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Industry report - steel.

Will Big Steel survive? There's nothing more basic to us than our steel industry, or more vitally threatened by imports. We see it bleeding daily in our newspapers. But Big Steel, Big Auto, and Big Government are almost like Father, Son, and Holy Ghost. They are sacred and indivisible--things we will not give up without a fight--nuclear if necessary.

It's different in other, presumably less vital industries. Take fasteners, for instance. Japan (and others) did. In two decades, two thirds of our industrial-fastener industry has been wpied out by import. Take machine tools: in a little over two years, half the US market was captured by imports.

Major losses like these are usually gone forever. You can't just pass a law to make them return. In fastener's case, facilities have been closed down, equipment dismantled and sold, and people left to start a new life. Machine tool's fate is not yet decided; we will be discussing that in June.

But Big Steel is different. Whenever its critical mass is threatened, an alarm is sounded and important people respond. Leaders of countries wind up glaring at each other across conference tables and threats, both expressed and implied, are exchanged. The aggressors back off, a truce is struck, and one battle ends--but the war goes on.

And there are casualties. Wow, have there been casualties! Imports of steelmill products soared to 26,171,000 tons in 1984, reports the American Iron and Steel Institute. Donald H Trautlein, chairman of Bethlehem Steel Corp (also chairman of AISI) called the financial results for 1984 "totally unsatisfactory" for domestice steelmakers because of the "highly injurious; level of steel imports. These results, he said, underscore the urgency for improvement that could come from successful implementation of President Reagan's Comprehensive Fair Trade Program.

Imports were up 53.3 percent over 1983 and represented an estimated 26.6-percent share of the American market. The previous peak was 21.8 percent in 1982. Compared to the 50+ percent import leap last year, the domestic-shipment increase was a mere hop of 10 percent. Domestic steel-industry employment fell 10 percent during '84. In December alone, the industry lost 5000 production people and 600 white-collar workers.

In a year when the profit picture should have improved, this intensive competition produced huge losses for the major integrated mills. Bethlehem lost $64.5 million in their fourth quarter and $112.5 million for the year. LTV Corp posted a record $246.7-million fourth-quarter loss, and a loss for the year of $378.2 million as they "bit the bullet," taking steel-related write-downs in consolidating their Jones & Laughlin and newly acquired Republic Steel operations. Even once mighty leader US Steel--who lost a combined total of $1.5 billion during '82 and '83--only showed an '84 profit by selling assets and siphoning profit from newly acquired Marathon Oil.

Whose fault is it?

Charles Bradford, steel industry analyst for Merrill Lynch, feels that the industry brought a lot of this on itself by seeking relief. "A key factor in the surge of imported steel was the steel industry's push for import quotas. Both the Bethlehem Steel/United-Steelworkers-union trade suit and the industry's attempt to get Congress to legislate quotas frightened steel-exporting countries and steel importers. Thus, a major incentive was created to get steel into the US before any quotas could go into effect. Also, a strong dollar made the US, with its already high steel prices, a very attractive market for overseas steelmakers. Debt repayment problems of the less developed countries also contributed to their export drive."

With voluntary restraint agreements in place, the question for Bradford is whether overseas steelmakers will abide by them. "We believe that actual imports of steel-mill products during 1985 will amount to about 20 percent of the market, or about where imports probably would have been anyway if Bethlehem Steel and the United Steelworkers union had never launched their trade case before the International Trade Commission. All that was accomplished, in our opinion, by this very expensive exercise was to increase imports sharply during 1984, possibly with a cost between $3 billion and $6 billion to the industry in lost sales and lower prices."

Steel's case

Before we agree too quickly with Bradford, let's review the case made for steel-import protection by Bethlehem's Trautlein before the Subcommittee on International Trade, Senate Finance Committee in June of '84 on behalf of Senate Bill S. 2380 and House Rule 5081.

He started by citing industry losses in '82 and '83 totalling $6 billion, the 170 plant or facility closings, and a decline in employment for '75 to '83 of 210,000 or almost 50 percent of the workforce. Between '81 and '83, the industry lost nearly a third of its net worth, yet its capital needs will be over $5 billion annually just to stay viable. To continue in this manner, he stated, "would be tantamount to the near-term liquidation of the industry.

"We are the only major industrial nation that cannot presently supply its own needs in a time of strong demand," he continued. "We have not overbuilt, yet we are suffering the consequences of foreign overbuilding. Foreign government import restrictions and subsidies for steel production capacity have removed the discipline of the market system in world steel trade. This has insulated other countries from the damage of imports and made the US market an increasingly attractive target for excess foreign tonnage."

He cited his industry's reliance on existing trade laws. "We have probably spent more time, effort, and money in attempting to use existing trade laws to address our trade problems than any other US industry. Domestic steel producers have filed more than 150 trade cases just since 1982. But despite some successful decisions, the overall result have been more imports, from more countries, at increasingly destructive prices." And he noted the bill's provisions to impose a quid pro quo on the domestic steel industry to reinvest in steel substantially all the cash flow from steel operations.

As a result of inadequate internal-cash generation, long-term debt for the steel segment of domestic steelmakers rose from 43.9 percent of equity in '79 to 80.9 percent in '83. This has severely restrained the industry from raising any significant additional equity capital at reasonable costs. (See chart, Domestic Steel's Net Worth Approaches Zero.)

Help yourself

But Trautlein also pointed to a number of self-help measures underway that will help the industry regain competitiveness. Continuous casting capacity (only 39 percent of steel poured in '84 versus 88.5 percent in Japan, for example) will double in the nest five years (16 continuous casters, 16-million tons total capacity, were installed between '82 and '84). "Significant improvements are being made in metallurgy, computerization, and electric-furnace operations, where the US industry is the world leader. Manjor steel-consuming manufacturers with world-wide steel consuming operations have recently asserted that the quality of American Steel is second to none."

