`We hold the future'.

-- An address

Addressing the 34th IISI Annual Meeting in Melbourne, Kirby Adams, President of BHP Steel, called for capacity cuts in order to stop destroying shareholder value. The industry should be focused on building value rather than capacity, and e-commerce had a vital role to

play in this, he said. Reminiscing on the recent Olympic Games in Sydney, Mr Adams remarked on the 140kt of steel used at the venues and the manner in which the opening ceremony reflected on the use of steel in general and the aptness of the song sung by the National Youth Choir; `We hold the Future'.

Australia has always played a significant role in the World Steel Industry and this is no different today, claimed Mr Adams. By the standards of many countries, it indeed has a small domestic market. Nevertheless, Australia has been a leading innovator in the global steel industry. Australia is a regular contributor to research and continuous improvement in steel making technologies, and BHP's Thin-Strip Casting Technology is just one example of many. But Australia's largest contribution to the Global Steel Industry must be in its role as a supplier of steelmaking raw materials. As a former BHP Chairman said when speaking at the 1979 IISI Conference in Australia, "If Australia is modest as a steel producer, it has no such inhibitions as a raw materials supplier to the steel industries of the world."

RAW MATERIALS SUPPLIER

And, 21 years later, those facts have come true today. But the scale of this contribution to the world's steel industry is really worth re-capping. Australia provides significant volumes in a wide range of steel-making raw materials, not just iron ore but also nickel and manganese ore and limestone. But most important, however, is the significance of the country's role as supplier of iron-ore and metallurgical coking coals. Last year, in 1999, 36% of the world's sea-borne coal trade (171Mt) originated from coalmines in Australia. In that same year, Australia dispatched 148Mt of iron-ore. This represents 37% of the sea-borne trade in iron-ore. Australia clearly features in the global steel industry, and as you know, BHP, is a major contributor to this trade.

AUSTRALIAN STEEL MARKET

Over the past 10 years, the Australian industry landscape has changed very dramatically. Only a decade ago, the industry was just emerging from a very highly regulated era called the `Australian Government's five year Steel Plan'. This had been introduced following the global industry's downturn of the early 1980s, only 20 years ago. In the early 1980s, the downturn in the steel industry happened to coincide with the dramatic run up in the price of oil, rising interest rates and raging inflation. "Let us hope that we are not repeating history", said Mr Adams.

The 1990's were a period of significant capital investment in the Australian Steel industry. BHP alone invested A$6bn in this time to rejuvenate its plant and equipment, and develop new facilities and technologies. BHP spent another $1.5bn on investments and acquisitions, including the purchase of 100% of New Zealand Steel, which was completed in 1992.

The Australian and NZ industry now consists of three steel producers. BHP Steel, OneSteel and Smorgon Steel (Fig 1). Smorgon Steel, who is an associate member of IISI, has been very busy over the past decade, developing their business year on year. Smorgon Steel has grown their share of the long products segment through both acquisitions and aggressive growth.

[Figure 1 ILLUSTRATION OMITTED]

The past decade has seen Australian Steel production remain flat at relatively consistent levels. But in September 1999, a major event took place in Australia -- that was the closure of the front end of Newcastle Steelworks. A momentous event in the history of the Newcastle community, a very difficult decision and difficult, but well-done, implementation. This closure eliminated 1.6Mt/y of capacity in Australia -- representing approximately 20% of the country's iron and steel making capacity. This also bought about a reduction in Australian steel exports and since this time the Australian Steel industry's production of long products has more closely matched domestic consumption.

At BHP, it was announced earlier this year the intention to spin off to BHP shareholders, the Australian and New Zealand long products businesses. By the time October closes, this business, which has now been named OneSteel Limited, is scheduled to be separately listed on the Australian Stock Exchange. OneSteel will be a completely separate organisation from BHP with no cross share holdings, their own board of directors and yearly sales in excess of A$3bn. OneSteel is led by Dr Bob Every former President at BHP Steel.

If we were to paint a profile of Australian Steel production at the end of this year, production has not moved much, but there are now clearly three players on the Australian continent. Through the eyes of IISI, we can see their view that is an imminent decline in Australia's steel consumption on the horizon following the boom in infrastructural and building projects for the Olympics and the strongest period of home building in the country's history.

So after a decade, the structure of the Australian Steel industry has fundamentally changed with three very strong players on deck on this continent. Now there have been implications for a whole range of people directly employed by the Steel manufacturers here, just as there have been in other countries. Early in this decade, BHP Steel alone had 25 000 employees in Australia, today, the total for BHP Steel is just under 10000, post the separation of OneSteel at the end of October (Fig 2).

