Stelco Inc. Business Information, Profile, and History

Company Perspectives:

Stelco is a market-driven, technologically advanced group of businesses that are committed to maintaining leadership roles as steel producers and fabricators. These businesses are dedicated to meeting the requirements of their customers and collectively providing an appropriate return for Stelco shareholders. The people in these businesses will achieve these objectives in healthy and safe environments through maximum development of their skills, by the creation and application of innovative process and product technology, through the identification and pursuit of new market opportunities, and by providing superior levels of quality and service.

History of Stelco Inc.

Stelco Inc. operates as one of Canada's largest steel producers with an annual capacity of 6.2 million tons. The company operates four major steel facilities, including Hilton Works in Hamilton, Ontario; Lake Erie Steel Company in Nanticoke, Ontario; Stelco-McMaster Ltee in Contrecoeur, Quebec; and AltaSteel Ltd. in Edmonton, Alberta. Hot rolled and cold rolled/coated sheet account for the majority of Stelco's sales. The firm's other products include rod and bar products, pipe and tubular products, plate products, and wire. The company's main business segments include integrated steelmaking, mini-mill operations, and manufactured products.

Early History: Mid- to Late 1800s

Like many aspects of the Canadian economy, Stelco's origin reflected both British and U.S. influences. During the 1850s, the Montreal merchant house of Moreland and Watson imported British iron to meet investment needs in the burgeoning Canadian economy. During the following decade, Moreland and Watson established the Montreal Rolling Mills (MRM) to reroll British wrought iron and scrap into nails and other hardware. The MRM managing director was Charles Watson, who in 1873 appointed William McMaster as secretary; McMaster then succeeded Watson in 1888.

The 1880s were a decade of transition for the MRM. This was an era of increasing protectionism by both Canadian and U.S. governments following the devastating trade depression of the 1870s. Tariff increases helped to preserve a role for British metal in the Canadian market, but the advantage was gradually passing to U.S. suppliers whose raw material and transportation costs were falling rapidly. These trends increasingly handicapped the MRM, whose trade relied on the reworking of metal from Great Britain.

MRM sales in the Ontario market were challenged during the 1880s by the Ontario Rolling Mills (ORM), established at Hamilton in 1879 by a group of Ohio businessmen. These U.S. tradesmen and investors were representative of many who migrated north to create industrial enterprises in early Ontario. The ORM used an abandoned mill to reroll scrap iron rails and rework metal for use by local machine shops and hardware manufacturers.

The ORM and other Hamilton-area secondary metal firms created a growing local demand for primary metal. Favorable tariff and transportation changes made it profitable by the early 1890s to establish a blast furnace on Hamilton harbor using U.S. ore and coal. Local foundry owners and the Hamilton municipal council were instrumental in launching the Hamilton Blast Furnace Company (HBFC) in 1894, after U.S. investors withdrew from what seemed a risky prospect. Alexander Wood, a hardware merchant and later a Liberal senator, was the largest HBFC shareholder. By 1899, HBFC had proven its value to the ORM leadership, who agreed to merge the two firms. The resulting company, the Hamilton Steel and Iron Company (HSIC), quickly erected steel furnaces using its capitalization in excess of C$1 million. The company's vice-president and general manager was Robert Hobson, son-in-law to Wood and later president of the Canadian Manufacturers Association.

Mergers Lead to the Creation of Stelco: 1910

The HSIC was Canada's first fully integrated iron and steel company. It flourished during the massive wave of investment that swept over the Canadian economy between 1900 and 1910. In the latter year, William McMaster offered to bring the Montreal Rolling Mills into a larger organization that would provide a secure supply of primary metal. The successful Maritime financier Max Aitken, later Lord Beaverbrook, promptly brokered yet another merger of the HSIC with the MRM and several smaller secondary metal companies, resulting in the Steel Company of Canada, or Stelco as it was soon unofficially labeled.

