MEETING THE CHALLENGE:

U.S. INDUSTRY FACES THE 21ST CENTURY

THE BASIC STEEL INDUSTRY

R.M. Cyert

R.J. Fruehan

Sloan Steel Industry Competitiveness Study

Carnegie Mellon University

Pittsburgh, PA

U.S. Department of Commerce

Office of Technology Policy

December 1996
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OFFICE OF TECHNOLOGY POLICY THE BASIC STEEL INDUSTRY

TABLE OF CONTENTS

PAGE

FOREWORD ................................................................................................... 5

EXECUTIVE SUMMARY .................................................................................. 7

INDUSTRY CONDITION .................................................................................. 9

The World Steel Industry............................................................................. 9

The U.S. Industry Structure ...................................................................... 11

The U.S. Industry Position in World Markets ........................................ 14

Comparison of U.S., Japanese, and Korean South Companies ........... 17

FINANCIAL PERFORMANCE......................................................................... 21

Overview ..................................................................................................... 21

Operating Ratios ......................................................................................... 21

Return on Assets ...................................................................................... 22

Cost Components ................................................................................... 24

Cash Flows and Capital Investments .................................................... 25

Pensions ....................................................................................................... 27

INDUSTRY DRIVERS .................................................................................... 29

Economic Climate....................................................................................... 29

Infrastructure .............................................................................................. 30

Technology Developments ..................................................................... 30

Technology Implementation and Efficiency ......................................... 33

Raw Materials........................................................................................... 34

Management and Labor .......................................................................... 37

High-Performance Workplace ................................................................ 39

Social Costs .............................................................................................. 40

Research and Development .................................................................. 40

Education and Training ......................................................................... 43

Government Regulations ......................................................................... 43

EVOLVING MARKETS ................................................................................. 47

Automotive ................................................................................................. 47

Construction ................................................................................................ 48

Appliances ................................................................................................... 48

Containers .................................................................................................... 49

Oil and Gas .................................................................................................. 49

MAJOR FACTORS INFLUENCING COMPETITIVENESS................................... 51

Technology ................................................................................................... 51

Thin-Slab Casting ..................................................................................... 51

Ironmaking ................................................................................................ 51
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Electric-Furnace Steelmaking ................................................................. 52

Vacuum Degassing .................................................................................. 52

Continuous Annealing............................................................................. 52

Capital-Economic Performance ................................................................ 52

Environmental Regulations ....................................................................... 54

Scrap Availability, Price, and Substitutes ................................................ 55

Foreign Competition .................................................................................. 56

Subsidies ................................................................................................... 57

Imports ...................................................................................................... 57

Foreign Exchange ..................................................................................... 58

CONCLUSIONS AND POSSIBLE FUTURE DIRECTIONS.................................. 59
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FOREWORD

For over a decade there has been widespread and increasing concern

that the ability of the United States to achieve sustained economic

growth and long-term prosperity is adversely affected by declining

industrial competitiveness. The President and Congress, in a bipartisan

response, have introduced a wide range of programs and policies directed toward improving U.S. competitiveness.

Such polices, whether focused on building a 21st-century infrastructure,

stimulating technological innovation and commercialization, improving

the business climate for investment and growth, education and training,

or promoting trade, start with assumptions, often implicit, about the

competitive position of U.S. industry.

Meeting the Challenge: U.S. Industry Faces the 21st Century is a new

series of studies, produced by the Department of Commerces Office of

Technology Policy, that develops an assessment of the competitive position of a number of major U.S. industries and the factors influencing their

growth. Drawing principally from the experience and insight of the

private sector, some 150 experts from over thirty organizations in industry, academia, and government have contributed to the drafting and

review of the series. Overall, the studies provide a framework for government policy that is better informed and more accurately reflective of the

shifting, and often improving, competitive position of U.S. industry.

This report on the basic steel industry discusses how advances in technology and industry restructuring have led to a U.S. basic steel industry

substantially more competitive than ten years ago. However, the industry

still faces challenges from less developed countries, from the continuing

pressure of environmental regulations, and from pricing pressures related

to surplus capacity. Within the industry, the integrated producers, with

their high fixed costs and lingering costs of their large retiree population,

face special challenges from electric arc furnace mills, which have been

investing heavily in new production technology and have adopted new

human resources practices to improve productivity.

Graham R. Mitchell

Assistant Secretary of Commerce for Technology Policy
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EXECUTIVE SUMMARY

This report is an overview of the competitiveness of the American

basic steel industry. The industry is defined here as the companies

that produce flat-rolled, structural, and tubular products from iron

ore (integrated producers) or from scrap (electric arc furnace or EAF

producers).

The industry has gone through wrenching changes over the past 10 to

15 years, but has now emerged in much better financial and operating

condition. Downsizing and present economic conditions are allowing the

industry to operate near capacity. These factors, combined with the

substantial sums invested in modernization, have made the U.S. steel

industry competitive for the U.S. market.

This report discusses the improvement in the industrys operation, the

impact of the EAF producers, and the position of the U.S. industry with

respect to the Japanese and the South Korean producers. A brief description of the financial performance of the industry is also included.

No industry operates in a vacuum. The steel industrys ability to grow

and compete is modulated by constraints imposed by governments, the

economy in which it operates, and its own decisions on priorities. The

most important of the forces acting on the industry are discussed in this

report and their impact on the future of the industry assessed.

The changing nature of the market for steel is illustrated by discussions of

the automotive and home construction markets, among others. The

automotive materials market is still dominated by steel, even though

much is written of the rise of aluminum and plastics. The international

steel industry, in cooperation with Porsche, has shown that a weight

reduction of the order of 25 percent is possible in automobiles using

steelso the final outcome of the steel vs. aluminum vs. plastics competition is still unknown. The U.S. home construction industry presents a

great opportunity. In 1993, the number of homes built using steel framing

was 15,000. In 1994, it increased to 75,000. This rapid increase could

indicate a large latent market.
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The steel industry is much more competitive today than it was 10 years

ago. Environmental requirements continue to have a major impact on the

industry as a whole. The integrated producers must meet a special set of

challenges: the growth of the EAFs, the relative inflexibility of the rules

governing their labor force, the costs of pensions and other benefits for

retired workers, and the inherent high capital expenditures associated

with integrated production.
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INDUSTRY CONDITION

The World Steel Industry

World steel consumption more than doubled in volume between

1960 and 1974. During this period, consumption grew at an average

annual rate of 5.5 percent until suffering a decline of 8.2 percent in 1975.

Consumption recovered and then suffered a second decline of about 40

million tonnes1

 in the 198082 time period (figure 1). The drop was

particularly substantial in the Organization for Economic Cooperation and

Development (OECD) countries, where a decline of 13.8 percent was

reported in 1982, with steel consumption falling to its lowest level since

1967. From 1983 onward, growth in steel consumption resumed more or

less uniformly, with a transient peak consumption of 650 million tonnes in

1989. In 1994, consumption was at about 620 million tonnes.

The development of international trade in steel over the period has

been somewhat different. World exports grew rapidly from 1960 to 1974

(9.4 percent annually) and somewhat more unevenly thereafter to reach a

level of about 150 million tonnes today. As a percentage of world steel

production, international trade in steel grew almost continuously from

1960 to 1984, from 11.7 percent to 23.4 percent. After falling from 1986 to

1989, the percentage rose again to todays value of about 25 percent of

production (figure 1).

Over the past fifteen years or so, many changes have occurred in the

world that have affected the world steel industry. The collapse of the

Eastern Bloc trading system in particular brought to an end the steel trade

flows among these countries. The difficult conditions encountered by

these countries in the initial stage of their transition to market economies

prompted them to search for new outlets for their steel in order to secure

hard currency for their structural adjustment and modernization programs. The entry of Eastern Bloc steel producers had an adverse impact

on established trade flows that, combined with sluggish world markets,

led to a dramatic decline in steel prices for all producers.

The period also saw the emergence of dynamic new market economies

with rapidly expanding steel-making capacity and output level; this

development altered the pattern of trade flows, not only because by

approaching or reaching self-sufficiency these countries imported less

World steel consumption

more than doubled in

volume between 1960

and 1974.

1 A metric tonne is 1,000 kilogramsapproximately 10 percent larger than a

ton (2,000 pounds). To convert metric tonnes to tons, multiply by 0.91.

The entry of Eastern

Bloc steel producers had

an adverse impact on

established trade flows

that led to a dramatic

decline in steel prices for

all producers.
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steel, but also because they became steel exporters in their own right, first

at the regional level but ultimately at the world level (figure 2). Finally,

the past few years have been marked by soaring growth in the demand

for steel in China and South Korea, and this increase also had a significant

impact on world steel trade (table 1).

The share of world steel production accounted for by the OECD nations

has declined almost continuously since the early 1960s. This trend has

also lowered the share of world steel exports accounted for by the OECD

from 93.6 percent in 1960 to 66.8 percent in 1983. The decline continued

until 1992, when the percentage share was 55.1 percent (table 2). Apart

from 1993, when the downward trend was reversed as a result of increased imports by China, the OECDs market share in third world

countries has steadily declined, from 17.6 percent in 1983 to 11.7 percent

for 199092. Likewise, the share of steel produced and exported by OECD

member countries fell from 27.7 percent in 1983 to 21 percent in 199092.

Since the volume of steel produced in OECD countries had not actually

declined, this result was primarily due to increased production in the

developing countries. However, the crude steel production capacity of

the OECD did decline steadily from 1982 to 1993, falling from 565 million

to 485 million tonnes per year, an overall reduction of over 14 percent,

which to some extent allowed a better match between supply and

demand.

Figure 1. World Steel Production and Trade
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This realignment of world production was accompanied by substantial

reduction in worldwide industry employment. The only countries to

escape the trend were those with emerging steel industries (table 3).

The U.S. Industry Structure

The basic steel industry in the United States is composed of integrated

producers and electric arc furnace (EAF) producers, both of which

produce flat-rolled, structural, and tubular products (the companies in

Table 1. Apparent Steel Consumption

(Million Tonnes Product Equivalent)

1980 1991 1992 1993 1994

United States 84.5 75.4 82.7 89.7 99.8

European Union 96.5 109.9 108.3 95.8 106.0

Korea 4.9 24.7 21.6 25.1 30.3

Eastern Europe 43.6 15.2 12.8 11.5 13.6

China and North Korea 38.0 68.0 75.7 107.3 95.9

World 558.1 618.5 610.2 622.2 621.6

Source: The Steel Market in 1994 and the Outlook for 1995 and 1996, OECD, Washington, D.C.

Figure 2. Steel Exports as Percentage of Steel Production
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table 4 are used as surrogates for the U.S. basic steel industry). An integrated producer is one that makes steel starting with iron ore and coal.

