United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-19661
IPSCO Inc.
(Exact name of registrant as specified in its charter)
CANADA
(State or other jurisdiction of incorporation or organization)
98-0077354
(I.R.S. Employer Identification No.)
650 Warrenville Road, Suite 500, Lisle, Illinois 60532
Telephone: (630)-810-4800
(Address and telephone number of principal executive offices)
Securities registered pursuant to section 12(b) of the Act: Common Shares Registered On: NYSE and TSX
Securities registered pursuant to section 12(g) of the Act: None
Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o Yes ý No
Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
o Yes ý No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ý |
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Accelerated filer o |
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Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes ý No
The aggregate market value of the common stock held by non-affiliates was approximately $1,673,861,421, computed by reference to the price at which the common stock was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 2005.
48,073,018 shares of common stock were outstanding at March 6, 2006.
Documents incorporated by reference into this report include Sections of the registrant’s Proxy Statement to be filed on or before April 9, 2006 for the Annual Meeting of Stockholders to be held on May 4, 2006 (Part III). Such portions, except for the parts therein which have been specifically incorporated by reference, shall not be deemed “filed” for the purposes of this report on Form 10-K.
Except for the historical information contained in this report, certain matters discussed herein contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and include, but are not limited to, statements that relate to projections of sales, earnings, earnings per share, cash flows, capital expenditures or other financial items, discussions of estimated future revenue enhancements and cost savings. These statements also relate to our business strategy, goals and expectations concerning our market position, future operations, margins, profitability, liquidity and capital resources. Although we believe that, in making any such statements, our expectations are based on reasonable assumptions, any such statements may be influenced by factors that could cause actual outcomes and results to be materially different from those projected. When used in this document, the words “anticipates,” “believes,” “expects,” “intends,” “may,” “plans,” “predicts,” “projects,” “should,” and similar terms and phrases are used to identify forward-looking statements in this report, as well as in the documents incorporated in this report by reference. These forward-looking statements are subject to numerous risks and uncertainties. They are important factors that could cause actual results to differ materially from those in the forward-looking statements, certain of which are beyond our control. These factors, risks and uncertainties include the following:
• general economic conditions in North America and globally
• domestic and international competitive factors, including the level of steel imports into Canadian and U.S. markets
• general industry conditions, including competition and product and raw material prices
• changes in supply and demand for steel and our specific steel products
• potential replacement products or technology
• supply, demand, and pricing for scrap steel and iron, alloys and other raw materials
• supply, demand and pricing for electricity and natural gas
• fluctuations in other costs, including freight, input and employee costs
• availability of scrap, gas, electricity and other critical inputs to our manufacturing processes
• availability of transportation for the Company’s products
• our ability to properly and efficiently staff our manufacturing facilities
• labor organizing activities, labor difficulties or changes to labor laws and regulations
• access to capital markets
• equipment performance at our manufacturing facilities
• unanticipated capital expenditure requirements
• fluctuations in interest rates, currencies, and exchange rates
• the occurrence of any material lawsuits
• trade sanction activities and the enforcement of trade sanction remedies
• legislative or regulatory requirements, particularly concerning environmental matters
• other risks described under “Risk Factors”
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This list is not exhaustive of the factors that may impact our forward-looking statements. These and other factors should be considered carefully and readers should not place undue reliance on our forward-looking statements. As a result of the foregoing and other factors, no assurance can be given as to any such future results, levels of activity or achievements. Neither we, nor any other person, assume responsibility for the accuracy and completeness of these forward-looking statements. We undertake no obligation to update forward-looking statements contained in this report.
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ITEM 1. |
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BUSINESS |
In this Form 10-K, IPSCO Inc. and its subsidiaries, unless otherwise specified, are collectively referred to as “IPSCO” or the “Company”, and unless the context otherwise requires, the terms “we”, “us” or “our” refer to the Company.