Nonunion employment costs have been curtailed substantially, he pointed out. American steel companies during 1982-1983 not only substantially reduced administrative work forces in line with actual and projected economic conditions, but also made a large number of changes in compensation and benefit programs for both management and other nonunion salaried employees. Overhead has been reduced approximately 25 percent.

Trautlein also lauded energy conservation efforts since 1972 that reduced by 25 percent the BTUs required to produced a ton of finished steel. He also claimed that diversification into nonsteel business had improved profit stability by using external financing, and not taking internally generated funds away from investment in steelmaking facilities.

Other technological, though incremental, improvements he named included recovery and recycling of waste materials, computerized process control, sensor development, rapid in-process analysis of liquid metal, direct temperature measurement, and detection of porosity in hot and cold strip. He also strongly implied that technology breakthrough could be used to "leapfrog" foreign competition.

Trautlein was proud to point out a labor-productivity edge US steelmakers now have. Manhours per net (US) ton in third-quarter '83 were estimated at 6.48, versus 7.28 for Japan and over 11 for West Germany, France, and England. This advantage would be far less, he admitted, if each industry were operating at full capacity. "Japan, generally considered the world's most efficient steel industry, would have the best labor productivity at high operating rates. However, if over a long period, market demand is lower than projections, potential efficiency is transformed from a competitive strength into a liability. Persistent excess capacity represents a managerial error, regardless of the potential efficiency of the idled facilities."

Yield benefits

Yields are an important measure of efficiency, he emphasized. Since the US's product mix is more sophisticated, its yields necessarily lag behind. Inadequate cash flow since the late '60s retarded investment in continuous casting (which can improve yields 15 percent). In '83, continuous casting output was only 29.7 percent of US shipments, versus 81.4 percent for Japan, 69.6 percent for West Germany, and 63.3 percent for France. "In the European community," he said, "governments have provided more than $30 billion to their steel industries over the past decade," and much of this was for continuous-casting equipment.

On the positive side, he felt it was remarkable that average US yield is as high as it is (76 percent, shipments/raw steel production, equal to West Germany and FrancE, versus 86 percent for Japan) with such a low percentage of continuous casting in use. Thus his conclusion that "if the US is compared only with its European competitors, where the distortions caused by subsidies and trade barriers have been most apparent, US industry is highly competitive."

Subsidize to survive

To illustrate the heavy subsidies in Europe, he displayed net income figures for key world competitors in the past decade (See graph World Producers Rate of Return). "These massive and persistent losses (while the US, Canada, and Japan were making money) show that the precent problems of the world steel indsutry are structural rather than cyclical. Rather than accept the losses in employment and foreign earnings that would result from the bankruptcy or reorganization of steel firms, many governments--especially in Europe and the developing countries--have increased their subsidies for steel industries, intensifying the underlying problems, and resulting in the politicizing of international steel trade and the near breakdown of the market mechanism."

The result has been excess capacity worldwide. European capacity began to sharply exceed production in 1975. Japan increased its capacity at annual rates of 6.8 percent. Meanwhile, the US added no net capacity. "As a result," Trautlein said, "many industries abroad were forced to rely on export markets to boost or maintain operating rates."

Their drive to export was linked to an effort to restrict imports. By the spring of 1978, agreements were concluded with all major exporters to the European market, stringently limiting imports into the EEC. "In effect, this left much of the world steel market subject to cartel-like arrangements. The Japanese, who have a competitive cost advantage against European producers, shipped only 300,000 net tons into the EEC in 1983, while shipments to the US market were 14 times greater," Trautlein observed.

Japan has similarly restricted steel imports from low-cost producers in Korea and Taiwan to 3 percent of their domestic market. In Brazil, the "Law of Similars" assures that any import cannot be brought in without permission, regardless of the sufficiency of domestic production.

"With the exception of Britain, many European countries are now subsidizing replacement of inefficient facilities with new ones, with insufficient reduction in capacity," Trautlein reports. "The principle victims of such programs, besides European taxpayers, are the relatively efficient private firms, which are being pushed into bankruptcy by competition from state-supported industries willing and able to sell steel at prices well below their cost of production. Government involvement has generally kept the market from determining where capacity reductions should occur. It is the least efficient facilities that should be retired, yet jobs and income are lost in regions that have resisted playing the subsidies game."

US is best

The US steel industry, Trautlein feels, has been better able to cope with world overcapacity (at least until the catastrophic downturn of '82-83), showing the advantages of a private, market-based industry. "US industry has not expanded its capacity, even though it cannot supply all of its home market in a year of strong demand. Yet our steel industry has suffered most from the over-expansion of world steel capacity. The surge of imported steel since 1980 stems largely from intervention by foreign governments and from the disastrous effects of an overvalued dollar. If we look behind these factors, the underlying competitive standing of the American steel industry is still relatively strong. There is clearly no basis for arguing that immutable factors support further massive contraction in the US industry, or that government policies designed to assist the industry cannot reverse its current decline."

This, then, was the essence of steel's appeal for quotas. Labor costs were obviously mentioned in great detail as a leading factor in domestic steel prices, but let's examine that subject separately, along with a more detailed look at steel's past and present technology.

Steel price and cost

What's a ton of steel cost on the American market today? It depends on who you are and how much you want to buy. More importantly, will prices this year move up or down? That's easier to answer--they shouldn't move far either way. Most feel they will inch upward, but some say the steel glut and stiff competition will cause further price erosion.

Merrill-Lynch's Bradford says, "Steel prices within the US increased reasonably steadily during the first eight months of '84, but then abruptly decreased, almost as if prices ran off a cliff. We believe steelmakers panicked when orders did not recover in August, and started a price war among themselves. Each of the major steelmakers blames the others for causing the price war and clearly we cannot tell who is at fault. However, it is clear to us that US Steel has gained some market share, a sign that they were the ones leading prices lower."

Looking at the costs behind prices, Bradford says donht overlook the fact that despite extensive cost cutting, prices have decreased about the same amount, leaving most companies still unprofitable. "Clearly, labor is the largest cost of making steel, accounting for between 25 percent and 40 percent of total costs, depending on the company. Energy is also important, accounting for 20 percent, and iron ore another 15 percent. A major difficulty for US steelmakers is that labor and ore costs are substantially greater than elsewhere in the free world.

