Austrian Steelmaker Offshores Production To ... Texas

testosteronepit's picture

Wolf Richter   www.testosteronepit.com   www.amazon.com/author/wolfrichter

Labor is expensive in Austria, and heavily unionized with strict work rules governing what workers can and can’t do, and with long mandated vacations, and all sorts of other welfare-state goodies, and yet the unemployment rate of 4.7% is the lowest in the Eurozone, and one of the lower rates around the world. Austria is a small industrial powerhouse, dependent on its largest export partner, Germany, to which it is, economically, joined at the hip.

Nevertheless, there are issues: shaky TBTF banks exposed to Eastern European “growth opportunities,” such as Hungary; Alpine Bau, a construction group with 15,000 employees that just went bust; Germany whose economy is stagnating; and now offshoring by the steel industry. 

The voestalpine Group, a steelmaker based in Linz, Austria, with over 46,000 employees, saw its revenues for 2012/13 decline by 4% to $15 billion. It blamed the “cooling down of the global economy,” and “dwindling momentum in Asia (especially China).” It doesn’t see a scenario that’s exactly rosy [the CEO of Siemens had sketched a similar scenario: my take.... “During The Last Crisis, We Had China,” Now We Have No One].

Like many titans, the company is under pressure to increase profits while revenues are declining. Hence the need to cut costs. One solution: offshoring to cheap countries! So the company announced in its annual report, right at the beginning, as one of the hope items, that it would undertake “its largest ever foreign investment – construction of a direct reduction plant,” not in cheap countries like China or Indonesia, but in Texas.

Now the contracts have been signed. The plant, on Corpus Christi Bay, would be built by German industrial conglomerate Siemens and consortium partner, MIDREX Technologies, a US company that was acquired by Japanese steelmaker Kobe Steel three decades ago. The plant will use the MIDREX process to produce Hot Briquetted Iron (HBI), or sponge iron, an “excellent pre-material for the manufacture of crude steel.” And at least half of the plant’s capacity of 2 million metric tons will be shipped back to Austria, to the company’s steel production sites in Linz and Donawitz.

The plant will employ 150 people. But their cost in Texas won’t differ enough from the cost of 150 people in Austria to justify the investment of $715 million – plus the cost of shipping 1 million metric tons of HBI a year to Austria. There must be another reason. And there is: “In contrast to using purely coke-based blast furnaces,” the company said, “the planned direct reduction plant will only use natural gas.”

So there are some green aspects: natural gas is “much more environmentally friendly as the reducing agent,” the company claimed. It would help the company improve its “carbon footprint” and achieve its “ambitious internal energy efficiency and climate protection objectives.” Sounds great, and it looks good on company PR materials. But it’s corporate blah-blah-blah: natural gas is available in Austria as well; no reason to go all the way to Texas.

But there’s a real reason: survival!

The price of natural gas in the US is “about one quarter of the price in Europe,” the company conceded. It would allow the company to produce low-cost HBI for its plants in Linz and Donawitz and ensure “their competitiveness in the long term.” Minus the corporate PR jargon, it would sound like this: They’d be competitive with Chinese steelmakers; they’d get to stay in business!

So one Austrian steelmaker decided to construct a plan in the US based on the availability of copious and cheap natural gas. But it isn’t the only foreign company to dip its big ladle into this resource. Since natural gas prices hit rock bottom in early 2012, a number of companies, American and foreign, have announced plans to build facilities in the US to take advantage of what they consider a natural gas nirvana – and not just those that use gas as energy, but also those that use it as feed stock for the production of chemicals and fertilizers.

That sea change came out in the annual survey by the Association of German Chambers of Industry and Commerce (DIHK). When asked about their overseas expansion plans, these German industrialists showed how their priorities were shifting: the only region in the world that actually moved up in importance was the US. In 2005, only 20% of the German companies wanted to invest in the US. By 2012, it had risen to 26%. In 2013, it jumped to 30%, the highest ever. They cited a variety of reasons, particularly natural gas [my take.... “But the Rising Star Is the USA”].

The math by these energy-starved German CEOs might get a bit twisted in the future. While the price of natural gas in the US nearly doubled since the low in April last year, it remains below the cost of production for “dry gas” wells in many areas. The industry has been bleeding. And drilling for dry gas has been curtailed drastically. But even major price increases in the US would likely pale compared to the sky-high prices in Germany, largely determined by long-term contracts with Russia’s Gazprom.