An EAF producer is one that starts with scrap steel. Integrated producers

tend to be firms that have been in the industry for a long time. They have

not only integrated the steelmaking process, but to a great extent have

integrated the other functions and requirements of the industry. For

example, their maintenance tends to be done internally by workers with

specific job classifications.

EAF manufacturers are often called minimills. Their manufacturing costs

are normally significantly less than those of integrated producers, but

they cannot produce all products. Their strengths tend to be in lower

Table 2. Changes in International Trade in Steel

(Worldwide Exports)

Table 3. Employment

(Thousands)

Average over 3 Years

1983 198486 198789 199092 1993

Origin as Percentage

OECD 66.8 64.5 57.3 55.8 58.7

Non-OECD market economies 16.2 17.3 22.2 27.0 25.0

Old Eastern Bloc 16.6 17.9 20.1 14.8 15.4

China and North Korea 0.4 0.2 0.3 2.4 0.9

Exports from OECD to Third World Countries

In million tonnes 49.0 50.2 38.7 36.4 52.1

As percentage of market 17.6 16.6 12.0 11.7 15.9

Source: The Steel Market in 1994 and the Outlook for 1995 and 1996, OECD, Washington, D.C.

Region 1974 1994 Change (%)

EU 895 303 (66)

U.S. 610 234 (62)

Japan 324 183 (44)

Mexico 46 57 24

South Korea 63 66 5

Total OECD 2,183 980 (55)

Source: The Steel Market in 1994 and the Outlook for 1995 and 1996, OECD, Washington, D.C.
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quality products, particularly bars and structural shapes. Recently they

have also begun producing lower quality flat-rolled steel and have taken

that market away from integrated producers. Minimills are generally

considered world leaders in efficiency, human resource practices, and

ability to implement new technology.

There is, however, some blurring in the distinctions between the two

methods of production. Some integrated producers have stopped coke

production, and one or two are building minimills. Some of the EAF

producers will integrate back into direct reduced iron production and will

probably also get into more complex finishing. So over time, the distinction between these two industry segments will probably become less

clear.

In markets where minimills and integrated producers have competed,

minimills have gained market share because of their lower costs and

resulting lower prices. The integrated producers, in response, have

shifted to producing higher quality, more complex products, and the

industry tends to be divided in this fashion. The threat of the minimills

improving their ability to produce higher quality, more complex products

exerts a constant pressure on the integrated producers.

Minimills have gained

market share because of

their lower costs and

resulting lower prices.

Table 4. Sample Steel Firms

(1994) ($ Million)

Sales Net Income

Integrated Firms

Armco Incorporated 1,438 78

Bethlehem Steel Corporation 4,819 81

Geneva Steel 486 (26)

Inland Steel 2,488 54

LTV Corporation 4,529 127

USX-US Steel Group 6,066 201

Weirton Steel Corporation 1,261 35

EAF Firms

Bayou Steel Corporation 161 (1)

Birmingham Steel Corporation 703 22

Chaparral Steel Company 532 20

Lukens Inc. 947 22

NUCOR Corporation 2,976 227

Oregon Steel Mills 838 12

Quanex Corporation 699 19

Source: Compustat Database.
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The steel industrys products are used in every sector of the economy. In

1994, the industry shipped 95 million tons of steel, whose main uses are

depicted in table 5.

The U.S. Industry Position in World Markets

In recent years, the American steel industry, especially the integrated

producers, has increased its efficiency significantly and is now probably

the lowest cost producer for its market. Sagging demand and international competition have resulted in a tremendous restructuring of the

integrated producers. Many inefficient plants have been closed, workers

have been laid off, and the workforce has been reduced permanently.

Despite low profits during the past ten years, the industry has managed

to invest, primarily in continuous casters and secondarily in refining.

Because of the increased capital/worker ratio, productivity has also

increased significantly.

As shown in figure 3, imports, which were 25 percent or more in the

1980s, dropped to 16 to 20 percent in the early 1990s. Import levels rose

in the 1980s because the U.S. industry did not meet its customers needs

in terms of quality, and because steel buyers frequently want a diversity

of suppliers to protect them against shutdowns in the American industry.

Some of the increase in imports may have been due to unfair trading

practices such as dumping or selling subsidized steel. In 1994, imports

again rose to about 25 percent, not because of quality problems but

Imports will always

represent a competitive

threat to U.S. producers

because basic steel is a

commodityquality is

important to some

customers, but for most,

price is the deciding

factor.

Figure 3. Imports as a Percentage of Apparent Steel Supply
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Table 5. Markets/Products Matrix

(1994) (Main Items Only)

Total Tons Percentage

Classifications Products (million) of Total

Steel for Processing

Wire and wire products Wire rods 1.037 1.1

Pipes and tubes Plates, hot-rolled sheets, 3.065 3.2

cold-rolled sheets

Industrial Fasteners Wire rods, bars, hot 0.443 0.5

rolled

Construction Products

Pre-engineered buildings Sheets, galvanized 0.728 0.8

General construction Structural shapes, piling, 7.551 7.9

plate, reinforcing bars,

galvanized sheets

Contractor Products

Building products Sheets, cold rolled; 1.737 1.8

sheets, galvanized

Automotive

Vehicles, parts, and Bars, hot rolled; 13.890 14.6

accessories sheets, hot rolled;

sheets, cold rolled;

sheets, galvanized

Rail Transportation

Rails and trackwork Rails 0.595 0.6

Freight cars Plates 0.560 0.6

Oil and Gas Industry

Oil and gas drilling Oil country goods 0.569 0.6

Machinery and Equipment

Construction and Plates 0.879 1.0

general purpose

Electrical Equipment

Power transmission/ Sheets, cold rolled; 1.372 1.4

distribution sheets, galvanized

Appliances

Major appliances Sheets, cold rolled; 1.199 1.3

sheets, galvanized

Containers and Packaging

Cans Tin plate, tin free steel 3.121 3.3

Barrels and drums Sheets, cold rolled 0.497 0.5

Source: Shipment of Steel Products by Market ClassificationsRevised Final Year 1995,

American Iron and Steel Institute, Washington, D.C.
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because even at full capacity the U.S. industry could not produce all the

steel required for the strong U.S. economy.

Imports will always represent a competitive threat to U.S. producers

because basic steel is a commodityquality is important to some customers, but for most, price is the deciding factor. For this reason, exchange

rates will continue to have a major impact on the relative importance of

imports in the U.S. market.

A significant amount of the imports was unfinished steel, such as slabs,

which were finished in U.S. mills. The difficult economic conditions in the

ex-Soviet countries and the European Community (EC) imposition of

tariffs and quotas on imports from Eastern Europe have led to a surge of

imports of semifinished and plate products from Russia and Ukraine.

Dumping of steel on the market at below-production cost or by producers receiving large subsidies remains a problem. In the early 1990s, the

Commerce Department concluded that imports included a substantial

amount of dumped steel or steel produced by subsidized firms, and

applied tariffs in many cases. However, the International Trade Commission later ruled that in most cases there was no injury to the U.S.

industry, and the tariffs were removed.

The long-term problem is that for the past fifteen years, worldwide capacity has exceeded production by 200 million tons, as shown in figure 4.

Dumping of steel on

the market at belowproduction cost or by

producers receiving

large subsidies remains

a problem.

Figure 4. World Raw Steel Capacity and Production
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Figure 5 shows that, in contrast, U.S. production and capacity became more

in balance during that period. There is some evidence that worldwide

overcapacity will diminish in the next decade, but it will remain a major

problem.

Comparison of U.S., Japanese, and South Korean Companies

While the United States consumes more steel than any other country, it

is not home to the worlds largest producers. Japan, South Korea, and

France have concentrated their industries, and thus have steel producers that are twice the size of any other countries producers. Japan has

the largest single producerNippon Steel (table 6)and has set the

standard for productivity in steelmaking for the past twenty years.

However, South Korea is emerging to set a new standard for low-cost

production, due to the fact it has new, highly efficient plants and

relatively low wages. In this section, we compare the U.S. industry

with the Japanese and South Korean industries.

In comparing the Japanese and American steel industries, it is logical to

focus on productivity.2

 One commonly used measure of productivity is

South Korea is emerging

to set a new standard for

low-cost production, due

to the fact it has new,

highly efficient plants

and relatively low wages.

2 Marvin B. Lieberman and Douglas R. Johnson, Comparative Productivity of

Japan and U.S. Steel Producers, 19581993, Working Paper of the Sloan Center

for the Study of the Steel Industry, Carnegie Mellon University, Pittsburgh,

1994.

Figure 5. U.S. Raw Steel Production and Capacity
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labor hours per ton of steel. A second is value added per employee.

One problem with using these measures is that Japanese companies use

many contract workers who do not appear in statistics as employees.

Typically, contract workers make up 30 to 60 percent of the direct employees in Japan. In the United States, the use of contractors has grown,

but it is still only about 10 to 25 percent.

In this study, labor input was taken as the total hours worked by a firms

employees during the year. In the early 1960s, the Japanese required

15 to 30 labor hours per ton. By the 1970s, the requirement was less

than 5 labor hours per ton, and it remained fairly steady at that level

through 1992.

In the United States, the labor input in 1958 was between 12 and 23 hours

per ton. By 1964, it had improved to 7 to 14 hours per ton. Productivity

then stagnated for twenty years. In the 1980s it began to improve again,

Table 6. Raw Steel Production

Top 15 Producers (Million Tons)

Percentage

Company Country 1984 1994 Change

Nippon Steel Japan 32.4 28.1 (13.3)

POSCO South Korea 10.1 24.4 140.7

Usinor-Sacilor France 19.5 20.4 4.5

British Steel UK 14.0 14.2 1.4

NKK Japan 13.8 12.0 (13.1)

Thyssen Germany 12.0 11.8 (1.4)

U.S. Steel U.S. 15.1 11.7 (22.7)

ILVA Group Italy 14.9 11.4 (23.8)

Sumitomo Metal Japan 12.5 11.1 (10.6)

Kawasaki Japan 12.4 11.1 (10.9)

SAIL India 6.9 11.0 59.0

Bethlehem U.S. 12.2 9.8 (19.8)

BHP Australia 6.7 9.3 38.1

Arbed Group Luxembourg 12.1 9.2 (23.8)

Shougang China  9.1 

Source: Metal Bulletin Handbook, 1985, Vol. 2: Statistics and Memoranda, p. 271, and Metal Bulletin,

Feb. 23, 1995, p. 19.
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and it is now less than 4 hours per ton for many integrated producers and

less than 2 hours per ton for EAF producers. New EAF thin-slab casting

plants may use less than 0.5 labor hours per ton.