"Despite wage concessions in '82, steelworkers still earn substantially more than the average American. (See Wage Premium, Steel versus all Manufacturing.) We believe that if the domestic steelworker wages were pushed back to the normal steelworker premium (33 percent), then domestic steel companies would be sufficiently profitable to attract outside investment and to possibly modernize some of their facilities. However, this does not seem to be a likely event."

Wage rates are only half the equation, Bradford reminds us. They must be multiplied by manhours/ton to get total employment costs/ton. "USW work rules have inhibited productivity for many years. During the last few years, major progress has been made in eliminating many of these inefficiencies, and a number of the least efficient steelworkers have been closed. Domestic steelworker productivity has soared--30 percent in '83 alone, and we estimate another 30-percent gain in '84."

But, warns Bradford, "One major problem with that data is the use of outside contractors to do some of the work previously done by members of the USW. The steelmakers do not want to talk about this situation. This is a practice used extensively by the Japanese steelmakers, and possibly accounts for 40 percent of total steel industry employment in Japan. It could be as much as 20 percent in the US."

At any rate, when Bradford multiplies the industry productivity number of 7.5 manhours/ton times an average wage cost of $22.50, he gets an employment, cost/ton of $170, or roughly a $90 premium over Japan and West Germany and a huge $150 premium over low-wage countries like Korea and Brazil.

How did it all happen?

How did the steel industry get in this mess? It's a long story, and a lot is being written today to answer that question. It's high drama, high stakes, and high implications for almost everyone, especially those of us in metalworking whose ability to stay competitive and survive hinges significantly on steel's ability to supply us with a quality product at a reasonable cost.

I talked with two key authors who have been heavily involved with the steel industry for over three decades: "William T Hogan, SJ (Father Hogan, the "Steel Priest"), of Fordam University's Industrial Economic Research Institute; and John Strohmeyer, editor of the Bethlehem Globe-Times and a Pulitzer-Prize winner in 1972 for his editorials critical of steel management.

Steel strikes have marked many of the critical turning points for this industry. The 1959 strike was unquestionably the most significant, Father Hogan feels. "It was practically four months long, and fought over union concessions in work rules. The union saw this as a basic threat and made quite a fuss."

President Eisenhower brought that one to a close, concessions were made, and wage scales at that time were not greatly affected, (that came later). "The major effect was the severe cutback in US production," Hogan explains. "In 1957, the US industry exported 5.1 million tons of steel and imported 1.1 million tons. In '58, the exchange was still balanced in favor of exports. Then, with the strike in '59, imports shot up to 4.5 million tons, and exports dropped to 1.5 million. Most people thought this was just temporary, but from that date forward, imports have always been larger than exports."

In 1956, John Strohmeyer came to Bethlehem, PA, where the biggest story in town has always been Bethlehem Steel. He agrees that '59 was pivotal. "That was the year that steel buyers discovered that other nations also sold steel. When the strike ended, the big customers came back because they couldn't get the quality of steel they needed from other sources. The Japanese were just getting cranked up and the Europeans were barely satisfying their own needs at home. It was the steel byproduct markets that didn't require US-mill quality--barbed wire, nails, etc--that were the first to go to foreign steel.

"The biggest steel customer was the auto industry. They couldn't buy foreign sheet steel that was up to their standards in '59. Another reason was loyalty--which is still true today. The American automakers are still buying domestic steel, except in instances of specific shortages." Clearly, Big Steel and Big Auto need each other.

"GM adopted a policy in 1973 that they would use no foreign steel," Father Hogan notes, "and they've stuck to that pretty much. On the other hand, Ford and Chrysler have used some imported steel for a number of years, beginning in the early '70s. The quality of imported steel certainly improved in the '60s as foreign companies developed their plants more fully. By the end of the '60s, they had a quality product."

Overcapacity

Overcapacity first became a problem in the '60s, Strohmeyer feels. "There was a basic philosophy in the US steel industry--it was engraved in granite--that you could never have too much capacity. The demand for steel was going to continue forever upward--more people, more cars, more bridges, etc. It all stood to reason. People like Father Hogan contributed to this notion--no one could see the market collapse ahead."

Father Hogan obviously disagrees. "The '60s saw no major increases in steelmaking capacity, certainly not like the '50s when we added 50-million tons. There was a tremendous urge to expand then--even the government got behind it--and we went from 100-million tons capacity in 1949 to 150-million tons in 1960. The changes in the '60s were mostly modernization.

"The capacity added in the '50s was open hearth. Rather than go with the oxygen process that was just getting started, they decided to stick with the tried and true, something they could count on. In the '60s, when the Japanese expanded their steel industry, from 22-million tons capacity of 95-million tons, the oxygen process had become fully developed, so they put it in."

Another pivotal year was 1965 when the drift of union negotiations convinced steel customers that they should hedge for a coming major strike. Imports jumped from 6.4-million tons in '64 to 10.3 in '65. Following that settlement, there were small increases in '66 and '67, but then a negotiating year in '68 again drove imports from 11.4-million tons to 18 million. Thus, two negotiating years had tripled imports.

"In 1969," Father Hogan explains, "our voluntary restraint agreement with the Japanese and European dropped imports to 14-million tons, and 13.4-million tons in '70, as the world market strengthened. It is very interesting to note that total revenue--what we paid for that reduced quantity of steel--was almost identical to what we paid for the 18-million tons previously."

Wage distortions

In the '70s, the energy crisis and pollution-abatement requirements siphoned off dollars needed for industry capital improvements. But critics like Strohmeyer feel these capital drains merely accelerated the agony that would have occurred sooner or later.

"You cannot pay those wage rates; you cannot pay those bonuses that the officers got! The system was bound to fail because every time the union won its wage increases, they were also passed along to all the white-collar workers. And those white-collar workers were growing like rabbits! I can't fault a guy who stands in front of a blast furnace all day from making 22 bucks an hour. But dammit, when a file clerk or somebody who just picks upt a time card everyday makes the same thing, that's a bad system!"

