Case: Steel imports
Case: Steel imports
In 1984 the United States instituted steel-import quotas. In 1989 these were extended until March 31, 1992, so that foreign steel supplies could increase from 19.1 percent to 20.26 percent of the overall U.S. market. This overall quota necessitated negotiations for separate voluntary restraint agreements (VRAs) with each country supplying steel. How did this situation come about?
At the end of World War II, the U.S. steel industry was the most powerful in the world, and it seemed that no one could challenge its supremacy. By 1950, U.S. raw steel production accounted for 47 percent of the world's supply. By the early 1980s, however, this share fell to about 10 percent, where it has since stabilized. Not only has the U.S. world share of production fallen, the United States has become a net importer of steel. (See Map 5.1 for the major sources of U.S. imports.) Steel companies in the United States have argued that import figures understate the inroads of foreign competition because j>o much additional steel enters in finished productg_such as automobiles and pipes. Steel jobs in the United States fell by more than 200,000 in the 1980s.
Worldwide, several factors are important for understanding the evolving competitive situation. One involves additional capacity created in
countries that are relatively new to steel production. Many developing countries consider domestic mills essential for achieving their industrialization objectives, and they view steel output in terms of security and prestige considerations. These countries have been able to increase capacity because the technology, except for certain specialty steels, has become widespread and easily attainable. Because of the high priority placed on steel, many countries have been willing to forgo other development projects in order to build mills or have received financial assistance from outside for construction. Since the early 1970s the largest capacity increase has been among Third World countries; they have a substantial, growing excess capacity. In the 1980s Brazil and South Korea's worldwide ranks moved from 10th and 18th to 6th and 8th, respectively. Excess capacity in the United States, Europe, and Japan led steelmakers in all three areas to effect capacity cuts.
Given the high fixed costs of steel production, a second factor affecting steel competition is that much of the world's production has been government-owned. Some observers argue that these firms will continue operating regardless of whether they cover their short-term costs. Because of employment pressures in countries such as France, it has been politically very difficult to cut back production more rapidly in the state facilities. Export markets have been used as an instrument of maintaining more output. The state-owned companies in such countries as Spain and Argentina have reported record losses, but continued exporting at low prices. In addition to direct ownership, it has been argued that governmental assistance through tax incentives, reorganization schemes, provision for long-term, low-interest loans, and waiving of environmental requirements have placed U.S. steel producers at a disadvantage vis-a-vis some foreign producers.
A number of other factors have contributed to the ability of foreign steel producers to compete effectively in the United States. One such factor
is technology: Although U.S. firms claim that their newest plants are as advanced as any, the average age of plants in some countries is much below that of U.S. plants, so these plants are more productive on average. For example, it is generally recognized that the useful life of a coke oven is 25 years; however, in 1982, 41 percent of U.S. ovens exceeded that age as compared with only 2 percent in Japan. In 1958 it took Japanese workers nearly 36 man-hours to produce a ton of cold-rolled sheet steel, which U.S. steelmakers could turn out in 12 man-hours. Japanese productivity caught up with that in the United States in 1975; by 1983 it exceeded U.S. productivity by 25 percent. American firms once guaranteed their workers pay increases that exceeded increases in productivity in order to gain a "no-strike" clause in labor contracts. This caused steelworkers to earn more than U.S. production workers in any other manufacturing sector. The plight of the industry, however, caused U.S. companies not to grant any increases between 1982 and 1988, and in 1987 the contract between labor and USX, the largest U.S. steel producer, actually called for wage cuts.
Another factor concerns production location. Most U.S. mills were built decades ago in the corridor of states bordering the Great Lakes. This location minimized transportation costs for raw materials and for finished steel to be shipped to industrial users in this same corridor. Today, however, if a firm wants to use cheaper iron from Brazil and to sell to the expanding industrial and population base in the South and West, these locations may no longer be optimal. Japan, the largest steel exporter to the United States, situates its production largely at deep-water ports. The Japanese industry now has an estimated cost advantage on purchases of raw materials even though they are imported. Despite these advantages, Japan is increasingly importing steel from Taiwan and South Korea, both of which have, on average, lower labor rates and newer plants than Japan. South Korea's Pohang Iron & Steel is now considered the world's most
efficient steelmaker. In addition, the average South Korean steelworker earns only one third the salary of a Japanese steelworker.
