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Sparrows Point: Vulnerable and striving Lower-cost minimills nudging Beth Steel toward new strategies


Faced with growing competition from steel minimills in the next few years, Bethlehem Steel Corp.'s Sparrows Point division is pursuing a range of strategies that will tie it closer to its customers and may include buying new equipment costing hundreds of millions of dollars.

More than a dozen steel mills are planned to be built in the next few years, adding some 15 million tons of capacity, or 16 percent of the 95 million tons of steel produced in 1994.

Built by companies with names such as Nucor, Gallatin, Steel Dynamics and Trico, the new plants are called minimills because they use electric furnaces rather than the coal-fired blast furnaces of the larger integrated steel makers -- and scrap metal as a raw product instead of iron ore. The competitive advantage of these low-cost producers is further strengthened by nonunion work forces.

But there is nothing mini about their production. Concentrating in past years on bar and structural steel products, they have driven major steel companies such as USX and Bethlehem from those markets. Now, bolstered by newer and more efficient equipment, the minimills are entering the steel sheet market -- flat-rolled in industry jargon -- that accounts for half of the country's steel market and long has been a stronghold of the major mills, including Sparrows Point.

Sparrows Point is especially vulnerable because a third of its 3 million tons of annual steel production consists of flat-rolled products that can be produced by the new minimills. And, unlike Bethlehem's other major plant in Burns Harbor, Ind., which makes high-quality steel sheet for the auto industry, Sparrows Point makes lower-grade sheet used in construction and appliances -- the market targeted by the minimills.

The Baltimore County plant is trying to fight back by improving its customer service -- particularly its on-time-delivery record -- and increasing its market in specialized flat-rolled products, such as coated steel, that cannot be made by the new minimills.

Sparrows Point management is also considering major capital improvements, such as building a more efficient plate operation called a Steckel mill, and adding equipment to boost productivity and quality at its tin-coated steel operation.

Curtis H. Barnette, Bethlehem's chairman and chief executive officer, confirmed that those projects are under consideration, but he said Sparrows Point will have to compete for capital dollars with its sister plants in Burns Harbor and Bethlehem.

While not saying when a decision will be made, Mr. Barnette said a key factor in selecting projects will be how well the plants are meeting their financial goals. Judgments on those matters are likely to be made in the first quarter of next year, Mr. Barnette said.

And while Sparrows Point has failed to meet some of its goals, according to financial information distributed to management and union officials, Mr. Barnette said the steel mill is still in the running.

"I think Sparrows Point has made very good progress and has every right to have their projects considered along with all the other divisions," he said.

And along with being challenged by the minimills, Mr. Barnette said, the company also faces competition from other integrated steelmakers, mills rebuilt from closed operations, imports and other materials such as aluminum and plastic.

To meet the overall competition, Bethlehem is continuing to strive for lower costs and higher quality at the same time it emphasizes its diverse variety of products -- many of which are not yet made by minimills.

"You want a mix of products that are simply different from your competitors, whether its electric furnace or others," Mr. Barnette said.

He stressed that products such as steel plate, tin-coated steel and various coated products -- which constitute about two-thirds of Sparrows Point's production -- are not usually made by minimills.

Mr. Barnette also said the company wants to become the "supplier of choice" for its customers, by having prompter delivery, beefing up customer support and catering to special needs through its research and technical division.

"Research and technology, especially for us, is just a core value of the company," he said.

One area in which Sparrows Point will have difficulty competing is price.

Charlotte, N.C.-based Nucor Corp. -- the largest of the minimill companies and the country's fourth-largest steelmaker -- will be able to produce 1.8 million tons of steel at its proposed Berkley, S.C., plant when it hits full production in 1997. But even though it is making more than half the tonnage of Sparrows Point, its work force will number fewer than 500 -- one-tenth of the 5,400 workers at the Baltimore County mill.

With newer technology, the plant also will be able to make a ton of steel sheet in 48 minutes while integrated mills such as Sparrows Point require three to four man-hours.

"That gives you some idea of the competition that they are faced with," said Nucor Chairman F. Kenneth Iverson.

Mr. Iverson does not believe that the Berkley plant, which will be the minimills' most direct competitor to Sparrows Point, is a lethal threat to the Maryland plant. "Sparrows Point -- they've kept it fairly up to date in the flat-roll area and I think it's now one of the more efficient mills," he said. But he did say Nucor's new mill might cause Sparrows Point to shift more into steel plate and coated products, which his mill will not make.

"It certainly pushes them in that direction," Mr. Iverson said.

The new plant will also put the pressure on Sparrows Point to continue to cut its costs, according to Charles A. Bradford, a metals analyst for UBS Securities Inc.

"They have to focus on where the other guy's costs are going to be and be competitive," he said. "Nucor's plant in South Carolina is going to have very, very low operating costs."

Mr. Bradford does not see a need for more equipment at Sparrows Point, where Bethlehem has spent $1.6 billion on capital improvements in the last decade. But he does see new pressure to reduce its work force.

That effort is hampered by a union contract that allows reduction only by retirements and resignations -- now running at about 3 percent a year, Mr. Bradford said.

"And one of the questions is, is that enough, because of the competition?" he said. "It may not be enough."

But even without the union restriction, Bethlehem is finding it difficult to operate Sparrows Point with fewer people. Last year, employees worked large amounts of overtime to keep up with demand and 120 workers were transferred from a closed Johnstown, Pa., operation to supplement the work force.

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