Post on 05-Aug-2015
transcript
David Level BA 301 - 002 Final Paper
Portland State University
AK Steel Holdings: Improving Environmental Responsibility
Table of Contents
EXECUTIVE SUMMARY 2
POSITION 3
UNCOVER 10
SOLVE 17
BUILD 20
ACHIEVE 22
APPENDIX A 24
BIBLIOGRAPHY 25
1
Executive Summary
This inquiry investigates the steel producer AK Steel Holdings and the environmental
compliance problems that threaten it. These problems are related to AK Steel’s poor
environmental performance and the costs associated with it. Additionally, AK Steel faces
higher prices for raw materials. AK Steel also faces the threat of loose foreign environmental
oversight that affect steel prices on the American market.
The most important issue that faces AK Steel is its cost of environmental compliance.
Government regulation has gotten progressively stricter regarding climate change. Industry
players that do not learn to adapt face heavy fines if they fail to comply.
Potential solutions include refining AK Steel’s production processes to reflect just-in-
time production styles through an engineering consulting firm to benefit from increased
environmental performance Another solution that AK Steel can implement is to adopt new
innovative DRI technologies that can recycle steel and natural gas. A third solution entails
lobbying the government to impose carbon tariffs on countries that do not meet American
environmental standards for their steel production
The best option presented was to invest in innovative direct-reduced iron (DRI) plants
because it would allow AK Steel to develop sustainable business practices with consideration
to long-term pollution reduction and environmental compliance. An indirect benefit to
adopting these technologies is that AK Steel can take advantage of DRI factories and their
ability to use recycled steel and natural gas. Decision criteria include: cost of
implementation, sustainability, amount of time it would take to construct, reliability, and
long-term savings. The cost of implementing a new factory may be high, but long-term
savings made up for initial engineering and construction costs. This solution will position AK
Steel to become an industry leader in sustainable manufacturing. The time that it takes to
2
implement a DRI steel production plant into AK Steel’s integrated production operations is
highly variable depending on many factors, but other DRI plants take 18-24 months, as is the
case for a new DRI plant in Arkansas (Carter & Turner). The development would be planned
and implemented by Dastur Steel Consultants. This solution is a feasible investment in AK
Steel’s future.
3
Position
AK Steel is an American-based industrial steel manufacturing company that is based
in West Chester, Ohio. AK Steel’s predecessor, Armco (American Rolling Mill Company)
was first founded in 1899 in Middletown, Ohio. Over the course of its one hundred fifteen
year history, the company has seen many mergers into what is now considered AK Steel
Holdings. AK Steel is a global leader in the production of advanced processed steel products
that supply manufacturing industries in the secondary sector of the economy. AK Steel
“specializes in automotive, infrastructure, construction, and electrical power distribution
networks” (AK Steel Corporate Profile). AK Steel generates revenue by “producing flat-
rolled value-added carbon steels including premium quality coated, cold-rolled and hot-rolled
carbon steel products that are sold in sheet and strip form, as well as carbon and stainless
steel that is finished into welded steel tubing” (2013 AK Steel 10-K).
“The Company sells its stainless steel products to manufacturers and their suppliers in
the automotive, food handling, chemical processing, pollution control, medical and health
equipment” (2013 AK Steel 10-K). “51% of AK Steel’s sales come from automotive
applications, with distributors and converters attributing 29% of net sales while infrastructure
and manufacturing draw in 20% of net sales” (2013 AK Steel 10-K). With such demands,
AK Steel must ensure that quality products maintain high levels of inventory to meet
requirements of certain customers.
AK Steel Mission and Vision Statement
AK Steel’s mission statement is “AK Steel is dedicated to safely producing the
highest quality steel products for our customers, delivering them on time and providing
outstanding service” (AK Steel - Our Vision). With recent investment in raw materials
4
firms, AK Steel is solidifying its position of creating quality manufacturing materials in a
timely manner.
AK Steel’s vision statement is “to operate ethically with all constituents,
maintaining fair and honest relationships and to operate within both the letter and the
spirit of the law” (AK Steel - Our Vision). As AK Steel continues to invest in its supply
chain, The Company can ensure that customers and suppliers are treated fairly and
equally in a world that sees exponential competition for raw materials and refined
goods in a timely manner.
Fiscal Information
Year 2013 2012 2011Revenue 5,570,400 5,933,700 6,468,000Net Income (46,800) (1,027,300) (155,600)Debt 1,506,200 1,411,200 650,000Stock Price 8.20 4.60 8.15
Table 1: AK Steel Fiscal Performance12
At the end of fiscal year 2013, AK Steel’s revenue was $5.6 billion, down 6.1% from
2012 revenues of $5.9 billion (AK Steel Income Statement & Balance Sheet). Recent
macroeconomic stagnation and the company’s recent investments in raw material stakes have
resulted in poor short-term performance. For the fiscal year of 2013, AK Steel had produced
a net loss of $46.8 million. While this is a 95.4% decrease from the net loss in fiscal year
2012, there is still a trend of negative performance. Fiscal year 2012 had seen such poor
performance relative to 2013 and 2011 because of a number of company investments in raw
material stakes that affected its short-term bottom line and is just a small snapshot in the
company’s long-term investment strategy.
