Kentucky Electric Steel, Inc. History

Company Perspectives:

Our mission is to be a world class bar mill, world class in product quality and customer service.

Company History:

Kentucky Electric Steel, Inc. is a steel minimill that melts scrap and turns it into bar flats. The bar flats, which are produced to a variety of specifications, are of two basic types: special bar quality (SBQ) and merchant bar quality (MBQ). Sales of SBQ bar flats account for approximately 80 percent of the company's total sales. These bars, which are manufactured in more than 2,600 varieties, conform to precise customer-ordered specifications in order to ensure that the customer's end product meets performance requirements. The remainder of Kentucky Electric's sales come from MBQ bar flats, which are used for more generic applications, such as metal buildings.

Kentucky Electric Steel's bar flats are used in a number of niche markets in the United States, Canada, Mexico, South America, and England. The majority of its sales are made to manufacturers of the leaf-spring suspensions used in trucks, trailers, minivans, and sport utility vehicles. Other major customers include steel service centers, truck trailer producers, and cold drawn bar converters--companies that draw steel bars through cutting dies to create bars of a specific tolerance.

1960s: From Scrap Yard to Minimill

Kentucky Electric Steel was formed by the Mansbach family, of Ashland, Kentucky--a small community in the northeastern part of the state near the Ohio border. The Mansbach's original business was a scrap metal yard. In 1963, however, the family decided to expand its scrap operation. Forming Kentucky Electric Steel Corporation, they began constructing a steel minimill.

The Mansbachs' decision to enter the steelmaking business was a timely one. Since 1960, minimills had been claiming an increasingly large share of the total domestic steel output. The smaller minimills, which made their steel from melted scrap, had several advantages over the large integrated steel makers, which produced steel by melting and processing iron ore. Operating on a much smaller scale and offering far fewer products, minimills had lower labor costs and higher productivity then the big steel makers.

Construction of the Kentucky Electric mill was completed in 1964; in 1965 the company began manufacturing its first products--steel rounds. The original mill was a fairly small operation. All the metal was melted in a single 20-ton electric arc furnace, and the molten metal was then poured into individual molds in order to shape it. After cooling, the metal ingots were run through a one-stand rolling mill, which compressed and refined them. The rolling mill was operated by workers called 'tongmen,' who fed the ingots through, then pulled them out, turned them, and sent them back through again. Once they had been rolled, they were sawed, stacked by hand, and banded as finished product.

In 1968, Kentucky Electric expanded its melting capacity by adding a second 20-ton electric arc furnace. It also added a baghouse--an air-pollution control device that captured particulate from waste combustion gases in filter bags. Even more significantly, the company began planning to install a two-strand continuous caster. The continuous caster cast molten steel into continuous strands, replacing the process of pouring the metal into molds. The new caster allowed the company to offer more flexibility in the lengths of its products.

The next item on the list of upgrades was the rolling mill. The company's improvements to the rolling mill meant that the bars no longer had to be hand-fed, cutting down on labor and greatly enhancing efficiency. With its new equipment and expanded capabilities, Kentucky Electric was able to add MBQ flat bars to its product line. Although the company was successful, in the late 1960s the Mansbachs sold it to a California-based conglomerate.

1970s: New Products, Facility Upgrades

In the late 1970s, Kentucky Electric's new owners decided to begin production of SBQ flat bars. Producing SBQ bars was a much more involved process than producing MBQ bars or any of the mill's other products. To produce SBQ flat bars, the mill had to be able to add a variety of alloys to the metal to make different grades of steel. It also had to have a variety of specialized equipment in order to assure precision in the product's dimensions and chemistry.

The decision to expand into SBQ flat bars led to a $30 million improvement program, which the company called 'Project '80.' Some of the Project '80 upgrades included the addition of a third strand to the continuous caster, two new 50-ton electric arc furnaces, and new mill stands to expand and complete the finishing mill. The project also called for a quality control testing facility, complete with state-of-the-art spectographic computer-controlled equipment. The addition of new process-control computers expanded the mill's metallurgical capabilities and maintained tighter tolerances.

