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BusinessWeek: January 11, 1993 |
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Industry Outlook: Manufacturing
STRIKING WHILE THE IRON IS HOT Steelmakers can credit two factors for that: the recovery, and their own fight against foreign steel. Last spring, the Bush Administration allowed 10-year-old "voluntary" quotas on imports to expire. Subsequent talks with U.S. trading partners failed to erect new barriers. So 12 big U.S. steelmakers took their case to the Commerce Dept., where they charged overseas competitors with being government subsidized and with dumping--selling steel in the U.S. at below-home-market prices. On Nov. 30, Commerce agreed with the subsidy charge. Its preliminary findings on the dumping complaint are due this month. TIGHT SUPPLIES. Final rulings on both aren't due until June, but already, the requirement that importers post bonds until the charges are resolved is discouraging imports and tightening supplies. At steel service centers, which buy 25% of the steel sold in the U.S., inventories are at an unusually lean 90 days. So, any new demand "should translate into orders to domestic mills fairly quickly," says Andrew G. Sharkey III, president of the Steel Service Center Institute in Cleveland. Prices are rising in anticipation. Producers have announced a Jan. 1 hike of $10 to $20 a ton on flat-rolled steel, used in cars and appliances, and buyers expect at least part of that to stick. It will take even more to lift the industry into the black: That would require about a 5% hike in the current average price of $470 a ton across all steel products, according to a PaineWebber analysis. But many companies could get by with less. An overall increase of $7 a ton would let U.S. Steel break even, says Thomas J. Usher, ceo of the steel division of usx Corp. The big mills are this close to profitability because they're leaner than ever. Over the past decade, integrated steelmakers--the old-line companies that blast iron ore into steel--spent $23 billion modernizing and rationalizing their plants. They've closed 37 million tons, or 25%, of capacity and installed continuous-casting equipment and new lines for galvanizing steel. Today, U.S. producers need only an average 5.3 work-hours to make a ton of steel--slightly less than their Japanese and European counterparts. They hope to cash in this year if President-elect Clinton follows through on his promised infrastructure spending. MUCH TO DO. Still, it will take several years of healthy demand for the industry to thrive. Restructuring left the integrateds holding pension and retiree health insurance obligations that PaineWebber calculates at $20 for every metric ton of steel they make. That will make it hard to entice lenders and investors to bankroll the next round of necessary investments. William T. Hogan, a longtime steel authority, figures companies must invest $25 a ton, or more than $2 billion a year, just to survive the '90s. The needed additions range from coke ovens to technologies for meeting clean-air rules to mills that can make sheet steel to within 0.002 inch. "Our wish list exceeds our ability to fund it," says National Steel Corp. Chief Economist Joseph A. Rainis. What's more, this year's buffer against imports--which are now 17% of the U.S. market--may be only a breather. Importers are mobilizing manufacturers who rely on foreign steel to lobby against duties. And if stiff steel tariffs get in the way of a General Agreement on Tariffs & Trade breakthrough, Clinton may push for a negotiated agreement--which would end any windfall from steel import duties. Meanwhile, strapped auto makers are unlikely to swallow big steel-price increases without a fight. And minimills, which make steel by melting scrap in electric furnaces, are entering Big Steel's markets. The only minimill that has moved into flat-rolled steel, the heart of Big Steel's business, is Nucor Corp. But a Nucor expansion in Indiana, plus a plant in Arkansas, will nearly double its sheet production in 1993, to 2.1 million tons, says ceo F. Kenneth Iverson. Other companies, from Mexico's Hylsa to Oregon Steel Mills Inc., also plan to buy the "thin-slab" casting equipment Nucor is using--which cuts production costs by $40 a ton. Ultimately, this will force the integrateds into higher-profit specialty products such as noncorrosive steels and alloys. There, they'll battle plastics, aluminum, and ceramics makers. In short, a decade of protectionism and painful restructuring has bought the U.S. steel industry nothing more than the chance to compete again. This year may mark the start of a new test: Can the industry meet the much tougher challenge of clawing its way to the top? | |
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