1 Figures as of December 31 of each year2 All values are expressed in thousands except stock performance
5
Stakeholders and Stakes
Company Shareholders
Industrial steel manufacturing requires massive amounts of capital investment.
Naturally, AK Steel shareholders play an important role in the company’s performance. As
with any business, profits play an important role in the success of AK Steel and shareholders
aim to see that the company attains just that. If financial performance does poorly, then the
shareholders see that changes take place. Publicly traded companies contain hierarchy like all
institutions. Shareholders direct the board of directors to take action when performance is
weak by voting in new board members, which in turn influence executive decisions.
AK Steel Employees
As of April 2014, “AK Steel employs about 6,400 full time workers and is
headquartered in West Chester Ohio” (AK Steel Corporate Profile). Employees depend on
AK Steel in order to produce a stable means of living. While different tiers of employees
(workers, managers, or top executives) have different roles within the organization, they all
work towards the same mission. Good performance may result in expanded hiring, pay
increases, or other employee incentives.
Industrial and Consumer Manufacturers
AK Steel produces goods for the secondary sector of the economy; raw materials are
converted into industrial materials and then sold to firms that create final products for
business, government and consumers. The secondary sector of the economy relies on firms
such as AK Steel to convert natural resources into useable manufacturing materials.
Activities such as construction, automobile manufacturing, and food handling do not possess
the ability to convert raw earth into manufactured steel materials.
6
Raw Materials Suppliers
While AK Steel produces industrial materials for finished goods manufacturers, AK
Steel is in the middle of the proverbial production food chain. Primary sector raw material
procurement firms that supply AK Steel collect natural resources such as iron ore, coal, and
oil that power AK Steel’s manufacturing plants. Some of AK Steel’s raw materials are
collected through subsidiary companies of AK Steel Holdings as well, as part of its internal
raw material investment strategy to reduce reliance on outside resources.
Areas and Populations Surrounding Production
It is important to note the relationship that AK Steel has with surrounding businesses
and consumers at its corporate headquarters, various production facilities, and mines that AK
Steel invests in. While its headquarters plays a minimal role in West Chester, Ohio’s
livelihood by not even being part of the townships top ten employers by numbers (W.C.
Comprehensive Annual Financial Report), the company holds a large part of its operations in
rural areas where raw materials are procured and converted into industrial goods. Likewise,
AK Steel is the lifeblood of many small towns.
Sense
AK Steel is finding it harder to operate in a new age of environmental responsibility.
Companies such as AK Steel must find ways to improve environmental performance as times
change. Environmental laws affect industrial-manufacturing operations nationally and
internationally and are increasingly monitored and scrutinized by governments as the modern
economy moves toward sustainable business practices. This problem is of high importance
and medium to high urgency.
7
The Political Economy Research Institute’s list of top 100 air polluters in the United
States placed AK Steel at number sixty-one with .22 million pounds of toxic air released
based off of information obtained by the EPA (Toxic 100 Air Polluters 2013) and number 92
of the top 100 greenhouse gas emitters with .12% of the entire nation’s greenhouse gas
emitted based on 2011 data (Greenhouse 100 Polluters Index).
If AK Steel hopes to survive in the twenty-first century as a major player in the steel
industry, then the company must improve its environmental impact, and fast. A key success
factor for iron and steel manufacturing companies is the ability to comply with government
mandated environmental impact requirements (IBIS: Competitive Landscape). The EPA
announced on June 2, 2014 that it aims to slash power plant CO2 emissions 30% below 2005
levels by 2030 (Magill, EPA Aims To Slash Power Plant CO2); other heavy industries should
expect to see similar requirements. “In the event the EPA’s tailoring rules or if similar
regulations are upheld, the Company likely will suffer negative financial impact over time as
a result of increased energy, environmental, and other costs in order to comply with the
limitations that would be imposed” (2013 AK Steel 10-K).
While there are high barriers for market entry, other established firms are also
recognizing the need to reduce their impact on the environment. The days of wanton
government oversight on business operations are over and firms risk absorption into more
compliant firms if they fail to comply with environmental protection mandates. A Perfect
example was with Union Carbide when a chemical leak in Bhopal, India forced the company
to liquidate its shares before being bought by Dow Industries in 1999 (Warren, Dow
Chemical to Acquire Union Carbide).