Regardless of the source of competition, there is a general agreement that there must be major new investment and restructuring of the U.S. steel industry if it is to align its costs with those of imported steel. The steel industry in the United States has argued the difficulty of making this investment because of poor earnings records and the poor outlook of recent years. The lack of funds has been contested by critics who pointed to U.S. Steel's (now USX) acquisition of Marathon Oil when it apparently lacked funds for technological improvements. The USX chairman responded, "Rebuild steel mills to do what? Sit and rust again?" Critics have also blamed industry managers for spending funds for years on hopelessly obsolete (now being retired) plants rather than targeting outlays to viable facilities.
Six competitive responses appear to offer some hope for the future of the steel companies in the United States. The first has been a move to so-called minimills, such as those owned by Nucor, which have specialized products, the latest technology, and proximity to markets. These plants are competitive, and their combined capacity and sales were about 25 percent of the U.S. market by the end of the 1980s. Furthermore, they have recently been moving toward the premier products, such as sheet steel for the auto industry. The second response has been a move by foreign steel firms, such as Nippon Ko-kan and Kobe Steel of Japan, to buy into the U.S. industry or form joint ventures with U.S. firms, thus infusing funds and technology while not competing so directly with U.S. firms. The third has been a move by U.S. producers to buy semifinished steel from abroad, thus cutting costs at an important level of production. For instance, Korea's Pohang has a joint venture in the United States with USX, to which hot-rolled coils are shipped from Korea. The fourth has been a move to merge firms in the industry in
order to gain administrative scale economies, to complement production, and to phase out less competitive plants while maintaining a full product line. An example of this was the Republic Steel-LTV merger plan. The fifth is to phase out nonsteel activities and older steel facilities to concentrate on efficient steel operations. Both Bethlehem and Inland have been following this approach. The sixth is to diversify out of steel. The business of both Armco and USX is now primarily nonsteel related, and USX discussed the possibility in 1990 of getting out of steel altogether. Relatedly, the big five Japanese steelmakers are all diversifying from steel.
In spite of these moves, the steel industry in the United States continues to push for stringent protection. Many steel customers in the United States have complained that the quotas, when coupled with steel-capacity cuts, meant higher prices, delayed deliveries, and inability to get steel of the needed specifications. Caterpillar has complained of being burned because of short supply. Handy & Harman's Indiana Tube Corporation has even considered moving its production abroad to overcome the supply problem.
In 1984 the United States instituted steel-import quotas. In 1989 these were extended until March 31, 1992, so that foreign steel supplies could increase from 19.1 percent to 20.26 percent of the overall U.S. market. This overall quota necessitated negotiations for separate voluntary restraint agreements (VRAs) with each country supplying steel. How did this situation come about?
At the end of World War II, the U.S. steel industry was the most powerful in the world, and it seemed that no one could challenge its supremacy. By 1950, U.S. raw steel production accounted for 47 percent of the world's supply. By the early 1980s, however, this share fell to about 10 percent, where it has since stabilized. Not only has the U.S. world share of production fallen, the United States has become a net importer of steel. (See Map 5.1 for the major sources of U.S. imports.) Steel companies in the United States have argued that import figures understate the inroads of foreign competition because j>o much additional steel enters in finished productg_such as automobiles and pipes. Steel jobs in the United States fell by more than 200,000 in the 1980s.
Worldwide, several factors are important for understanding the evolving competitive situation. One involves additional capacity created in
countries that are relatively new to steel production. Many developing countries consider domestic mills essential for achieving their industrialization objectives, and they view steel output in terms of security and prestige considerations. These countries have been able to increase capacity because the technology, except for certain specialty steels, has become widespread and easily attainable. Because of the high priority placed on steel, many countries have been willing to forgo other development projects in order to build mills or have received financial assistance from outside for construction. Since the early 1970s the largest capacity increase has been among Third World countries; they have a substantial, growing excess capacity. In the 1980s Brazil and South Korea's worldwide ranks moved from 10th and 18th to 6th and 8th, respectively. Excess capacity in the United States, Europe, and Japan led steelmakers in all three areas to effect capacity cuts.
Given the high fixed costs of steel production, a second factor affecting steel competition is that much of the world's production has been government-owned. Some observers argue that these firms will continue operating regardless of whether they cover their short-term costs. Because of employment pressures in countries such as France, it has been politically very difficult to cut back production more rapidly in the state facilities. Export markets have been used as an instrument of maintaining more output. The state-owned companies in such countries as Spain and Argentina have reported record losses, but continued exporting at low prices. In addition to direct ownership, it has been argued that governmental assistance through tax incentives, reorganization schemes, provision for long-term, low-interest loans, and waiving of environmental requirements have placed U.S. steel producers at a disadvantage vis-a-vis some foreign producers.
