Odds are pretty high right now that buyers of foreign-made steel will see offshore supplies disrupted at some point next year. However, that could change if multinational agreements are reached to stabilize world steel trade. At the moment, the steel trade picture is muddled by rhetoric from integrated mills, legislators and trade groups. The facts are these:

• To placate solons touting protectionist legislation that would stifle virtually all imports of foreign-made steel, President Bush has ordered a special investigation—under Section 201 of the Trade Act of 1974—into the role of imports in the financial woes of domestic steel producers. Section 201 was created to provide temporary relief to U.S. producers injured by increased levels of imports. The purpose of this provision is to give hard-pressed industries time to adjust to foreign competition.
• Steel trade is decreasing in line with overall reduced steel demand this year, but remains an important enough factor in the global marketplace to grab the attention of the Organization for Economic Cooperation and Development (OECD). Steel shipments to the U.S. from foreign mills are on pace to drop to their lowest level in six years. World steel trade overall has declined this year, along with overall demand. Still, the tonnage traded annually is quite high, so the OECD Steel Committee last month began discussing an "early warning system" for global steel trade. The OECD concept is designed to reduce significantly the number of anti-dumping cases that dislocate trade worldwide by giving industry and governments access to additional statistical information indicating global market gluts and shortages.
• The European Union and Japan are appealing to the World Trade Organization (WTO) over dozens of punitive tariffs and duties already imposed by the U.S. on steel from Europe and Japan. Over the years, U.S. steel companies have obtained from Washington regulators various dumping and countervailing (anti-subsidy) duties against steelmakers in other nations, based on findings that they had been underselling in the U.S. market or receiving illegal government subsidies. While such duties are legal, the U.S. regulations are considered heavy-handed and the WTO already has ruled that procedures used to impose duties are illegal under existing world trade laws.
• U.S. trade legislators, nonetheless, are now attacking imports from smaller countries that are shipping material—ranging from Latvian concrete reinforcing bar made to Argentinean hot-rolled sheet—into the U.S. Most economists and analysts dismiss the domestic steel industry's claims—supported by findings of the U.S. International Trade Commission and International Trade Administration—that collapsed steel prices are the result of such imports.
• The ongoing and increasingly bitter public steel debate between the U.S. and various trading-partner nations and between buyers and suppliers at home has opened the door for government-to-government negotiations on a multinational steel agreement (MSA). Treasury Secretary Paul H. O'Neill, U.S. Trade Representative Robert B. Zoellick and Commerce Secretary Donald Evans are spearheading efforts, at Bush's request, for a global steel trade pact that would eliminate inefficient capacity, reduce production, limit trade and bring supply and demand into balance—without an extraordinary upswing in pricing. The first multilateral talks were hosted last month in Paris (at the time of the OECD Steel Committee meeting) by Peter Allgeier, deputy U.S. trade representative, Grant Aldonas, Commerce's undersecretary for international trade, and John Taylor, Treasury's undersecretary for international affairs.

Mills have been selling aggressively into
Asia and South America, propping the global
steel marketplace, since imports by North America
and Europe are down this year.

It will take some time for all this trade-related activity to play out and the biggest problem for world trade negotiators right now is the U.S. integrated steel industry. While mini-mills have built new technologies that give them significant cost advantages and enable them to compete with imports, most of the traditional integrated mills have lagged behind in closing older, uneconomic facilities, restructuring and consolidating.

Most steelmakers worldwide "support multilateral negotiations that would lead to elimination of inefficient excess steel capacity and new rules to govern steel trade in the future," says Ian Christmas, secretary general of the International Iron and Steel Institute ( IISI ) in Brussels. "The companies are in agreement that the present financial problems of the industry result from excess capacity," he adds. "So, an agreement is vital for the future of the industry and its customers."

However, U.S. producers continue to insist that inefficient capacity doesn't exist here. They blame the rest of the world's producers for their financial problems and are demanding that everybody else shut mills and stop selling into the U.S. In a recent position paper, integrated U.S. producers suggest that trade officials use the Section 201 investigation, and its threat of long-term loss of access to the U.S. market, as a primary negotiating lever to secure "meaningful commitments" from "problem countries" on capacity reductions. At the same time, they feel they should not be forced to consolidate without tax relief, long-term funding of retiree healthcare legacy costs and other financial incentives.

Commerce Secretary Evans has said the "the Bush administration wants to free the world steel industry from 50 years of government subsidies and intervention."

Treasury Secretary O'Neill has suggested a blueprint that would cut global steel overcapacity by 10-20%. Despite public rejection of permanent production cuts by domestic mills and labor unions, O'Neill has stressed in public forums that the U.S. steel industry "won't be exempt from any agreement that eliminates inefficient excess capacity in the steel industry worldwide." He says U.S. mills "should not expect only foreign steelmakers to sacrifice production capacity" to end the financial turmoil that has beset various segments of the world steel industry off and on since 1995.

