The confluence of a diminishing customer base, more efficient materials, environmental regulation, the strong dollar and global competition has made for an interesting "witch's brew" in the North American refractory industry.
First and foremost, the dismal performance of the U. S. steel industry starting in late 1997 reinforced the trend toward lower refractory production volume. Since the iron and steel industry consumes roughly half of all refractories made in North America, the downward trends in profitability and capacity utilization necessarily must be reflected in key supplier industries. Although iron and steel production is expected to turn around, a market environment as robust as the 1990s is unlikely to return. When coupled with a weaker outlook for other refractory consuming industries, demand for refractories will remain fairly weak.
On the environmental front, regulation of emissions will force refractory producers to meet the Maximum Achievable Control Technology (MACT), which will consume valuable capital resources. In addition, the specter of new crystalline silica regulation is on the horizon. Both of these key regulatory initiatives are important, and the industry proactively endorses responsible regulation, as always. In the case of MACT, the refractory industry, through The Refractories Institute (TRI), has been working with the Environmental Protection Agency on a testing program to ensure that truly achievable standards are set.
In the case of crystalline silica, industry environmental personnel have been actively engaged with the Silica Coalition, a group assembled to ensure that responsible regulation comes from this OSHA initiative. (Contact TRI for more information on MACT and the Silica Coalition at 412-281-6787.)
Through the Refractory Ceramic Fiber Coalition (RCFC), the ceramic fiber industry is actively engaged with a voluntary Product Stewardship agreement at OSHA. This state-of-the-art effort has received plaudits from regulators across the country. Similar programs are underway around the world.
I mention these efforts only to point out that for a small industry (slightly more than 100 companies by some estimates) with relatively low profitability, substantial amounts of scarce resources continue to be dedicated to socially responsible programs.
One of the wonderful things about working in refractories over the years has been the truly global nature of the business. Products and practices developed regionally have been employed around the world, and raw materials have been sourced globally. Now, however, markets and suppliers are far less regional.
The emergence of China as a major consumer and producer of finished refractories bears great influence on the future of North American refractory production. Given relative economics, products with substantial labor and raw material content can be produced more economically in China. The burgeoning Chinese refractory industry evolved from raw material supply. From the late 70s, China has been a low cost source for magnesia. In the ensuing years, China's raw materials have played a major role in increasingly sophisticated products. It was a natural evolution from raw materials to finished goods. Since the 70s, Chinese exports of finished refractory products have more than tripled. Coupled with a Chinese steel industry that is rapidly growing, exporting and taking an ever larger share of the North American steel market, Chinese exports are consuming ever more of the available market in North America. Similar scenarios are being played out in other steel exporting areas of the world.
The strong dollar is the capstone piece in a downward spiral for the domestic industry. Recently, Paul O'Neill, Treasury Secretary and former chairman of Alcoa went on record with his support for the continued strong dollar policy endorsed by the Bush Administration. As a former manufacturer and global business manager, one would assume that Mr. O'Neill would be sensitive to the impact exchange rates have on manufacturing industries. To the contrary, Mr. O'Neill purports that "The good ones don't need help? when asked to comment on recent National Association of Manufacturers pleas for a weaker dollar.
From the mid 90s to today, the U.S. dollar has appreciated approximately 12.5% against the German mark (or euro today), and 32% against the Japanese yen. South American currencies have lost virtually half their value against the dollar in the same time frame. The North American refractory industry would have to be mightily productive to offset these changes.
What will be the prescriptive fix for refractories in North America? There is not one simple answer. Refractory suppliers will need to be global and not simply North American players to capitalize on emerging markets and lower cost manufacturing options. Innovative technology, new products and diversification will have a role. Finally, the seemingly relentless push for consolidation and capacity reduction must continue to align supply and demand while eliminating administrative costs. Perhaps that sounds like a dose of strong medicine, but it is the key to survival for North American manufacturers in the increasingly global market.