General
IPSCO is a North American steel and steel pipe producer with facilities and processing equipment located at 19 sites throughout the United States and Canada. Three of these facilities, the steelworks, produce carbon steel slabs, hot rolled discrete plate and coil. The remaining facilities further process the plate and coil into value-added products, including heat treated and normalized plate, cut-to-length plate and a comprehensive line of tubular products include casing, tubing, large and small diameter line pipe and industrial pipe. IPSCO processes scrap metal at several locations in North America.
IPSCO was incorporated by certificate of incorporation under the laws of Saskatchewan on July 13, 1956 and was continued by articles of continuance under the Canada Business Corporations Act on January 28, 1977. Originally known as Prairie Pipe Manufacturing Co. Ltd., the name of the Company was changed to Interprovincial Steel and Pipe Corporation Ltd. on August 26, 1960. On April 2, 1984, the Company changed its name to IPSCO Inc.
Financial Information About Segments
We operate and report our business as a single business segment. The Company’s operations are managed, and operating results are reviewed, as a consolidated enterprise for purposes such as resource allocation and performance assessment. The Chief Operating Decision Maker (“CODM”) and the Board of Directors currently review profitability for the Company on a consolidated basis. The financial information reviewed by the CODM is presented on a consolidated basis and includes information by product only to the gross margin line. Allocation of selling, general, administrative and other costs is not computed between product groupings. As a result, operating income by product group is not presented in financial data prepared by the Company. The Company believes the information presented in this report meets the requirements for segmented reporting as defined by generally accepted accounting principles.
Description of Business
Operations:
IPSCO owns and operates three steelworks in: Regina, Saskatchewan; Montpelier, Iowa; and Mobile, Alabama. The Regina facility has been in operation since 1956, with the steel mill coming on line in 1961. The Montpelier Steelworks began production in 1997 and the Mobile Steelworks in 2001. These steelworks use electric arc furnace or “mini-mill” technology to convert scrap metal into liquid steel. Alloys are added during processing to create a variety of steel grades. Liquid steel is cast into slabs and subsequently hot rolled, using Steckel mill technology, into either discrete plate or coil. Completion of construction of the two U.S. steelworks added 2.5 million tons of plate and coil processing capacity, increasing our total steelwork’s production capacity to 3.5 million tons per year.
We operate five coil-processing locations, sourced primarily with IPSCO-produced coil, which fabricate cut-to-length products. Cut-to-length products are produced from steel coils of various widths, thicknesses and grades. They are cut to specific lengths to meet customer requirements in pieces ranging from 8 feet to over 60 feet. IPSCO produces a wide range of cut-to-length products in yield strengths as high as 100,000 pounds per square inch, thicknesses of up to ½ inch and widths as great as 96 inches.
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Eight pipe facilities, at six locations throughout North America, utilize primarily IPSCO-produced coil to fabricate electric resistance weld (ERW) tubular products that range from 1½ inches up to 24 inches in diameter, as well as spiral formed, double submerged arc welded tubular products greater than 24 inches.
We also operate five auto shredder facilities in Western Canada and a number of small scrap metal processing and auto wrecking yards. These supply a significant portion of the scrap metal requirements of our Regina Steelworks in addition to processing non-ferrous materials that are sold throughout the world.
In the last decade, our workforce has increased by approximately 1,200 employees or 88%. Steel production volumes over the 10-year period increased by 2.4 million tons or nearly 264%. The investment in new facilities and technology in the United States, combined with training of production employees, has allowed us to expand and improve efficiency. We have a high rate of employee retention by providing industry competitive wages, which are supplemented by profit-driven incentives for achieving production, safety, and shipment targets.
Products:
Over the last decade, IPSCO has invested heavily to build modern, highly efficient facilities while continuing to reinvest in existing facilities. Since 1996, over $1 billion has been invested in new steel mill facilities located in the United States. Part of our strategy has been to compete on a low cost basis in a larger geographic area with broader markets. All of our steelworks employ Steckel mill technology, a design that allows us to vary production between coil and discrete plate in response to changing market conditions, optimizing mill performance and lessening commercial risk. Our steelworks can produce discrete plate in thickness from 3/16 to 4½ inches and coil in thickness from 1/10 to ¾ inches. Widths for discrete plate and coil range from 48 inches to 120 inches and 40 inches to 120 inches, respectively. Discrete plate may either be sold directly to customers or further processed for sale at our heat treat facility. Coil may either be sold directly to our customers or further processed for sale at our cut-to-length and tubular facilities. We also have expanded our value-added product lines to include blasted and painted products, as well as quench and temper, and normalized plate products.