A number of other factors have contributed to the ability of foreign steel producers to compete effectively in the United States. One such factor
is technology: Although U.S. firms claim that their newest plants are as advanced as any, the average age of plants in some countries is much below that of U.S. plants, so these plants are more productive on average. For example, it is generally recognized that the useful life of a coke oven is 25 years; however, in 1982, 41 percent of U.S. ovens exceeded that age as compared with only 2 percent in Japan. In 1958 it took Japanese workers nearly 36 man-hours to produce a ton of cold-rolled sheet steel, which U.S. steelmakers could turn out in 12 man-hours. Japanese productivity caught up with that in the United States in 1975; by 1983 it exceeded U.S. productivity by 25 percent. American firms once guaranteed their workers pay increases that exceeded increases in productivity in order to gain a "no-strike" clause in labor contracts. This caused steelworkers to earn more than U.S. production workers in any other manufacturing sector. The plight of the industry, however, caused U.S. companies not to grant any increases between 1982 and 1988, and in 1987 the contract between labor and USX, the largest U.S. steel producer, actually called for wage cuts.
Another factor concerns production location. Most U.S. mills were built decades ago in the corridor of states bordering the Great Lakes. This location minimized transportation costs for raw materials and for finished steel to be shipped to industrial users in this same corridor. Today, however, if a firm wants to use cheaper iron from Brazil and to sell to the expanding industrial and population base in the South and West, these locations may no longer be optimal. Japan, the largest steel exporter to the United States, situates its production largely at deep-water ports. The Japanese industry now has an estimated cost advantage on purchases of raw materials even though they are imported. Despite these advantages, Japan is increasingly importing steel from Taiwan and South Korea, both of which have, on average, lower labor rates and newer plants than Japan. South Korea's Pohang Iron & Steel is now considered the world's most
efficient steelmaker. In addition, the average South Korean steelworker earns only one third the salary of a Japanese steelworker.
Regardless of the source of competition, there is a general agreement that there must be major new investment and restructuring of the U.S. steel industry if it is to align its costs with those of imported steel. The steel industry in the United States has argued the difficulty of making this investment because of poor earnings records and the poor outlook of recent years. The lack of funds has been contested by critics who pointed to U.S. Steel's (now USX) acquisition of Marathon Oil when it apparently lacked funds for technological improvements. The USX chairman responded, "Rebuild steel mills to do what? Sit and rust again?" Critics have also blamed industry managers for spending funds for years on hopelessly obsolete (now being retired) plants rather than targeting outlays to viable facilities.
Six competitive responses appear to offer some hope for the future of the steel companies in the United States. The first has been a move to so-called minimills, such as those owned by Nucor, which have specialized products, the latest technology, and proximity to markets. These plants are competitive, and their combined capacity and sales were about 25 percent of the U.S. market by the end of the 1980s. Furthermore, they have recently been moving toward the premier products, such as sheet steel for the auto industry. The second response has been a move by foreign steel firms, such as Nippon Ko-kan and Kobe Steel of Japan, to buy into the U.S. industry or form joint ventures with U.S. firms, thus infusing funds and technology while not competing so directly with U.S. firms. The third has been a move by U.S. producers to buy semifinished steel from abroad, thus cutting costs at an important level of production. For instance, Korea's Pohang has a joint venture in the United States with USX, to which hot-rolled coils are shipped from Korea. The fourth has been a move to merge firms in the industry in
order to gain administrative scale economies, to complement production, and to phase out less competitive plants while maintaining a full product line. An example of this was the Republic Steel-LTV merger plan. The fifth is to phase out nonsteel activities and older steel facilities to concentrate on efficient steel operations. Both Bethlehem and Inland have been following this approach. The sixth is to diversify out of steel. The business of both Armco and USX is now primarily nonsteel related, and USX discussed the possibility in 1990 of getting out of steel altogether. Relatedly, the big five Japanese steelmakers are all diversifying from steel.
In spite of these moves, the steel industry in the United States continues to push for stringent protection. Many steel customers in the United States have complained that the quotas, when coupled with steel-capacity cuts, meant higher prices, delayed deliveries, and inability to get steel of the needed specifications. Caterpillar has complained of being burned because of short supply. Handy & Harman's Indiana Tube Corporation has even considered moving its production abroad to overcome the supply problem.
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