Steel Industry Needs Tariffs and Much More
Steel industry problems are front and center once again in Washington and this time they involve not only foreign steel imports but also retiree health costs for the unionized portion of the American steel industry.
The import situation has become critical. Recessions and slow growth in economies around the world in recent years have led to record low prices for steel worldwide and a surge of steel shipments to the U.S. market.
The profitability of the American steel industry has been damaged; prominent firms, including Bethlehem Steel Corp., have entered bankruptcy. The shrunken steel business, now smaller than the plastics industry, needs help against the onslaught of cheap imports.
To be sure, problems are not the only story in steel today. The industry’s innovative record and potentially strong companies are less well known to investors but could come to the fore amid the international furor about to erupt if the United States raises tariffs.
President Bush must decide by Wednesday whether to impose tariffs on some steel products and also whether the government should pick up the estimated $12-billion cost of supplemental health benefits for retired steelworkers, which the companies have failed to fund and now want to drop.
Experts predict the White House will approve some tariff protection for the domestic industry but not grant immediate help with health benefits.
Raising tariffs on steel imports will bring international protests.
But look for the Bush administration to respond by launching a new effort to deal with the chronic global ills of steel: international overcapacity of production and closed foreign markets.
Europe, Japan and other steel producers will join the effort, but solutions predictably will be slow in coming.
The world’s steel mills are capable of producing roughly
865 million tons a year--106 million in the United States. In other times, the U.S. market took in less than 20 million tons a year in imports.
But in the last decade, as economies hit severe downturns in Asia, Russia and Latin America, their exports to the U.S. increased to 30 million to 40 million tons a year.
The flood of imports and declining prices hurt the U.S. industry even though American steelmakers have improved efficiency enormously--with productivity equal to that of Japan and Germany.
The U.S. steel industry has cut back its capacity by 30 million tons in the last decade. Big Steel’s work force has declined from 548,000 at its peak in 1965 to roughly 160,000 today.
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No Help for Legacy Costs
Technological competition also has affected steel. Engineered plastics increasingly are used in automobile bodies and appliances, displacing steel. The plastics industry now employs four times as many workers as steel.
Steel industry cutbacks have brought economic devastation to communities in northern Indiana and nearby Chicago, and to the Minnesota iron range where ore boats lie idle in Duluth.
It is the political clout of these steel regions, and others in Ohio, Pennsylvania and West Virginia, that will win White House tariff relief for the industry.
But Washington experts such as Philip Potter, president of Federal Strategies Group, a lobbying firm, say the industry won’t get the 40% tariffs it is asking for and won’t get help on billions of dollars of unfunded retiree health benefits, which the industry calls “legacy costs.”
Legacy costs are supplemental medical benefits, beyond Medicare, that steel management granted to the United Steelworkers Union when the industry was richer and the union larger.
But as companies incurred losses and the industry shrank, these benefit promises were not funded and now present a burden. The companies and union are asking the federal government to pick up the tab.
Most likely, though, the government will let companies and unions work out their own problems, which are partly self-inflicted. Unions never renegotiated benefit demands that had become unrealistic, and companies, even as they neglected employee health programs, never ceased to pay millions of dollars in salaries and bonuses to their top executives.
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Global Expansion
Nonetheless, with some temporary tariff relief and a concerted White House effort to open foreign markets, conditions could turn up for the American steel industry. A look at three different companies offers a good perspective on this traditional yet changing industry.
U.S. Steel Corp. is responding to the global challenge by trying to grow and compete on the world stage. U.S. Steel is seeking to merge with Bethlehem Steel if the latter firm’s legacy costs can be taken care of. It also is in the process of acquiring National Steel from NKK Corp. of Japan, which bought the U.S. firm in the 1980s. And U.S. Steel bought the Kosice mill in Slovakia two years ago and would be in the market for other overseas ventures.
Pittsburgh-based U.S. Steel sees foreign steel companies, such as France’s Usinor, merging with others to become international giants, and thinks that’s a good strategy. To succeed, it will need concessions on work rules from the United Steelworkers and a better climate in the world economy, says analyst Christopher Olin of Midwest Research, a Cleveland-based investment firm. But there’s no reason it cannot compete globally.
Some of the most efficient steel companies in the world, after all, are in the United States. Nucor Corp., based in Charlotte, N.C., is one of them. Nucor is a “minimill,” a firm that produces new steel from scrap using an electric arc furnace instead of the traditional blast furnace. Its steel generally is used in construction rather than in the production of cars and appliances, which demand smoother sheet steel.
Nucor is nonunion and has invested in new equipment and innovations through the years. But that did not prevent the company from being hurt by the industry’s downturn and the flood of imports. With tariff relief and an upturn in world business, Nucor could get back to the 20% profit on investment of the mid-1990s, rather than the 4.5% returns it recorded in 2001.
And in a global market, it should not be overlooked that some of the most efficient U.S. steel producers are owned by overseas firms. California Steel Industries Inc., in Fontana, is owned by Brazil’s Companhia Vale do Rio Doce and Japan’s Kawasaki Steel. It produces rolled sheets of steel, for appliance panels and construction forms, from semi-finished slabs imported from Brazil, Mexico and Australia.
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A Return to Production
California Steel’s president, Lourenco Goncalves, doesn’t fear the White House imposing a tariff on slabs he must bring in from Brazil because, as a U.S. producer, he’ll “be protected from the Japanese, Korean and Chinese steel imports that really dominate this market,” he says.
That’s a reminder that California is a steel-importing region, and its businesses will pay whatever tariff Washington imposes to protect the American steel industry.
The real point of this crisis in the world steel industry is that everybody would be better off if the global economy could get back to hitting on all cylinders rather than relying on the United States as the top buyer of steel and other products.
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James Flanigan can be reached at jim.flanigan@latimes.com.
