Technology and Steel Industry

Competitiveness

June 1980

NTIS order #PB80-208200
Library of Congress Catalog Card Number 80-600111

For sale by the Superintendent of Documents, U.S. Government Printing Office

Washington, D.C. 20402
Foreword

A severe downturn in the domestic steel industry in 1975-76, coupled with

continued increases in steel imports, led to widespread concern about the industry’s future. In October 1977, the House Ways and Means Committee’s Subcommittee on Trade requested that OTA examine how technology might be used to improve the industry’s international competitiveness. The brief recovery of 1978-79

appears to be over and, with another downturn on the horizon, the following concern expressed in the Subcommittee’s original request seems just as relevant

today:

While it is possible that some short-range solutions to the current world steel

crisis may be developed in the near future, the need for a long-range policy will remain,

This report focuses on the creation and adoption of advanced technology in

the U.S. steel industry. Although it is not a comprehensive study of the industry, it

does examine nontechnological factors that shape the environment in which new

technology is created and adopted.

OTA finds that a number of technological opportunities exist for improving

the competitiveness of the domestic steel industry. The industry consists of different types of firms with markedly different performances, and this report identifies the opportunities for new technology and new policies that apply to each. It

examines the costs and benefits of specific Federal policy options, and constructs

several scenarios for the next 10 years to assess how these options would affect

the industry and the Nation.

The domestic steel industry remains vital to the economic well-being and national security of the United States. However, technology alone cannot solve all of

the industry’s problems. Given the complexity of these problems, the technologyrelated policy options in this report should assist any congressional debate on a

national policy for renewal of the domestic steel industry.

JOHN H. GIBBONS

Director

. .

I l l
Steel Industry Assessment Advisory

Gordon H. Geiger, Chairman

University of Arizona

Edmund Ayoub

United Steelworkers of America

James Cannon

Citizens for a Better Environment

Robert W. Crandall

The Brookings Institution

Milton Deaner

National Steel Corp.

Steward G. Fletcher*

William E. Dennis

American Iron and Steel Institute

William B. Hudson

Davy, Inc.

Robert R. Irving

Iron Age Magazine

F. Kenneth Iverson

NUCOR Corp.

Betty Jardine

League of Women Voters

Ruth Macklin

The Hastings Center

Peter F. Marcus

Paine, Webber, Mitchell, Hutchins, Inc.

Donald R. Muzyka

Carpenter Technology Corp.

Mary Ann Ritter

General Motors Corp.

Roger E. Shields

Chemical Bank

Edward A. Stanton

Diocese of Youngstown

Catholic Charities

Caroline Ware

Board—National Consumers League

NOTE: The Advisory Panel provided advice and comment throughout the assessment, but the members do not necessarily approve, disapprove, or

endorse the report, for which OTA assumes full responsibility.

*After February 1980 replaced by Dr. Dennis because of retirement from AISI.

Acknowledgments

This study was initiated in the OTA International Security and Commerce Program. The

assistance of Henry Kelly, former Program Manager, and Dorothy Richroath and Helena Hassell

of the administrative staff is acknowledged.

iv
Steel Industry Assessment Project Staff

Lionel S. Johns, Assistant Director, OTA

Energy, Materials, and International Security Division

Audrey Buyrn, Materials Program Manager

Joel S. Hirschhorn, Project Director

Antoinette B. Kassim, Analyst

Administrative Staff

Carol A. Drohan Patricia A. Canavan

Stanley Hampton Michelle Landy Margaret M. Connors

Contractors

Adams and Wojick Associates

G. K. Bhat

J. K. Brimacombe

Frank A. Cassell

J. A. Clum

Sven Eketorp

Richard W. Heckel

Arthur D. Little, Inc.

OTA Publishing Staff

John E. Newman, Research Assistant

Gustave J. Rath

Charlene Semer, Editor

Sterling Hobe Corp.

Karen Stoyanoff

George R. St. Pierre and Associates

Phillip Townsend Associates, Inc.

John C. Holmes, Publishing Officer

Kathie S. Boss Debra M. Datcher Joanne Heming
. . —

Participants— OTA Seminar on New Techniques in Steelmaking, May 2 and 3,1979

Robert N. Anderson

San Jose State University

D. Apelian

Drexel University

M.D. Ayers

Metal Innovations, Inc.

Thomas E. Ban

McDonnell-Wellman Co.

G. K. Bhat

Carnegie-Mellon Institute of

Research

J. K. Brimacombe

University of British Colombia

James Cannon

Citizens for a Better

Environment

Jack W. Clark

Westinghouse Research &

Development Center

James A. Clum

University of Wisconsin—

Madison

Donald H. Cookson

Dravo Corp.

R. S. Dalal

NUCOR Corp.

John F. Elliott

Massachusetts Institute of

Technology

Stewart G. Fletcher

American Iron and Steel

Institute

Gordon H. Geiger

University of Arizona

William R. Gray

Inland Steel Co.

Peter L. Gulliver

Foster-Wheeler Ltd.

A. J. Klein

American Can Corp.

J. A. Lepinski

Allis-Chalmers Corp.

Lawrence C. Long

Armco, Inc.

Donald R. MacRae

Bethlehem Steel Corp.

Stanley V. Margolin

Arthur D. Little, Inc.

Donald R. Muzyka

Carpenter Technology Corp.

H. W. Paxton

United States Steel Corp.

Richard K. Pitler

Allegheny Ludlum Steel Corp.

Y. K. Rao

University of Washington

Kenneth J. Reid

University of Minnesota

Gerhard Reuter

Lurgi Chemi u Huettentechnik

GmbH.

Stephen R. Satynski

Rensselaer Polytechnic

Institute

George St. Pierre

Ohio State University

Andres J. Syska

Wingaersheek, Inc.

Edward M. Van Dornick

M. K. Witte

UOP, Inc.

vi
Contents

Chapter Page

1.

2.

3.

4.

5.

6.

7.

8.

9.

100

11.

12.

Summary . . . . . . . . . . . . . . . .. .. s ......000...0000060 .O o. c o”””” 3

Policy Options . . . . . . . . . . .9 .. .. .. .0 $..O. $..OS $00 ..O*OOOOG”GO 27

Problems, Issues, and Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

The Domestic Steel Industry’s Competitiveness Problems . . . . . . . . . . 115

Past and Future DomesticUse of Steel. . . . . . . . . . . . . . . . . . . . . . . . . . 155

New Technologies for the Steel Industry . . . . . . . . . . . . . . . . . . . . . . . . 185

Technology and RawMaterials Problems . . . . . . . . . . . . . . . . . . . . . . . 221

Technology and Industry Restructuring . . . . . . . . . . . . . . . . . . . . . . . . 247

Creation, Adoption, and Transfer of New Technology . . . . . . . . . . . . . 267

Capital Needs for Modernization and Expansion . . . . . . . . . . . . . . . . . 309

Impacts of EPA and OSHA Regulations on Technology Use . . . . . . . . . 331

Employees and the Development and Use of New Technology . . . . . . . 363

vii
CHAPTER 1

Summary
Contents

International Competitiveness Problems of

theU.S.Steel Industry•• ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● 4

Policy Options *aes*** *a** ***s **** s* **v* 5

Futree Chamges in Technology . . . . . . . . . . . . . 9

Continuous Casting.. . . . . . . . . . . . . . . . . . . . . 9

Direct Reduction of Iron Ore . . . . . . . . . . . . . . 11

Other Future Technologies... . . . . . . . . . . . . . 13

Capital Needs for Modernization and

● **0e*9* **** **m ***********s 13

Different Estimates of Capital Needs . . . . . . . . 14

Industry Restructuring_. . . . . . . . . . . . . . . ● . . . 15

Steel Use and Future Demand ● *a. ****e**** 16

A Future Steel Shortage? . . . . . . . . . . . . . . . . . 17

Problems With the Creation, Use, and Sale

of Technology ● ● ● ● ● ● ● ● ● ● ● ● ● ● * ● ● * ● ● ● ● 17

Raw Materials Problems ● ● ● ● . ● ● ● ● Q ● ..• ● ● ● 1 9

Coke and Coke Ovens ● . ● , ● , ● . ● ● . . ● . ● ● 0, ● c, 19

Ferrous Scrap ● *.****.*******..********* 19

Impcts of EPA and OSHA Regulations on

Technology Use ● ● ● ● ● . ● ..•,.• ● ● ● *• ● ● ● ● 20

Impacts of Regulations on Industry.. . . . . . . . 21

Cost Effectiveness of Control Technologies . . . 21

Industry Expenditures on Controls . . . . . . . . . 22

Employment Practices and New Technology . 22

Technical Workers. . . . . . . . . . . . . . . . . . . . . . 22

Hourly Workers . . . . . . . . . . . . . . . . . . . . . . . . 22

List of Tables

Table No. Page

1.

2.

3.

Projected Growth in Direct Reduction

capacity, ViqMOOO**•• ● ● ● . ● ..• ● , ● ,0. # 12

U.S. and Trade

Performance *•* ● *•* ● .•• ● ● ● * ● ., ● ● * ● ● ● ● 18

Estimated Decline in Actual Productive 

Capability of Coke Oven Plants in the

United States: 1973 v. 1979. ● . ● ● . ● * ● o ● ● ● 1 9

I

List of Figures I

I

i

Figure No. Page

1. U.S. Exports-Share of World Steel

3.

4.

5.

6*

Trade, l945-77 . . . . . . . . . . . . . . . . . . . . . . . . 4

U.S. Trade Balance in Iron and Steel

1927-70 . , ● . ● . , ‘ . . ● ● ● J. , . ● ● , , , , ● ● ● ● , ● 4

Continuous Casting Apparatus . . . . . . . . . . . 10

The Diffusion of Continous Casting, 10

Countries, 1962-78 . . . . . . . . . . . . . . . . . . . . . 11

Schematic Diagram of Direct Reduction

Processes . . . . . . . . . . . . . . . . . . . . . . . ~.. . 12

Annual Gapital Costs for Productive

Steelmaking Facilities Under Three

Modernization Scenarios. . . . . . . . . . ., . . . “ 14

7. Range of Projected Domestic Demand for

Steel. 1980’-90• ● ● . . ● .. .,,, ● ● ● .,. * , ● ● ● ● 16
CHAPTER 1

Summary

Summary

Steel will probably remain the world’s

most important engineering material, and the

steel industry is vital to the Nation’s security

and economic prosperity. It is possible, however, that continued low profitability and

some Federal Government policies, such as

long depreciation times for new facilities, will

cause the domestic steel industry to contract

substantially. Many jobs could be lost and the

Nation might become vulnerable to scarce

and high-priced imports, which by 1990 could

account for 40 percent of the domestic market, compared with recent levels of about 15

percent,

The U.S. steel industry can be revitalized

through increased investment in research

and development (R&D) and the adoption of

new technology. For that to happen, however, steelmaker must increase their capital

spending on production facilities by at least

50 percent during the next decade, to approximately $3 billion per year (1978 dollars), in

order to modernize existing mills, expand capacity modestly, and bring profitability up to

the level of most other domestic manufacturing industries. Supportive Federal policies

are needed to generate at least $600 million

of this additional capital per year. The industry estimate for modernization and capacity

expansion is $4.9 billion per year.

Small nonintegrated steel plants that rely

on ferrous scrap rather than iron ore to produce the simpler steel products could nearly

double their market share (now at about 13

percent) in the coming decade, provided that

adequate electricity and scrap are available

in specific market areas. Considerable nearterm potential also exists for increased exports by the highly competitive alloy/specialty

steelmaker in the next 10 years, if the new

Multilateral Trade Agreement is enforced

vigorously.

After a decade of restructuring, modernization, and expansion, the industry could

adopt major new steelmaking innovations if

the Federal Government supports basic research in steelmaking (which barely exists today), provides incentives for more industry

R&D, and assists in pilot and demonstration

projects. Major process innovations around

1990 could then give the domestic industry a

competitive advantage, rather than mere parity with foreign industries. This is the type of

long-range strategic technology planning that

the industry has neglected in the past.

A well-designed and vigorously implemented government policy has nurtured the

Japanese steel industry’s expansion and

adoption of new technology. The U.S. steel industry, on the other hand, has been hurt by a

long series of Federal Government policies

that have frequently been uncoordinated,

contradictory, and inattentive to critical issues. A Federal policy that coordinates the industry’s needs, the Nation’s interests, and

specific technical concerns is an important

option.

Neither technology nor capital, alone, will

solve the steel industry’s problems. New technologies could be adopted by the domestic industry if problems of insufficient capital and

uncertain levels of imports are resolved. One

such technology already used by major foreign competitors is the continuous casting of

molten steel, which reduces energy consumption, increases productivity, and expands

steelmaking capacity. Another, the coalbased direct reduction of iron ore to produce

a low-cost substitute for ferrous scrap and

NOTE: Generally, data throughout this report are expressed in metric units for ease of comparison with data supplied by international organizations.

3
4 ● Technology and Steel Industry Competitiveness

blast furnace iron, may be developed com- For a graphic and abbreviated summary of

mercially within the next 5 to 15 years. Poten- the problems and solutions discussed in this

tial advantages include reduced capital costs, report see the diagram on pages 6 and 7.

reduced pollution, and increased use of coal.

International Competitiveness Problems

of the U.S. Steel Industry

Although world steel demand has more

than doubled during the past two decades,

domestic steel production has increased by

only 20 percent during the same period and

actual domestic capacity has been decreasing recently. By comparison, the Japanese

steel industry increased production sevenfold, and Common Market production went

up by 70 percent. Substantially increased imports and constant export levels also testify

to the declining role of the U.S. steel industry

in the international market. (See figures 1

and z.)

1945 1950 1955 1960 1965 1970 1974 1977

Year

NOTE One U.S. ton = 0.907 metric tonne

SOURCES. American Iron and Steel Institute, Sfeel Industry and Federal Income Tax Policy, June 1975, p 46; U.N. Secretary of Economic

Committee for Europe, Statistics of World Trade in Stee/, 1913-59,

Geneva, 1967

Figure 2.— U.S. Trade Balance in Iron and

Steel, 1925.70a

750

500

250 [

0

-250

-500

-750

– 1 ,000

—1,250

—1,500

1925 1940

aExcluding the war years 1941-45

1945 1970

SOURCE. W. H. Branson and H. B Tunz, Brookings Papers on Economic ACtivity, 2:1971 (based on U.S. Department of Commerce and U.S. Bureau

of the Census data)

Unlike foreign firms, domestic steelmaker

have financed capital investments largely

from retained profits or through equity financing. Foreign governments play a more direct role than does that of the United States in
Ch. 7—Summary ● 5

facilitating industrial access to capital markets and public funds. Historically, the domestic steel industry’s indebtedness levels

have been relatively low compared to foreign

steel industries.

The deteriorating world market position of

the U.S. steel industry may be attributed to a

number of factors. The domestic industry’s

most recent expansion started earlier and

was of much shorter duration than that of

competitive foreign industries, particularly

Japan’s. Furthermore, impeded in part by

lack of capital, the industry has been slow in

adopting certain productive new steelmaking

technologies. Consequently, U.S. plants tend

to be older, smaller, and less efficient than

the steelmaking facilities of some foreign industries, although there are a number of old,

inefficient plants in Western Europe as well.

The tradeoff between maintaining employment and losing profitability and efficiency is

receiving much attention in the United States

and some Western European nations.

Despite major technological and economic

difficulties, domestic steel industry profit

levels have been higher than those of foreign

steel industries, although they are only about

half the U.S. manufacturing average. However, the resource-poor Japanese steel industry, benefiting from post-World War II technological, economic, and government policy

advantages, has been the world’s low-cost

producer since the early 1960’s. Japan has

had extensive steel industry expansion,

based largely on new plant construction. This

has given it superior technology and costcompetitive steelmaking capability. Some less

developed steel-producing countries, such as

South Korea, are also becoming increasingly

cost competitive.

Raw materials, including energy, continue

to be the most costly input factors. Foreign

steel industries have brought down their unit

costs for raw materials during the past decade, despite major price increases. By contrast, domestic raw materials unit costs have

increased. Virtually all steel industries are

experiencing declining employment levels. Although it still has high labor productivity,

domestic steel industry unit labor costs are

higher than those in Japan, though they are

still lower than those in Europe.

Predictions of future supply and demand

for steel products are uncertain, but high

steel demand and barely adequate world capacity are possible by the mid- to late 1980’s.

Under those conditions, if domestic capacity

is replaced with modern facilities, the U.S. industry can claim its share of increased demand and thereby finance new capacity. If at

least limited expansion and modernization do

not start immediately, however, the United

States will become dependent on imported

carbon steel at increased prices during cyclic

periods of high domestic demand which coincide with high worldwide demand,

Policy Options

It is in the Nation’s interest to have a

strong domestic steel industry that makes effective use of domestic iron ore, coal, and

scrap. Technology alone is not sufficient to

reverse the slow shrinkage of U.S. steel capacity. Nor can new technology immediately

help those parts of the industry that use old,

inefficient, or poorly located plants.

Nevertheless, short-term Federal policies

that fail to encourage technological innovation and modernization would be only temporary and superficial remedies. The ability of

the large integrated steelmaker, who have

been especially hard hit by aging facilities,

poor capital recovery, and high costs of environmental regulations, to supply most of the

Nation’s steel while maintaining profitability

has probably reached its limits. Even those

parts of the industry that are profitable, competitive in the domestic market, and well

managed, need continued technological modernization to maintain and improve their com-
— — ..—— ——

6 ● Technology and Steel Industry Competitiveness

This diagram is a simplified graphic summary of the major issues and options discussed in the full report.

It illustrates the complexity and interrelationships of the problems facing Government and industry.

The domestic steel industry

I

What is its

present position? 1

Why?

Imports

I

I

Why?

1 ,

Where is it headed?

I

Why?

is a major

source of

I

Such as?

Why?

Why?

technology

and

Why?

I
Ch. 1—Summary ● 7

What might be done to help?

T

By Federal Government By industry

How? (options) 1 How? (options)

1

1

[

How? (options)

I

1

I

In what?

1

[

How?

1

I

Such as7

I

Integrated

steelmaking
8 ● Technology and Steel Industry Competitiveness

petitive positions, particularly in the international market.

The creation and adoption of new technology are hampered by a number of factors, the

most important of which are inadequate capital formation, inadequate R&D, high regulatory compliance costs, and the threat of unfairly traded imports. In a world in which

most foreign industries are owned or heavily

supported by their governments, the U.S.

steel industry is at a disadvantage because it

must generate the capital it needs for modernization and expansion from profits. Past

Federal policies have affected costs and

prices, and hence profitability; yet most steelmaker have been slow to pursue cost reductions through better technology in order to

cope with those policies. The superior technological and economic performance of some

domestic steelmake r demonstrates the

potential for improvement in other companies; but both Federal and industry policies

have led to underinvestment in capital plant,

R&D, and innovation. The industry itself has

not emphasized long-range planning for technological innovation, nor has it kept its costs

as low as might have been possible. It has

chosen to pay high dividends, even during

periods of declining profits. The domestic industry has also been adversely affected by

unfairly traded foreign steel, both in the domestic market and in third-country markets

where U.S. producers could have competed.

Substantial trade and tax issues exist with

regard to the steel industry, and Federal policies on these issues need examination. Policies are also needed to deal directly with

technology issues. OTA uses three scenarios

for the next decade to examine costs and benefits of policy options. The “Liquidation” scenario implies an extension of present policies

and a continued shrinkage of domestic

capacity and employment. The “Renewal”

scenario considers policy options linked to

moderately increased capital spending for

modernization and expansion to revitalize the

industry. The “High Investment” scenario examines policies compatible with greatly increased capital spending to quickly modernize integrated steelmaking facilities. OTA’s

analysis suggests the following possible options for Federal policy with regard to the

steel industry:

●

s

●

●

●

●

●

●

●

Provide greater capital formation to be

used for investment in steelmaking

through, for example, faster depreciation, investment tax credits, loan guarantees, or subsidized interest loans.

Provide incentives for industrial R&D

and increase Federal support of basic

research and large-scale demonstration

projects, particularly those which use

environmentally cleaner technologies.

Coordinate Federal energy development

programs with the needs of industry—

for example, the development of synfuel

or coal gasification technology might be

coordinated with requirements of direct

reduction of iron ore.

Reach a better understanding of the benefits of Federal environmental and occupational health and safety regulations

on the one hand and, on the other, of the

costs to communities of a shrinking industry, the industry’s capital and modernization needs, and the regulatory

barriers to technological innovation.

Examine the costs and benefits of limiting the export of energy-embodying ferrous scrap.

Examine the feasibility and adverse

impacts of Federal targets for ferrous

scrap use, and compare these targets

with alternative mechanisms such as incentive investment tax credits for adopting new technology that uses less energy.

Reexamine trade practices, particularly

to assess the impact of unfairly traded

steel imports on the industry’s ability to

make long-term commitments to new

technology and additional capacity,

Promote increased exports of high-technology steels.

Emphasize long-term assistance to steel

plants capable of technological rejuvenation, and at the same time provide

short-term assistance to workers and
Ch. 1—Summary ● 9

communities impacted by closing old facilities.

New Federal policies, however, would be

ineffective without appropriate shifts in the

attitudes and policies of industry. For example, industry would have to reexamine its policies of using capital for diversification out of

steelmaking, emphasizing short-term benefits

from relatively minor improvements in technology, quantifying the costs but not the benefits of regulations, and resisting industry restructuring by ignoring the benefits of expansion by small, scrap-based steelmaker.

The present state of the industry and the

pressing need for a critical examination of

policy options are, in large measure, a consequence of a long series of uncoordinated Federal Government policies. These policies have

not been properly related to each other or to

a well-considered set of goals for the industry, goals which satisfy both national interests and industry needs. The lack of policy coordination and the failure to designate a lead

agency to implement such policies have led to

a situation where policies are often at crosspurposes with each other and thus ineffective, where the interaction of Government

and industry is adversarial rather than cooperative, and where critical issues are not addressed. Examples of conflicting Government

policies include:

s promoting energy conservation while not

allowing adoption of continuous casting

(see next section) to qualify for the energy investment tax credit;

● encouraging the domestic industry to use

more scrap, which requires capital investment, without providing realistic

capital recovery; and

● attempting to hold prices down, while at

the same- time using the trigger-price

mechanism, which leads to price increases.

Thus, perhaps the greatest need is for a

careful examination of the costs and benefits

of a Federal policy for the steel sector that

would first establish a set of goals consistent

with national and industry needs and then a

set of coordinated, reinforcing actions that

would effectively and efficiently help achieve

those goals. The most important lesson to be

learned from the past experience of the international steel industry is that such sector

policies may be needed for major domestic industries if international competitiveness is to

be achieved. Foreign governments, particularly the Japanese, have adopted sector policies to build competitive industries. Without

a coordinated policy, improvement efforts

may be at cross-purposes or fail to address

critical issues. For example, the steel industry’s emphasis on the need to raise adequate capital for modernization and capacity

expansion ignores the need for additional efforts in R&D and innovation. Domestic policies that deal effectively with only one of

these areas would not help, in the long run, to

ensure a profitable and competitive industry,

nor would trade policies that deal effectively

with import problems but fail to support technology, innovation, and the means of production. The risks of adopting a steel sector policy include an overemphasis on the welfare of

the steel industry to the exclusion of other domestic industries, insufficient attention to

social or environmental goals and impacts,

and possibly insufficient attention to smaller

steelmaker.

Future Changes in Technology

Continuous Casting casting. This process replaces with one operation several steps in steelmaking: ingot castThe most important technological change ing, mold stripping, heating in soaking pits,

for integrated steelmaker during the next 10 and primary rolling. (See figure 3.) Continuyears will be greater adoption of continuous ous casting also increases the yield of fin-

,– – -
10 . Technology and Steel Industry Competitiveness

Figure 3.—Continuous Casting Apparatus

Molten metal

Tundish

1

Mold

Solidified bar

Support

rolls

Motorized pull rol l 1

SOURCE: Technology Assessment and Forecast, Ninth Report, U.S. Department of Commerce, March 1979.

ished steel. Although it is the preferred process for most steels, the ability to continuously

cast some types of steel has not yet been developed.

The main benefits of continuous casting

are:

●

●

●

Considerable energy is saved both by

eliminating energy-intensive steps in

steelmaking and by increasing yield.

Capital costs per tonne of output are lower because the increase in yield allows

more shipped steel to be produced without increasing capacity.

Labor productivity is higher because

there are fewer process steps, higher

yields, better working conditions, and

shorter production times.

●

●

●

The quality of steel is higher because

there are fewer steps and greater automatic control of the process.

Pollution is reduced by eliminating soaking pits and reheating furnaces, using

less primary energy, and exposing less

hot steel to the atmosphere; also, because of higher yield, less primary ironmaking and cokemaking are required.

More scrap would be used domestically

because it would be needed to replace

the home scrap eliminated by higher

yields; insofar as scrap embodies the energy that was used to produce it, its domestic use saves energy that might have

been shipped abroad.

These advantages are not being fully exploited by the domestic steel industry. Although domestic adoption of continuous casting is increasing, the United States has fallen

behind almost all other steel-producing nations in the extent to which this process is

used. (See figure 4.) For example, in 1978,

Japan reached a 50-percent level—that is, 50

percent of the liquid steel made was continuously cast—and the European Community

continuously cast 29 percent of its steel; the

U.S. level was only 15 percent.

This figure for the United States conceals

wide differences in the extent of use in the

steel industry. Nonintegrated producers, who

make steel in scrap-fed electric furnaces, use

more than 50-percent continuous casting.

However, integrated producers, who first

make iron from iron ore in blast furnaces and

then steel from the iron, use only 9-percent

continuous casting and account for about 85

percent of domestic steel production. Thus,

the adoption of continuous casting lags even

more than published figures indicate.

The reasons for the low domestic adoption

rate of continuous casting include the following:

●

●

an inadequate amount of discretionary

capital with which to replace existing,

and perhaps not fully depreciated, ingot

casting facilities;

the costs and difficulties of substantially

modifying an operating plant;
Ch. 1—Summary ● 1 1

Figure 4.—The Diffusion of Continuous Casting,

10 Countries, 1962-78

Percent

50 [

45

40

35

30

25

20

15

10

5

0

1960 1965 1970 1975 1978

Year

SOURCE: Organization for Economic Cooperation and Development

the additional capital costs of downstream facilities to process the increased production of semifinished

steel;

technical problems with using the process for some types of steels and for small

production runs;

difficulties in expediting Environmental

Protection Agency (EPA) permits, and

the costs of regulatory compliance once

the permits are granted; and

uncertainties over the extent to which

future steel imports will capture domestic markets.

The OTA analysis indicates that, on balance, the overall economic benefits of continuous casting justify increasing its use,

although recent economic conditions have to

some extent justified industry’s short-term

focus, which has not favored investments in

continuous casting. A key question is how

much continuous casting could and should be

adopted by the domestic steel industry, and in

what time frame. To prevent drastic erosion

of cost and technological competitiveness

with foreign producers, the whole industry

would need 50-percent continuous casting by

1990. This goal appears to be technically

feasible.

Even though returns on investments in continuous casting could be 20 percent or more

before taxes, there is probably insufficient

capital now and in the foreseeable future

(with present price levels, import levels, and

Federal policies) for this increased adoption

of continuous casting.

Direct Reduction of Iron Ore

Another important new steel technology is

direct reduction (DR) of iron ore. DR refers to

a number of processes (four of which are illustrated in figure 5) that are alternatives to

the blast furnace and coke oven for the pro-
72 . Technology and Steel Industry Competitiveness

Figure 5.—Schematic Diagram of Direct

Reduction Processes

Waste gas

Reducing gas

Pellets

lump ore

A

Fuel

Sponge iron

retort

HyL

gas

t Pellets

7

lump ore

f.

. . !:.

. . .

. .

. . . 

..%.

. ..

;;: Reducing

- .. -,.

gas

1

Sponge iron

shaft furnace

Armco

Midrex

Purofer

Pellets

lump ore

Sponge iron Sponge iron

rotary kiln fluidized bed

Krupp HIB

SL-RN FLOR

SOURCE K H. Ulrich, “Direct Reduction by Comparison With the Classical

Method of Steel Product ion,” Metallurgical Plant and Technology,

No. 1, 1979

duction of iron. These processes typically

operate at lower temperatures than blast furnaces and they convert iron ore to iron without melting. DR is compatible with other new

technological developments, and direct reduced iron (DRI) can also be used as a substitute for scrap.

DR is undergoing rapid expansion, particularly in the Third World and in nations with

abundant natural gas (see table 1). The size of

some foreign gas-based DR plants, including

one being built in the Soviet Union, has

reached that of large integrated plants—

several million tonnes annual capacity.

Natural gas is the simplest reductant for

making DRI, but low-grade coals can also be

Table 1 .—Projected Growth in Direct Reduction

Capacity, 1975-2000 (millions of tonnes)

North Third

Year America Japan EEC World Mid East

1975. . . . 2.0 1.2 0.7 ‘4.0 o.o1980. . . . 2.9 4.1 3.6 11.2 4.4

1985. . . . 5.3 6.3 6.6 21.2 9.6

1990. . . . 9.5 7.7 9.4 33.9 15.3

1995. . . . 13.3 9.0 11.9 45,2 20.3

2000. . . . 15.3 9.7 13.2 . 51.2 22.9

SOURCE: G.S. Pierre for OTA --

used directly as the reductant, as can the

products of coal gasification. A number of

foreign firms are aggressively developing

new coal-based processes, some of which offer significant energy savings. Several of

these processes have already been used for a

number of years with varying levels of success, particularly in South Africa and Brazil.

When these coal-based processes are more

fully commercialized, the capital costs of DR

may become more attractive to domestic producers, particularly for small plants presently using scrap. The extent to which the United

States can and should use DR based on lowgrade coals (which the United States has in

abundance) or coal gasification is still unclear. Much depends on the pace of technical

advances in DR and in the competitive process of blast furnace reduction.

The Nation could benefit from greater use

of DR in a number of ways:

●

●

DRI can be used in combination with

scrap in the increasing number of electric furnaces as well as in basic oxygen

furnaces. The partial substitution of DRI

for scrap could help to prevent a potential shortage of domestic scrap and consequent steel price rises. It would also

allow the production of higher quality

steels in electric furnaces.

DRI can also be used in blast furnaces to

substitute for some iron ore, which

would improve furnace productivity and

reduce coke consumption; it might also

be possible to base DR on available cokeoven gas, with a further net economic

advantage.
Ch. l—Summary 1 3

●

●

Increased use of DR would reduce the

growing dependence on imported coke

and reduce coke-related pollution.

DR might be used by integrated steelmakers in conjunction with coal gasification plants to create new steel capacity

at competitive cost and with fewer steelmaking pollution problems.

DRI, like steel and scrap, is already becoming a world-traded commodity. Its availability

will increase greatly in the years ahead, especially from the developing nations of the

Third World. If the U.S. steel industry does

not build domestic DR facilities, DRI may

have to be imported as scrap becomes more

expensive and nonintegrated mills expand

production. Conversely, the huge domestic

reserves of coal could be used to satisfy U.S.

steelmaking needs and perhaps to develop

and export coal-based DR technology. Instead

of exporting scrap, the United States could

export DRI.

There are several reasons why there has

been relatively little domestic interest in coalbased DR: 1) integrated companies are committed to blast furnaces and coking, which

uses company-owned metallurgical coal; 2)

the supply of relatively low-cost scrap has

thus far been plentiful; 3) future DRI import

levels are uncertain; and 4) limited capital is

available for R&D.

Other Future Technologies

In addition to wider use of continuous casting and DR, several radical changes in steelmaking could occur during the 1990’s:

●

●

●

●

direct casting of sheet and strip from

molten steel, which would save considerable energy, time, and labor;

direct, one-step steelmaking (from ore to

molten steel), which might reduce all

costs;

plasma arc steelmaking, which may offer a lower capital cost alternative to the

blast furnace, particularly suitable for

making alloy steels and for use by small

plants; and

formcoking, which offers the possibility

of an environmentally cleaner way of

making coke from low-grade coals while

still producing valuable byproducts.

Capital Needs for Modernization and Expansion

Inadequate capital has frequently been

cited as the most critical barrier to the increased adoption of new technology by the

domestic steel industry. The historical record

—declining capital expenditures, coupled

with trends of decreasing capacity, decreasing technological competitiveness, very modest gains in productivity, and increasing age

of facilities—offers some support for this

assertion. However, the real issue is the extent to which capital spending actually results in new technology and new capacity.

Capital spending has declined during the

past two decades in terms of real dollars

spent on productive steelmaking facilities per

tonne of steel shipped. However, such capital

spending has been cyclical, with peaks occurring every 7 to 8 years, following peaks in

net income by 1 or more years. Increasing

amounts of capital have been used to expand

nonsteel activities and to maintain cash dividends to stockholders even in periods when

sales and profitability have been depressed,

There are three routes to revitalizing the

technological base of the industry: 1) modernization and replacement; 2) expansion of existing facilities; and 3) greenfield (new plant)

construction. OTA’s analysis of the minimum

modernization and expansion needs for the

coming decade indicates that the most costeffective approach may be to expand capacity at existing integrated plants and to construct more electric furnace facilities, particularly in nonintegrated companies that

produce a limited range of products. The high

capital costs of building new integrated
— — —.

14 . Technology and Steel Industry Competitiveness

plants based on best available technology are

not sufficiently offset by reduced production

costs. Major technological changes in integrated steelmaking may change this situation

in the long term. Should massive rebuilding of

the large integrated segment of the domestic

industry take place in the near term—an option favored by the integrated steelmakers—

the large capital costs would have to be offset

by a combination of Federal policy changes

promoting greater capital recovery plus sanctioning of real price increases for domestic

steel.

Different Estimates of Capital Needs

The steel industry, in the High Investment

scenario of the American Iron and Steel Institute (AISI), finds a need for a 150-percent

increase in capital spending during the next

10 years over the average for the past decade. OTA, in its Renewal scenario, projects a

minimum 50-percent increase in spending to

achieve the same increase in productive

steelmaking.

Because AISI, the major trade association

for the domestic steel industry (its members

represent about 90 percent of domestic production), has performed a detailed analysis of

the future needs of the industry as seen by

the industry itself, OTA included AISI’s scenario as one of the three scenarios it analyzed

(figure 6). But where AISI’s High Investment

Figure 6.—Annual Capital Costs for Productive

Steel making Facilities Under Three Modernization

Scenarios (1978 dollars)

Liquidation $2.0 billion per yeara

I

Renewal (OTA)

I

$3.0 billion per year

scenario predicts that a $4.9 billion annual

capital expenditure will be required, the OTA

Renewal scenario calculates that approximately $3 billion annually could meet the minimum goals for modernization, replacement,

and expansion. Both scenarios attempt to increase the profitability of the industry to

make it comparable to other domestic manufacturing industries, and both scenarios project additional nonproductive capital requirements of $1.5 billion annually. The chief differences between the two, which account for

the lower capital needs of the OTA scenario,

are that: 1) where AISI has emphasized expanded capacity in the integrated segment of

the industry, OTA has stressed the expansion

of capacity in the scrap-based nonintegrated

plants, which have lower capital costs; and 2)

OTA has assumed lower capital costs in general for modernization and replacement.

The OTA analysis of capital sources and

needs indicates a capital shortfall of at least

$600 million per year through 1988. The

larger projected deficits of the AISI scenario

would have to be offset by substantial price

increases, even if a much accelerated depreciation schedule became available. If modernization and expansion lead to the modest

2-percent saving in production costs assumed

in the Renewal scenario, then return on equity could increase to about 12 percent (from

the 1978 level of 7.3 percent) and could provide a basis for more vigorous long-term

growth and expansion. However, under the

OTA scenario, there would be a substantial

need at the end of the decade to invest in new

integrated plants because of the relatively

low spending for replacement of integrated

facilities during the preceding period. AISI

believes that deferring investment for a decade in new integrated plants would lead to an

unacceptable level of obsolescence in plants

producing the preponderant share of the U.S.

supply of steel.

aRepresents a continuation of capital Investment trend for the past 5 to 10

years

SOURCE Off Ice of Technology Assessment

OTA also finds that the international capital cost competitiveness of the domestic industry has suffered relative to Japanese and
Ch. l—Summary ● 1 5

European steelmaker. Some reasons for this factors, such as design and equipment suppliare outside the control of the industry; other er choices, are within its control.

Industry Restructuring

A permanent restructuring is taking place

in the domestic steel industry. The size and

importance of the nonintegrated carbon steel

producers and alloy/specialty steel producers

are increasing. These companies tend to be

more profitable and are expanding more rapidly than the larger integrated steelmaker,

whose capacity is actually decreasing. Nevertheless, integrated steelmaker account for

approximately 85 percent of the domestic

shipments and, even though this may decrease during the next decade, they will remain the source of most domestic steel.

Both profitability and growth stimulate the

adoption of new technology, which further

enhances profitability and cost competitiveness by improving productivity and reducing

production costs. Nonintegrated and alloy/

specialty steelmaker use, and are continuing

to adopt, more continuous casting than do integrated facilities. Both have also been quick

to adopt new and efficient electric furnace

steelmaking,

The nonintegrated companies are moving

in the direction of supplementing ferrous

scrap with DRI and may spur coal-based DR

technology in the United States. Nonintegrated producers are also expanding their

range of products to include higher quality

and higher priced steel products, formerly

made only by the integrated companies. The

potential development of small-scale rolling

mills to make flat products not currently

made in these plants will further expand

their markets. During the past decade, this

segment’s capacity has tripled. If adequate

scrap and electricity are available, much of

the domestic growth in steel capacity could

come from these producers, whose tonnage

increase for the next decade could equal the

increase for the past decade. Significant

foreign investment in these companies has

already taken place and assisted growth; this

may accelerate in coming years.

Alloy/specialty producers will benefit from

ever-increasing use of high-technology steels.

Demand for these steels is growing and the

emerging steel-producing countries have little

capability to produce them; this creates export opportunities for U.S. producers. If the

new Multilateral Trade Agreement is vigorously enforced, domestic alloy/specialty steelmaker are sufficiently cost competitive to

enter this world market.

The favorable prospects for exporting

high-technology steels are based on U.S. comparative advantages over many other countries’ industries, including:

●

●

●

a large supply of relatively inexpensive

coal and iron ore;

a sophisticated industrial base, including substantial science and technology

skills and R&D activities; and

domestic labor costs that are now competitive with those of European industries.

The major problems in developing greater exports in this area are:

● dependence on foreign sources for most

important alloying materials,

● lack of experience and infrastructure

for exporting, and

● less governmental support for steel exports than is found in other industrialized nations.

The United States was, in fact, a net exporter of alloy and specialty steels in 5 of the

last 15 years, although it has been a net importer since 1974. Domestic producers are

most competitive for 90 percent of the steels

in the alloy and specialty category, and least

for tool and stainless steels. They have done
16 . Technology and Steel Industry Competitiveness

well in the remaining alloy and specialty steel

export markets, and domestic markets for

these steels have been impacted least by

imports. In 1978, for example, imports

amounted to just over half of domestic shipments for tool steels and almost 17 percent

for stainless steels, but only 6.5 percent of the

remaining alloy and specialty steels. However, this was when quotas were still in effect

for some of these steels. (Imports of carbon

steels were nearly 22 percent of domestic

shipments in 1978. )

Finally, the United States has an opportunity to export more high-technology steel because worldwide demand is rapidly increasing. Higher quality and performance capabilities are justifying the greater use of these

more costly steels in a broad range of applications, including advanced energy production,

manufacturing, and higher quality consumer

products.

Steel Use and Future Demand

Steel remains the most important engineering material in American society. There is literally no aspect of private or public life that

does not in some way depend on steel. Nevertheless, steel is usually taken for granted. It is

not generally considered to be technology intensive, changing in nature, or particularly

critical for economic or military security. Yet,

steel is all these things. It plays a pervasive

and vital role in all primary manufacturing

and construction, and it is and will remain a

strategic material for the Nation.

Domestic consumption of steel continues to

increase (see figure i’) but at a slower rate

than during the early phases of industrialization. The use of aluminum and plastics has

greatly increased in the past several decades,

but the per capita consumption of these materials is only about 60 and 140 lb, respectively,

compared to steel consumption of approximately 1,000 lb per capita. Steel may be better able to compete in the materials market as

a result of future changes in energy and raw

material costs, which will have stronger

adverse impacts on aluminum and plastics

than on steel.

Although it may appear, according to some

measures, that the use and role of steel are

declining, for many applications there are

no cost-competitive performance substitutes

for steel. For example, steel is essential in

bridges, buildings, railroads, primary manuFigure 7.— Range of Projected Domestic Demand’

for Steel, 1980.90

140

130

110

100

.

●

I 1 1 1

1978 1980 1985 1990

(actual)

Yea r

aDemand = total consumption = domestic shipments – exports + imports

SOURCE Off Ice of Technology Assessment composite of projections from

Government Industry and academic sources See table 66 of the

main report for detailed data

facturing facilities, and many other physical

structures. Many observers believe there will

be a surge in domestic steel demand for con-
Ch. 1—Summary . 17

struction as structures such as bridges, buildings, and manufacturing facilities wear out.

A frequently mentioned area in which substitutes for steel are being used increasingly

is the automotive industry. Driven by energy

conservation measures to produce lighter

vehicles, automobile manufacturers are reducing the amount of steel used in each automobile, and steel consumption for this use is

likely to be steady or decline. It is possible,

however, that a reduction in the steel content

of automobiles could be offset by an increase

in the number of cars manufactured in the

United States by foreign companies, which

may use domestic steel.

A Future Steel Shortage?

It is distinctly possible that the demand for

steel will increase enough in the future that

domestic steelmaking capacity will be inadequate to reverse the trend of increasing imports. Modernization and expansion programs for the next decade (discussed in chs. 2

and 10) assume that domestic demand for

steel will increase by only 1.5 percent per

year. Should that projection be too low, the

capacity planned would be inadequate. If demand-growth forecasts of 2 percent or more

prove accurate, the United States would have

to import 20 percent of domestic consumption, or 27 million tonne/yr. This would be

about 50 percent more than any previous

maximum tonnage of imports. Without any

modernization and expansion, and assuming

the higher demand level, domestic capacity

would likely be so low by the end of the 1980’s

that more than 44 percent of the steel would

be imported, compared to 15 percent over the

past several years. The current overcapacity

in the world steel market may soon disappear, and such a degree of steel import dependence would raise economic and national

security problems for the United States not

unlike those now encountered with petroleum.

Problems With the Creation, Use,

and Sale of Technology

The domestic steel industry has a wellestablished record for internal generation of

product innovations, but this record does not

extend to the internal creation of new production processes. The industry prefers to adopt

proven technologies that have a record of

successful commercialization and, to the extent that this strategy reduces risk and R&D

costs and provides near-term payoffs, it is a

useful approach. It does have major drawbacks, however: it leads to dependence on

technologies that may not be well suited to

domestic needs, it reduces learning opportunities for innovative applications, and, most

importantly, it does not enable the industry to

stay ahead—or even abreast—in the international market.

That domestic steelmaker lag in adopting

new process technologies, such as continuous

casting and the basic oxygen furnace, can be

explained by: cautious attitudes about new

technology, an aging steel industry plant,

sluggish industry growth rates, and lack of

capital.

New technology increases the potential for

reducing raw materials use and production

costs, and for improving quality. Independent

creation of new technologies and their successful application would enable the domes-
18 ● Technology and Steel Industry Competetiveness

tic industry to gain technological advantage,

rather than merely the delayed parity that

would result from the adoption of foreign innovations. The industry’s competitive position

in domestic and international markets would

be enhanced if such an advantage were

achieved.

Research, development, and demonstration

play an important role in the creation of new

technologies. Domestic steel industry R&D expenditures, as a percentage of sales, have declined over the years, and they are lower

than for most other basic industries in the

United States (see table z). Expenditures for

basic research are particularly low. There is

no trend of declining dividends as a fraction

of aftertax profits comparable to the trend of

declining R&D spending, even though these

uses of funds are related. For example, R&D

investments can be viewed as a means to improve future earnings and capital gains to

stockholders, and thus an alternative to dividends. The industry’s reluctance to invest in

R&D may be attributed to a number of factors, including: low profitability, cautious

management attitudes towards research,

high costs of demonstration projects, and the

downward trend in the industry’s share of

the domestic market. Industry R&D, including environmental technology research, is

matched by an even more limited amount of

steel R&D in the Federal Government and

academic sectors.

Foreign steel R&D is generally more vigorous because more money is devoted to it, because industry places more emphasis on it,

and because steelmaking has more prestige in

the academic sector. It also receives government support, particularly for high-risk projects whose benefits promise to be widespread. Many foreign steel industries support

and carry out steelmaking research through

multisectoral institutes.

Japan, West Germany, Austria, and Great

Britain develop and transfer significant

amounts of innovative steelmaking technologies to other countries, but U.S. technology

exports are limited. They are largely handled

Table 2.—U.S. R&D Intensity and Trade Performance

Trade balance

exportsR&D imports, 1976

intensity (millions

Description (percent) of dollars)

. . --— . . Above-average R&D intensity

Communications equipment. . . .

Aircrafts and parts . . . . . . . . . . . .

Office, computing equipment . . .

Optical, medical instruments . . .

Drugs and medicines . . . . . . . . . .

Plastic materials. . . . . . . . . . . . . .

Engines and turbines . . . . . . . . . .

Agricultural chemicals. . . . . . . . .

Ordinance (except missiles) . . . .

Professional and scientific instr.

Electric industrial apparatus . . . .

Industrial chemicals. . . . . . . . . . .

Radio and TV receiving

equipment . . . . . . . . . . . . . . . . .

Average . . . . . . . . . . . . . . . . . . .

Below-average R&D intensity

Farm machinery . . . . . . . . . . . . . .

Electric transmission equipment

Motor vehicles. . . . . . . . . . . . . . . .

Other electrical equipment . . . . .

Construction, mining . . . . . . . . . .

Other chemicals . . . . . . . . . . . . . .

Fabricated metal products. . . . . .

Rubber and plastics . . . . . . . . . . .

Metalworking machinery . . . . . . .

Other transport . . . . . . . . . . . . . . .

Petroleum and coal products. . . .

Other nonelectric machines . . . .

Other manufactures . . . . . . . . . . .

Stone, clay, and glass. . . . . . . . . .

Nonferrous metals . . . . . . . . . . . .

Ferrous metals . . . . . . . . . . . . . . .

Textile mill products. . . . . . . . . . .

Food and kindred products . . . . .

Average . . . . . . . . . . . . . . . . . . .

15.20

12.41

11.61

9.44

6.94

5.62

4.76

4.63

3.64

3.17

3.00

2.78

2.57

—

2.34

2.30

2.15

1.95

1.90

1.76

1.48

1.20

1.17

1.14

1.11

1.06

1.02

0.90

0.52

0.42

0.28

0.21

—

$ 793.7

6,748.3

1,811.4

369.6

743.5

1,448.0

1,629.2

539.3

553.0

874.8

782.5

2,049.4

– 2,443.4

1,223.0

696.2

798.1

-4,588.6

311.2

6,160.4

1,238.5

1,525.7

– 478.8

736.4

72.1

NA

3,991.3

-5,137.4

-61.3

-2,408.9

-2,740.4

40.3

-190.0

2.0

aMeasures of R&D intensity and trade balance are on product-line basin the

ratio of applied R&D funds by product field to shipments by product class,

averaged between 1968-70

SOURCES: Department of Commerce, BIERP Staff Economic Report, U S

Bureau of the Census

by equipment firms and are mainly in the

area of raw materials handling. Foreign steel

industries are increasing their efforts in

technology transfer in order to offset their

declining exports of steel products. To a

much greater degree than domestic steelmaker, foreign companies have design, consulting, and construction departments that aggressively pursue the sale of both hard and

soft technology to other nations, particularly

the less developed countries.
Ch. 1—Summary ● 1 9

Raw Materials Problems

Coke and ferrous scrap are among the raw

materials essential to steelmaking. Unlike

other materials, such as iron ore, which the

United States possesses in abundance, the

adequacy of future supplies of both coke and

scrap is uncertain, but for different reasons.

Coke and Coke Ovens

Most coke is produced by the integrated

steel companies in byproduct ovens using

high-grade metallurgical coals. The coke is

then used as a feedstock in ironmaking. Domestic consumption of coke has been higher

than production during 3 of the past 6 years;

in 1978, domestic consumption was 51.7 million tonnes, 16 percent more than U.S. production, with the gap filled by imports. The

shortfall was caused not by a shortage of metallurgical coal, which the United States has in

abundance, but by declining coke oven capacity. (See table 3.)

About one-third of all domestic coke ovens

are considered old by industry standards.

These older ovens are less efficient, more

polluting, and tend to produce poorer quality

coke than the newer ones. The domestic industry has a much higher coke oven obsolescence rate than do the industries in other major steel-producing countries. The productive

capability of U.S. coke ovens has declined by

close to one-fifth since 1973, primarily because the construction of new ovens has been

discouraged by high capital costs and by regulatory requirements. The shortage of ovens

has contributed to rising coke imports and to

declining employment in this phase of steelmaking. It has been estimated that by 1985,

the coke oven shortage will increase to about

9.1 million tonnes, or 20 percent of domestic

production, because of continuing capacity

decline and demand growth.

There are several technology and business

choices that, with varying degrees of effectiveness, could help stabilize or reduce current coke shortages. These include: constructing more coke ovens, importing more

coke, developing formcoking, using DRI, importing more semifinished or finished steel

products, increasing the use of electric furnace steelmaking, and improving the coke

rate in blast furnaces. Federal policy changes

which would alleviate coke shortages include

improved capital recovery and greater incentives for developing environmentally cleaner

coke-free ironmaking processes. Relaxation

of environmental standards to deal with the

shortage, although possible, would imply that

increased carcinogenicity of coke oven air

pollution is the appropriate way to achieve

adequate steelmaking capacity.

Ferrous Scrap

The steel industry is a major consumer of

ferrous scrap, and most near-term technological changes in steel production will tend

to increase the use of scrap: growing use of

electric furnaces and continuous casters,

changes in the basic oxygen furnace that inTable 3.—Estimated Decline in Actual Productive Capability of Coke Oven Plants

in the United States: 1973 v. 1979a (millions of tonnes)

Capability change ..—

Capability 1973-79 1979-85-

est.

1973 1979 1985 est. Tonnes Percent Tonnes” -

” - Percent ‘-

—————.. —..

Capacity in existence. . . . . . . 68.0 ‘

-

57. 5

-

” ”

— - —%2: 7 10.5 15,5 4.8 -

8.3

Capacity in operation. . . . . . 61.2 51.8 — 9.4 15,4

Actual productive capability

— —

57.6 47.6 42.6 10,0 17.3 5.0 10.4

aComparison of estimated average levels for 1973 and levels on July 31, 1979, as determined by Ford ham University survey

SOURCE: William T Hogan, Analysis of the U.S. Metallurgical Coke Industry, 1979.
20 ● Technology and Steel Industry Competitiveness

crease the proportion of scrap used, and the

growing demand for high-performance specialty steels. Scrap prices have doubled since

1969, and there are some concerns in the

steel industry about the future availability,

price, and quality of scrap, Other factors,

such as scrap industry processing capability

and the availability and cost of railroad cars

to ship scrap, either are not problems for

scrap suppliers or are problems that are

being remedied. The main concern is physical

availability of high-quality scrap.

Scrap supply projections range from adequate at much higher prices, to inadequate at

any price. Demand for scrap does not decline

significantly when supplies decline and

prices increase. This places the steel industry

in an increasingly difficult position, because

it has few potential substitutes for scrap. The

nonintegrated

most severely

problems.

domestic producers will be

affected by price and supply

Options to offset scrap supply problems, in

addition to maintaining existing inventories,

include expanding DRI use and monitoring

exports or imposing export controls on scrap.

Scrap exports have been relatively stable

thus far, but they are expected to increase

because of worldwide increases in electric

furnace use. Favorable exchange rates have

made U.S. scrap attractive to many foreign

buyers. Increasing domestic use of scrap has

prompted steel industry interest in controlling exports, but the scrap industry is opposed to such a measure.

Statutory resource-conservation targets attempting to increase the use of domestic

scrap have not been well directed in the past.

They fail to differentiate scrap-use opportunities and problems by industry segment. Furthermore, on a plant basis, these targets are

not always feasible for economic or technical

reasons. The targets may also act as a disincentive for development of beneficial coalbased DR technology.

Impacts of EPA and OSHA Regulations

on Technology Use

The steel industry is one of the largest

sources of pollution in the Nation, with the integrated steelmaker accounting for close to

one-fifth of all domestic industrial pollution.

The industry also has very high rates of occupational injury and illness. The harmful emissions of steel plants are a greater hazard for

steelworkers than the general population;

consequently, the Federal and State Governments have created a large number of regulations to protect workers as well as the public.

There can be no argument against the goals

of reducing environmental pollution and

occupational risks; however, the impact of

these regulations on the creation and use of

steelmaking technology merits examination.

For technological innovation, regulations can

act as either a barrier or an incentive. While

industry has tended to emphasize the barrier

effect, there are opportunities for the regulations to serve as incentives for technological

innovation. Because of the scope of this study,

the impact of regulations on the steel industry

has been emphasized. But this does not mean

that the impact of pollution on workers and

the general public is thought unimportant.

Thus far, EPA policies have had a greater

impact on the steel industry than those

administered by the Occupational Safety

and Health Administration (OSHA). However,

OSHA policies will grow in importance as

more of its regulations become operational.

Applicable regulations administered by EPA

and OSHA will impose major capital investments and operating changes on the industry

by the mid-1980’s. The various environmental

statutes and the Occupational Safety and

Health Act encourage the use of technology-
Ch. 1—Summary ● 2 1

based performance standards, but although

these standards allow for industry flexibility

they do not provide direct assistance for industrial innovation. Available regulatory incentives, such as delayed compliance, do not

appear to have been used effectively by industry in promoting innovation.

Impacts of Regulations on Industry

Regulatory requirements have accelerated

industry decisions to phase out and replace

aging facilities. Economic and regulatory

forces have thus tended to reinforce each

other. Regulatory policies have had the most

severe impact on integrated facilities, which

generally have a higher proportion of aging

cokemaking, ironmaking, and steelmaking

equipment as well as high production costs.

The impact on relatively new nonintegrated

electric furnace plants has been less severe.

Furthermore, they have been able to comply

in a more cost-effective reamer by installing

abatement equipment at the time of construction.

Three policies are favorably affecting the

adoption of new steel technology:

●

●

●

The

the revised offset policy, which allows

tradeoffs of pollution from different

sources within geographical regions;

the bubble policy, which extends the offset concept to a particular steel plant;

and

the limited-life facilities policy, which

gives a steelmaker time to prepare a solution to a compliance problem or prepare for closing down a plant by a certain time (usually 1982-83).

revised offset policy creates difficulties

for companies wishing ‘to expand, because

they will be required to create a pollution

reduction or somehow “buy” emission reductions from another source of pollution within

a given region. The bubble concept, which is

being debated in Congress, could make facility replacement and modernization more feasible and cost effective. However, the tradeoff between more and less hazardous pollutants within a bubble area requires assessment. The limited-life policy forces hard decisions between modernization and shutdown

for older plants generally having the poorest

profitability; these decisions are now generally in favor of plant closing.

Cost Effectiveness of Control

Technologies

There has been considerable disagreement

concerning the economic and technical feasibility of regulatory technologies that Federal

agencies consider attainable at specified control levels. Judicial decisions have directed

EPA to give greater weight to economic considerations when identifying feasible control

technologies for nontoxic pollutants. If a

pending Supreme Court decision supports the

private-sector position, OSHA may be the

first Federal agency required to undertake

cost-benefit analyses of major proposed regulations. With respect to technological feasibility, EPA continues to have fairly broad authority that allows for diffusion of the latest

environmental technologies; OSHA’s technology-transfer authority is much more limited.

Congress has expressed a strong interest

in improved regulatory technologies that will

be more cost effective and will further reduce

public health hazards. It is the steel industry’s position that available control technologies are generally capable of meeting regulatory standards; Federal agencies suggest that

considerable R&D is still needed. Regulatory

technology R&D by the private sector suffers

in part because of the high costs and limited

private gains associated with it, Steel industry environmental R&D spending is rather

modest—about $75 million per year, a considerable amount of which appears to be engineering work. EPA spends less than $1 million per year on steel-specific R&D but much

larger sums on environmental R&D that is applicable to the steel industry, yet even these

amounts may still be inadequate for the rapid

changes in the industry which the regulations

demand.
.

22 ● Technology and Steel Industry Competitiveness

Industry Expenditures on Controls

Without adjusting downward for regulatory overlap, EPA- and OSHA-related capital

investments during the 1970’s were about

$365 million per year, or about 17 percent of

total annual steel industry capital investment. These expenditures have placed greater limits on steel industry modernization than

has been the case with other basic industries.

Annualized capital and operating costs for

environmental requirements presently add

about 6 percent to steel production costs and

prices.

Industrial development bonds (IDBs) have

in the past been used for half of all environmental capital spending by the steel industry.

Assuming this pattern continues, the steel industry will need to generate between $235

million and $400 million annually, in addition

to IDB financing, to meet EPA and OSHA regulatory requirements through the mid-1980’s.

These expenditures are relatively modest

compared to the massive total capital needs

that the industry expects during the next several years.

Employment Practices and New Technology

Technical Workers

A technical manpower shortage is now developing in a few areas in the steel industry,

and it could become more serious and more

widespread if the industry were to embark

upon vigorous modernization, R&D, and innovation programs. The most likely shortages

would be of metallurgists, electrical engineers, and computer scientists.

The number of research personnel in steel

declined during the early 1970’s and has

since slowly climbed back to 1970 levels. Only

about 18 percent of all steel industry salaried

technical personnel are now engaged in engineering R&D, and even smaller numbers in

steelmaking R&D. This is partly because considerable research manpower is absorbed in

environmental R&D. Research personnel are

primarily engaged in market-oriented research leading to evolutionary changes in

process and product, rather than in fundamental research that might produce radical

changes.

Steel-related research in foreign nations

provides more long-term intellectual and professional opportunities for R&D personnel

than is the case in the United States. This may

be attributed to greater foreign government

support for research and also to the greater

involvement of foreign steel companies in the

sale of machinery and technology. Sabbaticals and industry-university-Government exchanges are not very common in the domestic

industry. In addition, there is only a negligible

movement of technical personnel from other

high-technology industries into steel. These

deficiencies limit opportunities for personnelbased technology transfer.

Hourly Workers

The training, skills, and performance of

steelworkers have not, on the whole, impeded

the development and use of new technologies,

The industry has developed and marketed

new products successfully, although its record of process improvements is not as strong.

But when new equipment is introduced, steelworkers are generally cooperative. Prevailing manpower-use patterns reflect the industry’s concern with production capability

rather than an emphasis on changing and improving technology.

Job classification schedules for hourly

workers appear to have incorporated most of

the changing skill requirements associated

with technological change. Furthermore, the

2-B “local practices” clause that is in most

steel industry labor contracts gives management the right to change unilaterally past

practices concerning crew size and other
Ch. 1—Summary 23

staffing arrangements when required by leadership is concerned with technological

“changed conditions, ” including technologi- displacement, but does not resist the introcal innovation. However, it appears that the duction of new technology. With the possible

2-B clause makes it difficult to extend new exception of a few plants, difficulties with the

practices to adjacent production areas not work force have no limiting effect on indusdirectly involved with the new equipment; try’s adoption of new steelmaking technolsuch changes are subject to negotiation with ogies.

the local union affiliates. National union

Notice to the Reader

The reader should be apprised that the General Accounting Office

(GAO) will complete a complementary study of various aspects of steel

industry problems during the summer of 1980. GAO’s study will place

specific emphasis on: an evaluation of the effectiveness of past and current Federal programs and policies related to steel, and an in-depth

evaluation of steel consumers and their attitudes and concerns regarding problems of the domestic steel industry.
CHAPTER 2

Policy Options
———— —

Contents

Page

summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Reconciling Congressional and Industry

Concerns . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Learning From the Steel Industry ., . . . . . . . . 32

A Governmental Steel Industry Sector Policy. 33

The OTA Study . . . . . . . . . . . . . . . . . . . . . . . . . 34

Three Scenarios for the Future. . . . . . . . . . . . 35

Liquidation Scenario . . . . . . . . . . . . . . . . . . . . 35

Renewal Scenario . . . . . . . . . . . . . . . . . . . . . . . 37

High Investment Scenario . . . . . . . . . . . . . . . . 37

Implications of the Scenarios for

Congressional and Industry Concerns. . . . . 38

Implications of the Scenarios for

the 1990’s . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

Overview of Possible PoIicy Options . . . . . . . . 42

R&D and Innovation Activities . . . . . . . . . . . . . 43

Capital Formation. . . . . . . . . . . . . . . . . . . . . . . 45

Regulatory Compliance Costs. . . . . . . . . . . . . . 49

Raw Materials . . . . . . . . . . . . . . . . . . . . . . . . . 53

Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

Foreign Government Policies Toward Steel

Industries ● *..,*** ● **,,,.*. . . . . . . . . . , 58

International Comparison of Cost Recovery

Allowances . . . . . . . . . . . . . . . . . . . . . . . . . . 58

Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

Japan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

Third World and Developing Countries . . . . . . 68

List of Tables

Table No.

4.

5.

6.

7.

8.

9.

10.

11.

12.

13.

14.

15*

Congressional Interests and Steel

Industry Needs . . . . . . . . . . . . . . . . . . . .

Characteristics of Three Scenarios for

the Next 10 Years of the Steel Industry.

How Scenarios Affect Three Industry

Segments . . . . . . . . . . . . . . . . . . . . . . . . .

How Congressional Concerns Are

Affected by Three Scenarios . . . . . . . . .

How Industry Needs Are Satisfied by

Three Scenarios . . . . . . . . . . . . . . . . . . .

Major Policy Options for Two Scenarios

Features of Four Federal Options for

Increasing Capital Formation in the

Domestic Steel Industry . . . . . . . . . . . . .

Regulatory Change: Policy Options and

Consequences ... .... . . . . . . . . . . . . .

Increased Federal Support for

Regulatory Compliance and R&D: Policy

Options and Consequences . . . . . . . . . . .

Ranking of Factors for Government-Steel

Industry Relations. . . . . . . . . . . . . . . . . .

Comparison of Cost Recovery

Allowances in the Steel Industry . . . . . .

Distribution of R&D Projects Funded by

ECSC, 1979 . . . . . . . . . . . . . . . . . . . . . . .

Page

31

36

37

39

39

40

45

51

52

58

59

63
CHAPTER 2

Policy Options

Summary

It is in the Nation’s interest to have a

strong domestic steel industry that effectively

uses domestic resources such as coal and

scrap materials. However, technology alone

is not sufficient to reverse the decline in steelmaking capacity, nor can new technology immediately help those parts of the industry

that use old, inefficient, or poorly located

plants.

Nevertheless, Federal policies that at least

indirectly facilitate technological innovation

and modernization are necessary to avoid

temporary and superficial remedies. Even

those segments of the industry that are profitable, competitive in the domestic market, and

well managed need more and continued technological modernization to maintain and improve their competitiveness in the domestic

and world markets.

The creation and adoption of new steel

technology are hampered by a number of factors, the most important of which are inadequate capital formation, inadequate R&D,

high regulatory compliance costs, and the

threat of unfairly traded imports. In a world

in which most foreign steel industries are

either owned or heavily supported by their

governments, the U.S. steel industry is at a

disadvantage because it must generate from

profits the capital it needs for modernization

and expansion. Past Federal policies have affected steel costs and prices, and hence steel

industry profitability, Most of the industry

has been slow to adopt cost-reducing new

technology as a means of coping with Federal

policies. The superior technological and economic performance of some steelmaker demonstrates the potential for improvement in

other companies. Both Federal and industry

policies have contributed to industry’s underinvestment in capital plant, R&D, and innovation.

The industry has also

fected by imports of steel

port potential affected by

tries. For the most part,

been adversely afand has had its exforeign steel indushowever, steel imports have led to complaints about Federal

policies rather than to increased emphasis on

R&D, innovation, and improved competitiveness. Some domestic market imperfections

have resulted from foreign government policies favoring their steel industries, and it is

apparent that substantial trade and tax issues exist with regard to the steel industry.

Federal policies on these issues need examination, but policies are also needed to deal

directly with technological issues.

OTA uses three scenarios for the next decade to examine costs and benefits of policy

options. The Liquidation scenario implies the

slow shrinkage of domestic capacity and employment. The Renewal scenario considers

policy options linked to moderate increases in

capital spending for modernization and expansion to revitalize the industry. The High

Investment scenario examines policies compatible with greatly increased capital spending to quickly modernize integrated steelmaking facilities, OTA’s analysis considers the

following possible options for Federal policy

toward the steel industry:

● provide greater capital formatio n

through faster depreciation, investment

tax credits, loan guarantees, or subsidized interest loans;

● increase support of basic research and

large-scale demonstration projects, and

provide incentives for industrial R&D;

. coordinate energy development programs with the needs of industry—for

example, development of synfuel or coal

gasification technology might be coordinated with requirements of direct reduction processes;

27
28 ● Technology and Steel Industry Competitiveness

●

●

●

●

●

●

reach a better understanding of the benefits of Federal environmental and occupational health and safety regulations

on the one hand and, on the other hand,

the costs to communities of a shrinking

industry, the industry’s capital and modernization needs, and the regulatory

barriers to technological innovation.

explore the controversial issue of limiting the export of energy-embodying ferrous scrap;

examine the feasibility and adverse impacts of targets for ferrous scrap use,

and compare targets with alternative

mechanisms such as incentive investment tax credits for adoption of new

technology that may use more energy;

reexamine trade practices, particularly

to assess the impact of unfairly traded

steel imports on the industry’s ability to

make long-term commitments to new

technology and investment in additional

capacity;

promote the export of high-technology

steels; and

emphasize long-term assistance to steel

plants capable of technological rejuvenation, and at the same time provide

short-term assistance to workers and

communities impacted by closing old facilities.

New Federal policies, however, would be

ineffective without appropriate shifts in the

attitudes and policies of industry. For example, industry would have to reexamine its policies concerning using capital for diversification out of steelmaking, emphasizing shortterm benefits from relatively minor improvements in technology, wanting to quantify the

costs but not the benefits of social regulations, and resisting industry restructuring, including the expansion of small, scrap-based

nonintegrated steelmaker.

Perhaps the greatest need is for a careful

examination of the costs and benefits of a

Federal policy for the steel sector that would

first establish a set of goals consistent with

national interests and industry needs and

then initiate a set of coordinated, reinforcing

actions that would effectively and efficiently

help achieve those goals. The most important

lesson to be learned from the past experience

of the steel industry is that such sector policies may be needed for major domestic industries if international competitiveness is desired. Foreign governments, particularly Japan’s, appear to use sector policies to achieve

competitive industries. Without such a sector

policy, improvement efforts may be at crosspurposes or fail to address critical issues. Isolated policies that deal effectively with capital formation or imports, but fail to encourage additional efforts in R&D and innovation,

would not ensure a profitable and competitive industry in the long run.

The risks of adopting a steel sector policy

include an overemphasis on the welfare of

the steel industry to the exclusion of other

domestic industries, insufficient attention to

social goals and impacts, such as pollution

abatement and worker safety, and possibly

insufficient attention to smaller steelmaker.

Understanding the greater support that

foreign governments give their private and

public steel industries provides important insights for the examination of U.S. policies.

Foreign governments have coordinated sector

policies that link support for R&D and innovation with capital formation, protection of

home markets, and the export of steel technology. The United States provides a much

lower level of direct and indirect support

than Japan, Western Europe, and Third

World nations. The U.S. steel industry may

never achieve international competitiveness

unless Federal policies become more comparable to the policies of other countries

towards their steel industries.
Ch. 2—Policy Options ● 2 9

Reconciling Congressional and Industry Concerns

The past several decades have witnessed a

reversal in the condition of the American

steel industry. Before World War II, and for

the decade following, the domestic industry

was the world leader in steelmaking technology and production. It supplied domestic needs

and was a net exporter of steel, Its profitability, though rarely as high as most domestic

manufacturing industries, was markedly better than in recent years, During the last 10

years, however, a turnabout has occurred.

The domestic industry shifted from technology leader to follower and from net exporter

to dependent importer. Its profitability, moderate in the 1950’s, became unacceptable by

domestic standards in the 1970’s. Domestic

steelmaking capacity declined and a substantial percentage of this capacity (about 20 percent) became obsolete, All this happened during a period of phenomenal world growth in

steelmaking capacity and demand, New technology, as a means to reduce costs and energy

consumption, received greater attention

abroad than in the United States.

Japan has emerged as the new world

leader in steel technology and production,

and it exports much of both. Although European steel industries have generally followed

the U.S. pattern of decline, a number of developing nations have acquired considerable

modern steelmaking capacity, much of it purchased from Japan. Japan, Europe, and Third

World countries have used their steel exports

to sustain domestic employment and obtain

foreign currency; their industries have not

been particularly profitable, however, even

by U.S. steel industry standards.

The American steel industry, faced with increasing foreign capacity as well as unprecedented technological and cost competition,

must also face a variety of Federal policies,

carried out by a variety of agencies, that address a variety of national concerns. These

policies, with their disparate but relatively

narrow individual objectives, have added to

the industry’s problems. The Federal Government has contributed to the loss of international competitiveness in the following ways:

1.

2.

3.

4.

5.

6.

Cost-price policies:

formal and informal limits on domestic

steel prices;

long capital-recovery periods that do not

recognize the rising costs of building

new steelmaking capacity; and

environmental and worker health and

safety regulations that increase the

costs of steelmaking.

Trade and monetary policies:

● international trade policies that have

allowed steel imports to capture a large

share of the domestic market; and

● little monitoring or control of the export

of domestic ferrous scrap, a valuable

source of both iron and energy.

Very low levels of support for research in

steelmaking.

Contributions to international sources that

make loans to foreign steel industries,

which then export steel to the United

States.

A loan policy aimed at maintaining employment in troubled companies, rather than

modernizing or expanding steel capacity.

Monetary policies that, until recently, had

the effect of keeping the dollar overvalued

relative to major foreign currencies and

thereby made domestic steel less competitive in world markets.
30 Technology and Steel Industry Competitiveness

On the other hand, events and policies in

the steel industry itself have also contributed

to the industry’s problems:

I. The cost-price squeeze and profitability:

a tendency to emphasize the size of

steelmaking facilities rather than their

profitability;

wage increases that have exceeded increases in productivity and have therefore resulted in higher real labor costs;

the tendency of some major companies to

pay high dividends even during periods

of low earnings;

insufficient attempts to reduce capital

costs through the use of lower cost foreign steelmaking equipment, less costly

designs, and more inhouse engineering

and design;

costly attempts to delay compliance with

environment regulations;

slowness in maximizing the use of domestic scrap; and

minimal attempts to export the technology-intensive steels in which the industry

is technologically and cost competitive.

2. Technology:

●

●

●

●

●

minimal spending on R&D;

an emphasis on product rather than

process R&D, and on short-term payoffs

rather than long-range benefits from

higher risk, major innovations;

few attempts to employ technical and

managerial personnel from other domestic industries that have been successful

in technological innovation and exporting;

insufficient long-range strategic planning for technology to minimize future

production costs; and

insufficient matching of steelmaking

processes with product characteristics

to obtain optimum product mixes.

All these public- and private-sector actions

and policies together, have shaped the industry’s current problems and congressional

concerns about them. The present time is critical in the history of the domestic steel industry—modern, competitive steelmaking capacity takes years to build, so what happens now

will determine the shape of the industry for

decades to come.

Congress has diverse and sometimes conflicting concerns about steel. Table 4 contains a summary of congressional concerns

without reference to particular geographical,

economic, social, or trade problems. The

table also lists industry needs drawn from a

major policy statement by the American Iron

and Steel Institute (AISI), whose member

companies produce about 90 percent of domestic steel. (Not all of the nonintegrated

scrap-based steelmaker, who account for

about 13 percent of domestic production,

belong to AISI.)

Rising imports, for the most part, are an

issue on which the Government and industry

are in accord. Dependence on steel imports

would threaten national security because of

the critical role of steel in this society. The

steady loss of employment caused by imported steel is also of major concern to the

Nation, particularly for regions with concentrations-of older steelmaking facilities. Steel

imports also contribute significantly to the

trade-balance deficit. Imports may offer a

low-price source of steel during brief periods

of world oversupply, but their long-term net

effect on the economy will probably be negative. Industry wants to limit imports in order

to improve its domestic competitiveness and

increase its profitability so that it can expand

and modernize. As long as there is great uncertainty about future imports, however, industry will be reluctant to make major investments in steelmaking technology. For corollary reasons, increasing steel exports is an

issue on which Congress and industry should

also have common interests.

The increasing age and obsolescence of domestic facilities should be a matter of concern both to industry and Government insofar

as it affects competitiveness. But compared

to the risks of building new, modern plant capacity which imports might leave idle, operating old facilities can appear attractive for the

short term. In some cases, the continued operation of older facilities, even at low levels of
Ch. 2—Policy Options . 31

Table 4.—Congressional Interests and Steel Industry Needs

Congressional interests .

Tren d Effects

Rising imports National security loss

Increased competition

Lower prices

Potential inflation

Trade deficit

Unemployment

Declining exports Trade deficit

Unemployment

Aging facilities Productivity loss

Decreasing capacity National security loss

Unemployment

Diversification out of Competitiveness loss

steel making Diversion of capital

Declining R&D and Competitiveness loss

innovation

Rising steel prices lnflation

Improved environmental Public well-being

effects of steelmaking Increased costs of

(increased regulatory steel making

compliance) Force new technology

SOURCE Off Ice of Technology Assessment

—

Industry needs

Maintain/

improve cost Increase Modernize Increase

competitiveness capacity technology profitability — —.

Accord

Accord

Accord

Conflict

Conflict

Accord

Accord

Conflict

profitability, provides a cash flow to support

diversification out of steelmaking. To the extent that such diversification reduces capital

investment, R&D investments, and capacity,

it adds to congressional concerns.

In many cases, companies do not continue

to operate old facilities, nor do they replace

them with an equal or greater amount of new

capacity. Some companies choose to become

competitive and profitable by closing marginal or unprofitable facilities and modernizing only their best plants. These companies

are among the largest steelmaker, and

although the smaller companies are expanding, the net effect, of concern to Congress,

has been a loss of domestic capacity and jobs,

There are areas of both conflict and accord with regard to declining R&D and innovation. Willingness to develop and use innovations in steelmaking can improve competitiveness, consistent with congressional concerns. However, the industry’s desire to inAccord Accord Accord

Accord Accord Accord

ConfIict Accord Accord

Accord ConfIict ConfIict

Conflict ConfIict ConfIict

ConfIict Accord Conflict

ConfIict Conflict Conflict

Conflict Accord ConfIict

crease profitability by investing in modernization and expansion may actually reduce investments in R&D and innovation.

Nor is the industry sympathetic with congressional desires to limit inflation by holding

down steel prices. To the extent that controlling prices improves demand for domestic

steel and thereby contributes to high rates of

plant utilization, this policy supports cost

competitiveness. But to the extent that it

diminishes profitability and thereby discourages capacity expansion and modernization,

it will undermine long-run competitiveness.

Similarly, the congressional interest in

enforcing Environmental Protection Agency

(EPA) and Occupational Safety and Health

Administration (OSHA) regulations conflicts

with industry’s concerns about cost competitiveness, profitability, and capital formation.

Technology, however, may be a better way to

reduce costs than relaxing these regulations.
32 ● Technology and Steel Industry Competitiveness

Learning From the Steel Industry

The steel industry may be only the first of

several domestic industries to face a decline

in technological preeminence and economic

prosperity. As the less industrialized nations

begin to produce at lower costs and to consume more, they become more attractive than

highly industrialized countries as a location

for industry. The decline of established industries in advanced nations may also

result from a partial loss of domestic markets through product substitution; moreover,

these industries may not produce sufficient

technological innovations to reduce production costs markedly or improve products dramatically. These explanations may not appear as valid in today’s world economic order

as they once did: the policies of various

governments have introduced so many imperfections to the free-market and free-trade

system that the role of traditional economic

factors in international competition has been

fundamentally changed, When each of the

above factors is examined for the domestic

steel industry, it is found that none of them

can adequately explain its decline,

In the first place, no major foreign steel industry has had a more advantageous combination of labor costs, energy costs, raw materials costs, and industrial and technological

infrastructure than the United States. At

best, foreign steel industries have had slight

advantages in one or two of these factors.

Generally, such advantages have been shortlived and insufficient in themselves to account for those industries’ penetration of export markets, particularly the U.S. market.

What has occurred is that foreign governments have adopted policies that provide

many direct and indirect benefits to their

steel industries: many foreign steel industries

have been built with public funds to serve social and political goals, Even though foreign

demand for steel has increased substantially,

foreign-produced steel is often exported rather than used to satisfy domestic needs.

Secondly, although steel has faced increasingly stiff competition from other materials—

notably aluminum, concrete, and plastics—it

still possesses a unique combination of properties, forms, and costs that ensures it substantial and growing markets. There has

been no major technological displacement of

steel in the marketplace.

Thirdly, contrary to accepted wisdom,

there have in fact been major technological

changes in domestic steelmaking and products during the past several decades, and all

signs are that this will continue. Unfortunately, some domestic firms have justified their

lack of progress with the “mature industry”

concept, and have become defensive and antagonistic toward Federal Government policies rather than changing their corporate

policies to meet changing social, economic,

and political conditions. Others, in the meantime, have moved ahead with optimism and

even boldness—taking risks, investing in the

newest technology, and capturing the profits

that are there to be made.

The lesson to be learned from the steel industry’s experience is that private industries

can find themselves losing price competitiveness because Federal Government policies are not comparable to those of other nations. Foreign government policies have distorted the workings of the marketplace, sometimes in ways unique to a particular industrial sector. The steel experience has shown

that Federal policies can actually improve the

profitability of foreign industries while having adverse impacts on domestic producers.
Ch. 2—Policy Options ● 3 3

A Governmental Steel Industry Sector Policy

Steel market imperfections have led to

underinvestment in three areas— equipment,

R&D, and innovation—and policy changes

that dealt with only one of these areas of

underinvestment would be inadequate in the

long run, The choice of policy options is further complicated by the fact that the domestic

steel industry is undergoing a restructuring.

The impact of policy options on this restructuring process requires careful examination.

It is often contended that the steel industry

should not be singled out for Federal help and

that legislation affecting all domestic industry is sufficient. However, steel has a unique

combination of problems and assets, and it

has already been uniquely and adversely affected by many Federal policies. Singling out

the steel industry for a sector policy presents

policymakers with difficult choices and opportunities for several reasons:

● The industry is essential to both the

domestic economy and national security,

but it is contracting and diversifying out

of steelmaking. which can only result in

increased imports.

. The industry’s cost-price squeeze and

capital shortfall are the result of prices

that are too low to provide adequate return on investment, or costs that have

not been kept low enough, or both; of

Federal policies that have led to high

regulatory costs; and of unfairly traded

imports, which have captured a large

share of the domestic market and contributed to artificially low prices.

c There is a nucleus of companies whose

plants are highly competitive in costs

and technology and who could contribute positively to the trade balance by exporting more steel.

●

●

There are many short- and long-term

technological opportunities for strengthening the industry and recapturing the

premier status it once possessed.

The industry has available to it the domestic material resources of iron ore,

coal, and ferrous scrap, and a highly

competent labor force, a large domestic

R&D infrastructure, and a reservoir of

managerial and entrepreneurial talent.

The most critical policy option may be that

of a governmental steel industry sector policy, that is, for a coherent set of specific policies designed to achieve prescribed goals.

The present state of the industry and the

need for critical examination of policy options

are, in large measure, a consequence of a

long series of uncoordinated policies. These

policies have not been properly related to

each other or to a well-considered set of goals

for the industry, goals that satisfy the needs

of both the Nation and the industry. The lack

of a sector policy and the designation of a

lead agency to implement such a policy has

led to policies that often conflict with one

another, create an adversarial relationship

between Government and industry, and fail to

address critical issues. Examples of conflicting policies include: 1) the attempt to have domestic industry use more scrap, which requires capital investment, without providing

realistic capital recovery; 2) the use of the

trigger-price mechanism, which leads to

price increases, while attempting to hold

down prices; and 3) the promotion of energy

conservation, while not allowing continuous

casting to qualify for the energy investment

tax credit.

A recent attempt by the Government to formulate a sector policy for the domestic steel

industry was the report by Anthony M. Solo-
34 Technology and Steel Industry Competitiveness

men, Undersecretary of the Treasury, entitled “A Comprehensive Program for the

Steel Industry, ” which was issued in December 1977. A number of this report’s recommendations materialized, notably the triggerprice mechanism for steel imports, the loan

guarantee program of the Economic Development Administration (EDA) of the Department

of Commerce, and a slight reduction in the

depreciation schedule for new machinery

and equipment (from 18 years to 15 years).

However, the Solomon report paid little attention to issues related to the development and

adoption of new technology, and it formulated

no clear strategy for the future development

of the domestic steel industry. Although it

recognized the problem of providing more

capital for modernization, it made no detailed

analysis of what those modernization needs

were or of what the costs would be. Events of

the past 2 years have shown that the policy

changes stemming from the Solomon report

have not succeeded, even though they were a

promising attempt at a sector policy.

The report was an attempt to deal quickly

with a crisis situation; as such, it contained

little independent analysis of the situation

and it made no recommendation for a centralized coordination of the diverse Government

policies affecting the industry, The agencies

playing dominant roles in steel policy as a result of the Solomon report were the Departments of Commerce and the Treasury, neither

of which concentrated on problems relating

to R&D, innovation, or restructuring. The

establishment of the Tripartite Committee of

industry, labor, and Government, while satisfying a need for better communication, has

not facilitated decisive policymaking in Government, nor has it provided a mechanism for

detailed and independent analyses of critical

issues and options, focused on long-range

problems and opportunities.

At present, a large number of people and

agencies in the Government deal with steel,

but they do not reinforce each other’s work

nor do they provide an accessible source of

expertise and guidance for the industry or facilitate its efficient interaction with the Government. The waste of resources by both Government and industry in dealing with such divided and compartmentalized bureaucracies

is enormous. The preeminence of the Japanese steel industry is in large measure due to

the creation and execution of an effective

steel sector policy. The Federal Government

may seek reasons for the loss of international

competitiveness in the steel industry, but its

own lack of a sector policy also deserves examination.

The chief difficulty in establishing a steel

sector policy is obtaining qualified personnel

who are acceptable to all parties involved,

and who could perform an ongoing analysis of

the industry. There is also the jurisdictional

problem of obtaining sufficient cooperation

between existing agencies and whatever office or agency is assigned the responsibility

for designing and implementing such a policy,

The historically prevalent inattention to technology by both the Federal Government and

industry would have to be addressed. Finally,

there would be a risk that the interests of

large steelmaker would dominate those of

smaller companies, that the benefits of social

regulations would be obscured by their costs,

and that the interests of the steel industry

would overshadow the interests of other industries.

The OTA Study

The overriding theme of OTA’s study of the

steel industry has been how technology enters into both its problems and their solutions.

OTA interprets technology broadly technology includes the specifics of technical knowledge, the means for implementing that knowledge, and the factors that promote or discourage its creation and adoption. Consequently,

technological issues cannot be isolated, This

OTA study deals with related issues, such as

trade, capital allocation, and profitability, to

the extent that they affect technology, Detailed aspects of marketing and pricing have

not been pursued, nor have the details of the

literally thousands of Federal policies, regulations, laws, and agreements that affect the

steel industry. The purpose of the following
Ch. 2—Policy Options ● 3 5

analysis of policy options is thus to deal with

major trends, goals, and alternatives, rather

than to give a detailed, quantitative analysis

of current and future policies. The OTA analysis is more conceptual and strategic than it

is tactical. It presents a framework, based on

analysis, assessment, and forecasts of technology, in which Congress can examine its opportunities and its policy choices with regard ●

to the U.S. steel industry.

A critical methodological feature of the

OTA study is its treatment of domestic steel

industry as three segments, based on a combination of process and product differences,

rather than as a single entity. These segments

are:

●

●

Integrated steel producers, who make

commodity carbon steels with conventional ironmaking and steelmaking technology: iron ore is converted to iron in

blast furnaces using coke; the iron is

then converted into steel in either a basic oxygen, open hearth, or electric furnace. To a limited extent, ferrous scrap

is used with virgin iron in the first two

types of furnace; the electric furnace

uses ferrous scrap exclusively. These

companies also produce a limite d

amount of higher quality, higher priced

alloy/specialty steels.

Nonintegrated steel producers, who primarily make simple carbon steels with

scrap-based electric furnaces. Their

product range is more limited than the

integrated steelmaker; their plant capacities are generally about 10 percent

of the size of integrated operations.

Alloy/specialty steel producers, who primarily use scrap-based electric furnaces to produce relatively small quantities of the highest priced, most technology-intensive steels. Neither they nor nonintegrated producers engage in primary

ironmaking.

Three Scenarios for the Future

OTA has developed three scenarios that

postulate future possibilities for the domestic

steel industry. Summary information on these

scenarios is provided in table 5. The time

frame for each is the next 10 years—there

are too many uncertainties about general

conditions to go beyond that period, except in

the most qualitative terms. Nevertheless,

events in this time period will have implications for the years beyond, and these are also

examined.

Liquidation Scenario

In this scenario, no substantial changes in

Government policy, improvements in industry

profit; profitability, or changes in corporate objectives occur during the next decade. The

trends of the past 5- to l0-year period continue. Faced with low profit levels, many of

the larger steel companies diversify out of

steel making, and capital investment in productive steelmaking facilities declines. * Profit levels themselves signify a decreasing realdollar investment level.

Industry restructuring continues. The integrated steel producers’ share of domestic

production continues to decline, and that of

the more profitable nonintegrated and alloy/

specialty producers expands, depending on

how effectively the new Multilateral Trade

Agreement is enforced.

*The following examples illustrate the trend to diversification. According to Armco’s 1979 Annual Report and public

statements of company officia1s, the percentage of the firm's

net alssets related to steel was 73 percent in 1976 and 62 perrent i n 1979, and will be 49 percent by 1983. Armco has been

the leading large integrated steelmaker using diversification to

improve corporate profits. The Nation’s largest steelmaker,

U.S. Steel Corp., also has been experiencing large losses from

its steelmaking operations; according to its 1979 Annual Report, 37 percent of its invest mens during the past 5 years have

been for expansion and growth of nonsteel businesses. In the

industry's High Investment scenario, 11 percent of total capital

spending is allocated to nonsteel investment.
36 . Technology and Steel Industry Ccompetetiveness

Table 5.—Characteristics of Three Scenarios for the Next 10 Years

of the Steel Industry

Scenario

High

Characteristics Liquidation Renewal Investment

Degree of capital investment . . . . . . . . . . . . .

—-——.

Low” Moderate High

Degree of Government assistance. . . . . . . . Low Moderate High

Need for policy change . . . . . . . . . . . . . . . . . None Moderate High

Investment in R&D . . . . . . . . . . . . . . . . Very low High Uncertain

Capacity change. . . . . . . . . . . . . . . . . . . . . . . . Decrease Moderate Moderate

increase increase

Degree of new technology

Short range (1980-90) . . . . . . . . . . . . . . . . . . . . Low Moderate Moderate

Long range (post-1 990). . . . . . . . Low High Moderate

Furtherance of industry restructuring . . . . . . High High Low

aHigh restructuring means increasing market shares for non Integrated and alloy/specialty steelmaker

SOURCE Off Ice of Technology Assessment

No new Government policies provide direct

or indirect assistance to the industry: no loan

guarantee programs, no revisions in capitalrecovery periods, no substantial change in

import protection, no increase in Federal support of R&D or demonstration projects, and

no great freedom to increase prices to levels

that would raise return on investment in steel

to the all-industry average or provide sufficient capital to allow extensive modernization and capacity expansion.

Only relatively small technological improvements are made, and these are concentrated in the best of existing facilities. Thus,

though capacity would probably decline, remaining capacity steadily improves in technological competitiveness. However, the longterm prospects for creating and adopting major new technology would not be good,

If domestic capacity does not expand significantly and domestic demand grows at

even moderate rates, it is possible that, by the

end of the 1980's, imports could more than

double. Domestic demand could range from

122 million to 132 million tonnes: domestic

shipments might be only 82 million to 91 million tonnes, Steel employment would decline

by about 20 percent, or some 90,000 workers,

from the 1978 level. At 1978 prices ($440/

tonne), the steel trade deficit would rise to

between $14 billion and $22 billion annually,

compared with under $6 billion in 1978. * (By

comparison, the total balance-of-payments

deficit in 1978 was $13,5 billion.) Moreover,

forecasts of world demand and capacity suggest that by the mid- to late 1980’s there will

likely be little overcapacity. Hence, steel imports, if obtainable, could be priced much

higher than domestic steel; past experience in

1973-74 suggests that, in such circumstances,

prices of imports could be 15 to 35 percent

higher than domestic prices.

Although the money not invested in steel

would go to other domestic uses, which would

partially offset steel-related losses in employment, capital investment, and taxes. the net

economic effect of this scenario is unlikely to

be positive. The trade deficit would weaken

the dollar, aggravate inflation, and drain domestic capital; the real increase in steel import prices would add further inflationary

pressures. Since steel employment in older facilities is geographically concentrated, employment substitution would be difficult. Capital would be diverted to manufacturing sectors with lower labor and capital intensity

than steel. Moreover. because capital markets set rates on the expectation of future

events, anticipation of higher trade deficits,

prices, and unemployment. and of steel shortages affecting other domestic industries,

could raise capital market rates and increase

current capital costs.

*All sums in this chapter are expressed in 1978 dollars unless otherwise noted.
Ch. 2—Policy Options ● 3 7

Renewal Scenario*

In this scenario, the level of capital investment for modernization and capacity expansion is sufficient to accommodate a relatively

modest (I.5 percent per year) increase in

domestic steel demand while keeping imports

to 15 percent of domestic consumption (approximately the same tonnage as 1978). Capital investment in productive steelmaking facilities is 50 percent higher than the prior

decade’s annual average (approximately $3

billion per year, versus $2 billion). The capital shortfall for minimum renewal amounts to

at least $600 million per year, which could be

obtained through a number of Federal actions

such as reducing capital recovery time from

the present 15 years to 5 years. A slightly

higher 2-percent-per-year increase in domestic demand, which is possible, could raise the

capital deficit to $1 billion per year. A reduction in depreciation time could also generate

this much additional capital, and other means

of Federal assistance, discussed below, might

be used as well.

Under this scenario, the next 10 years see

the adoption of continuous casting increase

from the present 15 percent to about 50 percent, primarily through the modernization of

old integrated mills and the construction of

additional nonintegrated plants. Production

costs are not reduced sufficiently, relative to

high capital costs, to justify constructing new

integrated plants, The market share for the

nonintegrated companies rises from their

1978 level of 13 percent to as much as 25 percent (an addition of almost 10 million tonnes

of shipments) as they broaden their product

mix, adopt new production equipment, and

*See ch. 10 for an estimate of future capital needs based on

this scenario.

begin using direct reduced iron (DRI) to supplement ferrous scrap (see table 6). This expansion of the nonintegrated segment is contingent, however, on adequate supplies of ferrous scrap and electricity in specific geographical areas.

Domestic steelmaker maintain their market share under the Renewal scenario, and

they improve their technological and cost

competitiveness. Profitability also rises: given

a modest 2-percent reduction in production

costs as a result of modernization and expansion, return on equity should rise from its

1978 level of 7.3 percent to the average level

for all domestic manufacturing industries,

about 12 percent. Although no major new

technology is adopted during the lo-year

period, the domestic steel industry becomes

profitable enough to participate in the development of new technology for the 1990’s; by

that time period, new integrated processes

should reduce production and capital costs

enough to justify building large new integrated plants at a time when the limits for

nonintegrated steel mills are being reached.

Under this scenario, the 1980’s are the decade of growth for the smaller nonintegrated

steelmaker and the 1990’s--with increased

capital investment—the decade for growth of

larger, integrated producers.

High Investment Scenario

AISI recently created a scenario for the

next 10 years that is based on the same assumptions about domestic demand and shipments as the Renewal scenario, ] although its

‘American Iron and Steel Institute, Steel (If the (3wssrwlds:

The American Steel ln(iustr} in the 1980”s, 1980. OTA purposely used the same basic production param[?ters in designing its

Renewal scenario to permit close comparison of the two: both

scenarios are described in det;~il in (h. 10.

Table 6.— How Scenarios Affect Three Industry Segments

Scenario

Liquidation . . . . . . . . . . . . . . . .

Renewal. . . . . . . . . . . .

High Investment, . . . . . . . . . .

—.—.

Industry segment

Integrated Non integrated Alloy/specialty

Very harmful Slightly harmful Uncertain

Beneficial Useful Useful

Very beneficial Useful Useful

SOURCE Off Ice of Technology Assessment
.

38 ● Technology and Steel Industry Competitiveness

modernization and expansion paths differ

considerably. The AISI scenario forecasts a

need for $4.9 billion per year for modernization and expansion, a nearly 150-percent increase over the previous decade’s average

annual spending. The main reasons why AISI

found greater capital requirements than OTA

are: 1) AISI assumed higher unit capital costs

in calculating the total needed for modernizing and increasing the capacity of integrated

plants (nearly as costly as building new

plants), 2) it assumed fewer nonintegrated

plants would be built and at higher cost, and

3) it allocated greater sums to reducing the

average age of facilities.

The capital shortfall in the High Investment scenario is approximately $2,3 billion

per year, assuming no increase in industry

debt or equity and no change in existing capital-recovery rules. The industry would require considerable financial and policy assistance from the Government to meet its capital needs. AISI favors faster capital-recovery periods and marketplace steel pricing;

the combination of price increases and improved capital recovery should give a return

on equity comparable to other domestic industries.*

*The price increase would be at least 10 percent of the 1978

average price per tonne of steel. Such an increase would greatly increase the profits of nonintegrated producers, or allow

them to capture a greater market share with more competitive

prices than integrated producers. More importantly, greater

trade protectionist measures would be necessary to prevent

lower priced foreign steel from entering the domestic market.

The long-term consequences of the High Investment scenario, however—with its greater capital spending level and its emphasis on

replacement and expansion of integrated facilities during the 1980’s—make the adoption

of major new integrated steelmaking technology in the 1990’s less likely than under the

Renewal scenario. The additional $2 billion

per year investment would create enough

new integrated capacity (using present technology) to satisfy future demand without constructing new facilities in the 1990’s. The Renewal scenario, on the other hand, by delaying new integrated construction, ensures that

these facilities will incorporate the newest

technologies when they are built. This conclusion is based on a relatively constant, low

rate of growth in steel demand for the next

several decades; should demand growth be

higher, opportunities for new integrated

plants in the 1990’s would exist under both

scenarios.

The High Investment scenario leads to less

restructuring of the industry than the Renewal scenario. There is no indication that the

market share for nonintegrated companies

(as opposed to the nonintegrated plants of integrated companies) would increase significantly, if at all (see table 6). Should nonintegrated companies fail to expand during the

1980’s, they might do so in the 1990’s, further

discouraging the construction of high-cost

improved-technology integrated facilities.

Implications of the Scenarios for

Congressional and Industry Concerns

The impacts of the three scenarios on the

congressional concerns discussed earlier are

summarized in table 7. The Liquidation scenario fails to deal satisfactorily with most

congressional concerns; all of the adverse

trends that have led to those concerns continue. At best, steel exports might improve

slightly because of the already enacted Multilateral Trade Agreement, which would open

up foreign markets for the alloy/specialty

steels in which U.S. producers have cost and

technological competitiveness. Rising and inflationary steel prices would be stabilized,

consistent with present policy. The impact on

regulatory compliance is uncertain; there is

continuing debate on the benefits of demanding increased compliance, and a congressional role that acknowledges the costs of

compliance might slow the loss of capacity in

the integrated segment.
Ch. 2—Policy Options ● 3 9

Table 7.— How Congressional Concerns Are Affected by Three Scenarios

Congressional concerns

Rising imports . . . . . .

Declining exports . . . . . . . . . . . . . . . . . . . .

Aging facilities . . . . . . . . . . . . . . . . . . . . . . . . .

Decreasing capacity; decreasing employment.

Diversification out of steel making . . . . . . . . . . .

Declining R&D and innovation . . . . . . . . . . . . . .

Rising steel prices—inflation. . . . . . . . . . . . . . .

Increasing compliance with EPA/OSHA

regulations . .

SOURCE Off Ice of Technology Assessment

The Renewal scenario generally deals with

congressional concerns in a satisfactory manner. By improving profitability and encouraging modernization, expansion, and R&D without the need for real-dollar price increases, it

strengthens the industry sufficiently in the

near term to reverse most of the threatening

trends of the past decade.

The High Investment scenario, with two exceptions, also deals with congressional concerns quite satisfactorily. Those two exceptions are continuing diversification out of

steelmaking and rising steel prices. Under the

High Investment scenario, more capital is

planned for diversification than in previous

years. Moreover, the lack of emphasis on

technology and R&D suggests either a weak

long-range commitment to steelmaking, or

shortsightedness. Financing the rather large

annual capital deficits that result from this

scenario’s high spending will require significant price increases, even after the most favorable anticipated reduction in capital-recovery schedules.

——

Scenario — ——

High

Liquidation ——— ——- . —..—Renewal Investment

Worsens Stabilized Stabilized

Improves Improves Improves

slightly

Worsens Improves Greatly

improved

Worsens Improves Improves

Increases May decrease May increase

slightly slightly

Worsens Improves May improve

Uncertain Constant Increases

Uncertain Improves Improves

——

The impacts of the three scenarios on industry needs are summarized in table 8. The

Liquidation scenario meets only one of the

stated industry needs; that is, profitability

would increase for the portion of the industry

that survives the continued contraction, because capital spending would have been focused on the best plants. Long-range profit

ability is less certain. With rising imports and

declining technology and R&D, the integrated

sector can hardly expect to retain its competitiveness or profitability; the nonintegrated

and alloy/specialty companies might remain

reasonably profitable. The argument that

more imports at low prices would benefit consumers and help fight inflation may be

flawed; a variety of factors suggest that major foreign steel production responds more

readily to world market prices than to costs.

The Renewal scenario would satisfy all industry needs, and for the l0-year scenario

period the High Investment scenario would

satisfy them even better. But because of the

combination of higher prices, reduced longTable 8.— How Industry Needs Are Satisfied by Three Scenarios

—

———— Scenario

Industry needs Liquidation Renewal High Investment

Maintain/improve cost competitiveness.

—— ———.——

Worsens Improves Improves greatIy

Increase capacity . . . . . . . . . . . . . . . . Worsens Improves Improves

Modernize existing plants . . . . . Worsens Improves Improves greatly

Increase profitability. . . . . . . . . . . . improves Improves Improves greatIy

SOURCE Off Ice of Technology Assessment
40 ● Technology and Steel Industry Competitiveness

term R&D commitments, and minimal restructuring of the industry, most of the benefits of

the High Investment scenario accrue to the integrated companies. Foreign creation and

adoption of major new steelmaking processes

might well lead, in the long term, to a further

loss of competitiveness and the need for additional Government assistance at a later date.

Major policy options for the Renewal and

High Investment scenarios are summarized in

table 9. Options in each of the policy areas

except pricing (capital formation, R&D, regulations, raw materials, and trade) are discussed and analyzed in detail in the following

section. The policy aspects of the two scenarios differ considerably in the amount of freedom they accord to the industry. The industry

faces a tradeoff between corporate freedom

and supportive Government intervention.

From a national point of view, the social returns on Government investments in the domestic steel industry must be traded off

against industry’s freedom to choose its own

course of action, including asking for interventions it thinks beneficial. The Renewal

scenario, together with its policy options, is

an attempt to channel Government assistance

into those industry segments and technologies

that offer both near- and long-term benefits to

Table 9.—Major Policy Options for Two Scenarios

Policy-are a

Capital information .

R&D . . . . . . . . . . . . . . . . .

EPA/OSHA regulations .

Raw materials . . . . .

Trade . . . . . . . . . . . . . . . .

Steel prices. . . . . . . . . . .

.—.—

Renewal scenario

-

Improve through one or more of the following:

. more rapid capital recovery,

. loan guarantees,

. industrial development bonds,

● investment tax credit,

. subsidized interest loan, or

● emphasize technological rejuvenation of

viable plants.

Increase Government support of basic

research and demonstrate ion of major new

technology. Provide incentives for industry

R&D.

Correlate regulations with industry’s capital

and modernization needs.

Explore the controversial issue of limiting the

export of energy-embodied ferrous scrap.

Examine the feasibility and adverse impacts

of Federal targets for ferrous scrap. Compare targets with alternative mechanisms

such as incentive investment tax credits for

adoption of new technology which uses

more scrap.

Reexamine trade policies. Assess the impact

of unfairly traded steel imports on the industry’s ability to make long-term commitments to and investment in new

technology and additional steelmaking.

Not examined

High Investment scenario

‘–More rapid capital recovery.

Increase Government support of research

and costly pilot demonstration plants.

Regulatory framework be modified to mandate

only those requirements that are

demonstrably necessary to protect public

health, and that can be rationally justified

on a cost-benefit basis.

Let market forces rather than Government

mandate determine international trade.

Need vigorous enforcement of U.S. trade laws

and improved mechanism for keeping import

levels consistent with other nation’s limits.

Trigger-price mechanism should be changed.

Favors International Safeguards Code, use

of OECD Steel Committee, bilateral trade

policies with LDCs and centrally planned

economies, international commodity trade

policy.

Market forces would establish the level of

steel prices, rather than Government price

controls.

—-— SOURCE: Office of Technology Assessment
Ch. 2—Policy Options ● 4 1

the Nation and the industry. It does impose

some constraints on industry—for example,

with regard to diversification out of steelmaking and long-term commitments to R&D—and

these are legitimate issues for discussion. The

dangers of superseding the discipline of the

market are considerable, and the fears that

increasing Government intervention will have

unfavorable impacts on the private sector are

legitimate.

Both the Renewal and High Investment scenarios accept as a basic premise that longstanding market imperfections have caused

underinvestment by the domestic steel industry in capital plant, R&D, and technological

innovation. These market imperfections have

resulted from foreign and domestic Government policies that have affected investments,

costs, and prices.

If the international competitiveness of the

American steel industry is to be markedly improved, Federal policies, which constitute the

socioeconomic environment in which the industry operates, must be comparable with

those of other governments, To be effective,

the policies must also address the totality of

underinvestment. The industry emphasizes

its need for Federal assistance in redressing

underinvestment in capital plant, but OTA

finds an equally great need to deal with underinvestment in technology—in R&D and innovation.

Implications of the

Scenarios for the 1990’s

The Liquidation scenario would probably

make it difficult for the domestic industry to

rejuvenate technologically at the end of the

1980’s. A large degree of its capability for

technology improvement would be lost, particularly the R&D personnel and facilities

needed to originate innovations. Most negatively affected would be integrated steelmaking which is vital for the large-scale processing of iron ore,

The High Investment scenario requires

spending enough capital on existing technology to ensure a relatively modern industry by

the end of the 1980’s. The industry would

then be more efficient and productive by today’s standards, but the real issue is whether

the industry might by then be technologically

obsolete because of newly developed technology, or whether (having already spent so

much on new plants) its opportunities for

adopting new technology in the 1990’s would

have been lost. Only very rapidly rising demand for steel would reverse these adverse

effects,

The Renewal scenario, on the other hand,

sets the stage for a major rejuvenation of the

industry in the 1990’s based on basic innovations in process technology. This would necessitate high capital expenditures in the 1990’s,

particularly for new integrated steelmaking

facilities. There is no guarantee that a radical change in integrated steelmaking will occur. But there are indications that it may, because the seeds of radical change are already

planted.

Basic innovations, which create profoundly

new industrial processes, products, and industries, occur not in a continuous manner

but in clusters.’ Research on coal-based direct reduction (DR), direct one-step steelmaking, and plasma steelmaking suggests that a

radically different way of making steel might

be commercially possible by 1990 (see ch. 6).

Furthermore, major breakthroughs in any of

the several areas of energy production (such

as economical large-scale coal gasification,

magnetohydrodynamics, or even fusion) could

create an opportunity to combine steelmaking

with energy production and gain unprecedented efficiencies.

The risks associated with the Renewal scenario appear to be minimal. Even if no wave

of basic innovations in steelmaking occurs,

the domestic industry should be well positioned for an expansion based on the best

available technology. The ability and readiness to take advantage of new technology in

the 1990’s could lead to a considerable competitive advantage over foreign steel industries. The Japanese and European steel indusG. Mensch. Stalemate in Technology--Innovations Overcome Depression Cambridge Mass.: Ballinger Press, 1979).
42 ● Technology and Steel Industry Competitiveness

tries both have invested heavily in new plants

in recent years; they already have considerable excess capacity as well as poor records

of profitability. Third World steel industries

will likely expand considerably during the

1980’s using current technology; this investment will make it difficult for them to adopt

radically new technology in the 1990’s and it

will be some time before their scientific and

industrial infrastructures actively contribute

to the adoption of basic innovations.

Problems will develop under the Renewal

scenario if demand grows faster than anticipated, if shortages develop in electricity or

ferrous scrap, or if nonintegrated producers

fail to expand their product mix. All of these

would lead to insufficient domestic capacity

during the 1980’s, which would result in the

same negative effects anticipated for the Liquidation scenario.

If the United States is to reap maximum

benefits from basic innovations in steelmaking in the 1990’s, it must participate in their

development during the 1980’s. Adopting innovations developed by foreign steel industries would at best give the domestic industry

technological parity, not technological advantage or leadership. This points to the need to

link economic assistance with efforts to spur

domestic development and early adoption of

basic innovations. Government policies that

fail to encourage technological innovation

and modernization, at least indirectly, would

only be temporary and superficial remedies.

With the moderate capital spending of the

Renewal scenario there would be a need at

the end of the decade for substantial investment in integrated steelmaking plants, particularly for new facilities to replace old plants

which are too costly to modernize. The scenario delays investment in integrated plants

by emphasizing expansion in the nonintegrated segment and by minimizing facility replacement. Although the rate of growth for

nonintegrated mills is the same as for the past

decade, the implementation of this scenario is

contingent on the availability of ferrous scrap

and electricity in specific market areas. Data

on domestic scrap supplies indicate that if

present export tonnages are used domestically and a few million tonnes of DRI becomes

available there should be no major problems,

although the price of scrap might rise substantially. The increased demand for electricity would amount to less than 1 percent of

current domestic industrial usage; spread

over a number of plantsites during a l0-year

period, with some concentration in the South

and Southwest, this is unlikely to be a major

barrier to nonintegrated growth, except for

firms in the industrialized areas of the Northeast and Midwest.

The Renewal scenario is linked to a coordinated set of policies encouraging R&D and

capital formation. AISI’s High Investment

scenario gives less weight to remedying current deficiencies in R&D efforts; its economic

scenario runs linearly for 25 years, apparently without emphasizing the creation or adoption of profoundly new technology during that

period. The executive summary of the AISI

policy report does not mention R&D; its three

requests for Government action do not include R&D; increased Federal R&D assistance is discussed in three pages of an appendix.

Overview of Possible Policy Options

Steel’s competitive problems are primarily try’s competitiveness. These options are

in the areas of technological innovation, cap- aimed at:

ital formation, regulatory compliance, raw

materials, and international trade. The fol- . increasing R&D and innovation,

lowing sections discuss policy options that ● encouraging pilot- and demonstrationcould be instrumental in improving the indus- plant testing of new technologies,
Ch. 2—Policy Options ● 4 3

●

●

●

●

facilitating capital formation,

reducing the adverse economic costs of

regulatory compliance,

improving the availability of scrap, and

constraining steel imports and facilitating certain exports.

R&D and Innovation Activities

Investment in R&D and innovation activities in steelmaking would be stimulated by

the following Federal policy options:

●

●

●

●

●

increased support of basic research,

increased support of large-scale demonstration projects for new technologies,

changes in antitrust policies to permit

greater industry cooperation in applied

R&D activities,

improved coordination of existing Federal programs with industry needs, and

change in tax laws to provide an incentive for industry R&D. -

All available data show that the amount of

funding for basic research in steelmaking is

very low, The industry itself spends very little

on basic research, just 7 percent of its total

R&D budget, which itself is a very low fraction of sales compared to the R&D spending of

other domestic industries. However, the industry’s R&D spending as a percent of profits

is relatively high. Federal support of basic

research also appears minimal, not only in industry but in the academic sector and in Government laboratories; total annual spending

on basic steelmaking research by all sectors

is probably less than $5 million. The factors

that have led to the generally low levels of

basic research are discussed in chapter 9.

A bill has been introduced (H.R. 5881, the

Basic Research Revitalization Act) to provide

a tax incentive for basic research sponsored

by industry and carried out in the academic

sector. The Act provides a tax credit for 25

percent of the amount contributed in cash to

a basic research reserve, with the maximum

credit limited to 5 percent of the taxpayer’s

business income. An income deduction is allowed for payment from the reserve. This Act

could provide approximately $50 million per

year for basic research for the steel industry,

a tenfold increase over present spending.

There has been little public discussion of the

Act’s potential utilization by industry or problems with implementing it, but it is a good example of a creative policy approach to a critical problem.

The option of providing the steel industry

with an incentive to carry out its own R&D activities also merits examination. One approach would be to increase investment tax

credits for R&D facilities; another would be to

allow rapid depreciation of such investments;

both could be contingent on the activities being steel-related, Because the level of steel

R&D is so low, even substantial increases in

R&D activities would cause a relatively minor

loss of tax revenues.

Federally Sponsored Research Centers

It is widely accepted that the Federal Government is justified in correcting privatesector underinvestment in basic research,

and OTA finds ample evidence that basic research in steelmaking could have substantial

benefits in the long term. A feasible and attractive option would be the creation of federally sponsored research centers at universities. Such centers should have close working

relationships with industry to ensure that research leads to results that are useful. Added

benefits would be university/industry personnel exchanges and the maintenance of an

adequate academic base for training technical personnel for industry (both are important manpower benefits—see ch. 12). Industry could help support such centers, although

most of the funds would likely have to come

from Government; funding for each such center would be $1 million to $3 million annually.

Several such centers could be designed

around specific technologies such as integrated or nonintegrated steelmaking processes, the use of low-grade coals, and the use

of new energy forms. The National Science

Foundation is already well organized to pursue such activities: it has sponsored a planning grant for a center dealing with research

in nonintegrated steelmaking, although in this
44 Technology and Steel Industry Competitiveness

case the center appears oriented toward applied research.

Pilot and Demonstration Plants

Because of the scale of steelmaking and its

reliance on well-established technologies, the

need for pilot-plant demonstration of new

technologies is great, In recognition of the industry’s limited profits and its underinvestment in demonstrations, the Federal Government could provide more funds than the small

sums it now devotes to such activities. Further, the present focus of demonstration support is energy conservation, only one of many

industry needs; other worthy goals include

shifting to different resources, reducing capital costs, reducing pollution, improving labor

productivity, and using new forms of energy

generation.

Although direct grants for demonstration

purposes are an accepted means of support,

other options should also be considered. Some

of these options might help to minimize the

Government’s role in deciding which technologies to support. For example, where Government funds the demonstration directly, an alternative especially important for small firms

would be buyback arrangements for the recovery of Federal costs after the technology is

proven.

Changes in patent and antitrust policies

might also effectively promote demonstration

projects. Although progress has been made in

patent and licensing arrangements between

the Government and industry, such arrangements still appear to involve confusion and

bureaucratic delays. There is little doubt that

industry expects to obtain some form of proprietary ownership or advantage to justify its

cosponsorship or use of personnel in such

demonstration projects. By promoting licensing, the Government can deal with the objection that Federal assistance can lead to unfair competitive advantage for some companies.

Large demonstration projects are extremely expensive, and it is difficult for any one

company to justify an investment of that size

and nature. In some cases, a joint industry effort might eliminate the need for direct Federal support, but the legality of joint participation by several companies needs clarification

with respect to antitrust regulations. The antitrust issue also applies to the feasibility of

joint industry efforts in traditional R&D activities: there are a number of areas, such as energy conservation and pollution abatement, in

which the social returns would be sufficient

to sanction joint efforts that would not be particularly anticompetitive.

Other Federal Options

There are opportunities for the Government to coordinate existing Federal R&D and

demonstration programs more closely with

the needs of the domestic steel industry.

Large sums are now being allocated to a number of energy-related technologies without

much apparent attention to their possible application to steelmaking. For example, Federal activities in coal gasification and synfuels

could be examined for their ability to supply

the necessary technology for providing gaseous reductant fuels for direct reduction of

iron ore. Similarly, a systems approach to the

combination of steelmaking with energy generation could lead to low capital costs and

high efficiencies.

There also appears to have been inadequate examination of the potential ways in

which Bureau of Mines facilities, formerly

used for research in steelmaking, could be

resurrected for R&D activities and possibly

used for pilot plants as well. The apparent

policy shift away from joint industry/Government work and the present Bureau policy of

not performing ironmaking and steelmaking

investigations appear to preclude using this

means to assist in the modernization of the

domestic steel industry. * ——-. —

*"One example of the lethargy of the steel industry toward

R&D is last April’s shutdown of the experimental blast furnace

at Bruceton, Pa., a cooperative venture involving the Bureau of

Mines , and a consortium of private steel companies organized

as Blast Furnace Research, a nonprofit corporation. This furnace had been responsible for most of the developments in ironmaking in recent years. In the 4 years of its existence, it was

credited with saving the iron industry some $350 million per
Ch. 2—Policy Options ● 45

Scenario Differences

The Liquidation scenario would maintain

the current low levels of Government and industry support for R&D and demonstration

plants. The most likely consequence of this

policy would be further loss of technological

and cost competitiveness for the domestic

steel industry. Both the Renewal and High Investment scenarios would support more pilot

and demonstration testing of new technologies. The High Investment scenario does not

differentiate between basic and applied research, nor does it specifically consider R&D

policies. The Renewal scenario emphasizes

near-term basic research to support longterm innovation, with greater Government

support for R&D. The Renewal scenario also

sees a need for policies to support more industry R&D, coordinated with policies affecting capital formation and trade.

Capital Formation

Four Federal policy changes could increase capital formation in the domestic steel

industry without sanctioning significant price

increases:

c reduced capital-recovery periods (accelerated depreciation),

● investment tax credits,

● loan guarantees, and

● subsidized interest loans, including industrial revenue bonds.

Summary information on these four approaches is given in table 10.

Faster Capital Recovery

Accelerated depreciation continues to receive the greatest amount of attention from

both the steel industry and Congress. The

Jones-Conable Capital Cost Recovery Act of

1979 (H. R. 4646) typifies the interest in reducing capital-recovery times for all industry. If

enacted, this proposal would allow steelmaking machinery and equipment to be depreciated over 5 years instead of the present 15.

Because the Act applies to all industries,

however, its cost to the Federal Government

in lost tax revenues would likely be very high.

The administration has forecast a net revenue loss of $35 billion annually by 1984,

Table 10. —Features of Four Federal Options for Increasing Capital Formation in the Domestic Steel Industry

Federal option

Accelerated depreciation

Jones-Conabl e

Certificate of necessity

Investrnent tax credit

Increase capacilty

Modernization

Innovation

Loan guarantee

Increase capacit y

Modernization

Innovatio n

Subsidized interest loan

Increase capacity

Modernization

Innovation

SOURCE: Office fo Technology Assessment

Governmen t

cos t

High

Moderate

Moderate

Moderate

Moderate

Sligh t

Sligh t

Moderat e

Sligh t

Sligh t

Sligh t

Administratlv e

burde n

Low

L o w

Low

Low

High

Moderat e

Moderat e

Hig h

Moderat e

Moderat e

Hig h

Bias against

small firms

Yes

Yes

No

Yes

No

Yes

Yes

Yes

No

Yes

No

Promotion o f Applies t o

new technolog y steelmaking onI y

No No

No Yes

No Yes

No Yes

Yes Yes

Yes Yes

Yes Yes

Yes Yes

No Yes

No Yes

Yes Yes
46 ● Technology and Steel Industry Competitiveness

which would rise until 1988 and then stabilize, assuming the measure takes effect in

1980. ‘

The administration forecasts that by 1984

Jones-Conable would give the steel industry a

tax saving of around 16 percent of projected

investment, or some $1 billion for a projected

investment of $6.7 billion per year, 4 a level

corresponding to that of the High Investment

scenario. Based on the Renewal scenario investment of $3 billion per year on productive

steelmaking, the tax saving would amount to

approximately $500 million in 1984, but presumably would rise thereafter. Thus, the level of capital-recovery increase accomplished

through the reduction in depreciation time

from 15 to 5 years is almost the same as the

$600 million per year capital deficit projected

in the Renewal scenario.

The Jones-Conable Act has the advantage

of creating a relatively low administrative

burden, but it can be criticized on several

other grounds, One is that this approach does

not promote investment in truly new, highrisk technology. Another is that it does not

take into account the idiosyncrasies of any

particular industry. For example, this general approach to improving capital formation is

biased in favor of the large integrated steelmaker and against the smaller nonintegrated producers, The integrated companies

already have a large capital base and could

direct a large amount toward modernizing

their facilities. Though they are less profitable than many small companies, they have

larger absolute profits against which the increased tax offset can be applied, For smaller

companies, with smaller capital and profit

bases, the increased capital recovery cannot

offset enough taxes for the large investment

“1’[?slimt)ny of G. Willi{~m hfillcr, Sf?creliirv of th[? ‘1’rwlsury,

Iwf{)rc the Sutxomrnit tcc 011 ‘1’~ix{~li[)n an(i Wh[ Nf;inagem(?nt of

11](? St?n{]tc F’in:)n((? (;(~mmit 1(?(:, ()(:1. 22, 1979. ‘1’he loss is [] fler

/in i] ssumd fc[dbil (’k cffc( I t hv w h i(’h some 30 permm t () f the

st:l t i(’ r[:vcnuc 10ss is t u rn(?d in I {) ;ldd i t ion;] 1 ttl x rx?m!ipts [)s :1 resul t of I ho (x>on{]m i(’ [? x p:) nsion induu?d hy ! he t:) x rt?du(:t ions.

‘j{)r~(:s-(;on:lt)lc; (J{)uld Ic:]d to even ~rc~itt?r ttlx s:]vings. (Jsing

the 5-vt!iI r wril(v)f[ for e(luipmcnt on [In ;l((x;lcri] led tx]sis,

coupled wi I h I he c1 ist ing 1 O-percent investrnen t t;] x (Ir[?dit,

w [ju 1( I Icii(t to g rc{i t [:r It] R s; I v ings I hti n i f the e(lu ipmen t kvcrc

t:xp(?ns(xi in th[’ first v[~i] r. (Irorl Age. Nov. 12, 1979, p. 30. )

needed for a rapid rate of growth. That is, in

a high-growth situation profits lag behind

capital investment, and thus the faster depreciation cannot be fully utilized when it becomes available. Accelerated depreciation is

biased in favor of a linear rate of capital investment growth. Furthermore, many large

steel companies have nonsteel business that

is more profitable than steelmaking, so they

can write off more profits than smaller, less

diversified companies. An indirect, but very

substantial, benefit for the steel industry of a

general reduction in capital-recovery schedules would be the overall national increase in

capital spending. Nearly two-thirds of steel

use is for capital projects, so domestic demand for steel should be boosted.

An alternate accelerated-depreciation option would be to use a limited-term approach

that would apply to steelmaking investment

only. This corresponds to the existing certficate-of-necessity reduction in capital-recovery periods during times of national emergency. This would place a limit, perhaps 10

years, on the time for taking advantage of accelerated depreciation, and it would pertain

to steelmaking investment only. This option

would have the same built-in bias against

small steel companies, and it would not specifically promote investment in innovative

technology, Applied to a particularly troubled

industry like steel, however, it could make a

large difference in profitability in the long

run. Hence, the long-term costs to the Government would be low, because it would more

than recoup in additional taxes whatever the

measure had cost in initial tax losses,

A third option for accelerated depreciation

would be to apply it to certain types of investment in steelmaking, Admittedly, this increases the administrative burden and influences the industry’s freedom of choice. Nevertheless, criteria could be established for investment objectives such as capacity expansion or the adoption of innovative technology,

energy-saving technology, and technology

making greater use of abundant domestic

resources.
Ch. 2—Policy OptIons ● 4 7

Investment Tax Credits

Investment tax credits are another tax approach to increasing capital formation, General investment tax credits have proven effective in raising the Nation’s investment

rate, and more narrowly focused tax credits

have also been recognized as a useful means

to accomplish specific aims like conserving

energy. For the steel industry, several types

of investment tax credits are possible, including credits for increasing capacity, modernizing facilities, or introducing innovative

technology (see table 10). Focused tax credits

would cost the Government less than general

ones.

Clearly, the innovation option could be

used to promote investment in new technology, although defining such activities would

be a substantial administrative burden. A

greater credit might be offered for high-risk

innovative activities. The modernization option would be more advantageous to large integrated companies than to smaller companies with a smaller capital base, but credits

for capacity increases and adoption of innovative technology would be less biased

against sma11 companies than the accelera ted-depreciation option. Under current procedures, however, credits cannot be taken

until the investment project operates, so it

could still be difficult for companies with high

debt-to-equity ratios to obtain capital.

A further advantage of tax credits over

accelerated depreciation is that they could

more easily be designed to accomplish the

specific goals Congress deems most relevant

to improving capital formation in the steel industry: however, they would be more difficult

to administer. Industry clearly prefers the

Jones-Conable approach, which provides

maximum flexibility to industry to use additional capital for whatever purposes it

chooses, Companies could even choose to diversify out of steelmaking and realize a tax

advantage from diversification.

Guaranteed Loans

The third major option for increasing capital formation in the steel industry is the loan

guarantee. Unlike tax approaches, which

shift revenues from the Government back to

the private sector and have little advantage

for low-profit industries, loan guarantees

place the burden of capital supply on the

private money market and better meet the

needs of less profitable companies. Moreover, a loan guarantee enables companies

who would otherwise have trouble obtaining

reasonable loans, if any at all, to borrow

capital at low interest rates. In this respect, it

favors the less profitable steel companies

over more profitable ones; in the context of

steel, that would amount to a bias against the

small, profitable nonintegrated and alloy/specialty companies.

The costs to the Government of a loan guarantee are slight (assuming no defaults), because borrowers pay a small interest fee to

the Government. Loan guarantees can easily

be designed to apply to steelmaking only and,

defined in terms of specific objectives, could

be aimed at the objects of particular congressional concern. Even nonspecific industry

loans would promote the introduction of innovative technologies, however, because the

Government shares the risk of failure.

EDA Special Steel Program.—The administration established a loan guarantee program

for the steel industry in 1977, under EDA of

the Department of Commerce. This program,

which is just now ending, did not focus on the

adoption and development of new technologies, and it has been criticized by a number of

steelmaker because of its orientation toward

helping unsuccessful companies.

The EDA special steel program was established in response to recommendations by the

1977 Interagency Steel Task Force. Its purpose is to help improve the efficiency and

competitiveness of financially troubled steel

companies. The task force stated that:

The use of EDA loan guarantees (would be)

the simplest and most direct way to assure

that viable modernization projects of (eligi-
48 Technology and Steel Industry Competltlveness

ble) firms actually receive the funds necessary for their completion. f

The program has no mandate to promote innovative technology; its primary objective is

to stabilize or increase employment levels in

certain designated areas, *

The EDA program represents a substantial

amount of Government assistance. Nevertheless, its funding level of slightly more than

$500 million is modest compared to steel industry capital investment needs. At the present time, the Department of Commerce has no

plans to extend or expand the EDA steel loan

guarantee program: to do so would require a

specific budget request and congressional appropriation, and no such special request was

included in the administration’s proposed

budget.

During its year of operation, the special

steel program has had mixed results. Implementation has been slow, in part because of

industry concerns about the program’s possible anticompetitive effects in the marketplace. Section 702 of the Public Works and

Economic Development Act prohibits EDA

from providing assistance to companies if

that assistance might lead to unfair competition in the marketplace. Unfair competition

could be brought about if Government-supported corporate investments in new technologies gave the assisted firms an undue cost or

price advantage, As a result, the program has

not encouraged industry to adopt innovative

technologies: instead, it has emphasized pollution control equipment and incremental improvements in existing facilities and conventional technologies.

On the whole, the program can be best described as one of tradition-oriented renewal

‘Intcr[]gency Task F[)rcc, ~c~)ort to the Presi(ien t: A (;(mpr[~-

hrns]ve Pr(~gram for the Stw~l ]nd[lstry. 1977, p. 12.

*’I’ht; program gu:]rt]nt[?cs I():]ns nnd leases fln;lnced bv priv{) te lending institutions i) t f;ivornble int(?rest rt+tes to SIC 3312

firms ulth f:i(ilities hi]vlng ;]n [~nnual production (:iparltv of at

1(’:~st 225,000 tonnes of raw steel. I’he minimum capacitv rc?-

qu i remen t e] im intl t(’s :i numtwr of min imllls. I!] igible firms hai’e

to l)t~ 1[)(’[i ted in rcd[?v(?lopmt?nt a re;ls with [In un(?mplo}rnent

r{l tc of ~1 t 1(:, ist 6 p(?rr[?nt, or In spe(’i:]l imp[i(t ,~ re[+s havin~

(!I t her substantial unemployment iw :]n i](’tui~ I or thren tened

iibrupt rise in un(’mpl[)ym[?nt du[? to the cl(wing or curt: ]ilm[>nt

of,} malor sourf’[? [)f (?mplo~”m(?nt. [ 1,) (;F’R pt~rts .10’2-304, )

aimed at responding to contemporary economic and environmental problems. This

should come as no surprise. The umbrella Office for Business Development Assistance,

itself, does not have a “modernization’” mandate. Furthermore, the Interagency Steel

Task Force recommendations, and particularly the implementing guidelines, make it

quite clear that genuine modernization can

never play more than a limited role in the

special steel program.

Loan Guarantees—A Summary.—It would

be desirable to examine the benefits of a limited-term loan guarantee program that would

require: 1) evidence of the company’s inability to raise capital through any conventional

means, including new stock issues; 2) a degree of risk and innovation that is proportional to relative profitability, so that successful firms would be encouraged to develop

risky, long-range, major innovations, while

still allowing the less profitable firms to share

in the Federal assistance program; and 3)

commitments to delay diversification out of

steelmaking until companies meet certain mutually agreed-on objectives for such factors

as capacity, productivity, energy use, or pollution abatement. This approach, though

complex, would least disturb the relative

competitiveness of domestic companies,

while providing a means of restoring domestic steelmaking capacity and technological

leadership compared to foreign industries.

Subsidized Interest Loans

The fourth major option for increasing capital formation is the use of subsidized interest

loans, including industrial development

bonds, which could be designed for specific

purposes. Like loan guarantees, this approach places the financing burden on the

private money market and costs the Government a relatively modest amount. Here too, to

the extent that this approach increases the

borrowing ability of unprofitable companies,

it is biased against those that are profitable

or have not reached a debt-to-equity ratio private lenders consider the upper limit for borrowing,
Ch. 2—Policy Options ● 4 9

Considering the level of capital shortfall

under the Renewal and High Investment scenarios, loan guarantees or subsidized interest

loans might not be well received by the private financial sector. The increased burden

on the private money market could be inflationary. However, the same argument can be

made for accelerated depreciation and investment tax credits, which lead to reduced

Government revenues and, under the assumption of unaffected Government spending levels, increased Government borrowing. Loan

guarantees and subsidized loans bypass the

normal budget process, because they are not

expenditures and do not cause losses in tax

revenues.

Summary of Capital Formation Options

In summary, all four of these approaches

to improve capital formation within the domestic steel industry involve costs and benefits. Quantifying them for the near and long

terms would require considerable analysis.

Qualitatively, OTA finds that focused investment tax credits, or accelerated depreciation

for capacity expansion and technological innovation, or risk-related loan guarantees

could be used to raise the capital called for in

the Renewal scenario. The additional capital

required by the High Investment scenario

would have been raised through steel price

increases. There is a minimal risk in these options that capital will be used for purposes

that would not address congressional concerns and that would have adverse impacts

on small steel companies. The costs and difficulties of administering focused Federal assistance would be significant, but not insurmountable. Helping already healthy companies is best done through tax relief programs,

The near-term direct costs of any of these

programs would likely be offset by increased

tax revenues after the rejuvenation of the domestic industry.

Scenario Differences

The Liquidation scenario would extend

present policies and capital spending on productive steelmaking facilities would continue

to decline, which would lead to further loss of

capacity and increased obsolescence of facilities, The High Investment scenario is based

on obtaining the benefits of the accelerated

depreciation for facilities and a substantial

increase in steel prices in order to maximize

near-term investment in current technology.

The Renewal scenario is dependent on policy

changes that would generate at least $600

million annually; it considers a number of

policy options that could accomplish this goal,

but would be best accomplished by those options that assist modernization and expansion

of steelmaker that are profitable. The Renewal scenario also favors policy changes

that promote technological innovation in the

long term and relatively low investment in

current technology in the near term.

Regulatory Compliance Costs

The steel industry is one of the largest

sources of pollution in the Nation, with the integrated steelmaker accounting for close to

one-fifth of all domestic industrial pollution.

The industry also has very high rates of occupational injury and illness. The harmful

and toxic emissions of steel plants are a

greater hazard for steelworkers than the general population. Consequently, the Federal

and State governments have created a number of regulations to protect both workers

and the public. There can be no argument

against the goals of reducing environmental

pollution and occupational risks; however,

the impact of these regulations on the creation and adoption of new technology merits

examination. Regulations can act as either a

barrier or an incentive to innovation, While

industry has tended to emphasize the barrier

effect, there are opportunities for the regulations to serve as incentives for technological

innovation. Because of the nature of this

study, the impact of regulations on the steel

industry has been emphasized; but this does

not mean that the impact of pollution on workers and the general public is thought unimportant.

Complying with Federal environmental

and, to a lesser extent, occupational hazard
50 . Technology and Steel Industry Competitveness

regulations has imposed additional capital

and operating cost demands on the steel industry. These promise to increase because of

more stringent requirements that will become

effective during the coming years. Furthermore, EPA is in the process of reviewing Ambient Air Quality Standards and steel industry effluent guidelines, And finally, the number of EPA and OSHA regulations applicable

to the steel industry is steadily increasing.

States and regions have some flexibility in

considering economic and technical constraints facing individual steel plants. However, industrywide changes would require

Federal action, The trend of increasing regulatory costs may be halted or reversed

through changes in regulatory policies or

through increased Federal support of steel industry efforts to meet current standards. In

addition to reducing the regulatory costs,

some available options could also foster replacement or expansion of steel capacity, The

major options for changes in regulatory

policies are:

●

●

●

●

●

●

●

●

congressional endorsement of the “bubble concept, ” which allows air quality

control on a plant rather than a point-bypoint basis:

more even distribution among different

industries of the cost of offset policy

tradeoff requirements;

relaxation of the limited-life facilities

policy for plants owned by companies

committed to replacing facilities or

otherwise providing for regional economic growth:

relaxation of fugitive air emissions requirements;

use of administrative penalty payments

for environmental technology R&D fund;

improved coordination of OSHA compliance deadline when a company is considering innovation;

improved coordination of EPA innovation waivers; and

cost-benefit analysis of major proposed

regulations.

The major options for increased Federal support

●

●

●

●

●

are:

additional acceleration of the depreciation schedule for pollution abatement

equipment;*

increased investment tax credit for pollution abatement equipment;

loan guarantees, provided on a continuing basis;

extension of industrial development

bonds to cover in-process changes; and

increased regulatory technology R&D

and demonstration.

Regulatory Change

Regulatory cost impacts would be reduced

under both sets of options, but changing enforcement approaches would not affect direct Federal costs. A few of the changes

could also promote new regulatory technologies or facilitate replacement or modernization (table 11). Small integrated companies

would benefit from such policy changes more

than other industry segments.

Congressional endorsement of the bubble

concept, which allows pollution offsets within

a plant, would improve EPA’s ability to apply

this approach across the board to existing

and replacement facilities. By varying the

degree of control with the costs involved for

individual point sources while still attaining

air performance standards on a plant basis,

companies could reduce their compliance

costs by 5 to 20 percent (see ch. 11). However,

the tradeoff between more and less hazardous pollutants within a bubble area requires

assessment.

The offset policy requires that companies

adding new, polluting plant capacity in a

given geographical area offset that addition

to the area’s pollution by reducing pollution

from another facility in the same area. Because of the steel industry’s complex industri-

*Suggestions also have been made to eliminate the sales tax

on pollution abatement equipment. Such changes would have to

be made at the State level.
Ch. 2—Policy Options . 51

Table 11.— Regulatory Change: Policy Options and Consequences

Regulatory change

Bubble concept

Distributing cost of tradeoff

requirements (offset policy)

Extension of limited-life facilities

policy while replacing steel

facilities or otherwise providing

for regional economic growth

Fugitive emissions

Use of administrative penalty

payments for environmental

technology R&D fund

Improved coordination of OSHA

compliance deadlines

Improved coordination of EPA

innovation waivers

Cost/benefit analysis

NA - not applicable

—.

Promotion of

Social impacta

new technology

Modest

None; increased equity among

expanding firms in

nonattainment areas

Modest; at least partially offset

by strengthening regional

economy

High

None, but goal change in favor

of R&D

Modest

Modest

Varies with cost-benefit

tradeoff

Yes

No

Yes

No

Yes

Yes, if given as

condition for

extended

deadlines

Yes

No

Regulatory

cost impact

Reduction

Reduct

Reduct

ion

ion

Slow down

growth rate

Transfer of costs

None

None

Potentia l

reductio n

Capacity

FaciIitates

replacement

Facilitates

expansion

Replacement/

expansion

NA

NA

NA

NA

NA

aSocial impact is defined as Increased environmental degradation or occupational risk resulting from regulatory relaxation

SOURCE Off Ice of Technology Assessment

al processes, it has paid a disproportionately

high price (compared to many other industries) for economic growth and capacity expansion in industrialized areas. Redistributing the “purchase cost” of emission offsets

could help improve the steel industry’s unfavorable compliance cost position. The Department of Energy’s (DOE) energy entitlement

program, aimed at equalizing the cost of expensive imported oil among domestic refiners, is one approach that could be considered.

The limited-life facilities policy

phaseout of marginal facilities by

less they have been retrofitted

ment equipment. Relaxation of

calls for the

1982-83 unwith abatethis policy

would enable steel companies to benefit from

an extended period of continued operation.

This approach could coupled with replacement, modernization, and expansion programs, perhaps at other plants.

Relaxation of fugitive air emission standards regulating conventional pollutants from

steel plants would help slow down anticipated increases in compliance costs (see ch.

11), Such relaxation could put undue pressure on regional air quality, however, and inhibit economic growth potential as a result.

Relaxation of standards or compliance dates

could be especially problematic in heavily

polluted regions of the country.

Administrative penalty payments made by

the steel industry for noncompliance with environmental regulations are presently received by the U.S. Treasury. These funds

could be used for public- or private-sector

regulatory technology RD&D in presently underfunded fields such as research on innovative process or control technologies capable

of improved protection or regulatory cost reduction.

OSHA compliance schedules and deadlines

lack uniformity and are inconsistent in their
52 . Technology and Steel Industry Competitiveness

consideration of industry economics and

technology development. EPA innovation

waivers for air and water also lack uniformity. Improved coordination could encourage

the industry to make use of innovation waivers and technology development provisions.

A cost-benefit requirement for major regulatory policies could help clarify the tradeoff

between the economic costs and the social

benefits by placing the economic impacts in a

broader social framework, To the extent that

it is difficult to quantify the social benefits of

regulations, such an approach may not be

feasible.

Increased Federal Support

Some options, if applied without any accompanying regulatory relaxation, would increase Federal costs in varying degrees. Regulatory costs would be reduced in all cases,

and new regulatory technologies would be

promoted in a few cases (table 12), Capacity

would not be affected by any of these policy

options, except to the degree that they improve capital formation. These options would

indirectly tend to benefit small integrated

companies more than any other industry segment because of those companies’ proportionately greater regulatory costs.

Industrial development revenue bond (IDB)

financing is presently a more attractive option for pollution abatement equipment than

is the use of available fiscal incentives. IDB

financing makes large sums of capital available to industry at relatively low cost to the

Treasury. Thus, one option would be to expand the scope of IDB financing to include

specifically the financing of in-process

changes for environmental compliance purposes whether or not there are cost savings.

However, increased use of IDBs would increase pressure on the municipal bond market, which could inhibit capital projects for

local governments.

As an alternative, some IDB financing

could be replaced by a continuing flow of federally guaranteed loans or by more effective

fiscal incentives. Fiscal incentives could include allowing higher investment tax credits

for regulatory investments (currently 10 percent) or further reducing the accelerated depreciation schedule for regulatory compliance equipment (from the present 5 years to

perhaps 1 year). Fiscal options would likely

entail higher Federal costs than either increased IDB or federally guaranteed loan financing.

RD&D of innovative regulatory technologies and cleaner steelmaking technologies are

not receiving sufficient public- and privatesector support. Consideration should be given

to a strengthened program to increase direct

Federal cost-sharing support of regulatory

technology RD&D not readily undertaken by

the steel industry.

Scenario Differences

The Liquidation scenario assumes a continuation of current policies—continued strict

enforcement of existing laws and standards.

The likely effect would be a moderate increase in capital spending and production

costs related to EPA and OSHA regulations,

which would influence the profitability of domestic steelmaker. For those firms with

older, inefficient facilities, this could contribTable 12.—increased Federal Support for Regulatory Compliance and R&D: Policy Options and Consequences

—

Promotion of

Increased Federal support Federal cost new technology Regulatory cost impacts —

Improved accelerated depreciation High No, unless specified Reduction

Increased investment tax credit Modest No, unless specified Reduction

Loan guarantees Modest No Reduction

Extend IDB coverage for regulatory equipment Modest. pressure o n Y e s Improves capita l

to in-process change municipal bond markets availability y

Increased Federal regulatory technology R&D Modest Yes Reduction

SOURCE: Office of Technology Assessment
Ch. 2—Policy Options 53

ute to plant closings and a further loss of domestic capacity. The High Investment and Renewal scenarios both make use of the costbenefit approach to determine the extent to

which the social goals of EPA and OSHA regulations are also consistent with the goals

and needs of industry modernization and expansion. The Renewal scenario provides a

more thorough examination of policy options

that would reconcile industry and national

needs, with particular attention to the need to

promote technology change and innovation

leading to cleaner steelmaking technologies.

Raw Materials

Potential future shortages of coke and ferrous scrap have raised the general problem

of inadequate data and analysis of such supply problems. In the cases of coke and scrap,

the Government has had to rely on limited

data from different segments of industry. Because of differing interests in the problem,

there are contradictory findings concerning

future domestic supplies. This uncertainty is

acting as an incentive for the development of

DR and other technologies. Existing legislation relating to ferrous scrap affects both demand and supply, but not necessarily in a

cons is tent manner.

Scrap Use

On the demand side, two legislative acts

have been passed that attempt to maximize

the use of scrap and other waste sources of

iron genera ted in steel plants. The requirements of the two acts may he summarized as

follows:

● Section 461 of the National Energy Conscrvation Policy Act (Public Law 95-619)

of 1978 mandates that DOE set targets

for the use of recovered materials for

the entire ferrous industry —ironmakers

and steelmaker, foundries, and ferroalloy producers. Such targets, now set,

are voluntary, but steel producers are

concerned that they might become mandatory.

● Section 6002 of the Resource Conservation and Recovery Act (Public Law 94-

580) of 1976 amends the Solid Waste

Disposal Act and deals with Government

procurement, It requires that Government procuring agencies shall procure

items composed of the highest percentage of recovered materials practicable,

and it instructs the EPA Administrator

to promulgate guidelines for the use of

procuring agencies in carrying out this

requirement. It also requires suppliers

to the Government to certify the percentage of recovered materials used in the

items sold. As yet, EPA has not set these

guidelines, nor has it proposed a schedule.

Although instigated by the scrap industry,

these acts have satisfied neither scrap users

nor suppliers, Users believe that targets or

guidelines for scrap use do not make economic or technical sense on an industrywide basis, and suppliers believe that the Government targets have been too conservative.

OTA finds both are correct.

Although it is in the national interest to

maximize the use of recovered materials in

order to save energy, the setting of scrap-use

targets or guidelines presents a number of

problems; it may not be technically or economically feasible in all cases to use recovered materials to the extent suggested or required by the Government. There has been no

apparent recognition by DOE and EPA of the

differences between steel industry segments

and the unique constraints and opportunities

they have in regard to scrap use. Another

problem is that a numerical target rests on

many assumptions about future scrap availability and use, as well as total steel demand

and changes in technology, all of which are

highly controversial in themselves.

Targets could, in fact, be counterproductive to the original goals of maximizing recovered materials use and saving energy, ‘Unrealistic targets could be circumvented, for example, by companies selling their home scrap

to others and purchasing other firms’ home

scrap.* If targets and guidelines increase de- — .—. — * This could be a paper transaction unless prohibited by the 

target legislation since physical transport of scrap would be

costly in most cases. See ch. 7 for a full discussion of future

supply, demand, and uses of scrap.
54 ● Technology and Steel Industry Competitiveness

mand for scrap, and thereby raise prices, the

impact on nonintegrated companies would be

much worse than on integrated steelmaker;

if this led to a decrease in nonintegrated output, it could result in even less total scrap

use. Technically and economically, it would

be extremely difficult for integrated steelmaker to increase substantially their use of

recovered materials in existing facilities; and

if they modified their equipment to use more

scrap in basic oxygen furnaces, they would

probably use more oil or natural gas as well.

