Big steel banking on a rustproof product for US automakers
Peer under the average American car and you are likely to discover a surface marred by rust spots caused by an onslaught of snow, rain, and ice. These spots will become increasingly rare starting with next year's car models, because the nation's steelmakers have sunk millions of dollars into plants to make a highly rustproof product called electrogalvanized steel.
Since the beginning of the year, five production lines have come on stream, each costing upward of $100 million, with a total capacity of more than 2 million tons a year, according to the American Iron and Steel Institute in Washington.
The big push has been prompted by the automakers' goal to build car bodies that will resist perforation damage from rust for 10 years and cosmetic spots for five. These manufacturers have told their steel customers the lines must be built if they expect to keep their automotive business.
While the electrogalvanizing technology is not new, the mass production of it is. Up until now, rustproofing has been achieved by dipping sheet steel into vats of molten zinc or zinc alloy, a process appropriately termed hot-dip galvanizing. This resulted in an uneven layer of coating that is difficult to paint, hard to weld and form, and occasionally prone to cracking.
In electrogalvanizing, the sheet steel is passed through a molten coating that is bathed in an electrical current. The coating thickness can be carefully controlled simply by adjusting the strength of the current and the speed of the line.
In January, when National Steel Corporation dedicated its $120 million electrogalvanizing line in Ecorse, Mich., Robert McBride, then National's president, said, ``Chrysler has made the strongest commitment up to now, but all of the carmakers are going down the same road.''
There are murmurs of discontent, however, among some steel executives that they are investing sorely needed capital into plants that will eventually turn into white elephants.
Why? In a word, plastics. More and more, car bumpers, grilles, and interior body parts are fashioned of plastic, not steel. So far, the vast market for sheet steel on the roof, hood, and elsewhere on cars has resisted inroads from plastics: Plastic is too expensive except for short production runs of 200,000 to 300,000, according to one steel official.
But the threat is there. ``It's perfectly natural that plastics will go after the automotive market with emphasis. The end result is that, as steelmakers, we will emphasize the qualities and physical properties of steel,'' said David Hoag, president and chief executive officer of LTV Steel Company. LTV and Sumitomo Industries of Japan dedicated their L-S Electro-Galvanizing joint venture in May. LTV's Robert Buck, senior vice-president, commercial, said at the ceremony that the new line ``will help fight the inroads of plastics.''
Whether these new plants improve or worsen the steel industry's ailing bottom line depends upon hard-to-pin-down forecasts of plastics consumption in the auto industry. The Plastics Group of General Electric Company believes that by 1990 the average car will contain 300 pounds of plastic, up from 180 to 220 pounds now. In a study quoted by GE, 0.4 pounds of plastics replace one pound of steel.
An analyst who works for one of the biggest steel companies estimates that demand for steel will drop by 1 million tons by the year 2000 because of plastics. Most of this drop, however, would come out of cold-rolled and hot-dip galvanized, not electrogalvanized steel, according to his estimates. These predictions rest upon highly uncertain estimates of the rate of technical progress and even how quickly the average automotive engineer will become accustomed to dealing with plastics.
Robert Crandall, of the Brookings Institution in Washington, warns, ``Maybe they are all rushing in to today's good market, but there's a possibility there will be a fallout tomorrow.'' He said there has been a ``herd instinct'' in the construction of these lines reminiscent of the move into pipe and tube products several years ago, which have suffered from slumping oil prices. But Mr. Crandall added that it is too early to tell whether the lines are a wise investment.
An executive with one major steel company said the payback period for most electrogalvanizing lines is three years, short enough to justify their expense. But he cautioned, ``If plastics indeed come on as projected for the next 10 years, there could be a problem.''
Meanwhile, steelmakers have opted for novel forms of financing, like leveraged leases and joint ventures, to reduce the costs of building these lines, according to Robert Decker, a steel analyst with Duff & Phelps in Chicago. ``The net financing costs are lower than if the steel companies had bought capital themselves,'' Mr. Decker said.