Despite of the longest period of U.S. economic expansion ever and booming steel demand from 1992-2000, most integrated mills have been unable to earn sufficient profits to invest adequately in modern facilities, reduce costs, and be competitive enough to withstand the difficult market conditions of 2001. There now are 10 steel mills attempting to reorganize under Chapter 11 bankruptcy court protection. Since U.S. integrated mills are often at a cost disadvantage compared to foreign producers, analysts and economists believe that it is time to let noncompetitive mills go out of business—rather than prop up weaker companies with subsidies or erect temporary import barriers. "You need a healthy steel industry, not a situation where the government is trying to support the dead and dying," says economist Robert Crandall of the Brookings Institution in Washington.

U.S. integrated mills have been fighting calls for consolidation, which European and Japanese executives—themselves deep in major mergers—say is a mistake. European Trade Commissioner Pascal Lamy points out that while two-thirds of average annual production (176 million tons) in Europe comes from six companies, two-thirds of production (110 million tons) in the U.S. comes from 12 companies. "Consequently, there is no U.S. company among the world's ten largest steel firms," he says. "More importantly, financial analysts and major steel users are worried that U.S. steel producers don't have the critical size required to be world-class players."

Continued weakness in steel demand and compressed hot- to cold-rolled spreads led to U.S. Steel's decision to permanently shut its remaining cold-rolling and tin mill operations at Fairless Works, located near Philadelphia. While the facility has a rated capacity of approximately 1.5 million tons of cold-rolled and tin products, the operation produced only 249,000 tons last year and halted cold-rolled production entirely in March of this year. Remaining tin production will be phased out by fourth quarter. Analyst Michael F. Gambardella at J.P. Morgan Securities Inc. in New York says, "The decision to eliminate inefficient capacity (albeit on a relatively small scale) is one rarely made by domestic producers, and every bit helps."

Midyear imports of steel mill products
are down 26% from a year ago.
That hasn't stopped domestic steel executives
from blaming foreign suppliers for their
continuing financial woes.

Meanwhile, the rancor over trade persists between steel buyers and domestic mills. Domestic steel industry executives, union leaders and their allies in Congress keep touting the Section 201 trade investigation as an panacea for their ills. Andrew G. Sharkey, president of the American Iron and Steel Institute (AISI) says, "The root cause of this crisis is global excess steel capacity and market-distorting practices." He contends that "U.S. steel users would be the winners long-term if the country had an effective policy to counter unfairly traded and disruptive steel imports and thus preserve a healthy domestic steel supplier base."

Meanwhile, buyers are gathering support in Congress by pointing out that elimination of imports would devastate many metalworking firms because some steel mill products aren't available from domestic producers while other products aren't made in sufficient quantities here to satisfy demand. "Steel imports are not optional. They are a necessity," says Jon E. Jenson, chairman of the Consuming Industries Trade Action Coalition (CITAC), a trade group of steel-using companies. "Import quotas won't undo poor management decisions, improve productivity or make the domestic steel industry more competitive,"

Jenson says that "steel indeed represents a significant part of the cost of making products in steel-consuming industries. For the domestic industry to suggest there aren't significant differences in quality and processing characteristics between foreign and domestic steels is vintage steel-industry deception." Although the U.S. steel industry has increased its annual steelmaking capacity by more than 20 million tons since 1993, Jenson says "domestic steel can't always be substituted for foreign steel."

Jenson points out that "foreign steel is used in fire extinguishers because properties of applicable domestic steels aren't consistent enough to assure the necessary processing efficiencies and pressure resistance." He adds that "foreign steel is specified and mandated for certain truck brake parts because domestic steel doesn't satisfy the customer's concern for quality and safety." For certain other drawing applications, he says, domestic steel is not competitive for reasons of quality and consistency of processing characteristics, making it more efficient to pay premiums for European steel because it causes fewer manufacturing problems and less downtime. Jenson goes on to say that "stainless steel floor plate, radiation-free steel for metal detectors, catalytic converter foil, tire cord quality wire rod are among steel products not sufficiently available from domestic sources."

Steel industry executives have labeled CITAC a mouthpiece for steel importers and the few multinationals that source steel worldwide. But CITACS views have gained widespread support among so-called stealth manufacturers. These are principally durable-goods makers with fewer than 500 employees, who have an outsized impact on the manufacturing economy. These largely anonymous businesses account for more than half of manufacturing jobs in North America and buy a large percentage of steel used annually.

Analyst Charles Bradford of Bradford Research Inc. in New York says "the recent European and Japanese mergers are signs that U.S. steel producers are being left behind. If we continue to support inefficient and failing companies, it is detrimental to both the domestic steel industry and downstream users of steel in the U.S."

Steel index values in U.S. and the world
indicate the seriousness of the global steel crisis. They
are nearly as low as last nadir reached in early
1999, just after the Asian financial crisis struck.

Steel sold outside the boundaries of the producing nations accounts for more than 40% of all steel products made annually. World steel trade in semifinished and finished mill products has nearly tripled from 115 million metric tons in 1975 to 313 million metric tons in 2000, according to statistics from the International Iron and Steel Institute (IISI).

