Excess in Global Steel Industry

TABLE OF CONTENTSPage 1. Table 3. 1. 3 2. Figure 3. 2 6 3. Question 2 What are the reasons for persistent excess capacity in the global steel industry? What would it take for this capacity to be eradicated? 4. Question 2 6 Do you think that the steel industry is vital to the national security Interest of the United State? If so, is it important to protect this industry from low cost foreign producers? 5. Question 3 9 Do you think it is correct to assert, as advocates of free trade do, that Protectionism is self-defeating and harms consumers? 6. Question 4 12

What do you think would happen to American steel makers if the U. S Government were to unilaterally remove all barriers to foreign steel imports? Would the steel industry in the United States become extinct? 7. Question 5 14 What do you think President Bush should do in this case? Why? 8. Reference 17 Question 1 What are the reasons for persistent excess capacity in the global steel industry? What would it take for this capacity to be eradicated? The basic reason for global steel industry has been persistent with excess capacity is because of supply has exceeded demand.

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There are many reasons contributing towards the excess in supply. The extensive use of metal in industry started during the early 20th centuries when the world is going through the industrial revolution. The introduction of machinery in almost all the industries promotes the use of steel. Then come the World War where the used of steel is at its maximum when almost all the machines and weapons used in the war are made with one or more combination of steel. In view of the high use of steel, the demand of steel worldwide is increased and many new companies emerge to capitalized with the high demand.

Until after the Second World War, the major world producers of steel were Western Europe and United State of America (USA). However, between 1980s and 1990s other major producing nations which include China, Japan, Russia, Germany, South Korea, Ukraine, and Brazil has emerge in response to the high demand and contributes to the word supply. In 1999, some 40 percent of all steel produced was traded internationally, increase from 26 percent in 1990. The United State of America now is no longer the major world producers of steel instead the USA has become the word largest importer of steel.

In 1999, the world largest steel producer company is Nippon Steel of Japan with production of 28. 4 million metric tan and the second largest is POSCO of South Korea, producing 27. 7 million metric ton. The statistic on world export and import of steel for 1999 is as per Table 3. 1 ( W. L Hill, 2003). |Table 3. 1. |Exports and Imports of Steel, 1999 (million of metric tons) | | |Country |Exports | |Country |Imports | |2 |Japan |26. |2 |Germany |17. 7 | |3 |Germany |20. 9 |3 |China |17. 0 | |4 |Belgium-Luxembourg |20. 7 |4 |Italy |15. 9 | |5 |Ukraine |19. 0 |5 |France |15. 3 | |6 |France |16. |6 |Taiwan |13. 1 | Source : Charles W. L. Hill (2003), International Business, Competing in the Global Marketplace, International Edition, Fourth Edition. Another reason in the excess of world steel supply is created when there is an additional capacity created in many developing countries. In a pretext to be an industrialized nation, many developing countries consider domestic mills essential for achieving their industrialization objectives, and they consider steel output is vital in terms of security and prestige consideration.

Because of the high priority placed on steel, many of these developing countries have to forgo other development projects in order to build mills. With a lower steel production cost, these developing countries then would be able to increase the production capacity in meeting the demand of steel within. With the increase in capacity also, these developing countries would first stop importing steel from the initial major producers and at the same time, when there is excess production internally, these developing countries would be able to export to other countries.

Not only the developing countries would be able to export but they also can reduce the prices of steel with lower labor production cost and could compete with the developing countries. When this happen there would be excess supply of steel worldwide (Daniels and Radebaugh, 1992). Another important reason for persistent excess capacity is government interventions have distorted the market process. In Europe, for example, governments responded to problems in the steel industry by privatizing troubled state-owned steel companies, mostly in the early 1990s.

Many of these troubled companies were given a new lifeline to make them financially viable. Governments wrote off billions of dollars in accumulated debt, constituting a massive hidden subsidy to formerly state-owned steelmakers. Many of these companies are now losing money bust since it has government backing, these companies will continue operating regardless of whether they cover their short-term cost. Export markets have been used as an instrument of maintaining more output and to stay in business in the hope that demand will improve (W.

L Hill, 2003 ; Daniels and Radebaugh, 1992). In order for the excess capacity in the global steel industry to be eradicated, the governments and steel firms must jointly formulating measures to increase the demand of steel worldwide. Developed and developing countries must help each other to promote the use of steel worldwide. The world can reconstruct period of high demand in use of steel during the industrial revolution where with the introduction of machinery in almost all the industries, promotes the use of steel.

