Government support for steel hurts automotive suppliers

Distortions in the steel market, including the record high price of steel, are being fostered by the U.S. government and are causing a crisis that has impacted automotive and heavy duty suppliers across the country, triggering unprecedented bankruptcies and job losses. These findings are from a new report by the Motor & Equipment Manufacturers Association (MEMA), the largest trade group representing automotive suppliers.

The study, written by economist Brian Becker and Kevin Hassett and released today by MEMA, found that the steel crisis has triggered distortions in the steel market that have contributed to decreased availability, poorer quality, and delayed deliveries of steel.

The study's central focus was a comparison of the domestic steel industry and the U.S. steel consuming industry. Key findings include:

• Profitability: In 2004, U.S. steel manufacturing firms enjoyed their highest profits in years. The domestic steel industry noted record earnings in 2004, leading to market value increases of 60 percent or more for the largest of these companies. Meanwhile, automotive suppliers continue to face bankruptcies and worker layoffs.
• Forecasts: Not only are current profits trending upward for steel manufacturers and downward for automotive suppliers, projections point toward continued disparity. Both market participants and analysts are predicting a strong 2005 for the steel manufacturing industry—similar to the best-in-recent-memory results seen in 2004.
• Market Power: With its increased market concentration since 2001, the U.S. steel manufacturing industry enjoys more leverage to charge higher steel prices and pass on increased raw material costs to steel consumers, including automotive and heavy duty suppliers. Automotive suppliers do not have the market power to pass their higher steel costs onto their customers, particularly in view of the competition that suppliers face from imports of automotive parts.
• Utilization: With the surge in demand, industry consolidation and price spikes, capacity utilization rates have spiked to 10-year highs for U.S. steel manufacturers. The steel manufacturing industry's capacity utilization rate rose dramatically in 2004 to 94 percent, rising from a recent low of 79 percent in 2001. Utilization rates are forecast to be near 100 percent globally by 2005. Automotive suppliers by contrast are seeing their utilization decline due in part to decreased availability, reduced quality, and delayed deliveries of steel.
• Import Levels: Steel import shares have stayed essentially at or below their 10-year average levels since 2000.
• Prices: Steel prices climbed as a result of the 201 safeguards, but have increased even more significantly since the 201 safeguards were repealed. U.S. prices still remain at a premium to the rest of the world. For example, the January 2005 price of hot-rolled steel in the U.S. was $695 per ton, on the world spot market $575 per ton, and in China $510 per ton.

The study also addresses the role of China in the world market for steel. China recently became the world's largest consumer and producer of steel, as it supplies its fast growing economy. The growth in demand is forecast to outstrip the growth in supply, keeping China as a net importer of steel, according to industry analysts and the U.S. steel manufacturing industry's recent SEC filings.

In March, MEMA will be urging the International Trade Commission (ITC) to sunset anti-dumping and countervailing duty orders on specific steel commodities as a first step in providing a level playing field for U.S. businesses. ITC hearings will be held in March and April to review duties on imported hot-rolled, flat-rolled, and stainless steel strip and coil previously found to be unfairly priced, "dumped" into the U.S. market, or subsidized.