Targets and guidelines are irrelevant for

electric furnace steelmaking; this process

presently uses nothing but scrap.

With the advent of DR and the availability

of DRI, a technology that may offer benefits

for both the industry and the Nation (see ch.

6), electric furnace steelmaker could use

less scrap. Hence, targets or guidelines could

actually discourage the introduction of DR.

Even though the percentage of scrap used per

unit of output would decrease in electric furnace shops using DRI, it can be argued that

the use of DRI in conjunction with scrap

would promote an expansion of electric furnace steelmaking, with the net result that the

total use of purchase scrap would increase.

Is it necessary for the Government to set

any targets or guidelines for ferrous scrap

use? OTA finds no compelling reason to legislate broad goals for the industry. The economic advantages of using scrap have been

sufficient incentive to increase scrap use,

especially by the nonintegrated producers

who rely solely on ferrous scrap. Even the integrated companies have changed their attitudes and recognized the economic benefits

of maximizing their use of scrap to the degree

their facilities and capital permit. A more

direct and fruitful approach to increasing

domestic use of domestic scrap would be to

provide a financial incentive for adopting

scrap-using processes. For example, a special

investment tax credit could be offered for

adoption of equipment that allows an existing

plant to use more scrap. Because scrap is embodied energy, it might only be necessary to

redefine some terms to qualify such equipment for special energy conserva

ment tax credits.

Ferrous Scrap Exports

tion investPerhaps the most critical area for policy

analysis is the issue of ferrous scrap exports-.

Domestic steelmaker are uncertain about future scrap supply and maintain that exports

greatly influence domestic prices. The scrap

industry favors free export of scrap. It contends that there is sufficient domestic scrap

for export, that more scrap becomes available as market forces increase prices, and

that historically the integrated steel producers have not attempted to maximize their

use of scrap, To some extent the latter has

been true, although the situation appears to

be changing.

The importance of examining policies affecting the supply and demand for ferrous

scrap is shown by data demonstrating the inflationary effect of scrap on steel prices. During the past 2 years, when scrap exports have

reached very high levels, so too have scrap

prices, The increase in the producer price index for ferrous scrap from 1977 to 1979 was

52 percent, compared to increases of 21 percent for labor, 6 percent for metallurgical

coal, 16 percent for iron ore pellets, 18 percent for electrical power, and 33 percent for

fuel oil. For the same period the price increase for the entire steel mill product mix

was 21 percent, but the price for reinforcing

bars (which unlike the other products are

made entirely from scrap) rose 37 percent.

Available data point to direct relationships

between scrap exports and domestic scrap

prices and between scrap prices and finished

steel prices.

Scrap exports make a positive but relatively small contribution to the Nation’s trade

balance; for 1979, they equaled only about 15

percent of the net steel-related trade deficit.

By exporting scrap, moreover, a valuable

source of both iron and embodied energy

[about 17 million Btu/tonne) is being exported.

The more scrap used domestically, the less

energy, time, money, and labor will be ex-
Ch. 2—Policy Options ● 5 5

pended to mine, process, and reduce iron ore.

When scrap is exported, these savings are realized instead by foreign steelmaker, whose

government-subsidized steels then return to

compete in the domestic market. To the extent that steel and steel-intensive products

are imported, such as automobiles, the Nation may eventually add to the domestic scrap

supply at the expense of that in steel-exporting nations, like Japan; at present, however,

these nations are able to buy back their scrap

from the United States. These scrap exports

cause the domestic price of scrap to rise, giving foreign producers a net price advantage

because of the devalued dollar and their inherently greater energy costs.

Present-day steelmaking processes use

more scrap and produce less, than did previous methods. Steelmaker are becoming more

dependent on purchased scrap, which is declining in quality. The domestic demand for

scrap is so great, and increasing so rapidly,

that the scrap industry may have no longrange economic need to export; it is even possible that a domestic shortage of ferrous

scrap may develop during the next decade

unless DRI becomes available. Perhaps the

most significant long-range consequence of

continued scrap export is the possible detrimental impact on the nonintegrated steel producers, who depend on electric furnace steelmaking. If formal or informal Government

price controls on steel cannot be released

quickly enough to offset quickly rising scrap

prices, these companies may be caught in a

cost-price squeeze that could drive them out

of the market. This impact is particularly

acute now, when DR is in the early stages of

domestic introduction and DRI is not yet readily available as an import.

The Export Administration Act of 1979 offers a means for monitoring and controlling

scrap exports. To the extent that substantial

market imperfections exist as a result of U.S.

and foreign government policies, interference

with free trade can be rationalized. The longrange consequences of permitting unlimited

exports of scrap for the competitiveness of

the domestic steel industry are sufficiently

serious to warrant responsible implementations of the Export Administration Act. The

welfare of the domestic scrap industry must

also be considered, however, and to this end

any limits placed on scrap exports could, in

the near term, be balanced by appropriate

Federal incentives for increased domestic use

of scrap by, for example, special investment

tax credits for the adoption of continuous

casting and certain modifications to steelmaking furnaces.

Scenario Differences

The Liquidation scenario implies a continuation of existing policies with regard to ferrous scrap, resulting in continued problems

due to uncertainty about future supply and

demand. Moreover, policies related to scrap

could remain controversial and to a large extent contradictory. There is particular need

to balance control of scrap exports with promotion of domestic scrap use. The High Investment scenario allows market forces to determine raw material supply and demand and

does not deal with specific policy changes.

The Renewal scenario emphasizes better coordination, which would include examination

of policy changes that link incentives for increased domestic use of ferrous scrap with

appropriate monitoring and, if needed, control of scrap exports. The Renewal scenario

also supports DR technology, which would offer a substitute to ferrous scrap in electric

furnace steelmaking in the future.

Trade

Although worldwide trade in steel is not

the central focus of OTA’s study, certain aspects of that trade do affect technological

levels in the industry. OTA has addressed

two of these aspects:

● the impacts of the new Multilateral

Trade Agreement* on the export of technology-intensive alloy/specialty steels,

and

*This new international trade treatv. signed by most of the

industrialized and increasing numbers of Third World nations,

promotes trade under equitable, competitive conditions.
56 ● Technology and Steel Industry Competetiveness

s the impact of uncertain levels of steel imports on investment decisions relating to

modernization, capacity expansion, and

innovation.

Vigorous enforcement of the Multilateral

Trade Agreement, which will govern much of

the world’s trade and other domestic trade

laws and policies, such as the trigger-price

mechanism, * is necessary but not sufficient

for bringing about a revitalization of the domestic steel industry. Lax enforcement, however, is sufficient to perpetuate present

trends and to assure the slow but inevitable

demise of much of the industry.

Even if the new trade agreement is vigorously enforced by the United States and its

trading partners, it could do little to solve the

fundamental problems of the domestic steel

industry. At best, there would be an uncertain amount of decline in imports and an increase in exports. The most important benefit

of an effective trade agreement would be to

reduce domestic steelmaker’ uncertainty

about both their potential for capturing

growth in domestic demand and their rewards for long-term investments in technology, If the new trade agreement is not vigorously enforced, other policy changes aiding

the industry could be nullified by surges in

unfairly traded imports, or by the producers’

fear of such surges.

Of the issues related to the Multilateral

Trade Agreement, the subsidy issue is the

most critical. Domestic steel producers have

expressed concern that the definitions and

implementation of the subsidy provisions will

result in increased penetration of the domestic market by imports at prices kept low by

foreign government subsidies of their steel

producers, According to C. William Verity,

Chairman of Armco.

The steel industry’s other major concern

has been about the effect of the negotiations

on our domestic laws governing international

trade. We’re specifically concerned that the

international codes on subsidies and coun-

*This procedure attempts to detect dumped steel quickly by

setting a price below which imports are examined for dumping,

tervailing duties and anti-dumping, and the

legislation necessary to implement these

codes, could weaken our present statutory

defenses against dumped, subsidized or

otherwise damaging imports—thus making it

more difficult for American manufacturers

to obtain relief from unfair or injurious imports.’

The proposed process to establish whether a

subsidy is illegal is complex:

The (subsidies) Code provides for two

routes (or tracks) of redress for parties who

claim they are being injured by foreign subsidy practices or claim that their international trading interests are being prejudiced

by the payment of foreign subsidies in violation of the Code’s obligations. The first track

is domestic action intended to prevent injury

to national industries through the traditional

means of countervailing duties. The second

track provides a multilateral mechanism

through which signatory countries can enforce their rights under the Code. The second

track would be used, for example, when a

country is losing a share of a third-country

market to subsidized exports from another

signatory country.“7

This issue arises because, increasingly,

most industrialized countries are subsidizing

their exports by providing loans, loan guarantees, interest subsidies, and related assistance to exporters. A recent report by the Congressional Research Service provides a comprehensive summary of such subsidies.” In

brief, the programs of major exporting countries are as follows:

s France. The report judged that the

French “have the broadest and most

confessional’ program. Private banks

can make medium-term, fixed-interestrate export loans and then borrow

against such loans under “attractive refinancing arrangements” at the French

central bank. In addition, the govern-

‘ (1. Willi[]rn \~eritV, “1nternF]ti0n(]1 ‘1’ri;de P[ict—steel”s

\Tlf;~,,‘‘ Trade Negotktiun Panel. AISI Press Cmference, !Wiy

1979.

*"Wrapping Up the MTN Package. ” Business Amcrica, Apr.

23, 1979, pp. 4-5. (i{~ongre~sjona 1 Reset] r~h Service, F:xpor ! S tim UIU ti(~n Pr(~-

grums in the M(]jor [ndustri(llCkun tries, U’ashington, LI. c.,

1979.
Ch. 2—Policy Options ● 5 7

ment provides direct loans to finance up

to 85 percent of long-term (over 7 years)

loans. Exporters can also often obtain

foreign-aid loans with 3-percent interest

rates and 25-year repayment periods for

some shipments to developing countries.

Finally, the government offers insurance

to protect exporters against political

risks and the impact that inflation or exchange rate changes could have on their

costs.

“ Japan. The Japanese Export-Import Bank

offers direct credit for about half the

value of exports financed with mediumand long-term loans; the interest rates (6

to 9 percent) are close to market rates.

The Japanese also mix foreign-aid credit

[with interest rates of 4 to 6.75 percent

and maturities up to 25 years) with normal export loans and guarantee private

banks against losses on export loans.

● Great Britain. The Export Credit Guarantee Department (ECGD) provides subsidies on private bank loans to exporters; that is, the private bank makes a

fixed-interest-rate loan at below-market

rates, and the ECGD makes up the difference. The ECGD provides such subsidies

not only in pounds but also in other currencies, including the dollar. It also provides insurance and guarantees against

losses on export loans.

● Italy. “On paper, ” the report says, “the

Italians have a highly confessional export financing system, but in practice

the actual level of government support is

limited by budget shortages in the administering agencies, ” The Italians provide interest-rate subsidies for private

bank loans as well as insurance against

export loan losses; in 1976, however,

only about 9 percent of Italy’s exports

benefited from insurance protection.

● West Germany. Most export financing is

handled privately through a consortium

of private banks, but some medium-term

credits (generally 2 to 5 years) can be

refinanced through the central bank. A

government agency

percent of long-term

provides up to 45

export loans to developing countries, and Hermes, a private company supervised by the government, writes insurance and guarantee

policies.

Netherlands and Switzerland. Both

countries leave export financing largely

to private banks, although the Dutch

have a small program that allows export

loans to be refinanced at the central

bank and the Swiss Government writes

export insurance. In 1976, however, only

about 9 percent of Switzerland’s exports

used this insurance.

In the past, the United States’ attempts to

subsidize exports have been relatively limited. Recently, there has been significant

change in this policy by the Export-Import

Bank of the United States (Eximbank).’ In

summary,

The Eximbank offers both direct loans and

protection against losses on private loans.

Through the Foreign Credit Insurance Corporation (FCIA, a consortium of the Eximbank

and private insurance companies), it offers

insurance for U.S. exporters that finance

their own overseas sales; if the foreign buyer

doesn’t meet its payments, the insurance will

cover the exporter’s losses. There’s a similar

guarantee program for banks if the foreign

buyer doesn’t repay the loan, the Eximbank

makes up the loss. Banks can also discount

loans at the Eximbank; that is, they can borrow at the Eximbank against one of their own

export loans. And finally, there are direct

loans, which the Eximbank makes either to

foreign buyers or foreign banks.

Eximbank’s role in providing export support has been increasingly significant in recent years. In the fall of 1979, its outstanding

commitments were about $27 billion, but

these were concentrated in only a few manufacturing sectors of the economy: powerplants—$7 billion; civilian aircraft—$6 billion; and heavy industry—$5 billion. The domestic steel industry has had no support from

the increased Eximbank activities.

‘%ee: Robert J. Samuelson, “The Export Credit Subsidy

Game—If You Can’t Lick ‘em, Join “em,”” Nutional Journal. Apr.

14, 1979, PP. 597-602.

.- i
58 . Technology and Steel Industry Competitiveness

Scenario Differences

Since there is so much going on at present

in the trade policy area, it is difficult to tell

what the Liquidation scenario (based on continuation of existing policies) implies in this

area. The main problem has been the uncertainty domestic steelmaker face with respect to future imports of steel. Vigorous enforcement of the new Multilateral Trade

Agreement could remedy this uncertainty;

both the Renewal and High Investment scenarios require such enforcement, as well as

other trade policies that promote greater certainty about steel imports in order to make

capital investments rational, but this is not an

area that the OTA analysis has dealt with in

detail. The Renewal scenario places some additional emphasis on the potential for increased exports of the high-technology steels

in which the United States already has technological and cost competitiveness.

Foreign Government Policies Toward Steel Industries

It is not within the scope of this study to

give an exhaustive review and analysis of foreign government policies toward their steel

industries. However, it is clear that other

governments have played a very large role in

the international steel market and that their

policies tend to be better coordinated than

are U.S. policies.

Table 13 uses eight general factors to rank

relations between government and industry in

four geopolitical regions. Japan emerges as

having the most beneficial policies toward its

steel industry; following Japan, but with less

difference among them, are Third World nations, the European Community, and the

United States. The ranking system uses the

perspective of industry and what would be

most desirable from the corporate viewpoint

toward maximizing management’s freedom of

choice, minimizing costs, and maximizing

profits.

International Comparison of

Cost Recovery Allowances

Table 14 presents a more specific international comparison of capital cost recovery allowances for major steel-producing countries. The table includes all special allowances, investment credits, grants, and deductions generally permitted in each country; regional incentives, if any, have been excluded.

The data presented in the first column,

“representative cost recovery period, ” refer

to the total number of years required to recover 100 percent of the cost of an asset, inTable 13.—Ranking of Factors for Government-Steel Industry Relations

Factor — United States EEC ‘Japan Third World

Stature of steel industry. . . . . . . . . . . . . . . . .~-. . . . . . . . . . . . . . .

— .

1 2 3 3

Good Government/industry relationship

(adversarial v. cooperative). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 3 3

Minimum Government involvement in steelmaking decisions. 3 2 3 1

Government protection of domestic steel markets. . . . . . . . . . . 2 3 3 3

Availability of emergency funds . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 3 3

Government support R&D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 3 1

Producer’s pricing freedom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2 3

Low pollution abatement requirements . . . . . . . . . . . . . . . . . . . . 1 1 1 3

Ability to lay off workers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2 1 1

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 18 23 19

NOTE Ranking has been interpreted from the perspective of what IS desirable from Industry viewpoint, with the highest numerical value representing the most advantageous Government poIicy.

SOURCE Off Ice of Technology Assessment
Ch. 2—Policy Options ● 5 9

Table 14.—Comparison of Cost Recovery Allowances in the Steel Industry

Representative cost Aggregate cost recovery allowances (percentage of cost assets)

recovery periods (years) First taxable year First 3 taxable years First 7 taxable years

Australia a b 

. . . . . . . . . . .

Belgium a c 

. . . . . . . . . .

Canada a d

. . . . . . . . . . . .

France e f . . . . . . . . . . . . .

West Germanyg h . . . . . .

Italy a j. 

. . . . . . . . . . . . . . .

Japan j k 

. . . . . . . . . . . . .

Netherlands m 

. . . . . . . .

Sweden a n 

. . . . . . . . . . . .

United KingdomO P 

. . . . .

United States qr 

. . . . .

10

9

2

7

10

6

11

8

4

1

11

aNo special relief provisions are available for pollution control facilities

bCapital cost recovery iS computed on a straight Iine or accelerated (150-per.

cent D.B.) basis with an additional 20-percent deduction available in the year of

acquisition (40 percent prior to 6/30/79) 150-percent D B depredation over a

10 year period plus the additional first year depredation has been assumed

Australia s sole steel manufacturer may have negotiated a special cost recovery arrangement

cCapital cost recovery Is computed on a straight Iine or accelerated (200-per

cent D B.) basis As a temporary measure to promote Investments, a onetime

special deduction of 15 percent IS allowed on certain acquisitions of fixed assets made during 197980 The special deduction wiII be allowed to the extent

that 1979 or 1980 investments in fixed assets exceed the average annual investments for the years 197476 The 15 percent deduction IS applicable to a

maximum of 40 percent of the total new investments 200. percent D B

depredation over a 10 year period plus the additional first year depredation

has been assumed

dCapital cost recovery may be claimed at a rate of 50 Percent in the Year of acquisition and the remainder in the next succeeding year A 7-percent (5 percent

if certain Iegislation IS not extended during 1979) Investment tax credit may be

claimed in the year of acquisition and has been Included in the table computation Investment tax credits reduce the cost of property for purposes of computing cost recovery allowances Based on proposed Iegislation, Investment

tax credits of up to 20 percent may be available depending on the Iocation of

the asset

eCapital cost recovery IS computed on a straight Iine or accelerated (250 percent D.B.) basis. Based on proposed Iegislation an additional 10 percent de

ductlon may be claimed on the net increase in assets over the preceding year

without reducing the Increase in assets over the preceding year without reducing the basis for regular depredation Over an 8-year period 250 percent D B

depredation plus the additional 10-percent deduction has been assumed

fThrough 1980. pollution control facilities attached to building in existence prior

to 1/1/76 wiII qualify for a 50 percent special cost recovery allowance in the

year acquired The tax basis of such facilities are reduced by the special allow.

ance for purposes of computing regular cost recovery If the pollution control

SOURCE: Richard M. Hammer. National Office, Price Waterhouse & Co , June 1979

eluding the tax benefit of any investment tax

credit or other allowances. The useful lives

used are considered representative for the

country for which the depreciation computation is made. The present value of cost recovery allowances has not been taken into account. Note, however, that in some countries

investors must agree with the tax authorities

as to the rate of depreciation and other benefits available before they invest in fixed

assets; such agreement would, in many cases,

have the effect of substantially increasing the

allowances presented in the table.

35%

26

63

41

25

25

31

37

48

100

35

5 9 %

55

109

78

58

75

55

57

86

100

57

88%

86

109

105

87

100

84

97

118

100

86

— facilities do not qualify for the special allowance described above, regular cost

recovery may be claimed over a shorter useful Iife than iS generally allowed for

other assets (e. g , 6 Instead of 10 years)

gCapltal cost recovery iS computed on a straight Iine or accelerated (250-percent D.B.) basis Regional Investment grants of up to 20 percent of the cost of

certain assets may be claimed in the year of acquisition. Over a 10-year period

250-percent D.B. depredation has been assumed

hA special Capital cost recovery allowance IS available for Pollution control facilities purchased or constructed between Jan. 1, 1975, and Dec. 31, 1980 A

capital cost recovery of 60 percent may be claimed in the year of acquisition

and 10 percent in each of the 4 following taxable years

ICapital cost recovery IS allowed at a rate of 10 percent per year plus an additional deduction of 15 percent for each of the first 3 taxable years

ICapital cost recovery IS computed on a straight line or accelerated (206-percent

D B ) basis A 10-percent Investment tax credit IS available in the year of acquisition Over a 14-year period 206-percent D B depreciation plus a 10-percent investment tax credit IS assumed

kA sspecial capital cost recovery allowance is provided in lieu of Investment ‘ax

credit for pollution control facilities at one-thlrd of the cost in the year of acquisition This special allowance reduces the cost of the facility for purposes

of computing regular cost recovery discussed in footnote (j) above

ICapital cost recovery is computed on a straight line basis Investment tax credit ranging from 7 to 23 percent IS available in the year of acquisition depending

on the type of asset Straight Iine depredation over a 10 year period plus a 13-

percent Investment tax credit IS assumed In addition, where production capacity or the number of jobs IS Increased grants of up to DF L 5 milIion are avail

able

‘If a particular business IS subject to air pollution regulations which are more

severe than would be expected for the type of business, the government may

indemnify the business for the extra cost Incurred This subsidy IS deter

mined on a case by case basis, without Iimitation and reduces the cost of the

facility for purposes of computing the Investment tax credit discussed in foot.

note (1) above

The data indicate that the United States

and Japan have the largest representative

cost recovery period—l1 years. In Canada,

the representative period is only 2 years, in

Sweden, 4 years. The aggregate cost recovery allowance (percentage of cost of assets)

for the first 3 taxable years is a significant

measure of the attractiveness of capital investments in steel. The United States, with a

57-percent recovery, has a lower rate than

most other nations. Only Japan and Belgium

have smaller recovery allowances; a number

of countries have much larger allowances.
60 ● Technology and Steel Industry Competitiveness

Europe

The EEC Commission

The discussion of government policies for

the steel industries of Europe is made complex by the combination of individual policies

of nations and the presence of the Commission of the European Economic Community

(EEC), which has absorbed most of the policy

functions of the European Coal and Steel

Community (ECSC). Management of the European steel industry is now conducted through

the EEC Steel Directorate. The supranational

policies of the group are discussed first. It

should be noted, however, that the policies of

the ECSC and EEC are not always followed by

member nations, although there appears to

be increasing agreement on policy implementation.

The Davignon Plan.—Current policies of

ECSC have one major emphasis—that of overcoming the crises of the European steel industry, which resulted in job loss for more than

100,000 workers between 1974 and 1979 and

may lead to an additional 80,000 lost jobs in

1980. The state of the European steel market

in the spring of 1977 was described in these

words:

The present situation is that production is

falling, new orders are continuing to stagnate, the rate of utilization of production

capacity is running at no more than about 60

percent, prices are low, exports slack and

stocks large, and short-time working is at almost the same level as during the most difficult period of the earlier recession, ’”

At a special meeting on March 16, 1977,

the Commission adopted a new set of policy

guidelines which set forth the group of steel

policy measures that came to be known as the

“Davignon plan.” The proposed policy was

accepted a few days later by the European

Council—the heads of state and government—which issued the following declaration:

The European Council has considered the

situation in the steel sector, on the basis of a

‘(lBul)etin of the European Community, No. 3, 1977, p. 28.

communication from the Commission. This

sector is experiencing a depression more

serious than at any time in the history of the

Coal and Steel Community, The heads of

state and government have taken this opportunity to reaffirm their resolve to restore to

the steel industry through the appropriate

measures, the viability and competitiveness

essential to the maintenance of a truly European industrial potential.

The European Council expresses its appreciation of the efforts being undertaken by

the Commission to put forward at an early

date practical proposals and initiatives for

short-time remedial measures to stabilize the

market, for a longer term structural reorganization of the European Steel industry and

for measures in the social field to assist

workers adversely affected by such reorganization.

The European Council expresses the wish

that the Council of Ministers gives its urgent

attention to the Commission’s proposals and

initiatives on these issues.1 1

The new policy guidelines, aimed at

strengthening the Community’s crisis measures, were grouped into four main categories:

1) preservation of the unity and openness of

the market, 2) accomplishment of a modernized production capacity, 3) market intervention, and 4) retraining and redeployment of

workers. ’z Most (but not all*) of the policies of

the Davignon plan have been accepted by the

European steel-producing countries, and the

Commission has obvious strength in formulating and executing supranational policies affecting the steel industry in Europe.

The present powers of the EEC Steel Directorate include:

●

●

●

veto power over new investments in

steel;

the power to enforce or waive major antitrust rules;

setting minimum prices;

“Ibid. p. 29.

“Ibid.

*For summary of the pr~blems fa~in~ D~vignon plan see:

“Davignon Plan Fate at Stake,”’ American Metui Market, Aug.

16, 1979, pp. Iq,
Ch. 2—Policy Options ● 6 1

setting production quotas for each country and suggesting production ceilings

for each company;

negotiating voluntary quotas for exports

of steel to the EEC by Japan and Eastern

European and Third World nations;

consolidating industrywide confidential

data on their operations and plans;

making projections of planned capacity

set against likely demand for every

category of steel;

providing supplemental funds to deal

with displaced workers; and

veto power over all government subsidies to steel; however, the Steel Directorate cannot force a company to close a

facility.

in addition to the policies to minimize problems arising from the currently acute overcapacity of European steelmaker, the Commission has implemented other important policies. It has for many years helped finance

capital investment programs. As an entity,

the Commission is able to borrow funds at

lower rates of interest, in part because of its

authority to levy a tax on the value of steel

and coal produced within the EEC. It then

loans the funds it borrows in the open market

to steel enterprises within the EEC at lower

interest rates and longer payback terms than

they could otherwise command on the basis of

their individual credit. Between 1954 and

1974, the Commission granted a total of $2.4

billion in low-interest loans to EEC endeavors.

This averages $120 million annually, including $65 million that is distributed directly to

the iron and steel industry. During 1974

alone, the Commission granted low-interest

industrial loans totaling $42.2 million to finance such production facilities for highgrade and specialty steels, environmental

equipment for the steel industry, modernization of coal facilities and iron ore mining, and

a research center for specialty steels.

The Commission also has significant longrange planning functions and has recently

formulated its “General Objectives for

1980-85” for the iron and steel industry. This

statement sets priorities and establishes

guidelines for the EEC iron and steel industries through 1985, with particular stress on

the areas of specialty steel and raw materials

(scrap, iron ore, and energy). The objectives

were developed by a steering committee composed of representatives from major iron and

steel producers, national governments, and

the Commission. While these objectives are

described as “guidelines,” they are nonetheless real objectives since they constitute

the framework for the Commission’s extensive financial investment program.

The Commission has also extended its influence beyond Europe by establishing formal

ties with the Organization for Economic Cooperation and Development (OECD). The OECD

Ad Hoc Working Party on the Iron and Steel

Industry, set up at the request of the EEC to

provide a forum for discussions of the world

steel crisis, was transformed into a permanent Steel Committee 13 a year later for the

following stated purposes:

●

●

●

●

continuously follow the evolution of national, regional and world steel industries

with regard to employment, profits, investments, capacity, input costs, productivity,

and other aspects of viability and competitiveness;

develop common perspectives regarding

emerging problems or concerns in the

steel sector and establish, where appropriate, multilateral objectives or guidelines for government policies;

regularly review and assess government

policies and actions in the steel sector in

the light of the current situation, agreed

multilateral objectives and guidelines and

the GATT and other relevant international

agreements;

identify deficiencies and gaps in existing

data needed by the Committee with a view

of improving national inputs to the Committee and cross-national comparability of

data.

OECD’s responsibilities for policymaking are

distinctly limited. Nevertheless, OECD can

advocate certain policies related to steel in-

‘ ‘See “Problems of the Steel Industry: And a Search for Solutions,’” OECD ohserwr, November 1978.
62 ● Technology and Steel Industry Competitiveness

dustries in member countries, including the

United States and Japan.

Regulatory Policies.—Regulatory compliance costs for European steel companies

have generally been at levels similar to those

experienced by domestic producers. However, European steelmaker enjoy rather favorable fiscal incentives and attractive financing to help them meet those costs. Furthermore, there is a considerable level of public support for regulatory technology R&D in

all areas of steelmaking.

The less competitive steel industries of Belgium and France have experienced relatively

low environmental compliance costs. Should

European steel-producing nations, as expected, adopt future environmental requirements similar to those in the United States,

then French and Belgian regulatory costs will

gradually approach U.S. levels. ”

European steelmaker generally benefit

from preferred rates for accelerated depreciation of pollution abatement equipment.

This places these industries at a significant

advantage over U.S. producers, particularly

because their general depreciation schedules

for industrial equipment are already more

favorable. They also have ready access to

loans made available by the ECSC or national

governments. Moreover, since 1975 the ECSC

has supported research on environmental

protection and occupational risk reduction

technologies at levels two to three times

higher than U.S. levels. *

R&D.—The ECSC has funded a considerable R&D “effort, particularly in the technical

aspects of steel production and in pollution

abatement and occupational health issues.

Funding of production-related R&D activities

‘‘OECD, “Emission Control Costs in the Iron and Steel Industry,’” Paris, 1977. p. 95-96; and Hans Mueller and E. Kawahito,

“The International Steel Market: Present Crisis and Outlook

for the 1980’s.”’ Middle Tennessee State University, conference

paper No. 96, 1979, pp. 26-27.

*From 1974 to 1978, ECSC provided $2.2 million annually for

this purpose, For the next 5 years, starting with 1979, ECSC

has made $3.8 million annually available for regulatory technology R&D. (Official Journal of the European Communities: Informotion and Notices, June 13, 1979, No. C147.)

was initiated shortly after ECSC was established in 1951. The basic purpose is:

. , . to encourage the development of new

technology for subsequent incorporation in

the construction and operation of steel plant

and equipment and to advance the quality of

the wide range of semifinished and finished

products that are manufactured within the

Community’s industry. The ultimate objective of this effort is to enhance the ability of

the European steel producers to compete in

both home and export markets.15

ECSC support for R&D activities has varied

over time but has averaged from $15 million

to $20 million per year. The funds are allocated through the Iron and Steel Technical

Research Committee, staffed by ECSC member country iron and steel experts who evaluate R&D proposals and make recommendations. The scope of the research is considerable: in 1979, for example, ECSC allocated $24.75 million to 73 different R&D projects whose total costs were $79 million; table

15 provides a partial breakdown of these

projects. ECSC funding does not rule out

direct support by individual governments.

National Policies

There is extensive government ownership

of European steel industries. For example,

approximately 80 percent of the United Kingdom’s and 70 percent of France’s steelmaking

capacity is government owned. These industries are far from profitable. The approximate 1978 losses per tonne of shipped steel

were $55 for the United Kingdom and France.

These and other foreign steel industries are

sustained by the favorable financial, export,

and tax policies of their governments.

Conflicts Between National Subsidies and

EEC Policies.— In light of relatively weak demand for steel products worldwide, most if

not all subsidy and procurement policies in

the EEC have been directed towards reducing

capacity by early closure of older mills and by

.

‘

iCommission of the European Communities, “Memorandum

on the Implementation of an Iron and Steel Research Program,

With a View of Obtaining Financial Aid Under Article 55(2)(c)

of the ECSC Treaty, ” February 1979, p. 1,
Ch. 2—Policy Options ● 6 3

Table 15.— Distribution of R&D Projects Funded by ECSC, 1979

— ————.

Funding total

(millions ECSC aid (millions Subject area

of dollars) of dollars) percent of total

$ 7.5 —

.———— — .——

Ironmaking . . . . . . . . . . . . . . . . . . . . . . $ 4.50 9.5%

Steelmaking . . . . . . . . . . . . . . . . . . . . . 47,8 6.70 60.5

Rolling mills and related areas . . . . . . 2.3 1.38 2.9

Measurements and analysis. . . . . . . . 4.6 2.76 5.8

Properties and service performance

of steels . . . . . . . . . . . . . 16.8 9.41 21.3

Totals. ., . . . . . . . . . . . . . . . . . . . . $79.0 $24.75 1OO.OO

/O

SOURCE: - Commission of the European Communities’. Memorandum on the Implementation of an Iron and Steel Research

Program With a View of Obtaining Financial Aid Under Article 55(2)(c) of the ECSC Treaty.’ February 1979.

early retirement of workers. These policies

are in direct conflict with those of some member countries, however. The British Steel

Corp. (BSC), for example, has had plans for

considerable expansion. In June 1978, BSC’s

expansion plans involving continued investment of $2 billion annually were slashed by

the Labor Government. But since then, a new

investment revival has taken place, and the

Conservative Party plans to continue it.

British Steel’s investment plans are not

likely to be halted by the conservative government. The corporation is near completion

of the biggest spending program on steel

plants ever seen in Europe. Work is so far advanced that it could not be stopped. Spending

will continue at a rate of about $1 billion a

year until 1980 but should fall away sharply

in the early 1980s. British Steel will be the

biggest and most modern equipped steel company in Europe with more than 22 million

tons of highly productive capacity. It will

also be the third biggest steelmaker in the

western world, after U.S. Steel and Nippon

Steel. ”

In Belgium, where government policies are

controlled by labor unions, a new policy

toward the steel industry has been adopted

that clearly conflicts with the ECSC plan for

member countries. The key elements of this

policy are increasing employment levels, lowering nonwage labor costs such as social security contributions, keeping wage increases

in line with inflation, and linking public

spending to gross national product levels.

“ Skxl wreck, h!:l}’ 7, 1979, p. 7.

Likewise, but to a lesser extent, the Governments of West Germany, Austria, and

Italy have been under union pressure either

to continue and even expand operations of

their steel mills in order to provide employment opportunities. This in turn has resulted

in significant national subsidy payments in

various forms to the steel industry.

Loans and Subsidies. —National governments are extensively involved in financing

steelmaking production. The Fond de Development Economique et Social (FDES) is an important source of low-interest, long-term

credit in France. FDES loans, which are advanced by the national treasury, are given to

private borrowers through the Credit National. Applications must be approved by the Regional Development Agency or the Ministry of

Industry. As a basic industry, iron and steel

receives special consideration in granting

these loans; for example, FDES is lending

roughly one-third of the total project cost of a

$1.75-billion steel complex at Fos-en-mer.

These loans bear an interest rate of only half

the market rate and require no payment of

principal or interest charges for 5 years.

Italy is another country where the government is extensively involved in the iron and

steel sector. The Instituto per la Reconstruzione Industriole (IRI), a state holding institution, is contributing 80 percent of the capital

(in the form of government-guaranteed low-interest loans) to increase the capacity at the

Taranto steel complex at a cost of $2.5 billion

over a 5- year period. The $1,6-billion Calabrin steel complex at Giora Taura is also

heavily funded by IRI. Loans for these proj-
64 ● Technology and Steel Industry Competitiveness

ects are classified as being used for regional

development purposes.

In Belgium, government has for a number

of years aided the steel industry under a program administered by the Comite de Concertation de la Politique Siderurgique (CCPS).

Under the CCPS program, approximately

$101.6 million in grants and low-interest

loans has accrued to the Belgian steel industry during the lasts years.

In 1972 the British Government reduced

the equity obligation of BSC by writing off almost $480 million of public dividend capital

held by the government. Thereafter the government also wrote off the equivalent of $360

million in loans that had been due to the National Loans Fund. The statutory corporations bill (financial provisions), published in

May 1975, will raise British Steel’s borrowing limit by $1.7 billion to a total of $4.5 billion.

Export Incentives.—Export credits financing and export insurance are widely employed methods of stimulating exports that

have been particularly effective in Western

Europe. For example, the British Government

has set interest rates for export credit finance since 1972. Clearing banks that provide export credit are furnished with refinancing for any such lending beyond 18 percent of their current account deposits; more

importantly, the government guarantees that

banks can earn a return on export loans that

is 1.25 points above the average of their rates

on treasury bills and loans to nationalized industries. Interest rates for export credit are

much lower than those charged for domestic

working capital, with the government making

up the difference.

British insurance is primarily handled by

an autonomous government agency that maintains credit ratings for foreign firms. Insurance is available against default by the

buyer, government action that blocks or delays transfer of payments, imposition of new

import-licensing restrictions in the country of

purchase, war, or “any other cause” of loss

occurring outside the United Kingdom and not

within the control of the exporter. There are

also policies to cover goods being processed

or goods being held in stock abroad,

Italy offers export credit/financing through

several banks and institutions and keeps medium- and long-term export financing at favorable rates. Export credit rates are currently about 6.5 percent, in contrast to 10.25

percent for nongovernment financing. This

form of preferential or export financing must

be approved by the Ministry of Foreign

Trade, with extensions for longer than normal periods of time requiring approval by the

Treasury. Insurance at low premium rates is

granted by a public agency that implements

decisions adopted by an interministerial committee, which in turn operates within the

framework of the Institute of Foreign Trade.

In Belgium, the central bank helps firms obtain export credit at preferential rates by issuing special “visas, ” which make the acceptances eligible for rediscounting with a semipublic organization. Interest rates for export

credit range between 5.2 and 6.0 percent.

Credit Export, an organization formed as a financing pool by public agencies and private

banks, operates in the field of long-term export financing. Insurance at favorable premiums is available for exporters from a public

institution that insures against commercial

and political risks.

The French Government actively encourages exports through low-cost export credits.

Medium- and long-term credit is available at

a special Bank of France rediscount rate of

4.5 percent for exports destined to countries

outside the EEC. Insurance is granted by a

quasi-public firm, at government-guaranteed

premiums, and covers commercial and political risks, currency fluctuation, unretrieved

costs of advertising and promotion in foreign

countries, and increases in costs of production.

The West German Government grants export insurance through an authorized syndicate, which receives applications and prepares them for approval by the Interministerial Committee for Export Guarantees. This
Ch. 2—Policy Options ● 6 5

committee includes representatives from the

Ministry of Economics, the Ministry of Finance, and the Ministry of Foreign Affairs.

Coverage includes both commercial and political risks.

Tax rebates are another way foreign governments stimulate exports. The value-added

tax rebate, which is prevalent in Western

Europe, provides a competitive edge for exporters, because it permits them to avoid conventional income tax as well as the value-

-added tax. The following list reflects the percentage of value-added tax rebate on exported products by European governments:

Austria . . . . . . .

Belgium . . . . . .

France . . . . . . .

Italy . . . . . . . . .

Luxembourg. . .

Netherlands. . .

Norway. . . . . . .

United Kingdom

West Germany .

Other forms

. . . . . . . . . . . . . . . . . . . . . . . . . . 16

. . . . . . . . . . . . . . . . . . . . . . . . . . 18

. . . . . . . . . . . . . . . . . . . . . . . . . . 20

. . . . . . . . . . . . . . . . . . . . . . . . . . 12

. . . . . . . . . . . . . . . . . . . . . . . . . . 10

. . . . . . . . . . . . . . . . . . . . . . . . . . 16

. . . . . . . . . . . . . . . . . . . . . . . . . . 20

. . . . . . . . . . . . . . . . . . . . . . . . . . . 8

. . . . . . . . . . . . . . . . . . . . . . . . . . 11

of direct export assistance in

the United Kingdom include financial support

for trade missions, exhibitions, market research, and export promotion schemes.

Grants are also available to United Kingdombased exporters to set up offices, warehousing, and related sales facilities for joint

overseas marketing ventures.

Raw Material Supply. —In the United Kingdom, the National Coal Board operates a system of direct government subsidization which

averages between $20 million and $30 million

annually. Added to this are substantial sums

being received from the ECSC, which has also

subsidized coking coal production for several

years. In 1973, the EEC Commission authorized the Governments of the United Kingdom,

Belgium, West Germany, France, and the

Netherlands to grant subsidies to the coal industries in their respective countries. The

more than $800 million in subsidies granted

in 1973 was significantly higher than previous years.

Japan

The socioeconomic and cultural environment in which industrial policies are made

and carried out by the Japanese Government

differs markedly from that of the United

States. This affects their steel industry in

several ways. First, the Japanese steel industry, like most other sections of the Japanese

economy, specializes in its own area of business to a much greater degree than does its

U.S. counterpart. Second, there is considerable cooperation between Japanese steel

firms and related enterprises. Third, although the Japanese Government does not

own its steel industry, it has close relations

with it through the Ministry of International

Trade and Industry (MITI), which guides the

operations of the industry and creates financial conditions that enable it to compete effectively in the world market. These unique aspects of the Japanese steel industry’s socioeconomic environment are well summarized

clearly in a recent book by Ezra F. Vogel:

Virtually all major Japanese firms specialize in a single sector like banking, trading,

real estate, department stores, heavy industry, electric appliances, petroleum, and

textiles. This pattern—developed partly

through bureaucratic guidance—to encourage the most competitive performance is

very different, for example, from American

conglomerates, which spread over several

sectors and leave and enter various industrial sectors with relative ease. Given the specialization of Japanese firms in a given industrial sector, the aggregation of interests can

take two directions. One is the organization

of all firms from a single industrial sector,

which maximizes the cooperation that comes

from looking after their common interests in

building up their sector. The second is the

organization of firms into “groups” consisting of one firm from each sector. A firm in a

group has the advantage of special Zaibatsu

(literally, “financial clique”) groups (like

Mitsui, Mitsubishi, and Sumitomo) link firms

formerly united under their prewar holding
66 Technology and Steel Industry Competitiveness

company, and non-zaibatsu groups (like Fugi,

Sanwa, Daiwa, and Dai-ichi Kangyo) center

around large banks.

In addition to these two types of organization, a third type combines virtually all firms

of given size in all sectors: Nikkeiren (Japanese Federation of Employers), for example,

deals with labor problems of all large firms,

Keidanren (Federation of Economic Organizations) and the either other regional associations deal with all issues aside from labor

confronting big business, and the Chamber of

Commerce (composed of all companies) includes all firms but now particularly represents small business.

Depending on the issue and the extent of

common interests, trade associations, or ad

hoc groups of companies in a sector, look out

for a range of interests impossible to represent in the United States, where antitrust

laws are more rigid, To make sure that they

have entree when politicians consider issues

like tax rates, consolidation and rationalization of firms, industrial and safety standards, and protection against foreign industrial threats, they make regular collective

political contributions as a sector. On more

detailed issues they deal regularly with the

bureaucracy, and major trade associations

include staff members who were elite bureaucrats in big ministries, creating smooth

relationships with the bureaucracy, The associations discuss virtually every issue considered by MITI in their sphere, for even if

MITI eventually resolves the issues, it would

not do so without fully understanding the

dominant views of the sector. 17

As a “priority sector, ” Japanese steel producers obtain loans from private lending institutions with relative ease and apparently

with implicit assurance of government support in the event of default on such loans. The

Japanese Government also has provided its

domestic steel industry with government

loans during crucial time periods such as the

early reconstruction period after World War

II and during the first modernization program

(1951-55). In the 1960’s, the aid fell to a low

level but then rose again beginning in 1971,

“Ezra F. Vogel, Japan Has Number One Lessons for America,

Cambridge, Mass., (Harvard University Press, 19w), pp.

108-199,

mainly for environmental protection expenditures. Until 1961 these loans were made at interest rates that were typically 1.3 percentage points lower than the prime rates

charged by private long-term credit banks; in

subsequent years, the rates were the same. In

Japan, however, loans are allocated through

an informal rationing system applied by the

Bank of Japan and the large city banks, a system that has assured the Japanese steel industry the capital it needs for modernization

and expansion.

Because of this financial leverage, MITI

and other government agencies play a major

role in all other aspects of steelmaking. For

example, MITI’s long-term forecasts of demand govern the expansion of the steel industry. As a rule they are submitted on a periodic

basis to the Industrial Structure Deliberation

Council (an advisory body to the Prime Minister), and the Council’s decisions normally

become established as government policy in

the industrial sector. Another planning technique is the “target production goal:” MITI

establishes quarterly and annual production

levels after consultation with steel industry

representatives and a review of market conditions. Although this is referred to as a

“guideline, “ in practice it allows the government to coordinate production and stabilize

prices.

MITI is also instrumental in the procurement of supplies and in the creation of cartels. In order to assure a supply of raw materials, MITI has established the Stockpile

Council, which makes industrywide recommendations for raw material acquisition. At

the beginning of 1975, under the guidance of

MITI, the industry established a Japanese

Ferrous Scrap Stockpiling Association, which

handles both imported and domestic scrap. It

is expected that in the first 3 years a total of

450,000 tonnes of scrap will be stockpiled.

Proposals call for purchases and releases to

be arranged among steelmaker, the Ferrous

Scrap Council, and scrap processors.

In addition to economic stockpiling, the

Ministry of Finance and MITI have also

funded surveys and studies of overseas min-
Ch. 2—Policy Options ● 6 7

eral development, sea-bottom mineral resources, metal deposits, and stable import

sources. They also grant credits, issued

through the Bank of Japan, to domestic producers of raw materials that are hard hit by

rising inventories of ore and concentrates imported under long-term contracts.

Beyond these financial assistance and

planning functions, MITI also funds and

directs the activities of the Agency of Industrial Science and Technology (AIST), one of

the principal R&D centers in Japan, which

undertakes large-scale R&D projects and encourages industry to innovate. Four policies

have been enacted and are administered by

AIST for this last purpose:

● subsidies for R&D effort,

. tax credits for increased R&D expenditures,

. low-interest loans for the commercialization of new technology, and

● establishment of a research association

to promote mining and manufacturing

technology.

AIST itself operates 16 research laboratories

with a staff of 3,800 and annual budget of 32

billion yen ($133 million at 240:1).

Another policy area in which the Japanese

differ substantially from the United States is

the promotion of exports. The cornerstone of

Japanese steel export policy is an orderly international market in steel, with stable prices

controlled by the governments of steel-producing countries. The Financial Times of London has commented that:

The Japanese were among the first to be

converted to the idea of controlling the world

steel trade, a notion which is anathema to

emerging low-cost steel producers such as

South Korea. In fact, it was Nippon Steel

chairman Yoshihiro Inayama who many

years ago introduced the term “orderly marketing” to the world trade vocabulary.

Yuzuru Abe, the executive vice president

of that same company, in a recent U.S.

speech went so far as to say, “Until the current significant demand-supply gap can be

closed . . . some coordination is necessary in

order to maintain fair international trade.

Conventional principles of free trade are not

enough to cope with the additional tonnage

from the emerging nations or the continued

flow from government controlled steel producers, ”

The trigger price mechanism “can be

looked upon as the notable first step forward,” Mr. Abe said, adding that some loopholes and drawbacks remain.

Higher U.S. prices under controls, steel

men argue, will help the U.S. industry generate the revenues needed to carry out much

needed large-scale replacement and improvement of plant and equipment. In the

long run, the Japanese say this will benefit

consumers even though they are now complaining bitterly about the high steel price.

At the same time, the Japanese chide the U.S.

industry for not having taken full advantage

of previous periods of Japanese self-restraint

to strengthen its position in the late 1960’s

and early 1970’s.18

In addition to the export of steel products,

the Japanese policy has also been to export

steelmaking technology, particularly to less

developed countries. In this regard the following statement by T. Dahlby is of considerable interest:

In the steel industry, the guiding

philosophy now is to beef up divisions handling design and to build integrated steel

works for developing countries by offering

package deals, including technology licensing, feasibility studies, construction and

engineering advice. By selling experience

gained in building their own highly-efficient

industry, Japan’s Big Six steelmaker are

hoping to makeup for the expected low levels

of crude steel demand in the coming

years . . . .

Restrictions now in effect on exports to the

U.S. and Europe, as well as the strengthening

of the yen, have cut deeply into steel companies’ earnings. Severe price competition

from South Korean and Australian producers has registered an additional blow, though

Japanese makers feel safe in the short term

since the capacity of these rivals is still

relatively small.

‘financial Times of London, “Steel Japan No. 1 and Still

Gaining, ” vol. 2, No. 17, Apr. .30-May 6, 1979.
68 . Technology and Steel Industry Competitiveness

“At times of recession, ” says Hisao

Kuzuoka, general manager of Kawasaki

steel’s international department, “competition naturally intensifies, but we also realise

that we cannot continue to export large

amounts of crude steel. Therefore, the industry is putting emphasis on exports of

technology to countries like China, Brazil and

those in Southeast Asia, ”19

This drive for technology export, conducted

by several Japanese firms working in consortium and with significant assistance from

MITI and other government agencies, has

achieved considerable success.

Regulatory Policies

From 1971 to 1977, Japanese capital costs

for environmental compliance were 65 percent higher than U.S. levels. These higher investments were closely linked to capacity expansion taking place during that time; more

recent expenditures have been below U.S.

levels.

20 As is the case in Europe, Japanese

steelmaker also benefit from favorable fiscal and loan policies for industrial equipment

in general, and pollution abatement equipment in particular.

Third World and Developing Countries

The two principal policy tools of the developing countries are long-range planning and

direct government assistance. Mexico, for example, has established a Steel Coordinating

Commission to organize and advise both private and public companies engaged in the

production of iron, coal, coke, and steel. The

commission includes representatives from

the Council of Non-Renewable Resources, the

Ministry of Industry and Commerce, the Ministry of Finance, and the Office of the Presidency. The commission has helped plan two

large steel plants, including the development

of raw material supplies, transportation facilities, and housing. Significantly, the capacity of these and other steel facilities, when

completed, will exceed the present demand

“Tracy Dahlby, “J~p~n seeks a Long-Term Strategy for Prosperity,” For Eastern Economic Review, Aug. 2!5, 1978,

‘(’Hans Mueller and K, E, Kawahito, op. cit., p. 27.

for steel products within Mexico, and it is expected that much of it will be earmarked for

export markets.

Brazil’s Conselho Nacional de Nav Ferrosos e de Siderurgia coordinates and supervises the national steel plan, which aims to increase steel capacity to 20 million tonne/yr by

1978-79. To reach this goal the Brazilian Government is expanding its holdings into the remainder of the private steel sector and is involving itself extensively in raw materials

through the National Department of Mineral

Production,

Venezuela, Peru, India, Iran, South Korea,

Turkey, and Egypt have all developed 5-year

plans aimed at expanding steel productions.

Most of these plans are initiated, monitored,

and implemented by the governments.

Financing

Mexico provides an excellent example of

how developing countries use governmentfinanced assistance in support of their steel

industries. Both national and international

financing organizations invest in Mexican

steel. Siderurgica Lazaro Cardenas—Las

Truchas SA (SICARTSA), a Mexican publicsector enterprise established in 1969, is

building a steel plant with a first-stage production capacity of 1.2 million tonnes. Financial arrangements include a World Bank loan

and a long-term loan, guaranteed by the Mexican Government, from a group of industrial

nations. Related facilities, such as a railroad

spur, enlargement of port facilities, and housing for workers, will be financed directly by

the government. SICARTSA is 51-percent

controlled by the government, 25 percent by

National Financier (a government financing

agency), 12 percent by Altos Hornos de Mexico SA (71.5 percent of which is government

controlled), and 12 percent by private capital

sources,

Specialty steel production in Mexico is being expanded by the same type of financing

arrangements. Mexinox SA, a joint FrenchMexican venture to establish Mexico’s first

integrated stainless steel complex, has ob-
Ch. 2—Policy Options . 69

tained financial assistance from the Interna- ment-owned mills. Participants in the financtional Finance Corporation (IFC), a World ing of these projects include the World Bank,

Bank affiliate, and the National Financier. the Inter-American Development Bank, the

Agencia Especial de Financiamento IndustriBrazil has initiated a broad program to in- al (a Brazilian government agency), other

crease its raw steel production capacity from local sources, and (by credits) certain foreign

7.2 million to 20.2 million tonnes by 1980. The governments. Loans are guaranteed by the

program will be carried out by three govern- Federal Republic of Brazil.
CHAPTER 3

Problems, Issues, and Findings

Contents

P

81

81

82

83

84

85

86

88
Page

Impacts of New Technologies on the U.S.

Steel Industry ● *. ******D**..**.*****,, 86

18. How would technological changes affect

the restructuring of the domestic steel

industry?. . . . . . . . . .,,0, s . . . .,,....,, 88

19. How will future technological changes

affect the amount and type of energy

used by the domestic steel industry? ., . . . 90

20. To what extent can technological

changes reduce increasing U.S. reliance

on foreign coke? ● . . . . . 0,, .,, .0.,.,.., 91

21. How will technological changes affect

the cost and availability of ferrous

scrap? ● **. *.. .. O.*,..*.**, . ● ● ● ● ● . . ● 91

22. How do& changing technology affect the

timing and strategy of capacity

expansion? . . . . . . . . . 0 . .,.,...,, .., ,, 92

Financial, Regulatory, and Institutional

Barriers to the Adoption of New

Technology . .*..........*,*.*.******* 94

23. To what extent is insufficient capital a

barrier to the increased use of new

technology?. , . . . . .*****..,.*.*...*** 94

24. Do steel companies use effective longrange strategic planning for technological

innovation in order to gain competitive

advantage over domestic and foreign

producers? ., . . . . . , ., . . . . . ... , , , , ., . 95

25. Is there sufficient steel-related R&Din

the United States to meet the goal of

future technological competitiveness? . . . 96

26. Does the domestic steel industry employ

enough technical personnel and use

them effectively to enhance its

technological competitiveness?. ., , , , . . . 97

27. What are the impacts of EPA and OSHA

28

regulations on steel industry

modernization?., ● ,*. .. O., .**, ,* *O*,*, $8

How might labor practices affect the

introduction of innovative technology? , . . 99

.

Page

policy Considerations.*. **. .*. ***. ******a 99

29. Can the domestic steel industry stay

competitive without changes in Federal

policies? . . . . . . . . , . . . **,.*.*.*,,.*.* 99

30. Can the experiences of the steel industry

31.

32.

33.

contribute to the formulation of more

effective Federal policies for other

domestic industries?. ., , ... , ., . . . . 100 ● . . .

Should the steel industry be singled out

for a sector policy? ● ● ● ● ● ● ● * ● ● . * * ● ● . . ● ● 101

How do foreign government policies

affecting their steel industries compare

to U.S. policies? ● ● ● * ● ● ● ● . * ● ● ● ● ● * ● ● ! ! ● .102

What will be the effect of the new

Multilateral Trade Agreement on the

domestic steel industry?. . . . . . . . ... ....103

Policy options ● *.*, .., **. .***, *e** ***e*e 104

34. How can increased Federal assistance to

the steel industry be justified?. ...... ...104

35. Is there a need for direct Federal

financial assistance to the steel

industry?. . . . . . . . . . . . . 0,, . .,, ,, ...., 105

36. What effect would changes in Federal

tax laws have on capital formation? .. ...106

37. Should there be more Federal support of

steel R&D and innovation?. . . . . . . . . . . .. 107

38. What regulatory changes could be

considered that are simultaneously

aimed at improving environmental and

occupational protection and at

revitalizing the steel industry?. . ........108

39. What will be the affects of continuing to

export ferrous scrap?. . . . . . . . . . . . . . . . . 109

40. Are Federal Government targets for

utilization of ferrous scrap and other

recovered materials needed, feasible,

and the best approach? ● *.*,,*,.*.,,** 110
CHAPTER 3

Problems, Issues, and Findings

Introduction

This chapter discusses 40 topics which,

taken together, give a detailed view of the entire report supplementing the brief summary

in chapter 1. Each of the 40 discussions is

self-contained and usually draws from several chapters of the report.

Because each topic stands alone, the reader may tackle them in any order and may skip

questions without sacrificing comprehension.

Within each of the eight groups of topics, the

higher priority problems or issues are addressed first.

The question-and-answer format should

promote a fresh look at a number of longstanding and much publicized topics. Moreover, by defining a relatively large number of

questions, attention is given to important

problems, particularly of a long-range nature, which are normally hidden by shortrange, crisis-type questions facing Government and industry.

Reasons for Congressional Concern

1 What does competitiveness mean?

The term “competitiveness” does not have

much meaning when it is taken out of context.

One oversimplified meaning of competitiveness is how much of a product is sold by one

producer relative to another; in this sense,

market share becomes the dominant measure

of competitiveness. There are, however,

many ways to sell more of a product than a

competitor does, especially if maximizing

profit is not a goal.

If profits are a secondary consideration,

then prices are not necessarily linked to

costs. A steel company may be price competitive and, indeed, may have a price advantage

over other firms in the same marketplace,

rather than mere parity with them; but it still

may not be cost competitive. Cost competitiveness is determined by many factors, only one

of which is the production technology; other

factors include management, labor, capital

investment, financial structure, marketing

strategies, strength of national currency,

Federal regulatory costs, and ownership of

physical resources and technology. In many

complex ways these other factors are also

linked to technology.

Technological competitiveness refers to the

type of technology used, the extent to which

new technologies have been adopted, and the

resources and infrastructure related to the

creation of new technology, such as R&D facilities, staff, and funding levels.

In addition to price competitiveness, cost

competitiveness, and technological competitiveness, there are considerations of product

quality, performance, dependability, consistency, and range. Technology plays a role in

some of these factors, too, particularly in the

sense that the technology used to make steels

will, to some extent, determine the physical

and chemical characteristics of the steels

produced. Customer service, including technical services, financing, and deliverability, is

also important.

Lastly, Federal Government policies can

affect competitiveness, particularly in the international market. Direct and indirect Fed73
74 . Technology and Steel Industry Competitiveness

eral support to steel producers can easily offset any competitive disadvantage a company

or industry may have (see Topic 30). Policies

that have the effect of limiting increases in

capacity also limit the opportunities for

adopting new technology and achieving maximum technological competitiveness.

2

Is the U.S. steel industry homogeneous?

Three factors can cause confusion in an

analysis of the U.S. steel industry:

●

●

●

There are a great number of companies

involved in ferrous materials that are

best not considered as part of the domestic steel industry.

The domestic steel industry is not homogeneous.

Some companies usually treated as

steelmaker have diversified out of steel

and are continuing to do so.

Companies not considered part of the domestic steel industry in this analysis include:

foundries, ferroalloy producers, steel distribution companies, steel fabricating companies, companies producing or processing raw

materials only (e.g., coal, iron ore, scrap,

coke); and the design, construction, consulting, and equipment companies that serve

steelmaker. In this analysis, the U.S. steel industry includes only those firms that at one

point in their production sequence make molten steel and subsequently sell mill forms and

perhaps some primary products.

Because the industry is not homogeneous,

OTA has found it useful for purposes of analysis to distinguish three major segments:

● integrated steelmaker,

● nonintegrated steelmaker, and

● alloy and specialty steelmaker.

The first group, integrated steelmaker, convert iron ore to molten iron in blast furnaces,

with coke as the reducing agent, and then

convert the molten iron to commodity carbon

steels in either basic oxygen, electric arc, or

open hearth furnaces. The second group, nonintegrated steelmaker, do not have ore conversion facilities; they depend mainly on ferrous scrap to feed electric arc furnaces, and

produce a relatively small range of simple,

low-price carbon steels. The third category,

alloy/specialty steelmaker, use a variety of

processes to make higher priced, higher performance steels than those produced in the

other segments.

Some companies may have plants in more

than one of these three categories, and this

makes company classification difficult: some

integrated companies are installing scrapbased electric furnaces, and both integrated

and nonintegrated facilities may also make

alloy or specialty steels, Nonintegrated companies may be able to install direct reduction

(DR) facilities to convert iron ore into solid

iron that is substitutable for and superior to

some grades of ferrous scrap in electric furnaces (see Topic 16). A company taking this

route could become integrated, whereas a

company purchasing direct reduced iron

(DRI) would remain nonintegrated.

It is also difficult to classify steel producers by size. The term “minimill” was originally coined to describe nonintegrated producers who made relatively small amounts of

steel, on the order of 45,000 tonne/yr. Many

of these companies have grown substantially

and now produce in the same range as the

smaller integrated companies (up to 1 million

tonne/yr); these facilities are now sometimes

called “midimills” or market mills.

Diversification of steel companies out of

steelmaking has made analysis of some issues

even more difficult, particularly analysis of

financial performance and R&D activities.

(See Topic 8.) How a steel company that produces its own raw materials, such as coal

and iron ore, figures its steelmaking costs

greatly affects its profitability. Its input costs

may be based on market price, actual production cost, or something in between. For some

companies, the profitability of their steelmaking business is actually much worse than

available data indicate, because the profits

from their nonsteel operations offset steel
Ch. 3—Problems, Issues, and Findings ● 75

losses. For example, according to one analysis, U.S. Steel Corp., the Nation’s largest

steelmaker (with 21 percent of domestic shipments), actually lost over $15/tonne shipped

in 1978, although the corporation as a whole

showed a net profit on investment of 5.3 percent.

3

Are other engineering materials displacing steel?

Steel has been and remains the most important engineering material in American society. It plays a vital role in all primary manufacturing and construction and is a strategic

material that is especially and increasingly

critical for economic and military security.

Domestic consumption of steel continues to

increase, though at a slower rate than during

the early stages of industrialization. In real

terms, however, the consumption of steel has

declined: during the 1950’s, 230 lb of steel

were consumed annually per $1,000 of gross

national product (GNP) (in constant 1971

dollars), 194 lb during the 1960’s, and 176 lb

for 1970-77. The consumption of aluminum

and plastics per $1,000 of GNP increased

substantially during the same period. In recent decades, the growth rate in steel consumption has been approximately 2 percent

per year; in aluminum, 6 percent; and in plastics, 8 percent. Nevertheless, the per capita

consumption of aluminum and plastics is only

about 60 and 140 lb annually, respectively,

compared to approximately 1,000 lb of steel.

Although the use and role of steel appear

to be declining according to some measures,

many analysts believe that there will be a

surge in steel demand as the steel-using structures, such as bridges, buildings, railroads,

and primary manufacturing facilities, built in

the United States during the last 50 years

wear out. Furthermore, in many applications,

there are still no cost-competitive performance substitutes for steel.

One frequently mentioned case in which

other materials are being substituted for

steel is in automobile manufacture. The need

to reduce vehicle weight in order to meet fueleconomy standards has driven manufacturers to substitute plastic and aluminum for

steel, even though these substitutes may increase costs. Much of the steel in an automobile cannot be economically replaced or eliminated, however, and the use of steel alloys to

make strong, lightweight components is limiting further substitution of nonferrous materials. If automobile sales grow enough to outweigh the reduction in steel per automobile,

there might even be a small net increase in

steel consumption. If foreign automobile companies continue to increase their U.S. manufacturing operations and use domestic steel,

this too could increase the consumption of

steel for automobiles. It is still likely, however, that the use of steel in the automobile

market will be steady or decline.

To the extent that aluminum, plastics, and

cement can be substituted for steels, the consumption growth rate differences among

these materials may reflect price differences.

During the past two decades the average

price for steel increased by about 30 percent

in constant 1971 dollars, while prices for cement and aluminum stayed about the same,

and prices for plastics decreased by about 40

percent. However, prices vary greatly within

each material category.

Steel’s future price competitiveness with

other materials may improve as a result of

energy and raw material cost changes, which

have much stronger adverse impacts on aluminum and plastics. Aluminum prices have

already started to increase sharply and will

continue to do so as electricity costs increase

in the future. The aluminum industry also is

very dependent on imported raw materials,

although new technology and increased recycling may lessen this dependence. Prices of

plastics are dependent on natural gas and petroleum prices. Here, too, technological

changes may improve the situation. In contrast, cementmakers can switch from oil and

gas fuels to coal, and new cement technology

reduces energy use by nearly half. Steelmaking already depends primarily on domestic
76 . Technology and Steel Industry Competitiveness

coal and can use domestic ore and scrap as

raw materials.

4

To what extent has the U.S. steel industry lost its ability to compete in domestic and foreign markets?

On the basis of price, product quality, customer service, and dependability, all three

segments of the domestic steel industry are

still competitive for the vast majority of steels

in most domestic markets (see Topic 2). European steelmaker have higher production

costs than U.S. companies, and although

some foreign producers, such as Japan and a

few developing nations, may have lower production costs for some steels, these cost advantages are not great enough to offset transportation and other costs associated with exporting to many inland U.S. markets. But

other nations sometimes sell steel below

costs—and possibly below their domestic

prices—suffering economic losses in order to

achieve social goals such as maintaining employment levels. Domestic trade laws and policies have not, from the industry’s perspective, successfully eliminated “dumped” or unfairly traded steels from the market.

U.S. technological disadvantage, while serious, is not yet overwhelming; most innovations are not so unique as to rule out competition from older processes or products. Thus,

although the domestic steel industry has very

low levels of adoption for a number of new

technologies and a very high percentage of

obsolete facilities, it does have market and

product competitiveness at the present time.

The industry could be on the brink of losing

its competitiveness in domestic markets, however, because it has little proprietary technology, low adoption rates for existing technologies, and insufficient capital for an ambitious program of plant modernization, expansion, and construction. In contrast, some

foreign steel industries have already modernized considerably and are still expanding,

using the latest innovative technology. In a

few cases, where foreign producers also have

abundant resources of energy, raw materials, and relatively low-cost labor, they could

soon achieve a cost and price advantage over

American producers in some domestic markets. Currency exchange rates also play an

important role; a declining dollar in world

money markets somewhat reduces foreign

cost and price competitiveness.

The domestic industry’s future ability to

compete in its home markets will depend on:

1) the degree to which old, obsolete facilities

are closed, 2) the level of investment in modernizing remaining plants, and 3) the rate of

construction of new facilities based on technologies innovative enough to offer net cost

reductions. With present limits on capital for

investment, these steps can be carried out

only with a net reduction of domestic steelmaking capacity; the remaining capacity,

however, will probably be cost competitive in

the domestic market. The closing of obsolete

facilities is most likely in the integrated segment of the industry; in the other two segments, continued modernization and expansion are far more likely.

Domestic steelmaker are not competitive

in foreign markets, with the exception of

some technology-intensive high-priced alloy

and specialty steels. Domestic producers of

most commodity carbon steels do not have

sufficiently lower production costs to be competitive after adding transportation costs and

other costs of marketing in a foreign nation.

Domestic producers of the high-technology

steels lack experience in exporting and face

trade restrictions in many nations, as well as

stiff competition from other nations whose industries are often less profit-motivated than

U.S. companies. Many foreign steel industries

are directly or indirectly supported by their

governments, especially in export activities

(see Topic 32). Currency exchange rate

changes may also favor the competitiveness

of some foreign industries, and the unpredictability of these changes tends to dissuade

domestic firms from developing export business. Nevertheless, the recently completed

Multilateral Trade Agreement could facilitate exports by domestic steel companies;

much depends on how effectively this agree-
Ch. 3—Problems, Issues, and Findings ● 77

ment can be implemented and enforced (see

Topic 33).

5

How does the R&D effort of the U.S.

steel industry compare to that of foreign industries?

There has been a steady decline in domestic industrial R&D in steel (see Topic 25). The

current emphasis is on using existing technology to solve immediate problems in order to

secure a fast payoff rather than creating new

knowledge, new technology, and major new

opportunities. In this respect the United

States is more similar to the Japanese steel industry than to the West German, French,

British, or Swedish. These European industries place great emphasis on new knowledge

and major innovations. Japanese “innovation, ” on the other hand, is more an efficient

(and often brilliant) application of technical

knowledge to a particularly well-chosen problem, in order to obtain maximum economic

benefits rather than a profoundly new scientific concept. But despite this conceptual similarity, the United States lacks Japan’s closely

integrated, symbiotic industry-governmentuniversity R&D infrastructure, and this may

prevent its reaching the level of success the

Japanese enjoy.

In the U.S. steel industry, R&D personnel

usually do not have a major role in the strategic planning decisions of the firm, not even

those regarding adoption of new technology

(see Topics 24 and 26). The R&D function is

not well integrated into the corporate structure: the emphasis is on new products, and

R&D is more closely connected to sales and

marketing than to production or corporate

planning. Production problems may be

worked on and solved by R&D, because production problems quickly manifest themselves in poor corporate performance; but the

strong, continuous flow of creative ideas and

useful information from production to R&D,

which could stimulate innovative work, is

lacking. This is in marked contrast to Japan

and some developing nations, where there is

a much closer relationship between production and R&D personnel. R&D programs have

the prestige to attract capital and talent in

Japan; except for a few companies in the

United States, R&D is regarded as a service

function, particularly technical service to

customers, rather than a long-term investment for the future.

In European steel industries there is more

mobility of technical personnel among firms,

universities, and government facilities than in

this country. Working on R&D is highly regarded in all of these sectors, and the very

best scientific and technical personnel are attracted to R&D activities. The economic plight

of these industries seems to intensify their

use of R&D, rather than to diminish its importance as in the United States. Much of R&D

effort in European universities and research

institutes is government funded; in the United

States, there has been a decline in academic

steelmaking programs largely because of a

lack of Government support. There are no national institutes for steel R&D, such as those

in West Germany, in which companies join

with university personnel in long-range R&D

projects, including a great deal of basic research.
78 ● Technology and Steel Industry Competitiveness

Consequences of Continuing Loss of Competitiveness

6

In future periods of strong world demand, what would be the conse -

quences of contraction of the U.S. steel

industry and increased imports of

steel?

Contraction of the domestic steel industry

can improve the profitability of individual

companies. However, increased dependence

on imports could, in periods of strong world

demand, place the United States in a shortage

and price situation similar to that stemming

from the dependence on foreign oil. Many

analysts contend that consumers benefit from

low-priced imported steels and that imports

should be allowed to increase. The attempt to

hold down unfairly traded imports through

the trigger-price mechanism has also had the

effect of raising import prices.

The industry view is that, except in times

of world oversupply, domestic steels are

cheaper than most imports and that, in times

of tight world supply, import prices are markedly higher than those permitted for domestic

steels. This was the case during 1973-74,

when import prices were as much as $110/

tonne higher than domestic prices. The industry also notes that increasing dependence on

imports reduces domestic employment, makes

long-term investments in technology difficult,

affects national security adversely, and contributes significantly to the trade deficit.

The cyclical nature of the domestic and

world steel industries determines import

prices. During the past several years, imports

have risen to relatively high levels—about 18

percent of domestic consumption, not counting the steel in imported products such as automobiles. Domestic demand and capacity utilization have been relatively high, but world

markets have been depressed, foreign capacity utilization has been low, and steel has

been in oversupply. Thus, after the 1973-74

short-supply period, imports have been relatively cheap.

However, there is a distinct possibility that

worldwide supply will tighten within the next

5 to 10 years. Even as demand steadily increases, many industrialized nations (including Japan, apparently) will be maximizing capacity utilization and profitability by closing

obsolete facilities, reducing the number of

products made, and designing modern capacity for largely domestic demands. Many steel

industries, particularly in Europe, would like

to avoid the large losses that have occurred in

the past, when capacity was geared to exports and peak demand levels. The large increase in Third World steelmaking capacity

will also turn traditional exporters toward

their domestic markets. The result could be a

very tight supply situation in the worldwide

export market, with excess capacity to be

found only in a few energy-rich less developed countries (LDCs). Even if steel imports

should be available in such a period, their

price would probably rise dramatically, both

because of normal market forces and because steel from recently built plants (with

high fixed financial costs) will cost more than

steel from old plants.

7

Do the low profits of the domestic steel

industry make it an unattractive investment?

The profitability of the steel industry, compared to other domestic manufacturing industries, is poor and getting worse. The average

return on equity for the steel industry during

the 1950’s was 10.7 percent; during the

1960’s, 7.8 percent; and during 1970-78, 7.6

percent, as compared to 11.3, 11.2, and 12.5

percent, respectively, for all manufacturing,

Thus, the ratio of steel profitability to that of

all manufacturing industries was 95, 70, and

61 percent for the above periods. Even though

steel sales and profits are cyclical, the industry’s better years do not offset its poor years.
Ch. 3—Problems, Issues, and Findings ● 79

Compared to those few foreign steel industries operated for profit, however, the U.S. industry is one of the most profitable. Comparisons with Japan are difficult to make because

the Japanese industry is so highly debt financed, almost twice as much so as the U.S.

steel industry, with banks having ownership

in the form of loans so that return payments

take the form of interest rather than dividends. Only the much smaller Canadian steel

industry, with its much shorter depreciation

schedule (2-1/2 years v. 12 years in the United

States) is significantly and consistently more

profitable than the U.S. steel industry.

When the industry is disaggregated into its

three major segments, the financial data reveal that the nonintegrated and alloy/specialty producers have markedly higher profits

than integrated companies. For example, in

1978 the average return on investment for 12

integrated companies (accounting for 63 percent of domestic shipments) was 6.2 percent;

for 6 nonintegrated producers (accounting

for 61 percent of their segment’s shipments)

the average was 12.3 percent; and for 9 of the

major alloy/specialty companies the average

was 11.1 percent. (For the last segment import quotas were in effect for several years.)

The financial data for the integrated companies are somewhat misleading because

substantial nonsteel business is generally included. Without nonsteel profits, financial results for integrated companies would be substantially worse; indeed, for some companies

steelmaking itself generally loses money. In

contrast, the best performing of the nonintegrated and alloy/specialty companies have

profitabilities considerably above the averages for their segment and are often considered growth companies. (For example, an outstanding nonintegrated producer has had an

annual growth rate of close to 40 percent for

earnings and production during the past 10

years. ) These are precisely the companies

that use the latest technology.

Most steel companies have increased their

borrowing, although their debt limits may

have been reached. The low-profitability

companies are generally viewed as poor investment opportunities, but it can be argued

that this is a consequence rather than a

cause of their underinvestment in new technology, since investment capital is generally

linked to perceptions of future success rather

than past performance.

There is considerable evidence of continued financing of foreign steel industries by

U.S. banks and financial institutions. However, it is not clear that, as some industry

leaders have asserted, domestic steelmaker

have been unable to secure comparable financing from the same sources. During the

past 10 years, the debt-to-equity ratio for the

entire steel industry rose from 36.5 to 44 percent, indicating that financing has been available. In this same period, stock dividends remained relatively stable and high, totaling

$5.3 billion as compared to $4.1 billion for interest and charges on long-term debt.

Foreign investments in and purchases of

domestic steel companies have been increasing as a result of undervalued stocks, a weak

dollar, decreasing domestic competition and

capacity, increasing domestic demand, relatively abundant domestic resources. and

highly efficient labor. This trend toward increased foreign participation in U.S. steel

companies is likely to accelerate, particularly

for nonintegrated companies with good profitability.

8

What will be the impact of continued

diversification into nonsteel operations by domestic steel companies?

There is some controversy about the impact of diversification on steelmaking capacity and investment in new technology. On the

one hand, industry maintains that nonsteel

profits help finance steelmaking. On the other

hand, critics outside the industry contend

that diversification siphons off investment

capital needed for new technology and contributes significantly to the decline of domestic steelmaking capability.
80 ● Technology and Steel Industry Competitiveness

For the past 2 years, domestic capacity has

declined by at least 1.8 million tonnes, or 1.5

percent of raw steel capacity, per year. It appears likely that this rate of decline will continue for the next several years as unprofitable plants continue to close. The actions of

the Nation’s two largest steelmaker, U.S.

Steel Corp. and Bethlehem Steel Corp., accounted for much of this capacity reduction.

During the past 3 years, U.S. Steel’s nonsteel

assets grew by 80 percent, to $4.7 billion,

while steel assets increased only 13 percent,

to $5.9 billion, and capacity actually decreased. Although Bethlehem Steel has not

undertaken major diversification, it has reduced its steelmaking capacity by closing obsolete facilities to improve its profitability.

U.S. Steel is apparently now doing the same,

Diversification out of steel is likely to continue. This contributes to declining, but more

modern and competitive, domestic steelmaking capacity. The net result, however, is likely

to be a further increase in imports. The nonintegrated producers (whose profits are

healthy) may continue to expand, but they are

too small to reverse the decline in overall

capacity.

Industry argues that, without diversification into profitable nonsteel activities, more

plants and perhaps whole integrated companies would simply shut down. In this case, the

demise of the Nation’s steel industry would be

much faster and more dramatic than if present slow shrinkage continues, and the social

dislocations would likely be severe enough to

require substantial Government intervention.

9

Does the domestic steel industry have

the capability to innovate, or has it become dependent on buying proven foreign technologies?

Innovation requires new knowledge, inventions, capital, highly competent and creative

people, risk-taking, determination, and excellent insights into existing and potential

markets. The steel industry knows enough

about domestic markets and its own process

needs to utilize market-pull insights, but it

does not appear to have sufficient profitability to support a level of capital formation that

would create an R&D base strong enough for

future innovation. Considering the low levels

of basic research and R&D in the industry itself, as well as in universities and Government laboratories, it is doubtful whether the

domestic industry now has the capability to

create major process or product innovations

(see Topics 5 and 25). However, it undoubtedly has a significant capability to create incremental innovations.

Because the industry lacks adequate capital for high-cost innovation, it leans towards

purchasing patent rights, technology, and

know-how from foreign steel companies, from

foreign research, consulting, and technology

transfer companies, and from domestic design, consulting, construction, and equipment

companies. Often, these latter domestic companies are acting as agents for foreign-owned

technology. Foreign technology, if adopted at

a sufficiently rapid rate, can provide competitive parity, but not competitive advantage.

Paradoxically, during the past few years,

when the U.S. steel industry has been more

profitable than almost all foreign steel industries, foreign R&D and innovation have accelerated. There has been a steady stream of

foreign inventions and innovations that are

likely to place foreign industries at a distinct

advantage and to exacerbate American dependence on foreign technology. Developing

nations have produced impressive numbers

of innovations that place great emphasis on

suiting their fast-growing industries to the efficient use of local resources and conditions.

Some developing nations are pursuing strategies of exporting their production rather than

merely using this production at home and reducing imports. These countries also export

technology to industrialized and less developed nations.
Ch. 3—Problems, Issues, and Findings ● 81

Factors Affecting Competitiveness

10 What factors are most important in

determining total production costs,

both domestically and abroad?

Unusually large cost increases for raw materials were responsible for most of the 133-

percent increase in domestic steel production

costs during the 1970’s, Although hourly employment costs are higher than the all-manufacturing average and recent increases have

been considerable, the relative significance

of unit labor costs is declining as a result of

skyrocketing raw material costs, particularly

for energy. During the past decade, raw materials (including energy) were responsible

for almost 60 percent of the total costs of producing a tonne of steel in the United States;

labor, for slightly more than 30 percent; and

financial costs, for about 9 percent.

Although financial expenditures are generally a small fraction of production costs, they

have important indirect effects on the productivity of equipment, labor, and energy. In

turn, improved factor productivity plays an

important role in determining total production costs. Thus, the indirect impact of financial costs on total costs is much greater than

their share of total production costs would indicate, because increased capital expenditures decrease the per-unit costs of other inputs. American steelmaker have also benefited from high operating rates and a declining dollar over the last decade (see Topic 13).

Foreign steel industries have a roughly similar breakdown of production costs. During

the early 1970’s, both materials and financial

costs abroad were a somewhat larger share,

and employment costs a smaller share, of total production costs than in the United States.

During the past decade, however, despite major increases in raw material costs, particularly for energy, all major producing countries except the United States have slightly

reduced the proportion of raw material costs

in total costs. Only in the United States have

materials and energy costs increased at a

much faster rate than either employment or

financial costs. This is probably a consequence of lower domestic energy prices

(which are only now reaching international

levels), smaller energy conservation improvements than in some other countries, and

greater foreign financial costs.

Major European and Japanese steelmaker, since at least the late 1960’s, have made

larger capital investments than U.S. producers relative to their total steelmaking costs. In

Europe, financial costs hovered between 13

and 17 percent of total production costs during most of the decade. Japan, already burdened with a financial cost component of 20

percent, was the only major producing country in which financial costs increased faster

than either employment or raw material

costs.

Many of these differences result from the

high debt-to-equity ratios of foreign industries and the higher value of new assets requiring financing. This is particularly true of

the Japanese steel industry, whose accelerated investment has resulted in the construction of larger plants with optimum layout and

process control and, consequently, higher

productivity of raw materials, energy, and labor. The fact that Japanese producers continue to have lower production costs, despite

currency changes favoring U.S. producers,

can be explained largely by their investment

strategies.

The average 1978 cost of Japanese steel

(f.o.b. Japan) was about $385/tonne (materials, labor, capital costs) —some 10 to 20 percent below U.S. production costs. But the additional costs for exporting the steel—including transportation, warehousing, sales, and

marketing— must be added to production

costs. These costs are substantial, and transportation costs in particular are steadily increasing, These export costs may offset any

advantage in production costs, as is usually
82 ● Technology and Steel Industry Competitiveness

the case for Japanese steel exports to the

United States, especially for inland locations.

During the next several years, total production costs (in dollars) for the major producing countries are expected to draw closer,

with an approximate 15-percent margin between the highest (France) and lowest costs

(Japan). In local currencies, Japanese and

West German total production costs have increased at a much slower rate than U.S.

costs. Japan is expected to retain its present

leadership in total production costs, and

West Germany and Japan are expected to

continue as leaders in the more efficient use

of raw materials, with cost increases at only

about half the U.S. rate. Furthermore, materials costs in these countries are expected to

remain a smaller proportion of total costs

than in the United States.

With respect to near-term capital investments, Japan is expected to continue its current strategy of slowing down its plant construction program, while continuing to introduce more energy-saving equipment. Depending on actual operating rates, Japanese financial expenditures will decrease or only marginally increase during the next few years.

Relative to their current production costs, the

French and British steel industries are expected to be the major benefactors of restructuring and modernization among major steelproducing nations. Nevertheless, these countries will likely remain noncompetitive.

11 What are the impacts of environmental regulations on the competitiveness of the U.S. steel industry?

Compared to other basic industries, steel is

faced with a major environmental cost burden. This may be attributed in part to the fact

that most steelmaking processes were developed (and most facilities constructed) during

a time when environmental considerations

were an insignificant factor in equipment design. There has been little recent construction, which might allow the incorporation of

environmental technology, and the industry

has been forced to follow the less efficient

retrofit approach.

The steel industry has reported environmental equipment expenditures from 1969 to

1978 averaging $280 million per year, or

about 13 percent of annual capital investments. Future regulatory investments will increase to between $550 million and $800 million annually, according to Federal and industry estimates respectively. In addition, the industry will incur substantial costs in operating and maintaining environmental control

equipment, particularly for increased energy

use. Steelmaker have estimated that future

environmental costs will be about 20 percent

of the industry’s total capital investments per

year.

Industry claims that regulatory costs have

contributed to low profitability and capital

formation, particularly because the regulations apply to the large number of old plants,

not just new ones. This claim cannot be disregarded, but neither can the important benefits of health and environmental regulations

for steelworkers and society as a whole. New

plants benefit from optimal control technologies and lower compliance costs, but the

U.S. industry is not likely in the foreseeable

future to build completely new integrated

plants like those in Japan and the LDCs. To

some extent, compliance with environmental

regulations can even be used by management

to justify reduced investments. The Environmental Protection Agency (EPA) stresses compliance, while the industry is concerned

about modernization. Both are worthy social

goals, and it may be possible to reconcile

them through innovative technology that is

environmentally cleaner than existing processes.

U.S. regulatory costs are expected to increase over the next several years because

firms are still in an earlier stage of compliance; Japanese steelmaker, whose pollution

abatement investments have until recently

been higher than U.S. levels, are beginning to

enjoy an opposite trend. If other major steelproducing countries should in the future face
Ch. 3—Problems, Issues, and Findings ● 83

similar levels of environmental costs, the financing of environmental expenditures could

become an important factor affecting international competition. In the United States, environmental costs are borne directly by producers and indirectly by consumers only to

the extent that Government and the marketplace permit these costs to be passed on in

the form of higher steel prices. Industry

claims that Government has not permitted

enough of the costs to be passed on, and to the

extent that Government has limited price increases and allowed the entry of unfairly

traded imports, industry’s claim is justified.

Steel producers in other major industrialized

nations generally do not need to rely on the

market mechanism to distribute their environmental costs, because those industries

often are government owned or financed. Direct or indirect government support programs help them finance environmental expenditures, perform environmental R&D, or

gain more favorable tax laws.

As steelmaker from developing nations,

such as Venezuela, Mexico, Brazil, and South

Korea, increase their share of the international market, these producers will join those

in the European Economic Community (EEC)

in having an international trade advantage

over the United States in the form of lower environmental costs or greater government assistance to meet compliance costs. In a world

industry in which profits

environmental costs can

though they may amount

centage of total costs.

are low or absent,

be significant even

to only a small per12 What are the potential impacts of

OSHA regulations on the steel industry?

The Occupation Safety and Health Administration (OSHA) was established by Congress in 1970, but thus far OSHA regulatory

costs have been rather limited. They are the

steel industry’s greatest regulatory uncertainty: the costs to industry of OSHA regulations are not well understood, and information on future costs is speculative. As enforcement activities gain momentum and regulatory costs increase during the next several

years, more detailed reporting systems and

analyses will probably be developed.

The industry reported OSHA-related expenditures of about $4 I million for 1977, Expenditures in 1978 and 1979 are estimated to

have totaled about $80 million, When judicial

challenges are settled, and the Agency begins

actively enforcing major regulations affecting

the steel industry, these expenditures may increase considerably. In a number of cases,

however, environmental and occupational

regulations overlap, so that combined regulatory costs will be less than those for EPA and

OSHA evaluated separately and summed.

Cokemaking will remain the industry’s main

occupational health hazard for the foreseeable future. Thus, integrated producers, especially the older and smaller ones, will be

affected more severely than others in the

near future. However, anticipated revisions

in noise and metallics standards could have a

substantial impact on all industry segments.

OSHA has little specific statutory guidance

on questions of technological or economic feasibility. It can require the transfer of promising abatement technologies between industries, but it cannot require major privatesector R&D to develop such technologies. Its

standards may not be “prohibitively expensive” or disrupt a whole industry, but OSHA

is not required to consider the impact of its

regulations on the profit margins or viability

of individual companies. Under these circumstances, the industrial sector has developed a

strong interest in cost-benefit analysis. Although the industry is able to provide cost

data, the Government and labor interests

have had difficulty providing a dollar figure

for safety and health benefits. A Supreme

Court ruling is expected soon on this controversial subject.

Another problem is how the costs of OSHA

regulations should be distributed. To the extent possible, the industry passes these costs

on in the form of higher prices. However, industry claims that Government policy restricts price increases.
84 . Technology and Steel Industry Competitiveness

There is inadequate information on the effect of OSHA’s regulations on international

competitiveness. On the whole, producers in

other industrialized nations are also faced

with increasingly stringent regulations, but

they generally enjoy government assistance

or tax privileges in financing health and safety expenditures. Thus, for comparable requirements, U.S. steelmaker are typically at

a competitive disadvantage. At least for the

time being, producers in developing countries

have the greatest advantage because they

have the fewest occupational health and safety requirements.

13 What is the impact of domestic labor

productivity on international cost

competitiveness?

There is considerable disagreement on international comparisons of labor productivity. However, most sources suggest that the

U.S. steel industry no longer leads its international rivals in labor productivity as measured by man-hour requirements per tonne of

steel. Japan has overtaken the United States

as the world’s leader in labor productivity

because of differences in labor/management

relationships and because of Japan’s greater

investment in new technology.

Since at least the early 1960’s, the U.S.

steel industry has had a lower labor productivity growth rate than the average either for

other U.S. manufacturing industries or for

foreign steel industries. Nevertheless, actual

domestic labor productivity levels remained

competitive with international rivals until the

mid-1970’s. Japanese steel labor productivity

probably exceeded that of the United States

for the first time in about 1975.

Looking into the mid-1980’s, it is expected

that labor productivity growth rates will be

the highest in Europe, followed by the United

States and Japan. Even assuming a continuing

phaseout of older U.S. plants, Japan is likely

to maintain its lead in labor productivity. Between now and the mid-1980’s, Japanese

man-hour requirements are expected to be

reduced by 3 percent per year; by then they

will be only 90 percent of U.S. requirements.

Of the major European countries, only West

Germany is in a position to approach overall

U.S. labor productivity levels by the mid1980’s.

Because labor productivity is closely related to the capability of the equipment being

used, it is a good measure of the technological

competitiveness of the domestic steel industry. What matters even more on the international market, however, is the interaction between labor productivity, hourly employment

costs, and currency values. These factors,

taken together, determine unit (per tonne)

labor costs,

From 1969 to 1978, the declining value of

the dollar has had a major offsetting impact

on high hourly employment costs, and U.S.

steelmaker experienced small improvements

in unit labor costs compared to other steelproducing countries. U.S. labor productivity

improved modestly compared to its major

competitors, but foreign hourly employment

costs (in dollars) rose 1-1/2 to 3 times faster

than in the United States. As a result, U.S.

unit labor costs moved from highest to second

lowest, and they are currently only about 25

percent higher than Japan’s, which remained

the world’s lowest during the entire period.

The United States generally has enjoyed

more favorable capacity utilization rates

than its competitors during recent years. During the past 7 years, U.S. operating rates

have been very high—more than 85 percent

—while EEC and Japanese rates averaged

slightly more than 70 percent. High operating

rates increase equipment and labor efficiency and reduce unit labor costs.

The United States is not expected to maintain its favorable international position with

respect to unit labor costs into the mid1980’s. Assuming the European steel industry

reduces capacity and narrows its product

lines, West Germany and perhaps England

are expected to reduce their cost below the

United States; Japan is expected to continue

its clear lead until well into the mid-1980’s.
Ch. 3—Problems, Issues, and Findings . 85

Depending on actual operating rates, U.S. crease in value relative to the dollar at a

near-term productivity growth rates will con- much lower rate than during the past decade;

tinue to be no more than half of Japanese and if so, international monetary changes would

West German growth rates. Furthermore, favor U.S. steel producers less than they have

some foreign currencies are expected to in- previously.

New Technologies for U.S. Steel making

14 Can new technology help solve major industry problems of competitiveness, capacity, and capital?

Long-range planning for and expedient

adoption of a variety of new steel technologies could effectively reduce production

costs, thereby improving competitiveness and

slowing the rate of decline in domestic steelmaking capacity. The new technologies also

might have lower capital requirements than

more conventional technology for similar levels of capacity replacement or expansion.

There is particular need to recognize the

self-fulfilling aspect of the description of steel

as a “mature” industry (see Topic 24). The industry must recognize that the economic, social, and political world in which it operates

is changing and that technology must be used

to cope with externalities as well as to produce steel. There are substantial opportunities for change and innovation. New technologies, some already commercially available

and others with significant likelihood of successful development and demonstration,

could potentially reduce energy consumption,

improve yield, reduce use of coke, improve

labor productivity, reduce capital costs,

allow greater use of domestic ferrous scrap

and low-grade coals, permit faster construction of new plants, and offer greater flexibility for importing certain raw materials and

semifinished steels rather than finished steel

products.

15 What is the most important technological change for domestic steelmaking during the next decade?

Two major changes in steelmaking have developed since World War II. Basic oxygen

steelmaking has already been widely adopted

by the integrated segment; continuous casting

has not, even though it is a well-proven and

accepted technology.

Simply put, continuous casting replaces

with one operation the several steps of ingot

casting, mold stripping, heating of ingots in

soaking pits, and primary rolling of ingots into

various shapes. The basic concept in continuous casting is the use of an open-ended mold

to cast an indefinite length of the desired

cross section. The molten steel solidifies from

the outer cooled surfaces inward during the

casting process, and the semifinished slab,

bloom, or billet that emerges can be cut into

desired lengths.

The main benefits of continuous casting

over ingot casting are:

● It saves a considerable amount of energy

directly by eliminating energy-intensive

steps and indirectly by reducing scrap

and thereby increasing yield; the sum of

direct and indirect energy savings is approximately 3.3 million Btu/tonne cast,

or almost 10 percent of total steelmaking

energy consumption.
86 . Technology and Steel Industry Competitiveness

●

●

●

●

●

●

It increases process yield, in that more

finished steel is produced from the same

amount of liquid steel, thereby reducing

all unit costs.

It improves labor productivity by eliminating a number of steps, increasing

yield, improving worker conditions, and

sharply reducing production time.

It produces a better quality of steel because it requires fewer production steps

and allows greater automatic control of

the process.

It reduces pollution by eliminating soaking pits and reheating furnaces, reducing primary energy requirements, reducing exposure of hot steel to atmosphere,

and requiring less primary ironmaking

and cokemaking because of the increase

in yield.

It reduces capital costs compared to ingot casting and, considering the overall

yield and economic advantages, compared to other means of increasing steelmaking capacity.

It increases the use of purchased scrap

(where iron output is constant and steel

output increases) to replace the scrap

lost because of improved yield (see Topic

21).

These advantages are not being fully captured by the domestic steel industry, because

it has fallen behind almost all other steel industries in the adoption of continuous casting. For example, in 1978, Japan continuously

cast 50 percent of its steel, the European

Community 29 percent, but the United States

only 15 percent. Although U.S. adoption is increasing, so is that of foreign industries.

Nonintegrated facilities, by and large constructed quite recently, continuously cast at

least 52 percent of their raw output in 1978,

but they produce less than 10 percent of domestic raw steel. For the integrated companies who produce approximately 87 percent

of raw tonnage, the lag in adoption of continuous casting is even worse than the published

figures indicate.

The reasons for the low domestic adoption

rate of continuous casting include the following:

●

●

●

●

●

●

The industry has inadequate discretionary capital with which to replace existing, and perhaps not fully depreciated, ingot casting facilities.

Substantially modifying an operating

plant is difficult and costly.

Additional capital costs would be incurred in constructing downstream facilities to process the increased semifinished steel production.

There are technical problems with some

types of steels and perhaps with small

production runs.

There are difficulties in expediting EPA

permits and compliance costs linked to

the granting of such permits.

Uncertainties exist about the extent to

which future steel imports will capture

domestic markets.

Nevertheless, the overall economic benefits of continuous casting justify greater

adoption. A key question is how much continuous casting could and should be adopted

by the American steel industry, and in what

time frame. OTA finds that, to achieve increased technological competitiveness at a

minimum cost, 50-percent continuous casting

is needed for the whole industry by 1990.

Technically, this goal appears to be feasible;

but even though returns on investments in

this technology could be approximately 20

percent or greater, there is probably insufficient capital now and in the foreseeable future (given present price levels, import levels,

and Federal policies) for this large an increase in the use of continuous casting.

16 What other major new technologies

could aid the domestic industry during the next 10 to 20 years?

During the 1990’s, several radical changes

in steelmaking could occur:

● direct casting of sheet and strip from

molten steel, which would save considerable energy, time, and labor;
Ch. 3—Problems, Issues, and Findings ● 87

●

●

●

direct, one-step steelmaking (from ore to

molten steel), which might reduce all

costs;

plasma arc steelmaking, which may offer a low-cost alternative to the blast

furnace, particularly suitable for making alloy steels and for use by small

plants; and

formcoking, which offers the possibility

of an environmentally clean way to make

coke from low-grade coals, while still

producing valuable byproducts (see

Topic 20).

But the technological development with the

greatest advantages and best possibility of

limited commercial adoption within 5 to 15

years is coal-based DR of iron. DR refers to a

number of processes that are alternatives to

blast furnaces for converting ore to iron. DR

processes typically involve lower temperatures than do blast furnaces and use solidstate ore conversion. Natural gas is the simplest reductant to use, but low-grade coals

(which the United States has in abundance)

can be used directly as the reductant, as can

the products of coal gasification. The capital

costs of DR plants would be relatively low,

and by replacing both blast furnaces and

coke ovens DR could revitalize integrated

plants. DR might have a greater impact on

nonintegrated steelmaking than continuous

casting, particularly if small units become

commercialized, if merchant DR plants are

constructed, or if imported DRI becomes

readily available.

There are several ways in which the Nation could benefit from greater use of DR:

●

●

●

DR might be used by integrated steelmaker in conjunction with coal gasification plants to create new ironmaking capacity at competitive cost.

DRI can be used as a substitute or complement for scrap and could have a moderating effect on scrap prices as demand

rises and less usable scrap is generated.

DRI also can be used as a substitute for

ore in blast furnaces to improve their

productivity and thus reduce the amount

of coke required to fuel them; greater

●

Yet,

use of DR would reduce our growing dependence on imported coke and would

reduce pollution from coke burning, the

greatest source of dangerous pollution in

steelmaking; DR might also be based on

available coke oven gas, with a net economic advantage.

DR can be used with other technological

developments that are on the horizon, including nuclear steelmaking, which the

Japanese are developing for the year

2000, and magnetohydrodynamic steelmaking, expected in the 21st century.

there has been little domestic investment

in DR, largely because: 1) integrated companies are committed to blast furnaces and coking, which uses company-owned metallurgical coke, 2) relatively low-cost scrap is readily available, 3) future steel import levels are

uncertain, and 4) R&D capital is limited. Some

domestic companies have studied DR technology and have attempted to develop gas-based

processes, but thus far the results have not

compared with those of improving blast furnace efficiency.

Gas-based DR is undergoing rapid expansion in nations with abundant natural gas;

several such plants exist in Canada and Mexico. Several coal-based DR processes have

been used for a number of years on a relatively small scale, particularly in South Africa

and Brazil, with varying levels of success. A

number of foreign firms, especially in Sweden, are aggressively developing new processes based on coal, some of which promise

energy savings. A very attractive American

coal-based DR process—the Calderon Ferrocal process—is now ready for demonstration.

DRI is likely to become a world-traded commodity in the years ahead, especially by nations like Venezuela and Mexico that have

large supplies of natural gas, If the U.S. steel

industry does not build domestic DR facilities,

it may find itself importing DRI in great

quantities as nonintegrated mills expand and

scrap becomes more expensive. With DR facilities and huge reserves of coal, the United

States could satisfy its own steelmaking

needs and perhaps export coal-based DR
88 . Technology and Steel Industry Competitiveness

technology; instead of exporting scrap, it

might export DRI.

●

17 What incremental or evolutionary

technological changes will be significant for the next several decades?

Literally hundreds of incremental technological changes are likely during the next

several decades, including the creation of ●

new steels. The following are most significant

on the basis of likelihood of successful development, economic benefits, energy savings,

and large-scale applicability to most of the

domestic steel industry:

● External desulfurization, which removes ●

sulfur from molten pig iron rather than

having it removed in the blast furnace,

could be used very widely. This process

can use high-sulfur coal and thereby reduce coke use.

● High-temperature sensors would allow ●

better control of crucial variables during the finishing stages, and thus offer

improved quality control, increased

yield, energy savings, and improved labor productivity y.

Energy recovery techniques are possible—for example, the use of blast furnace top-gas pressure to generate electricity, the use of steelmaking furnace

gases, and the recovery of waste heat

from furnaces.

Continuous (direct/inline) rolling could

avoid intermediate cooling and reheating of ingots, slabs, or billets by rolling or

forming continuously cast products without any break in the processing sequence.

Self-reducing pellets, which are a combination of finely divided iron oxide from

ores or wastes, carbonaceous material,

and fluxes, can be used in blast furnaces

or in DR furnaces to obtain iron in relatively short times.

Computer process control (automation)

can improve process efficiency and

product quality.

Impacts of New Technologies on the U.S. Steel Industry

18 How would technological changes

affect the restructuring of the domestic steel industry?

Industry restructuring refers to shifts in

methods of production, nature of products,

size of firms, rate of technological change,

raw materials used, or types of markets

served. A significant restructuring of all

three segments of the industry—integrated,

nonintegrated, and alloy/specialty producers—is already in progress. Technological

changes are playing an important role in this

restructuring, which is best understood as a

change in the relative importance of each segment and a trend toward decentralization of

the industry. Restructuring is also shaping

technological needs.

The dominance of integrated plants is declining. This results from increasing advantages of plants of the other two types and

from structural changes in the integrated

firms themselves. These changes include: 1)

shifts in the raw material used, primarily

from original domestic sources of iron ores to

the lower grade taconite ores and to imported

ore; 2) shifts in markets from the Northeast

and North Central States to those in the South

and West; 3) increasing concerns over heavily concentrated sources of pollution; 4)

greater oscillations in market demand; 5) a

gradual physical deterioration of old plants

and inadequate capital to construct new

plants; and 6) significant changes in the technology of steelmaking, which require a fundamentally new plant layout to achieve maximum efficiency.

The steadily increasing growth of nonintegrated firms is difficult to quantify precisely
Ch. 3—Problems, Issues, and Findings w 89

because accurate and comprehensive data

distinguishing nonintegrated from integrated

producers are not collected by Federal agencies or trade associations. However, during

the past decade this industry segment has

roughly tripled its output. In 1978 the nonintegrated producers accounted for approximately 10 percent of raw steel tonnage and

13 percent of all domestic shipments; their

dollar share is smaller because their plants

produce lower price steels.

Factors promoting growth of the nonintegrated segment include: 1) markedly lower

capital costs per tonne of annual capacity

and much shorter construction times than integrated plants; 2) the availability of relatively low-cost, local ferrous scrap; 3) increasing

numbers of large local markets; 4) rising

transportation costs, which improve competitiveness of local suppliers using local resources; 5) relatively low-cost electricity (in

comparison to integrated steelmaking fuels)

and low energy consumption; 6) highly efficient, and improving, process technology consisting primarily of electric arc furnaces and

continuous casters; 7) use of nonunion labor

in less industrialized regions; 8) high labor

productivity; 9) less import competition

among the lower value steels; 10) fewer environmental problems and lower control costs;

11) an advantage over integrated producers

in times of slack steel demand because the

cost of scrap declines, whereas the cost of

iron ore does not; and 12) relatively low entry

costs,

The future growth of the nonintegrated

segment will depend on shifting their production to more complex and higher priced

steels, including perhaps alloy and specialty

steels. This trend is already beginning, but it

would be accelerated by introducing DR facilities in nonintegrated plants; by increasing

the number of merchant DR plants, which

serve many steelmaker; or by importing DRI.

The use of a combination of DRI and scrap

would have technical and economic benefits

that would promote the expansion of nonintegrated firms. The next most

nological development would

important techbe the introduction of small rolling mills for sheet and strip

suitable for nonintegrated plants, which do

not now make flat steel products. This is beginning. Even in the absence of flat product

manufacture, nonintegrated firms could

greatly increase their production, perhaps by

100 percent in the next 10 years, but cost and

availability of scrap and electricity will be important determinants. Very low R&D levels

may inhibit future growth and cost competitiveness.

The alloy/specialty segment is increasing

largely because of the ever-increasing use of

such steels for demanding applications. During the past 10 years, shipments of alloy

steels increased from 9.4 to 12 percent of all

domestic shipments. Technologically, the

firms in this segment are advanced, innovative, responsive to market demands, and competitive with any foreign industry. Apparently, they used several years of import quotas

effectively to improve their competitiveness.

They tend to be the lowest cost producers for

the domestic market and for many foreign

markets as well. Specific new technologies

that offer promise for these companies are:

powder rolling for the direct production of

sheet and strip from alloy powders, plasma

arc melting furnaces for improved melting

and alloying efficiencies, and greater use

than at present of recycled high-alloy-content

waste materials. It is noteworthy that some

integrated companies have shifted toward

producing more alloy and specialty steels.

The alloy/specialty segment might also be

able to export more of its products, although

there is some uncertainty about the future.

Quotas on imports of steels in this segment

are being removed; foreign producers would

like to export these higher priced, higher

profit products, and significant excess

foreign capacity exists for producing some of

these steels. Domestic companies are concerned that the Government vigorously enforce the new Multilateral Trade Agreement

to support exports and prevent the entry of

unfairly traded imports (see Topic 33).

, ,– ‘ , - - –
90 Technology and Steel Industry Competitiveness

19 How will future technological

changes affect the amount and type

of energy used by the domestic steel

industry?

The steel industry is the single largest industrial user of energy in the Nation, accounting for close to 5 percent of total consumption. Just over 60 percent of the energy

used in steelmaking derives from metallurgical coal, approximately 20 percent comes

from natural gas, somewhat more than 5 percent is from oil, and about 5 percent is purchased electricity. The steel industry is the

second largest user of electricity after the

aluminum industry.

In 1978, integrated plants used an average

of 35 million Btu/tonne of shipped products,

whereas nonintegrated plants making carbon

steels used an average of 10 million Btu/tonne

shipped. It must be noted, however, that nonintegrated plants do not reduce iron ore to

iron and generally make simpler products

which require less processing than others. A

goal established pursuant to the Energy Policy and Conservation Act is to reduce the

steel industry’s energy use by 9 percent by

1980. The industry indicates that it will meet

that target. Even without that motivation, the

industry has a financial incentive to reduce

energy use. Ten years ago, energy accounted

for about 10 percent of steelmaking costs; today, it is more than 20 percent.

A great many technological changes are

helping the industry to reduce energy consumption. The most significant is the increasing use of continuous casting, which can lead

to almost a 10-percent reduction in energy

use for integrated plants. The second most

important change is the ever-increasing use

of scrap-based electric furnaces, which, because they do not require the production of

new iron units from ore, use considerably less

energy than integrated production. The shift

to more continuous casting reduces coal, fuel

oil, and natural gas consumption; and although the shift to electric furnaces increases

the industry’s use of purchased electricity, it

reduces total energy use.

One of the factors pushing the industry to

more electric furnace use is the substantial

increase in the cost of constructing new coking facilities; these are largely environmental

compliance costs. Replacement of old coking

facilities has lagged so much that a considerable amount of coke is being imported (see

Topic 20).

The increasing costs of coking and of metallurgical coals have also made the potential

use of DR (which uses the cheaper, lower

grade steam coals) increasingly attractive.

Critics of DR point out that the process offers

no apparent energy savings, but large-scale

coal-based DR technology is only in its infancy and further experience could lead to

energy savings. Moreover, numerous innovations are taking place in this technology, some

of which should lead to significant improvements in energy efficiency. Developments in

coal gasification and synfuels could also promote DR; Brazil and West Germany are investing in development of coal-gasificationbased DR.

Many other incremental and major technological changes during the next several decades should do much to reduce steel industry

energy consumption. Greater adoption of

available new technologies could reduce energy consumption by one-third. The continued

closing of old, obsolete, and energy-inefficient

plants will perhaps have an even more significant effect on the industry’s energy consumption.

The degree to which improved technology

and energy conservation measures can reduce energy consumption is illustrated by the

remarkably low energy use of the Japanese

steel industry. In 1976, Japan used 70 percent

as much energy as the United States on a pertonne-shipped basis, and West Germany 85

percent as much. The Japanese attribute

much of their energy savings to continuous

casting and concerted energy conservation

efforts.
Ch. 3—Problems, Issues, and Findings . 91

20 To what extent can technological

changes reduce increasing U.S. reliance on foreign coke?

In 1972, the United States imported

168,000 tonnes of coke, mostly from Canada;

in 1978, 5,190,000 tonnes were imported, 70

percent of which came from West Germany.

Coke imports contributed nearly $500 million

to the U.S. balance-of-trade deficit in 1978,

and this amount increases as imported coke

prices rise. Moreover, when coke is imported,

there is a loss of increasingly valuable cokemaking byproducts, such as coke oven gas,

tars, and distillates, which the steel industry

uses itself or sells. Domestic cokemaking capacity decreased from 55.9 million tonnes in

1974 to 47.6 million tonnes in 1978. Associated with this decrease has been a loss of

5,000 jobs in the steel industry and 9,500 jobs

in the coal industry. Forecasts indicate a further loss of 4.8 million tonnes of coke capacity

by the end of 1985, with a possible domestic

shortfall of 7.3 million to 10.9 million tomes.

Other analyses, however, predict no shortage

of domestic cokemaking capacity in the near

future,

The industry’s explanations for decreasing

domestic cokemaking capability include: 1) a

large fraction of domestic cokemaking facilities are very old and reaching the end of

their useful lives, 2) the cost of a new coke

plant has increased 150 percent in the last 10

years and 40 percent in the last 5 years,

3) from 22 to 30 percent of the plant costs are

for unproductive regulatory compliance,

4) many old plants cannot be cleaned up at

reasonable costs, 5) enforcement of EPA regulations has reduced plant capacities and efficiencies, 6) there are limitations on sites for

new plants, 7) capital is scarce and uncertainty exists about long-range opportunities

to meet domestic demand, and 8) there is uncertainty about future regulatory requirements and their impacts on technology

choices.

In addition, relatively cheap foreign coke

has been available on the world market because most foreign steel industries, particularly those in Europe, have been in a depressed state. But as foreign steel industries

reach higher levels of capacity utilization,

domestic producers fear that coke will become less available and much more costly. If

coke is not available from foreign sources in

sufficient quantity, steel imports might have

to increase instead.

Other than importing more coke and steel,

or constructing more conventional coke facilities, the ways in which coke shortages can be

alleviated include: 1) increasing the use of

scrap-based electric furnace steelmaking to

the extent that scrap is available; 2) introducing coal-based DR to supplant blast furnace

technology based on coke; 3) modifying blast

furnace processes to reduce the amount of

coke used; and 4) promoting the use of cheaper nonmetallurgical grade coals, including

high-sulfur coals, by adopting new, environmentally cleaner formcoking technology.

Formcoking is the generic name given to a

number of processes, as yet unproven on a

large scale, to convert low-grade coals into

coke. It is possible that these processes may

offer economic benefits to domestic steelmaker, and environmental advantages for some

formcoke processes are possible. Large sums

will be required for demonstration plants,

however, and it will be a considerable time

before results are sufficient to affect domestic cokemaking.

21 How will technological changes affect the cost and availability of ferrous scrap?

There are four technological developments

that will affect the demand for and availability of ferrous scrap: 1) an increase in the use

of electric arc furnaces by integrated and

nonintegrated steelmaker; 2) the introduction of DRI, which can substitute for scrap;

3) greater use of continuous casting and other

process changes that will allow more use of

purchased scrap; and 4) continuing increases

in the use of alloy steels and nonferrous materials in automobiles and certain improvements in domestic manufacturing, both of

which may reduce the supply of readily available and easily processed scrap.
92 ● Technology and Steel Industry Competitiveness

Technological changes within integrated

steelmaking will increase the demand for ferrous scrap. The two most important changes

are: 1) the increased use of continuous casting, which reduces inplant scrap generation

and makes it necessary to use more purchased scrap to supply steelmaking furnaces,

and 2) changes in basic oxygen steelmaking

furnaces that allow them to use more ferrous

scrap, at perhaps a 40- to 50-percent level

rather than the present 30 percent, but also

increase energy consumption.

Electric arc furnace processes use significant amounts of scrap, and the use of electric

furnaces by integrated and nonintegrated

steelmaker is increasing at a rapid rate.

During the past 10 years the amount of domestic carbon steel made in electric furnaces

has nearly doubled, and the trend is similar

around the world. This has offset the decline

in scrap use that resulted from open hearth

furnace shutdowns. Many steel analysts believe that one-half of the domestic capacity installed during the coming decade will use

electric furnaces, assuming that adequate

electricity is available. Electric furnace steelmaking is certainly not a new technology, but

for several reasons its benefits are more significant today than ever before. These reasons include: 1) a relatively low cost for ferrous scrap during the past several decades,

although users have found it difficult to cope

with the large gyrations in scrap prices; 2) a

relatively low energy requirement, because

scrap embodies energy (nearly as much energy is used to convert iron ore to iron as to

make steel from iron); 3) a high labor productivity, which has improved more for electric

furnace steelmaking than for any other process of the steel industry—nearly 50 percent

during the past decade, compared to 13 percent for blast furnaces and 26 percent for

other types of steelmaking furnaces; 4) minimal pollution problems; 5) very low capital

costs; and 6) relatively short construction

times.

Because the competitiveness of electric

furnace steelmaking depends on the cost and

availability of ferrous scrap, domestic nonintegrated steelmaker are sensitive to the

uncontrolled export of ferrous scrap. Historical data show a connection between exports

and cyclic changes in scrap prices. It is also

believed that exports of scrap help feed foreign steel exports to the United States and

threaten future domestic availability of

scrap. The scrap industry argues that there

is a large domestic supply of scrap, particularly a great deal of obsolete scrap, such as

discarded automobiles and appliances scattered around the Nation, and scrap in wastes

and garbage. The cost of retrieving such

scrap is very high, however, and ferrous

scrap in general is becoming more costly to

collect, process, and distribute. The increasing use of alloy steels, especially in automobiles, is making scrap processing more difficult and costly, and impurities and minor

alloy additions build up as more and more

scrap is repeatedly recycled. The general

trend in manufacturing—to improve process

efficiency and reduce raw material and energy costs—means that less industrial scrap

will reach the market.

The most likely competition for ferrous

scrap is DRI, which offers a number of technical advantages over scrap and has greater

price stability. As scrap prices rise, DRI

becomes more competitive; conversely, low

scrap prices act as a disincentive to the development of DR. Thus, the price of DRI,

whether imported or manufactured domestically, is a potential way for the marketplace

to stabilize scrap prices. In the long run, DRI

availability will likely be a decisive determinant of increased electric furnace use (see

Topic 16).

22 How does changing technology affect the timing and strategy of capacity expansion?

The technological and cost competitiveness

of domestic integrated companies suffers

from the exceedingly small amount of new facilities added during the past several decades. Industry argues, and correctly so, that

optimum technology and efficiency require
Ch. 3—Problems, Issues, and Findings ● 93

new plants with proper layouts that will

allow new technologies to be introduced and

integrated into all phases of the steelmaking

process. The major obstacle to the construction of new integrated plants is their extremely high capital cost (about $1,320/tonne of annual capacity) and the large plant size needed

to capture economies of scale; capital costs

could reach many billions of dollars per

plant. Considering the industry’s capital

shortage, uncertainties over future Government policies affecting capital formation, and

the continuing problem of imports capturing

domestic markets, it is quite unlikely that new

integrated plants, based on modern blast furnace technology, will be built in the near

future.

Even if sufficient capital and financing

could be obtained, it can be questioned

whether such costly capital projects should

be built. Such plants take many years to complete, and by that time new and innovative

technology, with greater production cost savings, and possibly with reduced capital costs,

may be available and perhaps may even be

adopted by foreign steel industries. It can be

argued that this is exactly what happened to

the domestic steel industry in the 1950’s and

1960’s, when considerable plant construction

and expansion took place before basic oxygen

furnace and continuous casting technologies,

the two most important developments after

World War H, were proved on a large scale.

Important technological developments may

be commercialized within the next several

decades. One distinct possibility is the largescale use of some form of DR (see Topic 16).

There are so many current developments in

this area that success is likely, especially if

U.S. companies, much like the Japanese, creatively apply available foreign research to develop major innovative technologies by the

end of the century.

An alternate strategy, then, is to modernize

and expand capacity at existing plants. The

capital cost per tonne of annual capacity for

this approach is generally about half that of

building a new plant, but varies considerably.

Naturally, there are limits to the amount of

new capacity that could be added by this

means. When coupled with new plant construction in the nonintegrated segment,

which is proceeding at a significant pace, this

would probably create enough additional capacity for the next decade. Capital costs of

new nonintegrated plants range from $154 to

$275 per annual tonne today—about 10 to 20

percent of the cost for new integrated plants

—and although they cannot produce the full

range of steel products, expansion of their

product mix is occurring with moderate increases in capital costs.

A domestic strategy based on modernizing

and expanding existing plants and constructing new nonintegrated plants during the next

decade could lead to a distinct technological

advantage. There will be little steelmaking

capacity expansion in Western industrialized

nations, and the present large-scale expansion of steelmaking in the Third World and

Communist-bloc countries is based on either

blast furnace steelmaking or first-generation

gas-based DR processes. Thus, by developing

one or more major domestic technological innovations before building new integrated

plants, the United States could gain technological superiority. By adopting foreign innovations, the domestic industry would avoid

repeating the past mistake of investing in

rapidly outdated technology that it could not

afford to replace quickly. Thus, even the

worst case means the United States obtains

technological parity with foreign industries,

something it does not have now.
— — — .

94 . Technology and Steel Industry Competitiveness

Financial, Regulatory, and Institutional Barriers to

the Adoption of New Technology

23 To what extent is insufficient capital

a barrier to the increased use of

new technology?

Industry contends that its problem is not

lack of adequate technology to improve cost

competitiveness, but rather insufficient capital to adopt new technology. This position has

considerable merit. Industry argues that if

companies had sufficient capital, they could

select and use the best technology for modernizing existing plants and constructing new

ones. Industry also maintains that Government policies have contributed to low profitability and insufficient capital for new technology by: 1 ) keeping steel prices too low,

2) requiring high, nonproductive regulatory

expenses, 3) permitting unfairly traded imports, and 4) not providing adequate tax incentive for investment, such as faster depreciation schedules. Capital is surely necessary

to utilize technology, and there have been relatively low levels of capital available to the

industry from its own profits.

Both OTA and the American Iron and Steel

Institute (AISI) have analyzed the industry’s

capital needs for a major program of modernization and expansion for the next 10 years.

Both analyses assume the same increase in

shipment tonnage capability by 1988, both

agree on the need to improve profitability,

and both assume no radical technological

changes. They do assume a very large increase in continuous casting, elimination of

open hearth furnaces, substantial modernization of blast furnaces and finishing mills, and

replacement of about half of the present coke

ovens.

The differences between the scenarios are

more instructive. The OTA analysis assumes:

1) a greater expansion of nonintegrated steel

companies at relatively low capital costs, and

2) lower modernization and replacement

costs for integrated plants. The AISI analysis

projects a need for nearly $5 billion per year

(in 1978 dollars) during 1978-88 for investment in productive steelmaking, an increase

of 150 percent over the annual average for

the past decade; OTA finds a need for only $3

billion per year, an increase of 50 percent.

The OTA analysis of future capital formation

leads to a projected deficit of at least $600

million per year for the modernization and expansion program. Unlike the OTA scenario,

the AISI analysis concludes that substantial

real price increases will be needed, regardless of other impacts on capital formation, in

order to achieve improved profitability at the

higher levels of investment.

The real issue is not whether the industry

buys any modern technology with its available capital for modernization and new plants,

but rather how much of what types of new

and innovative technology its limited capital

will buy. A key issue is whether new technology can reduce production costs sufficiently

to justify large capital expenditures. The

OTA scenario delays investment in large integrated plants until the 1990’s, which is made

practicable by renewing the industry in the

1980’s through minimum-cost modernization

and replacement and maximum expansion of

nonintegrated companies.

Integrated companies, particularly the

largest ones, have the lowest propensity

among the three industry segments to use

capital for risky, major types of innovative

technological changes. Nonintegrated steelmaker generally show more inclination t o

adopt rapidly the newest types of technology;

however, their technological opportunities

are fewer because of their dependence on

scrap and their smaller range of products.

The alloy/specialty producers generally exhibit the greatest tendency to use capital

for rapid adoption of major technological

changes and for development of proprietary
Ch. 3—Problems, Issues, and Findings ● 95

innovations for both processes and products;

however, the demanding applications for

their products are more conducive to technological change than is the case for the other

segments. The greater inclination of both the

nonintegrated and alloy/specialty producers

to use new technology is also linked to their

greater profitability and, to a lesser degree,

to their more rapid growth. Profitability and

expansion may be a consequence of using

new technology, however, rather than a

cause of it.

Virtually all calculations of likely levels of

capital formation indicate that, for the next

10 years, domestic integrated steel companies will not have sufficient capital (at current levels of profits and borrowing) to create

and adopt enough new technology to maintain

domestic capacity and competitiveness. The

four most likely means of providing this additional capital are: 1) raising domestic steel

prices substantially, 2) changing tax and depreciation laws, 3) providing direct Federal

support such as loan guarantees or industrial

revenue bonds, and 4) greatly reducing regulatory demands. Raising equity capital, increasing borrowing from the private banking

and financial community, and greatly reducing dividends are also possible, but most analysts doubt that these methods could be effective, Foreign investment is increasing, however, and could be a significant (if uncertain)

source of equity capital. Should the capital

shortfall not be met by any of these means,

however, it is possible that steel imports (if

available) will claim 40 percent or more of the

U.S. market by the end of the 1980’s.

24 Do steel companies use effective

long-range strategic planning for

technological innovation in order to

gain competitive advantage over domestic and foreign producers?

More often than not, steel industry executives express a desire to be second with proven technology, not first with new technology.

This attitude is clearly a barrier to innovation

that does not exist in many other industries.

Under the currently accepted definition of

innovation—the first successful commercial

use of a technological invention—most domestic steel companies, with the exception of

some alloy/specialty producers, do not appear to emphasize innovation in their longrange strategic planning.

The steel industry apparently perceives

the advantage of innovation (over “modernization” with available new technology) as insufficiently rewarding. This is evidenced by

the industry’s relatively low levels of spending for R&D and for the more expensive

stages of pilot and demonstration work, as

well as its historical record of importing

foreign innovations. These factors combine to

form a second barrier to innovation. The ease

of buying new technology from foreign

sources encourages reemphasis of domestic

innovation, and lack of sufficient capital is

used to justify this trend. Domestic firms also

tend to sell whatever innovative technology

they do create, as quickly as possible, in

order to maximize immediate profits, instead

of keeping the technology proprietary and

thereby gaining a competitive advantage. Industry claims that this is also done by foreign

firms.

This lack of emphasis on technological innovation may be symptomatic of a generally

low level of planning by steel management or

simply unsuccessful planning that does not

sufficiently appreciate the potential of technology. Historical studies of the domestic

steel industry have examined several issues

indicative of poor planning: 1) the rapid decline of profitability and eminence after

World War II, 2) the lack of response to rapidly rising steel demand in Third World and

industrialized nations, 3) the lengthy and

costly resistance to compliance with environmental regulations, and 4) the large integrated producers’ lack of attention to demographic changes and opportunities for local

markets. One explanation for these and other

such shortcomings is a lack of dedicated,

long-range strategic planning by domestic

steel companies, particularly by integrated

producers.
96 . Technology and Steel Industry Competitiveness

Industry needs to develop appropriate

scenarios, risk/reward analyses, and corporate options in order to anticipate and respond to major changes in both the domestic

and world economies, as well as to changes in

Federal policies. The AISI scenario is a first

step in this direction. Domestic steel industry

management must examine the consequences

of continuing to concentrate on low-risk, incremental technological changes; defensive

rather than aggressive business strategies;

product rather than process changes; traditional domestic markets rather than exports;

promoting from within, rather than recruiting

personnel from other industries, universities,

and Government; and making profits from

their raw materials (iron ore and metallurgical coal) investments. It appears that much of

the industry, and particularly the integrated

segment, has endorsed the self-fulfilling notion that steel is a low-technology, “mature”

industry, with little potential for growth or

substantial technological changes. The consequences over the last 20 years have been a

decline in capacity, a fivefold increase in imports, and numerous missed opportunities in

both technology and foreign trade. Neither

the industry nor the Nation can afford the

consequences of another 20 years of poor

planning and missed opportunities.

25 Is there sufficient steel-related R&D

in the United States to meet the goal

of future technological competitiveness?

The total amount of industry, Government,

and university R&D devoted to steel in the

United States is woefully inadequate for future technological competitiveness. Within

the industry itself, what little R&D exists is focused on short-range, quick-payoff activities;

very little goes into basic research. The industry does not aggressively pursue major technological changes and innovations for longterm growth, and even spending for incremental improvements is minimal. What is

often termed R&D in the steel industry would

not be accepted as such in other industries

because the work is too applied and tied so

closely to manufacturing or sales. The industry does emphasize R&D in raw materials

processing and products, but for research in

ironmaking and steelmaking processes it depends on foreign producers and domestic

equipment suppliers.

The steel industry insists that it lacks adequate funds to invest heavily in long-range

R&D, both because of generally low levels of

available capital and because of other demands on that capital. R&D spending levels in

steel appear to be geared to the low part of

the business cycle; when net income is markedly greater than in preceding years, there is

no corresponding increase in R&D spending.

The total amount of steel industry spending

on R&Din 1978 was $259 million. In 1977 and

1978, steel industry R&D spending was 0.5

percent of industry sales; in 1975 and 1976, it

was 0.6 percent; and during 1963-71, it was

0.7 percent. These are very low figures: the

only domestic manufacturing industry with a

lower level of R&D spending is the textile industry; the aluminum industry spends about

twice as much. Steel R&D spending measured

as a fraction of industry profits appears more

reasonable, but it is still about half of the national industry average. In addition, much

steel R&D is aimed at dealing with Government regulations; about 20 to 25 percent of

R&D personnel work on environmental problems (see Topic 27).

Steel-related R&D in universities and Government facilities also appears to be minimal.

AISI funds only about $1 million of research

per year at universities, and Federal funding

is also very low, accounting for only 1.5 percent of steel R&D in 1977. By comparison, the

Federal Government funds 9 percent of R&D

for the chemical industry, 14 percent for the

machinery industry, 47 percent for the electric equipment industry, and 78 percent for

the aircraft industry.

There are no hard data available to delineate the difference among the three industry

sectors with regard to R&D spending, but it

appears that at least some alloy/specialty

producers are much more involved in R&D
Ch. 3—Problems, Issues, and Findings . 97

than most firms in the other two segments.

The integrated steelmaker spend very little

on R&D; the nonintegrated producers, who

have become quite dependent on equipment

manufacturers for technological developments, appear to spend even less.

Although the U.S. steel industry is one of

the world’s most profitable, it appears to lag

behind foreign steel industries in R&D spending; the Japanese, for example, now spend

about 1 percent of sales on R&D. Much of foreign R&D in steel is directly or indirectly supported by governments. At the present time,

for example, $36 million is spent annually on

steel R&D by the Commission of European

Communities, of which $20 million is supplied

by governments. In Japan, there also appears

to be significant government support of university research in steelmaking.

26 Does the domestic steel industry employ enough technical personnel and

use them effectively to enhance its

technological competitiveness?

The steel industry has been criticized for

its loss of technical leadership, slow adoption

of new technologies, and low levels of R&D. It

is therefore relevant to consider industry use

of technically trained personnel. In comparison to average employment levels of technical

personnel by domestic manufacturing industries, the steel industry’s use of technical personnel is low. As a percentage of its total employees, steel employs only about one-third

the number of scientists and engineers in the

petroleum, refinery, and chemical industry,

and about half the number in the electrical

equipment industry.

Moreover, for the entire steel industry only

about 18 percent of all technical personnel

are used in R&D. Engineers typically start in

R&D and reach higher levels of management

by moving to other areas. This practice has

the potential disadvantage of driving many of

the best technical people out of R&D, because

they can achieve higher salaries and greater

prestige in other departments. These technical personnel may not have the appropriate

expertise for business management and policy work; on the other hand, they have a better understanding of the technological basis

of the company and the effective use of technical knowledge for process improvement

and market development.

The steel industry draws few technical

personnel from high-technology industries.

There appears to be a trend toward retired

steel personnel going from industry to Government and universities; there appears to be

little return flow of midcareer professionals

to the industry, however, as is typical of intersectoral mobility and training in West Germany.

There is also some criticism of the industry

because training and development of technical staff are geared to managerial and executive development rather than to technical specialties. Most companies have tuition support

programs for undergraduate and graduate

education, but there is generally much less

support for publishing in professional journals or for sabbaticals at domestic and foreign universities. While technical personnel

in R&D are given some opportunity to attend

meetings and conferences, those in other

company areas have fewer such opportunities. This treatment of technical personnel

appears consistent with the “mature industry” image accepted by most integrated companies—why upgrade technical skills when

steel technology will not change in major

ways? (See Topic 24. )

Industry representatives seem satisfied

with the availability of new technical personnel, but college recruiters are concerned that

more growth-oriented industries may be attracting the best technical talent. Personnel

availability may be adequate to present industry needs, given its limited R&D and its

current use of technical people: but should

the industry choose to change its strategies, it

could face difficulty in recruiting the numbers and types of people it will need. Unlike

other nations, where steel research is regarded as important and exciting, the U.S. industry could have problems attracting the

best technical people away from high-tech-
98 . Technology and Steel Industry competitiveness

nology, R&D-intensive, high-growth industries.

27 What are the impacts of EPA and

OSHA regulations on steel industry

modernization?

Social regulations do have an impact on

steel industry modernization, and environmental regulations have a greater impact

than do occupational regulations, for several

reasons. First, environmental regulations

have been actively implemented since the late

1960’s, but implementation of OSHA regulations has been limited until recently. Second,

EPA regulations have an impact on the entire

range of production technologies, while those

of OSHA have had their greatest impact on

cokemaking. Future OSHA regulations may

more significantly affect the entire range of

operations, but OSHA has a certain degree of

administrative flexibility. OSHA compliance

deadlines, unlike those of EPA, are not prescribed in authorizing legislation. This gives

OSHA greater potential for successfully integrating industry modernization programs

with regulatory compliance schedules.

Both sets of regulations have both positive

and negative impacts on the steel industry.

On the positive side, both EPA and OSHA are

forcing the industry to consider technological improvements or substitutes for existing

steelmaking processes. An indirect, nearterm consequence of regulatory enforcement

has been increased use of electric furnaces

and an accelerated phaseout of aging and inefficient facilities. An unanticipated, longrange consequence of social regulations may

be increased incentive to develop safer and

cleaner new processes that are also more

cost effective. Continuous casting and DR are

among future alternatives showing promise

in this regard.

On the negative side, the expenditures

(capital and operating) required to comply

with environmental regulations divert corporate funds from modernization investments

that might otherwise be undertaken. Industry

reports suggest that in recent years steel

companies have invested about $450 million

annually in environmental control facilities.

Environmental expenditures are mainly for

retrofitting existing equipment and involve

gradual improvements in control technology,

and to a lesser extent for in-process changes.

Because of limited replacement and expansion activity during the past decade, there

has been little opportunity to integrate environmental expenditures with new plant construction, and expensive retrofitting has occurred instead. In fact, regulations have been

cited as a cause of some capacity reduction,

especially in cokemaking, in which import dependence has become a growing concern.

The next decade may offer more opportunities.

Available incentives, in and of themselves,

have not stimulated industry management to

choose technological innovation rather than

delay as a cost-effective response to regulations. EPA’s incentives are limited to extended compliance schedules and penaltypayment exemptions which allow, to some extent, for new technology development by the

steel industry. The Agency does not provide

regulatory guarantees or financial support

should the innovative approach fail to meet

regulatory requirements. OSHA’s regulatory

incentives are not strongly oriented towards

stimulating industrial innovation either.

Although OSHA may issue variances in response to operational constraints within the

steel industry, stimulating innovation is not a

specifically authorized goal in the issuance of

these variances. OSHA’s only specific authority to stimulate innovation is through its judicially interpreted “technology forcing” policy, which allows it to require the adoption of

promising new pollution abatement technologies or practices that have been developed by

other industries. Such forced transfers must

be limited to the regulation of toxic materials

in the workplace, however, and they may not

involve new equipment or controls that would

necessitate major industry R&D.

A final important consideration is that

neither EPA nor OSHA can complement their

regulatory requirements with significant eco-
Ch. 3—Problems, Issues, and Findings ● 99

nomic incentives to encourage the industry to

develop more cost-effective technologies. EPA

does have a limited environmental technology

RD&D program that involves industry cost

sharing. Both agencies lack vigorous anticipatory RD&D programs designed to develop

greater Government and industry awareness

of the environmental implications of emerging

steelmaking technologies. This is particularly

significant because some new process technologies could be less polluting or hazardous

than conventional ones.

28 How might labor practices affect the

introduction of innovative technology?

The adoption of new steelmaking equipment or technology affects steelworkers in

several ways: retraining may be needed, job

classifications may need to change to accommodate skill changes; and local practices may

need to allow for flexibility in work assignments. On the whole, however, it appears

that labor conditions have not been a constraint to the adoption of improved steelmaking equipment. Job classification schedules,

periodically updated, are sufficiently flexible

to accommodate gradual shifts in skill requirements resulting from technological

change. There is some concern, however,

particularly among those in the academic

community, that apprenticeship and retraining programs do not adequately train people

for changing job requirements associated

with the adoption of new technologies.

There is a consensus that the work force

generally cooperates with management when

modern equipment is introduced. The 2-B “local practices” clause in most labor contracts

gives management the right to unilaterally

change past practices concerning crew size

and other staffing agreements when such

change is required by “changed conditions, ”

including technological innovation. However,

it appears that the 2-B clause makes it difficult to extend past practices to adjacent

production areas not directly involved with

the new equipment. Such changes are subject

to negotiation with local union affiliates. National union leadership is concerned with

technological displacement, but does not resist the introduction of new technology. The

industry’s view is that—with the possible exception of a few plants—there are no difficulties with steelworkers when new technology

is introduced. Thus, it appears that the 2-B

contract provision has had no limiting effect

on industry adoption of new steelmaking technologies.

Policy Considerations

29 Can the domestic steel industry stay

competitive without changes in Federal policies?

The need for policy support of the steel industry varies among its three segments. By

almost any measure of economic and technological health, the integrated segment is

steadily declining. There are trends toward

more dependence on steel imports (although

they did decline in 1979), less employment,

only modest gains in steel demand, aggressive

competition from other engineering materials, lower profitability, high debit-to-equity

ratios, less investment in R&D, more dependence on foreign technology, a higher proportion of obsolete facilities, smaller domestic

steelmaking capacity, and inadequate capital

formation for modernization.

Not even large domestic demand and high

capacity utilization are likely to reverse the

slow decline of the integrated segment. The

situation may have already deteriorated to

such an extent that profitability cannot be

markedly reversed, nor sufficient capital generated, without changes in Federal policies.

The only major external factors that might

change this pattern are: 1) a large influx of

foreign investment and equity capital, and 2)
100 . Technology and Steel Industry Competitiveness

a devaluation of the dollar significant enough

to reduce imports and spur substantial domestic expansion.

Current trends might be reversed by

changes in Federal policies that permit substantially higher steel prices, fewer unfairly

traded imports, and faster capital recovery,

or policies that provide more support for R&D

and innovation and more direct financial support, such as loan guarantees. (Topics 34

through 40 deal in detail with these policy options.)

The future looks less bleak for the other

two segments of the industry. The nonintegrated segment should grow, remain profitable, serve more markets with a greater

range of steels, and provide increasing and

necessary competition to the larger integrated firms. (Such intra-industry competition will probably have even greater benefits

than the competition presently provided by

imports. ) This segment, too, could gain from

changes in Federal policies, particularly

those affecting the supply and cost of electricity, but it is likely to prosper even under

present policies. There will still be a need for

a large domestic ironmaking base to convert

iron ore to new iron units.

The alloy/specialty producers are in a period of adjustment to changing Federal policies

with regard to imports. It remains to be seen

whether the loss of protective import quotas

and the enforcement of the new Multilateral

Trade Agreement will be adequate to ensure

the continuation of this segment’s healthy

economic condition. Without direct Federal

support, however, high-technology steel exports are not likely to increase dramatically.

30 Can the experiences of the steel industry contribute to the formulation

of more effective Federal policies

for other domestic industries?

The steel industry may be only the first of

several domestic industries facing a decline

in preeminence and prosperity. As the less industrialized nations begin to lower production costs and to consume more commodities,

they become more economically attractive

than highly industrialized countries as a location for established industry. Established industries in industrialized countries may also

decline if they lose domestic markets through

product substitution or replacement, or if

they do not produce sufficient technological

innovations to reduce production costs or improve products.

These explanations do not appear as valid

in today’s world economic order as they once

were, because government policies have introduced so many imperfections to the freemarket and free-trade system that the impact

of traditional economic factors on international competitiveness has been fundamentally changed. None of the above factors can

adequately explain the decline of the domestic steel industry.

In the first place, no major foreign steel industry has enjoyed a more advantageous

combination of labor costs, energy costs, raw

material costs, and industrial and technological infrastructure than the United States. At

best, foreign steelmaker have had slight advantages in one or two of these factors, but

such advantages have generally been shortlived and insufficient in themselves to account for penetration of export markets, particularly the U.S. market.

What has occurred is that foreign governments have adopted policies that provide

many direct and indirect benefits to their

steel industries, and many of these industries

have in fact been built with public funds to

serve social and political goals. Even though

foreign demand for steel has increased substantially, foreign steel is often exported

rather than used to satisfy domestic needs.

This has promoted growth, but not necessarily prosperity. The American steel industry,

as a private, profit-motivated enterprise, is

becoming increasingly unique in the international market (see Topic 32).

Secondly, although steel has faced stiff and

increased competition from other materials—

notably aluminum, concrete, and plastics—it
Ch. 3—Problems, Issues, and Findings 101

still possesses a unique combination of properties, forms, and costs that ensure it substantial and growing markets. There has

been little technological displacement of steel

in the marketplace.

Thirdly, contrary to accepted wisdom,

there have been major technological changes

in domestic steelmaking and steel products

during the past several decades. All signs are

that this trend will continue. Some domestic

firms have justified their lack of progress on

the basis of the “mature industry” image (see

Topic 24); others, in the meantime, have

moved ahead with boldness and optimism,

taking risks, investing in the newest technology, and capturing the profits that are there

to be made.

One lesson to be learned from the steel industry’s experiences, then, is that domestic

industries can find themselves losing price

competitiveness because Government policies

are not comparable to those of other nations.

Foreign government policies have distorted

the workings of the marketplace, sometimes

in ways unique to a particular industrial sector. The steel experience has shown that Federal policies can improve the profitability of

foreign industries while depressing those at

home. But in spite of Government policies that

have not permitted domestic prices to equal

import prices in periods of strong demand,

that have limited capital recovery and hence

restricted capacity replacement and expansion, and that have not provided R&D assistance comparable to foreign governments, the

American steel industry is still the most profitable major steel industry in the world. Surely, more competitive Government policies

could help make steel and other “sick” industries well.

High-technology industries have captured

much of the public’s attention, and basic industries like steel have lost stature. Their

critical role in the economy and national

security has been overlooked. Government

policies must be reexamined to determine

whether they allow industries to wither and

save only the inept and unprofitable, or

whether instead they create a climate in

which competent and profitable companies

can grow. There is a need to examine, for

steel as well as domestic industry in general,

the long-term benefits of closing plants that

are inefficient, poorly located, or possibly

mismanaged. The costs Government incurs in

dealing with local, short-term social dislocations may be less in the long run than those of

continuing Federal assistance to industrial

facilities incapable of technological rejuvenation.

Another lesson to be learned from the past

experience of the steel industry—and perhaps the most important lesson—is that sector policies may be needed for major domestic

industries if international competitiveness is

to be achieved. Foreign governments, particularly the Japanese, have adopted sector policies to build competitive industries. Without

a coordinated policy, improvement efforts

may be at cross-purposes or fail to address

critical issues. For example, the steel industry’s emphasis on the need to raise adequate

capital for modernization and capacity expansion ignores the need for additional efforts in R&D and innovation. Domestic policies that deal effectively with only one of

these areas would not help, in the long run, to

ensure a profitable and competitive industry,

nor would trade policies that deal effectively

with imports but fail to support technology,

innovation, and the means of production. The

risks of adopting a steel sector policy include:

1) an overemphasis on the welfare of the steel

industry, particularly large integrated steelmakers, to the exclusion of other domestic industries and smaller steel producers, and 2)

insufficient attention to social goals and impacts, such as environmental protection, pollution control, and worker safety. Such risks

must be examined for any industry for which

a sector policy is considered.

31 Should the steel industry be singled

out for a sector policy?

Some critics contend that the steel industry

should not be singled out for Federal help and

that legislation affecting all domestic indus-
102 ● Technology and Steel Industry Competitiveness

try should be sufficient. Steel has a unique

combination of problems and assets, however, and it has already been uniquely and

adversely affected by many Federal policies.

For the following reasons, not all of which apply to any other domestic industry, singling

out the steel industry for a sector policy

presents difficult choices and opportunities

for policymakers:

● The industry is essential to the domestic

economy and national security, but it is

contracting and diversifying out of steelmaking, which can only result in increased imports.

● The current cost-price squeeze and capital shortfall are, to a substantial extent,

the results of prices that are too low to

provide adequate profits, Government

policies that have led to high regulatory

costs, and unfairly traded imports that

have captured domestic market growth

and contributed to artificially low

prices.

● There is a nucleus of companies with

plants that are extremely competitive in

costs and technology, and these could

contribute positively to the trade balance by exporting more high-technology

steels or impeding imports of commodity

steels.

. There are many short- and long-term

technological opportunities for strengthening the industry and recapturing the

premier status it once possessed.

● The industry has available to it the domestic material resources of iron ore,

coal, and ferrous scrap and the human

resources of a highly competent labor

force, a large national R&D infrastructure, and a reservoir of managerial and

entrepreneurial talent.

32 How do foreign government policies

affecting their steel industries compare to U.S. policies?

Most foreign governments have placed considerable strategic and economic emphasis

on developing and preserving their steel industries, which they view as national assets,

essential for industrialization, economic development, and economic stability. In fact, 45

percent of world steelmaking capacity, and

more than 50 percent of European capacity,

was government-owned in 1979. Foreign governments support their steel industries in a

number of other ways, as well, including government planning and financial assistance,

favorable tax policies, direct export incentives, tariff and nontariff barriers to steel imports, and the subsidizing and stockpiling of

raw materials. American steelmaker see

these forms of government support and ownership as trade-disturbing practices that

should be met with equivalent U.S. policies.

Foreign governments support their steel industries to such an extent because their industries are not just instruments of production and profits: they also have a role in social, economic, and foreign policy. Their industries are used to:

●

●

●

●

●

●

●

●

●

●

sustain employment levels,

train technical and management personnel for industrialization,

maintain social stability in certain geographical areas,

make use of domestic natural resources,

provide a cheap feedstock for other industries,

obtain foreign currency through exports,

gain access to international industrial

activities,

reduce dependence and improve negotiating positions with other nations,

enhance their national images, and

improve their military and economic security,

The steel industries in Japan and West

Germany are mostly privately owned, as in

the United States. Unlike those countries,

however, the United States: 1) lacks a national consensus to preserve and modernize its

steel industry, 2) enacts laws and regulations

that have considerable costs for its steel industry, without providing offsetting direct or

indirect benefits, 3) does not use trade laws

vigorously to prevent unfairly, or even fairly,
Ch. 3—Problems, Issues, and Findings ● 103

traded imports, and 4) provides little support

for the development and export of new technology.

Japan makes maximum use of government

planning and a coordinated steel sector policy. Through its Ministry of International

Trade and Industry, it provides its steel industry with marketing guidance, long-range

forecasts, target production goals, plans for

domestic and export cartels, support for

RD&D, assistance in procuring raw materials, and, most importantly, financial assistance in conjunction with the Japanese banking community. The United States has no comparable programs.