We estimate the North American plate market in sizes that IPSCO produces to have been approximately 14 million tons in 2005. The North American production of plate in those same sizes was approximately 12 million tons and IPSCO was the leading producer.
IPSCO is a major supplier in the energy tubular markets and industrial pipe markets in the United States and Canada, shipping 1.1 million tons in 2005. About 80% of our tubular shipments in 2005 were energy related, as classified by casing, tubing, and large and small diameter line pipe. Our primary source of material for tubular production is coil produced by our steelworks. Additional requirements are sourced externally, with approximately 19% of the 1.7 million tons consumed in our pipe and cut-to-length lines purchased from third parties in 2005.
Our energy tubular product line has three major components – oil and gas well casing and tubing, small diameter line pipe and large diameter line pipe. Oil country tubular goods or “OCTG” consist of casing and tubing and are used in the exploration, extraction, and production of oil and natural gas from well sites. Line pipe is used in the gathering, transmission and distribution of extracted oil and natural gas to end-users. IPSCO has developed a strong network of distributors and customers within the North American OCTG market. We estimate the current North American market for OCTG to be 5.5 million tons and IPSCO’s share of this market to be 12%. Major competitors in the North American OCTG market are Maverick Tube Corporation, Lone Star Steel Company, United States Steel Corporation, NS Group Inc., Tenaris, S.A., and a high percentage of imports, primarily from the Far East.
Large diameter pipe is a subset of line pipe, and is distinguished from other line pipe by its greater size. Large diameter pipe is used in transporting oil and gas across long distances. Demand for large diameter pipe is generally driven by either the need to transmit production from newly developed reserves, the need to meet demand greater than current oil and gas delivery system capacity, or replacement needs related to existing large diameter lines.
We produce large diameter pipe at our Regina facility, using our own coil, allowing the Company total control of the production process. Our Western Canadian location provides IPSCO with a freight advantage in the northern part of the continent. In addition, IPSCO is able to compete effectively elsewhere in North America as evidenced by the East Texas Expansion and Cheyenne
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Plains projects completed in 2004. Our competitors in the North American large diameter pipe market are Berg Steel Pipe Corporation, Oregon Steel Mills Inc. through Camrose Pipe Company, American Cast Iron Pipe Company, and Stupp Corporation.
Our industrial pipe is produced at various tubular facilities depending on size and shape. Hollow structural product or “HSS” in various sizes and shapes is made at the Geneva, Nebraska; Camanche, Iowa; Red Deer, Alberta; and Regina, Saskatchewan facilities. Standard pipe is produced at various facilities. IPSCO has a small share of the North American industrial pipe market, which is supplied by numerous producers.
As noted, a portion of the coil produced at our steelworks is used at our cut-to-length facilities. Three of our facilities (Houston, St. Paul and Toronto) have temper leveled cut-to-length lines, which produce product with superior flatness, surface quality, higher strength, and other qualities needed in certain manufacturing processes, all without heat treatment.