The government of developing countries must emulate those developed countries in the era of industrial revolution. They must introduce the use of machine in all the industries. As an example, the replacement of human labor and animal with use of machine in the agriculture industry. The use of steel can also be promoted in the housing industry, in replacement of wood. By replacing wood with steel in constructing office building and houses not only promote the use of steel but also helping the world environment by preserving the forest.

The developed countries must contribute their expertise and experience in ensuring that developing countries use more steel. The cost of such industrialization and preservation in the developing countries can be subsidized by developed nations in term of low interest loan. Another aspect of eradicating the excess capacity in the global steel industry is to reduce the import and export of steel among the countries worldwide. There are two ways of doing it. First is to reduce export by increasing the demand of steel within the countries.

We could take USA as an example. At the end of World War II, the US steel industry was the most powerful in the world. By 1950 US raw steel production accounted for 47 percent of the world’s supply. By the early 1980s and 1990s, however, not only their world share of production fallen, the United States has become the major importing country. This proves that the USA is able to promote the use of steel within its country. Hence, the countries worldwide must promote the use of steel internally thus would reduce income depending on export.

Second is through political arrangement among steel producing countries by introducing multinational trade agreements and negotiations. In order to reduce import of cheap steel, USA must outsource some of their major steel user industries such as automobile and heavy machines by creating trade agreement with other countries. This would help other steel producing countries maximize the use of steel internally (W. L Hill, 2003). Question 2 Do you think that the steel industry is vital to the national security interest of the United State? If so, is it important to protect this industry from low cost foreign producers?

At the end of World War II the United State (US) steel industry was the most powerful in the world. By 1950, US raw steel production accounted for 47 percent of the world’s supply. By early 1980s, this share fell to about 10 percent because of increase in import from low cost foreign steel producers. However, in contrast, the US steel consumption is showing a growing trend whereby it increase from 84. 5 million ton in 1980 to 99. 8 million ton in 1994 (Cyert & Fruehan, 1996). |Table 3. 2. |Major Steel Producer in USA 1994 ($ Million) | Sales Net Income | |Integrated Producers | |Armco Incorporated 1,438 78 | |Bethlehem Steel Corporation 4,819 81 | |Inland Steel 2,488 54 | |LTV Corporation 4,529 127 | |USX-US Steel Group 6,066 201 | |Weirton Steel Corporation ,261 35 | |Mini Mills | |Nucor Corporation 2,976 227 | |Lukens Inc 947 22 | |Oregon Steel Mills 838 12 | |Quanex Corporation 699 19 | |Chaparral Steel Company 532 20 | |Birmingham Steel Corporation 703 22 | | | |Source : R. M. Cyert and R. J.

Fruehan, 1996, The Basic Steel Industry, Sloan Steel Industry Competitiveness Study, Carnegie Mellon | |University, Pittsburgh, PA. | The steel industry in the US is composed of Integrated Producers and the Mini Mills producers. The Integrated Producers is one that makes steel starting with iron ore and coal through mining. Integrated Producers tend to be firms that have been in the industry for a long time. They have not only integrated the steelmaking process, but to a great extent have integrated the other functions and requirements of the industry. They employ many workers with specific job classifications and their maintenance cost is relatively high.

Mini Mills producers on the other hand use electric arc furnaces to smelt and process scrap metal. Their manufacturing costs are normally significantly less than those of integrated producers, but they cannot produce all products. The Mini Mills strength is in their efficiency, human resource practices and ability to implement new technology. The major steel producers in US (Integrated and Mini Mills) are shown in Table 3. 2 (Cyert & Fruehan, 1996). The US steel industry has long been a key component of the US economy and is considered vital to the national security interest. Since the mid 1800s the steel industry has been contributing towards the industrialization of US (W. L. Hill, 2003).

The following are among the industry, which have a direct relation with the steel industry and it is vital to the US national security and need to be protected from low cost foreign steel producers: a. US Employment industry The US steel industry generates $50 billion annually and employs some 150,000 workers. These are the people who will contribute towards building the nations and are a national security issue to protect their interest. It is therefore important to protect US steel industry from low cost foreign producers. The foreign producers are lowering the cost of steel and many of the US steel producers are not able to compete. The U. S. steel industry has been severely harmed by cheap unfairly traded steel imports.

