U.S. Steel: Why the Red Ink?By Mel Duvall Print
For all the talk (and reality) of bankruptcy in the steel industry, U.S. Steel is widely lauded for its technology and efficiency. Which simply begs the question: Why is it losing so much money?
For all the talk (and reality) of bankruptcy in the steel industry, U.S. Steel is widely lauded for its technology and efficiency. Which simply begs the question: Why is it losing so much money? Better yet, why is it pressuring the government for an industry bailout to pave the way to consolidate other troubled steelmakers?
How efficient American steel producers are in comparison to foreign competitors is in dispute. But opinion is fairly uniform that the fundamental problem is a basic one. The world's manufacturers can supply more steel than can be consumed by their customers.
Globally, steelmakers have the capability to produce about 200 million more tons of steel than the market is currently consuming, according to the American Iron and Steel Institute, an association representing steel manufacturers in the U.S., Canada and Mexico. Countries from the former Soviet Union alone produce about 120 million more tons than they consume. And the U.S.? Steelmakers here only produce about 80% of the annual needs of carmakers, building builders and the like. So the other 20% of the 131 million tons needed every year have to come from elsewherewith foreign producers driving down prices to keep their mills running. And because the strong U.S. dollar makes imports so attractive.
"U.S. Steel has done a good job controlling the things it can control," says Christopher Plummer, managing director of Metal Strategies, a West Chester, Pa.-based steel industry consulting firm. "The problem is, there are a lot of factors out of its control."
Plummer says there is nothing the company can do about the strength of the U.S. dollar, and while the 30% tariffs on many steel imports introduced by the Bush Administration in February have helped raised prices, they will not solve the long-term problem of global overcapacity. In fact, he says the tariffs may only prolong a much-needed consolidation of the country's less-competitive integrated producers.
Undisputed is the fact that U.S. Steel stands as the pre-eminent American manufacturer of steel products. But it stands above an industry in ruins. Some 30 U.S. steelmakers have sought bankruptcy protection since 1997. Employment in the once powerful sector has plummeted from a high of 650,000 in 1953, to about 140,000 today. The roughly 130,000 unionized steelworkers still employed by integrated manufacturers such as U.S. Steel are supporting more than 600,000 retirees and their dependents.
Until the recent introduction of tariffs on imports, steel prices hovered at 20-year-lows, at about $210 a ton for hot rolled coils. That was well below the profit lines of all but the most efficient producers. U.S. Steel produces hot rolled coils for about $240 a ton, and is saddled with another $30 to $40 a ton of costs to cover retirement and health benefits for former workers. By comparison, a nonunionized operator such as Nucor of Charlotte, N.C., faces just 27 cents of such costs per ton. Not surprisingly U.S. Steel estimates it lost $57 on each of the 3.1 million tons of steel it shipped in the fourth quarter of 2001. The impact on the bottom line was severe: U.S. Steel lost $218 million in 2001.
U.S. Steel would like to acquire Bethlehem Steel, along with National Steel and possibly Weirton Steel, but only if outstanding benefits can be unloaded. Senator Jay Rockefeller (D-W.Va.) has introduced legislation that would see the government assume as much as $10 billion in these burdensome costs, but the initiative is running up against stiff opposition. Non-unionized mini-mill operators in particular, bitterly oppose the bailout.
"The proposal (by U.S. Steel) is nothing more than an attempt to get the government to help a couple of companies at the expense of the rest of the U.S. steel industry and the taxpayers," says Nucor Chief Executive Dan DiMicco. "Our government should not be picking favorites within the industry."
A further wrinkle to come soon onto the scene will be a restart of twice-bankrupted steelmaker LTV. Investment banker Wilbur Ross picked up the company's mills in Ohio, Illinois, and Indiana for $80 million in cash, and about $200 million in liabilities. In the process, Ross was able to offload $4.4 billion in employee pension and healthcare costs largely to federal and state agencies. "He picked up the third largest North American producer for little more than what it costs to reline a blast furnace," says Plummer. "That's a big worry for U.S. Steel and the rest of the industry."
For its part, U.S. Steel is confident it will survive with or without government relief. Chairman Thomas Usher asserts Steel's pension liabilities are well-funded, its remaining facilities are competitive with the best in the world, and at today's prices the company is making money on the steel it sells. In May, hot rolled coil had rebounded to about $300 a ton.
Most critically, the U.S. steel industry is not nearly as inefficient as popular opinion might have it. U.S. Steel produces a ton of steel with just three hours of a person's time.
The average for steelmakers in Germany is 4.0 hours per ton, Japan 4.5 hours and South Korea, where POSCO is based, 4.8 hours. In effect, Korean steelmakers are, by this measure, 60% less efficient than U.S. Steel.
Elsewhere, the inefficiency just gets worse. Producing a ton of steel in Russia takes 16 hours, in China, 22, and India, 34, according to research firm World Steel Dynamics. Despite the huge number of hours required in China and India, labor costs are so low (about $2,600 per year for a worker in China), they can afford to be as much as 22 times as inefficient.
In April, Usher said U.S. Steel could turn a profit in its second quarter, and based on longer-term prices, it will be profitable for the year as a whole. One way or another, he believes the industry will iron out its problems.
"There will be a restructuring of the industry," says Usher. "Whether it happens in a planned, coordinated way with government help, or it happens in a scattered way like LTVit is going to happen."
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