U.S. Loan Program to Aid Steel Industry Has Been a Lesson in Defaults
FOR SALE by government, the most modern steel-rail mill in the country. Like new. Capable of turning out 360,000 tons of rail. Not far from Pittsburgh.
With a slick marketing campaign, the U.S. government is attempting to recover a portion of the $100 million it lent Wheeling-Pittsburgh Corp. in 1979 to build a steel-rail mill in Monessen, Pa. But it appears that the investment may be as shabby as many of the abandoned mills that litter America’s industrial landscape.
The Monessen mill is an example of ill-fated government intervention in an industry that is but a shadow of its old self. Under a special loan-guarantee program put in place by the Carter Administration to help the ailing steel industry, five loans worth $365 million were approved, backed by a 90% government guarantee.
Less than a decade later, all five loans are in default, and the Commerce Department’s Economic Development Administration, in an internal memorandum, notes that “by any measurement, EDA’s steel-loan program would have to be considered a failure.”
“The program is an excellent example of the folly inherent in industrial policy programs,” the memo added.
The companies that received the guaranteed loans are either in bankruptcy, out of business or no longer own the facility in which the money was invested.
Carried on the ledgers of the EDA, which administered the program in the late 1970s, the steel loan-guarantee program is evidence that politically influenced government investment decisions can result in unprofitable, if not disastrous, results, many analysts say.
“It says that in cases like these there is no reason for the government to get involved and second-guess the private capital markets,” said Robert Crandall, an economist with the Brookings Institution. “The argument for government intervention may be to develop seed technology with other applications. . . . But these were investments in rather rudimentary technology in a declining industry.”
Walter Adams, a steel expert at Michigan State University, called the loan program “another goodie, a lollipop thrown to the industry to assuage complaints about unfair competition and satisfy their demands for government assistance.”
At the time the loans were approved, some of them whipped up a storm of controversy in Congress.
Then the steel industry was being increasingly pinched by imports and a dramatic falloff in demand for steel. In an effort to save jobs and encourage investment, the industry pressured the Carter Administration to provide some relief.
President Jimmy Carter’s response was to form a special steel task force under the guidance of Anthony Solomon, the Treasury’s undersecretary for monetary affairs. One recommendation was to provide industrial loan guarantees for the industry.
Some of the loans, and the criteria under which they were made, proved to be troublesome. For example, a $42-million loan, which was never closed, was to go to a French-controlled company called Phoenix Steel. Critics pointed out that the loan not only encouraged overcapacity, but was a subsidy to a foreign producer.
The government has written off the $19.6 million it paid on a $21-million loan to Korf Industries, but hopes to recover the $94.2 million it already has paid bondholders on a $111-million loan to LTV Corp., which has filed for bankruptcy reorganization. The government has recovered about $16 million of a total of $63 million it lent the defunct Wisconsin Steel Co.
But the real eye of the storm has centered on the ill-fated Wheeling-Pittsburgh deal--for a facility that was up and running barely six years.
“Once you’re in bankruptcy, you’re just looking for ways to eliminate unprofitable operations,” said Raymond A. Johnson, spokesman for Wheeling-Pittsburgh, which filed for bankruptcy in 1985.
Though Wheeling-Pittsburgh’s competitors in the rail business--Bethlehem Steel Corp. and CF&I; Steel Corp.--insisted in the late 1970s that there was not enough demand to support another mill, officials at EDA and the company dismissed the objections not only of the companies, but of several members of Congress, such as Sen. Lowell P. Weicker, (R-Conn.). Robert Hall, who was then assistant secretary for economic development, called criticism of the new facility “misplaced.” Dennis Carney, former chairman of Wheeling-Pittsburgh, said at the groundbreaking of the Monessen mill that a new rail mill was “vitally needed.”
He also said he felt sure that the company could repay the loan, which was supplemented by yet another $50-million guaranteed loan from the Farmers Home Administration for pollution control equipment.
But demand has fallen far below the levels foreseen in 1979, when Bethlehem projected that the railroads would need about 1.2 million tons per year of rail. Since the mid-1980s, demand declined as the railroad industry shrank and turned to recycling rail.
“It’s not a booming market,” said Bob Matthews, president of the Railway Progress Institute, an association of railroad equipment manufacturers. He predicted that demand would be only 500,000 tons, on average, over the next decade while capacity--if Monessen is factored in--is at least double that. Also, imports account for about 30% of the market.
Last year, according to Bethlehem, industry shipments, counting imports, were only 540,000 tons. The industry is down to two producers: Bethlehem’s unprofitable plant at Steelton, Pa., and CF&I; in Pueblo, Colo.
Left to mop up the loan mess is the current crop of EDA officials, some appointed by the Reagan Administration, which itself has come under pressure to provide special help for the steel industry such as import quotas.
“We have vivid proof that federal government intervention in the markets has disastrous results,” said Orson Swindle, assistant secretary for economic development at the Commerce Department. “The taxpayer will take a bath.”
Just how big will the bath be?
In the case of the Monessen mill, the EDA, as instructed by the bankruptcy court, is taking bids and hopes to cover its share of the $63.5-million loan that financed the mill.
The chances of recovering the rest of the $100-million loan, which went to finance pollution controls, are not good, said Michael Oberlitner, director of EDA’s liquidation division.
Mill Draws Bids
The government made good on its part of the deal after Wheeling-Pittsburgh filed for bankruptcy in April, 1985, paying bondholders about $90 million.
To try to recoup its investment, the government has undertaken a $110,000 marketing and advertising campaign that includes having a public relations firm churn out press releases and field inquiries. A brochure touts the Monessen property as “the most advanced rail-rolling and finishing facility in America.”
Most of the budget, said Oberlitner, has gone to placing promotional ads in newspapers such as the Wall Street Journal and the Financial Times of London.
“We’ve had tremendous response to the advertising,” said Oberlitner, adding that about 130 inquiries have come from domestic and foreign companies and investors.
But the most interesting--if not ironic--bid for the Monessen mill has come from Wheeling-Pittsburgh’s old nemesis, Bethlehem Steel, which has offered $60 million for the facility.
Although Bethlehem’s own rail mill at Steelton is not profitable and faces a soft market, the company thinks that it can combine the mills: rolling steel at Monessen that has been shipped from Steelton’s under-utilized facilities.