Value added per employee is a somewhat better measure. Value added

is the difference between the firms total sales and its purchases of raw

materials and contract services. When these data are put into real terms

for 1980 dollars and 1980 yen, the comparison is significantly in favor of

the Japanese. Between 1958 and 1993, Japanese labor productivity increased about tenfold. For American firms the growth was slight, with

stagnation from the mid-1960s to the early 1980s. U.S. labor productivity

began rising again in the 1980s and had a major boost in 1993, when it

increased between 2.5 and 3 times.

A more recent competitor in the world steel markets is South Korea. The

South Korean steel industry is currently dominated by a single company,

POSCO (Pohang Steel Company). South Korean steel production grew

from 2.2 million tons in 1973 to 34 million tons in 1994, of which 24 million

tons is manufactured by POSCO.3

 POSCOs capacity has nearly doubled

in the past five years. The company has very modern plants with all the

critical technologies. Its productivity in terms of labor hours per ton is 25

percent higher than that of the United States and Japan. Its workers

average 54 hours per week, and wages are about $12.00 per hour, which

is 50 to 65 percent less than wages in the United States and Japan.

Consequently, POSCO has relatively low production costs. For example,

the estimated production cost for South Korean hot-rolled coil is about

$350 per ton compared with $450 in the United States.4

 POSCO and other

South Korean companies are continuing to invest heavily in steel production. They have been investing at a rate of $100 to $120 per ton of production, while the U.S. rate has been about $20 to $25 per ton, and the Japanese rate $40 to $60. Some experts predict that POSCO will be the largest

steel company in the world by the year 2000 and that it will be the

low-cost leader.

3 Peter Marcus, et al. World Steel Dynamics, a Paine Webber publication,

#20, May 1994.

4 Ibid.

South Korean companies

have been investing at a

rate of $100 to $120 per

ton of production, while

the U.S. rate has been

about $20 to $25 per

ton, and the Japanese

rate $40 to $60.
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U.S. EAF producers have

been able to maintain a

steady growth in output,

while the integrated

producers have

experienced a general

decline in output and a

volatile earnings history.

5 W. Barber, Y. Ijiri, R. Trueblood, S. Kang, Financial Analysis of the U.S., Japanese

and Korean Steel Industry, Sloan Steel Industry Study, Working Paper 25,

Carnegie Mellon University, Pittsburgh, 1993.

FINANCIAL PERFORMANCE

I

n this section, the financial performance of the U.S. steel industry is

illustrated and analyzed using sample companies as surrogates for the

industry.

Overview

Table 7 illustrates two of the key features of the U.S. industry over the

past few years. The EAF producers have been able to maintain a steady

growth in output, while the integrated producers have experienced a

general decline in output and a volatile earnings history.

Operating Ratios

Details of the sample firms and the data source are explained in Barber

et al.5

 The computations of the financial ratios are displayed in figure 6.

Notice that firm-level data are aggregated to obtain a single valueweighted measure for each year from 1974 to 1993. Mean measures for

each sample are in tables 8 and 9. Time-series plots in figures 7 and 8

compare selected performance parameters of integrated and EAF steel

firms with that of the S&P 500.

Table 7. Performance Overview

(Sample Firms) ($ Million)

1988 1989 1990 1991 1992 1993 1994

Sales

Integrated 26,870 24,262 22,762 20,141 18,254 19,603 21,087

EAF 3,305 3,703 4,193 4,128 4,427 5,452 6,856

Income Before Extraordinary Items

Integrated 564 1,381 (162) (1,979) (1,207) (415) 562

EAF 244 220 213 139 155 178 324

Source: Compustat Database.
22 The Basic Steel Industry

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Return on Assets

We use return on assets (ROA) (ratio of net income to the book value of

assets) as a summary measure of profitability. Alternative measures of

profitability based on operating cash flows do not alter the conclusion. We

make adjustments so that ROA comparisons are unaffected by capital

structure. Time-series plots and mean ROA measures for each sample

are displayed in figure 7 and table 8, respectively.

During the past two decades, integrated steel producers have been

generating a persistently lower ROA than EAF producers and other

industrial firms. To understand the source of the difference in ROA, we

decompose the ratio into two components: the product of the ratio of

revenues to assets (asset turnover (ATO)) and the ratio of net income to

revenues (return on sales (ROS)), where ROA = ATO x ROS. The reason

for decomposing ROA is that ATO provides a measure of how effiFigure 6. Computation of Financial Ratios

The aggregate ratio (Rt) for year t is

Where N is the number of firms appearing in the sample in year t.

Variable definition

1. Return on Assets (ROA) =

Income before extraordinary items + Minority interest + after tax interest

Total assets of the preceeding year

2. Return on Sales (ROS) =

Income before extraordinary items + Minority interest + after tax interest

Sales

3. Asset Turnover (ATO) = Sales

Total assets of the preceeding year

4. Cost of Sales = Cost of Sales excluding Depreciation

Sales Sales
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ciently the firm uses its assets to generate sales, while ROS indicates

how much profit the firm recovers from its revenues.

Not surprisingly, the mean profit margin of the EAF producers is more

than 5 percentage points higher than that of the integrated producers

(table 8). However, this is not the only reason for the superior return:

ATO of EAF firms has persistently exceeded that of the integrated firms

(1.35 versus 1.12; table 8), suggesting that the EAF firms have generated more revenues relative to the size of their assets.

Table 8. Profitability Ratios of the U.S. Steel Industry

(19751993)

Integrated EAF S&P 500

 Steel Firms Steel Firms Firms

ROA All periods (.052) 7.35 6.53

8893 0.10 7.04 5.27

8187 (6.81) 5.06 6.59

7581 4.33 9.57 7.59

ROS All periods (0.74) 5.30 5.59

8893 (0.36) 5.62 5.56

8187 (6.07) 3.94 5.54

7581 3.52 6.19 5.56

ATO All periods 1.12 1.35 1.17

8893 1.01 1.23 0.94

8187 1.10 1.25 1.19

7581 1.24 1.54 1.35

Table 9. Breakdown of Expenses per Dollar of Sales

(19751993)

Integrated EAF S&P 500

 Steel Firms Steel Firms Firms

Cost of Sales All periods 89.10 80.70 72.20

Sales 8893 89.90 81.30 70.00

8187 91.20 81.30 71.80

7581 87.50 79.60 74.30

Selling and All periods 4.83 6.55 14.43

Administration 8893 3.47 5.56 16.59

Sales 8187 6.29 7.23 14.81

7581 4.74 6.81 12.24
24 The Basic Steel Industry

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Figure 7. Return on Assets (ROA)

Cost Components

The product costs/sales ratio (cost of goods sold deflated by sales)

focuses on manufacturing costs. Table 9 indicates differences of 8 to 9

percentage points between integrated and EAF firms. The time-series plot

in figure 8 reveals that these differences were persistent over the 1975

1993 period.

While the EAF firms have a product cost advantage of 8 to 9 cents per

sales dollar over the integrated firms, their operating overhead (selling

Figure 8. Product Cost per Sales Dollar
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OFFICE OF TECHNOLOGY POLICY

and administration expense) is about 2 cents higher per dollar of

revenue (table 9). As a result, the net cost advantage of EAF producers

is about 7 cents per dollar. Since the average revenue per ton for the

integrated firms is about $500, this cost disadvantage amounts to about

$35 per ton, which accounts for a large portion of the lower ROA for

the integrated firms. Both integrated and EAF firms were successful in

reducing operating overhead during the past two decades. The operating overhead for integrated firms declined from 4.75 percent of sales in

1975 to about 3.5 percent of sales in 1993, and that for EAF firms

declined from 6.81 percent to 5.56 percent.

Cash Flows and Capital Investments

Cash flow is the oil that lubricates the machinery of business. The

integrated steel producers well-publicized earnings problems over the

Table 10. Cash Flow Data

Integrated Steel Producers (Selected Items) ($ Million)

1988 1989 1990 1991 1992 1993 1994 Sums

Operating Activities

Income before

extraordinary items 564 1,382 (117) (1,868) (1,196) (393) 616 (1,012)

Depreciation and

amortization 1,179 1,069 1,023 934 1,040 1,091 1,087 7,423

Deferred taxes 235 157 565 (237) (581) (173) 115 81

Funds from operations 1,175 (43) 367 1,399 1,241 (9) 398 4,528

Working capital changes 730 218 (221) (420) (55) (651) 744 345

TOTAL A 2,423 2,347 2,059 648 559 1,167 1,472 10,675

Investing Activities

Capital expenditures 1,406 1,618 1,851 1,795 1,218 1,106 1,432 10,426

Financing Activities

Sale of common equity 193 4 29 129 621 1,463 953 3,392

Cash dividend (214) (245) (245) (157) (128) (179) (189) (1,357)

LTD-issuance 273 466 786 1,162 745 827 292 4,551

LTD-reduction (2,247) (1,917) (788) (210) (608) (1,571) (638) (7,979)

TOTAL B (1,995) (1,692) (218) 924 630 540 418 (1,393)

TOTAL A+B 428 655 1,841 1,572 1,189 1,707 1,890 9,282

DEBT/EQUITY (w/o LTV)

Debt 4,407 3,331 3,378 4,223 4,497 3,833 3,633

Total equity 4,892 5,741 5,409 3,769 1,120 967 2,105

Debt/total equity 0.90 0.58 0.62 1.12 4.02 3.96 1.73

Note: LTD = Long-term debt

Source: Compustat Database.

Both integrated and

EAF firms were

successful

in reducing operating

overhead during the

past two decades.
26 The Basic Steel Industry

OFFICE OF TECHNOLOGY POLICY

past ten years or so (our sample companies had a total of $1 billion in

losses between 1988 and 1994) would seem to deny them the ability to

invest in modernization. Yet our sample integrated firms invested over

$10 billion in plant and equipment over that period.

A look at FASB #95 data (tables 10 and 11) for the surrogate firms

illustrates how the integrated firms managed this feat and shows the

fundamental economic differences between the integrated and EAF

producers.

