Mac's Muse: One potato, two potatoes, three potatoes ... gone! As U.S. steel industry gets its lunch eaten, many parties can share blame

WWW.THEFABRICATOR.COM NOVEMBER 2001

November 15, 2001

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A lot of parties can share the blame for what's happened to the North American steel industry, and its going to take effort from them all to pull the industry out of its quagmire. Can it be done? Time will tell.

A recession, defined by economists, is two consecutive quarters of negative (absent) GDP growth. History shows that there have been 12 recessions in the U.S. since the Great Depression of '29. Half of those recessions lasted approximately six months; the others, 18 months. Thus, the average recession lasts approximately one year.

Of course, in an empirical sense, they say a recession is when your neighbor has no job, but a depression is when you have no job!

For those of us in industry, are we not networking on behalf of more friends, contacts, and colleagues than ever before? And are we not networking longer than ever before? Are not many of these individuals well-qualified? Is the reason not just that management jobs in the steel industry simply are unavailable?

Many positions (and companies) have been eliminated permanently. Those positions that may be open and eventually filled will not be filled until ownership sees business returning. When that might be is the magic question.

Recession Nothing New Here

Notwithstanding the fact that the economy, after nine years of economic expansion, is entering a recession, our industry can write the book-we have been in recession for some time. In the past 24 months, we have seen a first dozen, and now with the bankruptcy of Bethlehem Steel, a second dozen steel mills file for bankruptcy. Now, if you can believe it, a third dozen have begun to file. With more than 24 companies in bankruptcy, approximately 30 percent of the steel industry currently is bankrupt, with more to come, including some highly leveraged steel distribution companies and some undercapitalized steel dot.coms that are hanging around temporarily.

Imports. The popular belief is that foreign imports are to blame. With 25 percent to 30 percent of U.S. consumption being satisfied by foreign material, this argument must be considered.

At the university, I tell my students never to buy American under the guise of being patriotic. People always should purchase the best value for their dollar. This philosophy fuels the free market, and, as such, has provided the stimulus for so many American industries to become world-class competitors.

Unfortunately, some (not all) foreign governments see their own domestic steel industries as symbols of national pride. After all, look at the pride we in the U.S. take in our own basic industries. Because of the high fixed costs and capital required to construct a steel industry, foreign countries' own domestic consumption is inadequate to cost-justify the investment, so they look to foreign markets.

Oversimplifying the trade laws, a foreign country cannot sell steel in the U.S. cheaper than it does in its own home market. Further, it cannot sell steel in the U.S. for less than its manufacturing cost. By subsidizing an inefficient steel industry and shipping steel offshore, they not only export their steel, they export their unemployment, as well. In these cases, shame on them. In the cases in which foreign steel is not dumped but simply produced more efficiently, shame on us. However-and it's a BIG however-foreign steel is not the sole, or perhaps not even the biggest, problem.

Sharing the Blame. In my opinion, other internal parties must share the blame. Let's be blunt: Some mills went bankrupt because of poor management. Shortsightedness, self-centeredness, and historical ways of operating that typically have gone unchallenged certainly have contributed. Albert Einstein once proffered that "You can't solve the paradigm from within the paradigm." Yet the historical practice of our industry is to home-grow talent and promote from within so that the protgs can continue the modus operandi of their mentors. This practice has backfired on many companies, to say the least.

Credibility gaps exist between labor and management. In some cases, these are unfounded. As labor has unfortunately bought into the mantra of "Trust no management," business agents have fought much needed work rule modifications and downsizing for the sake of self-preservation. After all, fewer employees means fewer business agents.

On the other hand, some distrust is warranted. As management seeks wage concessions, mitigation of health coverage, and reductions in pensioners' income, they often do so while giving themselves salary increases and bonuses, even in the absence of profits, or worse, even solvency. The distrust is obviously fueled by something. Ironically, upper management at some companies sees a $3 million bonus as a sacrifice because the previous year's was $4 million! They then try to equate this with the concessions they seek from others. Is it any wonder there is so much acrimony in current labor-management relations?

Effects From Other Institutions. The government and banking industries have not remained unscathed from the current situation. When recessions threaten, the government has two weapons in its economic arsenal-monetary policy and fiscal policy. Recognizing that it is the single largest consumer in the U.S. marketplace, representing 25 percent of our $9 trillion economy, the government can set fiscal policy to authorize more projects and spend more money when the economy is soft; when an overheating economy threatens to become inflationary, the government can tighten the purse strings.

Monetary policy is powerful in that it controls interest rates and money supply-the amount of money in circulation. An overheated economy brings higher interest rates and less money creation, thus preventing inflation, whereas in a recession, the government lowers interest rates and increases money supply. Over the past decade, it has not been unusual for the economy, as measured by the GDP, to grow at a 3.5 percent rate, with M-1, M-2, and M-3 money supplies growing at a much higher rate. Therefore, when more money is printed and put into circulation than is needed to fund the GDP growth, the excess liquidity makes its way into the banking system.

Just like a service center is in the steel business, a bank is in the money business. A bank that doesn't lend money is the equivalent of a service center that doesn't sell steel or a job shop that doesn't fabricate. When a manufacturer, distributor, or fabricator is experiencing a softening market, the price of steel goes down. When demand for money declines, banks have a tendency to rethink (lower) loan requirement thresholds. Thus, overcapacity in industries gets fueled and funded. The excess liquidity provides for the creation of capacity, which, under normal circumstances, could not be economically justified. Excess money supply not only builds unneeded capacity throughout the economy, but also eventually enters the stock market and pushes values to artificial highs.

Have we not seen both of these scenarios in the last couple of years? How about all those dot-coms that are now dot-bombs? Or those 401(k)s that some are now calling 201(k)s? Yes, the banks have to step to the plate and accept some of the blame for industry's problems.

Where Does That Leave Us?

Let's recap. The current abysmal condition of our industry can be attributed to foreign imports, but also to steel company management, labor unions, government, and the banking industry. And as it's taken all of these constituencies to create the problem, it most probably will take all of them to fix it. It can be fixed with self-discipline and sound management by all. We must fight the latest management du jour concept and return to the basics. You know, the meat and potatoes, blocking and tackling, 101-type stuff.

As Benjamin Franklin said, "We must all hang together, or we most assuredly will all hang separately." If we in the steel industry don't hang together, we can forget Einstein and Franklin and simply recall the refrain of our kindergarten playground: "Ashes, ashes, we all fall down ... "



Don McNeeley

Contributing Writer

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