Stelco's first president was Charles Secord Wilcox, who had arrived in Hamilton by horseback in 1880 to join other family members in the ORM. Wilcox was president of Stelco from 1910 to 1916 and chairman of the board from 1916 to 1938; he began the policy of plowing back as much profit as possible into the company. The firm's location in southern Ontario, which minimized transportation costs on material assembly and product delivery, was the most attractive possible in the fragmented Canadian market. Government tariffs and cash subsidies also augmented company profits and permitted the financing of new investment from retained earnings.

During World War I, Stelco produced large quantities of shell steel, but the production of munitions did not prevent the company from establishing a sheet mill to widen its potential product base, as well as opening ore and coal mines to facilitate raw material supply. Stelco's diversified product base and concentration on light steel products served it well during the Great Depression of the 1930s, as its share of the Canadian steel market rose from 17 percent in 1918 to 45 percent in 1932.

Two presidents served Stelco during this era. Robert Hobson, along with Wilcox from the Hamilton side of the company, presided from 1916 to 1926. Ross McMaster, son of MRM's William McMaster, had stayed to manage the Montreal works after its sale in 1910; he became president from 1926 to 1945.

Postwar Growth

The outbreak of World War II inaugurated a new era for Stelco as it did for the Canadian economy. Stelco expanded its finishing capacity with the erection of plate and hot strip mills in 1941 and cold and tin mills in 1948. The growth of the finishing mills resulted in the use of more primary metal. In 1951, Stelco expanded its primary production facilities by building a 226-foot blast furnace and new open hearth steel furnaces sufficient to increase Canadian ingot capacity by 20 percent.

Hugh Hilton, president from 1945 to 1957 and board chairman from 1957 to 1966, presided over the expansion of the postwar period. Hilton's best-known technical innovation had been a 1928 fuel-saving improvement for the system of distributing waste gas from the furnaces to other applications in the plant. Hilton was the last of the steelmaking engineers to head the company. He was followed by Vincent Scully, an accountant who had come to Stelco as comptroller in 1951. Scully was president from 1957 to 1967 and chairman of the board from 1966 to 1971.

The continued use of open hearth furnaces until the 1980s reflected the slow introduction of basic oxygen furnaces first available during the 1950s. Stelco demonstrated considerable prowess in the development of secondary production technology. In 1959, David McLean, superintendent of Stelco's shapes division, organized a team to improve the cooling and coiling of steel rods in a high speed mill. By 1961, the solution was found in an adaptation of a U.S. patent leading to the Stelmor process for high quality and low cost rod cooling and coiling. During the 1970s, the manager of product design services, Bill Smith, pioneered a coilbox technique used for intermill transfer of hot bars; this technique remained proprietary technology.

The Gordon Era: 1970s

The 1970s comprised the Gordon era of Stelco, named after Peter Gordon, who served as president from 1970 to 1976 and chairman of the board from 1976 to 1985. Gordon guided the company through a major expansion, as the number of Stelco employees mushroomed from 12,500 to 25,000 during the 1970s. Gordon's lasting contribution was the establishment of a new plant on Lake Erie.

Strong market growth before the 1973 oil crisis and subsequent economic slowdown led Stelco in 1974 to begin construction at a new location, the Lake Erie works (LEW). This plant began production during 1980. Annual capacity was 1.7 million tons of semifinished steel. The LEW had large production runs of continuous-cast, low-carbon steel that was cold-rolled into auto sheet and steel used in pipes.

The older and larger Hilton works on Hamilton harbor had an annual capacity of 2.8 million tons. This plant produced diverse and sometimes specialized high- and low-carbon steel in strip, bar, and rod forms. The average production run at Hilton was smaller than at LEW. Between 1985 and 1987, financing and technology from the Japanese firm Mitsui assisted in a major upgrading of the Hilton facilities that included the introduction of basic oxygen technology and continuous casting. The Quebec and Alberta plants had small production runs from mini-mills of a capacity less than one million tons, each from electric arc steel furnaces.