For the integrated firms, the $10 billion in capital expenditures was

funded through a combination of depreciation charges, substantial

equity sale, and the catch-all category of funds from operations. This

last category is made up mainly of the various accounting charges

resulting from industry restructuring and accounting changes. The

Table 11. Cash Flow Data

EAF Steel Producers (Selected Items) ($ Million)

1988 1989 1990 1991 1992 1993 1994 Sums

Operating Activities

Income before

extraordinary items 244 221 212 139 155 178 327 1,476

Depreciation and

amortization 135 162 186 205 235 274 320 1,517

Deferred taxes 6 11 13 0 17 (2) 2 47

Funds from operations 11 16 46 56 85 43 57 314

Working capital changes 53 88 (49) 131 130 11 309 673

TOTAL A 343 322 506 269 362 482 397 2,681

Investing Activities

Capital expenditures 483 273 346 377 567 593 534 3,173

Financing Activities

Sale of common equity 233 38 5 85 216 13 166 756

Cash dividend (105) (40) (51) (53) (60) (70) (73) (452)

LTD-issuance 113 190 186 143 622 128 359 1,741

LTD-reduction (165) (160) (262) (38) (319) (47) (575) (1,566)

TOTAL B 76 28 (122) 137 459 24 (123) 479

TOTAL A+B 419 350 384 406 821 506 274 3160

DEBT/EQUITY

Debt 408 504 426 566 863 1,005 969

Total equity 1,257 1,430 1,661 1,826 2,059 2,128 2,583

Debt/total equity 0.32 0.35 0.26 0.31 0.42 0.47 0.38

Note: LTD = Long-term debt

Source: Compustat Database.
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substantial equity sales are interesting in that during the period we are

examining, investor sentiment was generally not favorable to the

integrated firms, as shown in figure 9. Nevertheless, integrated producers were able to take advantage of more favorable recent (1992 onward) market conditions to sell more than $3 billion worth of new

equity. Throughout the process, the integrated firms have maintained a

very high debt/total equity ratio. The dividend payout testifies to the

lean 19881992 period.

Data for the EAF producers exhibit a more classic business profile.

Income and depreciation charges coupled with a more restrained sale of

equity more or less cover modernization needs. The debt/total equity

ratio is well behaved. Dividend payout is also well behaved (if a special

dividend paid in 1988 is excluded from the data).

Pensions

Pension costs are substantially higher for integrated producers than for

EAF producers. The integrated firms are older and have an older

workforce. In addition, the substantial rationalizing of operations of the

integrated firms over the past ten years has resulted in their having a

large ratio of retirees to active workers. For these reasons, the integrated

firms tend to have larger relative pension expenses than the EAF firms.

This disadvantage is especially acute for integrated firms (Bethlehem

The substantial

rationalizing of

operations of the

integrated firms over the

past ten years has

resulted in their having a

large ratio of retirees to

Figure 9. Investor Sentiment active workers.

Market Value Normalized to 1980
28 The Basic Steel Industry

OFFICE OF TECHNOLOGY POLICY

and LTV in our sample) that also have large unfunded pension liabilities.

In 1994, Congress passed new pension legislation that will have some

impact on the industrys pension responsibilities. While the companies do

not expect the new legislation to significantly increase their minimum

annual contribution to their pension plans for the next several years,

over time it will increase their annual premium to the Pension Benefit

Guaranty Corporation.
The Basic Steel Industry 29

OFFICE OF TECHNOLOGY POLICY

INDUSTRY DRIVERS

No industry operates in a vacuum, and the steel industry is no

exception. Its ability to grow and compete is modulated by constraints imposed by governments, the economy in which it operates, and

its own decisions and priorities. This section discusses the most important forces acting on the industry.

Economic Climate

The current economic climate is excellent, and domestic steel production is nearly in balance with capacity. Prices decreased from 1988 to

1993 but are now back to 1988 levels. In the second quarter of 1995, a

price reduction occurred in a few products. Integrated producers are

currently making profits. They have been able to raise equity, and

investment is strong. However, problems remain with pension plans,

some of which are still underfinanced, although the companies have a

number of years to bring them into balance.

There is a strong movement to use steel in new houses. Lumber prices

have risen significantly, and the steel industry has done a good job of

marketing steel as an alternative. The expectations for the future are

high. The industry needs to develop training programs for steel housing

construction, and it is doing so. In automobiles, there seems to be a

continued strong demand. Aluminum does not seem to be making

heavy inroads in the market. However, the steel industry must continue

to improve quality and control costs. The automobile industry is continually looking for lower prices, but in the competition with plastics,

steel seems to be holding its own. The beverage can market has been

lost, but food cans continue to be made of steel.

Clearly, the steel industry depends on the general status of the

economy; economic expansion benefits the industry. Demand is closely

tied to the gross domestic product. Due to potential foreign competition

and new capacity, prices will probably not exceed the 1988 level in

terms of constant dollars.

The steel industry

depends on the general

status of the economy;

economic expansion

benefits the industry.
30 The Basic Steel Industry

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Infrastructure

Technology Developments

The two basic manufacturing systems for producing steel are shown

schematically in figure 10. The integrated process uses ore and coal (coke)

as its major raw materials, and the EAF process uses scrap as its major

raw material. The integrated process is used by large plants producing

2 to 5 million tons per year and higher quality products. The EAF plants

generally produce 0.5 to 2.0 million tons per year and generally produce

lower quality, less complex products.

Pellet and Sinter Plants: The United States industry primarily uses pellet

plants, which are reasonably efficient. There has been significant overcapacity in pellet production.6

 Sinter plants, which are less common, generally prepare recycled materials, but they have significant environmental

problems, and many have been closed in the past five to ten years.

Coke Plants: Coke plants are highly capital intensive and have significant

environmental problems. Several major companies (e.g., Inland, Rouge,

and Weirton) no longer produce coke because of the high capital cost;

they rely on purchasing coke. U.S. coke plants are relatively old, and

many will have to be rebuilt or closed in the next decade. With the anticipated coke shortage, many U.S. companies are using coal and natural gas

injection in the blast furnace, which can reduce coke requirements by up

to 40 percent. In addition, there is a worldwide effort to develop a

process to produce iron without coke. Such processes include the

COREX process, which is commercially available for moderate-size

production (0.5 to 0.8 million tons per year), and the AISI Direct Steelmaking, HIsmelt (Australia), and DIOS (Japanese) processes, which are

under development.

Blast Furnaces: Blast furnaces in the United States range from extremely large modern furnaces such as Inland #7, which produces

9,500 tons per day, and nearly comparable furnaces at U.S. Steel Gary

Works and Bethlehem Sparrows Point, to relatively small furnaces (less

than 3,000 tons per day). The best U.S. companies match world-best

performances of total fuel rates (coke plus injected fuel) of 1,000

pounds per ton of hot metal and in productivity at over 10 tons per 100

cubic feet per day. While several U.S. companies (e.g., Inland Steel) are

becoming leaders in coal injection, on average the United States is

slightly behind Europe in this technology.

With the anticipated coke

shortage, many U.S.

companies are using coal

and natural gas injection

in the blast furnace,

which can reduce coke

requirements by up to

40 percent.

6 Metals Statistics 1994, American Metal Market, New York, NY 1994.
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OFFICE OF TECHNOLOGY POLICY

Oxygen Steelmaking (OSM): Oxygen steelmaking (basic oxygen furnace, quick basic oxygen process, etc.) is a fairly mature, universal

process. The last open hearth in the United States, at Geneva Steel, was

closed in 1991. OSM in the United States is, in general, competitive

with Japan and Europe with only slight differences.

Ladle and Vacuum Processing: Between 1975 and 1990 there was a

large growth in ladle furnaces and in vacuum degassing. The U.S.

industry lagged behind Europe and Japan in adopting vacuum processing for several reasons, including lack of capital and the misconception

that it was not required. In the late 1980s, however, the U.S. industry

invested significantly in this technology, and now most major integrated companies have such facilities. Currently there is adequate

Figure 10. Basic Steel Manufacturing Process
32 The Basic Steel Industry

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vacuum degassing capacity for normal operating levels. U.S. minimills

were quick to adopt ladle processing technology. Most major plants have

ladle furnaces or chemical reheating and carry out ladle processing.

Continuous Casting: The U.S. industry lagged behind Europe and, in

particular, Japan in the installation of continuous casters. However,

the United States has caught up and in 1994 continuously cast about

90 percent of the steel produced.

Finishing: While, the United States initially lagged in installing state-ofthe-art equipment, its current equipment is nearly equal to the worlds

best, resulting in major improvements in quality and productivity (e.g.,

reheat furnace productivity is 300 percent higher, and energy consumption is a third of what it was a decade ago); further improvements will be

relatively small. The United States still lags in the installation of continuous annealing, new developments in roll stands, and walking-beam

furnaces. However, despite the lower capital investment, productivity

and quality are competitive.

EAF Steelmaking: The scrap-based EAF producers have become highly

efficient. The improvements in the major operational parameters have

been significant, as indicated in table 12. These achievements were

brought about by a series of improved technologies and management

practices. The technologies included ultra-high-power furnaces, ladle

furnaces, oxy-fuel burners, foamy slag practices, and high use of oxygen.

Since 1980, both the integrated and EAF producers have made significant

improvements in ladle metallurgy and finishing, which have resulted in

higher yields and better properties. The industry now delivers material

with specific properties, not just steel.

In implementing new technologies, the U.S. steel industry was playing

catch-up from 1985 to 1992. In general, it has caught up and is leading

in a few areas.

Table 12. Improvements in EAF Efficiency

Metric 1970 Current

Time to produce liquid steel 180 minutes 55 minutes

Electrical energy per ton 600 kWh 430 kWh

Electrode consumption per ton 12 pounds 4.5 pounds

Labor hours per ton liquid steel 3 labor hours 0.4 labor hours

Both the integrated and

EAF producers have

made significant

improvements in ladle

metallurgy and finishing,

which have resulted in

higher yields and better

properties. The industry

now delivers material

with specific properties,

not just steel.
The Basic Steel Industry 33

OFFICE OF TECHNOLOGY POLICY

n Coal injection into blast furnaces has been or is being

installed, and by 1996 several U.S. plants will be leaders in

this technology.

n Continuous casting now includes over 90 percent of production.

n New thin-slab casting is up to about 4 million tons and could

reach 18 million tons by the year 2000; the United States has and

will continue to have the highest thin-slab casting capacity.

n All major producers have installed vacuum degassers to improve

quality and extend markets.

n Direct charging of slabs is being implemented in a number of

plants.

n Many new galvanizing lines, including electro-galvanizing,

hot-dip lines, and other types of finishing lines, have been

installed.

n Ladle metallurgical furnaces or other steel reheating capabilities

have been nearly universally installed.

n Continuous annealing of sheets is being implemented.

n Statistical process control of rolling processes has been implemented, along with computer models and automatic control of

variables, markedly reducing variations in properties.

n Advanced controls improved all dimensions except shapes.

n Flat-rolled coil weights and sizes are much larger on average than

ten years ago.

Technology Implementation and Efficiency

As part of the Sloan Steel Industry Study, researchers at Carnegie Mellon

University benchmarked the U.S. industry with regard to technology

implementation and manufacturing efficiency.7

 More than twenty critical

technologies and a similar number of measures of efficiency were considered for integrated and EAF plants. The results are shown in figures 11

7 R. J. Fruehan, et al., Iron and Steelmaker, January 1994, p. 25.
34 The Basic Steel Industry

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and 12 for most major U.S. producers and several international plants,

including the worlds best. Although the U.S. plants do not have the

same level of technology as the international best, they are nearly as

efficient. The U.S. industry in general has learned to do more with less

and invested in the most critical technologies.

