Background

Following two decades of rapid growth, world production of steel decelerated markedly in the 1970s, before falling by almost 14 percent in 1979–82. Output increased a little in 1983, then rose sharply in 1984 before slowing again in 1985. In 1985, however, world output remained well below the peak registered in 1978.

Several factors contributed to these changes. The annual growth of real GNP in industrial countries declined from 5 percent in the 1960s to 3 1/4 percent in the 1970s, and to 2 percent during the six years ended 1985. Also steel lost market shares to lighter weight, more malleable, and corrosionresistant products (such as plastics, aluminum, and fiberglass), particularly in the automobile industry, where efforts to improve the fuel efficiency of automobiles followed large increases in real energy prices over 1973–84.

Since the early 1950s, trends in US steel production have diverged markedly from that of worldwide production. From 1950 to 1970, production of steel by US firms increased at an average rate of 1 1/2 percent a year compared with average increases of 16 percent in Japan, almost 10 percent for both the developing countries and nonmarket economies, and 5 1/2 percent in the European Community (EC). As a result, the US share of the world market fell from 47 percent in 1950 to 20 percent two decades later (see Table 1). Since 1970 US production has declined by approximately 35 percent compared with growth in world steel production of about 21 percent; the US share of the world market fell further to 11 percent by 1985. In the domestic market US steel producers also have lost considerable ground to imports. In 1955, imported steel accounted for 1 1/4 percent of the apparent supply of steel in the United States, but this proportion has grown fairly steadily since then (see Table 2).

Table 1.

World production of raw steel

Source American Iron and Steel Institute, Annual Statistical Report.

Table 1.

World production of raw steel

	United States	European Community	Japan	Other industrial countries	Developing countries	Non market economies
(Percentage share)
1950	47	26	3	4	2	19
1960	26	28	6	5	3	31
1970	20	23	16	6	5	30
1980	14	18	16	7	10	36
1985	11	17	15	6	12	38

Source American Iron and Steel Institute, Annual Statistical Report.

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Table 1.

World production of raw steel

	United States	European Community	Japan	Other industrial countries	Developing countries	Non market economies
(Percentage share)
1950	47	26	3	4	2	19
1960	26	28	6	5	3	31
1970	20	23	16	6	5	30
1980	14	18	16	7	10	36
1985	11	17	15	6	12	38

Source American Iron and Steel Institute, Annual Statistical Report.

Table 2.

Share of US imports of steel mill products, by country

(As percent of apparent, supply in the United States)

Source: American Iron and Steel Institute, Annual Statistical Report.

¹Industrial countries other than Japan and the EC, plus non market economies.

Table 2.

Share of US imports of steel mill products, by country

(As percent of apparent, supply in the United States)

	Total	Japan1	European Community	Developing countries	Other1
1955	1.2	0.1	0.8	—	0.3
1965	10.4	4.4	4.9	0.2	0.9
1975	13.5	66	4.6	0.6	1.7
1985	25.2	6.2	7.2	5.3	6.0

Source: American Iron and Steel Institute, Annual Statistical Report.

¹Industrial countries other than Japan and the EC, plus non market economies.

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Table 2.

Share of US imports of steel mill products, by country

(As percent of apparent, supply in the United States)

	Total	Japan1	European Community	Developing countries	Other1
1955	1.2	0.1	0.8	—	0.3
1965	10.4	4.4	4.9	0.2	0.9
1975	13.5	66	4.6	0.6	1.7
1985	25.2	6.2	7.2	5.3	6.0

Source: American Iron and Steel Institute, Annual Statistical Report.

¹Industrial countries other than Japan and the EC, plus non market economies.

Trade policy

As the share of steel imports surged during the 1960s, concern mounted in the United States regarding the impact of these imports on the domestic industry. Policymakers and others emphasized the importance of steel to the US economy, often noting its deep sectoral linkages—both forward to other manufacturing industries and backward to the raw materials sector—that gave it considerably greater prominence than the employment figures, noted above, would suggest. In response to these concerns, in the summer of 1968, accord was reached with the Federal Republic of Germany and Japan on three-year “voluntary restraint agreements,” which were later extended in a modified form for another three years. While the voluntary restraints operated, the volume of steel imports (in terms of tonnage) exceeded the ceiling in only one year (1971), but the restraints induced a marked change in the mix of imports toward high-valued products.