Bethlehem was overstaffed with white-collar workers, Strohmeyer feels. "Many of them were hired on the basis of wildly over-optimistic projections and many were retained beyond their usefulness out of old loyalties that blinded practical decisions. Analysts with leading investment firms commonly accorded Bethlehem the dubious honor of having the most management employees per ton of steel produced."

When the '82-'83 cuts came, these people fell especially hard, Strohmeyer reveals. "Blue-collar workers had learned early in life to plan their living scale knowing that working in steel would be cyclical, but white-collar workers at Bethlehem had been protected during the lean years, and even during prolonged strikes. Getting a salaried job at steel meant security for life. While tremors of 'Black Friday' (when 2500 white-collar Bethlehem employees were cut in 1977) had not been forgotten, these were viewed as phenomena of the past. So, despite unceasing reports of company losses, many salaried workers went on assuming new mortgages, buying new cars, and entering into lengthy loans commitments.

"Suddenly, secretaries and file clerk, many with no more than a high-school education, were discharged from jobs paying up to $25,000 a year. Overnight, they were cast into the real world where the going rate for similar skills was barely half that."

But there were more fortunate victims. "It was common to hear of supervisors leaving with a $250,000 lump-sum severance payment. In '82 alone, 13 vice presidents who took 'the lump' left with severance packages exceeding $1 million apiece."

As editor of the local Bethlehem paper, Strohmeyer has talked over the years to a lot of people on both sides of the Bethlehem Steel labor/management equation. He's presently on a sabbatical, writing a book on steel, tentatively titled, The Demise of Big Steel.

At first, it was hard for him to get to talk to the top people at Bethlehem Steel. "It took me the first five years just to get recognized. One reason was that I has refused to join their damned country club--to run in their league. But the other reason was that every thim they raised prices, we questioned whether they would be pricing themselves out of business."

Now days, they are much more cooperative (mostly out of self defense), although he says it is still difficult to get official statements. Management has clearly been improved. "Trautlein is a different breed from the leaders they've had in the past," Strohmeyer advises.

Ed O'brien, president of USW Local 2598, told Strohmeyer, "Without Don Trautlein, I don't know if we'd be in existence. He cut the fat that had to be trimmed." And Chico Curzi, president of Local 2599 admitted to Strohmeyer that the union laid a bum rap on Trautlein in '82 when they marched to protest his pay increase. "I think trautlein is worth that kind of money, but it was the lump-sum pensions and all the salary increases. I think we took our frustration out on Trautlein and it was wrong."

Will Bethlehem or the rest of Big Steel survive? "Can any new technology produced in the breathing period of protection against foreign steel," Strohmeyer wonders, "cure an ailing industry locked into the world's highest wage rates and archaic work practices? The answer inevitably boils down to how much more the steel companies and the steel union are willing to do to save themselves?"

The born-again steel company

One of the brightest stories from the steel industry's viewpoint is that of the merger of LTV's J&L Div with Republic Steel. Had this been proposed as recently as the late '70s, it would have been quickly shot down by antitrust forces. But in today's situation, it was just good strategy and good politics.

Despite the dismal losses LTV just posted (noted earlier) and the cutbacks both steel segments of the new organization have gone through, the spirit at LTV steel today is one of a reborn company.

They are proud to point out that with their new raw-steel capacity of 24-million tons, they are now the nations's second largest producer (the world's third largest). They have a continuous casting capability of 5-million slab tons/yr and have been running their CCs full blast. They have the largest electric-furnace capacity in the country. They report their Indiana Harbor hot-strip mill is ranked the top production unit in the US, and they have the most sophisticated integrated-process-control system in the industry. They are proud of their three galvanizing lines and their more than 250 labor/management participation teams.

Richard S Gray, Senior vice president of strategic planning, LTV Steel, freely admits that those size stats would be much more impressive if they were operating at full capacity, and that the size of the corporate loss in '84 is more on everyone's mind right now.

LTV Steel represents about three fourths of LTV Corp, but only provided half the sales total in 1984 (figures included Republic for only the last half of the year.) While their tonnage clearly puts them ahead of former second-place Bethlehem, Gray says, "Our market share is now four points higher than US Steel, and this will be announced by AISI shortly."

Gray feels it's hard to rank the causes of the industry's problems, but a key turning point was when the productivity of US integrated mills was surpassed by both foreign mills and US minimills. "Labor costs per hour, or per man, are not nearly as important as labor cost per unit produced. If a minimill, with its narrow product line and cleaner, straight-through production process, produces bars for 2 man-hr/ton while we're producing bars for 6 man-hr/ton, it is almost irrelevant that we're paying our man $22.50/hr while they're paying theirs only $14/hr. The bigger difference is that productivity multiplier.

"At 6 man-hr/ton, we're bettern than Japan, West Germany, and the rest who are at 7 or much higher. But then there's the problem of whose hours do you count? Our government went to Japan and found they were counting the people working in their coke plants as contract labor, not part of their mill labor force. We're prohibited by union agreements from using contract labor for anything more than maintenance. This idea that 20 percent of our labor force is contract labor is apocryphal! Show me 1 percent of the workers in our plant who aren't on our payroll! We even have agreements with the union that in times of low demand, when people aren't needed in production, if there is work that they can do in maintenance and repair, they get a shot at that."

Tech retards?

"Despite what you may have heard, the American steel industry is not technically retarded," Gray iterates. "We've made tremendous improvements in the past couple of years, and we're getting our man-hr/ton down to the point where I feel very comfortable comparing them with what is being done abroad. Take a walk through a computer-controlled strip mill today, and you won't see many people. Even our coke-oven crews have seen tremendois reductions in manning levels.