The EEC has been particularly active in

providing government financial assistance,

some through individual governments and

some through regional programs. Such assistance takes the form of: grants-in-aid for antipollution compliance, technical aid, and research: low-interest and preferential-interest

loans: and writeoffs of bad debts. Although

the United States has used loan guarantees to

a small degree, financial assistance here is at

a far lower level than in other countries. Domestic producers must rely on direct credit,

and they are subject to all the financial tests

of the free enterprise system. Moreover, domestic firms argue that U.S. private and public funds, such as Export-Import Bank financing, often go to foreign steel industries at far

lower financial costs than domestic companies can obtain.

Direct export incentives used by foreign

governments include: export credit and financing, including guarantees to private

banks of a favorable interest rate; export insurance with liberal coverage against losses

not within the control of the exporter; tax rebates, generally in the range of 10 to 20 percent of the value-added tax in Europe and a

like percentage of the export sales price or

export value in developing nations; government assistance for trade missions, exhibitions, market research, and export promotion

schemes; and assistance to exporters for joint

foreign marketing efforts, offices, warehousing, and sales facilities. The United States

has been a very attractive export market for

foreign steel industries, with markedly fewer

and lower tariff and nontariff barriers to imports than most other nations. Although the

United States has the Export-Import Bank

and appears to be embarking on a more aggressive export incentives program, the domestic steel industry is not particularly experienced in or inclined toward exports.

Some domestic companies are attempting to

sell technology, particularly in the raw materials area, but direct incentives to export do

not match those of many foreign nations.

Foreign governments are also giving more

attention to raw materials subsidization and

economic stockpiling. European nations have

heavily subsidized their coal industries, and

most developing nations have state-owned ore

and energy resources that provide substantial benefits to steel exporters. Government

stockpiling of critical alloying elements, such

as nickel, chromium, cobalt, and tungsten, is

also widespread. Japan grants bank credits

to domestic producers of raw materials, especially coal, under adverse economic conditions. Sweden has a program of tax credits

for steel companies that stockpile raw materials and finished steel during periods of declining prices. The United States subsidizes

energy resources through controlled energy

prices, but this has benefited the domestic

steel industry only slightly since over 60 percent of its energy comes from coal, and in any

event U.S. energy prices are being gradually

decontrolled. The level of assistance provided

in energy-rich developing nations with rapidly growing steel industries, such as Mexico, is

very great, and energy costs in such nations

are far below their market value.

33 What will be the effect of the new

Multilateral Trade Agreement on

the domestic steel industry?

Vigorous enforcement of the trade agreement is necessary, but not sufficient, to bring

about a revitalization of the domestic steel industry. Lax enforcement is sufficient to ex-
104 ● Technology and Steel Industry Competitiveness

tend present trends and to ensure the slow

but inevitable demise of much of the industry.

Even if the new trade agreement is vigorously enforced by the United States and its

trading partners, it could do little to solve the

fundamental problems of the domestic steel

industry, At best, there would be an uncertain decline in steel imports and an increase

in exports. The most important benefit of an

effective trade agreement would be to reduce

steelmaker’ uncertainty about their potential for capturing domestic growth in demand;

this could offer them clearer rewards for

long-term investments in technology. If the

new trade agreement is not vigorously enforced, other steps to aid the industry could

be nullified by unpredictable surges in unfairly traded imports or by the industry’s fear of

such surges.

Policy Options

34 How can increased Federal assistance to the steel industry be justified?

The steel industry is necessary for military

and economic security. It is also a major

source of employment. Other materials could

not even theoretically substitute for most

steels; where theoretical substitutions exist,

they could not be implemented in any reasonable period of time at manageable cost. And

to become dependent on foreign steel is comparable to becoming dependent on foreign

food or energy.

There are arguments to be made for providing more Federal assistance to the steel industry, but there is an equally valid case to

be made for the industry’s fundamental

strength. The industry is not, as some argue,

composed entirely of inefficient, mismanaged

firms using inefficient industrial processes.

The industry has an extremely strong infrastructure, an excellent labor pool, access to

one of the world’s best markets and to

abundant domestic resources, a high-quality

knowledge base, and a number of highly profitable, well-managed companies upon which

to base industry reinvestment, restructuring,

and growth. It can thus be argued that the

U.S. steel industry has comparative advantages over many foreign steel industries and

that these advantages should be used to rejuvenate the industry.

Any Federal policy that helps the steel

industry invariably brings objections from

other domestic industries or from steel companies that may not benefit equally. The chief

objection is that such policies disturb freemarket competitive forces either within the

steel industry or between steel and competing

materials. Other direct Government actions

affect various industries unequally, however,

and past Government actions have contributed to steel’s present problems. The industry

can point to market imperfections and uncertainties, resulting from both domestic and foreign policies, that have led to its current low

profitability, poor capital formation, and apprehension about high-risk ventures.

A free-market economy for steel has not existed in the United States for some time.

There is indirect control of import and domestic steel prices through Government import

policies, particularly the trigger-price mechanism used in the past. The Government has

used jawboning to keep steel prices within

limits that policymakers believe to be noninflationary. At the same time, rising costs

have reduced steelmaker’ profits. The loan

guarantee program of the Economic Development Administration (EDA) has provided assistance to selected companies that have economic problems, operate in areas of high unemployment, or need assistance with environmental compliance; but stronger and larger
Ch. 3—Problems, Issues, and Findings ● 105

steel companies, despite low profitability or

inadequate capital, generally have not benefited from this program. They and others

have expressed concern that such a program

merely postpones the collapse of fundamentally unsound companies.

It can also be argued that, because steel

has been so dependent on coal, it has benefited less than some other industries from

Federal energy policies that maintain relatively low prices for other energy sources.

The aluminum industry, for example, relies

extensively on the low-cost Government-controlled hydroelectricity of the Pacific Northwest. Similarly, the plastics industry has benefited from low petroleum feedstock prices.

The social benefits of environmental and

occupational safety regulations are inarguable, but the costs of compliance have not

been equitably distributed because they have

not been fully passed on to the consumer.

Limitations on prices, coupled with substantial regulatory costs, have contributed to the

steel industry’s loss of profitability and capacity. Many other industries also have substantial regulatory costs, but the very nature

of the steelmaking process, the industry’s

large proportion of old facilities, and the lack

of Federal support for long-range development of cleaner technologies have all imposed

more severe regulatory costs on steel than on

most other manufacturing industries.

Other reasons for increasing the Federal

Government’s support of steel include: 1) neither the low-profitability integrated companies nor the small nonintegrated firms are

able to support long-term, risky innovations,

even though such innovations may have substantial social and economic benefits; 2) imported steel contributes significantly to a negative trade balance, but steel and technology

exports could offset some of this deficit; and

3) the lack of Federal policy support, especially compared to foreign support of their

steel industries, reinforces the perception

that the United States is losing its leadership

in technology and industry, and this contributes to a weakened dollar and a further

decline in U.S. influence in the international

business community.

A possible long-range negative consequence of more favorable Federal policies

toward the steel industry is that they could

lead to Federal subsidization or even ownership. Critics argue that such policies led to

the nationalization of many foreign steel industries and that, generally, these industries

are inefficient and operate at a large loss.

This is not a necessary outcome of Federal assistance, however, if policies are designed to

help private steelmaker regain sufficient

economic health to once again be viable profitmaking enterprises.

35 Is there a need for direct Federal financial assistance to the steel industry?

Clearly, a number of steel industry problems result from inadequate capital for modernization with the newest available technologies and investment in future innovations.

The situation has not yet become critical

enough to justify broad, direct Federal subsidies to support normal operations and investments, but an argument can be made for

selective Government assistance to promote

modernization as long as profit levels are low.

Loan guarantees and industrial revenue

bonds have become popular forms of Federal

assistance because they are not expenditures

and bypass the normal budget process. In

fact, Government usually shows a profit from

the low interest recipients pay. The problem

with loan guarantees is that they could disrupt normal competitive forces among individual producers. There are very large differences in costs and profits among companies,

as well as among industry segments. Loan

guarantees that offer assistance to the least

profitable companies act as disincentives to

other firms to manage and invest so as to

maximize profits. Federal assistance policies

also need to provide incentives to companies

that are relatively strong, both economically
106 . Technology and Steel Industry Competitiveness

and technologically, and are able to share the

risks with Government.

The EDA loan guarantee program, now in

its last stages, did not specifically focus on

the adoption of new technologies, and it has

been criticized by a number of steelmaker

for its tendency to help unsuccessful companies. If loan guarantees are to be offered, it

would be more efficient to use them to encourage and reward high-risk innovations, increased capacity, better use of domestic resources, products for export, reduced energy

consumption, increased overall productivity,

and environmentally cleaner processes.

The terms of such a technology-stimulating, limited-term loan guarantee program

might require: 1) evidence of the company’s

inability to raise capital through all conventional means, including selling new stock issues; 2) a degree of risk and innovativeness

proportional to the relative level of past profitability, so that successful firms would be

stimulated to develop risky, long-range, major

innovations, while less profitable firms would

still be able to share in Federal assistance;

3) commitments to delay diversification out of

steelmaking until companies meet certain objectives, such as achieving mutually agreedupon steelmaking capacities, productivity

improvements, energy-use reductions, or pollution-abatement improvements. This approach, though complex, would least disturb

relative competitiveness among domestic

companies while still providing a means of regaining domestic capacity and international

competitiveness.

Industrial revenue bonds benefit the companies by providing lower interest rates, but

they have an indirect cost to the Government

in the form of reduced taxes. There are also

problems with defining the social benefits of

technology-related investments and with allocating such bonds among competing needs.

36 What effect would changes in Federal tax laws have on capital formation?

Insufficient capital to modernize, expand

capacity, and innovate is an increasingly

critical problem for most of the steel industry,

which has long argued that changes in Federal tax policies could help to correct its capital

shortfall. There is little doubt, for example,

that appropriately designed investment tax

credits or reduced depreciation schedules

could yield large amounts of additional

capital. Furthermore, these methods do not

require expenditure of Federal funds and

therefore bypass the Federal budget process.

Tax credits already exist for energy-saving

investments; they could also be directed

toward other specific steel-related objectives

such as increased scrap use, increased direct

use of coal, or plant demonstrations of major

innovations.

In the area of the reduced depreciation

periods, the Jones-Conable Capital Cost Recovery Act of 1979 (H.R. 4646), if enacted,

would allow machinery and equipment to be

depreciated over 5 years instead of the present 15. The Department of the Treasury has

calculated that, 5 years after its passage, this

Act would generate an additional $0.5 billion

to $1 billion per year for the steel industry.

This amount would probably provide sufficient investment capital over the next decade

to achieve the minimum degree of modernization and expansion that is needed to improve

profitability and competitiveness.

If tax assistance of any kind were provided

to the steel industry, there is no assurance

that the additional capital gained thereby

would be used for: 1) steelmaking operations

of companies already committed to diversification out of steel, or 2) more innovative and

risky technologies. While diversification cannot be prevented, it may be blunted by policy
Ch. 3—Problems, Issues, and Findings ● 107

changes that the industry perceives to be

favorable. Technological innovation could be

encouraged by targeting tax assistance for

technologies that are likely to result in reduced pollution, lower energy use, greater

labor productivity, lower capital costs, or increased use of abundant domestic raw materials and wastes. Critics of legislation that

deals directly with technological choices,

rather than performance objectives, point to

the difficulty and undesirability of having the

Federal Government evaluate technology.

Those in favor of such legislation point to the

risks involved in not requiring the beneficiaries of Federal assistance to emphasize

technologies with long-range national and

corporate benefits, rather than those that are

less risky and more likely to increase the

short-term profits of individual companies.

37 Should there be more Federal support for steel R&D and innovation?

The Nation’s commitment to the future international competitiveness of the domestic

steel industry would be demonstrated most

clearly and most effectively by increased Federal support of research. There is a severe

lack of basic steel research, especially in

universities, and any truly radical innovations in steelmaking will be based on new

knowledge. New knowledge might emanate

from totally undirected research, but it is

much more likely to be produced in basic research programs that focus on the needs of

steelmaking.

An attractive approach for improving the

level of basic steel research would be to create federally supported research centers, located at universities but with close relationships with industry to ensure eventual use of

the research by steelmaker. Financial support for such centers could also be solicited

from industry (after clarification of antitrust

laws). Because of their low profitabilities and

their need for fast paybacks, individual companies are not likely to spend significant sums

on basic research; they might, however, contribute to joint efforts. The National Science

Foundation has taken a step in this direction

by funding a planning grant for a center dealing with research for nonintegrated steelmaking.

Funding is also needed for pilot- and demonstration-plant evaluations of the new process technologies that are vital for the nearterm survival of the industry. Policy changes

in this area would also require more liberal

interpretations of antitrust laws, as well as

either assurances of appropriate licensing to

all interested companies or provisions to

grant proprietary or financial rights to participating firms. Proponents of such funding

argue that the lack of sufficient discretionary

capital in the industry has limited applied

evaluation programs in the past. Risky, largescale projects generally require many hundreds of millions of dollars for evaluation

before commercialization can proceed, and

few individual companies can mount such efforts. The cost to the Government could be

minimized by using a buyback agreement that

allows a company or consortium to purchase

the facility upon successful demonstration.

Opponents contend that the Government

should not interfere with the private sector’s

ability to choose, evaluate, and fund projects,

and that in any event Government lacks sufficient experience and expertise to make the

critical choices. They argue that sufficiently

worthwhile projects that offer adequate returns on investment will, regardless of risk,

attract venture capital. The determination of

risk and return on investment for new steel

technology is filled with uncertainty, however, and the present lack of favorable conditions for capacity expansion worsens the
108 . Technology and Steel Industry Competitiveness

risk/reward assessment. Furthermore, biases

and attitudes toward the industry can be

used to make a promising technology look

more risky or less beneficial than it really is.

OTA has found that even worthwhile projects

are damaged by the generally negative views

of those outside the industry and the pessimism of steel executives who do not believe in

the feasibility of technological innovations.

For these reasons, the arguments against

Government assistance are not compelling,

although they do identify concerns which

should be examined in policy formulation.

An equally important role for Government

might be the coordination of steel R&D with

other federally sponsored research activities.

A good example of such linkage would be

with activities in coal gasification and synfuels, which might supply the necessary technology for handling reductants in coal-based

DR processes. This linked technology could

yield the extremely advantageous combination of a wise, efficient use of abundant domestic resources and a cleaner, low-capitalcost steelmaking process.

Government could also give greater encouragement to innovative efforts by small

firms and individual inventors who are outside the basic steel industry and have little

access to its resources. It is well known that

small firms have a very high rate of successful innovation compared to large corporations. OTA has found a surprising number of

such firms and individuals with new steelmaking inventions and processes that are

promising, but difficult to assess. Their difficulty is insufficient funding at the pilot and

demonstration stage to fully prove or disprove the new technology or to assess accurately its operating and capital costs. The

Calderon Ferrocal process, a form of coalbased DR, is an example of a promising invention that is having difficulty obtaining adequate funding for demonstration. It is difficult to envision how means other than direct

Federal funding could be used to assist such

efforts.

The facilities of the Bureau of Mines,

formerly used for research in steelmaking,

could be resurrected by the Government with

a minimal investment to establish an effective

RD&D program with industry, especially the

small nonintegrated companies. Both the

former Bureau policy (which apparently prevented cooperative research with industry)

and the present policy (which prevents research in the materials production area)

seem to ignore the needs and opportunities of

domestic steelmaking.

38 What regulatory changes could be

considered that are simultaneously

aimed at improving environmental

and occupational protection and at

revitalizing the steel industry?

Environmental policy should be reexamined taking into consideration the unique

needs, problems, and technological opportunities of the different steel industry segments.

The social goals of environmental and

worker safety and health are fundamentally

sound. Nevertheless, industry’s concern over

the long-term economic effects of such regulations are also legitimate. For instance, industry investment in EPA- and OSHA-mandated

technology and facilities is a considerably

higher percentage of total capital investment

than for other manufacturing industries and

may continue to increase during the next several years, Costs of operating these facilities

are also very high. In addition, needed improvements in environmental technologies

will assume growing importance as toxic pollutant guidelines affecting the steel industry

are issued within the next few years.

Possible changes in environmental policy

that merit examination and evaluation include:

●

●

Giving industry more flexibility in selecting the most effective means to attain environmental compliance, such as by regulating emissions on a plant rather than

an individual process basis.

Analyzing the regulation of pollutants

with the goal of providing tradeoffs be-
Ch. 3—Problems, Issues, and Findings ● 109

tween economic costs and environmental benefits.

Providing regulatory options for marginal plants with a limited life expectancy,

so that environmental goals can be better coordinated with both near-term

plant phaseouts and the maintenance of

domestic capacity.

Using EPA and OSHA penalty payments

for noncompliance to fund R&D in these

areas.

Clarifying the industry’s responsibilities

concerning RD&D for improved control

technologies that will meet EPA standards.

Complementing the existing regulatory

approach, as embodied in the innovation

waivers, with economic incentives to encourage industry RD&D of needed improvements in environmental technology,

Increasing Federal support of environmental technology R&D, particularly

with respect to in-process changes.

Increasing emphasis by regulatory agencies on innovative steelmaking technologies and process changes that present a

number of advantages in addition to improved pollution abatement and worker

safety and health.

39 What will be the effects of continuing to export ferrous scrap?

U.S. scrap exports are a positive contribution to the Nation’s trade balance, but they

are relatively small, in terms of both dollars

and tonnage, compared to imports of steel,

ore, and coke. For 1979, scrap exports probably equaled about 15 percent of the net

steel-related deficit. The scrap industry favors free export of scrap, contending that

there is sufficient domestic scrap to export,

that more scrap becomes available as prices

increase, and that historically the integrated

steel producers have not attempted to maximize their use of scrap. To some extent the

latter has been true, but that situation appears to be changing (see Topic 21).

By exporting scrap, the United States is exporting a valuable domestic resource. Scrap

is a source of both iron and embodied energy

(about 19 million Btu/tonne). The more scrap

used in domestic steelmaking, the less energy,

time, money, and labor are expended to mine

and process iron ore and then make iron in

blast furnaces.

Some of the exported scrap is used by foreign steelmaker to produce government-subsidized steels, which are then sold back to the

United States, with adverse impacts on the

domestic steel industry. Scrap exports drive

up the domestic price of scrap, but foreign

producers can still obtain a net advantage because of the devalued dollar and their inherently greater energy costs. Domestic producers must contend with both high scrap costs

and price controls on their output, which put

them in a cost-price squeeze.

Continuous casting and other improvements have decreased the amount of home

(inplant) scrap being produced; simultaneously, the greater use of electric furnaces

and the modification of basic oxygen furnaces have increased the demand for scrap.

As a result, steelmaker are becoming more

dependent on purchased scrap, which however is declining in quality as “tramp” contaminants build up over numerous recycling.

The domestic demand for scrap is so great

and growing so rapidly that the scrap industry may have no long-range economic need to

export. As nonintegrated electric furnace

steelmaker expand in the 1980’s, it is even

possible that a domestic shortage of ferrous

scrap may develop.

Perhaps the most significant long-range

consequence of continuing to export scrap is

the possible detrimental impact on the nonintegrated steel producers. If formal or informal Government price controls cannot be

released quickly enough to offset rapidly rising costs, quickly rising scrap prices (driven

by high foreign demand) may put a substantial cost-price squeeze on these firms and

even drive them out of the market. This impact is particularly acute now, when coal-
110 ● Technology and Steel Industry Competitiveness

based DR has not been developed domestically and when DRI is not yet readily available

as an import.

40 Are Federal Government targets for

utilization of ferrous scrap and

other recovered materials needed,

feasible, and the best approach?

The Government has been reluctant to put

controls on scrap exports, but two legislative

acts have attempted to maximize the use of

scrap and other waste sources of iron generated in steel plants. These acts foresaw

neither the difficulty of setting meaningful

and feasible targets nor the long-range consequences of this approach. For purely economic reasons, scrap use by the steel industry has

been increasing. As an alternative to setting

targets, the Government could consider direct incentives to the industry, such as an investment credit, to adopt technology that

would use more scrap (see Topic 21).

The requirements of the two acts may be

summarized as follows:

● Section 461 of the National Energy Conservation Policy Act (Public Law 95-619)

of 1978 mandates that the Department

of Energy set targets for the use of recovered materials for the entire ferrous industry, including ironmakers and steelmaker, foundries, and ferroalloy producers. Such targets, which have now

been set, are voluntary, but steel producers are concerned that they might become mandatory. The target set for 1987

was almost met in 1979.

. Section 6002 of the Resource Conservation and Recovery Act (Public Law

94-580) of 1976 amends the Solid Waste

Disposal Act and deals with Government

procurement. It sets forth the requirement that Federal procuring agencies

shall procure items composed of the

highest percentage of recovered materials practicable, and it instructs the EPA

Administrator to promulgate guidelines

for the use of procuring agencies in carrying out this requirement. It also requires suppliers to the Government to

certify the percentge of recovered materials in the total material used in the

items sold. As yet, EPA has not set these

guidelines, nor has it proposed a schedule.

Although it is in the national interest to

maximize the use of recovered materials in

order to save energy, the setting of scrap-use

targets or guidelines presents a number of

problems. It may not be technically or economically feasible in all cases to use recovered materials to the extent suggested or required by the Government. A major problem

has been that DOE and EPA do not appear to

recognize the different steel industry segments and the unique constraints and opportunities they each have in regard to scrap

use. Another problem is that a numerical target rests on many assumptions—about future

scrap availability and use, as well as total

steel demand and changes in technology—

which are themselves highly controversial.

Targets could, in fact, be counterproductive to the original goals of maximizing recovered materials and saving energy. Unrealistic

targets could be circumvented, for example,

by companies buying and selling one another’s home scrap on paper. Should targets and

guidelines be effective in increasing demand

for purchased scrap, and thereby rais e

prices, the impact on nonintegrated companies would be much worse than on integrated steelmaker; if this led to a decrease

in nonintegrated output, it could ultimately

result in lower total scrap use. Technically

and economically, it would be extremely difficult for integrated steelmaker to increase

substantially their use of recovered materials

in existing facilities, and the modification to

increase scrap use in basic oxygen furnaces

also increases the consumption of oil or natural gas. Credits for scrap-enhancing changes

in facilities would thus appear to be more effective than targets, since they ensure that investments would be productive and economically justified.

With the advent of DR and the availability

of DRI, electric furnace steelmaker could
Ch. 3—Problems, Issues, and Findings . 111

use less scrap. Hence, targets or guidelines unit of output would decrease in electric furcould act as a disincentive to the introduction nace shops using DRI, it can be argued that

of DR, a technology that may offer benefits the use of DRI in conjunction with scrap

for both the companies and the Nation. Indus- would promote an expansion of electric furtry cannot totally rely on scrap, so it needs nace steelmaking, resulting in a net increase

DR, which produces new iron units from ore. in the use of purchased scrap (see Topic 16).

Even though the percentage of scrap used per
CHAPTER 4

The Domestic Steel Industry’s

Competitiveness Problems

Contents

Page

summary ● .*. **** ***. *.**   9** * *D W** * 115

Decline of the U.S. Position in World Steel

Production and Trade . . . . . .. ...........116

profitability and Investment in the Steel

Industry ● **** *e. .**. ***********e***** 119

Trends undomestic Steel Industry Profits. .. .119

Financial Performance of the Steel

Industry Segments . . . . . . . . . . . . . . . . . . . . 119

Trends in Steel Industry Investment . .......123

ownership and Financial Performance of

Foreign Steel Firms... ....... ..........124

Factors in International Competitiveness. ... 128

Technology . . . . . . . . . . . . . . . . . . . . . .......128

Comparative Production Cost Data . ........134

Labor Costs. . . . . . . . . . . . . . . . . . . . . . ......135

Raw Materials and Energy. . ..............140

Capital Investment and Financing Costs .. ...142

Macroeconomic Changes. . ...............143

Shifts in Coat Competitiveness... ..........144

Future Trends in Competitiveness,

Supply-Demand, and Trade ............. 145

Steel Shortages in the Mid-1980’s . .........145

Potential for Exports. , . ..................146

Future Costs and Productivity . ............147

World Steel Trade . * * * * * . . * . . . . **,*...** 149

List of Tables

Table No. Page

16. Raw Steel Production: Total World, “

17.

18.

19.

20.

21.

22.

23.

24.

25.

26.

EEC Countries, Japan, and the United

States, 1956-78 . . . . . . . . . . . . . . . . . . . ● 116

Selected Countries’ Steel Exports as a

Percentage of Their Total Raw Steel

Production, 1955-78 . . . . . . . . . . . . . . . . 117

U.S. Imports and Exports of Steel Mill

Products, 1956-78 . . . . . . . . . . . . . . . . . . 118

U.S. Iron Ore and Steel Import and

Export Levels, 1971-78 . . . . . . . . . . . . . . 118

Trends in Steel Industry Profits,

195478 . . . . . ● . . . . . . . . . . . . . . . . . . . . 120

Selected Financial Highlights, Iron and

Steel Industry, 1950-78 . . . . . . . . . . . . . . 120

Selected Financial Data, U.S. Steel

Industry, 195478 . . . . . . . . . . . . . . . . . . 121

Index of Steel Industry Prices and

Costs,1965-78 ...... o... . . . . . . . . . . . 122

Steel Company Profitability by Industry

Segment, 1977-78 ... ... ... ... ..e. .o 122

Replacement Rates for Domestic Steel

Production Facilities, 1950-78 . . . . . . . . 123

Government Ownership of Raw Steel

Facilities, Selected Countries . . . . . . . . . 125
27.

28.

29.

30.

31.

32,

33.

34.

35.

36.

37.

38.

39.

40.

41.

42.

Comparison of Productivity and Labor

Costs in the U.S. Iron and Steel

Industries With Four Other Countries,

1964,1972-77 ....., . . . . . . . . . . . . . . .

Capacity Utilization in Several Steel

Industries ... , , ., . . . . . . . . . ., . . . . . .

Steel Industry Net Income as a

Percentage of Net Fixed Assets, Five

Countries, Averages for 1969-77 . . . . . .

Financial Statistics, Selected Steel

Companies, 1978 ..., . . . . . . . . . . . . . . .

Average Profitability for Steel

Industries in Six Nations and Europe,

1978. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Comparative Trends in Raw Steel

Production in Electric Furnaces,

1964-78 . . . . . . . . . . . . . . . . . . . . . . . . . .

Age Distribution of Domestic Steel

Production Facilities, 1979. . . . . . . . . . .

Integrated Steel Producers’ Capacities

in Selected World Areas, 1976. . . . . . . .

Estimates of U.S. and Japanese

Steelmaking Costs, 1976 . . . . . . . . . . . . .

U.S. Steel Industry Employment,

Productivity, and Compensation,

1960-78 . . . . . . . . . . . . . . . . . . . . . . . . . .

Labor Productivity at Actual Operating

Rates, Selected Countries, 1969-84 . . . .

Employment Costs for Domestic Steel

Companies, 1978. . .......;....,.. . .

Carbon Steel Production Costs, Five

Countries, 1969 and 1978. . . . . . . . . . . .

Steel Industry Hourly Employment

Costs, Five Countries, 1969 and 1978. .,

Unit Costs for Inputs,United States and

Japan, 1956-76. . . . . . . . . . . . . . . . . . . . .

Coke Consumption per Tonne of Pig

Iron Produced, ll Countries, Selected

Years, 1958-78 . . . . . . . . . . . . . . . . . . . .

126

126

126

127

43.

44.

45.

46.

47.

Capital Expenditures per Net Tonne of

Raw Steel Production, Five Countries,

1972-77 . . . . . . . . . . . . . . ...***, .,.,0 143

Production Costs per Tonne of

Carbon Steel Shipped: percentage

Increase 1969-78. ....,.. . . . . . . . . . . . 144

World Raw Steel Supply-Demand

Forecasts, 1980-2000.,.. . . . . . . . . . . . 146

Potential Impact on World Steel Supply

by Less Developed Countries . . . . . . . . . 148

Import Dependence of the Japanese

Steel Industry, Selected Years, 1955-78. 149

127

129

130

133

135

136

138

139

140

140

141

142

List of Figures

Figure No. Page

8.

9.

10.

11,

12.

13.

14.

15.

U.S. Exports—Share of World Steel “

Trade, 1945-77 . . . . . . . . . . . . . . . . . . . . 117

U.S. Trade Balance in Iron and Steel,

1925-70 . . . . . . . . . . . . . . . . . . . . . . . . . . 118

Steel Industry Annual Average Rates

of Return and Annual Rates of

Inflation, 1949-78 . . . . . . . . . . . . . . . . . . 121

Rates of Investment in Major Steel

Industries, 1963-76. . . . . . . . . . . . . . . . . 128

Capital Expenditures in Steel

Manufacturing as Percent of GNP,

Selected Steel-Producing Countries,

1960-78, . . . . . . . . . . . . . . . . . . . . . . . . . 128

The Diffusion of Oxygen Steelmaking,

12 Countries, 1961-78 . . . . . . . . . . . . . . . 130

The Diffusion of Continuous Casting,

10 Countries, 1962-78 . . . . . . . . . . . . . . . 131

Apparent Steel Consumption Indexes

by Region, 1973-78 . . . . . ...+..... . . . 148

. .
CHAPTER 4

The Domestic Steel Industry’s

Competitiveness Problems

Summary

Although world steel demand more than

doubled during the past two decades, domestic steel production increased by only 20 percent during this time. In this same period, the

Japanese steel industry increased production

sevenfold, and Common Market steel production went up by 70 percent. The declining role

of the U.S. steel industry in the international

market is reflected in substantially increased

U.S. steel imports and flat export levels. Despite major technological and economic difficulties, domestic steel industry profit levels

have been higher than those of foreign steel

industries. Nevertheless, steel profits were

only about half the U.S. manufacturing average.

Historically, the domestic steel industry’s

indebtedness levels had been relatively low

compared to foreign steel industries. Unlike

foreign firms, domestic steelmaker have financed capital investments largely from retained profits or through equity financing.

Foreign governments play a more direct role

than the U.S. Government in facilitating industrial access to capital markets and public

funds.

The U.S. steel industry’s market decline

may be attributed to a number of factors. Its

most recent expansion started earlier and

was of a much shorter duration than that experienced by competitor industries, particularly that in Japan. Furthermore, the domestic industry has adopted certain productive

new steelmaking technologies at a relatively

slow rate. As a result, U.S. plants tend to be

older, smaller, and less efficient than the

steelmaking equipment of many competing

foreign steel industries.

The resource-poor Japanese steel industry,

benefiting from post-World War 11 technological, economic, and government policy advantages, has been the world’s low-cost producer

since the early 1960’s. Japan has had a long-

-lasting steel industry expansion, based largely on new plant construction. As a result, Japan now has superior technological steelmaking capability and a strong competitive position. Some steel-producing less developed

countries (LDCs), such as South Korea, are

also becoming increasingly cost competitive.

Raw materials, including energy, continue

to be the most costly input factors. Foreign

steel industries have brought down their raw

materials unit costs during the past decade,

despite major materials price increases. Domestic raw materials unit costs actually increased. Virtually all steel industries are experiencing declining employment levels. The

domestic industry no longer has the highest

labor productivity, and U.S. unit labor costs

are higher than in Japan but lower than in Europe.

Predictions of future supply and demand of

steel products are uncertain, but high steel

demand and barely adequate world capacity

are possible by the mid-1980’s. Under these

conditions, if domestic capacity is replaced

with modern facilities, increased demand can

be met and financed. If limited expansion and

modernization do not occur, the United States

will become dependent on carbon steel imports at high prices during cyclic periods of

high demand.

115
116 . Technology and Steel Industry Competitiveness

Decline of the U.S. Position in

World Steel Production and Trade

Up to and throughout World War II, the

United States maintained an unapproachable

lead in steel technology and production. However, the postwar rebuilding and expansion

of European and Japanese steel mills provided foreign producers with great competitive leverage. U.S. steel firms did not build

enough new plants or expand existing capacity sufficiently to capture a portion of the

rapidly rising world demand for steel.

The dramatic decline in the growth rate of

the U.S. steel industry, compared to that of

other countries, is revealed in world production figures. From 1956 to 1978, the U.S.

share of total world output of steel dropped

from 37 to 17.5 percent and domestic production increased only 10 percent. During this

period, Japan increased its production nearly

tenfold (table 16). Japan and the European

Economic Community (EEC) experienced a

combined growth rate from 1950 to 1976 that

was 10 times greater than that of the United

States.

That the domestic industry did not capitalize on burgeoning post-World War II international steel demand is shown by the fact that

steel exports from the United States have remained constant during the past 30 years,

even though worldwide exports increased

more than tenfold during that time (figure 8).

In 1978, the United States exported only 2.5

percent of its total domestic raw steel production, while West Germany exported 53.7 percent; Japan, 36.8 percent; Italy, 37.6 percent;

and the United Kingdom, 21.5 percent (table

17). Clearly the industries in these countries

were built with the export market in mind, because their capacities far exceed the volume

needed to satisfy their domestic needs.

Not only have domestic steel exports failed

to keep pace with growing world steel deTable 16.—Raw Steel Production: Total World, EEC Countries, Japan, and the United States, 1956-78

— —.—

Millions of tonnes

U.S. share of total

world production

Year

— .—

Total world EEC Japan- United States (percent)

1956. ., , . . . . . . .; ~-, . . . . . . . . . 283. 8 77.9 12.0 104.5 36.8

1957. . . . . . . . . . . . ., . . . . . . . 291.8 82.0 12.5 102.2 35.0

1958, . . . . . . . . . . . . . . . . . . . . . 270.9 78.0 12.1 77.4 28.5

1959. ....., . . . . . . . . . . . . . . . 305.8 84.0 16.6 84.7 27.7

1960. .., . . . . . ... . . . . . . . . 346.1 97.9 22.1 90.1 26.0

1961 ....., ... . . . . . . 353.8 96.1 28.3 88.9 25.1

1962. . . . . . . . . . . . . . . . . . . . . . . 357.4 94.0 27.6 89.2 24,9

1963. ..., . . . . . . . . . . . . . . . . . 382.9 96.5 31.5 99.1 25.9

1964. . . . . . . . . . . . . . . . . . . . . . . 434.5 109.9 39.8 115.3 26.5

1965. . . . . . . . . . . . . . . . . . . . . . . 456.3 113.8 41.2 119.3 26.1

1966. ....., . . . . . . . . . . . . . . . . 470.8 110.2 47.8 121.6 25.8

1967. ...., . . . . . . . . . . . . . . . . 496.7 114.5 62.1 115.4 23.2

1968. ....., . . . . . . . . . . . . . . . 528.3 125.3 66.8 119.3 22.6

1969. . . . . . . . . . . . . . . . . . . . . . . 573.2 134.7 82.1 128.2 22.4

1970, . . . . . . . . . . . . . . . . ., . . . 593.4 137.5 93.3 119.3 20.1

1971 ...., . . . . . . . . . . . . . . . . . . 580.4 128.2 88.5 109.2 18.8

1972. . . . . . . . . . . . . . . . . . . . . . . 629.9 126.2 96.9 120.8 19.2

1973. . . . . . . . . . . . . . . . . . . . . . . 697.1 150.1 108.2 136.8 19.6

1974. ........, . . . . . . . . . . . . . 710.0 155.5 117.1 132.1 18.6

1975. . . . . . . . . . . . . . . . . . . . . . . 645.8 125.3 102.3 105.8 16.4

1976. . . . . . . . . . . . . . . . ... . . . 683.1 134.3 107.4 116.1 17.0

1977. ......, . . . . . . . . . . . . . 673.9 125.3 102.4 113.1 16.7

1978. . . . . . . . . . . . . . . . . . . . . . . 711.7 133.1 102.1 124.3 17.5

SOURCE: Compiled from data published by the American Iron and Steel lnsitute.
—

Ch. 4— The Domestic Steel Industry’s Competitiveness Problems ● 117

Figure 8.—U.S. Exports—Share of World

Steel Trade, 1945-77

117.9

L

f

108.8 I

99.8

45.4

36.3

27.2

18.1

9.1

I

World exports /

\

/

1945 1950 195 5 1960 1965 1970 1974 1977

Year

mand, but steel imports into the United States

since the late 1950’s have also grown at the

rate of 10 percent per year [table 18). * The

increasing gap between domestic steel exports and imports has a negative effect on the

U.S. trade balance. Steel imports exceeded

exports in dollar value for the first time during the late 1940’s and in volume during the

late 1950’s (figure 9, table 18). Since that

time, imports have captured much of the

growth in domestic steel consumption. In

1978, steel exports were only 20 percent of

imports, and iron ore exports were a mere 6

percent of imports. These trade patterns

have led to a very high annual trade deficit

(table 19), second only to petroleum as a

source of trade deficit. Although exports of

ferrous scrap reduce this deficit by a relatively small amount, imports of coke increase

it.

SOURCES: American Iron and Steel Institute, Steel Industry and Federal Income Tax Policy, June 1975, p 46, U N Secretary of Economic Committee for Europe, Statistics of World Trade in Steel, 1913.59,

Geneva. 1967

*It is generally recognized that the prolonged steel strike in

1959 played a role in the dramatic shift of the United States

from being a net exporter to a large net importer of steel.

Table 17.–Selected Countries’ Steel Exports’ as a Percentage of Their Total Raw Steel Production, 1955-78 —. ———

Year ——Total world

 -- —

1955 . . . . . . . . . . . . . . . . 13.0

1956 . . . . . . . . . . . . . . . . 12.8

1957, . . . . . . . . . . . . . . . . 14.1

1958 . . . . . . . . . . . . . . . . . 14.4

1959 . . . . . . . . . . . . . . . . . 14.1

1960 . . . . . . . . . . . . 15.0

1961 . . . . . . . . . . . . . . . . . 14.5

1962 ..., . . . . . . . . . . . . . 15.9

1963 . . . . . . . . . . . . . . . . . 15.8

1964, ... ... . . . . . . . 16.1

1965 ......., . . . . . . . 17.3

1966 . . . . . . . . . . . . . . . . . 16.6

1967 . . . . . . . . . . . . . . . . 16.9

1968 . . . . . . . . . . . . . . . 18.4

1969 . . . . . . . . . . . . . . . . 18.7

1970 . . . . . . . . . . . . . . . . . 19.0

1971 . . . . . . . . . . . . . . . . 21.4

1972 . . . . . . . . . . . . . . . . . 20.7

1973 . . . . . . . . . . . . . . . . 20.8

1974 . . . . . . . . . . . . . . . . . 23.5

1975 ........, . . . . . . . . 22.5

1976 . . . . . . . . . . . . . . . . . NA

1977 . . . . . . . . . . . . . . . . . NA

1978 . . . . . . . . . . . . . . . . . NA

EEC

30.3

30.1

31. 6

32. 9

36.1

34. 7

36. 3

36. 5

36. 2

36.1

39. 8

39. 9

42. 3

42. 7

40. 8

39. 0

46. 8

47. 6

48. 2

53. 2

54.1

N A

NA

NA

Japan

25.0

12.9

9.4

17.3

12.0

13.5

10.6

18,4

22.5

21.9

30.8

26.4

18.7

25.5

25.3

25.2

34.9

28.7

27.8

36.6

37.7

44.7

41.9

36.8

United

—.

States

4.6 –

5.0

6.3

4.6

2.5

4.0

2.8

2.8

2.7

3.6

3.5

1.7

1.8

2.2

5.0

7.1

3.2

2.9

3.6

5.4

3.4

2.8

2.2

2.5

Selected EEC countries -

Rest of West

world

6.8

6.9

7.9

7.4

7.4

8.4

8.0

10.5

10.3

10.4

9.8

10.3

10.7

11.0

11.1

11.3

11.8

12.2

12.0

11.2

11.5

NA

NA

NA

Germany

16.2

20.4

26.3

26.7

28.2

30.6

32.8

33.1

33.0

29.6

34.5

36.5

43.5

41.4

37.4

35.9

43.7

42.3

46.5

55.7

53.7

47.2

53.2

53.7

Italy

8.5

15.4

14,7

17.4

17.3

17.6

12.9

13.3

11.6

18.5

25.7

20.7

16.6

19.3

15.5

13.7

24.0

25.7

22.1

26.7

38.2

43.8

37.8

37.6 ——

United

Kingdom

17.1 —

16.0

18.1

17.4

18.6

16.9

19.0

20.0

19.8

18.7

19.2

19.1

21.3

22.1

19.9

19.9

27.3

24.3

21.4

19.8

21.5

21.6

21.5

21.5—

NA = Not available

aSemifinished and finished steel exports converted t. raw steel equivalent by dividing exports by O.75 Data include intra-EEC exports for EEC and European nations.

For EEC in 1978 exports outside the member nations amounted to 25 percent of raw steel production, and Imports from outside member nations was 13 percent of exports

SOURCES U S Congress, Senate Committee on Finance, Steel Imports, December 1976, American Iron and Steel Institute, Annual Statistical Reports, and U.N. Economic Commission for Europe, The Steel Market.
118 ● Technology and Steel Industry Competitiveness

Table 18.—U.S. Imports and Exports of Figure 9.— U.S. Trade Balance in Iron

Steel Mill Products, 1956-78 and Steel, 1925-70a

1956 . 1.2

1957 . . . . . 1.1

1958 . . . . . . 1.5

1959 . . . . . . 4.0

1960 . . 3.1

1961 . . . . 2.9

1962 . , 3.7

1963 ., . . . . 4.9

1964 . . . . . . 5.8

1965 9.4

1966 . . . . . . 9.8

1967 . . . . . . 10.4

1968 . 16.3

1969 . . . . . . 12.7

1970 . . . . . . 12.2

1971 . . 16.6

197 2 16.1

1973 . 13.8

1974 . . . . 14.5

1975 . . . . . . 10.9

1976 . . . 13.0

1977 .. . 17.5

1978 . . . . . . 19.1

3.9

4.8

2.5

1.5

2.7

1.8

1.8

2.0

1.7

1.5

2.9

6.1

4.7

4.7

5.6

6.9

750

500

2 . 3 10.3

1.5 10.9

1.5

2,0

4.7

6.4

2.5

2.6

3.7

5.3

2.7

2.4

1.8

2.2

12.2

16.7

13.7

13.8

17.9

16.6

12.4

13.4

13.5

14.1

17.8

18.1

SOURCE Compiled from official statistics of the US Department of

Commerce

Table 19.—U.S.Iron Ore and Steel Import

and Export Levels, 1971-78(millionsofdollars)

-—

Imports Exports Combined

trade

Year – Ore Steel Ore Steel deficit

—

–1

–1

250 + f\ \

–1

1925 1940 1945 1970

1971. ... $ 476,4 $2,636 $36.1 $ 576 $2,500

1972. . . . 441.4 2,794 24.9 604 2,607 aExcluding the war years 1941-45

1973. . . . 564.0 2,821 35.7 1,004 2,345

1974, . 798.3 5,116 38.2 2,118 3,758 SOURCE: W.H. Branson and H.B. Tunz, Brookings Papers on Economic Activ1975. . . . 1,017.3 4,093 56.3 1,862

ity, 2 1971 (based on U S Department of Commerce and U S Bureau

3,192 of the Census data)

1976. . . . 1,078.0 4,025 70.0 1,255 3,778

1977. . . . 970.5a 5,531 55.4a

1,037 5,409

1978. . . . 1,000.0a 6,917 60.0a

1,329 6,528

aPreliminary estimate

SOURCES Ore—Using Import/export tonnage data and average annual prices

In U S Bureau of Mines, “Iron Ore, ” MCP-13, 1978; steel—U.S. Department of Commerce, U .S. Industrial Outlook 1978.
Ch. 4—The Domestic Steel Industry’s Competitiveness Problems ● 119

Profitability and Investment in the Steel Industry

Domestic steelmaker’ limited exports and

the country’s growing imports are indicative

of the decline in the competitiveness of the

U.S. steel industry in the international market. Competitiveness is based on technological capability and its interaction with macroeconomic developments and inputs of labor,

raw material, and capital. It is axiomatic that

no matter how much technological knowledge

exists, it will not be used unless capital is

made available to finance applications of that

knowledge.

Trends in Domestic Steel

Industry Profits

To a significant extent, the problems that

the domestic steel industry presently faces

can be traced to longstanding low profitability, which according to many people has discouraged equity investment in the industry.

Aggregate financial data support this contention. Nevertheless, the domestic steel industry has had a far better financial performance than have many foreign steel producers.* Still, given the prevailing profit status of

many domestic steel firms, they will be significantly short of the capital they would need to

modernize, solve environmental problems,

and no more than maintain current capacity

levels, much less expand them.

Conventional comparisons of domestic

profitability, measured as aftertax profits as

a percentage of stockholder equity, show low

steel industry profits compared to other sectors. In only 4 years (1955-57 and 1974) during the past 25 did this measure of steel industry profit exceed the average for all domestic manufacturing firms (table 20). Steel

industry profitability has been lower than

prime interest rates for 5 of the past 10 years.

Although total revenue for the domestic

steel industry has increased steadily, from

*International profitability comparisons should be made

with caution since foreign government ownership and direct

and indirect support make measures of profitability used for

private U.S. firms difficult to apply to all foreign firms.

$9,534.6 million in 1950 to $46,877.3 million

in 1978, so have its operating expenses and

capital expenditures. Industry net income

fluctuated widely during the 1950-78 period

(table 21). The real rate of return has declined to very low levels, finally becoming

negative during the past few years as inflation rates exceeded steel industry profit margins (figure 10), Dividend payments have been

surprisingly stable, however, even in years of

very low profitability. In addition, capital expenditures as a percentage of net internally

generated cash funds have been relatively

high (table 22).

One of the industry’s explanations for its

shrinking profitability and growing capital

problem is the “cost-price’” squeeze, that is,

the situation in which steelmaking costs rise

more rapidly than do steel prices. The data in

table 23 confirm that this has been the case,

particularly for all forms of energy and for

labor. This trend started in the early 1960’s

and has continued to the present. Of particular importance has been the inability of the

industry to raise prices when it needed to

match cost increases and when the world

competitive situation would have tolerated

higher prices for steel. The industry has

always been a prominent target for Government “jawboning” when it announces price

increases. During the periods of worldwide

steel shortage, the Government directly controlled and held down domestic steel prices.

In 1973-74, for example, imported steel reputedly was selling for from $55 to $110/tonne

more than domestic steel (at $330/tonne).

Financial Performance of the

Steel Industry Segments

The nonintegrated and alloy/specialty steel

producers have exhibited much better financial performance than have integrated companies in recent years (table 24). There is

wide variation in profitability among integrated companies, however, which seems to

reflect major differences in technology, age
120 “ Technology and Steel Industry Competitiveness

Table 20.–Trends in Steel Industry Profits, 1954-78

aBased on equity at beginning of year. bData influenced by Bethlehem Steel’s plant closing and large loss.

SOURCES: American lron and Steel lnstitute; Citibank Corp.

Table 21.—Selected Financial Highlights, lron and Steel industry, 1950-78 (dollars in millions) —

Total Net

Year revenues income

1950, . . . . . . . . . . . . . . . .

1951 . . . . . . . . . . . . . .

1952 . . . . . . . . . . . . . . . . .

1953 . . . . . . . . . . .

1954 . . . . . . . . . . . . . . . . .

1955 . . . . . . . . . . . . . .

1956 . . . . . . . . . . . . . . . . .

1957 . . . . . . . . . . . . . . . . .

1958 . . . . . . . . . . . . . . . . .

1959 . . . . . . . . . . . . . . . .

1960 . . . . . . . . . . . . . . . . .

1961 . . . . . . . . . . . . . . .

1962 . . . . . . . . . . . . . . . . .

1963 . . . . . . . . . . . . . . . . .

1964 . . . . . . . . . . . . . . . . .

1965 . . . . . . . . . . . . . . . . .

1966 . . . . . . . . . . . . . . . . .

1967, . . . . . . . . . . . . . . . .

1968 . . . . . . . . . . . . . . . . .

1969 . . . . . . . . . . . . . . . . .

1970 . . . . . . . . . . . . . . . . .

1971 . . .

1972 . . . . . . . . . . . . . . . . .

1973 . . . . . . . . . . . .

1974 . . . . . . . . . . . . . . . . .

1975 . . . . . . . . . . . . . . . . .

1976 . . . . . . . . . . . . . . . . .

1977 . . . . . . . . . . . . . . . . .

1978 .

$ 9,534.6 $ 766.9

11,845.0

10,858.2

13,155.8

10,593.3

14,049.3

15)271.8

15,592.1

12,551.3

14,233.3

14,221.3

13,295.4

13,980.6

14,612.6

16,357.1

17,971.7

18,288.4

16,880.4

18,679.6

19,231.0

19,269.5

20,357.8

22,555.7

28,863.2

38,243.6

33,676.3

36,462.4

39,787.4

46,877.3

682.2

541.0

734.9

637.3

1,098.6

1,113.3

1,131.6

787.6

830.6

810.8

689.6

566.4

782.0

992.3

1,069.3

1,075,3

829.8

992.2

879.4

531.6

562.8

774.8

1,272,2

2,475.2

1,594.9

1,337.4

23.2b

1,291.9

— —

Net

Income as a

percentage

of revenues

8.0

5.8

5.0

5.6

6.9

7.8

7.3

7.2

6.3

5.8

5.7

5.2

4.1

5.4

6.1

5.9

5.9

4.9

5.3

4.6

2.8

2.8

3.4

4.4

6.5

4.7

3.7

0.06

2.8

Stockholders’

equity a

$ 5,458.3

6,037.9

6,373.0

6,780.9

7,139.6

7,920.2

8,664.7

9,465.6

9,898.2

10,248.4

10,545.1

10,646.9

10,676.1

11,008.3

11,393,4

12,031.9

12,045.1

12,168.5

12,617,5

12,836.0

12,966.0

13,281.4

13,674.5

14,513.5

16,243.2

17,192.2

18,027.3

17,603.7

18,403.3

Net

Income as a

percentage of

stockholders’

equity

14.1

11.3

9.5

10.9

8.9

13.9

12.8

11.4

8.0

8.1

8.2

6.5

5.3

7.1

8.7

8.9

8.9

6.8

8.2

7.0

4.1

4.1

5.8

9.3

17.1

9.8

7.8

0.1

7.3

— ——-

Working

capital

ratio

2.1

2.0

1.9

2.2

2.0

2.0

2.1

2.3

1.9

2.0

2.1

2.7

2.9

2.7

2.4

2.4

2.3

2,2

2.0

1.8

1.9

1.9

1.9

1.9

1.8

2.0

1.9

1.8

1.7

—.

Long-term

debt

$ 763.1

1,029.6

1,447.3

1,485.7

1,485.7

1,546.5

1,567,7

1,801.5

2,144.8

2,303.2

2,488.2

2,968.5

2,853.6

2,694.8

2,874.2

3,120.1

3,782.3

4,205,3

4,6014

4,608,2

5,1339

5,1444

5,2296

4,9629

4,6512

5,7053

6,9665

7,9307

7,7389

Captial

expenditures

$ 505.3

1,050.9

1,298.3

987.8

608.9

713.7

1,310.6

1,723.0

1,136.9

934.3

1,520.7

959.5

911.4

1,040.0

1,599.5

1,822.5

1,952.7

2,145.7

2,307,3

2,046.6

1,736.2

1,425.0

1,174.3

1,399.9

2,114.7

3,179.4

3,252.9

2,857.6

2,5383

aAs of January 1 of each year. bReflects substantial impact of Bethlehem Steel plant closings.
Ch. 4—The Domestic Steel Industry’s Competitiveness Problems . 121

Figure 10.—Steel Industry Annual Average Rates of Return and Annual Average Rates of Inflation, 1949-78

A. Rates of return and inflation

15

Annual percent change in

consumer price index

10

Net income/net assets

5

0

/

0

- -

0 , 1 I

1949-54 1955-59 1960.64 1965-69 197074 1975.7 8

Year

SOURCE American Iron and Steel Instlfute, U S Bureau of Labor Stattstlcs

Year

1954 ..., :

1955 ,

1956 ,

1957, . . . .

1958 .

1959 . ,

1960 .... ,

1961. ,

1962 . . . . .

1963 . . .

1964 ..... ,

1965 ,

1966 .

1967 . . . . . . . . .

1968 .

1969, . . . . .

1970 ,

1971 . . . . . .

1972. ,

1973 . . . . . . . . .

1974 . . . . . . . . .

1975 . . . . . . . . .

1976 .

1977.. ,

1978 . . . . . . . . .

B. Real rates of return

n

t

1949.54 1955-59 1960-84 198589 1970-74 1975-78

- 5 Real return

— 1 0 -

Table 22.—Selected Financial Data, U.S. Steel industry, 1954-78 (dollars in millions)

—

Captial

expenditures

as a percent of

net internally

Profits Depreciation, Gross Cash Net Capital generated

after taxes depletion, etc.a

cash flow dividends cash flow expenditures funds

$637 ‘ $703 —$1,340

1,099 783 1,882

1,113 794 1,907

1,132 816 1,948

788 713 1,501

831 653 1,484

811 840 1,651

690 749 1,439

566 958 1,524

782 1,034 1,816

992 1,046 2,038

1,069 1,117 2,186

1,075 1,199 2,274

830 1,444 2,274

992 1,316 2,308

879 1,173 2,052

532 1,128 1,160

563 1,123 1,686

775 1,196 1,971

1,272 1,329 2,601

2,475 1,553 4,028

1,595 1,591 3,186

1,337 1,614 2,951

22 1,888 1,910

1,292 2,010 3,302

$343(53.8)b

437(39.8)

508(45.6)

566(50.0)

540(68.5)

553(66.5)

564(69.5)

557(80.7)

508(89.8)

433(56.6)

462(46.6)

468(43.8)

483(44.9)

481(58.0)

452(45.6)

489(55.6)

488(91.7)

.390(69.3)

402(51.9)

443(34.8)

675(27.2)

658(41.5)

637(47.6)

555C

533(41.3)

$ 997

1,445

1,399

1,382

961

931

1,087

882

1,016

1,373

1,576

1,718

1,791

1,793

1,856

1,563

1,172

1,296

1,569

2,158

3,354

2,528

2,314

1,355

2,769

$ 609

714

1,311

1,723

1,136

934

1,521

960

911

1,040

1,600

1,823

1,953

2,146

2,307

2,047

1,736

1,425

1,174

1,400

2,115

3,179

3,253

2,850

2,538

61.1

49.4

93.7

124.7

118.2

100.3

139.9

108.8

89.7

75.7

101.5

106.1

109.0

119,7

124.3

131.0

148.1

110.0

74.8

64.9

63.1

125.8

140.6

210.3

91.7

a

lncludes changes in reserves

bNumbers in parentheses are dividends as of percent of after taxcredlts

cThe industry percent was 104, omitting Bethlehem Steel because of its extraordinary one time Ioss. For Bethlehem itself, dividends represented 146 percent ($65.5

million) of the net loss ($448.2 million)

SOURCE: American Iron and Steel Institute

l,— — - - J
122 . Technology and Steel Industry Competitiveness

Table 23.—index of Steel Industry Prices and Costs, 1965-78

Producer price indexes

Wholesal e

price index Metallurgical

Consumer for industria l Steel mill coa l Iron ore Steel Electrical

Year price index commodities products (high volume) (pellets) a

scra p powe r Fuel oil Wage s

b

1965 . . . . . .

1966 . . . . . .

1967 . . . . . .

1968 . . . . . .

1969 . . . . . .

1970 . . . . . .

1971 . . . . . .

1972 . . . . . .

94.5

97.2

100.0

104.2

109.8

116.3

121.3

125.3

96.4

98.6

00.0

02.5

06.0

10.0

13.9

17.9

27.0

97.5

98.9

00.0

02.5

07.4

96.8 NA 112.6

98.4 NA 106.6

00.0 NA 100.0

01.8 NA 93.0

10.2 100.0 110.8

07.7

05.0

00.0

95.7

93.3

25.5

66.0

58.8

90.4

94.05

97.37

100.00

105.76

112.97

119.31

131.59

148.70

161.43

03.0

99.8

00.0

00.9

02.2

06.6

15.5

23.9

32.6

14.3 150.9 105.1 138.8

23.0 185.3 111.1 114.6

30.4 198.4 111.1 121.8

973 . . . . . . 133.1 34.1 216.5 116.4 188.0

974 . . . . . . 147.7 153.8 170.0 232.8 140.3 353.2 172.3 485.4 190.79

975 . . . . . . 161.2 171.5 197.2 622.1 181.2 245.6 193.2 495.5 222.57

976 . . . . . . 170.5 182.5 209.7 657.8 201.6 259.0 226.9 451.7 246.82

977 . . . . . . 181.6 195.1 229.9 671.3 220.2 233.7 257.2 521.4 273.76

1978 . . . . . . 195.4 209.3 254.5 704.9 230.1 278.2 279.7 496.8 300.36

NA = Not available aDecember 1969 base. blncluding fringe benefits.

SOURCES: U.S. Department of Labor, American Iron and Steel Institute

Table 24.—Steel Company Profitability by Industry Segment, 1977-78

Steel sshipped Pretax profits from steel only

(thousand net tonnes) Return on Investment (percent) (dollars per tonne shipped)’

Company 1977 1978 1977 1978 1977 1978

integrated companies –

United States Steel 17,868

Bethlehem Steel 11,251

L T C 4,427

National Steel : : 6,912

Inland Steel 5,067

Wheellng.Pittsburgh Steel : 2,477

Kaiser Steel 1,440

McLouth Stee l 1,286

CF&l Steel 1,009

Interlake 738

Average

Republic Stee l 6,038

Armco. ., 4,973

Nonintegrated companies

Northwestern Steel & Wire 763

Nucor . . . 563

Florida Steel 418

Keystone Consolidated

Industries 461

Laclede Steel. : 397

Atlantic Steel . 346

Average “. —

Alloy and specialty steel companiesc

Sharon Steeld965

Cyclops 776

Allegheny-Ludlum Industries 344

Copperwel d 297

Washington Stee l 42

Carpenter Technology —

Lukens Stee l —

Athlone Industries (Jessop

Steel). ., –

Eastmet (Eastern

Stainless Steel) ., —

Averag e —

18,866

11,859

4,881

7,438

5,661

2,655

1,443

1,466

980

787

6X01

5,457

5.3

9.3

5.8

82

9.7

63

1.6

5.2

6.6

6.2

10.4

10.4

- 530

-104 8

– 1168

9.45

1538

– 1327

- 840

– 1873

2040

418

6.36

- 402

– 1. 04a

26.60a

5.26b

25.66a

36.24a

8.80

-122 5

7 .36b

11.64

– 31. 64b

23.35a

12.79a

1,077 7.2 139

718 16.7 250

600 48 138

3338

4169

854

53.33

7004

2727

497 0.2 23

471 42 94

430 4,0 9 6

— 6.2 123

– 14.88

- 09 9

3.00

—

1.35b

1664

2098

—

1,055 10.6 153

666 55 103

357 52 85

351 111 84

45 93 116

— 168 169

— 100 9.6

29.38

1614

47.75

77.41

150.29

NA

NA

5783

4111

6330

5413

190. 29b

NA

NA

— 7.5 9.9 NA NA

f,

I NA

—

— 6.0 90

— 9.1 11.1

NA

—

aSource: World Steel Dynamics, Business Week (Sept. 17, 1979) has given data on U S Steel Indicating a 1978 loss of

$15.00/tonne of steel shipped.

bFrom Steel Form 10-k reports. (U.S. Securities and Exchange Commission.)

CAIIoy and specialty steels account for more than 10% of the steel shipments of these companies.

dAlthough Sharon Steel is Integrated, most of its business is in alloy and specialty steels.

SOURCE Iron Age, May 7, 1979
Ch. 4—The Domestic Steel Industry’s Competitiveness Problems . 123

and scale of facilities, and management practices. Although the financial performance of

many domestic fully integrated steel firms is

relatively poor when compared to other domestic manufacturing sectors, their overall

performance appears to be far superior to

major steel producers in other nations.

Several factors account for the far better

financial performance of the nonintegrated

and alloy/specialty companies compared to

the integrated companies. Importantly, the

alloy/specialty mills and many of the nonintegrated mills use advanced and efficient technologies to a greater extent than do integrated plants, and these technologies tend to

yield higher profit margins than do older

methods. Alloy/specialty mills, since 1973,

have been provided with effective quota barriers against competing imports. Furthermore, their comparatively high-priced products have intrinsically greater profit margins

than the products the other segments produce. Nonintegrated firms have lower costs

than integrated firms because they use ferrous scrap almost exclusively as a raw material, they make a smaller range of simpler

products, and they have lower marketing and

other overhead costs.

Trends in Steel Industry Investment

The steel companies’ net income has been

insufficient over time to meet all of their capital needs and the industry has been forced to

borrow extensively for investment in new

equipment. The industry’s long-term debt increased tenfold between 1950 and 1978, from

$763.1 million to $7,738.9 million. One of the

principal reasons for the increasing debt has

been the steady growth in capital expenditures in actual dollars. In real dollars, these

expenditures have fluctuated widely (table

25).

In the same 1950-78 time period, stockholders’ equity increased only by a factor of three

from $6,812,6 million to $17,603.7 million (see

table 21). As a result, the debt-to-equity ratio

increased from 11.2 percent in 1950 to 44.0

percent in 1978. The debt-to-equity ratio is an

important variable, which significantly affects industry’s ability to enter equity markets. With a ratio of nearly 45 percent and

low profits, most steelmaker cannot issue

new stock or increase their debt.

Table 25.—Replacement Rates for Domestic Steel

Production Facilities, 1950-78

Capital expenditures

Capital expenditures on steelmaking

on productive facilities per tonne

steelmaking of finished steel Replacement

facilities (millions shipped (1978 dollars rateb

Year of 1978 dollars) per net tonne) (percent)

1950 . . . . . . $1,181 $19.03 1.73

1951 . . . . . .

1952 . . . . . .

1953 . . . . . .

1954 . . . . . .

1955 . . . . . .

1956 . . . . . .

1957 . . . . . .

1958 . . . . . .

1959 . . . . . .

1960 . . . . . .

1961 . . . . . .

1962 . . . . . .

1963 . . . . . .

1964 . . . . . .

1965 . . . . . .

1966 . . . . . .

1967 . . . . . .

1968 . . . . . .

1969 . . . . . .

1970 . . . . . .

1971 . . . . . .

1972 . . . . . .

1973 . . . . . .

1974 . . . . . .

1975 . . . . . .

1976 . . . . . .

1977 . . . . . .

1978 . . . . . .

Annual averages

1950-58. . 2,065 31.57 2.87

1950-78. . 2,245 31.68 2.88

1959-68. . 2,565 36.30 3.30

1969-78. . 2,089 27.06 2.46

aCapital expenditures less environmental expenditures and estimated non steel

capital expenditures. Current dollars (adjusted by using the GCP Nonresidential Investment Implicit Price Deflator) Capital expenditures shown are

for American Iron and Steel Institute reporting companies only

bCapital expenditures (1978 dollars) on productive steelmaking facilities per

tonne of shipments divided by replacement cost of facilities per tonne of

shipments. Replacement facility cost per tonne of shipments assumed to be

$1,100 (1978 dollars)

SOURCE: D.F. Barnett, American Iron and Steel Institute

2,268

2,749

2,055

1,258

1,447

2,484

3,094

2,045

1,647

2,675

1,698

1,600

1,811

2,760

3,107

3,405

3,367

3,576

2,869

2,214

1,705

1,265

1,630

2,163

2,684

2,599

2,054

1,706

32.56

45.87

28.71

22.33

19.36

34.10

43.89

38.17

27.28

43.01

29.37

25.96

27.39

37.07

38.83

43.45

46.42

44.66

36.52

29.37

23.10

16.28

17.16

23.54

40.48

34.98

27.72

21.67

2.96

4.17

2.61

2.03

1.76

3.10

3.99

3.47

2.48

3.91

2.67

2.36

2.49

3.37

3.53

3.95

4.22

4.06

3.32

2.67

2.10

1.48

1.56

2.14

3.68

3.18

2.52

1.97
124 ● Technology and Steel Industry Competitiveness

The relative profitability of the U.S. steel

industry compared to foreign steel industries,

the large size of the domestic market, and the

sizable proportion of imports in domestic

steel consumption have made domestic steel

mills and steel distributors attractive targets

for foreign investment and outright purchase.

The existence of stocks that are undervalued relative to book value and exchange rates

favorable to foreigners add to the relative attractiveness of domestic steel mills to foreign

investors. As a result, a number of small nonintegrated mills have been purchased or built

by foreign interests; these include Chaparral

Steel (50-percent interest) and Raritan Steel,

by Co-Steel International Ltd. of Canada;

Auburn Steel, by Japanese interests; Korf and

Georgetown Steel, by West German interests;

Atlantic Steel, by Ivaco Ltd. of Canada; Bay

Steel by VoestAlpine of Austria; New Jersey

Steel and Structural, by Van Roll of Switzerland; Azcon and Knoxville Iron, by Consolidated GoldFields of the United Kingdom;

Phoenix Steel (50-percent interest), by

Creusot-Loire of France; Judson Steel, by

Australian interests; and Schindler Bros.

Steel Co. by West German interests. In November 1979, Kaiser Steel Corp. held discussions with Nippon Kokan KK concerning potential takeover. These particular negotiations were discontinued, but further takeovers of domestic steel producers by foreign

investors are expected in the future.

Ownership and Financial Performance

of Foreign Steel Firms

The financial performance of the domestic

steel industry is somewhat difficult to compare with that in other nations because of the

significantly different economic settings in

which foreign steel firms operate. The principal difference is that many foreign steel firms

are at least partly owned and/or controlled by

their governments (table 26). Furthermore, in

many countries, government support of steel

is based on public policy considerations, such

as employment stability or growth of other industries, rather than steel industry profitability alone. The same type of socioeconomic

considerations in some foreign countries at

least partly account for the lower labor productivity in their steel industries compared to

the United States (table 27).

The domestic steel industry generally has

lower production costs than foreign industries and recently has had higher rates of capacity utilization (table 28). As a result, most

foreign steel producers havtl been less profitable during the past decade than domestic

steel producers, particularly if the comparison is with the best performing U.S. firms

rather than with industry averages (table 29).

Only the Canadian steel industry has been

consistently more profitable than the U.S. industry but the Canadian industry is much

smaller. Data on world rank by size, production, sales, and profitability for a number of

foreign steel firms are given in table 30.

These data underestimate financial losses,

because the most unprofitable companies,

often state-owned, generally do not publish

their financial results. World Steel Dynamics

(1979) has estimated that, for 1978, Western

world steel exports represented a loss of $4

billion, suggesting that considerable dumping

is occurring and that foreign steel industries

are being operated at rates for purposes

other than profitmaking.

Summary data on profitability of steel industries in Europe, several foreign nations,

and the United States are given in table 31.

These data show that the U.S. industry has

been much more profitable than Europe’s,

which has experienced large losses. Though

the technological and cost competitiveness of
Ch. 4—The Domestic Steel Industry’s Competitiveness Problems ● 125

Table 26.—Government Ownership of Raw Steel

Facilities, Selected Countries

(percent government owned)

197 4

Country product ion 1978 a

.

Canada .

Brazil . . . . .

Mexico ...

Venezuela . . ., . . . . .

Other Latin America ., . . .

Franc e

West German y

Italy ,,,

United Kingdo m

Spain. .

Netherlands. . . . .

Sweden .

Belgium . . . . . .

Austria . . . . . . . . . . .

Other Western Europe .,

Republic of South Africa

Other Africa. . . . .

India . . . . . . . . . . . . . . . . . . . .

Taiwan . . . . . . . . . . . . .

South Kore a

Other Asia . . . . . . . . . .

Oceania . . . . . . . . . . . . . . . . .

Total non-Communist

countries . . . . . . . . . . . . .

Total Communist countries.

Total world. . . . . . . . . . . . . .

NA = not available

17

6 0

4 7

8 6

N A

o

11

5 7

9 0

4 5

9 3

21

0

100

N A

8 7

N A

1 0 0

1 0 0

1 0 0

N A

N A

19

100

0

75

75

NA

NA

75

0

75

75

50

25

75

50

100

NA

NA

NA

75

NA

75

NA

NA

NA

NA

1979

capacity

13

68

74

85

56

69

9

57

79

39

NA

59

NA

NA

60

72

70

82

12

NA

75

30

30

100

44 - NA “45

—

aProductlon or capacity not stated (probably capacity), numbers apparently

rounded off to 0, 25, 75, or 100%.

SOURCES 1974 production—D.F. Barnett The Canadian Steel Industry in a

Competitlve World Environment Canadian Government. 1977:

1978 production – The Economlst Dec. 30, 1978 and 1979 capaclty—American Iron and Steel Institute

the Japanese steel industry cannot be refuted, it still has not been very profitable. A

number of factors explain this relatively low

profitability: low capacity utilization (about

70 percent for the past several years), high

financial costs, increasing energy prices and

labor costs, and high transportation costs for

raw material imports and finished steel exports. With the exception of Canada, * foreign ——— ———.

*For the three largest Canadian (integrated) steel companies, The Steel Co. of Canada, Dominion Foundries & Steel, and

Algoma Steel, the average returns on equity for 1974 to 1978

were 11.6 percnt. 12.9 percent, and 10.8 percent respectively.

The best performing large U.S. integrated firms for this period

were Armco with 11.3 percent and Inland with 11.2 percent return on equity. (‘‘The Steel Industry of America. ” Price Waterhouse & Co., 1 979. )

steel industries continue to suffer either large

losses or only moderate profits. Nevertheless,

as a result of government support, many foreign steel-producing firms have experienced

considerably greater expenditures than have

domestic steel firms both on a per-tonne basis

and as a percentage of the countries’ gross

national products (GNPs) (figures 11 and 12).

Japanese companies are about 83-percent

debt-financed, compared to an average of 44

percent for U.S. steelmaker. Japan’s close

government/business cooperation, aimed at

maintaining a strong, export-oriented steel industry, provides Japanese steelmaker with

considerable access to external funds. The

Japanese Government, through the Bank of

Japan and indirectly through commercial

banks, facilitates loans to steel companies to

finance modern capacity additions in order to

increase production or permit economies of

scale. This capital is not a subsidy: the companies pay interest at a rate slightly lower

than the prevailing rate. *

The steel industries of developing countries

have been given considerable help from international organizations. For example, the

U.N. International Development Organization

(UNIDO) has considered underwriting the expansion of ironmaking and steelmaking in

LDCs, and the World Bank has made available many loans for this purpose. A UNIDO

report argues that steel firms in developed

countries are planning to build up production

of semifinished steel in LDCs. The report

states:

Steel industry projects in developing countries in many parts of the world are being

pursued steadily . . . The shift presents the

developing countries with an exceptional opportunity. They are able to pursue their own

development schemes with technical assistance and deliveries of equipment more readi-

*The rate paid is about 1/2 to 1 percent lower than the market interest rate in Japan. A subsidy of this magnitude would be

less than $0.55/tonne on a $330/tonne product.
. .

126 . Technology and Steel Industry Competitiveness

Table 27.—Comparison of Productivity and Labor Costs in the U.S. Iron and Steel Industries

With Four Other Countries, 1964,1972-77

Measure United Japan West Germany United Kingdom France

and year States Minimum Maximum Minimum Maximum Minimum Maximum Minimum Maximum

Output per hour

1964 . . . . . . 100 46 53 53 60 48 51 48 52

1972 . . . . . . 100 85 101 76 84 51 54 62 69

1973 . . . . . . 100 94 112 73 80 48 51 59 66

1974 . . . . . . 100 95 113 80 88 43 46 61 68

1975 . . . . . . 100 103 123 82 91 43 46 61 68

1976 . . . . . . 100 108 128 82 91 48 51 63 70

1977 . . . . . . 100 104 123 81 89 43 46 64 72

Hourly labor costs

1964 . . . . . . 100 16 16 35 35 29 38 34 35

1972 . . . . . . 100 33 34 58 58 33 34 44 44

1973 . . . . . . 100 41 42 71 71 33 34 54 54

1974 . . . . . . 100 44 46 78 78 35 36 55 65

1975 . . . . . . 100 44 46 76 76 37 38 63 63

1976 . . . . . . 100 44 45 72 72 33 34 63 63

1977 . . . . . . 100 49 51 78 78 33 34 64 64

Unit labor costs

1964 . . . . . . 100 24 30 59 67 57 61 66 72

1972 . . . . . . 100 32 40 68 75 62 67 64 71

1973 . . . . . . 100 37 45 88 97 66 71 83 91

1974 . . . . . . 100 39 48 88 97 81 82 98

1975 . . . . . . 100 36 44 83 92 80 87 97 107

1976 . . . . . . 100 34 42 79 87 65 70 92 101

1977 . . . . . . 100 40 40 88 97 72 77 90 99

SOURCE U.S. Bureau of Labor Statistics.

Table 28.—Capacity Utilization in Several Steel Industries (percent of capacity)

United United West ECSC (six

Year States Canada Japan Kingdom Germany France countries) Total EEC

Annual averages

1956-65 . . . . . . . . . . . . . . . 75.8 86.8 84.2 – — — 89.8

1966-75 . . . . . . . . . . . . . . . 86.5 88.7 85.0 – — — 81.5 =

1956-75 . . . . . . . . . . . . . . . 81.1 87.7 84.7 – — — 85.6 –

Annual

1973 . . . . . . . . . . . . . . . . . 97.5a 85.8 92.5 84.2 90.0 86.3

1974 . . . . . . . . . . . . . . . . .

—

93.5a ~ 77.7 80.3 88.1 88.5 — 86.9

1975 . . . . . . . . . . . . . . . . . 76.2 — 67.3 74.2 64.3 64.0 — 66.1

1976 . . . . . . . . . . . . . . . . . 80.9 — 66.6 77.7 64.4 69.7 — 67.9

1977 . . . . . . . . . . . . . . . . . 78.4 — 61.1 70.9 57.6 66.4 — 62.8

1978 . . . . . . . . . . . . . . . . . 86.8 — 67.3 73.6 60.0 68.5 — 65.9

aEstimate.

SOURCES: Averages—D.F. Barnett, ’’The Canadian Steel industry in a Competitive World Environment,” Canadian Government, 1977,annualdata—American Iron and

Steel lnstitute, Eurostat, European Coal and Steel Community, and Japan’s Ministry of International Trade and lndustry.

ly available from developed countries than at

any time during the past ten years. As the

developing countries make rapid progress

with their steel industries, they will reduce

their dependence upon imports, improve

their balance of payments, and create a

sound basis for further industrialization. ’

1U.N. International Development Organization, Progress Report on the World Iron and Steel Industry (draft, no date, Vienna, Austria).

Table 29.—Steel Industry Net Income as a

Percentage of Net Fixed Assets, Five Countries,

Averages for 1969-77

Net income/

Country net fixed assets

United States. . . . . . . . . . . . . . . . . . . . . . . . . . 6.7

Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7

West Germany. . . . . . . . . . . . . . . . . . . . . . . . . 2.9

United Kingdom . . . . . . . . . . . . . . . . . . . . . . . – 5.3

France (1972-76) . . . . . . . . . . . . . . . . . . . . . . . – 8.3

SOURCE. International Iron and Steel Institute
Ch. 4—The Domestic Steel Industry’s Competitiveness Problems ● 127

Thus, it is clear that the privately owned ly better access to capital but that are no

and financed U.S. steel industry is largely more profitable, and in many cases less profcompeting in an international market with itable, than the U.S. industry.

foreign steel industries that have significantTable 30.— Financial Statistics, Selected Steel Companies, 1978

1978 Sales Profits after taxes 1978 return

1978 production 1978 1977-78 1978 1978-77 on book

world (millions (millions (percent (millions (percent valuea

Company rank of tonnes) of dollars) change) of dollars) change) (percent)

British Steel . . . . . . . . . .

Creusot-Loire . . . . . . . . .

FINSIDER . . . . . . . . . . . .

Dalmine. . . . . . . . . . . .

Italsider. . . . . . . . . . . .

Thyssen. . . . . . . . . . . . . .

Krupp. . . . . . . . . . . . . . . .

Klockner-Werke . . . . . . .

Salzgitter. . . . . . . . . . . . .

COCKERILL . . . . . . . . . .

ESTEL (Hoogovens and

Hoesch). . . . . . . . . . . .

Empresa Nacional

Siderurgia . . . . . . . . . .

Nippon Kokan. . . . . . . . .

Nippon Steel . . . . . . . . . .

Sumitomo . . . . . . . . . . . .

Kawasaki . . . . . . . . . . . . .

Kobe Steel. . . . . . . . . . . .

Stelco. . . . . . . . . . . . . . . .

Dominion Foundries . . .

Algoma Steel. . . . . . . . . .

Broken Hill. . . . . . . . . . . .

Steel Authority of India .

Tata Iron & Steel . . . . . . .

South African Iron

& Steel . . . . . . . . . . . . .

Comp. Siderurgia

Nacionale . . . . . . . . . .

Country

United Kingdom

France

Italy

Italy

Italy

West Germany

West Germany

West Germany

West Germany

Belgium

Netherlands

Spain

Japan

Japan

Japan

Japan

Japan

Canada

Canada

Canada

Australia

India

India

South Africa

Brazil

4

—

6

—

—

9

23

28

29

20

21,22

25

5

1

7

8

16

24

33

34

14

18

47

19

43

16.7 $ 5.882.0 3 -$690.0

– 85.0 —

– 75.0

-419.6

66.0

– 10.5

– 38.6

– 52.0

– 0.2

-146.6

– 174.1

49.3

216.1

72.9

83.3

65.4

101.3

80.0

58.7

95.5

33.1

9.5

– 84.4

– 2.2

NM

NM

-32

2,974.8 –36 —

630.2

2,941.5

12,086.1

6,556.3

1,882.5

3,464.2

3,294.4

1.5 17

13.0

—

—

11.8

5.1

4.1

3.9

5.3

5.3,5.1

4.9

13.4

31.2

12.0

12.0

7.1

5.0

3.3

3.0

7.6

6.3

1.9

6.1

2.1

—

4

15

12

7

13

5

NA

—

NM

NM

– 18

NM

NM

NM

NA

—

–81

- 6 6

4

– 1

– 14

- 1 6

NA

5,571.7 8 NM -11

1,390.1

5,523.8

11,526.3

4,918.3

4,591.1

4,223.9

1,496.9

994.5

728.5

2,680.2

1,798.8

426.1

NM

98

185

183

156

95

33

39

85

62

NA

– 3 6

NA

6

10

10

11

11

12

16

13

4

NA

8

7

– 4

4

6

3

6

23

22

26

11

NA

9

1,306.1 24 NM – 7

865.8 48 NM – 2

NM = not meaningful, NA = not available

aBook value IS common equity at end of fiscal year

SOURCES Rank and production—international Iron and Steel Institute, other data–Business Week, July 23, 1979

Table 31.— Average Profitability for Steel Industries in Six Nations and Europe, 1978

1978 dollars 1978 profit (percent)

Profit per Pretax profit per

Country/area tonne raw steel tonne shippeda Sales Return on equity

Europe. . . . . . . . . . . . . . . –21 .19 (1977 = –25.86)b — 1.6 —

Japan . . . . . . . . . . . . . . . . 6.43 (1 977= 2.45) 9 7.6 3.2c

Canada. . . . . . . . . . . . . . . 21.24 (1977= 15.32) — — 13.7

France . . . . . . . . . . . . . . . – 56.67 – 4 8 —

West Germany . . . . . . . .

—

– 1.41 – 2 —

United Kingdom . . . . . . .

—

– 41.32 – 5 0 —

United States . . . . . . . . .

—

10.48 (1977 = 4.81)d

31 2.8 7.3

aFrom World Steel Dynamics, September 1979, for commodity carbon steels made m integrated plants only.

bFrom data in Fortune, Aug. 13, 1979, for 17 European steelmaker representing897 million tonnes of raw steel, 1978 production (only 3 firms showed proflt).

CThe average of 96 percent for the five firms was normalized to 32 percent in order to compensate for the widely different debt-to-equity ratio, assuming that for the

United States the ratio IS4060 and for Japan it IS8020

dExcludes extraordinary losses of Bethlehem Steel and their raw steel production.

SOURCE American Iron and Steel Institute data. except as noted
128 . Technology and Steel Industry Competitiveness

Figure 11.— Rates of Investment in Major Steel

Industries, 1963-76

U.S. dollar per tonne

Figure 12.—Capital Expenditures in Steel

Manufacturing as Percent of GNP, Selected

Steel-Producing Countries, 1960-78

Percent of GNP

30 r 25.4

20

10

0

United Japan Wes t Canada Franc e Italy Unite d

States Germany Kingdom

SOURCE U N. International Monetary Fund

1960 1965 1970 1975

Year

SOURCES. Organization for Economic Cooperation and Development, International Iron and Steel Institute

Factors in International Competitiveness

The production factors—capital, labor,

and raw materials—are combined in various

ways, through technology, to produce steel.

The productivity of these inputs is partly determined by the technologies in use. Their

productivity and prices, in turn, determine

production costs, a major element of the profitability needed to attract capital.

Technology

Technology has direct and indirect effects

on total steelmaking productivity because investments in up-to-date processing equipment

help slow down real production cost increases. * During the 1960’s, the domestic

steelmaker made major technological gains

*Adoption of new technology is discussed more thoroughly in

ch. 9.

in hot wide-strip mills, rod and bar mills, and

in secondary refining. * The use of low-cost

electric furnaces also increased considerably, driven mostly by the construction of domestic nonintegrated plants that take advantage of locally available scrap. The production of raw steel from electric furnaces is

comparable to that in Japan, greater than

that in West Germany and France, but lower

than that in the United Kingdom (table 32).

The Federal Trade Commission (FTC) has

concluded that the U.S. steel industry

adopted new basic oxygen and continuous

casting technology more rapidly than any

*One of the newest U.S. hot strip mills. computer-controlled

from start to finish, requires only 32 workers on each shift compared to about 80 in other facilities. (U.S. Department of Labor.

Bulletin No. 1856.)
Ch. 4—The Domestic Steel Industry’s Competitiveness Problems 129

Table 32.—Comparative Trends in Raw Steel Production in Electric Furnaces, 1964-78 (percent of total production)

—

Total world

(excluding the

Year United Kingdom France —. West Germany Japan United States United States)

1964 . . . ~ . .

—

— — — — 9.98 —

1965 . . . . . . — — — — 10.50 —

1966 . . . . . . — — — — 11.09 —

1967 . . . . . . — — — 18.3 11.86 —

1968 . . . . . . — — — 18.2 12.79 —

1969 . . . . . . — — — 16.7 14.25 13.7

1970 . . . . . . 18.9 — — 16.7 15.33 14.6

1971 . . . . . . 17.5 — 10.0 17.6 17.39 14.7

1972 . . . . . 18.9 — 10.2 18.6 17.80 15.5

1973 . . . . . 19.4 10.7 10.4 17.9 18.40 15.6

1974 . . . . . . 22.9 11.5 10.8 17.8 19.67 16.2

1975 . . . . . . 26.9 14.2 12.6 16.4 19.44 17.2

1976 . . . . . . 29.7 14.2 12.4 18.6 19.23 19.1

1977 . . . . . . 30.0 14.5 13.0 19.1 22.25 18.5

1978 . . . . 34.7 15.0 14.5 21.9 23.53 17.3

SOURCES American Iron and Steel Institute Ministry of Industry and Trade, Japan, Statistlches Bundesamt, West Germany. Iron and Steel Statistics Bureau, United

——

Kingdom

other nation. z However, FTC only considered

the degree to which new steelmaking capacity used new technologies, not the extent to

which total steelmaking used new technologies.

The replacement of still usable and undepreciated facilities by new technology requires ample justification. Domestic steelmaking equipment, largely of the 1950’s and

earlier vintage, in the industry’s view, had

not depreciated enough by the late 1960’s and

early 1970’s to warrant replacement. Yet it

was inefficient compared to large Japanese

integrated plants and some recently acquired

European and Third World facilities. Coupled

with an alleged unwillingness in the mid1950’s* to adopt advanced, but not widely

proven steel production processes, U.S. production capability has not kept pace with constantly modernized Japanese mills and some

new production facilities in developing nations. For example, Japanese production increased 5 percent between 1962 and 1978,

and capacity increased 50 percent; while

U.S. production in this period increased 3

percent, and capacity increased 1 percent.

It appears, in retrospect, that domestic

producers did not adequately project the fuU.S. Federal Trade Commission, “The U.S. Steel Industry

and Its International Rivals, ” November 1977.

*This is a highly controversial topic.

ture economic advantages of certain technological options. In particular, they did not fully predict the rising costs of energy, labor,

and capital. When these increases did hit,

along with environmental control costs, the

steel companies were not in a good position financially to adopt available technology. * As

of 1978, 26 percent of steel industry plant

and equipment was reported to be technologically outmoded, as compared to 12 percent

for domestic durable goods industries. ’ A

more recent estimate is that 20 percent of

steel facilities is obsolete.4 The age of facilities is particularly high for open hearths,

blooming mills, and plate mills, followed by

cold strip mills and coke ovens (table 33).

Adams and Dirlan have criticized the U.S.

failure to adopt new technology rapidly

enough. s They argue that since the 1960’s domestic steelmaker have lagged behind other

* . . . much of the steel industry’s apparent unwillingness to

invest in energy-conserving equipment can be made to appear

completely rational (i. e., consistent with profit maximization)

by using constant, rather than steadily increasing energy

prices. ” F. T. Sparrow, “A Public-Private Sector Interactive

Mixed Integer Programming Model for Energy Conservation

Policy,” Purdue University, 1979.

‘McGraw-Hill. “HOW Modern Is American Industry?” November 1978.

“International Iron and Steel Institute, 33 Metal Producing,

January 1980, p. 9.

‘Walter Adams and Joel B. Dirlan, “Big Steel, Invention and

Innovation” Quarterlyr Journal of Economics (May 1966), p.

167ff.
130 ● Technology and Steel Industry Competitiveness

Table 33.—Age Distribution of Domestic Steel

Production Facilities, 1979

Average

age Percent older than—

Facility (years) a 30 years 25 years 20 years

Coke ovens . . . . . . . . 17.3 14.2 25.6 45.9

Open hearth furnaces 33.2 43.0 78.5 100.0

Basic oxygen

furnaces. . . . . . . . . 11.0 0.0 0.0 2.3

Electric furnaces. . . . 14.3 6.1 13.8 25.3

Plate mills . . . . . . . . . 25.6 40.8 45.1 53.6

Wire rod mills. . . . . . . 13.7 12.6 17.3 17.9

Hot strip mills . . . . . . 19.0 11.6 16.1 31.5

Cold strip mills . . . . . 21.2 14.7 29.2 54.1

Galvanizing lines. . . . 18.8 4.4 8.9 40.1

Aggregate . . . . . . . . . 17.5 12.5 20.4 33.3

aAs of Jan 1, 1979

SOURCE: American Iron and Steel Institute, The World Steel Industry Data

Handbook, vol. 7.

major producing nations in the adoption of

certain high-performance steelmaking technologies. Basic oxygen steelmaking* was

pioneered in Europe, and adopted faster in

*Basic oxygen steelmaking and continuous casting are discussed fully in ch. 9.

Europe and Japan than elsewhere from the

late 1950’s onwards (figure 13). All new U.S.

steelmaking facilities built since 1957 have

been either basic oxygen or electric furnaces,

but the percentage of total steelmaking capacity that uses basic oxygen has not increased

as rapidly as in some other countries because

the U.S. industry was already so much larger

than the others (see table 16). Japan, for example, which was not replacing old facilities

but expanding its total industry, was able to

advance its use of basic oxygen, as a percentage of all facilities, quicker and easier than

was the United States.

Continuous casting did not achieve full

commercial success, on a worldwide basis,

until the late 1960’s, and domestic steelmaker were involved in its development.

Again, new steelmaking facilities built since

about 1968 have incorporated continuous

casters, but few previously existing ingot

Figure 13.–The Diffusion of Oxygen Steelmaking, 12 Countries, 1961.78

I

— Luxembour g

o.- —Belgiu m

.~”

_ Netherlands

. _ —Austri a

8 —Japa n

*

. —Franc e

“-WA

.

. ~West Germany

.“

.

.“

.

.

. —United State s

—Canad a

- —United Kingdo m

F

-*

..#” ”

..0- - — Swede n

d

r

.“ .“ ~ :.:#z-:

0 0/ —Ital y

SOURCES” Organ lzatton for Economtc Cooperation and Development; International Iron and Steel Instttute
Ch. 4—The Domestic Steel Industry’s Competitiveness Problems ● 131

casting facilities have been replaced (figure

14). Also by the late 1960’s, Japanese and

West German rolling mill builders had outpaced domestic engineering design firms specializing in this field, and they have installed

this new technology with its higher outputs.

The major innovations during the 1960’s

were productivity enhancing, so failure to

construct plants incorporating any given

higher output process cost the United States

some of its competitive edge in world markets.’ Clearly, expansion opportunities, timing of new investments, and the size and cost

of new steel plants are among the most important factors affecting technological productivity and competitiveness.

‘Jonathan Aylen, “Imovation, Plant Size and Performance: A

Comparison of the American, British and German Steel Industries, ” a paper presented at the Atlantic Economics Association Conference, Washington, D. C., Oct. 12, 1979, pp. 34.

Expansion Opportunities

Steel producers in industrialized nations

have on several occasions benefited from periods of rapid demand growth, which have

justified capacity expansion. The most recent

domestic expansion period took place from

1960 to 1965, when production increased

about 20 percent (see table 16). Nevertheless,

U.S. steelmaking capacity increased only

about 1 percent per year during the 1962-78

period. Domestic steelmaker have emphasized the removal of bottlenecks in existing

plants. Such investments do not produce productivity gains as large as does construction

of greenfield plants, but they also require less

capital.

The most recent European expansion took

place during a longer period than that in the

United States, lasting from about 1956 to

1975. Japanese post-World War II steelmaking capacity was limited, and capacity inFigure 14.—The Diffusion of Continuous Casting, 10 Countries, 1962-78

Percent

50

45

40

35

30

25

20

15

10

5

0

1960 1965 1970 1975 1978

Year

SOURCE: Organization for Economic Cooperation and Development
132 . Technology and Steel industry Competitiveness

creased in subsequent years more than in any

other major steel-producing country. During

a 15-year timespan between 1962 and 1978,

Japanese steelmaker added approximately

50-percent new steelmaking capacity.

In the early 1970’s, foreign steel producers

planned expansion programs for the decade

to follow in such a way as to maintain rapid

growth patterns. To a large extent, realizing

these plans depended on offers of assistance

by governments who shared their industries’

desires to break into new markets. This optimism about expansion for the late 1970’s,

which no doubt stemmed from the 1973-74

steel shortages, was premature. Demand in

1975 fell below the peak demand of the shortage years, creating an overcapacity for production. The events of 1975 and thereafter

seem to have daunted most expansion plans

in steel-producing nations, including Japan,

and the EEC and LDCs. Capital investments

have declined since 1975, but generally increasing world steel demand has succeeded

in broadening the export market for foreign

steel-producing countries, and they expect to

hold that market,

Japan’s steel industry has been a prominent part of her postwar industrial development. Japan has recognized that the steel industry is critical to the manufacture of capital goods and is an important source of foreign exchange. Japanese steelmaker have

benefited more than those in any other steelproducing nation from a rapid and sustained

growth in capacity. Based on a strategy for

building a large and internationally competitive industry, and aided by their financial

structure 7 and economic philosophy, the Japanese have maintained and increased their

large capital investment in steel mills. Many

large greenfield plants, with excellent infrastructures and access to deep-water ports,

have been constructed in Japan during the

past 20 years. The infrastructure of these

7

See Caves and Masu Uekusa, “Industrial Organization in Japan, ” in Asia’s New Giant, High Patrick and Henry Rosovsky,

eds., The Brookings Institution, 1976; and Bank of Japan, Economic Research Department, The Japanese Financial System,

July 1970.

new plants is such that they can be “rounded

out” on a cost-effective basis, thereby reducing average unit production costs after capacity increases. Furthermore, Japanese

steelmaker with their newer facilities have

not had to replace outdated equipment to the

extent that U.S. and European producers

have. As a result, Japanese investments in

large, efficient facilities have more than offset comparatively significant cost increases

for input factors.

Efforts in LDCs to attain economies of scale

have contributed to the creation of steelmaking capacity in excess of current world demand. * South Korea in particular has an ambitious steel production program and low

labor costs. The Central Intelligence Agency

has estimated that steelmaking capacity in

LDCs will total 112 million tonnes in 1985, as

compared with 64 million tonnes in 1978. 8

UNIDO estimates that Brazil, Iran, Argentina, Venezuela, India, and South Korea will

collectively contribute 54 million tonnes of additional steelmaking capacity between 1979

and 1985. Steel consumption in LDCs is expected to increase 6.5 percent per year and

those industries should reach a capacity

utilization level of 85 percent by 1985.

Timing of Investments in New Technology

The process of substituting capital for

labor started much earlier and went further

in the domestic steel industry than in Europe.

The older U.S. plants were designed during a

period of labor scarcity and, for that time,

relatively high wages, and the industry’s capital equipment was highly mechanized by the

standards of its day. Now, however, its age is

clearly reflected in the declining labor productivity growth rate of the U.S. steel indus-

*LDCs benefit from indigenous steel production. For example, the cost of importing steel products to LDCs is from 15 to 30

times greater than the revenues gained from the sale of iron

ore, However, many of these countries will remain net importers of steel for the foreseeable future. (Ingo Walter, Trade

and Structural Adjustment Aspects of the international Iron

and Steel Industry: The Role of the Developing Countries,

prepared for the U.N. Trade and Development Board, New

York, 1978. )

‘Central Intelligence Agency, “The Burgeoning LDC Steel Industry: More Problems for Major Producers, ” 1979.
Ch. 4—The Domestic Steel Industry’s Competitiveness Problems 133

try. Without new investments in more productive steelmaking technologies, the domestic

steel industry may lose its technological and

cost competitiveness.

For the time being, domestic steel industry

productivity may have reached a plateau,

while some other major producing nations

have a much higher rate of productivity

growth, helped along by improved technology

and enlarged plants. Newer plants, embodying newer techniques, are likely eventually to

achieve higher output rates than older plants.

As “learning” occurs, efficiency should increase at a faster rate with respect to time.

Thus, it is expected that the newer foreign

plants will have higher trend rates of productivity growth and ultimately achieve higher

productivity levels, even though they may initially start up at lower levels of productivity

than their more mature, long-commissioned

U.S. rivals.’

Size and Cost of Steel Plants

Many U.S. steel plants have smaller capacities than foreign plants, particularly those in

Japan (table 34). As of 1979, domestic basic

oxygen furnaces had about 20 percent less

capacity than those in the United Kingdom

and about 25 percent less than those in West

Germany, U.S. and West German blast furnaces are of similar capacity, while British

furnaces average 5 percent more capacity.

U.S. hot wide-strip mills have an average ca-

‘AVlen, OP. cit., pp. 17 and 21.

pacity about 25 percent more than British

mills, but about 63 percent less than West

German mills. ’O Japanese steel plants, on

average, have more capacity at all stages of

production than either domestic or European

steel plants.

Domestic steel plants are generally smaller

because they are older. Additional factors

have also been thought to encourage small

plant size, including high transportation

costs, the lower capital intensity of the smaller scale, management policies, and labor relations practices associated with large

plants. Because domestic producers, on average, operate smaller plants than some of their

foreign counterparts, they are less able to

realize economies of scale and have higher

operating costs than they would with larger

plants.’]

In addition to differences in plant size,

there are also marked differences among

countries in median per tonne capital costs

for plants. * This is largely because of differences in construction labor costs and construction efficiency. In 1976, domestic steelmaker had per tonne capital costs for

equivalent technology that were about 44 percent higher than in Europe and as much as 41

percent higher than in Japan. ’z These capital

cost differences are probably smaller today,

but their pattern is similar to that of 1976. In

“’Aylen, op. cit., table 1.

1lAylen, op. cit.

*Capital costs are discussed more fully inch. 10.

1-Aylen, op. cit.

Table 34.—Integrated Steel Producers’ Capacities in Selected World Areas, 1976

— — -——— ——— —.

Raw steel tonnes of capacity ——— — ——

Average per

Number Plants Approximate Average Average plant among

Area of firms —-—per firm total per firm per plant 10 largest

Canada ~~! . . . . . . . . . . . . . 4 1.0 13.0 — 3.3 3.3 – NA

United States. . . . . . . . . . . . . . . 20 2.5 115.0 5.8 2.3 5.9

Japan . . . . . . . . . . . . . . . . . . . . . 8 2.5 120.0 15.0 6.0 11.5

European Coal and Steel

Community (six countries). 40a 1.8 135.0 3.1 1.8 6.4

‘Estimated

—

NOTE All numbers are approximate

SOURCES Average for 10 largest plants–H G Mueller, “Structural Change in the International Steel Market, ” 1978, all other data—D F Barnett, ‘The Canadian Steel

Industry in a Competitive World Environ merit,” Canadian Government. 1977
134 ● Technology and Steel Industry Competitiveness

contrast to the U.S. capital cost disadvantage, the domestic steel industry has an energy cost advantage—albeit a slowly eroding

one—because it is able to use domestic coal.

In conclusion, domestic steelmaker have

had less incentive than their international

competitors to adopt new technologies to replace open hearth steelmaking, dated-technology blast furnaces, and conventional casting facilities.13 High capital costs have encouraged the substitution of other factors of

production for capital improvements. But

with ever-increasing energy and raw materials costs and a rate of productivity improvement insufficient to offset rising employment

costs, domestic steel companies cannot expect aging equipment to remain profitable. Investing in new, more efficient, though more

expensive equipment may be justified if the

new equipment entails sufficiently lower production costs.

Comparative Production Cost Data

Available steel production cost data suffer

from two major shortcomings: lack of access

to specific confidential industry data and

noncomparability among sources. Thus, studies differ in industry cost performance data

for similar industry segments and time

frames. Even if total cost figures per tonne of

steel for materials, labor, and capital are

roughly similar, it is not uncommon to find a

different breakdown for these inputs in the

various studies. The most extensive steel production cost estimates are those prepared by

the World Steel Dynamics (WSD) organization. 14 However, that model is based on larger

economies of scale for integrated plants than

may exist in reality, particularly for U.S.

plants. * Thus, total factor productivity may

be overestimated somewhat using the WSD

data.

1‘Aylen, op. cit.

14World Steel Dynamics, Core Report J, September 1979.

*The WSD U.S. and European cost data are associated with

a 3-miHion- to 4-million-tonne/yr integrated plant and the Japanese data are based on a 5-million- to 6-mi]]ion-tome/yr integrated plant.

In addition to the WSD study, comprehensive steelmaking cost analyses have been

made by FTC, the American Iron and Steel Institute (AISI), Mueller and Kawahito, and

Thorn. 15 FTC, Thorn, and Mueller and Kawahito took similar approaches by relying on aggregate confidential cost data and/or information supplied by foreign government agencies concerned with steel industries. Only the

WSD data are based on models of large integrated plants producing a mix of carbon steel

products. The WSD simulation model compares costs in major producing countries

(United States, Japan, West Germany, United

Kingdom, and France), going back as far as

1969 and projected to 1984.

Available cost studies may differ with respect to both total steelmaking costs and input factors. For instance, the WSD 1974,

1975, and 1976 Japanese cost estimates are

higher by 7.6 percent, 10.4 percent, and 13.6

percent, respectively, than those presented

by AISI. The WSD data do not include transportation costs, and the same appears to be

the case for the AISI data. The AISI estimates

also do not include marketing costs, but the

WSD data do appear to include them. Both

sources deal with average costs for carbon

commodity steels only.

The WSD and Thorn data differ in input

costs. In comparing 1973 Japanese cost data

to those of the United States, the two sources

show an almost opposite condition for material and capital costs. There is an even greater

dissimilarity between the 1973 West German/U.S. comparisons by WSD and Thorn

than between their Japanese/U.S. cost comparisons. The WSD data show an $1 l/tonne

West German disadvantage relative to U.S.

producers, and the Thorn data show a

$33/tonne advantage. Of the major inputs,

}~u.s. Federa] T’rade Commission, ‘‘U.S. Steel Industry and

Its International Rivals,’” November 1977: American Iron and

Steel institute, “Economics of International Steel Trade,” 1977:

Hans Mueller and K. Kawahito, “The international Steel Trade

Market: Present Crisis and Outlook for the 1980’s,”’ conference

paper No. 46, Middle Tennessee State University, May 1979:

and R. S. Thorn, “Changes in the international Cost competitiveness of American Steel, 1966 -197 S,” working paper No. 8,

University of Pittsburgh, February 1975.
Ch. 4—The Domestic Steel Industry’s Competitiveness Problems 135

employment and capital costs contribute most

to the discrepancies.

Sets of U.S./Japanese data by WSD, FTC,

and Mueller and Kawahito for 1976 also illustrate the limitations of developing comparable steelmaking cost estimates. For the

United States, WSD shows the lowest total

cost estimates, followed by Mueller and Kawahito, and FTC. The Mueller and Kawahito

energy cost estimates are about 25 percent

lower than those in the other two sources.

And finally, WSD shows a different energyiron cost balance than do the other two

sources (table 35).

The methodologies of the various studies

differ in several other respects, as well. The

WSD data exclude electric furnace production. Thus, scrap costs tend to be underestimated and energy costs overestimated. ’G

The FTC and WSD data are based on market

prices for raw materials, while Mueller and

Kawahito incorporate company-owned materials prices. Less verifiable differences in the

studies include possible differences in industry definitions and adjustments for product

mix.

The following discussion is in many instances based on WSD cost data. * It should

be kept in mind that the WSD total U.S. cost

“>George R. St. Pierre, “lmpads of New Technologies and E~-

ergy/Raw Materials Changes on the U.S. Steel industry, ” Office of Technology Assessment, contractor report, 1979.

*Transportation costs are not included in the discussion in

this section. Unless otherwise noted, all references in this sectim are to U.S. dollars at actual operating rates.

data appear to be underestimated relative to

that of other countries—perhaps by as much

as 5 to 10 percent in the cases of Western

Europe and Japan, respectively. ’

Labor Costs

A significant portion of the cost of producing steel is labor cost. This cost can rise as a

result of increases in hourly wage rates and

fall as a result of increases in labor productivity.

Declining Employment and

Increased Skill Requirements

Domestic steel industry employment has

declined by 21.4 percent during the past two

decades, from about 550,000 employees in

1960 to about 450,000 in 1978.** From 1962

to 1966, employment levels rose slowly, about

1 percent annually. Since that time, however,

*This conclusion is based on findings such as:

● The Council on Wage and Price Stability found that

1972-77 WSD U.S. cost data were between 1 and 6 percent lower than comparable industry data (Council on

Wage and Price Stability, “Prices and Costs in the United

States Steel Industry, ” 1977, p. 25):

. WSD Japanese 1974-76 cost estimates were between 7

and 13 percent higher than comparable AISI estimates:

and

. WSD has lower 1976 U.S. cost estimates than either

Mueller and Kawahito or FTC, even though WSD, unlike

Mueller and Kawahito, uses higher market prices for

raw materials. * *Based on AISI data. Steel industry employment data are

typically about 22 percent lower than U.S. Department of Labor, Bureau of Labor Statistics, data. Unlike BLS, AISI does not

include smaller establishments primarily engaged in the finishing of purchased iron and steel.

Table 35.—Estimates of U.S. and Japanese Steel making Costs, 1976 (dollars per tonne)

—— .——

Input costs

Study Country Iron ore and scrap Energy Labor Total a

———

FTC. . . . . . . . . . . . . . . . . . . . . . United States $72.97 $92.80 $157.85 $323.62

Japan 54.57 68.40 57.98 180.95

WSD . . . . . . . . . . . . . . . . . . . . . United States 71.84 94.89 115.84 282.57

Japan 33.51 88.14 59.37 181.03

Mueller. . . . . . . . . . . . . . . . . . . United States 63.10 71.10 155.54 289.74

Japan 52.92 73.64 61.16 187.73

aTotals exclude miscellaneous materials and supplies, and capital costs.

SOURCES U S Federal Trade Commision,‘U.S. Steel Industry and Its International Rivals,”November 1977, World Steel Dynamics, Core Report J. 1979, H Mueller

and K. Kawahito, “The International Steel Market’ Present Crisis and Outlook for the 1980’ s,” Middle Tennessee State University, conference paper No 46,

1979
.

136 . Technology and Steel Industry Competitiveness

steel industry employment has dropped

steadily, by an average of almost 2 percent

per year (table 36). U.S. Bureau of Labor Statistics (BLS) projections for 1985 indicate that

steel employment is expected to continue its

downward trend, but with a somewhat lower

rate of decline—about 0.5 percent annually. 17

Declining steel industry employment may

be attributed to a number of factors, including growing steel import penetration, increased labor productivity, and product substitution. With the exception of France, steel

industry employment in other major producer

countries also has decreased to varying degrees, beginning at least in the 1960’ s.* The

U.S. decline has been greater than that generally experienced abroad.

Steel industry job content and occupational

requirements also have changed considera-

“BLS Bulletin No. 1856, footnote 22,

* 1978 West Germ:]ny: 205,000 employees, down by 4.5 percent since 1960: 1978 France: 135,800 employees, up by 3,12

percent since 1960; 1978 England: 170,000 employees, down by

14.01 percent since 1974; 1978 Japan: 302,487 emplo)rees,

down by 5.48 percent since 1965. (U. S. Department of Labor,

unpublished data. )

bly in recent years. These changes, brought

about mainly by new technologies, are reflected in the relative employment levels of

production and nonproduction workers. The

number of production workers employed in

steel hit a peak in 1965 and since then has declined steadily; nonproduction worker employment increased continuously from 1964

to 1970 and then dropped sharply. From 1966

until 1978, production worker employment

declined almost twice as fast as did nonproduction worker employment. For the entire

1960-78 period, employment of production

and nonproduction workers fell, on average,

1.36 and 0,58 percent per year, respectively

(see table 36).

Among production workers, craft and related workers have remained about the same

in number over the past two decades, and

skilled workers have increased relative to operators and laborers, whose part in the production process has been slowly diminishing.

The increasingly complex machinery and instruments used in steelmaking require craft

and maintenance workers who are more highly skilled and trained than those required

Table 36.—U.S. Steel Industry Employment, Productivity, and Compensation, 1960-78

—————— —.

Compensation per employee-hour

Average number of employees Output per (annual rate of change) — employee-hour

(annual rate

Year —— Total Product ion Non production of change) Actual Inflation adjusted

1960 . . . . . . 571,552 449,888 121,664 -5. 2 1.1 – 0.1

1961 . . . . . . 523,305 405,924 117,381 2.6 3.3 2.5

1962 . . . . . . 520,538 402,662 117,876 4.3 3.2 2.6

1963 . . . . . . 520,289 405,536 114,753 4.0 1.7 0.6

1964 . . . . . . 553,555 434,654 118,901 4.0 0.6 – 0.7

1965 . . . . . . 583,851 458,539 125,312 3.9 1.4 – 0.1

1966 . . . . . . 575,457 446,712 128,835 3.5 0.8

1967 . . . . . . 555,193 424,153 130,990 - 322’ 3.1 0.4

1968 . . . . . . 551,557 420,684 130,873 3.5 4.7 0.5

1969 . . . . . . 554,019 415,301 128,718 1.5 7.9 2.1

1970 . . . . . . 531,196 403,115 128,081 -2. 7 5.4 – 1.1

1971 . . . . . . 487,269 403,115 120,287 4.9 10.6 4.5

1972 . . . . . . 478,368 364,074 114,294 6.5 16.3 9.6

1973 , . . . . . 508,614 392,851 115,763 10.8 13.8 3.6

1974 . . . . . . 512,395 393,212 119,183 0 22.6 3.5

1975 . . . . . . 457,162 339,945 117,217 -15.9 28.3 7.3

1976 . . . . . . 454,128 339,021 115,107 6.9 19.5 4.4

1977 . . . . . . 452,388 337,396 114,992 1.1 18.0 1.7

1978 . . . . . . 449,197 339,155 110,042 5.1 30.0 5.8

Average rate of change 1960-78 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.90 10.82 2.62

SOURCES: 1%0-77-American Iron and Steel Institute. Annual Statistical Reports 1969; 1978—Department of Labor, Bureau of Statistics, Steel SIC 331, May 1979, unit

labor costs, October 1979 (unpublished)
Ch. 4—The Domestic Steel Industry’s Competitiveness Problems . 137

for simpler equipment. However, complexity

does not necessarily increase the number of

workers required, For instance, the more advanced oxygen furnace takes one-fifth as

much labor to process heat as is required by

the open hearth process.

The proportion of nonproduction (white

collar) workers in steel employment also has

increased somewhat since 1960, Nonproduction workers now make up nearly 25 percent

of the entire steel industry work force. In

general, the need for technically trained personnel is growing as more advanced instrumentation, computer controls, and pollution

control devices come into use. These personnel include control engineers, programmers,

laboratory testers, and R&D specialists, The

number of managerial, administrative, and

sales personnel also has increased substantially during the past decade.

Productivity

Labor is only one of several input factors of

production. Labor productivity, measured by

employee hours required to produce a tonne

of steel, reflects the joint effects of many influences, including new technology, capital

investment, capacity utilization, energy use,

managerial skills, and the skills and efforts of

the work force. When operating rates are

low, labor productivity measures understate

the technological capability of steelmaking

equipment. Nevertheless, labor productivity

at actual operating rates is a reasonable approximation of the technological competitiveness of the domestic steel industry on the international market.

Both BLS and WSD have developed data on

international steel labor productivity. * It appears that BLS slightly underestimates U.S.

steel industry labor productivity relative to

that of foreign steel industries, while Marcus

slightly overestimates U.S. productivity levels, The BLS unpublished steel productivity

series are based on a 1967 product mix and

have not incorporated the U.S. shift toward

producing more lightweight and specialty

steels since that time. The Marcus data assume larger economies of scale than exist in

reality, particularly in the United States.

The domestic steel industry frequently is

singled out for its low productivity improvement rate (see table 36), which has been well

below that of other U.S. industries since at

least the late 1940’s. As overall industrial

labor productivity and capital investment

have declined since the mid-1960’s, the gap

between steel industry labor productivity improvement rates and those of other industries

has narrowed somewhat. During the 1965-70

period, productivity growth rates for manufacturing and for the total private economy

both slipped to 2 percent, but that for steel

fell more sharply, averaging a minimal 0.2

percent annually. In 1971, when wages began

increasing substantially productivity also

moved upward. From 1971 to 1978 the average annual increase was 2.4 percent. Benefiting from high operating rates in 1978, U.S.

steel labor productivity improved 5 percent.

The wide gap between U.S. and Japanese

steel industry productivity improvement rates

is of particular significance. During the past

two decades, Japanese steelmaking labor productivity has improved faster than that in the

United States, and it appears that their productivity level exceeded that of the domestic

steel industry for the first time in about

1973. * According to WSD data for integrated

plants, U.S. steel labor productivity growth

since the early 1960’s has been only about

half that of the Japanese, although it is still

double the West German rate. BLS data,

which appear to be valid, show sizable labor

productivity improvements for West Germany, as well as Japan, relative to domestic

steelmaking (see table 37). The favorable

labor productivity improvement rates for Japan and West Germany have substantially reduced or eliminated the output-per-employee-

*International comparisons are difficult because of the different use of contract labor, level of fixed annual employment,

level of capacity use, and product mix.

*BLS data suggest that Japanese steel labor productivity

levels exceeded domestic levels in 1973. WSD data indicate

that this would not occur until 1984. The 1977 FTC report accepts the BLS findings.

1- i - + _ 1 ,-,
138 ● Technology and Steel Industry Competitiveness

Table 37.—Labor Productivity at Actual operating Rates, Selected Countries, 1969-84

(employee hours required per tonne of carbon steel shipped)

Year United States Japan West Germany United Kingdom France

1969 . . . . . . . . . . . . . . 10.53 14.69 12.76 22.73 19.38

1970 . . . . . . . . . . . . . . 10.39 13.67 13.85 21.49 18.03

1971 . . . . . . . . . . . . . . 10.50 13.75 15.05 23.60 18.06

1972 . . . . . . . . . . . . . . 9.76 12.82 12.76 22.82 16.62

1973 . . . . . . . . . . . . . . 9.25 10.13 11.59 20.06 16.20

1974 . . . . . . . . . . . . . . 9.16 9.60 10.82 21.99 15.51

1975 . . . . . . . . . . . . . . 9.57 10.29 12.90 25.62 17.79

1976 . . . . . . . . . . . . . . 9.08 9.91 12.48 21.47 16.27

1977 . . . . . . . . . . . . . . 9.34 10.01 12.88 23.74 15.41

1978 . . . . . . . . . . . . . . 8.63 9.79 11.82 23.21 14.12

1979 . . . . . . . . . . . . . . 8.56 9.20 — — —

1980a . . . . . . . . . . . . . . 8.37 8.54 —

1985a . . . . . . . . . . . . . .

— —

7.19 6.48 — —

Average annual

—

change 1969-79 . . . . –1.8770 –3.7370 –0.90% 0.23% –3.010/o

aEstimate

SOURCE World Steel Dynamics, Core Report J,1979.

hour advantage long held by U.S. steel producers.

This shift in the U.S./Japanese labor productivity relationship may be attributed in

part to continuing U.S. dependence on relatively small, old, and poorly laid-out plants.

Such plants do not use labor efficiently..18 Furthermore, expansion of existing plants (typical among domestic steelmakers) offers lower

productivity growth potential than does new

plant construction. Relatively old facilities

cannot handle the higher workload that a

new facility in the same plant can. Thus, bettlenecks develop. Labor-management attitudes about productivity improvement and

employment security also can affect growth

rates. For instance, occasional delays in setting incentive rates can constrain potential

productivity improvements associated with

the use of new equipment.

Wages and Unit Labor Costs

Both here and abroad, steel industry

wages are often higher than the all-manufacturing average.19 In the United States, the gap

between steel industry and manufacturing industry average wages narrowed during the

late 1960’s in response to increased import

‘Aylen, op. cithp. 17.

19Ernp10yeeS of the major Japanese stee] COMPEInk?S I’eCf3ive

about 33 percent more in wages than the average for allindustrial companies in Japan (WSD, p. J-1-14, 1979).

competition and reduced profitability in the

steel industry; but in the 1970’s and particularly since 1974, the lead held by steel industry wages again increased significantly. 2 0

Hourly earnings in 1977 in the steel industry

were estimated to be 55 percent higher than

the all-manufacturing average. 21 U.S. hourly

employment costs in the steel industry have

increased by 10 to 15 percent since 1960,

with higher than average increases during recent years. * The 1979 total yearly increase in

steel industry wages appears to have been

about 11 percent. 22

Employment cost data for companies in the

three segments of the domestic industry are

given in table 38. There is clearly a large

employment cost difference among integrated

producers, generally about a $55/tonne difference between the high and low labor cost

companies. (The very low value for the

McLouth Co. is related to its 100-percent use

1(’The substantial increases in the 1974 steel labor settlements were granted in exchange for the union’s support of the

Experimental Negotiating Agreement (ENA). This agreement

was negotiated in an environment of declining U.S. imports,

booming demand for U.S. steel products, and sharply escalating world steel prices. In such a situation, management was

eager to avoid disruption of production. Cost of living clauses

are a part of the Agreement. (Council on Wage and Price Stability, “Prices and Costs in the U.S. Steel Industry,” 1977.)

*’Ibid.

*AISI data show a 15-percent annual increase since 1960.

BLS data show a 10-percent annual increase since 1960.

“Bradford, op. cit., p. 14.
Ch. 4—The Domestic Steel Industry’s Competitiveness Problems 139

Table 38.—Employment Costs for Domestic Steel Companies, 1978

Employment costs

Net income as a Employment costs as dollars per tonne Capacity utilization

Company percent of investment a percent of sales shipped (percent)

Integrated

U.S. Steel Corp. . . . . . . . . . . . . . . . . . . 5.3 40.6 $238 76.1

Bethlehem Steel. ., . . . . . . . . . . . . . . . 9.3 41.2 214 84.8

National, . . . . . . . . . . . . . . . . . . . . . . . . 8.2 30.2 152 82.4

Inland. . . . . . . . . . . . . . . . . . . . . . . . . . . 9.7 30.0 172 95.0

Wheeling-Pittsburgh . . . . . . . . . . . . . . 6.3 36.5 160 92.4

Kaiser . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6 49.4 243 65.2

McLouth . . . . . . . . . . . . . . . . . . . . . . . . 5.2 25.0 116 79.3

CF&l. . . . . . . . . . . . . . . . . . . . . . . . . . . 6.6 44.7 214 82.2

Interlake . . . . . . . . . . . . . . . . . . . . . . . 3.7 33.1 386 82.0

Republic a ., . . . . . . . . . . . . . . . . . . . . . 10.4 33.8 180 76.3

Armco a . . . . . . . . . . . . . . . . . . . . . . . . 10.4 28.3 226 81.6

Nonintegrated

Northwestern . . . . . . . . . . . . . . . . . . 13.9 34.2 117 65.5

Nucor. . . . . . . . . . . . . . . . . . . . . . . . . . 25.0 18.7 51 96.0

Florida. . . . . . . . . . . . . . . . . . . . . . . . . 13.8 19.7 58 73.5

Keystone. . . . . . . . . . . . . . . . . . . . . . . 2.3 42.4 306 90.8

Lacledo. . . . . . . . . . . . . . . . . . . . . . . . . 9.4 39.8 177 91.9

Atlantic ..., . . . . . . . . . . . . . . . . . . . . . 9.6 28.3 114 78.0

Alloy/specialty

Sharon. . . . . . . . . . . . . . . . . . . . . . . . . . 15.3 26.3 122 90.5

Cyclops . . . . . . . . . . . . . . . . . . . . . . . . . 10.3 29.4 258 87.1

Allegheny-Ludlum . . . . . . . . . . . . . . . . 8.5 33.3 619 73.5

Cooperweld. . . . . . . . . . . . . . . . . . . . . . 8.4 32.3 385 82.6

Washington . . . . . . . . . . . . . . . . . . . . . 11.6 22.1 497 66.0

CarpenterTechnology. . . . . . . . . . . . . 16.9 32.6 NA NA

Likens . . . . . . . . . . . . . . . . . . . . . . . . . . 9.6 41.4 NA 81,9

NA = not available

aBoth of these flrms make substantial amountsofalloy/specialty steels.

SOURCES Income. employment. and production data from Iron Age, May 1979; capaclty data from International lron and Steel institute Commentary, January-February

1979, data for Nucor from company

of continuous casting.) A considerable spread

in employment costs also exists among the

nonintegrated steelmaker and, as might be

expected because of major product differences, among the alloy/specialty steelmaker.

The nonintegrated producers have a lower

employment cost than the integrated steelmaker, an average of $144 versus $210, respectively, per tonne of steel shipped.* Although a relationship between profitability

and employment costs might be expected,

none is found. For the integrated producers,

there is also no relationship between employment costs and capacity utilization, although

there is a strong correlation (a coefficient of

0.772) between profitability and capacity

utilization.

‘The nonintegrated segment of the steel industry generally

does not have contracts with the United Steelworkers of America. Their labor costs are reported to be about one-third less

than for unionized companies.

A major reason for the rise in labor costs

per tonne of steel is that wage increases have

only to a small degree been offset by labor

productivity gains or other efficiency improvements in total unit production costs. In

the U.S. steel industry, real and nominal compensation increased annually between 1.5

and 5.5 times faster, respectively, than labor

productivity (table 36). Foreign steel industry

unit labor costs increased at an even faster

rate than in the domestic industry during the

1969-78 period because of currency changes

and because of wage increases that exceeded

those in the United States. *

From 1969 to 1978, West German and Japanese employment costs increased 345 and

299 percent, respectively, compared with 117

percent in the United States (table 39). Never-

*Foreign producers, particularly the British and French,

probably also experienced labor productivity y gains insufficient

to offset increased hourly employment costs.
140 . Technology and Steel Industry Competitiveness

Table 39.—Carbon Steel Production Costs, Five Countries, 1969 and 1978

Total Employment Financial Materials

Dollars/ Dollars/

Country and year tonne tonne

United States

1969 ....., . . . . . . . . . . . . . . . . . . . .

1978 . . . . . . . . . . . . . . . . . . . . . . . . . .

Percent change, 1969-78 . . . . . . . . .

Japan

1969 . . . . . . . . . . . . . . . . . . . . . . . . . .

1978 . . . . . . . . . . . . . . . . . . . . . . . . .

Percent change 1969-78. . . . . . . . . .

West Germany

1969 . . . . . . . . . . . . . . . . . . . . . . . . . .

1978 . . . . . . . . . . . . . . . . . . . . . . . . . .

Percent change, 1969-78 . . . . . . . . .

United Kingdom

1969 . . . . . . . . . . . . . . . . . . . . . . . . . .

1978 . . . . . . . . . . . . . . . . . . . . . . . . . .

Percent change, 1969-78 . . . . . . . . .

France

1969 . . . . . . . . . . . . . . . . . . . . . . . . . .

1978 . . . . . . . . . . . . . . . . . . . . . . . . . .

Percent change, 1969-78 ........,

$169.39

395.65

133.57

$124.95

410.51

229.85

$126.48

438.12

246.38

$146.37

460.64

214.70

$152.22

456.33

199.78

SOURCE World Steel Dynamics,Core Report J. 1979

$ 48.33

127.18

117.86

$ 25.41

101.60

229.84

$ 30.10

134.23

245.94

$ 37.87

135.28

257.22

$ 42.45

143.10

237.10

Percent ——

34.43 %

32.11

20.41

24.74

23.79

30.63

25.87

29.36

27.88

31.35

Dollars/

tonne Percent

$ 17.46

30.91

77.03

$ 18.93

81.87

332.48

$ 21.37

60.02

180.86

$ 21.42

58.36

172.45

$ 25.86

71.77

177.53

theless, in 1978, U.S. hourly costs were still

30 percent higher than West German costs

and 40 percent higher than Japanese costs

(table 40), but it can be seen that annual

employment cost increases in local currencies were much lower than in dollars. Thus,

the rapid foreign labor cost increases of the

past decade have not yet eliminated the unit

cost advantage held by foreign steelmaker

(see table 27). 0nly 1978 was unexceptional

year, with relatively low U.S. unit labor costs

because of very favorable operating rates.

Raw Materials and Energy

Key raw materials for steelmaking are:

iron ore, scrap, coal and other sources of

10.30%

7.81

15.21

19.94

16.89

13.09

14.63

12.66

16.98

15.72

Dollars/

tonne Percent

$ 93.60 55.25%

237.66 60.06

153.91

$ 80.11 64.37

227.03 55.30

183.39

$ 75.01 59.30

243.87 55.66

225.11

$ 87.09 59.49

267.00 57.96

206.57

$ 83.91 55.12

241.47 52.92

187.77

energy, limestone and other fluxes, alloy additives, refractories, and oxygen. Raw materials comprise more than half of all input

costs for steelmaking (table 39). During the

past decade, the cost per tonne of raw materials for domestic steel has increased by 5

percent annually and now represents 60 percent of all input costs.

Within the materials component, direct energy costs have risen most (275 percent) and

now account for almost 40 percent of raw

materials costs (table 41) or 24 percent of

total steelmaking costs for integrated operations. About two-thirds of the energy used to

make steel from ore comes from coal. Of the

major producing countries, Japan has made

Table 40.—Steel lndustry Hourly Employment Costs, Five Countries, 1969 and 1978

Average annual

1969 1978 percent increase

Local - - Local Local

Country Dollars currencies Dollars currencies Dollars currencies

United States. . . . . . . . . . . . . . . $5.54 $5.54 $14.73 $14.73 18.43% 18.43%

Japan . . . . . . . . . . . . . . . . . . . . . 1.73 625.00 yen 10.42 2,169.00 yen 55.81 27.44

West Germany. . . . . . . . . . . . . . 2.36 9.25 DM 11.34 22.73 DM 42.27 16.19

United Kingdom. . . . . . . . . . . . . 1.66 LO.70 5.83 L3.04 27.91 33.71

France . . . . . . . . . . . . . . . . . . . . 2.18 fr11.32 10.09 fr45.44 40.31 33.49

SOURCE World Steel Dynamlcs, Core Report J. September 1979
Ch. 4—The Domestic Steel Industry’s Competitiveness Problems ● 141

Table 41 .—Unit Costs for Inputs, United States and Japan, 1956-76 (dollars per tonne of steel produced)

Total Iron ore Scrap Coking coal

United United ‘United United

Year States Japan States Japan States Japan States Japan

1956 ......, ., ... . . . $110.84 $119.83 $17.51 ‘—

———

$25.78 $35.15 $12.15 $20.0 1

1957, ... . . . . . . . . . . 110.00 133.21 18.17 31.55 10.95 37.98 12.73 23.03

1958, . . . . . . . . . . . . . 122.18 98.65 19.75 21.20 9.94 19.37 13.09 16.75

1959 . . . . . . . . . . . . 113.98 90.04 17.25 18.08 10.87 24.59 10.93 13.03

1960 ....., . . . . . . . . . . . 120.18 85,08 19.47 17.91 8.24 23.16 11.48 11.50

1961 ... . . . . . . . 122.50 91.59 20.58 18.54 9.45 30.09 10.21 11.85

1962 . . . . . . . . . . . . . . . . . 118.74 81.56 19.93 18.97 6.83 17,43 10.17 12.33

1963 . . . . . . . . . . . . . . . . . 116,01 79,03 19.60 17.80 7.39 18.12 9.16 10.99

1964 . . . . . . . . . . . . . . . . . 114.97 75.20 20.41 16.73 8.25 19.27 9.74 10.05

1965.. . . . . . . . . . . . 112.99 76.38 19,92 18.63 9.56 16.75 9.78 10.94

1966, . . . . . . . . . . . . 113.21 71.86 19.95 18.14 7.72 14.88 9.99 10.84

1967 . . . . . . . . . . . . . . . . . 117.70 69.53 20.10 16.68 6.73 15.73 10.83 10.27

1968 . . . . . . . . . . . . 119.40 67.78 20.65 16.99 6,71 12.16 10.69 10,91

1969 . . ., . . .,, ..,...,, 125.25 69.93 20.34 16.66 8.60 14.00 10.29 11.72

1970 . ., ., ., ...,.,.,, 137.23 78.05 21.54 17.47 10.05 16.05 12.80 14.65

1971 . . . . . . . . . . . . . . . . . 145.98 81.28 22.85 19.43 8,53 9.06 15.15 16.76

1972, ...,..,. ,..,, 155.11 83.56 23.84 16.97 11.26 12.04 16.08 14.65

1973 . . . . . . . . . . . ,..,. 161.21 100.97 24.42 17.62 17.08 23,38 17,44 15.18

1974 . . . . . . . . . . . . . . . . 215.55 147.30 29.66 21.65 34.10 33.65 29.20 29.84

1975 . . . . . . . . . . . . . . . . . 270.27 159.26 37.58 27.85 18.98 17.23 52.40 43.18

1976 ......, . . . . . . . 294.65 161.93 44.51 26.87 21.82 22.72 53.73 41.38

———-———————————

Fuel oil

—.——

Electric power Noncoking coal Natural gas

Year United States Japan

1956 ........,

1957 . . . . . . . . .

1958, .,.,.. .

1959 ..,...,..

1960.. ,

1961 ., . . . . .

1962 . . . . . . . . .

1963 . . . . . . .

1964 . . . . . . . . .

1965., . .

1966 . . . . . . . . .

1967 .....,...

1968, ..,,...,

1969 ..,, ..,,

1970 ...... ,

1971 .

1972 ..,...,..

1973 .,.. .

1974 . . . . . . .,

1975. .,

1976 . . . . . . . . .

$2.26

1,97

1.99

1.78

1.80

1.74

1.59

1.58

1,41

1.28

1.14

1,05

1.09

0.94

1,23

1.54

1.60

1.91

5.02

4.95

5.05

$2.85

4.27

2.54

2.09

2.30

2.04

1.92

2.04

1,92

1.93

1.75

1,87

1.74

1.44

1,81

2.73

2.47

3.43

9.01

8.66

6.84

United States

$4.15

3.73

3.96

3.47

3.92

4.27

4.71

4.73

4.48

4.64

4.90

5.30

5.74

5.83

6.49

7.70

7.60

8.09

10.21

14.03

15.84

Japan United States

$6.07 $0.74

6.29 0.75

6.72 1.07

6.61 0.80

6.44 0.85

6.50 0.89

6.28 0.83

5.87 0.73

5.88 0.63

5.70 0.63

5.33 0.63

4.92 0.63

5.02 0.61

4.80 0.51

4.74 0.56

5.31 0.62

5.45 0.54

6.04 0.54

10.54 0.76

12.41 0.85

14.47 0.85

——Japan

$3.31

3.31

1.94

0.61

0.75

0.63

0.54

0.45

0.37

0.31

0.24

0.13

0.10

0.10

0.11

0.00

0.00

0,00

0.00

0.00

0.00

United States

$1.58

1.46

2.28

2.19

2.59

2.99

3.29

3.19

3.01

3.09

2.93

3.16

3.56

3.54

3.74

4.55

4.64

4.40

5.67

8.60

9.31

SOURCE US Federal Trade Commission Staff Report on the United States Steel industry and its lnternatlonal Rivals,” 1977.p 113

the greatest improvements in energy-efficient The cost of iron ore and scrap metal went

steelmaking. Coke rates in Japan are present- up by about 120 percent during the past decly 25 percent more efficient than those in the ade and is now 26 percent of raw materials

United States’] (table 42) costs, according to WSD. 24 Ore costs, since

1974, have been pushed up at an annual rate

‘I~Jiipi]n [hetiwragccokc rate isnowiihoul 4.2okg/tonneof

[Jig Ir(m. wIt~ (Jnlv t~bout 40 liters ofoil injected. In the LJniled of nearly 10 percent as a result of large inS1,1[(!s, the (f}ke r:ltc WI:]S 585 kg’tonne l:]st vear, with onl} creases in energy and labor costs in mining, a

slightl~ less (JII used. [)nl} tho 13elhlehcm Steel “1,’” hlasl fur- decline in the quality of ore obtained, and n[~[[;i~t Spilrrmvs Point has:]rhievcxi a cokf? rate similar 10 th~t

In Jilpiln. (Br/](~for(~, op. rit., p. 17.) *WSD,op.cit.,p.J-l-49,
142 . Technology and Steel Industry Competitiveness

Table 42.–Coke Consumption per Tonne of Pig Iron Produced, 11 Countries, Selected Years, 1958-78

(kilograms/tonne)

Year

1958 . . . . . . . . . . . . . .

1960 . . . . . . . . . . . . . .

1965 . . . . . . . . . . . . . .

1970 . . . . . . . . . . . . . .

1971 . . . . . . . . . . . . . .

1972 . . . . . . . . . . . . . .

1973 . . . . . . . . . . . . . .

1974 . . . . . . . . . . . . . .

1975 . . . . . . . . . . . . . .

1976 . . . . . . . . . . . . . .

1977 . . . . . . . . . . . . . .

1978 . . . . . . . . . . . . . .

West

Germany France

922 1,023

834 980

672 780

559 629

521 595

487 563

494 558

517 551

497 531

482 —

484 —

486 —

The

NetherItaly lands

750 839

680 787

633 559

524 484

526 475

509 456

518 475

500 465

479 467

— —

— —

— —

Belgium

890

852

658

586

569

559

557

564

545

—

—

—

Luxem- United

bourg Kingdom

1,100 880

1,092 820

860 680

730 610

683 604

645 590

601 576

538 597

525 609

— —

— —

— —

Japan

667

619

507

478

451

442

432

442

443

432

434

429

United

States Canada

780 —

720 —

650 585

636 544

629 495

610 486

599 486

608 484

610 491

592 475

595 451

597 432

Sweden

675

650

555

545

550

540

550

—

—

SOURCES: Statistical Office of the European Community, Iron and Steel Yearbook, 1976, for the six original EEC countries for all years and the United Kingdom for

1973-75; data for United States and Canada, for 1958-70 forward, were calculated from data available in various issues of the Annual Statistical Report of the

American Iron and Steel Institute; for Japan, Japan Iron and Steel Federation, Tekko Tokei Yoran, various issues; Bo Carlsson, “Scale and Performance of

Blast Furnaces in Five Countries—A Study of Best Practice Technology,” Stockholm mimeo, March 1975; Statistiches Bundesamt, West Germany, U.S.

Bureau of Mines

sharply higher costs for ore-processing capital equipment. Increased steel demand and

limited coking capacity encouraged producers during the 1970’s to substitute scrap for

virgin metallics. Following the elimination of

general price controls in 1974, scrap prices

increased rapidly as domestic producers

competed with potential foreign scrap buyers

in a strong worldwide market. 25

During the past decade, the United States

was the only major steel-producing country in

which raw materials price increases exceeded the average increase in total production costs. As a result, it was also the only major producing country where raw materials

costs became a larger proportion, by 5 percentage points between 1969 and 1978, of

total production costs. In other countries,

raw materials became a smaller element of

production costs by 2 to 9 percent (see table

39). It is noteworthy that the materials cost

differential between the United States and Japan widened sharply from 1975 to 1977,

when very large increases in the costs of coking coal and iron ore were recorded.

Capital Investment and

Financing Costs

A number of factors influence steel industry investment decisions; some are quantifiZscouncil on wage arid Price Stability, op. Cit.

able and others more speculative. Market

size and rates of growth; the relative costs of

capital, labor, and fuel; the absolute cost of

capital; and Government taxation and subsidy policies all influence the potential profitability of investment projects. Other factors,

such as attitudes towards risk, time horizons,

and time preferences, also influence investment in less conspicuous ways.

There are considerable differences between the capital-attracting abilities of the

U.S. steel industry and foreign industries. Domestic steel companies rely heavily on internal sources, namely aftertax profits, for investment funds and can only attract outside

capital if they are reasonably profitable. Foreign companies, often with the assistance of

their governments, have easier access to external capital sources.

The U.S. industry’s aftertax profits depend

in part on the depreciation rate the Internal

Revenue Service (IRS) allows on capital expenditures. The faster capital assets can be

depreciated, the greater the deduction from

the gross profits, the lower the tax burden,

and hence the higher the level of aftertax profits. The IRS has, for many years, required

that capital investment in steel be depreciated over 18 or more years, although most

other U.S. industries are allowed to write off

their capital investments much faster, e.g.,
Ch. 4—The Domestic Steel Industry’s Competitiveness Problems 143

plastics in 9 years and aerospace in 7 years.

By comparison, the Canadian steel industry is

able to write off capital investments in 3

years. This puts the U.S. industry at a disadvantage in attracting capital on the basis o f

profitability.

During the 1970’s, real capital spending b y

the U.S. steel industry was 20 percent lower

than during the preceding decade (table 25). *

On a per tonne basis, U.S. capital expenditures also lagged behind that of foreign producers. From 1972 to 1977, domestic steel industry capital spending was, according to industry estimates, about 73 and 79 percent,

respectively, of Japanese and West German

steel industry investment levels (table 43).

Table 43.—Capital Expenditures per Net Tonne of

Raw Steel Production, Five Countries, 1972-77

(dollars)

Country Expenditures

United States. . . . . . . . . . . . . . . . . . . . . . . . . . $19

Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

West Germany. . . . . . . . . . . . . . . . . . . . . . . . . 24

United Kingdom . . . . . . . . . . . . . . . . . . . . . . 35

France (1972-76) . . . . . . . . . . . . . . . . . . . . . . 28

SOURCE International Iron and Steel Institute

The reliance of the U.S. steel industry o n

internal financing does leave it with a lower

financial cost burden than some foreign industries have. As a percentage of total production costs, the U.S. industry’s direct financial costs were about 9 percent during mos t

of the decade. In Europe, they hovered b e -

tween 13 and 17 percent of total production

costs. Japan had a higher financial cost component than any of its international competitors, at 20 percent of total production costs.

It was the only major producing country with

faster rates of increase in financial cost s

than either employment or raw material costs

(see table 38). These higher Japanese financial costs are the result of higher debt-equity

ratios and higher investment levels than are

found elsewhere.

*Required environmental capital expenditures (10 to 16 percent of total U.S. steel industry capital investment during the

past few years) have had a downward effect on the productivity-improving potential of new capital investment. Other major

producing nations have had similar experiences.

Though financial expenditures are generally a low fraction of direct production costs,

the capital expenditures they represent hav e

important effects on improving equipment, labor, and energy productivity. Improved total

productivity plays an important role in determining total steel production costs per tonne

of output. Thus, though financial costs may

directly increase total costs, they may indirectly reduce unit costs, so their influence is

much greater than their share of total production costs would indicate.

Macroeconomic Changes

Two major external factors influence steel

industry production costs considerably—

changes in operating rates and changes in

currency values. Operating rates tend t o

change cyclically, but often currency values

change abruptly. Both are strongly affected

by general economic conditions such as GNP

growth rates and inflation.

Operating Rates.—High operating rates increase the efficiency of steelmaking equipment with respect to raw materials an d

labor, particularly in integrated plants. U.S.

steelmaker have enjoyed higher capacity utilization rates than their international competitors during recent years. During 6 of the past

10 years, U.S. operating rates were mor e

than 85 percent—a high level.

26 Depresse d

operating rates for integrated plants have

been a severe handicap for Japanese and

other foreign producers, whose operatin g

rates have been below U.S. levels for 7 of the

past 10 years. 27

Even at comparable operating rates, domestic producers have one advantage not enjoyed by most foreign producers—that is,

more flexibility in employment levels. European unit labor costs increase significantly

during periods of low demand because of

their industries’ limited ability to lay off

“WSD, op. cit.

“Ibid. For example, in 1977 when the Japanese rate was 69

percent and the U.S. rate 78 percent, U.S. production costs

were 12 percent greater than the Japanese; but in 1978, with

the Japanese rate at 66 percent and the U.S. rate at 86 percent,

U.S. costs were 3 percent less than the Japanese.
144 . Technology and Steel Industry Competitiveness

workers during those times. * The Japanese

steel industry is relying more and more on

contractors. However, the Japanese lifetime

employment system does have an upward effect on unit labor costs at low operating rates

because of the difficulty of laying off workers

during a slowdown.

Currency Values.—Recent dollar devaluations have had a favorable effect on the international competitiveness of the domestic steel

industry. Monetary changes have made most

foreign steel production costs more expensive

*The European disadvantage has been offset somewhat during the past few years because of government transfer payments.

than domestic costs. For instance, during the

past decade, U.S. steelmaking costs increased at a higher rate than Japanese and

West German costs in home currencies, but

at a much lower rate in dollars (table 44).

Table 44.—Production Costs per Tonne of Carbon

Steel Shipped: Percentage Increase 1969-78

Home

Country —— currencies U.S. dollar

United States. . . . . . . . . . . . . . . . . . 133% 133%

Japan . . . . . . . . . . . . . . . . . . . . . . . . 92 229

West Germany. . . . . . . . . . . . . . . . . 72 246

United Kingdom . . . . . . . . . . . . . . 291 214

France . . . . . . . . . . . . . . . . . . . . . . . 160 199

SOURCE World Steel Dynamics, Core Report J 1979

Shifts in Cost Competitiveness

From 1946 to 1959, the international steel

market was dominated by U.S. exports. In the

1960’s, however, several European countries

and Japan became lower cost producers of

steel.

28 Two additional competitive shifts have

taken place since about 1973. The Japanese

have lost some of their cost advantage relative to the United States, * and European producers lost their advantage altogether. Compared to other major steelmaking nations,

U.S. raw material and employment costs per

tonne of steel are somewhat high and capital

costs somewhat low (see table 38).

U.S. steelmaking costs increased by 133

percent between 1969 and 1978, largely as a

result of rapidly rising purchased energ y

costs and wage rates. 29 Japanese steelmaking

costs increased by as much as 230 percent

during this period as a result of dollar-priced

raw materials, devaluations of the U.S. dollar, and the greater impact of rising energy

prices on Japanese producers. Nevertheless,

WSD data show that major Japanese producers have had a cost advantage of about 15

‘“Mueller and Kawahito, op. cit., p. 4.

*only Mueller and Kawahito suggest [hat Japan recently has

been able to increase its cost advantage over the United States

to pre-1973 levels.

‘

qBradford, op. cit., p. 14.

percent over U.S. steel firms for a decade or

more. The Japanese cost advantage de -

creased from about 27 to 12 percent between

1969 and 1977 (see table 38). For the U.S.

steelmaker, 1978 was a unique year: total

production costs were roughly similar to

those in Japan because of the unusually favorable U.S. operating rate compared to Japan. In 1979, U.S. steel production declined

by about 10 percent because of reduced demand for steel plates and structural stee l

products,

30 and by the first quarter of 1979,

Japanese steelmaker again had lower costs.

Although their operating rate was still far below that of the United States, Japanese producers benefited from a weakening of the yen

combined with a lower inflation rate than the

United States.’]

At the present time, the EEC steel industry

is characterized by far greater diversity in

structure and performance than those of Japan and the United States. The West German

industry does well, on average, with respect

to technology and productivity; but newer,

larger, and better located steelworks can be

found in Italy, France, and England. Most of

the individual EEC steel industries have pock-

“

)Bradford, op. cit., p. 6

‘]WSD, op. cit., p. J-l-5.
Ch. 4—The Domestic Steel Industry’s Competitiveness Problems 145

ets of less-than-average efficiency, and these

affect adversely the average performance of

those industries and of the EEC steel industry

as a whole.32 From 1969 to 1972, U.S. production costs were generally 5 to 15 percent

higher than European costs, but the European

advantage evaporated in about 1973-74 because of currency changes, increased labor

costs, and insufficient offsetting improvements in 1abor productivity. From 1972 to

1977, U.S. costs were about 5 to 15 percent

lower than European costs, and they were

about 9 to 22 percent lower during the early

part of 1979. West German steelmaker are

among the most efficient European producers. In 1978, their costs were 1 to 7 percent

‘N!ucller and Kii\\:)hito, op. cit., p. 34.

higher than U.S. costs, while French costs

were 10 to 15 percent higher (see table 38).

