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

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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

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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

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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.

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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.

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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

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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

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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

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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

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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

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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.

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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.

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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.

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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

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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)

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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

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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

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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

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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

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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

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