"Take a look at the throughputs at our Cleveland East strip mill, for example. In '83, we were running at 325 tons/hr, and now we're up to 500 tons/hr. It's the same mill, just better practices, more automation, improved process control, better gaging, and a better quality product. Throughput is not just how fast metal flows through the mill, you know, but how much of it is good and how much of the time that mill is down. It used to be normal for a mill to be down a third of the time, but no longer!"

Gray points out that a big difference between an integrated mill and a minimill is that in the minimill, the people that operate the mill also repair the mill. In an integrated mill, a separate crew is required by union agreements. "In the past several years," he explains, "we've worked with the union, in what I call 'enlightened self-interest' on both our parts, to try to get redundancy of job category reduced--to get multicraft people in repair and maintenance, for example, so that you don't need to have five different skills where maybe two will do. We still don't have what the minimills have, but we're getting a lot closer.

"Continuous casting is probably the greates single way to boost productivity. When you can pick up 15 points in yield, that goes right through the whole process. That's been very important for us."

Gray feels that industry capacities are overstated, and thus the concern about overcapacity is exaggerated. "You are what you produce. We should be finding out in the second quarter of this year--when lead times are extending and the order book is improving--what we as an industry can produce. And when we do, I bet it will be a lot lower than what's been stated."

According to AISI, US steel-industry capacity was reduced from 150.6-million tons in '83 to 135.3-million tons in '84. Father Hogan predicts a further reduction to 130-million tons this year.

People under pressure

Gray sees an attitudinal change in the mill today. "Sure, you see ancillary changes in controls and process integration, but there has also been a change in attitude. There's a whole lot of pressure from the market and from competitors. People see the jobs going away.

"Where's the import relief everybody's been looking for? I don't see it! I don't know whether I would blame present import levels on Bethlehem, but it certainly was a case of 'stock up before the hoarding sets in.' Everyone was figuring on some sort of restraints and tried to beat them before they came. The restraint program was supposed to be effective the first of October '84, but I don't think the Japanese or Koreans agreed to that. They wanted it to start the first of January '85, and be based on shipments leaving their ports then. Which means as much as six months of shipments won't count! And how much is in US warehouses right now? There's more foreign stell stacked up around here than we can use up in a long time.

"So my point is this: our people all know this and recognize that no mater what people say they are going to do for us, there is no evidence yet that help has arrived. So we had better be working at helping ourselves, and I'm very much encouraged by what I see going on in our plants as our labor and management people work together. J&L had a leadership position in participation programs and Republic had also made a large impact in that area. We've all decided we're going to make this product right, and get it out on time. Why? Because our jobs depend on it!"

Still a little rusty

In galvanized sheet, LTV (and others) are not quite up to the capacity the auto people would like, either in coil width or coating thickness. "We have a 60' line in Cleveland. It's true that the auto companies are waiting on the steel companies right now, but it was a very long process trying to jointly resolve exactly what their product needs were. It wasn't that they knew all along what they wanted and have been waiting for many years for us to deliver. We hope to have a 500,000-ton annual capacity, 72' galvanize line (differentially coated, one or two sides), on line in '83 for the '87 model year. It should be good, and I certainly hope the auto companies still want to buy it then!"

If they don't, LTV and others will really be stuck, because that's supposed to be their next big market. "This industry has made a heavy commitment to flatrolled steel, and we have no real domestic competition from minimills. We've done what I think is a superb job of staying close to the dominant market--automotive--and to what they need. The emphasis is on continuous-slab casters, third-generation rolling mills, a lot of process controls, and stress-leveling equipment to get shape, flatness, and coil size. They need defect-free coils and a good quality product, no question about it."

Seamless pipe disaster

The weakest product in steel today is pipe, Gray admits. "Seamless pipe is where the steel industry was first run off the road, principally because of Japanese and European mills that were built with tremendous investments when the oil-country-goods market seemed to demand it. They made excellent quality pipe--their reject rate in the field was far lower than ours: 0.5 percent when ours was running 3 percent or more. That was five years ago. Whether you get this quality by inspection or production, when you've got it, you've got it, and your customer soon knows it. So we went to third-party inspection and a lot of very costly measures to match their quality.

"But how big is the Japanese market for oil-country goods? Zip! The same goes for the German and Italian OCG producers. They were all exporting here and doing a better job, so we announced some major projects in OCG, yet when we took a second look, we didn't have the capital to do them, so we bobtailed most of them back. Which was smart--the only smarter thing, in retrospect, would have been not to have done anything at all! Because today that market is gone to foreign pipe. It's up to 70-percent imports, and even a voluntary restraint agreement is not going to cut it way down to something like 45 percent. So we, the US, were run off the road.

"There are probably only two premier domestic oil-country goods producers with the mill capability and quality to compete with the foreign OCG producers today: US Steel's Fairfield Mill and LTV's Campbell Works. The two of us can easily produce everything the domestic market requires. Beyond OCG, standard continuous-weld pipe, largely because of Korean imports, has gone 73-to 80-percent imports. Once import levels get that high, it is very, very hard for them to come back!"

Bars are better

"In the bar area," Gray observes, "where Republic had really made its mark in special quality carbon and alloysteel, hot-rolled and cold-rolled finished bars, there's been tremendous pressure from minimills. They first ate up the merchant-quality part of the market--rebars, angles, channels, shapes, etc--and had a free lunch because when the first voluntary restraints came along, the foreign producers had moved out of that market into 'the higher priced spread.' What market they abandoned, the minimills took. The minis do a good job metallurgically, their equipment is fine, their productivity is up, and now merchant-quality bars are minimill bars. And now, they're moving up scale to challenge us.

"But the competition from the minimills is a fair fight," Gray believes. "We're doing good things with ladle metallurgy to improve quality, and trying to get our labor content and productivity to match the minimills. We're not there yet, but we'll make a fair fight of it.

"The minimills growth in market share could continue as they move into special-quality bars. I read the report in your magazine that the return on investment for seven leading minis was 1.7 percent, whereas the integrated producers had a negative 10-percent return. But I think that if you look at how those seven minis were averaged, you'd find that only Nucor was making any money. I think that most of the US minimills are not really doing that well right now."