On the international market, raw materials, labor, and capital costs only partly determine competitiveness. The costs of exporting,

including transportation costs, warehousing,

sales, and marketing, are also relevant. Japanese steelmaker have made impressive efficiency gains in transportation costs. Nevertheless, ocean freight costs increased during

1978 by as much as 55 percent because of

skyrocketing oil prices. Total export cost for

1979 added about 25 percent to the cost of

Japanese steel products—up by 5 percentage

points from 1978.

I{WSD, report A, p. A-3-8, 1979,

Future Trends in Competitiveness,

Supply-Demand, and Trade

The cost factors that favored domestic producers in the 1970’s, along with changes in

demand and investment activity, will continue to affect future steelmaking costs, but

in uncertain ways. High operating rates

throughout the world are likely by the mid1980’s, and Japan is expected to continue as

the world’s lowest cost producer of steel, The

United States has a potential for the selective

export of high-technology domestic steels, but

its cyclical import dependence may grow in

importance.

Steel Shortages in the Mid-1980’s

There are major problems in forecasting

both future steel demand and future capacity. Rates of economic growth, actual new

plant construction, and capacity utilization

rates are major uncertainties. A low-demandgrowth scenario could create a favorable

U.S. cost position, because fixed-cost obligations affect domestic steelmaker less than

they affect foreign competitors. Rapid demand growth and the associated high operating rates could benefit foreign steelmaker

more than U.S. firms. In the immediate future, from 1980 to 1983, there probably will

be excess steel-producing capacity in most

countries of the world and for the United

States, even assuming improved economic

conditions and the continued closing (rationalization) of older European facilities. But

after 1983, there could be a worldwide shortage of steel products. By shortage is meant a

very close matching of supply to demand in

major areas of the world that causes substantial increases in export prices.

The domestic industry is aware that a

shortage could occur, and that its comparative cost position would be vulnerable in that

case. According to George Stinson, Chairman

of National Steel:

We are not crying wolf, nor are these

scare tactics to gain public or government

support . . . Our analysis concludes that

there is a good possibility that the world will

face a steel shortage beginning in the mid1980’s . . .

The industry view has also been supported by

a majority of steel experts in Government and
146 ● Technology and Steel Industry Competitiveness

financial communities, who have been noting

the steady decline in U.S. capacity as older

plants are closed. * However, some experts

claim that a steel shortage is not likely. David

G. Tarr, senior economist of FTC, for example, states that:

The imminent (steel) shortage has been

predicted by industry spokesmen for at least

five years. Every year or two the onset of the

shortage is pushed back by a year or two.

The projections of shortage are wrong, I

believe. The industry is cyclical, and if a simultaneous worldwide boom occurs there

will be a shortage. But it will be temporary

not secular .34

Most forecasts indicate that by the mid1980’s capacity utilization would have to

*Almost all steel specialists in the financial community see

the possibility of worldwide steel shortages after 1982. See,

e.g., any of the current industry analyses by Peter F. Marcus

from Paine, Webber, Mitchell, and Hutchins, Inc.; Joseph C.

Wyman of Shearson Hayden Stone, inc.: and Father Hogan of

Fordham University.

“Correspondence between David G. Tarr and Bernard L.

Weinstein, Special Study on Economic Change, U.S. Congress,

Joint Economic Committee, July 30,1979.

reach 85 percent to satisfy demand, and this

would represent the production level at

which pricing reflects a shortage condition.

Table 45 summarizes some of the major demand-supply forecasts.

Potential for Exports

If worldwide steel shortages do develop

there may be opportunities for the U.S. producers to export steel. However, this possibility raises a number of issues. The United

States does not possess a clear production

cost advantage in commodity carbon steels;

additional shipping costs also will constrain

successful competition in foreign markets

with commodity carbon steels. Domestic producers may be able to expand their exports of

high-technology steels in which the United

States is clearly cost and technologically competitive. However, several factors are likely

to mitigate against this expansion. Among

these are a lack of international trade experience among many domestic producers,

Table 45.—World Raw Steel Supply-Demand Forecasts, 1980-2000 (millions of tonnes)

Capacity Demand

Source of data Year Western Total Western Total

Chasea . . . . . . . . . . . . . . . . . . . .

Marcus b 

. . . . . . . . . . . . . . . . . . .

Hogan C 

. . . . . . . . . . . . . . . . . . . .

Marcus . . . . . . . . . . . . . . . . . . . .

Ilsld 

. . . . . . . . . . . . . . . . . . . . . . .

IlSl. . . . . . . . . . . . . . . . . . . . . . . .

AISle 

. . . . . . . . . . . . . . . . . . . . . .

Marcus . . . . . . . . . . . . . . . . . . . .

Chase . . . . . . . . . . . . . . . . . . . . .

IlSl. . . . . . . . . . . . . . . . . . . . . . . .

AISI . . . . . . . . . . . . . . . . . . . . . . .

Hogan. . . . . . . . . . . . . . . . . . . . .

Bureau of Minesg

. . . . . . . . . . . .

Chase . . . . . . . . . . . . . . . . . . . . .

Chase . . . . . . . . . . . . . . . . . . . . .

AISI . . . . . . . . . . . . . . . . . . . . . . .

Marcus . . . . . . . . . . . . . . . . . . . .

Bureau of Mines . . . . . . . . . . . .

1977

1977

1977

1979

1979

1980

1980

1983

1985

1985

1985

1985

1985

1986

1990

1990

2000

2000

625

637

—

613

698

715

675

696

—

730

730

794

781

791h

—

aMichael F Elliott-Jones (Chase Econometrics), “Iron and Steel in the 1980’s:

The Crucial Decade,” speech at George Washington University Steel Seminar,

Apr. 19, 1979.

bWorld Steel Dynamics, Apr. 25, 1979.

cW.T. Hogan, "Steel Supply and Demand in the Mid-1980’s, ” Center Lines, May

1979.

dlnternational Iron and Steel Institute, 33 Metal Producing, December 1979, p.

38.

eAmerican Iron and Steel Institute, “Steel at the Crossroads: The American

Steel Industry in the 1980’ s,” 1980: assuming operating rate = 0.85.

fHogan has given the following summary for total world steel demand in 1985:

— 430 —

— — —

815 — —

— — —

— 484 755 — 480 760

926 608 —

— — —

— 588 —

— — —

926 691 —

890 — 900f

— — 840

— 614 —

— — —

1,200 776 —

— — —

— — 1,350

Date of forecast Millions of tonnes

AMAX 3178 919

Citibank 6178 890

Cleveland Cliffs 7/78 920

Metals Society (United Kingdom). 5178 1,015

Stanford Research ., 4179 970

Wharton. . . 10/77 896

9Bureau of Mines, Iron and Steel, MCP-15, 1978

hExtrapolated from 1983 using given growth rate of 1.8 Percent Per Year
Ch. 4—The Domestic Steel Industry’s Competitiveness Problems 147

and tariff and nontariff trade restrictions by

many countries.

There is a growing shift of strategy among

steel companies in industrialized nations,

which may result in a growing cyclical dependence on steel imports. Industrialized nations appear to be aiming at higher average

capacity utilization by scaling capacity to

meet normal steel demand rather than cyclical peak demands and to supply domestic

rather than export demand. Future exports

may emphasize technology rather than steel,

including the export of high-price, technologyintensive steels, rather than commodity carbon steels. The net result of these changes

could be that in future periods of high domestic demand, domestic capacity would be inadequate and the United States would be

more dependent than at present on steel from

LDCs, which have distinct energy and labor

cost advantages,

The role of LDCs in the world steel supply

and demand situation is critical. Their rates

of growth in steel consumption are very high

(figure 15). Depending on their rates of economic growth and of new steel plant construction, their impact on world exports

could be substantial (table 46). Specific LDCs

are likely to develop increasing capability to

export semifinished steel and direct reduced

iron to industrialized nations if these industrialized nations make major capital investments in LDCs. For the United States, energyand iron-ore-rich Latin America presents singular uncertainties.

Future Costs and Productivity*

In home currencies and at high operating

rates, U. S., French, and British steelmaking

costs are expected to increase by about 8 percent, while Japanese and West German costs

may increase by less than 4 percent, from

1980 to 1984. ’5 Depending on operating rates,

Japanese steelmaking costs may be about 14

*Cost projections in this section are based on WSD cost data,

adjusted by 5 to 10 percent for methodological reasons. They

are limited to raw material, labor, and capital costs, and

should be viewed as indicators of trends rather than specific

developments.

I’WSD, op. cit., p. J-l-25

to 17 percent lower, and West German costs

may be 2 to 6 percent higher than domestic

steelmaking costs.

During the mid-1980’s, West German and

especially Japanese steelmaker are expected to continue as leaders in making further improvements in the efficient use of raw

materials, and their costs would then increase at only about half the U.S. rate. Furthermore, materials costs in these countries

are expected to remain a smaller proportion

of total steelmaking costs than those in the

United States. It is expected that by 1985 the

cost to domestic steelmaker of oil and coking

coal will reach world market levels. The combined U.S. unit cost for oil and coal is expected to be $3/tonne higher than in Japan

but about the same as in the EEC. Higher

American unit costs for iron-bearing materials would be approximately offset by lower

electricity costs.36

It appears that U.S. producers did not experience any improvements in labor productivity during 1979 because of increased repair and maintenance requirements caused

by bringing old equipment back into the production stream. As a result of anticipated reductions in the work force, gains in U.S. productivity into the mid-1980’s should be

around 2.5 percent annually. This is higher

than recent domestic labor productivity

growth rates but lower than those expected

for major producers abroad. As a result of

major cost reduction efforts, the largest labor

productivity gains are projected for Europe

[4.5 percent annually), followed by Japan (3.5

percent). Thus, barring major technological

improvements in the United States, Japan will

increase its lead over the domestic industry

in having lower man-hour requirements during the mid-1980’s. Of the major European

producers, only West Germany is likely to approach U.S. labor productivity levels.

It is projected that unit labor cost differences will widen, and by the mid-1980’s

domestic cost levels may be 8 to 10 percent

higher than Japanese unit labor costs. 37 This

“Mueller and Kawahito, op. cit., pp. 29-30.

‘“wSD, 1979.
148 . Technology and Sfeel Industry Competitiveness

Figure 15.—Apparent Steel Consumption Indexes by

Region, 1973”-8

1973 1974 1975 1976 1977 1978

Estimated

Year

NOTE. Eastern-bloc countries include North Korea and China.

SOURCE International Iron and Steel Institute

deterioration in the U.S. unit labor cost position is expected for several reasons, including declining U.S. productivity growth rates

and increasing hourly employment costs. At

the same time, anticipated increases in the

operating rates of Japanese and European

steel producers will increase their labor productivity and restrain upward pressures on

unit employment costs. The U.S. industry, operating at close to full capacity now, has

already exhausted these economies.38

Whereas the U.S. steel industry’s present

capacity is almost the same as it was in 1967,

one-third of steelmaking capacity in the EEC

and two-thirds of that in Japan has been put

in place since that year. Thus, a considerably

larger portion of steelmaking capacity in the

United States will need to be replaced by

1985 or soon thereafter than in Japan or in

the EEC. Maintenance costs can also be expected to be higher in the United States than

in the EEC or Japan because of the difference

in average age of plant and equipment.

Domestic steelmaker are expected to add

a number of continuous casting facilities and

new electric furnaces, thus bringing onstream new and efficient capacity. * In general, the scrap-based producers have modern,

highly automated facilities and use continuous casting extensively. These factors

should enable the scrap-based producers to

cope with rising labor and energy costs more

effectively than can the integrated producers.

39 However, limited scrap availability

could reduce the growth potential of this low-

‘“Mueller and Kawahito, op. cit.. pp. 28-29: Bradford, op. cit.,

p. 16.

*These and other components of modernization are discussed in ch. 10.

‘

(

’Bradford, op. cit., p. 5.

Table 46.—Potential Impact on World Steel Supply by Less Developed Countries (in crude steel equivalents)

Steel capacity Steel production Net Imports

-—— Apparent Degree of

(million (million (percent of (million (percent of consumption self-sufficiency

Year and growth assumption tonnes) tonnes) consumption) tonnes) consumption) (million tonnes) (percent)

1960 1 0 0 8.7 ‘ 4 1 4 ‘12, 3

-

58. 6 21. 0 41. 4

196 5 2 0 0 16.1 50. 2 16.0 49. 8 32.1 50. 2

1970 : : : 28. 0 21, 6 53. 2 19. 0 46, 8 40. 6 53. 2

197 7 58. 0 41 7 6 0 9 26. 8 39.1 68. 5 60. 9

1985 projected at:

30% GNP growth 110-115 92 92 8 8 100 92

4% GNP growth ~ ~ ~ ~ 110-11 5 93 86 15 14 108 86

5% GNP growth . 110-115 95 79 25 21 120 79

6% GNP growth , 110-115 95 73 35 27 130 73

7% GNP growt h 110-115 98 68 47 32 145 68

SOURCE: Central Intelligence Agency. "The Burgeonlng LDC Steel lndustry More Problems for Major Steel Producers 1979
Ch. 4— The Domestic Steel Industry’s Competitiveness Problems ● 149

cost segment of the U.S. steel industry, unless

direct reduced iron becomes available. This

cannot happen before 1983 at the earliest.

Partly as a result of the shift to electric furnace steelmaking, integrated producers are

expected to reduce costs by consuming 15

percent less coke in 1980 than in 1979. ’()

Japanese producers are likely to derive

long-term benefits from their decision to put

most of their investment funds into the construction of modern greenfield plants. These

benefits include low-cost production and stabilizing capital costs in the 1980’s for replacement and pollution control.” Japanese

and to some extent European steel companies

now have sufficient modern infrastructure to

add 9 million to 14 million tonnes of capacity

at a relatively moderate cost. Nevertheless,

Japan is expected to continue its current

strategy of slowing down its steel industry

plant construction program while continuing

to introduce more energy-saving equipment.42

The Japanese steel industry is very dependent on raw material and energy imports

(table 47), which has caused many of the raw

material and energy prices in Japan to be

somewhat higher than in the United States.

The only raw material the U.S. steel industry

imports in substantial amounts is iron ore—

about one-third of iron ore is imported. Nevertheless, unit costs per tonne of steel produced in Japan have been markedly lower

*’Ibi~.. p. 18.

‘

] Mueller and K~wahito, op. cit., pp. 30-31.

“Ibid., pp. 34-35, Moreover, it is predictable that at some

point in the future the Japanese steel industry will face many of

the same difficulties as those currently confronting the U.S.

steel industry. At some future time (probably beyond

1990-2000), Japan will face substantial capital replacement.

These replacement needs will place a considerable burden on

Japanese steel producers, especially because some of the important advantages the Japanese presently enjoy will no longer

be operative.

than those for most plants in the United

States (see table 41). This is a consequence of

the newer facilities and more modern technology in Japan,

During the next several years, Japan is expected to continue as the world’s lowest cost

steel producer. Some developing nations with

lower labor cost and modern plants are now

becoming almost as competitive as the Japanese. Indeed, they now pose a threat to the

Japanese market; this is especially true of

South Korea.

The largest European production cost improvements will result from programs designed to make the industry more efficient.

Apparently West Germany will be most likely

to succeed in cutting back its share of the 27-

million-tonne capacity reduction planned for

Common Market producers. Capacity reduction may be accelerated if foreign governments adopt implementing legislation for the

Multilateral Trade Agreement subsidy code,

which limits governmental aid to ailing producers and boosts payments to terminated

workers. 43

World Steel Trade

The domestic steel industry periodically

states that the U.S. competitive position in

home markets is eroded by the below-cost

pricing of exports by Japan, as well as by European countries.44 However, steel industry

“WSD, 4~putnam, Ha yes and Bartlett, Inc., The Economic ImP~iCfJtions of Foreign Steel Pricing Practices in the U.S. Market,

prepared for American Iron and Steel Institute. Newton,

Mass., 1978.

Table 47.—import Dependence of the Japanese Steel Industry, Selected Years, 1955.78 (percent imported)

Industry 1955 1960 1965 1970 1974 1976 1977

- —.——— —-

Iron ore . . . . . . . . . . . . . . . . . . . ~. . 84.7 92.0–

97.1 99.2 99.4 98.7 98.8

Coking coal. . . . . . . . . . . . . . . . . . . . . 22.0 35.9 55.1 79.2 86.1 88.6 89.7

Iron and steel scrap . . . . . . . . . . . . . 19.5 28.6 15.5 13,4 12.9 4.4 3.9

SOURCE: Japan's Iron and Steel Industry, Tokyo, Kawata Publicity, Inc. 1973 Edition, pp. 249, 250, 1975 Edition, p. 35: and 1978 Edition. p 48 –
150 . Technology and Steel Industry Competitiveness

findings of below-cost pricing have been disputed by many analysts, including FTC.45

There is a consensus that at the present

time most U.S. steel companies are price competitive for comparable steel qualities in the

domestic market. Nevertheless, Japanese

steel producers have been able to secure a

significant share of the U.S. steel market.

Some analysts claim that Japanese steel producers rely on agressive, even countercyclical, export programs to stabilize their highly

leveraged positions. Others correctly dispute

this allegation.46 Some analysts and consumers believe that Japanese steel—made in

more modern plants—is of high quality and is

for this reason more competitive than other

steels in the domestic market. There may

have been times at which some Japanese steel

was sold in the United States at below-cost

prices, but most available data support the

basic cost advantage of the Japanese. Although Japanese producers’ profits may be

small and their financial structure difficult to

comprehend, the dumping of Japanese steel

does not appear to be a valid issue.

As the amount of Japanese imports in the

U.S. market declined in 1978 and early 1979,

EEC and LDC exports to the United States increased. European producers have lost their

cost competitiveness during the past several

years. WSD cost data suggest that many European producers may have been selling in

the American market below cost, because

their costs are higher than U.S. costs but

their prices are equal to or below U.S. prices.

“FTC criticized a major AISI-sponsored study as follows:

“Thus (Putnam, Hayes and Bartlett) have estimated the costs of

making all steel and compared these costs with the price of carbon steel alone. Ignoring special steels in the price series

results in a series bias in favor of finding below-cost pricing.

Since PHB have not removed this bias from their data and

estimates, one cannot conclude from their estimates that

below-cost pricing has occurred. ” (FTC, “Staff Report on the

United States Steel Industry and Its International Rivals:

Trends and Factors Determining Competitiveness, ” 1977, p.

244.)

‘A study undertaken by the Council on Wage and Price Stability, “Prices and Costs in the United States Steel Industry,”

October 1977, states: “We conclude that a major reason for the

success of the Japanese steel industry cannot be found in a

countercyclical dual-pricing approach to domestic and world

markets. Japanese exports have grown at phenomenal rates

during good times and bad for the home economy.” (p. 90).

LDC finished products have also, to some

extent, replaced Japanese steel imports. EEC

countries, exceptionally sensitive to imports,

established a policy in 1977 to cut imports

from developing countries like Mexico, South

Africa, and South Korea. Japan traditionally

has resisted significant imports of steel products. Thus, the United States provides the

most accessible market for steel exports from

all foreign countries. Exports of semifinished

steel and direct reduced iron to the United

States also could become significant in the

future.

The trigger-price mechanism has been the

Government’s method of monitoring unfairly

traded imports. According to the Treasury

Department, the trigger-price mechanism has

achieved its twin objectives of reducing steel

imports and preventing dumping. * It has also

led to price increases. However, the domestic

iron and steel industry and some Government

analysts do not share the Treasury Department’s enthusiasm. The net effect of the system has been 1) to allow the least profitable,

highest cost foreign steelmaker, especially

the Europeans, to obtain higher export prices

and to reduce, but not eliminate, their losses;

and 2) to give the Japanese greater profits. At

the same time, any benefits the United States

realizes from low import prices have been

largely eliminated, because the mechanism

acts to set price levels. For example, during

1978, every tonne of finished steel imported

from Europe that could have been produced

in the United States would have generated a

domestic profit of more than $22/tonne. Instead, European exports to the United States

under the trigger-price mechanism reduced

European losses by $3/tonne.

*For example, steel imports were discussed extensively in

the 2 days of steel talks on Feb. 7 and 8, 1979, which opened

with Treasury Undersecretary Anthony Solomon’s report to

the Senate steel group on improved industry performance since

the inception of the trigger-price mechanism. Import penetration dropped from 20 to 17 percent in the final 8 months of

1978, when the plan was in effect, and in December it dropped

to 14 percent.
Ch. 4—The Domestic Steel Industry’s Competitiveness Problems ● 151

The situation has been summed up by

Roger E. Alcaly, senior economist with the

Council on Wage and Price Stability:

In short, the major impact . . . was on import prices, with most of the gain accruing to

foreign producers, while the effects on the

domestic steel industry were too small to

reverse the long-term trends.47

Over the 2 years of the trigger-price mechanism, carbon steel import prices rose 39 percent, while the domestic producer price index

for steel mill products rose 21 percent. ’8

Because of the industry’s skepticism about

the trigger-price mechanism, it has made a

considerable effort to have the new Multilateral Trade Agreement vigorously enforced,

particularly its provisions against direct export subsidies. The domestic steel industry

also feels that the Government’s handling of

the existing trade laws has been “less than

vigorous’ and that enforcement powers

should be transferred to another Government

agency. * Further, the domestic industry

would like to have the burden of initiating unfair trade practice agreements lifted from in-

~~Amerjcan Metal Market, Dec. Z4, 1979.

~8c. A. Bradford, “steel Industry Quarterly Review,”’ Merrill,

Lynch, Pierce, Fenner & Smith, Inc., February 1980.

*In July 1978 the Treasury Department was stripped of most

of its international trade responsibilities. The Undersecretary

for Trade at the Commerce Department now administers international trade programs such as the trigger-price mechanism.

dustry and handled by the responsible Federal agency.

The steel industry feels that Government

decisions regarding the enforcement of trade

laws should allow for more trade association

and labor union input. Also of importance to

the industry is a new definition of injury to an

industry that would extend and codify the

limits within which dumping can be prohibited. Given active foreign government participation in their steel industries, effective implementation of the subsidy code will also

grow in importance.

The new Multilateral Trade Agreement includes many of the industry’s objectives, but

the details and specifics of the agreement remain to be implemented. Its actual impact on

the domestic iron and steel industry cannot

be precisely determined at this time, A definite possibility exists that selected, high-technology U.S. steels would be more easily exported under a well-enforced Multilateral

Trade Agreement and some domestic alloy/

specialty steel producers might be able to

capitalize on this opportunity. * It is clear,

therefore, that Government policies within

the context of the Multilateral Trade Agreement are of paramount importance to the domestic iron and steel industry, both for preventing unfairly priced imports and for obtaining fair trade in export markets.

*Discussed more fully in ch. 8.
Chapter 5

Past and Future Domestic

Use of Steel
Contents

Page

Summary ● .*..**.,,*,****.,..******.*,* 155

The Importance of Steel . . . ... ...,.....,,.156

Steel Compared to Aluminum, Plastics,

Cement, and Wood, . . . . . . . . . . . . . . . . . . . 156

Comparative Properties of Materials . ......156

Comparative Economic Trends . ...........158

Comparative Innovation Trends. . ..........164

Impacts of Changes in Energy Costs on

Steel and Other Engineering Materials. .. .166

Four Energy Price Scenarios . .............167

Energy Use Factors. . . . . . . . . . . . . , . . . .. ...168

Trends in Domestic Consumption of Steel

and Competing Materials. . .............172

General Trends. , . . . . . . . . . . . . . . . . . . . . .. .172

Domestic Markets. . . . . . . . . . . . . . . . . . .. ...173

Domestic Supply-Demand Forecasts for Steel 179

List of Tables,

Table No. Page

48. Comparison of Material Properties (I):

Stiffness . . . . . . . . . . . . . . . . . . . . .......158

49. Comparison of Material Properties (II):

Strength . . . . . . . . . . . . . . . . . . . . ., .. ...159

50. Comparison of Material Properties (III):

Environmental Behavior. . .............160

51. Equivalent Prices for Engineering

Properties by Material, 1976...........160

52. Equivalent Prices for Engineering

Properties by Material, Year 2000 . . . .. .161

53. Inflation and Parity Pricing of

Engineering Properties by Material,

Year 2000, ., . . . . . . . . . . . . . . . . . .. ....161

54. OTA Data on Future Energy Costs. .. ....167

55. Four Energy Cost-Growth Scenarios .. ...167

56. Energies Used to Calculate Energy Costs

to Produce Domestic and Imported Steel

and Domestically Produced Aluminum, “

Plastics, and Concrete . ...............168

57. Estimated Energy Costs for Shipment of

Materials Involved in the Production of

U.S. Consumed Steel. . . . . . . . . . . . . . ... , 169

Table No.

58. Projected Year 2000 Energy Cost for

Domestic and Imported Steel and for

Domestic Aluminum, Plastics, and

Concrete, Using Four Price Scenarios

59. Production Energies for Reinforced

Concrete . . . . . . . . . . . . . . . . . . . . . . .

60. Steel Shipments by Selected Market,

1967-78 . . . . . . . . . . . . . . . . . . . . . . . .

61. Historical Growth Rates for Steel

Page

.., . 170

..* * 171

*.. . 174

Product Shipments by Markets, Imports,

Exports, and Apparent Consumption,

1951 -77 . . . . . . . . . . . . . . 0.............176

62. Material Consumption in Passenger Cars

as Percentage of Total Weight, 1978-87 .. 176

63. Steel Usage in Passenger Cars and Light

Trucks, 1978, 1985, 2000 . . . . . . . . . . . .. .177

64. Estimated Usage of Iron and Steel

Construction Materials . ..............178 ,

65. Summary of Materials, Energy, and

Labor Used in Comparative Floor Bay

Construction. . . . . . . . . . . . . . . . . . . . . , .. 178

66. U.S. Steel Demand and Capacity,

Comparison of Various Forecasts,

1980-2000 . . . . . . . . . . . . ..............180

List of Figures

Figure No. Page

16. Real Price Trends in Engineering

Materials . . . . . . . . . . . . . . . . . . . . . . . . . . 162

17. Percent Growth in Per Capita

Consumption of Plastics, Aluminum, and

Steel in Selected Countries, 1974-78.....170

18. Trends in U.S. Apparent Consumption of

Steel, 1950-77 . . . . . . . . . . . . . . .........173

19. Trends in U.S. Apparent Consumption of

Aluminum, 1960-77, . . . . . . . . . . . . .. ....173

20. Trends in U.S. Apparent Consumption of

Plastics, 1952-77 . . . . . . . . . . . . . . .......173

21. Effects of Rising Fuel Costs on the

Shipping Costs of Steel Products From

Japan, Europe, and Brazil to Los Angeles

and New York. . . . . . . . . . . . . . . . . . . . . .. 174

-=7
CHAPTER 5

Past and Future Domestic Use of Steel

Summary

Steel is the most important engineering material in American society. There is literally

no aspect of private or public life that is not in

some way dependent on steel. Nevertheless,

steel is taken largely for granted. Steel is not

generally considered to be technology intensive, changing in character, or especially critical for economic or military security, Yet,

steel is all these things. It plays such a pervasive and vital role in all primary manufacturing and construction that it will remain a

strategic material for the Nation. With regard to military security, the strategic role of

steel is increasing. In 1967 President Lyndon

B. Johnson commented that “steel . . . is basic

to our economy and essential to our national

security;

1

that statement is still valid today.

Domestic consumption of steel continues to

increase, although at a slower rate than during the early phases of U.S. industrialization

when there were large increases in per capita income. Although the use of aluminum and

plastics has greatly increased in the past several decades, the per capita consumption of

these materials is only about 60 to 140 lb, respectively, compared to approximately 1,000

lb per capita consumption of steel, Steel competitiveness may improve as a result of future

energy and raw material cost changes, which

will have stronger adverse impacts on aluminum and plastics than on steel.

Although it may appear, according to some

measures, that the use and role of steel are

declining, it must be recognized that for many

applications there are no cost-competitive

performance substitutes for steel. One frequently mentioned exception is the use of

‘Presidential Proclamation 3778, Apr. 8, 1967.

steel in automobiles. Driven by the need to

reduce vehicle weight, automobile manufacturers are reducing the amount of steel used

in each automobile. Steady or decreased demand for steel in this market is likely. To the

extent that foreign automobile companies

produce more of their automobiles in the

United States and use domestic steel, the decline in steel use per car may be partially offset by an increase in the number of cars produced. Some observers believe there will be a

surge in steel demand for capital reconstruction of physical structures such as bridges,

buildings, railroads, and primary manufacturing facilities, as those built during the past

50 years wear out.

Inadequate domestic steel capacity in the

future is a distinct possibility. The modernization and expansion program for the 1979-88

period proposed by the industry, through the

American Iron and Steel Institute (AISI),

assumes a very low rate of increasing domestic demand for steel (1.5 percent per year).

Should that projection be too low, the capacity planned for would be inadequate, and, according to other, higher demand growth forecasts, imports could rise to 20 percent of domestic consumption, or 27 million tonne/yr.

This would be about 50 percent greater than

any previous import tonnage. Without the

modernization and expansion program the industry deems necessary, low domestic capacity might require the import of more than 44

percent of U.S. steel by the end of the 1980’s.

The current overcapacity in the world steel

market is likely to disappear soon and that degree of import dependence could expose the

United States to economic and national security problems not unlike those the Nation has

encountered with petroleum.

155
156 ● Technology and Steel Industry Competitiveness

The Importance of Steel

Steel has generally been considered a basic industry. There is good reason for this.

Virtually every sector of the economy and all

aspects of human activity depend on steel in

some direct or indirect way. When steel is not

used directly, it invariably has been used in

the equipment that made the nonsteel materials being used and that transported them

from original source to final application.

Steel is the backbone of any industrialized

society. From rails, to machines, to girders in

buildings, to beverage containers, to eating

utensils, steel is ubiquitous. Yet, steel is no

longer thought of as a critical material in

society. Overshadowed by high-technology

products and industries, steelmaking is generally taken for granted and considered to be

a simple and unchanging technology.

In fact, steelmaking has undergone great

changes and continues to do so. Steel products have also changed dramatically as new

alloys and coatings for steel have greatly

enlarged its range of properties and applications. Other engineering materials, notably

aluminum and plastics, have given stiff competition to steel, but by and large steel has

Steel Compared to

Cement,

For one material to be used in place of

another, the substitute must perform adequately in a specific application. If it does,

then economic considerations—both cost and

price factors—play an important role in the

competition between the materials. Finally,

trends in technological innovation will influence the materials selection. *

Comparative Properties of Materials

To some extent, a particular steel may

have unique properties that determine its

● More detail on steel innovation is provided in other

chapters, particularly ch. 6.

held its own and remains the most important

engineering material in society.

Steel is particularly important from a national security viewpoint. It is irreplaceable

in military hardware like tanks and guns, but

military needs for steel go far beyond the actual steel in weapons. Like the economy itself,

the military establishment depends totally on

steel for the manufacture and transportation

of all its supplies. The Federal Emergency

Management Agency estimated in 1979 that

in a 3-year non-nuclear war, 26 percent of

steel industry output would be required for

direct military purposes. 2 This assumes that

such an effort would be preceded by mobilization of both military and industrial resources. Another 56 percent of domestic steel

would be needed for essential purposes in

support of the military effort, leaving 18 percent for civilian purposes, The corresponding

estimates in 1969 were 6 percent, 66 percent,

and 28 percent respectively, an indication

that the strategic role of steel has increased

during the past decade.

‘Communication from P. Kruger of the Federal Emergency

Management Agency, Jan. 15, 1980.

Aluminum, Plastics,

and Wood

selection, but more often it competes on the

basis of cost with other materials capable of

satisfying the requirements of the application. The two properties chosen for comparison here are strength and stiffness, but many

other properties may be important in a given

use. Although those properties have the same

units (MPa), they represent quite different

characteristics of a material. Strength represents material’s resistance to breakage

(breaking or tensile strength) or to permanent

deformation (yield strength). Stiffness on the

other hand represents a material’s resistance

to temporary deformation while a load or

stress is being imposed on it—such deforma-
Ch. 5—Past and Future Domestic Use of Steel ● 157

tion as the deflection of a stairtread when

stepped upon or the coiling of a spring. Using

absolute values, steel can have a wide range

of strengths, but all steels have approximately the same stiffness. However, the stiffness

of one class of materials is generally quite different than another class; for example, steels

are about three times as stiff as are aluminum alloys—even though, contrary to the general impression, some aluminum alloys are

stronger than some steels.

The stiffness of material should be appropriate to its design application. For example,

if an automobile were made of some flexible

material, its doors might fit very snugly when

empty but very poorly when loaded with passengers. Most plastics would be unsuitable

for such an application because of their low

stiffness. However, when very low stiffness

plastics are combined with a very stiff material, such as graphite or glass fibers, then the

reinforced plastic may have a composite stiffness as good as or better than steel.

Strength is important in materials applications, either in terms of yield strength (for

ductile material) or breaking strength (for a

brittle material). A ductile material has a

yield strength below its breaking strength. A

brittle material’s yield strength is the same as

its breaking strength, Once the strength is

known, a material can be chosen for an application so that only some fraction of either the

yield or breaking strength is realized in service. When the service condition involves an

applied stress level greater than the design

stress (an overload), then the material may

fail, causing loss of function. Failure may be

permanent (plastic) deformation, such as in a

bent wheel, or actual breakage, such as in

broken glass. The ability to deform prior to

fracture is normally an asset; for example,

some autos are designed to deform rather

than break under low-speed impacts so that

little or no damage occurs to the critical parts

of the auto or to the passenger. The metal deformation absorbs some of the energy of the

impacts.

As a general rule, materials with much

stiffness, such as graphite fibers, are also

brittle. An auto made of graphite would break

into pieces upon overload. When the stiff

graphite fibers are mixed with the more flexible plastics, the composite material is more

likely to stay in one piece on overloading. The

advantage that most metals have is that they

combine reasonable stiffness with reasonable ductility. An auto made of steel will permanently bend when overloaded but usually

will not break into pieces.

The properties of yield strength and stiffness can be given on an absolute and on a

specific basis. The specific strength or specific stiffness shows the “strength-to-weight”

or “stiffness-to-weight” ratio of each material. These ratios provide a means of comparing the size, volume, or mass of materials with

different properties required to perform in an

equivalent manner. For example, a large

piece of a weak material may respond in the

same way to the same load as a smaller piece

of a stronger material.

Tables 48 and 49 present comparisons of

the stiffness and strength, respectively, of

steel, aluminum, cement, plastics, lumber,

and composite materials. Table 50 provides

data on temperature and chemical environment limitations to the use of these materials.

Breakeven price indexes were also calculated for these materials. The indexes indicate the amount paid for alternative materials to steel, on a weight basis, for equivalent

stiffness or strength. At prices below the index prices (determined by multiplying the index by the cost of steel), the alternative materials cost less than steel for equivalent stiffness or strength. Note that this index measures only one cost; comparisons among materials require consideration of a multitude of

factors, including the practical means of obtaining the desired form and shape of the

material.

Table 51 presents actual breakeven stiffness and breakeven strength prices for the

various materials competitive with steel in

1976, and compares these prices with actual

prices. From this limited type of consideration, it is found that certain plastics and cement could be more competitive than steel.
158 ● Technology and Steel Industry Competitiveness

Table 48.—Comparison of Material Properties (l): Stiffness

Elastic Equivalent stiffness (steel = 1.000)

modulus Specific Specific Thickness Breakeven

Material (MPa x 103

) gravity modulus aratiob Weight ratioc

price indexd

Steel . . . . . . . . . . . . . . . . . . . . . .

Aluminum. . . . . . . . . . . . . . . . . .

Plastics

Thermoplasts

6/6 nylon. . . . . . . . . . . . . . . . .

HDPE . . . . . . . . . . . . . . . . . . .

ABS . . . . . . . . . . . . . . . . . . . .

Thermoses

Epoxies. . . . . . . . . . . . . . . . . .

Wood (clearwood)

Softwood

Douglas fir (green). . . . . . . . .

Douglas fir (12% H2O). . . . . .

Hardwood

White oak (green). . . . . . . . . .

White oak (12°\0 H, O). . . . . . .

Composites

Portland Cement concrete

(reinforced). . . . . . . . . . . . . . .

Fiber-reinforced plastics

S-glass/Epoxy (60% fiber,

filament wound). . . . . . . . .

Graphite fiber/Epoxy

Thornel 300 (resinimpregnated strand) . . .

-.

207.0

69.0

2.83

0.83

2.10

6.90

8.14

9.66

10.42

15.73

34.50

31.70

227.50

-.

7.870

2.699

1.100

0.950

1.060

1.100

0.400

0.430

0.640

0.720

2.410

1.990

1.740

aSpecific modulus = modulus •/• specific gravity

b

Thickness ratio = (steel modulus + alternative material’s modulus) one.third

power, derived from deflection of simple cantilever beams

For attainment of a desired stiffness with an alternative material, multiply

thickness of steel by the thickness ratio, e,g., aluminum must be 1 442 times

thicker than steel to provide stiffness equivalent to steel

CWeight ratio = thickness ratio X (specific gravity of alternate material +

specific gravity of steel)

Determines the weight of an alternative material which wiII give stiffness

equivalent to steel, e g , for aluminum need O 495 of the weight of steel

SOURCE: Office of Technology Assessment

Table 52 presents actual breakeven prices

for engineering properties by material in the

year 2000, assuming real rates of inflation in

steel prices of 1, 3, and – 1 percent per year

from 1976 to 2000. The inflation rates (in real

terms) that will lead to parity pricing (for engineering properties of steel) of other materials—given the steel inflation rates assumed

in table 52—are presented in table 53. Only

some plastics and cement could undergo larger cost increases than steel and still remain

competitive for the properties considered.

Comparative Economic Trends

Because the competitiveness of steel is normally related to price, as well as to engineering properties, it is useful to review the past

26.30 1.000 1.000 1.000

25.60 1.442 0.495 2.020

2.57 4.182 0.585 1.709

0.87 6.295 0.760 1.316

1.98 4.619 0.622 1.608

6.27 3.107 0.434 2.304

20.40 2.941 0.149 6.711

22.47 2.778 0.152 6.579

16.28 2.708 0.220 4.545

21.85 2.361 0.216 4.630

14.30 1.817 0.556 1.799

15.93 1.869 0.473 2.114

130.40 0.969 0.214 4.673

dBreakeven price index = reciprocal of the weight ratio

The multiplier of the steel price which is used to calculate the upper Iimit of

how much may be paid for an alternative material to achieve same stiffness as

steel, e.g., if steel costs $0.20/lb then aluminum must sell for $0 404/lb, or less,

to compete with steel strictly on the basis of stiffness, Average 1976 prices

used.

NOTE: S.I. metric units of Mega Pascals (M Pa) may be converted to customary

English units (pounds per square inch, lb/in2

) by the following factor: 1

MPa = 145 lb/in’, e.g., the elastic modulus of steel at 207 x 103 MPa con.

verts to 207,000 MPa x 145 lb/in2

/MPa = 30 x 106 lb/in2.

pricing of steel and its competitor materials.

Figure 16 presents price indexes in real

terms for five engineering materials. From

1956 through 1972, steel prices in real terms

were relatively constant. Cement and aluminum prices in real terms were, in general, declining, but plastic prices were plummeting.

Lumber prices were quite level through the

second half of the 1960’s, after which their

volatility increased. Since 1972, steel has exhibited relatively small price increases,

Capital costs, energy costs, the rate of

technological change, and Federal and State

regulations are all important elements in the

cost of engineering materials, although lumber is to a considerable extent an exception.
Ch. 5—Past and Future Domestic Use of Steel 159

Table 49.—Comparison of Material Properties (II): Strength

— -., . . ., ,, ,-. . . . ---

Tensile Specific Equivalent strength (HSLA steel = 1.000)

strength Specific tensile Thickness Breakeven

(M Pa) gravity strength aratiob Weight ratiocprice indexd

— — Material

Steel (wrought)

Plain carbon (1010) ... . . . . . .

HLSA (970X). . . . . . . . . . . . . . .

Stainless (301) . . . . . . . . . . . .

Aluminum (wrought)

Commercial purity (1060-H18)

Alloy

Single-phase (5052-H38) . . . .

Multiphase (7178-T6). . . . . . .

Plastics

Thermoplastics

6/6 nylon. ., . . . . . . . . . . . . . .

HDPE . . . . . . . . . . . . . . . .

ABS . . . . . . . . . . . . . . . . . . .

Thermoses

Epoxies. . . . . . . . . . . . . .

Wood (clearwood)

Softwood

Douglas fir (green). . . . . . . . .

Douglas fir (12% H2O). . . . .

Hardwood

White oak (green). . . . . . . . . .

White oak (12% H2O). . . . . . .

Composites

Portland Cement concrete

(reinforced). . . . . . . . . . . . . . .

Fiber-reinforced plastics

S-glass/Epoxy (60% fiber,

filament wound). . . . . . . .

Graphite fiber/Epoxy

Thornel 300 . . . . . . . . . . . .

365.44

483.00

1,275.58

131.0

289.59

606.76

81.36

27.58

48.27

68.95

24.82

43.44

31.72

45.51

34.50

877.00

2,654.00

7.870

7.870

7.870

46.43

61.37

162.08

1.150

1.000

0.615

1.150

1.000

0.615

0.870

1.000

1.626

2.699 48.54 1.920 0.659 1.519

1.291

0.892

0.443

0.306

2.258

3.268

2.699

2.699

107.30

224.81

1.100

0.950

1.060

73.96

29.03

45.53

2.437

4.185

3.163

0.341

0.505

0.426

2.936

1.980

2.347

1.100 62.68 2.647 0.370 2.703

0.400

0.430

62.05

101.02

4.411

3.334

0.224

0.182

4.460

5.489

3.151

3.355

0,640

0.720

49.56

63.21

3.902

3.258

0.317

0.298

2.410 14.32 3.742 1.146 0.873

0.742

0.427

0.188

0.094

5.329

10.602

1.990

1.740

440.71

1,521.20

aSpecific tensile strength = tensile strength - specific gravity.

b

Thickness ratio = (HSLA strength – strength of alternative material), one-half

power, as derived from formula for maximum surface stress in a cantilever

beam

For attainment of a desired strength (Ioad.bearing capacity) with a material

other than HSLA steel by the thickness ratio, e g , a 1010 plain carbon steel

must be 1.15 times thicker than HSLA while a 301 stainless steel need be only

0.615 times as thick as the HSLA.

CWeight ratio = thickness ratio X (specific gravity of alternate material +

specific gravity of HSLA)

Determines the weight of a given material which wiII provide the load.

bearing capability of a piece of HSLA steel, e.g., for 7178-76 aluminum only

0.306 kg of that material would be needed to replace 10 kg of HSLA dBreakeven price index = reciprocal of the weight ratio

The multiplier of the HSLA steel price which determines the upper Iimit that

should be paid for an alternate material in order to gain the same load bearing capacity as the HSLA steel, e.g., if HSLA steel costs $0 50/lb then 7178-76

aluminum must cost less than $1.634/lb to be competitive Average 1976

prices used

NOTE S I metric units of Mega Pascals (M Pa) may be converted to customary

English units (pounds per square inch, lb/in2

) by the following factor: 1

M Pa = 145 lb/in2

, e g the elastic modulus of steel at 207 x 103 MPa converts to 207,000 MPa x 145 lb/in2

/MPa = 30 x 106 lb/in2.

SOURCE Off Ice of Technology Assessment

Steel per tonne of iron produced has been dropping

steadily, and promises to continue to do so.

Second, low-grade coal is coming into use for

coking. The Japanese in particular have been

using lower quality coals for coking, the

United States is beginning to explore actively

the use of formcoke technology that will permit the use of abundant low-grade coals, and

the Soviet Union’s development of dry

quenching may also provide a technology for

using lower quality coals. Coal-based direct

reduction (DR) may also become commercialThe steel industry is the Nation’s largest industrial consumer of energy. However, rising

oil prices will affect steel less than they will

most other energy-intensive industries. Most

of the energy used in steelmaking is in the

form of coal in coking operations, and domestic coal is abundant. World prices for coking,

or metallurgical-grade, coal are likely to remain low relative to other energy sources for

several reasons. First, consumption of coke
160 ● Technology and Steel Industry Competitiveness

Table 50.–Comparison of Material Properties (Ill):

Environmental Behavior

Range of

service Resistance

temperature to chemical

Material (

0C )a

environment

Steel (wrought)

Plain carbon (1010) 430 / – 20

HSLA (970X) . . . . . . . . . . . . . . . . . 500c / -50

Stainless (301) . . . . . . . . . . . . . . . 540/ None

Aluminum (wrought)

Commercial purity (1060). . . . . . . 105/ None

Alloy

Single-phase (5052) . . . . . . . . . 105/ None

Multiphase(7178). . . . . . . . . . . 200c

/ None

Plastics

Thermoplastics

6/6 nylon . . . . . . . . . . . . . . . . . . 150 / 20

HDPE. . . . . . . . . . . . . . . . . . . . . 60125

ADS . . . . . . . . . . . . . . . . . . . . . . 100C

/25 C

Thermoses

Epoxies . . . . . . . . . . . . . . . . . . . 180/ N.A.

Wood

Softwood

Douglas fir . . . . . . . . . . . . . . . . 200d

/N.A.

Hardwood

White oak . . . . . . . . . . . . . . . . . 200d

/N.A.

Composites

Portland Cement concrete

(reinforced). . . . . . . . . . . . . . . . 1,170/ None

Fiber-reinforced plastics

S-glass/epoxy . . . . . . . . . . . . . . 100/ N.A.

Graphite fiber/epoxy

Thornel 300 . . . . . . . . . . . . . . 100C

/N.A.

F / P

G / P

VG/VG

VG/VG

VG/VG

G /G

G /E

G /E

G /E

VG/I E

G

e

VGe

F / VGf

F

g

F

g

aService temperature Iimits due to (elevated temperature creep/low temperature brittle failure)

bChemical environment resistance for (acidic/baste) environments; ratlng scale

P = Poor; F = Fair; G = Good; VG = Very good; E = Excellent,

cEstlmated dUpper seervice temperature Iimit for wood defined as ignition temperature

eWood measured in terms of decay resistance

fPoor in contact with alkali cations, reinforcing bar attacked by chlorides

gSusceptible to moisture or ozone or ironlzing radiation damage at fiber.resin

interface; otherwise the acid/base resistance IS as stated for epoxies

SOURCE: Office of Technology Assessment.

ized (see ch. 6). Finally, the recent opening of

Australian mines has made major additions

to world supply of coking coal. Problems with

inadequate domestic coke capacity, discussed in chapter 7, appear to be only of a

short-term nature.

Electric power costs are also important to

steel industry costs. Electric power is increasingly being used to melt scrap and make

steel in electric furnaces, to produce oxygen,

and to operate high-horsepower rolling mills

and other equipment. Thus, the apparent

trend toward closing the gap between industrial and residential power rates in the

United States has important implications for

U.S. steelmaking costs.

Capital costs for steel are very high for integrated greenfield (new plant) capacity, but

increased electric furnace capacity costs a

great deal less than new integrated plants, as

do expansions at existing plants. One way of

obtaining steel capacity is to improve the mill

yield on raw steel. Continuous casting (discussed in ch. 9) is clearly the most important

route to such improvements. Computer control and new high-temperature sensor technology will also improve yields and provide

savings both in raw steel and in labor costs as

well. Future changes in steelmaking are fully

analyzed in chapter 6. In the long term, these

are promising developments that could offer

substantial production and capital cost savings.

Table 51 .—Equivalent Prices for Engineering Properties by Material, 1976 (in cents per pound)

Breakeven stiffness price Breakeven strength price

relative to carbon steel relative to carbon steel

Material Actual 1976 price Hot-rolled sheet Cold-rolled sheet Hot-rolled sheet Cold-rolled sheet

Carbon steel

Hot-rolled sheet. . . . . . . . . . . 13.2¢ N.R. N.R. N.R. N.R.

Cold-rolled sheet. . . . . . . . . . 15.2 N.R. N.R. N.R. N.R.

Aluminum mill product. . . . . . . 65.0 26.7¢ 30.7¢ 23.O¢ 26.5¢

Plastics

HDPE . . . . . . . . . . . . . . . . . . . 28.0 17,4 20.0 30.0 34.6

ABS. . . . . . . . . . . . . . . . . . . . . 46.0 21.2 24.4 35.6 41.0

Portland Cement . . . . . . . . . . . 1.8 23.7 27.3 13.2 15.3

N R. = not relevant.

SOURCE: Office of Technology Assessment
Ch. 5—Past and Future Domestic Use of Steel . 161

Table 52.—Equivalent Prices for Engineering Properties by Material, Year 2000 (in 1976 cents per pound)

Forecast year 2000 prices

Assumed steel Breakeven stiffness price Breakeven strength price

product price relative to carbon steel relative to carbon steel

infIation (per- Actual Forecast year Hot-rolled Cold-rolled Hot-rolled Cold-rolled

cent per year) 1976 price 2000 price sheet sheet sheet sheet

Carbon steel

Hot-rolled sheet. . . . . . . 10/0 13.2¢ 16.8¢ N.R. N.R. N.R. N.R.

Cold-rolled sheet. ., . . . 1 15.2 19.3 N.R. N.R. N.R. N.R.

Aluminum mill product. ., 1 65.0 N.R. 33.9¢ 39.0¢ 29.3¢ 33.7¢

Plastics

HDPE . . . . . . . . . . . . 1 28.0 N.R. 22.1 25.4 38.2 43.9

ABS. . . . . . . . . . . . . . . . 1 46.0 N.R. 27.0 31.0 38.2 52.1

Portland Cement . . . . . . . . 1 1.8 N.R. 21.3 34.7 16.9 19.4

Carbon steel

Hot-rolled sheet. . . . . . . 3 13.2 26.8

Cold-rolled sheet. . . . . . 3 15.2 30.9

Aluminum mill product, . 3 65.0 N.R.

Plastics

HDPE . . . . . . . . . . . . 3 28.0 N.R.

ABS. . . ... . . . . . . . . . 3 46.0 N.R.

Portland Cement . . . . . . . . 3 1.8 N.R.

Carbon steel

Hot-rolled sheet. . . . . . . – 1 13.2 10.4

Cold-rolled sheet. . . . . . – 1 15.2 11.9

Aluminum mill product, . - 1 65.0 N.R.

Plastics

HDPE ., . . . . . . . . . . . . . – 1 28.0 N.R.

ABS. . . . . . . . . . . – 1 46.0 N.R.

Portland Cement . . . . . . . . – 1 1.8 N.R.

N R = not relevant SOURCE: Office of Technology Assessment.

N.R. N.R.

N.R. N.R.

54.1 62.4

35.3 40.7

43.1 49.7

48.2 55.6

N.R. N.R.

N.R. N.R.

21.0 24.0

13.7 15.7

16.7 19.1

18.7 21.4

N.R.

N.R.

46.8

61.0

72.3

26.9

N.R.

N.R.

18.2

23.7

28.1

10.4

N.R.

N.R.

54.0

70.3

83.4

31.0

N.R.

N.R.

20.8

27.1

32.1

11.9

Table 53.—inflation and Parity Pricing of Engineering Properties by Material, Year 2000

(in percent per year or average annual compound growth rate)

Inflation rates for other materials that yield parity pricing with steel in 2000 Assumed steel

product price Stiffness Strength

inflation Hot-rolled Cold-rolled Hot-rolled Cold-rolled

N.R. N.R.

– 2.7% – 2.1 %

– 1.0 -0. 4

– 2.2 -1. 6

10.8 13.1

Material (percent per year) sheet sheet sheet sheet

Carbon steel . . . . . . . . . . . 10/0

Aluminum mill product . . . 1

Plastics

HDPE. . . . . . . . . . . . . . . . . 1

ABS ., . . . . . . . . . . . . . 1

Portland Cement ... . . . . 1

Carbon steel . . . . . . . . . . . . . 3 ’

Aluminum mill product . . . . 3

Plastics

HDPE. . . . . . . . . . . 3

ABS . . . . . . . . . . . . . . . . 3

Portland Cement . . . . . . . . 3

Carbon steel . . . . . . . . . . . – 1

Aluminum mill product . . . . – 1

Plastics

HDPE, . . . . . . . . . . . . . . . . – 1

ABS . . . . . . . . . . . . . . . . . . – 1

Portland Cement . . . . . . . . . – 1

N.R. N.R.

– 0.8 – 0.2

1.0 1.6

-0. 3 0.3

14.7 15.4

N.R. N.R.

– 4.6 – 4.1

– 2.9 – 2.4

– 4.1 3.6

10.2 10.9

N.R. N.R.

–3.3% –2.7%

1.3 1.9

– 0.1 0.5

9.8 10.4

N.R. N.R.

– 1.4 – 0.8

3.3 3.9

1.9 2.5

11.9 12.6

N.R. N.R.

– 5.2 – 4.6

-0. 7 – 0.1

-2. 0 – 1.5

7.6 8.2

N R = not relevant SOURCE Office of Technology Assessment

—
162 “ Technology and Steel Industry Competitiveness

300

250

200

175

150

125

100

75

50

Figure 16.— Real Price Trends in Engineering Materials

1955 1960 1965 1970 1975

Year

SOURCE: Office of Technology Assessment.

Aluminum

Like steel, aluminum suffers from very high

investment costs for new capacity relative to

historical costs. Unlike steel, no major technological alternatives exist or appear likely in

the future for producing primary aluminum.

The aluminum industry is and will continue to

be almost totally dependent on imports of ore

(bauxite) or down-line products. The cheapest

form of additional aluminum capacity will be

increased recycling and growth in the secondary smelting industry.

The most likely source of scrap is the twopiece beverage can. In 1978, of the 1.1 million

tonnes of aluminum sheet that went into cans,

some 270,000 tonnes, or 25 percent, were recycled. The price paid for scrap was onethird of that for ingot. The ceiling on the recycle rate is probably 75 to 80 percent, judging

from the experience of the Adolf Coors Co.,

which requires distributors to recycle cans

and reports recycle rates of 75 percent. A recycle rate of 75 percent in two-piece beverage cans in 1978 would have supplied on the

order of 10 percent of total apparent aluminum consumption.

Electric power costs are at least 20 percent

of the manufacturing costs of aluminum ingot,

and they increased by a factor of three from

1950 to 1977, from 16.6 to 51.3 cent/lb. Although smelters now use considerably less

electric power per pound of aluminum than

formerly (see the section on comparative innovation trends), the rate of change is slow.

A new Alcoa process promises lower power

consumption, but commercialization is at

least a decade away, judging from public pronouncements. About one-third of the primary
Ch. 5—Past and Future Domestic Use of Steel 163

smelting capacity in the United States is

located in the Pacific Northwest and uses

electric power from the Bonneville Power Administration’s hydroelectric plants. Supply

contracts between Bonneville and these

smelters will begin to expire in the early

1980’s. The industry clearly will not be able

to renew the contracts at rates based on hydroelectric generating costs. * At best, the

smelters in the area will pay a weighted average cost of electric power from hydroelectric,

coal, and/or nuclear rates. However, the

rates are structured in such a way that onethird of the aluminum industry’s smelting capacity will suffer a severalfold increase in

the cost per kilowatthour.

A conservative estimate is that these increases alone will double the average cost of

electric power for the entire U.S. aluminum

industry. As a result, aluminum prices are expected to rise very sharply in the future. Indeed, in the past year, prices have already

begun to increase sharply.

Plastics

Capital costs are important in plastics production, but with feedstock prices set by the

alternative-use values for liquid and gaseous

hydrocarbon fuels, plastics prices are very

sensitive to imported oil prices. Technological

change in resin and monomer production is

more rapid for plastics than for more traditional materials and provides some cushion

for these materials. U.S. natural gas pricing

policy will set the prices for the feedstocks of

the most important monomer, ethylene. U.S.

gasoline demand and Government policies on

octane additives will be critically important

to the other major class of derivatives, the

aromatics. It is reasonable to expect that the

prices of the thermoplastics, which have remained relatively stable in the past (for some

types of plastics, i.e., high-density polyethylene and polypropylene), will increase significantly in the future.

*The total price per kilowatthour paid for hydroelectric

power does not even pay for the fuel required to generate a

kilowatthour with coal.

Cement

The cement industry is capital intensive

and new capacity is likely to set prices in

most regions. Although capital costs are an

undeniably strong upward cost pressure on

cement prices, several favorable cost influences are also at work on future prices. After

World War II, cement producers switched

from coal to fuel oil to provide the required

process heat. They are now in the process of

switching back and will benefit from the ability to use high-sulfur coals, which will be a

relatively low-priced and available fuel during the next two decades.

Even though raw materials for cement are

ubiquitous, and their cost is equal only to onsite extraction costs, an even cheaper raw

material may be available. Pollution control

of coal-fired electric power generation produces a cementitious material on which utilities can “make” money by giving it away to

avoid disposal costs. It is unlikely to be free,

but it will no doubt be inexpensive. Not all

grades of cement can be produced from this

material, but it is an important cost factor

nevertheless.

In spite of these factors, cement prices,

which increased less than steel in the last

three decades, are expected to rise, principally because of increasing capital costs.

Lumber

The most important factors in lumber

prices are U.S. Government forestland management strategy and homebuilding trends.

Recent forestland practices have tended to

remove more land from active forest management, reducing the supply of lumber and

pressuring prices upward. These practices

are currently going through a major policy

review. As other factors drive new home

costs up, pressure increases to free more

timber in order to keep building costs down.

Prices have increased in the last two decades by a factor of three for Ponderosa pine

and slightly less for Douglas fir and Southern

pine. They can be expected to increase more

rapidly in the future unless economic condi-
164 . Technology and Steel Industry Competitiveness

tions significantly dampen housing construction.

Comparative Innovation Trends

Opportunities for technological gains may

be found in the way materials are processed,

in the quality of their performance, and in the

forms in which they are marketed. Advances

in material processing can play a major role

in reducing production costs; modification or

better control of the composition, structure,

and properties of materials can make them

easier to form, stronger, more resistant t o

corrosion, and the like; and new methods of

fabrication can open up new markets or widen old ones.

Material Processing

Electric power consumption per pound of

aluminum ingot and coke consumption per

tonne of iron have decreased gradually over

the past decades. Average data like these

reflect a mix of new state-of-the-art plants

and older plants with varying degrees of efficiency. As an industry matures, the rate of

capacity replacement slows and with it the

rate at which technological improvements,

other than those that can be accomplished

through retrofit, can be implemented on an

industrywide basis. This has been a particularly acute problem for domestic steel.

In the post-World War II period the basic

oxygen process effected steel production

economies. By using oxygen and reducing the

time required per heat (batch), the basic oxygen furnace made continuous casting feasible on the scale required for commercial development, The main advantage of continuous

casting is that it improves yield by about 10

percentage points. This improvement in yield

reduces unit energy, capital, labor, and pollution control costs. *

Electric arc furnace capacity can be added

in much smaller increments than can oxygen

furnaces. Their smaller scale and lower capi-

*The adoption of these two major technological changes in

steelmaking is reviewed in ch. 9, and future changes are discussed fully in ch. 6.

tal costs per annual tonne reduce the risk in

building a mill. Rolling mills too have become

more efficient with the installation of multistand continuous mills. The continued evolution of process-control computers, coupled

with better gauge-detection technology, will

improve yields significantly.

In aluminum production, electric power

consumption rates have improved, and there

have been substantial gains in labor productivity in rolling and drawing operations—

about 5.5 percent per year during the last two

decades. Continuous casting has also found

its niche in the aluminum industry, one that is

likely to widen. Scale gains have been impressive: for continuous casters, the production

rate has grown from 1 tonne/hour in 1960, to

1.7 in 1970, to 4 in new units. These gains followed increases in the diameter of casting

rolls and the width of slabs.

The main reason continuous casting has

higher yields than the ingot pouring method

(for both aluminum and steel) is quite simple.

The ends of ingots must be cropped for proper performance in finishing operations; metal

is lost on each end of each ingot. In processing a slab, metal is lost only at the beginning

and the end of a long, continuous strand of

metal. The slab ends are squared off properly

when they are severed from the continuous

strand. Future process innovations are possible for aluminum, but a broader range of major steelmaking changes may be commercialized during the next decade,

For plastics, technological change ha s

been rapid, as is to be expected for a new industry. From the early 1950’s through the

early 1970’s, the real decline in plastic s

prices was substantial. Lower prices wer e

the result of several factors:

●

●

●

product standardization made it muc h

easier for new producers to enter the

market, which widened competition;

accumulated experience lowered th e

manufacturing costs in a dramatic way:

a n d

market growth permitted plant-scal e

economies that brought substantial sav-
Ch. 5—Past and Future Domestic Use of Steel ● 165

ings in capital costs per annual pound of

product.

The final two factors are technological in

nature, but market growth and size were essential to both. The experience curve is a

well-documented phenomenon repeated in industry after industry. Mathematically, value

added in real terms for a particular product

or group of products is stated as a function of

cumulative experience; the relationship i s

usually stated in terms of the percent decline

in real value added for each doubling of production. Typical for average industries are

experience curves of 15 to 20 percent; petrochemicals, in particular the commodity thermoplastics, have achieved declines in real

value added of 20 to 30 percent, with some

monomers and polymers boasting gains over

decade-long periods of 40 to 50 percent.

Scale gains are particularly important in

plastics production, Sharing of infrastructure

is an important element in these gains. In

some industries, rules of thumb have been

worked out to estimate the relationship of

scale to total capital costs, The capital cost of

a plant double the size of another plant will

be only about 1.5 times the capital cost of the

smaller plant. Each pound of product from

the larger plant will therefore have to bear

only three-fourths of the capital costs—profit, interest, and depreciation—carried by the

product from the smaller plant.

Probably the most significant future process innovation for plastics will be the use of

nonpetroleum feedstocks. Although this can

remove a dependency problem, it may not

lead to actual cost savings for quite some

time.

For lumber, the most important technological gains have come in land management

practices and the development of faste r

growing species, In the cement industry, the

regional nature of markets limits the scale of

plants, and no great scale economies ar e

available, anyway. The development of suspension preheating has lowered costs, and

flash calcining is expected in the coming decades, but no major technological changes that

profoundly affect costs are likely for cement,

Materials Performance

Technological innovations in production

techniques or in alloys and additives that

modify material properties can have major

market impacts by influencing the choice of

material and by changing the amount of material required for a particular application.

In steel, perhaps the most talked about new

material is high-strength low-alloy steel,

which is not really new. The use of these

steels in automobiles to reduce weight offsets

part of the decline in steel use per vehicle in

the United States. Their effect on total steel

demand is important in this one market alone.

The ever-increasing awareness of the massive cost of corrosion has major implications

for national materials policy. One steel industry response to this problem was the development of one-sided galvanized steel. Galvanized steel has been available for years,

but only with the costly coating on both sides.

Galvanizing only one side has lowered the

cost of corrosion resistance. (This is discussed more fully in ch. 9.) More new steels

are on the horizon. Dual-phase steels, which

are strengthened as they are formed, offer

users a material easier to form than other

steels but just as strong when finished. This

product, which is just coming onto the market, might account for significant tonnages of

steel in the coming decades. Another major

steel product innovation just evolving from

much basic research is amorphous or glassy

(noncrystalline) steels. They may offer a host

of new properties, but major commercial use

is probably several decades off.

In aluminum, one of the most interesting

lines of development is the search for an alloy

usable for both body and end stock. The effort

would have the major benefit of enabling aluminum cans to be recycled into high-value

aluminum can sheet. This would not only

lower the cost of can sheet, it could also raise

the price for used aluminum cans, thereby increasing the recycle rate. This could have a

very positive effect on U.S. aluminum supply.

In the early years of its commercial use, a

major problem in using polyvinyl chloride
166 . Technology and Steel Industry Competitiveness

(PVC) for residential siding was the heat expansion of extruded PVC. Because of this

problem, only light colors of siding could be

produced. Now, recently introduced additives

permit the use of a broad range of colors,

which greatly enhances the marketability of

PVC siding.

A particularly attractive market to highdensity polyethylene producers is the 55-gal

drum market, now held primarily by steel.

One method of producing plastic drums is rotational casting. This process has very low

tooling costs and is appropriate for short production runs of specially designed containers.

To be able to take advantage of this competitive edge, though, a more expensive grade of

cross-linked polymer is required. Plastics

processors believe that in time they may

learn enough about rotational casting to use

the regular grade of polymer, which is considerably less expensive than that now used.

An enormous number of examples of plastics innovation could be cited. Two particularly important ones for high-strength applications are fiber reinforcements and fabrication techniques, like reaction injection molding with faster curing times. These developments prove that gains in technology will be

the result of progress both in material properties and in fabricating practices.

Fabrication of End-Use Products

Innovations in this area affect materials

demand through materials substitution and

through changes in material consumption per

product. Metal cans are an example of how

new forms affected the choice of materials.

Before the advent of the two-piece aluminum

can for beverage packaging, the three-piece,

tin-plated steel can held that segment of the

market. When the aluminum can hit the market, the use of metal cans for beverage packaging grew, and aluminum took most of that

growth and some of the existing market away

from steel. But steel producers began to experiment. They produced a steel two-piece

can, but they could not match the operating

efficiencies achieved in aluminum can production. The difference is now minimal, and

steel is making a comeback in the beverage

can market. The steel two-piece can is first

replacing the steel three-piece can, then aluminum. Most can plants now include several

lines for aluminum cans and several lines for

steel. This dual tooling approach is being

adopted in other industries as well; some auto

plants have tools designed to work with either

steel or aluminum.

The auto industry offers the most conspicuous example of how fabrication affects materials demand, but there are many others. For

example, until recently the standard 55-gal

drum sported sides of 20-gauge steel and a

top of 18-gauge steel. By making both the top

and bottom out of X)-gauge steel, producers

saved 4 lb of steel per drum (thickness decreases as gauge rating increases), Although

impact of that change on total steel demand is

relatively minor, the cumulative effect of all

such changes is quite substantial, and they

play an important, if unquantified, role in the

decline in per capita consumption of steel in

developed economies.

Impacts of Changes in Energy Costs on Steel and

Other Engineering Materials

OTA has estimated the effects of some pro- gy costs have been estimated and added in for

jected fuel price changes on the costs of pro- imported steel. In addition, the energy costs

ducing steel in: 1) U.S. integrated plants, 2) involved in the domestic production of alumiU.S. nonintegrated plants, and 3) plants in Ja- num, engineering plastics, and reinforced

pan, Europe, and Brazil. Transportation ener- concrete are compared with the energy costs
Ch. 5—Past and Future Domestic Use of Steel 167

of domestically produced steel. In all cases,

technology was assumed not to change and

all electrical energy is user plantsite energy.

Four Energy Price Scenarios

Many possible combinations of high and

low price-growth rates for five fuels are

listed in table 54. From these combinations,

four scenarios were selected for comparison

of future energy costs; these are shown in

table 55.

These scenarios appear to be logica l

choices to show relative changes in energy

costs in 2000. Scenario A reflects a scarcity

of natural gas, which results in a substantially higher price-growth rate for it than for

other fuels. Scenarios B and C reflect a scarcity of both natural gas and oil, but in scenario B, electricity prices are independent of

oil and natural gas, implying coal and nuclear

generation of power. Scenario C has a high

electric price-growth rate too, which could

result from the high capital costs of constructing nuclear and environmentally ac -

ceptable coal-burning powerplants. Scenario

D reflects a shortage of coking coal.

Other possibilities were not selected for a

variety of reasons. In a situation where coal

and coke have high price-growth rates, the

other rates would be high also, so there would

be no relative change in prices among the

various fuels. A price scenario with a low

price-growth rate for steam coal, but high

rates for coke and electricity, would closely

approximate an all-high growth-rate scenario

because little steam coal is used directly t o

produce engineering materials.

Table 54.—0TA Data on Future Energy Costs (in 1976 dollars)

— ——— ———— — — -— —

3rdAnnual cost quarter

growth rates 1976 1980 1985 —————— 

1990 2000 .—.—— — actual

Energy source Low High Item Base Low High Low High Low High Low High 1979a

Electricity 10/ 0 4.7% ¢/kWh 1.9 2.0 2. 3

-– 2 . 1 2.9 2.2 3.6 2.4 5.7 2.37

$/MBt u 5.57 5.86 6.74 6.15 8.50 6.44 10.55 7.03 16.70 6.94

Natural gas 4% 5% $/103 ft3

1.31 1.53 1.59 1.86 2.03 2.26 2.59 3.35 4.22 1.81

$/MBtu 1.27 1.48 1.54 1.80 1.96 2.19 2.51 3.24 4,09 1.76

Oil . . . . . . . . 1 ,70/o 4.80/. @US gal 28.6 30.5 34.4 33.2 43.6 36.2 55.1 42.8 88.1 35.7

$/MBtu 1.66 1.77 2.00 1.93 2.53 2.10 3.19 2.48 5.11 2.07

Steam coal. . . 1 % 5% $/tonne 32.6 33.9 39.6 35.6 50.5 37.4 64.5 41.4 105.0 36.0

$/MBt u 1.31 1.36 1.59 1.43 2.03 1.50 2.59 1.66 4,22 1.45

Coke. . . . . . . . 1 % 5% $/tonne 74.3 77.3 90.3 81.2 115.2 85.4 147.0 94.3 239.5 82.05

$/MBtu 2.60 2.70 3.16 2.84 4.03 2.98 5.14 3.30 8.38 2.87

aFrom Energy Information Agency, monthly energy report for all Industry, January 1980. Steel Industry costs for natural gas and electricity are Iikely somewhat less than

average prices paid by al I domestic Industry

NOTE The original projections were made in early 1979 before very large Increases in 011 prices occurred The actual 1979 third.quarter data show that 011 prices have

risen much faster than originally anticipated but the results of the analysis are not affected qualitatively

SOURCE Off Ice of Technology Assessment

Table 55.—Four Energy Cost-Growth Scenarios (percent annual increase)

Scenario

A: B: c: D:

all low low rate only all high high rate only

Energy source growth rates for electricity growth rates for coke

Electricity. . . . . . . 1 .OO

/O 1 .OO/O 4.70/0 1 .OO

/O

Natural gas. . . . . . 4.0 5.0 5.0 4.0

Oil . . . . . . . . . . . . . 1.7 4.8 4.8 1.7

Steam coal . . . . . . 1.0 5.0 5.0 1.0

Coke . . . . . . . . . . . 1.0 5.0 5.0 5.0

SOURCE Off Ice of Technology Assessment
168 ● Technology and Steel Industry Competitiveness

Energy Use Factors

Energy Used to Produce Domestic and

Imported Steel

The quantities of the various energies used

to produce steel are shown in table 56. The

U.S. integrated plant assumed here is a large

multimillion-tonne-per-year type. Energy data

for a nonintegrated, scrap/electric arc furnace plant were obtained by adding finishing

energies to the energy needed to produce liquid steel. The nonintegrated plant is assumed

to produce 0,9 million tonne/yr.

All the foreign data were taken in aggregate form. The European data listed in table

56 represent an average for the United Kingdom, France, and West Germany. Data from

Brazil are incomplete: no natural gas data

were available; it is not certain whether the

electricity is total or purchased; and the value per tonne of steel of the biomass energy

that Brazil uses was unavailable. The United

States, Japan, Europe, and Brazil all have different production yields, mostly because each

country has a different product mix and various adoption rates of continuous casting.

Therefore, all energy values have been norTable 56.—Energies Used to Calculate Energy Costs to Produce Domestic and Imported Steel

and Domestically Produced Aluminum, Plastics, and Concretea

Steel Other engineering materials (U. S.)

United Statesb Aluminum Plastics d Concrete

Non integrated (polyEnergy source Integrated (scrap/EAF) Japan EuropeC

Brazil (ingots) ethylene) (reinforced)

Electricity (106

Btu/tonne) (buss bar) . 1.61 4.05 1.93 1.82 3.02e

64.1 N/A 0.274

Natural gas (106

Btu/tonne) . . . . . . . . . . 6.43 5.53 — 3.24 N/A 12.98 N/A 1.11

Oil (106 Btu/tonne). . . . . . 3.46 2.55 4.79 6.03 6.69 40.3 95.5 0.466

Coal (106 Btu/tonne) . . . . 1.01 — — N/A — 0.57 N/A 0.476

Cokef (106 Btu/tonne) . . . 19.16 0 15.62 18.36 11.1 9 14.04 N/A 1.386

aEnergy per tonne of steel shipped IS for common 70% yield from Iiquid steel eWhether this IS total or purchased electricity is unknown

bFrom World Steel Dynamics

cAverage of United Kingdom, West Germany, and France

dBased on yield of oil feedstock to produce polyethylene processing energy

not available

realized to a common yield of 0.64 tonne

shipped per tome produced. A common yield

statement corresponds somewhat to a common shipped product, such as cold-rolled

sheet.

Transportation Costs to Ship Steel to

the United States

The transportation costs of shipping steel

from Japan, Europe, and Brazil were estimated from daily operating costs reported by

Gilman.

3 Gilman’s data include daily fuel,

capital, labor, and maintenance costs at sea

and in port for various freighters. He also

provides freight dock-handling charges for

Japan, England, the Third World, and the

United States. Using Gilman’s data, it is esti-

‘S, Gilman, J~urnrd of Transport Economics and Policy, VO1.11,

No. 1 (1977).

fDoes not include energy to make coke

gBrazil uses fair amount of biomass, amount unknown

SOURCE Off Ice of Technology Assessment

mated that fuel costs in 1976 dollars are

about $0.64/tonne/1,000 statute miles. Fixed

costs, which include maintenance, depreciation, and crew, are about $2.12/tonne/l,000

statute miles. All fuel for transportation was

assumed to be oil.

Table 57 shows the average shipping distance and oil cost to ship steel products and

various steelmaking materials to the United

States. The distances from Japan, Europe,

and Brazil are an average for shipping to the

U.S. east coast and west coast. Shipping costs

for ore were also considered. For Japan, the

distance used is the average of South America to Japan, and Australia to Japan. A factor

of 1.45 tomes of ore per tonne of steel

shipped was used. One-half of Europe’s ore is

assumed to be imported from a shipping distance that is the average for South Africa and
Ch. 5—Past and Future Domestic Use of Steel ● 169

Table 57.—Estimated Energy Costs for Shipment of Materials Involved in the Production

of U.S. Consumed Steela (per tonne of steel delivered)

.——

Production country

U.S. integrated Japan Europe Brazil

Distance ‘Distance Distance Distance

Item of shipment (1,000 miles) Cost ($) (1,000 miles) Cost ($) (1,000 miles) Cost ($) (1,000 miles) Cost ($)

Product to United

States b

. . . . . . . . . . . . . — 9.5

Ore to production sitec. . 1.0 $1-00 14.0

Coking coal to

production site . . . . — — 6.0

Oil to production site . . . 0 0 12.0

Total costs. . . . . . . $1.00

aIn 1976 dolIars

bAverage distance used from production site to east and west coasts of the

United States Estimated shipping cost was $0.58/tonne/1,000 mile

SOURCE Off Ice of Technology Assessment

South America to Europe. The shipping distance for the United States is for Great Lakes

shipping. Japan’s coking coal is assumed to be

imported from Canada and Australia, and

her oil from the Middle East. Domestic supplies or relatively short shipping distances

were assumed for the rest of the fuels. An

estimate of the total shipping costs was made

for dock-to-dock imported steel product. An

in-port rate of $0.73/tonne/d is used for an

assumed total in-port time of 9 days. Freighthandling charges per tonne of steel are estimated from Gilman at $0.73, $1.82, and $1.21

between the United States and Europe, Japan,

and Brazil, respectively.

Figure 17 shows the effect of rising fuel

costs on the cost of shipping steel both to Los

Angeles and to New York City. Two fuel cost

curves are shown for each port-of-entry city

in accordance with a 1.7- and 4,8-percent annual increase in fuel oil prices. The relative

shipping distances are readily apparent in

the shipping rates, with Japan to New York

City being the longest and Europe to New

York City, the shortest. These costs compare

favorably with U.S. Federal Trade Commission (FTC)-reported shipping costs from Japan

to New York City of $48/tonne.’ However,

estimated shipping rates of $33 to $40/tonne

from South America appear to be slightly

‘U.S. Federal Trade Commission, “rrhe U.S. Steel Industry

and Its International Rivals, ” November 1977.

$ 5.04 6.8 $3.58 8.0 $4.12

11.80 4,8 2.00d

o 0

2.75 0 0 — —

1.00 0 0 — — —

$20.59 $5.58 $4.12

‘CLast figure includes correction for amount of item per tonne steel shipped

dAssume one half of European ore iS Imported

lower than FTC values. Fuel costs appear to

be relatively a small fraction of the total shipping costs of imported steel, from 10 to 15

percent of the totals in 1976 for the six shipping routes shown. Depreciation is the highest single cost, ranging from 45 to 50 percent.

Freight handling is about 20 percent of the

total cost.

The import (or export) of iron ore has lower

dock-to-dock shipping rates because of automated loading and unloading equipment.

With reduced in-port time and handling costs,

the fuel cost of shipping ore becomes a larger

fraction of the total shipping costs than it is

for finished steel products.

Energy Used to Produce Aluminum,

Plastics, and Concrete

Table 58 shows the energies needed in the

domestic production of aluminum, plastics,

and reinforced concrete. The aluminum data

are for ingot production. The production of

aluminum alloys from ingots requires an additional 25 percent of energy of unknown type

for milling and heat treating; these processes

mostly use electrical and oil-based energies,

and additional use of electrical and oil energies will have little influence on the comparisons among materials.

Industrywide energy consumption data for

plastics production is difficult to find because
—

170 ● Technology and Steel Industry Competitiveness

Figure 17.— Percent Growth in Per Capita Consumption of Plastics, Aluminum,

and Steel in Selected Countries, 1974-78

Percent

180

160

140

120

100

80

60

United States

Plastics

Austria

Switzerland

West

Germany

Italy

Japan

Sweden

Spain

Britain

France

Norway

1974 1978

SOURCE: Economist Intelligence Unit.

1975 1978 1974 1978

Year

Table 58.—Projected Year 2000 Energy Cost for Domestic and Imported Steel and for Domestic Aluminum,

Plastics, and Concrete, Using Four Price Scenarios (in 1976 dollars per tonne)

—

Scenario A Scenario B Scenario C Scenario D

Item 1976 cost

Steel; U.S. integrated

(BF-BOF). . . . . . . . . . . . .

Steel; U.S. non integrated

(scrap-EAF) . .

Steel; Japan . . . . . . . . . . . .

Steel; Europe. . . . . . . . . . .

Steel; Brazil . . . . . . . . . . . .

Aluminum (ingot). . . .

Plastic (polyethylene) . .

Reinforced concrete. . . . .

$ 74.7

33.7

79.9

77.6

60.9

506.0

168.0

8.4

Low: all

Total

energy

growth

2000 cost ratea

$107.0 1 .5%

54.5 2.0

108.0 1.3

107.0 1.3

80.8 1.2

682.0 1.2

252.0 1.7

12.9 1.8

High: gas, oil

Total

energy

growth

2000 cost rate

$120.0 2.00/0

65.9 2.8

123.0 1.8

135.0 2.3

104,9 2.3

806.0 2.0

518.0 4.8

15.5 2.6

High: gas,

oil, electricity

Total

energy

growth

2000 cost rate

$ 135.0 2.5%

104.0 4.8

142.0 2.4

152.0 2.8

134.0 3.3

1,470.0 4.5

518.0 4.8

18.1 3.2

High: coke

Total

energy

growth

2000 cost rate —

$204.0 4.3%

54.5 2.0

187.0 3.6

200.0 4.0

137.0 3.4

758.0 1.7

152,0 1.7

20.4 3.8

aGrowth rates are average annual growth rates for 19762000

SOURCE Office of Technology Assessment
of the multiproduct integration, the variety of

production processes, and the product mix

that characterize the petrochemical industry.

The most common engineering plastic is nylon, and the most common reinforced structural plastic is thermosetting polyester. The

starting monomer for polyester is p-xylene.

Overall, the most used polymer is polyethylene, with ethylene as the monomer. Over

the past few years, the cost of benzene, pxylene, and ethylene has been steadily rising.

Because these monomers are byproducts of

crude oil refineries, their prices for the most

part are controlled by crude oil prices. The

limited data found for polyethylene production was used for purposes of comparison

with other materials, even though bulk polyethylene is only about 40 cent/lb and bulk engineering polymers are generally twice as expensive. The yield of ethylene from oil was determined from published data for the C. E.

Lummus process, which produces half of the

world’s ethylene. No statement could be

found for other process production energies.

The yield of polyethylene from ethylene is

essentially 100 percent on a weight basis. The

amount of electrical energy used in polymerization is minimal compared to the energy content of the polymer. The assumption can be

made that no coal or coke is used in plastic

production.

The energies required to make reinforced

concrete were determined by using a typical

composition of a structural concrete found in

the Concrete Construction Handbook. Table

59 presents this composition and the relative

amounts of each energy used to produce each

component. The largest single energy item in

concrete is the coke required to produce the

steel reinforcing rods.

Projected Energy Costs

The energies listed in table 56 and energy

costs in tables 54 and 57 were used to estimate total energy costs in 2000 according to

the four price scenarios. Table 58 presents

these estimates and also lists effective annual

energy cost-growth rates.

In the steel projections, the deficiencies in

the Brazilian data make it difficult to compare the Brazilian results with those for the

United States, Japan, and Europe. All four

price scenarios show little relative change in

energy costs in 2000 for Japan, Europe, and

the United States (integrated plant). In price

scenarios with high oil price-growth rates (B

and C), European and Japanese energy costs

are the highest of any in 2000 because of

added shipping costs. Japan’s high coke efficiency is reflected in scenario D with an energy cost saving of about $16/tonne by 2000. Because the reductant energy for iron ore is not

included in the U.S. nonintegrated (scrap/

electric furnace) plant data, those energy

costs are substantially lower than the other

estimates.

Table 59.—Production Energies for Reinforced Concrete

——

Volume “ Weight – Electricit y

Item percent percent (buss bar) Natural gas Oil Coal Coke Total energy ——

Steel (rod) . . . 2.9% 90/o 0.195 0.619 0.283 0.098 1.386 2.58

Cement ... . . . 12.0 15 0.066 0.487 0.183 0.378 0 1.11

Water. . . . . . . 16.8 7 — — — — — —

Gravel . . . . . . . . . . 43.8 45 0.010 0 0 0 0 0.01

Sand . . . 23.5 24 0.003 0 0 0 0 0.003

Air . . . . . . . . . . . . . 1.0 0 — — — — — —

Totals ... . . 100.0 100 0.274 1.106 0.466 0.476 1.386 3.70

Percent . . . . . . . 7.4 30 13 13 37 100.4

———— . — .——-———— —— —

SOURCE Off Ice of Technology Assessment.

—
172 ● Technology and Steel Industry Competitiveness

Comparing absolute energy cost values for

steel, aluminum, plastics, and concrete is

much more risky than comparing values within the steel industry. Because of the wide

variety of common applications for these engineering materials, the amounts of energy

and material required to manufacture a specific product can vary immensely from material to material. As a result, the price per unit

of weight or volume is not as significant as the

rate of energy cost increases. Using scenario

A, there is little difference in relative energy

costs between 1976 and 2000. The annual energy cost-growth rates vary between 1.2 percent for aluminum and 2.0 percent for steel

from a nonintegrated plant. Plastic (polyethylene) is clearly at an economic disadvantage in

the high oil cost-growth rate scenarios, as is

steel from an integrated blast furnace plant

in the high coke rate scenario. Because the

most energy-intensive component of reinforced concrete is steel rod, the cost-growth

rates for concrete parallel the cost rates of

steel. Scenario C is probably a good estimate

of how aluminum is likely to lose competitiveness relative to steel made in integrated

plants.

Conclusion

When a static technology for engineering

materials is assumed, U.S.-produced steel

will have the most energy cost advantage

over imported steel if the prices of oil and

natural gas increase worldwide at a higher

rate than those of coal or coke (scenarios B

and C). Steel will have the most energy cost

advantage over aluminum and plastics if the

prices of electricity, gas, and oil increase at a

greater rate than coal and coke. Conversely,

the worst situation for U.S. (integrated) steel

will be if the price of coke is high, relative to

all other energies (scenario D). This could be

the situation if domestic coke capacity continues to decline and imports increase (see

ch. 7).

Trends in Domestic Consumption of Steel

and Competing Materials

General Trends

All sectors of the economy use steel and

will continue to do so in the future. Further,

because of technological developments in the

production of alloy and specialty steels, applications of these products are increasing.

Nevertheless, as shown in figure 18, steel

consumption in some industrialized countries

is declining relative to consumption of aluminum and plastics. In large measure, the effort

to reduce automobile weights and, in some

cases, lower prices for other materials are

behind the deceleration in steel consumption.

Trends in per capita steel consumption in

the United States (figure 19) show a very

slight increase from 0.420 to 0.450 tonnes between 1950 and 1977. Measured in terms of

tonnes consumed per $1,000 of real gross national product (GNP) (figure 19), however,

steel consumption has declined slightly from

0.120 to about 0.074 tonnes per $1,000 of real

GNP between 1950 and 1977. Comparable

data for aluminum and plastics consumption

are shown in figures 20 and 21. In absolute

terms, the growth rate of steel consumption

during the last several decades in the United

States has averaged about 2 percent per year

as compared to 6 percent for aluminum and 8

percent for plastics.

This slow-growth trend in steel consumption will probably continue. A recent, conservative analysis projects a growth rate of

about 1.6 percent per year from 1977 to

20 0 0.

5 (Future supply-demand forecasts are

considered in detail in the next section. ) It is

‘Robert K. Sharkey, et al., “Long-Term Trends in U.S. Steel

Consumption: Implications for Domestic Capacity,” Industrial

Economics Review, U.S. Department of Commerce, vol. I, May

1979, pp. 11-24.
Ch. 5—Past and Future Domestic Use of Steel ● 173

Figure 18.—Trends in U.S. Apparent Consumption of

Steel, 1950-77

.60 r A

1

I

1972$

1950 1955 1960 1965 1970 19751977

Year

Aluminum, 1960-77

70 ~

Per $1,000 of

real GNP in

1972$

1960 1965 1970 1977

Year

200

100

50

40

30

20

expected that plastics will continue to capture some steel markets in the future, but aluminum could lose competitiveness in some

markets. However, neither material, nor any

other, can to a significant degree replace

steel as the principal engineering material in

any of the major steel-using sectors of the

economy, and the demand for steel iS likely tO

increase over time (see the next section).

Domestic Markets

The “service centers and distributors, ”

which serve a multitude of users, are the

largest market for steel. The next largest is

the automobile industry, which consumed

21.7 percent of domestic steel shipments in

1978, and then building construction, which

consumed 13.7 percent. Other important

markets for steel mill products are equipment

and machinery manufacturers, with 10.9 percent of total shipments in 1978, and container

and packaging manufacturers, with 6.7 percent (see table 60). It is generally accepted

that about 60 percent of steel consumption is

related to capital expenditures.
174 ● Technology and Steel Industry Competitiveness

Figure 21 .—Effects of Rising Fuel Costs on the Shippinq Costs of Steel Products From Japan, Europe, and

Brazil to Los Angeles and New York

Annual

growth /

50 —

rate

0

Japan to New York City —

Japan to Los Angeles ---

10 —

0 I I I 1

10 -

0 . 1 1 [ 1

’75 ’80 ’85 ’90 ’95 2000 ’75 ’80 ’85 ’90 ’95 2000 ’75 ’80 ’85 ’90 ’95 2000

Year Year Year

NOTE. Due to the actual Increases in petroleum prices m 1979, shipping costs are shifted along the same axis to the right

SOURCE Off Ice of Technology Assessment

Table 60.—Steel Shipments by Selected Market, 1967-78 (in thousands of tonnes)

Total

Steel service shipcenters Automotive Construction Containers Machinery Rails ments

Tonnes Percent Tonnes Percent Tonnes Percent Tonnes Percent Tonnes Percent Tonnes Percent Tonnes

1967 . . . . 12,127 15.9 14,955 19.7 12,234 16.1 6,580 8.6 8,534 11.0 2,925 3.8

1968 . . . . 12,797 15.4 17,477 21.0 12,902 15.5 7,167 8.6 8,858 10.6 2,765 3.3

1969 . . . . 14,315 16.8 16,576 19.5 12,649 14.9 6,481 7.6 8,771 10.3 3,033 3.6

1970 . . . . 14,535 17.7 13,129 15.9 12,111 14.7 7,052 8.5 8,153 9.9 2,810 3.5

1971 . . . . 13,083 16.6 15,857 20.1 12,346 15.6 6,541 8.3 7,824 9.9 2,725 3.4

1972 . . . . 15,235 18.3 16,523 19.8 12,375 14.9 6,001 7.2 8,761 10.5 2,476 2.9

1973 . . . . 18,487 18.3 21,058 20.8 15,591 15.4 7,085 7.0 10,404 10.3 2,928 2.9

1974 . . . . 18,503 18.6 17,168 17.3 15,971 16.1 7,454 7.5 10,468 10.5 3,099 3.1

1975 . . . . 11,519 15.9 13,799 19.0 10,926 15.1 5,490 7.6 7,959 11.0 2,859 3.9

1976 . . . . 13,298 16.4 19,365 23.9 10,893 13.4 6,271 7,7 8,739 10.8 2,772 3.4

1977 . . . . 13,909 16.8 19,493 23.6 10,886 13.2 6,092 7.4 8,964 10.8 2,936 3.6

1978 . . . . 15,760 17.8 19,277 21.7 12,127 13.7 5,497 6.7 9,667 10.9 3,224 3.6

aincludes agricultural and electrical

SOURCE American Iron and Steel Institute

76,095

83,313

85,146

82,354

78,943

83,267

101,067

99,291

72,521

81,128

82,906

88,827
Ch. 5—Past and Future Domestic Use of Steel ● 175

The automobile market for steel is growing

at a rate of 1.5 percent per year, the building

construction market at 2.1 percent, the equipment and machinery market at 1.7 percent,

and the container and packaging market at

0.8 percent (table 61). Major declines in steel

consumption are occurring in transportation,

oil and gas, military goods, and export markets. Steel imports have grown spectacularly,

but there are no statistics on how that steel is

used. Commonly used data on steel consumption also do not take into account the steel embodied in other imported products, such as

automobiles.

Automotive Industry

The automobile industry is an important

steel market not only for the amount it consumes but also for the form of its consumption. The type of steel demanded has an important bearing on the technologies used in

steel production. Automotive applications account for more than 40 percent of sheet and

strip shipments and the auto industry is

clearly the key segment in future sheet demand. Thus, it will play a major role in determining the kind of raw steel capacity the steel

industry needs to add. This is an especially

pertinent point because the requirements for

steel by domestic motor vehicle producers

will continue to grow, albeit at a more modest

rate than in the past.

The fundamental reason for the slowdown

in future steel demand by the automobile industry is the need to manufacture lighter cars

that will meet Government fuel-efficiency

regulations. Although there has been little

change in average steel consumption for vans

and light trucks in the past few years, they

too will be affected by increasing fuel costs

and energy-conservation measures that will

make steel substitutes attractive. There is a

continuing effort to find appropriate lighterthan-steel substitutes like graphite-reinforced plastics, glass-reinforced polypropylene, and aluminum. In 1960, the average automobile incorporated 25 lb of plastics, and in

1979, approximately 200 lb; the forecast is

that in 2000a car will contain 750 to 1,000 lb

of plastics.

A number of factors may mitigate the rapid

rate of substitution for steel in cars, Other

usable materials have higher production

costs and lower rates of production per unit

of time than steel. Potential supply shortages

of aluminum and the dependence of plastics

on petroleum feedstocks are also significant

factors. The cycle of automobile model

changes and tool design also make any shift to

new materials a gradual process. Table 62

presents a recent General Motors forecast of

average material consumption per passenger

car from 1978 to 1987. Such forecasts tend to

change frequently, but this one shows declining steel consumption to be a function of

down-sizing, not of major materials substitution, Steel’s share of the vehicle net material

weight remains relatively constant, even

though the amount of steel used decreases

substantially.

New technologies in steel materials for

automotive applications also make steel more

competitive with aluminum and fiber-reinforced plastics. The longstanding emphasis of

the domestic steel industry on product could

have substantial future payoffs in this market. Substitution for steel by other materials

is, and will continue to be, offset by the availability of new types of alloy steel, such as

high-strength low-alloy and dual-phase steels,

and eventually perhaps by superplastic steels

and amorphous alloys.

New fabrication techniques being considered also will sustain the use of steel in automobiles. These combine steel, aluminum, and

plastics in relatively low-cost composites.

Steel/plastic sandwich constructions, allsteel honeycomb constructions, and steel

channel sections filled with polyurethane

plastic foam all provide suitable combinations of strength and stiffness with reduced
176 ● Technology and Steel Industry Competitiveness

Table 61 .—Historical Growth Rates for Steel Product

Shipments by Markets, Imports, Exports, and

Apparent Consumption, 1951-77 (percent per year)

Average annual

compound growth rate

Compound

Market segment Trendlinea

analysisa

——— .

Building construction . . . . . . . . . . 1.9% 2.1 %

Automobile . . . . . . . . . . . . . . . . . . . 1.6

Air, sea, and rail transportation. . . – 0.5 – 0.8

Equipment and machinery

(industrial and electrical) . . . . . . 1.8 1.7

Agriculture and mining. . . . . . . . . . 1.4 1.2

Oil and gas industry . . . . . . . . . . . . – 1.8b 

– 1.8 b

Containers and packaging. . . . . . . 0.8 0.8

Consumer and commercial

products . . . . . . . . . . . . . . . . . . . 0.6 0.4

Military. . . . . . . . . . . . . . . . . ... -1.1 – 3.6

Service centers and distributors. 1.7 1.6

Steel converters . . . . . . . . . . . . . . . 0.7 0.9

Other shipments. . . . . . . . . . . . . 4.1 4.4

Total domestic shipments. ., . . . . 1.4 1.3

Steel mill product exportsc . . . . . -0.1 – 0.3

Total U.S. mill shipments. . 1.4 1.2

Total exportsd ., . . . . . . . . . . . . . . . 0.6 0.6

Total imports. . . . . . . . . . . . . . . . . . 8.6 13.1

Apparent U.S. consumption . . . . . 2.1 2.0

aBoth methods are based on annual average consumption during 5-year periods

from 1951.75 The compound analysis IS simply the average annual rate of

change required to Increase (or decrease) average annual consumption from

the level prevalent in 1951.55 to that in 1971.75 The trendline growth rate IS derived from regression analysis of 5-year annual average shipment data, trend.

line analysis of annual data yields almost Identical results

blnnacurate due to the importance of imported products and service centers in

supplying this market segment

CAs reported by the American Iron and Steel Institute

dlncludes steel mill product exports

SOURCE Office of Technology Assessment

weight. Because of such developments in fabrication techniques and the developments in

new materials, steel will likely continue to

dominate the automobile market, even though

the use of aluminum and plastics will grow.

One forecast indicates 1985 steel use in the

automobile sector at about the same level as

in 1978.6

The projected growth of automobile industry consumption of steel to 2000 is shown in

table 63. The projections were calculated by

assuming growth rates for passenger cars

and light trucks. Future steel consumption for

these vehicles is then compared to 1978 consumption (determined by the same method) to

derive the implied growth rate for steel. The

present economic instability and various exogenous factors, such as future oil prices

and import penetrations, subject any projection to considerable uncertainty, and this one

should be regarded with suitable caution.

A more general belief is that total steel consumption will decrease. One recent forecast,

for example, indicated a decrease by 1985 of

1,185 lb in the conventional iron and steel

‘J. J. Tribendis and J. P. Clark, “An Analysis of the Demand

for Steel in the U. S.: 1978-1985,” Matericds and Society, vol. 3,

No. 4, 1979.

Table 62.–Material Consumption in Passenger Cars as Percentage of Total Weight, 1978-87

(net materials consumption as percentage of net weight)

—

1978 1979 1980 1981 1982 -1983 1984 1985 1986 1987

Steel. . ~. . . . . . 59.5% 60.00/0 60.2% 60.0% 60.2% 61.3% 60.4% 60.50/o 60.60/0 59.90/0

Cast iron . . . . . 17. 9 17.1 16. 2 16. 0 15.1 12. 9 12. 2 10. 7 10. 5 10.4

Aluminum . . . . 2.9 3.2 3.6 3.9 4.2 4.8 5.5 6.1 6.3 6.4

Plastics . . . . . . 5.4 5.6 5.7 5.9 6.6 6.7 7.6 8.3 8.5 9.0

Glass . . . . . . . . 2.7 2.3 2.7 2.7 2.6 2.7 2.8 2.8 2.8 2.8

Other . . . . . . . . 11.6 11.9 11.5 11.6 11.2 11.6 11.5 11.7 11.4 11.5

Total. . . . . 100.0 100.1 99.9 100.1 99.9 100.0 100.0 100.1 100.1 100.0

Steel weight (lb/unit)

Grossa . . . . . 2,871b

2,831 2,763 2,734 2,715 2,666 2,526 2,385 2,364 2,316

Net. . . . . . . . 2,083 2,057 2,004 1,986 1,958 1,936 1,825 1,736 1,721 1,688

aGross weight = amount of steel purchased Net weight = amount of steel in automobile

b1978 steel usage for pickups and vans was.

Pickups Vans

Gross 3,525 3,428

Net 2,580 2,596

SOURCE General Motors Corp , administrative services engineering staff, Apr. 2, 1979
Ch. 5—Past and Future Domestic Use of Steel . 177

Table 63.—Steel Usage in Passenger Cars and Light Trucks, 1978,1985,2000

—— ———— —----

Passenger cars ——-

1978 base

Unit production (1 ,000) . . . . . . . . . . . . . . .

Gross steel consumption per unit (kg) .

Gross steel consumption (1 ,000 tonnes).

1978-85

Case A—cars: 2.5% growth

trucks and vans: 3.0% growth

Unit production (1 ,000) . . . . . . . . . . . . . . .

Gross steel consumption per unit (kg )

Gross steel consumption (1 ,000 tonnes).

Case B—cars: 1.5% growth

trucks and vans: 3.0°A growth

Unit production ., . . . . . . . . . . . . . . . . .

Gross steel consumption per unit (kg) .

Gross steel consumption (1 ,000 tonnes).

Case C—cars: 2.5% growth

trucks and vans: 3.0% growth

—700/. steel reduction in vans

and trucks

Unit production . . . . . . . . . . . . . . . . . .

Gross steel consumption per unit (kg)

Gross steel consumption (1 ,000 tonnes).

1978-2000

Case A—cars: 1.5% growth

trucks and vans: 2.0% growth

Unit production (1 ,000) . . . . . . . . . . . . .

Gross steel consumption per unit (kg)

Gross steel consumption (1 ,000 tonnes).

Case B—cars: 1.O% growth

trucks and vans: 1.5% growth

Unit production (1 ,000) . . . . . ... .

Gross steel consumption per unit (kg)

Gross steel consumption (1 ,000 tonnes).

Growth rates are average annual compound rates -

N R = not relevant

SOURCE Off Ice of Technology Assessment

9,153

1,302

11.917

11,152

1,082

12,062

10,311

1,082

11,152

11,152

1,082

12,062

13,943

974

13,576

12,947

974

12.606

materials that go into an average automobile.

The loss would be partially offset by an increase of 450 lb in high-strength low-alloy

steel. 7 A factor which most forecasts have not

taken into account is the possible growth in

domestic production of automobiles now

made in other countries. This could lead to a

net increase in purchases of domestic steel,

especially for foreign-owned plants in inland

locations in the United States. However, one

study foresees no growth in automobile steel

use in the 1980’s even if Japanese plants in

the United States buy one-half their steel domystically.8

“Iron Age, Jan. 8, 1979, p. 25. Another forecast, by Arthur

Anderson & Co., leads to the same level of steel use per auto,

1,400 lb, but by 1990; American Metal Market, Dec. 24, 1979.

‘C. A. Bradford, “Steel Industry Quarterly Review,”’ February 1980, hferrill, Lynch, Pierce, Fenner & Smith, Inc.

Implied

Pickups Vans Total steel growth —.——

2,791 698 N.R. N.R.

1,599 1,555 N.R. N.R.

4,462 1,085 17,708 N.R.

3,536 884 N.R. N.R.

1,599 1,555 N.R. N.R,

5,652 1,374 19,099 1.1 %

3,27 0 8 1 8 N.R. N.R.

1,599 1,555 N.R. N.R.

5,227 1,272 17,651 0.1 0/0

3,536 884 N.R. N.R.

1,559 1,555 N.R. N.R.

5,088 1,237 18,388 0.6%

4,749 1,190 N.R. N.R.

1,295 1,260 N.R. N.R.

6,164 1,498 21,238 1 .0%

4,421 1,105 N.R. N.R.

1,295 1,260 N.R. N.R.

5,726 1,391 19,724 0.50/0

Building Construction

Materials competition in the construction

sector is considerable. The amount of steel

consumed in building and construction is understated because some is purchased by service centers and distributors, and then sold to

builders. Service center steel shipments to

construction markets are not reported directly, but various sources which include estimates for these shipments, indicate the actual amount of steel used in construction is

very large (see table 64). The proportion of

shipments to this sector as a percentage of

total steel shipments has remained relatively

stable over the last three decades, and available information suggests that the volume

consumed in construction activity will continue at the historical rate. However, if major
178 ● Technology and Steel Industry Competitiveness

Table 64.—Estimated Usage of Iron and Steel Construction Materials (1,000 tonnes)

1974 1975 1976 1977

Concrete reinforcing bars . 4,624 3,325 3,516 3,790

Galvanized sheets. . . . . . . . . . . 5,537 3,374 4,698 5,131

Cast iron pipe

Pressure. . . . . . . . . . . . . . . . . 1,776 1,138 1,210 1,456

Soil . . . . . . . . . . . . . . . . . . . . 702 539 597 619

Fabricated steel products . 4,141 3,932 3,372 3,162

Plates and structural shapes 16,507 15,901 16,354 10,793

Piling. . . . . . . . . . . . . . . . . . . . . 600 385 299 318

Total . . . . . . . . . . . . . . . . . . 33,887 28,594 30,046 27,856

SOURCES “Iron and Steel, ” MCP-15 Mineral Commodity Profiles, Bureau of Mines, U S Department of the Interior, July 1978

“Iron and Steel, ” a chapter from Mineral Facts and Problems, 1975 edition, Bureau of Mines reprint from Bulletin

667, U S Department of the interior

“Steel MiII Products, ” Current Industrial Reports, MA-33B (76).1, issued September 1977. Bureau of the Census,

U S Department of Commerce

“Iron and Steel Products Shipments, Bookings and Backlog,” Bureau of Mines, U S Department of the Interior,

January/February 1978

capital spending for the U.S. industrial base

occurs during the next decade, then this market could consume increased amounts of

steel. Much steel for construction is used as a

component of concrete in the form of reinforcing bar. Three basic types of commercial

construction use steel in different amounts:

● standard steel construction, in which a

floor deck is concrete and strong enough

to span the high-strength steel beams on

which it rests;

● composite construction, in which steel

shear connectors are welded through

the concrete deck to the steel beams

below; and

. concrete construction, in which a great

many steel reinforcing bars are used to

take care of tensile stress.

Table 65 shows the variation in the amount

of steel, energy, and labor used in these three

types of construction. In spite of these differences, an analyst notes that “assuming a

large project with many repetitive sections,

Table 65.—Summary of Materials, Energy, and Labor

Used in Comparative Floor Bay Construction

Labor Energy Materials

Commercial Man- Btu X Steel Concrete

building bays hours/ft 2

103/ft2Ib/ft2ft3/ft2

Standard steel . 0.49 284 10.3 0.33

Composite steel 0.44 250 8.9 0.33

Concrete. . . . . . 0.36 172 5.7 0.80

SOURCE B. Hannon, “Materials, Energy, and Labor Impacts in Typical Build

ing Floor Bay Assembles, ” University of Illinois, August 1978

the dollar costs of the three systems are approximately the same.’

9 In general, the

choice of system is made for other reasons,

including material availability, labor availability, and scheduling needs.

Containers and Packaging

This segment of the steel market has consumed a constant share of steel shipments.

Nevertheless, steel’s share of the total packaging market has declined in the last quarter

century. From 1972 to 1975, aluminum’s

share of the can market increased from 13 to

25 percent.10 The growth of both aluminum

and plastics has relied heavily on this market.

For instance, containers and packaging accounted for 10 percent of total aluminum

shipments in 1960 and 20 percent in the mid1970’s; packaging accounts for 25 percent of

total plastics use, The growth of aluminum

and plastics in packaging has come in part

from new products and from products not appropriate for steel, but both materials have

also penetrated steel markets.

Because aluminum prices may escalate

sharply, it may not continue to displace steel

in the container market at the historical level;

thinner steels are being used to retain the

market share on a unit basis. One study has

forecast a 1985 consumption level of steel for

‘B. Hannon, “Materials, Energy and Labor Impacts in Typical Building Floor Bay Assemblies, ” University of Illinois, August 1978.

“’U.S. Bureau of the Census,
Ch. 5—Past and Future Domestic Use of Steel ● 179

this market at about 10.4 million tonnes, a 30-

percent increase over 1978. ’1

Equipment and Machinery

For most equipment and machinery applications, steel has no major competitors. This

market has become somewhat less steel intensive over time, though. In large part, this is

because of the rapid growth of computeraided machinery, which uses less steel per

unit of output than machinery relying on mechanical components. Also, the United States

has lost some of its export market in machinery, and domestic industrial capital spending

has been at relatively low levels. No significant growth is expected in this sector through

1985 unless there is a turnaround in capital

spending .12

Other Consumers of Steel

Agriculture and Mining.—Steel has almost

no substitutes for agricultural and mining

equipment. Nevertheless, that market has

only retained its share of total steel product

shipments.

Air, Sea, and Rail Transportation.—The

transportation market segment has declined

in relation to total steel demand. Little new

rail mileage has been laid in the United States

in recent years, and railroad expenditures

“Tribendis and Clark, op. cit.

“Ibid.

for maintenance have been severely depressed by that industry’s economic malaise.

This trend appears to be changing now, and

rails could represent a growing steel market

in the next decade.

Because of weight restrictions, use of titanium and aluminum is more important than

steel in aircraft manufacture.

Although the worldwide shipbuilding industry has enjoyed intermittent booms in

tanker construction, particularly growth in

tanker size, the U.S. industry has not captured much of this market. The Japanese steel

industry reaped major benefits from the Japanese shipbuilding industry’s role in tanker

construction. In fact, demand for steelplate

served as a “base load” for new steel capacity during the 1960’s and 1970’s. However, the

future trends in domestic steel demand for

this use are expected to continue at the historical rate.

Consumer and Commercial Products.—The

rate of household formation directly affects

demand for steel because it governs the

course of appliance sales. Plastics, however,

have provided steel with competition in some

major appliance components, such as refrigerator door liners and washing machine tubs.

The best estimate of future demand for steel

by the consumer sector indicates a continuation of past trends, with relatively little

growth.

Domestic Supply-Demand Forecasts for Steel

There are many uncertainties in supply-demand forecasting for a commodity such as

steel, which is very sensitive to general domestic economic conditions and world supply

factors. Nevertheless, relatively good agreement exists among various steel demand forecasts. Table 66 shows forecasts from several

sources and, with the exception of Wyman’s

forecast,’] the range is not wide. For 1985, the

demand forecasts vary from a low figure of —

1‘Shearson Hayden Stone and J. C. Wyman, “Gold, Technology and Steel, ” February 1979.

114,7 million tonnes, representing the opinion

of industry itself, ” to a high of almost 133.4

million tonnes projected by Tribendis and

Clar k

15 on the basis of a high-economicgrowth scenario. For 1990, the industry projects steel demand in the United States at

125.0 million tonnes and Chase Econome-

“American Iron and Steel Institute, “Steel at the Crossroads:

The American Steel Industry in the 1980s, ’” 1980: U.S. Steel

Corp., Steelweek, Feb. 11, 1980.

1-Tribendis and Clark, op. cit.
180 . Technology and Steel Industry Competitiveness

Table 66.—U.S. Steel Demand and Capacity, Comparison of Various Forecasts, 1980-2000 (millions of tonnes)

Demand (total consumption = domestic shipments – exports + imports) Capacity

Bureau Shearson World

Com- Hayden Industry Steel

Year Mine s

a Chas eb DRIc merc e

d Stone’s analystsf AIS lg MITh Chas e

b Dynamics’ AISl g MITh

1980. . . . 110.5T 111.0 141.3 105.2 107.1 105.5 94.1

111.7 C

1981 . . . . 145.9

1982. . . . 150.7

1983. . . . 155.6 106.6

1984. . . . 160.6

1985. . . . 119.3 124.7T 119.4 165.9 117.9 114.7 133.4 High 111.8 115.8

124.1 C 121.7 Base

112.0 Low

1986. . . . 126.8 117.8

1990. . . . 137.3 137.1T 129.3 131.5 125.0 129.6 121.8

129.4C

1995. . . .

2000. . . . 151.1

aBureau of Mines, Iron and Steel, MCP-15, JUIY 1978, p. 25.

bMichael F Elliot-Jones, “Iron and Steel in the 1980’s The Crucial Decade,”

Chase Econometric Associates, Inc. Apr. 19, 1979 (assumes yields from raw:

1977 = 72, 1986 = 74, 1990 = 77)

CDRI Long Range Forecasting Model cited in (d), T = trend, C = cycle.

dRobert K. Sharkey, et al, “Long Term Trends in U.S. Steel consumption: lmlications for Domestic Capacity, ” Industrial Economics Review, U S Department of Commerce, vol. 1, May 1979, pp. 11-24

eShearson Hayden Stone and J C Wyman, “Gold, Technology and Steel, ” Feb.

ruary 1979 (Includes Indirect steel Imports and steel used in foreign industries

to construct factories producing exports to the United States

tries” at 137.3 million. Only one steel demand

projection, that of the U.S. Bureau of Mines, 17

is available for the period beyond 1990. This

forecasts steel demand in the United States

for 2000 at 151.1 million tonnes.

The low projections of AISI and the U.S.

Department of Commerce18 are based on low

growth rates in steel demand, 1.5 percent

and 1.6 percent annually, respectively. The

Tribendis and Clark low-growth-rate scenario calls for a 1.9-percent annual increase in

steel demand, their high-growth scenario has

a growth rate of 3.7 percent annually.

The methodologies used in these projections vary. For example, the Bureau of Mines

used the following methodology:

In a mature economy, such as that of the

United States, it is believed that iron and

steel demand closely follows population. The

demand forecasts were therefore based on a

curvilinear regression of steel demand (steel

mill shipments plus imports) on population.

The relatively rapid rise in steel usage at the

“Michael F. Elliot-Jones, “Iron and Steel in the 1980s: The

Crucial Decade,” Chase Econometric Associates, Inc., Washington, D. C., Apr. 19, 1979.

‘“U.S. Bureau of Mines, Iron and SteeI, MCP-15, July 1978, p.

25,

‘HR. K. Sharkey, et al., op. cit.

‘Cited In (d)

gAmerlcan Iron and Steel Institute, S/ee/ at the Crossroads The Arnerjcan Stee/

/ndustry In 1980’s, 1980, assuming raw yields of 1960 = 72, 1985 = 74, 1990

= 77 and an operating rate of 900/s

hJ J Tlbendls and J p Clark, “An Analysls of Demand for Steel In the U S

1978.1985,” A4aferia/s and Soc/ety, VOI 3, No 4, 1979 Demand based on three

economic scenarios with Imports a variable Capacity calculated from maxi.

mum domestic shipments (mln Imports of 140/. ) assuming 900/. operating

rate

‘World Steel Dynamics, Apr 25, 1979 (assuming raw yields of 1980 = 72, 1983

= 73)

beginning of the 20th century, caused by the

advent of the automobile, was eliminated by

beginning the regression line with 1915 data,

establishing a 62-year trend. The demand

projections for 2000 were based on Bureau

of the Census population projections Series I111, Although the demand data used in the regression included exports, the projections

were made on the basis of domestic consumption excluding exports, Exports were

assumed to remain at the average of 3 percent of steel demand (including exports) established over the past few years. 19

Apparently the Bureau of Mines did not take

into account any surges in capital spending.

The Department of commerce forecast

methodology was as follows:

The forecast model for apparent steel consumption for 1980, 1985 and 1990, developed

by the Office of Industrial Economics (OIE)

for this study, is a partial adjustment multiple linear regression model with three explanatory variables: (1) residential fixed investment, (2) non-residential fixed investment, and (3) motor vehicles and parts,

One advantage of using major components

of GNP as as explanatory variables is that

W.S, Bureau of Mines, op. cit., P. 23.
—

Ch. 5—Past and Future Domestic Use of Steel ● 181

they have been projected through 1990 using

the Data Resources, Inc., (DRI) long-term

macroeconomic model. The DRI model provides alternative growth paths for the economy. The higher growth rate scenario is

termed “trend,” which is a stable growth

long-run simulation of the DRI quarterly model of the U.S. economy, and a lower growth

rate is termed “cycle,” which is a less optimistic view of long-term growth embodying

periods of recession and strong growth.’”

The reason for the high-demand forecast of

Wyman can be found in several unusual, but

perhaps ultimately correct, underlying assumptions:

In assessing the real amount of steel usage

associated with the U.S. economy, one must

count both the indirect imports of steel and

the steel used to construct the factories in

which the foreign cars used in the U.S. were

built. Similarly, steel used for overseas

plants that exported steel directly to the U.S.

must be included, as well as the shipyards

which were “exported” from the U.S. In

short, we end up noting that since 1955, i.e.,

since capital spending of the industrial world

began to outpace that of the U. S., domestic

steel consumption statistics became progressively understated.

. . . whereas it typically is assumed that

steel consumption has grown by 2.39 percent

annually since 1955, we think it, in fact, has

grown by more, and perhaps by as much as

3.26 percent. The latter figure still would be

well below the actual 5.15 percent annual

growth for the Free World . . . Thus, our calculations indicate that U.S. steel consumption grew 36.7 percent less quickly than that

of the Free World (instead of 53.6 percent).

Steel consumption of the U.S. should have

grown at a slower rate than that of the Free

World because the U.S. is the more mature

economy and because substitution of steel by

other materials is probably much more advanced in the U.S. than in other areas. However, a U.S. consumption growth rate of less

than half that of the Free World, as the traditional statistics show, is much harder to understand than a growth rate of somewhat

less than two-thirds of the Free World’s.

Therefore, we think our estimated growth

‘[’R. K. Sharkey, et al., op. cit.

rate is more plausible than the traditionally

assumed growth rate for steel consumption

in the U.S.21

There are few domestic steel production

capacity projections. Such projections involve major uncertainties: the extent of import penetration and of investment, modernization, and expansion in domestic capacity.

World Steel Dynamics 22 has projected domestic steel industry capacity at 106.6 million

tonnes in 1985. Chase Econometric Associate s

23 estimates capacity will be 117.8 million

tonnes in 1986 and 129.6 million tonnes in

1990, and industry” itself forecasts 100.7 million tonnes in 1985 and 109.7 million tonnes in

1990. The industry forecast assumes that a

substantial modernization and expansio n

program takes place (see ch. 10).

To compare the capacity and demand projections, it is necessary to assume an operating rate; a 90-percent operating rate assumption yields a realistic production level. The

demand projections exceed those for domestic production, and the difference is made up

by imports. Most forecasters assume some

level of imports, but Tribendis and Clark used

their modeling technique to generate imports.

25 Their model predicted an import level

of 18.1 million tonnes for 1979, when the actual value was 15.9 million. 26 In their moderate-growth case and without import controls

other than the trigger-price mechanism, imports capture 26 percent of the domestic market in 1985, a very high fraction; domestic

steel shipments would then be 90.1 million

tonnes. If they assume a lower level of imports, 141 percent, domestic shipments would

be 104.2 million tonnes in 1985. AISI forecasts assume a 15-percent import level,

which results in domestic shipments of 102

million tonnes in 1985.

Zlwyman, op. cit. Wyman arrived at his U.S. steel demand

projections by extrapolating 1956-76 data by use of “best fit”

curves.

22 Wor1d Steel Dynamics, Apr. 25, 1979.

2JM. F. Elliot-Jones, op. cit.

~iAmerican Iron and Steel Institute, op. cit.

zsTribendis and Clark, oP. cit.

ZbAmerjcan Meta~ Market, Jan. 31, 1980.
182 Technology and Steel Industry Competitiveness

The various supply-demand projections

suggest two alternate possibilities for the

next 10 years.

1. The AISI low-demand-growth (1.5 percent) forecast with current levels of imports (15 percent), if incorrect, could

lead to inadequate domestic steel capacity— if demand is higher because of a

substantial capital-spending period or

faster economic growth, for example.

With 1990 steel consumption of 137 million tonnes (forecast by Chase Econometrics and DRI) and capacity of 122 million tons (by AISI), imports would be 20

percent, or 27 million tonnes; this would

be about 50 percent more than the maximum of actual imports to date. If the

world steel oversupply of the past few

years does not persist, and this is quite

likely, then imports would be both costly

and difficult to obtain, Operating rates

and profitability for the domestic industry would be high, particularly if Government policies allow domestic prices

to rise to meet high import prices. The

AISI forecast presumes a substantia l

modernization and expansion program

for the next 10 years. Without such a

program domestic capacity would be

only 85 million tonnes in 1988 (AISI).

With a high demand of 137 millio n

tonnes, this would lead to a more than

44-percent level of imports in 1990.

2. Alternatively, the domestic capacity in

1990 might be greater than the AISI

forecast. This could result from aggressive nonintegrated plant construction

and possibly from an influx of foreign

capital into steelmaking. If the Chase

Econometrics capacity forecast of 130

million tonnes is coupled with the low-demand forecast of AISI, then either imports would drop to 7 percent with a domestic operating rate of 90 percent or

operating rates would decrease to 82

percent while imports are maintained at

15 percent, If the Chase capacity forecast is coupled with their high-demand

forecast of 137 million tonnes, the 15-

percent import level is compatible with a

domestic operating rate of 90 percent.
CHAPTER 6

New Technologies

for the Steel Industry

Contents

Page

Summary ,*. *.** ...  e** ************* 185

Introduction and Background . ............186

Steel Industry Technology . ...............186

Technological Change in the Industry. .. ....187

Impacts of Changes in Raw Materials,

Energy Sources, Environmental

Requirements, and Capital Requirements .. 188

International Comparisons of Production

and Energy Consumption . . . . . . . . . . . . . . . 189

Energy Consumption in the Domestic Steel

Industry. . . . . . . . . . . . . . . . . . . . . . .......191

Characterization of New Technologies. .. ...192

Definitions. . . . . . . . . . . . . . . . . . . . . . .......192

Potential Technological Changes and

Opportunities . . . . . . . . . . . . . . . . . . . . .. ..193

Radical and Major Technologies . ..........194

Direct Reduction. . . . . . . . . . . . . . . . . . . . . .. .194

Direct Steelmaking. . . . . . . . . . . . . . . . . . . . . .208

Plasma Steelmaking . . . . . . . . . . . . . . . . . . . . .209

Direct Casting. . . . . . . . . . . . . . . . . . . . .. ....210

Incremental Technologies . ...............211

External Desulfurization . ................211

Self-Reducing Pellets . . . . . . . . . . . . . . . . . . . . 211

Energy Recovery. . . . . . . . . . . . . . . . . . . . . .. .212

Continuous Rolling . .....................212

Page

High-Temperature Sensors . ..............213

Computer Control . . . . . . . ................213

Processing of Iron Powders . ..............213

Plasma Arc Melting . ....................213

Long-Range Opportunities ... ... .* C...00 ..214

Changes in Steel Products .. .. .. ... ... ...”214

Incremental Product Developments. . .......215

Major Product Developments. . ............215

Development problems. . .................216

Summary . . . . . . . . ......................217

List of Tables

Table No. Page

67. Capacities of Steel Plants in the United

States, 1978 . . . . . . . . . . . . . . . . . . . . . . . 187

68. Unit Material and Energy Inputs per

Tonne of Steel Shipped, United States,

1977 .................0.. . . . . . . . . . 190

69. Steel Product Mixes for Various

Countries, 1976 . . . . . . . . . . . . . . . . . . . . 190

70. Comparison of Operating Parameters,

1976 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190

71. Aggregated Industry Apparent Energy

Consumption for Steelmaking by

Country, 1976. . . . . . . . . . . . . . . . . . . . . . 191
.

Table No. Page

72. The American Steel Industry and the

Nation’s Energy Consumption. . . . . . . . . 191

73. Steel Industry Energy Consumption by

Source . . . . . . . . . . . . . . . . . . . . . . . . . . . 191

74. The Mix of Energy Sources . . . . . ... , . . 192

75. Potential Technological Changes in the

Steel Industry ● ● ● ● ● ● ● ● ● ● * * ● ● ● ● ● ● ● ● ● ● 193

76. Direct Reduction Plants Constructed or

Scheduled for Completion by 1980 ...,. 196

77. Distribution of World Direct Reduction

Capacity, 1980 ● ● ~ * ● ● ● ● ● ● ● ● ● * ● ● ● ● ● ● . 198

78. Operating Direct Reduction Plants Based

on Coal or Coke Breeze. , . . . . . . . . . . . . . 197

79. Characteristics of Direct Reduction

Processes and Electric Furnace

Consumption 9 * * * . . * * * * * * . * ...*,..,* 197

80. Energy Consumption of Gas Direct

Reduction Processes ., . . . . . . . . , ... , . 198

81. Energy Consumption of Direct Reduction

Rotary Kilns ● . . . . . . . . . . . . . . . . . . . . . . 198

82. Energy Costs for Direct Reduction

Processes Based on OTA Energy Costs. . 198

83. Three New Swedish Steelmaking

Processes ● ● ● ● ● ● ● ● * * * ● ● * ● ● ● * ● * * * ● ● ● 201

84. Capital Costs of Direct Reduction

Processes * * ● ● ~ @ * ● ● ● ● ● . ● . * ● ● ● ● ● ● ● * ● 202

85. Total Steelmaking Costs in 1978

Dollars per Tonne of Raw Steel. . . . . . . . 204

86. Capital Costs for Different Steelmaking

Routes * ***..........**,,,, ,** , 204

87. Typical Specifications for Direct

Reduced Iron Used in Steelmaking 205

88. Projections for Direct Reduction Growth 208

List Of Figures

Figure No. Page

22. Schematic Flow Chart for Integrated and

Nonintegrated Steelmaking. . . . . . . . ,., 188

23. Schematic Diagram of Direct Reduction

Processes ● . * * * *, * *, * ., . *,, ...**.** 195

24. Projected Energy Costs to Produce a

Tonne of Direct Reduced Iron . . . . . . . . . 189

25. Two New Coal Direct Reduction

Processes ● ● ● ● ● ● ● . ● ● ● ● ● ● * . ● * : . ;“. ● ● ● 200

26. Three New Swedish Ironmaking

Processes ~ * ● ● * ● ● ● ● ● ● ● ● ● ● ● . ● ● 0. ● ● . + 202

27. Specific Investment Costs per Tonne of

Direct Reduced Iron. ., .. ., . ....,,.., 202

28. Specific Investment Costs for Different

Routes of Steelmaking per Tonne of Raw

Steel Capacity ● ● ● ● ● ● ● ● ● ● ● ● ● ● * ● ● ● ● ● + 203

29. Steelmaking Costs Upstream and

Exclusive of Continuous Casting for

Different Production Routes per Tonne of

Raw Steel . . . . . . * ... , . . . . . . . . . . e . . . 203

30. Comparison of Coal Gasification Direct

Reduction Steelmaking to Conventional

Blast Furnace and Nonintegrated

Steelmaking . . . s . . . . . . . . . . . . ● . . . . . . 203

31. Schematic Diagram of Direct

Steelmaking System . ● ● . ● ● . ● ● ● . ● ● . ● ● . 208

32. Plasma Steelmaking System . . . . . . . . . . 210
CHAPTER 6

New Technologies for the Steel Industry

Summary

Steel technology has entered a period of

particular vitality, Whether new processes

are being stimulated by raw material and energy changes or whether they are creating

opportunities to use new raw materials and

energy sources is not important: the technology of the industry is not static. Relatively

small integrated systems based on coal reductants and electrical energy are feasible

now, and the opportunity to add capacity in

small increments, where it is needed, can

lower the industry's capital intensity. Large

existing integrated systems can adopt new

technologies that will increase efficiency,

productivity, and product quality. The roots

of the steel industry have also spread; the diversity and wide geographical distribution of

steel plants in the United States are strengths

with which the industry can face the changing conditions of the coming decades.

It is expected that changes in the availability and cost of raw materials, fuels, and energy sources will provide impetus for building

new steel plants and modifying existing ones.

Integrated companies face some difficult decisions about replacing or drastically altering

operating systems; about using new raw materials, fuels, and energy sources; and about

how to fulfill often noncomplementary objectives. But for the industry has a whole, the

rich variety in plant size, location, and character will ease the industry’s adjustment to

new raw materials and energy sources and

its adoption of new technologies.

Technological developments that offer flexibility in the choice of inputs are more attractive than those that depend on single sources.

Also, new technologies that can be adopted

rapidly in efficient-sized modules, that can be

constructed in a variety of locations, and that

can fulfill regional market requirements, will

receive more attention than larger, less flexible systems.

The following

appear to offer

steel industry:

●

●

●

●

●

●

●

c

●

●

●

●

●

alternatives

technological developments

particular promise for the

to metallurgical coke as a

blast furnace feed material;

continuing improvement in coal-based

direct reduction (DR) systems, including

those that utilize coal gasification and

those that use coal directly:

continuing development of DR systems

that allow for the use of alternate fuels

and energy sources, including biomass,

hydrogen, and nuclear sources;

improved methods of increasing scrap

and sponge iron use;

increased availability of direct reduced

iron (DRI) as a substitute for scrap;

increased availability of suitable iron

oxide/carbon composites (pellets, briquettes) as “self-reducing” materials;

continuing development of systems for

solid-state processing (the direct conversion of metallic powders into structural

forms);

alternate electric furnaces such as plasma systems;

continuing development of high-speed

melting, refining, processing, and transfer equipment;

secondary or ladle steelmaking processes that allow separation of melting

and/or primary refining from final composition control;

improved instrumentation and control

procedures;

continuous casting and direct rolling;

and

improved methods for using waste materials and heat.

Several of these technologies are explored

in this chapter to illustrate the range of opportunities available to the steel industry.

185
186 . Technology and Steel Industry Competitiveness

Introduction and Background

Steel Industry Technology

“The steel industry” is composed of those

companies that produce steel products from

ferrous raw materials including ore, pellets,

sinter, sponge iron and other DRI, pig iron, *

recycled iron and steel scrap, and a variety of

waste products. Conventionally, the iron and

steel foundry industry is considered separate

from the steel industry, although substantial

overlap occurs in many technical areas. Differences in scale and product make it possible to distinguish the two industries clearly.

In 1978, the steel industry had approximately

156.9 million tonnes of annual capacity, and

the foundry industry 18.1 million tonnes.’ The

foundry industry produces only about 1.8 million tonnes of steel castings per year, about 2

percent of the total national steel production;

its remaining capacity is used to produce iron

castings. z

In 1978, the steel industry was composed

of 93 companies operating 158 individual

plants.’ The industry may be divided into

three categories, based on the type of primary operations, products, and marketing approach of the individual companies: integrated companies, alloy/specialty companies,

and nonintegrated companies.

Integrated companies have primary raw

material and ironmaking facilities (blast furnaces), ** steelmaking units, and finishing

*DRI designates the metallized products that come under the

general heading of direct reduced iron. The term “sponge iron”

describes a common type of DRI, DRI is formed from iron oxide

without fusion. Frequently, such iron is porous and appears

spongelike under the microscope. Pig iron is solidified blast furnace iron: the term originates from the appearance when cast

from a common feeder of liquid iron and one or more rows of

small castings result.

‘Institute for Iron and Steel Studies. “Plant Locations and

Capacities. ” 1978: D. H. Desy, “Iron and Steel.”’ Mineral Commodity Profiles. MCP-15, U.S. Bureau of Mines, July 1978;

American Iron and Steel Institute, “Annual Statistical Report,”’

1978.

‘Institute for Iron and Steel Studies, op. cit.; American Iron

and Steel Institute, op. cit.

‘Institute for Iron and Steel Studies, op. cit.

**A new class of integrated plant is emerging based on direct reduction. as discussed later.

mills. Alloy/specialty companies produce alloys and special products from steelmaking

units; usually they do not deal with primary

raw material or engage in ironmaking activities. Nonintegrated companies operate melting and casting units and fabrication mills,

and produce a limited range of products for a

regional market. The term “minimill” is used

to describe some of these nonintegrated activities, although it is now conventional to restrict that term to plants with capacities less

than 544,200 tonne/yr.

Table 67 shows that the majority of integrated plants are in the size range of 0.9 million to 8.2 million tonne/yr; most nonintegrated plants are in the 90,700- to 907,000-

tonne range; and most of the specialty plants

in the range of 9,070 to 108,840 tonne/yr. The

final column of the table lists the total number of plants in each size range operated by

all three categories of companies.4 The United

States does not have a single steel plant with

a capacity of 9.1 million tonne/yr, although

two are between 7.3 million and 8.2 million

tonnes. In contrast, Japan has eight postWorld War II steel plants with capacities of

about 9.1 million tonne/yr.5 The heaviest concentrations of U.S. steel mills are in the Pittsburgh and Chicago areas; only three fully integrated plants are in the Western States.

Although plants vary widely in character

and size, it is helpful to use current integrated plants to describe steelmaking technology. Figure 22 shows a flow line of steelmaking. All of the major material inputs and

operations are indicated, but many of the secondary operations, materials-handling operations, and environmental control operations

are not, nor are any of the inspection and

quality control operations. An integrated

‘Additional discussion of the characteristics and distribution

of steel plants is contained in a report prepared for OTA in July

1979: G. R. St. Pierre, C. E. Mobley, C. B. Shumaker, and D. W.

Gunsching, “Impacts of New Technologies and Energy/Raw

Material Changes on the Steel Industry,” July 17, 1979.

‘K, L. Fetters, “Innovation-The Future of the Iron and Steel

Industry,’” Journal of Metals, June 1979, pp. 7-13.
Ch. 6—New Technologies for the Steel Industry ● 187

Table 67.–Capacities of Steel Plants in the United States, 1978

Number of plants operated by the—

Size range raw steel 17 integrated 33 specialty 43 scrap/DRl Total number of

capacity tonnes/yr companies companies companies plants in size range

7,256,000-8,162,999

6,349,000-7,255,999

5,442,000-6,348,999

4,535,000-5,441,999

3,628,000-4,534,999

2,721,000-3,627,999

1,814,000-2,720,999

907,000-1,813,999

816,300- 906,999

725,600- 816,299

634,900- 725,599

544,200- 634,899

453,500- 544,199

362,800- 453,499

272,100- 362,799

181,400- 272,099

144,190- 181,399

126,980- 144,189

90,700- 126,979

68,025- 90,699

45,350- 68,024

22,675- 45,349

0- 22,674

Total number . . . . . . . . . . . . . . . .

2

1

1

3

4

9

11

15

1

o

1

1

1

2

2

1

0

0

0

2

0

0

57

SOURCE Institute for Iron and Steel Studies

plant would have many of the indicated operations; a nonintegrated plant would have only

a few. A nonintegrated steel plant might have

electric furnaces for melting scrap, continuous casting units to produce slabs or billets,

and rolling mills. A specialty steel plant might

have only electric furnaces with some secondary steel-refining equipment such as

vacuum degassing units, electroslag remelting equipment, argon-oxygen decarburization

(AOD) units, in addition to special forming

and rolling facilities. Most of the various operations can be performed on a widely varying scale, but several are inefficient and costly on a small scale. Blast furnaces and sheetrolling mills are examples of units that cannot

be scaled down economically. Where product

demand or capital availability is too low to

justify constructing a blast furnace, scrapbased electric furnace steelmaking or DR

ironmaking can be used.

Steelmaking, even in the simplest form,

consists of a number of processes. Iron from

the mine may go through more than 20 proc0 0 2

0 0 1

0 0 1

0 0 3

0 0 4

0 0 9

0 1 12

3 0 18

0 0 1

1 1 2

0 1 1

3 3 7

1 3 5

1 4 6

1 5 8

2 14 18

2 6 9

2 4 6

10 9 19

3 2 5

10 9 19

5 0 5

3 0 3

47 54 158

essing steps and transfers before it becomes

a finished product. Ore is ground, beneficiated, reconsolidated into pellets, indurated,

reduced, desulfurized, refined, cast, and finally subjected to a series of forming and

heat-treating steps. Technological developments that can eliminate these operating

steps or establish a more continuous flow

clearly have the greatest potential benefits.

Technological Change in the Industry

Major developments in ironmaking and

steelmaking include:

1. pneumatic steelmaking—first the Bessemer process, and more recently the basic oxygen converters;*

2. hot-blast techniques that permit “continuous” production of liquid iron in the

blast furnace;

3. the electric arc furnace (EAF);

4. continuous casting; and

*These processes are discussed inch. 9.
188 Technology and Steel Industry Competitiveness

Figure 22.—Schematic Flow Chart for Integrated and

Possible major routes:

Integrated: coking-blast furnace-basic oxygen-ingot

casting-finlshlng.

Non integrated: scrap-electric furnace-continuous casting

finishing,

Semi.integrated: direct reduction + scrap-electric furnacecontinuous casting-finishing.

SOURCE Off Ice of Technology Assessment

5. continuous rolling facilities to produce a

wide range of flat and structural products.

Very recently, DR processes have also taken

on importance.

The 20th century has seen many lesser developments in steelmaking as well: coking

procedures, low-cost systems for producing

oxygen, ore beneficiation and pelletizing procedures, rapid analytical and control techniques, and a host of others. Along with these

process developments came a multitude of

product developments based on a fuller understanding of the relationships between

composition, microstructure, and properties

of steel. Of necessity, steelmaking also became more sophisticated in the areas of composition and structure control.

A review of technological change in the

steel industry during the period 1963-76 reveals the adoption of more than a hundred

different developments during a 10- to 15-

year period.’ Although this information must

be interpreted carefully, two conclusions are

evident:

● information on technological developments in the steel industry is transmitted

very rapidly; and

● each new technology has characteristics

that provide opportunities in markedly

varying degrees to individual companies.

Impacts of Changes in Raw

Materials, Energy Sources,

Environmental Requirements,

and Capital Requirements

The overall conversion or dissociation of

iron ore (hematite, Fe2O3

), to metallic iron (Fe)

may be represented as, Fe 2O

3

- 2Fe + 3/2O2.

The minimum theoretical energy requirement

to convert Fe203 to Fe is about 7 million Btu

per tonne Fe. Expressed in another way, the

conversion of Fe2O3 to Fe represents the formation of a new “fuel” by a matching consumption of another fuel or energy source.

The replaced fuel might be coal, oil, natural

gas, hydrogen, combustible biomass, combustible wastes, another metal (e.g., aluminum in

the thermite process), or combinations and

derivatives of all of these. Potential energy

sources include electrical energy introduced

by a variety of techniques (electric arc, plasma, high-frequency induction, etc. ) and obtained from a variety of sources (fossil fuels,

hydro systems, wind, solar, nuclear, etc.).

The conversion of Fe2O3 to Fe cannot be accomplished with energy alone—the thermodynamic stability of iron oxide is too great. A

temperature of several thousand degrees Celsius is required to bring about spontaneous

dissociation to form metallic iron. Material

reactants must be used to drive the dissociation at moderate or practically attainable

temperatures. All of the common fossil fuels

and their derivates can act as suitable reduc-

“R. K. Pitler, “Wurldwide Technological Developments and

Their Adoption by the Steel Industry in the United States, ”

American Iron and Steel Institute, Apr. 13, 1977.
Ch. 6—New Technologies for the Steel Industry . 189

ing agents; however, there are strict thermodynamic requirements that limit the efficiency with which C, CO, and H2 can be used. For

example, the value of CO as a reducing agent

is practically exhausted when the CO2

/ C O

ratio is about three to one. * The minimum

material requirement of CO corresponds to

an equivalent carbon requirement of about

0.43 tonne of carbon per tonne of Fe.**

One common procedure for assessing the

combined requirements is called “thermochemical balancing.”’ For any particular system, thermochemical balancing can be used

to find optimal operating modes for the lowest

possible energy and material consumption.

Changing conditions stimulate the development of new processes and the adoption of

new technologies, Examples may be found

among changes in raw materials, energ y

sources, environmental requirements, and

capital availability.

Raw Materials.— Iron ore and scrap are the

two major sources of iron units for steelmaking, As scrap availability increases, incentives are created for adopting technologies

that use more scrap. The replacement of open

hearth with basic oxygen furnaces permitted

an expansion of scrap-based electric furnace

steelmaking. On the other hand, a limited supply of high-quality scrap may lead a scrapbased steel company to seek sources of DRI of

known quality or to construct new DR facilities of its own. Future developments in the

area of amorphous materials may create situations in which entirely new steelmaking and

casting sequences will be needed.

Coal, coke, and natural gas are the principal reductants available for the conversion of

iron ore. If coking coal is not readily available

and natural gas is, there is clear incentive to

adopt gas-based DR processes in place of

blast furnace ironmaking. Current blast fur-

*To fix the precise value, one must consider the individual

reduction steps (Fe 2O3 - Fe, O,, FeO - Fe) and the effective temperature of each.

* *This is surprisingly close to recent record coke consumptions in ironmaking: however, those records are achieved

 through the injection of otherr reductants (tar, oil, etc.).

naces also depend in part on injected oil to

achieve high production rates and low cokeconsumption rates. If oil is in limited supply

or very expensive, alternatives must be considered.

Energy Sources.—If the availability of conventional fuels is limited, development of new

processes such as those using plasma and

magnetohydrodynamics (MHD), which make

direct use of electrical energy, becomes important.

Environmental Requirements.—As pressure

to meet stringent environmental constraints

increases, processes are needed that are

more amenable to physical enclosure and require lower volumes of waste discharge. For

example, dry methods can replace aqueous

methods, as they have in coke quenching, and

countercurrent flow processes like cascade

rinsing become attractive. The need to produce low-sulfur steel can foster changes in

the mode of operation of an integrated steel

plant, External desulfurizers can be installed, secondary steelmaking units can be

added, and blast furnace practices can be

altered drastically.

Capital Requirements.—For a new technology to be adopted it must represent a sound

use of limited financial resources. Processes

that have high throughputs per unit volume

and that depend on a minimum of auxiliary

support equipment may meet such requirements.

International Comparisons of

Production and Energy Consumption

Tables 68 through 71 contain information

on raw material, energy, and labor consumption in the international steel industry. The

data in these tables represent a composite for

integrated plants and do not reflect the wide

differences in process configurations, age of

plant, available raw materials, and product

requirements of individual plants. Table 68

presents unit inputs per tonne of U.S. steel

shipped in 1977. Table 69 compares product
. . .

190 ● Technology and Steel Industry Competitiveness

Table 68.—Unit Material and Energy Inputs per

Tonne of Steel Shipped, United States, 1977a

Data source

Unit input (tonnes or as noted) AISl b WSDb

Iron ore . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.33 1.68

Coking coal . . . . . . . . . . . . . . . . . . . . . . . . 0.7666 1.01

Noncoking coal . . . . . . . . . . . . . . . . . . . . . 0.033 0.033

Coke C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.538 0.643

Scrap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.292 0.14

Natural gas (103ft3) . . . . . . . . . . . . . . . . . . 6.96 6.17

Fuel oil (U.S. gallons) . . . . . . . . . . . . . . . . 20.50 21.13

Electricity (kWh) . . . . . . . . . . . . . . . . . ...537.00 452.00

Oxygen (103

ft3 . . . . . . . . . . . . . . . . . . . . . 3.04 NA

Fluxes and alloys. . . . . . . . . . . . . . . . . . . . 0.304 NA

NA = not available.

a113,939,091 tonnes raw steel produced; 82,860,909 tonnes raw steel shipped,

yield (shipments/production) = 72.7%.

bAmerican iron and steel Institute, actual operating data for entire US. industry, World Steel Dynamics idealized model based on 10° tonne/yr integrated

plain carbon steel plant

cCoke is produced from coking coal, and thus represents a double counting of

inputs in this table Coke usage is included for comparison with data in subsequent tables

SOURCE: G. St. Pierre for OTA.

mixes for major steel-producing countries, *

table 70 provides country comparisons on a

wide range of operating parameters for several types of steelmaking units, and table 71

deals with energy consumption per tonne of

steel shipped. All these data point to technological opportunities for the domestic steel industry, but without full investigation of capital requirements and return-on-investment

factors for both replacement and expansion,

information of this type can be badly misinterpreted. A clear distinction must be made

between technological opportunity and

feasibility.

*Product mix for any nation varies with time. For the United

States, there is a trend toward making fewer flat products,

which are very energy and capital intensive.