According to various econometric studies, the restraints lowered average annual imports of steel by somewhere between 3 and 9 million net tons relative to the level of imports that otherwise would have prevailed. The estimated range of price increases associated with the restraints is even wider—from 1 1/2 to 14 percent of domestic prices—while the estimated impact of the restraints on employment ranges from increases of 19,000–58,000 man-years annually. Based upon the mid-point of these ranges, the estimates imply that the restraints cost approximately $15,000 per job (in 1970 dollars) over the six-year period that they were in effect.

Following the end of the voluntary restraints in 1974 and a drop in world demand during the recession of the mid-1970s, import share began to rise again. In response, import controls on specialty steel were imposed in 1976, followed in 1977 by the Carter Administration’s Solomon Plan (named after Under Secretary of the Treasury Anthony Solomon, who developed the plan), which attempted in a comprehensive way to reverse the deteriorating prospects of the US steel industry. Although this plan suggested policy changes in several areas, its centerpiece was a “trigger price” mechanism designed to keep imported steel from being dumped on the US market, while avoiding lengthy legal proceedings. The mechanism set a price floor determined by Japanese costs (assumed to be the lowest in the world) plus an 8 percent profit margin; steel entering the US market at prices below this trigger point was, in principle, subject to an immediate antidumping investigation.

By the late 1970s, however, US steelmakers had become disillusioned with the trigger mechanism and in 1981 began filing wide-ranging complaints against dumping and subsidies, alleging that producers in several countries would not be competitive in the US market without significant government transfers. Several of these complaints were settled in the early 1980s through bilateral negotiations with the EC, Mexico, and South Africa. Also, in July 1983 the President invoked the “escape clause” provision to extend new protection to specialty steel producers, increasing duties and implementing global quotas on certain products for four years.

In January 1984, US carbon steel producers filed a new request for escape clause relief. Following an investigation, the International Trade Commission (a US body that examines trade complaints) recommended that tariffs be increased on a number of products and that imports of other products be limited to their respective average market shares in the 1979–81 period. The President rejected the Commission’s recommendations and announced an alternative program that sought to limit steel imports to 18 1/2 percent of US consumption, rather than the 25 percent actual share in the first half of 1984. Voluntary restraints were to be negotiated with all major steel exporters except the EC (which was already subject to a voluntary restraint) and Canada. The President’s plan also provided for continued rigorous enforcement of US laws on unfair trade, discussions with trading partners to liberalize steel trade, and monitoring of the domestic industry’s efforts to adjust. Regarding this final provision, US companies were required to reinvest “substantially” all of their net cash flow from steel operations in the modernization of their industry and to commit at least 1 percent of their net cash flow to retraining displaced workers.

By December 1984, five-year restraints had been negotiated with Australia, Brazil, Japan, the Republic of Korea, Mexico, South Africa, and Spain; subsequently additional agreements were concluded with Czechoslovakia, Finland, Poland, and Romania. During 1985, the United States and the EC extended an earlier arrangement on finished steel and brought it into conformity with the other agreements. However, an understanding on EC exports of semi-finished steel was not reached, and the United States unilaterally limited such imports in January 1986. The EC retaliated, imposing quotas on US exports of certain non-steel products. During the summer of 1986 this dispute was resolved, with EC producers of semi-finished steel permitted to export under quotas to the United States and with the EC eliminating its retaliatory quotas on US exports.

Loss of competitiveness

Numerous explanations have been advanced to account for the decline in the United States’ international competitiveness. Excessive wage settlements, inadequate investment in new technologies, low expenditures on research and development, burdensome environmental and other regulations, unfair foreign competition and, at times, unfavorable exchange rates have all been cited. Many of these factors probably have been reflected in the relative cost structure of the US industry, as illustrated in Table 3.

Table 3.

Comparison of estimated unit cost of cold-rolled sheet steels¹ United States and Japan

(US dollars per ton of output)

Source Donald F. Barnett and Louis Schorsch, Steel Upheaval in a Basic Industry, Ballinger, Cambridge, MA. USA, 1983, Tables 3-6.

¹Cold-rolled sheet is a typical product of integrated mills and has been the most important product (as measured by the value of shipments) of the US steel industry over the past three decades.

Table 3.

Comparison of estimated unit cost of cold-rolled sheet steels¹ United States and Japan

(US dollars per ton of output)

1964		United States	Japan
Total		117	102
	Labor	44	17
	Ore	17	22
	Scrap	7	3
	Coal	8	14
	Other energy	l5	16
	Other	26	30
1980
Total		374	266
	Labor	135	64
	Ore	58	46
	Scrap	14	—
	Coal	45	58
	Other energy	46	42
	Other	76	76

Source Donald F. Barnett and Louis Schorsch, Steel Upheaval in a Basic Industry, Ballinger, Cambridge, MA. USA, 1983, Tables 3-6.

