incredible insights into the Steel industry. I
disagree with your opinion.
First, the American
Steel industry is very sick as evidenced by pretax
profits in 1999:
Millions of Dollars: ( ) Means
Loss
AKS.........$261
X...........
$76
LTV.........$(170)
BS..........$(179)
NS..........$($45)
The only reason X made a profit is that they are
substantially overprovided on pensions and took a bunch of the
excess as profit. In my opinion, if LTV and BS continue
to generate losses over the next 2 years at the rate
incurred in 1999 actual, they'll be insolvent and will be
forced to file for BK. In the fourth quarter alone, LTV
lost $70 million and have leveraged their balance
sheet up the yingyang with the acquisition of
Copperweld which under a best case scenario will be mildly
accretive.
And of course if LTV and BS go under,
there will be many other integrated producers who will
be forced to pack it in. The only way the Steel
industry can return to normal RONAs is to increase prices
substantially. Today's selling levels are probably equivalent to
levels actually experienced in the mid 1990s while
inflation has gone up 20% over this time. Productivity
improvements have offset the inflation.
So, something
has to give. Either, the American steel industry
folds or they return to normal RONAs. My bet is on the
latter. Detroit needs the integrated steels as badly as
the integrated steels need Detroit.
Lastly,
look at the market valuation of each company's
stock:
Billions of
Dollars:
X........$2.2
AKS......$1.0
BS.......$.9
LTV......$.4
NS.......$.3
AKS is valued at less than 50% of X but generates 3.5
times the profit. And what's really ludicrous is that
AKS and BS valuations are roughly the same even
though AKS generates
$430 more pretax profit dollars.
BS is desperate. They just cut their manpower by 500
people. That's worth $25 million annually so they only
need another $475 million to get to a marginal RONA
acceptability level.