The following table shows information about the types of products we manufacture and the types of customers we sold to in 2005 and 2004:
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2005 Tons % |
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2004 Tons % |
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Products: |
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Coil & Discrete Plate |
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53 |
% |
52 |
% |
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Cut-to-length Products |
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15 |
% |
16 |
% |
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Energy Tubulars |
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22 |
% |
19 |
% |
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Large Diameter Pipe |
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4 |
% |
5 |
% |
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Industrial |
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6 |
% |
8 |
% |
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Customers: |
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Service Centers & Distributors |
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38 |
% |
41 |
% |
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Pipe and tube |
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33 |
% |
32 |
% |
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OEM’s |
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29 |
% |
27 |
% |
During 2005, IPSCO had approximately 600 customers purchasing steel and pipe, primarily in the service center, distribution, energy, agricultural equipment, transportation equipment, heavy machinery, and construction industries. Two-thirds of the Company’s sales were made to U.S. customers. IPSCO’s wide assortment of plate product widths, lengths, thicknesses, and grades are used by end customers to manufacture construction and farm equipment, rail cars, barges, ships, storage tanks, bridges, structural poles, wind towers, large diameter pipe, and a host of other products.
IPSCO’s major variable costs of steel mill production are steel scrap, alloys, energy, both electricity and natural gas, and hot rolled coil for our pipe mills and coil processing facilities.
Scrap metal is the primary raw material input for mini-mill producers and a secondary input for integrated producers. Scrap prices increased significantly in the second half of 2003. The impact of this increase was absorbed by IPSCO and other steel producers through the end of that year. In January of 2004, most steel producers adopted some form of scrap surcharge mechanism to neutralize the impact on margins due to further increases and volatility in scrap pricing. Early 2005 scrap prices were comparable to the high levels at the end of 2004, but declined rapidly in May and June to levels lower than any point in 2004. By year-end 2005, pricing had increased again to levels approaching those in effect at the end of 2004. In 2005, scrap was approximately 40% of the cost of production in our steelworks.
IPSCO is vertically integrated through General Scrap Partnership, a Canadian scrap metal operation owned by IPSCO, with 14 collection sites, five of which include shredders. We also cultivate strong business relationships with most major scrap yards and brokers.
The addition of alloys is directly related to the production of specialty grade steels, which produce finished products with desired strength, hardness and abrasion characteristics. Use of alloys adds to the cost of production and typically the price of the finished product. The price of alloy inputs rose significantly in 2005. Alloys were approximately 8% of the cost of steel produced in our steel mills in 2004. In 2005, this cost increased to 10% of the cost of production reflecting price increases and product mix. The increase in this cost, with the exception of certain alloys, was not countered by a surcharge, but generally captured through higher prices in the related products.
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Electricity and natural gas are also important variable costs for IPSCO, and like all steel producers, IPSCO was impacted in 2005 by steep increases in the cost of energy. Despite these increases, energy costs represent only 10% of our total steel mill product cost.
Electricity is our primary source of energy in the steel making process. Our Regina facility’s electrical contract extends to 2009 and our Mobile facility has a contract through April of 2011. Our Montpelier facility negotiated a 10-year fixed contract in October of 2005, which extends through 2016. All of our contracts establish a fixed rate for our electrical usage subject to inflationary adjustments as well as pricing relating to seasonal and peak periods. Most of our electricity suppliers use some gas turbine based peaking capacity but rely primarily on coal, nuclear or hydro-electricity for delivery. Our pricing covers both firm and interruptible services.
Natural gas is another important input used in steel production. The sharp escalation of natural gas prices was absorbed in the industry’s margins with the sharpest escalation occurring in the second half of the year. North American gas prices were impacted further, although temporarily, by the impact of Hurricane Katrina on energy production in the Gulf Coast region. IPSCO utilizes hedging programs for natural gas covering a four-year period to smooth price volatility. These programs helped mitigate the significant increases in spot prices during 2005. We did not experience any supply shortages, but no assurance can be given on supply availability in the future.
The core effort of our strategy is to clearly differentiate IPSCO from other steel manufacturers by superior execution of a customer-focused commercial strategy, delivery to market, product quality, value added products, technical competence and financial performance. We build a high brand presence in the primary markets we serve in order to support and extend our ability to differentiate “who we are” and “what we do” from others in the marketplace.
