Steel industry crisis of its own making

By By Michael Locker -- Purchasing, 2/8/2001

The North American steel industry is in the throes of a major crisis that could prove even more devastating than the one that precipitated the painful restructuring of the 1980s. Like the 1980s, imports are flooding U.S. shores, driving product prices down, destroying profits and stock prices. No mill, including the most profitable mini-mills, has been untouched and the list of severe casualties is growing. The number of companies operating under Chapter 11 bankruptcy protection reached seven with Wheeling-Pittsburgh's November filing, and others are rumored to be on the brink.

Swift, strong trade restraints are absolutely essential to bring the crisis under control. But even if the political leadership is in place to impose effective trade relief-and we remain skeptical-it will not be sufficient to save the industry from major restructuring. The fact is that the highly fragmented, highly leveraged U.S. steel industry is ripe for another round of restructuring. Because the present crisis differs from the 1980s in several important respects, however, the impending restructuring will take a very different form.

First, unlike the 1980s, U.S. steel demand remains healthy and domestic producers are among the most productive in the world. But, these favorable dynamics are undermined by the over-valued dollar and the deluge of imports. Second, from what we can tell from recent events, including the Gulf States shutdown, the United Steelworkers of America (USWA) is not prepared to offer concessions in order to resuscitate troubled producers. Third, there is literally no U.S. capital available to finance restructuring-whether equity, bank debt, or junk bonds. Unless something happens soon to strengthen U.S. mills, we are convinced that foreign investors, lead by Europeans, will spearhead a wave of acquisitions and consolidations underwritten by bargain-basement stock and debt prices. The impetus for such a move is crystal clear: U.S. integrated mills enjoy a lucrative domestic customer base within the biggest, most attractive steel market in the world, especially the giant OEM auto, heavy equipment and appliance makers. The easiest way foreign producers can gain quick access to this lush market is by buying major U.S. steel mills.

For the U.S., this scenario poses several problems. In terms of national security and economic/political independence, can a major power like the U.S. afford to have its steel industry controlled by foreign interests? As part of their restructuring efforts, foreign investors will most likely retire less-efficient U.S. hot-end capacity, replacing it with lower cost, imported semifinished feedstock like slab from Latin America (at least until the next generation of steelmaking technology becomes commercially viable). This strategy could enable the mills to cut production costs by $25 to $40/ton, slash capital expenditure requirements (a full blast furnace reline costs over $100 million) and avoid the additional capital and operating costs required to comply with increasingly stringent environmental regulations. But this could leave the U.S. vulnerable to foreign pressure as well as a possible shortage of specific steel products used for military applications. This will leave the U.S. steel industry and government, as well as the USWA, with a difficult but unavoidable choice. Rescue the industry by imposing meaningful trade restraints and offering low-cost capital or risk the political/economic consequences of foreign control of a strategic industry.