[Figure 2 ILLUSTRATION OMITTED]

There have also been major reductions in tariff levels and these have vastly accelerated the impact of global competition on the Australian industry. They have made the Australian industry better. Australia is now an open market. It has high import penetration levels that hover consistently around 20% of consumption, which in many countries is high indeed.

The steel industry structure now reflects a clear distinction between the markets and the producers of flat and long products. Australian domestic steel consumption is approximately 6Mt in total. About 3.3Mt of that is in the flat products area and 2.7Mt in long products. The flat products market is served principally by BHP Steel and imported steel. The long products segment is supplied by OneSteel, Smorgon Steel and imported steel. In both cases, imports account for about 20% of demand. By the end of this year, no single producer will span all segments of the Australian Steel industry. In fact, the view is that the national boundaries are being redrawn into global alliances. And of course there are the players in the Australian distribution industry, some of which are captive of the producers, while others are independent (Figs 3 & 4).

[Figures 3-4 ILLUSTRATION OMITTED]

E-COMMERCE

What issues are attracting the attention of Australian steel executives? Like many companies, BHP Steel is very focused on the impact of electronic commerce on business and the relationship to customers, suppliers, partners in the steel industry and very importantly, BHP employees. Electronic commerce represents an enormous influence on the steel industry. At the same time it is a great opportunity to change the way business is done and change the way the Company relates to customers, employers, employees, partners, suppliers and indeed customers not yet even know about today. A question we all face is how do we deploy the capabilities of the world wide web for the benefit of all of our stakeholders? How do we successfully move commercial and consumer transactions from the real world to the on-line world? And in the process, how do we make these two worlds one and the same? As the steel industry moves toward full automation, we start with an order, or perhaps even just an idea in a customer's mind, and end with a customer's fulfillment and excitement, we have an opportunity to enhance customer relationships, lower transaction costs, and really step up the velocity in the supply chain.

BHP Steel has been working diligently over the past months developing a new web site bhpsteel.com.au which was unveiled during the Olympics and came live later in October. It is an example of e-commerce in action providing the steel industry, including both suppliers and customers, with a wealth of interactive information. This new site signals BHP's move down the path of large-scale virtual interaction with its customer. And it is one step forward towards the integration of all of the Company's business systems with those of the customers, and even their customers. At the end of the day, everyone will have the opportunity to interact with BHP Steel over the world wide web. BHP Steel wants its business customers in Australia, and perhaps even beyond, buying their Colorbond[R] roofs directly from the web. It is fair to say that high levels of on-line customer interactivity would be unfamiliar to some in the manufacturing industry, but it is Mr Adam's prediction that this will change very quickly. Just as in 1990, we would have never predicted where we stand today in the use of the web, in the next 10 years we will change ever more quickly and more dramatically. As a new executive in the steel industry, and as an Australian steel industry executive, Mr Kirby said he had seen many companies around the world begin to realise the enormous potential of this approach and to begin rethinking their business models and approach to the business market.

It is now essential for the steel industry, to re-think the way it does business. It must be said that as an industry it has not served its shareholders well. Apart from some notable exceptions, it has regularly delivered sub-par returns and destroyed shareholder value. So what must it do differently? Our view is we must begin to look to global partnerships and global alliances in a serious way and we must base these on customer needs. Although BHP Steel is a regional player serving principally Australia, New Zealand and southern Asia customers, it is a globally competitive company, and understands its potential role in global steel alliances. By promoting global steel partnerships in the steel industry based upon capabilities and mutual trust, we will be able to demonstrate to the equity markets, to potential employees, to communities, that the steel industry can attract capital while offering specialisation and steel solutions craved by customers -- and new applications like the Olympic Games projects (Fig 5).

[Figure 5 ILLUSTRATION OMITTED]

So what else can we do for the industry? The issue of over-capacity must certainly be tackled. When are we going to take the high cost, unproductive steel capacity out of our industry? Twelve months ago in Australia, BHP reduced steelmaking capacity, retiring 20% of its production capacity with the closure of the `hot end' of Newcastle. How many other steel companies can tell a similar story? If the Steel Industry is to stop destroying shareholder value, it must answer some difficult questions. It must start focusing on building value, not building capacity.

Abridged from the presentation to the 34th Annual Conference of the International Iron and Steel Institute, held in Melbourne, 3-5 October 2000

Kirby Adams, a graduate of Auburn University, USA, started his professional career in 1979 with Armco Inc, USA. Following a succession of senior posts in petroleum and mining, he joined BHP in 1997 as Group General Manager and CEO of BHP Service Companies, becoming President of BHP Services in 1999.

In 1999 he was appointed President of the new Flat Products Company, BHP Steel following the announcement of the division of the former company into separate flat and long products companies. The former President of BHP Steel, Dr Bob Every becomes President of the new long products company, OneSteel.