We attempt to minimize the volatility in our business and maximize earnings through our low cost platform, flexibility, and ability to move finished production between plate, coil, and different value added processes based on market trends. IPSCO’s strength derives not only from the intrinsic competitive abilities of each of the activities along our value chain, but also from the synergistic combination of our facilities, resulting in better service to our customers, good penetration in competitive markets, and a set of alternatives which provides a strong defense in difficult markets. We are vigilant about maintaining low costs in each of our activities and strive to be among the lowest cost producers in the world.
We operate “steel short”, which means we have more outlets for steel product than steel capacity. We purchase the additional steel needs from third parties. We plan to continue to increase our value-added mix of products without adding a green-field steel making facility. We will continue to secure outlets for products either by close customer collaboration, partnership, joint venture or ownership. These strong connections allow us to manage price fluctuations in broad commodity markets.
IPSCO has the ability to adopt a variety of operating configurations to match market and competitive environments. Our employees are trained to operate within the uncertainties of a highly competitive industry. We devote considerable resources to making sure that employees have the skills and motivation to manage both the individual units and the integrated whole to maximize our competitive and financial performance.
IPSCO’s financial goals derive directly from our operating configuration and practices. We aim not only to achieve high returns relative to the steel industry, but also to moderate the cyclical performance typical of most steel producers. To do so our capital investments are directed toward:
• differentiating our goods and services to maximize revenue for each unit of output and to limit exposure to the commodity auction
• keeping our cost among the lowest in North America
• stabilizing our earnings through a diversity of end markets, creating a buffer for cyclical swings
• growing the Company, including expanding our value-added product lines
IPSCO has targeted a regional geography – North America – where our focus, differentiation and value chain oriented strategy will have maximum effect. However, we actively seek ways to extend the scope of our ability to compete in, and meet the demands, of our chosen region. Where it enhances our opportunity to grow shareholder returns, we may expand outside North America.
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In 2003, the Company co-ventured with Blastech, Inc., to provide blast and paint processing service for steel plate. Construction of a new blast and paint facility at our Mobile, Alabama steelworks was completed early in 2004 and the facility began operating in February 2004, increasing the value-added product range for our Mobile plate operations. In 2005, capital projects for this co-venture were undertaken relating to efficiencies in material handling which will reduce operating costs and improve responsiveness to customer needs.
In 2005, capital expenditures were $67 million as we increased maintenance capital expenditures to approximately $23 million consistent with our high levels of capacity utilization. Additional expenditures were related to capacity and product line expansion and cost reduction programs. IPSCO continually reviews potential projects that target cost reductions, capacity, or product line expansion, and strategic support. Before approval, these projects must show a return in excess of our risk-adjusted cost of capital. Current expectations for capital spending in 2006 are $150 million reflecting $42 million in maintenance capital and $108 million for discretionary projects all of which exceed our risk-adjusted cost of capital.
In March 2005, IPSCO began the installation of state-of-the-art, high-speed finishing equipment at its tubular facility in Blytheville, Arkansas. The project, which came on line late in the year, increased the facility’s ability to thread and couple OCTG products of 4½ inches or less, allowing greater throughput, productivity, and customer responsiveness.
In April 2005, IPSCO broke ground on a $50 million steel plate Quench, Temper and Normalizing (or “Heat Treat”) facility at the Mobile Steelworks. Despite construction interruptions due to Hurricanes Dennis, Rita, and Katrina, normalizing operations began as originally planned in the fourth quarter of 2005, with the remainder of the project scheduled for completion in early 2006. Heat-treated plate is used in manufacturing applications, such as construction equipment, where strength, hardness and toughness are required. These products provide additional value to current product offerings and will displace commodity grade products in our sales mix. The facility will have a capacity of 170,000 tons of normalized and quench and temper product.
We also announced the expansion of our pipe mill capabilities at our Calgary, Alberta plant. Overall capacity of the Calgary heat-treat facility has been increased by more than 70% annually. The product range improvements will enhance the production of heat-treated casing from the current 4½ to 9⅝ inch diameters to include diameters through 13⅜ inches in high collapse, N, L, P and Q grades, as well as IPSCO proprietary grades. The enhancements also included equipment and process modifications to enable production of heat-treated tubing in smaller diameters through 3½ inches.