Table 69.—Steel Product Mixes for Various Countries, 1976 (percentage of total shipments)

Country

Product type United States Japan United Kingdom West Germany France

Hot-rolled sheet, under 3mm thick . . . . . . . . 51.9 43.1 28.6 22.3 34.9

Light sections. . . . . . . . . . . . . . . . . . . . . , . . . 15.9 19.1 19.4 14.0 16.0

Heavy plate . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.0 15.5 11.0 11.0 8.7

Strip . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5 2.1 7.4 7.6 6.9

Wire rods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.9 8.2 9.0 10.3 11.6

Heavy sections . . . . . . . . . . . . . . . . . . . . . . . . 4.7 7.1 11.2 6.3 6.1

Semis for sale . . . . . . . . . . . . . . . . . . . . . . . . . — 5 . 3

a

9.2 6.2

Medium plates. . . . . . . . . . . . . . . . . . . . . . . . . (b) 1.7C2 . 2 11.1 3 . 7

Percent total production . . . . . . . . . . . . 94.6 96.8 94.1 91.8 94.1

Sheets (< 3mm) and strip. . . . . . . . . . . . . . . . 58.4 45.2 36.0 29.9 41.8

aDeliveries b

lncluded in heavy plates. cFrom 3 to 6 mm.

SOURCE: Annual Bulletin of Sfeel Statistics for Europe, vol. V, 1977, U.N. Economic Commission for Europe

Table 70.—Comparison of Operating Parameters, 1976

Country

United United West

States Japan Kingdom Germany France Brazil

Raw steel produced, million tonnes . . . . . . . . . . . . 116.4 107.4 22.3 42.4 23.2 9.2

Apparent yielda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69.9% 84. % 76.80/o 80.7% 83.8% 81 .8%

Average blast furnace

(

tonne coke .b . . . . . . . . . . . . . . . . . . . . . )

0.6 0 Coke rate tonne pig iron

Steelmaking proces s

c

BOF . . . . .. : . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62.50/o

OH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.2

EF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.2

Continuous casting of raw steel . . . . . . . . . . . . . . . 10.5

NA = not available.

aApparent yield is the ratio of steel shipments to raw Steel production. This

ratio is dependent on the range and type of final products shipped, The

relatively low apparent yield value for the United States is associated, in part,

with its relatively large fraction of thin products and limited use of continuous

casting.

bThis coke rate (tonnes coke/tonnes pig iron) reflects only the actual coke

charged to the blast furnaces and is not the blast furnace fuel rate (i.e., tonne

fuel/tonne pig iron). It IS estimated that the fuel rates for the non-U.S. countries

0.43 0.60 0.48 0.52 NA

80.9 % 51.47 % 73.3 %

e

80.1% NA

0.5 18.1 14.3 5.6 NA

18.6 30.3 12.4 14.2 NA

35.1 9.4 28.3 18.0 12.1

are about 0.05 units greater than the coke rates cited

c1975 world steel production by process was 51 1 percent by BOF, 17.1 percent

by EF, 305 percent by OH, balance (1 3 percent) by Thomas and other processes

d 0.1 percent of steel made by “other” unspecified Processes

eIncludes 14 percent steel production by Thomas (airblown) converter process.

flncludes 11.8 percent steel production by Thomas (airblown) converter proc

ess.

SOURCE: G. St Pierre for OTA.
Ch. 6. 6—New Technologies for the Steel Industry 191

Table 71 .—Aggregated Industry Apparent Energy Consumption for Steel making by Country, 1976

(million Btu/tonne steel shipped)

—

United United West

Fuel States Japan Kingdom German y France Brazil

Coking coal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24.62 20.02 23.85a

22.22’ 23.22a21.91

Steam coal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.01 — — — — 0.98

Natural gas.... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.64 — 2.57 4.00 1.92 6.96

Fuel oil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.71 3.99 6.63 4.07 5.13 3.08

Electricity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.86 1.61 1.95 1.14 1.67 1.83

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36.84 25.62 35.00 31.44 31.94 34.76

Total b . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.75 21.52 26.88 25.37 26.77 25.27

Relative energy consumption. . . . . . . . . . . . . . . . . . 100 84 104 98.5 104 98

United States, 1976 = 100

aCokinq coal consumption is estimated from known coke consumption. Typically 1.45 tonne of coking coal is used to produce 1 tonne of coke.

bThe total energy per tonne of steel produced is the product of the total energy per tonne steel shipped and the apparent yield for each country

SOURCE: G. St. Pierre for OTA.

Energy Consumption in the

Domestic Steel Industry

Tables 72 through 74 summarize energy

consumption in the U.S. steel industry. Although the industry consumes about 4 percent of the total U.S. domestic energy, most is

in the form of coal. Steel processing accounts

for only about 0.6 percent of total domestic

petroleum consumption and about 3.2 percent of domestic natural gas consumption.

However, the trend is toward increasing the

use of petroleum (from 6.2 percent of steelmaking energy in 1972 to 11 percent in 1979)

and decreasing the use of coal (from 69 percent in 1972 to 63 percent in 1979). After adjusting for the decrease of 8 percent in total

energy use, the petroleum energy used in

steel production increased by 63 percent durTable 72.—The American Steel Industry and

the Nation’s Energy Consumption

Steel industry

as percentage

Consumption (quadrillion Btu)

of total

domestic

Year Steel industry Total domestic economy

1972 . . . . . .

1973 . . . . . .

1974 . . . . . .

1975 . . . . . .

1976 . . . . . .

1977 . . . . . .

1978 . . . . . .

1979 . . . . . .

3.13

3.45

3.42

2.94

3.05

2.91

2.98

2.88

71.63

74.61

72.76

70.71

74.51

76.54

78.15

NA

4.4%

4.6

4.7

4.2

4.1

3.8

3.8

NA

NA = not available

SOURCES. American lron and Steel lnstitute, Annual Statistical Report Depart.

ment of Energy, “Monthly Energy Review “

ing this period while coal energy use decreased by 16 percent.

Table 73.—Steel Industry Energy Consumption by Source

Percent from each source

Source of en erg y 1972 1973 1974 1975 1976 1977 1978 1979

Coking coal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64.0% 64.50/. 62.1 % 66.8% 65.7% 62.4°10 56.30/o NA

Other coal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5 3.4 2.9 2.6 2.4 2.9 2.4 NA

Outside coal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 1.7 2.8 (1 .5) (0.9) 0.9 5.8 NA

Subtotal from coal. . . . . . . . . . . . . . . . . . . . . . . 68.8 69.6 67.8 67.9 67.2 66.2 64.5 63.0

Natural gas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.7 19.0 20:0 20.0 19.9 19.9 20.5 21.0

Petroleum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 6.9 7.6 7.3 7.8 8.6 9.4 11.0

Liquid petroleum gas. . . . . . . . . . . . . . . . . . . . . . . . . — — — 0.1 0.1 0.1 0.1 NA

Purchased electricity . . . . . . . . . . . . . . . . . . . . . . . . 4.3 4.5 4.6 4.7 5.0 5.2 5.5 5.0

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

NA = not available

SOURCE American Iron and Steel Institute, Annual Statistical Report.
192 ● Technology and Steel Industry Competitiveness

Table 74.—The Mix of Energy Sources

Total Steel industry 1972-78 average

Energy source domestic 1978 Direct Adjusted

Coal . . . . . . . . . . . . . . . . . 18.20/o 67.5% 69.6%

Natural gas . . . . . . . . . . . 25.3 20.0 20.8

Petroleum . . . . . . . . . . . . 48.6 7.7 8.5

Nuclear . . . . . . . . . . . . . . 3.8 — 0.4

Hydro and other . . . . . . . —

Electricity . . . . . . . . . . . . (a) 4.8 (a)

Total. . . . . . . . . . . . . . . 100.0 100.0 100.0

alncluded in sources above. The adjusted mix for the steel Industry distributes the 48 percent purchased electricity to the

primary fuels in proportion to primary fuels consumed by the electric utility industry during the 1972.78 period.

SOURCES. American Iron and Steel Institute, Annual Statistical Report, Department of Energy, “Monthly Energy Review.“

Characterization of New Technologies

Definitions

Developments in the steel industry can be

divided into four broad groups:

● radical and major technologies;

● incremental technology developments;

● regulatory technology developments;

and

● developments from other industries.

The term “radical” is used to describe a

process modification that eliminates or replaces one or more of the current steelmaking

processes or creates an entirely novel option

for ironmaking and steelmaking.7 DR is thus a

radical ironmaking change because it is an

alternative to the traditional coke oven-blast

furnace sequence. Direct steelmaking processes are radical changes because they combine several processes into a single reactor.

Continuous casting is radical because it replaces ingot casting and shipping, reheating,

and blooming mill operations. Rolling of powders to strip is also radical.

“Incremental” technology developments

include process modifications that improve

efficiency, increase production, improve

product quality, or lower operating costs. Energy conservation measures and the recycling of waste materials fall into this category. So too does external desulfurization of

blast furnace iron, although it involves adding a new operating unit. Secondary steelmaking processes including AOD also are incremental technologies. * The economic impact and technological significance of incremental developments may be great.

Developments in environmental technology

include add-on systems that do not alter the

steelmaking process. Examples are biological

treatment of waste waters, pipeline charging

of coke ovens, and fugitive particulate collectors.

Developments from other industries can be

used in many ways. Analytical and control

techniques are transferred to the steel industry on a broad basis. The adoption of coal gasification processes in conjunction with DR

might represent a type of technology transfer,

although the steel industry has had long experience with generating, cleaning, and using

fuel gases in coke oven operations, in the

recycling of blast furnace top gas, and more

recently in the collecting of carbon monoxide

from steel convertors.

Piller. op. cit.: J. Szekely, “Toward Radical Changes in Steelmaking. Technology Review, Massachusetts Institute of Technology, F’ebruarv 1979, pp. 23-29. *AOD is a case study in ch. 9.
Ch. 6—New Technologies for the Steel Industry ● 193

Potential Technological Changes The entries in the table represent different

and Opportunities process designs such as DR. The adoption

projections in the table should be interpreted

Table 75 lists potential technological Technology, (J. Szekely, chairman), Apr. 24-25, 1978: OTA

changes to steelmaking identified in OTA seminar on “New Technologies in Steelmaking, ” Washington,

workshops, seminars, and reports and in the D. C., (J. Hirschhorn, chairman), May 2-3, 1979; S. Eketorp and

current technical and commercial literature.8 M. Mathiesen, “Direct Steelmaking—A Review of Processes

Under Development. ” report to OTA, 1979: J, T. Strauss and T.

‘St. Pierre, et al., op. cit: ()’rA workshop on “Radically Inno- W, Heckel, “Future Potential of Ferrous Powder Metallurgy.”

va tive S teelmaking Technologies. Massachusetts Institute of report to orrA, August 1979.

Table 75. —Potential Technological Changes in the Steel Industry

Significant adoption

possible within:

Technological processa Category 5 yr 10 yr 20 yr

Plasma arc steelmakinga . . . . .

Direct steelmakinga

. . . . . . . . . .

Liquid steel filtration. . . . . . . . .

Continuous steelmakinga

. . . . .

Secondary refining systemsa

.

Hydrometallurgy production

of iron . . . . . . . . , .

Nuclear steelmakinga

. . . . . . . .

Hydrogen systemsa

. . . . . . . . . .

Direct reduction processes . .

Coal gasification . . . . . . . . . . .

Preheating of coking coal/

pipeline charging. . . . . . . . . .

Dry quenching of coke . . . . . .

BOF/Q-BOP off gas utilization .

High top pressure BF

electricity generation . . .

Evaporative cooling. . . . . . . . . .

External desulfurizationa 

. . . . .

Induction heating of

slabs/coils . . . . . . .

Catalytic reduction process. . .

Blast furnace fuel injection . . .

Direct casting of steel. ... . . .

Continuous casting. . . . . . . . . .

Formed coke . . . . . . . . . . . . . . .

Biomass energy systems . . . . .

Self-reducing pellets and

briquettes. . . . . . . . . . . . . . .

Powder metallurgy steel sheet

Direct/inline rolling . . . . . . . . . .

Computer modeling/control. . .

High-temperature sensors . . .

1

1

2

1

2

1

1

1

1

4

2,3

2,3

2,3

2

2,3

2

2

2

2

1

1

1

2

2

1

2

2,4

2,4

—

—

?—

x

—

—

—

x

‘?

x

x

x

?

x

x

x

—

x

—

x

—

—

—

?

7

x

x

—

?

?

?

x

?

—

?

x

x

x

x

x

?

x

x

x

?

x

?

x

7

?

?

x

x

x

x

?

7

?

?

x

x

?

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

—. . . Pncipal features

Fast reactions, small units.

Eliminates cokemaking.

Improves product quality.

Conserves energy and reduces number of reactor

units.

Improves product quality.

Low-temperature processes.

Alternative energy source for steel making.

Alternate fuel/energy source.

Low-temperature solid-state reduction of iron ore

to iron.

Alternate fuel/energy source.

Reduces pollution and conserves energy in

cokemaking operation.

Reduces pollution and conserves energy in

cokemaking operation.

Energy conservation measure.

Energy conservation measure.

Improved cooling system, saves water usage.

Allows improved product quality and increased

blast furnace productivity.

Reduces scale formation, increases yield, and

conserves energy.

Used with coal-based reduction processes to

increase reaction rate.

Use of alternative fuels to replace coke (possible

energy conservation).

Eliminates mechanical forming and heating.

Direct conversion of liquid steel to solid slabs and

squares. Major energy conservation measures

and increased yield.

Replaces metallurgical coal/coke.

Alternate fuel source.

Iron ore/carbon flux is intimately mixed to allow

reduction in the pellet.

No melting or reheating required, mini mill

concept.

Eliminates holding and reheating steps.

Applies to any unit/process operation.

Units to measure and control high-temperature

iron making and steel makinq process variables.

Categories I-radical, 2-incremental 3-environmental, 4-transfer ?-slgnlflcant adoption possible if pilot efforts show promise. X-significant adoption possibl.

- .

alncludes a variety of processes

SOURCE: G. St. Pierre for OTA.
194 ● Technology and Steel industry Competitiveness

with care: a question mark indicates that a significantly adopted within the time period;

significant adoption is possible within that a dash, that adoption within the time period is

time period if current pilot efforts show prom- improbable. A number of the technologies are

ise; an X-entry, that the technology should be currently adopted or near adoption.

Radical and Major Technologies

Four major new technologies-direct reduction, direct steelmaking, plasma steelmaking, and direct casting—are described and

assessed in this section. * These technologies

are in markedly different stages of research,

development, demonstration, and adoption.

The first process is in use throughout the

world; the last three have not advanced beyond the R&D stage.

Direct Reduction

Description.— DR processes convert iron

ore (fines, pellets, sinter, etc. ) into sponge

iron at temperatures well below the melting

point of iron.** These processes distinctly

differ from the conventional blast furnace

process in two major respects: solid metallized product is produced, rather than molten

iron;*** and a wide variety of reductants

may be used in place of metallurgical-grade

coke. DRI is normally porous, or in some cases

has a filamentary form, and must be processed in steelmaking units that convert it into

a usable product. If the starting oxide material is finely divided, the resulting DRI does not

have the characteristic spongelike structure

but consists instead of finely divided particles

of iron. Subsequent processing involves consolidating the reduced or metallized powders

by either compression and sintering into finished forms, as in the powder metallurgy in-

*TWO other major changes, formcoke and continuous casting, are fully described and discussed in ch. 9.

**The principal concepts of DR were presented by William

Siemans in 1869; however, elementary direct reduction using

char was practiced by ancient ironmakers,

***The degree of metallization describes the fraction of the

iron content of the ore which is converted to metallic iron.

dustry, or direct rolling of these powders into

sheet products.

Another type of DR process is based on

combining the reducing agent with the iron

oxide as a charge material. For example, it

may use a self-reducing pellet or briquette in

which finely divided iron ore or mill scale is

mixed with a carbonaceous reductant material and fluxes. This pelletized or compacted

mixture contains all of the reactants for DR,

and it is only necessary to provide the heat

for metallization. If the particles are very

finely divided and well mixed in the pellet or

briquette, reactions can be very fast; for example, a number of reports indicate that

under favorable heat transfer conditions 95-

percent metallization can occur within 4 to 5

minutes at temperatures of about 1,3000 C.

The fuel requirements in the DR processes

are very different from those in conventional

blast furnace ironmaking. Current blast furnace practices require high-grade metallurgical coke, which is produced in coke ovens

from selected blends of coal. Current DR

processes use a variety of fuels and reductants, including coal without prior coking,

natural gas, oil, or gases produced from any

of these fossil fuels. DR processes also maybe

of many mechanical designs: there are batchtype processes in which preheated, preformed reducing gases are passed over a

static bed of iron oxide material; other designs are based on concurrent or countercurrent flows of gases and solids in a shaft. Fluidized beds have also been used for DR, as

have rotary kilns with countercurrent or concurrent flows of gases and solids. Figure 23 is

a schematic diagram of several of the principal DR systems.
.

Ch. 6—New Technologies for the Steel Industry ● 195

Figure 23.—Schematic Diagram of Direct Reduction

Processes

Sponge iron

retort

HyL

Sponge iron

rotary kiln

Krupp

SL-RN

HIB

F/OR

SOURCE: K.H. Ulrich, “Direct Reduction by Comparison With Classical Method

of Steel Product Ion,” Mefallurgical Plant and Technology, No. 1,

1979.

In all of these systems, the operating temperatures must be controlled so that the material moves uniformly through the system

without sticking, agglomerating, or clinkering; the gases and solids must have adequate

contact for fast reactions and heat and mass

transfer; and the design must allow the materials to be discharged and cooled properly.

About 20 different DR processes are in use

throughout the world.9 (See table 76.) Most of

the processes have not spread widely: only

‘]. R. Nliller, “Use of Direct Reduced Iron Ore and Balanced

Integrated Iron and Steel Operations,”’ Ironmaking (Ind StWJm(lkin,q, 1977, No. 5, pp. 257-264; ‘Crrhe Inevitable Nlagnitudes

of Meta Hized Iron Ore,’” iron ond Steel Engineer, December

1972.

three processes have been adopted in more

than four plants. The most prevalent process,

the Midrex, was first built at Oregon Steel

Mills in 1969; the remaining 16 Midrex plants

are widely scattered and include several 2.3-

million-tonne/yr plants in the U.S.S.R. The 14

HyL plants are also widely dispersed. All of

the Midrex and HyL plants use natural gas as

a reductant. The coal-based SL-RN process

has been adopted at six plants. Additional information on the distribution of operating DR

plants is given in table 77. A number of U.S.

steel companies are showing substantial interest in adopting DR: at least six plants have

been constructed, and at least another four

are planned.

Tables 76 and 78 show that most of the current DR systems, whether based on coal or

gas, have been built in units of less than

362,800 tonnes nominal capacity; however,

several larger units are being planned and

modules of 1.2 million tonne/yr are probable

in the next decade. Several DR plants have individual capacities in excess of 907,000

tonne/yr. 10 Some representative characteristics of major DR processes are shown in

table 79.

Energy consumption figures for the four

major natural gas DR processes vary significantly, as table 80 shows. The lower energy

processes are the more prevalent ones.

Table 78 presents general information on

three categories of operating coal-based DR

processes: direct use of coal, coke breeze,

and gasified coal. The third category is really

a separate breed, because the coal gasification processes can, in principle, be coupled

with any of the gas-based processes.ll Such a

“’’” Saudi Resour(ws and Korf Technology Combine to Create

a Dessert Steel hlill, ”” 33 Metal Producing, Nlat 1979. pp. 54-57:

W. Loewe. “DR Unit Construction Due in Six Nlonths. ” M’ashington Pos[. Mav 31, 1979.

“j. W’. Clark, “Integrated Steelmaking Based on Coal Gasification and Direct Ore Reduction,”” L1’estinghouse R&D Center.

Pittsburgh, Pa,, Dec. 8. 1979; OTA seminar. Llav 2-3.1979.
196 ● Technology and Steel Industry Competitiveness

Table 76.—Direct Reduction Plants Constructed or Scheduled for Completion by 1980

Number Year of Year of Capacity,

Process of plants original plant last plant Countries Reductant 103 tonnes Typeb

Hoganas. . . . . . . . . . . 3 1954 1954 1,2 Coke breeze 63-154

Wiberg . . . . . . . . . . . . 4

—

1954 1964 1,3 Coke breeze 9-82

Rotary kiln . . . . . . . . . 1

—

1957 1957 3 Coal 22 R.K.

HyL . . . . . . . . . . . . . . . 14 1957 1980 4, num. Natural gas 91-1,905 St. BC

Highveld kiln . . . . . . . 2 1968 1977 5 Coal 272-907 R.K.

Midrex . . . . . . . . . . . . 17 1969 1980 2, num. Natural gas 272-2,268 S.F.

Kawasaki . . . . . . . . . . 3 1969 1977 3 Coke breeze 65-227 R.K.

SL-RN . . . . . . . . . . . . . 6 1970 1978 6, num. Coal 54-327 R.K.

Purofer. . . . . . . . . . . . 4 1970 1980 7, num. Natural gas, CO 136-726 S.F.

Koho . . . . . . . . . . . . . . 1 1971 1971 3 Coke breeze 44 —

Armco. . . . . . . . . . . . . 1 1972 1972 2 Natural gas 300 S.F.

Krupp . . . . . . . . . . . . . 1 1973 1973 5 Coal 136 R.K.

HI. . . . . . . . . . . . . . . 1 1973 1973 8 Natural gas 590 FI. B.

Sumitomo . . . . . . . . . 1 1975 1975 3 Coal 218

Kubota . . . . . . . . . . . . 1

—

1975 1975 3 Coal 190

ACCAR . . . . . . . . . . . . 2

—

1975 1976 9 Coal, oil, gas 45-218 R.K.

FIORD . . . . . . . . . . . . . 1 1976 1976 8 Natural gas 363 FI. B.

NSC . . . . . . . . . . . . . . 2 1976 1977 3 Oil 136-218

Kinglor-Metor . . . . . . 1

—

1976 1976 10 Coal 36

Azcon C . . . . . . . . . . . . 1 1978 1978 2 Coal 91 R

-K.

a1-Sweden, 2-united States, 3-Japan, 4-Mexico, 5-South Africa, 6-New Zealand, 7-West Germany, 6-Venezuela, 9-Canada, 10-ltaly.

bR, K, = rotary kiln, St.B. = static bed, S F = shaft furnace, FI. B. = fluidized bed (See text)

CNow known as Direct Reduction Corp. (DRC).

SOURCE: G. St. Pierre for OTA.

Table 77.—Distribution of World Direct Reduction

Capacity, 1980

By process

Midrex . . . . . . . . . . . . 38.5%

HyL . ..............38.1

SL-RN . . . . . . . . . . . . . 5.6

Purofer. . . . . . . . . . . . 4.2

Others . ...........13.6

By reductant source

Natural gas . . . . . . . . 87.40/~

Coal . .............11.1

Gas/fuel oil. . . . . . . . . 1.5

By process type

Shaft furnace. . . . . . . 44.6%

Static bed. . ........38.9

Rotary kiln . ........12.6

Fluidized bed. . . . . . . 3.9

By country

Venezuela . . . . . . . . . 24.8%

Iran . ..............14.2

Mexico . ...........10.7

Canada. . . . . . . . . . . . 8.7

United States. . . . . . . 6.1

Japan . . . . . . . . . . . . . 6.1

Others . ...........29.4

SOURCE: R.J. Goodman, ‘

iDirect Reduction Processing—State. of-the. Art,”

Skillings Mining Review, vol. 68, No 10, March 1979

coupling would involve producing clean fuel

and reducing gas by pressurized gasification

of nonpremium, high-sulfur coal; using the

gas as a reductant in the chemical reduction

of iron ore; using the offgas from ore reduction either as a fuel for combined-cycle power

generation or as an auxiliary energy source

for gasification and reduction plants; and

then melting and refining the DRI in an electric furnace with electricity from the combined-cycle powerplant. Several coal gasification processes might complement other

steel processes.12

Table 81 summarizes energy consumption

in coal DR kilns. There is a wide range in the

energy consumption figures for coal-based rotary kiln DR because of the flexibility in the

operation of rotary kilns. In particular, coals

of varying ash and moisture content and ores

of varying quality can be processed. The low

consumption figures are for coals of low moisture and ash content with ores [pellet, lump,

fines) of low gangue and moisture and high

iron content. Energy consumption in shaft

units is about the same as in rotary kilns.13

The consumption in static beds is almost 50

percent greater, and in fluidized beds may be

75 percent greater, than in kiln and shaft systems.

Total consumption of energy in coal gasification processes might be as low as 12.1 mil-

‘iE. J. Smith and K. P. Hass, “Present and Future Position of

Coal in Steel Technology,”’ lronmaking ono’ Steelmoking, 1979,

No. 1, pp. 10-20,

‘ ‘D. S. Thornton and D. I. T. Williams. “Effects of Raw Materials for Steelmaking on Energy Requirements, Zronmoking

and Steelmuking, No. 4, 1975, pp. 241-247.
Ch. 6—New Technologies for the Steel Industry 197

Table 78.—Operating Direct Reduction Plants Based on Coal or Coke Breeze

—

Process

Plants-using-coal directly

SL-RN. . . . . . . . . . . . .

SL-RN. . . . . . . . . . . . . . . .

SL-RN. . . . . . . . . . . . . . .

SL-RN. . . . . . . . . . .

SL-RN . . . . . . . . . . . . . .

SL-RN/Krupp. . . . . . . . .

Azcon–DRC, ... .

Kinglor-Metor . . . . . . . . .

Kinglor-Metor .. .

Sumitom a

Highveld .

ACCAR. . . . . . . . . . .

Plants using coke breeze

Hoganas . . . . . . . . . . .

Hoganas . . . . . . . . . .

Wiberg . . . . . . . . . . . . .

Kawasaki . . . . . . ...

Kawasaki. . . . . . . . . . .

Sumitomo . . . . . . . . . . .

Rotary kiln. . . . . . .

Plants using gasified coal

NSC . . . . . . . . . . . . . . . . .

NA = not avaflable

Capacity Product

Location Company and country (tonnes) Startup usea

N.W. Ontario

Arizona

Rio Grande

Fukuyama

Glenbrook

Benoni

Tennessee

Cremona

Monfalcone

Kashima

Witbank

Ontario

Steel Co. of Canada

Hecla Mining, United States

Aces Fines Pir., Brazil

Nipon Kokan, Japan

New Zealand Steel

Dunswart, South Africa

Azcon Corp., United States

Danieli, ltaly

Danieli, ltaly

Sumitoma, Japan

Anglo-Am. Corp., South Africa

Sudbury, Canada

362,800

54,420

58,955

317,450

108,840

90,700

90,700

36,280

9,070

195,912

907,000

226,750

136,050

32,652

21,768

54,420

54,420

217,680

43,536

136,050

1975

1975

1973

1974

1970

1973

1978

1976

NA

1975

1968

1976

A

c

A

B

A

A

A

A

A

B

B

NA

Hoganas Hoganas AB, Sweden

Oxelosund Granges AB, Sweden

Sandriken Sandrik AB, Sweden

Chiba Kawasaki, Japan

Chiba Kawasaki, Japan

Wakayama Sumitomo, Japan

Muroran Nippon, Japan

1954

1954

1954

1969

NA

1975

NA

c

c

c

B

B

B

B

Hirohata Nippon, Japan 1977 B

aProduct use: A = steel making feed B = ironmaklng feed C = specialty product

SOURCE Department of Commerce ‘Production of Iron by Direct Reduction,’ May 1979

Table 79.—Characteristics of Direct Reduction Processes and Electric Furnace Consumption

——

SL-RN

Furnace ., . . Kiln

Reductant

source . Coal

Energy, 106 Btu/

tonne DRI. . . 13.1

Feed, type . . Coarse ore,

pellets

Product

metallization. 900/o

Elect ric-f urn ace

consumption charge

Sponge . . . 75%

Scrap . . . . 25

Hot metal. 0

Power,

kWh/tonne . 555

Yield. . 91 %

Armco

Shaft

Natural gas

13.1

Pellets

90%

200/0

30

50

272

84%

Midrex Purofer HyL

Shaft Retort

Natural gas Natural gas

HIB FIOR-ESSO

Shaft

Natural gas

11.9

Pellets

92-960/0

700/0

30

0

550

93°/0

Fluid bed Fluid bed

Natural gas Natural gas

or oil

15.1

Ore fines

13.1 15.5

Coarse ore, Coarse ore,

pellets pellets

95°/0 85-900/0

17.9 -19.9

Ore fines

90%. 920/o

500/o 600/0

50 40

0 0

583 625

— 92.40/.

75%

25

0

—

—

—

535

—

—

—

SOURCE: E.J. Smith and K.P. Hass, Present and Future Position of Coal in Steel Technology.” Ironmaking and Steelmaking, 1976, No 1, pp. 10-20

lion Btu/tonne of DRI. The most favorable en- count is taken of all inputs and outputs.14

ergy consumption figures for blast furnaces Waste heat losses are 0.5 million to 5.0 milare about 14.3 million Btu/tonne of iron. The lion Btu/tonne for steel production by the coke

high efficiency of modern blast furnaces is

“Clark, op. cit.: R. S. Barnes, “The Current State of Iron and undisputed, and it is unlikely that any DR sys- Steel Technology. ” Ironm(]king ond Steelm(lking, 1975, No. 2 ,

tern will consume less energy when proper ac- pp. 82-88: Thornton and Williams, op. cit.
 . 

198 ● Technology and Steel Industry Competitiveness

Table 80.—Energy Consumption in Gas

Direct Reduction Processes

Reductant Electricity

energy 106

consumption Total 106

Type Btu/tonne kWh/tonne Btu/tonne

Shaft . . . . . . . . 10-12 33-135 11.1 -12.8

Retort. . . . . . . . 12.5 20 136

Kiln. . . . . . . . . . 13-20 35-45 13-20

Fluidized bed . 15-18 40 14.7

SOURCE G St Pierre for OTA

Table 81 .—Energy Consumption of

Direct Reduction Rotary Kilns

Consumption

Item Low High

Coal, Btu/tonne . . . . . . . . . . 14.3 x 1 o’ 22.0 x 10’

Electricity, kWh/tonne. . . . . 38.5 49.5

Total energy, Btu/tonne. . . . 14.4 x 10’ 22.2 x 10’

SOURCE: G St Pierre for OTA

oven-blast furnace-basic oxygen furnace

(CO-BF-BOF) sequence and 11.8 million

Btu/tonne for the direct reduction-electric arc

furnace (DR - EAF) sequence using 20 percent scrap.15 The latter figure is likely to improve as technological advances occur, but

for energy consumption from ore to metal it

will be difficult to better the performance of a

‘

s

Barnes, op. cit.

modern blast furnace system; however, capital and operating costs may be improved with

DR systems.

A comparison of coal-based DR system energy costs with other types of DR systems has

been prepared using OTA energy prices and

projected rate of increase, (See ch. 5.) The results are presented in table 82 by specific

process and in figure 24 by type of process. A

favorable situation is predicted for coalbased DR systems in the United States.

New DR Processes.— A number of new DR

processes are under development. In the

United States, the Midrex Corp., originator of

one of the two leading natural gas DR processes, has also developed a direct coal DR

process. It is fundamentally different from

the coal kiln processes in use for some years.

The principle of the electrothermal process is

electrical resistance heating of the iron ore

and coal mixture; this is shown in figure 25A.

This process is now in the pilot stage and is

expected to be marketed for plant sizes of

181,400 tonne/yr within the next 5 years. Because of its relatively simple design, the process appears to offer good process control and

reliability, with a relatively low capital cost.

Table 82.—Energy Costs for Direct Reduction Processes Based on OTA Energy Costs

OTA

energy

cost and

annual Allis- Cost averages

cost Chalmers Armco FIOR HIB HvL Krupp Midrex Purofer S L- R N Fluid Retort

Energy sourcea

increase kiln shaft fluid fluid retort kil n shaft shaft kiln bed shaft Kiln

Electricity 10° Btu/tonne ., . . . — 0.17 ‘0.1 2 0.15 (d) 0.08 0,15 0.51 0.38 (d)

$ in 1976 $5.57 0.95 0.67 0.84 (d) 0.45 0.84 2.84 2.12 (d) – – –

Low $ in 2000 ~ ~ ~ ~ ~ ~ ~ ~ 1.0% 1.22 0.84 1.04 (d) 0.57 1.04 3.60 2.71 (d)

High $ in 20()(). . . . . 4.7% 2.88 2.01 2.49 (d) 1.38 2.49 8.55 6.39 (d)

Natural gas 1 0

6 Btu/tonn e 12.65 16.06 19.86 13.75 11,90 1320 (d)

$ in 1976 $1.-

27 (b) 16,07 2040 25.15 17.46 —

Low $ in 2000” ~ ~ ~ ~ ~ ~ ~ ~

15.11 16.76 (d)

4.0% 41.18 52.58 64.46 4476 37.87 42.97 (d)

High $ in 2000. . 5.0°10 51.81 65.78 81.10 56.32 48.73 54.07 (d)

Coal 10° Btu/tonne . 18.OC

$ in 1976 ... ., $1-31

18.OC 18.OC

23.8 – – – – 238 – – 23.8 – —

Low $ in 2000 . . . . . . . 1.0% 30.2 30.2 30.2

High $ in 2000. . 5.0% 76.7 76.7 76,7

Total energy costs per tonne

1976. , . . . . ($) 24.8 16.7 21.2 25.2 17.9 24.6 18.0 15.3 25.8 23.2 16.7 24.4

2000; all low increases, ... . ($) 31.4 42.0 53.6 645 45.3 31.2 41.5 45,7 30.2 59.1 43.1 30.9

2000; low electricity, high natural

gas, low coal. . . . . . . ($) 314 52.7 66.8 81.1 56.9 31.2 52,3 56.7 30.2 74.0 53.9 30.9

a1976 dollars, no coke or 011 used; energy consumptions from R.J. Goodman, “Direct Reduction –State-of-the-Art, ” Skillings Mining Review, Mar. 10-17, 1979

bAllis-Chalmers unit can use natural gas, oil, and coal. Coal used here

cAn average value of 18 106 Btu/tonne was used tO represent a readily available coal Typical of kiln processes and assumed to be used in each Process

‘Data not available

SOURCE: G St Pierre for OTA (see tables 54 and 55)
Ch. 6—New Technologies for the Steel Industry ● 199

Figure 24.—Projected Energy Costs to Produce

a Tonne of Direct Reduced Iron

100

50

20

shaft

(natural gas)

10

1976 1980 1990 2000

Year

Key,

High-curve: 5 percent Increase natural gas costs, 1 percent coal,

1 percent electricity

Low-curve 4 percent Increase natural gas costs. 1 percent coal,

1 percent electricity

Reactor type

Fluid bed: average of FIOR & HIB process data

Kiln average of All Is-Chalmers, Krupp, and SL-RN data

Shaft furnace and retort: average of Armco, HyL, Midrex, and

Purofer.

SOURCE G St Pierre for OTA

A rather ingeniously designed coal-based

DR process has recently been described by its

American inventor. ” (See figure 25 B.) Although pilot testing has not yet been carried

out, the proposed process uses well-accepted

chemical reactions, simple design, and

already proven technologies and materials

for its components. It is a good example of

designing a new technology to suit contemporary concerns, constraints, and opportuni11A. Calderon, “Program for Reconstruction of U.S. Steel Industr},” Calderon Automation, Inc., Cleveland, Ohio, February

1980. (Patents applied for.)

ties. The basic features of the Calderon Ferrocal ironmaking process are:

●

●

●

●

●

●

any grade of coal is mixed with any type

of iron ore, including domestic low iron

content taconite ores;

the mixture is put through a heatingreduction vessel consisting of a vertical

tower made up of several cells, each insulated from the others and tapered

downward;

the inside of the cells are made of alloy

steel which serves as a susceptor for induction heating, with the induction coils

surrounding the outside of the tower;

induction heating of the cells leads to a

temperature at which there is combined

coal gasification and solid-state reduction of the iron ore; the hot gases rise

through the tower and preheat the next

batch of the ore-coal mixture before being collected, processed, and used for

heating, electrical generation, or sale;

a portion of the solid metallic iron is

periodically pushed out of the bottom of

the tower into an induction-heated

holding vessel of liquid iron, in which

slag is formed and removed and desulfurization is accomplished; and

molten iron is periodically removed and

delivered to either a basic oxygen or

electric arc steelmaking furnace in the

same way that pig iron is delivered in a

conventional integrated plant.

This process has several advantages that

make it highly attractive, It could be adopted

by present scrap-based nonintegrated plants,

but it can also use the raw material and steelmaking facilities in existing integrated plants,

It uses low-cost iron ores and coals, but unlike

conventional DR processes it produces hot

liquid iron which can be used in existing integrated facilities. It is a closed system with

minimal environmental problems. It has high

thermal efficiency, and, because it produces

enough medium-Btu gases to generate electricity in considerable excess of the demands

of its induction units, it is adaptable to the

cogeneration of electricity. Present cost estimates also indicate considerable savings:
200 . Technology and Steel Industry Competitiveness

Figure 25.—Two New Coal Direct Reduction

Processes

Coal plus

limestone I

Electric

power

supply

Direct reduced iron plus

ash plus lime with sulfur

to magnetic separator

capital costs (exclusive of electricity cogenerating facilities) may be only one-half those of

coke ovens and blast furnaces; the modular

design allows higher utilization rates at lower

capacity levels; and there might also be savings in both construction time and maintenance costs. Return on investment could be as

high as 25 percent.

A pilot plant has been designed to produce

4.5 tonne/hour. It would cost approximately

$5 million to construct and operate for at

least several months. Since the process has

been invented by someone outside of a steel

company, although with considerable experience with the industry as a designer and

builder of steelmaking facilities, pilot evaluation which requires a steelmaking plant may

prove to be difficult. At this stage the technology provides an excellent example of the

problems facing the introduction of major innovations into the steel industry. This American invention or something similar to it could

become the most important innovation for domestic integrated steelmaking in the coming

decades.

SOURCE: Midrex Corp.

B. Calderon Ferrocal Ironmaking Process

SOURCE: Calderon Automation, Inc.
Ch. 6—New Technologies for the Steel Industry ● 201

A number of new ironmaking processes are

also being developed in Sweden, All are

based on the concept of using partial (low

degree of metallization) DR followed by a

smelting operation that melts and further refines the material to produce the equivalent

of the pig iron. Descriptive information on

three of these processes is given in table 83.

Some of them appear to offer a potential for

considerable energy savings, both in energy

units and in costs. This results from the use of

low-grade coals rather than coke. All produce

less environmental pollution because of their

relatively simple design (figure 26). Several

processes and plants based on the same approach of prereduction and smelting were developed in the United States; but for many

reasons, including the difficulty and expense

of testing new steelmaking technology in pilot

and demonstration plants by firms that are

not steelmaker themselves, they were not

successful. 17

Apparently the Hofors plasma process is

related to a recently announced, more traditional DR process producing DRI rather than

“See, e.g., T. E. Ban. “Effective Energy Utilization Through

Direct Electric Smelting of Hot Prereduced Iron Ore, ” Skillings

Mining Review, Sept. 14, 1974.

pig iron. The DR process, called Plasmared,

uses plasma heating and can burn oil, gas, or

coal as the energy source.18 A small plant is

now under construction in Sweden.

Costs.—An important aspect of evaluating

new DR processes is their capital costs. Reported capital costs for a number of DR processes are given in table 84. The cost for presently used natural gas processes is relatively

low, generally about $110 per annual tonne of

DRI capacity. This compares to two to three

times that cost for coke ovens and blast furnaces to produce pig iron. The capital costs of

using coal gasification, direct coal, or coke

oven gas are higher than those for natural

gas, but they are still quite competitive with

the conventional coke oven-blast furnace

route. The capital costs for the new Swedish

processes that produce pig iron are also quite

competitive with the conventional route (see

table 83).

More detailed data for a particular direct

coal, kiln DR process and a typical gas-based

process as a function of plant size are shown

in figure 27. This illustrates the savings re-

“{Americon Met(]l Murket, Sept. 21.1979, and Aug. 8, 1979.

Table 83.—Three New Swedish Steelmaking Processes

—

Capital costs

($1979)/tonne Production Energy use

annual costs ($ 1979)/ 106 Btu/tonne

Process capacity tonne pig iron pig irona

ELRED.—Reduction stage uses coal in a fluidized bed. Final smeltingreduction stage is in an electric arc furnace. Flue gases from both

stages generate electricity. NA NA 15

Hofors. —Reduction in fluidized beds followed by smelting reduction in a

plasma-heated shaft furnace. Gas for first-stage reduction from

smelting operation using coke. Outlet gas from first stage used for

drying and preheating of materials. The plasma-heating requirement

can be reduced by injection of oxygen or oxygen-hydrocarbon mixture

in second stage. $140

Low- and high-electricity versions within about 3 percent of each

other. 10

INRED. -First-stage reduction-smelting using coal which is partially

burned, the remainder forming coke. Second-stage uses coke from

first-stage and prereduced iron in an induction-heated furnace.

Electricity is produced from steam formed by cooling of first stage

furnace. Coal is sole energy source. 178 125 16

NA = not available

aFor comparison purposes the energy for a blast furnace ranges from 11.8 106 Btu/tonne of pig iron for a new blast furnace to 15.4 106 Btu/tonne for an existing one.

SOURCES: ELRED from P. Collin and H Stickler. “EL RED-A New Process for the Cheaper Production of Liquid Iron, ” provided by ASEA Corp. Others from S

Eketorp, et al “The Future Steel Plant—A Study of Energy Consumption,” Nat tonal Swedish Board for Technical Development, 1979

$116

I
.

202 ● Technology and Steel Industry Competitiveness

Figure 26.—Three New Swedish Ironmaking

Processes

I I

iron

Table 84.—Capital Costs of Direct Reduction

Processes (1979 dollars per tonne of DRI)

Process cost

IN RED

Prereduction

Final reduction;

iron

CO/H2

Prereduced

material

Coke

SKF process

(Hofors)

~ Iro n

SOURCE S Eketorp for OTA

Figure 27.—Specific Investment Costs per Tonne

$220

198

of Direct Reduced Iron (Krupp coal process,

price basis, 1978)

1 module

Gaseous direct

reduction

132

0 0 1 8 0.36 054 0.72 091

Annual production of sponge iron 106 tonne/yr

SOURCE: K.H. Ulrich, “Direct Reduction by Comparison With Classical Method

of Steel Production,” Metallurgical Plant and Technology, No 1,

1979
Ch. 6—New Technologies for the Steel Industry ● 203

suiting from scaling up DR processes, which

is just now beginning.

Another way of examining the potential

economic advantages of new processes is to

consider the costs to produce steel rather

than DRI, Capital costs as a function of annual capacity for a direct coal, kiln DR process and conventional blast furnace based on

steelmaking are shown in figure 28. For capacities less than 907,000 tonne/yr, DR appears to have a distinct capital cost advantage. A similar result holds for production

costs, as shown in figure 29.

A comparison of both capital and production costs for conventional steelmaking with

several variations of a coal gasification steelmaking process, shown in figure 30, shows

considerable savings possible.

A comparison of the Swedish ELRED process production costs with both conventional

blast furnace steelmaking and a typical natural gas DR system is shown in table 85. The

comparison with the conventional route is

valid, and it shows a saving with the ELRED

process at this relatively low annual capacity, but the comparison with the gas DR plant

Fiqure 28.—Specific Investment Costs for Different

‘Routes of Steelmaking per Tonne of Raw Steel

Capacity (price basis, 1978)

0.45 0.9 135 18 225

Annual production of Iiquid steel 106 tonne/yr

SOURCE K H Ulrich, “Direct Reduction by Comparison With Classical Method

of Steel Production,” Metallurgical Plant and Technology, No 1,

1979

Figure 29.—Steelmaking Costs Upstream and

Exclusive of Continuous Casting for Different

Production Routes per Tonne of Raw Steel

(price basis, 1978)

- and electric arc furnace

steelmaking

I I I

u 045 0.9 135 18

Annual production of Iiquid steel 106 tonnes/year

Coking coal: $72/tonne DR-coal: $33/tonne

(respective coke price Oil: $72/tonne

depending on size of Electric power. $0.02/kWh

coke oven plant)

SOURCE K H Ulrich. ‘“Direct Reduction by Comparison With Classical Method

of Steel Product Ion,” Mefallurgical Plant and Technology No 1,

1979.

Figure 30.—Comparison of Coal Gasification Direct

‘Reduction Steelmaking to Conventional Blast

Furnace and Nonintegrated Steelmaking

Coal-gas processes yield steel at $128to$134/tonne

C(
204 Technology and Steel Industry Competitiveness

Table 85.—Total Steelmaking Costs in 1978 Dollars

per Tonne of Raw Steel (for 050,000 tonne/yr of raw steel)

Shaft

Blast furnace

furnace (sponge

(sinter) ELRED iron) + arc

+ BOF + BOF furnace

Iron raw materiala 

. . . $51.6 $33.5 $60.0

Energy b. . . . . . . . . . . . 54.4 16.8 47.6

Processing. . . . . . . . 37.5 38.0 51.6

Capital costsd . . . . . . 39.0 45.7 44.3

Unforeseen costs . . . — 11.0 —

Total steel making

costs. . . . . . . . . . $182.5 $145.0 $203.5

Relative total costs

as a percentage. . . 100% 80% 112%

aConcentrates and pellets, respectively, alloying element, cooling pellets,

bCoke, coal, oil, minus energy credit plus electricity in steel mill ($181 tonne)

CLabor operation, repairs, and maintenance), electricity, electrodes, Iime, oxygen. refractories, desulfurizing (for ELRED)

dFor the ironmaking and steelmaking plants Plants assumed to be in Europe.

SOURCE P. Collin and H. Stickler, “EL RED-A New Process for the Cheaper

Product Ion of Liquid Iron, ” ASEA Corp.

is not quite so meaningful because the cost of

gas purchased in Europe would be high.

To help put the potential capital cost advantages of DR in better perspective, cost

data for steelmaking capacity for a number of

different process routes, including conventional steelmaking, are given in table 86. Although steelmaking based entirely on natural

gas is not likely to be practicable for the

United States, it is being adopted by foreign

nations with domestic sources of gas and

without large supplies of scrap. The costs are

less than for blast furnace technology. The

two more likely cases for the United States

are the use of a combination of coal DR and

scrap-based steelmaking and the use of coal

gasification DR ironmaking. Because coal

gasification is just now being commercialized, there are no reliable cost data for the

United States. However, the data for a Brazilian plant based totally on coal gasification,

and the data shown in figure 30, suggest that

this is a viable option for future domestic

steelmaking. The most intriguing possibility

for the near term (within 5 to 10 years) is the

combination of scrap-based steelmaking with

either direct coal or coal gasification. A

greenfield plant using a combination of scrap

and DRI (discussed more fully in ch. 8) would

cost much less than expanding an existing inTable 86.—Capital Costs for Different Steelmaking

Routes (1979 dollars per annual tonne steel

product capacity)

Process route cost

Conventional new plant (greenfield). ... ... ... ... .. $1,320

Integrated blast furnacea

. . . . . . . . . . . . . . . . . . . . . . 275

Nonintegrated scrap-electric furnacea. . . . . . . . . . . 275

Combined scrap non integrated with coal DRb

Direct coal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 385

Coal gasification. . . . . . . . . . . . . . . . . . . . . . . . . . . . 418

Integrated gas DRc

0.45 million tonne/yr, Midrex process Argentina . . 660

1 million tonne/yr, unstated process and Iocatione. 550

0.85 million tonne/yr, Midrex process,

Saudi Arabiaf

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 814

0.6 million tonne/yr, unstated process, Egyptg . . . . 725

Coal gasification-DR integrated

Unstated DR with Koppers-Totzek gasifier

in Brazilh

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,011

aFrom ch. 10 Value for nonintegrated plant IS for a broader product mix than is

currently true for most such plants

bAssumes 50-percentt use of DR plant to produce 1 tonne of steel Less then 50

percent of DRI would be used with scrap, but because of Incomplete metallization of the ore and yield uncertainties extra DR capacity IS accounted for

The unit cost for direct coal DR IS $220/tonne and for coal gasification

$3301 tonne The value for the base steelmaking plant IS $2751 tonne

CAssumes a product mix corresponding to a domestic nonintegrated producer

dAmerican Metal Market, Aug 281979

eAmerican Metal Market, Aug. 21, 1979 (by French Society of Steel Studies)

f33 Metal Producing, May 1979

gArnerican Metal Market, June 11 1980.

hAmerican Metal Market, Aug. 19, 1979.

tegrated plant or constructing a new integrated plant. Costs for the latter are discussed in chapter 10.

Labor requirements for DR systems range

from 0.4 to 0.6 employee-hours per tonne.19

For DR with EAF, the range is 1.6 to 1.9 employee-hours per tonne.20 In contrast, the

CO-BF-BOF sequence uses around 2.6 employee-hours per tonne.

Product Use.—In the steel industry DRI has

three major uses:

● feed to ironmaking units (BF, cupola,

electric smelting);

c feed to steelmaking units (BOF, EAF);

and

● feed to metal powder processes.

In addition, DRI may be used for a variety of

special applications such as the recovery of

copper from water streams. DR processes

may be used to recover other constituents in

‘“H, W. Lownie, Jr., “Cost of Making Direct Reduced Iron,”’

SME-AIME Fall Meeting. Florida, Sept. 11.1978,

“’Clark, op. cit.
Ch. 6—New Technologies for the Steel Industry 205

an ore feed, and in the extreme case DRI may

be a lesser value byproduct.

The composition of DRI determines its suitability for various applications. Some DRI

products have relatively low degrees of metallization (less than 90 percent, and even 80

percent in a few cases); these are suitable

only for ironmaking. Other DRI products have

a relatively high carbon content. Frequently,

DRI is marketed on the basis of its carbon-tin

oxygen ratio, which—depending on the particular steelmaking operations—is a very important factor in the selection among available DRI products.

One advantage of DRI is that it is free of

the so-called “tramp” elements that often appear in recycled scrap. Recycled scrap contains a variety of alloying elements, including

copper from copper-bearing alloys, tin and

zinc from coated products, and many others,

all of which can pose problems in steelmaking. On the other hand, DRI can have the disadvantage of a high sulfur content.

Desirable composition specifications of

DRI are given in table 87. It must be recognized, however, that off-specification material may be used in blending batches of DRI.

DRI is normally used in conjunction with

scrap, and an optimal ratio of DRI to scrap

can be established for any particular situation. 21 In one estimate of EAF energy consumption, it was found that energy consumption decreased linearly from about 770 kWh/

tonne at 80-percent metallization to 500

kWh/tonne at 96-percent metallization. 22

Most studies have shown that EAF productiv-

“’Ironmakin~ by Direct Reduction-A Review of the Detroit

hfeet ing, ”’ ]ron ond Steelm{lking, May 1979, pp. 44-45; D. H.

Houseman, “Direct Ironrnaking Processes, ” Steel Times, April

1978: B. Rollinger, “Steel Via Direct Reduction, ” Iron ond

,$teelmaking, January 1975, pp. 8-16: J. W Brown and R. L. Reddv. “E1ectric Arc Furnace Steelmaking With Sponge Iron,”’

lronmokin~ (Ind Steelm[]kmg, No. 1, 1979, pp. 24-31: F. Fitzgerald, “Alternative Iron Units for Arc Furnaces, ” lronmoking

~lnd Stwlm~lkmg, No, 6, 1976, pp. 337-442: K. Shermer, “Imprc~ved ‘1’echnologv for Pr(wessing Sponge Iron in the Electric

Arc h’uranrc, ’” lr~mm{lkin~ (Ind Steclm(lking, No. 3, 1975, pp.

1 18-92; J. 11. 1)’ Entremont, Armco Slcel Corp., paper presented

a I 1979 conference.

- E?rom’n and Reddv, op. r:lt.

Table 87.—Typical Specifications for

Direct Reduced Iron Used in Steelmaking

Item Specification (by weight)

Metallization . . . . . . . . . . . . . . . More than 95%

Total iron . . . . . . . . . . . . . . . . . . More than 93%0

Metallic iron. . . . . . . . . . . . . . . . More than 88%

Gangue a . . . . . . . . . . . . . . . . . . . Less than 6%

Sulfur . . . . . . . . . . . . . . . . . . . . . Less than 0.03°/0

Phosphorus . . . . . . . . . . . . . . . . Less than 0.05%

Carbon . . . . . . . . . . . . . . . . . . . . Between 0.8 and 1.7°A

Size b . . . . . . . . . . . . . . . . . . . . . Variable

Strength and density. . . . . . . . . Variable

aThe gangue specification would take into account the balance of basic oxides

(CaO, MgO, etc ) over acidic oxides (SiO2, AI2O3. etc). The former are desirable,

while the latter are undesirable from the standpoint of slag formation and refractory Iining life in steelmaking

bFor example, for Midrex processes. 100 percent less than 0.75 inch and no

more than 5 percent less than 0.13 inch

SOURCE G St Pierre for OTA

ity peaks at an optimal ratio of DRI to scrap

corresponding to about 45 percent DRI.23

Siting.—The selection of optimal sites

within the United States for coal-based DR

plants is a complex problem. Site selection

depends on whether the plant is to operate in

association with contiguous ironmaking and

steelmaking operations or is to transport and

market DRI. In the former case, it is important

●

c

●

●

●

to consider:

distance from ore and coal sources;

availability and price of scrap;

site, labor, and environmental constraints;

cost of electricity; and

distance to steel product market centers.

In the latter case, important factors include:

● distance from ore and coal sources;

● labor, environmental, and climatic constraints; and

● distance from iron and steelmaking centers.

There is almost no region within the continental United States that would be entirely unsuitable for a DR operation in some form. Particularly attractive opportunities appear to

exist in the Southwest and Gulf States, the

Appalachian States, the Northern Great

Lakes region, and the Canadian border

States.

-’Rollinger, op. cit.
206 . Technology and Steel Industry Competitiveness

Alternate Energy Sources.—In addition to

coal, other inexpensive solid reactants may

be used for DR systems. These include biomass, peat, lignite, wood and paper wastes,

and municipal and industrial wastes. Biomass, which embraces a large variety of vegetable and animal wastes, and the other materials have similar advantages and drawbacks as reactants. They cost little, are generally available, and are regenerable. They

also contain little inorganic matter, such as

ash, and few of the elements, such as sulfur

and phosphorus, that are undesirable in

steel. In addition, these materials frequently

provide very reactive sources of carbon; biomass, for example, may consist of cornstalks,

nutshells, and perhaps pulp and skin from a

variety of food-processing operations.

The chief disadvantages of these materials

are their high moisture content and low bulk

density. The direct charging of wet, low-density materials into iron production units, such

as rotary kilns, causes a substantial loss of

productivity, which translates into higher energy, labor, and capital costs per tonne of

product. Both problems can be overcome by

pretreating (drying, carboning, etc.) and compacting the materials, although this too takes

energy. Ironmaking operations present an attractive site for processing these materials.

Most large steelmaking plants have low-temperature waste heat available. Transferring

that heat is not very efficient, however, and

the bulky equipment is costly.

If inexpensive methods can be found to

convert all of these materials into a product

roughly equivalent to sub-bituminous coal in

moisture, density, and transportability, then

their use by DR plants within a reasonable

distance might follow. The pretreatment technologies are broadly recognized and are

under intensive investigation throughout the

country; significant advances should occur

during the next decade.

Advantages of DR Systems.—DR systems

offer an advantageous alternative to the blast

furnace process for the production of iron

from iron ore and recycled iron oxide, and to

scrap in the manufacture of steel products in

the electric furnace. Not all of the potential

advantages of using DR would apply to every

economic or regional enterprise. Further, it is

apparent that there is a wide variety of DR

processes from which to choose, and each

has its particular advantages and disadvantages. The following advantages, then, should

be treated as opportunities presented by the

development of DR systems:

●

●

●

●

●

●

●

●

●

●

DR units can be built on a variety of

scales, to use a variety of charge oxides

and reductants, and in a variety of locations;

scrap-based companies can manufacture high-grade steels from DRI, which,

unlike scrap, has a known, uniform composition;

DRI can be transported and handled

easily and can be charged to furnaces on

a continuous basis;

DRI can be used as a feed material for

blast furnaces and basic oxygen steelmaking units;

DR processes do not require metallurgical-grade coke;

DR systems do not pose environmental

problems as severe as those of coke

oven-blast furnace systems;24

DR processes can be coupled with several energy-generation systems (nuclear,

MHD, etc.);

DR processes can be coupled with coal

gasification systems;

DR systems can be constructed with

comparatively low capital costs; and

DR systems have competitive operating

costs.

The DR processes provide attractive opportunities for all three segments of the steel industry. The integrated segment could increase ironmaking capacity in increments

much smaller than is economical for the blast

furnace, and could do so without the need to

build additional coke capacity or purchase

coke. Both integrated and particularly scrap-

“L. G. Twidwell, “Direct Reduction: A Review of Commercial

Processes,”’ Environmental Protection Agency, 1979.
Ch. 6—New Technologies for the Steel Industry ● 207

based producers would benefit from having

DRI as an alternative to purchased scrap. *

Nonintegrated plants using DRI could produce higher grade steels and control their

operations more readily. In addition, DR facilities would allow this segment to integrate

operations from ore to steel product. The alloy/specialty steel companies, too, would benefit to some extent by the opportunity to substitute high-grade DRI for scrap.

In general, the substitution of DRI for scrap

lowers residual element (“tramp”) levels, facilitates material handling and charging, and

enhances product quality. In addition, DRI

enables steelmaker to write tighter specifications for iron units than is usually possible

with scrap. Although DRI use does not require special arc furnaces, many developments are likely in electric furnace design for

adaptation to DRI.

Difficulties With DR Systems.—Like DR’ s

advantages, not all of its disadvantages apply

to each DR system or economic region:

DR processes have higher energy and

material requirements than blast furnaces;

DR processes cannot be built on a scale

equivalent to a large modern blast furnace;

DRI is a solid product that cannot substitute significantly for “hot metal” as a

feed to BOFs;

DRI must be handled, stored, and

charged in a different manner from

scrap;

in coal-based DR processes, special provision must be made for sulfur control;

solid waste materials (lime, ash) from

coal-based DR processes must be disposed of in a different manner than slag

from a blast furnace;

the variety of DR options, many not yet

proven on a commercial scale, makes it

difficult to select an optimum process for

a given set of conditions;

off-specification DRI (high-oxygen, alkali, silica contents, fines) can damage

electric furnaces;

*Also discussed in chs. 7 and 8.

without special provisions, DRI use

might increase the generation of fugitive

particulate emissions around electric

furnaces; and

some coals are not suitable for direct use

in coal-based DR systems and must be

gasified in separate units.

Forecast.—The capacity of DR plants

throughout the world has grown at a rate of

about 30 percent per year since 1965; however, this growth rate has been achieved in a

relatively early stage in the technology’s development and adoption, when DR capacity is

still less than 5 percent of total world steel

production. Nevertheless, forecasts of future

growth in DR plant capacity have used rates

as high as 13 percent per year for the period

1980-85 and 4.7 percent per year for the period 1990-2005.25 The latter may still be too low,

in view of expected steel production growth

rates of 7.5 percent in the developing countries and 3.2 percent in the developed countries for the same period.

Worldwide, it is estimated that about 40

new DR units are planned for operation between 1981 and 1985. About one-half will use

natural gas, one-quarter will use coal directly, and the remainder will use liquefied natural gas, gasified oil, gasified coal, or byproduct gas.

The figures shown in table 88 are conservative estimates for the growth of DR capacity.

All of these projections might be influenced

markedly by shifting practices in the United

States and Japan or by industrial activity in

China. The table also shows data on actual

production of DR plants and it can be seen

that production has been far below capacity.

This has resulted from a depressed world

steel market, startup problems in developing

nations, and a combination of high natural

gas costs and low scrap prices in the industrialized nations.

-“H. W. Lownie, Jr., “Prospects for the Future, ” draft of ch.

13 for forthcoming book on direct reduction edited by J. R.

Miller: Lownie’s estimate agrees closely with the median estimate established by the Hamersley Delphi study.
208 . Technology and Steel Industry Competitiveness

Table 88.—Projections for Direct Reduction Growth (millions of tonnes)

Capacity a Production

North Third — Free Free Free

Year Rate* America Japan EEC World Mid East world worldb worldc

1975 . . . . . . 27.8 2.0 1.2 0.7 4.0 0.0 8.0 2.7 2.7

1979 . . . . . . NA NA NA NA NA NA NA 7.2 9.0

1980 . . . . . . 13.1 2.9 4.1 3.6 11.2 4.4 27.3 10.1 14.4

1985 . . . . . . 9.3 5.3 6.3 6.6 21.2 9.6 50.6 19.0 NA

1990 . . . . . . 5.7 9.5 7.7 9.4 33.9 15.3 78.9 NA NA

1995 . . . . . . 2.4 13.3 9.0 11.9 45.2 20.3 104.1 NA NA

2000 . . . . . . – 15.3 9.7 13.2 51.2 22.9 117.2 NA NA

“Annual compound growth rate (%) projected for succeeding 5 years

SOURCES aG. St. Pierre for OTA

bA.B. Jensen, “New Alternates for Charge Metal lie,” Ferrous Scrap Consumers Coalition Symposium, February 1980

cDepartment of Commerce, “Production of Iron by Direct Reduction, ” May 1979

Direct Steel making

Description.— Direct steelmaking is the

conversion of iron ore to steel in a single reactor system. This would represent a radical or

major technological advance, because it

would replace several operations in either

the CO-BF-BOF or

Included in this class

tinuous steelmaking

steelmaking systems

scribed separately in

chapter.

DR-EAF sequences.26

of technology are consystems and plasma

The latter are dea later section of this

In essence, direct steelmaking allows the

reduction, melting, and refining functions to

occur and be controlled in a single (perhaps

divided) reactor. Figure 31 is a schematic diagram of a proposed system, which has not advanced beyond pilot-plant exploratory work.

Furthermore, none of the proposed systems

represents the application of new basic principles.

Advantages of Direct Steelmaking.—The advantages of direct steelmaking may be summarized as follows:

● ore is converted to steel in a single reactor, rather than first making iron and

then making steel;

-%. Eketorp, ‘“Decisive Factors for the Planning of Future

Steel Mills, ” Iron and Steelmaker, December 1978, pp. 37-4 1;

D. H. Houseman, “Continuous Steelmaking Processes,”’ Stee)

Times, May 1978, pp. 457-462; A. K. Syska, “The S-Process,”’

OTA seminar, Mav 2-3.1979.

Figure 31 .—Schematic Diagram of Direct

Steelmaking System

SOURCE S. Eketorp for OTA

●

●

●

consolidation of fumes, transfer of liquid

products, and environmental problems

are reduced;

less land area, equipment, and capital

are required; and

a variety of raw materials (iron oxide

and reductant) may be used.

Suitability for Industry Segments.—Direct

steelmaking processes provide an opportunity for integrated steel plants; however, it is

unlikely that significant adoption by alloy/

specialty or scrap-based companies would occur rapidly.
Ch. 6—New Technologies for the Steel Industry ● 209

Disadvantages of Direct Systems.—None of

the pilot-plant efforts on direct steelmaking

has yet been successful. Specific technical

problems exist that require major research,

development, and demonstration efforts,

such as:

wall refractories are needed that can

withstand severe chemical and mechanical erosion;

procedures are needed for controlling

steep chemical potential gradients (e.g.,

simultaneous injection of reductant and

oxygen);

injection refractories that can operate

continuously must be developed;

uniformity of product must be maintained over a significant period; and

steel output per unit of reactor volume

must be increased to compete with alternative routes to steel.

Forecast.—The idea of going from oxide

concentrate directly to steel in a continuous,

smooth operation has excited imaginations

for many years. Europeans, Americans, and

many others have spent a great deal of money

on small pilot efforts, but none of these efforts, has been particularly successful from a

research standpoint, and none has been carried to commercial scale. The problem has

been that the different functions cannot be

isolated properly: all the equipment must be

tied up in a single strand, and the system has

little flexibility with respect to either process

variables or product requirements.

The major recent gains in improving the

speed, efficiency, and productivity of steelmaking systems have been accomplished by

separating rather than combining the different parts of ironmaking and steelmaking.

In integrated systems, for example, substitution of a desulfurization station between the

blast furnace and the steelmaking units can

result in the increased productivity of each at

a relatively low capital cost. In the development of the AOD system, adding another unit

to separate the melting function from the

refining function has markedly increased the

productivity of stainless steel and high-alloy

production systems.

Although major advances in the rates of

reduction, melting, and refining and in the

throughput per unit volume of equipment

must be made, it is very unlikely that any

direct, continuous single-reactor process will

assume commercial significance in the next

decade.

Plasma Steelmaking

Description.— Plasmas are already used

commercially for steel melting and refining,

but they can also be used for reduction reactions. 27 A plasma is generated in a steelmaking reactor either from “inert” gases like

argon or nitrogen or from reactive gases like

hydrogen or methane, and fine iron oxide particles and solid reductant are then fed into

the plasma. While most plasma smelting systems use the plasma as an intense and efficient source of energy, some experts now

think that the plasma also participates in

unique reactions with the oxide undergoing

reduction. Figure 32 is a schematic diagram

of a plasma smelting (reduction) system for

steel production. Bench-scale and small pilot

systems have been operated, and several are

reported in the literature. These systems include:

● the extended arc flasher at the University of Toronto;

● the falling film reactor at Bethlehem

Steel Corp.;

● the SKF Hofors plasma reduction process;

● the rotating plasma process; and

● the expanded precessive plasma furnace.

Advantages of Plasma Steelmaking.—The

advantages of the plasma steelmaking systems are similar to those of the direct steelmaking processes, but with several additional

advantages:

● the plasma provides an intense, concenI’, L. Gulliver and P. ]. F, Gladrnan, ‘‘F’l:]sm:] l-’urn;~(’e Pro(’-

essing, ”’ ()’1’A serninnr, Nl;j} 2-3. 1979: 1). R. hlrRt]e, ‘‘Plasrni]

Reduction of Iron Ores to RHW Steel.”’ (YI’A spmln~lr. lf:~t 2-J.

1979, popt?r No. 15; h. ]. Red, “l)ircrt Stc[?lm;lklng ~;lst?~i on

Solid-Plasma Intcra(t ions,”’ ()’I’A smnin[) r. hlt)t 2-i. 1979.

paper No. 16.
.

210 ● Technology and Steel Industry Competitiveness

Figure 32.-Plasma Steelmaking System

Expanded precessive plasma process

using closed-bottom reactor

Refractory

Slag Metal insulatio n m Metal oxide concentrate

and reductant

Carbon

monoxide

1

Anode connection

SOURCE. Tetronlcs Research & Development Co., Ltd, United Kingdom and

●

●

●

foreign patents pending.

trated source of energy for endothermic

reactions;

the plasma system is ideally suited for

the conversion of finely divided solids;

plasma processes may involve some

unique gas-solid-liquid reactions that

are not encountered during conventional

processing; and

plasma “reactions” may be very fast.

Suitability for Industry Segments.—If successful development of the plasma steelmaking processes occurs, they could provide major opportunities for all three segments of the

industry. Alloy/specialty companies might

benefit in a most significant manner by being

able to produce highly alloyed steels directly

from oxide charge materials rather than from

ferroalloys.

Disadvantages.— All of the disadvantages

of the direct steelmaking processes apply to

some degree to the plasma systems. An additional difficulty is that the engineering

developments and control procedures for

plasma systems are still in an early stage.

Also, the reported power requirements and

of fgas volumes are very high.

Forecast.—Some commercial development

of plasma steelmaking systems is likely to occur by 2000. The first adoptions are likely to

be for the manufacture of alloy steels.

Direct Casting

Description.— Direct casting is the pouring

of liquid steel directly into thin solidified sections suitable for conversion into strip products. While continuous casting produces

slabs that must be hot and cold rolled into

thin-gauge products, direct casting would

produce a thin product ready for final rolling

into suitable gauges.

Advantages of Direct Casting.—Direct casting would eliminate the necessity to produce

slabs for hot rolling. Some unique properties

might be developed, particularly if an amorphous material can be produced in the casting step.

Suitability for Industry Segments.—All

three segments of the industry would benefit

from the development of this technological opportunity.

Disadvantages.— Flexibility in the control

of properties and gauges of sheet products

might be lost.

Forecast.—The need for development and

demonstration is so extensive and costly that

it will take many years to bring such a technique to the point of adoption on a significant

scale.
Ch. 6—New Technologies for the Steel Industry . 211

Incremental Technologies

From literally thousands of advanced incremental technological opportunities that

are or will be available to the steel industry, a

few have been selected for illustrative purposes, These have particularly wide applicability during the next 10 years.

External Desulfurization

External desulfurization refers to all processes that lower the sulfur content of hot iron

after it leaves the blast furnace and before it

enters a steelmaking unit. It may be accomplished in torpedo cars or in ladles by introducing a sulfur-capturing reagent through

plunging or lance injection. Many reagents

have been used, including calcium oxides,

calcium carbides, soda ash, and magnesiumimpregnated coke (mag-coke). Special handling, injection, or plunging equipment must

be used to provide a fast, efficient reaction.

In addition, pollution abatement equipment is

usually required.

The principal advantages of external desulfurization are that:

s the blast furnaces can be operated with

less basic slags and at higher production

rates;

● lower sulfur-content hot metal can produce low-sulfur steels in BOF processes;

and

● capital requirements are modest compared to the alternatives.

External desulfurization is a proven technology available to the steel industry in a

variety of engineering “packages. ” It benefits

integrated and alloy/specialty steel companies that use the CO-BF-BOF sequence.

Continuing adoption by integrated steel companies is expected through the early 1980’s.

Self= Reducing Pellets

Self-reducing pellets are prepared from a

finely divided iron oxide concentrate, a solid

reductant such as char, and lime (for sulfur

absorption). 28 They contain all required reactants for iron production. The pellets may be

cold- or hot-bonded, but heat is required for

the endothermic reduction reaction. In addition, porosity is required to eliminate gaseous

reduction products (Co, Co2

).

The principal advantage of self-reducing

pellets is that no gaseous reactant is required. It is only necessary to establish suitable heat transfer in a reactor to produce

sponge iron. In addition, the pellets could be

used as supplemental feed to a BF system.

The principal disadvantages are that the production, handling, and conversion techniques

are unproven commercially, although some

limited tests appear promising. Abrasion and

impact resistance is important from both a

handling and a processing standpoint. Another disadvantage is that the sponge iron quite

readily absorbs sulfur from the carbonaceous

reductant.

The development of self-reducing pellets

could benefit all segments of the industry,

and it is likely that development will proceed

as an adjunct to DR developments during the

next decade.

‘“E, M. Van Dornick, “Furnace Reduction of Pelletized Ferriferous Materials,”’ U.S. patent No. 3,340,044, Sept. 5, 1967;

G. D. McAdam, D. J. O’Brien, and T. Marshall, “Rapid Reduction of New Zealand Ironsands, ” Ironmclking ond SteeImoking,

No. 1, 1977, pp. 1-9; K. Schermer, “Improved Technology for

Processing Sponge Iron in the Electric Arc Furnace, ” lronrnuking and Steelmoking, No, 3. 1975, pp. 118-92.
212 c Technology and Steel Industry Competitiveness

Energy Recovery

Energy recovery technologies in the steel

industry have advanced significantly during

the past 10 years.29 The pressures of rapidly

rising energy prices and declining availability

have served as major incentives. Energy now

represents nearly 20 percent of the cost of

producing steel; 10 years ago it was 10 percent. There are a number of energy recovery

opportunities available to the steel industry,

and some new ones may be on the way. Nippon Steel Co. of Japan has demonstrated the

effectiveness of energy recovery and conservation. In 5 years (1974-78) they achieved a

total energy savings of 11.4 percent. Of this

total, 3 percent resulted from energy-saving

equipment installation, 6 percent from

changes in operation, and 2.4 percent from

modernization of facilities such as the use of

continuous casting. 30

Various estimates have been made of the

potential for energy conservation in the steel

industry. A North Atlantic Treaty Organization study indicated a potential for energy

savings of up to 40 percent.31 A study in the

United Kingdom concluded that a savings of

30 percent was possible.32 This would be

somewhat applicable to the United States.

Another study indicated that 15 to 20 percent

of present energy consumption could be

saved within the next decade. That study

noted that two-thirds of the heat input to an

integrated plant is wasted: 13 percent in

waste gases, 16 percent in cooling water, 13

percent in sensible heat in residual matter

such as slag and coke, and 24 percent lost to

the ambient atmosphere.

Electric power could be generated by gasexpansion turbine generators operating on

high-pressure top gas from BFs. The technol-

%4. h40rleV, “Industry is Making Its Energy Work Harder, ”

[ron Age, Aug. 27, 1979.

‘(’Nil)pfm Steel News, December 1979.

“E, G. Kovach (cd,), 7’echnoiogy of Efficient Energy Utilization, Pergamon Press, 1974.

“G. Leach, “A Low Energy Strategy for the United Kingdom,’” Intern[itionfll Institute for the Environment (Ina’ Development, 1979.

“H. G. Pottken, et al., Met(]Jlur~i{;(il Plunt and Technology,

V()]. 4, 1978, p. 47.

ogy has been demonstrated in Japan, but

adoption is difficult and economically questionable for most older BFs. Similarly, hot offgases from coal-based DR kilns are being

used to produce steam for electrical generation.34

Another demonstrated technological opportunity is in BOF offgas collection.35 Carbon

monoxide is released intermittently from

steelmaking units, and its collection and use

for fuel purposes have been adopted by some

European, Japanese, and American operators. Hood design is the most critical parameter in modification for this purpose.

Adoptions of this nature are likely to continue through the 1980’s along with the development and demonstration of new concepts for recovery of sensible heat from process materials (coke, slag, sinter, and steel),

Continuous Rolling

If slabs from continuous casting units could

be rolled directly without the necessity of reheating, a considerable amount of energy

could be saved. However, the technology is

difficult to develop and the capital costs could

be high. In addition, the effect on cold-rolling

operations and the ability to control final

steel properties with such processing are unproven. Until research efforts show the feasibility of this technology, and until the composition and cleanliness of liquid steel fed to

continuous casters are controlled more tightly, any major development effort is unlikely.

With continued developments in secondary

refining36 and perhaps filtration, direct rolling may become an attractive technological

opportunity.

“33 Metal Producing, February 1980.

“

+

’ Potential for Energy Conservation in the Steel Industry to

Federal Energy Administration, ” Battel]e, Co]umbus Laboratories, May 30, 1975; U. K. Sinha, “Recenl Developments in the

Iron and Steel Industry in the Light of Energy Conservation,’”

Steel Times, January 1978. pp. 61-71.

‘“J. C. C. Leach, “Secondary Refining for Electric Steelmaking, ” Ironrnuking and Steelmoking, No. 2, 1977, pp. 58-65.

‘-R. L. Reddy, “Some Factors Affecting the Value of Direct

Reduced Iron to the Steelmaker,’” 38th AlhlE Ironmaking Conference, Detroit, Nlich,, 1979.
Ch. 6—New Technologies for the Steel Industry 213

High= Temperature Sensors

It is difficult to determine the composition,

cleanliness, and temperature of liquid iron

and steel on a continuous, reliable basis.

Although immersion thermocouples and oxygen-potential probes have been developed for

intermittent measurements, no instruments

are available for long-term continuous control. ‘H The difficulty lies not in the primary instruments but in the severe conditions under

which they must operate. Under reactive conditions at 1,550° C, “protective” materials

fail rapidly. Hence, developments in this area

depend on the development of immersion materials and/or major innovations in remote

sensors.

If continuous control measurements of temperature, composition, and cleanliness can be

developed, significant increases in productivity and overall quality could be achieved. As

is always the case, improvements of this nature lead to decreased energy and raw material consumption per tonne of steel product

shipped. Contact and remote sensors for hot

solid products in process are available and

under continuing improvement. The major research problem is in the liquid steel processing area. All sectors of the industry would

benefit, and the impact would be significant.

Breakthroughs on a selective basis are expected during the next two decades.

Computer Control

This subject is very broad and complex.

From a “black box” point of view, the steel industry appears no more complex than other

basic industries. The complexities arise when

the inputs must be fully characterized and

the process mechanism (reaction and transformation rates, heat and mass transfer,

electrical and electromechanical characteristics, and process variables) must be fully

described. Despite major effort, the surface

has only been scratched. 39

“{l. P. Ryan and R. R. Burt. “Oxvgen-Sensor Based Deoxirfation Con[ro],’” lrf~n ond Steelm[lking, Februarv 1978, p. 28.

‘“C. 1,. Kusik, hl. R. Nlournier, and C. J. Kucinkas, ‘+ State-ofthe-Art Review of (;ornputer C(~ntrol in the Steel Industry, ” A.

Processing of Iron Powders

The potential advantages of avoiding

very high temperatures associated with

uid steel processing and the potential

the

liqopportunities - for making difficult alloy components with iron powders have provided incentives for many ventures in iron powder

processing. The powdered metal industry has

developed proven technology for converting

iron oxide to metallic products through powder processing,40 but powder processing has

not competed with liquid processing for major

steel markets. Efforts to roll quality iron

powder directly into thin-gauge steel sheet

continue,’ ] The technology must advance to

the point where wide strip with a uniform

thickness and structural quality can be produced before significant demonstration can

occur. Cost competitiveness might be

achieved through major energy and fuel savings in the 1990’s.

Plasma Arc Melting

In the Soviet Union and East Germany,

plasma melting of steel scrap has become an

industrialized process.42 Plasma arc furnaces

with capacities of 27.2 to 90.7 tonnes are in

operation there, replacing conventional EAFs

used to melt and refine steel scrap. The furnaces may also be used for melting DRI.

In the conventional EAF, electric arcs are

ignited between carbon electrodes and the

furnace charge. Heat is transmitted by convection and radiation. Plasma arc furnaces

D. Little, Inc., contractor report for the Department of Energy,

June 1979; Central Intelligence Agency, “Foreign Development

and Application of Automated Controls for the Steel Industry, ”

S.K. 79-10010, January 1979; Iron Age, Feb. 4, 1980: H. Okada,

“Background to ‘technological Advance in the Japanese Steel

Industry, ” Workshop on Innovation Policy and Firm Strategy,

Dec. 4-6, 1979.

“Strauss and Heckel, op. cit.

“M. Ayers, “New Technology for Steel Strip Production, ”

OTA seminar, May 2-3, 1979, paper No. 11: P. Witte, “An Energy Efficient, Pollution Free Process for the Production of Steel

Sheet from Iron Concentrates,” OTA seminar. May 2-3, 1979.

paper No. 12.

‘-Eketorp and Mathiesen, op. cit.: A. S. Borodachev. G. N.

(lkorokov, N. P. Pozdev, N. A. Tulin, H. Fiedler, F. Muller, and

G. Scharf, “Melting Steel in Plasma Electric Furnaces, ” Stol,

1979, pp. 115-17.
.

214 ● Technology and Steel Industry Competitiveness

have bottom electrodes under the charge. The

plasma arc is generated by forcing a stream

of argon or nitrogen gas through an electric

arc, which ionizes the gas and raises its temperature. The gas may reach temperatures

as high as 13,7000 C. The arcs of injected gas

throw plasma streams through ports in the

furnace walls into the charge.

The advantage of the plasma arc furnace is

that the plasma process transfers heat much

more rapidly to the metal being melted and

refined. Radiation and convection are much

more efficient. According to reports, the power coefficient is 96 percent, which is considerably higher than in the EAF, where typical

values are on the order of 75 percent.

Long-Range Opportunities

Perhaps the two most significant opportunities on the horizon for the steel industry

are:

●

●

complete elimination of the need for

fossil fuels through the production of hydrogen by water hydrolysis; and

adaptation of steelmaking to the potentials afforded by advanced nuclear reactors, high-temperature gas-cooled reactors, and, further off, fusion or MHD

reactors .43

For the first opportunity to become a reality, energy from nuclear reactors must be

available at costs well below those for fossil

fuels. Hydrogen can then be used as a substi-

“J. Cushman, “Nuclear Steel: Long Wait for the Birth of an

Industry,’” Steel Week, Nov. 26, 1979.

tute for other gaseous reductants in most of

the DR processes. For the second opportunity

to emerge, the steel industry must work closely with the nuclear industry and take advantage of related developments in plasmas and

MHD.”44Although the Japanese have made the

first major move, * a U.S. energy-chemicalsteel consortium is underway. 45 By the turn of

the century, experts expect a demonstration

plant to be operating. By combining the best

features of available technology, it might be

possible to achieve very fast oxide reduction

and melting in DR and melting units.

“R. W. Anderson, “Application of MHD Power and MHD Exhaust Gas Sensible Heat,<’ OTA seminar, May 2-3, 1979,

*See ch. 9 for discussion of the Japanese nuclear steel making program.

‘Wushman, op. cit,

Changes in Steel Products

Perhaps the major factor affecting the development of steel mill products is the energy

shortage. Steel products play a large role in

energy production (e.g., in tubing for petroleum production and transport and in materials

for fossil fuel processing equipment and for

electricity generation), and the increased

needs of the energy sector will place greater

demands on steel products. At the same time,

the role of steel in the transportation industry

will be one of helping to conserve energy (e.g.,

by decreasing vehicle weights to save fuel or

by increasing the efficiency of electrical

equipment such as motors and transformers).

In these energy-related areas, steel products

will have to achieve higher levels of performance in such characteristics as strength,

toughness, corrosion resistance, fabricability, weldability, and formability. (See ch. 5 for

a discussion of these properties.)

Such characteristics have always been

considered in the development of steel alloy

composition and processing. Except for the

specialty steels (such as high-alloy steels,

stainless steels, and tool steels), production

costs, when weighed against properties, have

generally led to the use of carbon as the ma-
Ch. 6—New Technologies for the Steel Industry 215

jor modifier of properties. That is, it has been

possible to satisfy most markets by using the

range of properties attainable from carbon

steels in either the hot-rolled, cold-rolled, or

heat-treated condition.

The combinations of characteristics that

will be needed to meet future performance requirements are not readily attainable with

the plain carbon steels. Consequently, steel

metallurgists have been using a combination

of strengthening mechanisms to develop materials with greater strength and toughness—a difficult combination. A number of

new products have already been marketed to

a limited degree or are in advanced stages of

development. In some cases, barriers in processing technology are affecting or are likely

to affect the product developments.

Incremental Product Developments

High-strength low-alloy (HSLA) steels are

already marketed for energy production and

automotive applications. In these steels,

alloying elements such as titanium, vanadium, columbium, molybdenum, manganese,

nickel, or cobalt are added. Carbon content is

reduced in order to achieve high strength

along with good toughness, better weldability, and better corrosion resistance. The

precipitation of fine alloy carbides, which are

smaller and better distributed than the carbide in commodity steels, improves the properties of the steel. This alloying effect and

controlled rolling and heat treatment, which

create small gains in strength and toughness,

are the basis of the HSLA steels.

Dual-phase steels are on the market on a

limited basis in automotive applications.

These steels take advantage of the strength of

a high-hardness crystalline form of iron (martensite) but use it in a mixture of very fine

grains of relatively soft, virtually carbon-free

iron. The combination of grain hardness and

fine grain size, which can control the deformation pattern of the mixture, makes the

dual-phase steels especially useful in sheet

metal applications. The original material for

sheet metal is relatively soft and easily

shaped, but as it is being formed into shape, it

attains the high strength needed for final

service. This strengthening during the deformation process, or work-hardening, of a fine

grain size material is a major alternative to

the heat-treatment process for HSLA steels.

The lack of carbide precipitates in the dualphase steels generally gives them better

weldability, formability, and corrosion resistance than conventional HSLA steels.

Superplastic ferrous alloys are less developed than superplastic nonferrous alloys, but

there are some mainly small-scale test applications, primarily for the automotive and

packaging industries. These ferrous alloys

extend the concept that very fine-grained

solids are both stronger and tougher than

conventional steels by using ultrafine grains.

The grains in these alloys are extremely fine

(0.lμ to 5.0μ) mixtures of two crystalline

phases, one iron (austenite) and the other a

ceramic iron carbide (cementite). When this

material is deformed at a moderately elevated temperature, it can be shaped, like a

typical organic polymer plastic, into intricate

patterns with very little applied force. The

potential savings in design of dies and operation of presses for forming of sheet metal

could be substantial. Moreover, by using such

alloys in bulk form, such items as gears might

be formed in a small number of simple extrusion steps with significant savings of energy

and material compared to current machining

practices.

One-side galvanized steel is described and

discussed in chapter 9.

Major Product Developments

Amorphous ferrous alloys are under development in some small-scale test applications,

primarily in electromagnetic devices. The

amorphous ferrous alloys demonstrate the

reduction of grain size taken to the limit, so

that the aggregates of atoms no longer have

any of the ordered characteristics of crystalline solids; they are amorphous solids like

glass. Such materials have very useful properties, such as high strength, corrosion resist-
216 ● Technology and Steel Industry Competitiveness

ance (higher than ferrous alloys such as

stainless steels), and easy magnetization

(equal or better than materials such as permalloy). 46 The ferrous metallic glasses, as

they are commonly called, can be obtained

only by an extremely rapid cooling from the

liquid to the solid state (1060 C/see). They do

not have compositions typical of steels, although they have iron contents ranging from

3 to 93 percent. The greatest potential for

these materials seems to be in transformer

cores or in electric motors. The ease of

magnetization would greatly increase transformer and motor efficiency.

According to a recent description of the potentially large impact of metallic glass:

The random structure gives metallic glass

unique magnetic properties that translate

into vastly improved transformer efficiency,

And, if scientists can learn to use this substance in the transformer’s moving counterpart—the electric motor—Americans eventually could save up to $2 billion annually in

energy costs.

According to the U.S. Department of Energy, metallic glass will begin to tap enormous

quantities of wasted electric energy before

the decade ends.47

The National Academy of Sciences has noted

that commercial exploitation of these materials will stimulate much R&D during the next 5

to 10 years.

Development Problems

These steel products or potential products

face some common problems in further development and use, problems which reflect the

higher quality level of those products. Two

are general problem areas: control of melt

chemistry; and ability to carry out complex

and/or tight-specification thermomechanical

processing.

The melt chemistry problem involves the

control of both impurities and alloy additions.

‘“J. J. Gilman, “Ferrous Metallic Glasses. ” MetaLs Progress,

Juiy 1979, pp. 42-47.

‘ Freeman, ‘“Science and Technology—A Five Year Outlook. ” National Academy of Sciences, 1979.

The role of impurities, such as sulfur, oxygen,

nitrogen, hydrogen, and in some cases even

carbon, in affecting the properties of further

processing of steel is well known. Control of

those impurities requires more extensive

processing such as vacuum remelting, or degassing, as well as better process monitoring

and control procedures [e.g., the use of solidstate oxygen detectors for rapid chemical

analysis). The control of alloy additions requires similar attention. It is noteworthy that

the newer low-alloy steels are called “microalloyed” steels, which reflects the low levels

of alloy addition as well as the need to control

those levels within narrow ranges.

The problem of thermomechanical processing is central to all the materials that have

been discussed. Facilities to carry out such

processing, or the lack thereof, will significantly affect the marketing of the new steel

products. These facilities will affect the product costs in two ways: the more complex and

more closely controlled processing that these

materials require will raise operating costs;

and the equipment and facilities for producing the higher quality products will not be

part of the existing plant of most steel mills,

so production will require investment in new

facilities. It is reasonable to assume that

those mills with the more sophisticated thermomechanical processing capability will be

in the most competitive position to participate

in the market for these products.

The new products also have some individual disadvantages:

s Both HSLA and dual-phase steels pose

some problems in die design if they are

to be properly formed. For HSLA, the

major problem is that its great strength

causes “spring-back;” that is, the steel

deforms elastically, but then springs

back after the die pressure is removed.

For dual-phase steels, the problem is to

have the die contour control strain distribution so that sufficient hardening

occurs. In both dual-phase and HSLA

steels, corrosion resulting from the use

of thinner gauges of steel is of some concern. The use of more extensive corro-
Ch. 6—New Technologies for the Steel Industry . 217

sion protection methods will probably

compensate for that potential disadvantage.

Superplastic ferrous alloys are as easy

to form as plastics, but like plastics they

also have a low forming rate: it takes

longer to form one piece of the superplastic alloy than to form an ordinary

steel sheet. Additionally, the fine grain

size of the superplastic alloys is likely to

lower their corrosion resistance.

The amorphous ferrous alloys suffer

from two significant disadvantages with

respect to structural applications. They

are relatively brittle (have very low ductility), and they are currently only available in very limited shapes and sizes.

Perhaps the biggest potential problem in

applying the amorphous alloys is that

they are extremely susceptible to crystallization or devitrification if service is

at elevated temperatures.

Summary

There are a number of steel mill product

developments that indicate a continued competitiveness for steel products. Although

product development continues to improve

the applicability of the materials, there are

needs to be met in the processing technology

at the mills before full advantage of the potential markets can be realized, Of special

note are the need to gain greater control over

chemical composition and metallurgical

structure in order to produce uniformly highperformance materials, and the need to develop the procedures and facilities to carry

out the more complex processing needed to

obtain the desired metallurgical structures.

Mills that have the financial and technical resources to meet these needs should be at an

advantage in developing the markets.

The steel industry has played the dominant

role in the development of HSLA, dual-phase,

and superplastic steels; but chemical companies, universities, electrical equipment firms,

and commercial research organizations have

been very active in innovating in the glassy

steels. There is a high probability that new

companies will become the dominant producers of glassy steels.
CHAPTER 7

Technology and

Raw Materials Problems
 .

Contents

Page

summary ● ***.*....,***, .** .**.**** 221

Coke Supply and Demand. ................222

U.S. Metallurgical Coke Industry: Process

and Age Distribution. . .................223

Actual Productive Capability and Declining

Capacity . 0 . . . . . . . . . . . . . 0 . 0 . .,,,,...0 224

U.S. Production and Consumption: A

Growing Shortage . . . . . . . . . . . . . . . . . . . . 225

Coke Imports and Declining Employment. .. ..227

Future Coke Shortages. ., ... , . ...........228

Potential Solutions to Coke Shortages . ......229

Ferrous Scrap Supply and Demand. ... .....236

U.S. Ferrous Scrap Industry. . .............231

Supply, Demand, and Price . ..............232

Availability Concerns. ... , . . . . . . . ., , ... , , 234

Scrap Exports: Growing World Demand and

Price Impact . . . . . . . . . . . . . . . . . . . . . . . .

Impacts of Technological Change on

Scrap Demand,.. . . . . . . . . . . . . . . . . . . . .

Targets for Increased Use of Ferrous Scrap.

Future Scrap Shortages. . . . . . . . . . . . . . . . .

List of Tables

Table No.

89. Geographic Distribution of U.S. Coke

Oven Capacipacity. . . . . . . . . . . . . . . . . . . . . .

● 235

239

: 241

, 243

Page

223

90. Age Distribution of U.S. Coke Oven

Capacity . . . . . * O * * * . * ! . . . . . . . . . . . . .

91. Estimated Decline in Actual Productive

Capability of Coke Oven Plants in the

United States: 1973 v. 1979. . . . . . . . . . . .

92. U.S. Coke Consumption. . . . . . . . . . . . , , .

93.U.S. Imports of Coke by Country of

Origin, 1972-78 . . . . . . . . . . . . . . . . . . . . .

94. Measures of U.S. Ferrous Scrap Use,

1969-78 . . . . . . . . . . . . . . . . . . . . . . . . . . .

95. Selected Data on Iron and Steel Scrap:

Ferrous Scrap Relative to Scrap

Consumption and the Impacts of Scrap

Exports on Scrap Supply and Price , . . . .

List of Figures

Figure No.

33. Flowchart of Ferrous Metallics . . . . . . .

34, Scrap: Price and Export Levels; Domestic

Purchased Scrap Requirements, 1971-79

.,

224

225

225

228

232

236

Page

231

238
CHAPTER 7

Technology and Raw Materials Problems

Summary

Coke and scrap are essential raw materials for the steel industry: coke is the basis for

reducing iron oxide to metallic iron in blast

furnaces; scrap is the major input to electric

steelmaking furnaces. The adequacy of future supplies of both is uncertain.

A shortage of cokemaking facilities, not of

metallurgical coal from which to make coke,

is the problem. Coke, used by the integrated

steel companies as a feedstock in ironmaking,

is mostly produced in byproduct ovens from

high-grade metallurgical coals. About onethird of all domestic coke ovens are considered old by industry standards. These older

ovens are less efficient than newer ones and

tend to produce a poorer quality coke. The domestic steel industry has a much higher coke

oven obsolescence rate than do other major

steel-producing countries, and the actual productive capability of U.S. coke ovens has declined by almost one-fifth since 1973. The major reasons for this capacity decline are

growing capital costs and regulatory requirements, both of which discourage new coke

oven construction.

As cokemaking capacity declines, coke imports are growing and employment is falling

off in this phase of steelmaking. Domestic

coke consumption has been higher than production during 3 of the past 6 years. In 1978,

domestic consumption was 5.4 million tonnes,

an amount 16 percent higher than domestic

production. One estimate is that by 1985, the

coke shortage will increase to about 9 million

tonnes, or 20 percent of domestic production,

as capacity declines further and demand

grows. However, a different study indicates

that ample domestic cokemaking capacity exists,

Several options, with

effectiveness, could help

current coke shortages.

varying degrees of

stabilize or reduce

These include: importing more coke, using more direct reduced

iron (DRI), importing more semifinished or finished steel products, increasing the use of

electric arc steelmaking (which would also

require more scrap), and improving the cokeuse rate in blast furnaces.

The steel industry is also a major consumer

of commodity ferrous scrap. Although scrap

prices have doubled since 1969, in real terms

scrap remains an economical source of iron

input for steelmaking. However, the future

physical availability of high-quality scrap and

its price are matters of some concern. Scrap

industry processing capability and the availability and cost of transportation may affect

scrap supply; however, the problems that exist in these areas are being remedied to some

extent.

Scrap supply projections range from adequate, though at higher prices, to inadequate,

even at higher prices. Because the substitution opportunities for scrap are limited, demand does not decline significantly when supplies diminish and prices increase. Most

near-term technological changes will tend to

increase the use of scrap; these changes include the growing use of electric furnaces

and continuous casting and the modification

of basic oxygen furnaces to increase the proportion of scrap used. At the same time, demand is growing for high-performance specialty steels, which incorporate a higher proportion of alloy and other materials that make

scrap recovery difficult.

The growing demand for scrap places the

steel industry in an increasingly difficult position. The energy-efficient, nonintegrated producers will be affected most severely by

scrap price increases and supply problems.

There are statutory resource conservation

targets that apply to scrap, but these do not

distinguish scrap-use problems by industry

221
222 ● Technology and Steel Industry Competitiveness

segment. Furthermore, for economic or technical reasons, these targets are not always

feasible on a plant basis.

Options that might be used to offset scrap

supply problems and to maintain existing

scrap inventories include expanding the use

of DRI and imposing scrap export controls.

Scrap exports have been relatively stable so

far, but they are expected to increase because of worldwide increases in electric furnace use. U.S. scrap is attractive to many foreign buyers because of favorable currency

exchange rates. The bleak outlook for scrap

has prompted steel industry interest in export

controls, but the scrap industry opposes such

measures.

Iron ore supplies do not appear to pose a

substantial problem that calls for, or affects,

new technology. Although about one-third of

iron ore is imported, the United States has

substantial domestic ore resources and modern, efficient ore mines and processing facilities. Nevertheless, industry economics are

such that imports will continue, ’ Observations by World Steel Dynamics confirm this

outlook:

The North American iron ore business has

a unique industrial structure, resulting from

the combination of economics (huge capital

‘Iron Ore, Bureau of Mines, MCP-13, May 1978.

and economy of scale requirements), traditional factors, and the longer-term strategic

perceptions of the various players.

Until the 1960’s there was always a major

advantage for the steel producer to operate

its own iron ore mines. And these mines were

developed jointly in view of the huge capital

requirements, economy-of-scale factors, and

long lead times, The self-producers’ advantage eroded during the 1960’s as numerous

foreign ore properties were developed and

technological changes brought down transportation expenses. However, the nationalization of iron ore properties was important

for long-term economic survival. There are

not many iron ore properties in North America whose output is sold on a year-to-year

basis to the highest bidder. The mentality of

steel producers is that they have preferred

long-term arrangements,

Today, with steel production at high levels

in the United States and inventories depleted

by the iron ore strikes, demand is strong for

the output of North American iron ore properties. Should the Western World economy

be stagnant in the years ahead, economic

forces will push down the profit margins of

North American iron ore producers—as was

the case during the 1960’s and early 1970’s.

Conversely, if Western World economy is

strong, Rotterdam iron ore “spot” prices will

rise sharply within the next few years.2

‘World Steel Dynamics, Core Report A, ch. 12, 1979.

Coke Supply and Demand

A recent study for the Government concludes that the United States faces a shortage

of metallurgical coke that is expected to

worsen in the next 3 to 5 years.3 Coke is an

essential, coal-based industrial material used

primarily in the steel industry’s blast furnaces to reduce iron ore to iron, which is subsequently refined into steel. The United

States holds the most favorable world posi3Most of the material on coke presented in this chapter was

obtained from William T. Hogan, S. J., and Frank T. Koelbe,

Analysis o~ the U.S. Metallurgical Coke Industry, prepared for

the Economic Development Administration and Lehigh University, October 1979.

tion in terms of the size and

coking-coal reserves and the

capability for their commercial

quality of its

technological

development.

Nevertheless, as a result of coke oven obsolescence and declining capacity, the Nation’s

metallurgical coal reserves are being underutilized. Domestic coke producers are unable

to satisfy consumer demand and substantial

quantities of coke are being imported to supply the domestic deficit. Under current conditions, it is possible that this situation will not

improve and that dependence on imported

coke will increase, in which case domestic

iron and steel production may eventually be
Ch. 7— Technology and Raw Materials Problems 223

curtailed. Alternatively, the use of steelmaking technologies not based on coke will increase and improvements in the technology

will result in ample domestic cokemaking capacity.’

U.S. Metallurgical Coke Industry:

Process and Age Distribution

The U.S. coke industry consists of 34 companies with 59 plants in 21 States. The current annual capacity of these plants is about

57.5 million tonnes (table 89). Forty-six of

these plants are “furnace” plants, operated

by iron and steel companies that produce

coke primarily for use in their own blast furnaces; the other 13 are “merchant” plants

that generally sell their coke on the open market to foundries and other consumers. Furnace plants produce 93 percent of the Nation’s coke output (table 90).

Ninety-nine percent of all domestic “oven”

coke is produced in byproduct ovens. * Byproduct ovens use a distillation process that

heats metallurgical coals to high temperatures to drive off their gaseous content. The

resulting coke is hard, porous material, high

‘C. A. Bradford, “The Phantom Coke Shortage, ” Merrill

Lynch Pierce Fenner & Smith, 1980,

*An alternative coking method, the beehive process, is used

by only two plants. They produce relatively minor quantities of

“beehive” coke, most of which is marketed for blast furnace

use and classified separately for statistical reporting purposes.

in fixed carbon and low in ash and sulfur,

which is used as a reductant in the blast furnace for the ironmaking phase of steelmaking. A major advantage of byproduct coke

ovens is that they permit the recovery of salable, petroleum-type products, whose value is

rapidly increasing.

About one-third of total coke oven capacity

is 25 or more years old, and nearly one-fifth is

in the 20- to 25-year age category (see table

90). Domestic coke oven obsolescence rates

are high compared to those in other major

steel-producing countries. About two-thirds

of all coke ovens in the European Economic

Community (EEC) countries are less than 20

years old, and in Japan nearly 70 percent of

the coking capacity is less than 10 years old

and none of it is more than 25 years old.5

The generally accepted standard for the

normal, effective lifespan of a coke oven is 25

to 30 years. Compared to newer coke ovens,

those installed 25 to 30 years ago are less efficient, generate more pollution, require greater maintenance, produce lower quality coke,

and contribute less to the overall productivity

of the blast furnaces using that coke. Based

on this standard, facility obsolescence is an

acute problem for the domestic coke industry.’

‘International Iron and Steel Institute Survey, 33 Metal Producing, December 1979.

6Hogan and Koelbe, op. cit., p. ix.

Table 89.—Geographic Distribution of U.S. Coke Oven Capacity

—

Number of Number of Number of Capacity in

States plants batteries ovens existence Percent of total

Alabama . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 25 1,215 5,182,338 9.02

California, Colorado, Utah . . . . . . . . . . . . . . . . 3 14 710 3,273,472 5.70

Connecticut, Maryland, Massachusetts,

New Jersey, New York. . . . . . . . . . . . . . . . . . 4 18 1,074 4,987,013 8.68

Illinois. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 7 326 1,807,560 3.14

Indiana . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 25 1,076 9,926,684 17.27

Kentucky, Missouri, Tennessee, Texas. . . . . . 5 10 415 2,094,916 3.64

Michigan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 8 508 3,338,690 5.81

Minnesota, Wisconsin . . . . . . . . . . . . . . . . . . . 1 2 100 163,210 0.28

Ohio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 35 1,878 8,619,017 14.99

Pennsylvania . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 46 2,962 14,679,309 25.54

West Virginia . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 9 519 3,411,191 5.93

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 199 11,413 57,483,400 b100.00

aTonnes of Potential maximum annual capacity in existence on JUIY 31.1979, as determined by Fordham University survey.

b51.8 million tonnes are in operation, while actual p[roductive capacity has been estimated at 476 million tonnes (see table 98)

SOURCE William T Hogan, Analysis of the U.S. Metallurgical Coal Industry, 1979
224 . Technology and Steel Industry Competitiveness

Table 90.—Age Distribution of U.S. Coke Oven Capacity

Number

Age in yearsa

of batteries Number of ovens Capacityb Percent of total

Furnace plants

0-5 . . . . . . . . . . . . 24 1,437 12,028,221 22.66

5-10 . . . . . . . . . . . 7 526 4,687,077 8.83

10-15 . . . . . . . . . . 6 330 1,583,767 2.98

15-20 . . . . . . . . . . 20 1,225 5,737,183 10.81

20-25 . . . . . . . . . . 40 2,383 10,746,376 20.24

25-30 . . . . . . . . . . 37 2,216 9,793,931 18.45

30-35 . . . . . . . . . . 17 1,071 5,072,425 9.56

35-40 . . . . . . . . . . 12 650 2,728,886 5.14

Over 40 . . . . . . . . . 6 238 705,809 1.33

Total . . . . . . . 169 10,076 –

58,083,675 100.00 -

—-

Merchant plants

0-5 . . . . . . . . . . . . 4 242 901,132 20.48

5-10 . . . . . . . . . . . 2 95 419,778 9.54

10-15 . . . . . . . . . . 4 201 827,638 18.81

15-20 . . . . . . . . . . 1 60 217,834 4.95

20-25 . . . . . . . . . . 0 0 0 0.00

25-30 . . . . . . . . . . 7 298 947,810 21.54

30-35 . . . . . . . . . . 1 47 86,074 1.96

35-40 . . . . . . . . . . 3 100 256,899 5.84

Over 40 . . . . . . . . . 8 294 742,556 16.88

Total . . . . . . . 30 1,337 4,399,721 100.00

aAge dates from first entry into operation or from last date of rebuilding.

bTonnes of potential maximum annual capacity inexistence on July 31, 1979, as determined by Ford ham University survey.

SOURCE Willlam T. Hogan, Analysis of the U.S. Metallurgical Coke Industry, 1979

Most of the coking equipment being retired

is 25 to 30 years old. Many ovens in this critical age category cannot be upgraded to meet

pending environmental regulations and have

been earmarked for abandonment.’ Pennsylvania, Indiana, and Ohio are the sites of 57

percent of total in-place coking capacity (see

table 89) and would be affected most by future plant closings.

Actual Productive Capability

and Declining Capacity

When discussing coke oven capacity, it is

important to differentiate between several

measures of available or effective capacity.

First, 5 to 10 percent of all ovens are offline

at any point in time for rehabilitation or major repairs. Second, coke ovens will seldom, if

ever, sustain a 100-percent operating rate

over an extended period of time; periodically,

they must be shut down for maintenance and

minor repairs. Thus, some additional percentage of ovens will be temporarily out of service

at any time. In recent years, pollution control

has required a number of output-reducing

modifications in coking practice. As a consequence, the maximum annual operating rate

attainable by active coke plants throughout

the industry is currently about 92 percent of

their aggregate capacity.’

Coke oven capacity may be measured in

three ways, according to operating conditions:

●

●

●

capacity in existence (gross capacity, includes ovens out of order for rebuilding

and major repairs, used to measure historical trends and age of equipment);

capacity in operation (potential maximum productive capacity, excludes facilities that are offline for rebuilding and

major repairs); and

actual productive capability (excludes

ovens shut down for minor repairs and

maintenance, in addition to those out for

rebuilding and major repair).

‘Ibid., p. 48, ‘Ibid., p. 43.
Ch. 7—Technology and Raw Materials Problems ● 225

Existing capacity has declined by 15 percent

since 1973 and is now 57.5 million tonnes. A

decrease of similar magnitude has taken

place in operating capacity, which is now

51.8 million tonnes. Actual productive capability has fallen since 1973 by an even greater

amount—17 percent. This may be attributed

to the aging of cokemaking facilities and to

the expansion of regulatory requirements affecting cokemaking. During the past 6 years,

10 million tonnes of capability have been lost,

and current actual productive capability is no

more than 47.6 million tonne/yr (see table 91).

U.S. Production and Consumption:

A Growing Shortage

Total coke production has declined considerably since 1950—and dramatically since

1976. Production decreased by 20 percent between 1950 and 1976, and by 33 percent between 1976 and 1978. * Coke consumption

*Earlier production decreases were largely the results of imalso declined during this time, but at a much

slower rate: 23 percent between 1950 and

1978. More importantly, consumption has

been higher than production during the past

few years. During 1978, for the first time in

nearly 40 years, the coke industry produced

less than 44 million tonnes of coke, thus falling almost 15 percent below the Nation’s consumption of 51.3 million tonnes (table 92).

The loss of coking capacity has resulted

from a number of interrelated economic,

technical, and regulatory causes, the most

significant of which are:*

. long-term limitations on market growth

and producer profits, which restrict the

flow of investment capital into coke oven

replacement and modernization;

● the consequent problems of coke oven

age and obsolescence, reduced operatproved blast furnace efficiency; more recent decreases are

also the result of capacity reduction.

*These causes are listed without regard to ranking or degree

of importance.

Table 91 .—Estimated Decline in Actual Productive Capability of Coke Oven Plants

in the United States: 1973 v. 1979a (millions of tonnes) —

Capability change ‘“ —

Capability 1973-79 1979-85 est.

1973 1979 1985 est. Tonnes Percent Tonnes Percent

Capacity in existence. . 68.0 57.5 52.7 10.5 15.5 4.8 8.3

Capacity in operation . 61.2 51.8 — 9.4 15.4 — —

Actual productive capability 57.6 47.6 42,6 10.0 17.3 5.0 10.4

— aComparison of estimated average levels for 1973 and levels on JuIy 31, 1979, as determined by Ford ham University survey

SOURCE William T Hogan, Analysis of the U..S Metallurgical Coke Industry, 1979

Table 92.—U.S. Coke Consumption (thousands of tonnes)

Domestic

Year Total production Imports Exports Net stock change consumption

1950 . . . . . . . . . . . 65,955 397 361 – 598 66,589

1955 . . . . . . . . . . . . 68,299 114 482 – 1,132 69,063

1960 ., . . . . . . . . . . . . 51,907 114 320 + 51 51,650

1965 . . . . . . . . . . . . . 60,637 82 756 + 663 59,300

1970 . . . . . . . . . . . . . . 60,338 139 2,248 + 901 57,328

1971 . . . . . . . . . . . . . . 52,094 158 1,369 -50 6 51,389

1972 . . . . . . . . . . . . 54,880 168 1,117 – 532 54,463

1973 . . . . . . . . . . . . . . 58,343 978 1,265 – 1,594 59,650

1974 . . . . . . . . . . . . . . 55,854 3,210 1,159 – 226 58,132

1975 . . . . . . . . . . . . . . 51,887 1,652 1,155 + 3,688 48,694

1976 . . . . . . . . . . . . . . 52,908 1,189 1,193 + 1,356 51,548

1977 . . . . . . . . . . . . . 48,533 1,658 1,126 –43 49,109

1978 . . . . . . . . . . . . . . 44,074 5,189 629 -2,674 51,309

NOTE Totals may not add due to rounding

SOURCE U S Departments of the Interior Commerce, and Energy
— ——— — — .— - —. —

226 ● Technology and Steel Industry Competitiveness

ing efficiency, and increased oven emissions;

the fluid state of cokemaking technology

and the uncertainty of investing in unfamiliar equipment that may soon become

obsolete;

the escalating capital costs of coke oven

facilities, attributable to inflation and

the need to install complex pollution control and occupational safety equipment;

additional obstacles to investment that

derive from regulatory uncertainty as to

future rules governing coke oven facilities;

environmental control regulations which

have contributed to the closing of older

coke plants and to the curtailment of operating rates and output levels in remaining plants; and

environmental restrictions on the construction of new and replacement coke

ovens in certain geographic areas.

Capital Investment Requirements.—Coke

oven costs have increased considerably during the past few years. These sharp cost increases have contributed to the shortage of

coke ovens and coke. In 1969, the cost of installing a tonne of annual coke oven capacity

was $82 to $94, or a total of $82 million to $94

million for a million-tonne battery of coke

ovens. Installing a tonne of coke capacity now

costs between $198 and $220, or between

$198 million and $220 million for a milliontonne battery. This represents almost a 150-

percent increase in 10 years, which partly results from the inflation that has driven up all

capital costs.

Regulatory Requirements.—About onefourth of the total capital investment in coke

facilities is for environmental and occupational safety equipment. A recent estimate

suggests that the capital cost for regulatory

equipment may be as high as 30 percent.9 The

impact of regulations has been dramatic in

certain elements of the cokemaking process,

for example, on the quenching cars that receive the coke as it is pushed from the oven. A

new car with gas-cleaning equipment in-

’33 Metal Producing, May 1979, p. 69.

volves an investment of $6.5 million, compared with $150,000 for a conventional

quenching car purchased 10 years ago. The

Environmental Protection Agency (EPA) maintains that environmental regulations have

played a secondary role to economic and

other causes in the loss of coke capacity; however, there is at least a similarity of timing between environmental regulations and capacity shutdowns.

Most of the Nation’s coke oven batteries

are located at steel plants that are in poor air

quality, nonattainment areas. EPA has developed strict requirements for these areas. The

most stringent requirements apply to new or

rehabilitated coke oven batteries, but old facilities also have to be retrofitted with costly

controls. In a number of cases, companies

have decided that it would be more economical to shut down an operation and procure

coke from outside sources because the remaining life of a battery was too short.

A considerable percentage of existing coke

ovens is either in compliance with environmental standards or moving toward that goal.

Batteries that have a number of years of life

remaining have been or are being retrofitted

with pollution control devices. The installation of pollution control equipment often requires increased energy consumption. The

equipment may also require changes in operating practices, and these have slowed down

the coking process considerably.

Environmental regulations have also contributed to limiting plans for cokemaking capacity expansion. Current industry plans call

for less than a complete replacement of those

ovens scheduled to be abandoned, and there

are no announced plans to add capacity.

To install new coke oven capacity or replace existing ovens* in poor air quality

regions, the following conditions must be met:

. high-performance environmental tech-

*If a battery that has been in operation is torn down to be replaced by the same capacity, this is considered a new source of

pollution that will have to meet the most stringent requirements.
Ch. 7—Technology and Raw Materials Problems ● 227

nology, providing the least attainable

emission rates, must be used;

● a company desiring to add a new installation must have all of its facilities within a State in compliance with EPA standards, or be under agreement to bring

them into compliance; and

● the company must demonstrate continuing progress in reducing particulate matter so as to attain applicable air quality

requirement levels.

In addition to these requirements, a company planning to expand cokemaking capacity in a nonattainment area must offset the

additional pollution with pollution reductions

in that area. This condition poses a serious

problem for a new company moving into an

area in which it has no other facilities for

which pollution can be reduced. Even if a

company has the necessary funds to build a

coke oven battery in a nonattainment area, it

may be difficult to make arrangements for a

pollution tradeoff. * The increasing value of

coke byproducts, however, is making such

new ventures more attractive.

Coke Imports and

Declining Employment

As a result of declining coke oven capacity

and coke shortages, virtually every major

steel producer has had to resort to imports—

particularly since 1973. Coke imports, in

turn, have contributed to reduced employment opportunities in the steel industry. Coke

imports are expected to continue as present

coke oven capacity is reduced.

Imports of MetaHurgical Coke.—Annual

coke imports averaged about 16,326 tonnes

between 1950 and 1972 and nearly 1,814,000

tonnes between 1973 and 1977. In 1978 they

jumped to 5.2 million tonnes (table 92) or 10

percent of U.S. requirements, with almost 70

percent coming from West Germany. The balance came in relatively small amounts ranging from 12,000 to 300,000 tonnes from several other countries, including The Netherlands, Japan, the United Kingdom, Argentina,

*For additional comments, see ch. 11.

and Italy (table 93). * This marked the sixth

consecutive year that imports were near or

above the million-tonne level. Despite recent,

temporary improvements in domestic availability and the current slowdown in steel activity, 1979 also saw a high level of imports.

The need for the United States, with the

largest and best coking-coal reserves in the

industrial world, to import substantial quantities of coke on a regular basis is an anomaly.

It represents an example of the Nation’s

growing dependence on foreign suppliers for

an industrial source of energy. This dependence on foreign coke may also present supply

and price problems when steel industries in

exporting countries are operating at a high

rate. During the 1973-74 worldwide steel

boom, U.S. companies imported a substantial

amount of coke for $138/tonne, which was

over $55/tonne more than it cost to produce

coke domestically at that time. At the height

of the 1974 boom, prices for spot sales were

$143 to $154/tonne, and in one instance rose

as high as $180/tonne. Should an increase in

steel operations develop abroad, there is a

real question as to whether the United States

could count on obtaining coke from foreign

sources. However, the present closing of

much European steelmaking capacity and the

Third World’s ever-increasing use of direct

reduction (DR) could make more coke available.

Trade and Employment Effects.—The 5.2

million tonnes of coke imported in 1978, including freight and insurance charges, cost

close to $500 million. These imports contributed about 10 percent to the steel-related balance-of-payments deficit. Importing coke produced in part from foreign coal also carried a

high price in the loss of job opportunities. If

the 5.2 million tonnes of imported coke had

been produced in this country from domestically mined coal, there would have been an additional 3,400 jobs at the coke ovens, plus as

many as 6,000 jobs in the Nation’s coal mines.

It can also be argued that the loss of coke

*Steel plants in Western Europe and Japan did not operate

at maximum levels in 1978 as did domestic producers. As a

consequence, they had excess coke capacity available.
228 ● Technology and Steel Industry Competitiveness

Table 93.—U.S. Imports of Coke by Country of Origin, 1972-78 (thousands of tonnes)

Country of origin 1978 1977 1976 -

1975 1974 1973 1972

West Germany. . . . . . . . . . 3,604 1,108 808 1,259 2,505 664

The Netherlands . . . . . . . .

—

304 67 15 91 57

Japan . . . . . . . . . . . . . . . . .

— —

259 8 10 8

United Kingdom . . . . . . . .

— — —

213 17 — 44 347 8

Argentina . . . . . . . . . . . . . .

—

211 27 19 —

Italy. . . . . . . . . . . . . . . . . . .

— — —

191 158 — 39 7 29

Canada. . . . . . . . . . . . . . . .

—

119 109 122 134 177 263 155

France . . . . . . . . . . . . . . . . 84 138 102 — 2

Australia . . . . . . . . . . . . . . .

— —

54 — — —

Norway . . . . . . . . . . . . . . . .

— — —

45 — — — 51

Belgium-Luxembourg. . . .

— —

36 16 102 4

South Africa... . . . . . . . . .

— — —

33 — 11 54 31

Sweden . . . . . . . . . . . . . . . .

— —

24 10 — 4

Austria . . . . . . . . . . . . . . . .

— — —

12 — — —

U.S.S.R. . . . . . . . . . . . . . . . –

— — —

— — — 26

Czechoslovakia . . . . . . . . . —

— —

— — — 11

NewZealand . . . . . . . . . . . —

— —

— — — 7

Hungary . . . . . . . . . . . . . . . —

— —

— — — 3

Others . . . . . . . . . . . . . . . . . —

— —

— — 15 — — 13

Total . . . . . . . . . . . . . . 5,189 1,658 1,189

— —

1,652 3,210 978 168

SOURCE:US Departments of Commerce and the Interior

oven byproducts caused the use of more imported energy and an additional loss of jobs in

the petrochemical industry.

Future Coke Shortages

Anticipated reductions in domestic coke

oven capacity will force the domestic steel industry to depend on imported coke whenever

steel demand is high. It has been estimated

that coke imports are indispensable whenever the steel industry has an operating rate

of 83 percent or more—as is expected to be

the case often during the next several years.

The current supply-demand imbalance is expected by some to lead to an annual shortage

of 7 million to 11 million tonnes in domestically produced coke by 1985. Given likely increases in world steel demand, coke imports

might not be readily available, or available

only at high prices, unless additional coke

oven capacity is constructed in the meantime.

Decline in Capacity.—Based on the excess

of scheduled domestic coke oven abandonments over installations, it is expected that

an additional 4.8 million tonnes of annual capacity (8.3 percent) will be lost by the end of

1985, thereby reducing total existing capacity to 52.7 million tonnes (see table 91), Ninety

percent of this scheduled capacity loss is expected to occur by the end of 1982, when environmental control deadlines must be met.

Of more immediate concern is the fact that 2

million of the 4.8-million-tonne loss is expected to occur by the end of 1980. Given the

present decline in domestic steel consumption, however, this much reduction in cokemaking is not necessarily critical in the near

term.

Actual productive capability is expected to

decline even more than total existing capacity. When production losses from facilities

scheduled to be rebuilt or repaired, from

maintenance operations, and from environmental constraints are taken into account, it

is estimated that the industry’s actual productive capability will decline by 10.4 percent by 1985, to a maximum level of approximately 42.6 million tonnes.

Increased Demand.—Assuming a 2-percentper-year growth rate in domestic steel output

and the need for 0.56 tonne of coke to make 1

tonne of pig iron, approximately 53.5 million

tonnes of coke would be needed to meet demand in 1985. The domestic coke shortfall

would be about 11 million tonnes. Barring

coke importation, a shortage of that magni-
Ch. 7—Technology and Raw Materials Problems . 229

tude would result in a 15.4-million-tonne decline in the amount of blast furnace iron

available for steelmaking; raw steel output

would then be short of demand by some 26.3

million tonnes, the equivalent of 19.5 million

tonnes of finished steel products. * A l-percent-per-year increase in domestic demand

for steel would require 49.9 million tonnes of

coke in 1985, leaving a shortfall of 7.3 million

tonnes of coke from domestic sources, enough

to have a significant negative effect on pig

iron and steel production. Without coke imports and without an increase in domestic capacity, the steel industry could have finishing

facilities that are standing idle while the

country imports the steel it needs.

Changing Technology.—A recent analysis10

concludes that even with a steel boom in 1985

domestic demand would only be 41.7 million

tonnes of coke, which implies that adequate

capacity would exist. The critical difference

between this analysis and others is its optimism about future reductions in the amount

of coke needed to produce a tonne of pig iron

in blast furnaces: it forecasts a usage rate of

0.50 tonne of coke per tonne of pig iron for the

United States in 1985. Modernization of existing blast furnaces appears likely, and this

forecast may thus be correct. Other factors

which lead to the conclusion of ample coke

capacity include the increasing replacement

of open hearths with electric furnaces, and

continued improvements in existing cokemaking facilities to provide greater capacity.

Although OTA has not performed its own

detailed analysis of future cokemaking capacity and demand, the above conclusions are

consistent with other OTA findings: the increasing use of electric furnace steelmaking

(especially by nonintegrated steelmaker),

and a modernization and expansion program

for the coming decade aimed at improving the

performance of existing integrated facilities

(see ch. 10). Hence, although there is uncertainty about future coke shortages, only the

*This projection for 1985 is based on the following assumptions: growing emphasis on scrap-based electric furnace steelmaking: no major use of direct reduction; 0.580 of iron output

for each tonne of steel output.

“’Bradford, op. cit.

combination of very low capital spending and

high domestic steel demand would likely lead

to a severe coke shortage in the coming decade.

Potential Solutions to Coke Shortages

Domestic coke shortages, should they occur, could be remedied in part by purchasing

coke elsewhere. An active worldwide steel

market, however, could significantly reduce

the likelihood that imported coke would be

available, and whatever coke did become

available would be at very high prices.

Another alternative would be for steel consumers to import up to 19.5 million tonnes of

finished steel products. Occurring at a time

when steel demand is expected to be high all

over the world, this would also mean exorbitant prices for steel imports. * A third alternative would be to increase domestic coke oven

capacity. This course would make the steel industry more self-sufficient by reducing coke

imports, would improve the Nation’s balance

of payments, and would increase domestic

job opportunities. The ever-increasing price

of petroleum may also provide ample motivation for expanding coking capacity, because

the coke byproducts that can substitute for

petroleum products in some uses will have

more value. Byproduct sales would help to reduce the real cost of coke for blast furnace

use.

Additional solutions to the coke shortage

are available, but each presents problems of

its own:

● The use of electric furnace steelmaking

based on scrap iron could be increased.

The limitations to this option are that it

does not use virgin ore and thus does not

add to the available iron supply; a shortage of scrap iron may occur, or markedly higher prices may reduce the competitiveness of this steelmaking technology; ** and there may be inadequate domestic supplies of electricity.

*Whenever steel imports enter the United States under domestic shortage conditions, rather than in competition with domestic steel, prices reflect what the market will bear. This was

borne out in 1974, when import prices for steel were between

$55 and $110/tonne higher than domestic production prices.

**See following section on scrap.
230 ● Technology and Steel Industry Competitiveness

DR could supplant or complement blast

furnace technology based on coke. Available projections suggest that the use of

DR will increase. However, construction

of domestic DR facilities will depend on c

additional coal-based DR technology becoming available for large integrated

plants or small nonintegrated plants, or

both. The availability of imported DRI

depends on developments in a number of

less developed countries and is still ●

somewhat speculative. (See ch. 6.)

Semifinished steels could be imported to

bypass the need for domestic blast furnace operations. It would be better to import semifinished rather than finished

steel, because domestic capital investment for primary ironmaking and steelmaking would be greatlv reduced while

and finishing would be done domestically. Nevertheless, imports of semifinished

steel would still add to already sizable

balance-of-trade deficits.

Blast furnace-based plants could change

processes to reduce the amount of coke

they use. Such changes might have a major impact because of the large number

of old and small domestic blast furnaces

currently in use.

Formcoke technology could be adopted

to promote the use of cheaper, nonmetallurgical-grade coals. This technology

may offer environmental advantages,

but it has not yet been demonstrated on

a large scale. Furthermore, there are indications that capital costs and energy

use may be high. *

profitable secondary steel processing -

*See case study of formcoke in ch. 9.

Ferrous Scrap Supply and Demand

Recent testimony by the chairman of the

Ferrous Scrap Consumers’ Coalition provides

an introduction to the issues that currently

confront the domestic steel industry with regard to the demand and supply of ferrous

scrap:

The recent rate of United States ferrous

scrap exports has reached record levels.

Current exports parallel those experienced

in 1973 and 1974, a period in which Commerce imposed export restraints, During

1978, domestic consumption of ferrous scrap

approached the 100-million-ton level, 54 percent greater than in 1977. Japan accounted

for almost all of the increase in the United

States exports. Between 1977 and 1978 domestic exports of ferrous scrap to Japan increased by 208 percent to more than 3 million tons. Scrap exports to Canada, Italy,

Mexico, Taiwan, South Korea and Spain also

increased. During the last six months of

1978, as domestic demand rose and exports

skyrocketed, inventory stocks of industrial

ferrous scrap purchased on the open market

declined by 6 percent.ll

Ferrous scrap is an important raw material in steelmaking, and the demand for it is

growing rapidly, partly as a result of increasing worldwide use of the electric furnace.

Scrap can be viewed as embodied energy; as

such, it is a valuable domestic resource, and

there are advantages to maximizing its domestic use. However, to produce high-quality

steels with minimum impurities, it is necessary to have the domestic steel industry convert ore into new iron units, some portion of

which will eventually become available as

ferrous scrap. There are also limits to increased domestic steel production unless new

iron units are produced from ore.

The availability and quality of scrap will

also affect the development and adoption of

“W, J. Meinhard, testimony before International Finance

Subcommittee of Senate Banking Committee, Mar. 12, 1979.
Ch. 7—Technology and Raw Materials Problems 231

new steelmaking technologies. DRI, for instance, could partially substitute for scrap,

and the possible development of domestic

coal-based DR technology and the availability

of foreign DRI may reduce the future demand

for scrap. Scrap availability and price, in

turn, will determine to some extent how viable DR will be.

U.S. Ferrous Scrap Industry

Ferrous scrap is often defined as the portion of ferrous material that can be economically recycled. This economic definition is

significant because scrap is not a homogeneous commodity. Ferrous scrap normally originates from three sources:

● Home or revert scrap is discarded material generated in the iron and steel industry itself during the primary and secondary steelmaking operations.

● Obsolete or capital scrap is wornout or

discarded material from diverse sources

such as industry, consumers, or municipal dumps. This scrap is often mixed and

contaminated with other materials. Several of these materials, such as copper,

are difficult to remove and are deleterious to the steelmaking process or the

final steel products.

● Prompt industrial or process scrap is

discarded material generated in manufacturing operations using steel, which

cannot be recycled in the same plant.

Home and prompt industrial scrap generally represents higher quality iron than obsolete scrap. It is estimated that about 45 percent of all scrap in North America is home or

prompt industrial, and 55 percent is obsolete.

Because it is such a heterogeneous commodity, scrap is classified according to a complex

set of specifications based on such factors as

physical-chemical properties, origin, and consumer requirements. * Scrap that requires a

*More than 10 different grades of scrap are widely used.

These grades have various characteristics with respect to bulk

density, size coating, and chemical impurities.

great deal of treatment to improve its physical or chemical characteristics may be an uneconomic source of iron units.

The scrap industry is noted for its involved,

integrated market structure (figure 33). The

Figure 33.— Flow Chart of Ferrous Metallics

I r

– - f v

I I

f–- 1

I

I

I . I

I I The steel Iron and steel I

industry foundries

I

I

I

Steel mill Iron and

I products steel

I

scrap scrap

castings

1

I

Exports Imports Exports Imports

I Fahrlcated [ Exports Imports

‘ Exports Imports

I Nonrecoverable

I 1 Iron and steel

I

Reservoir of Inventory of iron

iron and steel — and steel products

available for scrap in use

.

SOURCE U S Department of Commerce

industry can be divided into four discrete

functions—collection, dealing, brokerage,

and processing. These functions may be completely segregated in different firms or combined in firms with some degree of vertical integration. A collector gathers the scrap and

sorts it into useful and nonuseful material;

most collection is now carried out by dealers

who classify the scrap before processing it to

meet customer’s requirements. A broker generally acts as the middleman between dealer

and customer, making arrangements on be-
232 ● Technology and Steel Industry Competitiveness

half of a customer for the purchase of specified grades of scrap on a contractual basis.

Scrap processors are usually fully integrated

companies that process material, such as

autos and appliances, into acceptable grades

for use in steel production. Scrap processing

is a major business, often involving high investment in such processing equipment as

shears, slabbers, crushers, and shredders.

Supply, Demand, and Price

The steel industry is the major consumer of

ferrous scrap, although other consumers

such as foundries offer competition for scrap

supplies in many areas. Total scrap consumption has gradually increased over the years,

while home scrap production has declined

somewhat. Scrap prices fluctuate considerably with demand and availability, although

the general trend has been upward, with a

more than twofold increase in price from

1969 to 1978 (table 94).

Not all types of scrap are equally important when considering availability, Home

scrap is not a primary concern. It is completely internal to the steel mill and bears no relationship to the price of scrap, except that a

reduction in home scrap could lead to greater

demand for purchased scrap. Purchased

scrap is a mixture of obsolete and prompt industrial scrap. The availability of obsolete

scrap, particularly, is at the core of the question of whether the U. S. steel industry has

adequate supplies of domestic scrap. The major and contradicting views on this question

have been presented in the Nathan study for

the research arm of the Institute for Scrap

Iron and Steel12 and the Fordham University

study for the American Iron and Steel Institute (AISI).13 The Nathan study was conducted for scrap suppliers and the Fordham

study for scrap users.

The main thrust of the Nathan study is that

adequate domestic supplies of obsolete scrap

exist and that a shortage is unlikely, although

prices could increase substantially. Nathan

started with a 1955 estimate of the total pool

of domestic obsolete scrap14 and added to it

his estimates of subsequent annual iron and

IZRobert R. Nathan Associates, Inc., Price-Vo/ume Rela tiOnship for the Supply of Scrap Iron and Stee~: A Study of the Price

Elasticity of Supply, for the Scrap Metal Research and Education Foundation, Washington, D. C,, Jan. 8, 1979.

“William T. Hogan, S. J., and Frank T. Koelbe, Purchased

Ferrous Scrap: United States Demand and Supply Outlook, for

AISI by Industrial Economics Research Institute, Fordham University, New York, June 1977.

‘+Battelle Memorial Institute, “Identification of Opportunities for Increased Recycling of Ferrous Solid Waste, ” for Scrap

Metal Research and Education Foundation, Washington, D, C,,

1972.

Table 94.—Measures of U.S. Ferrous Scrap Use, 1969-78

Total domestic Purchased scrap Purchased scrap Purchased scrap

purchased scrapa for steelmakingb for steelmakingc for Steelmakingd

Year Total pig iron Pig iron in steel Raw steel Steel shipments

1978 . . . . . . . . . . . . .53 .36 .22 .31

1977 . . . . . . . . . . . . .52 .34 .21 .29

1976 . . . . . . . . . . . . .48 .32 .20 .29

1975 .., . . . . . . . . . .48 .32 .20 .29

1974 . . . . . . . . . . . . .54 .38 .24 .32

Average. . . . . . . . . .51 .34 .21 .30

1973 . . . . . . . . . . . . .44 .32 .21 .28

1972 . . . . . . . . . . . . .47 .33 .21 .31

1971 . . . . . . . . . . . . .42 .28 .18 .25

1970 . . . . . . . . . . . . .37 .28 .18 .26

1969 . . . . . . . . . . . . .39 .28 .18 .28

Average. . . . . . . . . .42 .30 .19 .28

aFor regression fit between ratio and time, correlation coefficient = 0.86, growth rate = 0.017 per year.

bFor regression fit between ratio and time, correlation coefficient = 0.74, growth rate = 0.008 per year.

CFor regression fit between ratio and time, correlation coefficient = 0.63, growth rate = 0.004 per year.

dFor regression fit between ratio and time, correlation coefficient = 0. 55, growth rate = 0.004 per year

SOURCES Total domestic Purchased scrap from Bureau of Mines, other data from American Iron and Steel Institute
Ch. 7—Technology and Raw Materials Problems ● 233

steel discards. * This made it possible to

estimate current total obsolete scrap reserves. The Nathan study indicates that there

were 577 million tonnes of potential reserves

at the end of 1975 and 609.8 million tonnes at

the end of 1977. This study used the concept

of “potential reserves” of obsolete scrap,

defined as quantities recoverable with the

use of existing technology at high but realistic

prices—that is, prices possibly several times

higher than present levels. Specifically, the

definition of potential reserves implies a positive price-supply relationship. At any given

price above the present price, an additional

amount of scrap will move into the hands of

processors and, through them, to the iron and

steel industry. Thus, price increases trigger

larger supplies of difficult-to-process scrap,

although not necessarily in a linear relationship—dramatically higher prices would be

required to extract the last increment of

scrap from potential reserves and place that

increment in the ferrous supply system.

Hogan and Koelbe, in the Fordham study,

reached the converse conclusion, that scrap

would be in short supply in the early 1980’s.

Unlike Nathan, they did not use the total pool

of obsolete scrap reserves as the basis for

their current and 1982 estimates of available

domestic scrap. Rather, they looked at the

discarded materials from the Nation’s total

iron and steel inventory that it would be economically and technically feasible to recycle. They determined the current and 1982

projected iron and steel inventory by making

annual additions to a 1954 Battelle estimate.

They then estimated the portion of recyclable

material by using the 1974 maximum discarded-materials withdrawal rate of 1.63

percent. This approach led to the conclusion

that there will be a shortage of 9.9 million

tonnes of obsolete scrap by 1982.

Like the Nathan study, the Fordham study

considered the effect of scrap price on supply. The Nathan data showed greater sensitivity to changes in price than did the Ford-

*There has not been a net withdrawal from the total pool of

domestic obsolete scrap since 1956.

ham data. Using 1973-74 data, Hogan and

Koelbe found that a 100-percent increase in

price would yield a 7-percent increase in

scrap supply. The Nathan report found that a

price increase of that magnitude would yield

an increase of somewhat more than 83 percent in the supply of obsolete scrap. * Thus,

Nathan’s finding of significant supply elasticity for scrap supports his conclusion that

scrap supplies would be adequate under conditions of rising prices, while the finding of

limited supply elasticity underlies Hogan and

Koelbe’s prediction of a future scrap shortage. Neither study, however, is impressive in

its methodology or precision.

Very little attention has been paid to demand elasticity for scrap. Rossegger found

that the demand for scrap is price inelastic. ”

In other words, demand for scrap is quite insensitive to changes in price, because the possibilities of substituting other materials are

presently quite limited. Increases or decreases in the price of scrap will trigger only

very modest decreases or increases in demand. Rossegger’s findings have been confirmed in recent years, when demand for

scrap has not decreased with high prices. In

fact, several measures of domestic scrap use

indicate that the trend is toward increasing

consumption (table 94). The proportion of

scrap to either pig iron (blast furnace output),

raw steel (steelmaking furnace output), or

steel shipments over the past decade has increased significantly.

Thus, on the basis of these studies, scrap

supply can be expected to range from inadequate to adequate (at much higher prices)

and scrap demand to grow regardless of

price. The steel industry, as a major scrap

consumer, has few options. To reduce the impact of cyclical shortages, it could maintain

scrap inventories. In the long run, it could

substitute other raw material, such as DRI,

and support the imposition of export controls. **

*Nathan’s data show a supply elasticity of 0,83 for obsolete

scrap for the 1961-76 period. For 1973-74 the elasticity was

higher than 1.0.

“J. Rossegger, Human Ecology, vol. 12, November 1974.

**See below for a discussion of the latter two options.

,- —. .
234 ● Technology and Steel Industry Competitiveness

As a rule, steel companies do maintain substantial inventories, in absolute terms and in

relation to use, in order to offset short-term

scrap supply and price problems. As prices

rise, inventories decline, and when prices

fall, inventories increase. This requires substantial investment: the domestic steel industry invests more than $500 million annually in

carrying scrap inventories, and more in providing space and facilities to handle those inventories.

Recently, increasing demand for scrap has

altered this traditional pattern of curtailing

scrap purchases when prices are high. Scrap

inventories are drawn down during periods

of rising price, but net purchase receipts of

scrap by steel mills and other consumers

have continued to move upward to satisfy the

less flexible requirement for scrap. This

trend appears attributable to the increasing

use of electric furnaces and to the growing

exports of scrap.

Availability Concerns

Future availability at reasonable prices is

not the only concern with regard to scrap.

Other concerns include the adequacy of the

scrap industry’s processing capabilities in

the face of growing demand; the availability

of railroad cars to ship scrap; the structure of

freight rates; and finally, the effect on the use

of scrap of fiscal incentives for mineral exploration and mining. Some of these problems

appear to have little effect on scrap supplies

and steel production costs; others are now being remedied.

Processing Capabilities of the Scrap lndustry.-A recent Battelle report concludes that

present scrap-processing facilities can easily

process enough scrap even when the demand

is much greater than current levels. ’G No consideration is given to questions of cost and

price. The report claims that 47.3 million

tonnes of scrap were processed (operating an

average of 50 hours per week) in the peak

year of 1974. The report also claims that an

“7Battelle-Columbus Laboratories, The Processing Capacity

of the Ferrous Scrup Industry, Columbus, Ohio, Aug. 10, 1976.

additional 41.7 million tonnes or more of

scrap could be processed under the following

conditions:

●

●

●

●

optimum raw material supply and market demand: 9.1 million to 11.8 million

tonnes;

improved scrap operations and maintenance programs: 7.3 million to 9.1 million tonnes;

addition of a full second shift: 22.7 million to 27.2 million tonnes; and

improved materials handling and plant

flow: 2.7 million to 4.5 million-tonnes.

The report predicts that by 1980, 131.2 million tonnes of ferrous scrap could be processed annually. Thus, this report (without addressing the scrap cost issue adequately) supports the position that adequate scrap supplies exist for the future if scrap-processing

capabilities are viewed as the primary problem. But because scrap suppliers are forecasting scrap shortages, the Battelle report’s

conclusions can be questioned.

Gondola Railroad Cars.—Scrap is moved via

rail in gondola cars. Because most scrap is

moved from scrap processors to steelmaker

by rail, the gondola supply is a critical link in

the availability of scrap. Many incidents of

ferrous scrap supply shortages have been attributed to the unavailability of gondola cars.

The pool of gondolas available to scrap

processors has been declining for some

time. ’7 Every year, more gondolas are retired

than are added. From 1970 to 1979, there

was a 23-percent decrease (37,878 cars) in

the number of general-purpose gondolas. Daily shortages during 1978 were in the 3,000-to

5,000-car range.

One of the Interstate Commerce Commission’s (ICC’s) regulatory responsibilities under the Interstate Commerce Act is to make

sure that railroads supply sufficient cars to

satisfy shipping needs. To increase the gondola supply, ICC has approved an incentive per

diem (IPD) system, although its decision is being appealed. IPD adds to the basic gondola

‘ Phoenix Quurter]y, September 1978,
Ch. 7—Technology and Raw Materials Problems “ 235

rental fee an extra cost that simultaneously

penalizes railroads borrowing gondolas and

rewards those railroads investing in gondolas.

The gondola-supply situation appears to be

improving. In 1979, 6,000 replacement cars

were scheduled for construction by 1980.

This would slow down the loss of gondolas.

Continued increases in rail capability for

scrap shipment may occur but are not certain. 18

Railroad Freight Rates.—A longstanding

issue is whether railroad freight rates discriminate against ferrous scrap shipment

and, hence, limit the supply of scrap. ICC

recently found that discrimination against

ferrous scrap exists in some parts of the

country. 19 A study by OTA concluded that discrimination against scrap exists but that the

effect on supply is small:

The conclusion of this analysis is that substantial discrimination against secondary

materials is found, if one adopts cost-based

or equivalency-based railroad ratemaking.

For example, a 36-percent decrease in the

rail rate for iron and steel scrap would increase rail shipments by an estimated 0,2

million to 1 million tons (about 0.5 to 2.9 percent), but would cause a reduction in rail

revenues of $100 million to $110 million per

year. This loss is equivalent to about $100 to

$550 per ton of additional scrap moved, and

is not economically justifiable from the railroad’s perspective when iron and steel scrap

is selling in the neighborhood of $50 to $100

per ton.20

Tax Disparities.— Federal tax regulations

explicitly encourage exploration for minerals

and the mining of virgin ores. The regulations

that have most significance for scrap use are:

● depletion allowances—i. e., flat percentage deductions from gross income—for

iron ore mining operations;

●

●

●

expensing of exploration and development costs—i.e., immediate deductions

for iron ore exploration and development expenses;

capital gains tax rates on royalty payments to landlords that lease land for

production of iron ore; and

tax credits for payment of foreign taxes.

To the extent that these tax regulations apply

only to the exploration and mining of virgin

ore, they implicitly discriminate against the

use of iron scrap. But a number of studies

undertaken by various Federal agencies as

well as by industry suggest that the impact of

this discrimination is not substantial. For example, the 1975 total tax benefits from using

virgin ore to produce a tonne of raw steel

were found to be $1.38, or 1.7 percent of the

cost of producing the raw steel,21 an amount

that could only marginally affect the use of

ferrous scrap. The Department of Treasury

recently concluded that “it is extremely unlikely that the tax subsidies could reduce the

amount of recycling of scrap steel by more

than one percent. 22

Scrap Exports: Growing World

Demand and Price Impact

Whether or not current and future exports

of scrap by the United States will have adverse impacts on the domestic steel industry

is an acute, highly debated issue. Scrap exports had been fairly stable since at least

1969, but they rose sharply in 1979 to approximately 10 million tonnes (table 95). Unlike the

United States, many, if not most, of the steelproducing nations have very limited domestic

supplies of scrap, and eight countries (Japan,

Italy, Spain, Mexico, Canada, South Korea,

Turkey, and Taiwan) accounted for 85 to 90

percent of U.S. scrap exports between 1973

and 1979.

‘

nAmerican Metal Market, Aug. 9, 1979.

“

)

Interstate Commerce Commission, “Further Investigation

of Freight Rates for the Transportation of Recyclable or Recycled Materials,”’ Apr. 16, 1979.

Wlffice of Technology Assessment, Materials and Energy

From Municipal Waste, July 1979.

“Booz-Allen and Hamilton, “An Evaluation of the Impact of

Discriminatory Taxation on the Use of Primary and Secondary

Raw Materials,’” 1975.

