In the modern history of the world steel business, one of the longest-running strategic controversies has to be the question of owning iron ore properties vs. buying iron ore. This disparity in strategy involving a very fundamental characteristic of steel companies was never more visible than it was in 2012.
The divergence is largely a continental phenomenon. European, Japanese, South Korean and, most recently, Chinese steel industries were all built on the premise of purchasing iron ore on the world market. North and South American steel companies are largely developed around the notion of owning and operating ore properties or owning an equity interest in an iron ore venture.
U.S. Steel Corp. enjoys a long history of internal ownership of iron ore properties. ArcelorMittal SA had already launched plans aimed essentially at self-sufficiency in iron ore when the recession struck. AK Steel Corp. entered into a joint venture to partially reverse its reliance on purchased iron ore.
North American scrap-melting steelmakers either have no interest in iron ore or, as at Nucor Corp., a very recent and not yet fully developed requirement for iron ore in their steelmaking processes. Steel Dynamics Inc. is an exception, reporting ore self-sufficiency.
Independent iron ore producers entered the global recession after several consecutive years of strong demand and rapidly increasing prices. Vale SA, BHP Billiton Plc, Rio Tinto Plc and Cliffs Natural Resources Inc. were all in the midst of major capital plans to increase capacity in response to rising demand and strong profitability.
It is a teachable moment to see how these different producers reacted to the global recession and other challenges. Not so incidentally, three of the four independent iron producers abruptly terminated their chief executive officers in the past 18 months.
The international raw material suppliers and the steel industry are reacting in similar ways to challenges by raising capital, constricting nonessential capital spending, selling noncore assets and deleveraging their balance sheets. Seaborne iron ore producers Vale, BHP Billiton and Rio Tinto all stretched out their capital spending but maintained the essential elements that continued their progress toward increased iron ore expansion while eliminating capital spending in their other businesses. Cliffs did the same thing.
ArcelorMittal has maintained its drive to expand iron ore production in Canada and Liberia. It is possible to see in this behavior at least one more true believer in the inherent profitability of captive iron ore over the full business cycle.
One can imagine the Chinese planners who decided that China would build a 750-million-tonne-per-year steel industry based on purchased iron ore and wonder if they ever have had second thoughts.
Thomas C. Graham is a founding member of T.C. Graham Associates. He is a former chairman and chief executive officer of AK Steel Corp., president and chief executive officer of Armco Steel Co. LP, chairman and chief executive officer of Washington Steel Co., president of the U.S. Steel Group of USX Corp. and president and chief executive officer of Jones & Laughlin Steel Co. His column appears monthly. He invites readers comments and can be contacted at firstname.lastname@example.org.