Product Development:
IPSCO continually evaluates new ways to add value to our product lines. With focused development from our research personnel and product development engineers based on input from our customer base and sales force, we have expanded our plate product line to include certain niche or specialty steels, which have replaced a portion of our commodity grade products.
We began construction in November 2005 of a modern research unit specifically dedicated to accelerate development of the Company’s capability to produce large diameter pipe suited for frontier climates, as well as high-end grades of plate. Our new Frontier Pipe Research Unit will also be committed to conducting research related to other energy tubular products such as OCTG for frontier environments and other advanced energy sector steel products.
Competitive Conditions in the Business:
Integrated Mills Versus Mini-Mills - There are generally two types of primary steel producers differentiated by the process used to make raw steel. Steel manufacturing by an integrated mill involves the production of liquid steel from iron ore, using coke, lime and oxygen in a blast furnace. In contrast, IPSCO is a mini-mill producer and its steel making facilities in Regina, Montpelier and Mobile use electric arc furnaces to directly melt scrap or scrap substitutes into liquid steel. As a group, mini-mills have historically been characterized by lower costs of production and lower man-hours per ton than integrated mills. This is due, in part, to lower capital costs and lower operating costs. However, as a result of steel industry consolidation and the emergence from bankruptcy of previously inefficient and high cost steelmaking assets, the cost differential between mini-mills and some integrated mills has begun to narrow. During periods of historically high scrap costs, where iron ore costs have not increased at the same rate, such as those experienced in 2004 and 2005, the historical cost differentials between integrated and mini-mill steelmaking are further reduced as scrap is a secondary input for integrated mills and a primary input for mini-mills.
The Company’s product lines must compete against both domestic and offshore supply. The domestic industry has gone through a period of consolidation, which has reduced the supply of plate product manufactured in North America. Pricing
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levels in North America during 2004 and 2005 were driven primarily by strong end user global demand for steel product and lower domestic supplies than had been available prior to the consolidation. The volume of imported steel varies depending on the level of government control, demand and pricing in other parts of the world relative to North America, and the strength of the U.S. and Canadian dollars. Generally, foreign steel and pipe must be offered at discounts great enough to warrant the additional risks of earlier purchase commitment, longer delivery lead times, and in some cases, the uncertainty of quality.
Plate and Coil - Our hot rolled steel products compete with many North American integrated and mini-mill coil and plate producers. Our major competitors in discrete plate products are Nucor Corporation, the Mittal Steel group of companies, Oregon Steel Mills Inc., and Algoma Steel Inc. A large proportion of our coil production is further processed into cut-to-length plate and pipe, the balance competes against wide coil producers such as Algoma Steel Inc., Mittal Steel and Nucor Steel Tuscaloosa Inc., and to a more limited extent with many North American mills making coil less than 72 inches wide.
Tubular Products – Our tubular products with less than or equal to 16 inches in diameter compete with several North American producers. Our major domestic competitors for energy tubular products are Maverick Tube Corporation, United States Steel Corp, NS Group Inc. and Lone Star Steel Company. Our tubular products in excess of 16 inches in diameter compete with the products of Berg Steel Pipe Corporation, Oregon Steel Mills Inc., Stupp Corporation, American Cast Iron Pipe Company, and United States Steel Corporation. In addition to IPSCO, United States Steel Corporation and Oregon Steel Mills Inc. are the only other large diameter pipe fabricators which have the capability to produce their own coil or plate for input to their pipe making process.
Environmental Compliance:
We are subject to comprehensive and continually evolving environmental regulation of our operations under federal, state, provincial and local laws with respect to air, emissions, discharges to surface and ground water and waste systems, and the handling, generation, storage, transportation, treatment and disposal of hazardous substances. We require federal, state and provincial permits regulating air and water discharges in order to operate our facilities. We believe that our facilities are in compliance with all relevant federal, state and provincial environmental laws.
