14.9.16

SHAKING OUT THE SUBOPTIMAL CAPACITY.

Some years ago, I estimated the minimum efficient scale of a fully integrated steel plant as about six million tons of raw steel per year.  The turmoil that was going on along the rivers of Ohio and Pennsylvania I interpreted as a shakeout of suboptimally small capacity at locations with relatively high inbound transportation costs.  My subsequent research suggested that, Rust Belt lamentations notwithstanding, steel was a lively corpse.  That was the message of The Renaissance of American Steel, reviewed here.

The creative destruction goes on.
The US steel industry really stands out: over the period 1972-2002, it witnessed impressive productivity growth – 28% compared with the median of 3% – and this while the sector contracted by 35%. The starkest difference was the drop in employment of 80% compared with a decline of 5% for the average sector. This left the industry with only 100,000 workers in 2002 compared with about 500,000 in 1972.
That wasn't the effect of Chinese dumping, either.
The increase in productivity in the US steel industry can be directly linked to the introduction of a new production technology: the ‘minimill’. We find that minimill plants were significantly more productive than traditional steel plants, and that this productivity premium initiated a reallocation process whereby minimills displaced the older technology. Minimill plants were significantly more productive than traditional steel plants, and that this productivity premium initiated a reallocation process whereby minimills displaced the older technology known as vertically integrated production. The reallocation of output was responsible for about a third of the increase in the industry’s total factor productivity. In addition, the productivity of minimills steadily increased.
Plus the ability of the minimills to recycle scrap into ever-better products improved.  (Tramp elements in reinforcing bar are less of a problem than those same elements in sheet intended for automobile fenders.)
We see the exit of vertically integrated producers in precisely the product segments where they competed head-to-head with minimills. The entry and expansion of minimills was thus responsible for the reallocation process among incumbents.

When we evaluate the impact of a drastic technological change on aggregate productivity growth, we control for other potential drivers of productivity growth, including international competition, geography, and firm-level factors such as organization and management. We also show that mark-ups in this industry fell by 50% over the last 40 years, which is not surprising if we look at the output and input price changes in the industry. The joint increase in productivity and reduction in mark-ups led to an increase in consumer surplus of $9-11 billion per year.
Sometimes, the big steel firms had to be mugged by reality.  And -- as is the case with Marshallian improvements, steel consumers gained, but some communities and many steel workers, lost.  Social scientists will never lack for work.

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