These foreign producers, many of which are subsidized by their respective government and are dumping steel in the US at below-market price. As a result, the U. S. steel industry has suffered bankruptcies and the loss of thousands of jobs (W. L. Hill, 2003). According to the United Steel Workers of America (USWA), 32 steel companies in the United States have filed bankruptcy since 1997, including integrated steel giants Bethlehem Steel and LTV and 17 of these have been liquidated. Some 46,700 jobs have been lost nationally since January 1998, and steel prices are the lowest in 20 years. USWA Local President John Cirri told a steel rally in Baltimore on Feb. 0, that 100,000 of the 600,000 steel retirees have already lost their health benefits. By March 31, the health benefits of 85,000 retirees of bankrupt LTV, and their dependents, will cease. The USWA says most retirees have already been paying from 25 to 40 % of the cost of their modest health coverage, despite limited pensions in many cases. The majority of surviving spouses receive less than $100 a month in pensions. This is far less than health insurance would cost them if the company their husbands worked for shuts down. It is therefore vital for US to protect the steel industry from low cost foreign steel producer and US employment is definitely a national security issue (Anita Gallagher, 2001). . US Military Equipment industry US are among the major producer and supplier of military equipments. Steel is needed in almost all military equipments and is vital to the military equipments company. It is also a US national defense issue whereby the military equipments company must not become dependent on foreign steel producers. As an example during the World War II, steel is needed by the military, and it would be tactically wrong to become dependent on foreign steel producers for military equipments. Question 3 Do you think it is correct to assert, as advocates of free traders do, that protectionism is self-defeating and harms consumers?

According to the free traders the US should not complain when other countries export their steel at bargain prices or at low cost. Instead, the country should recognize such imports for what they are, a bargain that frees dollars investment and consumption elsewhere in the economy. The free traders said that foreign steel producers are subsidizing the living standards of American consumers by supplying steel at below the costs of production. The free traders also argue that import barriers on steel may cause more job losses overall US industries than the number of jobs saved in steel industry. This would happened when an increase in steel prices that would follow the imposition of trade barriers would ultimately be passed on to consumers (W. L. Hill, 2003).

We have said earlier that the protection given to the steel industry is for the US economic and national security reasons. First we look into the economic aspect. The advocate of free trader is correct that protectionism is self-defeating and harm consumers in term of US economy. The US economy has gained its wealth over the past two and a quarter centuries as a major economic trading power. It has usually been in the best interests of the US to lower barriers to trade because the United States is one of the most productive nations in the world. Steel was one of the US most important industrial products for a century, as the US has massive coal and iron ore deposits.

The United States first produced simple steel products such as I-beams and armor plate in Integrated Mills. Integrated Mills tend to be firms that have been in the industry for a long time. They have not only integrated the steelmaking process, but to a great extent have integrated the other functions and requirements of the industry. They employ many workers with specific job classifications and their maintenance cost is relatively high. However, as time went on, the United States advanced its technology and productivity in most of its manufacturing sector. US Steel have seen some of the greatest increases in labor productivity and technology over the past forty years.

This increased labor productivity has allowed American-based steel manufacturers to shift to higher value products such as specialized alloyed steel and low-magnetic steels. The United States began to shift its low-value steel work to other, low-labor and less productive countries during this time period. The increase in technology also has allowed a much more efficient human resource practices and ability to implement new technology. Hence, it is not necessary to impose any trade barrier (Cyert and Fruehan, 1996). With the imposition of tariff and helping the integrated mills also will raise the price of steel in the US and thus penalize other steel users. As an example we take the US automotive industry. With the increase in steel price, the cost of vehicle parts would also be increased.

In order to maintain its profits the US automotive industry players would then transfer the increase of production cost to consumers. Cost of car would become expensive and the consumer would require more money to purchase the car. The United States would benefits more from free trade arrangement because there is greater profit from using its own, limited, resources to produce high-value steel rather than low-value steel. More productive workers and assets, produce high-value items. Tariffs and trade barriers do not encourage technology advancement. Instead they allow inefficient steel producers to continue to be complacent, unnecessary use of human resources (high retirement benefits), and raise the consumer price of steel.