Another problem that AK Steel faces is the rising costs of raw materials procurement
that go into its production processes due to environmental regulation. AK Steel aims to
8
deliver its products on time, but environmental regulation mandates have limited the supply
of raw materials, affecting input prices for production; financial performance is adversely
affected and risk of delays in AK Steel’s supply chain are increased. As developing countries
such as China and India advance their own environmental protection policies, economically
developed countries of the twentieth century will no longer be able to freely acquire
unregulated natural resources. This problem is of high importance and low to medium
urgency.
Developing countries are beginning to limit how their firms can openly sell raw
materials without government oversight. Instead, government institutions are protecting their
own natural resource interests with future economic sustainability in mind. For example,
exporters such as the Indian state of Goa are “Under a Supreme Court ruling issued… mining
companies need to apply for a renewal of their mining leases, but that is not the only hurdle,
as output initially will be restricted to 20 million metric tons a year and as other
governmental approvals will be needed before production can restart” (Mukherji, India’s Iron
Ore Exports). This problem will only become more pronounced as the developing world
modernizes social and environmental policies.
AK Steel recognizes this growing trend and has developed a strategy that involves
investment in domestic private raw materials holdings. In the past, AK Steel has been able to
freely purchase raw materials from global suppliers, but now the company recognizes the
need to acquire stakes in metal ores and coal. These investments have minimalized volatile
market pricing that contributes to one of AK Steel’s highest expenses. “AK Steel bought 4.8
million tons of iron ore pellets in 2013 and expects to purchase approximately 6.1 million
tons in 2014” (2013 AK Steel 10-K). “AK Steel’s raw materials strategy attempts to mitigate
increases in raw materials costs by increasing spot market prices of its products and variably
9
pricing its products with contract customers to allow the company to adjust prices in response
to rising costs of certain raw materials and energy, including iron ore” (2013 AK Steel 10-K).
The data in table 2 shows how AK Steel’s hypothetical predictions for decreases in
raw materials hedge market prices as of December 31st, 2013 for key raw materials of
production could affect pre-tax income (2013 AK Steel 10-K). If AK Steel is able to lower
the prices that it pays for raw materials through its raw materials investment strategy, then
the company will be sure to improve financial performance and satisfy company
stakeholders.
Another problem is that foreign steel imports into the United States are steadily rising
due to high domestic environmental regulation relative to less developed countries. Stewart
et al. (2014, 6) report that domestic demand of steel has seen stagnation while import supply
has increased 12.3% from 28.5 million tons in 2011 to 32 million tons in 2013. If foreign
imports continue to rise, domestic market prices are forecasted to fall. Table 2 shows that AK
Steel will incur a loss in income because the business will be forced to sell its finished goods
at lower market prices while still paying relatively more than foreign producers to maintain
environmental compliance.
While the need to protect domestic markets from foreign competition seems apparent,
AK Steel’s power to influence foreign environmental regulations is limited. Firms such as
Table 2: Effects of Hypothetical Decreases in Hedge Market Prices on AK Steel’s Pre-Tax Income
10
Effect on Pre-tax Income (Millions)Commodity Derivative 10% Decrease 25% DecreaseNatural Gas 1.2 3Nickel 0.5 1.2Zinc 1.1 2.8Iron Ore 2.3 5.8Hot rolled carbon steel coils -4.70 -11.60
AK Steel may be able to engage in lobbying activities to create new trade remedies for less-
regulated markets of foreign steel imports, but attempts at deregulating domestic
environmental policies will only hurt stakeholders that live around AK Steel’s plants of
production and will be seen as regressive business policies by watchdog organizations.
Currently, import tariffs range from 1.1% to 10%, but if American lawmakers decide to
expand these trade remedies towards foreign imports, trade organizations such as the
European Union threaten counter-tariffs against US Steel producers (Operating Conditions).
Agreements between international trade organizations on environmental policies can clear
these types of stalemates. This problem is of medium to high importance, low urgency.
AK Steel needs to improve its environmental performance in order to reduce its
environmental compliance costs. Failing to comply with government standards can adversely
affect financial performance that stakeholders depend on. Equally important, failing to
comply will lead to a lower quality of life for its indirect beneficiaries living near locations of
production. While AK Steel is a heavy polluter, it has still managed to lower its position on
the list of 100 toxic air polluters from 49 (Toxic 100 Air Polluters 2012) to 61 (Toxic 100 Air
Polluters 2013). By further implementing measures to reduce its environmental impact now,
the company can position itself for sustainable business growth in the long run.
Uncover
The most important and urgent problem that AK Steel now faces is changing
environmental regulations that affect normal business operations. Increased environmental
regulation is entering the realm of normal business operations as sustainable business
practices are weighed as new factors of economic success. Corporate social responsibility is
now normal for business operations, and companies that do not put this into consideration
risk negative externalities.
