Continuous Casting Investment

at USX Corp.
PREPARED BY:
GROUP 1 EOS SECTION A
RAJNISH KUMAR, PGP/18/102
RAJSHRI MODI, PGP/18/103
PRITAM GHARTE, PGP/18/138
RUPESH KAMBLE, PGP/18/141
YASH RAJ SINGH, PGP/18/176

Introduction USX Corp.

Steelmaking giant established in 1901 through a series of mergers
Fully integrated company consisting of mining division, shipping fleet, railroads and

steel mills
First corporation to enter the $1billion revenue segment in 1917
Employed 1% (168,000) of the total US labour force
Post world war 2, the USSs share in the US market began to decline. In 1980s it was
around 20%
USS also faced increased competition from minimills who used their cost
advantage
USSs response:
Close underutilized, uncompetitive manufacturing facilities. Closed or sold 8 mills
Change its product strategy; Focus on hot and cold rolled sheets, strip and tin
Weak dollar, Increased labour productivity led to profitability of $500m in 1988

Minimills
Major competitors to USS corp
Used Scrap as their raw material
Manufactured products for less quality sensitive segment
Cost advantages in the following categories:

Lower cost non-union labours

Lower cost capital equipments
No restrictive work rules
Favourable tax rates and utility rates
Could sell profitably at prices less than 20% of what integrated mills
charged
Minimills with more advanced technology were beginning to enter the
high quality segment

Mon Valley Proposal

USSs Monogehela Valley Complex:

2 mills ET and Irvin, 10 miles apart

ET for steel making and Irvin for hot rolling

Proposal/Upgradation project:

$250 Million investment in continuous slab caster at ET

$300 Million investment in hot rolling mill in Irvin
Constraint: Caster had to be installed in ET as per labour law

Decision Point for Kappmeyer

Conventional casting vs CSP at Mon Valley

Factors

Conventional
Casting

Compact Strip
Production
(with modification
to Nucor approach)

Description

Capital Cost

$100 million

$87 Million

Exhibit 8

Capacity

1.5 million
tonnes

1.5 million tonnes

Operation Cost

X-15 (Best case

scenario)

Location

ET+Irvine

Only ET

Riskiness of the
project

Low

High

For CSP total

commitment would be
required.
No flexibility in cash
flows in CSP project

Customer Demand

Preferred

Not known

Customers are averse to

change.

CSP shows 15$ per tonne

less operating cost.

Traditional Continuous casting vs CSP

Based on the analysis of the previous table the scale is balanced (shown by the image on the
left below) between CSP and conventional casting.
But this analysis does not include diseconomies of scale associated with CSP.
USS executives fixed capacity at Mon valley at 2.6 million tonnes per year which indicated
that the capital costs would be very high
the 15$ advantage in operation costs would not cover the excess capital cost. Hence all 4
factors shifted towards Traditional continuous casting method.

Compact Strip Production

Compact Strip Production

After
considering
diseconomies
of scale

Should Kappmeyer Sign the proposal?

Based on the cost analysis it would seem conventional casting
is the logical step. But, Kappmeyer has not considered all
possible questions such as:
1. Should Kappmeyer ignore CSP completely considering it
gave USS cost advantage of $15 per tonne which would be
a huge cost advantage over competitors?
2. Can USS target different Customer Base to maintain

growth? USXs cost advantage is not sustainable in the

long run and other companies that can adopt CSP faster
may use it compete with USX

Should Kappmeyer ignore CSP completely?

Can USS capture returns from CSP innvoation?
PFI Framework for CSP

Can USS change Appropriability regime? No. USS does not own the

technology, therefore cannot go for IP protection. Also the entry barrier to CSP
is low due to low capital costs.
Can USS change Industry Architecture? Yes. USS had already modularized
steel making and hot rolling at Mon Valley. So if USS corp cannot attain
cost advantage from CSP it can go for JV or merger with Minimills.
Therefore CSP should not be ignored completely.

Can USS target different Customer Base?

The decision by Kappmeyer is currently based on the

fact that USS is targeting its current customer base

only.
Integrated Mills have very low market share in Wire
rods, Structural Shapes, Bars and Wire-Drawn
product categories. These categories make up 27.6
millin tonnes tons in 1988.
USS can enter into these markets with the help of JV
or merger with minimills like Nucor (net worth: $260
million)

Conclusion
Kappmeyer should not sign the proposal.
The decision for the proposal has been made

considering only the current cost factors and the

current customer base.
No consideration has been given to the fact that Mon
valley can be used to change the Industrial
Architecture and service other customer base where
USX is lagging and where minimills are the
dominant players.