Comparison of Ontario and Alabama/Georgia Steel Clusters

Transcription

1 Comparison of Ontario and Alabama/Georgia Steel Clusters Presented to: Jim Milway, Institute for Competitiveness and Prosperity Prepared by: Impact Consulting Group August 20, 2003

2 Steel Industry Overview The steel industry in North America underwent severe difficulties in the late 1990s, as decreased demand and worldwide overcapacity led to the dumping of foreign steel into the North American market. In 2000, the US government placed tariffs on steel imports from foreign countries. Canada was exempted from this trade action. Significant pressure has been placed by the Canadian steel industry on the Canadian government to impose similar tariffs on imported steel, however the Canadian government has not yet imposed any tariffs. 2

3 Steel Cluster in Hamilton, ON Established: 1895 Main reason for birth: Demand for iron and steel products in the early 1900s, as well as Hamilton s close proximity to raw materials and markets with a wellestablished industrial base. Current Cluster Capacity: 10.1 million tons/year (est.) 3

4 Hamilton, ON: Key Players Company Plant Plant Type Location Company Founded Dofasco Hamilton Plant Integrated Hamilton 1917 Stelco Lake Erie Steel Company Integrated Nanticoke 1910 Stelco Hilton Works Integrated Hamilton 1910 Slater Hamilton Specialty Bar Mini-Mill Hamilton 1960 Russel Steel Various Centres Service Center Hamilton 1886 Venture Steel Various Centres Service Center Etobicoke Unknown There are also several foundries in the area that provide value-added work to various customers. 4

5 Hamilton, ON: Markets Served by Plant Top Three Industries Serviced by Plant Automotive -Transportation -Construction 2.5 -Automotive -Forging -Cold Finish Dofasco Hamilton Lake Erie Steel Company Hilton Works Hamilton Specialty Bar Division -Automotive -Appliances -Food & Beverage -Automotive -Transportation -Construction Numbers represent plant capacities. 5

6 Hamilton, ON: A Closer Look at Markets Dofasco Hamilton Markets Construction 12% Packaging 11% Pipe & Tubular 3% Manufacturing 6% Automotive 39% Although a similar breakdown is unavailable for Stelco, approximately 40% of its sales were to the automotive industry from Distribution 28% Offshore 1% Source: Dofasco website. 6

7 Steel Cluster in Al/Ga Established: 1870 Main reason for birth: Abundance of raw materials (i.e. iron ore, coal) and workers within a 30-mile radius of Birmingham. Increased demand for steel after the civil war was also a key factor. Current Cluster Capacity : 8.55 million tons/year (est.) Note: For the purposes of this study, the steel mill in Cartersville, GA has been included in the analysis. This is Georgia s only steel mill 7

8 Interest in Alabama/Georgia Al/Ga represents a unique opportunity to witness a steel cluster entering a potential upswing. The state government has been successful in bringing new companies to the region. In particular, the automotive sector is experiencing significant growth in Al/Ga. The steel and automotive industries tend to be highly linked due to the need for steel in automotive production. 8

9 Alabama/Georgia: Key Players Company Plant Plant Type Location Plant Founded US Steel Fairfield Works Integrated Birmingham 1912 Nucor Trico Mini-Mill Decatur 1994 Nucor Nucor Steel Birmingham Mini-Mill Birmingham 1984 Ipsco Ipsco Alabama Steelworks Mini-Mill Mobile 2001 Gerdau Ameristeel Cartersville Mini-Mill Cartersville, GA 1989 Corus Corus Tuscaloosa Mini-Mill Tuscaloosa 1984 SMI Steel SMI Steel Alabama Mini-Mill Birmingham

10 Alabama/Georgia: Markets Served by Plant Top Three Industries Serviced by Plant Fairfield Works Trico -Appliances -Pipes & Tubes -Automotive -Construction -Industrial -Other -99% Rebar -1% Misc. IPSCO Alabama Steelworks Cartersville Corus Tuscaloosa -Construction -Fabrication -Automotive -Structural Steel -Construction Equip. -Service Centers -Service Centers -Construction Equip. -Pipe Manufacturers -Barge/Ship/Rail car Building Nucor Steel Birmingham SMI Steel Alabama Numbers represent plant capacities. 10

11 Porter s Diamond an Explanation 11

12 Competitiveness Scale [-3, 3] Ontario Alabama/Georgia Indicators of Competitiveness (change in competitive position) 0 Holding Competitive Position 1 Gaining Competitive Position Both clusters are competitive and have significant national importance. Ontario s steel cluster has a stronger overall competitive position than that found in Alabama. However, the Alabama cluster is growing faster and has a higher export growth rate than Ontario. One of the key reasons why Alabama lags behind Ontario is because the firms within Alabama typically do not pioneer products or process improvements like firms in Ontario (e.g. hydroforming at Dofasco). Furthermore, Alabama firms are more likely to sell steel products as commodities whereas firms in Ontario attempt to differentiate their products. 12