Improving mill technology

What can be done to upgrade existing integrated mill technology? "Lots of things, and we're doing them," Gray replies. "People are always writing the epitaph for the blast furnace. What a dodgy thing to have--it costs you $50 million ro reline! I real recently that blast furnaces can be traced back in recognizable form to the 13th Century. Yet, in the past five years, we have improved the productivity of our blast furnaces 25 percent, which is not bad for a process that's been around for 700 years."

How about rolling mills, can they be made to turn out a higher quality, more uniform product? "Definitely," says Gray. "It's a question of what is the value to you, the customer, of having a more absolute iniformity of thickness, for example, in a drawing operation. If that metal is going to move anyway in deep drawing, where's the added value of sheet uniformity? Idealistically, it might be desirable, but pragmatically it's useless there!

"We are producing flatter, more uniform sheets, with less gage variation from side to side and end to end. With the things being done in roll flexing and roll design, there are lots of ways to get dimensions more uniform. We've done quite a bit to improve coil flatness, but it is not yet as good as stretcher-leveled sheet. When we do get theire, I hope that the price a customer is willing to pay for something like that will enable us to recover the cost of doing it."

Rebuild Big Steel?

"We all make tradeoffs," Gray continues. "We have to ask ourselves what the value added is going to cost us to produce and what it's worth in the marketplace. When we condiser a major new facility, we must speculate on whether will help us increase our market share enough to recover its cost. That's life! That's business! Obviously, when we go to the bank these days, we better have a pretty good plan if we expect to get any money.

"You have to take a risk to make a buck. Good old American competition includes the freedom to fail--and that's the way it ought to be! The alternative is to collude and carve up the market, and then go to jail!"

Is anyone in this industry still salivating over what they could do with a greenfield mill? We all remember US Steel's Conneaut (OH) plans in the '70s. "The technology they were talking about would not have leapfrogged anybody. It was no Star Wars, just basic oxygen furnaces, blast furnaces, and coke ovens. That plan died with Mr Speer. It was production mainstream, a replica of a major Japanese plant.

"There's nothing basically wrong with wanting that today, but no one could afford it. I'd hesitate to guess what it would cost today--well over $2000 per annual tonnage ($billions)--we don't even have numbers to price out anything like that today.

"Look at what's being built today. A report a month ago listed three 300,000-ton oil-country goods mills to be built by Europeans--two mills in South America, one in Indonesia. That's the size of the whole US market right now, and US Steel and LTV, as I mentioned before, have that covered already! Then there are existing OCG mills in Japan, Europe, and some that the Canadians are talking about. Yet these people are going to build new mills? Where will they get the money? From the World Bank? Funds the US helped provide?

"It's appalling to me; all the mill projects either on the drawing board, under construction, or coming on-stream that have no local market. Where will those products go? Hello, USA!

"Which is why I think the combining of J&L and Republic was really the smart move for the American steel industry. We now have the two newest continuous casters in the US--Republic's in Cleveland, rated at 150,000 tons/month and running at 160,000 tons/month for the last five months, and J&L's Indian Harbor caster that should reach i60,000 tons/month soon. By rationalizing, concentrating on the mills that are the most efficient, we're turning LTV into a new steel company, without using new big-capital bucks. We're going to have the best of both worlds. But these decision, as we join the best of both companies, must be market-driven decisions. If you're not market driven, you'll go down the drain!"

A year ago in this magazine, a cynical Marvin Cetron was talking about the principles of good management, saying, in effect, if you can't innovate, automate, or emigrate to a low-wage country, then evaporate--"sell the company to the union, and let them go out of business, ala the Weirton Steel Co." This was a common view then; that those poor folks in a little West Virginia town had tried to ransom their jobs by betting all their life savings on a near-bankrupt tin-plate mill. Had they hitched their future to a tin can?

Now a year late, to the amazament of steel outsiders, Weirton Steel shipped over 2-million tons of steel, racked up profits of $48 million in the first three quarters of '84 (and expects a profit in the fourth quarter), and has added 200 customers. But this was no big surprise to industry insiders; they know that Weirton Steel is a good mill and that those employees got a relatively good deal.

So why did National Steel sell a $314-million plant for $75 million in cash and two very long-term notes (the first for $47 million due in '93, the second for $72 million, due in '98)? Because they considered the plant marginal--they felt their capital funds would yield a better return invested elsewhere.

Did those 7700 employees put up their life savings to come up with that down payment? No. Banks did. The employees agreed to acquire the company over a period of time, through an employee stock-option plan (still to be finalized). The big sacrifice they made was to agree to take a 32-percent cut in wages, to freeze wages for six years, to agree not to strike for three years, and to give up cost-of-living adjustments. In exchange, they will share in profits once the company's net worth exceeds $100 million.

Will they succeed? In his latest book, Steel in the Unites States: Restructuring to Survive, Father Hogan notes, "Capital requirements for the new corporation have been put at $80 million to $100 million/year for the next five years. It is doubtful that this much can be spent since they must conserve cash.

"Generally speaking, the Weirton plant is a competitive unit with a number of modern facilities, as well as some that should be updated and improved. However, the company is fighting for survival, and must make do with what it has for the next two or three years until financial conditions improve.

"Weirton Steel can succeed, since it has good facilities, some of which are excellent, access to raw materials at good prices, a reduced cost structure, and a reputation for making excellent tinplate product. Its raw-steel output wull most likely remain at 2.5-million tons/year for the rest of the decase, even though the market for its principle product is declining at a moderate 1 to 2 percent/year. Another factor in its favor is the determination of tis employees, who saved the plant from extinction, to succeed."

But could or should others follow this example? Probably not. These same conditions may never occur again--a mill that's marginally profitable and coperating, a stable market, a small mutually supportive community, reasonably good labor/management relations, and workers willing to take a substantial pay cut for a share in their company's future. The employee buy-outs being proposed to save other mills don't seem to come close to meeting these conditions.