Stelco's four primary plants were part of a production process that was integrated from the mine to a wide array of finished steel, including nails, sheet metal for appliances and vehicles, long-distance gas pipes, springs for vehicles, structural members for bridging and building, steel fencing, and a variety of hardware. During the 1980s, the final destination of output was the construction industry (35 percent), automobile assembly (30 percent), shipbuilding (10 percent), as well as railways, agricultural and other machinery parts, and packaging. Stelco also undertook secondary processing at Hilton and in more than a dozen subsidiary plants scattered from Montreal to Niagara and in Alberta.

Problems Arise: 1980s

The 1980s proved a difficult decade. Stelco lost its position as Canada's largest steelmaker, and employment declined considerably. Various facilities closed, and the company's long term debt-equity ratio climbed dramatically. In November of 1989, the Canadian Bond Rating Service downgraded its rating of the firm's senior debentures. Revenues in 1990 were 24 percent less than the previous year, as the company posted a C$200 million loss.

In part, Stelco's problems reflected the burden of more than C$2 billion in investments between 1978 and 1988 (just as the demand for steel declined because of slow economic growth from 1973 to 1984), as well as a trend to substitute other materials for steel for a variety of purposes. Lackluster growth in the market for steel and high interest rates during the early 1980s made it possible for Stelco to finance later growth from internal sources, with the hopes that the value of these costly investments during the 1970s and 1980s would positively impact future competitiveness.

Another difficult circumstance for Stelco was the need to reduce emission of suspended particles and sulfur dioxide into the air and various substances into Hamilton harbor. The latter included poisonous coal-tar derivatives and ammonia that deprived the harbor floor of oxygen and hence killed fish. Increasing public concern to minimize environmental damage prompted Stelco to invest in a variety of devices to control pollution. By 1985, the Hilton works alone had 49 facilities to clean waste water and 54 facilities to clean the air. By 1991, there were some signs of improvement in Hamilton-area air and water, although Stelco's emissions remained a concern. In contrast to and perhaps because of the pollution problems at Hilton, the Lake Erie works had been built under careful government scrutiny to minimize environmental concerns.

Difficult relations with organized labor were a traditional Stelco problem. The Hilton workers were represented by Local 1005 of the United Steelworkers of America, which historically had been one of the most militant of Canadian locals. In 1946, violence marred an 85-day strike that is often seen as a turning point in the modern history of Canadian industrial relations. Another strike lasting 86 days in 1958, a violent wildcat strike in 1966, a legal strike in 1969, a 125-day strike in 1981, and a 97-day strike in 1990 continued the record of debilitating labor-management relations.

More significant than resulting wage adjustments was the damage to both workers and investors of a persistently and seriously discordant industrial relations atmosphere. An individual worker needed a very long time to recoup the loss of three months pay. On the other side, Stelco had been disadvantaged by disruption of supply continuity and other costs of bitter collective bargaining.

Challenges Continue: Early 1990s

In 1991, the president and chief operating officer was Robert J. Milbourne, a long-time Stelco engineer. The chairman of the board and chief executive officer was Frederick H. Telmer, a career Stelco employee in marketing. By this time, there were signs that the challenge of competition from east Asia would force labor and management to collaborate in forging a new survival strategy. The union had agreed to set aside traditional job categories in a steel coating mill within the Hilton works. The new mill was a joint venture with Mitsubishi Canada Ltd. to improve the rust-resistance of sheet metal. Hand-picked Hamilton workers visited Japan to acquire technical knowledge and improve their understanding of the Japanese culture of company-worker cooperation.

The new coating mill was one aspect of Stelco's campaign to win contracts from Japanese-owned autfo assembly plants located in southern Ontario. This response to change in secondary markets reflected the same careful attention to customer needs embodied in nineteenth-century mergers with the Montreal Rolling Mills and Ontario Rolling Mills. Stelco policy returned the company to its historically successful strategy of careful integration between primary production and the secondary industry.