11
Modern society has a tremendous stake in successful industrial steel operations, but
that does not mean that it can allow the industry to go unrestricted. While steel production
was focused in Europe and the US during the 19th century, foreign producers now are now
dominant as developed nations look to reduce greenhouse gas emissions and toxic pollutants.
Companies such as AK Steel do not have the freedoms to produce that they once did. Figure
1 illustrates main causes of AK Steel’s poor environmental performance and provides some
context for why these causes have arisen.
Figure 1: Fishbone Diagram Explaining Possible Causes of AK Steel’s Poor Environmental Performance
12
Cause One: Inefficiencies in Production
Juran’s Law states that 15% of process inefficiencies are due to human fault and 85%
of inefficiencies are because of the process itself. This means that AK Steel has a chance to
effectively improve its environmental impact by simply implementing improvements to how
it already produces steel.
Hong Li and J. Shang (2037, 2001) purport that one of the best methods of reducing
the environmental impact of steel production is by redesigning processes that coordinate
production schedules, lowering factory run times, which in turn lowers greenhouse gas
emissions and toxic pollutants. Additionally, improving production processes can achieve
this goal with minimal investment in new capital. Lin and Moodie (1989) developed a
hypothetical approach to hierarchal production process management in figure 2
corresponding to the Purdue Laboratory for Applied Industrial Control (PLAIC) material and
energy network (Appendix A) (Figure 3) (Williams 1985). This process is dictated by a
master production schedule (MPS) that establishes a plan to coordinate every piece of
processing equipment. Production facilities can benefit by satisfying production needs while
minimizing industrial activity; energy consumption is lowered and work in progress is
reduced.
Figure 2: Correspondence Between Line and Moody’s Hierarchy
13
This approach fits easily into basic plant management and control structures, but Li
and Shang (2037, 2001) purport that this model lacks considerations of multi-plant
operations when individual inputs are aggregated into finished goods. This approach might
be useful for individual plants, but this process does not account for industrial inter-
dependencies that are common with companies such as AK Steel.
A drawback of this solution is that vertically integrating processes of streamlined
production activity in a single facility can impact the output capabilities of all factories that
depend on coordinated aggregate production. AK Steel may successfully reduce its
environmental impact and energy costs by implementing this solution, but part of AK Steel’s
mission is to deliver its products on time and the company risks major disruptions in its
supply chain. One small hang-up can potentially delay AK Steel’s entire operation.
Cause Two: Lack of Innovative Technologies
A second approach to reducing AK Steel’s environmental impact can be considered
by investing in new greener technology, which would lessen the company’s raw material
procurement impact on the environment. This solution may entail high capital costs, but AK
Steel would benefit from being able to recycle inputs of production such as pressurized gas
and scrap steel. Addressing AK Steel’s environmental compliance in this manner would also
minimize the risk of production interruptions that could arise from cause 1.
Pardo and Moya (113, 2013) report a newly proposed approach to European steel
manufacturing that considers long-term performance of steel manufacturing plants through
2030 in Europe. The EU has set a series of climate change and energy targets to be met by
2020, the 20-20-20 targets: a 20% reductions of greenhouse gas emissions below 1990 levels,
a 20% energy consumption from renewable resources, and a 20% reduction in primary
energy use.
14
The implementation innovative technologies (ITs) can substantially reduce
greenhouse gas emissions and energy consumption. ITs have been implemented elsewhere in
the world, but still have yet to reach Europe and North America. This will change as R & D
firms develop cheaper ways to engineer the next generation of plants.
Pardo and Moya (120, 2013) use figure 4 to illustrate how implementing ITs in
Europe is expected to reduce energy consumption (PJ) and the release of greenhouse gases
(CO2). Two periods can be identified: 2010 to 2020 where best available technologies are
currently implemented and ITs are economically unfeasible and 2021 to 2030 when a new
generation of ITs are expected to enter market: Corex/Finex Ironmaking, MIDREX, and
EnergIron/HYL are examples of technologies that are currently being developed for the next
generation of steel production.
Figure 4: Total direct energy consumption and total direct CO2 emissions on EU-27 Iron and Steel Associated Power Plants
MIDREX Industries specializes in production plants that combine direct-reduced iron
(DRI) pellets with scrap steel at lower cost than using scrap steel alone. Likewise, AK Steel
stands to benefit from a partnership with an engineering firm such as MIDREX. In 2011, AK 15
Steel formed Magnetation LLC., a joint venture with Magnetation, Inc., as part of its raw
materials investment strategy. Magnetation, LLC. operates plants that take legacy iron ore
stockpiles in Minnesota and convert them into direct-reduced iron pellets.