An interesting finding of the study was that some companies outperform others with similar levels of technology. This is due in part to

better coordination of processes in the plant and better technical

know-how, resulting in more production from the same equipment.

Raw Materials

The three major resources for producing steel are ore, coking coals, and

scrap; currently scrap or scrap substitutes are the most critical.

Ore: The United States has large quantities of medium-quality domestic

ore, which requires upgrading and pelletizing. Japan, South Korea, and

Europe use imported ore (primarily from Australia and South America).

But even with transportation costs, this higher quality material is similar

in price to U.S. domestic pellets. For many years, U.S. companies were

tied to long-term pellet contracts; in most cases this is no longer true, and

pellet costs have decreased. In general, using domestic ore offers the

industry no advantage.

Figure 11. U.S. and Non-U.S. EAF Plants

Efficiency vs. Technology

The U.S. industry in

general has learned to

do more with less and

invested in the most

critical technologies.
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OFFICE OF TECHNOLOGY POLICY

Coking Coal: Not all coals can be used for coking; special coals or

blends are required. Coking coals cost about $10 more per ton than

steam coals. At one time there was a concern about a possible future

shortage in coking coals; however, this shortage will not be critical for a

decade or more. The critical problem is in coke making, which has

many environmental problems and high capital cost.

Scrap: There will be 10 million tons per year in new scrap-based EAF

capacity in the next five years, primarily in flat-rolled steels, which require high-quality scrap. There is international concern about the future

cost, availability, and quality of scrap, which has been the subject of

several major studies. It is also being examined in detail by the Sloan

Steel Industry Study.

Scrap is classified as home, prompt, or obsolete. Home scrap is generated in the plant, and the supply has decreased significantly in recent

years due to the implementation of continuous casting. Prompt scrap is

from steel product manufacture (e.g., automotive stamping), and the

supply is also decreasing. Obsolete scrap is postconsumer scrap such as

shredded automobiles, appliances, etc. Home and prompt scrap are

low in residuals and are of high quality. Obsolete scrap is high in

residuals and cannot be used in large quantities for producing higher

quality steels.

Figure 12. U.S. and Non-U.S. Integrated Plants

Efficiency vs. Technology

There is international

concern about the future

cost, availability, and

quality of scrap.
36 The Basic Steel Industry

OFFICE OF TECHNOLOGY POLICY

As shown in figure 13, the fraction of scrap used to produce new steel

has increased to about 0.6; in other words, 65 percent of new steel

comes from scrap. The fraction of home scrap has declined, causing a

large increase in the use of purchased prompt and obsolete scrap.

Furthermore, the amount of high-quality prompt industrial scrap has

declined.

Pursuing the issue of the availability of scrap, we have made the following reasonable assumptions:

n an increase in steel production of 1 to 2 percent per year

n about 45 percent of steel in the United States produced in

electric arc furnaces

n an increase in scrap recycle rates from 35 to 45 percent in the

next decade

n a slight decrease in exports of scrap

n the availability of 3 to 5 million tons per year of scrap

substitutes

Figure 13. Types of Scrap in Steel
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From our own analysis and those of other studies, we reach the following conclusions:

n Sufficient obsolete scrap will be available. The price will

fluctuate, but on average it will increase only moderately

from todays relatively high prices.

n There will be a shortage of prime residual-free scrap in the

midterm. In the long term, scrap substitutes must fill the gap.

In any case, scrap availability, quality, price, and substitutes

will be a critical concern for the steel industry (see Major

Factors Influencing Competitiveness for further discussion,

page 51).

Management and Labor

Management in the steel industry has recognized the need to eliminate

overcapacity and to develop more efficient operations. As a result, there

has been an intensive effort to close inefficient facilities and to reduce the

labor force. Employment has decreased by over 60 percent in the past

fifteen years, as shown in figure 13. The integrated companies employment is down by about 300,000, or 75 percent, while EAF employment is

up by 10,000, or 100 percent. The aim is for each firm to develop a

much lower break-even point; to do that, fixed cost must be reduced.

Figure 13. Employment Relative to 1980

There has been an

intensive effort to close

inefficient facilities and to

reduce the labor force.
38 The Basic Steel Industry

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In the human resources area, management has made significant

progress. This area is extremely important because personnel costs,

while varying greatly depending on whether the firm is integrated or

not, account for 10 to 25 percent of the total cost of production.

The industry has made tremendous progress in improving labor productivity in the past ten years. Both integrated and EAF producers

have increased the tons per worker year by nearly 300 percent, as

discussed in the next section.

Labor costs in the integrated firms are still significant, since steel workers wages are about 50 percent more than the average wages for

manufacturing. The EAF firms generally are not unionized, but they

pay comparable salaries. However, a large portion of their compensation is incentive based, which gives them flexibility in their labor costs.

Since many of the other costs, such as capital, materials, and energy,

are difficult to control, labor is one of the few major costs that can be

reduced.

These developments in labor costs have not been lost on the integrated

firms or their union, the United Steelworkers of America (USWA).

Management and labor have developed a much more cooperative

attitude over the past ten years or so than previous history would have

indicated. Union representatives now sit on the boards of more than

thirty steel companies, including all the major integrated firms. The

major steel companies and the USWA are jointly funding and managing an Institute for Career Development for steelworkers. More than

25,000 workers are presently taking advantage of the courses offered

by the Institute, whose 1995 budget was $19.1 million. Finally, the

integrated firms and the union have signed cooperative partnership

agreements that promise a high degree of information sharing and

consultation and spell out common objectives aimed at improving the

profitability and competitiveness of the companies, thereby preserving

and enhancing workers jobs.

Management has done a good job of introducing new technologies,

thereby substituting capital for labor. Management has also been alert to

new human resource (HR) practices, and firms putting these practices

into use have improved productivity significantly. A number of integrated plants have reduced the labor hours required to produce

hot-rolled steel from about 10 to about 3. NUCOR, a scrap-based EAF

The integrated firms and

the union have signed

cooperative partnership

agreements that promise

a high degree of

information sharing and

consultation and spell out

common objectives.
The Basic Steel Industry 39

OFFICE OF TECHNOLOGY POLICY

producer, has used thin-slab casting to reduce labor hours to less than 1

per ton. The company also has made good use of pay incentives to

improve productivity.

High-Performance Workplace

The U.S. steel industry has improved the productivity of its workforce

by nearly 300 percent in the past decade in terms of labor hours per ton

of steel. This dramatic improvement has been the result of many factors, including capital investments in new technologies, investments in

technical know-how, reduction in overhead, changes in culture, and

improved productivity through modern HR practices.

The U.S. industry has made smaller capital investments than its international competitors and achieved greater improvement. The U.S.

industry carefully chose to invest in only the most critical technologies

and purchased technical know-how from overseas companies. The

United States has made vast improvements in these areas but is now

caught up, so further improvements from these sources will be limited.

Some companies have changed their corporate culture by streamlining

management and decision making. Layers of management have been

removed, reducing overhead costs and allowing decisions to be made

closer to the production process.

Innovative HR practices have also led to many improvements. As part

of the Sloan Steel Industry Study, researchers used site visits and questionnaires to gather data from twenty-six steel plants for a specific

comparison of production processes.8

 They factored in influences other

than HR practices to isolate the effect of these practices. Their results

clearly show that although isolated HR practices do not necessarily

improve productivity, clusters of such practices do improve it significantly.

One of the major innovative HR practices is the use of work teams with

multiskill training and responsibility. In particular, the use of production

workers for routine maintenance reduces the need for specialized maintenance workers, who are often underutilized. The use of multiskilled

workers and fewer job classifications is critical to a high-performance

workplace in the steel industry. To a great extent, the EAF producers

are more advanced than the integrated producers in developing a highperformance workplace.

8 C. Ichneowski, K. Shaw, and G. Prennushi, Working Paper 15, Sloan Steel

Industry Study, Carnegie Mellon University, Pittsburgh, 1994.

The use of multiskilled

workers and fewer job

classifications is critical to

a high-performance

workplace in the steel

industry.
40 The Basic Steel Industry

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Social Costs

High social costs such as pensions and health care remain a major

factor for the steel industry. The cost of pensions and health insurance

for the major integrated companies is in the range of $30 to $65 per

shipped ton, or an average 7 percent to 15 percent of the selling price.

Some of the older integrated companies have a ratio of retired to active

workers of four or more to one.

Many of the new EAF firms have lower social costs since they have

fewer retired workers, and they employ younger workers whose health

insurance is less expensive. Many international competitors have much

lower social costs since these costs are the responsibility of the government, putting U.S. companies at a disadvantage.

Research and Development

The steel industry of the future will require new technologies to reduce

capital costs and environmental concerns. But the U.S. industry spends

less on research than many of its international competitors.9

Industry spending: In figure 15, the research and development (R&D)

expenditures, as a percentage of corporate sales, are compared for the

major U.S. and international producers. Nippon Steel and Usinor Sacilor are

the two largest producers, and BHP (Australia) plans to expand significantly, as does POSCO, the South Korean producer. The major U.S. companies have about 20 researchers per million tons of production versus 30 for

the selected foreign producers. With few exceptions, the U.S. EAF producers do little or no research.

U.S. government support: Under the Metals Initiative of 1988 (Public

Law 100-680), the Department of Energy jointly funds research

projects with the American steel, aluminum, and copper industries to

increase their competitiveness and energy efficiency. Through fiscal

1994, the department had committed $102 million to these programs,

about $95 million of which was for past and present projects with the

steel industry. Through September 1994, the following projects were

funded:

9 The data in this section are from R. J. Fruehan, research in progress, Carnegie

Mellon University. Sloan Steel Industry Study, Pittsburgh.

The major U.S.

companies have about

20 researchers per million

tons of production versus

30 for the selected foreign

producers.
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OFFICE OF TECHNOLOGY POLICY

n Direct steelmaking

a) Direct steelmaking/ironmaking with the American Iron

and Steel Institute

b) Waste oxide recycling with the American Iron and Steel

Institute

n Near-net shape casting

a) Spray casting with Chaparral Steel, Air Products and

Chemicals, and seven other companies

b) Direct strip casting with Armco Steel

Figure 15. Research Budgets

(as percentage of sales)
42 The Basic Steel Industry

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n Raw materials beneficiation

a) Electrochemical dezincing of steel scrap with Metal

Recovery Industries, Inc.

n Advanced computer applications

a) Rapid analysis of molten metals with Lehigh University

and a consortium of steel companies

b) Advanced process control for the steel industry with the

American Iron and Steel Institute, National Laboratories,

private companies, and universities.