“U.S. Department of the Treasury, Federal Tax Policy und

Recycling of Solid Waste Materials, February 1979, p. 87.
236 . Technology and Steel Industry Competitiveness

Table 95.—Selected Data on Iron and Steel Scrap: Ferrous Scrap Relative to Scrap Consumption and

the Impacts of Scrap Exports on Scrap Supply and Price (thousands of tonnes)

—

Total scrap Home scrap

Year consumption – production +

1969 . . . . 85,998 51,052

1970 . . . . . . 77,602 47,686

1971 ... , . . 74,888 44,596

1972 . . . . . . 84,687 46,424

1973 . . . . . . 93,955 52,426

5-year

average. . 83,426 48,437

197 4 95,673 50,112

1975 . . . . . . 74,674 41,760

1976 . . . . . . 81,548 45,374

1977 ., . . . . 83,885 44,919

1978 (p) . . . . 89,889 47,110

5-year

average. . 85,134 45,855

Change in

consumer Domestic net

inventories = scrap receiptsa

– 1,206 33,740

+ 1,012 30,928

+ 749 31,041

- 295 37,968

- 977 40,552

– 143 34,846

+ 1,000 46,561

+ 421 33,335

+ 1,374 37,548

– 488 38,478

- 979 41,800

+ 266 39.545

Exports as a

Ferrous percent of

scrap Total scrap total

exports b

shipments shipments

8,322 42,062 19.8

9,401 40,329 23.3

5,674 36,715 15.5

6,697 44,665 15.0

10,210 50,762 20.1

8,061 42,907 18.7

7,887 54,448 14.5

8,714 42,049 20.7

7,365 44,913 16.4

5,602 44,080 12.7

8,197 49,997 16.4

7,553 47,098 16.1

— aGross shipments minus shipments by consumers, receipts by mills and founding

b1979 exports 10 million tonnes

cDomestic net scrap receipts plus ferrous scrap exports

(p) Preliminary

SOURCES Bureau of Mines (scrap consumption, production, etc.): U S Bureau of Census (exports), and Bureau of Labor Statistics (price index)

About 75 percent of all scrap traded internationally is from the United States.23 A s

worldwide use of electric furnaces grows, so

will demand for ferrous scrap, and additional

pressure will be placed on the United States

to export more scrap. A recent analysis forecasts a 30-percent increase in foreign demand for U.S. scrap by 1982 (excluding Canada and Mexico) .24 A recent article on this

issue stated:

Whatever future export demand will be, it

can be certain that world scrap requirements are going to grow. Preliminary results

of a detailed study on ferrous scrap by the

Steel Committee of the Economic Commission

for Europe (ECE) underline future expansion

in scrap requirements. The ECE indicates

that the world requirement for obsolete

scrap will increase (measured from 157 million tons in 1974) by 39 percent to 218 million

tons by 1985 and by 50 percent to 235 million

tons by 1980,

‘ll. M. J. Kaplan, “The Consumer’s Viewpoint, ” paper presented at the Ferrous Scrap Consumer’s Coalition symposium,

Atlanta, Ga,, February 1980.

“W. W. Blauvelt, “A Free Market: Ferrous Scrap Demand

and Supply, ” paper presented at the Ferrous Scrap Consumer’s Coalition symposium, Atlanta, Ga., February 1980.

BLS scrap

price index,

1967 = 100

1 lo:5-

138.9

114.6

121.8

188.0

134.8

353.2

245.6

259.0

231.2

264.6

270.7

Considering the expected growth in world

scrap requirements, we can reasonably anticipate in the future strong demand for U.S.

ferrous scrap exports. If history is a guide,

demand should show sharp cyclicality, and

at some point, market conditions that approximate the tight supply situation of 1970

and the exceptional period of 1973-74 (hopefully not too much like 1973-74). As you

recall, increasing steel production in the U.S.

and the rest of the world led to significantly

increased demand for scrap.

The composite price of No. 1 heavy melting

scrap increased 25 percent from $43 per ton

in December 1972 to $54 per ton in June 1973

and then by another 46 percent to $79 per

ton by December 1973, reaching a high of

$145 per ton in April 1974,25

Some exporters contend that exports of

scrap do not result in increased domestic

scrap prices. * The fundamental reason for

this contention is that there exists in the

United States a considerable volume of obsolete scrap that could be added to the supply

as the demand increases, although the cost of

‘

5D. R. Gill, Exports of Ferrous Scrap, Iron and Steelmaker,

March 1979, p. 30,

*For additional comments, see the discussion of the Nathan

study above.
Ch. 7— Technology and Raw Materials Problems ● 237

retrieving such scrap could be very high.

Others, including most of the domestic steel

companies led by AISI, argue forcefully for

controls of scrap exports:

. . . accordingly, it is the view of the U.S.

steel industry that continuous monitoring of

scrap exports by the U.S. government is essential. The industry has urged that the Congress revise the Export Administration Act

of 1969 to require such monitoring. Additionally, the industry has recommended that

a study be undertaken of policies other governments have implemented over the past

decade with respect to exports of their ferrous scrap. Such a study should evaluate the

extent to which the U.S. economy has been

adversely affected by such policies.

It can no longer be assumed that the U.S.

can supply a growing world need for ferrous

scrap while the rest of the world carefully

guards its internal supplies. This policy will

cause unacceptable domestic inflation, as is

the case today, and if unchecked, will ultimately lead to domestic steel shortages. As

the leading world supplier, the U.S. must assume a role of responsible leadership with

respect to world access to the supply of ferrous scrap on a non-discriminatory, most favored nation basis conditioned upon full satisfaction of home demand.26

The proponents of scrap export controls

also point to the conditions prevailing in the

1973-74 period. Steel demand was very high,

and this caused large demand for both foreign and domestic scrap. Prices were very

high. On July 2, 1973, the U.S. Department of

Commerce imposed export restrictions on ferrous scrap under the “short supply” provisions of the Export Administration Act of

1969. No new orders for more than 454

tonnes of ferrous scrap could be accepted for

the balance of 1973. Individual allocations

were distributed according to exporter, country, and grade, based on each exporter’s history of scrap exports during the base period,

from July 1, 1970, to June 30, 1973.

Almost all of the domestic steel producers

contend that the high prices of scrap experi-

-fAmerican Iron and Steel Institute, Ferrous Scrop Supply

und Demand (h tJook, June 1979.

enced in the 1973-74 period will be repeated

in the future unless some control of scrap exports is enacted. The domestic scrap exporters, on the other hand, argue that scrap exports have been stable over time, and therefore control of scrap is not necessary. Indeed,

exports of ferrous scrap have been relatively

stable when measured against total shipments. Furthermore, scrap exports make a

relatively small, but positive, contribution to

the balance of trade. In answer to the balance-of-trade argument, domestic scrap consumers point out that price increases spurred

by exports more than offset the value of export tonnage. Moreover, much exported

scrap contains valuable alloying elements

which the United States must import. However, scrap with alloying elements is generally less marketable domestically than conventional carbon steel scrap.

Although scrap exports have been fairly

stable, they do appear to correlate with price

and price volatility of scrap (figure 34). A recent study of this issue states that:

This study is intended to provide additional insight into the rapid escalation in

prices which has characterized the United

States market for purchased ferrous scrap

within the last year. Its focus is on measuring

the relative influence of U.S. exports and domestic demand on domestic ferrous scrap

prices. The results of a number of statistical

analyses directed at this end indicate that

the foreign component of total demand,

which is represented by U.S. exports, has

had a substantially greater impact on U.S.

ferrous scrap prices than has domestic demand during the last two years (January

1977 through January 1979). The influence of

the domestic component of total demand for

ferrous scrap on domestic prices was found

to be statistically insignificant .27

An earlier study, which examined the dependence of U.S. scrap prices for 1973-78 on

25 factors, found that the most statistically

significant correlations were first with foreign scrap prices and second with EEC steel

‘“Economic Consulting Services, Inc., The Impnct of U.S. Exports of Ferrous .%rclp on U.S. Ferrous Pri(:es: An Empirical

Anulysis, Washington, March 1979.
238 ● Technology and Steel Industry Competitiveness

Figure 34.—Scrap: Price and Export Levels; Domestic Purchased Scrap Requirements, 1971-79

Index

4.0 ‘

3.0 —

2.0 —

AMMI #1

3-city composite

Year

SOURCE: American Mefal Market, U.S. Bureau of Labor Statistics

mill operating rates.28 The latter variable was

more significant than domestic operating rate

or domestic scrap consumption. A methodological problem with findings relating exports

to domestic prices, however, is that the prices

may not be representative of all or most scrap

markets. Data on scrap prices for cities from

which exports are significant distort the picture for the entire country, which includes

many markets not influenced by exports.

Perhaps the most significant long-range

consequence of increasing scrap exports to

meet greater foreign demands is the possibly

detrimental impact of such exports on the

nonintegrated steel producers, the Nation’s

most efficient low-energy and low-cost steelmaker. Rising scrap prices, driven by high

‘“World Steel Dynamics, Core Report A, November 1978.

79

foreign demand, would put a substantial costprice squeeze on these firms and could drive

them out of the market, especially if steel

prices are subject to formal or informal Government controls that cannot be released

quickly enough to offset rapidly rising costs.

This impact is particularly acute now, when

DR is not widely used domestically and when

DRI is not readily available as an import.

When domestic demand and export demand for scrap impact the market at the

same time, the issue of adequate supply for

domestic use becomes acute. Foreign nations

have been much more restrictive of scrap exports than has the United States. The United

Kingdom presently has a licensing system

under which the quantity and grades of scrap

exported are controlled from time to time.
Ch. 7— Technology and Raw Materials Problems ● 239

Norway, Belgium, and Canada monitor

and/or license scrap exports. Denmark, Ireland, and Italy ban scrap exports outside the

EEC. Japan imports most of its scrap. The new

Export Administration Act gives the U.S. Department of Commerce the right to ensure

that an adequate supply of domestic ferrous

scrap is made available to domestic consumers. Domestic steelmaker have already requested that permanent monitoring be established, but the scrap industry opposes this

step.

Impacts of Technological Change

on Scrap Demand

Four technological developments will affect the price of and demand for ferrous

scrap:

●

●

●

●

the growing use of electric arc furnaces

by integrated and nonintegrated steelmaker;

greater use of continuous casting and

changes in the basic oxygen furnace;

further increases in the use of highquality, high-performance steels, which

impose more stringent requirements on

scrap quality while reducing the future

supply of low-alloy scrap, desirable for

most scrap applications; and

increasing use of DRI as an input substitute for scrap.

Scrap-Based Electric Furnace Steelmaking.

—The use of electric furnace processing is increasing rapidly in the United States and

throughout the world because it has relatively low capital and operating costs. This process uses a higher proportion of scrap input

than do other processes; it also reduces the

amount of prompt industrial scrap generated

per melting unit. Thus, increased use of

scrap-based steelmaking will increase the demand for scrap, while putting additional

downward pressure on available scrap supplies.

Domestically, the use of the electric furnace is growing rapidly among nonintegrated

steelmaker, and some of the integrated steel

mills are beginning to use more electric furnaces in combination with their other steel

production facilities. Presently, about onequarter (22.7 million tonnes) of domestic steel

is made in electric furnaces. Although ferrous scrap consumption in open hearth production in the United States has declined, this

trend will be offset by growth of scrap consumption in electric furnaces by 1982, when

new electric furnace installation, now underway or planned, will have been completed. It

is likely that as much as half of future domestic new capacity will eventually be based on

electric furnaces.29

Electric furnace use has grown at an even

faster rate abroad. In the last 10 years, world

electric furnace steel production has increased by nearly 75 percent, or almost 39

million tonne/yr. Almost 30 percent of the

growth in world steel production has been in

the electric furnace. One forecast suggests

that worldwide electric furnace use will increase by more than 50 percent from 1978 to

1985, and by 1985 will account for 38 percent

of the increase in world steel output .30

Continuous Casting and Basic Oxygen Furnace Changes.—These technological changes

also have increased steel industry use of purchased prompt industrial and obsolete scrap.

The increased yield from continuous casting, compared to conventional ingot casting,

causes less inplant scrap to be produced.

Thus, purchased scrap must replace “lost”

home scrap in order to maintain liquid-ironto-scrap ratios for steelmaking furnaces. This

also assumes increased shipments of finished

steel at existing levels of iron production (see

ch. 9). In 1978, 32 percent or 28.5 million

tonnes of all steel shipped was derived from

purchased scrap. If continuous casting were

increased to a 50-percent level on the 1978

base and produced a 12-percent increase in

‘

gHogan forecasts an increase in electric furnace raw steel

from 29.2 million tonnes in 1978 to 46.3 million in the mid1980’s. (W. T. Hogan, “Growth of the Electric Furnace, ” paper

presented at the Ferrous Scrap Consumer’s Coalition symposium, Atlanta, Ga., February 1980. ) A supplier of electric furnaces forecasts that “by IWO, half of all the steel will be made

in electric furnaces, ” (Iron Age, Feb. 4, 1980, p. MP-7. ]

‘

OAmerican A4etrd Market, Jan. 17, 1980.
240 ● Technology and Steel Industry Competitiveness

yield, then an additional 5.7 million tonnes of

scrap would have to be purchased to satisfy

steel production needs. * Under such circumstances, 36 percent or 34.3 million tonnes of

all steel shipped would be derived from purchased scrap.

Equipment changes in basic oxygen steelmaking furnaces (BOFs) also permit a substantial increase in the amount of scrap used

in production. These changes allow traditional scrap charges of 28 percent or less to

be increased to 30 or 40 percent. Using a combination of preheating and silicon carbide,

for instance, scrap use could be increased to

the 35-percent level, with a net cost saving.31

The economic advantage depends on the cost

of scrap compared to that of hot metal from

the blast furnace. For plants attempting to increase steel output without incurring the capital costs of installing new blast furnace

capability, this approach may be attractive.

A more recent variation is to remodel BOFs

with bottom as well as top blowing equipment

and to modify Q-BOP (a proprietary version of

a bottom-blown BOF) furnaces to allow for

the preheating cycle.32 This system, invented

by a West German company and known as

the OBM-S (advanced basic oxygen process

with scrap preheating), is being adopted by

the National Steel Corp. Increases of 27 to 42

percent in the amount of scrap used have

been reported, as well as reductions in processing time. The capital cost of this retrofitting option is relatively high (about $10 million per furnace), so companies taking this

route are likely to optimize scrap use in order

to reduce total production costs.

Quality of Scrap.—While the need for increasingly higher quality scrap to make higher performance steels is mounting, the quality

of the available scrap is declining. The increased use of alloy steels and recycled

*Assuming an average yield of 0.92.

“W. F. Kemner, “The Operating Economic and Quality Consideration of Scrap Preheating in the Basic Oxygen Process, ”

Proceedings of American Iron and Steel Institute technical

meeting, Philadelphia, 1969.

’133 Metal Producing, June 1979, p. 56; November 1979, p.

67-71.

scrap, as well as the greater use of nonferrous materials in automobiles, has resulted in

scrap containing more nonferrous elements

such as zinc, copper, nickel, chromium, and

molybdenum. These impurities, called

“tramp,” generally cannot be removed in the

steelmaking process. Steel made from a 100-

percent-scrap charge is only as “clean” as

the scrap it is made from. Steel made with pig

iron or DRI, along with scrap, does not have

this cleanliness problem if the scrap percentage is sufficiently low.

The problem that the domestic steel industry may face in the future because of poorquality scrap is spelled out in the results of a

recent industry survey:

The consensus of the returns was that the

quality of ferrous scrap, as judged by tramp

alloy contaminants, is generally declining,

and that it could become a serious problem

by 1985. The majority of the respondents

stated that their customers will be seeking

performance characteristics in steels by

1985 which are significantly to substantially

higher than those which can be commercially

achieved today. Further, this requirement is

felt to be closely linked to scrap quality, Most

of the respondents consider the tramp alloy

content of their scrap to be a high-priority

concern in this connection.

The survey yielded considerable detail in

regard to the tramp element which the responding mills routinely monitor, The implications of the rapidly-increasing usage of

high-strength, low-alloy steels by scrap consumers turned out to be a controversial and

uncertain matter to steelmen, Regarding the

possibilities of consuming a significant volume of scrap recovered from municipal solid

waste, a minor percentage replied “yes” and

a minor fraction said “no,’” while the majority hedged with the answer “possibly.”

The consensus seemed to be one of doubt

that technological developments in scrap

processing and in steelmaking will compensate for the build-up of tramp elements in

scrap, Closely related to this, the majority

seemed to feel that direct reduced iron might

become essential, in order to dilute the rising

contaminant levels.
Ch. 7— Technology and Raw Materials Problems ● 241

All-in-all, the attitudes expressed regarding a long-range build-up of tramp alloy contaminants in ferrous scrap represents a stiff

challenge to the scrap industry and its supporting sectors. It would seem to be crucial

to lose no time in mounting an intelligent,

well-coordinated campaign, nationwide, to

attack this problem. The best results will

doubtlessly require close cooperation between scrap suppliers and steelmakers. 33

To reduce the tramp-element problem, lowgrade purchased scrap ideally should be used

in BOFs, and home scrap mixed with highquality purchased scrap should be used in

electric furnaces. However, industry structure does not permit such optimization; for

example, electric furnaces are not always

close to the sources of home scrap, Theoretically, there are three additional points of attack on the tramp-element problem:

. Product design. —Even though materials

in products are becoming more sophisticated, products could be designed with

recycling in mind. These products by

their very design would facilitate identification and separation of various

usable materials upon recycling.

● Improved scrap processing techniques,

—This refers to better (more reliable,

faster, more discriminating, and more

economical) techniques of separating

and identifying usable materials at the

processing plant.

. New steelmaking techniques. —This refers to techniques of operation that

would allow some impurities to be removed in the steelmaking process.

The steel industry’s ability to influence

product design as a means of reducing the

tramp-element problem is limited, at best.

The scrap-processing and steelmaking industries could pursue the second and third options, and they have incentive to do so because they are directly affected by the trampelement problem. Scrap-processing improvement may have more potential than changing

“R. D. Burlingame, “Trends in Scrap Quality for the 1980s,’”

Iron ond Steeimaking, February 1979, p. 18.

steelmaking techniques, but there is some

chance for innovations in the latter area.

Direct Reduction. *—Of all current technological changes affecting the demand and

price for scrap, DR is the only one that can reduce demand for scrap and thus reduce its

price. Thus, a way to alleviate growing demand pressures on scrap and to moderate

scrap price increases may be to produce or

import DRI. This “clean” material can substitute for ferrous scrap in electric furnace

steelmaking, and it also offers certain technical advantages.

Recent technological advances in DR suggest that it could become economically viable

and could supplement ferrous scrap supply at

a price competitive with that of scrap. The

use of DRI can also help avoid some of the anticipated problems of tramp alloy contaminants in scrap. At the present time, DR facilities are limited in the United States (accounting for less than I percent of steel made), but

this is not so in other countries. In the past,

scrap availability and low scrap prices in the

United States have acted as a disincentive to

development of DR. As scrap prices rise, DRI

will become more competitive. **

Targets for Increased Use

of Ferrous Scrap

It is in the national interest to maximize the

use of recovered materials, in part to save energy. It has been generally accepted that

scrap embodies the energy (18.7 million Btu/

tonne) that was originally used to convert the

iron ore to iron. Two statutory provisions

have been enacted that deal with maximizing

the use of scrap and other waste sources of

iron generated in steel plants. These provisions do not adequately consider the longrange consequences of attempting to maximize the use of scrap and other recovered

materials. The relevant provisions are:

*DR is described and discussed in ch. 6, and its role in the

growth of nonintegrated steelmaker in ch. 8.

**The price of DRI, whether imported or manufactured domestically, will in the long run be a decisive determinant of increased electric furnace use.
242 ● Technology and Steel Industry Competitiveness

● Section 461 of the National Energy Conservation Policy Act (Public Law 95-619)

of 1978, which mandates that the Department of Energy (DOE) set voluntary

targets for use of recovered materials to

be observed by the entire ferrous industry—ironmakers and steelmaker, foundries, and ferroalloy producers.

● Section 6002 of the Resource Conservation and Recovery Act (Public Law

94-580) of 1976 amending the Solid

Waste Disposal Act, which requires that

Government procuring agencies procure

items composed of the highest practicable percentages of recovered materials

and instructs the EPA Administrator to

promulgate guidelines for the use of procuring agencies in carrying out this requirement, it also requires suppliers to

the Government to certify the percentage of recovered materials in the total

material used.

The setting of targets or guidelines presents a number of problems. It may not be

technically or economically feasible in all

cases to use recovered materials to the extent

suggested or indicated by the Government.

The methodology and assumptions used to

calculate targets can be tenuous and highly

controversial. Steel producers are especially

worried about infeasible voluntary targets

that could become mandatory,

One problem with legislative attempts to

maximize the use of ferrous scrap is that they

apply indiscriminately to all segments of the

steel industry and to all types of production

processes. Moreover, many types of companies would find targets relatively easy to circumvent. For example, targets for purchased

scrap could be circumvented if companies

sell their home scrap to others and purchase

other firms’ home scrap. * In addition, set

goals could in fact be counterproductive to

the original objective of maximizing recovered materials use and saving energy. Should

targets and guidelines effectively increase

demand for purchased scrap, this would

*Such an activity might only occur on paper through intermediaries, Actual transportation costs could be prohibitive.

raise scrap prices. The impact of higher

scrap prices on nonintegrated companies

would be much worse than on integrated

steelmaker. This could lead to a decrease in

steel made by nonintegrated producers and

less total scrap used. Additionally, integrated

producers using more scrap in BOFs must

also use more natural gas and electricity for

necessary process modifications, thereby increasing energy use at least on a temporary

basis.

Technically and economically, it is extremely difficult for integrated steelmaker to

increase their use of recovered materials

substantially. They would most likely incur

costs that do not improve productivity. An important exception is an integrated company

that increases its steel production, without increasing blast furnace capacity, by investing

in technology to increase scrap use in BOFs

or in electric furnaces that use purchased

scrap almost exclusively. Even then, these investments must be sound economically in

themselves on a plant-by-plant basis; targets

based on industry averages maybe inapplicable.

Scrap targets or guidelines are not relevant for electric furnace steelmaking because

at present that process uses only scrap. With

the advent of DR and the availability of DRI,

however, electric furnace steelmaker could

use less scrap, so targets or guidelines could

act as disincentives to the introduction of DR.

Though the proportion of scrap used in any

one electric furnace shop would decrease if it

also used DRI, an expansion in electric furnace steelmaking, even using both scrap and

DRI, could increase the total amount of purchased scrap used. The new average amount

of scrap used in nonintegrated companies or

electric furnace shops of integrated producers would likely be greater than the average

for conventional integrated operations using

BOFs.

It appears that EPA, for some of the reasons given above, will not actively pursue the

setting of guidelines for ferrous scrap use.

The Department of Energy has already set

targets, but they appear to be quite low. For
Ch. 7—Technology and Raw Materials Problems ● 243

the entire ferrous industry, the target for

1987 is that 41 percent of steel shipments be

made from purchased prompt industrial and

obsolete scrap. The actual value for 1978 was

40 percent, and for 1979 it appears to have

reached 41 percent. OTA analysis indicates

that if the use of continuous casting were increased to 50 percent on the 1978 base, scrap

use would be 44 percent. If a 2-percent annual increase in steel production is added to

a 50-percent continuous casting scenario,

scrap use would be 48 percent by 1987.

Changes in BOFs would increase the scrapuse rate still further.

Future Scrap Shortages

There can be no unequivocal answer to the

question: will there be a shortage of ferrous

scrap in the United States? A shortage is defined as a market situation in which there is a

rapid and substantial rise in the price of

scrap at the quality level required by a substantial fraction of users, but shortages can

vary with geographic or cyclical aspects of

ferrous scrap supply and demand. It is apparent that a number of major factors will influence the average supply and demand of

ferrous scrap in the United States, and thereby either promote or reduce the likelihood of

a general domestic shortage.

Physical Supply.—Although more and more

steel scrap will exist in some form within the

United States, steel consumption is growing

at a relatively low rate and, hence, so is the

magnitude of the scrap supply. The portion of

the supply that is readily and economically

retrievable will decline as: less scrap is produced in manufacturing, less steel is used in

automobiles, less scrap is concentrated in a

relatively small number of geographical

areas, the cost of transporting scrap by any

means increases, more and more nonferrous

materials become intimately part of and

mixed with ferrous materials, and product

lifecycle considerations lead to longer lifetimes for steel products. Thus, these factors

favor a future shortage of usable scrap.

Exports to Foreign Electric Furnace Steelmakers.—As the domestic and foreign trends

toward more electric furnace steelmaking

continue, foreign steelmaker will put greater

demand pressure on U.S. scrap, and this will

increase the likelihood of a scrap shortage.

Should the current shortage of domestic coke

continue, it would likely result in even greater

use of scrap-based electric furnace steelmaking, although inadequate electricity generation could reverse this trend.

From an international point of view, the

general shift of steelmaking capacity (especially from Europe) to the Third World will

tend to reduce foreign demand for U.S. scrap,

because steelmaking in those countries will

be based on DRI. On the other hand, the relatively high level of foreign steel production

costs, particularly in Europe, will make highpriced U.S. scrap competitive with alternate

overseas sources while raising costs for domestic steel producers. And finally, an important factor that is often overlooked is the effect of currency exchange rates. As the dollar weakens against other currencies, U.S.

scrap becomes more attractive to foreign

buyers. Thus, foreign steel producers can bid

up domestic scrap prices and still have an attractively priced raw material, but domestic

raw materials costs will be adversely affected. Conversely, strengthening of the dollar could reduce foreign demand.

New Technologies.—Although the expected near-term increase in the use of continuous casting and scrap-use-enhancing

changes in BOFs would increase the likelihood of a domestic scrap shortage, the development of coal-based DR would greatly reduce it. DRI clearly could be the most effective substitute for scrap and the most competitive means of limiting scrap price increases.

However, until and unless scrap prices rise

sufficiently to allow the lowest cost DR technology available to compete in the marketplace, DR is not likely to be adopted on a substantial scale in the United States. DRI imports seem to offer greater near-term poten-
244 ● Technology and Steel industry Competitiveness

tial than does domestic adoption of the technology. The increased development of DR in

less developed countries with cheap natural

gas could provide worldwide trade in DRI. It

is distinctly possible that within the next decade DRI imports could obviate a domestic

shortage of scrap. Farther in the future, more

radical steelmaking technologies, such as

nuclear steelmaking, magnetohydrodynamic

steelmaking, plasma steelmaking, or direct

(one-step) steelmaking, which could economically convert iron ore to steel, would greatly

reduce the likelihood of scrap shortages.

Federal Policies.—A number of policy options could either increase or reduce the likelihood of ferrous scrap shortages. In particular, policies that would increase transportation costs, increase domestic demand for

scrap, and facilitate scrap exports (including

a declining dollar) could promote a domestic

scrap shortage. Policies that could stimulate

the development of new steelmaking technologies, such as DR and formcoking, could help

prevent scrap shortages. In the absence of

any policy changes, and without the influx of

enough capital to construct major new blast

furnaces, a scrap shortage is likely to occur if

there is a continued steady growth of domestic demand for steel. An analysis by the president of a successful nonintegrated company

appears valid:

. . . scrap is going to be more valuable and

in shorter supply.

In how short supply? We have made an exhaustive study of this covering seventeen

variables including such things as scrap generation, plant construction, market growth,

the utilization yield and imports of coke, development of continuous casting, direct reduced iron production and imports, and

many others. We’ve tried to evaluate all of

these but manifestly with so many variables

there can be many answers. Nevertheless,

within what we believe to be reasonable parameters, a scrap surplus which has recently been allowing 10,000,000 tons a year to be

exported will by the year 1985 allow only

5,000,000 tons which leads quickly to no surplus at all. I should emphasize that I see this

drop in exports resulting from domestic price

competition, not from government embargo.34

Of particular importance in the above statement is the viewpoint that increasing domestic demand, rather than Government export

controls, will reduce exports. Even more interesting is a scrap supplier’s expectation of

a domestic scrap shortage under conditions

of continuing exports:

For the 18 months preceding August 1979

, . . domestic scrap demand . . . equalled the

scrap demand during 1973 and 1974. As a

practical matter, we had reached the balance between supply and demand, . . . Three

to four years from now, we will be hard

pressed to find enough No. 1 (high quality)

grades of scrap to meet the demand.

When such a shortage occurs, what will happen?

1. Scrap can be diverted from export, but

who will pay the extraordinary freight

charges to move this scrap to regions of

domestic shortage? And, what will be the

effect on our nation’s friends who are the

major consumers of our export scrap?

2. Direct reduced iron can be purchased in

the United States or imported, But who

will invest the hundreds of millions of dollars required to build these plants? Further, who will commit to pay $150 to $175

per gross ton for the product ?

3. Integrated steel production can be increased. But who will invest the billions

required and take the environmental risks

associated with this solution?

4. Finally, we can do nothing and our increased domestic demand for steel will be

satisfied by importing 25 percent or more

of our needs by the mid-1980s.35

Concluding that there will be a scrap shortage some time during the next decade is risky.

The number of uncertainties on both the supply and demand sides of the issue are so great

that any forecast must be equivocal. This

very uncertainty about future domestic scrap

supplies makes policy decisions affecting

scrap use, supplies, and exports quite difficult (see ch. 2).

“W. W. Winspear, president, Chaparral Steel Co., speech to

National Association of Recycling Industries, September 1979.

‘5Blauve1t, op. cit.
—— —- — —.

CHAPTER 8

Technology and Industry

Restructuring
Contents

Page

Summary. *.*,,*,.*.,..,*,*..*,,*,,*,. * 247

Internal Adaptation . . . . . . . . . . . . . . . . . . . . . 248

Nonintegrated Steelmakers. . .............251

Fundamental Advantages and the Role

of Technology . . . . . . . . . . . . . . . .........251

Future Changes. . . . . . . . . . . . . . . . . . . . . . . . .252

Future Expansion Forecast . ..............256

Alloy/Specialty Steelmakers ., ............257

Growth of Domestic Alloy/Specialty Steel Use. 258

Potential for Exports of Alloy/Specialty Steels 260

Technological Improvements in Alloy and

Specialty Steelmaking . ................262

Integrated Steelmakers . .................262

List of Tables

Table No. Page

96. Summary Data on Steel Industry

Segments, 1978. .......,.. . . . . . . . . . 248

97. Approximate Plant, Capacity, and

Shipment Data for Nonintegrated Mills 251

Table No.

98. Electric FurnaceUseofDirectReduced

Iron: Advantages and Disadvantages

Compared to Using All Scrap. . . . . . . . .

99. 0TA Estimate of Potential Production

for Nonintegrated Steel Companies,

1978 . . . . . . . . . . . . . . . . . . . . . . . . . . . .

100. Domestic Shipments of Alloy/Specialty

Steels, 1969-78 ● *.**.. ?*,*..*, ● *S.*

101. Domestic Consumption of

Alloy/Specialty Steels, 1969-78 . . . . . . .

102. Imports as a Percentage of Domestic

Consumption, 1969 and1978. . . . . . . . .

103. U.S. Exports as a Percent of Imports. . .

104. Japanese Production and Export of

Alloy/Specialty and Carbon Steels,

1965-77 .s.0.0. ● .**.**. ...0..,, ● , ,

105. Percentage of Domestic Yields,

1969 and 1978 . . . . . . . . . . . . . . . .fi...

106. Percentage of Raw Steel Made in

Electric Furnaces, 1969 and 1978. . . . .

List of Figures

Figure No.

35. Correlation of Product Lifecycle Stages

for Steelmaking Plants. . . . . . . . . . . . . .

Page

255

257

258

259

259

260

261

262

262

Page

249
CHAPTER 8

Technology and Industry Restructuring

Summary

The structure of the domestic steel industry is changing. What is meant by structural change? Broadly speaking, structural

changes in industries refer to permanent

changes in the character and competitive

positions of industry participants. Technology mixes, supply-demand relationships,

geographical patterns of company locations,

costs of entry into the industry, and raw material use may all be components of a structural change.

Structural changes can result from both

regulatory and technological influences. ’ For

example, deregulation changed the nature of

the U.S. securities industry by freeing commission rates; this led to many mergers and

acquisitions within the industry, an increased

concentration of capital, and the virtual elimination of some types of companies. Similarly,

deregulation of the airline industry is clearly

bringing about a rapid growth of small regional carriers and the need for new Government policies for this industry segment. An

example of technology-related structural

change, on the other hand, is in the watch industry, where the introduction of solid-state

technology by American and Japanese companies brought about a permanent change in

the industry. In 1970, the Swiss had a 70-percent share of the world market; by the late

1970’s, it was falling below 30 percent. Entirely new companies had entered the industry with new manufacturing technology and

new products.

Permanent structural changes within an

industry alter the impact of Government policies on the industry and create new needs

that may require new policies. But even profound structural changes are difficult to rec-

‘R. R. Osell, “Structural Versus Cyclical Change—Implications for Strategic Planning, ” paper presented at American Institute of Mining, Metallurgical and Petroleum Engineers annual meeting, February 1979.

ognize while they are taking place. One reason why OTA has examined the steel industry

as separate segments was to be able to determine whether structural changes are occurring in the steel industry and, if so, to analyze

their nature. OTA found that restructuring is

in fact taking place, and that it may accelerate because of a number of factors, including

new technology. This restructuring consists

of growing competitiveness, expansion, and

profitability of the two smaller segments of

the industry: the nonintegrated carbon steel

producers and the alloy/specialty steelmaker. As a result, traditional market shares in

steel are shifting, and the industry is becoming decentralized.

Part of the emergence of the two smaller

steel industry segments can be attributed to

internal, technical adjustments within individual companies; that is, the extent to which

companies match the nature of their production (its type and scale) with the type and

quantity of products they manufacture. For

example, the unprofitable integrated companies may be attempting to make too wide a

variety of products, using steelmaking technology better suited to large-volume production of a few commodity products. Nonintegrated and alloy/specialty companies generally have a good match between production

technology and product mix, and this enhances their profitability.

External forces have played some part in

its restructuring. Demands for alloy/specialty

products have increased. At the same time,

nonintegrated companies in particular have

not been reluctant to expand their product

lines and move into markets dominated by integrated producers. The structure of the steel

market reflects these factors. The market

share of integrated producers is declining

and, by 1990, it could drop from the present

247
248 ● Technology and Steel Industry Competitiveness

85 percent to about 70 percent. Nonintegrated steelmaker have tripled their output

in the last decade. In 1978, they accounted

for 13 percent of domestic shipments, and if

adequate ferrous scrap and electricity are

available they could account for 25 percent

by the end of the 1980’s. Because the domestic consumption of alloy/specialty steels is increasing at a rate about double that of carbon

steels, alloy/specialty production is likely to

expand by about a third during the next decade. (Table 96 presents recent production

and financial data for the three industry

segments.)

New technologies have and will continue to

influence the shift in the structure of the steel

industry. Electric furnaces and continuous

casters have reduced production costs and simultaneously enabled the small companies to

capitalize better on local markets for their

products. It can be argued that technological

changes would also enable the integrated

companies to take better advantage of their

process capabilities, but substantial obstacles deter the adoption of such changes.

These obstacles include inadequate capital

and conservative management,

The most important future technological

developments for nonintegrated producers

will be the introduction of rolling mills to

make flat products, such as strip, and the use

of direct reduced iron (DRI) to supplement

scrap and facilitate the production of higher

quality steels. The alloy/specialty steelmaker have excellent technological and cost

competitiveness and potential for exporting

their technology-intensive steels.

Table 96.—Summary Data on Steel Industry Segments, 1978

Raw steela Steel shipmenta Steel only—

Return on pretax profits Employment costs

1 ,000 tonnes) Percent (1,000 tonnes) Percent Invest mentb($/tonne shipped)b($/tonne shipped)c

Integrated. . . . .: . 107,889 87 ‘

–---- 75,52 2----- ‘– -

8 5

–---—- ‘-6. 9 $9.60 $209

Nonintegrated . . . 12,274 10 11,291 13 12.3 31.60 138

Alloy/specialty . . . 4,125 3 2,014 2 11.1 81.33 341

Total d . . . . . . . . 124,288 100 88,827 100 7.3 $22.00 $163

SOURCES. aBased on data and approximations provided by AISI OTA has assumed an average yield for Integrated companies of O 70 and for nonintegrated companies

of 0.92

b

From table 23

c

From table 23

d

From AISI, financiat data includes nonsteel activities.

Internal Adaptation

An analysis of process and product stages

of manufacturing companies permits a useful

understanding of differences among them. A

given company or industry segment is either

process- or product-oriented; that is, processfocused firms tend to find the market for their

product and process, while product-focused

companies try to fit the best process and

product to market opportunities:

Companies in the major materials industries—steel companies and oil companies,

for example—provide classic examples of

process-organized manufacturing organizations. Most companies that broaden the span

of their process through vertical integration

tend to adopt such an organization, at least

initially. Then again, companies that adopt a

product- or market-oriented organization in

manufacturing tend to have a strong market

orientation and are unwilling to accept the

organizational rigidity and lengthened response times that usually accompany centralized coordination.

Most companies in the packaging industry

provide examples of such product- and market-focused manufacturing organizations.

Regional plants that serve geographical mar-
Ch. 8—Technology and Industry Restructuring ● 249

ket areas are setup to reduce transportation

costs and provide better response to market

requirements. 2

A hidden assumption in the above analysis,

however, as in almost all descriptions of the

domestic steel industry, is that there is one,

single steel industry. This is not the case:

although the largest segment of the industry,

the integrated steelmaker, fits the description of process-organized companies, the

other two segments far better match the de-

‘R. H. Hayes and S. C. Wheelwright. “Link Manufacturing

and Process Life Cycles,’” Harvard Business Review, JanuaryFebruary 1979.

scription of companies that have a product or

market orientation.

A manufacturing company’s products can

be characterized along a continuum that

ranges from one-at-a-time production to continuous-flow production. For a company to

have an optimum, low-cost production system, its stages along these continuums must

match. Figure 35 illustrates this idea, using

the relative product and process positions of

different types of steel companies. The goal is

to be on the diagonal of the matrix, so that a

company’s product stage is consistent with its

process stage. The worst cases would be for a

Figure 35.—Correlation of Product Lifecycle Stages for Steelmaking Plants

Product structure

Product Iifecycle stage

Process structure

Process lifecycle stage

I

Jumbled flow

(job shop)

II

volume-lowl [ products ,

standard i- ~ low volume

zation, one I ]

of a kind I I

I

Disconnected line I

Smaller

flow (batch) alloy/specialty

*

Ill Iv

Few major High volumeproducts, standardihigher zation, r w

volume commodity

products

~

Iv

Continuous flow None

None

Nonintegrated

Less successful

integrated More

successful

integrated 

Nonintegrated

best

technology \

Flexibility.

quality
250 ● Technology and Steel Industry Competitiveness

company to try to produce a high volume of

highly standardized products (product stage

IV) with job-shop procedures (process stage

I), or for a company with a continuous flow

process (stage IV) to attempt to produce a

small number of unique products (stage I). As

a company or industry evolves, it does not

have to move along the diagonal, but it will be

more successful if it does.

According to this schematic, the low profitability of many integrated companies can be

linked to the fact that they attempt to make

too many different products in quantities unsuitably small for the nature of the steelmaking process they use. They do not capitalize

on potential scale economies. Integrated

steelmaking involves many steps that must be

coordinated in order to produce at optimum

levels. The economy-of-scale advantage of

having a large blast furnace is negated by

producing small lots of a great many different

finished steel products, because different

product types require different finishing

equipment. This means investing in highly

capital-intensive equipment that will not be

fully or continuously used. Thus, unprofitable

integrated companies are not appropriately

rationalized—their product lines are too various for large-scale production, and the capital investment requirement for each product

is too great to be justified by the size of the

market for that product. The plant closings of

several large domestic integrated steelmaker in the past few years are consistent with

those companies’ attempts to get back on the

product/process diagonal by narrowing the

scope of their product lines. Generally, they

are halting production of products that are

also made by nonintegrated companies or can

be imported at competitive prices.

Some integrated companies, however, have

the opposite problem: their process stage is

too primitive for the high-volume production

of a few products. Their production technology does not take advantage of the scale economies that high volume would allow, or their

secondary processing is not volume-coordinated with primary processing, or both.

The chief process deficiencies for these companies are small blast furnaces and ingot,

rather than continuous, casting.

The nonintegrated companies are moving

toward expanding their range of products,

but in doing so, they more often construct

new plants for specific products rather than

expand existing plants. In the most efficient

mills, there is a very smooth flow of materials

for large-volume production of products by a

combination of electric furnace steelmaking

and continuous casting. The less efficient

mills do not have the optimum process for the

product stages they are in: the chief problem

is the absence of continuous casting in plants

that make a relatively narrow range of products; but some plants that do have existing

continuous casting equipment produce too

many products to allow long, efficient runs.

Alloy/specialty steelmaker vary considerably in their product stages, but generally

their process and product stages are properly

matched. Some firms produce a large variety

of products, while others specialize in a few

products made in relatively large quantities.

A significant trend is toward expanding mill

capacity while maintaining product mix,

which permits more continuous processing

using new technology. For example, many

plants use continuous casters, which permit

very rapid changeover to different sizes and

shapes of products, and also offer considerable production-cost savings in the form of

lower energy consumption and greater yields

on expensive, high-alloy raw materials.
Ch. 8—Technology and Industry Restructuring ● 251

Nonintegrated Steelmaker

Fundamental Advantages and

the Role of Technology

Nonintegrated carbon steel producers are

often referred to as minimills, midimills, cold

metal shops, or special-market steel companies. In some analyses, companies OTA classifies as alloy/specialty companies are included in the nonintegrated category. This

classification may be correct in terms of the

process technology these companies use, but

it would not be correct in terms of the products they manufacture.

A few small domestic minimills have been

operating since the late 1930’s,3 more than 40

were constructed during the 1960’s, and

about 10 more were added in the 1970’s.4 The

term “minimill” derives from the very small

size of the early generation of nonintegrated

steelmaker: most made no more than 43,350

tonnes of product a year. Today, a number of

plants and companies have capacities in the

range of 272,100 to more than 907,000 tonnes

(table 97). As a whole, nonintegrated steelmaking capacity and production have tripled

in the past decade, and significantly more capacity, probably 0.9 million to 1.8 million

tomes, is now in the construction or planning

stages.

The nonintegrated companies are generally quite profitable compared to the larger integrated companies. Their success has been

based on their use of new technologies and

favorable product/market strategies:

. Nonintegrated mills have been quick to

adopt promising technological changes:

they spearheaded the adoption of electric furnaces, furnace improvements,

‘A. Cockerill [“The Steel Industry: International Comparisons of Industrial Structure and Performance, ” Cambridge,

1974) noted that 40 mills were built in the United States during

the 1960’s. In 1970, 42 plants were noted to be in existence (G.

J. McManus, “Mini-Mills Leery of Midi-Mill Size, ” Iron Age,

May 21, 1970). A 1978 listing includes 53 plants (HSS Commentary, January-February 1979).

‘C. G. Schmidt and R, B. Lelteren, “Mini-Steelplants in the

U. S.: Some Technological and Locational Characteristics, ”

Land Economics, vol. 52, No. 4, November 1976.

Table 97.—Approximate Plant, Capacity, and

Shipment Data for Nonintegrated Mills

Source

(1)

(2)

(3)

(4)

(5)

(6)

(7)

Number Product

Year of plants capacity Shipment

1967 34

1970 43 4,813,000 +

1970 3,706,000

1972-73 4 8 5,918,000 +

1974 40 2,979,000 +

1978 52 13,257,000

11,291,000

NOTE: Definitions and classifications of nonintegrated carbon steel mills have

not been Identical in sources of these data A ( + ) sign Indicates that

figure appears to be based on less mills than those included in OTA system or on an admitted lack of complete data

SOURCES

(I) C L Konir, “The Big Source of ‘Mini’ Steel Plants.” Iron Age, November

1967

(2) G J McManus, “Mlnl-Mills Leery of Mldl-Mill Size,” Iron Age, May 21, 1970

(3) G J McManus, “No More MiniMllls?” Industry Week, November 1971

(4) Association. of Iron and Steel Engineers, “Directory of Iron and Steel

Plants,” 1975

(5) Temple, Barker, and Sloane, “Analysis of Economic Effects of Environmental Regulations on the Integrated Iron and Steel Industry, ” July 1977

(6) IIIS Commentary. January-February 1979 Assuming 90-percent yield from

raw steel capacity

(7) Approximation based on data from AISI.

and continuous casting, all of which contribute to relatively low production

costs, low energy consumption, low capital costs, and high productivity. The rate

of labor productivity improvement in

electric furnace steelmaking has been

particularly high: employee-hours per

tonne decreased 25.3 percent between

1972 and 1977, compared with 6.9 percent in integrated steelmaking.5 Further,

because electric furnaces use scrap,

they consume far less energy than do integrated steelmaking processes: in 1978,

integrated plants used an average of

35.2 million Btu to produce a tonne of

shipped product, as opposed to 9.9 million Btu for nonintegrated plants producing carbon steels. In recent times the

price of scrap has been low relative to

the cost of making new iron units from

iron ore.

. Plant construction costs and leadtimes

are low. The nonintegrated plants can

be built for 10 to 20 percent of the cost of

a greenfield integrated plant. The elim5U. S. Bureau of the Census data.
252 ● Technology and Steel Industry Competitiveness

●

●

ination of primary ironmaking and finishing facilities for flat products and

complex steel products accounts for

much of this difference. The absence of

ironmaking and the use of electric furnaces also reduce the amount of pollution abatement equipment needed. The

simplicity of nonintegrated plants and

the common use of available technology

allow relatively quick new-plant construction, usually in 1 to 2 years.

The product range of nonintegrated

plants is narrow, consisting mostly of

simple commodity steels in nonflat

shapes such as reinforcing bar. Both of

these factors permit long production

runs with simple equipment.

Plants serve and draw upon relatively local markets. Plant locations are selected

to capitalize on the availability of local

ferrous scrap and local labor and to

produce for fast-growing local industries, particularly construction companies that use reinforcing bar. Their market strategy is to make special products

for special markets, Confining their operations within small, surrounding geographical areas also minimizes transportation, sales, and marketing costs.

As a result of these practices, nonintegrated mills are generally the lowest cost

steel producers in the country, and often

their products are even priced lower than imports. 6 At the same time, the nonintegrated

companies have performed very well for their

owners and stockholders, so much so that

they have become acquisition targets for

other domestic and foreign industries.

The nonintegrated companies are sometimes accused (by integrated producers) of

making the “easy,” lowest cost and price

steel products. But these companies have

caused their products to become low-priced

by virtue of their low production and capital

costs and their well-managed operations. The

‘)On the west coast, which has the greatest import penetration (4o percent), imports have only 6 percent of the market for

reinforcing bar, compared to more than 50 percent for structural and sheet and strip products (Iron Age, July 31, 1978).

current trend among integrated companies

toward switching to the electric furnace-continuous casting process is surely recognition

that the nonintegrated companies have made

some wise choices.

The growth of nonintegrated steelmaker

in the United States has been matched by similar growth in other countries. A European

steel expert has commented on the growth of

nonintegrated steelmaking in Europe:

In recent years a sizable expansion of

steelmaking capacity has taken place only in

the scrap-based mini-mills. Representative is

the 5 Mill, tons capacity of the Bresciani in

Italy, who were able to underbid the integrated steelmaker in front of their home

doors by a comfortable 50 dollars per ton in

non-flat products, This development has

been caused by the disregard for the scrap

market that was practised for many years by

the large integrated steelmaker.

As a result, the integrated steelmaker

have continuously lost market share in the

non-flat product areas.7

Future Changes

New Products

The initial success and growth of nonintegrated steelmaker and of new entrants into

the industry have been associated with producing simple products, notably reinforcing

bar, but increasingly they are also producing

more complex products and higher quality

steels. About half of the nonintegrated plants

produce only merchant and reinforcing bar,

but about one-fifth do not make merchant and

reinforcing bar at all.

Many plants make special-quality bars,

wire rod, and structural. A few plants make

plates, flange beams, I-beams, forging billets,

and alloy bars. There is a clear trend toward

making these higher grade products. Consider the following comments on one of the newest plants, designed solely for wire rod:

‘W. H. Philipp, “Probable Course of Europe’s Steel Industry,’” paper presented at American Institute of Mining, Metallurgical and Petroleum Engineers annual meeting, New

Orleans, La,, February 1979.
1 Ch. 8—Technology and Industry Restructuring 253

“We will be the only rod mill in North

America producing strictly rods,” says

Thomas Tyrrell, marketing vice-president.

“We will have no wire drawing subsidiaries,

no rebar line and no potential to shift raw

steel to other steel products, when market

conditions make them more attractive than

rods, ’

The concept of isolating markets is not

new to Co-Steel, which operates minimills internationally. Raritan River’s market is larger than the traditional minimill’s, where merchant bars and rebar are typical products,

the wire rod will be sold over the entire eastern U.S. and possibly abroad. Another hallmark of the minimill—low investment costs

per ton—is common to Raritan, And combining specific markets with efficient steelmaking is the key to minimill’s success.

“The whole minimill concept is operational, ” says Tyrrell, “since operations are the

key to cutting costs. As the theory goes, once

you have the product at the lowest possible

cost the market comes naturally. Our idea

goes one step further, If our operations are

the very best, we should be able to command

a high price. ‘8

The future strategies of nonintegrated

companies have been summarized as “upgrading product mix, concentrating on various shapes or sections that have been abandoned by the major mills and/or specializing

in chemistry modifications for selected customers. ”9

The most important characteristic of most

present products is that they are not flat

products like sheet and strip. Because conventional rolling equipment for flat products

is generally geared for economic production

of several million tonnes annually, there is a

long-held belief that nonintegrated companies

could not move into this product area, and

that if they did the change would greatly increase their capital costs. However, this is

not necessarily the view within the nonintegrated segment. F. Kenneth Iverson, president of Nucor Corp., has stated that:

Mini-mills started with a relatively simple

product —refinforced bar. Now we make

plate and wire products, rails, even structural grades. The only thing you can’t do with a

mini-mill now is make sheet, but even that

may not be out of the question in the future. 10

The minimum optimum scale for flat-rolled

products in a nonintegrated plant ranges

from 0.5 million tonne/yr for narrow strip to

4.1 million to 4.6 million for very wide strip.’]

The low end of this range is consistent with

larger size nonintegrated plants.

New Small Rolling Mill Equipment

Of greater significance is the current interest in developing new types of flat-rolling

equipment for nonintegrated plants: “VoestAlpine is also developing a flat-rolling mill for

wide strip and medium hot strip, capable of

production of 250,000 tons to 500,000 tons

per year of hot strip at minimum cost.”12 It

should be noted that Voest-Alpine is an Austrian firm that sells continuous casting equipment worldwide and is also the owner of a

new nonintegrated plant in New Orleans.

The most significant development in smallscale equipment for flat products is the hot

reversing mill, which has already entered the

marketplace. Sometimes called a Steckel mill,

the reversing mill flattens steel by successive,

back-and-forth passes through a single stand

rather than through many stands, which is

the method used in large sheet-rolling mills.

The reversing mill eliminates the heat losses

that occur when a flat strip travels through a

continuous mill. In the reversing mill, the

strip travels through the mill and is coiled in a

furnace on the other side. Moreover, the simplicity of the reversing mill greatly reduces

capital costs and shortens construction times.

A domestic equipment manufacturer has

already sold several hot-reversing mills to

nonintegrated companies. A Canadian nonintegrated steel producer with 408,150 tonnes

of steelmaking capacity will produce steel

‘Steelweek, Apr. 23, 1979.

“World Steej Industry Data Handbook—U. S., McGraw-Hill,

1979.

“’American Metal Market, Dec. 31.1979.

“D. G. Tarr, “The Minimum Optional Scale Steel Plant in the

Mid-1970’ s,” manuscript.

“American Metal Market, Aug. 24, 1979.
254 ● Technology and Steel Industry Competitiveness

pipe for a natural gas pipeline with this

equipment. The equipment will be used to

produce heavy-gauge flat-rolled high-strength

steel, one-half-inch thick, in widths up to 72

inches. 13

The cost of the Steckel mill is reported to be

about one-tenth the cost of a conventional

large sheet-rolling mill. One domestic nonintegrated producer has been making steel

plate in such a mill for a number of years. The

following comments by the equipment manufacturer point to the future potential of this

equipment for small steel producers:

In effect, we invented the mini-mill for flatrolled products.

I question whether any big, 4-million-ton-ayear hot strip mills are ever going to be built

again. The steel industry, instead of being all

things to all people and looking at a centralized plant for meeting all markets, is now

coming to a unit size plant, which might be

for a half million ton a year.14

An excellent illustration of the potential for

small steel companies to apply technology not

widely adopted domestically, and thereby to

capture a market abandoned by large integrated companies and deeply penetrated by

foreign steelmaker, is the case of the Berg

Steel Pipe Corp. of Panama City, Fla., which

has recently announced the opening of the

Nation’s largest diameter pipe mill. ’5 Heretofore, the United States Steel Corp. was the

largest domestic pipe producer with its 48-

inch mill; the new plant will make pipe ranging from 20 to 64 inches in diameter, and will

be able to produce approximately 181,400

tonnes annually, with an emphasis on pipe for

oil and gas transmission and coal slurry pipelines. The use of the pyramid rolling process

will be the first domestic application of an established European technology. Its chief advantage over the technology used in domestic

mills is that changing production from one

pipe size to another can be accomplished in a

little over 30 minutes, as opposed to from 8 to

24 hours in conventional mills.

13G. J. McManus, “Steckel Mills Reverse Trends in Steelmaking,” Iron Age, Feb. 4, 1980.

“Ibid.

IsAmerican Metal Market, Mar. 18, 1980.

Direct Reduced Iron

It is likely that a decade from now the

rather spectacular growth of nonintegrated

steel producers will be linked not only to the

use of electric furnace steelmaking and continuous casting, but also to the commercial

exploitation of DRI. * The introduction of DRI

as a supplement to ferrous scrap in electric

furnaces will facilitate the manufacture of

products. Direct reduction (DR) also provides

a means of introducing new iron units of high

purity into the steelmaking process, so that

electric furnaces can make higher quality

steels than they can with scrap. For a number

of years, several natural gas DR plants in the

United States have supplied DRI for electric

furnace steelmaking, and imported DRI is becoming increasingly available.

The advantages and disadvantages of

using DRI plus scrap as opposed to using only

scrap in electric furnaces are summarized in

table 98. There is general agreement within

the steelmaking community that the net benefits of using DRI are substantial: both processing and the final steel products can be improved with the use of DRI, and it can lead to

actual production cost decreases. Thus far,

however, the relatively higher cost of DRI

over scrap** and its limited availability have

not allowed widespread use.

Economically, scrap costs have been low

compared to the cost of DRI, so as long as industry growth could be maintained without

going to higher quality products, the use of

DRI was not justified. But, as discussed in

chapter 7, with further growth of electric furnace steelmaking by both nonintegrated and

integrated steel companies, ferrous scrap

supplies may not be adequate in the future:

The increasing problems faced by blast

furnaces and BOF’s—environmental and

high capital costs—have caused a dramatic

shift to, and increase in, electric furnace

steelmaking. This has and will put an increasing strain on scrap supply and has

*Direct reduction is discussed in ch. 6.

**presumabllJ with increased R&D and improved DR Processes, the cost of DRI will decrease.
Ch. 8—Technology and Industry Restructuring ● 255

Table 98.—Electric Furnace Use of Direct Reduced Iron: Advantages and Disadvantages

Compared to Using All Scrap

Advantages Disadvantages —

1. Higher purity steels can be made even with a relatively 1.

large proportion of scrap.

2. Furnace productivity can be increased 10 to 20%

because DRI can be continuously fed to furnace. 2.

3. Continuous feeding increases useful electrical power

10 to 14%. 3.

4. Continuous feeding reduces wasted time 5 to 150/..

5. Acoustical noise levels are reduced 10 to 15 dBa.

6. Metallic yield is increased. 4.

7. The variability of product chemistry is reduced.

8. The cold formability of steels is improved due to lower 5

content of nitrogen and other residuals, and rates of

finishing can be increased.

9. Product surface quality is improved and rejection rates

reduced.

10. There is a smoother, more efficient flow of material

from melting to finishing.

11. Less storage space, plant materials-handling equipment, and inventory are needed.

12. Lower grade scrap can be used to reduce costs or

deal with shortages or price fluctuations for highquality scrap.

13. Price fluctuations should be less than for scrap.

Need access to water transportation for DRI imports

or capital for DRI plant construction (unless domestic

merchant DRI plants are built).

Higher cost than producers using scrap only, if scrap

prices are less than DRI cost.

Unless proportion of DRI in charge is kept relatively

low (30 to 40%), nonmetallic impurities can cause increase in energy, time, and fluxing agents.

If bucket charging is used, nonmetallic cause lower

productivity.

Lack of alloying elements which may be desired requires greater use of alloy additions.

SOURCES R L Reddy, Some Factors Affecting the Value of DRI to the Steelmaker, ” AlME Ironmaklng Conference, Detroit, Mlch , March 1979; R A Redard, ‘Is

the Value of DRI to the Steelmaker Being Properly Assessed?” AlME Ironmaking Conference, Detroit, Mich , March 1979, R L Reddy, “Electric Arc Furnace Steel making With Sponge Iron, ” Canadian Mefallurgical Quarterly, vol. 1, pp. 1-6, 1979, J W Brown and R L Reddy. “Electric Arc Furnace Steelmaking With Sponge Iron ‘ Ironmaking and Steelmaking, No 1, pp. 24-31, 1979

brought direct reduction to the fore. Its time

has come. Without it, there simply is not

enough scrap in the world to support current

and projected electric furnace steelmaking.16

This increase in demand for scrap, along with

higher scrap prices and increasing production of higher quality products, may all combine to make DRI a necessary and economically feasible raw material for nonintegrated

producers.

Imports of DRI are becoming more available because a number of large-scale DR

plants in natural gas-rich nations are becoming operational, and more are expected

within the next decade. A recent analysis and

forecast by a domestic steelmaker shows

world trade in DRI increasing form 954,000

tonnes in 1979 to 4,350,000 tonnes in 1985. 17

Abundant DRI could act as abundant scrap

did during the 1960’s to spur the growth of

“H, B. Jensen, “New Alternatives for Charge Materials,’”

paper presented at Ferrous Scrap Consumers’ Coalition symposium, Atlanta, Ga., February 1980.

“Ibid.

nonintegrated steelmakers.18 Much of the increased supply of DRI will be coming from

Latin America, especially Venezuela and

Mexico. It is generally accepted that the

often-cited problem in transporting DRI, its

potential to heat up and possibly ignite, either

has been solved or will be within the near

future. The fact is that bulk ocean shipments

of DRI have been occurring for the past several years.

In the near future, furthermore, domestic

steelmaker will probably have an alternative to imported DRI. Small-scale, coal-based

DR plants may become available within the

next 5 to 10 years. These reduction plants

will need access to coal and iron ore, but they

should be particularly attractive to the larger

“’’New greenfield direct reduction (DR) capacity is judged to

amount to about 18 million tonnes during 1977-83-bringing total DR capacity to about 35 million tonne/yr. However, should

scrap prices continue to rise substantially in the years ahead

[which would be principally the result of a strong economy in

the West), this could attract significant additional DR capacity.

If our ‘judged doubtful” category were to materialize, another

18 million tonne/yr of DR production capacity would be added

by 1983.” (World Steel Dynamics, April 1979.]
256 . Technology and Steel Industry Competitiveness

nonintegrated plants far from large domestic

scrap markets. Yet another likelihood is the

construction of domestic merchant DR plants.

Although these might be coal-based facilities,

a natural gas-based plant in Texas has been

under discussion for some time. Because most

large integrated steel producers are increasing their electric furnace facilities, their increased demand is likely to spur the construction of domestic DR plants.

The rapid rise in foreign electric furnace

steelmaking is also leading to increased interest in the use of DRI. For example, it has been

reported that Japan has already begun to import DRI from a new plant in Indonesia. ’g The

cost of the DRI is approximately $125/tonne

including freight, compared to imported ferrous scrap costs of $160 to $170/tonne. A

joint industry consortium of 51 Japanese steel

mills, with the Ministry of International

Trade and Industry, is studying the increased

use of DRI. It is clear that DRI will likely become a world trade commodity whose price

will be determined by the demands of a multitude of users. Domestically produced DRI

might be exported in much the same way that

domestic ferrous scrap has been, which

means that domestic steelmaker could face

problems similar to those with scrap unless

they have their own sources of DRI.

Future Expansion Forecast

Integrated steelmaker generally affect a

lack of concern about the inroads made by

the nonintegrated steel producers, but the financial community has become keenly aware

of the growth and future importance of this

industry segment at the expense of the integrated companies:

. . . potential for a considerable restructuring of the domestic industry exists—

toward many mini-mills and away from mammoth integrated plants.20

Scrap-based steelmaking (will) remain just

about the only true growth area in the steel

industry (because) they have more modern,

“American Metal Market, Feb. 6, 1980.

2(’J. C. Wyman, quoted in American Metal Market, Feb. 5,

1980.

more highly automated facilities than the integrated producers and use continuous casting more extensively.21

The nonintegrated producers themselves

are also expressing a high degree of optimism

for the coming decade. One producer has described nonintegrated companies as the new

nucleus of a strong-again U.S. steel industry .22

Quantitative forecasts in 1978 showed this industry segment doubling its output in the next

decade 23 and increasing its share of domestic

steel shipments to at least 25 percent by

1990. 24

OTA finds these forecasts quite reasonable

for two reasons. First, the past growth of the

nonintegrated companies has been very high,

by approximately 9 million tonnes of shipments during the past decade (see table 97).

Second, these companies’ record of success,

excellent profitability, quick adoption of the

best new technologies, and ready access to

capital should permit this rate of growth to

continue. It is reasonable to believe that these

steelmaker could increase output by another

g million tonnes of shipments during the

1980’s.

Another way to assess the future potential

of the nonintegrated companies is to consider

what percentage of major types of steel products they will be capable of producing. Table

99 presents OTA estimates, using 1978 data

for product mix and assuming that DRI will

be used and that some flat products will be

made on new types of rolling equipment. The

result suggests that nonintegrated companies

could potentially double their market share

as well, to approximately 57 percent of these

products and 25 percent of total domestic

shipments of all steel products. These estimates are probably conservative, because

the product areas shown are expected to represent an increasing proportion of all steel

products and the estimates do not take this

into consideration. What is most significant

“C. A, Bradforci, quoted in American Metal Market, Feb. 5,

1980.

“F. Kenneth Iverson (Nucor Corp.), American Metal Market,

Feb. 6, 1980.

“Forbes, Dec. 11, 1978,

‘

+ Fortune, Feb. 13, 1978.
Ch. 8—Technology and Industry Restructuring ● 257

Table 99.—OTA Estimate of Potential Production for Nonintegrated

Steel Companies, 1978 (thousands of tonnes)

— .

Technically feasible and potential market

All-industry — for non integrated companies

1978 productiona

Percent – - Tonnes

Bars (excluding reinforcing). . 10,992

Reinforcing . . . . . . . . . . . . . . 4,267

Wire rods . . . . ... . . . . . . . 2,316

Wire products . . . . . . . . 2,277

Structural shapes (heavy). ., 4,233

Plates . . . . . . . . . . . . . . . . . . . 7,801

Strip (hot-rolled). . . . . . . . . . . . 931

Pipe and tubing . . . . . . . . . . . 7,031

Total . . . . . . . . . . . . . . . . . . . . 39,848b

aFrom AISI

— —-

bRepresents 45 percent of total domestic shipments.

CRepresents 25 percent of total domestic shipments.

about this finding is that for the next decade,

most of the anticipated growth in domestic

steel production could be accounted for just

by growth of nonintegrated steel companies. *

Other than the availability of scrap and

DRI, the availability of electricity is the main

determinant of the growth of nonintegrated

steelmaking. However, an increase of 9 million tonnes of shipments from this segment

would lead to an increase in electricity purchases amounting to less than 1 percent of all

electricity used by all domestic industry, and

less than 0.5 percent of all domestic uses of

electricity. ** Such an increase spread over

10 years and a number of locations, many of

*This possibility is considered in detail in the projection of

capital needs for a modernization and expansion program for

the domestic industry presented inch. 10.

**At 605 kWh/tonne of raw steel, a 9. l-million-tonne increase in production would result in an increase in steel industry electricity consumption of 5.5 billion kWh, compared to

1976 total domestic consumption of 257 trillion kWh, 1976 total

industrial consumption of 103 trillion kWh, and 1976 steel industry purchase of 44.3 billion kWh, of which about one-third

was for electric furnace steelmaking.

85

100

100

100

10

25

25

25

57

9,343

4,267

2,316

2,277

424

1,950

233

1,758

22,568 C

them in the South and Southwest, is not likely

to represent enough additional load on domestic electrical generation companies to

warrant special consideration. Nevertheless,

unless adequate domestic electricity is available during the next decade, nonintegrated

steelmaking could not grow to its full potential, particularly in major industrialized regions. Much depends on current plans and

forecasts which will determine whether new

electrical generation plants will be constructed.

Also noteworthy is that the analysis of future energy costs given in chapter 5 revealed

that under most future energy cost scenarios

nonintegrated steelmaker would face more

rapidly rising costs than integrated steelmaker. Nonintegrated energy costs would still

likely remain below those of the integrated

steelmaker because of their lower energy

needs, but the difference would be expected

to narrow over the next several decades, particularly if these firms adopt DR and become

partially integrated.

Alloy/Specialty Steelmaker

The alloy/specialty segment of the steel industry is difficult to define precisely. In the

OTA disaggregation of the industry, companies in the alloy/specialty category are those

that make the higher quality and higher

priced steel products rather than commodity

carbon steels. One recent compilation using

this definition lists 33 such companies. 25

~~Inst~tute for Iron and Steel Studies, ‘‘ Commentary,” January-February 1979.
— . ———— ..————— 

258 ● Technology and Steel Industry Competitiveness

There is little problem in identifying these

companies; the problem lies in measuring

their output.

The terms “alloy” and “specialty” do not

have precise, generally accepted meanings,

The only available data base is from the

American Iron and Steel Institute (AISI),

which distinguishes four categories of steels:

carbon, stainless, tool, and alloy. In the OTA

disaggregation, stainless and tool steels are

definitely in the alloy/specialty category, but

much stainless steel and many materials in

the alloy category used by AISI are made by

commodity carbon steelmaker (integrated

firms for the most part] and to a lesser degree

by nonintegrated producers, rather than by

alloy/specialty steelmaker. The alloy steels

made by the alloy/specialty steelmaker are

the higher alloy content, higher priced steels

made in smaller quantities. Because these

cannot be distinguished, the data for alloy

steels other than stainless and tool steels

overestimate those alloy steels made almost

solely in alloy/specialty steel companies,

probably by a factor of five. About half the

stainless steel is made by integrated companies. Finally, other types of higher quality,

higher priced steels made by the alloy/specialty steelmaker are not alloy at all, but

rather variations of carbon steel that are

made in small quantities compared to commodity carbon steels; some of these are called

“custom made” steels. Examples of these

steels include electrical steels, clad plates,

thick carbon steel plate, and coated strip.

Such steels are included in the carbon steel

data of AISI and thus do not enter into OTA

data for alloy/specialty companies.

Growth of Domestic

Alloy/Specialty Steel Use

The basis for the relative success and

growth of the alloy/specialty steelmaker is

the increasing use of the steels these companies produce. Data on domestic shipments

of alloy/specialty steels for the past decade

are given in table 100. Growth in domestic

shipments of carbon steels has been quite

low—except for 1973 and 1974, domestic

shipments remained virtually constant, with

a 1.3-percent increase from 1969 to 1978.

During this same period, shipments of alloy/

specialty steels grew nearly 34 percent. Alloys other than stainless and tool steels had

the most growth.

Data on domestic consumption of alloy/specialty steels are given in table 101. The use of

Table 100.—Domestic Shipments of Alloy/Specialty Steels, 1969-78

Stainless Tool Other alloy

Percent - Percent Percent

Year 1,000 tonnes of total 1,000 tonnes of total 1,000 tonnes of total

1964. . . . . . . . . . . . . . . . . . . . . . . 705 0.9 93 0.1 5,863

1969. . . . . . . . . . . . . . . . . . . . . . . 825 1.0 103 0.1 7,027 8.3

1970. . . . . . . . . . . . . . . . . . . . . . . 643 0.8 80 0.1 6,218 7.6

1971 . . . . . . . . . . . . . . . . . . . . . . . 651 0.8 71 0.1 6,291 8.0

1972. . . . . . . . . . . . . . . . . . . . . . . 775 0.9 82 0.1 6,972 8.4

1973. . . . . . . . . . . . . . . . . . . . . . . 1,029 1.0 101 0.1 8,400 8.3

1974. . . . . . . . . . . . . . . . . . . . . . . 1,220 1.2 102 0.1 9,130 9.2

1975. . . . . . . . . . . . . . . . . . . . . . . 687 0.9 63 0.1 7,589 10.5

1976. . . . . . . . . . . . . . . . . . . . . . . 924 1.1 69 0.1 7,285 9.0

1977. ........, ., . . . . . . . . . . . 1,014 1.2 77 0.1 7,869 9.5

1978. . . . . . . . . . . . . . . . . . . . . . . 1,080 1.2 83 0.1 9,492 10.7

1969-1978 percent change . . . . 30.9% -19.370 35.170

1979 (1st three quarters). . . . . . 937 1.3 66 0.1 7,649 10.8

Carbon steel percent change 1969-78 (77,191 -78,172 = ) 1.3%

All alloy/specialty percent change 1969-78 (7,955 - 10,655) = 33.9%

SOURCE Office of Technology Assessment.
Ch. 8—Technology and Industry Restructuring 259

Table 101.—Domestic Consumption of Alloy/Specialty Steels, 1969-78 (shipments + imports – exports)

Stainless Tool Other alloy

Percent Percent Percent

Year 1,000 tonnes of total 1,000 tonnes of total 1,000 tonnes of total

1964. : . . . . . . .-~ . . . . . . 656 0.8-

99 0.1 5,724 7.2

1969. . . . . . . . . . . . . . . . . . . . . . . 912 1.0 114 0.1 6,811 7.3

1970. . . . . . . . . . . . . . . . . . . . . 727 0.8 94 0.1 5,923 6.7

1971 . . . . . . . . . . . . . . . . . . . . . . . 775 0.8 79 0.1 6,385 6.9

1972. . . . . . . . . . . . . . . . . . . . . . . 861 0.9 93 0.1 7,207 7.5

1973. ....,........,.. . 1,058 1.0 114 0.1 8,520 7.7

1974. . . . . . . . . . . . . . . . . . . . . . . 1,255 1.2 118 0.1 9,076 8.4

1975. . . . . . . . . . . . . . . . . . . . . . . 769 1.0 78 0.1 7,687 9.5

1976.., ..., . . . 1,016 1.1 89 0.1 7,397 8.1

1977. . . . . . . . . . . . . . . . . . . . . . . 1,112 1.1 104 0.1 8,163 8.3

1978., . . . . . . . . . . . . . . . . . . . 1,196 1.1 122 0.1 9,712 9.2

1969-1978 percent change . . . 31.2% 6.3% 42.6%

1979 (1st three quarters). . . . . . 994 1.2 107 0.1 7,799 9.7

Carbon steel percent change 1969-78(85,296-94,770) = 11.1%

All alloy/specialty percent change 1969-78(7,836- 11,030)= 40.8%

SOURCE Officeof Technology Assessment

these steels increased about four times more

than carbon steels during 1969-78, and since

domestic consumption outpaced domestic

shipments, it can be concluded that imports

captured an increasing fraction of the domestic alloy/specialty market. Imports penetrated

the carbon steel market even more, however:

domestic consumption of carbon steels from

1969 to 1978 increased by 11 percent, but

shipments went up by only 1 percent. Summary data on imports as a percentage of domestic consumption are given in table 102.

Imports made their greatest inroads on tool

steels and their least on stainless steels.

Nearly 8 percent of all alloy/specialty steels

used in this country in 1978 was imported; for

carbon steels the figure was 19 percent. Except for tool steels, imports of all steels

decreased significantly in 1979.

Table102.— Imports as a Percentage of Domestic

Consumption, 1969 and 1978

1st three

1969-1978 quarters

1969 1978 change 1979

Stainless . . . . . . . . . . 18.1 15.2 – 2.9 11.2

Tool. . . . . . . . . . . . . . . 11.9 35.1 +23.2 40,7

Other alloy . . . . . . . 4,5 6.6 + 2.1 5.7

All alloy/specialty 6.2 7,8 + 1.6 6.7

Carbon . . . . . . . . . . . . 14.4 19.3 + 4.9 15.3

SOURCE Offlce of Technology Assessment

The worldwide use of alloy/specialty steels

has increased for several reasons:

advanced technology applications require steels with high-performance

characteristics, such as strength and

temperature resistance;

energy conservation has dictated using

less steel and more alloy in making automobiles;

consumers are demanding durables with

longer lives and reduced lifecycle costs,

built of materials with more corrosion

and wear resistance;

alloy/specialty steels have a comparative cost advantage over other high-performance materials because the others

are more energy-intensive in their processing; and

the economic costs for and sociopolitical

problems of minerals extraction are increasing, and this promotes the use of

smaller amounts of higher technology

steel.

Over the 15-year period from 1964 to 1978,

domestic consumption of all alloy/specialty

steels grew at an annual rate of 3.6 percent;

this was more than double the 1.7-percent

growth rate for carbon steel consumption.

The growth rate of alloy/specialty steels is

likely to increase in the years ahead. Thus, to
260 . Technology and Steel Industry Competitiveness

the degree that imports do not capture an increasing share of the domestic market, domestic alloy/specialty steelmaker should be

able to expand at a rate more than double the

1.5 to 2.0 percent per year anticipated for the

industry as a whole (see ch. 5).

One factor that OTA has not examined

which could limit alloy/specialty steel growth

is the problem of shortages of alloying elements, for which the United States is very dependent on foreign sources. This problem has

already received considerable analysis elsewhere. 26

Potential for Exports of

Alloy/Specialty Steels

Exports have traditionally played a more

important role for alloy/specialty companies

than for carbon steel producers. It is generally accepted that domestic alloy/specialty

steelmaker are both cost and technology

competitive in the world market. One measure of export competitiveness is the ratio of

exports to imports; such data are presented

in table 103 for the alloy/specialty steels, as

well as for carbon steels, for the period

1964-78. Exports of carbon steels have not

been large relative to imports, whereas ex2’)See, e.g., 7’echnical Options for Conservation of Metals, Office of Technology Assessment, September 1979.

ports of alloy/specialty steels, other than

stainless and tool steels, have exceeded imports during 5 years of the 15-year period. A

number of generic advantages have contributed to the favorable competitive position of

domestic alloy/specialty steelmaker:

●

●

●

●

●

●

They have a relatively strong technical

base and probably a commanding advantage over foreign competitors in

product development and secondary

processing.

The United States has relatively low energy prices, an advantage that could increase if DR processes using coal become widely used.

The United States has a good supply of

quality iron ore and ferrous scrap.

The enormous domestic market, much of

it technology-intensive, has encouraged

alloy/specialty steel product innovations.

U.S. labor costs and productivities are

competitive with European and possibly

with Japanese levels.

The United States has a very sophisticated industry infrastructure. -

These advantages are offset to an extent

by the greater level of assistance provided by

other governments (particularly in the area of

low-cost financing for exports), and by some

foreign industries’ experience in and infrastructure for export sales and marketing.

Table 103.—U.S. Exports as a Percent of Imports

———.

Remaining All

Carbon Tool Stainless alloy/specialty alloy/specialty

1978 .., . . . . . . 9.3 10.6 36.0 65.6 56.7

1977 . . . . . . . . . 9.2 23.1 39.3 40.0 39.0

1976 .., . . . . . . 16.5 21.4 42.3 72.7 62.5

1975 . . . . . . . . . 22.4 32.0 45.5 74.5 64.9

1974 .., . . . . . . 34.1 34.6 77.8 115.2 100.5

1973 . . . . . . . . . 25.2 31.8 74.2 67.7 67.8

1972 . . . . . . . . . 15.4 20.0 42.3 40.2 40.2

1971 . . . . . . . . . 14.0 30.8 28.6 74.1 58.8

1970 . . . . . . . . . 49.2 11.1 47.5 198.5 141.3

1969 . . . . . . . . . 33.8 20.0 47.8 170.4 124.5

1968 . . . . . . . . . 11.2 15.4 51.2 43.2 45.3

1967 . . . . . . . . . 13,1 10.5 77.2 63.5 66.6

1966 . . . . . . . . . 14.4 11.1 65.0 80.4 69.6

1965 ......, . . 21.9 15.4 82.3 173.3 118.9

1964 . . . . . . . . . 49.1 22.2 168.4 315.5 225.8

SOURCE American Iron and Steel Institute
Ch. 8—Technology and Industry Restructuring ● 261

Nevertheless, one major domestic producer

(Armco) has demonstrated that aggressive

marketing can improve exports. In 1978, it

exported 4.6 percent of its specialty steel,

compared to 2.9 percent in 1977.27 This export market change was the largest for any

domestic steel area, and is even more impressive when the depressed worldwide demand for steel in 1978 is considered. Most

foreign steel industries operated at low rates

in 1978 and were unprofitable (see ch. 4), but

domestic alloy/specialty producers were

quite profitable. Another major domestic producer has reported that it regularly exports

10 percent of its production.28

The growing worldwide demand for alloy/

specialty steels has not gone unnoticed by

foreign steelmaker, and foreign alloy/specialty steelmaking capacity has been increasing. Data for the Japanese steel industry for

1965-77 are given in table 104. Japanese

growth in alloy/specialty steels has been

great, nearly a fourfold increase in produc-

~ Armco, 1978 Annual Report; presumably the exports consisted mostl~ of electrical and stainless steels.

28R. P. Simmons, president, Allegheny Ludlum Steel Corp.,

testimony before the Senate Banking, Housing, and Urban Affairs Committee. Nov. 19. 1979; presumably the exports consisted mostly of stainless steel.

tion and exports in the 12-year period. This is

roughly twice the rate of growth for Japanese

carbon steel production and exports. Alloy/

specialty steels imports have made less penetration into the Japanese market than have

carbon steel imports, by about half. Japan is

the single largest supplier in the world export

markets for both carbon and alloy/specialty

steels, and, except for some very narrowly

defined alloy/specialty steels made by other

nations, it is the United States’ major competitor in those markets.

Stainless steels represent the single largest

type of alloy/specialty steel in production and

in world trade, and they are also subject to

the most price competition. The Japanese and

European shares of this market totaled 82

percent in 1976. In 1976, 47 percent of Sweden’s stainless production and 39 percent of

Japan’s were exported, and the British Steel

Corp. has planned to double its capacity and

export 40 to 45 percent of its stainless. It is

difficult to believe, however, that either

Great Britain or Sweden can be more competitive than domestic producers in a fair

market. It must be recognized, however, that

there is now considerable excess worldwide

capacity, which will make effective impleTable 104.—Japanese Production and Export of Alloy/Specialty

and Carbon Steels, 1965-77

1965 1977 1977/1 965

Alloy/specialty steel production (1,000 tonnes)

Stainless . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 396 1,626

Tool . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 207

Other alloy/specialty . . . . . . . . . . . . . . . . . . 1,363 5,650

Total, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,869 7,483

All alloy/specialty

As percent of total production . . . . . . . . . . . . . . 4.7 ”/o 8.4% 79%

Production tonnage change 1965 -77 . . . . . . . . . 387

Exports as percent production of total . . . . . . . 14.3 18.4 29

Percent exports to United States . . . . . . . . . . . . NA 19.2

Change in export tonnage 1965 -77 . . . . . . . . . . . 420

Change in import tonnage 1965-77 . . . . . . . . . . . 78

Carbon steels

Change in production tonnage 1965 -77 . . . . . . . 165

Exports as percent of total production . . . . . . . 27.6 38.6 40

Percent exports to United States . . . . . . . . . . . . NA 20.7

Change in export tonnage 1965-77 . . . . . . . . . . . 272

Change in import tonnage 1965 -77. . . . . . . . . . . 184

NA = not available

SOURCE Japan’s Iron & Steel Industry 1978 Kawata, Tokyo. 1978
—- —-.— .

262 . Technology and Steel Industry Competitiveness

mentation of the new Multilateral Trade

Agreement (see ch. 4) difficult. Nevertheless,

the worldwide rate of growth for stainless demand (about 5 percent per year since 1964)

should stay close to the 5.8-percent annual

growth rate in foreign capacity, which has

held since 1970. If the United States is to increase its stainless exports, then it must do so

by making inroads on present foreign market

shares, especially those of Europe and Japan.

Technological Improvements in

Alloy and Specialty Steel making

The alloy/specialty steel companies have

modernized considerably during the past several years, but even before this period they

were more technology- and research-oriented

than the rest of the domestic steel industry

(see ch. 9). The increase in yield from raw to

finished steel (see table 105) is partly a result

of improving technology, primarily from increased use of electric furnaces (see table

106), continuous casting, and other relatively

new steelmaking technologies. The yield for

alloy/specialty steels remains lower than for

carbon steels, however, because alloy/specialty steels are made in much smaller lots.

The role of technology in the future of alloy/specialty steelmaker will likely remain

important. This industry segment spends considerable funds on R&D (see ch. 9), and it is

likely to continue to develop and adopt new

process and product innovations. The use of

powder metallurgy fabrication has already

begun to increase. Most significant is the

larger potential of powder rolling technology,

which is an energy- and materials-efficient

Table 105.—Percentage of Domestic Yields, 1969

and 1978 (shipments/raw steel)

1969 1978 Change

All alloy/specialty . . . . . . . . . . . 53.4 58.4 + 5.0

Stainless . . . . . . . . . . . . . . . . . . 58.0 61.0 + 3.0

Alloy (including tool). . . . . . . . . 52.9 58.1 + 5.2

Carbon . . . . . . . . . . . . . . . . . . . . 68.2 73.7 + 5.5

SOURCE Off Ice of Technology Assessment

Table 106.—Percentage of Raw Steel Made in

Electric Furnaces, 1969 and 1978

1969 1978 Change

Stainless . . . . . . . . . . . . . . . . . . 100 100 0

Alloy (including tool). . . . . . . . . 34.9 41.0 + 6.1

Carbon . . . . . . . . . . . . . . . . . . . 10.7 19.5 + 8.8

SOURCE Office of Technology Assessment

way to produce sheet and strip products. Usually prealloyed powder is made from molten

alloys. The powder is then rolled, cold or hot,

and consolidated into a high-density, coherent metal. The process facilitates the production of very highly alloyed materials, which

present problems in casting and which have

limited plasticity for normal rolling of ingots

into sheet and strip.

Another future development is the plasma

arc melting furnace, a variation of the conventional electric arc furnace, which is just

now being proven commercially. It appears to

offer great efficiencies, and it may also facilitate the recycling of high-alloy-content waste

materials. Chapter 9 provides greater detail

on the past adoption of other important new

technologies, such as continuous casting and

argon oxygen decarburization, by alloy/specialty steelmaker.

Integrated Steelmaker

The future prospects for the nonintegrated

and alloy/specialty producers appear quite

favorable. Nonintegrated producers may undergo a 100-percent growth during the next

decade, and alloy/specialty producers are

likely to expand by about a third. In contrast,

the growth of the integrated steelmaker will

likely be small, perhaps 10 to 20 percent during the next decade, depending on the rate of

growth of carbon steel consumption and the

extent of imports. In addition to the shift of

carbon steel production to the nonintegrated

producers and the trend toward more use of

alloy/specialty steels, the integrated segment
Ch. 8—Technology and Industry Restructuring ● 263

of the industry has experienced the following

structural changes during the past decade:

There has been a shift in the raw materials used, primarily from original domestic sources of iron ores to the lower

grade taconite ores and imported ores,

Markets have shifted from the Northeast

and North Central States to the South

and West.

Concern about heavily concentrated

sources of pollution is increasing.

There are greater oscillations in market

demand and levels of profitability.

Old plants are gradually deteriorating.

Significant changes in the technology

of steelmaking require a fundamentally

new plant layout to achieve maximum efficiency.

These changes, which increase costs and

the need for modernization, are continuing to

contribute to the loss of market share by the

integrated companies. Moreover, the ratio of

capital investment to profitability for the integrated companies is the highest of the three

segments. It is conceivable that by 1990 the

products of integrated steelmaker will account for just over 70 percent of domestic

steel shipments, compared to 85 percent in

1978. This does not necessarily imply that integrated plants will close—a very low rate of

growth relative to the other industry segments may account for much of this market

loss. However, it also does not imply that

plants will not close. A number of smaller and

older integrated plants would require very

large sums to rejuvenate technologically,

sums too large to be justified on strictly economic grounds.
CHAPTER 9

Creation, Adoption, and Transfer

of New Technology
Contents

Page

Summary . . . . . ,0, ,0 . 00 . . . . . . . . . . . . . . . . . 267

Role of Technology in Solving Industry’s

Problems ● ,.. .s. ..0. ..00 s 0 . . . . . . . . . . . 268

Parity Versus Advantage. . . . . . . . . . .......268

Major Versus Incremental Innovation. .. ....270

Research and Development . ..............271

Long-Range Strategic Planning for Innovation 271

Domestic Funding and Structure . ..........272

Foreign R&D Activities. . .................277

R&D and Trade Performance. . . . . . . . . . . . . . 280

Adoption and Diffusion of New Technology—

Case Studies of Six Technologies. . .......281

Adoption Strategies . . . . . . . . . . . . . . . . . . . . .281

Six Case Studies of Technological Changes. .. 282

Conclusions From Case Studies . ...........298

Technology Transfer . . . . . . . . . . . . . . . . . . . . 299

From the United States. . . . . . . . . . . . . . . .. ..299

By Foreign Industries. . ..................301

Summary Comparisons. . .................305

List of Tables

Table No. Page

107. Allocation of R&D Funding by Selected

Sectors of Industry, United States, 1975 272

108. U.S. Steel R&D Spending. . . . . . . . . . . . . 273

109. R&D Spending of Several U.S. Steel

Companies, 1976-78 . . . . . . . . . . . . . . . . 273

110. Measure of Diversification of R&D

Efforts in Ferrous Companies . . . . . . . . . 274

111. R&D Funds as Percentage of Net Sales in

Ferrous Metals, Nonferrous Metals,

Chemicals, Petroleum Refining, and

Stone, Clay, and Glass Products

Industries, United States, 1963-77 . . . . . 275

112. Competitive U.S. Trade Performance in

Comparison With R&D . . . . . . . . . . . . . . 276

113. Federal Support of Industrial R&D, 1977 276

Table No. Page

114*

115.

116.

117.

118,

119.

120.

121,

122.

123.

124.

125.

126.

List

U.S. R&D Intensity and Trade

Performance . . . . . . . . . . . . . . . . . . . . . . 281

Summary Informationon Six OTA Case

Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . 283

Adoption of AOD Technology in Various

Countries of the World . . . . . . . . . . . . . . 284

Percent Raw Steel Continuously Cast... 289

Continuous Casting in Segments of U.S.

Steel Industry, 1978 . . . . . . . . . . . . . . . . 290

Economic Costs and Benefits of Adopting

Continuous Casting. . . . . . . . . . . . . . . . . 291

Ten Most Promising Formcoke Processes 294

High-Iron Waste-Recycling Processes

Commercially Available in the United

States . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295

Producers of One-Side Galvanized Steel 297

Channels of Steel Technology Transfer

Between the United States and Japan. . . 299

Channels of Steel Technology Transfer

Between the United States and Other

Nations Except Japan . . . . . . . . . . . . . . . 300

Major Japanese Steel Technology

Transfer Projects Involving Barter

Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . 302

Features of Technology Transfer in

Different Nations . . . . . . . . . . . . . . . . . . 306

of Figures

FigureNo. Page

36. R&D and Environmental Expenditures,

Steel Industry, United States, 1965-78. . 274

37. R&D Expenditures in Japan as

Percentage of Net Sales by Sectors . . . . 278

38. Installed Argon-Oxygen

Decarburization Capacity. . . . . . . . . . . . 284

39. Growth of BOF Installed Capacity . . . . . 286

40. Continuous Casting Apparatus. . . . . . . . 286

41. The Diffusion of Continuous Casting. ,.. 289
CHAPTER 9

Creation, Adoption, and Transfer

of New Technology

Summary

The domestic steel industry has a well-established record for generating product innovations, but it is less inclined to generate new

steelmaking processes. The industry prefers

to adopt proven technologies that have a record of successful commercialization. Even

then, its adoption rates for new products,

such as one-side galvanized steels, is very

good; but it lags in adopting new process technologies, such as continuous casting and even

the basic oxygen furnace. This lag is mainly a

result of aging plant, poor industry growth,

and lack of capital.

To the extent that adoption rather than

creation reduces risk and R&D costs and provides near-term payoffs, it is a useful approach. But it also has major drawbacks: it

leads to industry dependence on technologies

that may be poorly suited to domestic needs;

it reduces learning opportunities for innovative applications; and—most importantly—it

does not enable the industry to stay ahead in

the international market. Independent creation of new technologies and their successful

adoption would enable the steel industry to

gain technological advantage, rather than

merely achieve delayed parity, This advantage would enhance the industry’s competitive position in both domestic and international markets.

R&D expenditures by the domestic steel industry, as a percentage of sales, have declined over the years and are lower than in

most other basic industries in the United

States. The industry’s basic research effort is

particularly small. The low level of steel industry R&D may be attributed to a number of

factors, including cautious management attitudes towards research, the high cost of demonstration projects, the industry’s declining

share of the domestic market, high regulatory

costs, and low profitability.

Steel industry R&D has very little Federal

support and is complemented by only a limited amount of steel R&D carried out by the

Government and universities. Foreign steel

R&D, on the other hand, is generally in a more

vigorous state because of larger budgets and

stronger government support, particularly

for high-risk projects whose likely benefits

promise to be widespread. Some foreign steel

industries also benefit from the work of multisectoral steelmaking research institutes.

Domestic steel technology exports are limited. They are largely handled by equipment

firms and are mainly in the area of raw materials handling. Foreign steel industries are increasing their efforts in technology transfer

in order to offset declining steel product exports. To a much greater degree than domestic steelmaker, foreign companies have design, consulting, and construction departments that aggressively pursue the sale of

both hard and soft technology to other nations, particularly the less developed countries (LDCs). Japan, West Germany, Austria,

and Great Britain are major exporters of innovative steelmaking technologies.

267
268 ● Technology and Steel Industry Competitiveness

Role of Technology in Solving Industry’s Problems

In many industrial sectors in the United

States and in foreign steel industries, technology is viewed as one of the principal

means of reducing costs, gaining competitive

advantage, and meeting societal needs and

objectives. Some U.S. steel companies, however, are ambivalent and occasionally negative toward new technology and innovation.

These attitudes are barriers to the development and adoption of new technology.

Another impediment is the lack of emphasis

on basic and applied research. This shortrange orientation may result in failure to develop beneficial new technologies and in slow

adoption of successful foreign innovations.

Many steel executives consider theirs to be

a classic example of an industry characterized by a slow rate of technological change.

They firmly believe that innovation is a risky

undertaking with uncertain returns and that

purchasing proven technologies is more cost

efficient. This view, however, does not take

sufficient account of the many recent major

technological changes in steelmaking or of

the changing competitiveness of the domestic

steel industry.

Industry spokesmen contend—with considerable justification—that the rarity of major

technological changes in the steel industry

results from severe financial difficulties

which prevent the construction of new facilities based on new technologies. However, not

even increased capital availability and profitability—perhaps brought about with the assistance of appropriate Government policies—would ensure vigorous technological

innovation unless the prevailing industry attitude toward new technologies also changes.

The robust and highly competitive Japanese steel industry can be used as a model of

the maximum use of new technology: it

achieved its premier position by applying innovative processes widely and improving

them constantly. The real lesson of the Japanese experience, however, is that if Government policies facilitating capital formation

are combined with a positive industry attitude toward the adoption of new technology,

the widespread use of new steelmaking processes will indeed take place.

The U.S. steel industry needs new technology to cope with the changing nature of the

economic, social, and political world in which

it operates. New technology can improve the

competitiveness of domestic steels with respect to quality and cost; it can also reduce

industry vulnerability to inflation and other

external factors. New and innovative technologies, some already commercially available

and others with a significant likelihood of successful development and demonstration, offer

potential for:

reducing energy consumption, including

the use of coke;

making greater use of domestic lowgrade coals;

reducing production costs as a result of

improvements in process yield (although

yield improvements will also put upward

pressure on the price of scrap):

using more domestic ferrous scrap and

other waste materials containing iron;

improving labor productivity;

reducing capital costs per tonne of annual capacity;

shortening construction time of new

plants; and

allowing greater flexibility in using imports of certain raw materials and in importing semifinished rather than finished steel products,

Although new and improved steel technology,

alone, is not sufficient to reverse unprofitability and inefficiency, it is an essential ingredient for the future economic health and

independence of the steel companies.

Parity Versus Advantage

New technology may be developed through

two processes: by true innovation, consisting

of the creation and first successful commer-
Ch. 9—Creation, Adoption, and Transfer of New Technology ● 269

cial use of new technology: or by the adoption

of innovations created by others. For production processes, most domestic firms stress

adoption rather than innovation. They argue

that the cost and risks of innovation outweigh

the benefits and that it is cheaper in the long

run to buy proven technology than to create

it. Although the innovation process does in

fact produce failures as well as successes, it

also offers an opportunity for gaining the

competitive advantages of earlier market

penetration, cost reductions, and the possible

sale of new technology.

Strictly economic analyses of the creation

and adoption of new technology ignore two

very important issues: the unique circumstances of the domestic steel industry, and

the benefits of an ongoing learning process.

Innovations from external sources, especially

foreign sources, may not lead to new technologies appropriate to the particular characteristics and needs of the domestic steel industry. Domestic steelmaker understand

this with regard to raw materials and products, but they undervalue the importance

of developing unique process technologies,

shaped by domestic resource opportunities.

Furthermore, the domestic regulatory climate

should be viewed as a constraint which can

be dealt with most effectively through the creation of new technology specifically geared to

meeting its requirements.

The industry admits that there is a gap in

the adoption of new technologies between the

United States and its competitors, but it

denies that a knowledge gap exists. ’ The industry gives little weight to the consideration

that the foreign knowledge base is responsive

to foreign needs and may be better suited to

particular foreign conditions. A uniquely domestic steelmaking knowledge base cannot

exist without domestic innovation based on

research (basic and applied), development,

and demonstration that are shaped by the

current and anticipated needs and opportuIN. A. Robbins, proceedings of “The American Steel Industry

in the 1980’s—Crucial Decade.”’ AISI, 1979.

nities of domestic steelmaker. Even the Japanese, once noted for using foreign research

and innovations, have now shifted their emphasis to creating their own.

The secondary effects of innovation from

greater R&D experience are also lost in

adopting rather than creating new technologies. The lessons learned in originating

technology allow a firm or industry to move

more rapidly up the learning curve of a major

innovation. Japanese steelmaker, for instance, have benefited greatly from a constant flow of incremental innovations that

spill over from their extensive experience

with a major new technology and from their

high level of improvement-oriented R&D on

steelmaking software. These incremental innovations, based on new applications rather

than on new fundamental knowledge, can significantly reduce production costs and increase productivity. The Japanese experience

with continuous casting (discussed in a later

section) is the most recent example of turning

another nation’s innovation into a host of incremental new technologies for use and sale.

The U.S. steel industry, on the other hand,

has relatively low levels of R&D, adoption,

and experience with new technologies. As a

result, the industry does not have the same

opportunities for movement along learning

curves or for incremental innovation.

Consequently, whatever new technology is

purchased from foreign sources still leaves

the purchaser one step behind the originator.

By the time all is learned about the innovation, the foreign source is well on its way to

exploiting the next one. It may be true that

there is equality of knowledge among the

world steel industries concerning fundamental innovations, yet it is an error to believe

that knowledge about innovations is equivalent to innovating. Waiting to use someone

else’s innovation is a strategy likely to spell

competitive loss in the long run. It takes years

for steel plants to be designed and built, and

those who innovate tend to stay ahead of

their competitors.
270 . Technology and Steel Industry Competitiveness

Major Versus Incremental Innovation

Possible technological solutions that might

be considered for steel industry modernization are:

●

●

●

to modernize existing operations by adding existing technology;

to build new plants using the best available technology; or

to develop and put in place at new plants

radically innovative new technology.

These solutions differ in two major respects: in their capital costs, and in the

amounts by which they can be expected to reduce production costs. The third, for example, is a high-cost, high-payoff solution; the

second is somewhat less costly and somewhat

less productive; the first is an incremental

solution with incremental rewards. The

choice among these solutions rests on how the

costs and payoffs balance out,

The first solution, the extension of existing

operations with available, improved technology (such as continuous casting), is generally

considered to have the best balance between

capital costs and reduction of production

costs. The second option, involving construction of completely new plants using existing

technology, would involve high capital costs

that cannot be expected to be sufficiently offset by the limited production cost reductions

it would bring. The third option, construction

of new plants based on radically innovative

technology, will not be technically feasible for

at least a decade; once feasible, however,

there is a possibility that high capital costs

could be sufficiently offset by significant production cost savings. Thus, the first option,

complemented with a vigorous research program in radical steelmaking innovations,

could prepare the industry now for shortterm revitalization with the potential for longterm, fundamental modernization.

Several important considerations argue

against constructing new facilities using

available incremental improvements. The major constraints are the high capital costs of

greenfield construction and the need for immediate modernization and expansion. The

capital costs of greenfield sites, estimated to

be well over $l,l00/tonne of annual capacity, * are very high compared to the other two

investment alternatives—” roundout” expansion costing about $550/tonne, and nonintegrated (minimill) expansion costing only $154

to $275/tonne of annual capacity. Given the

high cost of capital, any reduction in steel

production costs gained by using advanced

steelmaking technologies in greenfield integrated plants is outweighed by significant increases in financial costs. The domestic industry’s low profitability would make it difficult to obtain the necessary funds for this

type of expansion.

The industry’s immediate need for capacity replacement and expansion** also makes

construction of new integrated plants less attractive than the roundout option. Conservative estimates place the time required for design, permit approval, and construction at

about 8 to 10 years, although plans exist for

one greenfield plant to be built in half that

time. Such a timelag is incompatible with the

industry’s current needs, and the long construction time would also dim the prospect of

achieving technological parity through greenfield expansion: during construction, major

steelmaking innovations could become available for commercial application elsewhere.

Furthermore, once a substantial number of

new domestic plants are in place, integrated

steelmaking technology in the United States

would be static for some years. The lifetime

of such plants is long, and the need for additional steelmaking capacity will have been

largely met for the immediate future; by the

time new capacity is needed, it is probable

that other nations will have moved ahead

with newer technologies.

*Detailed analyses of these costs are presented in ch. 10.

* *Detailed analyses of this are presented in ch. 10.
Ch. 9—Creation, Adoption, and Transfer of New Technology ● 271

Research and Development

Technological supremacy is most likely to

be achieved through deliberate and continuous research, development, and demonstration. A recent analysis of radical steelmaking

technologies suggests that several offer sufficient economic advantages to merit further

research. z These include direct steelmaking

and direct casting of steel. However, with a

leadtime of approximately 10 to 20 years for

the development of these and other radically

innovative technologies, they would not have

any impact on the industry’s current problems. Nevertheless, commitment to long-term

technological competitiveness would dictate

proceeding immediately with R&D activities

aimed at developing and using radical steelmaking technologies. This position has been

summarized by Bela Gold:

The very future of the domestic steel industry over the long run depends on intensive programs to develop such (radical technological) advances . . . . Such efforts must

be combined with a more immediate program

to modernize and expand the domestic steel

industry through effective utilization of

already available technologies as well as of

relatively straightforward extensions of

them. To do nothing—as is implied by the

COWPS Report—or to wait until some miraculous new technological advances are developed (which could not be reasonably duplicated by foreign competitors in relatively

short order) is likely to prove catastrophic

not only for the U.S. steel industry, but also

for related industries and major geographical areas.

In addition to developing radical innovations in the long term, it is important for the

domestic steel industry to adopt incremental

innovations in the near term, using available

‘See Julian Szekely, “Raciically Innovative Steelmaking Technologies. report submitted to OTA (no date), and ch. 4 of this

report.

‘Bela Gold, “Some Economic Perspectives on Strengthening

an Industry’s Technological Capabilities: With Appllica tions to

the U.S. Steel Industry, ” prepared for the Experts Panel on Exploring Revolutionary Steel Technologies, Office of Technology

Assessment, meeting at the Nfass. achuset ts Institute of TechnoIOKV, Apr. 25, 1978.

steelmaking technologies. This approach

would use the less costly roundout alternative

for increasing capacity and would calI for

constructing electric furnaces for use in combination with basic oxygen furnaces in nonintegrated plants (see ch. 10).

Long= Range Strategic Planning

for Innovation

A number of industry difficulties, presented in chapter 4, might have been less

severe had there been a well-prepared strategic plan for technological innovation. These

problems include:

●

●

●

●

●

increased production costs and declining eminence after World War II;

lack of exports to meet rapidly rising

steel demand in Third World and industrialized nations;

lack of emphasis on exporting proven

technology, which could have justified

new investments in R&D and innovation

activities:

the large integrated steel producers’

lack of response to demographic

changes and to opportunities for using

scrap in local markets by means of minimills; and

lengthy and costly resistance to compliance with environmental regulations.

A number of studies4 suggest that one of

the principal reasons for the lack of U.S.

steelmaking innovation lies in the lack of industry commitment to planning for technical

innovation. Most domestic steel companies

appear to conduct strategic economic planning, but few pay any attention to technological planning. This is reflected by their relatively low investments in R&D and pilot and

demonstration work, and by their heavy reliance on foreign innovations. These factors

‘For example, B. Gold, “Steel Technologies and Costs in the

U.S. and Japan, ” Iron ond Steel Engineer, April 1978; and J,

Aylen, “Innovation. Plant Site and Performance of the American, British and German Steel Industries, ‘“ Atlanta Economics

Conference, October 1979.
272 . Technology and Steel Industry Competitiveness

combine to form a barrier against innovation.

In addition, domestic firms are inclined to sell

promptly whatever innovative technology

they create: they maximize immediate profits,

instead of keeping the technology proprietary

long enough to gain a competitive advantage.

Domestic steel industry management must

examine the consequences of continuing to

concentrate on: low-risk, incremental technological changes to the exclusion of high-risk,

major changes; product rather than process

changes; promotion of R&D managerial personnel from within rather than recruitment

from other industries, universities, and Government; the enhancement of raw material

(iron ore and metallurgical coal) profitability;

traditional domestic markets; and defensive

rather than aggressive business strategies.

Domestic Funding and Structure

The U.S. position of leadership in steel production and technology through World War II

and the decade thereafter was achieved as

much by its size and economies of scale, and

by its organization and business practices, as

by technical innovation. A review of the principal technological contributions made by the

U.S. steel industry during the past several

decades indicates a practical orientation

toward labor efficiency improvement and

product development, According to an industry survey of a relatively small sample of

large steel companies in 1975, 81 percent of

steel industry R&D funds were allocated to

development, 12 percent to applied research,

and less than 7 percent to basic R&D work

(table 107).5 However, the annual National

Science Foundation (NSF) data series, R&D in

Industry, indicates that less than 2 percent of

steel industry R&D spending is in basic research, compared to 3 percent for all domes-

‘The following comment on basic research appears to summarize the situation well for the domestic steel industry: “Fundamental research is the most prominent casualty of the American industry’s need to adapt to the realities of high costs and

low profits, a situation that has prevailed and worsened over

the past two decades. “ (33 Metal Producing, June 1979.)

Table 107.—Allocation of R&D Funding by Selected

Sectors of Industry, United States, 1975

Percent Percent Percent

basic applied development

Steel . . . . . . . . . . . . . . 6.9 12.3 80.8

Aerospace . . . . . . . . . 1.5 39.2 59.3

Automotive . . . . . . . . 0.1 83.4 16.4

Chemicals . . . . . . . . . 10.9 37.9 51.2

Electronics. . . . . . . . . 2.1 27.0 70.9

Instruments. . . . . . . . 5.3 7.7 87.0

Office equipment,

computers . . . 1.9 5.3 92.8

Paper . . . . . . . . . . . . . 1.4 21.1 77.5

Textiles. . . . . . . . . . . . 0 9.0 91.0

SOURCE National Science Foundation, Support of Basic Research by Industry,

1978, (based on sample of companies belonging to Industrial

Research Institute (l RI) and a survey by IRI)

tic industry and nearly 4 percent for nonferrous metal companies, *

According to NSF data (table 108), steel industry R&D increased by about 10.2 percent

annually from 1963 to 1977, from $105 million to $256 million. However, annual real

R&D spending increased by only about 22

percent during this entire period. For all U.S.

industry, the growth in real R&D spending

during the same period was about 18 percent. 6 More importantly, expressed as a percentage of sales, steel research actually declined from 0.7 to 0.5 percent during the same

period.

R&D data for several steel producers are

given in table 109. These data illustrate several points: R&D spending as a percentage of

profits is rather large and closer to other industries than R&D spending as a percentage

of sales; alloy/specialty steel producers spend

more than integrated companies on R&D; and

the trend of decreasing R&D spending in the

past few years shown by NSF data is confirmed by company data.

*When using NSF data, it should be kept in mind that they

tend to overstate steelmaking-related R&D somewhat. First.

nonmetals R&D conducted by diversified steel companies appears to be included in the NSF data for ferrous industry R&D.

Secondly, the ferrous industry category also contains R&D

foundries and other metals-processing facilities not included in

the scope of this study. Nevertheless, since NSF data are the

best available, they will be used.

‘National Science Foundation, R&D in Industry, 1977.
Ch. 9—Creation, Adoption, and Transferor New Technology ● 273

Year

1963 . . . . . .

1966 .

1967 . . . . . .

1968 ... .

1969 . . . . . .

1970 . . . . . .

1971 . ,

197 2

1973 . . . . . .

1974 . . . . . .

1975 . . . . . .

1976 . . . . .

1977 ,,....

1978 . . . . .

Table 108.—U.S. Steel R&D Spending (dollars in millions)

Ferrous industry

Ferrous industry

R&D spending

$105 —

136

134

134

135

148

142

144

159

177a

211

252

256

259

R&D – steel

Percent of total Steel industry industry

Percent of ferrous Federal R&D Federal R&D environmental environmental

industry sales spending spending capital spending capital spending

0.7 -

$2--

1.9 —

0.7 3 2.2 $ 5 6 2.43

0.7 1 0.7 94 1.43

0.7 1 0.7 102 1.31

0.7 2 1.5 138 0.98

0.7 1 0.7 183 0.81

0,7 2 1.4 162 0.88

0.6 3 2.0 202 0.71

0.5 4 2.5 100 1.59

NA NA 2,2a 267 0.66

0.6 3 1.4 453 0.47

0.6 4 1.6 489 0.52

0.5b

4 1.5 535 0.48

0.5 5 1.9 458 0.57

NA = not available

acalculated from total of $181 million, assuming $4 million for Federal spending

bFirst 8 companies 0.5 next 12 companies 0.6.

NOTES 1) Federal R&D spending IS only for R&D in company Iaboratories, it does not include Federal R&D at Government facilities

2} NSF data based on sample of companies in the following SIC categories 331 blast furnace and basic steel products 332 iron and steel foundries 3,398 metal

heat treating and 3,399 primary metal products not elsewhere classified. only the first is the traditionally defined domestic steel Industry as used in this as

sessment and for which AISI data apply One consequence of this IS probably that R&D spending for just the 331 category IS lower than that Indicated by the

above figures particularly on a percent of Industry sales basis

SOURCES R&D data from NSF environmental capital spending from AISI

Table 109.—R&D Spending of Several U.S. Steel Companies, 1976-78

—

Millions of dollars

Company 1976 ‘- 1977 1978

Integrated ‘”

U.S. Steel . . . . . . . . . . . . . . . . . . . $52.2 $49.8 $52.5

Bethlehem . . . . . . . . . . . . . . . . . 43,7 42.7 37.1

Republic Steel . . . . . . . . . 16.3 16,8 15.1

Average. . . . . . . . . .

Alloy/specialty

Allegheny Ludlum ... . . . . . . . . . . . . . . . 9.2 10.7 13,3

Carpenter Technology . . . . . . . . . . 7.5 9.2 9.4

SOURCES Business Week July 3 1978 July 2 1979, and company annual reports

During the past several years, steel industry expenditures on research aimed at improving technological performance and reducing production costs have been lower than

aggregate steel industry R&D spending levels

indicate. This is because some R&D must be

directed toward regulatory research necessitated by the Environmental Protection Agency (EPA) and the Occupational Safety and

Health Administration (OSHA) policies. According to one steel R&D executive:

There is a trend toward more defense tvpe

Percent of sales ——.-—— Percent of profits

1976 1977 1978 – 1976 1977 1978 -

— —

0.6 0.5 0.5 66.2 36.1 21.7

0.8 0.8 0.6 26.0 -9. 5 16.5

0.6 0.6 0.4 24.7 40.9 13.5

0.7 0.6 0.5 40.0 22.5 17.2

1.0 1.1 1.0 131.4 42.1 34.9

2.8 2.8 2.4 30.3 32.2 27.8

meet government mandates and regulations,

and less time being spent on the kinds of longterm, high risk, innovative projects which

will lead to the new ways of making steel in

the future.

Part of the problem is that what we are doing with this money is not what everybody

would call research and development . , . but

is pointed more toward short term objectives

for a variety of reasons and not so much on

the real innovative work and the fundamental research work that you might define as

research and development .-

research . . . more time being spent on short- ‘Proceedings, “The American Steel Industry in the 1980’s—

er range projects and projects designed to The Cruci~l Decacl[?, ”’ AISI, 1979.
274 . Technology and Steel Industry Competitiveness

There is no obvious relationship between

R&D spending and environmental capital expenditures (see table 108), but the ratio of industrial R&D funding to environmental spending does appear to be related to the level of

capital spending (figure 36). As capital spendFigure 36.— R&D and Environmental Expenditures

Steel Industry, United States, 1965-78

(R&D)

Log e iE n

= 0.682 Lo ge En + 3.4 6

(Correlator coefficient) r = -.973

10 I

1

–1.0 { 1 I I

\

4 4,5 5.0 5.5 6.0 6.5

L o ge Environmental capital spending (En)

SOURCE Off Ice of Technology Assessment from data in table 108

ing for environmental needs increases, R&D

spending decreases relatively. That such a

statistically significant relationship should

hold over the 13-year period for aggregated

industry data is curious: nondiscretionary environmental spending because of governmental regulations appears to be controlling the

level of R&D spending. However, since environmental spending is in the capital category

and R&D spending is in the expense category,

the cause-effect relationship, if one exists,

may not be as simple as this curve implies.

The rate of R&D spending is not uniform

among segments of the domestic steel industry. Alloy/specialty mills often allocate a

larger proportion of their sales and profits to

R&D than do large integrated steel companies

(see table 109). Furthermore, integrated steel

companies that have diversified are channeling a growing proportion of their R&D funds

into nonsteel R&D spending. Using NSF data,

apparent nonsteel R&D spending by steel

companies increased between 1963 and 1977

from 14 to 32 percent of total R&D spending

(table 110). Thus, R&D spending as a percentage of sales for diversified steel companies

declined by even more than the data in table

106 indicate. Finally, it appears that nonintegrated steel companies spend much less on

Table 110.—Measure of Diversification of R&D Efforts in Ferrous Companies

(dollars in millions)

Apparent nonferrous R&D spending

Ferrous industry Ferrous product of ferrous companies

R&D spending field spending Dollars Percent of total

1963 . . . . . . . . . . . . $105 $ 90 $15 14.3

1966 . . . . . . . . . . . . 136 104 32 23.5

1967 . . . . . . . . . . . . 134 117 17 23.5

1968 . . . . . . . . . . . . 134 119 15 11.2

1969 . . . . . . . . . . . . 135 125 10 7.4

1970 . . . . . . . . . . . . 148 127 21 14.2

1971 . . . . . . . . . . . . 142 114 28 19.7

1972 . . . . . . . . . . . . 144 137 7 4.9

1973 . . . . . . . . . . . 159 158 1 .6

1974 . . . . . . . . . . . . 177 156 21 11.9

1975 ....., . . . . . . 211 144 67 31.8

1976 . . . . . . . . . . . . 252 163 89 35.3

1977 . . . . . . . . . . . . 256 172 84 32.8

SOURCE National Sc!ence Foundation
Ch. 9—Creation, Adoption, and Transfer of New Technology . 275

R&D than the other industry segments, although no published data on spending levels

are available to document this.

In addition to significant within-industry

R&D spending differences, there are major

between-industry differences. Ferrous metals

R&D as a percentage of net sales has been

lower than that of other basic industries for

15 years or more. Between 1966 and 1977,

ferrous metals R&D was only one-sixth to onehalf the level of other basic industries like

nonferrous metals and chemicals (table

11 l). * Steel industry R&D also ranks very low

among a broader range of manufacturing industries—at about 20 percent of the all-manufacturing average, it ranks above only the

food, textile, and lumber industries. Similarly, the number of R&D scientists and engineers per 1,000 employees is smaller for steel

‘Steel industry sources claim that the record understates actual research efforts, since considerable research is for operational and tax accounting purposes undertaken in production

departments and reported as a production expense, See, for instance, Frederick C. Lagenberg, president, American Iron and

Steel Institute, “United States Steelmaking Technology-Second to None, ” in Proceedings of the Steel Industry Economics

Seminar, AISI, 1977, p. 43.

The same tax laws also apply to other industries, and therefore similar reporting practices could prevail in other industries although the extent probably varies from industry to industry. Valid conclusions can be made about the comparative

standing of steel industrv R&D.

than for any other industry except for textiles

and apparel, about 15 percent of the average

for all reported industries (table 112).

Low R&D levels relative to other industries

and declining R&D relative to sales can be attributed to a number of economic factors. The

pilot and demonstration plant stages of steelmaking research are very expensive compared to R&D in other sectors of the economy,

and the steel industry is thus exposed to a

much greater degree of risk than are other industries. The decline in the steel industry’s

share of the domestic market has also increased the market risk of capital-intensive

R&D. Related to a declining market share has

been a real decline in steel industry investments since about 1965 (ch. 3), which has

narrowed the industry’s choices among production processes and equipment. And finally, as steel profitability declined professional

managers of iron and steel companies have

exercised considerable caution with respect

to R&D activities. In the case of conglomerates, these managers must allocate R&D

funds among various activities: they are undoubtedly influenced by profitability trends

in these activities.

Nonindustry R&D.— Steel industry R&D is

complemented by only limited efforts elseTable 111.— R&D Funds as Percentage of Net Sales in Ferrous Metals, Nonferrous Metals, Chemicals,

Petroleum Refining, and Stone, Clay, and Glass Products Industries, United States, 1963-77

Stone, clay, and

Year Ferrous metals Nonferrous metals Chemicals Petroleum refining glass products

1963 ., . ~~• .

.-

0.7 1.1 4.3 1.0 -

1.6

1966 . . . . . . . . . 0.7 0.8 4.4 0.9 1.5

1967 . . . . . . . . . 0.8 1.0 4.6 0.8 1.8

1968 . . . . . . . . . 0.7 1.0 3.8 0.8 1.6

1969 . . . . . . . . . 0.7 1.0 3.9 0.9 1.7

1970 . . . . . . . . . 0.7 1.0 3.9 1.0 1.8

1971. , . . . . . . 0.7 1.0 3.7 0.9 1.8

1972 . . . . . . . . . 0.6 0.9 3.6 0.8 1.7

1973 . . . . . . . . . 0.5 0.9 3.5 0.7 1.7

1974. , . . . . . . . 0.5 1.0 3.5 0.6 1.7

1975 . . . . . . . . . 0.6 1.2 3.7 0.7 1.2

1976 . . . . . . . . . 0.6 1.2 3.7 0.6 1.2

1977 . . . . . . . . . 0.5 1.1 3.6 0.7 1.2

Annual averages

1966-77, . . . . . . 0.6 1.0 3.8 0.8 1.5

1968 -72. . . . . . . 0.7 1.0 3.8 0.9 1.7

1973 -77. . . . . . . 0.5 1.1 3.6 0.7 1.4

SOURCE National Science Foundation
276 . Technology and Steel Industry Competitiveness

Table 112.—Competitive U.S. Trade Performance in Comparison With R&D

.

‘Scientists

and engineers

engaged in R&D

Company R&D as Federal R&D as Total R&D as as a percentage

U.S. share of percentage of percentage of percentage of of employment,

exports, 1962 sales, 1960 sales, 1960 sales, 1960 January 1961

Aircraft . . . . . . . . . . . . . . . . . . . . 59.52 2.6 19.9 22.5 7.71

Scientific and mechanical

measuring equipment. . . . . . 36.52 4.1 7.7 11.8 NA

Drugs . . . . . . . . . . . . . . . . . . . . 33.09 4.7 0.1 4.8 6.10

Machinery . . . . . . . . . . . . . . . . . 32.50 2.7 1.6 4.3 1.39

Chemicals, except drugs . . . . 27.32 3.4 0.7 4.1 3.65

Electrical equipment. . . . . . . . . 26.75 3.7 7.2 10.9 4.40

Rubber products . . . . . . . . . . . . 23.30 1.4 0.7 2.1 0.95

Motor vehicles and other

transport equipment. . . . . . . 22.62 2.4 0.7 3.1 1.14

Other instruments. . . . . . . . . . 21.62 4.4 2.1 6.5 NA

Petroleum refining . . . . . . . . . . 20.59 1.0 0.1 1.1 2.02

Fabricated metal products. 19.62 1.0 0.5 1.5 0.51

Nonferrous metals ... . . . . . . 18.06 0.9 0.2 1.1 0.64

Paper and allied products. . 15.79 0.7 0.0 0.7 0.47

Lumber, wood products,

furniture . . . . . . . . . . . . . . . . 12.26 0.5 0.1 0.6 0.03

Textiles and apparel . . . . . . . . 10.26 0.4 0.2 0.6 0.29

Primary ferrous products . . . . . 9.14 0.6 0.0 0.6 0.43

Rank correlation with first column. . . . . . . . . . . 0.84 0.73 0.92

Linear correlation with first column. . . . . . . . . . . . . 0.59 0.84 0.90

NA = not available

—

SOURCE D B Keesing, “The Impact of Research and Development and U S Trade, ” J. Political Economy 75, 38-48, 1967

where in the private sector and in Government and academic institutions. The industry

relies heavily on its supplier industries and

companies for technological developments,

but for a variety of reasons, including the low

level of new steel plant construction in the

United States, these supplier companies have

been losing their share of the world market

and are themselves spending less on R&D.

Federal contributions to support steel R&D

have also been meager. On average, since

1966, Federal agencies have spent $3 million

annually, or 1.9 percent of total steel industry

R&D, to support ferrous metals and products

R&D (table 108), In fact, Federal support of

ferrous metals R&D is lower than for any

other category of industrial R&D (table 113).

Commenting on this imbalance in Federal

R&D, the administration’s major policy statement on the steel industry, the so-called Solomon report, notes:

Despite the fact that steel is an important

basic industry, Federal contributions to the

steel industry’s R&D expenditures are low,

Table 113.—Federal Support of Industrial R&D, 1977

—

Federal R&D funds

(percent of total R&D)

Ferrous metals and products. . . . . . . . . . . . . 1.9

Nonferrous . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4

Aircraft and missiles. . . . . . . . . . . . . . . . . . . . 77.8

Electrical equipment and communication . 45.5

Motor vehicles. . . . . . . . . . . . . . . . . . . . . . . . . 12.5

Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.0

Instruments. . . . . . . . . . . . . . . . . . . . . . . . . . . 11.1

SOURCE National Science Foundation, R&D in Industry, 1977

representing only 1.9 percent of the industry’s R&D spending—compared with 9 percent for the chemical industry, 14 percent

for the machinery industry, 47 percent for

the electrical equipment industry, and 78

percent for the aircraft industry,8

Academic institutions also make a limited

contribution to steel R&D. The American Iron

and Steel Institute (AISI) provides about $1

million annually for university research projects. Federal funding for steel-related R&D

at universities may approximate this level, al-

“Solomon Report, 1977.
Ch. 9—Creation, Adoption, and Transferor New Technology 277

though no detailed data on university research in ironmaking and steelmaking appear

to be available. The relatively low level of

academic effort devoted to this area can be

inferred, however, from the research interests of metallurgy and materials faculty: in a

1976 survey, thought to be representative of

the past decade, less than 3 percent of faculty

members listed interests in the areas of iron,

steel, or ferrous research.9 There are larger

numbers of academic researchers working on

subjects applicable to the steel industry than

this figure would suggest, but they may be

only indirectly concerned with iron, steel, or

ferrous metals research. Low levels of steel

research by professors also reflect the poor

image steel research has in the academic

community. The National Academy of Sciences has identified this low level of academic activity in materials processing as a

barrier to progress and innovation:

Materials-processing technology also suffers from insufficient attention in our engineering colleges. Fewer than 10 percent of

the materials faculty (who themselves comprise only a small fraction of the engineering

faculty) are experts in materials processing

and manufacturing. These fields do not enjoy

the status accorded some other academic

disciplines, and little current research in the

schools is relevant to major developments in

materials processing. The near absence in

our universities of research in materialsprocessing and manufacturing technology

denies the country a potential source of new

ideas and innovation. Furthermore, it means

that the universities are not exposing young

people to current advances in the field. 10

It is apparent that steel R&D must be

strengthened, and that current R&D must be

redirected, for the industry to lower its overall costs, Some of the emphasis on improving

labor productivity should be shifted toward

‘Metcl~lurg}/M~]teric]ls Education Yeorbook, American Society for Nletals. 1976. This represents 27 of the 936 listed facu]ty

members, 6 of whom mere a t Canadian schools; the remaining

21 were at 16 U.S. schools. There were 92 schools represented

in the survev.

‘{’National Academy of Sciences, Science and Technology

—A Five Year Outlook, Freeman, San Francisco, Calif., 1979,

p. 322.

attaining substantial raw material and energy savings through technological changes.

Capital cost reductions are also necessary.

During the late 1960’s, U.S. raw materials

costs were low and labor costs high compared to European producers.]’ Under such

conditions, it was reasonable that considerable U.S. steel R&D effort—mainly innovation

in operating efficiency—centered on laborintensive operations such as rolling. But a

heavy emphasis on improvements in labor

productivity may no longer be appropriate.

The costs of energy, materials, and capital

have increased during the past decade to

such a degree that they now deserve more

prominence in R&D strategies. This inappropriate allocation of steel R&D effort is especially serious in view of the U.S. steel industry’s need to modernize. More intensive research into and use of continuous casting and

other raw-material-saving innovations would

have made this need less pressing. *

Foreign R&D Activities

Foreign steel-related R&D activities differ

radically from those in the United States: they

have significantly larger budgets; they are

conducted with considerable government assistance; and they are often undertaken in

multisectoral steel production research institutions,

Foreign steel producers spend more on

R&D than those in the United States. The U.S.

steel industry’s steel-related R&D expenditures have been about 0.5 to 0.6 percent of

sales in recent years; in Japan, they are

slightly more than 1 percent. Furthermore,

Japanese steel-related R&D expenditures

“A. K. McAdams (“Big Steel, Invention and Innovation Reconsidered,” Quarterly ]ournol of Economics, 91 :457-82, August 1967) provides the following data:

costs United States ECSC

Labor, total ., . . . . . . . . . . . ., . . 400 u 20~ o

Energy, materials, supplies, . . . 45 70

Investment and interest , ., . . . . 10 5

h!iscellaneous. . . . . . . . . . . . . . . 5 5

*It is interesting to note that U.S. Steel Corp. in May of 1977

formed a task force to develop a comprehensive procedure to

ensure that potentially attractive new steelmaking processes

are effectivelv evaluated.
278 Technology and Steel Industry Competitiveness

have grown gradually but steadily over time

(figure 37), even though Japanese steel sales

and profits have declined since 1974. In 1974,

steel R&D occupied 3 percent of the total

number of researchers in Japanese industry,

and accounted for 5 percent of total industry

R&D spending; ’2 in 1973-75, the equivalent

figures for U.S. steel R&D were 0.9 and 1.3

percent, respectively. 13 As in the United

States, however, steel R&D ranks lower than

R&D expenditures in other sectors of the Japanese economy. French and West German

steel industry R&D as a percentage of sales is

roughly similar to U.S. levels,l4 but there is

somewhat more difference in R&D spending

per net tonne of raw steel produced; in 1972,

the United States spent $1.30, the European

Community $1.46, and Japan $2.26 per tonne

of steel output. ’s

IZA~ency for Industrial Science and Technology, 1977.

1 INational Science Foundation, op. cit.

‘

+ Hajime Eto, “Relationship Between Basic and Improvement

Innovations—Development of Innovation Policy of Japan, ” presented at IIASA, December 1979.

‘“H. Mueller, “Factors Determining Competitiveness in the

World Steel Market, ” Atlanta Economic Conference, October

1979.

Figure 37.— R&D Expenditures in Japan as

Percentage of Net Sales by Sectors

0 I f’ I I

1965 1970 1975 1977

Year

‘Electrical machiner y ~ Machinery

~Precision Instrumen t ~ Tota l

‘-----Chemistr y . . . . . . . . . . . . Iron and steel

—. ● —Transport equipmenl

Regional and intersectoral (industry, university, government) steel R&D cooperation is

typical in foreign steel-producing countries,

but not in the United States. Here, joint R&D

efforts by domestic steel producers are inhibited by Federal antitrust policies, but in many

other steel-producing countries such cooperative efforts are encouraged. Further,

much foreign steel research is undertaken by

research institutes jointly supported by industry, university, and government. The Steel

Directorate of the Commission of European

Communities has a mechanism for regional

R&D coordination. It arranges for significant

steel-related R&D funding, and the costs are

shared among the steel companies and the

member countries. At the present time, the

annual funding level by the Steel Directorate,

alone, is about $36 million. Member country

governments supply $20 million of this funding, an amount about four times greater than

the U.S. Government’s support of steel R&D.

Japan

The Agency for Industrial Science and

Technology (AIST) is the part of the Ministry

of International Trade and Industry (MITI)

that coordinates and influences R&D within

Japanese industry. The stated purpose of

AIST is the “promotion of R&D of industrial

science and technology and diffusion of obtained results.’’16 One of the many AIST programs, the national R&D program, deals with

large-scale projects that require “a great

deal of expense, risks and long-range period. ”17

When initiated in 1973, the policy criteria

guiding the selection of projects were that:

Projects should have a prospect for high

social returns by providing technical advances for a wide sector of the economy.

Projects should be unable to be undertaken by private firms because of “market failure,” including an absence of

profit motives and high risk.

“’’Agency for Industrial Science and Technology, ” MITI,

1978.

SOURCE Japanese Government 1979 “Agency for Industrial Science and Technology, op. cit.
Ch. 9—Creation, Adoption, and Transfer of New Technology ● 279

Projects should use technologies that

can be clearly specified: extensive basic

research should not be required.

Projects should be carried out cooperatively by universities, government laboratories, and industry; projects involving only one firm are usually rejected. 18

One of the major AIST R&D projects has

been the nuclear steelmaking program, with

the goal of a commercial nuclear steelmaking

capability by 2000. A sizable amount (about

$54 million) was allocated for the first phase

of the program in 1973-79, and project implementation continues on schedule.

Another part of AIST supports R&D activities in private industry. There are four components of this program:

● Subsidies for R&D: “The total subsidies

granted in (the) past 29 years . . .

amounts to approximately 40.2 billion

yen ($168 million) for 4,112 programs. ”

. Tax credits for increased R&D expenditures: “If R&D expenses exceed the largest amount of such expenses of any preceding accounting periods since 1966, 20

percent of such excess amount may be

deducted from the corporation tax. The

maximum amount deductible is 10 percent of the corporation tax, ”

● Low-interest loans: AIST plays an important role in allocating long-term loans

through the Japan Development Bank to

encourage the use of new technology

developed by private enterprises. “The

sum of loans furnished in 1976 was approximately 36 billion yen ($150 million)

for 38 items. ”

. A research association for mining and

manufacturing technology: “for the promotion of joint research among private

companies and the research associations, ” 19

AIST has been conducting technology assessments since 1975; the Japan Industrial

Technology Association also helps disseminate technical information by spreading R&D

results achieved mainly by AIST laboratories

and institutions. In addition, AIST carries out

for industry a technological survey that defines R&D themes and describes ongoing R&D

activities.

The AIST laboratories and institutes also

play a direct R&D role. There are 16 of these,

and many, such as the National Research Institute for Pollution and Resources and the

Government Industrial Development Laboratory, carry out work of interest to the steel industry. The Industrial Development Laboratory, for example, has a project on high-pressure fluidized reduction of iron ore, as well as

one on coal gasification.

The Japanese steel industry, during the

period since World War II, has shifted from

basic research to very applied R&D. This

shift, largely stimulated by demonstrated deficiencies in manufacturing and other technologies, set the stage for Japan’s massive industrialization after the war.

Japanese physicists developed high quality

steel in the interwar period. But the Japanese production process of iron and steel

was inefficient for mass production, and lack

of quality control resulted in big variance of

quality which cancelled out the theoretically

calculated high quality. The basic innovation

founded on great physical discoveries was

found useless without suitable production

technology.

* * *

A great deal of effort was [therefore] put

into automation technology development

rather than to improvement in quality of iron

and steel itself. 20

A recent survey of Japanese steel industry

personnel, apparently conducted by MITI,

found that the most significant changes for

the iron and steel industry were expected to

be a future de-emphasis on market-driven innovation and resource saving, and an increase in R&D in other fields. The latter

would appear to indicate a trend toward

diversification. Furthermore, nearly threequarters of the industry personnel believed

‘nIbid.

“41t]id. -“EIo, op. cit.
280 “ Technology and Steel Industry Competitiveness

that there would be incremental innovation

within 5 years, and 10 percent believed that

there would be an epoch-making innovation in

the next 10 years. There are, indeed, indications of a decline in private-sector R&D,

which the respondents attributed variously to

higher costs, greater risks, declining profits,

and a global stagnation in both basic research and technical innovation.

West Germany

The Federal Ministry for Education and

Science in West Germany plays a strong coordinating and sponsoring role in the area of industrial research. The attitude of the German

steel industry is that basic research should

be done in the universities and the development work in the industry. The West German

Government apparently accepts this division

of labor.

As in Japan, government support for steelrelated R&D can also be found in West Germany. Government-funded projects are established and supported on a long-term basis.

Four-year projects are normal, with renewal

periods ranging from two to four years. Such

support creates a large core of people to

guide R&D projects to successful outcomes,

and German technology in steelmaking and

processing normally stays abreast of competition from other countries, This has helped

West German steel plant equipment purveyors to capture a fairly large share of business

from both developed and developing countries. Several research organizations also

draw West German Government support to

solve steel industry problems:

●

●

●

●

Verein Deutscher Eisenhuttenleute

(VDeh)

Iron Works Slag Research Association

(Reinhausen)

Iron Ore Dressing Study Group (Othfressen)

Iron and Steel Application Study Group

(Dusseldorf) -

-

The aim of these groups is to find solutions to

practical problems encountered by steel

plant operators. Government funding is tied

to close cooperation between these research

organizations, the steel plants, and the senior

faculty at the universities and polytechnical

schools.

Sweden

The emphasis of Swedish R&D appears to

be on the alloy and specialty steels and on the

development of major steelmaking innovations that can be exported to foreign steel industries. Swedish research is particularly active in coal-based direct reduction, direct

steelmaking processes, and plasma steelmaking.

In addition to significant, though recently

declining, private-sector R&D, the government funds a number of research establishments. These include the Swedish Institute

for Metals Research and the Royal Institute

of Technology, both in Stockholm, and the

Foundation for Metallurgical Research

(Mefos). Mefos was promoted for the Swedish

steel industry by Jernkontoret, the Swedish

Iron Makers Association, which is owned collectively by the steel works of the country.

Mefos has 65 employees and an annual budget of $3.8 million. About 50 percent of its annual expenditures, outside of contract research, come from the Swedish Government.*’

The foundation operates two full pilot plants,

constructed and equipped for a total investment of about $16 million.

R&D and Trade Performance

The export performance of an industry increases with increasing levels of private and

government R&D spending, as well as with increasing numbers of scientists and engineers

engaged in R&D.22 The data of tables 112 and

114, as well as more recent trade data,

strongly suggest that increasing U.S. steel imports and decreasing participation in world

z IStee] Technology Bu]]etin, Swedish Trade Office, December

1979,

Z-’ The causa] re]ation of R&D in determining export performance was shown to be significant in W. H. Branson and H. B.

Junz, “Trends in U.S. Trade and Comparative Advantage, ”

Brookings Popers on Economic Activity, vol. 2, 1971.
Ch. 9—Creation, Adoption, and Transferor New Technology 281

Table 114.—U.S. R&D Intensity and Trade Performance

Trade balance Trade balance

exports- exportsR&D imports, 1976

Intensit y

a (millions

R&D imports, 1976

Description (percent)

intensity (millions

of dollars) Description (percent) of dollars)

Above-average R&D intensity

Communications equipment. .

Aircrafts and parts . . . . . . . . .

Office, computing equipment . .

Optical, medical instruments .

Drugs and medicines . . . . . . . . .

Plastic materials . . . . . . . . .

Engines and turbines . . . . . . . .

Agricultural chemicals. . . . . . .

Ordinance (except missiles) . . . .

Professional and scientific instr.

Electrical industrial apparatus .

Industrial chemicals. ... . . . . . .

Radio and TV receiving equip.

Average . . . . . . . . . . . . . . . . . . .

15.20

12.41

11.61

9.44

6.94

5.62

4.76

4.63

3.64

3.17

3.00

2.78

2.57 —

$ 793.7

6,748.3

1,811.4

369.6

743.5

1,448.0

1,629.2

539.3

553.0

874.8

782.5

2,049.4

– 2,443.4

1,223.0

Below-average R&D intensity

Farm machinery ., ... 2.34 696.2

Electric transmission equipment

Motor vehicles. . . . . . . . . . . . . . . .

Other electrical equipment . . . .

Construction, mining . . . . . . . . . .

Other chemicals . . . . . . . . . . . . . .

Fabricated metal products. . . . . .

Rubber and plastics . . . . . . . . . . .

Metalworking machinery . . . . . .

Other transport . . . . . . . . . . .

Petroleum and coal products. . .

Other nonelectric machines .

Other manufactures . . . . . . . . . . .

Stone, clay, and glass. . . . . . . . .

Nonferrous metals . . . . . . . . . . . .

Ferrous metals . . . . . . . . . . . . . . .

Textile mill products, . . . . . . .

Food and kindred products . . . .

Average . . . . . . . . . . . . . .

2.30 798.1

2.15 – 4,588.6

1.95 311.2

1.90 6,160.4

1.76 1,238.5

1.48 1,525.7

1.20 – 478.8

1.17 736.4

1.14 72.1

1,11 NA

1,06 3,991.3

1,02 – 5,137.4

0.90 –61 .3

0.52 – 2,408.9

0.42 -2,740.4

0.28 40.3

0.21 – 190.0

— 2.0

aMeasures of R&D intensity and trade balance are on product line basis The ratio of applied R&D funds by product field to shipments by product class, averaged be

tween 1968-70

SOURCES Department of Commerce, BIERP Staff Economic Report U S Bureau of the Census

export markets are linked to the domestic

steel industry’s relatively low levels of R&D

spending. A counter example can once again

be found in Japanese R&D and the connection

between Japanese performance in technology

and exports:

Japan, which has no significant natural resources, runs a positive trade balance. The

U. S., which has many natural resources,

runs a large deficit. A key difference is in our

use of technology. The export accomplishments of Japan in optics, steel, automobiles,

and consumer electronics provide obvious

examples of what the Japanese can do when

they set technological and export goals. In all

of these fields they have used their resources

more effectively than we . . . We should

match it with our best efforts and people. z]

“J. B. Wiesner, The Chronicle of Higher Educ(ltion, Nov. 13,

1978.

Adoption and Diffusion of New Technology—

Case Studies of Six Technologies

Adoption Strategies

Any successful technological innovation

has certain benefits associated with it; these

may be reductions in the costs of input factors (like raw materials and labor) or improvements in product quality. The changeover to new technology also has the attendant

costs of adjustments in employment levels,

skill requirements, production quotas, and

associated supervisory arrangements. For an

innovation to be adopted, obviously, the

benefits should outweigh the capital and

changeover costs. The adoption decisions

made by the management of individual firms

collectively determine the rate at which a

technological innovation diffuses throughout

an industry, and capital investment is a major

factor in the firms’ adoption decisions. *

*A third variable, labor relations has generally not created

any difficulties with the introduction of new steelmaking equipment (see ch. 12).

.– i – 1- :.
282 . Technology and Steel Industry Competitiveness

The issue of capital formation, then, is a

crucial one. A company’s sources of capital

funds may be external, or they may be internal—that is, generated from cash flow. Governments, by their tax policy, influence the

cash flow companies have available for reinvestment. If a company has sufficient discretionary funds, it will base its investment decisions on its evaluation of the return on investment from alternate projects, the perceived

risk of each project, and the urgency management associates with each project.

The diffusion of major innovations falls

into one of three categories: those involving

capacity addition, those involving replacement of obsolete facilities, and those involving

displacement of functioning facilities.24 The

economic considerations in a decision to

adopt a technological innovation are quite

similar for capacity expansion and for replacement of obsolete facilities, but they are

slightly different for displacement.

When management considers capacity expansion or replacement to be necessary, it is

likely to prefer new technology to established

technology if the new technology offers either

improved product quality (and increased revenue) at little or no increase in cost, or equivalent product quality with at least a modest

cost reduction. Both options, however, depend on the prior elimination of technological

uncertainties about minimum acceptable performance; even in expansionary periods, the

adoption rate of a new technology may remain modest so long as its technical uncertainties outweigh prospective gains. Moreover, if innovations offer advantages in only a

limited range of plant sizes or only part of a

product range, technological diffusion may be

delayed while methods are developed to

adapt the technology to the remainder of the

size or product range. And finally, a short

supply of inputs may delay rapid adoption of

technology. Adoption rates would be expected to rise sharply, then, as cumulative

~~B. Go]d, W. S, pierce, and G. Rosseger, “Diffusion of Major

Technological Innovations in the U.S. Iron and Steel Manufacturing,”’ The Journal of Industrial Economics, vol. 18, No. 3, July

1970, pp. 218-41.

practical experience removes uncertainties

about acceptable performance and as further

technical advances allow the innovation to be

applied advantageously to a broad array of

products and facility sizes.

The economic criteria for adopting innovations that displace currently functioning

facilities are more stringent than for those

that add to capacity or replace obsolete facilities. First, an innovative facility that is to

replace a functioning facility producing an

equivalent product must produce at costs

comparable to those of the technology it replaces. If a company has recently undertaken

major modernization or expansion programs,

any undepreciated investment must be written off, so management is less likely to adopt

innovative technology to replace functioning

facilities. In evaluating displacements, the

changeover costs associated with adjustments in employment levels, skill requirements, production quotas, and associated

supervisory arrangements must also be considered. If the displacement of capacity is effected with no increase in capacity, the potential gains may be lower than if capacity

can also expand. In such a case, direct displacement is likely to be substantial only if

the older facilities have heavier requirements

for input factors that are in short supply, or if

demands increase for product qualities not

attainable by the older facilities.

Six Case Studies of

Technological Changes

The six case studies chosen examine major

innovations representing different aspects of

steel technology, different national origins,

and different levels of adoption. Information

on the six innovations is summarized in table

115.

Argon-Oxygen Decarburization (AOD)

Process

This process is generally considered to be a

major process innovation of U.S. origin. It

belongs to a class of pressurized-gas stainless

steel processes developed during the mid1950’s and early 1960’s, and has been in com-
Ch. 9—Creation, Adoption, and Transfer of New Technology ● 283

Table 11 5.—Summary Information on Six OTA Case Studies

Type of innovation Stage of steel making Place of major Level of adoption

Casting- innovation World- United

Innovation Process Product Ironmaking Steelmaking fabrication activity wide States

Argon-oxygen decarburization. X — — x — United States High Very high

Basic oxygen furnace. . . . . . . . X — — x — Austria Very high Very high

Continuous casting. . . . . . . . . . X — — — x West Germany High Low

Formcoking . . . . . . . . . . . . . . . . X — x — — United States Very low Very low

Steel mill waste recycling. . . . . X — x — — Japan High Very low

One-side galvanized steel. . . . . — x — — x United States Moderate High

SOURCE Off Ice of Technology Assessment

mercial production since the late 1960’s.

Other processes in this class include the

basic oxygen furnace (or “oxidation-reduction”) process, the vacuum oxygen decarburization (VOD or LD-VAC) process, and the

steam, ammonia/oxygen, or Creusot-Loire

Uddeholm (CLU) process.

An AOD furnace uses pressurized argon

and oxygen to prepare molten alloy steel. The

use of argon in combination with oxygen

allows decarburization of the melt without

excessive oxidation of the chromium, which is

quite expensive and has a high affinity for

oxygen. In the AOD steelmaking and refining

process, less chromium is lost and lower cost

chromium charge material can be used,

The AOD process was invented in 1954 by

Union Carbide at their Niagara Falls facility.

Several years of R&D followed, and Union

Carbide began a cooperative AOD development program with Joslyn Stainless Steels in

1960. In conjunction with experiments in the

arc furnace, Union Carbide continued to explore the idea of using a separate refining

vessel, In 1969, 15 years after AOD’s original

invention, Joslyn started a 100-percent, fullscale AOD system. The successful demonstration and commercial operation at Joslyn

and the aggressive technical marketing effort

by Union Carbide spurred the rather rapid

adoption of this technology by U.S. alloy/specialty companies.