A major drawback for this approach is that capital investment for IT plants are
expensive, as was the case when a deal was made in January 2013 for a $1 billion DRI plant
for Big River Steel, LLC (Brantley, $1 Billion Steel Mill Announced). The last operational
DRI plant in America closed in 2009 and while there are plans for other steel producers to
build two DRI plants, developing new steel manufacturing technologies can be costly. This
drawback can be mitigated, as DRI technology becomes more ubiquitous, which Pardo and
Moya (2013, 117) predict by 2020.
DRI plants use natural gas to strip oxygen from iron ore while utilizing various
engineering processes that recycle gas, rather than releasing massive amounts of CO2 into the
atmosphere. On top of the benefit of lower greenhouse emissions, coal is not used in the
production process. If AK Steel can reduce its dependence of coal, lowering the risk of
release of toxic pollutants, as was the case with Duke Energy when managers failed to
recognize catastrophic failures that led to the release of coal ash near Wilmington, N.C. (AP:
Judge: Coal Ash Lawsuit).
If AK Steel implements a DRI plant in its operations, it will take a big step towards
reducing its environmental impact by reducing greenhouse gas emissions, with no risk of
toxic coal pollution in its DRI plant. Additionally, AK Steel can benefit in its raw materials
procurement activities. DRI smelting plants boast innovative technologies that recycle gas for
repeated use and are capable of utilizing scrap steel. This will help AK Steel cut costs as
foreign governments move to develop their own environmental protection mandates to
protect natural resources.
16
The cause and effect diagram in figure 1 shows that this solution would hit two birds
with one stone because AK Steel would reduce its release of environmental pollutants and
would tackle a new means of raw materials procurement through recycling. Steel production
possesses the capability to adopt sustainable business practices, but such moves cannot
happen overnight.
Cause Three: Discrepancies in Foreign Climate Policy
This cause addresses poor environmental performance on an international scale that
does not directly involve internal business dynamics. Possible trade protectionism can benefit
domestic markets with high climate regulation costs. The expansion of foreign steel
manufacturing after the Great Recession coupled with soft environmental protection abroad
has put American firms like AK Steel that operate under a stricter set of laws at a
disadvantage to less-regulated foreign industry. (AK Steel SWOT Analysis).
The US is slated to export just $15.8 billion in steel products, but there is a foreign
import supply of $33.7 billion expected for 2014 (IbisWorld: International Trade). This $17.9
billion steel trade deficit has led to falling prices of manufactured steel. Stewart et al. (2014,
17) report that domestic steel producers have absorbed net losses totaling $3.6 billion in four
out of the last five years (2009-2013) in Figure 5.
Steel producing companies such as AK Steel have little say in global trade, but they
still have options. Lobbying for reduced environmental policies is regressive and violates the
company’s vision to operate ethically. However, AK Steel can still work with government
institutions to increase protectionism for domestic steel manufacturers while companies
continue to recover from the financial crisis. Domestic trade remedies are already in place,
but the US government can weigh new carbon tariffs relative to a country’s handling of
environmental issues.
17
Figure 5: U.S. Steel Producers Net Income & Income as a Share of Net Sales, 2003 – 2013
The drawback with this solution is that emerging nations develop environmental
policies at their own pace. Foreign environmental policies cannot simply be instated by the
US overnight, and even the US sometimes disagrees with international climate standards, as
was the case with the Kyoto Protocol. Other nations also possess the ability to develop
counter-tariffs against the US if carbon tariffs are implemented. The best way to address the
effects of foreign advantage relative to environmental regulation is through multilateral trade
agreements so that all parties are satisfied with respect to industrial production and the
handling of the environment.
Solve
Investigating a diverse range of solutions for a problem is the key to successfully
solving it. A quickly implemented solution may seem inviting, but is only necessary if a
problem requires immediate attention. Failing to consider long-term implications could result
in possible failure of fixing the problem. AK Steel is a solid industry that has survived for
one hundred and fifteen years. Likewise, long-term solutions were favored because AK
Steel’s problem was not critical to immediate operations of the business. All three decisions
considered how industrial steel production would evolve for years to come. Given the high 18
cost of market entry, new competitors are unlikely to threaten AK Steel. The global market
and government regulation are AK Steel’s biggest concerns and decisions to improve their
environmental responsibility reflect that.
