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American Steel - Richard Preston


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Amercian Steel, by Richard Preston, was originally published as a series of articles in the New Yorker Magazine concurrently with the steelmaker Nucor’s troubled construction of a new mill utilizing an experimental production technology.  The articles were later adapted into this excellent book which is sadly out of print, but still available used from Amazon.


Although the book is a few years old, the recent events surrounding Horsehead Holdings brought it back to mind because the early history of Nucor does have a strong resemblance to the Horsehead situation.  Both companies made all-in bets on a new metallurgical process that promised unusual cost advantages, and while one was wildly successful the other seems, for now at least, to have been a failure. 


In the book Preston describes the technical aspects of steelmaking in a mini-mill plant, which is a fascinating process where scrap iron is heated to the temperature of the sun’s surface and coaxed through elaborate machinery until it becomes recognizable sheets or ingots.  Molten steel is scary stuff, it can melt concrete and human flesh, it explodes like a bomb when it falls into water, and it can sometimes behave in weird ways for no observable reason at all.  The people who work in the melt shops are a salty bunch who love working with raw steel despite the danger.  As Preston describes it, working with steel is basically unscientific.  Steelmaking lore is passed down between steelworkers, and many decisions on the production line have to be made on the spot by experienced workers based off of their intuition because there are no hard and fast rules.


The experimental production technology in Nucor’s new mill gave the experienced steel men fits, and even at one point caused a huge explosion that destroyed a good portion of the mill and resulted in fatal injury for a worker.  After lots of trouble in almost every aspect of the operation, the company did get the mill to produce efficiently and it later became the model for the many more mills they would build in the coming decades.


Everyone reading this probably knows the story of Nucor and how successful they’ve become, what is probably less well known is how dicey things got for them at certain times in their history, and how many people, including the German engineers that created the new technology at the heart of the new plant, were convinced that they would fail. 


A board member who also maintains an outside investment blog recently wrote a thoughtful post (http://www.oddballstocks.com/2016/01/reading-resolutions-and-research.html) that comes to the heart of the matter, what can we as investors expect to learn from reading business history?  Does reading a book like American Steel allow you to predict how a similar situation like Horsehead is going to play out, or is this stuff just sterile pondering that will never make you money?


The answer IMHO is not that we should, in most cases, expect that history is going to be predictive of anything in the positive sense, but that its proper use lies more in the negative sense, and even then only probabilistically.  That is to say that reading American Steel is not going to allow you to distinguish between future Nucors or Horseheads going forward, but it should at least warn a reader to be skeptical of new manufacturing processes which are historically problematic.  It’s only a modest lesson, but it might save you a buck or two over your lifetime. 


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