Given the continual evolution of environmental laws and increased enforcement actions taken by regulators, our environmental capital expenditures, as well as compliance costs, will likely increase in the future and may vary substantially from those currently anticipated. The increased costs of environmental compliance may place North American steel producers at a competitive disadvantage with respect to foreign steel producers, which may not be subject to similar environmental costs.
The United States Environmental Protection Agency (“U.S. EPA”) has proposed an air emission rule relating to air emissions from Electric Arc Furnace (“EAF”) operations. The U.S. EPA regulates major sources of hazardous air emissions under a rule known as Maximum Achievable Control Technology (“MACT”). EAF operations are not major sources of hazardous air pollutants and are therefore not subject to MACT requirements. However, the U.S. EPA has authority to regulate small hazardous emission sources under a set of rules called the Area Source Rules. The main focus of the proposed air emission rule relating to EAF operations has been mercury emissions caused by mercury switches in automotive scrap. It had been expected that this rule would be effective in 2005. U.S. EPA has, however, recognized that the removal of switches from automobiles prior to the shredding process is likely the best method to control EAF mercury emissions. As a result, U.S. EPA has been promoting programs to have switches removed and recycled prior to the time shredded materials are sent to the EAF operations. As a result of the activities by the U.S. EPA, the finalization of the EAF Area Source Rule has been delayed and it is now expected that the final rule will not be effective until 2006. We cannot at this time predict the impact of the final rule on our operations.
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In Canada, Environment Canada has been looking to mirror the U.S. EPA rules in developing a mercury switch program. As a result of the length of time it has taken the U.S. EPA to implement a final rule, Environment Canada has attempted to arrange a cost sharing arrangement between the auto manufacturers and the steel industry to remove mercury switches from autos before they are shredded. The negotiation of this type of program is ongoing. Environment Canada does not currently appear to be contemplating regulations that would require the installation of mercury control equipment at the Company’s Regina EAF operations. The programs being contemplated in Canada would not add any material cost in operations or in capital expenditures. General Scrap Partnership was proactive in this area and has been removing mercury switches and properly disposing of them since 2000. Currently our programs have been used by both the U.S. EPA and Environment Canada as examples for others to follow, and we are working with vehicle manufacturers, other steelmakers, vehicle dismantlers and shredders, and the environmental community to create a national program for recovering mercury switches from scrap cars and light trucks before they are shredded for recycling.
In 2006, a new emission standard for Canadian manufacturers covering dioxin emissions from EAF operations will become effective. For new EAF related facilities, the standard will be 100 picograms per normal cubic meter of exhaust gas from the EAF melting operations and the standard will be 150 picograms for existing EAF related facilities. A new bag house to capture EAF particulate emissions was recently constructed at the Regina Steelworks, at a cost of approximately CDN $14 million. In addition to dramatic improvements in the capture and control of particulates, the new baghouse will allow the Regina operations to meet the new source dioxin standard of 100 picograms. The Regina facility will be subject to annual compliance testing. Based on 2005 test data demonstrating compliance with the new dioxin standard, we do not anticipate any further material impact associated with the implementation of this new standard.
With the ratification of the Kyoto Protocol Treaty (the “Treaty”) by the Canadian government, manufacturing operations in Canada have become subject to mandated reductions in emissions of greenhouse gases. The United States has not ratified the Treaty and as a result has not agreed to mandated reduction, but instead has committed to reporting such emissions and also is conducting many voluntary reduction programs. In Canada, as part of the effort to comply with the Treaty, the Canadian government identified a number of industrial sectors that would be required to reduce emissions during the first commitment period ending in 2012. These sectors were classified as “Large Final Emitters”. The steel industry was included in this group. The Company has been actively engaged in negotiations with the Canadian government on implementation of the reductions that will be required within the steel industry. As a result of these negotiations, and the fact that the government has capped the cost of CO2 credits at $15 per ton, we do not currently expect the implementation of the Treaty in Canada to have a material impact on our operations. However, any changes to the program that significantly restrict access to sufficient carbon allocations for the steel melting operations in Regina could impact our ability to expand operations at this facility.