Cost CSR Time to Implement
Reliability Long-Term Savings Score
Process Improvement 80 80 100 50 80 76 |||||||||||||||
DRI Investment 60 100 60 100 100 89 |||||||||||||||||||||||
Lobby for International Trade Protection 100 60 85 75 90 82
||||||||||||||||||||
The first option, to improve production planning, was not feasible because of
logistical constraints on the inter-dependencies of AK Steel’s plants. Initial cost might be a
neutral factor in going this route, but a failure in any of AK Steel’s facilities would affect the
company’s entire supply chain. Caruana and Einav (2014, 18) show that modern steel
producing firms have a financial incentive to exaggerate preproduction targets to account for
declines in real production as production nears. If AK Steel were to hire a consulting firm to
develop a refined production process that considered reducing energy consumption, the
company wouldn’t have as much flexibility in supply to meet a volatile market demand that
is characteristic of the industrial steel goods market. Hong Li and J. Shang (2037, 2001)
investigate hypothetical financial and environmental benefits of a just in time approach to
individual facility planning, but potential bottlenecks involved in individual inputs on facility
production planning negate the benefits of cheap and quick implementation costs.
Lobbying the US government to impose foreign carbon trade remedies for less-
regulated foreign steel industries was flawed because individual companies such as AK Steel
Table 3: Weighted Decision-Making Matrix
19
are unable to greatly influence international trade. Results would be too obscure to measure
success and company resources would be wasted trying to change something that can be
speculative at best. Foreign industry in developing countries may benefit from a less
restrictive environmental protection model, but AK Steel holds little influence on
macroeconomic dynamics of international trade. US steel producers operate essentially at the
mercy of commodity markets. AK Steel may possess the ability to buy out other firms to
increase its global footprint, but presents a whole different set of issues. Cole, Elliott, and
Okubo (2010, 13) found that there is a statistically significant3 relationship between foreign
industry’s propensities to agglomerate (group together) in developed countries that attract
cheap foreign imports due to the domestic manufacturers’ inability to compete because of
stricter environmental standards. Companies that operate in developing nations benefit from
lower environmental regulations in their respective regions while still liberally importing
goods into the US market to undermine prices. There is little that AK Steel can do to solve
this environmental problem on its own. Resources would be better spent on directly
implementing internal solutions.
The best available solution that AK Steel can implement to improve environmental
responsibility is to invest in innovative green technologies. Investing in new technologies can
address environmental and financial factors of raw material procurement and also help
reduce CO2 and toxic pollutants. While capital investment is high, this solution would
position AK Steel for long-term sustainable growth and reduce externalities that adversely
affect stakeholders.
3 The Spearman correlation coefficient between ENVREG and AGGLOM is 0.083 (p-value 0.027)
20
Pardo and Moya (2013, 125) find that by 2030, top gas-recycle furnace
implementation can reduce CO2 emissions by 15% given current technological projections,
as illustrated in figure 6. AK Steel is in a great position now to invest in green technologies.
The recent natural gas boom, a diverse selection of next-generation production processes, and
industry expansion into materials recycling mean that opportunity is knocking for those that
are willing to answer the door.
Figure 6: Evolution of the Specific CO2 emissions for the Integrated Production Route for the Scenarios of the EU-27 Iron and Steel Industry up to 2030
Build
Ethical Screening
Climate change and environmental sustainability are at the forefront of current
government policies. Industrial manufacturing has always responded to new standards set by
environmental institutions such as the EPA. “With respect to release and remediation of
hazardous substances, AK Steel unfortunately faces challenges from the government”
(AK Steel Holding Corporation SWOT Analysis). Multiple EPA acts have hindered AK
21
Steel’s operations, which will require major compliance cost in order to curb pollution.
The company recognizes the need to develop Corporate Social Responsibility, which it has
yet to accomplish (2013 AK Steel 10-K).
The global community cares about climate change and international institutions are at
the forefront of this development. The United Nations Development Program (UNDP) has
set a series of development goals by 2015, one of which is ensuring environmental
sustainability. Unfortunately, “Environmental sustainability is under severe threat,
demanding a new level of global government cooperation” according to the UNDP (MDG
Report 2013).
As natural resources used in production diminish and pollution increases, companies
will be faced with need to adapt to sustainable business practices. Mining production has
decreased from $75.8 billion in 2012 to $74.3 billion in 2013 (USGS, 7). If this reduction
becomes a trend, AK Steel will have a financial incentive to develop sustainable business
operations through raw material recycling.