By the early 1990s, Stelco--with its new facilities--was well positioned in the competitive North American market. Canada ran a trade surplus with the United States on steel. The introduction of the Canadian-U.S. free trade agreement favored Stelco because it reinforced a tendency to preserve the North American market for North American producers, among whom Stelco with its new facilities was a strong competitor.

This trade agreement, however, received mixed reviews. Even as the company worked diligently to remain competitive in its industry, a recession during the early years of the 1990s forced Stelco to lay off over 1,100 workers at its Hilton Works facility. Leo Gerard, national director of the United Steelworkers union, blamed the favored Canadian-U.S. Free-Trade Agreement for the decline in Canada's steel industry. In a 1992 issue of Canada Newswire, Gerard queried, "How bad does it have to get before the government realizes that the country needs an industrial strategy that allows us to compete in a global economy? Trade deals that take more from the economy than they add, and policies which ignore our basic industries, are ruining the futures of entire communities. The more this kind of thing happens, the more remote recovery becomes."

The North American economy slowly recovered in the mid-1990s and Stelco's fortunes gradually changed. Sales remained relatively flat between 1994 and 1996 but surpassed the C$3 billion mark for the first time in 1997 due to increased demand. At this time, company management set forth several growth strategies related to improving operational performance, increasing the value of its product mix, and bolstering customer loyalty by providing superior quality. Stelco also completed a $400 million capital investment program that increased output at its facilities by 10 percent and looked to forge strategic alliances to increase market share.

An Industry Downturn in the New Century

The highly competitive nature of the steel industry once again caught up with Stelco in 2000, with steel imports into Canada increasing by 29 percent over 1999, representing a 44 percent share of Canada's market. As a result, Stelco experienced oversupply and a decrease in demand. Sales fell by 9 percent and net income dropped by 96 percent over the previous year.

The slowdown in the North American economy continued in 2001, and the Canadian market was plagued by cheap imported steel--Stelco and other Canadian manufacturers felt this steel was unfairly priced and were working with the Canadian government to rectify the situation. In Stelco's 2001 annual report, the firm reported that North American steel prices fell to their lowest point in over 20 years. The falling prices, coupled with high energy costs and decreasing demand, forced Stelco to report a C$178 million loss that year.

Nevertheless, Stelco management remained optimistic about the future. Over the past five years, it had spent over C$900 million in facility updates and new technology. Its cost cutting measures also began to pay off--by 2001, cost per ton had been reduced by C$35 million over the past three years--and its increased production capabilities had left it well positioned for the eventual economic recovery of the North American market. While low-cost imports remained a thorn in Stelco's side, the Canadian steelmaker remained committed to enhancing shareholder value.

Principal Subsidiaries: Stelco-Mcmaster Ltee; AltaSteel Ltd.; Stelwire Ltd.; Stelfil Ltee; Stelpipe Ltd.; Welland Pipe Ltd.; CHT Steel Company Ltd.; Stelco USA Inc.; Chisholm Coal Company (U.S.).

Principal Competitors: Dofasco Inc.; Ipsco Inc.; Algoma Steel Inc.; United States Steel Corporation; Nucor Corporation.

Chronology

• Key Dates:
• 1910: The Steel Company of Canada is created from the merger of HSIC, MRM, and several secondary metal companies.
• 1932: Stelco's share of the Canadian market climbs to 45 percent.
• 1941: Plate and hot strip mills are erected.
• 1951: The firm builds a 226-foot blast furnace.
• 1961: The company develops the Stelmor process for high quality and low cost rod cooling and coiling.
• 1974: Stelco begins construction on the Lake Erie works.
• 1984: The company's market share declines due to slow economic growth.
• 1992: Stelco lays off over 1,100 workers.
• 1997: Net sales exceed $3 billion for the first time as Canadian steel consumption reaches a record high.
• 2001: The company posts a C$178 million loss.