Since President Obama began his second term in January 2013, a number of issues have arisen that directly affect the steel industry and its ability to conduct profitable business. And in 2014, with the upcoming midterm elections placing politics front and center in the nations mind, steel executives have been busy reacting to--or trying to take the lead on--many of those public policy developments.
From calls for a pro-growth economic agenda to fairer trade policies, from the desire for infrastructure investment to positions on taxes and regulations, many steel executives have a number of concerns over the intersection between government and the metals sector.
I do not have a great deal of optimism about the North American steel industry. The state of political dysfunction in the United States today makes for good television but a poor economy, one steel executive said.
Many in the industry say they believe that the political climate is creating more uncertainty in the economy, and they dont expect things to change much in the near term even though 2014 is an election year.
The U.S. economy is struggling mightily. The lack of cooperation among both (political) parties is making matters worse, a second executive said.
Yet there is some optimism about potential breakthroughs. If Washington can agree on the deficit ceiling and other budgetary issues, businesspersons will have greater confidence to forecast and invest in business, a third executive said. More importantly, hiring would also improve.
One of the bigger issues on the minds of steel executives right now is trade policy. In an American Iron and Steel Institute press briefing during the groups annual general meeting in May, Nucor Corp. chairman, president and chief executive officer John Ferriola said steelmakers and other U.S. manufacturers continue to face significant trade and competitive challenges from foreign governments trade-distorting policies and practices, including Chinas brand of state-owned capitalism.
Addressing these challenges is our highest priority. A more effective U.S. trade policy is needed to level the playing field and preserve and strengthen our nations manufacturing base, Ferriola said. We are advocating with lawmakers and government officials on a nearly daily basis to get better enforcement to legislative remedies like addressing currency manipulation in ongoing trade negotiations.
While there has been some positive news--mainly two World Trade Organization rulings that were favorable for the domestic steel industry--Ferriola said industry executives are concerned that two recent U.S. Commerce Department anti-dumping determinations go against the concept of strong trade enforcement.
In the first case, the department failed to recognize and address the injurious dumping of oil country tubular goods by South Korea and other producers, Ferriola said. In part, this appears to be due to the governments barrier to take into account all the information supplied by the domestic industry prior to issuing a preliminary determination.
In a second case brought by Nucor and other rebar producers, Commerce ruled that Turkey was providing its industry with energy subsidies but concluded that they were inconsequential (in value), he said. Considering the energy-intensive nature of steelmaking, this flies in the face of logic and good common sense that energy subsidies would have little or no value.
U.S. steel producers are among the lowest-cost producers in the world, Ferriola said, and enjoy clear advantages in practically every aspect of steelmaking, but the disregard many global competitors have for the global rules of fair trade wipes these advantages out. We need the government to go after unfair trade practices whenever and wherever they occur, he said. I want to be clear: we welcome competition, but it must be on a level playing field and based upon sound commercial terms.
In the domestic arena, the Steel Manufacturers Association (SMA) has been calling for U.S. policymakers to institute a pro-growth agenda that allows domestic manufacturers to capitalize on the nations comparative advantage, thus stimulating domestic growth and addressing persistently high unemployment levels.
But the government has instituted a broad range of unnecessary environmental and work force regulations that have increased compliance costs for the industry while increasing uncertainty for would-be investors in the U.S. economy, the SMA said in a 2014 policy paper, and it also has maintained the highest corporate tax rates in the world.
Many of the SMAs member companies have managed to remain profitable even in the midst of the extended downturn, owing largely to productivity, efficiency and variable cost control, the SMA paper said. This has been a positive development for both the steel industry and its employees, but it does not mean that harm has not occurred.
Bob Weidner, president and chief executive officer of the Metals Service Center Institute (MSCI), recently weighed in on the tax issue in an opinion piece issued by the organization.