The case for importing

There is obviously another side to the steel story. There are many who are well satisfied with imported-steel quality and availability, and feel that no special effort should be made to preserve if it means sacrifices by steel users struggling to stay competitive in world markets. These people say, in effect, "Let the steel companies get competitive on their own, or let them die. No one's going out of his way to help me, why should I make sarifices for other industries!"

The best recent example of the arguments for free importing of steel was made in a speech by Senator John Chafee, Republican, Rhode Island, to the American Institute for Imported Steel Inc, in December. Granted, this was a political address (he told these people exactly what they wanted to hear) and that Chafee is from a high-tech state, not a steel state, but his comments typify the case being made against steel import restrictions.

Free trade or fair?

"Across the land, the increased cry for protectionism is coming from every quarter: shoe manufacturers, machine-tool builders, and textile, electronics, and automotive industries--you name an industry, it's a sure bet they've written to Congress seeking special tariff protection. Twice in the past four years, domestic-content legislation has passed the House of Representatives.

"Nobody wishes to appear to be pro-protectionist, so the cry is always, 'I'm for free trade, but I want it to be fair trade.' Then follows a tirade about our trade deficit with Japan, but our trade surplus with Europe is never mentioned.

"The steel industry is probably the loudest complainer of all. Yet, for nearly 20 years, US steel manufacturers have enjoyed unique protection. In 1969, President Nixon negotiated voluntary restraint agreements with Japan and the European coimmunity. These stayed in place until 1974. Next, in 1978, President Carter negotiated the trigger-price mechanism that set a price floor under imported steel. This lasted until early 1982, when the European Economic Community agreed to restrain its steel exports to us, and in 1983, US specialty producers were granted quota relief."

Room to suffocate?

"All of these actions were intended to provide the industry with 'breathing room.' But what 'breathing room' has really meant is a chance to hike prices and salaries. Breathing room is to often used not to get breath back, but to further suffocate, choking both the industry and the consumer. ...

"The Administration's recent comprehensive and objectionalbe steel plan, described initially as a rejection of the new tariffs and quotas proposed by the International Trade Commission, amounts to quotas, pure and simple. We are making the same old mistakes.

"Congress compouned the problem by adopting provisions in the Trade and Tariff Act of 1984 that would give serisous enforcement teeth to any v oluntary arrangements agreed to. That legislation gives the President the broadest possible authority, which could include requiring export lecenses issued by the exporter's government to accompany every shipment of steel as a condition of entry.

"This is the most stringent steel-quota system ever adopted by this country. For the first time, we have congressionally mandated enforcement of steel protection. We have handed the consumer to the steel industry on a plater and made sure that Customs will strictly enforce our trading partners 'voluntary' import targets."

Everybody pays more

?Keeping out foreign goods is bad in every way: bad for our consumers, our workers, our industry, and our foreign policy. In 1980 alone, the estimated cost of tariffs and quotas on steel imports cost US consumers an estimated $6 billion. The trigger-price mechanism tacked on an additional $1.1 billion. The Congressional Budget Office estimates that a quota limiting steel imports to 15 percent of the market for five years--what big steel wants--would cost consumers $25 billion.

"As steel prices go up, so do prices of all products with steel components: autos, home appliances, new office buildings, farm machinery, other machinery, bridges, public construction--and the taxes needed to pay for them.

"World Bank economists estimate that for every job saved in the domestic steel industry by trade protection, 50 jobs are lost in US export industries. Steel quotas would also de severe damage to metalworking industries which employ 20 times as many people as the integrated steel industry, and would almost certainly cost more American jobs then they would save. When a US industry seeks import protection, no attention seems to be given to the ramifications on other US producers if the import relief sought is granted.

"None of us has to be an eminent historian to know the disastrous consequences of protectionsim to our nation and to the world. As surely as the Great Depression followed the enactment of the Smoot-Hawley Tariff Act, 'fair trade' will end up meaning 'no trade' for our exporters and higher unemployment.

"I don't mean to imply that all of our trading partners are playing by the rules. We must continue to address the problems of closed markets, to react more effectively against unfair trade practices, and to negotiate more for more open markets for our service and high-tech exports. Our laws contain adequate provisions to address such problems. If improvements are required, then let us fine tune those laws, but not jettison them to embrace a policy of proven disaster."

Steel should help itself

"My final point is that a major portion of our integrated steel industry's problems are unassociated with imports, but are peculiar to that industry. There seem to be three fundamental trends: First, the demand for steel domestically has declined dramatically in the past 12 years for reasons unassociated with recessions. In the last eight years alone, the amount of steel per automobile has declined by 558 lbs, or 21 percent.

"Second, significant technological developments, have altered the standards of efficiency in the industry. Foreign steel producers have exceeded US technological standards.

"Third, production has shifted from older economies to such developing economies as those of Brazil and South Korea, which combine the latest developments in technology with cheaper labor and very dynamic internal markets. Take Pohang Iron and Steel, South Korea's only integrated producer, for example. Their labor coast per ton of steel shipped last year was $20, compared with an average of $150 in the US. Pohang Steel sells in world markets without subsidy, and thanks to a combination of low labor costs and high technology, it is financing 65 percent of its new construction internally.

"US steel producers, on the other hand, come up short in world competition partly because of the hodgepodge way in which they have applied technology and allocated capital--here a blast furnace, there some new basic oxygen capacity, alongside some of the same old dinosaurs. The effect has been to keep open semimodernized, marginal plants, thus dissipating investments that would bring much higher returns if concentrated in a single new installation built from the ground up.

"Part of the reason for our steel industry's troubles are labor costs, which at nearly $22/hr with fringes, are 75 percent higher than the average US manufacturing wage."

Technology answers?

"Perhaps the answer is technology. The President's Commission on Industrial Competition has recommended that the real solution to the problems of the steel industry is to invest in finding 'leapfrog' technologies that, by drastically lowering costs, will permit the domestic industry to jump ahead of competition.

