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Oregon steel mill owners seek efficiencies

for The Associated Press

McMINNVILLE ' Flames shoot 30 feet in a burst of hot air as a large bucket drops 120,000 pounds of scrap steel into the top of the new melting furnace at Cascade Steel Rolling Mills.

Less than a month into its life, the larger, more efficient furnace ' installed in December at a cost of &

36;4.5 million ' already is shaving power costs, company officials report, helping Cascade in its efforts to beat last year's record operating profits.

But on the other side of Cascade's 80-acre campus stands an empty production warehouse ' a symbol of the fear underlying the nation's steel boom. Cascade, owned by Portland-based Schnitzer Steel Industries Inc., once made fence posts and vineyard stakes in the now-empty building, but cheap Asian imports drove Cascade to drop those product lines two years ago.

The complex relationship between the Chinese and U.S. economies plays out at Northwest steel companies. On the one hand, China's demand for steel products helped drive up prices and stock values last year. But after China and other Asian countries use that steel to build new plants, they become competitors.

The market has changed significantly, said Jeff Dyck, the company's director of operations. International competition is what you have to compete against. It's something this company has to gear up for.

— Already, steel prices appear to be leveling out, and industry insiders are growing nervous about reports that China might become a net exporter of steel instead of a voracious consumer. Some fear that could mean more low-cost imports arriving at U.S. docks, dampening prices for the state's two steel producers, Schnitzer and Portland-based Oregon Steel Mills Inc.

So far, industry insiders in the Northwest see only scattered evidence of imports, mostly in finished products such as steel tubing.

But Cascade recently dropped its prices for wire rod, Dyck said, because of increased imports in December and January from Asia.

I don't know what to believe, said Jim Declusin, president and chief executive of Oregon Steel Mills. I don't think there's anybody in the steel industry who can tell you exactly what's going to happen three months from now.

Neither Oregon Steel nor Schnitzer exports much finished product. Oregon Steel makes mostly steel plate, coil and rail for industrial customers, while Schnitzer makes rebar and wire rod used in construction. Increased demand from China benefits them indirectly by raising prices and reducing the amount of foreign steel sold in the United States.

With higher prices and reduced competition, profits soared. Oregon Steel Mills' third-quarter earnings set a quarterly record. Cascade posted its most profitable year since Schnitzer acquired it in 1984. Other steel companies posted similar results.

Like Cascade, steelmakers began reinvesting in their mills, rather than mothballing them. Cascade's old furnace took 48 minutes to melt steel. The new one is five minutes faster, company officials say, and conserves energy by taking less time to load. Dyck said the new furnace's efficiencies should help it pay for itself in less than two years.

But steel stocks dropped suddenly Dec. 30 after a front-page article in The Wall Street Journal highlighting a debate among analysts and industry observers about whether China would become a net exporter of steel in 2005.

Since then, reports on Asian production have done little to resolve the debate. Newly built mills will boost China's production by an estimated 24 percent to 340 million tons by 2006, the Organization for Economic Cooperation and Development said last month.

The group also forecast that steel demand worldwide would grow by 5 percent in 2005, with consumption in China growing 10.7 percent. Schnitzer Steel Chief Executive Bob Philip has told investors twice in the past month that he sees no slip in China's demand for steel to feed its construction boom.

We're very bullish about the Asian demand for scrap and also the Asian demand for finished steel, said Philip during a conference call with analysts last month. This past Monday he told company shareholders: We intend to be winners, not whiners.

China's rising production is good news for Schnitzer Steel, which got nearly 40 percent of its &

36;688.2 million revenue last year feeding Asian steel mills with unprocessed scrap metal, company records show.

But it could bode ill for steel mills and area steel distributors if the Chinese government curbs demand to cool the nation's rapidly growing economy, as some experts say it is trying to do. Many area steel distributors are sitting on larger-than-normal inventories of steel products, worrying that any price drop will eat profits.

Regardless of what happens in China, demand in the United States appears healthy. Last month, Oregon Steel announced a &

36;30-a-ton price increase for product shipped in February, an increase that customers appeared to accept.

In an interview last month, Oregon Steel's Declusin said the company will begin building its new large-diameter pipemaking plant next to its North Portland steel operation this spring.

The company is one of the few mills in the nation that can make heat-treated plate, used to armor military vehicles. Demand for the product jumped in November when U.S. troops in Iraq complained to Defense Secretary Donald Rumsfeld about the lack of armor for their vehicles, said David Terry, sales manager for Lampros Steel Inc., a Portland steel distributor.

It was almost like people read that, and our phone started ringing, Terry said.