¹Cold-rolled sheet is a typical product of integrated mills and has been the most important product (as measured by the value of shipments) of the US steel industry over the past three decades.

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Table 3.

Comparison of estimated unit cost of cold-rolled sheet steels¹ United States and Japan

(US dollars per ton of output)

1964		United States	Japan
Total		117	102
	Labor	44	17
	Ore	17	22
	Scrap	7	3
	Coal	8	14
	Other energy	l5	16
	Other	26	30
1980
Total		374	266
	Labor	135	64
	Ore	58	46
	Scrap	14	—
	Coal	45	58
	Other energy	46	42
	Other	76	76

Source Donald F. Barnett and Louis Schorsch, Steel Upheaval in a Basic Industry, Ballinger, Cambridge, MA. USA, 1983, Tables 3-6.

¹Cold-rolled sheet is a typical product of integrated mills and has been the most important product (as measured by the value of shipments) of the US steel industry over the past three decades.

In 1964 the operating cost of US steel mills was estimated to have been $117 per net ton of output, roughly 15 percent above that of Japanese producers. Allowing for the costs of entering the US market from Japan, this differential was sufficient to leave US steelmakers with a small competitive advantage. This favorable position reflected the low cost of raw materials and high labor productivity that largely offset wage rates that were approximately five times higher in the United States than in Japan.

By 1972, the competitive position of US producers had deteriorated to the point where US unit operating costs were about 40 percent higher than those of Japanese producers. A major improvement in labor productivity in Japan had eliminated the earlier US advantage, and absolute declines in the cost of iron ore to Japanese producers had reversed the competitive edge previously enjoyed by US steelmakers in their use of this input. However, abundant domestic reserves allowed US mills to retain a price advantage for scrap and coal, and a surge in Japanese wages during the 1960s limited the extent to which the United States’ competitive position had been eroded.

Over the remainder of the 1970s, both US and Japanese producers experienced major increases in wage costs in the face of a slowdown in the growth of labor productivity. At the same time energy costs increased markedly in both countries—an increase that directly affected the relative cost of steel, which employs a highly energy-intensive technology.

Wage rates in the US steel industry, which have been considerably higher than those in Japan, are also high relative to those in other manufacturing industries in the United States. In 1951, average hourly earnings for production workers in steel mills exceeded the average level for all manufacturing by almost 25 percent; by the early 1980s this differential had widened to 65 percent. In response to a sharp decline in steel demand, hourly earnings decelerated in 1982, before dropping 4 percent in 1983 as a result of wage concessions negotiated as part of a special labor agreement. Despite this decline and relatively small increases during the following two years, in 1985 wages in the steel industry were still almost 50 percent above the average for all manufacturing.

A counterpart to high wage costs has been a chronically low rate of profitability. Since the 1950s, the profitability of the steel industry measured in relation to shareholders’ equity has generally been below the average for manufacturing—in most years by a fairly wide margin. In 1982 85, US steel companies experienced net losses averaging almost 10 percent of shareholders’ equity, compared with net profits of 11 and 9 percent for all manufacturing and the durable goods sector, respectively.

The slow growth of labor productivity in steelmaking in the United States relative to Japan to some extent reflects the investment strategies of these industries. During the 1960s, investment in the basic oxygen furnace—a major technological advance in steel-making—proceeded at roughly the same rate in the United States as in the EC, although both lagged behind Japan. The pace of implementation in the United States flattened out in the mid-1970s at roughly 60 percent of the industry’s total capacity. In comparison, roughly 75 percent of steelmaking capacity in the EC and Japan used that new furnace technology after 1975.

The electric arc technology, which is used to melt down scrap steel and features a more powerful heat-creation capability than the open hearth technology, was also introduced quite rapidly in the United States during the 1960s. In contrast to the basic oxygen furnace process, however, the rate of implementation of the electric arc technology was maintained during the following decade, probably reflecting the availability and low price of scrap steel in the United States and the enforcement of antipollution legislation regarding open hearth furnaces and other facilities that support basic oxygen furnaces.

By the early 1980s, the output of US steelmakers using the electric arc approach exceeded that of both their Japanese and European competitors. As measured by the combined share of output accounted for by these two advanced processes, the technology of US steelmaking was at least comparable to that of the EC until 1975. Since then, however, the US steel industry has been slow to shed its remaining inefficient mills and, in 1984, roughly 10 percent of US output still used the older, open-hearth technology. In contrast, the use of open hearth furnaces had been virtually eliminated in Japan by 1970 and in the EC by 1980.

