Big Steel on Steroids

Corporate Research E-Letter No. 19, December 2001

BIG STEEL ON STEROIDS: 
AN INDUSTRY PUSHES FOR FEDERAL AID AND PERMISSION TO CREATE A MEGA-PRODUCER

by Philip Mattera

Among the corporate pleas for federal assistance that have proliferated in response to the weakening economy and the fallout from 9/11, perhaps the most audacious is the one put forth by the steel industry. The dollar amount is not as large as the airline or insurance rescues, but unlike the others, the steel deal involves a radical restructuring of a key sector of the economy.

In recent weeks a group of big integrated steel producers -- including the U.S. Steel unit of USX Corp. and Bethlehem Steel -- have been pressing the Bush Administration and Congress to support a plan that would grant antitrust exemption to a merger of as many as six steelmakers to form a single mega-producer. This super steel company would, proponents claim, stand a better chance of taking on foreign rivals, which have captured a quarter of the U.S. market. To assist in this transformation, the industry wants the federal government to take over responsibility for an estimated $13 billion in retiree healthcare obligations.

Among the supporters of the plan is the United Steelworkers of America, which has been desperately trying to avoid further shrinkage of an industry that has seen domestic employment plunge from nearly half a million workers in the late 1970s to fewer than 150,000 today. In the past 18 months, more than 20 American steel companies --including leading producers such as LTV and Bethlehem -- have filed for Chapter 11 bankruptcy. About a third of these have ceased operations, and LTV is moving in that direction.

THE LOGIC OF GLOBALIZATION

The decline of the U.S. steel industry has provoked alarm in some quarters, complacency in others. A country’s steel output has traditionally been considered a primary indicator of its level of economic development. In the United States, the rise of the industry proceeded in tandem with the growth of the entire economy. American steel producers dominated the world market from the end of the 19th Century through the 1950s, when European and Japanese producers began to mount an effective challenge. In fact, the expansion of production capacity overseas, especially in developing countries such as Brazil and South Korea, has given rise to the view that the U.S. no longer needs a large domestic production capability.

What remains of Big Steel and the Steelworkers are not about to succumb quietly to the logic of globalization. For the past three decades, the industry has been complaining that foreign producers use subsidies from their governments to dump output on the U.S. market at artificially low prices. Amid a wave of steel mill closings in the late 1970s, the Carter Administration set up a trigger-price system designed to discourage dumping. Political pressure by the industry kept the system alive even during the Reagan Administration. U.S. steelmakers have also been aggressive in filing complaints with the federal government’s International Trade Commission (ITC).

Despite these measures, steel imports began rising sharply in the late 1990s. U.S. producers sounded the alarm and launched a campaign for import quotas. They did not succeed in that goal, but Congress did enact a $1 billion loan guarantee program. The Bush Administration took a further step last June by agreeing to pursue a Section 201 anti-dumping complaint with the ITC and by pushing for a multilateral agreement to raise prices by limiting world production. Earlier this month, the ITC responded favorably to the Bush Administration complaint, recommending duties on 16 product lines, representing about 80 percent of steel imports. At a summit of steel-producing countries in Paris this week, the Bush Administration succeeded in pushing through an agreement on cutting world output, but the size of the reduction was less than half what the United States had sought.

SLEEPING WITH THE ENEMY

Despite the genuine difficulties they are facing, it is a bit disingenuous for the large U.S. producers to adopt an antagonistic posture toward foreign steelmakers, given that some of them have entered into business arrangements with their overseas counterparts. During the 1980s, companies such as Inland Steel and LTV formed joint ventures with Japanese companies, while USX opened a mill in California together with South Korea’s Pohang Iron and Steel. One of the largest U.S. companies, National Steel, has been controlled by Japan’s NKK Corp. since 1984. Holland’s Ispat International bought Inland Steel in 1998. Last year USX-U.S. Steel Group acquired the dominant producer in Slovakia. Even those U.S. steel companies not formally tied to foreign producers have been known to import cheap steel in slab form and then process it into finished products.

The threats to the well-being of the large integrated producers such as U.S. Steel and Bethlehem are not all foreign in origin. For the past few decades a growing share of the U.S. market has been seized by low-cost minimill producers, which use electric furnaces and continuous casters (and usually non-union labor) to turn scrap steel into commodity products that are sold in regional markets. The minimills were originally relatively small companies, but the most successful of them, Nucor, has become one of the largest producers in the entire industry.

Another irony of the current situation is that the Steelworkers union is forced to make common cause with companies that have often been its bitter foes over the past two decades. After Wheeling-Pittsburgh filed for Chapter 11 in 1985, the company successfully petitioned the bankruptcy court for permission to abrogate its union contract and demand an 18 percent wage reduction. A decade later, workers at Wheeling stayed on strike for 10 months in a dispute over pensions. In recent years, two of the labor movement’s leading corporate campaign targets have been AK Steel and Oregon Steel Mills.

Perhaps the biggest insult to organized steelworkers came in the mid-1990s, when LTV opened a non-union minimill in Alabama – in a joint venture with two foreign producers: British Steel and Japan’s Sumitomo Metal Industries. Even more irritating to labor was the fact that the operation, called Trico Steel, was subsidized with state tax breaks. Union members may have felt some satisfaction when Trico went bankrupt last March and ceased operations; its assets were later sold off to Nucor.

For all the complaints by U.S. producers about the subsidies received by their foreign counterparts, it turns out that domestic steelmakers are also recipients of government largesse. In 1999 the American Institute for International Steel -- a trade association that represents importers and exporters and thus favors free trade -- issued a report documenting billions of dollars in subsidies received by U.S. steelmakers from both federal and state government programs.

Even if the industry’s ambitious proposal is not approved, further consolidation is likely to occur. Recently, there were reports that U.S. Steel was involved in negotiations to purchase National Steel. Whether it happens in a big way with federal blessing or more gradually through the market, consolidation raises some troubling issues. Industries that consume steel are concerned about a jump in their costs. But the risk is perhaps even greater for the Steelworkers. The union is supporting a mega-merger in the name of saving jobs and will seek to negotiate some form of employment guarantees. Yet it is likely that a new super steel producer will see job eliminations -- as well as wage and benefit cuts -- as unavoidable measures in its effort to meet the import challenge. Preserving high-wage, unionized jobs in an era of hyper-competition is no easy task.

LEADING U.S. STEEL PRODUCERS

1. USX-U.S. Steel Group
2000 revenues: $6.09 billion

2. LTV Corp.
2000 revenues: $4.93 billion

3. Nucor Corp.
2000 revenues: $4.59 billion

4. AK Steel Holding Corp.
2000 revenues: $4.52 billion

5. Bethlehem Steel Corp.
2000 revenues: $4.20 billion

6. National Steel Corp.
2000 revenues: $2.98 billion

7. Weirton Steel Corp.
2000 revenues: $1.12 billion

8. Rouge Industries Inc.
2000 revenues: $1.10 billion

9. Wheeling-Pittsburgh unit of WHX Corp.
2000 revenues: $1.05 billion

Sources: Company reports

LEADING STEEL PRODUCING COUNTRIES
Ranked by 2000 production of crude steel in millions of metric tons

Source: International Iron & Steel Institute

RESOURCES

United Steelworkers of America <www.uswa.org>

American Iron and Steel Institute <www.steel.org>

Steel Manufacturers Association <www.steelnet.org>

International Iron & Steel Institute <www.worldsteel.org>

American Institute for International Steel report on subsidies to the steel industry <www.aiis.org/pdfs/report.pdf>

American Metal Market <www.amm.com>