Consequences of these costs are now oozing to the surface. Germany’s recovery from the Financial Crisis was steep, and in 2011, the gloating started. They called it the German “success recipe,” a superior system that would keep the economy growing even amidst Eurozone mayhem. That optimism has endured, and stocks have hit new highs, but the economy has diverged sharply. Read....  Blinded By Optimism, German Economy Now Below Stall Speed

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JohnF's picture

Two reasons that aren't mentioned:

1) Environmental regulations and local opposition (NIMBY) basically lock out any further investment in Austria for this kind of work. The output of the plant can be used world-wide, Voest-Alpin is increasing its vertical integration.

2) Direct reduction by NG isn't just cheaper, it's also significantly more productive, which means that when energy costs increase, there remains a comparative advantage for this production method.

Voest-Alpin is one of the few European steelmakers that went heavily into specialty steels back in the day and are profitable, unlike most others in Europe. The unionization of the workforce has a marginal effect on the bottom line as the union isn't politicized and is interested in maintaining jobs in a highly competitive environment. They also have a seat on the board and hence lack the kind of extremely antagonistic relationship that unions elsewhere have with management. Works very well for them.

Nassim's picture

It makes an awful lot more sense than exporting the gas to Europe.

foofoojin's picture

large copiuse amounts of LNG in austrailia in 18 to 24 months.  

http://www.chevronaustralia.com/ourbusinesses/wheatstone.aspx

http://www.chevron.com/countries/australia/

 

"Three years after construction began on Barrow Island, offshore Western Australia, the Chevron-led Gorgon Project is on track to deliver the first shipment of LNG in early 2015.


 

 

GMadScientist's picture

Yay, let's build plant to supply product noone needs for Texan job credits; but sure, blame Austrian unions like that matters.

"The most pressing concern is an old one: overcapacity. In Europe especially, the drive to build lots of vast steelworks in the post-war reconstruction effort continued into the booming 1960s, only for demand to hit a wall in the oil shocks of the 1970s. Too little was done to adjust capacity to the meagre growth rates that followed. The financial crisis delivered the latest blow. Around half of steel output is used in construction, an industry that took a heavy battering. Steel consumption in Europe, at around 145m tonnes in 2012, is nearly 30% below its pre-crisis level and demand is still falling."

What the world, needs now...is not another idled steelmill.

CH1's picture

I hope Texas tells DC to go to hell.

falak pema's picture

comparative advantage; cheap gas and illegal hispanic labor = texas.

As the middle class dies in first world the third world invades it. Talk about vacuum cleaners! 

Some suction! 

Oligarchy is a sweet borderless game that knows no nation's name! 

NoWayJose's picture

But isn't Texas just a third world country? Rick Perry has resisted all of those labor laws, healthcare laws, handouts for doing nothing, and endless education funding that the rest of America has come to expect. But then again, maybe that's why the economy in Texas is doing better than the rest of America...

dark pools of soros's picture

huh?  15% using food stamps down there..  4million strong

 

Mongoose's picture

ya got a lil' bit o' tobacco juice runnin' outta the corner o' yer mouth after that yell, Clem

SAT 800's picture

What a farce. You give away your fuel reserves so Austrians can make money. We need new dictators, the old ones need a nap.

CSA's picture

If we dont' sell our natural resources now, we're highly likely to get nothing for them in the future (as technology makes them obsolete).  We easily have over 100 years of KNOWN natural gas reserves.

 

I thought all Zeroheads were capatlism fanatics?  After reading several comments like this, it makes me wonder.

thestarl's picture

Yeah mate frack your way to hell. 

Omen IV's picture

 

 There are enormous downstream opportunities for basic industry and millions of jobs by NOT allowing the export of the liquified natural gas  - keeping the gas price very reasonable allows more valued added to remain in usa and contributes to balance of payments correction of the deficit and therefore stronger dollar

nickt1y's picture

Moar centeral planning!

Manic by Proxy's picture

So, what you're proposing is not allowing free market flow of goods and capital. You know, capitalistic venture and trade. We should rather control such flow of commerce in a command economy fashion. And why not? It worked out so well for the former Soviet Union. I can imagine you have Obama/Biden bumper stickers and think "Forward" is a relentlessly hip and minimalist slogan.

Scro's picture

That would require forward thinking.

Mi Naem's picture

Perhaps you mean "Forward!" thinking, because that is certainly what such an export prohibition would require.   

1100-TACTICAL-12's picture

"I never could stay sober, on the Corpus Christe Bay"

                                                                (Robert Earl Keen)

 

SmittyinLA's picture

I saw a TV show on the TX steel industry, they employ a lot of ex-convicts. 