Worldwide, steel demand is expected to drop about 2% this year, the first decline since a 2.1% fall in 1986. That's why analysts at MEPS International Ltd. in Sheffield, England, project that global raw steel output will dip about 1.5% this year to 830 million metric tons, which mean that shipments of semifinished and finished steel would slip to about 734 million tons. Industry analyst Peter Marcus at World Steel Dynamics in Englewood Cliffs, N.J., suggests that world steel trade will slide about 1.5% this year. That would amount to 308 million metric tons, and would equal 42% of all the mill products sold worldwide for a second straight year.

Much of discussion about the Section 201 investigation centers on its use as a remedy for unfair trade. However, according to the International Trade Commission, a Section 201 investigation is to determine if "increased imports are alleged to be a substantial cause of serious injury, or threat of serious injury, to a U.S. industry." Statistics show that midyear semifinished and steel mill product imports were down 30% to 14.1 million net tons from 20.3 million in first half 2000. Annualized, 2001 imports of about 28.5 million tons will be the lowest since 1994 when 24.4 million tons were imported. Despite this fact, Sharkey of the AISI insists that "the industry needs a sustained period of import stability" because the U.S. mills' share of apparent supply dropped from 85% in 1990 to 78% last year.

Domestic mills' share of supply is expected to rise to 81% this year because of the slowdown in imports. Leo W. Gerard, president of the United Steelworkers of America in Pittsburgh wants Congress to impose import quotas for five years on all steel products. "This will allow our domestic steel industry the time it needs to recover from the flood of foreign steel imports, including illegally dumped foreign steel, which has entered into our market and depressed both the demand for U.S.-made steel as well as domestic prices," he says.

However, some analysts and economists say the biggest competitive headache for large integrated blast furnace-driven steel manufacturers isn't really imports. Instead, they say it's the mini-mills that produce steel at lower costs by melting scrap in electric-arc furnaces. "Don't blame imports," says economist Robert Crandall of the Brookings Institution in Washington, who points out that "the change in imports' share of market from 25 years ago isn't more than 10%. "The big integrated steel companies have lost much more market share—almost 30%—to mini-mills," he says.

PURCHASING calculations, based on data from the Commerce Dept., Steel Manufacturers Association and AISI , show that imports averaged 27% of end use throughout the 1990s—rising from 21% in 1990 to 32% in 1999. Meanwhile, the mini-mills went from 20% of supply in 1990 to 46% in 1999. Large integrated mills accounted for only 53% of raw-steel production in the U.S. last year, compared to 62% in 1990.

Domestic mills continue to blame most of their financial problems on low prices, which they blame on imports. But most global analyses show the U.S. integrated mills to be high-cost producers when compared to both foreign producers and domestic mini-mills. The analysts insist that U.S. steel producers must be competitive on prices and operating costs.

"The problem for some domestic steelmakers is their costs," says analyst Bradford at Bradford Research. He says that some integrated steelmakers have slab costs as high $215 per ton. With another $40 needed to roll slab into hot-rolled coil, he says, "It is quite obvious that when hot-rolled coil prices dropped to $220/ton late in 2000 and rose to only $240 by mid-2001, the red ink must become a river." Meanwhile, mini-mill slab costs in the U.S. are substantially below that $215 and depend upon the cost of scrap and imported direct-reduced iron and imported pig iron. "Slab prices have been as low as $140/ton in Brazil and $162/ton in Japan," Bradford adds.

This is important because "the only thing that matters to most users of steel and metal fabricators is price, not where it is made, because most users of steel view it as a commodity," says Waldo Best, analyst with Morgan Stanley Dean Witter in New York. Purchasing's surveys say quality, delivery and service also play roles in sourcing, but price has become a bigger factor with manufacturing in recession this year. And foreign metal is cheaper partly because of the strong U.S. dollar that makes it attractive for foreign mills to sell here even at lower prices than in the past.

PURCHASING 's latest survey of metals buyers in manufacturing finds just 5% sourcing steel offshore directly while 43% buy foreign-made steel through service centers. Jenson of CITAC says the reliance on foreign steel is understandable "since, in the metalforming industry alone, steel represents between 40% and 70% of the total cost of manufacturing parts, components, subassemblies and assemblies for automobiles, appliances, machinery and thousands of other products."

This attitude among buyers means that steelmakers must shift to low-cost mentalities that, Best says, will require "many changes" at traditional integrated steel companies. "They will have to reduce overhead and labor costs, change how raw materials are purchased, and make changes to their manufacturing strategies," including adoption of new production technologies.

"It is competition from the U.S. mini-mills that has caused reductions in market share and reductions in jobs at large integrated mills," says Joseph Zoric, professor of economics at Franciscan University of Steubenville in Ohio. He says the U.S. mini-mills have gained market share because the large integrated mills have top-heavy management structures, high labor costs, inflexible work rules and outdated steelmaking facilities. "This has made many large integrated mills noncompetitive not only with U.S. mini-mills, but in global markets as well." The proof: In 2000, the biggest global steel-buying year ever, the U.S. industry exported just 6.5 million tons, or 0.6% of all mill shipments.