Secondly we look into the national security interest aspect. The advocate of free trader is correct that protectionism is self-defeating and harm consumers in term of US sales of military equipments. The US makes military equipments for its own consumption and at the same time it makes money, which contributes towards US economy through selling of arms to other developing countries. The United States is a major exporter of military equipment in the world, and the US military depends on exports in order to reduce the price of building complex weapons system. By imposing tariffs or trade barrier to the countries that export steel into US, it might affect the relationship between those countries.

Then the country that is adversely affected by the tariff policies might refuse to buy US weapons, which would increase costs and limit the capabilities for the US military. Instead of putting protectionism in the steel industry which is self-defeating and harms consumers, there are some solutions that many other industrialized nations have already implemented. The major problem in the steel industry in the US, especially in the Integrated Mills, is that the companies are still paying for the massive work forces that they needed two and three decades ago through paying for retiree health costs. The US government may be willing to take over those expenses, which would free up several hundred million dollars a year in working capital.

Secondly, the government can fund more research on productivity and technology enhancements and unique steel properties so that even more value can be added at the most efficient mills in US. Finally, we need to realize that some Integrated Mills companies are economically obsolete. Workers should be retrained and assisted in creating new lives if they lose their jobs to technological obsolescence, and remediation should be government-assisted. This plan would be cheaper and more effective if the purpose was to help the US steel industry (Cyert and Fruehan, 1996). Question 4 What do you think would happen to American steel makers if the U. S Government were to unilaterally remove all barriers to foreign steel imports? Would the steel industry in the United States become extinct?

We have mentioned earlier that the steel industry in the US is composed of Integrated Producers and the Mini Mills producers. The Integrated Producers is one that makes steel starting with iron ore and coal through mining. Integrated Producers tend to be firms that have been in the industry for a long time. They employ many workers with specific job classifications and their maintenance cost is relatively high (Cyert and Fruehan, 1996). If the U. S Government were to unilaterally remove all barriers to foreign steel imports the first to suffer and to some extend closing down are these Integrated Producers. There are two reasons why the Integrated Producers would be affected: 1.

Higher production cost would increase the cost of steel The high production cost in the steel making process (with iron ore and coal through mining) by the integrated producers would make the cost of steel to be increased. The high labor cost where most of it are in the forms of pension and health benefits to retired workers, also contributes to the high production cost. When the cost of steel sold by these Integrated Producers is high, the main users of steel would then prefer to buy steel from the low cost foreign producers (import steel). The Integrated Producer would definitely cannot compete with such low cost foreign producers hence, if the US Government were to unilaterally remove all barriers to foreign steel imports, these Integrated Producers would have to close down. 2.

Outdated Technology makes steel product becomes uncompetitive With outdated technology in steel making process, to some dated back to the early 1800s, has makes the integrated producers steel products become uncompetitive. As a comparison Japan have concentrated their industries and has set the standard for productivity in steel making for the past twenty years. South Korea also is emerging to set a new standard for low-cost production, due to the fact it has new, highly efficient plants and relatively low wages. If the US Government were to unilaterally remove all barriers to foreign steel imports, these Integrated Producers steel product would becomes uncompetitive and would have to close down (Cyert & Fruehan, 1996). However, even if the U.

S Government were to unilaterally remove all barriers to foreign steel imports, the steel industry in the United States would not become extinct. The Mini Mills producer has proven that even during the hard time they still can be profitable. Mini Mills producers use electric arc furnaces to smelt and process scrap metal. Their manufacturing costs are normally significantly less than those of integrated producers. One of the most successful of the mini mills producers, Nucor Corporation, remained profitable, earning $213 million in after tax profits on sales of $4. 9 billion, in contrast of USX largest Integrated Producers in US, lost $147 million on sales of $6. 4 billion in 2000 (W. L.

Hill, 2003). The mini mills would be able to continue operates because they are able to compete with the foreign steel producers by introducing high quality and more up to-date steel products with low production cost. Question 5 What do you think President Bush should do in this case? Why? The history of America steel industry has proven itself in using trade legislation, and particularly Section 201, to gain relief from foreign competitors. Although steel accounts for only 2 percent of US imports, some 46 percent of antidumping quotas and tariffs imposed by International Trade Commission and in force in 2001 are on steel product (W. L. Hill, 2003).