In the long term, the lack of R&D could be a problem for the U.S. industry, although it can be argued that technology can always be purchased,

making R&D less critical. Collaborative research could make the use of

R&D resources more efficient. A recent report published by the American

Iron and Steel Institute and the Steel Manufacturers Association,10 recognized the need to accomplish continuous improvements in the following

areas of technology:

n Production efficiencyto seek improvements in energy

efficiency to reduce pollution, control production costs, and

limit exposure to fluctuating energy costs.

n Recyclingto increase the use of steel scrap and the recycling of

plant solid wastes.

n Environmental engineeringto reduce air and water emissions

and the generation of hazardous wastes and to develop processes

to avoid pollution.

n Product developmentto achieve flexibility in production capabilities, to implement advanced process controls and sensors,

and to produce higher strength steels with improved

weldability, fabricability, and toughness characteristics.

10 Steel: A National Resource for the Future, American Iron & Steel Institute,

Washington, D.C., May 1995.

In the long term, the lack

of R&D could be a

problem for the U.S.

industry, although it can

be argued that technology

can always be purchased,

making R&D less critical.
The Basic Steel Industry 43

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Education and Training

The U.S. steel industry is behind its competitors in Japan and Europe

with respect to training and the number of qualified engineers with

specific knowledge of the industry. Greater skills will be needed, as the

future industry will be more automated, rely more heavily on advanced

control systems, and will need to be more flexible in both production

and products.

Specifically, the U.S. industry does not have as skilled a workforce as its

competitors.

n Germany has a highly developed, state-supported apprentice

program that trains individuals for three years in plants.

n Japan has over twice as many graduate engineers per ton of

steel produced as the United States.

n Europe and Japan still have university programs devoted to the

production and products of steel. U.S. universities, in general,

have abandoned education in this area in favor of so-called advanced materials.

n European companies have a more structured continuing education and training program than the U.S. industry.

In the future, the U.S. industry must develop processes and manufacturing systems that require fewer, but more highly skilled, workers while

continuing to provide education and training to increase the capabilities

of the reduced workforce.

Government Regulations

For the past twenty years, the steel industry has been influenced by a

growing set of government regulations and initiativesnot only regulations restricting its own practices, but regulations covering steel end uses.

Penalties for violations of environmental regulations have increased

significantly and include criminal enforcement measures. A list of the

major regulations affecting the industry in the order in which they

became effective is given below.

1970 Occupational Safety and Health Act: This act set standards for

safety and health in steel plants. Coke ovens became a major concern in

Penalties for violations of

environmental

regulations have

increased significantly

and include criminal

enforcement measures.
44 The Basic Steel Industry

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the mid-1970s, after a large increase in lung cancer risk was documented. The industry made major investments to improve worker

health and safety.

1970 Clean Air Act: This act established National Ambient Air Quality

Standards and technology-based emissions standards. The industry

curtailed emissions of sulfur dioxide, particles, and toxic releases.

1972 Clean Water Act: This act and subsequent amendments established

water quality standards and technology-based discharge standards. Water

pollution control standards are set by the states, making it difficult to

compare U.S. standards with those of other nations. Nonetheless, the

standards appear to be broadly comparable.

1975 Energy Policy and Conservation Act: This act required an increase

in fuel efficiency for the average new car sold from 14 miles per gallon

(mpg) to 27.5 mpg. As a result, the average new car has shed about

1,000 pounds. The amount of steel in a car has declined primarily

because of lower total weight and, to a lesser extent, through the

substitution of competing materials. In recent years, the percentage of

steel in automobiles has held relatively constant and has even increased

slightly. However, future legislation or consumer demand for greater

fuel efficiency could further lower the steel content of cars, and, as will

be discussed, the industry is responding.

1980 Comprehensive Environmental Response, Compensation and

Liability Act (CERCLA or Superfund): This act established joint and

several liability for cleanup of existing toxic waste sites.

1982 Resource Conservation and Recovery Act (RCRA): RCRA established cradle-to-grave regulation of toxic materials to prevent the

generation of new toxic waste sites. RCRA covers generation, transportation, storage, use, and disposal of hazardous material. In the steel

industry, dusts, sludge, and some slag are of particular concern. EAF

dust is loaded with heavy metals and therefore is a hazardous waste.

According to the International Trade Commission, the largest difference among nations is in disposal of hazardous waste and treatment of

toxic waste dumps.

1986 Superfund Amendments and Re-authorization Act (SARA): SARA

revised requirements and funding. Title 3 requires reporting environmental discharges of plants.

Future legislation or

consumer demand for

greater fuel efficiency

could lower the steel

content of cars.
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1990 Clean Air Act: This act set stringent emissions standards for toxic

pollutants.

Carcinogens are a particular focus of the legislation, resulting in stringent

standards for benzene and coal tars (coke plants) and heavy metals (blast

furnace, basic oxygen furnace, and EAF steel making).

Concerns with tropospheric ozone are leading to concerns over emissions

of volatile organic compounds (VOC) and oxides of nitrogen. The northeastern states are setting stringent standards for emissions of nitrogen

oxides and VOC.

A risk analysis in the year 2000 will determine whether the reductions

are sufficient to lower the risks of cancer to one in 1 million. If not, still

more stringent standards will be required. Benzene from coke ovens is a

particular concern. According to the International Trade Commission,

national air pollution standards are broadly comparable between

industrialized nations.

1994 Rio Protocol: The Rio accords committed the United States to

reduce greenhouse gases. A carbon tax would severely hurt the steel

industry. A carbon tax of $100 per ton of carbon is estimated to raise the

cost of steel by more than $100 per ton.

Recycling: Many local governments have recycling laws for steel cans

and other materials. More than 70 percent of the steel in cars is recycled, as is a large part of the steel in refrigerators and other white

goods. This percentage is likely to rise in the future, although there is

not much room for improvement.

The costs associated with pollution abatement regulations have been

substantial (figure 16). Although capital expenditures have fluctuated

over the past decade, they have remained significant. Costs have risen

because of increases in the administrative cost of complying with regulations and permits and because of fines and litigation resulting from lack

of compliance. In 1992, steelmakers paid almost $25 million in environmental fines and litigation costs. The cost of operating and maintaining

equipment associated primarily with environmental control is estimated

at between $10 and $20 per ton of steel shipped. Total pollution abatement operating costs were $981 million in 1991. Over the past two decades, the industry has invested approximately $6 billion in pollution

control systems.

Over the past two

decades, the industry has

invested approximately

$6 billion in pollution

control systems.
46 The Basic Steel Industry

OFFICE OF TECHNOLOGY POLICY

Figure 16. Pollution Abatement Operating Costs

and Capital Expenditures
The Basic Steel Industry 47

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Although the industry

has greatly improved its

competitive position in

the past decade, it still

faces tremendous

challenges to maintain or

increase its share in the

evolving markets of this

country and the world.

EVOLVING MARKETS

One thing that is clear in the steel industry is that consumers are

requiring better quality and improved products. These more stringent

requirements require new steelmaking processes and products. Although

the industry has greatly improved its competitive position in the past

decade, it still faces tremendous challenges to maintain or increase its share

in the evolving markets of this country and the world. Some of the major

markets in which the steel industry must participate are described below,

along with some of the problems associated with each.

Automotive

This is a major and very competitive market still dominated by steel,

even though much is written of the rise of aluminum and composites.

The chairman of General Motors said recently that it is steels market to

lose, and made it clear that nothing less than continuous improvement

will be acceptable.

Aluminum has attractive features, such as lighter weight and corrosion

resistance, but it also has drawbacks in a high-volume manufacturing

operation, such as lack of weldability and limits on formability. It is

making headway as a cast material in engine blocks, much of it from

recycled aluminum. With a relatively fixed world aluminum production

(approximately 20 million tons), aluminum sheet for autos will have to

compete with other uses (e.g., containers and aircraft), and the relative

profitability becomes relevant.

The great unknowns for competitiveness in the auto market in the

medium term relate to many external factors (e.g., corporate average

fuel economy, guzzler tax, fuel price at the pump, and recyclability).

Downsizing of automobiles (by 10 to 25 percent) appears likely regardless

of materials and will influence flat-rolled products of all types.

One of the goals of a cooperative project formally called The Partnership for a New Generation of Vehicles, is to develop a midsize green

vehicle that will have fuel economy in the range of 80 miles per gallon

and meet customers needs and preferences in safety, performance,

utility, and affordability. The target is a concept vehicle by 2001 and a

prototype by 2005. The car would have a mass reduction approaching

one-half that of todays models. Not all of this reduction will necessarily

come from reducing the density of the materials of construction. While
48 The Basic Steel Industry

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aluminum and fiber composites meet the density criterion, they cannot

be substituted directly for steel and still meet manufacturing, productivity, recycling, safety, and cost criteria. However, for the project to

become a reality, these other materials will certainly occupy a larger

place in the automobile. The effect on steel consumption would be in

the range of a few million tons per year.

The steel industry can retain more of the automobile market by being

innovative in holistic design and by accepting the need in some areas,

such as safety and recycling, to work cooperatively with suppliers of

other materials. The international steel industry, in cooperation with

Porsche, has shown that a weight reduction of about 25 percent is possible in an automobile using steel. To the degree that formability for

aesthetic reasons becomes less important, steel can be favored because

of the reserve of potential strength in ferrous systems, even those that

must be welded. The true tradeoff between the competing materials

awaits an analysis that will take into account the above parameters

and the life cycle costs of energy, pollution, and recyclability.

Construction

The home construction industry is a great opportunity. In 1992, about

500 homes were built with steel. In 1993, the number was 15,000, and

in 1994, it increased to 75,000. The steel industrys goal is 250,000

homes by 1997. Steel could displace large amounts of wood because of

an insufficient supply of high-quality wood. The market for steel in the

housing industry is suppressed by lack of familiarity on the part of

installers, lack of specifications and codes, inadequate standardization,

and thermal properties that can be improved. The steel industry is

developing programs with how-to manuals and seminars on steel

housing construction.

For large structures, steel and concrete will continue to compete with

each other, with no trends apparent to cause a major shift in material

choice. One possible growth area for steel is in short-span bridges.

Appliances

Some inroads into this market have been made by plastic liners, but the

modules of steel and the enameled finish possible will keep it competitive. Some switch back to steel has already occurred. New, more efficient

horizontal-rotor washers being offered will favor steel.

