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Demise of Old-Line Steel Companies Would Be Costly to U.S. Economy—Viewpoints | EPI

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Opinion pieces and speeches by EPI staff and associates. 

Demise of Old-Line Steel Companies Would Be Costly to U.S. Economy 

by Eileen Appelbaum

In a rare act of heroism, the U.S. House recently voted to impose quotas on steel imports for the next three years. But the struggle is not over. The dumping of steel in the U.S. by distressed producers in Russia, Brazil and Korea has been warmly greeted in some quarters by detractors of the large integrated mills, who have predicted their demise since the 1970s. This time, they hope, illegal imports will finally drive a stake through the heart of “Big Steel” and its union workforce.

Sounding the death knell for a segment of the steel industry that is vital to the health of industries like auto and appliances, whose robust growth has been a mainstay of the current long boom, is not only unseemly, it’s misplaced. Today’s integrated producers, “Big Steel,” bear scant resemblance to their former selves.

The turnaround in steel since 1987 can be credited both to the growth of the minimill steel companies — no longer new and no longer small — and to the aggressive restructuring of the large integrated producers. These large steel companies shed excess capacity in the 1980s, formed joint ventures with the Japanese, invested in technology, flattened their organizations, and adopted workplace practices that mobilize the skills and knowledge of their workers. Today, labor productivity in U.S. integrated mills is as high as in Japan, and higher than in integrated mills anywhere else in the world.

Would the U.S. economy be better off if illegal imports forced the closing of the large integrated steel producers? There are three reasons why the answer is a resounding “no.”

First, minimills melt scrap to make steel, while integrateds produce iron and steel from scratch. Without the integrated producers, the domestic supply of steel would be fixed. That’s not a problem now, when much of the world is mired in recession or depression and the price of scrap steel, like the price of oil, is cheap. But, like oil, the price of scrap — which is 55% to 60% of minimill costs — will increase sharply when demand accelerates. The minimills know this, and are already integrating backward, investing in facilities that produce iron. At present, however, these techniques are not commercially viable on a large scale. If the integrateds were forced to close, scrap imports and scrap prices would rise precipitously.

Second, even with the addition of new plants in the last few years, domestic minimills lack the capacity to produce more than a fraction of the cold rolled or galvanized steel required by U.S. manufacturers. Capacity to produce these products still resides overwhelmingly in the large integrated producers or in their joint ventures with the Japanese.

Third, steel sheet produced using minimill technology is still of lower quality than can be achieved in an integrated. Impurities in the scrap used to make steel in a minimill are inevitable, and minimill technology can’t achieve the physical properties required in steel for exterior surfaces in cars and appliances. Moreover, new upstarts have difficulty meeting the just-in-time delivery schedules demanded by the auto industry. If the integrated producers go under, look for GM, Ford, Caterpillar, John Deere, Maytag, and other leading manufacturers to import finished sheet.

It’s a mistake to conclude that steel dumping threatens only “Big Steel.” At present, the minimills compete mainly with each other and with imports. Foreign producers have dumped bar products, produced in the U.S. only by minimills, into the booming West Coast construction markets. And competition at the bottom of the sheet market, where prices for hot rolled steel fell by $100 a ton between 1998 and 1999, has sharply undercut the profitability of minimill as well as integrated producers.

Nucor — the most successful minimill and the second largest steel company, behind US Steel and ahead of Bethlehem — owes much to its commendable “share the gain, share the pain” philosophy. Instead of responding to declining demand with layoffs, Nucor has honored its commitment to employment security by reducing hours of work and pay for workers and managers at some of its mills. The pain is more equitably shared, but no less real. Nucor’s experience shows that no segment of the steel industry is insulated against the effects of dumping.

Steel plants that are driven to bankruptcy and closure by the import surge are unlikely ever to reopen. Preventing this will forestall the decimation of an industry that has aggressively and successfully modernized its production facilities and its workplace practices — and whose improvements in efficiency help underwrite U.S. gains in productivity and living standards.

[ POSTED TO VIEWPOINTS ON JULY 8 ]

Eileen Appelbaum is EPI’s research director. She specializes in labor markets.