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Algoma boss lauds hedge funds

Date: Thursday, May 11, 2006
Author: Steve Arnold- The Hamilton Spectator

Demand for profits, return on investment disciplines steel industry.

Canada's struggling steel industry is recovering, thanks to the relentless demands of hedge fund managers for profits and return on their investment.

Algoma president Denis Turcotte told a conference here yesterday that funds like Tricap Management Ltd. which backed the restructuring of Stelco have brought a needed discipline to a badly fragmented industry.

"Steel producers are return driven today, and the hedge funds will keep them that way," Turcotte told members of the Automotive Parts Manufacturers Association. "The days of saying we'll take short-term losses and make money in the long term are over, and in some cases that's clearly good because it's holding people accountable to the owners of the business."

Companies which don't meet those demands will lose their access to capital, and their presidents and boards of directors will quickly find themselves unemployed, he said.

"As a minimum, the hedge funds are saying they want to see the tough decisions being made that will translate quickly into returns," Turcotte added. "They will turn over boards of directors and do whatever else it takes to get those returns."

Steel's nightmare, Turcotte said, developed slowly between 1974 and 1998 as demand for the metal slowed, but countries continued to add production capacity, creating a situation where returns to the industry sagged well below the cost of the capital needed to produce it.

"The net effect was a complete loss of reasonable returns to the industry," he said. "It was a very bad situation and half the industry melted down."

That meltdown meant 42 steel company bankruptcies between 1998 and 2002, including that of Algoma. Stelco followed in 2004. The failures sparked a consolidation wave which has seen the share of world capacity controlled by the 10 biggest companies increase from 22 per cent when Turcotte joined Algoma to 30 per cent today. The number will rise further if the proposed Arcelor-Mittal merger goes ahead.

The industry today has the capacity to produce about 200 million tons more steel than is needed, but with world economic growth of 3 per cent a year, that excess will be absorbed by 2013.

"Supply is still chasing demand so it will be a long time before we can expect the price of steel to flatten out," he said. "Today it's a fundamental question of supply and demand."

Signs of the trouble which required such drastic treatment in the steel mills can be seen in the auto assembly and parts businesses. Speakers such as Scotiabank economist Carlos Gomes noted some Ford and General Motors plants are operating at 85 per cent of their production capacity "and that just doesn't make sense."

At the same time, North America's former auto giants are seeing their market share erode. In 2000, Japanese carmakers commanded 25.3 per cent of a market of 19.5 million vehicles, but by 2005, their share had risen to 32.2 per cent of a total market of 19.6 million. That loss of revenue makes investment in new technology such as hybrid engines and flexible manufacturing plants both critical, and harder to accomplish.

To make the adjustment, companies such as GM are expecting their suppliers to share some of the pain, rewarding those who meet tough new standards with long-term contracts and cutting off those who fail.

Bo Andersson, GM's vice-president for global purchasing and supply chain, told the conference his company spends $18 billion a year buying goods and services in Canada, but the growth in that spending has been flat in recent years as the Canadian dollar has risen.

"The very good companies continue to win business with us, but the average companies just aren't competitive," he said. "We have a good supply base here, but its growth is flat."