US mini-mills - big profits in small steel plants

To hear the pundits tell it, the US steel industry is on the verge of going the way of the horse and buggy or the brown felt derby. The evidence seems irrefutable: Industry analysts say steel plants are operating at half their capacity, labor wage rates are nearly double those of other workers in the manufacturing sector, and losses totaled more than $3.5 billion last year.

So why is Rhode Island Forging Steel about to open a new steel plant here?

The answer lies at the heart of the steel industry's continuing struggle to survive. Rhode Island Forging Steel Inc. is a ''mini-mill'' - a small plant that sells specialty steel. The continued growth of such mills is one of the few bright spots in what many industry observers see as a gloomy long-term outlook for US steelmakers.

Since the mini-mill concept first caught fire in the United States about 10 years ago, the number of such plants has increased to more than 60 and they account for slightly more than 15 percent of steel production. While the rest of the industry is flirting with recovery, mini-mills are coming off the recession in fighting trim, primed to snatch away up to 25 percent of overall steel production from their larger kin by 1990, according to some industry analysts.

''Most of the mini-mills have weathered the recession quite well,'' says Charles Bradford, a vice-president and steel expert at Merrill Lynch, Pierce, Fenner & Smith. ''They're making inroads, and we expect that to continue over the long run.''

A better indication of the strength of mini-mills is the way they have stemmed their losses during the past two years. Nucor, the largest of the mini-mill operators with a capacity of 2 million tons a year, remained profitable through the recession with net earnings of $35 million in 1981 and $ 22 million in 1982. While the number of people employed in the steel industry dropped from 450,000 six years ago to 250,000 today, Nucor has not laid off a worker in 14 years.

A key to the success of mini-mills is their attention to the two major factors normally linked to the decline of the US steel industry: obsolete plants and equipment, and high labor rates.

Through a combination of energy-efficient electric furnaces, nonunion labor, off-peak power rates, and the use of scrap iron (a standard practice for mini-mills), Rhode Island Forging Steel expects its break-even point for operating the plant to be as low as 15 percent of capacity.

And the company is stressing a cooperative relationship with workers. All employees at the new plant will be salaried; there will be no time clocks; supervisors and workers will share the same locker rooms, parking lots, and benefits; and workers and management will meet each week to encourage open communication.

More important than not paying union wages, say the owners of the Rhode Island mini-mill, is the lack of union work rules. ''We won't have five guys standing around for an hour waiting for a pipe fitter,'' says Joseph McCormick, vice-president of Rhode Island Forging Steel.

Nucor's recipe for success is a similar mix of new technology and greater output by workers. The oldest Nucor plant was built in 1969, and all its operations are 100 percent continuous casting (a relatively new process), compared to 15 to 20 percent for the steel industry as a whole.

With incentive pay, the salaries of nonunion Nucor workers meet or exceed the wages of their union counterparts, but the company isn't complaining. Nucor workers produce as much steel in two labor-hours as workers in integrated mills turn out in six to eight labor-hours. That kind of productivity puts mini-mills in a highly competitive position with overseas competition.

''Our prices are equal to or less than any steel dockside in the US,'' says Nucor spokesman John Savage.

There is some concern that if mini-mills get too large, they will begin to encounter the same difficulties that now plague integrated mills. ''If you get too large, you can lose that personal touch with the workers, and if that happens all the other factors - the technology and so on - won't do you much good,'' says James F. Morrill, president of Rhode Island Forging Steel.

Others express concern about such factors as the price of scrap metal. But Joel Hirschhorn, project manager for the federal Office of Technology Assessment in Washington, D.C., says, ''The only limiting factor is that you wouldn't expect mini-mills to get into large-volume steel products.''

Most agree that the mini-mills will remain profitable if they stay on their toes.

''It's not a come-on-in-the-water's-fine environment,'' says Peter Anker, an analyst for First Boston Corporation. ''The easy growth is over. The mini-mills will have to be much more ingenious and look harder for windows of opportunity. But that's not to say it can't be done.''

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