23.11.03

SOMETHING DOESN'T ADD UP. Last Thursday, I attended a steel industry technical session that focused on the international expansion of U. S. Steel (motto: At United States Steel, we're involved) in light of the world trade in steel. The presenter noted two features of the steel market that struck me as internally inconsistent, and one feature of the restructuring of the U.S. steel industry that leads to friction between the old and the new manufacturers.

Short term, the speaker anticipated a world steel shortage in 2004. Here is one trade publication's view. Note the internal inconsistency. We first read, "World Steel Dynamics says there is a better than even chance for a steel shortage in 2004, which portends rising prices." OK, and for full credit, note that rising prices have the effect of calling forth more supply and encouraging conservation, thus eliminating the shortage. That's not what the commentator expects, however: "Despite improving demand, the U.S. market will see fewer imports due to the weakening of the dollar, leaving a larger market share for domestic mills. A nearly 30 percent drop in the value of the dollar vs. the euro in the past year has made it untenable for steelmakers in Western Europe to compete in the United States." (Yes, but if steel prices rise, won't the steel price of a dollar fall? Wouldn't it be nice if business analysts understood markets as they really work rather than as abstractions to be trotted out for polemical purposes?)

The next paragraph introduces the internal inconsistency: "Little steel production capacity is being added to the world market, with the exception of China, WSD notes. The number of companies producing sheet steel in China will rise from 13 to 28, adding 50 million tons of capacity by 2010. Meanwhile, in the United States, the trend is toward consolidations, as evidenced by the high-profile mergers of U.S. Steel and National, ISG and Bethlehem, and Nucor and Birmingham." And why might that be? Might the existence of 200 million tons of excess capacity (the article doesn't specify the prices at which this capacity is uneconomic) have some bearing on the unwillingness of investors to build new capacity? The existence of that capacity suggests that there will be a price at which suppliers will be willing to provide sufficient steel to serve buyers; there might be some difficulties in some types of product if there isn't sufficient casting and rolling capacity for those shapes or grades.

To put the global excess capacity in perspective, 200 million tons of annual production is roughly equivalent to twice the steel production of the United States. And it's that excess capacity, rather than any export subsidies or any dumping, that drives the industry difficulties the trade barriers are supposed to address. Scroll down and read, "In negotiations conducted under the auspieces of the Organization for Economic Cooperation and Development, major steel producing countries have pledged to cut excess steel capacity by 115 million tons by 2005. While the Bush administration has welcomed these pledges, U.S. officials said that much remains to be done with the 100 million-ton excess capacity and market-distorting practices in place." The developed countries, in fact, have a plan to manage the withdrawal of resources from the steel business. It is not only the developed countries that complain about the excess capacity leading to economic hardships.

Capacity rationalization is not everybody's strategy, however. In China, a rather primitive steel sector anticipates further expansion, perhaps as an import-substitution strategy? Vietnam is another country with plans to expand steel production. Something there is about building additional capacity in a mature industry where there is currently excess capacity that doesn't make sense, but it certainly does not bode well for the ability of tariffs or quotas to protect U.S. steel producers.

In the United States, the old-line producers have been closing plants and reducing their work forces for years. The antitrust authorities have allowed mergers that the Carnegies and the Morgans would have feared to attempt: see this and this. The consolidations are not without controversy, as the old steel companies have contractual commitments to retired workers, referred to as legacy costs, which current earnings might not be sufficient to cover. The old steel companies propose to shift those pension costs to the taxpayers in exchange for closing some capacity. Not surprisingly, the new steel companies don't like such proposals, suggesting inconsistencies in working to close outdated capacity elsewhere while subsidizing it here. This release notes an interesting way of financing the legacy cost relief -- which didn't pass Congress.

What, then, for the future of the steel business? Until there's something resembling equilibrium in capacity and consumption worldwide, look for continued trade spats. And perhaps it's time to short China.

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