Defying the Recession

Steel profits, like the bumblebee, seem to be defying gravity. They hit record levels in 1974, and have gone right on rising through the recession-darkened first quarter of this year. While earnings of all manufacturing industries fell an average of 18% from the same quarter last year, the sharpest drop in 14 years, Bethlehem Steel posted a profit gain of 86% and Republic Steel 57%. U.S. Steel earned 54% more from operations than a year earlier; a huge capital gain lifted the total increase to 103%. The surge occurred despite plummeting demand from such major customers as the battered auto and home-appliance industries.

Bigger Inventories. Commenting on these rich returns, steelmen insist that prospects for the rest of 1975 are dim because the conditions that brought prosperity have changed drastically. Profits boomed last year partly because many users, including auto and appliance companies, piled up bigger inventories than they needed as a hedge against rising prices. Users also bought extra steel because they worried that a lack of coal caused by a miners' strike last year would bring a metal shortage. With production running at optimum capacity, efficiency at the mills increased and operating costs rose only slowly.

But the biggest reason for the profit surge was the rapid series of price hikes that steelmen imposed after Government controls were lifted in April 1974. In the steel executives' view, those boosts were needed to make up for years of low earnings. Last December, after U.S. Steel announced price boosts of 8% to 10% on about two-thirds of its product line, President Ford's Council on Wage and Price Stability asked the company to justify its action; U.S. Steel then trimmed the increase to 7% to 8%. Nonetheless, steel prices at the end of 1974 averaged 40% higher than at the start of the year.

The price rises continued to keep profits aloft in the first quarter of 1975, even after demand shriveled for flat-rolled steel used in cars and a sudden drop in users' capital-spending plans caused a fall in orders for steel used in construction. But remarkable as the first-quarter profit gains were, they fell off substantially from late 1974. In the third quarter last year, steel profits rose an average 172% from the equivalent quarter of 1973, and in the fourth quarter 91%. The average gain for this year's first quarter was 49%.

Last week U.S. Steel Chairman Edgar Speer predicted that the industry's profits will shrink through the rest of this year and possibly into 1976. Independent experts agree that the party is over; already many mills are operating at only 78% to 80% of capacity and growing numbers of workers are being laid off. In a recent report, Steel Analyst Robert Hageman of the Wall Street brokerage house of Kidder Peabody reckoned that steel shipments this year will fall to about 87 million tons, off 25% from last year. Though some steelmen have been talking up additional price rises later this year, when labor costs will go up under a long-term contract, any boosts will be difficult to sustain; indeed, some mills have quietly begun discounting prices. The industry also faces stiffening competition from European and Japanese firms that are offering steel to U.S. buyers at prices well below those charged by American mills.

Yet though the recession may belatedly catch up with steel profits, the industry is in better health than it has been during past downturns. The Pittsburgh Post-Gazette neatly summed up the situation last week with a headline: STEEL'S BEST RECESSION EVER. For the auto industry, bad news seems unending. Sales figures released last week confirm that the long-awaited spring upturn has yet to begin. Through April this year, the industry sold 2,039,426 cars, down 17.6% from a year earlier and 38.8% below the record 1973 pace. Inventories of unsold cars, which were reduced sharply in the first quarter, are creeping up again, and Ford last week cut its May-June assembly schedules by 5%. In July, Ford will close most of its 62 domestic plants for a two-to three-week vacation.

For both stockholders and workers, the financial pain is acute. Last week Chrysler reported a first-quarter loss of $94.1 million, and American Motors a January-March loss of $47.8 million. General Motors has cut its dividend for the second straight quarter, and last week it told 55,000 laid-off workers that no more funds are available to pay them supplemental unemployment benefits --which, combined with unemployment compensation, can give a furloughed auto worker 95% of his normal take-home pay. S.U.B. funds for 39,700 Chrysler workers ran out five weeks ago.

This file is automatically generated by a robot program, so viewer discretion is required.