 recycling facilities that collect, sort and process about 2 million tons of ferrous scrap annually for charging into the companys electric furnaces. Downstream of the melt shop and rolling mills, the company operates a nationwide network of some 60 reinforcing steel fabricating facilities.
Globally, Gerdau sources about 50 percent of the scrap melted in its furnaces. The figure for North America is lower, in the 40s, Johannpeter said, explaining that the companys sourcing strategy revolves around a metallics/raw materials group that goes out and sources scrap to our own mills. Their goal is very much aligned with the mills: Get to the lowest billet cost. The focus is to get the best raw material you can for the lowest price. We dont have a separate P&L (profit and loss) for the raw materials department.
In addition to ferrous scrap, Gerdau Long Steel North America uses very limited quantities of pig iron shipped into Beaumont, Texas, from a third partynot the parent companyin Brazil. We use pig iron when we make rod to get low residuals, Johannpeter said. These third parties are in a better position to export. Gerdau SA consumes the pig iron it produces in Brazil.
Asked to comment on the factors behind the volatility in ferrous scrap prices, Johannpeter cited three: scrap exports, currency and to a certain extent the proliferation of shredders in North America. What we are seeing is a big fight for feed to keep the shredders running because there has been this proliferation. What is also changing is the recovery rates in nonferrous. The price they can get for nonferrous is also different than in the past.
GLSNA has nine shredders, each of which are basically feeding all our operations, Johannpeter said, noting that very minimal shredded material goes outside. We are not exporting shred. The focus of our shredders is to minimize the billet cost. We like our model, the utilization we have been having with our shredders and the feed flow to supply our own mills.
Right now, the health of the markets GLSNAs mills servefrom infrastructure, commercial, industrial and residential construction and metal buildings to manufacturing, automotive, mining, electrical transmission and industrial equipmentruns the gamut from relatively rosy to stuck in a rut.
Johannpeter acknowledges being positively surprised by the strength in automotive. Fundamentally, there have been some changes in the manufacturing spectrum in North America in which youre not only seeing more cars being built but also more auto parts, he said. I think you will continue to see this recovery in automotive. The Big Three have made some fundamental changes in the way they are running their businesses to stay competitive and maintain a sustainable business. I think they are poised for a success story.
Construction, of course, is an entirely different picture. That continues to be fairly soft. And thats the biggest challenge for us, Johannpeter said. The infrastructure market continues to be soft. We need to see more activity in such a relevant sector. Here at Gerdau, we support the long-term funding of the surface transportation bill. That is something that is absolutely critical for us and our customers.
Until the gridlock melts and Congress actually passes the long-delayed billa prospect insiders dont expect to see happen until after Novembers presidential electionJohannpeter and his executive team intend to continue to pursue a long-held objective. We really want to focus our team and leadership here on a key question: Are we prepared? We have to be in better shape in the future to take advantage of any opportunities that may come or if a downturn the magnitude of what occurred in recent years happens again Our focus is to put this company in a position to keep growing.
In our culture, we want to be the supplier of choice. We want to make sure we help our customers build their businesses, help our employees build their lives and help the communities we operate in build their futures in a sustainable way, he said. That is really what the Gerdau culture is about: Its about win-win.
Coast-to-Coast Consolidation à la Gerdau*