This solution is ethically best because it shows that AK Steel is actively pursuing
greener business practices. Company stakeholders might consider improvements in current
production processes as not doing enough to improve environmental responsibility. Also,
ethically speaking, even if AK Steel lobbies the government to impose carbon trade
remedies, lobbying for corporate interests usually carries a negative connotation. AK Steel
can certainly reduce its environmental impact by adopting new sustainable technologies, with
the added benefit of long-term cost reductions to environmental compliance and procurement
of raw material
Cost vs. Benefit
22
Steel manufacturing incurs heavy costs of capital investment and adopting a new
generation of production plants can be a heavy burden on AK Steel. It is hard to tell exactly
how much an individual plant would cost due to a large amount of factors, but AK Steel can
look at the costs of other plants that have already been produced. A plan to construct a DRI
plant for $1 billion in Arkansas was announced in January 2013 when a deal was made in
January 2013 for a $1 billion DRI plant for Big River Steel (Brantley, $1 Billion Steel Mill
Announced). DRI plants could be an expensive initial investment, but they utilize natural gas,
which has seen a recent resurgence. The cost associated with retrofitting AK Steel’s factories
can be expensive, but the company operates in a solid industry where long-term benefits are
valued over short-term solutions. Given AK Steel’s solid one hundred and fifteen year
history, a capital investment of this magnitude can benefit the company for years to come.
Achieve
AK Steel needs to first look into hiring a consulting firm to develop a plan that fits
next-generation production plants capabilities into AK Steel’s current operations. AK Steel
can hire Dastur engineering and power plant consultancy services for this step of the process.
Dastur is internationally recognized and has a track record for innovation by pioneering
direct reduction technologies in 1975 (Heritage: Journey so far). AK Steel may specialize in
the operation of its steel mills, but it certainly has relatively little knowledge integrating new
innovative technologies into its current production plans.
Next, AK Steel needs to decide which company will design and build their plant.
Corex/Finex Ironmaking, MIDREX, and EnergIron/HYL are examples of firms that are
currently developing the next generation of steel plants using DRI technology. Due to the
many factors that go into implementing new production plants, AK Steel can take its findings
from Dastur Consultants on the needs of the company and get price quotes similar plants. Big
23
River Steel’s $1 billion plant in Arkansas or Nucor’s $750 million plant in Louisiana can be
used as early estimate figures.
Once price quotes are obtained, AK Steel just needs to come up with the funds for the
project. This can be done by selling company stock, seeking funding from local economies
that stand to benefit from a new production plant, or by selling their old inefficient factories
that hurt the company’s environmental compliance. A timeframe for construction is highly
variable because every production facility is different. DRI development projects have many
factors that influence construction times. Water and land access, the type of energy
consumed, and AK Steel’s current integrated production capabilities.
A year upon completion, a newly formed sustainability committee can conduct an
analysis of results. The team can investigate whether a statistically significant relationship
can be found between the adoptions of innovative technologies and cost savings from
environmental compliance. The team should measure:
Production results
Cost of saved materials from recycled steel and gas
Emission results
Environmental compliance
Then the team could suggest further implementing DRI technologies to its operational
facilities if there is a noticeable reduction in cost savings by environmental compliance
standards.
Conclusion
Environmental compliance is the most serious issue facing the US Steel industry and
AK Steel needs to develop a proactive business strategy. Implementing innovative
technologies such as a new generation of DRI plants will allow AK Steel to improve its
24
environmental compliance with government standards, which will save it money in the long
run. Additionally, AK Steel can tap a growing steel recycling industry as its technology
improves. On top of that, AK Steel will be able to reduce environmental pollution, and show
to the world that it is willing to take steps to help the environment for generations to come.
Appendix A
Figure 3: Material and Energy Network of Iron, Steel, and Gas Products in an Integrated Steel Company
25
Bibliography
"AK Steel." Corporate Profile. AK Steel Holdings, n.d. Web. 18 Apr. 2014. "AKS Balance Sheet | AK Steel Holding Corporation Co Stock - Yahoo! Finance."
AKS Balance Sheet | AK Steel Holding Corporation Co Stock - Yahoo! Finance. Yahoo! Finance, 31 Dec. 2013. Web. 18 Apr. 2014.
"AKS Income Statement | AK Steel Holding Corporation Co Stock - Yahoo! Finance." AKS Income Statement | AK Steel Holding Corporation Co Stock - Yahoo! Finance. Yahoo Finance, 31 Dec. 2013. Web. 18 Apr. 2014.
"AK Steel." Key Values. AK Steel Holdings, n.d. Web. 18 Apr. 2014. "AK Steel." Our Vision. AK Steel Holdings, n.d. Web. 18 Apr. 2014. "AK Steel Holding Corporation SWOT Analysis." EBSCOHOST. MarketLine, 4
Nov. 2013. Web. 17 Apr. 2014. <http://web.a.ebscohost.com.proxy.lib.pdx.edu/bsi/pdfviewer/pdfviewer?sid=b63cee62-dae3-498e-a751-aa9b67d480af%40sessionmgr4002&vid=4&hid=4212>.
AP. "Judge: Coal Ash Lawsuit in NC Can Move Forward." Newsobserver.com. The News & Observer Publishing Co., 10 June 2014. Web. 10 June 2014. <http://www.newsobserver.com/2014/06/10/3925542/judge-coal-ash-lawsuit-in-nc-can.html>.
