A proposal to build a 1.7-million-ton-per-year steel plant in
Osceola, Ark., has drawn the attention of at least one U.S.
steel producer, primarily because the $1.1-billion project
would be founded on a $125-million package of loans and grants
from the state.
Nucor Corp., Charlotte, N.C.,
has expressed vigorous opposition to the proposed role of the
state, and has described to legislators the negative effects of
the $125-million seed money on its Hickman, Ark., plant.
Consultancy IHS Global Insight
Inc., Lexington, Mass., which was retained to evaluate the
project, has weighed in with a remarkable assessment: The
steel industry can handle the addition of Big River Steel
(LLC), both Phase I and Phase II, from a capacity perspective.
However, if any other major facilities, other than projects
already announced, were to be added to the U.S. steel stock,
the industry would quickly find itself in a highly competitive
Current producers would argue
that they already are in a highly competitive zero-sum
The notion that this particular
1.7 million tons per year of hot-rolled, cold-rolled and
galvanized steel just tops out neatly to total current demand
(less imports) is breathtaking. IHS goes on to explain that
electrical steel, which Big River Steel would produce, is an
Allegheny Technologies Inc.,
Pittsburgh, and AK Steel Corp., West Chester, Ohio, stand ready
to serve this market with available capacity.
So what is the matter with this
picture? Nothing, if Big River Steel were privately financed.
It is the use of public funds that offends Nucor--and many
others. It will be argued that everybody does
it--and there is some truth to that--but does that make
There is a growing awareness
that every time the government picks a winner, they seriously
distort the competitive landscape. Politicians will protest
that they are creating jobs; but this is becoming a
hollow argument. Jobs created in Arkansas can well be
eliminated outside that state--but in most cases, if the market
isnt there, there will be no net gains in jobs.
Well take it out of
imports is a familiar cry in the steel business, but
nobody believes that any longer. The international market
doesnt work that way. Steel distributors are recognized
for their market knowledge, and at a meeting of the Association
of Steel Distributors there was vocal skepticism about the
market impact of the proposed mill.
Does anyone really believe that
an additional 1.7 million tons per year in demand for scrap
could be created and not escalate the price of scrap to all
consumers in Arkansas?
Steel companies and governments
are destined to intersect in many ways and on many fronts.
Pittsburgh-based U.S. Steel Corp.s recent moves in Serbia
and Slovakia are an illustration of the real-world power of
governments over steel companies. In America, the pertinent
question raised by Big River Steel is: Have we studied and
absorbed the lessons of Europe, where the hand of government
created whole steel companies, without regard to the
marketplace, under the banner of creating jobs?
It takes a long time to learn
some lessons. This issue isnt a partisan political issue,
because both Democrat and Republican politicians become
entranced with doing good by creating jobs. Think
back to ethanol and California-based solar company Solyndra
LLC. They were undoubtedly the costliest jobs ever created.
Even well-intentioned politicians can inadvertently wreak
destruction in the marketplace.
There is growing interest in
academic circles in crony capitalism. One paper
that addresses this issue was produced by Matthew Mitchell, a
senior research fellow at the Mercatus Center at George Mason
University. Titled The Pathology of Privilege: The
Economic Consequences of Government Favoritism, the paper
summarizes Mitchells economic analysis with the
observation that privileges depress long-run economic
growth and threaten short-run macroeconomic
Thomas C. Graham is a founding member of T.C. Graham
Associates. He is a former chairman and chief executive officer
of AK Steel Corp., president and chief executive officer of
Armco Steel Co. LP, chairman and chief executive officer of
Washington Steel Co., president of the U.S. Steel Group of USX
Corp. and president and chief exec utive officer of Jones &
Laughlin Steel Co. His column appears monthly. He invites
readers comments and can be contacted at firstname.lastname@example.org.