In the years following Kentucky Electric's completion of Project '80, the company continued to upgrade the mill in a piecemeal fashion. Several new pieces of equipment were installed, which further improved efficiency and enabled greater precision in production. In addition, the company purchased 40 acres of land adjoining its existing facility, in preparation for anticipated future growth.

1980s: Ownership Change

The early and mid-1980s were difficult times for U.S steelmakers. High labor costs, overcapacity, and competition from imports had combined to depress profits industrywide. In addition, the U.S. was seeing a sharp decrease in the use of steel altogether; between 1978 and 1985, domestic consumption of rod and bar steel dropped by 20 percent. Although steel minimills had for years been able to operate more profitably than large integrated mills, by the mid-1980s they, too, were feeling the effects of the soft market. Unable to remain profitable, many began closing down.

Kentucky Electric Steel was no exception. In January 1985, the company's parent, Triton Group Ltd., discontinued operation of the mill--and a few months later, announced that it was closing the operation permanently. In an August 2, 1985 press release, Triton's President and CEO Ralph Briscoe said that conditions in the domestic steel industry had put Kentucky Electric in a non-competitive condition. He also announced that Triton was seeking a buyer for the mill.

A year later, Triton found its buyer. A group of four former managers of a steel mill in Newport, Kentucky, purchased the closed-down minimill for $7.3 million. Kentucky Electric was the second such mill acquired by the four partners. In 1981, they had banded together to acquire Newport Steel Works--their former employer--after its owner shut it down. After acquiring Kentucky Electric, the partners formed a holding company, NS Group, for its subsidiaries.

The company's new owners proved adept at turning around troubled steel mills. After absorbing $1.9 million in start-up costs to get operations up and running again, NS Group managed to return the mill to profitability within a year. In the first three quarters of 1987, Kentucky Electric's steel bars produced a $9 million profit on sales of $61.3 million. NS Group's earnings mounted throughout 1987, and in March 1988, the company went public. Its IPO generated $46 million--almost $10 million more than it had anticipated.

1990s: Independence

In the early 1990s, the NS Group's fortunes reversed. The company posted losses in 1991, 1992, and 1993, and accrued substantial debt. In 1993, attempting to improve its financial situation, NS decided to spin off its Kentucky Electric subsidiary as a public company. The new company, Kentucky Electric Steel, Inc., was capitalized in an initial public offering on October 6, 1993, and began trading on the NASDAQ under the ticker symbol KESI. At the time of its spinoff, Kentucky Electric had sales of approximately $90 million, net earnings of $5.5 million, and around 450 employees.

A year after becoming an independent company, Kentucky Electric initiated an ambitious $26 million capital improvements program designed to greatly expand the plant's capacity and modernize its operations. The program, called 'Project '94,' was divided into two phases.

Phase I, which was completed in 1995, boosted capacity in several aspects of the company's steelmaking process. A fourth strand was added to the melt shop's continuous caster, increasing its casting capabilities to approximately 400,000 tons. A new billet transfer line allowed the mill to transport larger-sized bars to storage, and new rolling mill equipment enabled the completion of 400,000 tons of finished products. Project '94 also provided a new cooling bed that was 2.7 times larger than the previous one, and a new shear with a 54-inch cut and a 1,000-ton capacity. The previous shear had a 36-inch cut and a 400-ton capacity. Not only did the improvements allow KESI to produce more product, but they also allowed it to expand the size range of its bars. Before Project '94, the company was able to produce bars up to two inches in thickness and eight inches in width; after the project's completion, it was capable of making bars up to three inches thick and 12 inches wide. KESI hoped that its expanded product size ranges would serve to both enlarge the company's share of existing markets and enable it to enter new ones.

With the new equipment in place, the mill was able to finish more product in its rolling operation than it could produce in its melting shop. The company took steps to remedy that imbalance in Phase II of Project '94, which involved the installation of a ladle metallurgy station. The ladle metallurgy station,

1964:The Mansbach family opens Kentucky Electric Steel Corporation.

1968:The Mansbachs sell Kentucky Electric to a California-based conglomerate.

1980:Kentucky Electric embarks on Project '80, a $30 million upgrade program.