"Perhaps the answer to the future of the American steel industry lies with those modern, lean, and highly specialized minimills that have comboned state-of-the-art equipment, high productivity, and low operating costs to invade the stodgy American steel market almost overnight. The result is an industry labor cost at $65 per ton that can match Japan's.

"We must also recognize that a major factor in the imbalance of US trade is the high value of the dollar, which traces back directly to the US government's deficits.

"It is absurd for anyone to assume that growth is going to solve our problems. It is likewise impossible to achieve adequate cuts in domestic programs with defense and Social Security both exempt. The challenge for all of us is to freeze government spending, and supplement that with tax increases to bring these deficits under control--no less than 2 percent of GNP by 1988 or sooner. Declining deficits will mean lower interest rates, a more reasonable dollar, and a major assist to our exporters. No more serious challenge faces our nation than achieving that goal."

Obviously, Senator Chafee's speech was followed by much applause from this partisan group.

What lies ahead

Merrill Lynch's Bradford sees the steel industry having a better than expected '85, from both an output and profit standpoint. "If volume improves as we expect, steelmaking costs should decrease significantly. If costs decrease, companies usually lower their prices, essentially a form of masochism. This has been especially true recently, and we do not have a lot of confidence that steel company managements underestand that lower prices do not increase volume, at least not over the short run. Just trying to equal foreign costs, plus freight and tariff, is not nearly good enough.

"The protection from imported steel that the industry has just received from President Reagan is likely to harm the long-term outlook for the industry, in our opinion, because we believe that cost cutting will be slowed and steel use moved overseas at an accelerated rate."

Buy now!

Will steel prices mve up or down? Karlis Kirsis, director of World Steel Dynamics (WSD), New York, NY, a forecasting unit of Paine Webber Inc, examined steel cost and supply in January. "The US pricing situation for domestic producers is in dire straights. The industry hasn't had a price increase in three years, and there is no practical way that they can be competitive with foreign steel, either in the home market or in the international arena. We see prices on a powder keg--the export market is two tiered and waiting to explode.

"The President's plan to restrict steel imports came at a time when the collapse of the steel-pricing structure appeared imminent, and the forces are such that we do not see the VRA (Voluntary Restraint Agreement) permitting significant price increases."

WSD sees price increases for '85 averaging $30 a metric ton. "However, starting in 1986," Kirsis predicts, "things will really start to move as pricing power swings from buyers to sellers. We look for the world-steel-export spot price to rise from $331/metric ton in '84 to $363 in '85, and then explode to $555 in 1986."

He feels domestic mills' costs will stay flat (while some improve dramatically, $50 and $100/ton, while foreign costs rise and exchange ratea subside. The EEC mills, for example, "fared even worse then the US mills because their massive losses began in 1977 (combined losses from '77 to '83 were $15 billion). Hence, most major EEC mills are now increasingly dependent on government, but governments are finally beginning to cut off the funds, leading to an ever more rapid pace of capacity rationalization."

With these world-market destabilizing factors, steel buyers will have to uncover new and unproven sources of supply, Kirsis feels, such as South Korea, Taiwan, Brazil, Venezuela, Mexico, and South Africa. He recommends closing long-term supply agreements at today's prices, establishing global procurement policies, and developing an information syttem that quickly reveals pricing changes. "Consider long-term survival to be the result of numerous short-term actions."

Buy later!

LTV's Rich Gray is adamant about the near-term direction of steel prices. "Prices will do down! They have to! They're not going to inch upward as some are claiming. We're clearly off the cost-plus track--that when costs rise, you can just pass them on. That was the whole US economy for a long time, but no longer. And we won't be getting any more palliatives from the government. When you add up the imports for '85, I prerdict they will be more than the 18.5-percent VRA target and barely less than the 26 percent of last year."

Sink or swim?

In reviewing all of this, what's the bottom line, you ask? Will big steel survive or not? Or will it just subdivide into little minis or specialty mills? Well, there's little doubt that the minis will survive, but the key to steel's future health is what happens to the integrated mills.

For them, Father Hogan observes, there are two main schools of thought: the pessimistic view (widespread among industry critics and even held by some major integrated producers, he reports) that the industry is a dying dinosaur and the future lies with the Third World's new facilities and low labor costs, and a contrasting view that dares harbor a little long-range optimism.

The dim view, according to Hogan, is based on adding up the effects of these key problem areas: the current structure of steel prices (commodity pricing with sharp discounts), government ownership and/or subsidizing of overseas competitors, the labor-cost disadvantage, the long-range no-growth effects of energy costs and uto downsizing, the competition from developing countries, the competition from substitute materials, and the overwhelming cost of modernization.

The optimists, on the other hand, says Hogan, focus on the progress steel companies have or soon will make. "The recent steel crisis has given rise to fewer, smaller, but stronger, more efficient producing companies, manifested by the merger of J&L and Republic. In the future, restructured companies will be able to operate at higher capacity with lower break-even levels, and show profits, in spite of the many difficulties that must be faced. There will be fewer, but better, steel companies. Steel's worst days are past."

So you can take your pick of scenarios, but here are a few things you can count on:

1. There will be fewer integrated mills--some will die, others merge. World capacity will ultimately shrink to match the market.

2. Prices will eventually move upward as producers settle on market share and then recoup their losses.

3. The minimills will prosper, even move into international markets, but their growth will top out at one third the domestic market.

4. The micromill will eat away at the minimill's regional markets, just as the mini ate up vulnerable integrated-mill markets.

5. Employee ownership will never be significant in steel.

6. Labor rates for steel will eventually match those for the rest of manufacturing.

7. Domestic steel will retain its lion share of the domestic market.

8. Don't bet on "leapfrog" technology to put the US back in front. That's too much of a long shot.

Big Auto is next

Next month, Survive-85 will report on the automotive industry.
COPYRIGHT 1985 Nelson Publishing
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1985 Gale, Cengage Learning. All rights reserved.

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Author:Sprow, Eugene E.
Publication:Tooling & Production
Date:Apr 1, 1985
Words:9986
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