About 1.6 million companies, most of them very large, pay taxes through the corporate income tax system. Their top rate is 35 percent, Weidner wrote. Not only is this the highest rate in the world, American companies also bear the worlds highest effective tax rate on the amount they actually pay to Uncle Sam after credits and deductions. According to the Business Roundtable, U.S.-based companies pay a rate higher than those based in Germany, Japan and China--a fact that severely diminishes U.S. competitiveness.
According to the Tax Foundation, about 30 million U.S. companies pay taxes using individual income tax rates. This number has increased exponentially in recent decades while the number of businesses that pay corporate rates has fallen. The top marginal individual income tax rate, at 39.6 percent, is even higher than the top corporate rate, which means some small businesses pay even higher rates than corporations. That hardly seems fair, Weidner said. If lawmakers move to lower the tax rate corporations pay, they should also lower rates for the 30 million businesses that pay through the individual rate system. Lowering rates overall would reduce the complexity of the tax code.
The MSCI also reacted earlier this year after Obamas State of the Union address, in which he focused on the theme of rising income inequality and his plan to implement his agenda through executive orders and regulatory agencies. While the MSCI did not take a position on several of the specific policies and actions the President called for, Weidner said it supports the Presidents overall goal to help the manufacturing industry and bring back well-paying jobs to U.S. shores.
Income inequality is a major concern for a large majority of Americans and its a concern for U.S. business owners as well, Weidner said. The gap between the nations wealthiest expanded in the 1990s, in the 2000s and, unfortunately, it has expanded even more during the Presidents term in office. The growth in this gap has coincided with a loss of well-paying manufacturing jobs. Its quite simple: ending the wealth gap means enacting policies that help regenerate the nations manufacturing base.
The MSCI believes the Obama administration and Congress should focus on combating currency manipulation.
According to the Economic Policy Institute, eliminating currency manipulation would reduce the U.S. trade deficit between $190 billion and $400 billion over three years, Weidner said. It would also increase (gross domestic product) by as much as 3.1 percent and create up to 4.7 million new jobs--new jobs that could address income equality issues.
Congress currently is considering a renewal of the Trade Promotion Authority (TPA), which would allow Congress to approve new free-trade pacts in an expedited process. The bills language says it is designed to establish congressional trade negotiating objectives and enhanced consultation requirements for trade negotiations to provide for consideration of trade agreements, and for other purposes. The TPA would allow the President to negotiate international agreements that Congress can approve or disapprove but cannot amend or filibuster. The last version of the TPA expired in 2007, but continued to apply to agreements already under negotiation until they were eventually passed into law.
The bill as drafted includes a provision requiring that future trade pacts include debate on currency manipulation.
While the MSCI supports free-trade bills that open more world markets to U.S. products, it doesnt believe the currency provision in the current TPA draft is strong enough, Weidner said. We agree with House Ways and Means Committee ranking member Sander Levin (D., Mich.) who believes lawmakers need to go back to the drawing board and write into the TPA a stronger plan to ensure future trade pacts include specific policies to address currency manipulation. A more effective currency provision is the best way to bring back manufacturing jobs and to address income inequality.
The SMA agrees that the United States needs a competitive tax policy. U.S. business tax policy places domestic manufacturers at a global competitive disadvantage, the group said. The gap between the effective tax rate of the United States and those of its nine largest trading partners is 9 to 11 percent, clearly benefiting foreign producers with higher after-tax rates of return.
Manufacturing is the sector that is most exposed to foreign competition, and therefore it is especially sensitive to comparative rates of corporate taxation.
The SMA also is calling for incentives for manufacturing investment. Steel production is a highly capital-intensive process. As such, there are tax credits and deductions in place intended to promote manufacturing investment and the creation of jobs in the U.S. economy, the SMA policy paper said. Recently, proposals have been introduced that would lower the corporate tax rate from the current 35 percent to either 28 or 25 percent.
While SMA supports a lowering of the U.S. corporate tax rate to a more globally competitive level, a rate cut should not be financed through the elimination of corporate credits and deductions that are critical to the promotion of manufacturing investment and the creation of jobs in the U.S. economy. If not properly structured, a swapping of credits and deductions for a supposedly lower corporate rate could result in a net tax increase for capital-intensive industries, including steel manufacturing.
