Something unexpected is happening in the U.S. economy--orders for steel are booming, and one big reason is that American steel producers have become internationally competitive and are keeping subsidized foreign steel out of the market.
That U.S. producers are using anti-dumping lawsuits to keep out foreign production tells you that steel remains one of the world’s most politicized commodities. But that they are winning the lawsuits tells you that U.S. costs have become competitive--after a decade of idling uneconomic mills and the elimination of 250,000 steel industry jobs. Now overseas producers, particularly in Europe, cannot ship steel economically to the U.S. market. The result is considerably more business for U.S. steelmakers, who are having a boom year.
Surging steel tells you that the economic recovery is strong. In the first three months of 1993 steel orders have been at an annual rate of more than 100 million tons--up 40% from 1992 and a level equal to the total capacity of the American industry. Orders are coming from the automobile and appliance industries, says analyst Robert Schenosky of Kemper Securities.
Also, U.S. machinery makers are ordering steel to meet increased demand for exports, especially to new customers in Mexico and China. “It’s a new and wider world,” says Christine Lisec-Pinto, a vice president and economist at Merrill Lynch, who sees the success of U.S. exporters and the competitiveness of steel as evidence of a long-term shift in stock markets too. “U.S. industrial stocks will be to the new decade what food and consumer goods stocks were to the ‘80s,” she says.
But behind that success lies a complex tale of government policies and global industries.
From 1982 to March of ’92, the U.S. government employed a series of Voluntary Restraint Agreements with other countries to hold down their steel shipments to the U.S. market. It was an expensive tactic. The Economic Policy Institute, a labor backed research group in Washington, estimates that VRAs cost U.S. steel users $984 million a year in higher prices for foreign and domestic steel.
In a sense, the higher prices financed severance pay. The understanding was that U.S. steel companies would use the competitive truce to cut costs and become more efficient. Perhaps surprisingly, they succeeded. Steel capacity in the United States fell 25% in the 1980s, as old blast furnaces were shut down. More than half the industry’s employees lost their jobs.
But it wasn’t all foreign competition. A big component of the American steel turnaround has been the growth of mini-mills, companies such as Nucor Corp. and Birmingham Steel, that produce new steel from scrap. In the 1980s, here and in Japan, mini-mills went from supplying simpler construction steels to the finished steel sheets that automobile makers demand.
Mini-mills are much more efficient. Charlotte, N.C.-based Nucor can now produce a ton of steel for almost one-third less than steel producers anywhere in the world, including Taiwan and South Korea. The model is not cheap labor but more productive use of labor. Nucor’s wages are comparable to industry averages in the United States, Japan and Europe, but its labor cost per ton of steel is lower because it uses people and machines efficiently.
And the mini-mills’ efficiency forced the rest of the U.S. industry to shape up--which is why U.S. steel production costs are now below those of Japan and Germany and comparable to South Korea.
World competitiveness is shifting. U.S. industry has come through a difficult renewal that other parts of the world still must endure. Europe, aside from Britain, did not restructure its steel industry in the 1980s, or encourage mini-mills, and so faces severe cutbacks.
Already German steelworkers are staging protests. French, Italian and Brazilian steel producers won’t be able to ship to the U.S. market for a long time, says analyst R. Wayne Atwell of Morgan Stanley.
The reason is U.S. steel producers are filing lawsuits, and the U.S. government’s International Trade Commission is cracking down. Countries that subsidize their steel industries, as most nations do, will be hit with anti-dumping penalties. Already foreign producers are holding back from even trying to ship to the U.S. market.
But as much as there is justice in the crackdown, lawsuits are an imperfect solution. Canada, for example, is suing U.S. producers for dumping while the United States sues Canadian producers. And with the market tightening, steel prices are going up--and due to rise again in July.
The steel industry, to be sure, says prices are only recovering from depressed levels. But rising metal prices are scaring the bond market, sending interest rates higher, and that is counterproductive. For every half a percent rise in bond interest, U.S. citizens pay $4 billion extra interest on the national debt--not to mention higher mortgage interest and so forth.
So a multilateral agreement on steel, perhaps a pact to bring in cheap steels from the struggling Soviet Republics, might be wiser than legal warfare. Efficient U.S. steel producers, especially mini-mills such as Nucor, have little to fear. Suddenly, unexpectedly, they’re globally competitive.
Who’s Competitive Now?
U.S. pretax cost of producing a ton of steel--including costs of labor, material and financing--is lower than that of Japan and Germany and comparable to South Korea. Costs seem lower in the former Soviet Republics, but their statistics for labor and capital are artificially low. The true winner is Nucor Corp., the Charlotte, N.C. based mini-mill producer.
United States: $513
South Korea: 511
Former Soviet republics: 200
Nucor Corp.: 366
Source: PaineWebber’s World Steel Dynamics