How Big a Rise?

TO stockholders at the annual mee ing last week. Board Chairman Roger M. Blough of U.S. Steel Corp. totted up all the expansion plans his company had either committed itself to or was considering. The total came to 1,000,000 tons annually for the next ten years, with a total capacity for U.S. Steel of nearly 50 million tons by 1966. The cost will be $5 billion, and to finance it; U.S. Steel must have higher prices. Said Big Steel's Blough: ''Our profits, at their present level, could neither support nor finance the heavy capital expenditures that we must make." Blough's statement poured added fuel on a hot debate blazing through U.S. industry: Should steel prices go up this year, and if so, by how much?

Many businessmen and economists think that any big increase in the price of steel is both 1) dangerous to the stability of the economy and 2) unnecessary. They argue that the industry can pay for the increased capacity out of its profits. Last year's earnings of $1 billion, about 72% better than 1954, were the best ever. And in 1956's first quarter, profits improved to $264.5 million, more than 40% better than 1955's first three months.

Though the base price of steel has held steady since the $7.35-a-ton increase last summer, spot price boosts on tin plate, wire rods, etc. have resulted in an overall hike of about $2 a ton in the price of steel. More increases, warn critical economists, would only add to the dangers of inflation to the U.S. economy, send costs upward for dozens of industries.

Steelmen talk of a price boost to $15 more per ton--the biggest hike in history. Such talk is partly to prepare U.S. businessmen for an unpopular move, and partly to put much of the onus for the rise on the United Steelworkers, who are expected to demand a big wage increase, possibly as high as 60-c- an hour. Even if the Steelworkers get as much as 20-c- an hour, the union claims that it will cost the industry only an additional $4.00 per ton. While other costs are also climbing--iron ore is up 7.4% since July, railroad freight 7%, scrap iron 83.5%--the total increase still falls well short of the $12-to-$15per-ton increase the industry wants. Thus, while costs will eat up part of any price boost, the bulk of it will go to pay for added capacity. And it is here that the industry makes its best case.

Steelmakers argue that the base price of steel is too low to start with. On the U.S. Department of Labor wholesale price index, steel prices between 1939 and April 1956 rose 131%. about the average for all commodities. However, many industries where demand was also high got much bigger price boosts, e.g., nonferrous metals went up 195%, lumber and wood products 305%. Furthermore, as Republic Steel President C. M. White points out, the industry's net income in relation to its worth has usually lagged well behind other industries. As one result, says White, steel stocks have a market value of only eight to ten times earnings, while chemical stocks sell at 20 to 30 times earnings. Because of this, steelmakers argue, it is far harder for them to raise cash for expansion. It becomes especially hard considering the enormous investment required for each ton of steel produced. At Jones & Laughlin. says Chairman Moreell, it amounts to $1.35 for every dollar of sales, v. 35-40-c- per dollar for the auto industry.

Replacement costs alone are high. This year, for example, it will cost U.S. Steel $64 million to replace a worn-out open-hearth furnace built in 1930 at a cost of $10 million. It took sales of $600 million, one-seventh of U.S. Steel's total, says Chairman Blough. to earn enough profit after taxes to pay for the furnace. To pay for expansion in the next five years, U.S. Steel will reinvest earnings of $220 million annually, the profit on about 56% of its sales, will use another $140 million from cash set aside for depreciation. But the other $140 million must be financed by adding to U.S. Steel's current $286 million debt.

Smaller companies paint an even gloomier picture. Of Jones & Laughlin's current three-year $230 million expansion, only $90 million is available from retained earnings and another $90 million from depreciation, leaving $50 million which must be borrowed. As it is. says Chairman Ben Moreell. the company held dividends to 62 1/2-c- per share on record first-quarter earnings of $2.09 per share, with the rest going into expansion. Expansion beyond the next few years will be even tougher for steelmakers. Entirely new plants must be built from the ground up, at as much as $350 per ingot ton. v. $100 to $200 per ingot ton for expansion in existing plants.

There is little doubt that a steel price rise is coming. Steelmakers will have to guard against making it so big --i.e., putting it too far above wage increases and expansion costs--that its inflationary effects will harm the entire economy of the nation.

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