ARCELORMITTAL : Cleveland Steel Mill, US Manufacturers Slowly Expanding
06/14/2012| 04:50pm US/Eastern
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--ArcelorMittal reopens part of Cleveland steel mill after four-year shutdown
--Manufacturers meeting higher demand with fewer employees
--Only 21% of the manufacturing jobs lost to recession have been restored
By Bob Tita
CLEVELAND--The furnaces and other hulking machinery to make steel on the west side of ArcelorMittal SA's (MT) Cleveland Works were fired up last month for the first time in almost four years. But the steel maker added just 150 people for operations that used to be staffed by 900 people a dozen years ago.
The west side was the last part of the 950-acre mill to reopen after the company nearly closed the entire plant during the 2008 recession. The steel maker's willingness to slam the brakes on production at one of its largest U.S. mills and its cautious, incremental approach bringing the mill back to life have been repeated at scores of other U.S. companies in recent years.
While manufacturing has led the U.S. recovery out of the recession, the characteristics of the rebound have differed from previous business cycles when rising demand and higher production volumes typically brought sharp increases in employment. With the ability to raise output through improved efficiency and automation, companies have had the option of adding employees slowly or running with permanently smaller work forces.
Since the middle of 2009, manufacturing output has been growing at an annual rate of 6.5%, but just 21% of the manufacturing jobs lost during the recession have been restored, according to the U.S. Federal Reserve.
Cleveland Works employs about 1,800 people, down from 5,000 during the 1980s. The mill specializes in producing low-carbon, galvanized steel used in car fenders, hoods and other auto components. The plant can produce about 3.8 million tons of raw steel a year.
ArcelorMittal, the world's largest steelmaker by volume, wasn't convinced until late last year that the U.S. auto industry had recovered enough to justify reopening the remainder of Cleveland Works, whose east and west sides are separated by the Cuyahoga River. The company in 2008 idled the mill's two blast furnaces that melt iron ore. The furnaces, which are on the east side, were restarted in the middle of 2009.
Restoring the mill's west side will expand the mill's capacity for producing steel by about 480,000 tons a year. The west side's basic oxygen furnace takes molten iron from the blast furnaces, mixes it with steel scrap and turns it into steel, which is further refined in another furnace before being fed into a caster that produces slabs of steel about the size of a bed mattress. The slabs are rolled into sheets less than a half inch thick and wound into big coils.
"We're making the most sophisticated steel on that line," said Ronnie Masliansky, general manager of marketing and product control for Chicago-based ArcelorMittal USA. "It's a key cog in our automotive strategy. Steel is still the easiest material for car manufacturers to work with."
Volatile prices for steel add a measure of risk to investments in steel production. U.S. prices for hot-rolled sheet steel have fallen about 16% since peaking at about $740 a ton in January. Although demand for steel from the auto industry remains strong, the sluggish U.S. economy is holding down demand from other key end markets for steel, such as the construction industry.
To drive down costs and preserve margins, ArcelorMittal has leaned on technology at Cleveland Works to improve productivity and output. The mill's man-hours-per ton of steel--a measure of labor costs and output--has fallen to about one man-hour per ton from five hours in the 1960s.
Explosive gains in productivity have allowed ArcelorMittal and other manufacturers to meet rising demand with slimmed-down operations and smaller work forces. Cleveland Works continues to operate below its pre-recession rate.
U.S. production capacity--the ability to produce goods and materials--dropped 6.4% between 2007 and April 2011, when the decline bottomed out. Economists say the severity of the capacity decline is unprecedented.
"It's something we never saw before," said William Strauss, senior economist and economic advisor for the Federal Reserve Bank of Chicago. "Capacity is never something that's gone negative."
Over the past year, production capacity has increased by almost 1%, still well below the 3.1% a year average increase in production capacity since 1960. During previous recessions, production capacity was under used, but was rarely idled for long stretches or permanently eliminated. Population growth always fueled greater consumption, creating a need for more production capacity.
The dent in production capacity left by the 2008 recession has economists and business leaders wondering whether a seismic shift has occurred, leaving the U.S. with a permanently smaller capacity base for manufacturing. After all, manufacturers has been fleeing the U.S. for lower-cost locations overseas for several years and manufacturing employment has been steadily declining since the 1970s.
Nevertheless, there are indications that weakness in the manufacturing sector is still largely the result of a steep downturn in demand, rather than a permanent reduction in manufacturing activity.
Manufacturing capacity utilization has rebounded from its all-time low of less than 64% in 2009 to 78.8% in April, just shy of the 79% to 80% considered as full utilization.
"There is room to rebuild capacity through investments in new and existing plants," said Sandra Pianalto, president of the Federal Reserve Bank of Cleveland. "Investment often increases as capacity utilization tightens, but many companies have only recently reached the point."
The divergence between higher output in U.S. manufacturing and lower employment levels is likely to continue, mirroring the agricultural sector, which is able to achieve record production volumes while accounting for just 2% of the total U.S. work force.
"We need to be looking at output as a metric for manufacturing, as opposed to number of workers," said the Chicago Fed's Mr. Strauss.
Write to Bob Tita at robert.tita@dowjones.com
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