The steel industry

can retain more of the

automobile market by

being innovative in

holistic design and by

accepting the need in

some areas, such as safety

and recycling, to work

cooperatively with

suppliers of other

materials.
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OFFICE OF TECHNOLOGY POLICY

Containers

Competition among steel, aluminum, and various paper and polymer

macrocomposites is vigorous. Beverage cans have long since gone to

aluminum in the United States, costing steel a 2- to 3-million ton market

at the current number of over 100 billion cans per year. Food cans seem

likely to remain steel; competition in other food packs may depend on

recycling issues. Steel recycling historically has handled far more scrap

than its nearest competitorssome 65 percent, or about 50 million tons

per year, is recycled. The retail scale recycling from individual consumers is now much more active and may soon be competitive with aluminum. Polymer recycling techniques are not making the progress needed

to permit economic recycling levels. There is an outside chance that steel

may regain a foothold in the beverage can market, especially if detinning

facilities continue to improve.

Oil and Gas

The number of drilling rigs has been reduced by some 80 percent from

the high point in 1982, with a major reduction in pipelines. A combination

of factors including low energy prices, cuts in exploration budgets, and

offshore environmental restrictions has reduced the number of new finds.

Large tankers are being scrapped; the growing demand for double hulls

will provide demand for a currently indeterminable new volume of

plate.

Although exploration activities have decreased from their 1982 high,

there has been an increase in shipment of steel products for the oil and

gas industry over the past few yearsto 2.6 million tons in 1995.11

The growing demand for

double hulls will provide

demand for a currently

indeterminable new

volume of plate.

11 Shipment of Steel Products by Market Classification, American Iron and

Steel Institute, Washington, D.C., 1996.
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OFFICE OF TECHNOLOGY POLICY

MAJOR FACTORS INFLUENCING COMPETITIVENESS

Technology

Technology affects competitiveness in two fundamental ways:

n Competitive advantages in the choice of manufacturing

technology system: scrap- versus ore-based production.

n Competitive advantages within an industry segment due to

technology.

As discussed in the section on capital considerations, the scrap-based

EAF producer has a significant competitive advantage in capital costs

over the ore-based integrated producer. Also, as will be demonstrated, at

historical scrap prices, the scrap-based producer has an advantage in

production costs. However, at high scrap prices, like those in 1994, the

integrated producer is competitive.

Within the steel industry, technology and know-how are readily available

at a cost. In most cases, a company cannot sustain a competitive advantage for long by installing or developing new technologies. If the return

on investment is attractive, the technology will be duplicated elsewhere.

As part of the Sloan Study, the effect of technology on efficiency and

quality was examined. Where there was a positive correlation, other

factors dominated in many cases.

A few technologies (see figure 11) that have not been universally implemented do provide some competitive advantage with respect to cost or

quality. They include the following:

Thin-Slab Casting

In 1995, only three U.S. plants (two NUCOR plants and Gallatin Steel) had

this technology, which greatly reduces the cost of producing flat-rolled

steel. It is estimated that by the year 2000, five to seven more plants will

have this technology.

Ironmaking

The coke oven-blast furnace method of producing iron is highly capital

intensive and relies on coke, which is expensive to produce and has

extensive environmental problems. Most major U.S. companies are

installing pulverized coal injection equipment to reduce coke require-
52 The Basic Steel Industry

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ments. Several plants are using 300 pounds of coal per ton of metal,

reducing the coke requirement to 700 pounds; eventually, up to 500

pounds of coal will be used. In the long term, however, a method of

producing iron that uses only coal and is less capital intensive will be

required. Processes such as AISI Direct Steelmaking (ironmaking), the

Japanese DIOS process, and the Australian HIsmelt show promise, but

they are at least five years from commercialization. Direct reduced iron

(DRI), hot briquetted iron (HBI), and iron carbide require natural gas and

will be primarily produced outside the United States and used as supplementary feed to the EAF producers.

Electric-Furnace Steelmaking

Scrap preheating technologies such as Consteel and the Fuchs Shaft

Furnace are emerging. Direct current furnaces are being widely implemented. The bottom or return electrode requires innovative approaches

to reduce costs. Methods of reducing dioxin formation are required. A

major long-term problem associated with EAF production is the cost of

disposal or recycling of EAF steelmaking dusts, which are classified as

hazardous wastes. Several technologies have been developed for treating

the dust and recycling the iron portion. However, these processes are not

economical in all cases, and optimized or new processes are required.

Vacuum Degassing

The installation of vacuum degassing allows for the production of

higher quality flat-rolled steels. Most major Tier I (quality) producers

have such facilities, but Tier II (merchant-quality) producers do not.

Continuous Annealing

This technology reduces cost, but it is not clear whether the capital can

be justified. Several plants have this capability.

There are many other examples of new technology, such as ultra-highpower EAFs, walking-beam furnaces, and advanced coatings. If a plant

can justify the capital, these technologies are available.

Capital-Economic Performance

The steel industry is highly capital intensive. Capital costs vary greatly

depending on the manufacturing system and product, but range from 20

to 35 percent of the total cost of producing steel. Therefore, the capital

costs associated with new manufacturing facilities are a major driver in

In the long term,

however, a method of

producing iron that uses

only coal and is less

capital intensive will be

required.

The capital costs

associated with new

manufacturing facilities

are a major driver in

selecting technologies.
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OFFICE OF TECHNOLOGY POLICY

selecting technologies. In particular, the capital cost for the integrated

production of steel from ore and coal is extremely high, and consequently much of the new production capacity installed in the past

twenty years has been scrap-based EAFs. The capital costs associated

with conventional slab casting and subsequent rolling, along with the

large capacity requirements for economic operation, were a driving

force in the development and implementation of thin-slab casting.

Tables 13 through 15 roughly estimate the approximate capital costs for

new and rebuilt integrated production equipment, along with those for

EAF production. The figures given are only crude estimates, since capital

costs are very site-specific and depend on the actual equipment used.

Nevertheless, they do illustrate the importance of capital when selecting

technologies.

Although these costs are only approximate, it is clear that if new capital is

required, scrap-based EAF has significantly lower capital cost. It should

be noted that scrap-based EAF production cannot produce all grades of

steel. For example, exposed automotive steels can be produced only by

the ore-based process and conventional casting. Therefore, although the

capital cost for EAF production is significantly lower, it cannot be used

exclusively.

Table 13. Capital Cost for Liquid Steel Production in an

Integrated Plant (3.0 Metric Tonnes Annual Production)

Production Cost of Output Cost of Steel

(metric tonnes Capital ($/tonne ($/tonne

Facility per year) ($ million) per year) per year)

New Greenfield Site

Coke plant 1.0 300 300 100

Blast furnace 2.5 600 240 200

Steelmaking 3.0 550 183 183

Totals 3.0 1,450  483

Rebuild and Update Existing Facility*

Coke plant 1.0 200 200 67

Blast furnace 2.5 400 160 133

Steelmaking 3.0 200 67 67

Totals 3.0 800  267

NOTE: Costs for hot metal are $360 per annual tonne for new plants and $240 for rebuilt plants.

*Site-specific costs would vary depending on the degree of rebuilding.

Much of the new

production capacity

installed in the past

twenty years has been

scrap-based EAFs.
54 The Basic Steel Industry

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The large difference in capital costs between integrated and EAF

production has been partly responsible for the increase in production

by EAFs from less than 20 percent to 38 percent. The cost difference

between conventional and thin-slab casting has helped drive the recent

decisions to install nearly 18 million tons of thin-slab casting capacity

by the year 2000.

Environmental Regulations

Environmental concerns and regulations on discharges will be one of the

major future forces behind developing new technologies. Government

regulations could also significantly affect demand for steel. The industry

will be more proactive and less reactive in the future, particularly in the

area of recycling scrap and plant waste materials. These materials will be

considered man-made resources for producing new steel. Current and

potential government regulations will require new technologies and capital.

The major areas that will drive the industry to develop new technologies

or restructure include reduction in nitrogen oxides, sulfur oxides, VOC

emissions, and recycling of in-plant wastes such as basic oxygen furnace

dust and especially EAF dust.

Table 14. Capital Cost for Liquid Steel in an EAF Plant

(1.0 Metric Tonnes Annual Production)

Production Cost of Steel

(metric tonnes Capital ($/tonne

Facility per year) ($ million) per year)

New Greenfield Plant

Scrap Only

EAF refining 1.0 160 160

Scrap plus DRI/HBI*

EAF refining 1.0 160 160

DRI/HBI 0.2 35 35

Total 1.2 195 195

*DRI/HBI assumes 20 percent of 1 metric tonne per facility costing $175 million.

The major areas that will

drive the industry to

develop new technologies

or restructure include

reduction in nitrogen

oxides, sulfur oxides,

VOC emissions, and

recycling of in-plant

wastes.
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Scrap Availability, Price, and Substitutes

As discussed in the section on raw materials, there are major issues

related to the availability and price of scrap. Historically, scrap prices

have been lower than the cost of producing hot metal, giving EAF

producers an advantage in the cost of production in addition to their

lower capital cost. However, scrap prices have risen significantly

recently because of high demand. Also, integrated producers have cut

the cost of producing hot metal and steel. Although the cost of producing steel is site-specific and may vary significantly from plant to plant, a

reasonable comparison between the cost of production for EAF scrap

versus integrated ore-based production demonstrates the effect of scrap

price.

Table 16 shows the cost of producing steel for both processes at scrap

prices of $100 and $150 per ton. At the low historic price, the EAF producer has a cost advantage, but at the high peak price, the integrated

producer has a slight advantage. The high-priced scrap is for an EAF

plant producing higher quality products such as flat-rolled steel. For

producing lower quality long products, such as reinforcing bar and

constructional shapes, the scrap costs are lower and the EAF producer

will almost always have a significant advantage, and EAF producers have

indeed captured that market.

There is expected to be a great increase in thin-slab flat-rolled production, from about 2 million tons per year in 1992 to more than 10 million

and possibly 18 million by the year 2000. This increase will put tremenTable 15. Capital Cost for Casting

and Finishing to Hot Band

Production Cost of Steel

(metric tonnes Capital ($/tonne

Facility per year) ($ million) per year)

New Greenfield Plant

Conventional slab rolling 3.0 1,000 333

Thin-slab rolling* 1.0 200 200

Conventional slab stickel mill 1.0 250 250

Rebuild and Update Facility

Conventional slab rolling 3.0 500 167

*Thin-slab rolling has only a finishing train.
56 The Basic Steel Industry

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dous pressure on the availability and cost of high-quality scrap, which

will significantly affect the relative competitive position of the two

steelmaking processes.

Part of the demand for low-residual, higher quality scrap will be met

with scrap substitutes such as pig iron, DRI, and possibly iron carbide

and liquid hot metal. Several plants to produce DRI and carbide are

being built or planned for the near future (NUCORs iron carbide plant

in Trinidad is expected to produce about 300,000 tons per year when it

is fully operational). In the meantime, imported pig iron is being used to

fill industry needs. The availability and price of scrap substitutes are

still relatively uncertain and will greatly affect competitiveness.