Beyond taxes, spending also can play a role in economic development, the SMA said. A healthy infrastructure is vital to the functioning of our nations economy. Sufficient, long-term investment has the ability both to provide an immediate boost to employment levels and to make the U.S. more competitive in the decades ahead.
According to a recent study by the Federal Reserve Bank of San Francisco, the fiscal multiplier of infrastructure spending greatly exceeds that of typical government spending. Each dollar of infrastructure spending increases a states gross domestic product by at least $2. The positive impact was found to be even greater during economic downturns, with a multiplier roughly four times greater than average spending. With sustained high unemployment levels and limited resources available, policymakers should prioritize spending on highways, roads, bridges and other components of the U.S. infrastructure in order to maximize the return on investment.
The AISI, the SMA and the MSCI have pushed this year to make energy efficiency a national priority. Industrial manufacturers promote production efficiency whenever possible to maximize their competitive edge, the SMA said, and intense competition has driven manufacturers to continuously improve processes, from productivity to waste reduction, while boosting the quality and performance of their products.
The push to increase competition will ensure that manufacturers weigh all opportunities to increase productivity and invest in technologies that will supply the greatest competitive advantage. The SMA supports the rapid adoption of public policy initiatives to increase the energy efficiency of commercial and residential buildings, power generation and distribution systems, appliances and industrial processes.
At the federal level, actions that increase industrial efficiency will create a positive climate for capital investment in new plants and equipment, the SMA policy paper said. Federal agencies like the U.S. Department of Energy have an important role to play in the research, development and demonstration of new, high-risk energy efficiency and waste-minimization technologies. SMA advocates that overly prescriptive federal energy efficiency requirement policies need to be rescinded for industrial manufacturers, since industrial energy efficiency improvement cannot be mandated.
Still, national governments can have a powerful impact on the steel industry--for good or ill--executives from some of the worlds largest steelmakers told delegates at the World Steel Associations annual meeting late last year in So Paulo.
From debt issues and a federal government shutdown in the United States last fall to aggressive fiscal policies in Japan and a lack of public action on sustainable energy in India, government action--and inaction--can have a direct impact not only on consumer confidence but also on how the steel industry functions.
Our Congress remains locked in this difficult struggle ... and the positions are so extreme that the ability to reach a compromise doesnt seem to be the way things work in Washington these days, said John P. Surma, former chairman and chief executive officer of U.S. Steel Corp. He reminded delegates in So Paulo that after the last major government shutdown, the resulting compromise led to a period of relative prosperity for the U.S. economy.
In Japan, a series of aggressive fiscal policies keyed to revive the local economy--dubbed Abenomics, after Prime Minister Shinzo Abe--has spurred a positive outlook from Japanese steelmakers.
The past seven years, we saw the prime minister change every year in Japan. Now, Abe can continuously take very strong action for the next couple of years, said Eiji Hayashida, president and chief executive officer of Japans JFE Steel Corp. Although weve seen a slowdown in emerging economies like China, India and southeast Asia, the (gross domestic product) of Japan is recovering ... driven mainly by the strong construction sector and public investment.
Its not that American metals company executives dont see a role for government, although many are critical of the current administration. Last November, Obama visited Chicago-based ArcelorMittal USA LLCs plant in Cleveland, which makes steel used for fuel-efficient cars, in an attempt to highlight his agenda for the economy and the energy sector.
Obama said the auto industrys comeback during his presidency helped the ArcelorMittal plant and saved more than 1 million American jobs. Weve got to do more to get those engines of the economy churning even faster, he said. But because weve been willing to do some hard things, not just kick the can down the road, factories are reopening their doors, businesses are hiring new workers.
But not everyone is buying the Presidents words. (I have) no confidence in this government, another steel executive said. We need to make our own best decisions from a business standpoint no matter what Washington does or doesnt do.