Since the level of enforcement of environmental laws and regulations, or the nature of those laws that may be enacted from time to time are subject to changing social or political pressures, our environmental capital expenditures and costs for environmental compliance may increase in the future. In addition, due to the possibility of unanticipated regulatory or other developments, the amount and timing of future environmental expenditures may vary substantially from those currently anticipated. The cost of current and future environmental compliance may also place North American producers at a competitive disadvantage with respect to foreign steel producers, which may not be required to undertake equivalent costs in their operations.
Pursuant to the Resource Conservation and Recovery Act, or RCRA, which governs the treatment, handling and disposal of solid and hazardous wastes, the U.S. EPA and authorized state environmental agencies can require facilities to take corrective action to remediate releases of wastes. RCRA also allows citizens to bring suits against regulated facilities for potential damages and clean up. Our manufacturing operations produce various by-products, some of which, for example, electric arc furnace or EAF dust, are categorized as industrial or hazardous waste under RCRA, requiring special handling for disposal or for the recovery of metallics. While we cannot predict the future actions of the regulators or other interested parties, the potential exists for required corrective action at IPSCO’s facilities, the costs of which could be substantial.
Under the Comprehensive Environmental Response, Compensation and Liability Act, or “CERCLA”, the U.S. EPA and, in some instances, private parties have the authority to impose joint and several liability for the remediation of contaminated properties upon generators of waste, current and former site owners and operators, transporters and other potentially responsible parties, regardless of fault or the legality of the original disposal activity. We have a number of waste handling agreements with various contractors to properly dispose of our electric arc furnace dust and certain other waste products of steelmaking. However, we cannot assure that, even if there has been no fault by us, we may not still be cited for liability as a waste generator by reason of an environmental clean up at a site to which our waste products were transported.
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In addition to RCRA and CERCLA, there are a number of other environmental, health and safety laws and regulations that apply to our facilities and may affect our operations. By way of example and not of limitation, certain portions of the federal Clean Air Act, Clean Water Act, Oil Pollution Act, Safe Drinking Water Act and Emergency Planning and Community Right-to-Know Act, as well as state, provincial and local laws and regulations implemented by the regulatory agencies, apply to our facilities’ operations. Many of these laws allow both the governments and citizens to bring certain suits against regulated facilities for alleged environmental violations. Finally, any steelmaking company could be subject to certain toxic tort suits brought by citizens or other third parties alleging causes of action such as nuisance, negligence, trespass, infliction of emotional distress, or other claims alleging personal injury or property damage.
As of December 31, 2005, we had approximately $3.7 million reserved for environmental liabilities. We believe our liability for these matters was adequately reserved at December 31, 2005.
Our Employees:
IPSCO employs approximately 2,700 employees as of December 31, 2005. The majority of hourly employees at our Canadian facilities are covered by collective bargaining agreements. Expiration dates for the collective bargaining agreements are in 2007 for 148 employees at the Red Deer facility and 2011 for 1,011 employees at the Regina and Calgary facilities. Nineteen workers at one location in the United States are covered by a collective bargaining agreement, which expires in 2007.
Financial Information About Geographic Areas
As noted above, the Company is organized and managed as a single business segment. Sales are allocated to the country in which the third party customer receives the product.
The table below sets out financial information relating to the Company’s geographic areas for the last three fiscal years.
|
Sales |
|
2005 |
|
2004 |
|
2003 |
| |||
|
Canada |
|
$ |
978,898 |
|
$ |
825,680 |
|
$ |
520,963 |
|
|
United States |
|
2,053,829 |
|
1,705,710 |
|
837,848 |
| |||
|
Total |
|
$ |
3,032,727 |
|
$ |
2,531,390 |
|
$ |
1,358,811 |
|
|
Capital Assets |
|
|
|
|
|
|
| |||
|
Canada |
|
$ |
213,621 |
|
$ |
216,254 |
|
$ |
200,854 |
|
|
United States |
|
842,565 |
|
852,335 |
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