In the modern history of the
world steel business, one of the longest-running strategic
controversies has to be the question of owning iron ore
properties vs. buying iron ore. This disparity in strategy
involving a very fundamental characteristic of steel companies
was never more visible than it was in 2012.
The divergence is largely a
continental phenomenon. European, Japanese, South Korean and,
most recently, Chinese steel industries were all built on the
premise of purchasing iron ore on the world market. North and
South American steel companies are largely developed around the
notion of owning and operating ore properties or owning an
equity interest in an iron ore venture.
U.S. Steel Corp. enjoys a long
history of internal ownership of iron ore properties.
ArcelorMittal SA had already launched plans aimed essentially
at self-sufficiency in iron ore when the recession struck. AK
Steel Corp. entered into a joint venture to partially reverse
its reliance on purchased iron ore.
North American scrap-melting
steelmakers either have no interest in iron ore or, as at Nucor
Corp., a very recent and not yet fully developed requirement
for iron ore in their steelmaking processes. Steel Dynamics
Inc. is an exception, reporting ore self-sufficiency.
Independent iron ore producers
entered the global recession after several consecutive years of
strong demand and rapidly increasing prices. Vale SA, BHP
Billiton Plc, Rio Tinto Plc and Cliffs Natural Resources Inc.
were all in the midst of major capital plans to increase
capacity in response to rising demand and strong
It is a teachable
moment to see how these different producers reacted to
the global recession and other challenges. Not so incidentally,
three of the four independent iron producers abruptly
terminated their chief executive officers in the past 18
The international raw material
suppliers and the steel industry are reacting in similar ways
to challenges by raising capital, constricting nonessential
capital spending, selling noncore assets and deleveraging their
balance sheets. Seaborne iron ore producers Vale, BHP Billiton
and Rio Tinto all stretched out their capital spending but
maintained the essential elements that continued their progress
toward increased iron ore expansion while eliminating capital
spending in their other businesses. Cliffs did the same
ArcelorMittal has maintained its
drive to expand iron ore production in Canada and Liberia. It
is possible to see in this behavior at least one more true
believer in the inherent profitability of captive iron ore over
the full business cycle.
One can imagine the Chinese
planners who decided that China would build a
750-million-tonne-per-year steel industry based on purchased
iron ore and wonder if they ever have had second thoughts.
Thomas C. Graham is a founding member of T.C. Graham
Associates. He is a former chairman and chief executive officer
of AK Steel Corp., president and chief executive officer of
Armco Steel Co. LP, chairman and chief executive officer of
Washington Steel Co., president of the U.S. Steel Group of USX
Corp. and president and chief executive officer of Jones &
Laughlin Steel Co. His column appears monthly. He invites
readers comments and can be contacted at