What now? Every facet of steel industry watches, waits as change sweeps in
There's no telling just what the steel industry will look like even in the next few months as the federal government mulls its options for protecting a domestic steel industry suffering through perhaps its most threatening slump ever.
As steelmakers await President George W. Bush's decision on recommendations to slap tariffs of up to 40 percent on certain imported steel products, fabricators (and just about everyone else in the steel industry) are wondering just how heavily those tariffs will affect their respective corners of the market.
The problem are many — too much capacity, lousy prices, weak demand, and stultifying retiree costs, all topped off by the hesitancy of most of the involved governments to cut capacity in an industry regarded as vital to everyone's respective national interests.
Oh, and don't forget the spate of bankruptcies, most notably that of No. 3 steel producer Bethlehem Steel and No. 4 LTV Corp., which has chosen the road — decreasingly less-traveled — to nonexistence rather than flounder about under Chapter 11 protection, which it filed for in 1986 and again in December 2000.
The U.S. International Trade Commission (USITC) has recommended that President Bush enact large tariffs on certain imported commodity steel products, notably hot-rolled sheet products, under Section 201 of the Trade Act of 1974.
Tariffs do not solve the problem by any stretch, according to LTV Steel's former chairman and CEO.
"In my opinion, [a] tariff is a short-term fix," said William Bricker, who retired as head of LTV in late November after a little more than a year on the job. "It'll probably last as long as Bush's first term, certainly no longer than that. Probably, unless fixes accompany it, it'll just put off the inevitable restructuring of the industry."
The president is expected to make his final decisions on the recommendations, which call for tariffs of up to 40 percent, by mid-February. One manufacturer of stainless bar, rod, and wire is hoping the Bush administration opts for quotas rather than tariffs on the imported counterparts to its products.
"We have recommended the use of quotas because we're primarily concerned about volume," said William Pendleton, director of corporate affairs for Carpenter Technology Corp. "We have been hurt by the surge of [import] volume that's occurred. We need to provide ROI with volume in our mills."
Carpenter has made about $500 million in capital investments over the past five years and needs the mill volume to make those investments pay off, Pendleton said.
Pendleton said he's encouraged by the president's program, which is looking not only at tariffs and quotas but also at negotiating with foreign steel producers to cut production and to negotiate rules to eliminate market-distorting subsidies.
"This is the first president to lay out [not only] a 201 program but the other two parts of the program," said Pendleton, Carpenter's point person for governmental affairs. "I don't think they're looking for just a political solution. I think they're looking for a real solution."
Tariffs actually can work doubly against domestic industry by putting steel consumers out of business, according to Don McNeeley, president and COO of Chicago Tube & Iron, a steel service center with 11 subsidiaries throughout the Midwest.
McNeeley's hypothetical scenario works like this: The U.S. tells a certain country, "We don't want your flat-rolled steel anymore" and slaps a tariff on it. That country then pulls its flat-rolled out of the U.S. market and instead makes it into washing machines back home. Then it sends its washing machines here and sells them at a fraction of the cost of domestically built machines.
"Now you've lost jobs in steelmaking and in washing machine manufacturing," McNeeley said.
How It All Hits Home to Fabricators, Distributors
So are tariffs a good idea? From the largest parts manufacturers down to the smallest job shops, they all are looking at having to cover higher costs one way or the other if tariffs are enforced.
Steel industry analyst Charles Bradford said automotive parts manufacturers will get priced out of the U.SS. market if foreign steel has a tariff on it.
"Auto companies will switch to foreign suppliers for parts," Bradford said. "You can lose the steel manufacturing business in this country. That's not a short-term issue, it's a medium- to long-term issue."
The Large. Delphi Automotive Systems, the largest automotive parts manufacturer in the world with 198,000 employees in 43 countries, may not be worried about getting priced out of the market, but it does take issue with the government tinkering in the free market.
"We look at duties and quotas as opposed to the spirit of the free and open marketplace we prefer," said Eric Sandford, who oversees $2.8 billion in annual ferrous and nonferrous material purchases as deputy director of metal raw materials purchasing for Delphi Global Purchasing in Troy, Mich. "We have been following the proceedings since the outset. We definitely have concerns about [what we're] following and what the outcome may be.