13 Factor Conditions Scale [-3, 3] Ontario Alabama/Georgia General Factors Specialized Factors 2 - Advantage 2 - Advantage 2 - Advantage 1 Weak Advantage Both clusters have strong general factors due to their accessible locations and solid general infrastructure. Both clusters also have good training and university programs. Ontario has an edge in terms of specialized factors due to its excellent scientific infrastructure in local universities, including at the McMaster Steel Research Centre. There is a constant flow of people between the different companies and at different layers (i.e. processors, service centers, etc) within the cluster in Ontario. This allows for more information flow within the entire cluster. In both cases, research done in North America is primarily for value-added and process improvement. Primary metallurgical research is conducted in Europe and Japan. 13

14 Demand Conditions Scale [-3, 3] Ontario Alabama/Georgia Local Demand Size 3 Strong Advantage 2 - Advantage Local Demand Qualities 2 - Advantage 1 Weak Advantage Canada is the 7 th highest per capita consumer of steel in the world. Although the domestic demand for both clusters is strong, the clusters serve different markets. Ontario: Focus on the automotive industry. Alabama: Focus on service centre, pipe & tube, construction, heavy machinery and appliance industries. The Ontario market demands steel producers to continually innovate in order to improve the quality of steel products and services provided. A large percentage of the steel produced in Alabama is destined for industries less concerned with quality as with cost and service. Thus, steel producers in Alabama are not encouraged to innovate as much by their customers. 14

15 Related & Supporting Industries Scale [-3, 3] Ontario Alabama/Georgia Suppliers 1 Weak Advantage -1 Weak Disadvantage Related Industries 3 Strong Advantage -1 Weak Disadvantage The steel industry requires three main raw materials: iron ore or scrap metal, coal and electricity. Alabama sourced its raw materials from within the state until the mid-1970s. It now sources iron ore and coal from other locations due to quality concerns. Both clusters have a good source of electricity generated nearby. Ontario has an advantage over Alabama in terms of suppliers because there are several steel-mill service and consulting companies located around Hamilton. There are several related industries around the Ontario cluster. Automotive customers locate around the cluster to purchase steel. Plastic manufacturers locate around the cluster to service the automotive plants a part companies. Independent auto part companies such as Magna locate in these areas since there is both a demand for their products and source of inputs near by. This could encourage further investment of automotive plants which would then increase demand for locally produced steel. In Alabama, there are few related industries and this is thus a weak disadvantage. 15

16 Firm Strategy & Rivalry Scale [-3, 3] Ontario Alabama/Georgia Rivalry Co-operation 1 Weak Advantage 2 - Advantage 0 Neutral 1 Weak Advantage Second-tier steel firms in Ontario have recently been purchased by foreign firms. The most prominent foreign company is Gerdau of Brazil. This direct investment by foreign firms increases competitiveness as new technology and know-how is injected into the purchased company and its cluster. In Alabama, most firms are owned by US companies, with the exception of the Corus plant in Tuscaloosa and the Gerdau/Ameristeel plant in Cartersville, GA. Co-operation between firms is commonly found in Ontario. Dofasco and Stelco partake in joint research at nearby institutions. The two companies are also 50/50 partners in Baycoat, which services the appliances industry. In Alabama, co-operation is limited mainly to vertical subcontracting, where Mobile s DRI plant (owned by Corus) services competitors. Ontario firms are geographically close enough where they can participate directly with global research initiatives such as the ULSAB project. Alabama firms indirectly participate through their parent companies located in Northern States 16

17 Firm Strategy & Rivalry (cont d) Scale [-3, 3] Ontario Alabama/Georgia Strategy and Structure Local Investment Context 2 Advantage 1 Weak Advantage 1 Weak Advantage 2 Advantage Dofasco in Ontario has been trying to reposition itself from a steel products company to a steel services company. Both Dofasco and Stelco place engineers in their customers plants to gain a better understanding of ways in which they can help their customers achieve their goals. Stelco has formed a co-venture with a Japanese firm, helping to disseminate new skills. Alabama does not seem to have any unique strategies such as those found in the Ontario cluster. However, consolidation in the industry has brought much needed stability. The Investment Context in Alabama is stronger than that found in Ontario. This is mainly due to lower taxes in Alabama and lucrative incentive packages for companies who relocate to the state. 17

18 Other Advantages Scale [-3, 3] Ontario Alabama/Georgia Other 0 Neutral 0 - Neutral The Ontario cluster is at the forefront of Web-based technologies for the steel industry. The Alabama cluster might have declined in the mid 1980s if it were not for a commitment to place a pipe mill at the location of the Fairfield Works, allowing the steel mill to continue operating successfully. Both of these factors play very small roles in the overall competitiveness of the respective cluster. 18