Computer techniques for optimizing AOD

were also developed in the United States and

came into use in 1972.25 This practice has

-’)R. K. Pitler, “Worldwide Technological Developments and

Their Adoption bv the Steel Industry in the United States, ” prepared for the General Research Committee of the American

Iron and Steel Institute, Apr. 13, 1977.

since been widely adopted throughout the

world to about the same extent as in the

United States.*’ The use of the AOD process is

now being extended to the manufacture of

other specialty alloys, such as tool-and-die,

high-speed, and forging steels. A great many

foundries have also installed AOD vessels

within the last few years.

Since its first commercial use by a U.S.

steel company, the AOD process has been

widely adopted throughout the world for the

production of stainless steel. Worldwide installed AOD annual capacity increased from

90,700 tomes in 197027 to 5,705,000 tonnes

by mid-1978.28 Of this, about 40 percent, or

2,282,000 tonnes, is in the United States,29

U.S. installation of AOD capacity since 1970

has been almost double that of Western Europe and more than double that of Japan (figure 38); of all major steel-producing countries, only Italy has adopted AOD technology

faster than the United States (table 116). The

United States is clearly the leader, by far, in

installing AOD technology.

U.S. adoption of AOD technology was encouraged by the generally high domestic

growth rate for stainless steel consumption.

The overseas marketing effort was delayed

pending the results in the U.S. domestic market, and this appears to have contributed to

differences in the rates of AOD diffusion for

the United States and other countries. Also,

some plants in Japan and

— —

‘

h

Ibid.

“Ibid.

IBRichard Dai]y, “Round-Up of

Steelmaker, July 1978, pp. 22-29.

~’Ibid.

Europe had recently

AOD Furnaces,’ Iron and
284 ● Technology and Steel Industry Competitiveness

Figure 38.— Installed Argon-Oxygen Decarburization

Capacity

1965” 1970 1975 1980

Year

SOURCE American Iron and Steel Institute

Table 116.—Adoption of AOD Technology in

Various Countries of the World (in tonnes)

1974 production of

1978 installed stainless steel

Country AOD capacity ingot

United States . . . . . . . . . 2,250,000 1,955,000

Japan. . . . . . . . . . . . . . . . 762,000 2,037,000

West Germany . . . . . . . . 454,000 688,000

France . . . . . . . . . . . . . . . 272,000 570,000

Sweden . . . . . . . . . . . . . . 390,000 519,000

Italy . . . . . . . . . . . . . . . . . 372,000 311,000

United Kingdom . . . . . . . 400,000 224,000

Others . . . . . . . . . . . . . . . 554,000 446,000

Total. . . . . . . . . . . . . . . 5,454,000 6,750,000

SOURCES, Institute for Iron and Steel Studies, INCO World Stainless Steel Statistics, 1976

adopted competing technology. For such

plants, a switch to AOD would offer only incremental cost savings, and in addition undepreciated equipment would have to be written off. In some of the LDCs, the availability

of industrial gases could be responsible for

the delay in adopting AOD technology.

The rapid growth of the AOD process can

be attributed to its reduction of raw material

costs. The process permits refining almost

any initial melt chemistry and achieves high

recoveries of almost all elements. High-carbon chromium charge can replace more expensive low-carbon ferrochrome. In addition

to chromium, improved recoveries of manganese, molybdenum, nickel, and titanium have

been reported. Other savings stem from less

overall silicon consumption, lower electric

furnace costs because of less power consumption, reduced electrode consumption,

and less refractory wear.

AOD operating cost savings range from an

estimated $55 to $110 or more per tonne of

stainless steel. Even larger savings are typical for the higher chromium and other specialty alloys. Between 20 and 30 percent of

these stainless steel savings are attributable

to lower energy-related costs. Payback periods ranging from 6 months to 2 years have

been estimated. In addition to allowing cost

economies, the process also improves product

quality: sulfur content is lower, inclusion distribution is improved, temperature and chemical homogenization are better, and final dissolved oxygen, nitrogen, and hydrogen are reduced.

Summary .—The main motivating factors

for the rapid adoption of AOD technology are:

●

●

●

●

reduced raw materials cost, because of

improved yields of alloying elements and

the use of lower cost raw materials;

improved product quality;

low-cost increases in capacity, because

AOD vessels can be retrofitted in existing melt shops; and

an aggressive technical marketing effort

by the process developer, a company in

the “supplier” category.

Some of the barriers are:

●

●

●

the recent installation of competing

pneumatic technology in Europe and Japan, which reduced the economic incentive to switch to AOD when it became

available;

the availability of industrial gases,

which may have hindered adoption of

AOD technology in the LDCs; and

delays in government approval of licenses in certain countries.

Basic Oxygen Process

The basic oxygen furnace (BOF) has revolutionized steelmaking, and it is generally

considered the most significant major process
Ch. 9—Creation, Adoption, and Transfer of New Technology ● 285

innovation for steelmaking in modern times.

Total BOF tonnage has grown faster in Japan

and the European Economic Community (EEC)

countries than in the United States. About 62

percent of all U.S. steel, 75 percent of West

German and French steel, and 80 percent of

Japanese steel are made in the BOF,

BOF technology reduces costs and improves productivity. The BOF comprises a

vertical, solid-bottom crucible with a vertical

water-cooled oxygen lance entering the vessel from above. The vessel can be tilted for

charging and tapping. The charge is normally

made up of molten pig iron (“hot metal”) plus

scrap and fluxes, although small quantities of

cold pig iron and iron ore may also be

charged, The distinguishing feature is that

the heat produced by the reaction of oxygen

with various constituents of the charge is

used without other sources of energy to bring

the metal to the desired final conditions of

composition and temperature. Occasionally,

the heat balance may be altered by the introduction of supplementary fuel to permit

melting of above-normal amounts of scrap.

In 1949, experimental results from a small

BOF pilot plant in Switzerland showed that it

was possible to refine iron by use of oxygen

and to remove phosphorus and sulfur by the

use of basic linings and fluxes. In addition, a

significant proportion of scrap could be

added—close to half the weight of the iron in

some cases. Scientists at VOEST continued

development work on the BOF at Linz, Austria, where the first successful heat was

made in October 1949. This development resulted in the first commercial plant, which began operation in 1952 with 32-tonne vessels.

Many problems had to be met as growth continued. Some of the improvements were carried out in Austria, and as other nations

began to use the BOF, they accelerated the

pace of improvements. The BOF has grown

from a 30-tonne novelty to the leading steel

process in the world, with vessels more than

10 times the original size. To achieve such

growth during 20 short years of industrial life

is remarkable.

Most of the world’s BOF capacity came onstream in the 1963-70 period, and the rate of

BOF installation has since declined substantially. The earliest plants were installed

in the early and mid-1950’s, with vessels

ranging from 27 to 45 tonnes; none had a design capacity exceeding the 73 tonnes of

Jones and Laughlin’s BOF in 1957. Thereafter, the number of yearly installations and

the size of the vessels continued to increase,

with four installations of over 200 tonnes

starting up by the end of 1962.

It has been pointed out that the U.S. industry was more aggressive than Japan or the

EEC in introducing this technology as opportunities occurred to increase capacity; however, only limited U.S. capacity expansion

took place during the 1952-76 period when

large numbers of BOFs were being installed

throughout the world. Until 1969, BOF adoption rates for the United States, Japan, and

Europe were in fact roughly similar. Since

that time BOF capacity in Europe and particularly in Japan has continued to grow.

Despite limited steel industry growth, the U.S.

steel industry has had a reasonable growthrate record for the BOF, largely as BOFs

replaced open hearth capacity. Europe and

Japan, on the other hand, experienced substantial capacity expansion during the postwar period, and more BOF capacity was put

into place in Japan and the EEC countries

than in the United States (see figure 39). *

Most of the U.S. companies that have

adopted BOF technology are large integrated

plants producing carbon and low-alloy steels,

and most have hot metal available—a prime

requirement for the BOF. U.S. companies can

easily purchase BOF technology from other

companies and vendors, so it is not necessary

for them to support extensive R&D work before installing BOF capacity, nor do they need

pilot or demonstration plants, A company can

decide on the size of the equipment it needs

and purchase it from the vendors, who will

*The higher Japanese and EEC growth rates for the installation of BOFs has contributed to growing exports from these

countries to the United States and the rest of the world.
286 . Technology and Steel Industry Competitiveness

Figure 39.—Growth of BOF Installed Capacity

1955 1960 1965 1970 1975

Year

SOURCE. American Iron and Steel Institute

also provide technical and operating knowhow. None of the operations in the United

States, however, has received any Government assistance in adopting BOF technology,

whereas in Europe and Japan a number of

companies received help from their governments in securing capital for BOF adoption.

Continuous Casting*

Continuous casting was originally patented

in 1865 by Sir Henry Bessemer. However, engineering and equipment problems were not

solved and the process was not commercialized until the early 1960’s, when significant

amounts of steel began to be continuously

cast in a number of the world’s steel industries. Today, continuous casting is the pre-

*A detailed discussion of continuous casting has been given

in Benefits of Increased Use of Continuous Casting by the U.S.

Steel Jndustry, OTA technical memorandum, October 1979.

ferred choice in new steelmaking plants,

although there are still some types of steel

that have not been converted from the older

ingot casting method to continuous casting.

Continuous casting replaces with one operation the separate steps of ingot casting, mold

stripping, heating in soaking pits, and primary rolling. In some cases, continuous casting also replaces reheating and rerolling

steps (figure 40). The basic feature of all continuous casting machines is their one-step

nature: liquid steel is continuously converted

into semifinished, solid steel shapes by the

use of an open-ended mold. Clearly, continuous casting makes long production runs of a

particular product easier and more efficient

than ingot casting. The molten steel solidifies

Figure 40.—Continuous Casting Apparatus

Molten metal

*

Tundish :’ m’

Mold

Solidified bar

Support

rolls

To ingot shearing and

transfer stations

Motorized pull roll

SOURCE. Technology Assessment and Forecast, Ninth Report, Department of

Commerce, March 1979.
Ch. 9—Creation, Adoption, and Transfer of New Technology . 287

from the outer cooled surfaces inward during

the casting process, so that finally a fully

solid slab, bloom, or billet is produced. This

product can then either be processed in a secondary rolling mill or be shipped as a semifinished steel product.

Energy Savings and Increased Yield.—The

continuous casting process saves energy directly, by eliminating energy-intensive steps,

and indirectly, by increasing yields. The elimination of intermediate casting steps reduces

the consumption of fuels (natural gas, oil, and

in-plant byproduct gases) and electricity by

approximately 1.1 million Btu/tonne cast. In

Japan, where one-half of all steel is continuously cast, the direct energy savings is apparently about 50 percent over traditional ingot

casting. Further energy is saved indirectly by

the substantial increase in yield from continuous casting, perhaps an additional 2.2 million

Btu/tonne.

Increased yield also means that less scrap

is generated. End losses, typical with individual ingots, are eliminated, and oxidation

losses are reduced because less hot metal is

exposed to the air. The simplicity and improved control of continuous casting also improve overall efficiency. All these improvements mean that more shipped steel can be

obtained from a given amount of molten steel.

When yield increases by 10 percent, an additional tonne of shipped steel is gained for

each 10 tonnes of molten steel; continuous

casting increases yields by at least 10 to 12

percent, and in some cases by 15 to 20 percent. The raw materials used to produce

these “extra” tonnes of steel, including iron

ore and coke, have also been saved.

Total direct and indirect energy savings

average 3.33 million Btu/tonne continuously

cast, which can lead to a significant cost saving. These are average energy savings for

many types of steels, but although actual savings may vary considerably the figure is probably conservative. For example, one detailed

analysis showed a saving of 6.0 million

Btu/tonne for the traditional integrated steelmaking route of blast furnace to basic oxygen

furnace, and 2.9 million Btu/tonne for the

scrap-fed electric furnace route used by

nonintegrated mills. * It is probably safe to

say that the total energy savings because of

continuous casting are normally equal to

about 10 percent of the total energy used to

make finished steel products. A comprehensive survey by the North Atlantic Treaty Organization of steel industry experts throughout the world, which considered 41 energyconserving measures for steelmaking, concluded that continuous casting had the best

combination of potential energy conservation

and return on investment.30

Other Advantages and Benefits.—Continuous casting can also be recommended on the

basis of its potential for higher labor productivity, better quality steel product, reduced

pollution, lower capital costs, and the increased use of purchased scrap.

Because continuous casting eliminates

many of the steps required by ingot casting,

all of which require direct labor input, it results in higher labor productivity. The Department of Labor reports that 10 to 15 percent less labor is required in continuous

casting than in ingot casting.31 Productivity

growth also results from the increase in yield

of shipped steel, from improved working conditions, and from at least 5 hours reduction in

production time from the pouring of molten

steel to the production of semifinished forms.

Advances have recently been made in eliminating time losses that occur when products

of different size or composition must be made

sequentially.

Most industry experts also report an improvement in the quality of some continuously

cast steels, resulting from the reduced number of steps and greater automatic control of

the process. There have been steady improvements in the process, particularly in the production of slabs for flat products that require

high surface quality.

*This analysis (by J. E. Elliott, in The Steel Industry and the

Energy Crisis, J. Szekely (cd.), Marcel Dekker, N. Y., 1975, pp.

9-33) assumes a 10-percent increase in yield, which is probably

conservative.

‘(’’’The Steel Industry, ” NATo/ccMs-47, 1977.

“ U.S. Department of Lahor, Bureau of Labor Statistics Bulletin 1856, 1975, p. 4.
288 ● Technology and Steel Industry Competitiveness

It is generally recognized that continuous

casting reduces pollution, as well. It eliminates soaking pits and reheating furnaces,

and its lower energy requirements also reduce pollution—hot steel is exposed to the atmosphere for a shorter time than in ingot

casting, so there are fewer airborne particulate. Increased yield also means that less

primary steelmaking is required for any given

level of shipped steel, so less coke is manufactured in integrated plants using blast furnaces; coking is steelmaking’s largest source

of pollution, particularly for toxic substances.

It is generally agreed that continuous casting reduces capital costs because it eliminates intermediate processing equipment. A

study of five new steel technologies by Resources for the Future concluded that continuous casting has the greatest potential for

capital cost saving* and recommended the

adoption of continuous casting both in new facilities and to displace existing ingot casting

capacity.

Finally, continuous casting increases the

use of purchased scrap. “Home” scrap (produced in-plant) is normally recycled back to

the steelmaking furnaces or the blast furnaces, or both. With higher yields, purchased

scrap must replace the lost home scrap in

order to maintain liquid-iron-to-scrap ratios.

The price of purchased scrap has generally

been lower than production costs for hot steel

made from new iron units; under such circumstances, increased use of purchased

scrap is an advantage.

U.S. and Foreign Rates of Adoption of Continuous Casting.—During the past several

years, the Japanese have made frequent reports concerning the continued adoption of

continuous casting and its effects in reducing

energy consumption and increasing yield in

steelmaking operations. Despite these advantages, the United States has fallen behind

almost all foreign steel industries in adopting

this beneficial technology. Continuous casting

has been adopted at a much faster rate in

countries like Japan, West Germany, and

Italy than in the United States, England, or

Canada (figure 41). In 1978, Japan continuously cast 50 percent of all its primary steel

and West Germany, 38 percent; in the United

States the level was only 15 percent. The

Soviet Union has the only major foreign steel

industry with a lower level of continuous

casting than in the United States (table 117).

This is explained by that country’s unusual

commitment to the open hearth process,

which does not readily interface with continuous casting equipment. *

The high rate of adoption of continuous

casting by many countries, particularly Japan, is largely explained by the considerable

expansion of their steel industries in the late

1960’s and early 1970’s. The benefits of continuous casting are so compelling that it is the

obvious process to choose when new steel

plants are constructed, More recent construction of steel plants in Third World nations has also revealed the unequivocal advantages of continuous casting.

Although much of the increased use of continuous casting in the Japanese steel industry

has been related to its expansion, in more recent years the Japanese have also pursued a

replacement strategy. They will probably

meet their goal of 70-percent continuous casting production within a few years. This will

be a remarkable achievement, particularly in

view of a number of negative factors facing

that industry: low rates of capacity utilization, the closing of many older facilities, continued loss of world export markets, and very

low profit levels. One reason these adverse

factors have not impeded continuous casting

adoption is that the Japanese Government

and the banking system have channeled suffi-

*The other four technologies were: scrap preheating, direct

reduction based on natural gas, coal gasification for direct reduction, and cryogenic shredding of automobilederived scrap.

(W. Vaughan et al., “Government Policies and the Adoption of

Innovations in the Integrated Iron and Steel Industry, ” 1976,

Resources for the Future. )

*The energy-intensiveness of the Soviet iron find steel industry is suggested by its 13-percent share of total energy consumption, compared to about 3 percent for the United States.

This must be considered a consequence, in part, of its low use

of continuous casting.
Ch, 9—Creation, Adoption, and Transfer of New Technology 289

Figure 41 .—The Diffusion of Continuous Casting

1960 1$65 1970 1975

Year

SOURCE Organization for Economic Cooperation and Development International Iron and Steel Institute

Table 117.— Percent Raw Steel Continuously Cast

————

Country 1969 1975 1977 1978

United States . . . . . . . . . . 2 9 9.1 11.8 15.2a

Japan. . . . . . . . . . . . . . . . . 4.0 31,1 40.8 50.9b

Canada . . . . . . . . . . . . . . . . . 11.8 13,4 14.7 20.2

West Germany . . . . . . . . . . . 7.3 24.3 34.0 38.0

France. . . . . . . . . . . . . . 0.6 12.8 23.6 27.1

Italy . . . . . . . . . 3.1 26.9 37.0 41.3

United Kingdom. . . . . . . . . . 1.8 8.4 12,6 15.5

U.S.S.R. . . . . . . . . . . . . . . . . . – 6.9 8.3 –

aAlSl has reported that for the first half of 1979 the full Industry usage rate was

161 percent bA lower value of 46.2 percent has been reported by the International Iron and

Steel Institute, presumably this figure iS for calendar year 1978 while the 509

percent figure iS for Japanese fiscal year 1978 (April 1978. March 1979) and IS

indicative of the rapidly Increasing usage

SOURCES AISI, IISI: Japan Steel Information Center, Iron and Sfeelmaker,

1978

cient capital at favorable interest rates to the

Japanese steel industry .

The most important factor explaining th e

low rate of U.S. adoption of continuous casting is the low rate of new steel plant construction during the past several decades. A sub -

stantial number of small new nonintegrated

steel plants using scrap-fed electric furnaces

(“minimills’”) process all their steel by continuous casting. This segment of the industry,

however, represents onlv about 10 percent of

domestic raw steel tonnage. Data-revealing

the significant differences in continuous casting use among the three main industry seg -

ments and types of plants are given in tabl e

118, Use by integrated steelmaker, just over

9 percent, is far below the nonintegrated carbon steel producers’ use rate of nearly 52

percent. The nonintegrated companies may

soon have the capacity to make 80 percent of

their steel by continuous casting,

The main issue confronting the domesti c

steel industry with regard to greater adoption

of continuous casting is: Can replacement o f

existing ingot casting facilities with continu -

ous casting be justified economically? One integrated steel company, McLouth, replace d

all its ingot casting with continuous casting ,

and another, National Steel, has embarked o n

such a course. By late 1980, National wil l

process 40 percent of its steel in this manner ,

Recently, CF&I Steel Corp. announced its intention to increase its use of continuous casting from 18 to 100 percent by replacing all of

its ingot facilities.
290 . Technology and Steel Industry Competitiveness

Table 118.—Continuous Casting in Segments of U.S. Steel Industry, 1978

Continuously Percent

Raw steel cast (1,000 continuously

industry segment (1,000 tonnes) tonnes) cast

Integrated—carbon steel

Nonelectric furnace. . . . . . . . . . . . . . . . . . . . . 95,048 8,841 9.3

Electric furnace . . . . . . . . . . . . . . . . . . . . . . . . 8,715 2,375 27.2

Integrated—alloy/specialty steelsa . . . . . . . . . . 4,125 680 16.5

Subtotal. . . . . . . . . . . . . . . . . . . . . ., . . . . . . . . . . 107,888 ‘-1 1,896 ‘11 .0

Non integrated

Carbon steels . . . . . . . . . . . . . . . . . . . . . . . . . . 12,274 6,323 51.5

Alloy/specialty steels. . . . . . . . . . . . . . . . . . . . 4,125 680 16.5

Subtotal. . . . . . . . . . . . . . . . . . . . . ., . . . . . . . . . . 16,399 7,003 ‘42.7

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124,287 18,899 15.2

aThe total of 9,096 raw steel tonnage and 1,499 continuously cast tonnage was split between Integrated companies producing

mostly carbon steels and companies considered as alloy/specialty producers

SOURCE. AISI, Including estimates on amount of steel made by integrated companies in electric furnace shops

A 1990 time frame appears realistic for

substantial expansion of domestic continuous

casting capacity, considering the large size of

the domestic industry, the long leadtimes for

construction, the problems of capital availability, and the possible need for Federal

assistance, which would require extensive

congressional deliberation. There is no simple calculation that can determine unequivocally how much continuous casting the domestic steel industry should use. At best, the

feasibility of several possibilities can be examined. It appears that levels of from 25 to 50

percent are feasible and that 50 percent

would be necessary to achieve even minimum

competitiveness on the international market.

The 25-percent level has been suggested in

several recent analyses of the steel industry.

However, this level reflects nothing more

than extrapolation of the past adoption rate

for the industry to about 1990.

A 50-percent level of adoption of continuous casting is physically achievable in the

United States by 1990; that is, there are no

engineering or technological reasons why this

level could not be attained. OTA calculations

have shown that at this level of adoption the

national yield rate could be increased to at

least 76 percent. * The 50-percent goal can be

supported by the following factors:

●

●

●

●

In 1974, when the domestic industry was

doing exceptionally well, A.D. Little, on

the basis of a survey of industry opinion,

concluded that by 1985 there would be

53-percent use of continuous casting.

The Japanese and U.S. steel industries

are similar enough in product mix and

size to suggest that if the Japanese can

produce 50 percent and probably 70 percent of their steel by continuous casting,

then a level of 50 percent for the U.S. industry is technically feasible.

In a 1979 OTA-conducted survey of steel

industry opinion on future technological

changes, the respondents projected a

U.S. level of 54-percent adoption by 1990

and 74 percent by 2005.

If appropriate Federal policies were designed to stimulate greater conversion to

continuous casting by providing some

means of obtaining the necessary capi-

*The yield of 76 percent may appear to be lower, especially

relative to that of the Japanese, as noted previously; but we

have not assumed any large-scale closing of older U.S. steel

plants, which could increase the base yield for the industry at

the expense of capacity loss.
Ch. 9—Creation, Adoption, and Transfer of New Technology . 291

tal, then it would be economically feasible to obtain the 50-percent use level

(greater details on costs are given below).

One top major steel company executive who

has provided much useful information to the

OTA assessment has suggested feasible targets of 50 percent for 1987 and 70 percent for

1990. Similarly, one long-time steel in

analyst on Wall Street has just sugges

“the U.S. could get to 40 percent by

the money was available. ”

dustry

ed that

1985 if

Economic Benefits of Adopting Continuous

Casting.—The economic justification for replacing existing ingot casting facilities with

continuous casting is not examined; summary

data are provided in table 119. There are two

key areas to be discussed and quantified before proceeding to a calculation of return on

investment: the significance of the increase in

yield with regard to new steelmaking capac-

‘Charles Bradford of hlerrill, Lynch, Pierce, Fenner and

Smith, in an interview in Steelweek, Sept. 24, 1979.

ity; and the direct production cost savings

provided by continuous casting.

With higher yields, a given amount of raw

steel will produce more finished steel and less

scrap. Both are of significance for steel plant

profitability: the first allows capacity expansion at very low capital cost; the second increases reliance on purchased scrap at

prices typically lower than the cost of home

scrap. But what has not been fully appreciated by some U.S. steel industry and policy

analysts is that continuous casting is also an

economical way to increase the steelmaking

capacity of existing plants. Building major

new integrated facilities in the United States

appears impossible under existing or projected economic conditions, and new minimills will still represent relatively small tonnages. The substantial increase in yield from

raw steel to semifinished steel that continuous casting makes possible means that more

steel can be shipped from a given amount of

molten steel.

Table 119.—Economic Costs and Benefits of Adopting Continuous Casting (CC)a

Incr. in CC Incr. in steel Total steel

tonnage Energy shipped shipments New C C

b capital Total CC Deer cost/ Total annual Payback

Percent (thousands Incr. in (thousands (thousands industry cost capital cost incr. profitc

benefit

c c

Return on period

of tonnes) 1 0

12 Btu yield of tonnes) of tonnes) yield ($/tonne) ($ mill.) ($/tonne) ($ mill. ) Investment (years)

25

——

13,42 4 44.1 0.10 1.342 90.16 9 0.73 $44 $ 592 $28 $185 031 ‘

-—– -

3 ?

012 1,611 90,438 073

50 44,496 147.2 0.10 4,450 93,277 0.75

012 5,340 94,167 076

aBase case 1978 CC usage = 142 percent or 17,648,000 tonnes of 124,287,000

tonnes of raw steel production assumed to remain constant, total domestic

shipments = 88,827,000 tonnes, yield = O 715, al I calculations done for

replacement of ingot casting in Integrated (blast furnace. based) plants by CC

bThree levels of capital cost for CC have been used $44/tonne is somewhat

greater than recent expenditures by National Steel for a major facility;

$66/tonne has often been quoted and may be appropriate in those situations

where ingot casting facilties to be replaced have not been fully deprecated or

where more complex shapes are being cast, $88/tonne IS undoubtedly a high

cost estimate but may be realistic for those cases where downstream

finishing facilities must be added to take advantage of Increased capacity

44

66

66

44

44

66

66

66

88

44

44

66

66

44

66

66

88

592

888

888

592

592

888

888

888

1,184

1,962

1,962

2,944

2,944

1,962

1,962

2,944

2,944

2,944

3,925

55

28

55

28

55

28

55

83

83

28

55

28

55

28

55

28

55

83

83

222

185

222

192

237

192

237

281

281

613

736

613

736

638

785

638

785

932

932

038

0.21

0.25 033

0.40

0.22

0.27

0,32

024

031

0.38 021

0.25

0.33

0.40

0.22

0,27

0.32

024

2 7

4 8

4,0

3.1

2.5

4 6

3.8

3.2

4 2

3.2

2 7

4.8

4.0

3.1

2 5

4.6

3.7

3.2

4.2

resulting from a greater yield

cDecreased cost/increased profit (for the increased steel shipped) resultin9

from the hot metal-purchased scrap differential and the normal operating

profit

dTotal annual benefit IS calculated on the basis of a $11/tonne combined sav.

ings for the additional CC tonnage and the product of the Increase in steel tonnage shipped and the hot metal to scrap savings, the latter IS undoubtedly a

crude but conservative estimate of the additional profit resulting from increased yield and capacity. there IS substantial company to company variation

in both hot metal production cost and net income per tonne shipped

SOURCE Office of Technology Assessment
292 ● Technology and Steel Industry Competitiveness

In view of the large amount of capacity lost

to equipment obsolescence and industry contraction, and the steady increase in domestic

steel consumption, an economical way to increase the capacity of existing plants offers

considerable benefits, including the avoidance of increased dependence on imports.

Past experience, such as in 1974, has shown

that import dependence during a period of

tight world supply of steel and sharply escalating prices for imports can be a significant

inflationary factor in the domestic economy.

National security could also be threatened,

because it might be difficult to obtain required steel at any price.

Virtually all current analyses point to considerable shortfalls in capital for the domestic steel industry and a growing demand for

steel in the years ahead. At the same time, the

world supply of steel may be very tight by the

mid- to late 1980’s because of continued contraction of Western European steel industries, insufficient new capacity in Third

World countries to meet their own rapidly increasing demand, and likely insufficient domestic capacity in Soviet bloc nations and the

People’s Republic of China .33

Production Costs, Profits, and Return on Investment.—Although capacity increases from

higher yield are a direct benefit of continuous

casting, increased yield may have a “hidden”

cost that should also be considered: the need

to purchase scrap to substitute for that not

generated by the continuous casting process.

The profit of the additional shipped tonnage

is determined by the ratio of the cost of the

liquid steel (“hot metal”) to that of the purchased scrap; the lower the cost of purchased

scrap relative to in-plant costs to produce the

liquid steel, the greater the profit from the increase in yield and capacity. This ratio is difficult to determine, but from many discussions with steel industry personnel it has

been determined that the cost of hot metal is

‘

] See for example, CIA reports, “World Steel Market—con.

tinued Trouble Ahead,” May 1977; “China: The Steel Industry

in the 1980’s and 1990’ s,” May 1979; and “The Burgeoning

LDC Steel Industry: More Problems for Major Steel Producers,’” July 1979.

typically in the range of $132 to $198/tonne;

and although the price of scrap varies considerably over time, it has generally been somewhat less than $110/tonne.

Another factor to consider is the normal

operating profit that would accrue to the additional steel shipments from the increase in

yield; this operating profit is typically $28 to

$55/tonne. Because of the wide variations in

all cost and profit figures among companies

and among plants of any one company, and

because of a desire to make conservative estimates of returns on investments, three levels

of profits are used —$28, $55, and $82/tonne

—for additional steel shipments gained

through the greater yield of continuous casting; two levels of yield increase are assumed—lo and 12 percent.

Before proceeding to the return-on-investment calculation, an additional profit factor

must be considered: the reduction in production costs for all the steel continuously cast.

The decrease in energy consumption is the

primary source of these production cost savings: 10 years ago, energy was approximately

10 percent of steelmaking costs; today, it is

more than 20 percent. About one-third of the

energy saving from continuous casting for the

domestic steel industry results from reduced

purchases of electricity and fuels, such as

natural gas and oil; the other two-thirds is

from in-plant energy byproducts that can be

put to other productive uses. Because the

price of energy and its contribution to the

costs of steelmaking appear destined to rise,

the future cost-reduction importance of continuous casting will increase. Discussions

with industry personnel indicate that the total reduction in production costs resulting

from reduced energy use, improved labor productivity, and reduced environmental costs is

at least $1 l/tonne cast for a typical plant. For

many plants, it would be two to three times

greater.

Conclusions.— The results of a complete

set of calculations for the return on investment for substitution of continuous casting

for ingot casting in existing integrated plants

are given in table 119. Three levels of capital
Ch. 9—Creation, Adoption, and Transfer of New Technology . 293

costs for the casting equipment have been

used: $44, $66, and $88 per annual tonne capacity. These have been chosen on the basis

of limited published data and extensive discussions with industry experts. Even with

what is believed to be relatively conservative

assumptions, the economic rewards of such a

substitution are substantial. More than a 20-

percent return on investment is likely, although the precise return will be plant specific.

The calculations so far have assumed that

raw steel production remains static at the

1978 level. A 2-percent annual increase in

domestic shipments from 1978 to 1990 would

require additional production of 23.9 million

tonnes of steel. Significantly, the attainment

of a 50-percent level of continuous casting (on

the 1978 capacity base) could supply 5.4 million tonnes of this increase without the need

for additional raw steel capacity, and that

level of continuous casting would also substantially reduce the amount of additional

new steelmaking capacity required to meet

the remainder of the increased demand.

Hence, total capital needs for the industry

would be much lower than for simply adding

new steelmaking capacity.

Most integrated domestic steel companies,

however, have not used their limited amounts

of discretionary capital to install continuous

casting capacity. Instead, their investments

have been for a variety of other purposes:

●

●

●

●

to finance short-range capital projects

with payback periods of 1 to 2 years, including technological improvements that

minimize capital expenditures as well as

implementation times;

to replace old open hearth furnaces with

either basic oxygen or electric steelmaking furnaces, which may give older

plants a better return than continuous

casting would;

to make needed repairs or replace wornout equipment and to comply with regulatory requirements; and

to diversify out of steelmaking in order to

improve profitability or to compensate

for the cyclic nature of the steel business.

The industry also cites other reasons for not

replacing more ingot casting with continuous

casting:

the difficulty of justifying replacement of

operational ingot casting facilities that

have not been fully depreciated;

the costs and difficulties of substantially

modifying an operating plant;

additional capital requirements for

downstream facilities to process increased semifinished steel production;

technical problems with some types of

steels and, in some cases, relatively

small production runs;

difficulties in expediting EPA permits

and costs of other modifications of facilities EPA may demand before granting

construction permits for continuous

casting; and

uncertainties about the degree of competition from imported steel. -

Formcoking

Formcoking is a process that makes blastfurnace-grade coke, of uniform size and quality from low-cost, low-quality “noncoking” or

steam coals. Formcoke has an advantage over

coal-based direct reduction (see ch. 6)

because the process generates valuable coke

byproducts such as coke oven gas. Formcoke

technology has several potential benefits:

●

●

●

●

●

the ability to use less expensive and/or

more available domestic feed coals;

equipment that is less expensive and

more flexible than conventional byproduct ovens;

assurance of high-quality product that

can substitute for conventional metallurgical coke;

lower total production costs than with

conventional methods; and

reduction of pollution in the cokemaking

process.

Many formcoking processes have been conceived in the last 40 years, but none of them
294 Technology and Steel Industry Competitiveness

has yet achieved full commercial operation.

Table 120 lists some processes that appear

promising in the near future on the basis of

technical performance and commercialization status.

A number of steel companies throughout

the world have supported the development of

formcoke technology. The United States led in

the early development, but most of the ongoing development is occurring abroad, particularly in countries that provide significant government support of their domestic steel industries: England, West Germany, the U. S. S. R.,

and Japan. Eight of the ten leading formcoking processes and a score of less advanced

concepts have been developed outside the

United States. Only the FMC Corp. has operated a significant commercial plant producing a formcoke that has been successfully

tested in blast furnaces.

U.S. companies have spent considerable

sums on formcoke development because of inadequate coking capacity. The FMC process

will be evaluated on a demonstration-plant

level by Inland Steel with assistance from the

Department of Energy (DOE). Also supported

by DOE, U.S. Steel has been developing a laboratory-scale “clean coke process” with the

intention of producing a number of other

chemical products, together with coke, from

noncoking coals.

At this stage in its development, the most

important factors limiting the adoption of

formcoke are technical in nature and are concerned with energy use and coke quality. A

recent EPA report noted that:

Although a new process called “formed

coke” has been developed that may meet environmental and OSHA standards, this process is not a panacea because of its high energy input and some uncertainties concerning

its performance in large-scale blast furnaces.34

However, it appears that the FMC process

may meet environmental standards.

Interruptions in coke supply have a significant impact on blast furnace performance, so

operating companies are rightly concerned

about the reliability of this undemonstrated

technology. Another important factor is the

probably lower quality and quantity of byproducts produced by formcoking processes

compared with those produced by conventional byproduct ovens. * In the present period of diminishing energy resources and rising

aromatic chemical values, this possibility

“Environmental Protection Agency, Analysis of Economic A~-

~ects of Environmental Regulations on the Integrated Iron and

Steel Industry, vol. I, 1977, pp. 228-29.

*The FMC Formcoke process can yield a byproduct gas with

an energy content of only 200 to 250 Btu-scf, compared to the

400 to 500 Btu-scf gas produced by a byproduct coke battery.

Table 120.—Ten Most Promising Formcoke Processes

Process Developer Country

FMC formcoke . . . . . . . . . . .

BFL . . . . . . . . . . . . . . . . . . . .

Consol-BNR process. . . . . .

Sapozhnikov process . . . . .

ANCIT process. . . . . . . . . . .

Sumitomo process. . . . . . . .

HBN process . . . . . . . . . . . .

ICEM process. . . . . . . . . . . .

Anscoke process ., . . . . . . .

APCM process . . . . . . . . . . .

FMC Corm. United States

Bergbau-Forschung and Lurgi Mineralotechnik

West Germany

Consolidated Coal Co. with Bethlehem Steel, United States

National Steel, Republic Steel, Armco Steel,

and C. Itoh and Co.

The Ukranian Coking Institute U.S.S.R.

Eschweiler-Bergwerks-Verein West Germany

Sumitomo Metal Industries Japan

Les Houilleres du Bassin du Nord et du France

Pas-d-Calais

ICEM (Romania) Romania

Broken Hill Proprietary Co., Ltd. Australia

Associated Portland Cement Manufacturers United Kingdom

and Simon-Carves, Ltd.

SOURCE A D Little for Off Ice of Technology Assessment
Ch. 9—Creation, Adoption, and Transferor New Technology . 295

may be a major impediment to adoption of

formcoke technology by integated steelmaker. Uncertain capital costs for formcoking

processes make comparisons to conventional

byproduct ovens difficult. The experiences of

the British Steel Co. and Ruhrkohle in West

Germany have demonstrated the high cost of

trying to develop this new technology.

Because of the limited experience in constructing and operating formcoke plants,

their costs are not well known and investments in such technology pose a very real

technical and economic risk.

In addition to these technical concerns, the

abundance of domestic coking coals has given

some domestic steelmaker little reason to be

interested in developing formcoking processes. U.S. steel companies have far less economic incentive to develop formcoking processes than do steel companies in countries

that do not have adequate domestic reserves

of coking coal. A recent OTA survey of steel

industry technical personnel asked respondents to predict the domestic use of several

technological changes in coke manufacture

for the years 1990 to 2005. The major

changes were improved coke oven design,

coal preheating and hot charging, and formcoke. The respondents indicated that the

fraction of coke made with these technologies

in 1990 would be 41, 32, and 10 percent, respectively. There is some indication that

formcoke may not develop quickly, but that

modifications of existing technology will affect the industry substantially within the next

decade. ’5

Steel Mill Waste Recycling

In an average good steel production year,

approximately 11.8 million tonnes of highiron wastes are generated annually. These

wastes are found in flue dusts, mill scale, and

various in-plant particulate. Historically,

most of these wastes have been recycled

within the steel mills, particularly in sinter

plants. Many of these operations are being

curtailed, however, because of environmenWITA, Survey of Technical Personnel, 1979.

tal considerations related to volatile organic

compounds and particulate matter emissions.

Japan is probably the only country in the

world where there is a strong emphasis on recycling those in-plant fines; it has been estimated that the Japanese recycle more than 70

percent of their residues. Environmental

regulations force Japanese steelmaker to

reuse their high-iron dusts. To comply with

the regulations, a Japanese steelmaker may

use the resources of sister companies or form

a joint venture to devise as economical a

processing sequence as possible. The solution

that evolves is a combination of careful

housekeeping with the adaptation of process

equipment borrowed from other technologies.

The know-how acquired is for sale or license,

should other steelmaker be interested in it.

Only in-depth studies can determine

whether any of the commercial fines-recycling processes is profitable on its own or is

the least expensive way to comply with local

environmental regulations. Table 121 summarizes the dust-treatment processes that

are presently available in the United States.

There are three categories of recycling processes:

High-temperature reduction (dezincing

processes). —If inplant fines are brought to

about 6000 C under oxidizing conditions, followed by a reducing action at around 1,000°

to 1,1000 C, lead volatilizes as PbO in the first

stage and zinc volatilizes as metallic vapor in

Table 121. —High-iron Waste-Recycling Processes

Commercially Available in the United States

Commercially operated processes (all in Japan)

● Kawasaki (1968)

. Sumitomo (1975)

. Ryoho Recycle (Mitsubishi and Toho Zinc Aen) (1975)

. Sotetsu Metals (Waelz process, Germany 1925) (1974)

● Lurgi (SL/RN) (1974, Nippon Kokan)

Other potentially competing processes

● Imperial smelting (United Kingdom)

Agglomeration processes at low or moderate temperatures

● Berwind —Reclasource (United States)

. Grangcold—A. B. Granges (Sweden)

● Aglomet —Republic Steel (United States)

● MTU— Pelietech (United States)

SOURCE A D Little for Office of Technology Assessment
296 ● Technology and Steel Industry Competitiveness

the second stage. An hour or two at the higher temperature is usually sufficient to volatilize 95 percent of the zinc present. The vaporized zinc and lead can be recovered as contaminated oxides or, by more sophisticated

processing, can be recovered as metals. The

iron fraction is prereduced to some degree,

but it may or may not be recovered for subsequent reuse in steelmaking.

Agglomeration at low or moderate temperature (nondezincing).—These processes

do not change the chemical characteristics of

the recycled materials. A binder, such as cement clinker, calcium carbonate, or polymerized asphalt, is used to provide the physical

strength needed during handling and furnace

operations. These processes are comparatively cheap, and they produce briquets or

pellets containing all the carbon collected in

the various fines. The blast furnace is the

normal outlet for such products.

Hydrometallurgy. —A number of patents

have been granted on wet-mill-waste-recycling processes. Assignees include private

domestic interests, the U.S. Government, and

foreign interests, A great variety of schemes

have been proposed; there is no commercial

application of any significance today.

Domestic acceptance of steel mill waste recycling will be predicated on mandatory regulations set forth by EPA and State and local

regulators. With its capital so limited, the

steel industry is reluctant to invest in these

types of processing technology and would

prefer that third parties own and operate recycling facilities. Pelletech, Inc., is actively

pursuing this approach, as Reclasource and

Aglomet did in the past. The foreign process

developers are not interested in third-party

arrangements.

By far the most important group of companies who may seek to diversify into this business are the slag processors, who presently

work along with the steel industry. Most steel

plants, with the exception of a few owned by

U.S. Steel Corp. and Bethlehem Steel Corp.,

use a slag processor. Slag processors are

secretive about their business because their

supplies of raw materials are limited to

whatever the steel mills give them and the demand for and prices of their products are limited by the realities of the natural aggregate

marketplace in which the crushed slag competes. Some of the scrap processors have the

financial resources to process steel dust as

well as scrap. Most of the companies are very

protective of their positions with the steel industry, and for defensive reasons they may

want to tie up steelmaking dusts for future

processing, by either themselves or others.

One-Side Galvanized Steel

The most important manufacturing processes for producing one-side galvanized were

developed in the late 1960’s. Significant

quantities of this product have been on the

market only during the last 5 years, and the

future of one-side galvanized as a major steel

product is still far from established. With the

exception of one Japanese steel company, all

one-side galvanized steel is produced by domestic steelmaker.

One-side galvanized steel differs from

other technological innovations examined in

these case studies in that it is a product

rather than a process. In contrast to the

adoption of new process technologies, which

are controlled by the producer or a third party, adoption of a new product is determined in

the United States by the consumer. Although

a producer may offer a new product, it is the

potential purchasers who make the decisions

that determine the extent of its acceptance in

the marketplace. In this case, market concerns about the large quantities of salt used

on pavement in this country led to Detroit’s

interest in a corrosion-resistant, paintable

steel. The call went out from domestic car

manufacturers to steel producers during the

late 1960’s for a steel product coated, preferably with zinc, on one side only, and with the

following performance characteristics:

● resist rusting on automobile surfaces

that are normally exposed to corroding

elements, that is, the bottom of the car;

● accept a highly glossed paint coat, free

of spangles and other imperfections nor-
Ch. 9—Creation, Adoption, and Transfer of New Technology ● 297

●

The

call

really associated with galvanized steel;

and

provide a zinc-free surface so that spot

welders can make strong welds and diminish tip fouling.

steel industry responded quickly to the

for help from Detroit. Existing one-side

galvanizing processes were not considered

economically feasible for producing the massive tonnages Detroit requires, * and the R&D

sections of the major steel firms began a

search for new processes. Each major steel

producer developed its own innovative and

patentable approach to producing one-side

galvanized.

The processes can be grouped into four

general categories: hot dip, differential hot

dip, electrolytic, and a combination of hot dip

and electrolytic. According to the most recent

estimates, the U.S. steel industry in 1978 produced 181,400 tonnes of one-side galvanized

by hot dipping and 317,45o tonnes by electrolytic processes (including hot dip/electrolytic

combinations). These quantities were produced by six independent steel companies. A

list of these companies, including the only foreign producer of one-side galvanized, is given

in table 122.

Steelmaking companies that have successfully adopted one-side galvanized technology

‘one steel producer, Sharon Steel Corp., had been manufacturing one-side galvanized for a number of years for sale to the

automotive industry on a limited basis. Another steelmaker,

U.S. Steel, had developed and pilot tested a one-side process in

the late 1950’s.

Table 122.-Producers of One-Side Galvanized Steel

Company Plant location Process

U.S. producers

Armco Corp.. . . . . . . Middletown, Ohio Hot dip

Inland Steel Co. . . . . East Chicago, Ind. Differential hot dip

National Steel Corp. Portage, Ind. Hot dip/electrolytic

Republic Steel Corp. Cleveland, Ohio Hot dip

Sharon Steel Corp. . Sharon, Pa. Electrolytic

U.S. Steel Corp. . . . . Gary, Ind. Electrolytic

Foreign producers

Nippon Steel Corp. . Japan Differential hot dip

SOURCE A D Little for Office of Technology Assessment

share a number of characteristics. These include the following:

●

●

●

●

●

●

All manufacturers of one-side galvanized are integrated steel producers

who produce diversified lines of steel

products. One-side galvanized represents but one of their many products.

They are mature companies. The producers of one-side include some of the

oldest steel companies in America. The

only foreign producer of one-side, Nippon Steel, is the oldest steelmaking firm

in Japan.

They possess organized R&D programs.

Without these programs, the innovative

processes for producing one-side could

not have been developed as rapidly as

they were.

They possess the capital needed to invest in a new product like one-side without jeopardizing their survival should

the market for one-side galvanized disappear.

They all had close connections with the

automotive industry prior to the development of one-side galvanized. The plants

in which one-side is produced are located in close proximity to automobile

manufacturers.

They were all producers of galvanized

products prior to the development of

one-side and had expertise in zinc-coating applications.

The willingness of company management

to take a risk on an unestablished product appears to have been the most important characteristic behind the adoption of one-side

technology. Even today, the producers of oneside cannot be certain that in 10 years Detroit

will accept one-side galvanized as a manufacturing material. In fact, it would appear that

the domestic automobile industry is beginning

to favor two-side galvanized over one-side because of the increased corrosion protection

two-side offers. Interestingly, each of the producers of one-side galvanized also markets

Zincrometal, a major competitor of one-side,

to minimize the risks associated with Detroit’s uncertain attitude towards one-side.

.— I — - -
298 . Technology and Steel Industry Competitiveness

Unlike process technologies, insufficient

capital has not been important in determining

which companies adopted one-side galvanized steel as a new product. Two categories

of steel companies have not adopted one-side

technology: companies like Bethlehem Steel,

which backed competing products; and companies like the European steelmaker, which

do not feel that the product is worth manufacturing until Detroit firmly decides on the type

of steel product it needs.

An enormous disparity exists between the

rates at which domestic and foreign steel producers have adopted one-side galvanized

technology. Until 2 years ago, only U.S. steel

companies offered a one-side product. The

reason for this disparity can be traced directly to the U.S. automotive industry, which is

the only automotive industry in the world that

demands large tonnages of galvanized steel.

Foreign steelmaker are only partially dependent on U.S. automakers as customers,

and they can afford to wait until Detroit settles its mind before committing capital to new

product ventures. Domestic steelmaker,

much more vulnerable to the current fancies

of the domestic automotive market, could not

afford the possibility of losing their biggest

customer.

With regard to imported cars, only Japanese carmakers rely chiefly on zinc-plated

steel sheets to meet corrosion-resistance requirements, and then only on cars exported to

Canada and the United States. This explains

why the only producer of one-side galvanized

outside of the United States is a Japanese

steelmaker. Nippon Steel first began shipping

the new product to major automotive manufacturers in Japan and the United States

about 1976, and began full-scale marketing of

one-side galvanized steel sheets for automobile use in 1978. Although exact production

figures are not available, it is safe to say that

Nippon’s production of one-side galvanized is

far less than the combined production of U.S.

manufacturers.

Nippon Steel uses a hot dipping method to

produce one-side. While passing through a

molten zinc bath, one side of the basemetal

steel sheet is galvanized thinner than the

other side. After galvanizing, the thinner

coating is mechanically brushed off in a continuous process in order to completely remove

the zinc film and produce a bare steel surface

with adequate roughness. The well-controlled

roughness of the uncoated side ensures excellent paint finish characteristics.

Conclusions From Case Studies

The slow pace of most domestic adoption of

process innovations is primarily a result of

the industry’s financial problems and limited

growth. Both factors have slowed down BOF

construction during the past two decades.

The relatively slow adoption of continuous

casting by the domestic steel industry can be

attributed indirectly to the impact of poor

financial performance and directly to poor

steel industry growth. Construction of continuous casting facilities is best undertaken in

a new steel production facility; retrofitting

existing facilities with continuous casting is

more difficult and more expensive.

The rapid domestic diffusion of AOD technology is attributable to the fact that this

technology is used principally by the alloy/

specialty steel segment. This segment has had

significantly better earnings and far better

financial status than the integrated segment.

Significant production cost reductions

brought about by the AOD process, combined

with a rapid increase in the demand for alloy/specialty steels, also contributed to the

high adoption rate for this technology. The

rapid adoption of one-side galvanized steel

was also unique in several ways. Domestic

steel industry R&D and innovation have always emphasized product development,

which requires far less capital than process

innovations. Furthermore, there was a close

collaboration between steel producers and

the domestic automotive industry, the consumer that represents the single largest market for domestic steel producers.

In addition to limited capital availability,

the relatively old age of steel production

facilities in the United States compared to
Ch. 9—Creation, Adopt/on, and Transfer of New Technology ● 299

those of its principal international competitors has contributed to the slow adoption of

process innovations. Obsolete facilities pose

technological as well as financial problems

for the introduction of innovative technologies within existing plants—the many sequential steps of steelmaking create problems

of coordinating old and new facilities. The

age of domestic mills thus accounts for lags in

introducing continuous casters and is also

cited as one of the principal reasons why millwaste-recycling technology has made relatively modest gains in the United States as

compared to Japan.

Another important factor is that many of

domestic steel producers are unwilling to

adopt innovative technologies unless they

have already had large-scale commercial success. Furthermore, domestic steel mills continue to depend on established methods of

raw material supply. For instance, the historical availability of excellent coking coal has

limited interest in formcoke development, and

historically ample scrap supplies have led to

only marginal interest in waste recycling.

Finally, service industries play a powerful

role in creating and developing new technology and providing it to steel companies. It appears that this dependency is unique to U.S.

steelmaker; many foreign steel companies do

their own design, engineering, construction,

and equipment work.

Technology Transfer

There is very little steel technology transfer from domestic steel firms to other countries, and the technologies that are transferred are mostly related to raw material

handling rather than steel production. To the

extent that domestic steel production technologies are transferred abroad, it is done by

domestic equipment manufacturing and engineering firms. Conversely, Japanese, and to a

lesser extent West German, steel companies

develop and transfer significant amounts of

steel production technologies, equipment, and

facilities to other countries, including the

United States.

From the United States

Earlier in this century, domestic steel companies had a strong role in the transfer of major U.S. steel production technologies to other

steel-producing nations. However, the direction of this technology transfer has been reversed since the end of World War II.

Most of the melting, refining, and ingot

casting technology presently used by U.S.

steel companies had its origin in foreign countries. The only major U.S. process technology

that has been quickly adopted by all domestic

and foreign steel industries is the AOD process, and this domestic technology was transferred abroad, not by a domestic steel producer, but by a manufacturer of equipment.

A large part of domestic steel technology

transfer to other countries similarly takes

place via domestic equipment manufacturers

and engineering firms. In Japan and Europe,

it appears that steel firms that create new

technologies for their own use are the principal channels for subsequent technology

transfer. Tables 123 and 124 summarize the

channels of technology transfer to and from

the United States as perceived by U.S. steelmaker.

There is some technology transfer from the

United States to foreign nations by domestic

Table 123.—Channels of Steel Technology Transfer

Between the United States and Japan

Type of channel Percentage use

Cross-licensing/licensing . . . . . . . . . . . . . . . 20

Engineering/design firms. . . . . . . . . . . . . . . . 15

Steel producers. . . . . . . . . . . . . . . . . . . . . . . . 40

Retro engineering . . . . . . . . . . . . . . . . . . . . . 5

Suppliers of manufacturing equipment . . . . 10

Technical papers. . . . . . . . . . . . . . . . . . . . . . . 5

All others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

aRefers to indirect access to foreign technology; no direct purchase available

Information IS used to duplicate technology

SOURCE Survey of U S steel executives by Sterling Hobe Corp for OTA.
300 ● Technology and Steel Industry Competitiveness

Table 124.—Channels of Steel Technology Transfer

Between the United States and Other Nations

Except Japan

Type of channel Percentage use

Cross-licensing/licensing ., . . . . . . . . . . . . . 30

Engineering/design firms. . . . . . . . . . . . . . . . 30

Steel producer. . . . . . . . . . . . . . . . . . . . . . . . . 5

Retro engineering. . . . . . . . . . . . . . . . . . . . . . 5

Suppliers of manufacturing equipment . . . . 15

Technical papers. . . . . . . . . . . . . . . . . . . . . . . 2

All others . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

SOURCE Survey of U S steel executives by Sterling Hobe Corp for OTA.

steel mills. However, available data suggest

that such transfer is not substantial. Recently, two major domestic firms, U.S. Steel and

Bethlehem, have been holding discussions

about the export of U.S. steel technology to

China, but no sales had been concluded as of

1979.

A major investment for scaling-up an innovative process is often required before its potential applicability and profitability can be

fully demonstrated and foreign sales made.

This is a large obstacle in the U.S. steel industry, with its low rates of new plant construction and lack of capital for demonstration plants. Government capital assistance

may be the only way by which process development can be sustained by the industry.

Experience with the electroslag remelting

(ESR) process illustrates the economic constraints that tend to limit domestic technology

innovation and transfer. The ESR process

was invented in the United States during the

1930’s and 1940’s and became commercially

successful around 1966. This process gained

little domestic recognition until a U.S. Air

Force agency investigated the special claims

a Soviet research laboratory made for ESR.

The Air Force awarded a 4-year ESR manufacturing technology development contract

for less than $500,000 to Carnegie-Mellon Institute during the early 1960’s. The attention

that was focused on the ESR process and the

prompt dissemination of pertinent information to various segments of the industry resulted in an explosive growth in use of the

ESR process. U.S. capacity for ESR steels

climbed from 5,442 tonne/yr to more than

163,260 tonnes—close to Soviet capacity levels—between 1965 and 1977. *

Interestingly, neither the original inventor

nor the company supporting the work received any benefits from ESR process growth

in the United States, because the rights to this

technology had been sold prior to its initial

commercialization in 1965, The technology is

presently owned by the Pullman-Swindell

Corp. —an engineering, consulting, and manufacturing conglomerate. Pullman is now in

the process of acquiring certain Soviet ESR

process rights and licenses for marketing in

the United States. Thus, a U.S. investor company will be marketing in the United States

the Soviet refinements of a technology originally invented and developed here. However,

eventual success of the Soviet ESR technology

is far from certain. Thus far, the Soviets have

had only modest success in transferring this

technology on a worldwide basis, mainly because of their inability to provide proof of the

economic viability of the technology.

The domestic steel industry has strongly

protested the loans the U.S. Export-Import

Bank (Eximbank) provides to foreign competitors to buy domestic steelmaking technology.

Many U.S. steelmaker are concerned about

the Bank’s willingness to finance steel expansion abroad, arguing that low-interest rates

are permitting unreasonable investment in

unneeded steel capacity, which results in unfairly traded steel exports to the United

States. In response to such concerns, the

Bank has noted that such loans are needed

because they generate U.S. exports and domestic jobs—especially for firms selling technology. According to John L. Moore, president

and chairman of Eximbank:

The net positive economic impact in just

the steel products area is over 4,000 manyears of U.S. labor. These employment figures become even more positive when the favorable impact from the related exports of

U.S. coal and spare parts are added.36

*In 1965. domestic ESR steelmaking capacity was limited to

5,442 tonnes of annual production, all of which was used by

one company in the Pittsburgh area, compared to 181,400

tonnes of annual ESR capacity in the Soviet Union.

“American Banker, Oct. 22, 1979, p. 2.
Ch. 9—Creation, Adoption, and Transfer of New Technology . 301

Domestic equipment makers have had opposite concerns about Eximbank loans for the

construction of steel plants abroad. Thes e

companies have asserted that inadequate export financing causes domestic firms to lose

sales of technology abroad. The Bank’s position has been that lack of price competitiveness, rather than inadequate export financing, has been the principal factor responsible

for limiting technology exports. Along these

lines, Bank representatives have noted that:

We found that most of the cases lost were

awarded to foreign firms because the American exporter was not competitive in th e

price offered. In 51 of our recent “lost offers,” the U.S. product was priced out of the

running. In fewer than 10 percent of th e

cases did inadequate financing appear to be

the reason for losing the bid—and most of

those were lost against “foreign aid type” financing .

A distinct handicap for U.S. exporters of

technology is the inability of the Bank to finance loans to certain nations undergoing

substantial steel industry expansion, including the People’s Republic of China and the Soviet Union. Eximbank representatives commented on the resulting decline in U.S. competitiveness in technology exports:

U.S. firms, however, are constrained from

competing in certain key countries of the

world, mainly the People’s Republic of China

and the U. S. S. R., because competitive financing by Eximbank is not yet available to those

countries. As a result, the Japanese and the

Germans, particularly, have taken advantage of early entries into those countries and

have concluded contracts of major proportions to provide technology and equipment,

financed by low-interest rate loans . . . Except for the sale of technology to the Russians by one of the three U.S. producers having expertise in making that particular type

of steel, the United States has evidently lost

out on all the potential equipment and engineering sales . . . [and also on] the longer

term benefit of actual experience of building

the most modern silicon steel plant anywhere. 38

i Ibid.

‘“Testimony of I). E. Stingel, Director, U.S. Export-Import

Bank, before Senate Subcommittee on International Finance,

Nov. 19, 1979.

By Foreign Industries

Unlike the United States, most foreign

steel-producing nations, even those with

small steel industries such as India or Austria, practice aggressive transfer of their

steel technologies. The undisputed leader is

Japan.

Japan

Most major Japanese steel companies are

engaged in steel technology transfer as well

as some design and construction. These companies have well-established ties with West

German, British, Austrian, Swedish, and U.S.

companies engaged in technology transfer

projects through licensing, equipment manufacturing, and joint project efforts. The Japanese steel industry, working in partnership

with the Japanese Government, has sold its

steel technology on a global basis more successfully than any other country. *

The Japanese, who move technologists to

other countries to put their projects in place,

are motivated by the need for technology exports to compensate for the loss of steel export markets. They are also aware of the

need for access to raw materials. The sacrifices made by individuals engaged in such

ventures are well rewarded by the companies

they serve and by society in general. Time

spent overseas on technology transfer projects is viewed as a service to the country, and

the Japanese are proud of their contributions

to world technology and to the welfare of

their own country.

Commenting on international steel trade,

the general manager of Kawasaki Steel’s international department has noted that “We

realize that we cannot continue to export

large amounts of crude steel. Therefore, the

industry is putting emphasis on exports of

technology, to countries like China, Brazil,

and those in Southeast Asia." 39 The assimila-

*The success of this Japanese strategy is shown by the fact

that in 1975 their steel industry’s technology exports were

almost twice as great as imports [a positive balance of 5,800

million yen a year or $24 million at 240: 1). This probably has

improved greatly in recent years,

W’, Dahlby. “Japan Seeks a Long-Term Strategy for Prosperity, ” Far Eastern Economic Review, Aug. 25, 1978, p, 45.
302 Technology and Steel Industry Competitiveness

tion of designs and technical know-how from

different sources has enabled Japanese companies like Nippon Kokan, IHI, Hitachi, Daido

Steel, and Mitsubishi to provide the most

modern plants to developing countries. The

LDCs, in turn, promote the construction of

steelworks using the electric furnace process

or integrated steelworks employing the BFBOF process or DR-EAF process, with their

technological choices dependent largely on

prevailing domestic conditions, such as size

of steel demand and existence of natural resources.

There appears to be little concern that

Japan is cutting its own throat by selling technology that will strengthen developing countries’ production capacities:

Steelmaker are selling basic technology

while improving their own technology for the

production of more sophisticated items such

as large-diameter steel pipe and higher quality crude steel.

Even so, how long can the Japanese maintain

their technological lead? The Kawasaki executive replies that:

There are no major technological breakthroughs on the horizon for the next 10 to 15

years. Now we are only involved in a fairly

sophisticated rounding out process by raising the productivity per worker, but there is

a limit.40

The search for raw materials and energy

has also stimulated Japanese steel companies, in partnership with their government

and other companies, to launch an aggressive

compensation-trade program based on barter

with developing countries. A number of such

projects are presently underway in the Middle East, Brazil, Indonesia, and several other

developing countries (table 125), and Japan is

aggressively pursuing the exchange of steel

technology for Mexican oil. In the Japanese

steel industry, the guiding philosophy is to

beef up divisions handling design and to win

contracts in developing countries by offering

package deals, including technology licensing, feasibility studies, construction, and en-

*’Ibid.

Table 125.—Major Japanese Steel Technology

Transfer Projects Involving Barter Trade

Abu Dhabi—A Government-Kawasaki Steel ioint venture

steel plant; $4 billion.

.

Qatar— Kobe Steel 20°10, Tokyo Boeki 10°/0, balance local

for Midrex DR and mini steel plant; $980 million.

Nigeria— Kyoei Saiko and Nissho-lwai, joint venture DR and

ministeel plant; reportedly $440 million.

Saudi-Arabia-Petromar DR plant; ownership: Italy, Marcona 40%, Estel 25%, Japan (Nippon Steel) 25%, United

States (Gilmore Steel) 1OO

/O; investment, unofficial, $950

million. Project reorganized recently to include Korf

Group.

Sudan— Kyoei Seiko joint venture mini steel plant; $250 million.

Tunisia—C. Itoh (Japan), Korf Industries (West German),

and Government of Tunisia; Midrex DR plant; investment

figures unavailable.

Morocco—Kawasaki Steel 12.5%, Konematsu Goshu

12.5%, balance local; ministeel plant; $200 million.

Iran— DR plant at Bandar Abbas; Japanese participation: C.

Itoh, Marubeni, Mitsubishi, Kawasaki Steel. A

compensation-trade venture for over $800 million.

Indonesia —Ministeel plant; financial investment by C. Itoh

74%, technology by Kowasaki steel 6%, balance by private Indonesian capital. A compensation-trade venture

for approximately $300 million.

Greece—Hellenic Steel; C. Itoh and Co. (Japan) 25°/0 and

Estel (Netherlands) 20%; investment unavailable.

Brazil-Siderurgica Brasileira; Nippon Steel 490/.; Japanese

investment over $1.8 billion —Usiminas; Nippon Steel

19%; investment unavailable.

SOURCE: OffIce of Technology Assessment

gineering advice. By selling the experience

gained in building their own highly efficient

industry, Japan’s major steelmaker are hoping to make up for the export markets they

have lost through increased competition and

the relatively slow growth of demand in industrialized nations.

Nippon Steel serves as a good example of

Japan’s commitment to steel technology export.41 About 10 percent of its sales are technology sales, and the company has promoted

the development of steel production in LDCs

in particular. It recognizes LDC interest in

“U.S. Steel Corp. has recently signed a 3-year contract with

Nippon Steel for technical aid. “The contract with Nippon is

U.S. Steel’s third, and by far the most extensive, call for help

from abroad, Although most other domestic steelmaker have

been getting help from foreign steel companies for years, Wall

Street analysts and industry insiders have long suspected U.S.

Steel of harboring a corporate arrogance that led it to ignore

foreign technological developments. But the extent of the new

contract with Nippon confirms that LJ. S. Steel is prepared to

scour the world for the best steelmaking technology available. ”

(Wal) Street JournaJ, Feb. 14, 1980.)
Ch. 9—Creation, Adoption, and Transferor New Technology ● 303

such matters as the use of domestic resources, the role of a strong steel industry in

accelerating the growth of steel-consuming

industries, and foreign currency savings. As

of early 1979, Nippon Steel’s overseas engineering activities had extended to 37 nations,

85 firms, and 285 projects.42

Kobe Steel has also accelerated its technology sales efforts. It has improved the quality

of its overseas activities, stepped up information exchange, and expanded the scope of its

activities from mere product sales to investment, procurement, plant construction, and

management and operation guidance. The

company employs qualified personnel and

gives them language training in special

schools or sends them to schools in foreign

countries. Moreover, it exchanges personnel

with foreign companies and accepts foreign

trainees, 43 Kawasaki Steel Corp. ’s technology

exports in 1978 contributed only 5 percent of

the company’s business, but it expects to increase them to 10 percent within 5 years.44

Japanese steel firms are also increasing

their technology trade with China, whose

modernization plans offer an obvious market

for Japanese exports. Under a long-term

trade pact signed early this year by Tokyo

and Peking, Japan will export roughly $10 billion worth of plants and construction machinery to China during the next 10 years. The

biggest single export project involved is a $3

billion deal for Nippon Steel to build a 5.4-million-tonne/yr steel mill in Shanghai, due for

completion in 1980.45

West Germany

German steel technology has penetrated

both the industrialized and developing countries. Important coke-producing, ironmaking,

steelmaking, and metals-working technologies have originated in West Germany and

spread to different parts of the world. West

German technology transfer methods are as

“’Nippon Steel News, January 1978,

“Kobe SteeI Report, January 1979.

“’’Kawasaki Steel: Using Technology as a Tool to Bolster Export, ” Business Week, Jan. 29, 1979, pp. 119-20.

‘iSteeJ Week, Oct. 23, 1978.

varied as the countries served. Technology

sales have traditionally been pursued by

West German industry and government in a

highly competitive manner, using technologies developed through the active participation of the West German academic and research communities.

The West German Government offers substantial incentives in the form of loan guarantees of up to 90 percent for the export of steel

technology and equipment to developing

countries. Intergovernmental agreements are

actively sought and implemented on a compensation-trade basis. Such barter agreements usually last from 5 to 10 years and

have provided for the establishment of entire

steel plant complexes in India, Brazil, Iran,

Argentina, Venezuela, and Mexico. West

German credits extended in India during the

past 12 years have exceeded $1.32 billion, to

Iran $0.8 billion, to Brazil $1.63 billion.

West German steel plants and equipment

construction companies have comprehensive

agreements for technical cooperation with

Japanese companies engaged in similar ventures. Often such cooperation overlaps with

technology agreements with U.S. and British

builders of steel-melting and metal-working

equipment.

Several West German companies are currently engaged in the export of steel technology. Europe’s largest steel group, Thyssen,

has a joint venture with Armco Steel in West

Germany, and it owns the Thyssen Purofer

direct reduction (DR) process, through which

it has interests in DR plants in Iran and Venezuela. The Thyssen Group also controls the

Dortmund-Horder degassing process, which

is used in U.S. and Japanese steel industries.

The United States has received a number

of steel-related technologies from West Germany. West German technology entered the

United States during the 1960’s mostly in the

form of licenses, know-how, and personnel

exchange. During the 1970’s, successful

West German corporations established joint

ventures, limited partnerships, and even

operating companies in the United States for
304 ● Technology and Steel Industry Competitiveness

timely transfer of steel technologies. The

West German company of Laybold-Heraeus

opened manufacturing, sales, and service

subsidiaries in the United States during the

1960’s; it has aggressively pursued the application of vacuum technology to solve a host

of steelmaking problems, as well as steel

treating and steel protection. In cokemaking

and allied coal technology, Koppers Co. in

the United States has good access to West

German technology through cross-licensing

agreements with Lurgi.

Another entrepreneurial West German

steel company spreading its technology to the

United States is the Korf Industries Group.

This firm formed the Midrex Corp. in the

United States, and has successfully promoted

the Midrex DR process, developed originally

by an American company. The Korf Group

has successfully promoted minimills in the

Untied States based on the use of scrap and

DRI. Korf also has projects in Iran, Trinidad,

Tunisia, and the U.S.S.R. for the installation

of Midrex DR plants with capacities ranging

from 227,000 to over 590,000 tonne/yr.

Demag is the leading German builder of

complete metallurgical plants and equipment,

and it enjoys a worldwide reputation. It has

excellent working relationships with U.S.

companies, such as Mesta, Wean United, and

Blaw-Know, and the technology transferred

by Demag is reliable and up-to-date. Demag

also cross-licenses and shares its engineering

know-how with American builders of rolling

mills, forging presses, and other steel plant

equipment. International cross-licensing and

technology-exchange practices prevailing in

metallurgical equipment building make it

very difficult to assess the actual monetary

values of such technology transfers.

Austria

Austria sits between the East and West in

Europe, and receives steel-processing technology from both sides. It often serves as a

“window” for Western industries to observe

and assess steel technology developments in

Eastern European countries, including the

U.S.S.R.

The Austrian steel industry originated the

BOF steelmaking process and made it available to several of the world’s steel industries.

This technology was the forerunner of the

present-day basic oxygen steelmaking process and of recent variations such as the QBOF.

Austria received technology transfer revenues from the United States of about $26 million during 1978. In turn, Austria has received less than $1 million worth of steel-related technology from the United States.

The major Austrian steel technology exporter is Voest-Alpine. This governmentowned steel conglomerate is well-known

worldwide for its plant design, engineering,

and construction expertise. Voest-Alpine has

established joint ventures with other European partners in the United States (the Louisiana-Bayou Steel Corp.), Turkey, India,

Brazil, Argentina, Colombia, and Iran. Other

Voest companies have many technology licensing arrangements with the U. S. S. R.,

Czechoslovakia, Hungary, South Africa, India, and the United States. Dravo Corp. of

Pittsburgh is the principal holder of Voest licenses for steel process technology in the

United States. The technology portfolio of

Voest-Alpine claims to have more than 1,500

patents related to steel technology.

United Kingdom

There are no barriers to technology transfer between the United States and the United

Kingdom. Steel company interests on both

sides are engaged in acquisitions and joint

ventures for technology transfer and market

shares for products. Until about 5 years ago,

British engineers and technologists, with advanced technical and industrial skills, had

complete freedom to find employment in the

United States, so advanced steel technology

transfer to the United States occurred largely

through the mass movement of highly qualified and experienced engineers. Except

through this source, the United States has not

received any major steel technology from the

United Kingdom during the last two decades.
Ch. 9—Creayfon, Adoption, and Transfer of New Technology ● 305

Many large British companies are engaged

in integrated steel technology transfer. Davy

Ashmore has recently completed steel technology transfer projects in the United States,

Mexico, and Sweden. The company recently acquired complete control of Arthur G.

McKee Co. of Cleveland, a well-established

design, engineering, consulting, and construction company. This acquisition seems to have

strengthened both the technology base of

Davy Ashmore and the financial base of Arthur McKee.

Guest, Keen and Nettleford (GKN) has recently increased its engineering and technology transfer activities. The company is well

established, with steel technology transfer

projects in West Germany and in Australia

through its interest in John Lysaght, an integrated steel producer. At present, GKN and

John Lysaght are under the umbrella of Australia’s biggest company, the Broken Hill Proprietary Co. (BHP). BHP also owns Peabody

Coal Co. in the United States, and this ownership includes West German and Japanese interests under the name of Theiss Campier

Mitsui Coal Pty Ltd. This arrangement provides all parties involved with good access to

the latest British, West German, U. S., and

Japanese technologies related to coke, iron,

steel, and transportation,

India

Moving away from an emphasis on domestic self-sufficiency, India has emerged during

the past 5 years as an exporter of steel, By

the end of this century, India plans to export

annually 9.1 million to 13.6 million tonnes,

The steel industry in India has made considerable progress in technology and is now

self-reliant, Countries in the Middle East,

Africa, and Southeast Asia are looking to India for major technical support for the development of metallurgical industries. The Steel

Authority of India has established one of the

largest consultancy and engineering organizations in Southeast Asia, with more than

1,700 trained engineers and specialists in

various disciplines. This agency, named Metallurgical and Engineering Consultants (India) Ltd. (MECON), is rendering services at

home and abroad in the development of integrated steel mills, alloy/specialty steel plants,

raw materials preparation and agglomeration, sponge iron and DR plants, and other

chemical and metallurgical plants. MECON

has know-how licensing agreements in the

United States, the United Kingdom, West Germany, Czechoslovakia, Sweden, East Germany, and Japan. *

Another Indian consulting organization, M.

N. Dastur and Co., has gained a considerable

international reputation for its expertise in

preparing feasibility and project reports.

This company is advising governments and

private industries in Venezuela, Brazil, Colombia, Libya, Iran, Saudi Arabia, Nigeria,

Yugoslavia, and the developing countries of

Southeast Asia. MECON and the Dastur Co.

jointly plan and implement metallurgical and

chemical industrial plant development with

technology that is purchased from overseas

services, then “repackaged” and marketed to

developing countries. Both organizations

compete with similar organizations from industrialized countries for projects in any part

of the world.

India has reportedly received steel technology transfer income in excess of $6 million

since 1975. Raw technology purchases by India from the United States during the last 5

years reportedly amounted to $14.5 million

for 69 agreements. West Germany has 413

collaboration agreements with India in the

steel technology sector, 114 of which are joint

ventures, with the West German industries

holding more than 40 percent equity interest.

All these projects have been initiated since

1971.

Summary Comparisons

Technology transfer plays a critical role in

determining the technological competitiveness among steel industries. Moreover, as

*Personal discussions of OTA contractor Dr. K. Bhat with

Mr. R. Dave, Manager, Bombay Office of M. N. Dastur and Co.,

Ltd.
306 Technology and Steel Industry Competitiveness

steel export markets are lost to expanding in- tria, the United Kingdom, and India are given

digenous industries, technology sales deter- in table 126. Generally, the nations that are

mine to an increasing degree the economic most successful in steel technology transfer

success of these industries. Nevertheless, have supportive government policies and

there is a dearth of detailed information on steel companies that have strong R&D prosteel technology transfer. Summary descrip- grams and pursue technology transfer as an

tions of steel technology transfer in the integral part of their operations.

United States, Japan, West Germany, AusTable 126.—Features of Technology Transfer in Different Nations

Role of technology

transfer in steel Type of technology Salient aspects of

Country industry transferred Role of Government technology transfer

Japan. . . . . . . . . . . . . . . Integral part of most

major steel companies. Supplement

to steel experts.

West Germany . . Moderate. German

equipment and construction companies

active.

Austria . . . . . . . . . . . . . Strong in State-owned

steel company.

United Kingdom. . . . . . Slight. Mostly in

design/engineering/

construction companies.

India . . . . . . . . . . . . . . . Strong in State-owned

industry.

United States. . . . . . . . Moderate. A number of

design/engineering/

construction firms

are active.

Basic ironmaking and

steel making.

Strong in secondary

finishing and heat

treatments. Direct

reduction.

Steel making.

Basic ironmaking and

steel making.

All phases.

Strongest in raw materials processing and

steel products.

Strong—provides plan- Consists of all soft and

ning, advice, financing.

Strong, assists with

financing.

Strong because of

ownership of steel

industry.

Minimal.

Strong because of

ownership of steel

industry.

Minimal.

hard transfers, including construction and

advice.

Strong and complex

associations with

foreign design/engineering construction

companies.

Very aggressive in Third

World Western and

Eastern sections.

Weak because of declining steel industry.

Very aggressive in

Asian, Middle Eastern, and African

LDCs.

Strength lies outside of

all but a few large

steel companies.

SOURCE Office of Technology Assessment
Capital Needs for M

CHAPTER 10

odernization

and Expansion
— —

Contents

Page

summary ● . . * *, *, . * ., .,, ., * * * *,, **.*..* 309

Three Ways to Modernize and Expand

Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 310

Capital Requirements for Modernization and

Expansion .*. **. *.**, .,. *a******..,.. 313

Unit CapitaI Costs for Modernization. . ......314

Comparison of Capital Cost Estimates. .. ....315

Scenarios for Expansion . . . . . . . . . . . . . , .. .316

Differences in Modernization Results , .. ....318

Differences in Expansion Results. . . . . . . .. ..322

Differences in Lower Spending Scenarios, .. .322

Total Capital Needs and Shortfalls . . . .. ....322

Capital Needs . . . . . . . . . . . . . . . . . . . . .. ....322

Capital Availability . . . . . . . . . . . . . . . . . . . . .323

Capital Shortfalls in the OTA Scenario .. ....325

International Capital Cost Competitiveness ., 325

List of Tables

Table No. Page

127. Change in Steel Equipment Cost Index

Versus Other Cost and Price Indexes . . 310

128. Cost or Price Increases Required by

Integrated Greenfield Expansion . . . . . 313

Table No.

129. AISI and OTA Assumed Increases in

Domestic Steel Use and Reduction in

Imports, 1978 and 1988 . . . . . . . . . . . . .

130. Integrated Carbon Steel Plant Capital

Cost Estimates for New Shipments

Capacity. . . . . . . . . . . . . . . . . . . . . . . . .

131. Capital Costs for Nonintegrated Carbon

Steel Plants. . . . . . . . . . . . . . . . . . . . . . .

132. Unit Capital Costs for Replacement and

Expansion in Integrated and Electric

Furnace Plants. . . . . . . . . . . . . . . . . . . .

133. Eight Scenarios for Expansion and

 Modernization Strategies and Annual

Capital Costs for Actual Shipment

Increases . . . . . . . . . . . . . . . . . . . . . . . .

134. Capital Cost Estimates for Major

Facility Replacements, 1978-88—

Scenario F . . . . . . . . . . . . . . . . . . . . . . .

135. Projections of Annual Capital Needs. . .

136. Average Annual Capital Sources and

Uses . . . . . . . . . . . . . . . . . . . . . . . . . . . .

137.1968-79 Real Dollar Changes in

Profitability and Common Stock

Performance for Selected Steel

Companies . . . . . . . . . . . . . . . . . . . . ., .

138. Estimates of Capital Costs for the

United States, Japan, and a Developing

Nation. . . . . . . , , ... , , . . . . . . . . . . . . .

Page

313

315

315

316

317

319

319

323

324

326
CHAPTER 10

Capital Needs for Modernization

and Expansion

Summary

The U.S. steel industry has a record of relatively low levels of capital expenditures, This

record has been coupled with a history of decreasing capacity, decreasing technological

competitiveness, very modest gains in productivity, and aging facilities. The industry frequently cites inadequate capital as the most

critical barrier to the greater adoption of new

technology, but the real issue is what its capital spending buys in terms of new technology

and new capacity.

Although the industry’s capital spending

has had a downward trend during the past

two decades in terms of real dollars spent on

productive steelmaking facilities per tonne of

steel shipped, it is also cyclical, Peaks occur

every 7 to 8 years, and they follow peaks in

net income by 1 or more years, The industry

uses increasing amounts of capital for nonsteel expansion activities and continues to

distribute relatively large cash dividends to

stockholders, even when sales and profitability are depressed.

There are three routes to revitalizing the

technological base of the industry: modernization and replacement; roundout or

“brownfield” expansion of existing facilities;

and new plant or “greenfield” construction.

OTA’s analysis of the minimum modernization and capacity expansion needs for the

coming decade indicates that a cost-effective

approach is to maximize the use of roundout

expansion at existing integrated plants and to

construct more electric furnace steelmaking

facilities, particularly in nonintegrated companies producing a limited range of products.

The high capital costs of greenfield integrated facilities based on the best available

technology are not sufficiently offset by reduced production costs. This situation may

change eventually if major technological

changes are applied to integrated steelmaking.

The American Iron and Steel Institute

(AISI) estimates that it will require $4.9 billion’ annually to modernize and expand steelmaking capacity. OTA calculates that modernization and expansion could be achieved

by spending approximately $3 billion annually over the next 10 years followed by large expenditures for new integrated facilities in the

1990’s. The industry scenario increases capital spending for productive steelmaking by

150 percent over the past decade’s average;

the OTA scenario increases it by approximately 50 percent. The AISI and OTA scenarios agree that approximately $2.2 billion annually will be needed for meeting regulatory

requirements, nonsteel investments, and

other increases in working capital. Total capital spending is thus $7.0 billion annually by

industry estimate and $5.3 billion by OTA calculations.

Given the basic assumptions of this analysis, such as increased steel shipments and,

hence, increased total revenues, to what extent can the industry meet its own capital

needs? The industry has not provided an

analysis of capital formation and cash flow.

The OTA analysis of capital sources and

needs points to a capital shortfall of at least

$600 million annually through 1988, assuming 1978 levels of profitability, dividends, and

nonsteel activities are maintained. This is

considerably less than the deficits projected

by the industry analysis. If modernization and

expansion lead to a modest 2-percent saving

*Unless otherwise noted. all figures in this chapter are in

1978 dollars.

309
310 . Technology and Steel Industry Competitiveness

in production costs, then by 1988 return on OTA finds that the international capital

equity could increase from the 1978 level of cost competitiveness of the domestic steel in7.3 percent to about 12 percent, and could dustry has suffered relative to Japanese and

provide a basis for more vigorous industry European steelmaker. Some reasons for this

growth and expansion in the years beyond. are outside the control of the industry, but

The same reduction in production costs, other factors, such as design and equipment

coupled with a Federal policy that added ap- supplier choices, are within its control.

proximately $600 million to the industry’s

cash flow, would increase the return on equity to almost 15 percent.

Three Ways to Modernize and Expand Capacity

Inadequate capital has probably hampered

the adoption of new technology by the domestic steel industry. The rate of capital spending has declined during the last two decades,

from an average of $36.3/tonne shipped during 1959-68 to $27. l/tonne during 1968-78. ’

But this is not the entire picture. During the

1950-78 period, there was a cyclical pattern

to the industry’s capital spending, with peaks

occurring every 7 to 8 years. Thus, in 1952,

1960, 1967, and 1975, the respective levels

of capital expenditures were $45.9, $43.0,

$46.4, and $40.5/tonne shipped. The spending

peaks correspond to replacement rates of

about 4 percent, compared with the more typical replacement rates for the past several

decades of 2 or 3 percent. The peaks in capital spending follow peaks in net income by 1

or more years.2

A more fundamental issue is not when the

capital spending occurs or even its level, but

the extent to which it produces new technology and new capacity in the industry. Because the costs of steelmaking equipment and

facilities have risen faster than the general

ID. F. Barnett, “Capital Requirements for Modernization,”

Atlantic Economic Conference, October 1979. These values are

for productive steelmaking and exclude spending for regulatory needs and nonsteel activities,

‘Cyclic capital investment linked to cyclic profits has been

cited as a cause of underinvestment, “As a result of this cyclical investment policy, the industry has not been able to replace

its high-cost, outdated, inefficient, steelmaking capacity as

fast as was necessary to remain competitive with foreign producers. ” (R. S. Thorn, “The Trouble With Steel, ” Challenge,

July-August 1967.)

level of inflation, capital expenditures buy

less today than before. Table 127 compares

changes in the steel equipment cost index

with changes in other price and production

cost indexes. Nominal inflation, shown by the

consumer price index, has been less than that

for equipment, energy, and labor costs indexes. Steel prices have increased at a lower

rate than capital equipment costs but not

significantly so for the past 5 years. This

slowdown in equipment cost increases may

be due to greater use of foreign-produced

capital equipment, which has generally become available in the U.S. market at considerably lower costs than from domestic equipment manufacturers. Also, relatively low levels of replacement and plant additions may

have reduced domestic demand for capital

equipment and discouraged price increases.

As capital spending declined following the

1975 peak, so did domestic steel capacity.

Table 127.—Change in Steel Equipment Cost Index

Versus Other Cost and Price Indexes

Ratio for Ratio for

Index 1978- 1965 1978 – 1973

Steel equipment costa

. . . . . 2.79 1.95

Consumer Price Index. . . . . 2.07 1.47

Steel price index . . . . . . . . . 2.61 1.90

Steel industry wagesb . . . . . 3.19 1.86

Metallurgical coal . . . . . . . . 7.28 3.26

Electrical power. . . . . . . . . . 2.71 2.11

—— aFrorm World Steel Dynarnamics, April 1979, derived from ECSC data through 1976

and estimated by WSD thereafter bBased on dollars per hour includlng fringe benefits, from the U.S. Department

of Labor
Ch. 10—Capital Needs for Modernization and Expansion ● 311

From 1977 to 1979, about 6.35 million tonnes,

or 4 percent, of total raw steelmaking capacity was lost. The loss would have been greater

were it not for considerable increases in electric furnace steelmaking capacity in bot h

integrated and nonintegrated companies ,

which partially offset the closing of older integrated plants. Today’s production capacit y

is about the same as it was in 1960, Because a

significant percentage of steelmaking facil -

ities are obsolete (see ch. 4), it is likely that in

the near term, when demand for steel is ex -

pected to decline as a consequence of a gen -

eral economic slowdown, the closing of olde r

and obsolete plants will continue or increase ,

Steel capital spending is generally for th e

purposes of modernization, brownfield, o r

greenfield expansion. These terms maybe de -

fined as follows :

Modernization. —Traditionally, spending in

this category has been directed at replacin g

unusable and wornout equipment in order t o

maintain the operating capacity of a plant .

The terms maintenance and replacement ar e

also used. A point of confusion is whether

capital spending in this category is associated with capacity expansion. Some analyst s

assume that capacity does not increase whe n

facilities are modernized, maintained, or re -

placed, Although it is true that these expenditures are not primarily intended to add ca -

pacity , improvement s in technology an d

equipment design do result in increased ca -

pacity, generally because of higher yields; the

replacement of ingot casting with continuou s

casting is an important example of such in -

creases (see ch. 9). Also significant is the fact

that with newer facilities it is possible to

operate a plant at higher sustained rates o f

capacity utilization .

Because most steelmaking equipment i s

long-lived, it is reasonable to assume that by

the time it is replaced, the new equipment,

representing newer technology, will be mor e

productive than the old. Thus, replacement i s

likely to involve capacity increase, unless a s

an economy measure the new equipment i s

selected purposely to keep capacity stable. In

some cases, however, the capacity increas e

that new equipment makes possible may apply only to a particular step of the steelmaking process; it does not necessarily affect

capacity for the entire plant and canno t

always increase steel shipments from tha t

plant. Steelmaking is a sequential process ,

and plant capacity levels will be constraine d

to the lowest capacity link in the sequence .

But generally, capital spending for modern -

ization either leads to significant improve -

ments in capacity or sets the stage for future

expansion by removing individual “bottle -

necks” in the production process .

Roundout or Brownfield Expansion.—These

terms have been used to describe capita l

spending that has as its main purpose in -

creasing capacity in the total steelmakin g

operation. Both roundout and brownfield ex -

pansion occur on the site of an existing plant.

One type of roundout is the installation o f

higher capacity equipment at one or more o f

the “bottleneck” steps that limit capacity fo r

the whole plant. In some cases, plants ar e

constructed and designed so as to anticipat e

future roundout; when roundout does occur,

it is an add-on expansion, rather than a re -

placement. Brownfield expansion is a form o f

roundout, usually on a large scale, that in -

volves better balancing of individual opera -

tions than a simpler roundout .

3 A radica l

form of brownfield expansion, theoreticall y

possible but apparently not used or contem -

plated, is the tearing down of an existin g

plant and the construction of a new plant o n

the same site .

The chief limitation of roundout as a means

of increasing capacity is that the basic tech -

nology and layout of a plant are maintained .

Roundout costs less per net increase in ca -

pacity than new plant construction, but ther e

will usually be fewer improvements in productivity and efficiency of inputs. A plant designed from the ground up, on the other hand,

may use new types of equipment throughout

and be designed to realize economies of scale.

New plants also allow optimizing geographical location when markets and sources of

‘J. C. Wyman, “The Steel Industry: An American Tragedy?”

Faulkner, Dawkins, and Sullivan, February 1977.
312 Technology and Steel Industry Competitiveness

raw materials have shifted. For example, access to major waterways is more importan t

today than in previous decades, becaus e

more use is being made of domestic iron ore s

located far from major centers of steelmakin g

and ports of entry for imported ores .

The exact capacity increase that roundou t

makes possible is a significant issue. A Ford -

ham University study in 1975 estimated that

roundout could expand capacity for finishe d

steel products by 11.8 million tonnes .

4 Inlan d

Steel estimated that roundout potentiall y

could expand product capacity by 14.5 mil -

lion tonnes ,

5 and its chairman has said tha t

rounding out can satisfy the industry’s grow -

ing needs, presumably at current import an d

demand growth levels, through the 1980’ s

without the need to build new plants .6 T h e

chairman of National Steel has indicated tha t

by 1985 roundout expansion could lead to a

net increase of 4.5 million to 5.4 millio n

tonnes of product capacity, assuming that the

current rate of plant closings continues .

7 T h e

chairman of Bethlehem Steel has noted that

his company’s 4.5-million-tonne/yr plant at

Burns Harbor, Ind., was designed to accommodate expansion to 9.1 million tonnes. 8 A n

A. D. Little study based on extensive interaction with the industry stated that:

Our calculations of capital requirement s

to achieve capacity expansion were based on

our assessment of the types of facilitie s

needed to add 40 million tons of capacity

from the beginning of 1975 to 1983. We have

assumed conservatively that this expansion

could be achieved largely by “rounding out”

of plants rather than building more expensive, new “greenfield” plants. The industry

anticipates that 40 percent of this growth in

capacity will be realized from the installa -

tion of new facilities, and that the balance

will be accomplished by the modernization or

“rounding out’ of existing facilities. 9

‘Fordham University, “Financial Study of the U.S. Steel Industry, ” August 1975.

‘W. H. Lowe, “Capital Information in the Steel Industry, ”

Proceedings of Steel Industry Economics Seminar. .41S1, March

1977.

‘Fortune, Feb. 13, 1978, p. 129.

‘industry Week, June 11, 1979, pp. 186-188.

“Ibid.

“’Steel and the Environment: A Cost Impact Analysis, ” A. D.

Little, May 1975.

This study estimated that roundout expansion

could produce 21.8 million tonnes of raw steel

or 16.3 million tonnes of product capacity, a

figure confirmed by at least one other study;

1 0

a third study resulted in rather large esti -

mates of 27.2 million tonnes of product capac -

ity expansion for the United States and 36. 3

million tonnes for Japan .

ll

Greenfield Expansion.—This type of expansion involves building a new steel plant on a

site not previously used for steelmaking. It i s

the highest cost approach to capacity expan -

sion, especially if capital cost estimates fo r

greenfield integrated plants include the cos t

of raw materials processing capacity. (Ther e

appears to be a consensus that the prope r

methodology is to include such costs, because

that capacity is an integral part of the plant;

given a choice, OTA capital cost estimates include the costs of raw material processin g

capacity. )

It is accepted that greenfield expansio n

provides the greatest opportunities for in -

stalling optimum new technology and plan t

layout and offers maximum production cos t

savings. These advantages, however, usuall y

will not offset the large capital costs. Tabl e

128 shows several comparisons of greenfiel d

to roundout expansion. There is agreemen t

that greenfield expansion cannot be justified ,

either on the basis of the price necessary t o

obtain an acceptable level of profitability o r

in terms of the net increase in costs. The case

of energy conservation exemplifies this con -

clusion: by spending $1 l/tonne on retrofi t

equipment, a steel company could save 1. 1

million Btu/tonne; a greenfield replacement of

the same productive facilities could save 8

times that much energy, but it would cost a t

least 120 times as much to accomplish .

l 2

Given current policies and price levels, th e

capital and financial costs are too high rela -

tive to the benefits from the best available integrated steelmaking technology to favo r

greenfield expansion .

‘(’E. Frank, quoted in Industry Week, May 15, 1978.

“H. G. Mueller, “Structural Change in the International

Steel Market, ” Middle Tennessee State University, May 1978.

“Iron Age, Nov. 12, 1979, p. 40.
Ch. 10—Capita/ Needs for Modernization and Expansion ● 313

Table 128.—Cost or Price Increases Required by Integrated Greenfield Expansion

(dollars per tonne)

Greenfield

Source Comparison basis Greenfield Roundout difference

Marcus a ‘

- Price-1 3°/0 return on equity 1st year $541 $356 + $185

midlife 431 333 + 98

price- 12% discounted cash flow,

36% debt midlife 526 366 + 160

Republic Steelb

Price-15% return on investment NA NA + 165

COWPSc Manufacturing costs 573 396 + 177

Mueller d Manufacturing costs 473 396 + 77

NA = Not available

aP. Marcus, ‘Steeling Against Inflation, ’ Mitchell, Hutch Ins, May 1977.

b.W.J DeLancey, C.E.O. New York Times, June 181979

cCounciI on Wage and Price Stability “Prices and Controls in the U S Steel Industry, ” 1977

dH.G. Mueller Structural Change in the International Steel Market, Middle Tennessee State University, May 1978

An excellent example of how roundout can

be far more cost effective than new plant construction is the following case of blast furnace modifications. U.S. Steel Corp. pai d

$100 million for modifying a s-year-old blas t

furnace because it had failed to reach its de -

signed capacity of 5,900 tonnes of iron daily;{

with the modifications it is expected to pro -

‘“rhe ~~{1~] Street Journal, F’eb, 14, 1980.

duce 6,800 tonnes daily. Assuming that 80

percent of the capacity has been reached ,

that the new furnace will operate 300 days /

yr, and that the yield from blast furnace iron

to finished steel is 70 percent, the cost of new

finished steel capacity is just over $11 l/an -

nual tonne. This is less than 10 percent of the

cost per tonne for a green field integrated facility.

Capital Requirements for Modernization and Expansion

Calculating future capital requirements

necessitates making a great number of as -

sumptions about supply, demand, and uni t

costs, AISI has recently made a major stud y

of capital requirements in the steel industry.

14 

OTA believes the AISI study assumptions ar e

reasonable and has used those assumption s

and designed its scenarios so as to be com -

parable with the AISI study. Both studies project capital requirements for the perio d

through 1988, using 1978 as the base year.

Domestic steel consumption is assumed t o

increase by approximately 1.5 percent pe r

year. This is a conservative forecast, whic h

under present economic conditions appear s

valid, although it is conceivable that an eco -

nomic turnaround in the next few years and a

period of major capital spending throughou t

industry could push consumption significant-

“AISI, “Steel at the Crossroads:

dustry in the 1980’s,”’ 1980.

The American Steel Inly higher (see ch. 5). The projected tonnages

of shipped steel for 1988 and the actual tonnages for 1978 are given in table 129. There

is a net increase of 17.2 million tonnes of domestic shipments during the 10-year period .

It is also assumed that imports account for 15

percent of domestic consumption throug h

1988, as compared to 18 percent of domesti c

consumption in 1978. This is a critical as -

sumption, which depends on a combination of

Government policies and foreign economi c

conditions and choices. If appropriate condiTable 129.—AISI and OTA Assumed Increases in

Domestic Steel Use and Reduction in Imports,

1978 and 1988 (million tonnes of shipped steel)

1978 1988

Domestic shipments . . . . . . 89 106

Exports ., . . . . . . . . . . . . . . . 2 3

Imports . . . . . . . . . . . . . . . . . 19 18

Domestic consumption. 106 121

——.-—. . . —

SOURCE OffIce of Technology Assessment

.,
314 ● Technology and Steel Industry Competitiveness

tions do not prevail, imports could rise substantially above the assumed 15-percent level

before 1988 (see ch. 5).

AISI’s capacity expansion figures are for

net capacity increases; that is, capacity reductions at the current rate of decline (2 percent per year) are more than offset by increases stemming from the modernization

program. Capacity utilization is assumed to

increase from the 86.8 percent that prevailed

in 1978 to an average of 90 percent in 1988.

This is technically feasible, and perhaps conservative. 15 During the past 2 years, there

have been sustained periods of capacity utilization well over 90 percent—during 1979,

for example, the average operating rate was

more than 93 percent from March through

mid-July. 16 Nevertheless, 90-percent utilization

of capacity would increase steel shipments by

3.3 million tonne/yr.

AISI further assumes that modernization

will improve the total yield of the steelmaking

process from the present 71.5 to 77 percent

by 1988, which will provide another 7.1 million tonnes of shipments per year. OTA finds

this assumption quite realistic if the industry

substantially increases its use of continuous

casting and makes other improvements. AISI

assumes that continuous casting will increase

from the 15-percent level in 1978 to 45 percent in 1988. OTA believes that 50-percent

use of continuous casting is feasible and

would increase industry yields to 76 percent.

The 10.3-million-tonne total increase in actual steel shipments obtained through replacement of facilities in the AISI analysis is

attributed to neither roundout nor brownfield

expansion, but rather to modernization. Personal communication with AISI personnel indicated that they refer to their modernization

program as brownfield expansion accom-

“Worid Steel Dynamics (April 1979) indicates that in 1978

domestic effective or available capacity was 92 percent of

rated capacity, and for 1971-76 it was 95 percent.

lbAmerican Metal Market, Jan. 4, 1980, P. 3.

“’’Benefits of Increased Use of Continuous Casting by the

U.S. Steel Industry, ” OTA technical memorandum, October

1979.

plished in a piecemeal fashion, which leads

eventually to the equivalent of construction of

new plants. Four examples of the replacements in AISI’s modernization program are

the replacement of older blast furnaces with

larger and more efficient modern ones, the

replacement of all existing open hearth steelmaking furnaces with electric furnaces and

basic oxygen furnaces on an equal tonnage

basis, the replacement of ingot casting with

continuous casting, and the replacement of

one-half of existing coking capacity with new

ovens. These examples do not appear to be

consistent with previous use of the term

“modernization’ within the industry, but

they are consistent with past definitions of

roundout activities. ’8 However, the unit capital costs of the AISI modernization program

are higher than most estimates for rounding

out.

Unit Capital Costs for Modernization

Data on roundout and greenfield unit capital costs for integrated plants from a number

of sources in addition to AISI are given in

table 130. The table shows that the average

of the capital cost estimates from a number of

sources is in excellent agreement with the

values used by AISI, although the AISI value

for roundout is higher than all but one of the

other estimates. In the table all dollar figures

for years prior to 1978 have been converted

to 1978 dollars by the use of gross national

product (GNP) implicit price deflators for

nonresidential investment as provided by the

U.S. Bureau of Economic Research. For both

roundout and greenfield costs, there is no significant difference between estimates for

1975 and those for the past 2 or 3 years. This

indicates that it is not necessary to adjust

costs to take into account the increase in the

steel equipment cost index, and the AISI analysis does not use such an adjustment to account for the lower purchasing power of in-

“’’’While rounding out usually connotes an expansion of existing facilities, obviously’ the same logic applies to modernization through replacement of facilities in place.’” (Council on

Wage and Price Stability, “Prices and Costs in the U.S. Steel Industry, ” October 1977.)
Ch. 10—Capital Needs for Modernization and Expansion ● 315

Table 130.—lntegrated Carbon Steel Plant

Capital Cost Estimates for New Shipments Capacity

(1978 dollars/tonne of capacity)

Source Year Roundout Greenfield

A. D. Littlea 

. . . . . . . . . 1975

Fordham b . . . . . . . . . . . . 1975

COWPSC . . . . . . . . . . . . . 1976

U.S. Steeld . . . . . . . . . . . . 1976

Marcus e. . . . . . . . . . . . 1976

Inland Steelf . . . . . . . . . . 1977

Mueller g. . . . . . . . . . . . . . 1978

Republic Steelh. . . . . . . . 1979

Average . . . . . . . . . . . .

(Standard deviation).

AISII 

. . . . . . . . . . . . . . . . . 1980

AISI—on actual

shipment basis (90

percent of capacity) . . 1980

$628

880

710

NA

630

520

715

372

636

(160)

743

825

$1,296

1,474

1,502

1,220

1,514

956

1,210

1,367

1,317

(190)

1,287

1,441

NA = Not available

aA.D. Little, “Steel and the Environment A Cost Impact Analysis,” 1975, these

estimates appear to Include a relatively small amount of nonintegrated mills

b

Fordham University, “Financlal Study of the U S Steel Industry,” 1975

Council on Wage and price Stability, “ Prices and Controls in the U S Steel lndIndustry Week, Apr 15, 1976, P 11

eP Marcus, ‘Steeling Against Inflation, ” Mitchell, Hutch Ins, May 1977

fW H Lowe, vice president for finance, “Capital Formation in the Steel Industry, ” Proceedings of the Steel Industry Economics Seminar, AISI, 1977.

gH G Mueller, “Structural Change in the International Steel Market, ” Middle

Tennessee State University, May 1978

hW J Delancey, C E O , New York TimeS, June 181979

‘AISI, “Steel at the Crossroads The American Steel Industry in the 1980’ s,”

1980, and personal communication that greenfield cost was $430/tonne of actual shipments and operating rate was 0.9, and that the roundout costs although

not called that are indeed of that nature even though they are Iisted in the expansion category

vestments during the period of the forecasting.

Comparison of Capital Cost Estimates

Capital cost estimates from a number o f

sources for greenfield plants of noninte -

grated companies and the AISI figure fo r

electric furnace facilities are given in tabl e

131.* Here too, there is no indication that ,

other than using the GNP deflator, an adjustment is necessary due to a more severe in -

crease in the equipment cost index. The rela -

tively large variation among the estimates for

nonintegrated steelmaker is due to rathe r

large differences in their product mixes. I n

several cases, the plants have been designe d

to make higher grades of steels and products ,

and thus their capital costs are greater tha n

*The much lower costs in table 131 as compared to table 130

result largely from the absence of facilities to convert iron ore

to metallic iron. Instead, ferrous scrap is charged to electric

steel making furnaces.

Table 131 .—Capital Costs for Nonintegrated Carbon

Steel Plants (Greenfield) (1978 or 1979 dollars)

cost Annual

(dollars product

per tonne capacity

Dollars capacity) (tonnes)

Fordham Univ.a

. . . . . . . . 1978 $278 NA

Chapparal Steel Cob . . . 1979 320 450,000

Huron Steel Co.C

. . . . . . . 1978 220 225,000

Bayou Steel Cod. . . . . . . 1979 211 550,000

Raritan Steel Co.C

. . . . . . 1978 207 450,000

North Star Steel Co.e 

. . . 1979 193 350,000

Florida Steel Co.f . . . . 1979 157 300,000

Chapparal Steel Co.g . . . 1979 165 NA

Nucor Corp.h. . . . . . . . . . 1979 154 300,000

Average . . . . . . . . . . . . 212

AISI (apparently for

broader product

mix of integrated

companies)l

. . . . . . . . 1979 545

NA = Not available

a

Fordham Unlversity, “Financial Study of the U S Steel Industry, ” 1975

bAmerican Metal Market, Dec 7, 1979 (for a plant to produce more complex and

costly products such as plates and structural beams)

clron and Steel Engineer, February 1978 (for a plant to produce special quality

bar products)

dIron Age, Apr 23, 1979

eAmerican Metal Market, Oct 4, 1979 (for a plant to produce special quality bar

products)

fAmerican Metal Market, Nov 21, 1979

gW W Winspear, president, Chapparal Steel, September 1979

hAmerican Metal Market, Aug 5, 1979

IAISI, “Steel at the Crossroads The American Steel Industry in the 1980’s”

1980, and personal communication that the categories of electrical furnace

facility expansion corresponded to a green field plant

the traditional nonintegrated plant, which

emphasizes the production of such simple

products as reinforcing bar. The average cost

of $21 l/tonne for the nonintegrated plants is

markedly less than the AISI figure of $544/

tonne .

One reason for the higher cost figures o f

AISI may be that they are based on electri c

furnace steelmaking in integrated companies .

These companies generally have higher capital costs than nonintegrated companies, be -

cause they produce a broader line of prod -

ucts than do nonintegrated companies; thi s

diversity requires extensive forming and fin -

ishing facilities that the electric shops of nonintegrated companies do not normally have .

The AISI analysis apparently assumes tha t

the nonintegrated companies will not expan d

capacity in the future; however, considerin g

the recent rapid growth of nonintegrate d

steelmaker (see ch. 8), this is a questionabl e

assumption .
316 ● Technology and Steel Industry Competitiveness

Table 132 shows the unit costs and plant

mix used in the AISI analysis and the equiv -

alent figures used in the OTA scenario. Fo r

integrated and nonintegrated plants, OT A

used the averages given in tables 130 an d

131, and for the electric furnace facilities o f

integrated plants, the AISI costs. For th e

replacement program, OTA has also used th e

25-percent electric furnace fraction in inte -

grated plants. OTA has assumed no replace -

ment of facilities in nonintegrated companies ,

because these plants account for only 10 percent of present total capacity and most are

relatively new. The higher cost alloy and specialty plants are omitted explicitly in both the

OTA and AISI calculations. These plants ac -

count for only about 3 percent of domestic capacity, and they have been modernizing an d

expanding during the past several years an d

appear to have excess capacity. Thus, no sig -

nificant error will be introduced by excluding

them from this 10-year projection and analysis .

Table 132.—Unit Capital Cost for Replacement and Expansion in Integrated and Electric Furnace

(Integrated and Nonintegrated) Plants (1978 dollars per tonne)

Replacement Expansion

Average Integrated ——-–Gr~e~f!e~d-– ---- Average

Integrated EF (int.) (25% EF) roundout EF (int.) EF (non int.) (50% EF)

AISl b

Actual shipments. . . . . $1,293 $550 $1,100 $825 $605 NA $677

Capacity. . . . . . . . . . . . . 1,164 495 990 743 545 NA 644

OTA

Actual. . . . . . . . . . . . . . . 1,320 550 1,128 708 605 $234 564d

Capacity. . . . . . . . . . . . . 1,188 495 1,015 638 545 211 508d

Actual. . . . . . . . . . . . . . . 459e

Capacity. . . . . . . . . . . . . 413e

NA = Not available reduction plant Beggs has forecast an increase of about 25 million tonnes of

aUsing the AlSl procedure of replacement = 0.9 X greenfield costs direct reduced iron in the United States by 1985 and a total of $2 billion for capbAlSl, “Steel at the Crossroads The American Steel Industry in the 1980’s.” ital spending on direct reduction plants for the period 1980-90 Assuming that

1980 $1 billion IS used to obtain the 25 million tonnes, the capital cost per tonne of

CActual shipments = 0.9 of shipment capaCltY DRI IS about $330 (1978 $) It is more realistic to assume this increase in dod50% nonintedgrated; 25% electric furnace Integrated; 25% intewatecf mestic DRI production and the predicted 73 million additonal tonnes of prode100% nonintegrated with the $413/tonne cost obtained as follows: assuming ucts made in electric furnaces for the 1978-88 period of the OTA forecast This

50% @ $275/tonne, 25% @ $440/tonne, and 25% @ $660/tonne for plants pro. corresponds approximately to about one-quarter of the additional electric furducing higher quality/cost products on a capacity basis The justification for nace steelmaking using direct reduction (D Beggs, ‘ Issues and Answers on

the $660 cost IS as follows Half IS for the steel plants and half for a direct the Future of Direct Reduction in the U S ‘33 Metal Producing, January 1980.)
Ch. 10—Capital Needs for Modernization and Expansion ● 317

Table 133.—Eight Scenarios for Expansion and Modernization Strategies and

Annual Capital Costs for Actual Shipment Increases (million tonnes/year)

—- Modernization/replacement Expansion — .—.. .—

Net annual Total annual

Cost/Year tonnaqe Cost/year capital costs

Capacity

affected a

4.0%

(billions

of 1978$)

$4.4

increase Tonnage

by 1988 increase

10.3 6.9 –

Cost/ (billions

tonne of 1978$)

(billions

Cost/tonne of 1978$)

AISI b . . . . . . $1,100

OTAc

$715 $0.5 $4.9

2.9

2.6

3.2

2.1

3.0

3.1

3.7

6.8 6.9

3.5

564

708

564

564

708

564

708

464

459

0.4

0.3 )

0.4

0.4

0.3 I

0.4

0.3 }

0.3

0.3

Scenario A

Scenario B

2.0

2.0

98.9

1,128

1,128

25

2.2

2.2

2.5

10.3 6.9

6.8 {

6.9

3.5 Scenario C

6.8 {

6.9

3.5 Scenario D . . . 2.0

98.9

4.0

708

28

708

1.4

2.7

2.8

Scenario E . . .

Scenario F

Temple, Barker, &

Sloane, 1975-83d

10.3 6.9

10,3 6.9

75.3 28 2.1 0 29.9 464 1.6

aEither a small fraction of currentt capacity can be replaced at a relatively high cost per tonne, or an alternative methodology is to assume a smaller per tonne spending

level on the entire capacity base

bAISl Steel at the Crossroads The American Steel Industry in the 1980’ s,’ 1980

cThe OTA scenarios incorporate the following assumptions

Modernization Expansion

A 200. replacement rate at cost Similar to AISI, operating rate at 90°. = 33 million 69 million tonne/yr from OTA variable

tonne/yr yield increase = 35 millilon tonne/yr (1/2 AISI value) plant mix and 35 million tonne/yr

from integrated plant roundout

B Same as A except obtatain same 103 million tonne/yr as AISI at one-half the cost, 69 million tonne/yr form OTA variable

justified on basis of costs for five types of facilities replacement plant mix

C Based on historical spending rates a cost per average tonne of actual shipment for Same as A

1979.88 levels to A results

D 2% replacement rate using roundout cost for Integrated plants giving results of A Same as A

E Cost per tonne from TBS study based on process step analysts gives AISI result 69 million tonne/yr using TBS

(10.3 million tonne/yr) expansion cost

F 4% replacement rate at Integrated plant round out cost gives 10.3 million tonne/yr 69 million tonne/yr from 100%

nonintegrated plant expansion

dTemple Barker and Sloane Analysis of Economic Effects of Environmental Regulations on the Integrated Iron & Steel Industries, 1977

procedure are used (i.e., based on 90 percent

of greenfieId integrated costs). The expansion

program is the same as in scenario A.

OTA scenario E uses the unit costs and

methodology of the Temple, Barker, and

Sloane (TBS) study19 for the modernization

and expansion programs.

OTA created scenario F in order to include

a scenario that represents a major change in

the structure of the domestic steel industry,

yet a change consistent with minimal capital

requirements. In this scenario, all expansion

occurs in nonintegrated companies. This

could happen even if the nonintegrated companies merely doubled their total annual tonnage by 1988, not an unrealistic possibility

(see ch. 8). However, this rate of nonintegrated company growth would likely entai l

place in both nonintegrated and integrated

electric furnace steelmaking and in nonelectric integrated steelmaking (greenfield for the

former and roundout for the latter). In scenario A, to compensate for the lower capacity

increase from modernization, an additional

expansion of capacity corresponds to more

integrated roundout.

In OTA scenario C, modernization is based

on a capital spending average applied to the

total steelmaking capacity base, rather than

some part of it; and unit capital cost of

$25.3/tonne is derived from historical data.

The expansion program is the same as that

for scenario A.

In OTA scenario D, the modernization program is based on roundout costs for integrated plants, applied to one-half the capac -

ity base used in the AISI analysis—this in

contrast to OTA scenarios A and B, in which

the higher unit costs analogous to the AISI

“’remple, Barker, and Sloane, “Analysis of Economic Effects

of Environmental Regulations on the Integrated Iron and Steel

Industry, ” Environmental Protection Agency, July 1977.
318 . Technology and Steel Industry Competitiveness

capital cost increases for plants to make

higher quality steels and more complex products; a small fraction of plants might even

introduce direct reduction facilities to supplement scrap use after 1985. Thus, in this

scenario unit capital costs increase from

$211/tonne of shipment capacity to $412 in

1988. The modernization program is based on

roundout of integrated facilities or replacement of specific facilities as discussed in the

next section.

Interestingly, the total annual capital costs

are quite close to each other in all six OTA

scenarios, ranging from $2.1 billion to $3.2

billion per year and averaging $2.8 billion. All

are less than the AISI figure of $4.9 billion

per year. Scenario F is considered the most

important option for the next decade.

Differences in Modernization Results

For the modernization category, an important difference between some of the OTA possibilities and the AISI approach is the unit

capital cost. AISI used a relatively high modernization cost, $1,100/tonne, applied to a

large base, an annual average of 98.9 million

tonnes of shipments. The OTA estimates were

based on lower unit costs consistent with past

trends for roundout, which are lower than

those for modernization. This lower unit cost

is applied either to the same capacity tonnage

base as is the AISI case, assuming a 4-percent replacement rate, or to half this tonnage,

which results in markedly lower annual capital expense. The AISI method leads to an annual modernization cost of $4.4 billion, the

largest single contribution to its estimated

total annual capital needs. All the OTA modernization scenarios lead to additional capital costs of between $1.4 billion and $2.8

billion per year. While the OTA modernization program at $2.8 billion annually might

suffice for the 1980’s, there would be a need

in the 1990’s for large investment in new integrated facilities.

The lower estimates for modernization in

the OTA methods are consistent with past

per-tonne spending and the capacity expansion that resulted from that spending. For the

past 10 years, the average annual industry

capital spending on productive steelmaking

(excluding regulatory costs and nonsteelmaking activities) was just over $2 billion. The industry maintains that this level of spending

has been inadequate. During that period,

however, very high operating rates were attained for sustained periods. Moreover, there

were also very large increases in the use of

continuous casting, continued replacement of

open hearth furnaces with basic oxygen furnaces, and substantial increases in electric

furnace steelmaking. The favorable effects

these changes had on capacity were masked

to some degree by the loss of capacity from

closing obsolete plants. But what has evolved

is more efficient capacity than before, capable of operating at higher rates with lower

production costs.20

A more explicit way of obtaining modernization capital needs is to consider the actual

costs for replacement of particular technologies and phases of steelmaking. Using several categories of technologies discussed by

AISI, OTA has estimated total modernization

needs for scenario F (table 134). The total for

the 10-year period is $28 billion.

This total compares to $44 billion in the

AISI scenario. A discussion with AISI officials and industry representatives’ provided

detailed information on the anticipated uses

of capital for the AISI scenario that was not

provided in the formal AISI report. Although

AISI and industry representatives agreed

with categories one through four of table 134,

a major difference existed for category five,

replacement of finishing mills. For this use,

AISI used a cost per tonne of $550 applied to

~t~he effectiveness of past capital spending has been underestimated by most analysts. For example, “The recent plant

closings have created a widespread impression of general

decrepitude. But the steel industry has been extensively modernized since 1960, with capital expenditures totaling $3o billion. The best proof of its health is that the industry has managed, after all, to hold on to most of the business in the world’s

least protected major steel market, and has survived until now

without special government favors. ” (E. Faltermayer, “HOW

Made-in-America Steel Can Survive, ” Fortune, Feb. 13, 1978. )

ZIMeeting on Mar< 13, 1980 with representatives of U.S. Steel

Corp., Inland Steel, Bethlehem Steel, and AISI.
Errata Sheet

The reference on page 319 to table 135 was a typographical error. It should

have read table 134A. Table 134A was omitted and appears below.

Table 134A. -Capital Costs for Finishing Mill Replacement, Scenario F, 1978-88

Type of finishing mill

Unit capital costs

10-Year capital

percent 1978 Approximate average annual costs for mill

(1978$/tonne output) capacity shipments affectede

replacement

Hoga n

a T B Sb OTAC

replacedd

Percent Tonnes (106

r —-—— ) (1978$ billions)

Plate. . . . . . . . . . . . . . . . . . . . . . . . . ‘-” - - ‘ -- “ “”-

. , .

.- .-

Hot strip. . . . . . . . . . . . . . . . . . . . . .

Cold strip. . . . . . . . . . . . . . . . . . . . .

Wire rod. . . . . . . . . . . . . . . . . . . . . .

Galvanizing . . . . . . . . . . . . . . . . . . .

Heavy structural . . . . . . . . . . . . . . .

Rod, . . . . . . . . . . . . . . . . . . . . . . . . .

Seamless pipe. . . . . . . . . . . . . . . . .

Other . . . . . . . . . . . . . . . . . . . . . . . .

Weighted average. . . . . . . . . . . . . .

Assuming 75-percent facility

availability y and 20-percent

additional replacement . . . . . . . .

$310

95

na

na

528

186

396

na

$288

100

321

713

561

514

na

$297

330

660f

462

550

220

495

4409

$1.3

.3

1.8

.3

.8

.3

1.4

$312

45 10 10

17 17

29 19 19

17 3 3

9

15g 5 5

20g

17 17

15g

4 4

15 16

Total. 100 98

22

7.0

$418 26 11.0

na = not available.

aW. T. Hogan, et al., Financial Study of the U.S. Steel Industry, Department of Commerce, August 1975, baaed on company interview.

bAttributed to Temple, Barker, and Sloane as given in P. Marshall, Report to the Council on Wage and Price Stability, World Steel Trade: Current Trends and Structral

Problems, Hearing, House Ways and Means Committee, Sept. 20, 1977.

cOTA has used this value to calculate costs, as baaed on data of Hogan and TBS end other available information.

dAmount over 25 yers old according to AISI, Steel At The Crossroads: The American Steel Industry in the 1980's, 1980.

eUsing product mix for 1978 se reported by AISI and rounding off.

fThis may be highly overestimated since a new wire rod steelmaker (Raritan Steel Co.) has recently constructed an entire new steel plant for approximately $220/tonne

capacity, only half of which is likely to be for finishing.

gAssumed by OTA on the basis of both generally available information and confidential information from industry Sources.
Ch. 10—Capital Needs for Modernization and Expansion ● 319

Table 134.—Capital Cost Estimates for Major Facility (Technology) Replacements, 1978-88—Scenario F

Approximate

Approximate 1978 tonnage affected

Approximate cost capacity changed (annual million Total capital cost

Change per tonnea (1978 $) (percent) tonnes) . (billion 1978$)

1. Replacement of older, s-mall blast furnaces with

larger modern ones . . . . . . . . . . . . . . . . . . . . $110 250/. 27 $ 3

2. Replacement of open hearth furnaces with

basic oxygen furnaces . . . . . . . . . . . . . . . . . . . . 55 100 18 1

3. Replacement of ingot casting with continuous

casting . . . . . . . . . . . . . . . . . . . . . . . 88 35 32 3

4. Replacement of old coke ovens with new ones . 220 50 27 6

5. Replacement of old finishing mills with new

ones (in integrated plants) . . . . . . . . . . . . 418 26 25 11

6. Replacement of old electric furnaces . 83 33 9 1

7. Raw materials and miscellaneous . . . . . . . . . . . — — — 3

Total cost ., ... . . . . . . . . . . . . . . . . . . . . . . . . $28 -

aObtained from- discussions with Industry personnel news reports on plant construction, and by using data in “Analysis of Economic Effects of Environmental Regulations on the Integrated Iron and Steel Industry, ” Temple Barker and Sloane for EPA. 1977 (converted to 1978 dollars and rounded off)

SOURCE Off Ice of Technology Assessment

40 percent of 1978 capacity and 36.3 million

tonnes. This results in spending $20 billion on

finishing mills, as compared to $11 billion for

scenario F.

The details of the OTA calculation of finishing mill replacement costs are given in

table 135. The methodology consisted of using

unit capital costs for particular types of finishing mills and specific amounts of capacity

replacement based on replacing the oldest facilities, and applying these costs to the product mix reported by AISI for 1978. Adjustments were then made to compensate for 75-

percent availability of finishing mill facilities

and to increase replacement by 20 percent to

account for facilities that would reach excessive age during the l0-year modernization

period.

Of the $16 billion difference in total modernization capital needs between scenario F

and the AISI scenario, $9 billion is accounted

for solely by the difference in finishing mill

replacement. Although there is no doubt that

the greater spending by AISI would result in

more new finishing mill facilities at the end of

the decade, three qualifications should be

noted: the AISI scenario calls for spending $2

billion annually on finishing mill replacement,

a rate equal to the total capital spending on

productive steelmaking facilities for the past

Table 135.—Projections of Annual Capital Needs (1978 dollars in billions)

——

Wymana

Inland Steelb U.S. Steelc AISl d

(1977) (1977) (1978) (1980) OTA

Increase in shipments (million tonnes) . . . . . . .

Replacement/maintenance. . . . . . . . . . . . . . . . . $2.3 $2.2 $2.2 $4.4 $2.8

Expansion . . . . . . . . . . . . . . . . . . . . . . . .7 1.6 1.7 .5 .3

Regulatory compliance . . . . . . . . . . . . . . . . . 1.0 1.1 1.0 .8 .8

Nonsteel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 .5 .4 .8 .7

Subtotal. . . . . . . . . . . . . . . . . . . . . . . . . . . .

——

4.3 5.4 5.3 6.5 4.6

Debt repayment/increase in working capital. . . .3 NA NA .5 .7

Total. . . . . . . . . . . ... . . . . . . . . . . . . . . . . . $4.6 $5.4 $5.3 $7.0 $5.3

—.—

aJ.C. Wyman, “The Steel Industry: An American Tragedy?” Faulkner, Dawkins, and Sullivan, February 1977

bThrough mid-1980’s, W H Lowe (vice president for finance, Inland Steel Corp.), “Capital Formation in the Steel Industry,” Proceedings of Steel Industry Economics

Seminar, AISI, March 1977

cThrough mid-1980's B.D. Smith (vice president and comptroller, U S Steel Corp.), “Capital Formation in the Steel Industry,” proceedings “The American Steel Industry in the 1980’s—The Crucial Decade, ” AISI, April 1979, dollars converted to 1978 dollars by multiplying by O 87

dThrough 1988, the deflcit results from present Capital recovery periods; AISI, "Steel at the crossroads: The American Steel Industry in the 1980’ s,” 1980
320 ● Technology and Steel Industry Competitiveness

10 years, of which only about 10 percent was

spent on finishing mills; although some steelmaker have old finishing mill facilities, they

are still more profitable than the industry

average; 22 and the capital costs of finishing

mills are probably lower today than in past

years because of the availability of foreign

equipment at prices considerably below those

of some domestic equipment makers. The tenfold increase in purchases of finishing mills

for the AISI scenario could probably not be

supplied by domestic finishing mill manufacturers; extensive use would probably have to

be made of foreign equipment. The average

unit finishing mill cost of $550 per tonne compares to the $418 value estimated by OTA.

Use of the latter cost would decrease the AISI

total finishing mill replacement cost from $20

billion to $15 billion.

After differences in spending for finishing

mill replacements are accounted for, the remaining $7 billion difference between the

AISI scenario and scenario F results from

miscellaneous replacements and raw materials facilities. Category six in table 134 is for

replacement of electric steelmaking furnaces

at a cost of $1 billion. AISI has indicated a

total of $4 billion for miscellaneous replacement capital spending, including electric furnaces. Furthermore, AISI had indicated

spending of $7 billion for replacement of raw

materials facilities. Category seven in table

134 is for raw materials and miscellaneous

spending with a cost of $3 billion.

OTA has found it extremely difficult to

determine specific needs for raw materials

facility spending. Much of the spending for

this purpose is not reported by steel producers as part of their steelmaking operations, and much is by companies outside of

the steel industry, such as coal and iron ore

companies, and by foreign sources of imported iron ore who account for one-third of

domestic ore use. Moreover, the industry has

For example, Inland Steel Co,, generally recognized to be

the most profitable large integrated producer, has some very

old finishing mills. Two of its three hot strip mills are over 40

years old, and the average age for its four cold strip mills is 22

years, [World Steel Industry Data Handbook—The United

States, McGraw-Hill, 1978.)

spent considerable sums in this area during

the past two decades, including much for iron

ore pelletizing facilities. If AISI is correct in

its estimate for capital needs in the miscellaneous category including electric furnaces

and OTA is correct in its estimate for electric

furnace needs, this would mean that $3 billion, or 15 percent of the annual capital

spending for the past 10 years, is actually

needed for miscellaneous spending. In this

case, the $3 billion for raw materials development in scenario F would disappear. It may

be more realistic to assume that approximately $2 billion would be available for raw

materials spending in scenario F. This would

be equivalent to approximately 10 percent of

the annual capital spending for the past decade, rather than the 35 percent of the past

decade’s annual spending in the AISI scenario.

In the TBS23 study based on AISI data on

plants of member companies, most of the estimates for replacement capital needs are in

approximate agreement with the costs in

table 134. The largest difference is for the

raw materials area. Making suitable adjustments for capacity differences and other factors to make the comparison valid, the TBS

study found a need for $60 million annually

for raw materials, or less than 10 percent of

the AISI figure and only 30 percent of the

estimate of $200 million annually most likely

for scenario F. The total annual capital needs

for replacement over a 10-year period in the

TBS study is $23 billion, compared to $28

billion in scenario F and $44 billion in the

AISI scenario. In addition to having unusual

access to the AISI plant operating data,

which allowed a detailed process-by-process

cost analysis for capital needs, a great many

industry personnel were involved with the

TBS study. Moreover, their analysis is based

on consideration of integrated plants only

and extrapolation of this to the entire steel industry. Hence, the effect of noninintegrated

companies’ lower costs is not factored in.

With the level of spending for modernization in scenario F, the replacement cycle for

‘‘Temple, Barker, and Sloane, op. cit,
Ch. 10—Capital Needs for Modernization and Expansion 321

steelmaking facilities can be calculated. The

cycle is obtained by dividing the capital cost

per tonne of annual shipment by the annual

capital expenditure. With capital spending of

$2.8 billion annually, the annual spending per

tonne of shipments equals $25, which is the

industry average for 1969-78. There is

greater uncertainty as to the correct cost for

the replacement of shipment capacity. AISI

uses a cost which is 90 percent of the capital

cost for constructing a new, greenfield facility. On this basis, scenario F leads to a replacement cycle of 37 years, * compared to 30

years for the industry during 1959-68, 40

years for 1969-78, (an average of 35 years for

the 20-year period), and 25 years for the AISI

scenario. However, OTA cannot find any specific way of justifying the use of the 90-

percent figure in obtaining the replacement

capital cost. Considering the value of many

elements of existing plants that would continue to be used, as well as the scrap value of

facilities removed, it is likely that average

replacement capital costs would be less than

90 percent of greenfield costs; other analysts

have estimated the ratio of replacement to

greenfield costs to be 67 percent” or even as

low as 45 percent.25 For scenario F, if the

ratio is 80 percent then the replacement cycle

is 33 years. for 75 percent the cycle is 31

years, and for 67 percent it is 27 years.

In any event, the utility and relevance of

using the facility replacement cycle are not

beyond criticism. Using average industry

costs and average industry age does not accurately describe the process of replacing

portions of existing plants. Each type of

equipment is likely to have a different maximum lifetime during which it performs at

*The calculation is based on using the integrated replacement cost of $1,129 tonne for 87 percent of the industry and the

greenfield cost for nonintegrated plants of $234/tonne for 13

percent of the industry.

“P. Marshall, report to the Councd on Wage and Price

Stability, “World Steel Trade: Current Trends and Structural

Problems,’” hearing of the House Committee on Ways and

Means, Sept. 20, 1977.

W. ‘I’. Hog~ln, et al., “Financial Study of the U.S. Steel Industry.<’ LT.S. Department of Commerce. August 1975.

design efficiency, and a different age because

of prior replacement and modernization. Current facilities, although relatively old, may

have costs that still allow acceptable profit

levels. * Advancing technology also limits the

usefulness of average age: the age at which

specific types of equipment become obsolete

can increase, depending on the original

choices regarding design and construction, or

decrease, depending on the advent of radical

new technology. Age may also be an invalid

indicator of the need to replace because,

more often than not, the facilities have not

been operated at full or rated capacity for the

entire chronological period corresponding to

age. Furthermore, the quality of labor practices combined with increasing use of computer control can reduce the wear and tear

on facilities and extend their useful lives,

Nevertheless, it is pertinent to evaluate

what the AISI modernization capital needs

would be on the assumption that the replacement rate is kept at 4 percent, but the unit

cost is reduced from the assumed 90 percent

of greenfield costs to a lower value. The

result for a 75-percent figure is that modernization capital needs decrease from $4.4 billion annually to $3.7 billion. The $2.8 billion

annual spending of scenario F would be obtained if replacement costs are 57 percent of

greenfield costs, which seems reasonable

based on the estimates cited above, assuming

an increase in market share for the lower

capital cost nonintegrated producers.26

*The situation is analogous to an old automobile which has

had many of its critical components replaced at different times.

How useful is it to describe the automobile as, for example, 30

years old, if it is still functioning in an acceptable manner? It

may still be less costly to replace parts rather than replace the

entire automobile. The situation changes dramatically when a

major technological innovation occurs for a component that is

not compatible with the other, older components.

“)See especially Marshall, op. cit. Assuming a growth of

nonintegrated company market share from 13 to 25 percent for

the 10-year period, greenfield integrated costs of $ 1,253/tonne,

and a 4-percent replacement rate, Marshall’s 67-percent ratio

of replacement to green field costs leads to an annual replacement cost of $2.9 billion. Using his 67-percent figure and the

slightly lower AISI unit cost of $1, 100/tonne and replacement

rate of 3.25 percent, the annual cost of replacement would be

$2.6 billion.
322 . Technology and Steel Industry Competitiveness

Differences in Expansion Results

OTA used lower unit costs than AISI for

capacity expansion, based on roundout costs

that are historically lower than greenfield

costs for integrated plants. Moreover, OTA

has assumed the continued growth of the nonintegrated electric furnace segment and factored in their low capital costs in the total for

capacity expansion. When OTA assumed less

capacity increase from modernization, capacity was assumed to increase by an identical amount through roundout expansion of

integrated plants. In scenario F, capacity expands as much as assumed by AISI, but entirely through greenfield construction of nonintegrated plants (at greater unit cost because of product-line expansion). This does

not imply that integrated capacity does not

expand, only that it does so by means of

roundout rather than greenfield construction.

Neither the AISI study nor the OTA scenarios incorporate any greenfield construction of

integrated plants, although the AISI modernization costs are 90 percent of greenfield integrated unit costs. As previously noted, a consensus exists that integrated greenfield construction cannot be justified because of the

higher costs and higher prices it would entail

(see table 128). The implicit assumption in the

AISI analysis is that major changes in Government policy, such as allowing faster capital recovery, will enable the industry to spend

at the high levels proposed in their scenarios.

Differences in Lower

Spending Scenarios

There is another part of the AISI analysis

(designated as their scenario 11) which is a

continuation of current trends. The annual

cost for productive steelmaking investment is

given as $3 billion. Although the spending

level is the same as OTA scenario F, the anticipated results differ. AISI asserts that this

level of investment would lead to maintenance of existing production capability and

the same average equipment age if the unit

cost is just under $1,100/tome (the figure

used in their high replacement scenario summarized in table 133). That is, the replacement rate is under 2 percent but there is no

improvement in production capacity resulting

from improved operating rate or increased

yield. However, it is also suggested that up to

20 percent of production capacity would be

eliminated because of low profitability.

This scenario seems questionable in view

of the experience and results within the industry during the past decade, when annual

spending was at the $2 billion level. While a

loss in capacity has occurred during the past

decade, the ability to produce more steel from

the remaining capacity appears to have actually increased, This is because the most obsolete facilities have been closed, and substantial modernization was obtained at the $2

billion per year level.

Total Capital Needs and Shortfalls

Capital Needs

To understand the significance of these

capital cost calculations and of the difference

between the OTA and AISI estimates, it is

necessary to examine the steel industry’s

total capital needs. Summaries of the AISI

estimates and three earlier industry projections of capital needs, as well as OTA findings, are given in table 135. OTA projects

capital requirements for modernization and

expansion at $3 billion annually; although

this finding corresponds to OTA scenario F, it

is representative of the range for all the OTA

scenarios. OTA concurs with the AISI estimate for the costs of compliance with Environmental Protection Agency (EPA) and Occupational Safety and Health Administration

(OSHA) regulations, $0.8 billion annually,

although OTA believes that toward the end of

the period OSHA-related costs will tend to be

greater than the annual $0.1 billion assumed

by AISI; but this difference should be offset

by declining EPA-related costs.
Ch. 10—Capital Needs for Modernization and Expansion ● 323

On the basis of unpublished survey data,

AISI projected that $800 million would be

needed annually to finance nonsteel diversification. OTA put this amount at $700 million

because it is more consistent with the trend of

the past decade. Barnett of AISI, on the

grounds that 22 percent of the capital spent

on productive steelmaking facilities has been

spent on nonsteel activities, concludes that

this need will absorb $660 million a year. As

shown in table 135, previous estimates for

nonsteel spending range from $300 million to

$500 million annually. ’

Adding in the amounts needed for increases in working capital—$().7 billion by

OTA estimate, as compared to AISI’s $0.5 billion annually—AISI arrives at a total capital

*There are no data to support a trend of increasing diversification of steel companies, but attention to such diversification

has been increasing. Analysis of company annual reports and

Securities and Exchange Commission 10-K reports reveals

vastly different diversification activities, from nearly none for

some companies to very considerable levels for others, Neither

is there an apparent link between diversification and steel

profitability. Nevertheless, the argument is often made that diversification absorbs capital needed for steelmaking modernization and expansion. The industry’s position is that profitable

diversification provides a positive cash flow, which supports

less profitable steelmaking investments. Moreover. diversification provides stability to the normally cyclic steel business. A

steel industry modernization and expansion program that improves profitability could reduce interest in and need for diversification.

requirement of $7.0 billion annually, while

the OTA scenarios find a total need of $5.3

billion per year between 1978 and 1988. The

OTA total agrees with 1978 industry estimates of $5.4 billion and $5.3 billion, as well

as a 1977 estimate of $4.6 billion by a Wall

Street analyst. ”

Capital Availability

The AISI study did not provide a detailed

analysis of capital formation and cash flow in

the steel industry. Personal discussion with

AISI officials has revealed that the deficit

under the existing laws would be $2.3 billion

annually. Table 136 compares results for the

OTA scenario with an earlier analysis and

with an actual 1978 cash flow and cash use

as derived from official AISI information for

1978.

Net income has been adjusted upwards in

order to be consistent with the assumed increase in shipments for the 1978-88 period.

Income as a percentage of revenues was at

first held to the 1978 level of 2.8 percent, but

this cannot be the case if the modernization

and expansion program reduces production

costs was assumed, which added $225 million

‘-Wyman, op. cit.

Table 136.—Average Annual Capital Sources and Uses (1978 dollars in millions)

—

Industry

Wyman (1977)’ actual 1978b OTA scenario

Aftertax profit (including deferred taxes). . . . . . $2,100 $1,452 $1,871’

Depreciation, depletion. . . . . . . . . . . . . . . . . . . . 1,600 2,258 3,100

Increase in long-term debt. . . . . . . . . . . . . . . . . . 600 451d

Cash dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . (800) (598) (650)

Net cash flow ... . . . . . . . . . . . . . . . . . . . . 3,500 3,112 4,772

Capital expenditures . . . . . . . . . . . . . . . . . . . . . . 4,300 2,852 4,600

Debt repayment and increase in working

capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300 260 746’

Cash use . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,600 3,112 5,146

Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,100 0 574

aJ.C. Wyman, “The Steel Industry An American Tragedy ?” Faulkner, Dawkins, and Sullivan, February 1977; depredation

times were greater in 1977 than now

bAlSl data (Annual Statistical Report—1!376) for companies representing 88.8 percent of domestic raw steel production have

been converted to all industry figures by dividing by 089

CAssuming as does AISI, an average annual domestic shipment level of 991 million tonnes. and that prices and sleel/nonsteel

contributions are the same as 1978, yields total revenues of $58.8 billion if net income as a percent of revenues iS the same

as 1978 (2 8 percent) then profit (net income) is $1,646,000

dIf the stockholder's equity is assumed to increase (in constant dollars) at 1 percent per year, then the midterm equity increases to $20.788 miIlion as compared to $19,779 million for 1978, and maintaining a debt-to-equity ratio of 44% provides an

increase of $451 million

elncrease in working capital IS approximated by taking 13 percent of increase In total steel sales
324 ● Technology and Steel Industry Competitiveness

to the aftertax profit of $1,646 million (based

on 1978 profitability). The issue of cost savings is discussed further in the next section.

The increase in depreciation results from

the rising level of capital spending during the

period, but present capital recovery rates

have been assumed. The increase in longterm debt has been calculated by assuming

that part of the increased capital spending

and modernization of the industry will be financed by a small increase in stockholder’s

equity, and then applying the same debt-toequity ratio of 44 percent that existed in

1978. The average total net cash flow of $4.5

billion represents these three items minus

stock dividends, which have been increased

over the 1978 level by approximately 10 percent.

The issue of dividends and their relative

constancy regardless of performance (see ch.

4) is linked to the question of the potential for

forming more capital through new equities.

The industry usually maintains that it keeps

dividends at relatively high levels, even

though profitability is low and perhaps declining, in order to maintain stock prices.

Despite this policy, however, the performance of most steel company stocks, with the

exception of those of some of the nonintegrated and alloy/specialty companies, has not

been good. Data on real dollar trends for several of the major steel companies are given in

table 137. Real net income has fallen substantially during the past 10 years, and real

return on common stock has decreased even

more. The real cost of goods sold has risen

more than the real value of sales.

To illustrate the relationship of dividends

to performance, it is instructive to examine

the best and worst performing major steelmaker, Inland and U.S. Steel, respectively.

The comparison in constant dollars will be

made for 1979 versus 1974, both years being

in the “up” business cycles for the domestic

steel industry. For Inland Steel earnings per

share decreased 47 percent and dividends

decreased 30 percent; for U.S. Steel earnings

per share declined by 130 percent but dividends dropped by only 26 percent. Interestingly, the most diversified major steelmaker,

Armco, shows the least drop in earnings per

share at 27 percent, with exactly the same

decline in dividends per share. Armco generally has the best economic performance as

well, for example in terms of net income as a

percent of sales. This is due to its diversification, since data on its steelmaking operations

show it to be less profitable than Inland Steel.

Thus, there is a linkage between profitability

and diversification on the one hand, and dividends which accurately reflect economic performance on the other.

Many analysts have concluded that it is

highly improbable that new equity issues

Table 137.—1968-79 Real Dollar Changes in Profitability and

Common Stock Performance for Selected Steel Companies

Change in

1979/68 real Real growth

Real growth of return on Real growth of cost of

net income common stock of sales goods sold

Company a

(percent/year) (percent) (percent/year) (percent/year)

Bethlehem Steel . . . . . . . . . . . . -13.87 – 48.00 2.18 2.92

National Steel . . . . . . . . . . . . . . – 2.80 – 45.84 5.60 6.49

Republic Steel , . . . . . . . . . . . . . -1.87 – 59.79 3.16 3.95

U.S. Steel . . . . . . . . . . . . . . . . . . – 0.13 – 39.06 3.04 3.76

Armco b. . . . . . . . . . . . . . . . . . . . 2.29 11.77 5.03 5.59

Average of 100 largest U.S.

industrial corporations, . . . . 4.75 – 25.54 6.16 6.63

aThese Companies represent 56.4 percent of 1978 domestic shipments.

— .

bArmco iS the most diversified of the major domestic steelmakers.

SOURCE Interactive Data Corp., Washington, D.C.
. .

Ch. 10—Capital Needs for Modernlzation and Expansion ● 325

would be successful, except for the nonintegrated and alloy/specialty companies with excellent records of growth and profitability. It

is plausible, however, that the prospect of a

major modernization and expansion program,

facilitated in part by supportive Government

policies, would allow dividends to be reduced

and the funds to be used to help finance modernization and expansion. The perception of

greatly improved future earnings might not

only prevent any dramatic decline in stock

prices, but actually increase investor interest

in obtaining capital appreciation rather than

income. In such a scenario, new equity issues

might be successful; the key factor would be

coupling dividend reduction with major investment in cost-cutting new technology for

the future.

Capital Shortfalls in the OTA Scenario

In the OTA scenarios, the total cash the

steel industry would need to finance capital

expenditures for modernization and expansion, plus the increase in working capital,

amounts to $5.3 billion annually for 1979-88.

At the same profitability levels as 1978, the

industry would be about $600 million per

year short of this requirement. This is considerably less than the deficits projected by

industry analyses. If modernization and expansion reduced total costs by an average of

2 percent28 for the lo-year period, then about

‘nThe 2-percent reduction in total costs is conservative. The

future saving for continuous casting alone should give a 5-percent cost saving when replacin~ ingot casting. (OTA, “Benefits

$900 million would ultimately be added to

annual net income, even after taking into

count the rise in financial costs caused by

debt increase, Return on equity would t

increase to about 12 percent.

the

acthe

hen

A policy option of accelerating depreciation, which is discussed in chapter 2, could

provide enough additional income to finance

the $600 million per year deficit in the OTA

scenario. If, in addition to such an increase in

cash flow, production costs are assumed reduced by 2 percent in the OTA modernization

program, then return on equity would be

close to 15 percent and return on sales about

5 percent. These returns would bring the

steel industry up to the average for all domestic manufacturing.

of Increased Use of Continuous Casting, ” technical memorandum, October 1979.) For the newest integrated mill in North

America, the Steel Co. of Canada projects that efficiencies of

new technology will produce a cost savings of 15 to 20 percent,

and of that amount, 10 percent will result from continuous casting. (American Metal Market, Feb. 29, 1980. ) Applying a 5-percent cost savings for continuous casting to an increased adoption by 35 percent of the industry yields a 2-percent saving for

the whole industry. Crandall has suggested a 3-percent saving

‘‘if all opportunities were exploited in the very near future, [R.

W. Crandall, “Competition and ‘Dumping’ in the U.S. Steel

Market,” Challenge, July-August 1978). Gold’s analysis of the

COWPS study suggests an 8-percent saving in operating costs,

which would have to be reduced by increased financial costs.

(B. Gold, “Steel Technologists and Costs in the U.S. and Japan, ”

Iron and Steei Engineer, April 1978. ) AISI’S analysis includes a

potential savings in operating costs of 30 percent and in total

costs of 15 percent after 25 years of the capital spending program already discussed. There is a lag between capital spending and realized cast savings. Thus, the 2-percent savin~ used

here appears reasonable for the first 10 vears of the pro~rarn.