"When you talk about duties and quotas, there's the specter of potential price increases," said Sandford, who's been involved in steel purchasing for Delphi since 1994. "They may be restricting importation of some materials. That would influence the balance of supply and demand, obviously influencing an upward price for some products."
The Steel Service Center Institute (SSCI) in Chicago, which represents about 300,000 manufacturers and fabricators in the U.S., Canada, and Mexico, has proposed a five-step program that it believes would balance the interests of steel producers and steel consumers. In its first public policy statement on the matter, SSCI has recommended the following to the Trade Policy Staff Committee that will advise President Bush on relief measures for steel mills:
1. Bush should proclaim an additional tariff of 20 percent on all steel mill products and a corresponding offsetting tariff on certain imported steel-containing products. This differs from the USITC's recommendation that only mill products carry tariffs.
2. For each steel mill product, the maximum tariff rate should be applied so as to eliminate the lowest current import prices from the market and the average financial loss, if any, incurred by producers of that product in 2000-2001. In each group, tariffs should be phased out gradually as import values increase until the tariffs decrease to zero.
3. The president should waive additional tariffs for any country or customs union that he deems is in compliance with the principles of free and open steel trade, using as guidelines the relative balance between steel mill imports and exports, relative balance between capacity and consumption, and the extent to which the exporting country uses subsidies to maintain or increase capacity.
4. Any country or customs union that has not achieved certification by the end of the fourth year of the program should have tariffs placed on it for an additional four years.
5. The president should appoint a special ambassador within the U.S. Trade Representative's office to negotiate and administer the program.
The Medium."To the extent we have customers that require imported product for whatever reasons, we would no doubt talk to them and just let them know that if they absolutely had to have those products, we would go ahead and import them," said David Hannah, president and CEO of Reliance Steel & Aluminum Co., a Los Angeles-based conglomerate of steel service centers and fabrication businesses. "Obviously, the price to ... the customer would have to cover base costs and tariffs, plus our spread."
Whatever happens to prices and the market in general, Hannah is hoping it's good.
"This is probably the toughest time that I've seen in over 20 years that I've been in the industry, and a lot of the people who I speak to that have been around this business longer than that have said that this is the toughest time that they've ever seen, primarily because it's lasted longer than some of the previous dips," Hannah said.
Reliance employs about 4,200 people in more than 85 processing and distribution facilities in the U.S., France, and South Korea.
The Small. To Dave Nader at Max Weiss Co., a small fabricator of structural steel in Milwaukee, the issue with a clamp on imports isn't price-it's availability. Nader, senior estimator for the company, said the battle to find product when foreign steel supplies dried up for a time a couple of years ago isn't one he wants to fight again soon.
"That was brutal," said Nader, a 22-year veteran of the company, which employs about two dozen people. "There were beams you just flat out couldn't get because domestic producers couldn't keep up. I don't want that to happen again."
Using foreign steel "is just a fact of life," Nader added.
"I did a job [recently]-we had a load of assorted material come in, beams from South Africa, Russia, Spain. That was all on one truck," Nader said. "As much as I'd like to see prices go down, if a beam is 20 cents or 30 cents a pound, we just mark it up."
While people mull the possibilities surrounding tariffs, industry consolidation, and mass bankruptcy among producers, other corners of the market are astir.
Gadsden, Ala., is seeking permission to issue $5 million in industrial revenue bonds to reopen Gulf States Steel, which closed in 2000, costing 1,700 employees their jobs.
On Minnesota's Iron Range, where a billion-ton iron ore deposit has lain fallow for more than 15 years, Minnesota Iron & Steel Co. (MIS) is forging ahead with its plan to construct a $1.15 billion mining and compact strip casting facility in the town of Nashwauk with some multimillion-dollar tax help from the state of Minnesota and the state's Iron Range Resource and Rehabilitation Board (IRRRB).
Bradford calls the projects "nonsense."
"I wish the people involved would put up some of their own money instead of using tax money," Bradford said.
