Dynamic Approach

Steel Dynamics Inc. posts profits in the competitive steelmaking arena.

The 1990s, when everything high-tech was hot and anything with a historical track record was considered "old economy," was a challenging time to enter the steel industry. Even so, Keith Busse and the other founding officers of Steel Dynamics Inc. (SDI), Fort Wayne, Ind., successfully established a profitable steel producing company that has outlasted many of the tech firms with which it used to grapple for investment dollars.

Now, in a decade where offshore outsourcing is a dominant business practice, SDI continues to post profits while making steel and steel products in North America to serve North American customers. In 2004, Steel Dynamics posted a record net income of $295 million on sales of $2.1 billion, more than double 2003 sales.

RED HOT IDEA. Keith Busse, Dick Teets and Mark Millett saw the potential for scrap-based electric arc furnace (EAF) steelmaking when they worked together to help establish the world’s first thin-slab casting process to produce flat-rolled steel in an EAF mill in Crawfordsville, Ind., for Nucor Corp., Charlotte, N.C.

The three ventured out on their own to establish SDI in 1993, building a high-production EAF flat-roll mill in Butler, Ind., in the northeast corner of the Hoosier State.

The trio raised $380 million in capital to build the Butler mill, which began melting scrap for making steel coils in 1996. Within six months, SDI was producing a profit. SDI made its initial public offering in November of 1996, entering the stock market just as a high-tech frenzy was about to send inordinate sums of money into speculative Internet and telecom companies that never produced a drop of black ink.

Throughout the late 1990s and the early part of this decade, SDI navigated an equities market biased toward tech stocks and a steel marketplace that kept a low ceiling on the prices the company could get for its finished steel.

Despite the challenges, SDI has operated profitably and invested its profits to expand its operations. The company has doubled the annual output of its Butler mill, built a second new mill that produces structural steel and rail in Columbia City, Ind., and acquired and retrofitted an idled bar products mill in Pittsboro, Ind.

The company has also integrated vertically in each direction by starting a fabrication business known as New Millennium Building Systems and a scrap substitute business known as Iron Dynamics.

The series of moves SDI made has helped it grow from annual sales of slightly more than $400 million in 1997 (its first full year of operation) to more than $2.1 billion in 2004.

SDI Investor Relations Manager Fred Warner says the company is expanding into new business segments while also keeping a narrow focus on the bottom line. "The company strives to be the lowest-cost, most profitable provider of a broad range of steel products," he says.

MELTING POINT. As with any other EAF steelmaker, SDI is aware that its foremost operating cost is the purchase of materials that are melted to make its steel.

SDI Ferrous Resources and Logistics Manager Rich Brady says scrap materials account for more than 60 percent of the company’s finished product cost.

He was brought on board in mid-2004 to lead the company’s ferrous scrap procurement efforts, which includes ferrous scrap, pig iron and alternative iron units.

Throughout SDI’s first eight years, OmniSource Corp., also based in Fort Wayne, acted as its scrap procurement agent. But effective March 31, 2004, the SDI-OmniSource contract was terminated "amicably," according to SDI’s 10-K filing. Under the OmniSource contract, the Fort Wayne company filled 89 percent of SDI’s scrap orders in 2003.

OmniSource, however, remains an important supplier, SDI says. At the same time, Brady and the SDI team he is putting together will look for additional scrap sources as the need arises. "We’re continuing to enhance our supplier relationships and develop and build some new ones," says Brady.

DESK REFERENCE. Scrap suppliers working with Brady are generally glad to learn that he spent more than a decade working as a scrap broker, sometimes playing the role of the scrap supplier.

Brady worked for a decade with the David J. Joseph Co., in various brokerage, logistics and management roles. His work there gave him a familiarity with both sides of the buy-sell desk, making him aware of what buyers and sellers are trying to accomplish in a transaction.

One of Brady’s impressions: Whether scrap supplies are abundant or not, information is often in short supply.

Among the characteristics Brady is establishing for the SDI Ferrous Resources department is a system to provide feedback to scrap suppliers regarding the quality of what they have shipped.

In an effort to make sure communication is not traveling a one-way path, Brady has also opened SDI’s doors with "open houses," essentially information sessions that allow suppliers who wish to learn more about the company’s melting procedures to visit the facilities for themselves.

Visitors to the Butler mill will see a plant that can now produce 2.4 million tons per year of rolled sheet steel.