Brantley, Max. "$1 Billion Steel Mill Announced for Mississippi County." Arkansas Blog. Arkansas Times, 29 Jan. 2013. Web. 2 June 2013. <http://www.arktimes.com/ArkansasBlog/archives/2013/01/29/1-billion-steel-mill-announced-for-mississippi-county>.
Carter, Mark, and Lance Turner. "Big River Steel Announces $1.1B Mill for Osceola, Will Employ 525." Arkansas Business, 29 Jan. 2013. Web. 2 May 2014. <http://www.arkansasbusiness.com/article/90461/mike-beebe-set-to-announce-1-billion-business-deal?page=all>.
Caruana, Guillermo, and Liran Einav. "Production targets." RAND Journal of Economics 39.4 (2008): 990+.
Business Insights: Essentials. Web. 11 June 2014. Cole, Matthew, Robert Elliot, and Toshiro Okubo. "Trade, Environmental
Regulations and Industrial Mobility: An Industry-Level Study of Japan." Ecological Economics 69 (2010): 1995-2002. Print.
Dash, Jayajit. "Dastur & Co to Conduct Study for Mega Steel Projects." Business Standard. N.p., 7 Sept. 2010. Web. 24 May 2014. <http://www.business-standard.com/article/companies/dastur-co-to-conduct-study-for-mega-steel-projects-110090700091_1.html>.
Dastur. "Journey So Far." Heritage. Dastur, 2014. Web. 20 May 2014.
26
<http://www.dastur.com/content-188-Heritage-Journey>. Finance Department. COMPREHENSIVE ANNUAL FINANCIAL REPORT. Rep. no.
45069-3840. West Chester: West Chester Board of Trustees, 2009. Print. Goddard, Leah. Iron and Steel Manufacturing in the US: Competitive Landscape.
Publication no. 33111. Los Angeles: IbisWorld, 2014. US Industry Reports. Web. 1 June 2014. <http://clients1.ibisworld.com.proxy.lib.pdx.edu/reports/us/industry/competitivelandscape.aspx?entid=569#KSF>.
Hong Li & J. Shang (2001) Integrated model for production planning in a large iron and steel manufacturing environment, International Journal of Production Research, 39:9, 2037-2062, DOI: 10.1080/00207540110035200
Lin, C. W. and Moodie, C. L., 1989, Hierarchical production planning for a model steel manufacturing system. International Journal of Production Research, 27, 613± 628.
Magill, Bobby. "EPA Aims To Slash Power Plant CO2 by 30 Percent." Climate Central, 2 June 2014. Web. 7 June 2014. <http://www.climatecentral.org/news/epa-co2-rules--power-plant-17506>.
Mukherji, Biman. "India's Iron-Ore Exports Still Face Hurdles." Wall Street Journal. N.p., 22 Apr. 2014. Web. 27 May 2014. <http://online.wsj.com/news/articles/SB10001424052702304049904579516932477592484>.
PERI. "Toxic 100 Air Polluters." PERI: Toxic 100 Air Polluters 2012. Political Economy Research Institute, 2013. Web. 15 May 2014.<http://www.peri.umass.edu/toxicair_current/>.
PERI. "Toxic 100 Air Polluters." PERI: Toxic 100 Air Polluters 2013. Political Economy Research Institute, Aug. 2013. Web. 15 May 2014.
PERI. "Greenhouse 100 Polluters Index." PERI: Greenhouse 100 Polluters Index. Political Economy Research Institute, June 2013. Web. 25 May 2014. <http://www.peri.umass.edu/greenhouse100/>.
Stewart, Terence P., Elizabeth J. Drake, Stephanie M. Bell, Jessica Wang, and Robert E. Scott. Surging Steel Imports Put Up to Half a Million US Jobs at Risk. Briefing Paper 376. Washington, DC: Economic Policy Institute, 2014. EPI - Trade and Globalization. Web. 20 May 2014. <http://www.epi.org/publication/surging-steel-imports/>.
UNDP. The Millennium Development Goals Report. Rep. no. 3-26318. Vol. 2013. New York: United Nations, 2013. Print.
United States. Securities and Exchange Commission. Form 10-K. By Roger K. Newport. West Chester: AK Steel Holdings, 2014. XNYS:AKS AK Steel Holding Corporation Annual Report. Morningstar, 21 Feb. 2014. Web. 17 Apr. 2014.
Warren, Susan (5 Aug 1999). "Dow Chemical to Acquire Union Carbide --- Deal, Valued at $8.89 Billion, Would Position Firm to Challenge DuPont". Wall Street Journal A3.
Williams, T. J. (ed.), 1985, Design of Hierarchical Control Systems: With Special Reference to Steel Plant Operations (PLAIC and Elsevier).
27