Steel at the Crossroads

Beset by imports and low investment, an industry struggles to shape up

Throughout the developed world, trouble is brewing for one of modern society's most basic industries: steel. Producers everywhere are struggling with softening demand and excess capacity. Western European producers are trying to ensure their survival by dismantling older, inefficient plants and concentrating their slimmed-down industry not on raw steel but on sophisticated finished and specialty steels that have strong markets at home and abroad. But some of the toughest problems lie ahead for the American steel industry; 26% of its capacity is still outdated despite a series of closings over the past three years. The outlook for this year is uncertain. Orders for capital goods are stronger than anticipated, but sales to steel's other big customers, autos and construction, are down.

Steel is at the crossroads. With relatively inexpensive imports keeping a lid on prices and a considerable portion of capital outlays diverted into nonproductive environmental controls, the industry cannot raise the money to build the efficient plants it must have to compete with foreign steel. Management, labor and the Government know it, and they are finally in agreement that steps must be taken now to harden and sharpen steel.

Labor negotiations for a new three-year contract are now under way in Pittsburgh, and they will shape the industry's labor costs for the early 1980s. The 450,000 steelworkers are among the highest-paid American industrial laborers; their hourly wages average $10.59, and bene fits swell the total to $16.80. The United Steelworkers' high priority now, says President Lloyd McBride, is to win better pensions for their 250,000 retirees. Equally important is preserving jobs; in the past 20 years, more than 100,000 jobs have been lost because of plant shutdowns. Thus the union does not appear to be in a demanding mood, and bargaining is expected to reach a reasonably smooth conclusion by the April 15 deadline. Even if talks break down, there will be no strike; disagreements will be settled by binding arbitration. Says one high union official: "We have no illusions. The owners are not going to keep a steel mill open if it is not making money."

The past two years have been fairly good for American steel, but demand began weakening in the second half of 1979. Result: last year's profits were down by a still undetermined amount from $1.3 billion on sales of $46.9 billion in 1978. Rates of return have slid from 11.5% of net worth 30 years ago to 8.2% today. Those rates are the lowest in all American manufacturing and will have to be improved in order to attract investment. Steelmen want the Government to raise their return by enacting tougher protection against imports, faster depreciation on plant and equipment, and less stringent environmental laws.

American steelmen complain that many foreign governments covertly subsidize their steel industries, often dumping products in the U.S. at prices below manufacturing costs in order to keep the mills going at home and prevent unemployment. To fight this practice, the Carter Administration in 1978 implemented the trigger price mechanism (T.P.M.), which sets a floor price below which imports will trigger an investigation for dumping. This floor is based on the cost of manufacturing and transporting a ton of steel made in Japan, which is the lowest-cost producer among big nations.

Consequently, imports fell from 21% of the U.S. steel market in 1977 to 15.2% last year. American mills were operating at an extraordinary 87% of capacity during much of the year, a significantly higher rate than that of any major competing industrial country. Still, the Americans complain that foreign competitors are getting a better deal from Washington than Americans are. For one thing, the Europeans, whose manufacturing costs are about $50 a ton higher than Japanese costs, could be dumping even when they sell their steel at trigger prices. For another, some imports are selling below the T.P.M. A General Accounting Office study concluded that from Oct. 1, 1978, to March 1, 1979, the Government applied the T.P.M. so laxly that almost 40% of imported steel came at prices lower than the floor, though only 6% was "significantly below the trigger price."

This week U.S. steelmakers expect to bring antidumping suits against European steel exporters. The suits could be embarrassing to the Carter Administration because the State Department is trying to line up European support for a grain, technology and Olympic boycott against the Soviet Union. Viscount Etienne Davignon, the European Community Industrial Affairs Commissioner, warns: "If we enter into a trade war and protectionism in steel, then cars will follow rapidly, and after cars it will be shipyards and then advanced technology industries."

American steel manufacturers invest less per ton of steel produced than do any of their major foreign competitors. The American Iron and Steel Institute (A.I.S.I.) estimates that if the industry is to preserve its domestic market from further erosion, steelmakers must raise annual capital expenditures from an average $2.9 billion now to $7 billion over the next decade. The industry is hoping for some tax breaks so that it can recover its capital faster than the 15-year depreciation schedule allows. Pushed by inflation, plant and equipment costs almost doubled in the past ten years or so. Thus $100 spent in 1968 to buy a machine would replace only half the machine when recovered through depreciation in 1978. Forced by inflation and the tax code to eat their capital, steelmen are backing the Capital Cost Recovery Act. Introduced in the House by New York's Barber Conable and Oklahoma's James Jones, it would speed up depreciation to ten years on buildings, five years on machinery and equipment, and three years on vehicles.

Steelmen would also like to use for more productive investment some of the $600 million a year they will have to spend through 1985 to comply with air-and water-quality standards. In just one year, the spending to meet the last 5% to 10% increments in environmental standards is so high that the money could build four energy-saving continuous casters for rolling steel. Says U.S. Steel Vice President Earl Mallick: "If we could invest that money in those facilities, we would have a totally different steel industry."

Leaders in the industry talk much about a steel shortage leading to high returns in the mid-1980s, but that is probably wishful thinking. Still, steel demand is projected to rise from last year's 115 million tons to 134 million tons by 1988. If the industry starts to invest in more productive plant and equipment now, it will probably be able to meet most of that demand without much more than the current 15% reliance on imports. But if nothing is done by then to halt the decline of steel, the A.I.S.I. warns, domestic shipments will drop to about 85 million tons. That would leave 40% of America's steel needs to be filled by imports.

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