Concerns over excess capacity and funding sources notwithstanding, MIS CEO and President John Lefler insists that his venture would do the U.S. industry good by giving it the world's first site at which all the latest ore and steel-making technologies are couched in one operation.
The MIS facility, which Lefler hopes will begin operations in 2004 and reach its full annual production capacity of 2.4 million tons of hot-rolled steel in 2006, would use two MIDREX® MEGAMOD direct reduced iron (DRI) units to melt taconite mined from the now-idle Butler Taconite plant and process it at the National Steel Pellet Co. in nearby Keewatin, which MIS is negotiating to purchase from National Steel Corp. The ore then would be manufactured into hot-rolled coils in a third-generation compact strip-casting mill.
According to Lefler, by using these technologies, the mill would produce the automotive-quality steel now available domestically only from integrated mills with a process that costs less than even minimills can boast with their electric arc furnaces that use scrap as a feedstock.
The main problem, of course, is attracting capital from an investment community that sees "steel" in the business plan and runs the other way.
"Our point is that this is a new concept," said Lefler, the former CEO of Gulf States. "This is one that has proven technology all the way through it. Now we have the concept of producing higher quality but at a lower cost than mini-mills because raw material will actually be at a lower cost than scrap when extracted from the ground and processed into DRI.
"We'd be making very good money today, even at today's prices, if we were running," he added. "But you've got to get running."
The Future of Steelmaking
While some, namely the United Steelworkers of America (USWA), are clinging to the hope that integrated steel mills can compete in today's market, others have written off the old mills and are instead looking at scrap-based facilities such as those run by Nucor and other mini-mill companies.
"The ore-based facilities do not make sense anymore," said Vijay Mathur, a professor of economics at Cleveland State University who specializes in regional economic development and has followed the LTV situation closely. "I understand the plight of the [integrated mill] workers. I think the problem is that they are keeping their hopes high, and I think that is sad. That's not where the future is.
"The future is to train these people for future jobs, jobs we are going to have in the future based on technology," he added. "They can be retrained."
Cleveland, in particular, is becoming a financial center, he said. Former steelworkers could be retrained to serve in that industry or others, such as biotech, plastics, drug manufacturing, and fuel cell manufacturing.
LTV spokesman Mark Tomasch concurred with Mathur, noting that the minimills now set the standard for price and products in the hot-rolled market. Mini-mills maintain a much lower cost of capital and therefore a more flexible cost structure than the integrated mills, or "integrateds" in industry parlance. One example Tomasch offered of the "staggering" fixed cost of doing business at an integrated mill is the price tag for rebuilding a blast furnace-routinely $100 million or more.
"That's the essential cost of just being in business," said Tomasch, who has been in the steel business for 17 years. "[Integrated mills] have an insatiable appetite for capital. The equipment destroys itself.
"The fundamental problem is that the integrated steel industry isn't competitive," he said. "It's not really a technology issue, it's a fundamental cost structure problem."
In addition, the "minis" usually employ nonunion labor. Because of those twin cost advantages, minis will continue to become a more dominant force in the U.S. steel business unless the integrateds can achieve "a massive restructuring" of the union compensation package, former LTV head Bricker said.
"The mini-mills are the ones with the most favorable production economics in the United States," Bricker said. "The economics of the steel business are more of a function of that disparity than the so-called import problem.
"The import problem is not helpful, that's for sure," he added. "But the import problem became much more grievous because of the differences in production costs between the integrated [mills] and the minis."
Lefler said that while illegal imports should not be allowed to decimate the U.S. steel industry, domestic steel producers cannot sit on their collective laurels indefinitely, no matter how hard it is to make them do otherwise.
"The industry does resist change," said Lefler, a veteran of two integrated steel producers. "I took this project on as a crusade. I know the American steel industry does not easily move into new areas. It has to be forced to. The industry should not be allowed to sit unchanged, but that's difficult to do in an industry with such tremendous inertia and capital costs."
The FABRICATOR is North America's leading magazine for the metal forming and fabricating industry. The magazine delivers the news, technical articles, and case histories that enable fabricators to do their jobs more efficiently. The FABRICATOR has served the industry since 1971.