A major technological innovation in the steel industry during the 1970s was the process of continuous casting, which eliminates intermediate products in the steelmaking process by pouring molten steel directly into a semi-finished stage. This reduces wastage, lowers energy requirements, and produces more uniform quality. The US steel industry was slow to adopt this new technology, however. During the 13 years ending in 1984, supply capacity based on continuous casting rose by roughly 90 million net tons in Japan and by some 80 million tons in the EC. By contrast, only 30 million tons were added in the United States, of which roughly half was introduced during 1980–84. In 1984, only 40 percent of the US steelmaking capacity used continuous casting, compared with 89 percent in Japan and 65 percent in the EC.

An important reason for the difference between the rates at which the United States and some of its competitors introduced more advanced technologies may be associated with the fact that since the 1950s the US industry has tended to replace obsolete capacity while other producers generally built new facilities. The significance of this difference is twofold. First, installing replacement capacity in an existing facility requires compromises because the new capacity must fit into an existing configuration. Consequently, the re-fitted facility is not likely to be as efficiently organized as a totally new one. Second, the financial performance of a company that is replacing obsolete capacity ahead of schedule tends to be weaker than that of a firm that is building new capacity. In the former case, debt-service costs incurred to build the obsolete capacity must still be met even though the obsolete capacity is no longer generating any income.

With these considerations in mind, it is somewhat surprising that in making long-term investment decisions since the 1950s, US producers have generally opted to replace existing capacity rather than build totally new facilities. The explanation appears to be related to the difference between marginal and average costs; the marginal cost of a ton of output from an existing “inefficient” facility generally appears to have been less than the average cost from a modern “efficient” facility. Investment decisions based on such considerations would be viable over the longer term if there is an expectation that the cost advantage of the efficient foreign producers could eventually be offset by some other means, for example, by a protective trade policy.

“Mini-Mills”

While the steel industry as a whole in the United States has lost its dominance of the world market, a highly competitive class of new firms known as “mini-mills” has emerged. These firms, which typically are relatively small and employ nonunionized labor, may be differentiated from the traditional, integrated companies along three lines—technology, markets, and products. In recent years, the success of the mini-mills has encouraged an expansion in their market and product line, which has tended to blur the distinction between them and the older, integrated firms. Consequently, technology is now their major distinguishing feature.

In general, the mini-mill technology uses electric furnaces to produce carbon steel from scrap iron, which is then continuously cast into forms suitable for final products. By contrast, the traditional firms use integrated works—which include raw-materials facilities (such as iron ore and coal yards), coke ovens, and blast furnaces—to support basic oxygen or open hearth furnaces. The cost of these facilities constitutes an important share of the total investment in an integrated steel plant.

The markets served by mini-mills are often restricted to local areas, well-endowed with convenient sources of scrap, and sometimes insulated by high transportation costs from integrated producers and foreign competition. Also the mini-mills have concentrated on relatively simple, low-value commodities (such as wire rod and concrete reinforcing bars), leaving the more complex products—in which economies of scale may be significant— to the large, integrated producers.

Estimates for the cost structure in 1981 of a major mini-mill product suggest that costs in the United States, Germany, and Japan were approximately equal. At the same time the costs of integrated producers in all three countries were considerably higher, principally because of higher unit labor costs. On this basis it appears that US mini-mills were still competitive internationally in the early 1980s and highly competitive relative to the traditional integrated US steel producers.

Conclusion and outlook

After dominating world steel markets during the decade that followed World War II, the US steel industry saw its global influence diminish to the point where it now accounts for a small proportion of world output. In addition, despite some form of protection virtually throughout 1969–86, foreign producers have captured approximately one-quarter of the US domestic market. To reverse the trends of the past three decades, the industry clearly faces major challenges. To be sure, some factors—such as the drop in the value of the US dollar since February 1985—favor a substantial recovery in the international competitive position of the US industry, at least relative to Japan and the EC. But the extent to which the industry —and especially the traditional, integrated producers—will benefit from such factors depends ultimately upon its ability to convert these gains into improved productivity and reduced unit costs. For the traditional, integrated producers this probably means further restructuring of their operations and overall capacity. Without such adjustments, the older, inefficient producers will merely find that the form of their competition has changed; low-cost foreign producers will have been replaced by efficient domestic firms, such as the mini-mills, that have successfully exploited the opportunities open to them.