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Steel and the state and its effects on the state of steel

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There is a growing unanimity that the single most important factor depressing world steel profitability is excess capacity. In a normally functioning market, projects to add capacity would be shelved, high-operating-cost plants would be closed and the imbalance would be self-corrected by a market in which the players all operated in their own self-interest.

Unfortunately, steel is not a normally operating market. The intervention of state-owned companies has frustrated the normal market mechanisms. Although many countries may contribute to the problem, they are all small potatoes compared with China. 

In the face of the growing overcapacity problem, China will issue its annual forecast of steel capacity to be retired by, say, 2018. However, it does not simultaneously reveal that new capacity is being added. About half of the capacity to be retired will be realized, while the other half will continue to operate; those balky provincial governments did not get the memo! In the net, China continues to add capacity every year.

China long ago emerged from a steel-short economy to a steel-surplus economy, and the nation exported 60 million tons of its 750-million-ton production in 2013. It should be clear by now that steel is indeed a global commodity, and that China’s actions have a direct impact on operating rates in the United States, even if no Chinese steel ever arrives here. 

The best estimate of this world imbalance, courtesy of London-based Ernst & Young LLP, is an excess of 350 million tons of capacity. But what can be done to address this problem? 

U.S. steel executives have decried the traffic in unfair imports for 50 years. These executives continue to make the same speeches, mainly to each other. Trade litigation has become a major industry for Washington lawyers. The Congressional Steel Caucus has been mobilized. Politicians, if not from a steel-producing state, have been content to mouth free-trade clichés in their own defense. It may be time to acknowledge that the status quo is not working.

The existing legal remedies for subsidized or dumped steel have several visible shortcomings that have become apparent over time. First, trade litigation is very costly and the burden of proof on the plaintiff is significant. Second, the remedies available do not achieve longer-term deterrence, even in cases that are clear wins for the plaintiff. Third, the underlying legal theory seems to be based on the notion that the offender must physically export steel to the United States, and thus be identified that way, but the workings of a complex global market make that qualifying identification difficult, if not impossible. Fourth, the principal offenders change from Western Europe to the Far East, including China and Latin America, but the unintended consequences of state ownership go on. 

Although some congressmen are complaining about “steel fatigue,” it must be recognized that at current operating rates (around 78 percent) the U.S. steel industry is not sustainable. It probably requires an improvement to 85 percent to call the industry adequately profitable over the longer term (once again, Ernst & Young). 

It is appropriate to recognize that this is not a “temporary crisis” and, therefore, it is not amenable to a “temporary” solution. These have been attempted in the past but soon fell by the wayside in the face of growth in state-owned capacity.

The U.S. policy of laissez faire assumes a functioning market, but growth in state-owned steel capacity continues to make such a policy irrelevant and even self-destructive.

So what is required? Some form of “loser pays” is particularly appropriate in trade cases. Second, long-term deterrence should be enhanced by lengthening the term of the assessed penalties and then banning repeat offenders. Finally, the plans for new steel capacity have to be subjected to a world spotlight so that it becomes apparent who is aggravating the current imbalance.

Recommended reading for serious students of this subject is Steel and the State by Thomas R. Howell, William A. Noellert, Jesse G. Kreier and Alan Wm. Wolff, published in 1990. (This is not a-day-at-the-beach reading.) It is startling to read this 25-year-old study and realize that nothing has changed. The players are different, but the consequences are the same and the U.S. policy response (i.e., do nothing) has remained unchanged.

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 executive officer of Jones & Laughlin Steel Co. His column appears monthly. He invites readers’ comments and can be contacted at tom.graham@tcgrahamassociates.com.


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