The mill’s front end contains two electric arc furnaces managed by Melting Manager Ricky Rollins, another veteran from the Nucor-Crawfordsville mill.

The two furnaces melt a mixture of scrap, pig iron and scrap substitutes, with percentages of each that can vary greatly depending on market conditions, availability of materials and the chemistry of the steel being produced.

Rollins says the process to determine the least-cost suitable-charge formula reaches as high as SDI President and CEO Keith Busse. "The scrap mix is generally determined by Keith, Rich [Brady] and Butler General Manager Mark Millett."

In the second half of 2004, although scrap prices were high, pig iron prices were higher. Traditionally, pig iron would only account for 7 to 10 percent of the charge. But as pig iron became available at prices lower than premium scrap, SDI began to introduce more pig iron into the melts, sometimes reaching the 25 percent mark.

A World of Change

Steel Dynamics Inc. (SDI), Fort Wayne, Ind., has spent its first decade of existence in a turbulent market for steel, ferrous scrap and manufacturing as a whole.

North American-based steel companies have declared bankruptcies by the dozen during those years, while both struggling and healthy steel companies have merged to create a more consolidated steel industry.

Scrap prices in the past few years have bounced up and down in an even wider range than had been historically established, and scrap trading patterns have witnessed record amounts of international scrap trading.

And through this all, the manufacturing sector in the U.S. has undergone turbulent changes, often in the form of the off-shoring of operations.

The global changes affect SDI differently, say the company’s managers. "Most of the growth in the consumption of steel in the world has been in China, but that affects the American steel industry quite a bit," Fred Warner, SDI’s investor relations manager, notes.

Warner points out that there is still enough steel consumption in North America to justify SDI’s added capacity. "In a good economy, the U.S. can run short as much as 30 million tons per year of productive capability, so we’re still short in the supply of steel, even with the manufacturing that is going offshore," he remarks.

As a result, the U.S. relies on imported steel to make up the shortfall. "SDI’s added capacity helps to fill that void," says Warner.

In the scrap substitutes arena, SDI has developed its own reduction iron technology known as Iron Dynamics Inc. and has also been a joint venture partner in an effort to produce another scrap substitute using iron ore pellets known as the Mesabi Nugget Project.

MULTIPLE TASKS. In his first year on the job with SDI, Brady has assembled a team of scrap buyers and logistics personnel to help the company meet its supply needs as it continues to grow. Further, a contract with Systems Alternatives International, Maumee, Ohio, will enhance SDI’s scrap management systems.

Brady says suppliers are eager to work with SDI and are welcoming the efforts toward two-way communication. "If you make an effort to engage the consumer and the supplier—if there is an active effort—you’ll see good results," says Brady.

He acknowledges that the circumstances may not always be sunny, but that the communication is necessary. If a supplier sends a sub-standard shipment, everyone is better off if they know, he contends. "Scrap quality is a major focus and feedback must be given regularly if you hope to improve performance," Brady says. "Conversely, we look for feedback from our shippers as well. They let us know if their truck deliveries went smoothly, if our paperwork is accurate and timely, etc."

Brady says the communication is vital now that SDI has set up its own purchasing department to perform some of the tasks formerly handled by OmniSource.

"We’ve been pleased by the response from our suppliers as we transitioned from an agency purchasing arrangement to direct buying," he says. "We’re interested in strengthening our relationships with the scrap industry and we’ll do everything we can on our end to keep the lines of communication open."

A Paycheck Payoff

Working at Steel Dynamics Inc. (SDI), Fort Wayne, Ind., can be good for one’s income level, especially when the company is profitable.

A profit sharing and incentive program in place at the company has created a workforce that is well rewarded when production and quality levels meet expectations. In 2003, SDI’s average full-time, non-executive employee was paid $75,400 and received an average $3,800 in profit-sharing proceeds.

Production workers at SDI facilities receive incentive money based on "the volume of quality product that is produced by their work unit," according to SDI Investor Relations Manager Fred Warner. Additionally, employees receive incentive pay for meeting efficiency and cost-control goals.

The contributions of employees are also valued, according to SDI Butler mill Melting Manager Ricky Rollins. "A lot of our ability to improve every year comes from our people, from their ideas" he comments. "They can see where improvements can be made and their suggestions are often implemented."

The author is editor of Recycling Today and can be contacted at btaylor@gie.net.

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