It's hot, hard, dirty, dangerous low paid work, teens flipping signs in LA make more. 

Steaming_Wookie_Doo's picture

Then not much has changed. My dad used to be a purchasing agent for a foundry in CA 1979 (they ended up moving to TX as well). Even in CA, a lot of the workers were ex-cons, bikers, etc. Probably one of the few options ex-cons have for legit work. It was definitely dangerous and hot.

Freddie's picture

Calif used to be dangerous in the 1970s with all those biker gangs and biker gang movies until Billy Jack kicked all their asses.  

If you want a good laugh - go to Amazon and read the reviews of Billy Jack movies.  He was/is a lefty loon and the movies were so bad. They loaded it up with every leftist agenda you could think of.

They had this ad campign back in the day promoting it as the people's film on TV.  Idiots with cigaratte lighter holding them up in the theater at the end of the film.  Hilarious.   It was a low budget shitty movie but it cleaned up.

Roandavid's picture

You'll notice that they didn't move their production to Pennsylvania, Ohio, New jersey, Illinois or Michigan.

sethstorm's picture

I thought ALEC was supposed to fix that three years ago.

Why does Austria hate worker friendly environments - especially ones that have the experience in this kind of industry?  Or do they share a disdain for free workers?

Has there been any movement to locate anything in those states (aside from ALEC-controlled Michigan)?  Those states aren't exactly dead in the water for not worshipping businesses as if they were The Almighty.

Roandavid's picture

Roflmfao ..... free workers ..... please, my ribs.

LostAtSea's picture

one word, Unions.  Those states are full of them.

sethstorm's picture

So is Texas, they just call them staffing agencies.

lakecity55's picture

"As pResident, I am happy to announce ALL the new steel jobs will be going to our new illegal-legal aliens. These jobs are too important to be performed by native Texans."

disabledvet's picture

drilling might be curtailed but production isn't.

Buck Johnson's picture

Come to america, you are protected and can pay your workers crap.

Manic by Proxy's picture

That would explain why Pittsburgh still has a powerful steel industry. Oh, wait......

stacking12321's picture

you might find this hard to believe, but salary is set by mutual agreement.

if you don't like the offer you get, don't take it!

 

dark pools of soros's picture

and they overspend and thus bendover for a dollar

Dareconomics's picture

Oodles of cheap, American energy will raise the profitability of domestic manufacturers and cause more international companies to consider opening facilities in the U.S.

 

http://dareconomics.wordpress.com/2013/07/10/around-the-globe-07-10-2013/

Mugatu's picture

Go Texas - Bitchez!  No state income tax, weak state government, no handgun laws - and these other states wonder why?

Up until a few years ago, you could not even get a home equity loan in Texas.  That was the only reason we came back from the texas Real Estate Depression of the 80's.  I bet a lot of people in California now wish they didn't pull all their equity out now.  

The only California legislation I wish we had in Texas is prescription pot - we got that one way wrong.

Take the hint - less is more!

PS - not trying to bag on CA since I love the state.

dirtbagger's picture

The steel company is relocating to Texas because Perry is going to confiscate the guns and the Austrians will have an inexpensive supply of scrap metal

Manic by Proxy's picture

You mean Barry is going to confiscate the guns.

ZerOhead's picture

Nothing screams "stupid" quite like producing steel from a versatile, critical. limited and soon to be peak (and not-so-cheap) resource such as natural gas rather than coal.

And if you really want to be green (and more stupid) why not just build a giant solar furnace in the Sahara?

nickt1y's picture

Sarc? Please be sarc, please. Your sarcasm may have reached such an advanced level that you sound stupid.

nickt1y's picture

Doubble post ... who looks stoopid now!

OldE_Ant's picture

Ooodles..  LMAO.  Yeah I already read a number of research reports regarding the fracking bubble which will also burst soon enough and leave a lot of players high and dry including the US consumer.

I honestly have to agree.  Want to go green hit the Sahara with a solar furnace.  Hell those Arabs could use some jobs and the shipping costs halve immediately.   What I find interesting is no comment regarding the energy required to ship the product.

 

Everything to keep doing the unsustainable BS so we can all hit the wall together.    Great plan esteemed leaders, and all the smartest dumbasses in the world.    One truely has to wonder whether humans are just full out stupid or permanently psychologically fucked up.

CheapBastard's picture

"Hecho en Tejas" is what they mean to say.

Ying-Yang's picture

I still chuckle when I buy an auto part that says "Hecho in China"

TisFU