1985:Unable to remain profitable in adverse market conditions, Kentucky Electric is shut down.

1986:Kentucky Electric is purchased by Newport, Kentucky-based NS Group.

1993:NS Group spins off Kentucky Electric as a public company.

1994:Kentucky Electric begins Project '94, another capital improvements program designed to enhance capacity and product line.

which began start-up operations in the fourth quarter of 1996, was the step between melting the metal and pouring it into the continuous caster. In the station, the molten steel was mixed with a variety of alloys to make different grades of steel--a process that had previously taken place in the electric arc furnaces. By removing the refining cycle from the furnace, the ladle metallurgy station reduced the amount of furnace time, thereby allowing more steel to move through the melt shop in a shorter period. The station also made for cleaner, more homogenous steel, and increased the number of grades that the mill could produce. The company sold 225,800 tons of finished goods in 1996, which amounted to 87 percent of its production capacity. Earnings were $58,000, on sales of $98.3 million.

In 1997, KESI inadvertently melted some radioactive scrap in its furnaces. The error caused a 12-day shutdown in its melt shop operations while a contractor tested and cleaned the mill's ductwork and baghouse. The company lost another ten days of production that same year, when the melt shop was shut down for caster superstructure repairs. The shutdowns hurt the company's financial performance. Its sales for 1997 decreased by $3.6 million from 1996's level--and it posted a net loss of $2.6 million.

In 1998, Kentucky Electric finally saw the fruits of its Project '94 labor. As productivity in the rolling and finishing operations improved through the year, the company set records in output. Sales for the year were up by almost 16 percent over 1997, and net income was $1.5 million. The productivity gains made in the company's finishing operation, however, meant that its melt shop remained unable to keep up. While the rolling and finishing facility could output approximately 400,000 tons of product annually, the melt shop's capacity was only around 300,000.

1999 and Beyond

One of Kentucky Electric's main goals for the future was to balance its overall capacity in both melting and finishing operations at around 400,000 tons. This, obviously, meant increasing the capacity of the melt shop. Toward that end, the company had begun testing a method of adding chemical energy to the electric arc furnaces. It was also planning an overhaul of both its furnaces and a replacement of some of its melt shop equipment. The company believed that the improvements, along with the increased energy to the electric arc furnaces, would increase the melt shop's output--thereby allowing the plant as a whole to operate at its full capacity.

Much of the company's future performance, however, hinged on conditions in the U.S. steel market. As 1999 drew to a close, domestic steelmakers faced heavy competition from lower-priced imports, which were claiming an increasingly large share of the U.S. market. The flood of cheap steel from foreign producers had driven down steel prices, hurt the industry's bottom line, and caused the loss of thousands of jobs. Kentucky Electric, like many steel mills, posted losses in the first half of 1999.

It appeared possible that the import situation would be ameliorated somewhat, however. Following a series of dumping charges against foreign steelmakers, the U.S. Commerce Department and International Trade Commission ordered punitive tariffs on several steel firms' imports. The government also signed agreements with Russia and Brazil that limited their steel imports and set price levels in exchange for a suspension of dumping tariffs. Those actions, and similar ones, were likely to prove beneficial to Kentucky Electric's business, as well as to the domestic steel industry in general.

Principal Subsidiaries: KESI Finance Company.

Principal Competitors: AK Steel Holding Corporation; AmeriSteel Corporation; Bethlehem Steel Corporation; Birmingham Steel Corporation; Cargill, Incorporated; Commercial Metals Company; Nucor Corporation; The LTV Corporation; Steel Dynamics, Inc.; Steel of West Virginia, Inc.; USX-U.S. Steel Group; WHX Corporation.

Further Reading:

• Hershberg, Ben, 'Despite Steel's Woes, NS Group Forges Ahead,' Louisville Courier-Journal, December 26, 1988, p. 10B.
• Russell, Mark, 'Steel Minimills Face Difficult Times,' Wall Street Journal, September 4, 1985.
• Rohan, Thomas, 'Minimill Miracle Workers,' Industry Week, October 16, 1989, p. 31.

Source: International Directory of Company Histories, Vol. 31. St. James Press, 2000.

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