Tough Times for Big Steel
Kiplinger Washington Letter
Jim Ostroff
Jan. 5, 2001

Reprinted with permission of The Kiplinger Washington Editors, Inc. to subscribe, call 1-800-544-0155.

The string of bankruptcy filings and consolidations by U.S. integrated steel producers that began last year will continue in 2001, leaving steel users with fewer-and mainly foreign-suppliers. That could eventually lead to higher prices, though not in '01.

U.S. integrated producers account for half of America's steel production, and the segment "is in catastrophic shape," beset with anemic steel prices, surging capital and energy costs, inefficient facilities and tough foreign competition, says David Jardini, director of Hatch Beddows, a steel industry consulting firm. Further chilling the industry's prospects: a cool reception from the incoming Bush administration, which will balk at imposing further limits on imports despite industry pleas for help.

Buyers of steel can figure on hot-rolled sheet, used in auto frames and welded pipe, sinking from $220 a ton now to around $180 through the end of the first quarter. Average price for the year: about $210 a ton, compared with $230 a ton in '00. Most integrated mills need to sell hot-rolled steel at $250 a ton to break even.

Cold-rolled, used in auto bodies and buildings, and galvanized sheet, used in car frames and industrial roofing, both will sell for a $100 premium over hot-rolled prices. Stainless steel, used in appliances and sinks, sells for about $1600 a ton now. However, its price is determined by nickel content. Expect stainless prices to move lower this year as nickel prices decline. One bright spot will be steel pipe used in oil and gas drilling. Record new exploration will pump up prices for the benchmark carbon seamless pipe 10% this year over its current price of about $1000 a ton, after a 20% jump in '00 from '99. Another ray of hope for the U.S. industry is strong demand for steel in Mexico.

But while customers enjoy the prospect of another year of mostly low prices, large domestic producers are in the throes of major change. LTV Corp.'s Chapter 11 filing in late December followed a like filing the month before by Wheeling-Pittsburgh and earlier bankruptcy moves by Gulf States, Acme, Geneva and Northwestern Steel & Wire. Others in tight straits-with stocks trading at $2 a share or less on the New York Stock Exchange, making new capital difficult to obtain-include National Steel (a subsidiary of NKK Corp.), Bethlehem, Birmingham, Weirton, Oregon and Rouge. The integrated industry's strongest balance sheets belong to U.S. Steel and AK Steel.

Meanwhile, minimills, such as Nucor and Steel Dynamics, Inc., which make steel from scrap, retain relatively strong share prices despite taking a hit from soaring electricity and natural gas prices and slowing demand. But with scrap prices tumbling from $80 a ton in '00 to around $50 now and scrap comprising about half their operating costs, minimills can profitably make steel for roughly $20 a ton less than integrated mills.

More integrated mill closures and consolidations will help bump up unemployment. Big Steel employs about 150,000, mainly unionized workers, and industry restructuring will bring some layoffs. Steel suppliers and steel regions also will be impacted. The integrated steel industry's woes will send shock waves through the financial services industry too. Many U.S. banks collectively own about 10% of the nation's steelmaking capacity via loans, including several to firms that already have declared bankruptcy.

Steel users, especially auto and appliance makers plus the building trades, may take the biggest hit. Lower-priced imports are beneficial to their bottom lines, though they'll be at the mercy of foreign producers, who, absent domestic competition, are freer to raise prices on a whim. And given much longer order-to-delivery lead times for steel imports, some big steel users may opt to pay premiums to ensure a domestic source of supply to avoid risking the loss of just-in-time deliveries that are critical to their bottom lines.

When the smoke clears by '03 or so, there will be fewer U.S. integrated steel producers, more specialization and new links between foreign and domestic producers.

Washington Outlook

Big Steel and its union allies will play up their woes in major lobbying efforts on Capitol Hill and with the Bush administration in coming weeks, although prospects are bleak that Washington will give domestic steel producers more import protection.

Bush will make a show of considering import-restraining deals with non-World Trade Organization (WTO) countries, and he'll listen to pleas for the Organization for Economic Co-operation and Development to pay some overseas steelmakers to eliminate capacity.

But, fact is, he wants to jump-start a new round of WTO talks aimed at lowering trade barriers and won't gamble on angering European and Asian trading partners by acquiescing to new crackdowns on steel imports.

Moreover, Big Steel's entreaties for import relief will run into a buzz saw of opposition from steel importers and users, who say steel producers' problems are caused by their own inefficiencies and inability to compete in a global marketplace. The newly formed Consuming Industries Trade Action Coalition, which represents steel users in auto, machinery, construction, energy, food processing and retailing sectors, will argue that even existing laws aimed at curbing imports hurt many more businesses than they help. "The steel industry uses these laws all the time, and they'll have to explain why they're still not competitive," says Lewis Leibowitz, the coalition's counsel.

About 38 million tons of foreign steel were shipped to the U.S. in '00, the second-highest amount ever, behind '98, when 41 million tons were shipped in. The domestic industry claims much of this tonnage was illegally subsidized, or dumped at lower prices, and it has filed a slew of claims under U.S. trade laws, with limited success, to stanch the flow.