Scrap substitutes such as DRI, HBI, and possibly in the near future, iron

carbide, will be commercially available in reasonable amounts. The

availability of these materials could put a limit on high-quality scrap price

increases, but as of 1995, the quantity available does not significantly

affect scrap prices.

Foreign Competition

The profitability of U.S. steel producers will continue to be subject to

the influence of subsidies to foreign producers and the strategic investment policies of foreign governments. The U.S. government can be

expected to continue seeking free and fair trade in international marThe availability and price

of scrap substitutes are

still relatively uncertain

and will greatly affect

competitiveness.

Table 16. The Effect of Scrap Price on the Cost to Produce

Liquid Steel (Per Ton of Liquid Steel)

EAF Integrated

Scrap Price per Ton $100 $150 $100 $150

Scrap $110 $165 $25 $37

Ore   41 41

Coke/Coal   33 33

Electricity 20 20 5 5

Labor 10 10 20 20

Other 28 28 30 30

Capital 25 25 65 65

Total cost $193 $248 $219 $231
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kets, but there is uncertainty concerning the effect of U.S. monetary

policies on international exchange rates. As a consequence of these

forces, U.S. steel producers will continue to be concerned about the

impact of imported steel.

Subsidies

In the past, foreign competitors sustained strategic investment programs, gained access to new markets, and won long-term advantage

with government support. Subsidies have been the rule rather than the

exception in the world market for steel. The steel industry often plays a

critical role in a nations economic development plans, as attested by

Japans success in the 1960s and 1970s or by the success of steel producers in Brazil, South Korea, and Taiwan in more recent years. Even

when steel firms are privately held, many, if not most, outside of the

United States have recourse to government aid in times of crisis.

Under the General Agreement on Tariffs and Trade (GATT), three

specific types of subsidies are allowed: R&D, assistance to affected

regions, and assistance to meet new environmental standards. As

discussed under R&D, subsidies in this area could give companies a

long-term advantage, and assistance to affected areas could reduce the

social costs for subsidized producers.

Imports

The profitability of all U.S. steelmakers is linked directly to import

penetration, and therefore, their ability to implement and sustain

investment strategies hinges on how easily foreign steelmakers can sell

their goods in this country.

The competitive pressure on U.S. steel producers from imports is likely

to be unabated. However, the rules governing steel trade are subject to

change under several new international agreements. The North American

Free Trade Agreement provides for tariffs to be reduced in stages for

trade among the United States, Canada, and Mexico. Similarly, the Uruguay Round of GATT, which was signed and approved in 1994, provides

for the elimination of tariffs between the United States and a number of

other countries over a ten-year period. The countries involved in both of

these agreements account for at least three-quarters of all U.S. steel

imports and exports, as measured by the value of trade (USITC Pub.

#2759, April 1994, p. 9).12 Further, because of the most favored nation

12 Steel Semiannual Monitoring Report, U.S. International Trade Commission,

Washington, D.C., 1994.

Subsidies have been the

rule rather than the

exception in the world

market for steel.
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provisions of the GATT/WTO, the elimination of steel tariffs in the

United States and a number of other countries will allow duty-free access

for all World Trade Organization (WTO) members, not just those eliminating tariffs.

At a minimum, the enhanced trade flows that are likely to result from the

lowering of tariff barriers will continue to put pressure on U.S. steel

producers to maintain efficient operations and reduce costs in order to

remain internationally competitive. Free trade also has the effect of

encouraging more specialization in product lines. Integrated producers in

the United States have become more specialized in recent years, owing

primarily to competition from domestic minimills, and lower tariff barriers should promote this trend. On balance, if the new trade agreements

are enforced, the U.S. steel industry will benefit.

Foreign Exchange

Changes in the value of the dollar on international markets are driven by

policies here and abroad, and it is difficult to predict exchange rates.

Exchange rates can significantly affect the profitability of steelmakers by

making imports more (high dollar) or less (low dollar) attractive.

The anti-inflation policy of the Federal Reserve Bank has been a major

determinant of import penetration in the U.S. steel market in the past

decade. Inflation was controlled in the U.S. economy by restricting the

money supply in the early and mid-1980s, and this forced real interest

rates up to unprecedented levels. The inevitable consequence of this

policy was a strengthening of the dollar, and a surge of imports resulted.

The general price level in the United States now appears to be relatively

stable, but the Federal Reserve is vigilant in its battle, and could once

again pursue tight money policies. The dollar is firming at the moment,

making imports more attractive, but predictions of the direction and

extent of changes in its value are uncertain.

Thus, U.S. government policies that cause large temporary changes in

exchange rates can have long-lasting effects on U.S. steel producers, in

part because some foreign governments may continue to play an active

role in supporting steel exports.

The enhanced trade flows

that are likely to result

from the lowering of tariff

barriers will continue to

put pressure on U.S.

steel producers to

maintain efficient

operations and reduce

costs in order to remain

internationally

competitive.
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CONCLUSIONS AND POSSIBLE FUTURE DIRECTIONS

The U.S. steel industry is certainly more competitive than it was ten

years ago. Management has lowered costs significantly by reducing

much of its excess labor and upgrading its technology. In addition, there

have been some modifications in product portfolio, with firms concentrating on products in which they have a comparative advantage. For the

integrated producers, these are products at the higher end in terms of

quality and sophistication.

At the same time, environmental regulations continue to have an impact

on the industry. For example, a number of firms are importing slabs from

Europe, Asia, and South America and then rolling and finishing them in

this country. While this is due, in part, to current domestic demand

exceeding U.S. companies production capacities, it is also due to U.S.

environmental regulations coupled with old, inefficient production

technologies that would need to be replaced to meet current environmental standards. As a result, it is cheaper for these U.S. firms to import

slabs rather than produce them domestically. This displaces pollution

from the United States to other nations, forfeits potential domestic jobs,

and essentially results in the importation of ore and energy. For EAF

producers, the most critical environmental concerns are the disposal or

recycling of EAF dust and emissions from the furnace.

In the early days of steel, integration of the supply and production

chain was a major corporate strategy. There was concern, for example,

that the supply of iron ore might be inadequate to maintain steel production. Thus, US Steel bought iron mines in Northern Minnesota to

guarantee its supplies. Others formed consortia to guarantee the availability of a supply. Today, it appears to be advantageous not to be

integrated vertically in this manner.

Today, many of the so-called integrated mills are purchasing slabs and

coke on the open marketpreviously manufactured as part of the

integrated production processto reduce their costs. In fact, several

major firms no longer produce coke, finding it cheaper to buy coke

pellets on the open market than to produce it to meet their own requirements.

In a similar fashion, a number of companies are contracting out for

labor to reduce costs associated with their high level of integration. As

steelworkers wages have risen faster than those in manufacturing as a

whole, integration has become a curse rather than an advantage. Compa-
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nies not contracting out for labor are paying more than is necessary for

operations such as maintenance. This is due to work rule restrictions

that reduce the flexibility of individual workers.

In general, integrated steel firms have three major challenges. The first

is the growth of the minimills. Most observers expect that the minimills

will gradually improve quality and be able to produce a full product

line that is competitive with that of the integrated mills. At the same

time, a number of minimills are moving into ironmaking to guarantee a

supply of iron for their electric furnaces. An example is NUCORs iron

carbide plant in Trinidad. As indicated, the distinction between the two

types of firms will gradually become blurred. At least one integrated

firm (LTV) is building an EAF thin-slab minimill.

The second major challenge is labor and pension costs. The minimills

have shown they can pay wages equal to those of unionized steelworkers

and get higher productivity from them. The keys are the lack of work

rules, and in some cases the management culture. The integrated mills

problem is not the high wages of the steelworkers, but rather the work

rules under which they operate. These rules result in a decrease in flexibility for the integrated mills and a decrease in productivity. As labor

and management become aware that productivity must be increased to

guarantee the survival of the integrated mills, we expect to see greater

changes in the work rules as well as an increase in contracting out. This

will give the management of the integrated mills the flexibility they

need.

A related problem for the integrated firms is the lack of flexibility in

compensation, leading to high fixed cost. In contrast, a large percentage

of the labor compensation in minimills is linked to production and profits,

making labor costs flexibleincreasing or decreasing with the companies

economic performance. The older integrated producers also have large

pension costs. Several firms have two to five retired workers for each

current employee. This puts a tremendous burden on their financial

performance.

The third and possibly most critical problem is the high capital costs

associated with integrated production. If conventional technologies are

used, these costs will increase further because of complex environmental

regulations. In the long term, the steel industry must develop processes

to convert ore to steel that require less capital. Many believe these processes should be coal based because of the abundance of coal available.

As labor and

management become

aware that productivity

must be increased,

...we expect to see greater

changes in the work rules

as well as an increase in

contracting out.
The Basic Steel Industry 61

OFFICE OF TECHNOLOGY POLICY

The existing processes must be combined and the overall process made

more continuous.

The U.S. steel industry has greatly improved its competitive position in

the past decade by closing inefficient plants, improving productivity and

quality, investing in crucial technologies, and being more customer

oriented. It is the low-cost producer for the U.S. market. However, to

prosper in the future, the industry must manage a number of difficult

issues:

Additional domestic capacity: In the next five years, an additional 15 to

20 million tons of new flat-rolled capacity will be installed. This will cause

further competitive changes and restructuring, perhaps causing some

marginal producers to leave the market. While this adjustment will be

very painful for some companies and individuals, it is expected to result

in a more competitive industry and lower steel costs to consumers.

Evolving markets: The industry must maintain its position in the automotive market in the face of efforts to reduce the weight of automobiles

through material substitution. The industry also must increase its penetration of the housing market through cost reduction, innovative design,

and customer training.

Technology: Until recently, U.S. industry has employed a fast-follower

strategy, acquiring technical know-how from international companies and

investing only in the most critical technologies. Further improvement

from these sources will be limited. In the future, the U.S. steel industry

will require new technology to reduce capital costs and address environmental concerns.

Capital requirements: Integrated producers have extremely high capital

requirements. In addition, many long-established producers have large

pension liabilities. Several have two to five retired workers for each

current employee, placing a tremendous burden on their financial

performance.

Imports: The profitability of U.S. steel producers will continue to be

subject to the influence of the current world production overcapacity,

subsidies to foreign producers, the strategic investment policies of foreign

governments, and fluctuation in global currency exchange rates. As a

consequence of these forces, and in spite of the U.S. governments continued support for securing free and fair trade in international markets, U.S.
62 The Basic Steel Industry

OFFICE OF TECHNOLOGY POLICY

steel producers will continue to be concerned about the impact of

import penetration on the domestic industry.