If the metal industry wants to survive in Western Pennsylvania, it must think long-term and continue with big-ticket projects in the face of a shaky economy, business analysts say.
U.S. Steel plans to break ground today on $1.2 billion in improvements at its Clairton Coke Works -- the company's largest capital project anywhere.
Last month, Allegheny Technologies Inc. said it would pump the same amount of money into its Brackenridge metal-rolling plant over the next four years.
Neither company has hinted at changing its plans in light of global economic problems.
"The economic downturn isn't going to last forever. Economic downturns usually last less than a year, and these projects take a couple of years," said Charles Bradford, a metals analyst based in New York City. "And, in the case of U.S. Steel, they're very vulnerable to being closed down if they don't clean up Clairton. They can't afford to buy coke internationally; that would put them in the red, and there isn't any available anyway.
"So they have to do it here," Bradford said.
And that means the industry Pittsburgh was built on -- for which it is still known worldwide -- will continue its presence in Western Pennsylvania.
"This solidifies steel-making operations in Allegheny County for years and years to come," said Dennis Davin, director of economic development for the county. "The fact that they are making these kinds of investments shows how competitive we are -- not only in the country but the world."
Leaving the region to build likely would have been more expensive.
"It stands to reason that if you've got the real estate and a community accepting of the industrial facility, and the infrastructure to get raw materials to your plant and the customer base, you'll want to stay and expand in the existing facilities," said Bruce Steiner, president of American Coke and Coal Chemicals Institute in Washington. "So I think that's what Allegheny Technologies and U.S. Steel are doing."
Coke is produced by baking coal. By improving coke-making operations, U.S. Steel is staying ahead of environmental laws that eventually would shut down Clairton Coke Works.
"It's a no-brainer to improve the Coke Works," said Marc Liebman, president of AIM Market Research in Ross.
"No time is ever a good time to spend a billion dollars," he said. "But coke is an essential raw material in making steel, in making iron. When you're talking about the essential raw materials, you have to look at the long-term. You can't look at short-term ups and downs."
U.S. Steel is following a market trend of returning to "vertical integration" -- or securing raw materials by buying or investing in the companies that make them. Recently, Koppers Holdings Inc.'s Monessen coke plant, PBS Coals of Somerset County, and Shenango Inc.'s coke plant on Neville Island were bought by steel or energy companies looking to secure coke supplies.
"This is a complete about-face from the strategy followed by steelmakers for most of the last 30 years, where they were divesting all of their raw-materials assets -- iron ore, metallurgical coal and coke," said Christopher Plummer, managing director at Metal Strategies Inc. of West Chester.
"It was because those materials were so relatively cheap until about four or five years ago, and it was better suited to buy it on the open market."
The "relative scarcity of these raw materials ... is really compelling companies to acquire, own and operate these assets," Plummer said.
A benchmark price for coke imported from China, the world's largest producer, averaged about $268 per metric ton in 2007 and spiked to a peak of about $755 per ton in August before retreating more recently, Plummer said. He estimated the price for mid-October is about $600 per metric ton, excluding transportation costs.
"When you have your own capacity, you can transfer the product -- whether it be coke, or metallurgical coal or iron ore -- at a fraction of what you would have to pay on the world market," he said.
Even with the economic downturn affecting the automotive and construction industries -- both of which consume steel -- worldwide demand is expected to keep growing, said Nancy Gravatt, spokeswoman for American Iron and Steel Institute.
"The World Steel Group just met here in Washington, and their forecast for world steel demand over the next several years is continued growth," she said. "For the short-term, they said they couldn't forecast because of the market volatility, but they were still anticipating some growth in 2009."
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