19 Evolution Ontario Alabama/Georgia Birth 2 Demand Conditions 1 Factor Conditions The Ontario cluster was born due to the local need for iron and steel products in the region. Secondary factor: In the 1920s, American firms started placing mills in Ontario due to the close proximity of raw materials and electricity, established industrial base, and skilled workers. The Alabama cluster was born due mainly to the abundance of raw materials within 30 miles of Birmingham and skilled workers from surrounding rural areas. Secondary factor: After the end of the Civil War, there was an increased demand for iron and steel implements, as well as an increase in construction projects. 19

20 Key Comparisons 20

21 Key Comparisons Category Ontario Alabama Competitiveness 0 Internationally Significant Diamond -1 Nationally Significant Factor Conditions 2 Advantage 2 Advantage Demand Conditions 2 Advantage 1 Weak Advantage Related & Supported Industries 2 Advantage -1 Weak Disadvantage Firm Strategy & Rivalry 2 Advantage 1 Weak Advantage Other Advantages 0 Neutral 0 Neutral Evolution Developed Critical Mass Present Primary Reason Behind Competitiveness Demand Conditions Factor Conditions 21

22 Main Reason Behind Competitiveness Ontario Alabama/Georgia Primary Reason behind Competitiveness in order of importance. Demand Factor Related and Supporting Industries Firm Strategy & Rivalry Other Factor Demand Firm Strategy & Rivalry Related and Supporting Industries Other It is interesting to see that although both Ontario and Alabama are competitive, the explanation behind this competitiveness is different. In the Ontario cluster, both demand and factor conditions are very important. However, demand conditions in Ontario, specifically in the automotive industry, drives the cluster. The automotive industry also aids in bringing related and supporting industries (such as plastic component manufacturers) to the area. In the Alabama cluster, demand for steel products is high, however the demand qualities are not as rigorous due to the lack of automotive-grade steel. Alabama boasts a strong government-funded skill training program, which is a key factor in its ability to attract manufacturing-related jobs. 22

23 Key Challenges and Issues The Ontario steel cluster in Hamilton faces an interesting challenge. Alabama s steel industry could be on the verge of major growth and could become a major world cluster. There is a potentially large demand for Alabama steel from the automotive sector. There are several automotive plants in Alabama, Georgia and surrounding states. However, only a small fraction of the steel needed by these plants is supplied by Alabama firms. Most of the steel comes from higher-quality integrated mills in the northern states. According to discussions with members of the Economic Development Partnership of Alabama, some North American steel producers have inquired about the potential for locating automotivegrade steel mills in Alabama to meet local automotive demand. If automotive firms in Alabama and Georgia start to buy Alabama steel, mills in the northern states will look to fill lost capacity utilization by expanding service to auto plants in the north the same plants currently served by Hamilton-based firms. 23

24 Key Challenges Thin strip technology has been developed by Nucor which could change the way automotive grade steel is made. This technology eliminates the need for secondary rolling processes. Furthermore, this technology could potentially be fitted in current steel mills, eliminating the added expense of constructing a green field plant. Nucor purchased the Trico plant in Decatur in 2000 with the intent of eventually supplying automotive steel. It would be prudent for Hamilton based companies to keep a close watch on this development. 24

25 Key Opportunities The current strategy of incentive packages for companies who locate in Alabama likely cannot be sustained. However, these incentives can serve to create the critical mass needed for a sustainable cluster. Thus, one would not be surprised by an introduction of automotive-grade steel mills in Alabama. This will also bring in independent auto parts suppliers such as Magna to the area There are several key advantages the Hamilton cluster possesses. Strong R&D activities at the McMaster Steel Research Centre Many inter-related industries Joint ventures between firms (e.g. Baycoat) 25

26 Key Opportunities (cont d) There is currently no significant benefit to North American steel firms to replicate R&D currently performed in the northern states and Hamilton region. Hamilton has a unique advantage in attracting companies who require valueadded services and development of new products. Thus firms in Hamilton must find ways to make the most of this advantage. 26

27 Future Outlook Note: This diagram illustrates the potential changes in the Diamond approximately 5 years after the introduction of automotive grade steels. 27

28 Future Outlook (cont d) Category Ontario Alabama Comments Competitiveness 0 Internationally Significant Diamond 0 Internationally Significant Diversification into the auto industry could make Al/Ga internationally significant. Note: This chart illustrates the potential changes in the Diamond approximately 5 years after the introduction of automotive grade steels. Factor Conditions 2 Advantage Demand Conditions 2 Advantage Related & Supporting Industries 2 Advantage Firm Strategy & Rivalry 2 Advantage 2 Advantage 2 Advantage 1 Weak Advantage 2 Advantage Other Advantages 0 Neutral 0 Neutral Evolution Developed Critical Mass Present Primary Reason Behind Competitiveness Demand Conditions Demand Conditions Stringent compliances set by auto customers will increase the demand quality. Al/Ga will attract a few related industries and services companies. However, this will take a number of years to develop. Although the cluster will become more diversified, thus not affecting rivalry, the rise of the cluster s importance will attract industry associations. The increase in demand qualities and conditions may push demand ahead of factor conditions. 28