Magazine article The American Prospect

A Parade to Oblivion: That's Where America's Steel Companies May End Up If President Bush and the Congress Don't Heed the United Steelworkers and Act Fast

Magazine article The American Prospect

A Parade to Oblivion: That's Where America's Steel Companies May End Up If President Bush and the Congress Don't Heed the United Steelworkers and Act Fast

Article excerpt

WHEN EMPLOYEES AT THE STEEL MANUFACturer LTV cheered the resignation last November of the corporation's chief executive--he had been brought in only a year earlier to save the company--it was a telling sign. Steelworkers, who bristled at CEO William Bricker's continuing campaign to slash their wages and cut off health insurance for retirees, had become convinced that he was purposefully scuttling the operations with his wastefulness and wild threats.

Clashes between union workers and corporate executives are nothing new, but this was more significant than the standard wage dispute. Steelworkers are worried about the future of their livelihood--and with good reason: Since 1998 the industry has been in a crisis deep enough to undermine even the best managers and steel mills. Over the past four years, 32 percent of the nation's steel producers--that's 29 companies, including the third and fourth largest--have gone into bankruptcy. Thirteen have stopped operating altogether. Several others teeter on the edge of bankruptcy or closure. If LTV doesn't find a buyer by February 28, its still-warm furnaces will be turned off and the company's assets auctioned. Few steel companies are earning enough to cover operating expenses; virtually none are covering their financing costs.

Since the early 1980s, the formerly stodgy steel industry has spent many millions of dollars painfully overhauling itself, to the point that by the early 1990s it was even prospering. So what happened to American steel? And can anything be done to save it?

AN INDUSTRY IN CRISIS

Bad management at some companies, like LTV, still plagues the steel industry. But its current problems are rooted in the federal government's counterproductive policies and the ripples of the global economy. The Asian economic crisis of 1997-1998, which spread to Russia and Brazil, produced a sudden surge of steel exports to the United States, especially from Korea, Japan, Brazil, and Russia. As Asian economies tanked, their markets for steel dried up and their currencies depreciated (so their export price to this country dropped). Thus, we became the world's dumping ground for the metal: Steel imports, which had dropped to 18 percent of the U.S. market in 1990, shot up to nearly 32 percent in 1998. The price of steel collapsed.

What made this sadly ironic was that the very growth in demand that made the United States such a ready dumping ground for cheap imports should have generated substantial revenues for domestic steel companies--income that could have been reinvested in technology and research. Instead, the influx of cheap foreign steel drove prices far below the costs of production. Losses at U.S. steel companies mounted, financing dried up, and mills shut down.

The crisis underscored structural problems in the global steel industry. Rather than cut back when markets weaken, steel companies everywhere have an incentive to keep producing, even at a loss, in order to pay at least some of their high fixed costs and to avoid the big expenses of idling a blast furnace. But here's the bigger problem: Even during the recent economic boom, the global steel industry had the capacity to produce 30 percent more steel than the world could use--a surplus of 300 million tons a year. Japan, for instance, can produce more than twice what it needs, and Russia more than four times. In fact, the United States is one of the few industrial countries in the world that cannot produce all the steel that it consumes. What's more, according to industry analyst Michael Locker, with 40 percent of steel now globally exchanged through new trading, world steel-market prices are more volatile than ever. Thus, even though the volume of steel imported to this country has begun to decline, the threat that traders will suddenly dump cheap steel imports keeps U.S. prices at 20-year lows.

AS A COMMERCE DEPARTMENT STUDY CONCLUDED TWO years ago, the steel industry in the United States gets hit particularly hard by the current global surplus because it is at a strategic disadvantage relative to steelmaking operations abroad. …

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