International Capital Cost Competitiveness

The lower capital costs in foreign steel industries have long been used to impugn the

rate of technological innovation by the domestic steel industry. Japan’s post-World War II

success in steel has often been linked to its

low capital costs:

At an annual average cost of $1.2 billion, it

meant a dramatic capacity expansion from

28 million tons at the end of 1960 to 115 million tons at the end of 1970. The expansion of

87 million tons compares to an estimated net

expansion of around 20 million tons in the

U.S. and Canada. For an annual average expenditure of $1.2 billion, Japan bought itself

about 4.5 times as much added capacity a s

the U.S. and Canada did for an expenditure

of $1.8 billion. 29

(’Wvman, op. cit.
326 . Technology and Steel Industry Competitiveness

One factor in this has been that steel mill

construction costs in Japan have been less

than 40 percent of U.S. levels, for which the

following reasons have been given:30

●

●

●

●

●

The

lower wage and price levels in Japan,

which result in cheaper building materials and equipment as well as lower

wages for construction workers;

cost analysis on a facility basis, rather

than on the basis of entire plants or projects;

faster construction times because there

is less labor trouble and because steel

companies, rather than general contractors or consultants, supervise all or most

construction;

constant capacity improvement after, as

well as before, installation of equipment;

and

use of larger economy-of-scale designs.

following additional factors also help to

explain lower Japanese costs:31

●

●

●

c

It

an overvalued dollar vis-a-vis the yen

during the postwar period;

coastal locations, which eliminate many

infrastructure expenditures;

the absence of raw material resources,

which led to imports rather than construction of raw material processing facilities for or in integrated plants; and

rationalization of the entire industry

through cooperation between banks, industry, and government, which prevented competing steel companies from

duplicating facilities, notably high-cost

finishing mills.

is generally accepted that the dollar difference between Japanese and U.S. capital

costs has been decreasing. In part, this is because labor costs are increasing more rapidly

in Japan than here, because the value of the

‘(’Gold, op. cit.

‘lWyman (op. cit.) provides an interesting analysis of the

relationship between low domestic capital spending during the

past several decades and the monetary policy of the United

States. An overvalued dollar, he believes, forced U.S. capital

spending overseas and has led to a ‘‘dismantling” of domestic

industry. “While ‘dismantling” its basic industry, the U.S.

“created’ a high technology base. ‘“

dollar is declining, and because domestic

companies are increasing their use of foreign

sources of equipment and consultation. Table

138 provides some recent data that illustrate

Table 138.—Estimates of Capital Costs for the

United States, Japan, and a Developing Nation

(1978 dollars per tonne of product capacity)

Brownfield or Green field

roundout additions integrated

to integrated plant plant

United States . . . . . . . . . $715 $1,210

Japan . . . . . . . . . . . . . . . 660 880

Developing nation . . . . . 880 1,540

SOURCE H.G. Mueller, ‘(Structural Change in the International Steel Market, ”

Middle Tennessee State University, May 1978

the diminishing difference between Japanese

and American capital costs, and also compares costs for a typical developing nation. It

shows a 27-percent advantage to Japan over

the United States, and a 27-percent advantage to the United States over the developing

nation for a greenfield integrated plant. This

last difference may be greater, because most

developing nations usually have a substantial

lack of basic industrial infrastructure.”

A comparison of the 1976 capital cost of

similar items of steel plant equipment in different countries—correcting for differences

in plant size and design and for differences in

construction cost, and based on prevailing exchange rates—reveals that the United States

has the highest capital costs, Europe’s are in

the middle, and Japan has the lowest. Western Europe enjoys 22-percent lower costs

than the United States, while Japan’s are 41

percent lower.33

Aylen’s analysis of American, British, and

West German capital costs34 has led him to

the following conclusions regarding the cap32A recent analysis has indicated that actual costs for greenfield steel plants in developing nations are twice the original

estimates. (Iron & Steelmaker, December 1979, p. 37,)

1lA. J. Jarvis, “Inflation and Capital Investment in the United

Kingdom, ” transactions of the 5th International Cost Engineering Congress, Utrecht, November 1978.

“J. Aylen, “Innovation, Plant Size and Performance: A Comparison of the American, British and German Steel Industries, ”

Atlantic Economics Conference, October 1979.
— —

Ch. 10—Capital Needs for Modernization and Expansion ● 327

ital spending and costs of domestic steelmaker:

. . . the recognized investment series for

U.S. iron and steel from the Bureau of Economic Analysis or the American Iron and

Steel Institute overstate steel industry capital spending on plant and equipment by as

much as 180 or 190 percent when compared

with European levels, owing to the combined

effect of a broader definition of steel industry activities, which include diversified

activities, and the relatively high cost of steel

plant in America.

With regard to the generally low level of U.S.

capital spending (described in ch. 4) and its

impact on technology choice, Aylen notes

that:

The higher cost of steel plants in the U.S.

provides one explanation as to why the industry has invested at a relatively low rate

per ton. High capital costs encourage substitution of other factors of production for capital. In contrast to its absolute capital cost

disadvantage, the American steel industry

has an absolute energy cost advantage. The

American steelmaker has a stronger incentive than his European counterparts to hang

on to old, energy-intensive processes such as

open hearth steelmaking, poor technology

blast furnaces, and conventional casting facilities.

Aylen adds, moreover, that because of the impact of capital improvements on other inputs,

the full impact of capital cost differences

among nations goes beyond the actual contribution of capital costs to fixed steelmaking

costs:

Admittedly capital costs per se might not

introduce much absolute cost difference between steelmaker. But they do induce differences in investment behaviors with long run

implications for overall factor productivity

and unit costs.

Using a hypothetical reduction of 20 to 30

percent in U.S. capital costs for steel plants,

Aylen simulated the effect of having capital

costs similar to those in Europe. He found that

from $2.9 billion to $4.8 billion would have

been generated from 1960 to 1978, or the

equivalent of an extra 2 to 3 years” investment at average annual rates. He concludes

that, with replacement and roundout, the

United States could have obtained an additional 11.3 million tonnes of raw steel capacity, or 8.6 million tonnes of actual shipments.

“Such extra marginal investment would have

been sufficient to improve innovation rates

and raise plant size in the American steel industry to average OECD [Organization for

Economic Cooperation and Development]

standards. ”

Aylen puts the capital investment of the domestic steel industry in perspective and deals

fairly and succinctly with the criticism it has

often received:

. , . the American steel industry’s failure

to invest and innovate can be seen as a perfectly rational response to prevailing factor

prices, rather than evidence of any inherent

inefficiency. This is not to say that the steel

industry should not bear part of the blame

for the high costs of plants. Why must the industry order such lavish plants by Europen

standards? Why have steel producers not

been tougher clients when dealing with plant

suppliers? Why does the industry not buy

certain items of equipment more widely from

European or Japanese plant suppliers?

Although importing steelmaking equipment is

clearly detrimental to the balance of payments and to the welfare of domestic equipment manufacturers, it might be preferable

in the long term to losing substantial domestic

steelmaking capacity, with a concomitant increase in steel imports.

In conclusion, there is a distinct difference

in capital cost competitiveness between the

domestic and foreign steel industries. This

could be remedied in the future by:

●

●

●

●

making more steel in nonintegrated companies that use simpler, less costly

equipment, and whose capacity utilization rate would be very great (see ch. 8);

using more lower cost foreign-designed

and foreign-manufactured equipment;

using more economy-designed and economy-priced equipment in integrated

plants;

putting more pressure on equipment
328 ● Technology and Steel Industry Competitiveness

●

manufacturers and design, engineering, Radical, long-term changes in steelmaking

and consulting firms to achieve lower may also bring reductions in capital costs. If

costs; and domestic steelmaker take the lead in these

developments, it will increase the likelihood

undertaking more in-house equipment that the necessary capital equipment will be

design and construction. manufactured in this country.
CHAPTER 11

Impacts of EPA and OSHA

Regulations on Technology Use

●
4

Contents

Page

Summary ● **************e*********.*** * 331

Introduction ● ***, *.**   ** ** **.8 *****9 332

Statutes That Regulate Steelmaking ........ 334

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 334

Statutes ● * . . . . * . * * * * * * * * . * * * * * ****.*.** 335

Feasibility of Standards . . . . . . . . . . . . . . ● ...336

Innovation . . . . . . . . . . . . . . . . . . . . . . ... *...338

Conclusion . . . . . . . ......................339

Pollution Abatement R&D. . ...............339

Summary,..,.... .,******* ********* ● * * * 339

Limited Private and Public Sector Efforts ....34O

Constraints Affecting Regulatory

Technology R&D. . ....................341

Conclusion . . . . . . .............0.........344

Regulatory Cost Impacts . ................345

Summary ,...,.. ● **..... ,.,..,0. .*.**** 345

Past and Current EPA and OSHA Compliance

costs...*.*..*. . * O * ** . .+.*.*.** ● .*.*345

Need for Improved Regdatory Cost

Projections .*.*,., ● *..**.* ● *O.,..* ● . * 348

Future Regulatory Cost Impacts. . ..........349

Financing of Regulatory Equipment. . .......352

Conclusion. ● *.***** .**.*...* *.****.*. . . 353

Regulatory Requirements and Modernization 354

Summary . . . . . . . . . . . . . . . . . . . . . . . ..***.* 354

Limited Modernization. . .................354

Industry Differences. . ...................355

Potential Modernization Problems. . ........356

Page

● ****O*** ● ********* ● *****99 a 359

List of Tables

Table No. Page

139. Occupational Health Hazards in

Steelmaking .**,  .** ****** . . . . . 333

140. Air and Water Pollution Abatement

Expenditures as Reported by the Basic

Steel Industry, 1973-77 . . . . . . . . . . . . . 342

141. Total and Regulatory “Current Capital

Costs” for the U.S. Steel Industry,

1969=79 ● . * * * * . * * * * * * . * . * *****..** 346

142. Pollution Abatement Investments as a

Percentage of Total New Plant and

Equipment Expenditures, Four U.S.

Basic Industries, 1973-79 . . . . . . . . . . . . 346

143. Effect of Environmental Requirements

on Steel Production Costs and Prices,

1979-83 . **,,,.******.*****,****** 340

144. Reported and Planned Investment in

Employee Safety and Health, Four Basic

Industries, 1972-82 . . . . . . . . . . . . . . . . 348

145. Annual Steel Industry Investments in

Abatement Equipment; Projected

Increases, 197085.. . . . . . . . . . . . . . . . 349

146. Steel Industry Environmental Control

Investment Outlays: United States and

Japan, 1970-71 . . . . . . . . . . . . . . . . . . . . 351

147. Type-of-Plant Differences in Pollution

Control Capital Costs. . . . . . . . . . . . . . . 356
CHAPTER 11

Impacts of EPA and OSHA

Regulations on Technology Use

Summary

In the past, the policies of the Environmental Protection Agency (EPA) have had a greater impact on the steel industry than those administered by the Occupational Safety and

Health Administration (OSHA). In the future,

however, OSHA policies will grow in importance as more regulations become operational.

Congress has expressed a strong interest

in regulatory technologies that are more cost

effective than present ones and that will further reduce public health hazards. It is the

steel industry’s position that available control

technologies are generally capable of meeting

regulatory standards, but Federal agencies

suggest that considerable environmental R&D

is still needed. EPA spends less than $1 million per year on steel-specific R&D, but much

larger sums on environmental R&D that is incidentally applicable to the steel industry. Industry reports that its environmental R&D

spending is about $75 million per year, although a considerable amount of this appears

to be for engineering work. Regulatory technology R&D by the steel industry suffers in

part because of the high costs and limited private gains associated with it.

Some regulatory approaches, such as the

use of technology-based standards, were developed to encourage private-sector improvements in abatement technologies. Other statutory provisions go beyond encouragement by

requiring or “forcing” private-sector development of new regulatory technologies. The

various environmental statutes and the Occupational Safety and Health Act (OSHA Act)

encourage the use of technology-based performance standards. Although these standards allow industry more flexibility they have

not encouraged major industrial innovations

that are the subject of this report. Available

regulatory incentives, such as delayed compliance, have generally been inadequate in

encouraging fundamentally new and cleaner

steelmaking technologies such as continuous

casting or direct casting of sheet or strip.

Regulatory incentives have been more successful in providing the initial impetus for incremental improvements in abatement technologies. Examples include improved coke

oven controls.

There has been considerable disagreement

about the economic and technical feasibility

of the regulatory technologies that Federal

agencies have identified as being capable of

attaining specified control levels. EPA’s technology-forcing approach allows for diffusion

of new environmental technologies that are

not yet commonly used by the steel industry,

but judicial decisions have directed EPA to

give greater weight to economic considerations when identifying feasible control technologies for nontoxic pollutants. EPA has yet

to develop guidelines for private-sector environmental technology R&D. OSHA’s technology transfer authority is more limited: OSHA

may not require major private-sector R&D efforts, but it may call for the diffusion of the

latest techniques within any given industry

whenever toxic or hazardous materials are

involved.

The steel industry has reported EPA- and

OSHA-related capital investments during the

1970’s of about $365 million per year, or

about 17 percent of its total annual capital investments. * These expenditures have placed

greater limits on steel industry modernization

*These estimates have not been adjusted downward for regu]a tory overlap between agencies.

331
332 Technology and Steel Industry Competitiveness

than has been the case with other basic industries. Annualized capital and operating

costs for environmental requirements alone

typically add between 4 and 6 percent to production costs.

EPA and OSHA regulations applicable to

the steel industry will impose major capital

investments and operating changes on the industry well into the mid-1980’s because of

statutory requirements. Federal projections

of steel industry regulatory investments during the 1980’s suggest only modest increases

compared to the 1970’s, while industry estimates suggest that average levels of regulatory investment would almost double between

now and the mid-1980’s. Differences between

industry and Government projections result

from differences in the assumptions underlying their estimates. Among the factors affecting future levels of regulatory investment are:

facility replacement rate, expansion plans,

technological choices affecting investment

decisions, interpretation of regulations, the

scheduling of regulatory investments, and

broader industry trends with respect to profitability and shipments.

EPA data indicate that industrial development bonds (IDBs) have in the past been used

for half of all environmental capital spending.

Assuming this pattern continues, industry

will need to generate from internal sources

between $275 million and $400 million annually, in addition to similar amounts financed

with IDBs to finance regulatory compliance

through the mid-1980’s. These expenditures

are relatively modest compared to the massive total capital needs that the industry expects during the next several years.

The need for regulatory compliance has accelerated industry decisions to phase out and

replace aging facilities. Thus, economic and

regulatory forces have tended to reinforce

one another to some extent. Regulatory policies have had the most severe impact on integrated plants, which have a high proportion

of aging equipment and high production

costs. The impact on nonintegrated electric

furnace facilities has been less severe. These

newer mills have a narrower and less complex range of processes to control, and most

of their control equipment was designed for

installation at the time of construction.

Recent regulatory reform initiatives may

be more effective in encouraging steel industry development and use of improved regulatory technologies. EPA’s “revised offset” policy may create difficulties for companies

wishing to expand, because it requires high

abatement investments in existing plants to

offset future pollution increases for the new

plant in the same region. The Agency’s “bubble” concept could make facility replacement

more cost effective, although some concerns

remain about allowable tradeoffs between

different types of pollutants generated in the

same plant. Moreover, EPA’s current “limited life facilities” policy may require some

hard decisions about the continued operation

of marginal facilities by the early 1980’s. And

finally OSHA appears to have a growing interest in using its authority to issue variances

to standards for innovative purposes.

Introduction

The direct and indirect effects of EPA and ited. Pollution abatement and hazard reducOSHA regulations on the domestic steel in- tion were therefore relatively minor considerdustry are significant. In part this is because ations in the design of steelmaking equipmost of the process technologies the industry ment.

uses were developed around the turn of the

century, at a time when awareness of the im- The steel industry is one of the largest

pact of industrial pollution on public and oc- sources of pollution in the Nation, with the incupational health and safety was very lim- tegrated segment alone accounting for nearly
Ch. 11—Impacts of EPA and OSHA Regulations on Technology Use ● 333

one-fifth of all domestic industrial pollution.

The industry is increasingly coming into compliance. Nevertheless, more than half of the

steel industry’s operations but less than half

of its plants are now in compliance with environmental requirements. * Steel mills present

a wide range of environmental problems—

conventional and harmful solid waste, excess

liquids, gases, and noise. High-temperature

water, zinc, manganese, lead, and suspended

oil and grease also present major difficulties.

Coke ovens, blast furnaces, and sinter plants

in particular pose complex environmental

problems because they emit sulfur dioxide,

tar vapors, coal, coke, dust, and other organic

compounds. The industry also has very high

rates of occupational injury and illness, Steelworkers are exposed to a variety of harmful

and toxic emissions (table 139), generally in

much higher concentrations, more frequently, and for longer periods than is typical of

the general population. ] This results in high

medical expenses, and high compensation

payments for death and disability among the

industry’s half a million employees. United

Steelworkers of America data indicate that

*For instance, 45 percent of domestic iron and steel facilities

are out of compliance with air pollution control regulat ions. ‘E. J. Calabrese, Methoddogiad Approaches to Derivm~ En-

(EPA, Industrial Analysis Branch, letter to OTA, Mar. 18, ~’ironment(d ond occupotion(d Health Stondurds, New York,

1980. ) W’ilev, 1978, p. 223.

Table 139.—Occupational Health Hazards in Steel making

Operation Contaminants . . ., . ,.. .

.—

Coking

Byproduct

Blast furnace

Steelmaking furnaces

Molten metal pouring

Rolling mill

Steel conditioning

Pickling

Maintenance

Galvanizing

Forging

Foundry

Coke oven emissions

Heat

Silica

Benzene

Coal tar pitch

Organic chemicals

Blast furnace gas

Iron oxide fumes

Heat

Metal fumes

Noise

Heat

Metal fumes

Heat

Lead

Fluorides

Asbestos

Silica

Noise

Heat

Oil mist

Metal fumes

Metal dust

Hydrochloric acid

Sulfuric acid

All hazards

Zinc oxide fumes

Lead

Noise

Heat

Oil mist

Silica

Heat

Noise

Oil mist

Organic chemicals

Metal fumes

Medical condition

Cancer and respiratory disease

Heat stroke and heat exhaustion

Silicosis

Leukemia and Iymphoma

Skin cancer

Liver and nervous system damage

Carbon monoxide poisoning

Siderosis

Heat exhaustion

Possible cancer and siderosis

Asbestos is and masothelioma

Nose and throat irritation

Mucous membrane irritation

Mucous membrane irritation

Chemical pneumonitis

Heart disease

Metal fume fever

SOURCE Unifed Steelworkers of America, Safety and Health Department
334 . Technology and Steel Industry Competitiveness

131 deaths took place from August 1977 to

December 1979 as a result of occupational

hazards. Excess death rates have been reported for some phases of steelmaking. For instance, OSHA’s final environmental impact

statement (EIS) on coke ovens found an excess of over 200 cancer deaths per year

among coke oven workers.

Industry’s regulatory obligations have

emerged during a period of declining competitiveness on the international steel market (see

ch. 4). The U.S. share of the world export

market has declined during the past decades,

while imports have grown in volume. The industry’s most recent modest expansion took

place during the early 1960’s, and a large

number of domestic plants are now relatively

old, small, and inefficient. Projected capital

requirements for regulatory compliance are a

relatively small portion of total capital needs

for the next decade (see ch. 10), but the industry’s capital shortfall affects its efforts to

meet regulatory compliance goals as well as

its larger modernization programs.

Dealing effectively with the particular hazards that accompany steelmaking raises

many issues concerning: 1) the development

and costs of fundamentally new regulatory

technologies, and 2) the interaction between

Government regulations and the operation

and modernization of the industry. It may not

always be possible to carefully distinguish

R&D for regulatory compliance from other

R&D efforts, capital investments for compliance from other capital investments, and, innovations due to regulation from other innovations. In addition, comprehensive and verifiable cost data are not always available.

Consider also the following interconnected

factors. The goal of Federal regulatory policies is to encourage the development and use

of improved abatement or process technologies. Limited replacement and modernization

of facilities, however, may make the development of new technologies more difficult. Federal economic and regulatory policies have a

major influence on industry’s levels of both

capital spending and operating costs for modernization and compliance. On the other

hand, a vigorous replacement and modernization program might make newer, more costeffective compliance options available, thereby lowering those costs. In short, broader

trends of industry operation and profitability,

as well as Federal tax, trade, and pricing policies, have major impacts on both the development and the adoption of new regulatory

technologies by the steel industry. Thus, Federal environmental and occupational hazard

regulations are contributing factors rather

than forces singularly affecting and affected

by industry modernization.

Statutes That Regulate Steelmaking

Summary ments, but their impacts have been limited so

EPA regulations are based on a number of

specific statutes, while OSHA is guided by

general authorizing legislation rather than a

series of specific statutes. Compared to current investment levels and industry practices,

major regulatory technology investments and

operating changes will have to be made from

now until the mid-1980’s to meet requirements of the Clean Air Act, the Federal

Water Pollution Control Act, and the Resource Conservation and Recovery Act. The

OSHA Act also imposes certain requirefar and their future impacts are uncertain, in

part because of regulatory overlap.

A growing number of regulatory standards

applicable to the steel industry are technology based. This allows industry some flexibility and encourages innovation in complying

with the regulations. Vigorous industry innovation has not yet been attained, however, in

part because the economic incentives appear

limited relative to potential benefits for companies considering abatement R&D. Recent

regulatory reforms such as EPA’s “bubble”
Ch. 11—impacts of EPA and OSHA Regulations on Technology Use ● 335

policy, attempt to incorporate economic incentives in regulatory measures. OSHA’s authority to issue variances to standards could

perhaps also play a greater role in technology

development aimed at improved or cheaper

regulatory compliance. In addition to standards that encourage new technology, EPA

and OSHA also have the authority to “force

new technology” when toxic or hazardous

pollutants are involved. EPA’s approach allows for the diffusion of the latest environmental technologies between industries while

OSHA may call for the transfer of promising

new technologies within or between industries such as steel.

Questions of economic and technological

feasibility have been of great concern in developing standards. Compared to its earlier

actions, EPA must now give greater weight to

economic considerations. OSHA must narrowly consider the technological feasibility of

proposed standards. Both agencies have to

assess economic impacts of proposed major

regulations in compliance with Executive

Order 12044.

Statutes

The basic policy framework for steel industry regulation is provided by several statutes,

particularly the Clean Air Act (CAA) and

the Federal Water Pollution Control Act

(FWPCA). CAA and FWPCA will continue to

have considerable impact on steel operations

at least until the mid-1980’s, when highperformance abatement technologies or inprocess changes will have to be installed.

EPA’s Resource Conservation and Recovery

Act (RCRA) and the OSHA Act will also have

a growing impact on existing steelmaking

technologies.

EPA has an ongoing process of promulgating air emission standards for specific steelmaking processes in order to adequately protect public health and property as required

under CAA. The Agency is also in the process

of revising steel effluent guidelines for the

regulation of waterborne pollutants so that

all pollution may be eliminated from navigable waters by 1985, as required by FWPCA.

RCRA also is of growing importance to the

steel industry. This statute directs EPA to

regulate the disposal of hazardous solid

waste, and final steel industry guidelines

have only recently been promulgated. This

legislation may become the major impetus

towards increasing the steel industry’s use of

recycling and other in-process changes that

reduce the volume of solid, hazardous waste

it generates.

OSHA’s principal responsibility is to ensure safe and healthful conditions in the

workplace. OSHA is guided by general authorizing legislation embodied in the Occupational Safety and Health Act of 1970 rather

than by a set of specific statutes, as is the

case for EPA. The OSHA general duty clause,

hazard-specific standards, and judicial interpretations are the basis for most OSHA compliance requirements applicable to the steel

industry. Specific OSHA standards having an

impact on the steel industry include those

concerning sulfur dioxide and machine

guarding. The fire and electrical codes are

also significant. However, OSHA's impact on

the steel industry has thus far been rather

limited because its major standards are narrower and more recent than those of EPA.

The coke oven standard, for instance, has

only been in effect for a short time, * and a

number of others are not yet fully operational, including the benzene standard and the

proposed noise standard.** Some future impacts of OSHA standards have already been

felt, to varying degrees, under environmental

regulations that apply to the same steelmaking processes, as in the case of the coke oven

standard.

EPA and OSHA performance standards

are technology based to the extent this is possible. Such standards identify demonstrated

control technologies and, to a lesser extent,

in-process changes that are capable of meet-

*The final coke oven standard, promulgated in 1976, did not

become enforceable until January 1980 because of extended

litigation.

* *The benzene standard is being contested by a number of

industries. The interim noise standard is based on voluntary industry standards and OSHA has actively considered revising

this and other interim standards.
336 . Technology and Steel Industry Competitiveness

ing minimum abatement levels. CAA and

FWPCA call for three types of standards that

vary in degree of stringency. Steelmaking facilities not emitting hazardous pollutants generally must be equipped with environmental

technologies capable of meeting low- and medium-stringency levels in existing and new

plants, respectively. Any steelmaking facilities or point sources emitting hazardous pollutants must be equipped with the high-stringency, high-performance environmental technologies. Compliance schedules for the two

lower stringency standards were set for the

late 1970’s, and standards regulating hazardous pollutants will have to be met by 1982-83.

OSHA’s approach is similar to EPA’s in

that it also requires more stringent performance levels for new facilities and for all existing point sources emitting hazardous pollutants. Specification standards, commonly

adopted at the outset of the OSHA program,

are now being revised to provide industry

with greater flexibility in attaining compliance. Recent OSHA standards have generally

been of the performance type. It is OSHA’s

view that the rigidity of existing specification

standards is frequently overstated. Section

6(d) of the OSHA Act enables employers to

obtain a variance from any standard. Such

variances allow employers among others to

select innovative means while providing for

optimum employee protection as required by

the standard. Such variances may apply to a

single location or they may be extended to all

employers within an industry, as in the case

of a soon-to-be published variance dealing

with arsenic and lead exposures in the automobile industry.

EPA has the responsibility of stimulating

private-sector development of innovative

process or control technologies that will result in greater pollution abatement or lower

cost systems. To encourage the diffusion of

new technologies, EPA may call for one industry to share an equipment development it

uses if that equipment can be applied effectively in another industry. z When calling for

‘Suggested in-process changes do not have to be common industry practice whenever toxic pollutants are involved. (EPA,

office of the General Counsel, letter to OTA, Nov. 30, 1979.)

the transfer of such technology, EPA must

keep in mind a proper balance between

health impacts and questions of economic

and technological feasibility.

The OSHA Act has given OSHA the general

authority to require industry implementations of regulatory technology that is “looming on the horizon."3 If forcefully implemented, this approach could have the effect

of stimulating the development of technologies capable of improved or cheaper performance whenever hazardous substances are involved. The scope of OSHA’S major technology-forcing mandate applicable to steelmaking is now being considered for review.

Feasibility of Standards

Industry feels that both EPA and OSHA

have gone too far with their technology-based

standards,

4 and its objections, often presented before the courts, are generally based

on considerations of technical or economic unfeasibility. The American Iron and Steel Institute (AISI) and individual companies have

challenged a number of standards, including

those governing water pollution and the

OSHA coke oven standard. The statutes originally appeared to have given EPA greater latitude than OSHA with respect to technological and economic requirements for the control of toxic or hazardous pollutants; subsequent court interpretations, however, seem to

have reduced the authority of both agencies.

In general, EPA now has to give greater

prominence to economic considerations, although it may still require technology transfer between industries. OSHA, on the other

hand, now has narrower authority over the

stimulation of technological innovations that

reduce occupational risks. OSHA is considering to promulgate an interpretive field memorandum governing the steel industry that

could place constraints on OSHA’s ability to

require major R&D efforts for improved coke

‘OSHA Act, Public Law 91-596, sec. 6(b)(5),

“AISI, letter to OTA, November 1979.
Ch. 1 I—Impacts of EPA and OSHA Regulations on Technology Use ● 337

oven compliance, EPA notes on the subject of

feasibility that:

Although the Court rejected all challenges

to the technical and economic feasibility of

the BPT [best practicable technology) limitations, it held that certain BAT (best available

technology) and NSPS (New Source Performance Standards) limitations were “not demonstrated. ” In addition, the Court remanded

all of the regulations because, in its view,

EPA had not adequately considered the impact of age of plants on the costs or feasibility of retro-fitting controls, or the impact of

the regulations on water scarcity in arid and

semi-arid regions of the country.;

Commenting about court review of steel-finishing effluent guidelines, EPA notes:

Here again, the Court rejected all challenges based on technical feasibility. But

here, too, the Court held that EPA had failed

to adequately consider the age/retrofit and

water scarcity issues. In addition, the Court

held that the agency had failed to adequately

consider ‘‘site-specific’ costs and the economic posture of the industry. (However,) the

Court’s remand was not based on the severity of economic impacts, but on the ground

that EPA promulgated the regulations on the

basis of a draft economic analysis.’)

Thus, while EPA’s authority over questions of

technological feasibility has been generally

unchanged, * these and other court cases

have given greater prominence to economic

issues and local concerns.

State agencies can be more responsive to

local concerns than EPA, because they have

greater latitude than EPA to consider the economic or technological implications of environmental requirements affecting specific

plants in polluted areas, For instance, in the

past few years a number of States have

granted variances to individual steel plants

solely on the basis of economic burden or

~EPA, Office of the General Counsel, letter to OTA, Nov. 30,

1979, p. 7 (basic steel effluent guidelines].

‘Ibid.

*Informal comments from within and outside EPA occasionally suggest that the Agency has not yet vigorously pursued its

“technology forcing” mandate. For related comments, see

“Limited Private and Public Sector Effects, ” p. 34o.

technological feasibility, while still planning

to meet statewide goals for improved environmental protection. The role of State governments in regulating steel plant construction

will probably expand in response to a June

1979 Federal court decision, while EPA is

likely to be excluded from reviewing construction standards for smaller emitting

sources.

OSHA considers both economic and technical feasibility when developing proposed

standards. When several court rulings indicated that OSHA was not limited to issuing

standards based solely on devices already

fully developed,’ OSHA interpreted the rulings as enabling it to “force industry to develop control technology whenever quick action

is needed to regulate worker exposure to toxic and hazardous materials."8 The steel industry, concerned about OSHA’s ability to require industrial development of new technologies as a means of improved compliance, initiated its own court challenge to the concept. In

a 1978 case, the court invalidated OSHA’s

R&D requirement for coke oven engineering

and work-practice controls with respect to

fundamentally new technologies.9

As a result of the appeals court decision,

OSHA will not place an industrywide requirement on steel companies to research and develop new technology for improved compliance with the coke oven standard. Instead

OSHA will require controls for noncomplying

batteries in addition to those specified in the

standard as necessary and feasible for individual batteries. This may require the use of

additional controls that have been shown to

be potentially adaptable to individual batteries being considered, OSHA is now preparing

an interpretative field memorandum which

may indicate that it can request of steel firms

‘Society o) Plastics industries v. Occupational Safety and

Health Administration, 509, F. 2d 1302, 1309 (1 975); American

Federation of Labor v. Brennan, 53o F. 2d log, 131 (1975):

American Iron and Steel institute v. Occupational Safety and

Health Administration, 577 F. 2d 825,830-839 (1978).

“W. Grover, “OSHA Now Technology-Forcing Agency,”’ Occupational Safety and HeaJth Reporter, p. 453.

The court also noted that the steel industry had not made

sufficient effort to make use of already operating technologies.

(AIS1 V. OSHA, 577 F. 2d 825,834-835 (1978 ).)
338 . Technology and Steel Industry Competitiveness

incremental improvements in engineering

and work-practice controls applicable to particular batteries without requiring major

R&D efforts.l0As a result of these and other

challenges to its technology-forcing powers, it

appears that OSHA’sauthority to require

major private sector R&D efforts aimed at improved compliance with the coke oven standard now has been reduced. 11

It is conceivable that in the long term EPA

could play a stronger role than OSHA in stimulating new technology when worker protection from toxic materials is at stake. Only

EPA, under narrowly specified conditions described in the 1976 Toxic Substances Control

Act, can require a firm to discontinue use of

toxic or hazardous materials. The need to

substitute alternate raw materials could, under certain conditions, stimulate new process

design and the development of safer substitute materials and processes.

OSHA’sinfluence over regulatory cost impacts may also be changing. Thus far, OSHA

standards have been judged economically infeasible only if they are likely to cause serious

disruption of an industry. But standards may

be deemed economically feasible even though

they are financially burdensome, reduce

profitability, or affect the continued viability

of individual companies.l2In order to enforce

a greater consideration of macroeconomic issues by OSHA, the petroleum industry has

sued OSHA, asking that cost-benefit analyses

be required for major proposed regulations

such as those concerning benzene. The steel

industry joined the petroleum industry as one

of six co-parties in this case. Industry argues

that provisions analogous to risk assessment

or cost-benefit analysis are found in most environmental statutes (including the OSHA

Act), that most regulatory agencies undertake such analysis of major proposed regulations, and that OSHA should therefore do the

‘“Discussion with OSHA staff in the Office of Field Coordination, Feb. 22, 1979.

‘

t

’’ Occupational Exposure to Lead, ” Federal Register, Nov.

21, 1979, pp. 54474-54475, lzlndustrial union Department, AFL-CIO V. Hodgson, C.A.

D.C. 1974: 499 F. 2d 467; USCA 29655 (notes of decisions). See

also OSHA legislative history.

same by identifying the tradeoffs between

employee protection and regulatory cost impact when developing standards. The Supreme Court is now considering an OSHA appeal, which argues that the petroleum industry view is incorrect as a matter of both statutory mandate and policy. OSHA does not accept the assumption that costs and benefits

from regulations are comparable since human life and health do not have an applicable

dollar value.

Innovation

The premise underlying technology-based

performance standards is that they provide

an incentive to innovation by identifying,

rather than prescribing, technologies capable

of attaining specific standards. Such innovation, in turn, could help lead industry to use

improved or cheaper regulatory technologies.

EPA and OSHA have therefore been concentrating on technology-based performance

standards. Performance standards are periodically reviewed with the objective of revising allowable emission limits in cases where

improved abatement or process technologies

have been developed during a given time

frame.

Despite their inherent flexibility, however,

performance standards alone do not appear

to have been an effective mechanism for encouraging industrial innovation of regulatory

technologies. Instead of encouraging the development of new technologies, performance

standards may actually encourage the riskaverting strategy of adopting technologies

that qualify under the technology-based limits

established by the agencies. At that point

there is no further incentive for the private

sector to develop new technologies that might

make possible more effective—or even cheaper—environmental compliance. ’3

The following findings illustrate the limitations of the innovation incentives that performance standards have provided in prac13A, Merrick III, Freeman, The Benejits of Environmental Improvement: Theory and Practice, Resources For The Future,

Johns Hopkins University Press, 1979, pp. 56-57.
Ch. 1 I—Impacts of EPA and OSHA Regulations on Technology Use ● 339

tice. A comprehensive 1977 review of EPA effluent standards concluded that industry installed abatement technologies equivalent to

EPA-suggested technologies, rather than new

equipment specifically designed for further

improvements in compliance .

14 New technol -

ogy development has also been rather slow in

the area of occupational hazard reduction .

For instance, OSHA’s forthcoming requirements for new coke ovens are expected to b e

similar to those for existing batteries because

there has been so little subsequent develop -

ment* of new control technologies .

It is possible that recent regulatory refor m

initiatives will provide supporting incentive s

needed to more effectively encourage privat e

sector innovation. But only a thorough review

of the application of these reforms over tim e

can provide documentation concerning their

full impact on the development of new tech -

nologies . Some of these reforms, such a s

EPA’s bubble approach and the offset polic y

are expected to provide economic incentive s

that conventional regulations appear to b e

lacking. They give industry the flexibility t o

select the least costly measures for pollutio n

abatement .

16 OSHA also has some regulator y

flexibility by means of variances that may b e

issued to applicable standards under certai n

conditions. The first major industrywide variance to a standard is expected to be issue d

shortly to the automobile industry. Proce -

“National Commission on Water Quality, staff report PH-68,

1977.

*Incremental improvements such as magnetic lid lifters and

water-sealed sandpipe caps have been developed during this

time.

“Discussion with OSHA staff in the Office of Field Coordination, Aug. 13, 1979.

“EPA, “Proceedings: First Symposium on Iron and Steel Pollution Abatement Technology,” Interagency Energy/Environmental R&D Program report, Chicago, Ill., 1979, p. 11.

dures may need to be developed for variances

specifically aimed at new technology development. Variances could be issued on a case-bycase-basis. Another approach would be t o

consider the issuance of industrywide innovation variances based on steelmaking equip -

ment replacement cycles. If properly applie d

and supported by economic advantages, variances also might provide more effective innovation incentives than some of OSHA’s pre -

vailing regulatory approaches .

Conclusion

Statutory requirements administered by

EPA have imposed definite compliance schedules requiring major steel industry invest -

ments through the mid-l980’s. The industry i s

also faced with a growing number of OSHAadministered compliance schedules. Thes e

have been set administratively, however, an d

reasonably could also be changed at tha t

level,

Although the development of cheaper an d

more effective control technologies is an im -

portant goal, there has been little such activity because of limited economic incentives. Instead, in order to reduce private-sector engineering and development work, industry ha s

focused its attention on the adoption of available regulatory technology. As part of it s

cost-cutting goals, the steel industry has de -

veloped a strong interest in cost-benefit analysis of proposed technical standards that regulate steelmaking processes. A pending Su -

preme Court decision should help resolve thi s

issue. Recent regulatory reform initiative s

may be a first step towards more effective innovation incentives made available to the in -

dustry .

Pollution Abatement R&D

Summary about the cost effectiveness of regulatory requirements and about environmental and ocCongressional interest in R&D for regula- cupational health hazards. There is a belie f

tory technology and less polluting steelmak - that new, high-performance regulatory o r

ing processes stems from growing concern s cleaner process technologies will also creat e
340 ● Technology and Steel Industry Competitiveness

additional flexibility for economic growth in

heavily polluted regions by making attain -

ment of environmental standards more feasible. *

In addition to improving production effi -

ciencies , several major new steelmakin g

processes reviewed in this report are als o

less polluting than complementary or sub -

stitute conventional technologies. Pollutio n

abatement is brought about either directl y

through reduced energy or raw materials us e

or indirectly through reduced discharges .

Cleaner steelmaking technologies still in various stages of development and adoption in -

clude: continuous casting, coal-based direc t

reduction, direct casting of sheet and strip ,

formcoking, and electric furnace steelmak -

ing.

Of the major technologies considered i n

this report, formcoking and electric furnac e

steelmaking have been affected most by Fed -

eral encouragement. The former primarily b y

means of DOE support and the latter mainl y

by EPA and OSHA. In general, however, Federal agencies have had a greater impact o n

incremental rather than on fundamenta l

technology change. Modest technological im -

provements have tended to result from the initial “push” provided by Federal regulations .

Examples include: pushing emission control s

and improved door seals for coke ovens. De -

velopmental work, induced by regulations, i s

still underway in areas such as biologica l

treatment of coke oven plant waste and basi c

oxygen furnace (BOF) fugitive emissions con -

trol technology. However, private sector efforts to make abatement still cheaper or more

effective, have generally not been wide -

spread or successful once standards hav e

been in existence for some time. For instance ,

nonfugitive emissions control technology fo r

BOFs has not changed significantly durin g

the past 5 years. ”

*New facility construction can be most readily accommodated when regional environmental standards have been attained. OSHA does not have the authority to approve industry

construction plans for regulatory impact, Thus, regional economic growth potential is not directly affected by OSHA policies.

“Ibid,, p. 39.

The steel industry estimates it now spend s

about 15 percent, or $75 million, of its annual

R&D budget on environmental matters. EP A

supports only a small amount of regulator y

technology R&D, and OSHA maintains no program in this area. Applicable statutes impl y

that the private sector is primarily responsible for regulatory technology development, although these responsibilities are not speci -

fied. The steel industry believes the responsibilities should fall mainly on equipment sup -

pliers, but it also contends that already available technology can deal adequately with virtually all environmental problems. The agen -

cies argue otherwise .

There are some major problems affectin g

regulatory technology R&D, including: un -

clear EPA directives regarding private-secto r

R&D, an emphasis on costly “end-of-line ”

technology, inadequate regulatory incentives ,

including lack of economic incentives .

Limited Private and Public

Sector Efforts

Regulatory technology RD&D is aimed at

developing improved control systems or inprocess changes that will make steelmakin g

processes environmentally or occupationall y

less hazardous or that will reduce the cost of

compliance with Federal requirements. Th e

steel industry has conducted regulatory tech -

nology research for many years, but it is difficult to ascertain how much work has actually been done. A limited amount of environ -

mental technology research is underway i n

company laboratories and in an AISI-spon -

sored program .

1 8

Informal 1979 AISI dat a

would suggest that about 15 percent of stee l

industry R&D expenditures are devoted t o

pollution abatement projects. With abou t

$500 million of steel R&D per year, this would

amount to about $75 million annually for regulatory R&D by the steel industry. It is difficult to quantify the extent of this research ,

however, because often it is connected wit h

‘eDuring the past 5 years, the cost of the AISI program has

averaged about $600,000 per year, AISI letter to OTA, November 1979.
Ch. 1 I—impacts of EPA and OStiA Regulations on Technology Use ● 34 I

other process development projects. A con -

siderable portion of industry environmen t

R&D appears to involve engineering work .

Thus, actual environmental technology R& D

undertaken by the steel industry is likely to be

significantly less than $75 million annually. A

small amount of OSHA-stimulated research i s

undertaken in universities, by industry, an d

by the industry-sponsored Industrial Healt h

Foundation, which concentrates on technica l

assistance to industry .

The industry feels that pollution contro l

equipment makers have first responsibilit y

for new regulatory technology development.

Furthermore, industry contends that, wit h

the exception of a few technically comple x

situations such as coke oven controls, tech -

nology already exists to handle steel’s environmental problems .

19 Recent EPA studies, o n

the other hand, suggest an overwhelmin g

need for environmental technology R&D cov -

ering a variety of steelmaking processes .

virtually every process in the iron an d

steel industry currently requires environ -

mental technology R&D to either improve the

level of control, lower the costs or both. The

most significant concerns are for cokemaking, blast furnaces and basic oxygen furnaces. Continued assessment of discharge s

from the various steelmaking processes are

urgently needed to uncover hazardous and

toxic situations that need applications o f

controls or RD&D if controls are not available .

2 0

The Federal Government plays a limite d

role in regulatory technology development for

steelmaking, OSHA offers technical support

to other agencies and individual companie s

concerning the feasibility of engineering con -

trols necessary for compliance .

21 OSHA ha s

the general authority to conduct or sponso r

research and demonstration projects relatin g

to innovative techniques for dealing with oc -

cupational safety and health problems. *

However, OSHA’s interpretation of the legis -

“’Ibici.

“’EPA, Industrial Environmental Research Laboratory, Met-

~llur~iml Processes Branch, letter to OTA, Nov. 13, 1979.

L]OMB, U.S. Budget for FY 1979, p. 656.

*29 U.S. Code 669,

lative history accompanying its authorizin g

statute is that Congress did not give OSHA a

substantial mandate for regulatory technol -

ogy R& D.* This consideration, along wit h

budget constraints, appears to have been re -

sponsible for the lack of an OSHA regulator y

technology R&D program, EPA, on the othe r

hand, does undertake and sponsor some environmental technology R&D, Since fiscal yea r

1976, EPA has provided slightly more tha n

$500,000 annually on a cost-sharing basi s

with the industry for improved environmental

controls, largely for coke ovens. The Agenc y

also cosponsors with AISI a very modest R&D

program .

2 2 However, EPA does support a

larger amount of industrial environmenta l

technology R&D that is applicable to the steel

industry .

The electric utility industry and pollutio n

abatement equipment manufacturers hav e

developed regulatory technologies, such a s

‘‘scrubbers , that are now being used by the

steel industry. Foreign steel industries, particularly in Japan, also have developed sev -

eral advanced control technologies. EPA currently has a foreign technology evaluatio n

project underway to identify potential applications in the domestic steel industry. Tech -

nologies being evaluated include control of fugitive air emissions from the BOF, control o f

wastewater from coke plants and blast furnaces, and general identification of technolo -

gy to increase recycling or reuse of materials .

EPA has already identified some exemplar y

technologies and will support engineerin g

work to determine domestic applicability ;

findings and cost evaluations are expected i n

1980 .

2

’

Constraints Affecting

Regulatory Technology R&D

Regulatory technology R&D conducted by

or for the steel industry suffers from severa l

*Discussion with staff at the OSHA Office of Solicitors. June

2, 1980.

“This program has been funded during the past 4 years at

approximately $150,000 annually. (Nov. 13, 1979 EPA letter to

OTA.)

-“EPA, Industrial Environmental Research Laboratory, Metallurgical Processes Branch, letter to OTA. Nov. 13, 1979.
342 . Technology and Steel Industry Competitiveness

weaknesses, including limited policy guidance on private-sector R&D, emphasis on

“end of the line” (EOL) control technologies ,

and lack of economic incentives .

Limited Policy Guidance on Steel Industry

R&D.—Although EPA has the authority to

stimulate the development of innovative environmental technologies, the Agency does no t

have any guidelines detailing what circum -

stances call for steel industry environmenta l

technology R&D. This option could be use d

whenever available technologies are inade -

quate for meeting new facility standards o r

controlling toxic pollutants. OSHA, as a re -

sult of its 1978 AISI court case, does hav e

clear policy guidance. OSHA’s “technolog y

forcing” policy concerning coke ovens is no w

limited to the diffusion of marginal technological improvements within or between indus -

tries; this decision could set a precedent fo r

other OSHA “technology forcing” regula -

tions .

Emphasis on EOL control technologies.—

Both EPA and the steel industry concentrate

their R&D programs on EOL technologies that

capture pollutants produced by existing proc -

esses, rather than technologies that modif y

the processes so that they produce less pollution in the first place. Very little work ha s

been done on major “changes in process ”

(CIP), such as recycling, alternative uses o f

water, and materials recovery from waste -

water streams. Limited steel industry re -

placement and expansion activities also di -

rect industry interest towards available retrofit technologies.

The prevailing EOL orientation is reflecte d

in pollution abatement capital expenditures .

From 1973 to 1977, the industry reporte d

spending on the average only 5 percent, o r

$25 million, of its pollution abatement fund s

on CIP equipment (table 140). Compared t o

EOL technologies, CIP equipment leads t o

more cost-effective environmental control be -

cause more efficient use is made of ra w

materials and waste products, but often i t

also calls for more technologically comple x

changes. Furthermore, CIP equipment is mos t

efficiently installed at the time of plant con -

struction. But the slow pace of steel industr y

modernization and expansion has been a ma -

jor constraint on the pursuit of this more costeffective abatement approach. Industria l

groups have argued that EPA exceeds it s

statutory authority whenever it consider s

in-process modifications. Nevertheless, th e

growing concern about toxic pollutants i s

likely to lead to increased research and in -

vestment in CIP technologies. *

One area receiving even less attention than

CIP research is the development of proces s

alternatives. ** For instance, EPA has not yet

*EPA’s fiscal year 1980 environmental research budget was

doubled to almost $12 million to support a greatly increased industrial wastewater program.

**Concerned about EPA’s concentration on immediate problems, and responding to National Academy of Sciences and

OTA findings, Congress directed EPA for the first time in 1977

to allocate 15 percent of each R&D program to a separate longterm environmental R&D program.

Table 140.—Air and Water Pollution Abatement Expenditures as Reported by the Basic Steel Industry, 1973-77

(millions of dollars)

Air Water Air and water

Total EOL CIP CIP% Total EOL CIP CIP% Total EOL CIP CIP%

1973 ....., $142.0 $110.5 $31.3 22.18 $ 58.4 $ 54.1 $4.3 7.4 $200.4 $164.6 $35.8 17.86

1974 . . . . . . 179.2 155.9 23.3 13.0 105.3 101.7 3.6 3.41 284.5 257.6 26.9 9.47

1975 . . . . . . 302.5 295.2 7.3 2.41 279.0 17.5 2.8 1.0 581.5 312.7 10.1 1.73

1976 . . . . . . 339.7 325.1 14.6 4.29 301.9 26.4 7.3 2.41 641.6 351.5 21.9 3.41

1977 . . . . . . 317.5 302.9 14.7 4.62 283.4 29.9 3.1 1.09 600.9 332.8 17.8 2.96

Annual

average

(1973-77) . . 256.18 217.28

NOTE: EOL—end-of-llne methods, involvlng the separation, treatment, or reuse of pollutants after they are generated but before they are emitted from the firm’s proper

ty. CIP—changes.in-process methods, involving the modification of existing production processes or the substitution of new processes to reduce or eliminate

the pollutants generated

SOURCE. U S Department of Commerce, Bureau of the census, Current Industrial Reports Pollution Abatement Expenditures, 1973.77, (table 2A)
Ch. 11I—Impacts of EPA and OSHA Regulations on Technology Use ● 343

issued air performance standards and costimpact analyses for the promising new technology of continuous casting. OSHA does no t

have a strong long-term regulatory researc h

program either: although it has encourage d

small improvements in coke oven control technologies, * it has not actively considered les s

hazardous processes that could reduce indus -

try’s dependence on cokemaking. The limited

initiatives that have largely been taken in thi s

area have been taken by EPA, whose regula -

tory actions have tended to reinforce presently available options, such as the electric furnace as a partial replacement of coke-base d

steelmaking, rather than fundamentally ne w

processes ,

Until last year, the National institute fo r

Occupational Safety and Health (NIOSH) di d

not undertake any evaluation of emergin g

technologies,** even though the Institute ha s

a clear mandate to explore the safety an d

health implications of new process technolo -

gies .

24 During 1977 congressional testimony ,

NIOSH representatives discussed attempts t o

strike a balance between short- and long-term

research in support of future standards de -

velopment. NIOSH 1980 program plans indicate that a number of new technologies wil l

be assessed .

2 5

EPA also has started a modest anticipator y

R&D program aimed at exploring the environmental impacts of fundamentally new proc -

ess technologies. For instance, EPA has evaluated coal-based direct reduction (DR) an d

concluded that pollution abatement capita l

costs are one-third less and operating cost s

one-fifth less than for the conventional cok e

*EPA's role has been equally—or more—important in this

area, in part since the Agency has a longer history of enforceable steel industry regulations.

**Some work is now underway on new energy technologies,

but no long-term research has been proposed by NIOSH on

emerging steelmaking technologies.

“The OSHA Act directs NIOSH to undertake special RD&D

related to occupational safety and health as is necessary to explore new problems, including those created by new technology

in occupational safety and health, which may require ameliorative action beyond that which is otherwise provided for in the

operating provisions of the Act, (OSHA Act, Public Law 91-596,

sec. 20(a)(4). )

‘

%Discussion with Dr. John Froines, deputy director, NIOSH,

Aug. 22, 1979.

oven-blast furnace-BOF-hot metal route. Recirculation of fuel gas is expected to bring

about even lower pollution levels compared to

conventional DR processes. The environmen -

tal cost advantages of coal-based DR steel -

making result mainly from reduced water pollution problems. Reducing steel industry reliance on coke ovens by increasing the use o f

electric arc furnaces (EAFs) involves proces s

changes that can make a major contributio n

to the lowering of pollution levels .2’

In continuing support of anticipatory re -

search, EPA noted in its 1979 Research Outlook that:

EPA research to examine the minera l

problem must shift from a focus on existing

mineral processing industries to evaluations

of new technologies and the corresponding

development of environmentally sound control approaches .

Perhaps even more significantly, the Agenc y

added that:

In the long term, environmental criteria

must become an inherent part of a design of

new methods and technology for mineral s

production.

Companies, such as 3M in its “Pollutio n

Pays” program, strongly advocate the inte -

gration of regulatory criteria into the investment decisionmaking process. This approac h

could also be considered by the steel industry

because potential cost-saving advantages ar e

associated with the timely consideration o f

regulatory requirements in investment plan -

ning .

EPA now supports limited R&D aimed a t

evaluating substitute pollution control meth -

ods or “cleaner” steelmaking processes. Nev -

ertheless, neither EPA nor OSHA are in a

strong position to encourage steel industr y

demonstration or use of these new steelmak -

ing technologies . Industry is already con -

cerned about regulatory consideration of in -

process changes ; even greater resistanc e

ZbThe EpA-sponsored report (600/ 7-76-034C) COmPares coalbased DR/EAF steelmaking with the conventional alternative

coke oven-blast furnace-BOF route, American Metal Market,

Oct. 2, 1979.
344 . Technology and Steel Industry Competitiveness

could be expected should regulatory agencies

also actively encourage the industry to adopt

new process technologies .

Limited Economic lncentives.—Perhaps the

most important barrier to regulatory technology development by the private sector is the

lack of strong economic incentives. Available

regulatory incentives, in and of themselves ,

have been insufficient to encourage low-profitability industries to innovate in environmental technology. These incentives, develope d

during the early 1970’s, provide for extende d

compliance in existing plants or temporar y

waivers for new plants that will incorporat e

innovative technologies .

2 7

Unlike EPA, OSHA is not bound by statu -

tory deadlines, and it can set complianc e

deadlines adminstratively, taking into ac -

count factors such as occupational risks, in -

dustry economics , and technology develop -

ment. The coke oven standard, for example ,

provides for delayed compliance schedules o n

the basis of economic feasibility. Once dead -

lines have been set, however, OSHA may only

issue variances to specific operations tha t

need time to respond to material, equipment,

or staffing problems .

28 Although innovation i s

not specifically identified, it could perhaps be

subsumed under the allowable category o f

equipment problems. Thus far, however, th e

steel industry has not actively responded t o

available regulatory incentives like deadlin e

extensions. During the past few years, th e

steel industry has only submitted two propos -

“The Clean Air Act gives EPA the authority to extend compliance of existing mills by 5 years (“delayed compliance order”)

to allow for the demonstration of improved or cheaper control

technologies. For new facilities demonstrating innovative process or control technologies, EPA may grant variances from applicable standards for up to 7 years (innovation waivers).

Should the new system fail during this time, the Agency will

grant an additional temporary compliance waiver to give the

company time to install conventional controls. For innovative

water pollution abatement technology, EPA is authorized to

issue a 3-year waiver for innovative production or control technologies having the potential of industrywide application for

companies wanting to replace existing production capacity.

There do not appear to be any regulatory incentives for retrofitting existing plants with innovative control technologies.

(Public Law 95-95, sec. Ill(j), l13(d)(4); U.S. Code and Admin

News, legislative history of Public Law 95-95, p. 1276; U.S.

Code and Admin News, Public Law 95-217, p. 4375.) 28

U. S. Code AMotated 29, subsec. 655(d), Labor—Safety and

Health, “Variances From Standards.”

als to EPA for innovative controls in existing

plants; EPA did not approve these proposal s

because similar control technologies wer e

already being used by other industries .

It is clear that the temporary waivers an d

deadline extensions are not attractive enoug h

to induce companies to assume the technical ,

financial, and strategic risks involved in innovating. The only cost protection EPA’s inno -

vation incentives provide to participatin g

companies is to free them from noncompli -

ance penalties of up to $25,000 per day whil e

demonstration work is going on. Neither EPA

nor OSHA legislative mandates provide regu -

latory guarantees or financial support shoul d

the innovative approach fail to meet regula -

tory requirements. There is also a strategi c

mismatch between potentially broad eco -

nomic and environmental benefits resultin g

from successful innovation and the limite d

private gains to be made by the innovativ e

firm. Under these circumstances, investmen t

in such innovation may promise too much risk

and too little profit from a private point o f

view. The low rate of new facility construc -

tion and replacement is also a major con -

straint on the development of improved regulatory or process technologies. Without effec -

tive public-private risk sharing, there is little

incentive to bring new technologies online .

Conclusion

The steel industry has only a limited environmental R&D effort, a considerable portio n

of which appears to be devoted to engineering

work, and Federal R&D is also very limited .

Applicable statutory provisions for regula -

tory incentives designed to stimulate the de -

velopment of improved and cheaper regula -

tory technologies have not been very success -

ful, thus far, with the steel industry. A number of applicable technologies have been de -

veloped by foreign steel industries or othe r

domestic industries such as the electric utility

industry, Several process modifications an d

alternatives hold considerable promise for re -

duced pollution. Increased incentives for R&D

and innovation, perhaps including public -

private risk sharing, may be needed to brin g

these technologies online .
Ch. 1 l—impacts of EPA and OSHA Regulations on Technology Use ● 345

Regulatory Cost Impacts

Summary

EPA and OSHA regulations affect modernization and competition most directly by im -

posing additional capital requirements an d

increasing production costs. However, it i s

difficult to measure the extent of these burdens; data availability is a problem. Durin g

the 1970 ’S , the steel industry reported spend -

ing on average 13.1 percent, or $280 million ,

of its annual capital investments for environ -

mental compliance and about 5.8 percent, o r

$85 million, of its annual capital investment s

for industrial health and safety purposes. Ac -

tual spending levels have been lower than for

several other industries, but the opportunit y

cost of regulatory requirements vis-a-vis in -

dustry modernization has been higher fo r

steel because of its relatively low total capital

spending. Annualized capital, operating, an d

maintenance costs for environmental require -

ments presently add between 4 and 6 percen t

to production costs .

Regulatory cost projections are based o n

considerable uncertainty. Available cost-im -

pact studies generally show different cost s

for the same proposed regulatory require -

ments. Federal agencies have estimated tha t

EPA and OSHA capital costs for air, water,

and coke oven compliance will total approximately $550 million annually until the mid -

1980’s, while AISI has estimated total regula -

tory capital costs at $800 million annually .

2 9

Reliable cost estimates may not become available until just prior to implementation o f

standards, when requirements will be fina l

and qualifying control technologies will b e

known. Furthermore, cost savings resultin g

from improvements in regulatory technolo -

gies may not occur until after the standard s

are promulgated. A recent EPA report underscores the point that steel industry expendiNE PA, The Cost of Clean Air and Clean Water, report to Longress, 1979; D.B. Associates, Economic Impact of Coke Oven

Standards, vol. 1, report prepared for OSHA, 1975. Federal estimate is not adjusted downward for possible regulatory cost

overlap; industry estimate includes a much broader range of

regulations than Federal estimate.

tures for abatement equipment are generall y

less than was expected on the basis of projec -

tions. The increase in production costs as a

result of environmental capital and operatin g

costs is expected to remain rather stable ,

ranging between 4 and 6 percent. About 4 8

percent of regulatory capital costs have i n

the past been financed through IDBs. Assum -

ing a similar pattern in the future, betwee n

$275 million and $400 million will need to be

generated annually outside the bond marke t

for investments in regulatory equipment.

Past and Current EPA and OSHA

Compliance Costs

There are several series of data for stee l

industry reported capital expenditures o n

regulatory investments. The Department o f

Commerce and AISI have series relating t o

environmental equipment, and McGraw-Hil l

has one reflecting investments for occupa -

tional health and safety equipment. All thes e

sources depend on industry data. Reportin g

procedures suggest that costs be allocated o n

the basis of the productive or regulatory func -

tion the equipment serves, in an effort to limit

the data base to purely regulatory invest -

ments. No attempt is made to differentiate investments required by statute from thos e

made voluntarily or to differentiate invest -

ments made in response to more than one regulatory requirement. when these series ar e

adjusted for differences in industry defini -

tion, the environmental expenditure report s

are fairly similar, with the AISI data con -

forming most closely to the OTA definition of

the steel industry.

Industry reported that annual capital in -

vestments for required environmental investments during the 1970’s averaged 13.1 percent, or $280 million, of total capital spend -

ing. pollution control investments have gradually increased, particularly since 1975. I n

1978, the steel industry reported that envi -

ronmental capital spending was about 18 percent, or $450 million, of total capital invest-

) 1- – - -
346 . Technology and Steel Industry Competitiveness

ment (table 141). Assuming that half of the environmental investment was financed wit h

IDBs, about $225 million, or 9 percent, of total

capital spending must have come from internally generally funds, loans, or stock offerings. * Environmental capital expenditure s

seem to have been more burdensome for stee l

than for other major polluting industries. The

chemical, petroleum, and electrical utility in -

dustries spent no more than about 10 percen t

of their total capital investment on pollutio n

abatement during the 1970’s (table 142). Relatively higher regulatory spending may t o

some extent have affected steel’s profitability

and limited its capital spending for modernization and R&D.

EPA and OSHA regulations, along wit h

their impacts on capital requirements, hav e

led to changing employment requirements .

When extra workers are needed for the operation of retrofit equipment, labor productivity

tends to decline. In other instances, mainl y

when less polluting substitute technologie s

such as continuous casting or electric furnaces are involved, labor productivity in -

*Data provided by the EPA Office of Planning and Management suggest that the steel industry has in the past financed

close to half of all pollution abatement investments with IDBs,

Table 142.—Pollution’ Abatement Investments as a

Percentage of Total New Plant and Equipment

Expenditures, Four U.S. Basic Industries, 1973=79

(millions of dollars)

—

Electric

Steelmaking Chemicals Petroleum utilities

Sic. . . . . 331

1973. . . . $1,407

16.6%

1974. . . . $2,030

12.170

1975. . . . $2,926

13.5%

1976. . . . $2,954

15.170

1977. . . . $2,815

16.60/0

1978. . . . $2,622

16.8%

$4,324

10.170

$5,628

8.3%.

$6,300

10.8%

$6,723

11.3?40

$6,902

10.1 ‘/0

$7,205

7.9%

$ 5,409

10.9%

$ 7,868

10.170

$10,947

11.8%

$11,744

10.8%

$14,185

8.2%

$15,560

8.3%

491

$16,250

9.2%

$17,649

8.9%

$17,030

9.6%

$18,942

10.5%

$21,743

10.4%

$24,590

10.O%

1979

planned $2,908 $8,106 $17,504 $27,308

18.4% 7.1 0/0 8.00/0 9.70/0

aAir, water, and solid waste.

SOURCE: U.S. Department of Commerce, Survey of Current Business, June

1978 and June 1979.

creases and there is a decline in the total

number of employees. A second employmen t

effect is of a distributional nature. If a plant

closes down, perhaps in part because of regulatory requirements, employment will declin e

in the affected area. This decline may be offset by production increases in other stee l

companies, unless the output of the close d

Table 141.–Total and Regulatory “Current Capital Costs” for the U.S. Steel Industry, 1969.79

Pollution

control

Pollution control as percent

Total capital Pollution control as percentage of of net Occupational health

investment Net capital investment capital investment income capital investments

income Percent of

Year Commerce AISI AISI Commerce AISI Commerce AISI AISI (million) total

1969 . . . . . . . . . NA 2,046.6 $ 879.4 NA $138.0 NA 6.7 15.69 — —

1970 . . . . . . . . . NA 1,736.2 531.6 NA 182.5 NA 10.5 34.33 – –

1971 . . . . . . . . . NA 1,425.0 562.8 NA 161.5 NA 11.3 28.69 – –

1972 . . . . . . . . . 1,174.3 774.8 201.7 NA 17.1 26.03 193.0

1973 . . . . . . . . . $1,407

12.3

1,399.9 1,272.2 $234 100.1 16.63 7.1 7.86 121.0 6.9

1974 . . . . . . . . . 2,030 2,114.7 2,475.2 245 198.8 12.06 9.4 8.03 92.0 3.5

1975 . . . . . . . . . 2,926 3,179.4 1,594.9 396 453.0 13.53 14.2 28.4 70.0 1.9

1976 . . . . . . . . . 2,954 3,252.9 1,337.4 146 489.2 15.09 15.0 36.57 34.0 0.9

1977 . . . . . . . . . 2,815 2,319.3a 377.3a 470 407.6 16.7 1 7.5a 108.0a

41.0 1.2

1978 . . . . . . . . . 2,622 2,538.3 1,291.9 441 457.9 16.8 18.0 35.44 41.0 1.2

1979 . . . . . . . . . NA NA 1,297.2 NA 650.9 NA NA 50.17 NA NA

aExcluding Bethlehem Steel, which incurred a $355 million loss in 1977 due to plant closings.

NOTE: AISI estimates are for the steel industry proper, Commerce Department estimates are for all environmental expenditures by steel companies, including for occasionally substantial nonsteel expenditures.

SOURCES Commerce—Survey of Current Business, June 1978 (survey started in 1973; solid waste for all years); AISI—Armual Statistical Report, 1978 (air and water)

only; Special Survey (air and water only), McGraw HiII, Annual Surveys of Investments in Employee Safety and Health, vols. 1-7, 1973-79
Ch. 11—impacts of EPA and OSHA Regulations on Technology Use ● 347

plant is replaced by imports. The increasing

use of scrap and electric furnaces, accelerated by regulatory considerations, may als o

be leading to a loss of jobs, or at least a shift

of employment from basic ironworking to the

scrap industry .

EPA expects the level of capital investment

for regulatory compliance until the mid -

1980’s to be lower than does AISI, but it expects that annual investments will gradually

increase over this period, while AISI assume s

roughly similar levels. According to EPA, be -

tween 1977 and 1986 the steel industry wil l

invest $41.+1 billion, or about $490 million a n -

nually, in pollution abatement equipment t o

comply with clean air and water require -

ments .

30 AISI, on the other hand, predicted in

1978 that 1976-85 capital investments fo r

compliance with all environmental regula -

tions would be $4.9 billion, or about $55 0

million annually .31 In 1980, AISI estimate d

that environmental plus occupational healt h

investments will amount to $800 million pe r

year until 1988 .

3 2

Operating and maintenance costs for regulatory equipment are an additional cost burden, and as more pollution abatement sys -

tems are installed these costs will increase.

Using the 1978 AISI estimate, 1979 annualized air and water pollution abatement costs

(capital recovery, operating, and maintenance) were about $2.5 billion.33 This is about

$0.5 billion higher than comparable EPA

estimates (table 143). The AISI data are annual averages of cumulative investment projections, while the EPA data attempt to

reflect actual capital investments expected to

be made each year. Thus, EPA estimates for

capital investment and annualized costs increase over time in accordance with anticipated compliance with future regulatory requirements, and AISI projections show higher

‘EPA, The Cost of C)ean Air and Water, op. cit.

31 ADL/AISI, Stee] and the Environment, 1978, p. 1 (1979 dollars).

32 AISI, Steej at the Crossroads, 1980, p. 44.

“About $1.3 billion of this amount is for operating and maintenance costs only. This is in contrast to the $5OO million estimate for O&M in AISI’S Steei at the Cross Roads (republication draft), 1980, p. 11-7.

near-term capital recovery and operating

costs than does EPA. The EPA estimates more

accurately represent actual industry practices, while the AISI data for annualized

pollution abatement costs overestimate current expenditure levels somewhat by including certain investments well before compliance deadlines.

Using industry estimates for annualized environmental costs, one finds that they added

6.4 percent to production costs in 1979. Using

the lower EPA annualized estimates, reflecting in part lower current expenditure levels

relative to future requirements, the figure is

5.1 percent (table 143). *

OSHA-stimulated capital costs have on the

average been considerably less than those for

environmental regulations. Thus far, major

occupational regulations have covered a narrower range of steelmaking processes, and

implementation of major OSHA regulations is

a more recent development. Capital investments for occupational safety and health during the 1970’s averaged $85 million per year

or about 5.8 percent of total capital spending,

but there is no clear trend yet in these expenditures. In 1978, steelmaker reported investing $41 million for industrial safety and

health purposes (see table 141).

Steel industry investment levels for occupational safety and health were on average

less than half those of other basic industries,

such as the chemical and electric utility industries, but they represented a higher proportion of total capital spending (table 144).

Steel industry opportunity costs for occupational safety and health have on the average

been higher than for other industries. Thus,

compared to other basic industries, steel may

be under greater pressure to forgo investments in new production equipment because

of OSHA-related investments.

*EPA estimates that annualized capital and operating costs

for environmental requirements have in the past added 4.6 percent to steel production costs and prices. [EPA, Industrial Analysis Branch, letter to OTA, Mar. 18, 1980.)
348 ● Technology and Steel Industry Competitiveness

Table 143.-Effect of Environmental Requirements on Steel Production Costs and Prices, 1979-83 (1979 dollars)

P.A. as

Annualized percentage of P.A. as

Annualized P.A. costsa (millions) P.A. costs Production production percentage of

Operating and Capital per tonne costs per Total revenue costs per total revenue

maintenance recovery Total shippedb

tonnec

per tonne tonne per tonne

ADL/AISI

1979. . . . . . $1,360.60 $1,151.30 $2,512.00 $27.08 $422.40 $467.50 6.4 5.8

1983 . . . . . . 2,261.50 1,926.00 4,188.50 41.88 574.20 605.00 7.3 6.9

EPA

1979. . . . . . 1,260.30 734.64 1,995.04 21.50 422.40 467.50 5.1 4.6

1983. . . . . . 2,456.65 1,411.93 3,868.35 37.98 574.20 605.00 6.6 6.3

NOTE: P.A. = pollution abatement.

1) Annualized P.A. costs; capital, operating, and maintenance costs for air and water requirements 1983 AISI estimate Includes fugitive emissions, but 1979

estimate does not.

2)8% annual inflation assumed between 1979 and 1983.

3) Shipments: 197992.5 million tonnes.

198399.8 million tonnes,

aArthur D. Little (for AISI). Steel and the Environment: A COSt Impact Ana;ysis, 1978, p. 3.

bEnvironmental Protection Agency, “The Cost of Clean Air and Water,” report to Congress, 1979

cWorld Steel Dynamics, Core Report J. Steel Prices, Costs, and Proflts, 1979.

Table 144.-Reported and Planned Investment in Employee Safety and Health, Four Basic Industries, 1972-82

(in millions of 1978 dollars and as percentage of capital spending)

1972 1973 1974 1975 1976

Iron and steel . . . . . . . . $193 12.3% $121 6.9% $ 9 2 3.5% $ 70 1 .90/0 $ 34 0.9%

Chemicals. . . . . . . . . . . 72 2.1 89 2.0 119 2.1 200 3.2 234 3.5

Petroleum. . . . . . . . . . . 68 1.3 196 3.6 216 2.7 263 2.5 128 1.1

Electric utilities . . . . . . 203 1.4 144 0.9 229 1.3 170 1.0 150 0.8

All-manufacturing

average . . . . . . . . . 52.1 3.0 67.0 3.2 87.6 3.4 92.2 3.1 64.6 2.2

1972-78

1977 1978 1979 planned 1982 planned annual average

Iron and steel . . . . . . . . $ 4 1 1 .2% $ 4 1 1.7% $ 4 1 1.4% $116 3.3% $84.5 4.O%

Chemicals. . . . . . . . . . . 212 3.1 249 3.5 243 2.9 349 3.6 167.8 2.7

Petroleum. . . . . . . . . . . 250 1.8 490 3.2 600 3.4 222 1.1 230.1 2.3

Electric utilities . . . . . . 194 0.9 448 1.8 413 1.4 577 1.8 219.7 1.1

All-manufacturing

average . . . . . . . . . 87.2 2.6 114 3.0 127.5 2.8 111.2 2.3 79.2 2.9

SOURCE McGraw-Hill, 1st through 7th Annual Surveys of Investrnent in Employee Safety and Health, (1973-79).

There are no comprehensive data on annualized operating and maintenance costs of

OSHA regulations or on the impact of these

regulations on cost and price competitiveness. It stands to reason that the cost impact

will be far less than that of environmental

regulations. More importantly, there are no

thorough analyses of the cost impact of EPA

and OSHA regulations, together. The full

costs of regulation will be less than the sum of

the costs for meeting EPA and OSHA standards separately, because standards overlap

both within and between the two sets of reguNeed for Improved Regulatory

Cost Projections

Steel industry capital expenditures for pollution abatement during the next few years

will be concentrated in investments such as

high-performance environmental equipment

for the control of fugitive emissions and for

the treatment of carcinogenic or hazardous

air and water pollutants, OSHA-related cost

increases are expected to be associated

mainly with required process changes—such

as closed systems, improved ventilation,

and acoustical redesign—and operational

lations. changes leading to reduced coking times.
Ch. 1 I—Impacts of EPA and OSHA Regulations on Technology Use ● 349

Both EPA and OSHA conduct economic-impact analyses of major proposed regulations.

In addition, EPA periodically prepares comprehensive industry impacts of the cost of

regulations. The steel industry also sponsors

economic-impact analyses of regulatory requirements. However, economic-impact studies concentrate only on anticipated regulatory costs. There is little or no effort to compare these costs with the benefits resulting

from new or extended regulations, nor do the

studies compare the cost effectiveness of regulatory control technologies for the steel industry with those for other industries. And

finally, these projections generally do not consider the offsetting effects (which can be considerable) of fiscal incentives or public-financing options on capital need estimates for

regulatory compliance. Both planning and decisionmaking will be aided if future projections take these factors into consideration.

Future Regulatory Cost Impacts

Available cost studies often show different

cost impacts for the same regulations. For instance, EPA annualized environmental cost

projections for capital and operating expenditures into the mid-1980’s are 8 percent less

than those prepared by AISI for the same period (see table 143), while the Agency’s capital expenditure projections are approximately 20 percent lower than AISI’s (table 145).

Each successive projection has increased

the predicted cost of regulatory compliance.

A 1970 EPA report to Congress identified particulate as the steel industry’s major pollutant and projected 1975 operating and maintenance costs for air pollution compliance to be

around $250 million.34 A 1979 report for EPA

estimates that similar expenditures for the

1981-86 period are expected to be $780 million per year.35 These increases over time and

by the same agency are the result of inflation,

better forecasting, and the installation of additional equipment needed to control hazardous pollutants.

Even regulatory cost projections developed

around the same time and covering approximately similar regulatory areas frequently

show rather different estimates of future

capital investments and operating costs. Differences between industry and Government

projections are largely attributable to different assumptions concerning facility replacement rates, expansion programs, technological choices, interpretations of regulations, and the scheduling of regulatory investments. The more extensive the industry’s

investment in integrated facilities—as in the

High Investment scenario discussed in chap-

“Department of Health, Education, and Welfare, The Cost of

Clean Air, second report to Congress, March 1970, Senate

Document 91-65.

“EPA, The Cost of Clean Air and Water, op. cit.

Table 145.—Annual Steel Industry Investments in Abatement Equipment (air, water,

coke ovens): Projected Increases, 1970-85 (millions of 1978 dollars)

Industry estimates Federal estimates

1978 Pollution abatement $450.00 EPA $441.00

Industrial health 41.00 OSHAb

41.00

1985 Pollution abatement

$499.00

700.00 EPAc =

Industrial health 100.0 0 OSHAd

$800.00

68.00

$558.00 1978-85 increase 60% 1570

aAll applicable regulatory requreements.

bSteel industry reported data since no Federal estimates are available.

c1977-86.

d1976-85

SOURCES: Survey of Current Business, June 1978, McGraw-Hill, Survey of Investment in Employee Satety and Health, 1979, American Iron and Steel Institute, Annual

Statistical Report, 1979, Environmental Protection Agency, The Cost of Clean Air and C/can Wafer, Report to Congress, 1979, D.B. Associates, Inflationary

Impact Statement Coke Ovens, report prepared for OSHA, 1976, American Iron and Steel institute, Steel at the Crossroads, 1980
350 ● Technology and Steel Industry Competitiveness

ter 10—the greater regulatory capital costs

will be. Technological choices and the facility

replacement rate will also significantly influence future regulatory capital costs: for instance, electric furnaces and continuous

casters require less regulatory investment

than parallel conventional equipment, and a

high replacement rate reduces the need for

costly retrofit equipment.

In addition to uncertainty about future

changes in the economy, Federal policies, and

industry investment decisions, the following

factors also contribute to differences in regulatory cost projections:

● Different interpretations of regulatory requirements:

—AISI cost projections are reported to include compliance costs for some facilities scheduled for shutdown by the early

1980’s; only if shutdown took place after

1982 would these facilities be subject to

environmental regulations.

—AISI assumes a 20-percent coke oven capacity increase will be needed to replace

existing capacity expected to be lost

under a strict interpretation of the

standard; the OSHA-sponsored analysis

appears to include only retrofitting of

existing capacity .3’

● Unknowns about qualifying regulatory

technologies:

—Uncertainties about qualifying abatement technologies have produced widely

different cost estimates for specific EPA

standards such as those concerning fugitive emissions, storm runoff, and BAT

requirements for air- and water-quality

control .37

—Industry-sponsored economic impact

studies of the proposed coke oven stand-

‘Federcd Register, Oct. 22, 1976 p. 4674846749; Temple,

Barker, and Sloane, “The Financial Impact of Proposed Coke

Oven Standards on the U.S. Steel Industry, ” report prepared

for AISI n.d., p. 7; Policy Models, Inc. A Methodological Approach for Use in Assessing Impact of Government Regulation

of the Steel Industry, report prepared for the Council on Wage

and Price Stability, 1977, p. A-33.

370rganization for Economic Cooperation and Development.

Emission Control Costs in the Iron and Steel Industry, Paris,

1977, p, 151.

●

●

ard included capital costs for automatic

and remote control systems that, according to the United Steelworkers of America, would only be required of new and

rehabilitated batteries.38

Differing allocation of joint costs for productive and control equipment.—This is

an issue whenever investments are made

in new production processes simultaneously aimed at improved productivity and

environmental compliance. Examples include capital costs for waste-product recycling systems and perhaps even electric

furnaces. Available time series on investments in regulatory equipment attempt

to allocate costs on a functional basis. It

appears, however, that steel companies

tend to allocate joint costs disproportionately to the regulatory function, thereby

overestimating compliance costs. For instance, the EPA Enforcement Office argues

that AISI charged the cost of facility closures, modernizations, or replacements as

environmental costs even though substantial production benefits may be realized. If

steel industry modernization programs are

stepped up in response to growing demand,

the issue of proper allocation of joint costs

will grow in importance.

Lack of access to independent industry

data.—In its 1977 report on EPA, the National Academy of Sciences noted that:

EPA is inevitably dependent on the industries it regulates for much of the technical and economic information it uses in

decision-making (among others with respect to) the assessment of the costs and

technical feasibility of pollution processes

to achieve pollution control. The impact of

many decisions on industry creates a potential conflict of interest that may cause

industry either inadvertently or intentionally to distort or withhold necessary information.

The Academy recommended that:

EPA should develop sufficient scientific

and technical expertise with the Agency

38Federa] Register, oct. 22, 1976, P. 46749; policy Models,

Inc., op. cit., p, A-9; Federal Register. Oct. 22, 1976, p. 46748.
Ch. 11—impacts of EPA and OSHA Regulations on Technology Use 351

or through independent institutions (and

that EPA) should institute procedures to

assure the quality, reliability, relevance

and completeness of data provided by industry for EPA’s use.39

Similar observations very likely also apply to

OSHA. Both agencies have taken steps to

strengthen their economic analysis activities

in response to the growing interest in the

economic implications of regulatory requirements.

It is important to recognize that projections

are essentially best available estimates of

predicted industry regulatory investments.

Not only do projections differ between sponsoring organizations and over time, they also

appear to be higher than actual expenditure

reports with they attempt to predict. EPA

recently reported that steel producers spent

less money meeting antipollution regulations

than either the industry or EPA had predicted. The Agency found that for the 1975-77

period, industry investment estimates for

water pollution control were three times

higher than actual costs incurred. EPA estimates were about 1-1/2 times higher than actual steel industry regulatory expenditures. *

Future steel industry investment in regulatory equipment is, according to Federal estimates, expected to increase by 13 percent to

about $550 million annually until the mid1980’s. The industry, on the other hand, expects that future levels will be almost double

current investments, averaging $800 million

per year (see table 145).

“National Academy of Sciences, Decision Making in the Environmental Protection Agency, 1977, vol. II, p. 12.

*Washington Post, June 19, 1980, p. A7.

While U.S. regulatory investments are expected to increase over the next several

years, Japanese steelmaker are beginning to

experience the opposite trend. The financial

burden of pollution abatement seems to have

been highest in Japan from 1971 through

1976 (table 146). These efforts were closely

linked to the installation of new equipment;

upon completion of the last expansion projects in 1977, the industry’s pollution control

expenditures have declined significantly and

recently they have been below those of the

American industry. Because American steel

firms are still in an earlier stage of complying

with regulatory requirements, their expenditures for this purpose are likely to remain for

some time at a considerably higher level than

those of Japanese firms. In Japan, where a

large portion of capacity is of relatively recent vintage, antipollution devices could be

designed to fit the new equipment. This has

led to lower costs per tonne of steel produced

than the retrofitting of such devices on old

equipment. Moreover, a greater effort was

made in Japan than elsewhere to utilize captured waste gases for power generation; this

reduces the requirement for purchased energy and thus helps offset to some extent the

cost of operating the antipollution equipment .40

Using AISI and EPA projections for the

distribution of regulatory investments over

time, 1983 annualized air and water pollution

abatement costs (operation and maintenance)

are expected to be around $4.2 billion and

‘Hans Mueller and Kiyoshi Kawakito, The International

Steel Market: Present Crisis and Outlook for the 1980’s, Middle

Temessee State University, conference paper No. 46, 1979, pp.

26-27.

Table 146.—Steel Industry Environmental Control Investment Outlays: United States and Japan, 1970-71

(in millions of dollars and as a percentage of total capital expenditures)

1977 1976 1975 1974 1973 1972 1971 1970

United States $407.6 $489.2 $453.0 $198.8 $100.1 $201.7 $161.5 $182.5

17.5°h 15.OYO 14.2% 9.4% 7.1 % 17.170 11 .30/0 10.5%

Japan 555.3 920.1 685.2 555.6 367.9 284.4 219.2 NA

15.2 20.6 18.4 18.6 17.3 13.4 8.9 NA

NA = not available

SOURCES American Iron and Steel Institute, Annual Statistical Report, 1978, Hans Mueller and Kiyoshi Kawakito, The International Steel Market Present Crisis and

Outlook for the 1980’s, 1979, p. 27.
352 . Technology and Steel Industry Competitiveness

$3.8 billion, respectively. AISI 1983 capital

recovery estimates for pollution abatement

equipment are a higher proportion of total annualized regulatory costs than is the case for

EPA estimates. This difference reflects the

higher cumulative capital investments and

capital costs assumed by the steel industry

(see table 143). The AISI data show a 66-percent increase in annualized pollution abatement costs between 1979 and 1983, while

EPA data suggest that annualized costs will

not quite double during this period (see table

143). The EPA trend may be the more accurate one because its data are based on gradually increasing costs that anticipate compliance with the more stringent environmental

requirements of the mid-1980’s.

EPA projections for cumulative 1979-83

capital recovery and operating costs for

clean air and water compliance are within 10

percent of the AISI projections, and future

steel production cost and price impacts are

projected to be rather similar. Using AISI and

EPA data, annualized clean air and water

compliance costs are expected by 1983 to add

7.3 and 6.6 percent, respectively, to steelmaking costs. If these regulatory costs are fully

passed on to consumers, steel prices are expected to increase between 6 and 7 percent

(see table 143).*

There are no comprehensive cost projections for all OSHA standards applicable to

the steel industry, although individual future

cost estimates are prepared during the standard-setting process. A major standard that is

presently operational is for the reduction of

coke ovens emissions. An OSHA-sponsored

estimate suggested in 1975 that this standard

would impose annual capital and operating

costs of at least $22o million.41 The benzene

*Preliminary EPA estimates suggest that air and water control requirements will increase steel prices by no more than 4

percent. (EPA, Industrial Analysis Branch, letter to OTA, Mar.

18, 1980,)

‘)OSHA estimates annual capital and operating costs of $218

million, and AISI estimates $1.28 billion. Expressed as a price

increase per tonne of coke produced, OSHA anticipates a $2.75

increase and AISI an increase of $14.62. OSHA attributes its

estimated increase largely to a projected 18-percent decrease

in the productivity of the coking process, AISI’S estimate, on the

other hand, is based on cost increases associated with reduced

productivity, external financing costs, and price increases to

standard, now being considered by the Supreme Court, is not expected to impose additional capital requirements on the steel industry because of its compliance overlap with

the coke oven standard.42 If implemented in

its present form, the benzene standard could

add between $5.5 million and $6 million per

year in steelmaking costs. Cumulative annualized capital and operating costs for coke oven

and benzene standards are expected to be

around $275 million per year (1978 dollars).

Still further into the future are regulatory

costs for compliance with final OSHA noise

standards, which are still being developed.

One source estimates a compliance cost impact of about $100 million annually. *

Financing of Regulatory Equipment

One important option often overlooked

when analyzing steel industry regulatory capital requirements is IDB financing.43 Such financing reduces the need for internally generated capital for investments in regulatory

technologies. IDBs make large amounts of outside funds available at low cost and for long

periods of time.

All types of permanent facilities, such as

piping, pumping, and treatment units, can be

financed with such bonds. During the early

1970’s, Congress authorized State and local

governments to sell IDBs to help companies

obtain the financing needed to meet Federal

pollution control requirements. The public entity issues tax-exempt revenue bonds, repayment of which is based solely on the credit of

the business. The public entity is the nominal

owner of the property which is conveyed to

the business under a lease, lease purchase,

raise the rate of return on investment to the manufacturing average of 12.4 percent. (Federal Register, Oct. 22, 1976, p.

46749; Temple, Barker, and Sloane, op. cit., p. 6: Policy Models,

Inc., op. cit., p. A-33.)

‘

zOSHA, EJS: Benzene Standard, vol. 1, pp. 5-6.

*The final noise standards are expected to be quite different

from the proposed standards, and final cost projections are

likely to differ as well.

‘3For instance, OSHA- and industry-sponsored cost impact

studies of proposed coke oven regulations differed in their

treatment of IDBs. (FederaJ Register, Oct. 22, 1976, pp.

4674846749; Policy Models, Inc., pp. A-9-Io; Temple, Barker,

and Sloan, op. cit., p. 7.
Ch. 1 I—Impacts of EPA and OSHA Regulations on Technology Use ● 353

installment sale, or similar contract. The

business may also obtain tax advantages,

such as the 5-percent investment credit and

accelerated amortization. The Internal Revenue Service determines whether the interest

paid to bond purchasers is subject to income

tax.44 On average, IDBs mature in 23 years

and have an average interest rate of 6.8 percent. 45

All major industries have increasingly relied on low-cost IDB financing to help meet

capital requirements for regulatory compliance. Between 1971 and 1977, the steel industry obtained at least $960 million in outside funds through IDB financing. This

amounts to 48 percent of past annual pollution abatement investments. IDBs continue to

be more attractive to the steel industry than

available fiscal alternatives including a recent revision of the tax code which increased

the investment tax credit for pollution abatement equipment from 5 to 10 percent. The

steel industry’s potential tax savings from

this source, estimated at $6.5 million for

1978, are not likely to be realized because of

the continued industry preference for IDB

financing. 46 Continued IDB financing for environmental equipment could reduce future

capital requirements from internal sources

by the same 48 percent, thereby reducing

total internally generated capital needs. *

Future capital shortfalls that may result in

part from regulatory compliance are affected

by broader industry trends in shipments and

profitability. These trends are heavily influenced by industry investment strategy and

also by Federal price, tax, and trade policies.

Regulatory costs are of concern to the steel

industry in part because these expenditures

may divert capital from the industry’s re-

~~EpA and the Council on Environmental Quality (CEQ), Federal Assistance for Poilution Prevention and Control, 1979, p. 9.

“)EPA, Office of Planning Management, informal survey,

1980. A@To receive a 10.Percent investment credit, steel CrlmpalliE?S

must choose between IDB financing and 5-year amortization.

(EPA and CEQ. Ibid, p. 9).

*See ch. 10, table 135.

placement and expansion plans. Capital diversion, however, is a relative concept. Since

the Renewal scenario discussed in chapter 10

projects lower total capital needs than the

High Investment scenario for the 1978-88 period, the former would involve a greater proportionate diversion of capital from replacement and expansion to regulatory compliance

than the latter. Government and industry regulatory capital need projections of $550 million and $800 million annually would be 18

percent and 26 percent respectively of the

total capital needs under the Renewal scenario, but 11 percent and 16 percent respectively under the High Investment scenario.

However, since the Renewal scenario emphasizes expansion by means of nonintegrated

plants, regulatory capital needs may be less

than even the $550 million of $800 million

projections.

Conclusion

Federal projections for meeting OSHA and

EPA steel industry standards suggest that by

1985 annual investments for regulatory compliance will increase by 13 percent over 1978

levels, to about $550 million, while the steel

industry predicts that by 1985 capital spending for a broader range of regulatory requirements will increase by 35 percent over 1978

levels, to about $800 million per year.

Federal and industry regulatory investment projections may be integrated with the

Renewal and High Investment scenarios discussed in chapter 10 to determine the magnitude of future capital diversion from steel industry modernization to regulatory compliance. Industry data suggest that in 1988, capital diversion from modernization to compliance would have increased by 2 percent to a

total of 16 percent. Federal data, when integrated with the lower Renewal scenario, suggest that capital diversion could increase by

as much as 4 percent to a total of 18 percent.

However, when integrated with the more

costly High Investment scenario, Federal estimates of capital diversion from modernization to compliance could decline by more than

2 percent to slightly below 12 percent.
354 ● Technology and Steel Industry Competitiveness

These divergent conclusions arise in part reconciliation of these divergent conclusions

from differences in estimates of total capital may have to await the time, just prior to imneed and also from the omission of solid plementation of standards, when requirewaste and other emerging regulatory costs ments will be firm and qualifying control

from available Federal projections. A final technologies will be known,

Regulatory Requirements and Modernization

Summary

Environmental policies have thus far had a

greater impact on steel industry investment

decisions than have those administered by

OSHA. To the extent that industry has responded to these policies by making investments in retrofit equipment, they have generally increased production costs, and modestly

decreased labor productivity. On the other

hand, the need for selective facility replacement has made it necessary to enter into environmental agreements earlier than might

otherwise have been the case. Industry economics are presently such that it can be

cheaper and more productive to replace

rather than retrofit in order to comply with

environmental standards. In this sense, regulations have accelerated industry modernization. Regulatory requirements have had their

most serious impact on integrated companies

with a large proportion of aging facilities;

they have affected nonintegrated electric furnace producers less than other industry segments.

Three major policies are currently of special concern to the steel industry, all of which

pertain to EPA air quality matters. The cost

effectiveness of the revised offset policy has

become well established, but potential difficulties remain should a steel company wishing to expand have to “buy” emission offsets

to compensate for the additional pollution expected from a planned facility, EPA’s bubble

concept promises cheaper compliance options for existing and replacement facilities,

but there is some concern about possible

tradeoffs between different types of pollutants within the same plant. And finally, the

limited-life facilities policy is of major concern

to the industry because there is no alternative

phase-out schedule for marginal plants beyond the 1982 statutory compliance date.

Limited Modernization

Regulatory policies, particularly those of

EPA, appear to have slightly accelerated the

steel industry’s modernization process. EPA

issues construction permits for new or expanded facilities, while OSHA enforcement

activities are limited to inspection of existing

production facilities; the latter do not directly

affect construction or expansion plans.

OSHA does have an indirect impact on industry modernization plans because regulatory

requirements become effective as soon as a

new facility is operational.

The most apparent effect of environmental

regulations on modernization has resulted

largely from recent EPA/industry settlements,

which included the closing of old, heavily

polluting facilities and the construction of

modern replacement facilities. For instance,

during the fall of 1978 EPA concluded an

agreement with Republic Steel committing

the company to the construction of a new

electric furnace shop and related facilities in

one location while phasing out outdated coke

batteries, suiterplants, and blast furnaces

elsewhere by 1982.

With a high proportion of outdated facilities, for which retrofitting is not cost effective, the industry is poorly equipped to respond to present high demand for steel products and the anticipated greater demand of

the 1980’s. The need for facility replacement

has led the industry to comply by selectively

updating or modifying existing plants: most
Ch. 1 I—Impacts of EPA and OSHA Regulations on Technology Use ● 355

commonly, outdated integrated facilities such

as coke ovens, blast furnaces, and open

hearths have been replaced by less polluting

electric furnaces requiring comparatively

low capital investments.

Both regulatory requirements and industry

economics influence industry investment decisions. The industry reports that 1.3 percent

of all steelmaking capacity was phased out

between 1973 and 1975 because of regulatory requirements; subsequent shutdowns for

this reason have been of a much smaller magnitude. 47 A 1978 EPA survey, however, found

that market conditions and business considerations were major factors in phaseout

and replacement decisions that were in part

spurred by environmental requirements. The

survey identified 28 facilities, owned by 12

companies, with one or more processes that

may close down or be replaced; it was found

that contributing business factors included

the availability and cost of transportation,

changing market conditions, and corporate

investment plans for replacing antiquated

facilities or rounding out existing facilities. In

some instances, plants were found to b e

either so outdated or in such dire financial

straits that shutdown would simply be inevitable regardless of EPA action.48

Industry’s view is that if compliance has to

be achieved, it should be accomplished by

making “safe” investments that require comparatively small layouts and fit into a plant’s

existing infrastructure. Along these lines,

electric furnaces have frequently turned out

to be an economically more attractive compliance option than extensive rehabilitation of

old facilities or replacing them with identical

new facilities.49 Initial capital investment and

operating costs for electric furnaces are relatively low, and their return on investment as

a replacement for outdated facilities is generally very satisfactory.

iTMcGraw Hill, 1st through 7th annual surveys Of hvestment

in Occupational Safety and Hea~th, 1973-79.

4HEPA Enforcement Office, Steel Documentation Book, 1979.

‘Steelmaking Today Supplement, Sept. 24, 1979, pp. 34A;

“Bethlehem Steel to Add Minimill Capacity,” New York Times,

Aug. 7, 1979.

Industry Differences

EPA and OSHA regulations often affect different steel companies and plants in different

ways. OSHA regulations, in particular, have

a greater impact on integrated plants than on

nonintegrated or alloy/specialty companies.

The degree of process integration and the age

of the facilities are two of the most significant

determinants of regulatory expenditures different companies face.

Degree of Process Integration.—It appears

that environmental requirements are a more

significant element in the cost of steel for integrated plants than for the smaller nonintegrated plants, which involve a less complex

range of steelmaking processes. Furthermore, pollution abatement in these plants is

already quite efficient because most of their

control equipment was designed for installation at the time of construction.

AISI data show that environmental cost impacts are more severe for nonintegrated than

for integrated plants, but independent OTA

data indicate there is little difference between segments when considering environmental investments relative to replacement

value. However, when considering sales the

OTA data show a lower cost impact for nonintegrated plants. AISI data show that current

environmental costs are about 7 percent of

replacement value for integrated plants and

15 percent for nonintegrated plants. OTA

data show that nonintegrated environmental

costs would be no more than 7 percent of replacement value, approximating those of integrated mills. This comparison of environmental cost relative to capital cost is clouded,

however, by the fact that nonintegrated

plants have lower capital costs per tonne of

steel produced than integrated producers.

Comparing the environmental costs relative

to shipments, AISI data suggest that the segments are affected about equally, at about 5

to 8 percent. OTA data, on the other hand,

show that environmental costs can be as low

as 0.5 percent of shipment costs for nonintegrated plants equipped with wastewater recycling equipment (table 147).
356 ● Technology and Steel Industry Competitiveness

Table 147.—Type-of-Plant Differences in Pollution Control Capital Costs (1979 dollars)

Capital costs (millions Percentage of Percentage of total

Number of plants of 1979 dollars) replacement value shipment cost

Facility type AISI OTA AISI OTA AISI OTA AISI OTA

Integrated . . . . . . . . . . . . 33 — $4,572.0 6.9% — 7.6%

Nonintegrated a

. . . . . . . .

—

8 5 54.0 $9-

16 15.0 6.7% 5.0 0.4%

NOTE Investment levels reflect approximate 1979 practices The AISI data are based on 1975 information, validated in a 1978 study and adjusted for changes in the producer price index for capital goods.

aThese plants are all equipped with wastewater recycling equipment and have zero discharge. Thus, environmental capital and operating costs only pertain to meeting

air quality standards.

SOURCES: Arthur D Little, Steel and the Environment. A Cost Imrpact Analysis,

nonintegrated steel company

Changes in annual unit costs for emission

control will be greatest for finishing facilities

because fluctuations in the rate of capacity

utilization are greatest for this equipment. As

the operating rate goes down, the annual cost

of pollution abatement equipment per tonne

of steel produced will increase.50

Age, Economies of Scale, Location, and Financial Performance.—In some instances, the

oldest equipment bears a disproportionate

cost burden because of comparatively high

retrofitting costs. Frequently, compliance is

made easier by replacing outdated equipment

with more efficient and less polluting facilities. Unit pollution abatement costs tend to be

lower for new facilities in part because they

are larger than the old facilities: various engineering estimates indicate that a 100-percent

increase in operating capacity can lead to a

20- to 25-percent decrease in unit treatment

costs for airborne pollutants. Economies of

scale for waterborne effluent control are

somewhat higher—25 to 30 percent. 51 T h e

geographic location of a firm’s steel-producing capacity also can materially influence

regulatory cost impacts. Water pollution control, for example, is often less costly in dry

regions, where natural evaporation can inexpensively reduce the volume of discharge.

Smaller and older integrated firms are most

severely affected by regulatory cost impacts

because they frequently have limited, if any,

financing options for investments in newer

and safer steelmaking technologies. Financially and technologically weak firms may

‘OECD, op. cit.

“I bid., pp. 88-90.

1975, revised 1978; OTA data from confidential communication with major

have no choice but to undertake relatively inexpensive stopgap measures, which tend to

be counterproductive to the long-range goals

of a viable business enterprise.52 As a result,

their relative positions in the industry may

slide even further.

Potential Modernization Problems

In response to private-sector concerns that

EPA’s offset policy for new facility construction would preclude such activity in heavily

polluted areas, the Agency revised its policy

in 1977. Under the revised offset policy, new

construction is allowed if the new facility

uses very stringent emission controls and if

more than equivalent reductions are made

from existing sources owned by the same or

different companies in the same or contiguous States. Virtually all recent EPA/industry

consent-decree settlements have provided for

industry investment in new facilities that

follow offset policy principles but attain some

net reduction in area emissions.

It is not expected that the revised offset

policy will inhibit new facility construction on

the basis of regulatory cost considerations

alone. There was concern that the requirements for new facilities were too stringent,

and thus too costly, compared to requirements for existing plants. Following this reasoning, the more stringent requirements generally applicable to new steelmaking facilities could encourage firms to defer new construction. Thus, firms could continue operat3ZN. A. Ashford, Crisis in the WorkpIace: @cupationaI Disease and Injury (a report to the Ford Foundation), Cambridge,

MIT Press, 1976, p. 315-316.
Ch. 1 I—Impacts of EPA and OSHA Regulations on Technology Use ● 357

ing their older, less efficient plants longer

than they might have in the absence of these

stringent requirements. This reasoning seems

to suggest that environmental requirements

alone can shape investment decisions. However, investment decisions are based on

overall cost (rather than merely environmental cost) for new or existing plants and on the

rate of return on alternate investments. Relative stringency of environmental requirements is only one of several factors influencing such decisions,

A 1979 EPA-sponsored report analyzed investment scenarios for certain steelmaking

processes by comparing environmental cost

requirements of retrofit with new facility

replacement. 53 The authors found that only

two investment options were attractive (using

typical industry criteria for return on investment), and neither of these options favored

retrofitting as a favorable way to meet environmental requirements. The preferred options were: 1) replacement of conventional

casting processes with continuous casting

and 2) contraction of existing facilities coupled with construction of new electric furnaces. Steelmaker are in fact actively pursuing the latter option, thereby implicitly confirming EPA’s conclusion that replacement

can provide a more attractive return on investment than the alternative of retrofitting

aging equipment—despite the fact that such

replacement facilities would have to meet

more stringent environmental standards.

The revised offset policy might still create

difficulties should a company decide to expand its productive capacity to a point that

would create additional pollution. Preliminary EPA findings, however, suggest that

most steel plants will be able to find internal

offsets for expansion under the revised offset

policy, and the few plants unable to develop

internal offsets would be able to trade offsets

with other plants.54 The major concern may

not be with the availability of tradeoffs but

with the cost of trading emission offsets between companies. If unable to efficiently develop internal tradeoffs, a steel company

might have to “buy” emission offsets from

establishments that are able to control pollution more cheaply and effectively, thus placing an extra economic burden on the industry. Although a “market” in offsets might

minimize the total cost of achieving emission

reduction in a region, steel producers would

probably pay a relatively high price because

of the complexity and high cost of pollution

abatement in the industry.

Recently EPA also. adopted the “bubble

concept” for existing plants and replacement

facilities. The bubble concept applies the offset principle at the plant level and enables

EPA to regulate entire plants as single

sources rather than as a collection of separate emission points. This approach increases regulatory flexibility by enabling the

industry to impose stringent controls where it

is least costly and to relax controls on emission points with similar pollutants but higher

control costs. Because it emphasizes cost effectiveness, EPA expects that the bubble concept will provide industry with increased incentive for innovation in environmental control technology.

The bubble concept is particularly appropriate for steel mills because of the many

emission sources in a typical plant. Recent

EPA analyses suggest potential cost savings

of 5 to 11 percent, or $1.2 million to $1.9 million per year, for moderate controls on average-size integrated plants in industrialized

regions of the country. Potential cost savings

for nonintegrated minimills are 20 percent, or

$20 million per year, for stringent controls.55

The flexibility inherent in the bubble concept

would also apply to equipment replacement:

rather than replace old facilities and control

the new source of emissions, management

could opt to install other new equipment with

“Mathtec, Inc., “The Effect of New Source Pollution Control

Requirements on Industrial Investment Decisions,’” report prepared for EPA, 1979, p. 76.

“EPA, Industrial Analysis Branch, letter to OTA, Mar. 18,

1980.

“Putnam, Hays, and Bartlett, “An analysis of the cost impact

of plant-wide emission controls (the bubble concept) on four domestic steel plants, ” prepared for the Economic Analysis Division of EPA, 1979.
358 ● Technology and Steel Industry Competitiveness

tighter and less costly controls elsewhere in

the plants.56

The steel industry is also concerned about

the impact that the limited-life facilities policy will have on modernization. This policy

does not provide the special treatment for aging plants that industry has sought; it merely

permits the conditional operation of noncomplying facilities for which there are agreements involving replacements or phaseouts

no later than December 1982.57 Implementation of this policy may accelerate the closing

of old, inefficient facilities and thereby increase the productivity of the industry. The

leadtime is short, however, possibly to short

for the timely replacement of aging facilties

with major new facilities. There is considerable concern that large replacement expenditures crowded into short periods may overtax

the financial capability of the industry and

further capacity contraction.

Like EPA, OSHA does not exempt marginal,

noncomplying facilities whose planned phaseout is beyond applicable compliance deadlines. OSHA appears to have greater administrative flexibility than EPA, however, because the duration of variances for individual

facilities is not specified in the authorizing

legislation. An executive task force reviewing

OSHA regulations has recommended that:

OSHA begin to identify standards for

which compliance could be mandated in tandem with normal equipment replacement cycles instead of by retrofitting.58

OSHA may issue variances aimed at innovative compliance approaches on a caseby-case basis or perhaps, industrywide by

’633 MetaJ Producing, January 1980, p. 23. Sqndustry sources suggest that large-scale retrofitting of old

facilities is less often required abroad than in the United

States. Old plants, particularly in Japan, have to be retrofitted

only to meet the most serious violations. (AISI, Steel at the

Crossroads, prepublication draft, 1979, p, II-7.)

‘“Interagency Task Force on Workplace Safety and Health,

“Making Prevention Pay, ” 1978, p. I-3.

considering modernization rates. Informal

OSHA comments suggest that, until recently,

variances may have been under utilized.

Current enforcement and compliance activities may also have a serious impact on future coke and scrap problems if they fail to

give sufficient consideration to new substitute steelmaking technologies. A number of

steel companies have found it profitable to

construct additional cokemaking capacity,

because the use of company-owned coal and

the sale of coke byproducts generate fiscal

benefits and additional revenues that can far

outweigh the regulatory costs associated with

cokemaking. However, a more prevalent response to regulatory and market forces has

been to install electric furnaces to replace

outdated integrated equipment like coke batteries, sinter plants, and blast furnaces—industry economics are presently such that it is

often cheaper to build electric furnaces than

to retrofit or make replacements in kind. As a

result, U.S. coking capacity declined from 61

million to 49 million tonnes between 1975 and

1978. Domestic coke supplies are now being

supplemented with imported coke, some of

which is processed abroad from American

metallurgical coal. Growing use of scrap will

help offset some of the anticipated coke shortage while undoubtedly also contributing to increases in the price of scrap. Industry and

EPA alike have underassessed the long-term

raw material pressures and the technological

alternatives that could reduce the likelihood

of future shortages or price increases. One of

these alternatives, continuous casting, reduces the need for coke and other process

materials by increasing yield. Improved coke

rates in newer blast furnaces will also help

reduce the need for coke. Still another option,

domestic or imported direct reduced iron,

could be used as a superior complement to

limited scrap supplies. Although major integrated companies have made only minimal efforts in these areas, smaller firms are actively pursuing continuous casting and considering the merits of direct reduction.
Ch. 11—Impacts of EPA and OSHA Regulations on Technology Use 359

Conclusion

Regulatory requirements have been and

will continue to be a major cost burden on the

domestic steel industry. As additional pollution control equipment is installed during the

next few years, the industry’s capital, operating, and maintenance costs will increase accordingly. Future industry decisions regarding facility replacement, capacity expansion,

and selection of steelmaking technologies, as

well as trends in productivity and shipments,

will all have some influence on future capital

investments for regulatory compliance. Federal agencies expect that regulatory investments for air, water and coke oven pollution

abatement will increase modestly to around

$550 million per year by the mid-1980’s.

These estimates do not include anticipated

capital investments for emerging requirements, including those for noise abatement

and hazardous solid waste disposal. Industry

projections suggest that regulatory capital investment will increase by almost 60 percent

to $800 million annually to meet all present

and future requirements. IDB financing,

heavily used by the industry as a source of

regulatory capital, will help offset potential

financing problems. Once compliance has

been achieved by the mid-1980’s, pollution

abatement equipment investments could well

level off, while operating costs—depending

on the replacement rate—could either level

off or increase.

Had these requirements emerged during a

period of vigorous industry renewal and expansion, their costs would have been considerably less burdensome. Retrofitting, the prevailing compliance approach, is not a very economical way of responding to Federal mandates. Additional RD&D is needed to find and

encourage the use of more cost-effective,

high-performance regulatory technologies.

The potential private gains from regulatory

research are limited, however, and the industry prefers to use already available control

systems. Future industry decisions regarding

replacement and expansion, its selection of

steelmaking technologies, and trends in its

productivity and shipments will heavily influence future capital investment for regulatory

compliance.

Federal regulations, particularly those administered by the EPA, have in effect forced

companies that wish to modernize or expand

to enter into compliance agreements with the

Agency. This has accelerated industry phaseout and replacement of marginal facilities, so

that environmental and occupational policies

have had beneficial, as well as detrimental,

effects on the industry. Economic considerations have recently been receiving greater

weight in the identification of qualifying control technologies, and the industry hopes that

the feasibility of future regulatory technologies will also be fully considered.
CHAPTER 12

Employees and the Development

and Use of New Technology
Contents

Page

Summary ● ***************.************ - 363

Technically Trained Personnel.... .... ....364

Education . . . . . . . . . . . . . . . . . . . . . . . ● . . . . . 364

Technical Manpower Use. . ...............366

Differences Between Industry Segments. ....368

Employment and Continuing Education .. ....369

Present and Future Manpower Needs. .. ....369

Labor ● **9  ● S** ***** 8******** ● s*..** 370

Apprenticeships and Retraining . ..........370

Job Classification .. .. ** *. .. .. ***. .371 *..37l

Local Work Practices. . . . . . . . . . . . . . . . ,..!371

Conclusion ● .****** ● **.***** ● ******** ● * 373

Llst of Tables

Table No. Page

148. Steel Industry Technical Personnel

Proportion in Total Work Force: Tonnes

per Technical Personnel, 1979 . . . . . . . 364

149. Technical Personnel Degree and Work

Assignment . . . . . . . . . . . . . . . . . . . . . . . 365

150. Technical Personnel by Degree and

Field . . . . . . + . . . . . . . . . . . . . . . . . . . . . 366
CHAPTER 12

Employees and the Development

and Use of New Technology

Summary

An industry’s human resources are a vital

factor in its ability to develop and adopt more

competitive process technologies or to produce improved products. Steel industry personnel may be differentiated on the basis of

education and compensation method. For the

purposes of this study, technically trained

personnel are employees with academic degrees in physical or computer sciences or

engineering disciplines. Also included in this

category are nondegree salaried employees,

such as “melters,” who have a high degree of

technical expertise, training, and responsibility. Employees in the labor category generally

have lower levels of education than technical

personnel and are paid on an hourly basis.

The steel industry uses smaller numbers of

technically trained personnel, and those personnel have lower levels of education, than is

typical of most other industries. Slightly more

than half of all technical personnel are employed in production and quality control, followed by somewhat less than one-fifth in engineering and R&D. Integrated firms employ

large numbers of technical personnel in production, while alloy/specialty firms have a

high proportion in quality control and marketing. These differences in the use of technical

personnel are, to some extent, a reflection of

the relative importance of these areas to the

two industry segments. The nonintegrated

segment employs the fewest technical personnel, consistent with the greater simplicity of

both its processes and its products.

Research personnel are mainly responsible

for market-oriented research that will lead to

evolutionary changes in process and product.

Their number declined during the early

1970’s and has since slowly climbed back to

1970 levels. l Steel-related research in foreign

nations provides more long-term intellectual

and professional opportunities for technically

trained personnel than in the United States.

This may be attributed to greater government

support for research abroad and also to the

greater involvement of foreign steel companies in the sale of machinery and technology.

Opportunities for personnel-based technology transfer in the United States are limited,

partly because movement by technical personnel into steel from nonsteel high-technology industries is negligible, and partly because the support given to continuing education by the steel industry is generally limited.

A technical manpower shortage, now developing in a few selected areas, could become

serious if the industry were to embark on vigorous modernization, R&D, and innovation

programs.

The adoption of new steelmaking equipment or technology affects steelworkers in

the labor category in several ways. Retraining programs may be needed and job classifications may need to be changed to accommodate skill changes. Plant labor practices

need to allow for greater flexibility in work

assignments.

There is some concern, particularly among

those in the academic community familiar

with the steel industry, that apprenticeship

and retraining programs do not adequately

train people for changing job requirements

associated with the adoption of new technologies. On the whole, however, it appears that

labor conditions have not been a constraint

Bureau of the Census, “’The Number of Scientists ~nd Engineers in the Basic Steel Industrv, 1970-1977,”’ 1978.

363
364 ● Technology and Steel Industry Competitiveness

on the adoption of new or more modern steel- sulting from technological change; and local

making equipment. Job classification sched- practices do change, at least among those imules are periodically updated to accommo- mediately affected, to allow for the efficient

date gradual shifts in skill requirements re- introduction of new technologies.

Technically Trained Personnel

OTA’s information on technical personnel

is largely based on a representative sample of

companies responding to a written survey

conducted by an OTA contractor. The companies covered in the survey represent close to

60 percent of the integrated producers, almost one-fourth of the nonintegrated firms,

and more than one-third of the alloy/specialty

companies. The information gathered was

used to examine the adequacy of prevailing

levels of education and training, technical

manpower use patterns, and present and future technical personnel needs.

About 10 percent, or 16,000 employees, of

the integrated companies are technical personnel. The greatest use of technical personnel by integrated steel companies is made by

large plants with advanced technological

bases. For the other two industry segments,

the percentage of technical personnel ranges

between 3 and 4 percent (table 148).

These figures are consistent with data on

the profitability y of the three segments (see ch.

4): the low employment costs of nonintegrated

producers contribute to their greater profitability, and the same appears true for the alloy/specialty producers. The most likely explanation for this pattern is that these two

segments are largely free of the need for technical personnel in the primary, ironmaking

stages of the industry; moreover, there is evidence that these two segments have made

greater use of equipment suppliers for much

of their technical support, particularly in the

development of steelmaking furnaces.

The employment figures are also consistent

with the lower capital costs for modernization and expansion in nonintegrated versus

integrated plants (see ch. 10). As a result,

OTA’s Renewal scenario, with its emphasis

on the nonintegrated segment, would have

lower technical personnel requirements than

the High Investment scenario, and its lower

capital costs would be paralleled by lower

employment costs.

Education

Compared to other manufacturing industries, the steel industry employs small numbers of technically trained personnel. Based

on its total work force, the industry employs

only about 60 percent as many scientists and

engineers as the average manufacturing industry. This compares to 220 percent for petroleum refining, zoo percent for chemical

and allied products, and 130 percent for electrical equipment.

The steel industry also relies more heavily

on scientists and engineers with 1 to 3 years

of college than is typical of manufacturing inTable 148.—Steel Industry Technical Personnel: Proportion in

Total Work Force; Tonnes per Technical Personnel, 1979

Integrated Non integrated

carbon steel carbon steel Alloy/specialty Total

Percent of technical personnel

in total work force. . . . . . . . . 9.60/. 3.3% 3.60/. 8.71%

Tonnes per technical employee 2,256.3 11,947.2 2,131.8 2,352.3

SOURCE: OTA contractor report by F A Cassell, et al,
Ch. 12—Employees and the Development and Use of New Technology 365

dustries in general.2 For example, about 5.4

percent of the aluminum industry’s work

force has completed a 4-year college education in science or engineering, but this is the

case with only 3.9 percent of all steel industry

employees. Technical personnel with undergraduate degrees make up three-fourths of

the steel industry’s technical staff. They are

well represented in production, but less so in

engineering, R&D, and administration. Only

12 percent of all technical employees have

graduate degrees—mostly at the Master’s

level. Larger companies tend to have more

personnel with graduate degrees (table 149).

Significantly, slightly more than 4 percent of

technical employees have nondegree technical training.

The largest numbers of technical employees in the steel industry are mechanical and

electrical engineers and material scientists

(including metallurgists). A much smaller

number are chemists and chemical engineers, and even fewer mining engineers and

physicists work for the steel industry. In recent years, steel companies have brought in

computer specialists, electronic engineers,

and pollution engineers (table 150). With the

exception of researchers, nearly all technical

personnel are recruited upon graduation

from college.

For steel-related technical input, the steel

industry also relies heavily on domestic

equipment manufacturers and engineeringconstruction firms, many of which are associated with foreign engineering firms and increasingly with foreign steel companies and

equipment manufacturers. Domestic equipment companies have rather limited R&D programs. They tend to promote from within and

maintain stable engineering groups, although

their blue-collar work force may fluctuate

‘Bureau of the Census, 1970 Census of the Population: Industrial Chclrocteristlcs.

Table 149.—Technical Personnel; Degree and Work Assignment

. . -—

Employees in top

management

Number Percent

Total

Other Number Percent

Engineering R&D

Integrated -

Ph. D ... ... 222

M.S./M.A. . 382

B.S./B.A. . . . . . 1,041

Associate ... 11

Nondegre e 11

Total. . . 1,667

Percent of total (18.70/~)

Admin- Sales/ Pro- Quality

istrat ion marketing duct ion control

12 3 15 8

104 43 199 53

807 377 4,480 502

10 1 65 3

8 – 99 3

’94 1 424 4,858 569

(10,6°/0) (4.80/~) (54.60/’) (6.5°/0)

5

64

347 —

3

277

845

7,564

90

124

8,900 -

3.1

9.5

85.0

1.0

1.4

26 9.4

71 8.4

321 4.2 — —

3 2.4

421

(4.7°/0)

419

(4.7°/0)

—

4

31

10

18

Nonintegrated

Ph.D. . . . . . . —

M.S./M.A, ... 4

B.S./B.A. . 21

Associate . . . . 3

Nondegree . . . 5

Total. 33

0.5

7.8

58.7

9.7

23.3

1 100.0

8 50,0

20 16.5

— —

1 2.1

(1 4.%0)

— — l — 1

16

121

20

48

206

2 – 3 3

25 9 23 12

— 3 4 —

1 — 20 3 ——

28 12 50 18 81

Percent of total (16.0°/0) (13,6°/0) (5.8°/0) (24.3°/0) (8.7°/0) (39.3°/0)

Alloy/specialt y

Ph.D. . . . . . . . 23

M.S./M.A . 24

B.S./B.A. . . . . 137

Associate . . . . 20

Nondegree . . . 18

Total. . . . . -222

Percent of total (19.8%)

29

54

692

274

1,120

2.6

4.8

61.8

24.5

6 10,7

2 3.7

51 7.4

— —

1 0.4

(5.4%)

1 2

5 5

123 101

9 9

62 69

200 186 -

(17.9%) (16.6°/0)

1

10

190

25

69

295

(26.3%)

1 1

5 5

122 19

5 3

45 11

178 –

(15.9°/0) (3.5%)

SOURCE. OTA survey, 1979 The sample represents close to 60 percent of the Integrated producers, almost one. fourth of the non!ntegrated producers, and more than

one.third of the alloy/specialty producers
366 ● Technology and Steel Industry Competitiveness

Table 150.—Technical Personnel by Degree and Field

—.

Comp. Chem. -

Mat. sci. Chem.—-— ———— sci. Physics eng.

Integrated

—

Ph. D. . . . . . . 85 64 – 14 19

M.S./M.A. . . . 99 80 15 18 81

B.S./B.A. . 704 514 57 106 523

Associate . 2 6 9 – 1

Nondegree 6 12 11 2 4

Total. . 896 676 92 140 -

628

Nonintegrated

Ph. D. . . . . . . 1——— –

M. S./M.A. . . . 2 2—— —

B.S./B.A. . . . 18 7 9 – –

Associate . . — — 8 – –

Nondegree . — — ——14 – —

Total. . . 21 9 31 “ – –

Alloy/specialt y

Ph. D. . . . . . . 19 3 – 1 —

M.S./M.A. 19 4 — 1 —

B.S./B.A. . . . 139 34 9 11 22

Associate . 3 1 3 1 —

Nondegree . 2 2 6 17 — —

Total. . 202 48 29 14 22

Elect.

eng.

—.——

Mech. Ind. Mining

————— eng. eng. eng. Other Total

277

845

7,564

90

124

8,900

1

16

121

20

48

6

70

1,065

16

16

17

93

1,271

7

12

4

79

597

6

34

158

60

276

2,569

49

55

3.009

—

6

1,173 1,400 686 198

—

1

13

6 —

—

4

20

1

5

—

2

17

1

3

— —

5

36

4

26

71

—

1 —

—

23 1

—

2

65

5

2

20 30 206

29

54

692

71

274

1,120

1

7

108

8

6

5

19

223

30

215

—

2

64

20

6

—

—

16 —

—

92 130 74 16 492

SOURCE OTA survey, 1979 The sample represents close to 60 percent of the integrated producers; almost one-fourth of the nonlntegraled producers, and more than

one-third of the alloy/specialty producers

with changing business conditions. Many engineering-construction firms have broadly

trained staffs, skilled in developing, organizing, and executing major projects from planning to startup. These staffs are well informed about new technological developments in steel and they know how such developments can best be incorporated into existing or new plants.

Technical Manpower Use

Production and Quality Control.—The steel

industry employs slightly more than half of all

its technical personnel in production and

quality control (table 149). The industry’s orientation toward engineering and product improvement as important means of responding

to market needs gives these two functional

areas great importance. Employees with responsibilities for technological problems tend

to spend most of their time in the role of “firemen, ” responding to particular problems at

particular shops or plants that are beyond

the capability of local operating and engineering managers to solve. Steel industry

technical personnel are generally well

trained to perform in the existing environment, which emphasizes incremental engineering and product improvements rather

than major innovations based on new scientific or engineering knowledge.

Research and Development.—About 18 percent of all technical personnel in the steel industry is employed in engineering and R&D

(table 149). There has been no growth in the

number of research personnel during recent

years. This may be attributed to a real dollar

decline in steel R&D expenditures and to the

virtual standstill in new plant construction.

Not all steel companies even have R&D departments; in some cases, consulting firms

are used instead of in-house technical R&D

staff.

Steel industry research has been focused

for the most part on cost improvement and on

new products and alloys, and the development of new processes has been undertaken

mostly to achieve these ends. A considerable

amount of process research is carried out

jointly by several steel companies, the entire

industry, or by equipment manufacturers.
Ch. 12—Employees and the Development and Use of New Technology ● 367

Sometimes research personnel undertake

specific studies for the purpose of designing

new equipment, but more often they function

as troubleshooters in defining and solving

problems that occur in the course of production with existing equipment. According to industry sources, approximately 20 percent of

R&D staff works on meeting environmental

requirements. For instance, U.S. Steel estimates that 12 percent of its scientists and 25

percent of its engineers are currently engaged in environmental control activities. The

proportion of R&D personnel working on energy-related technologies is unknown.

The industry’s orientation towards incremental, market-oriented R&D is generally reinforced by a reward structure that does not

encourage independent and creative research. Although R&D and engineering personnel of steel companies may reach management positions by promotion in those units, a

more typical route to higher levels of management is for a scientist or engineer starting in

an R&D or engineering department to move

first into other areas, such as marketing and

production, where there are greater opportunities. Thus, competent researchers may

not stay in R&D because they are more likely

to reach higher salaries and more prestigious

positions through other departments. The

main disadvantage of drawing directly from

R&D staff for management is that technical

personnel may not have appropriate expertise for business and policy work. An advantage, however, is that such promotions

will lead to greater awareness at the management level of the technological base of the

company and a more effective use of technical feedback for process improvement and

market development.

Of the steel industry’s major international

competitors, only the Japanese steel industry

has an R&D program that is as strongly market-oriented as that of the United States.

France, England, and West Germany have

more diversified steel R&D activities, ranging

from basic to applied research, than is the

case in either the United States or Japan.

Foreign steel producers are often the beneficiaries of publicly supported steel-related

R&D, and they are also involved to a much

greater extent in the sale of steelmaking

equipment. All of these conditions combine to

make R&D less subject to short-term fluctuations in the business cycle and to create more

numerous long-term intellectual opportunities

for R&D personnel than is the case in the

United States.

Top Management.— Only 5 percent of all

technical personnel in the entire industry

have top management positions (table 149).

Some steel industry analysts and customers

argue that the overall influence of accounting

and financial executives in the steel industry

is far stronger than in the past; others disagree. If this is indeed the case, it is likely a

reflection of declining profit margins in the

industry and a resulting interest in tighter,

more formal budgeting and proposal evaluation. Nevertheless, top executives of many of

the most profitable and technologically competitive firms do have technical backgrounds.

Although not heavily represented in top management, research department personnel regularly participate in the planning, conceptualization, and specification stages of capital proposals, Their primary functions in this

role are to help anticipate technological

changes and to evaluate the technological

feasibility of various equipment features.

Technological change per se is generally

not a primary concern of steel executives.

Managers usually make an investment decision on the basis of the general necessity or

wisdom of making such an investment, calculated or at least justified in terms of the profits and rate of return to be realized. Financial considerations are given priority, operating considerations are secondary, and technology is at best ranked third. *

*Important factors encouraging new investment are growth

in markets, followed by considerations about the price level of

steel. Still another factor affecting the decision to invest in new

facilities is the rate of payoff from alternative investment opportunities outside steel. Tax factors also affect the extent and

timing of investment in new facilities. The degree of technological change as it affects expected rates of return and risk also

has considerable impact on the kind of equipment being acquired, but less so on the extent of investments being made. (D.

L. Hiestand, High Level Manpower and Technological Change

in the Steel Industry, New York, Praeger, 1974, pp. 29-30. )
368 ● Technology and Steel Industry Competitiveness

Research personnel are sensitive to the

reluctance of steel company executives to

adopt new technologies. The receptivity of

particular steel companies towards new technology largely depends on the top executives

themselves. If top management creates an environment that is receptive to ideas and risk

taking, those below them will be innovative; if

adventurous planning, operating, and engineering managers are penalized or their suggestions discouraged, they will hold back.3

Differences Between Industry

Segments

The major industry segments—integrated,

nonintegrated, and alloy/specialty companies—show some interesting variations in

their use of technical personnel (see table

149). On the whole, these differences are related to the greater complexity of integrated

steelmaking and the greater emphasis on

quality control and marketing in the alloy/specialty segment of the industry. The most significant differences are in the educational

level of the technical staffs and in the way

technical personnel are used.

Differences in Educational Level.—In general, lower level technicians are more prevalent

in the nonintegrated and alloy/specialty segments of the steel industry, while integrated

companies tend to require technicians with

undergraduate and graduate degrees. Only

about 2.5 percent of all technical employees

in integrated companies have limited technical training rather than full degrees. By comparison, almost 35 percent of the technical

staffs of nonintegrated companies and about

30 percent of those in alloy/specialty companies do not have baccalaureate degrees. Of

those who do have degrees, about 3 percent

of those in integrated companies, 8 percent in

nonintegrated companies, and 7 percent in

the alloy/specialty companies have advanced

graduate degrees. One-third of all R&D technical employees in integrated companies have

‘D. L. Hiestand, High Level Manpower and Technological

Change in the Stee~ Industry, New York, Praeger, 1974, pp.

29-30.

graduate degrees, compared with one-fifth

for alloy/specialty companies and only onetenth for nonintegrated companies.

Differences in Use of Technical Personnel.

—Nonintegrated and particularly alloy/specialty companies employ a somewhat larger

percentage of technical personnel in administration (14 and 18 percent, respectively) than

do integrated producers (11 percent). Of

greater interest, alloy/specialty companies

use proportionately more technical employees in marketing and quality control than do

the other segments (30 percent as opposed to

10 and 15 percent for integrated and nonintegrated firms). Alloy/specialty firms use about

three times more of their technical personnel

in marketing than do the nonintegrated producers. This is a reflection of the relative importance of product quality and marketing to

alloy/specialty producers.

Integrated producers use more than half

(about 54 percent) of their technical employees in production, twice the level for the other

two segments (about 25 percent). To some

degree this difference occurs because integrated companies use more processes than

the others, so the technical side of production

plays a more important role in their operations.

Although the nonintegrated companies

have the smallest number of technical employees in relation to total production, they

use a greater fraction of them in top management than do companies in the other steel industry segments. Fifteen percent of all technical personnel in nonintegrated companies

are in top management, compared to about

five percent for the other segments. Nonintegrated companies thus appear to encourage

greater coordination between the economic

and technological dimensions of management. One result of this may be the apparent

rapid adoption of new technology made available by equipment manufacturers (foreign

and domestic) and the constant attempt to

reduce costs through technological change.
Ch. 12—Employees and the Development and Use of New Technology ● 369

Employment and Continuing Education

Most steel companies have tuition support

programs for undergraduate and graduate

education. There is generally much less support for publishing in professional journals

and for sabbaticals at domestic and foreign

universities. Technical personnel in R&D are

given some opportunity to attend meetings

and conferences, but technical people in

other departments tend to have few such opportunities, There is some criticism of the industry because the training and development

of technical staff are geared to managerial

and executive development rather than to

ongoing education in technical specialties.

These are the areas viewed by management

as the industry’s backbone, an orientation

reflected in mobility patterns that generally

reemphasize R&D.

The steel industry draws only small numbers of technical personnel from high-technology industries, such as aerospace, computers, and electronics, or from similar types

of process industries such as chemical, glass,

and aluminum. There appears to be a trend

among steel technicians toward retiring to

Government and university jobs; there is little

flow of personnel in the opposite direction.

The U.S. steel industry also lacks strong links

with other industries, universities, or the

Government with respect to midcareer employment or training, This limits the industry’s ability to draw on technological ideas

originating in other areas or to otherwise

strengthen the professional background of its

technical personnel. In Europe and Japan, on

the other hand, there are opportunities for intersectoral training and mobility of technical

manpower; in West Germany, there is much

greater opportunity than in the United States

for technical talent to move back and forth

between Government and industry and between basic and applied research. The underlying goal is to provide industrial activities

oriented towards the international marke t

with a strong science and engineering basis.

Clearly, this approach allows and even encourages considerable training and technology transfer between different sectors of the

economy .

Present and Future Manpower Needs

The steel industry claims that it does not

have problems in meeting its current technical personnel requirements. The industry’s

ability to attract technical personnel in sufficient numbers is in part related to improvements in steel industry pay scales during the

1970’s. Starting salaries have become more

competitive with those of other industries.

Many steel executives make the following

manpower assumptions:

Most or all of the necessary manpower,

with the required skills, is already present in the organization.

If not already available, the necessary

skills can be acquired by present employees through training, experience, or

other means quickly enough to avoid hindering a project.

If there are no present employees who

can acquire the needed skills quickly

and easily enough, trained personne l

can be attracted from elsewhere either

to meet fully the company’s needs or to

help develop existing employees.

If all of the above are inadequate, some

other organization can be engaged o n

contract to meet all of the company’s

needs or to develop the manpower required.’

Other industry representatives, particularly college recruiters, are concerned that more

growth-oriented industries may be attracting

the best technical talent. Clearly, the ability

to meet personnel requirements does not fully

lay to rest the question concerning the performance of the industry’s technical personnel—particularly when more sophisticated

equipment or processes are involved.

Occupational projections by the Department of Labor show that demand for steel industry professional technical personnel will

‘Ibid., p. 38
370 Technology and Steel Industry Competitiveness

increase by 5.6 percent between 1976 and

1985.

5 The use of lower level technicians in

control and monitoring of production promises to enlarge. However, most growth and replacement demand is expected to be for

chemical, civil, electrical, and sales engineers. This is the result of an ongoing emphasis on the development and application of

existing steelmaking technologies.

Research activity in mining and metallurgical engineering is virtually nonexistent; this

represents a national weakness in the preparation of sufficient numbers of such personnel. In addition to the lack of manpower,

funding is a problem. Given the growing demand for high-performance steels and th e

growing use of computers in steelmaking, additional shortage areas are likely to include

material scientists and electrical engineers

familiar with both the industry and process

control technology. Anticipated shortages of

mining and metallurgical engineers and of

process control experts will make it difficult

for the steel industry to meet its needs for

‘F. A. Cassell, The Use of Technical Personnel in the steel industry Including Comparison With Japanese and German industries, contractor report for OTA, 1979.

cost reduction, energy economies, and environmental compliance.

The future availability of technical personnel must also be viewed in terms of alternatives to present industry strategies. Current

investment strategies entail leadtimes from

concept to installation of new capacity that

provide technical personnel with sufficient

opportunity to learn what needs to be known

about the improved technology. Should the industry decide to shift to a more extensive research program involving a greater emphasis

on basic research and accompanied by a vigorous investment program in new steelmaking technology, it is uncertain that present

staff would be fully capable of making the

transition. Familiarity with fundamentally

new technological concepts and completely

new skills could be required, and most steel

technicians are not now equipped to dea l

with such new skill requirements. Furthermore, the steel industry could face difficulty

in recruiting some types of personnel. Unlike

the highly regarded government-supporte d

steel industries in other countries, the U.S .

steel industry could have problems in attracting capable domestic technical personne l

who now are inclined to work in higher technology, more R&D-intensive, and highe r

growth industries than steel.

Labor

Generally, steel industry employees in the

labor category have not impeded technological change. However, the job classification

system and local union work practices, as

well as limited familiarity with new technologies, are potential constraints on the flexibility needed to introduce new steelmaking

equipment and processes.

Apprenticeships and Retraining

The median age of steel industry employees

is higher than the all-manufacturing average. * Nevertheless, a number of companies

*In 1970, the median age for steel industry employees was

provide programs for the training or retraining of workers for jobs made more complicated by new technologies.** At one company, a program has been in effect since 1962 to

retrain electrical workers for efficient main43.9 years, compared to the all-manufacturing average of 39,9

years. (Department of Commerce, Bureau of the Census, 1970

Census of Population: Industrial Characteristics, table 32.) Because of declining steel industry employment, it is likely that

the industry’s median age has increased at a faster rate during

the past decade than the all-manufacturing average.

**Entry into apprenticeship training does not guarantee subsequent employment in a craft. Training may be terminated

upon a substantial reduction in the number of required craftspeople within specific crafts as a result of technological

changes in steelmaking process, practices, or equipment,

(Agreement Between U.S. Steel and the USWA, 1977, p. 205.)
Ch. 12—Employees and the Development and Use of New Technology ● 371

tenance of modern electrical equipment and

controls. These updating and upgrading programs consist of classroom and laboratory

training of up to 5 years. Most companies conduct some form of apprenticeship program to

meet their maintenance requirements. There

are such programs for about 20 differen t

crafts in the steel industry, usually of 3 to 4

years duration , consisting mainly of shop

training and classes.’ Apprenticeship training provides companies with the growin g

number of craft workers that are needed in

today’s plants. An industry-labor committee

develops educational attainment and work

achievement standards for the various types

of apprenticeships.

There is some concern, however, particularly among members of the academic community familiar with the steel industry, that

these apprenticeships and retraining programs are inadequate because the instructors themselves may lack sufficient familiarity with new steelmaking technologies.

Job Classification

Generally, production processes and operating procedures in the steel industry have

changed slowly over the years. Neverthe -

less, gradual technological and operational

changes in steelmaking have created shifts in

job content and occupational requirements

for employees in the industry. During the

1950 ’S and 1960’s, the industry made major

investments in blast furnaces, basic oxygen furnaces, and computer-controlled processes. A number of open hearths were gradually phased out. These technological changes

reduced the need for unskilled workers and

increased the need for craft workers and

process-control specialists. Fewer workers

are now directly engaged in production processes, and more nonproduction workers are

needed. *

‘Bureau of Labor Statistics, “Labor Productivity of the Steel

Industry in the United States, ” BLS report No. 310, 1966, p. 23.

*A 1969 Bureau of Labor Statistics study of the manpower

implications of computer process control in blast furnaces,

steel works, and rolling mills found that the major impact was a

change in job duties rather than a change in the number employed. Job changes among operators generally consisted of a

When such shifts in occupational requirements occur, job classifications may change

too. The job classification system used in the

steel industry describes skill requirements

for 12 major job categories. These descriptions are developed and agreed upon by separate industry and union committees. A major

overhaul of the job classification system took

place in 1971 to bring job categories in line

with gradually changing skill requirements.

Local Work Practices

Changes in skill requirements and declining steel industry employment levels** may

require modifications of established work

practices. These practices evolve from management policy, supplementary agreements

with local unions, arbitrary decisions, and

verbal understandings. Specific local practices cover such issues as job content, workload, crew size, seniority practices, and coffeebreaks. By their very nature, local practices may vary from plant to plant across the

country.

A number of work practices go back many

years in origin and during World War II a

considerable number of local practices were

added, either unilaterally by management or

by agreement with local unions. At the height

of the postwar economic boom, plants were

operating at maximum rates and domesti c

market conditions were such that potential

labor instability could be more counterproductive to the industry than limited protection for existing work rules. Local practices were given formal recognition by the

well-known “local practices” (z-B) clause in

labor’s agreements with the major steel companies. Most, but not all, companies now

have this provision in their contracts; a few

shift from manual to automatic control of dials, levers, and

other control devices, Nevertheless, unskilled jobs are being

eliminated wherever possible as labor-saving devices are

adopted. For example, more efficient blast furnaces using processed ores eliminate many unskilled jobs. (Bureau of Labor Statistics, “Technological Change and Manpower Trends in Five

Industries,” Bulletin 1856, 1975, )

**Steel industry employment levels have decreased by 21.4

percent since 1960 as a result of limited growth and improved

productivity. (See ch. 4.)
372 . Technology and Steel Industry Competitiveness

companies are bound by a weaker version of

2-B. The 2-B clause regulates unilateral management changes in local work practices. It

requires management to maintain local practices unless change is required by contractually defined “changed conditions, ” such as

technological innovations, or by union agreement with proposed changes. *

As time passes, the gap between current

conditions and those for which the local practices rule was originally established may

grow wider. With the introduction of new

steelmaking technologies, there has been a

sudden surge in the number and gravity of

labor issues. During the late 1950’s, for instance, the various effects of automation on

employment, job content, and organization of

work dominated collective bargaining.

Work rules may become dysfunctional from

a productivity point of view, although they

may continue to serve the best interests of individual workers. Herein lies the potential for

disagreement about the value of specifi c

rules. It is often difficult to determine which

local rules are inefficient, make-work rules.

The U.S. Supreme Court has generally taken

the position that because make-work practices sanctioned by union-management agreements are intended to protect labor, they are

allowable. Most disagreements on local work

rules are settled by arbitrators, and over the

years a sizable body of formal understanding

has developed from arbitration alone.

Regulations concerning the size of whole

crews are the local practice usually held

responsible for inefficiency. Management

made unsuccessful efforts during the 1959

steel strike to have the 2-B clause removed

from contracts in order to increase flexibility

when using new technology such as fully automated equipment. Instead, the 1960 settlement of the steel strike provided for establish-

*“The Company shall have the right to change or eliminate

any local working condition if, as the result of action taken by

Management under Section 3, the basis for the existence of the

local working condition is changed or eliminated, thereby making it unnecessary to continue such local working condition.

Management’s action is subject to the grievance procedure. ”

(Section 2-B, paragraph 4, of the basic steel industry agreemerit. )

ing a joint committee to study local working

conditions.

7 This committee never became effective because the parties were unable to

agree on a neutral chairman. Nevertheless,

labor-management discussions continued on

the subject, During the 1965 contract negotiations, the union made an unsuccessful demand for stronger union control over eliminating or changing job duties because of technological change. Finally, the 1974 Experimental Negotiating Agreement, the “no strike

agreement, ” retained the union’s right to

strike and management’s right to lock workers out at a particular operation over local

issues unique to that operation. *

Contractual changes relating specifically

to 2-B continue to be made at the plant level

during formal bargaining on local issues.

These talks coincide with industrywide contract negotiations held every few years. Arbitrators have in general interpreted the local

practices section in such a way as to give

management a free hand in introducing technological changes and new equipment. Substantial changes in production methods have

also been held to justify eliminating local

practices. An accumulation of small changes

over a reasonable length of time has been

held to have the same effect as a single substantial change. When such changes occur,

arbitrators have upheld management’s unlimited right to make a fresh start in crew assignments rather than to be held to assignments in proportion to former workloads.

Clause 2-B has been held to apply in many

contract areas, but it has been narrowly applied in most cases. Most 2-B cases have been

decided in management’s favor. In part, this

is because unions have failed to screen arbitration cases, and in part because charges of

violation of 2-B have tended to be thrown into

cases in which local working conditions are

at best a peripheral issue. These arbitration

“’Featherbedding and Union Work Rules, ” in Editorial Research Reports, vol. H, R. M. Boeckel (cd.), 1959, pp. 815,

824-828.

*The agreement aims to stabilize steel production and employment in a cyclical economic environment faced with growing import penetration by labor agreeing not to strike during industrywide bargaining in return for cooperative contract negotiations.
Ch. 12—Employees and the Development and Use of New Technology ● 373

decisions have encouraged most companies to

consider local working conditions no longer a

major barrier to eliminating inefficient work

practices and certainly no barrier to introducing new technology.’

Companies differ in their ability to eliminate work rules that are inappropriate for

new, modern equipment. * Only in a few companies or plants do employee pressures prevent the effective and efficient adoption of

new equipment.

9 Successful companies wisely attempt to make new equipment more attractive to their employees: they develop

“G. L. Magnum, “Interaction of Contract Administration and

Contract Negotiation in the Basic Steel Industry,’” Labor Law

Journu], September 1961, p. 856.

‘Nonunionized companies, such as smaller nanintegrated

steelmaker (“minimills”), are not bound by the 2-B contract

provisions. They have much greater latitude in changing local

work rules, regardless of whether such changes result from the

use of new technology or new operating procedures. However.

such companies might also be fared with informal resistance

on the part of individual employees.

‘In conversation with Milton Deaner, vice president, National Steel Corp.

wages and other incentives that reward highly productive operation and that cover a large

proportion of their work forces. Established

local practices do not prevent management

from making unilateral changes in local practices such as reducing crew sizes if “conditions change” as specified in 2-B. The installation of new equipment, for instance,

makes it possible to change local practices

and improve productivity, although the 2-B

clause makes it difficult to extend such

changes to adjacent production areas tha t

are not directly involved with the new equipment. *

*The following arbitration issue illustrates justifiable and

unjustifiable management actions under 2-B:

While introducing a new incentive plan in a butt mill, management installed cooling table synchronization and reduced

the crew size in the process. At the same time, for purposes of

the incentive program, management reduced the spell time and

crew size at a welder station on the same production line not

affected by the changed mechanical condition.

The arbitrator upheld the first action but reversed the second, [J. Stieber, “Workrules Issue in the Basic Steel Industry, ”

Monthly Labor Review, March 1962, pp. 267-268. )

Conclusions

The training and skills of steel industry e m -

ployees and their execution of responsibilities

on the whole have not impeded the development and use of new technologies. The industry has successfully developed and marketed

new products, although its record of process

development is less strong. Nevertheless,

there is room for improvement with respect to

technical education and training, the use of

R&D personnel, and local staffing practices,

The proportion of technical employees in

the steel industry’s work force is lower than

the all-manufacturing average, and their educational attainment is somewhat lower than

for other basic industries, Continuing education is generally adequate, although extensive

career changes by means of sabbaticals or

exchanges with universities and Government

are not very common. Insufficient instructor

familiarity with new steelmaking technologies appears to be a constraint in apprenticeship and retraining programs. Assuming that

steelmaking technologies continue to grow in

complexity and that product quality requirements continue to increase, then it appears

that a future manpower shortage in mining

engineers, metallurgists, electrical engineers,

and computer scientists is likely.

Prevailing manpower use patterns are

functional in that they reflect the industry’s

concern about production capability. The

great majority of technical personnel employed by integrated producers work in this

area. The technical staffing patterns of

alloy/specialty companies place a greater emphasis on quality control and marketing. Only

about 18 percent of all steel industry technical personnel are engaged in engineering

R&D; an even smaller proportion is in steelmaking R&D because of considerable engineering work and environmental R&D being

conducted by R&D staff.
374 ● Technology and Steel Industry Competitiveness

Job classification schedules appear to have local unions must approve changes in past

incorporated most changing skill require - staffing practices in production areas adjaments associated with technological change. cent to those where new equipment has been

Staffing flexibility at the plant level appears installed.

to be constrained, however, by the fact that