Thriving Steel Industry Needs No Import Curb, Experts Say

Although the House voted last week to throw up protective barriers on behalf of a reputedly staggering domestic steel industry, experts say most U.S. steelmakers are actually in good shape and anticipating a robust year.

Last year, even with a 33% rise in imports, the U.S. industry shipped 102 million tons of steel--its second-best year ever--and earned $1.4 billion. Both figures were down just modestly from a strong 1997.

This year, thanks to a looming price increase and continued strong demand, Wall Street has issued “buy” orders for steel stocks. And steel imports have already fallen.

“To say we are about to see an industry collapse is to stretch into the hysterical,” said Waldo Best, analyst for Morgan Stanley Dean Witter investment firm.

The willingness of the House to embrace Big Steel’s self-portrayal as a crippled industry illustrates not just skillful lobbying but also the easy political appeal of trade protectionism, even with a booming economy and near-record low unemployment.

It also offers a clear lesson in the trade-offs of protectionism: Cheap steel and other products from overseas have helped drive U.S. inflation to minuscule levels, fueling the economic boom.

Conversely, quotas on imported goods usually lead to higher prices, and that has already begun to happen on steel. By one estimate, an increase of $50 a ton in steel means American consumers would pay $6 billion more for finished goods such as cars and household appliances.

There is no question that an import influx beginning last summer hurt U.S. steel companies and led to layoffs of American workers as prices plunged and profits fell.

About 41 million tons of steel were imported last year, a surge of 33%, as the falloff in demand in Asia led to a worldwide glut. Much of the excess was shipped to the U.S., where the strong economy kept demand high. Indeed, the domestic steel industry couldn’t meet the demand on its own, analysts say.

Despite the high demand, prices of key steel products fell steeply and remain depressed. Prices for hot-rolled steel, used in auto parts, now average about $250 a ton, compared with about $330 a ton a year ago, analysts say.

That triggered a big lobbying campaign by the Steel Coalition, made up of corporate and labor interest groups.

“If we do not act decisively in the present crisis, there will be no American steel industry in the 21st century,” said George Becker, president of the United Steelworkers Union.

Echoed Paul Wilhelm, president of USX Corp.’s U.S. Steel Group, the nation’s top steel producer: “This industry is being devastated.”

Yet despite the plunge in prices, the industry’s $1.4 billion in earnings last year amounted to a decline of just 14%, not a dramatic reversal. Just two of the nation’s 13 largest producers lost money.

Meanwhile, the flood of imported steel that triggered Wednesday’s House action has already fallen for three consecutive months due to previously ordered anti-dumping tariffs aimed at the key violators: Japan, Brazil and Russia.

In effect, those tariffs are a license to domestic steelmakers to boost prices, which they are scheduled to do in April. That is one reason analysts are upbeat on steel stocks: Merrill Lynch is positive on USX and LTV Corp., while Morgan Stanley Dean Witter likes AK Steel, Rouge Industries and Steel Dynamics.

Analysts add that first-quarter steel profits will be down but should pick up strongly for the remainder of the year.

“There is no steel crisis,” declares Daniel Griswold, a trade analyst for the Cato Institute, a free-trade think tank.

The House bill is given little chance of becoming law. If the Senate unexpectedly approves it, President Clinton promises to veto it rather than invite retaliation overseas and violate international trade laws.

Critics of the House bill, which would impose a blanket cap on all steel imports, say the apparent success of the narrower, more targeted anti-dumping tariffs makes the proposed legislation not only reckless but unnecessary.

The readiness of Congress to act can also be traced to Big Steel’s lingering, but out-of-date, reputation as a beleaguered industry that needs saving.

In fact, the U.S. industry is globally competitive, having invested $50 billion in new technology and closed hundreds of inefficient plants. Along with virtually all surviving U.S. manufacturing industries, it has drastically downsized its work force since the 1980s.

The steel industry today employs only 163,000 workers, according to the Bureau of Labor Statistics. In 1980, it employed 459,000. Steel employment has continue to drop steadily as the result of productivity gains, while other sectors of the economy add workers.

Productivity has nearly tripled as the industry replaced older facilities with more efficient mini-mills. Seven new plants will come on line this year, but each will employ fewer than 200 workers.

In fact, the domestic industry itself contributed to the global steel glut that has depressed prices: New U.S. mills have added at least 10 million tons a year to the industry’s capacity since 1995.

While some weaker U.S. steel companies continue to struggle--and did even before last year’s import imbroglio--the top-rung domestic producers are well equipped to compete head-to-head with the world’s most efficient steelmakers, analysts say.

Because jobs in the industry have been disappearing for years, some experts question whether steel imports can be identified as the only culprit in 10,000 layoffs last year, as steelmakers contend. In any event, some laid-off workers have since been called back to work.

The industry has been quick to draw attention to the recent bankruptcies of three steel companies--Acme Metals, LaClede Steel and Geneva Steel--blaming them on the import deluge. But analysts said their problems, though exacerbated by the import-related price drops, were more fundamental. Geneva, for instance, was highly leveraged from large investments in new technology that never paid off.

“These companies would have gone bankrupt regardless,” analyst Best said. “They couldn’t make money even in the best of times.”

Steel customers, while appropriately sympathetic to the industry’s trade concerns, also are skeptical of the dire portrait that the steel concerns have presented to the public.

General Motors, which buys 4.7 million tons of steel annually from U.S. producers, is opposed to quota restrictions or similar actions for fear that it will create shortages and drive up prices.

“We oppose any extraordinary relief . . . to resolve this apparent short-term problem,” Mustafa Mohatarem, chief economist for GM, said recently.

Jon Jensen, president of the Precision Metal Forming Assn., which represents makers of steel parts, said of steel protectionist quotas: “Prices go up, delivery lead times lengthen and quality deteriorates. Every time.”