No matter how the US Government tackles the low cost foreign steel producers, the imports threat to US steel producers will always be there because price, which in turn would decide business profit, is always be the deciding factors especially for those major steel users. Instead of imposing tariff to the US steel imports which is only temporary in nature, President Bush should look at other factors that contributes to the problems of US steel industry for a long term benefit of US steel industry: a. Addressed the global excess capacity of steel. The global steel industry for the last 30 years has been persistent excess capacity. Supply has often exceeded demand by 20 percent, and during the late 1990s this figure rose to 30 percent.

Such a persistent global excess capacity in the steel industry has caused unhealthy competition among producing country and putting pressure on prices and resulted in ongoing losses for many of the world’s steel companies (W. L. Hill, 2003). One of the main reasons for steel producing countries to export their steel is because the production of steel is more than the amount of steel it consumes. In view to that Bush should encourage the major user of steel products in US, as an example the automotive industry, to open factory in the steel producing country where the cost of steel is low. By early 1980 US raw steel production accounted for 37 percent of the world’s supply.

However, in contrast, the US steel consumption is showing a growing trend whereby it increase from 84. 5 million ton in 1980 to 99. 8 million ton in 1994 (Cyert & Fruehan, 1996). The demand of steel in US exceeds the supply and this encourages the major steel users to import steel into US. Since the price of import steel is low compared to the US steel producers, the major steel users is encouraged to continue importing steel from the low cost foreign producers in order to gain higher production profit. The only way to stop the imports is to encourage these major steel users in US to open factory at the country of the foreign steel producers. Bush may provide subsidies to assist and encourage the major US steel users to open factory overseas.

This also would stop the foreign steel producers to export steel because of the increased demand in steel locally and the global excess capacity of steel would be reduced. b. Upgrade the US steel industry technology. When Bush introduce Section 201 Tariff measures, eight World Trade Organization (WTO) members namely, Brazil, China, the European Communities, Japan, New Zealand, Norway, South Korea, and Switzerland challenged the tariff measures. The complaining countries allege that the cause of the US domestic steel industry’s woes is competition within domestic industry, particularly from mini mills, rather than imports, and that the Section 201 measures was taken purely for domestic political reasons (The American Steel Industry Current Trade Issue, 2003).

There are some truths in this complaint and Bush should upgrade the US steel industry technology The US Integrated Producers has been in the industry for a long time and their maintenance, labor, and production cost is relatively high. Instead of giving them assistance to maintain their high cost of producing steel, Bush should encourage them to either upgrade the production method in line with the mini mills or close down in order to save on the retirement benefits cost. With better technology in producing steel and low production cost, the cost of steel would then be reduced and US steel industry will be able to compete with the low cost foreign producers. c. Introduce quota on import

Under the section 201 tariffs measure, Bush has instituted a tariff based remedy of up to 30 percent tariff in the first year, a 24 percent in the second year and an 18 percent in the third year, to allow producers of flat-rolled steel product to adjust to import competition. However, even with the section 201 tariff imposed, the steel imports in 2002 have actually increased over 8 percent compared to 2001(The American Steel Industry Current Trade Issue, 2003). This shows that the section 201 tariffs measure implemented by Bush is not effective. Instead of applying the import tariff on foreign steel the president should introduce a total import quota on steel import for 3 years period.

Even by imposing section 201 tariff measures by up to 30 percent, the foreign steel producers still would be able to absorb the additional cost of the import tariff and would be able to maintain and continue to sell low cost on steel export to US. The foreign steel producers would be able to absorb the additional tariff through government subsidies and lower production cost. By introducing total quota on import, Bush would be able to control the import of low cost foreign producers and the excess of import of steel would be resolved. |REFERENCES | 1. Charles W. L. Hill (2003), International Business, Competing in the Global Marketplace, International Edition, Fourth Edition, Mc Graw-Hill Irwin, USA. 2. John D. Daniels and Lee H.

Radebaugh, (1992), International Business, Environments and Operations, Sixth Edition, Addison-Wesley Publishing Company, New York. 3. Anita Gallagher (2001), Bush’s Action on Steel Tariffs Means The Real Economy is Back on the Agenda, Executive Intelligence Review, March 15, 2001 issue, USA. 4. R. M. Cyert and R. J. Fruehan, (1996), The Basic Steel Industry, Sloan Steel Industry Competitiveness Study, Carnegie Mellon University, Pittsburgh, PA. 5. The American Steel Industry Current Trade Issues, (2003), The President Steel Program, Stand Up for Steel, a coalition of the hardworking men and women of the United Steelworkers of America AFL-CIO/CLC and leading American Steel companies, USA.

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