Continuous Casting
Investments at USX
Corporation
Case Summary - USX
Formed in 1901 as the United States Steel Corporation
through a series of mergers with Pittsburgh based
Carnegie Steel Corporation as core
A fully integrated company where supplies of iron ore,
limestone, coal were extracted by mining divisions and
transported to steel mills
In 1917, USS was the first corporation in America to burst
through $1bn revenue barrier and employed 168000
workers
From its founding in 1901 through the 1970s the company
was the market leader
In the 1980s USX was hit hard by poor economic
conditions and higher manufacturing costs
Case Summary - USX
Mini-mills gained the market share of USX as the product
mix of USX can be cheaply manufactured and customers
are not quality conscious
Major Restructuring of USX to respond to the challenges closed or sold eight inefficient facilities and restructuring
its remaining manufacturing facilities to focus on high
quality products like hot-and-cold rolled sheet, strip and
tin products rather than a larger range of products
USX invested over $2 billion to improve its processes to
become one of the, if not the, most efficient steel
manufacturer in the world by improving labor efficiency
from 11 man hours per ton (mhpt) to just 3 mhpt
Case Summary Emergence of
Mini-mills
Became a major competitors to USS from being non-
competing entities
Produce Steel from scrap using electric arc furnaces instead
of Blast furnaces
Produce low quality products in small optimal capacity at
cheaper rates
They enjoy cost advantage due to lower plant cost, nonunion labours and favourable tax rates
They could sell profitably at prices less than 20% of what
integrated steel plants charged
Mini- mills with more advanced technology were beginning
to enter the high quality Structural Steel segment. This
could pose a huge threat to USS in the near future
Current Dilemma
Currently USS wants to upgrade the Mon Valley
steelmaking complex, and it required large
investment
USSs Monogehela Valley Complex provides unique
challenge as it has 2 mills ET and Irvin, 10 miles
apart for steel making and for hot rolling respectively
$600 million investment to be made in 2 phases:
1st phase : Design, building & installation of a continuous slab
caster at ET, costing $250 million
2nd phase: Upgrading the Irvin hot rolling mill, with an
approximate cost of $300 million
This investment will make USS unable to make any
new Capital investment in the foreseeable future
Current Dilemma
Kappmeyer is in a dilemma whether to invest in Conventional
continuous casting or to embrace new technology of Compact
Strip Production (which mini-mill company like Nucor is adapting)
which claims to reduce cost of production significantly
The Disadvantages of CSP are:
CSP is not yet commercially proven
CSP would require the caster to run at 4 to 5 times the conventional
speed which can cause significant diseconomies of scale
The new technology posed a different challenge altogether for
USS, due to ET and Irvin plants being located 10 miles apart
Evaluation done by a multidisciplinary team, with Jim Stull (chief
development engineer) and Dr. Michael Moore (veteran researcher of
advanced casting technologies) on board
Evaluation done in report states that it is better to go with
conventional continuous casting process
Either of these decisions taken should help in sustained growth
and profitability of USS
Conventional vs CSP
Factors
Conventional
Casting
Process
CSP(with modification)
Capital Cost
$100 million
$87 Million
Capacity
1.5 million tonnes
1.5 million tonnes
Operation Cost
X-15 (Best case
scenario)
Location
ET + Irvine
Only ET
Riskiness of the
project
Low
High
Customer Demand
Preferred
Not known
X-5 (Worst
case
scenario)
Based on these factors and significant diseconomies of scale and
complications due to scale of project, it looks like conventional
casting is better
Should Kappmeyer sign the
Proposal?
Even though all analysis shows that the conventional casting technology
was the correct investment for Mon Valley, Kappmeyer should not sign the
proposal without further considering other investment options outside of
the two described in the case.
The researchers and engineers only compared two investment options the
CSP investment option involving continuous thin slab casting and the $600
million option for the conventional casting
With either investment, USX is still focusing on its same particular customer
base and relies on its motto Mon Valley sells surface, not bulk
The analysis has not considered other options to grow the business beyond
the conventional continuous casting and CSP technology at Mon Valley.
Other options that could be considered include:
Other companies would likely soon compete on the main advantage of CSP
i.e., cost savings, which they had done in the past
Would it be possible for Mon Valley to implement the conventional
continuous casting system at Mon Valley but create an expansion that could
involve use of the CSP technology at low costs and serve customers who
demand lesser quality?
Does USX have investment opportunities that involve a merger, acquisition
on joint venture with a minimill
Could they serve new markets? Can USX to expand its market and customer
base and further take advantage of economies of scale
PFI Framework Can USS capture
Value from CSP innovation??
PFI Framework
Appropriability
Regime
Low
Small mini-mills may find it difficult
to imitate because of finances but
integrated players can copy
considering there is no IP protection
Industry
Vertica No modularity
Architecture
l
Can USS change Appropriability regime? No
USS does not own the technology
Entry barriers to CSP is low due to low capital costs
Can USS change Industry Architecture? Yes
USS had already modularized steel making and hot rolling at Mon
Valley. So if USS corp. cannot attain cost advantage from CSP it
can go for JV or merger with mini-mills
Therefore CSP should not be ignored completely
Recommendation
Kappmeyer should not sign the proposal as it
contains only current cost and current customer
base as determining factors
How will the Industrial architecture be affected
due to CSP at Mon Valley needs to be considered
One way of addressing the current concerns is to:
Implement the first phase at ET wait for CSP to
evolve
If CSP succeeds, start an electric furnace at Irvin
mill without going to second phase
Otherwise go to second phase
Thank You
