Financial Daily from THE HINDU group of publications
Thursday, Apr 18, 2002
Industry & Economy - Steel
Steel in the melting pot
IN THE US, the steel industry, a relic of the Old Economy, is hogging the limelight even as the much-touted `New' Economy is writhing in pain? Unlike the upstart New Economy, steel still means employment for thousands small wonder why trade unions cosy up with steel majors. But the more important issue is whether the US Government should intervene and save the sagging industry and, if so, in what manner and to what extent. Should an administration wedded to "free trade" impose quotas and tariffs or attempt to `discipline' exporting countries allegedly engaged in unfair trade.
Though the US steel industry has faced several crises in its long history, the most recent dates back to 1998 a fallout of the East Asia crisis of July 1997 which, in1998, spread to Russia and Brazil as well. The think-tanks viewed the crises as merely on the banking and currency fronts and were unprepared for the fallout on the steel sector. It was, in a way, reverse globalisation. The crises in these economies weakened the world steel market. In 1997, South-East Asia imported 75 million tonnes of steel more than any other region followed by the US, at a distant 30 million tonnes. But after August 1997, US steel imports began to surge even as its exports declined.
During the years of high growth, Asia produced around 300 million tonnes or 40 per cent of the world output. Much of this capacity was built on foreign currency loans. The crisis led to an abrupt drop in steel demand in East Asia and the former Soviet Union. Producers serving these markets had to turn to others. Exports were vital both for rehabilitation and servicing foreign currency loans.
Japan, for instance, virtually diverted all its steel exports from the shrinking Asian markets to the US, quadrupling, thereby, its exports. Russia, with its massive steel sector, redirected huge volumes to the US and reduced prices to compete with the Japanese units. It is estimated that Russian exports to the US constituted 28 per cent of its total metal exports.
Brazil too jumped into the fray to make good the slump in the domestic and Asian markets. It mounted an aggressive export effort in Europe, Mercosur and the US. In 1997, exports of hot-rolled flat products jumped 75 per cent over the previous year. And the prices of steel products fell to their lowest levels 25 per cent of the 1995 prices.
Korea also came under intense pressure to export. The Pohang Iron and Steel Company (POSCO) and other steel mills had expanded capacity far beyond the domestic demand. Shutting down the mills would have meant Korean banks going bust, as they had extended huge loans for capacity creation.
The European Union, which too faced an import surge, was quick to establish quotas with Russia, Ukraine, and so on, thereby making those countries turn their attention back to the US.
A report to the US Senate described the situation thus: "The surge of imported steel, which began in the spring of 1998, simply has no historical precedent, either in terms of its sheer magnitude, or the velocity at which it unfolded."
In July 2000, the US administration released a 240-page report, Global Trade: Structural Problems and Future Solutions, covering every aspect of the steel crisis.
The report proposed a six-pronged strategy to prevent the recurrence of the 1998 crisis. It covered early-warning systems on imports, faster relief for industries and workers hit by imports, faster investigations, and inter-agency co-ordination for rapid response.
The major proposals had international implications in that they contemplated bilateral negotiations with large producers to rectify long-term imbalances in steel production and exports. As an interim step, there was to be a moratorium on multilateral development lending to expand global steel capacity. There was also an underlying idea to negotiate and establish a Multilateral Steel Agreement (MSA) to eliminate subsidies, import barriers and other market distorting practices globally. Overall though, 2000 was not a bad year for the industry. The capacity utilisation was 91 per cent compared with 83.7 per cent in 1999 and 86.8 per cent in 1998. Steel consumption, too, remained high. The consumption (shipments plus imports minus exports) increased rapidly over the decade and in 1999 it was 40 per cent more than in 1990.
The exuberance over the New Economy and the expectations fanned by the Fed under Mr Allen Greenspan that the high levels of productivity and growth and the low levels of inflation would not end could have relegated the steel industry to the attic.
From a macro view, the steel industry commands a low premium, especially in advanced economies such as the US. In 2000, the US employed about 160,000 workers compared with over 800,000 in 1970. Steel users, such as the automobile, construction and transportation sectors, accounted for a major chunk of the employment. The low inflation in the US is attributed, among other things, to the low price of imported steel from East Asia. To counter the steel-producer lobby, the Consuming Industries Trade Action Coalition (a group of steel importing industries) was formed, whose standpoint is that import protection would drive up steel prices and consumers will have to pay higher prices for cars and other products. Thus, conflicts developed within the industry itself.
Coping with declines in the steel industry, unlike in other sectors, is much tougher because of the high capital and labour intensities. The lumpy nature of investments creates stickiness or rigidities, which nullifies any rapid downward adjustments during recessionary conditions.
In the US, the industry tried to beat the cyclical fluctuations through newer technologies such as electrical arc furnaces and direct reduction from scrap. But this created a chasm between the old `integrated' mills and the newer mini-mills. Gary Hufbauer and Ben Goodrich in their study, Time for a Grand Bargain in Steel? (Institute for International Economics, Policy Briefs, January 2002), analyse the cost advantages of newer mills. It is estimated that mini-mills incur $30 of fixed costs per tonne of hot-rolled steel compared to $130 by integrated mills. The total cost, including variable costs, is estimated at $350 for integrated mills compared with $315 for a mini-mill. "As a result of the cost advantage, the mini-mills' share in US steel production has doubled since 1975 and reached 45 per cent in 2000."
What is more, the older mills bear the cross of "legacy costs" pension and medicare benefits estimated at $1 billion annually. The study say that "between 1972 and 1981 when import controls were severe, steel wages rose 179 per cent while productivity actually declined." Thus, the behemoth American steel industry could not face competition from newer mills and producers from Asia, Latin America and the CIS, all of which had the advantages of newer technologies, lower labour costs and no `legacy' costs.
For developing countries such as India, the steel sector is pivotal to economic growth. And if the sector slumps owing to the vicissitudes of international trade, the economies would feel the pinch. For the US too, lifting its sagging steel sector is a compulsion. But in invoking remedial measures, it is caught in the ideological trap of free trade versus state intervention. Till date, the US has neither succeeded in state intervention nor allowed the "market forces" to operate freely. In fact, it has bungled on both the counts, by imposing (on March 5, 2002) an average tariff of around 30 per cent across a range of steel products. The US did, however, try to avoid introducing tariffs for some time. Broadly, the US administration tried to adopt two major strategies to safeguard its steel sector. One, the old, but unreliable, anti-dumping route; and the other, MSA. The former turned out to be a blind alley while the latter, stillborn.
In anti-dumping, the US was hoist by its own petard. Several anti-dumping complaints lead to a proliferation of counter-complaints by other countries. The WTO records are full of such suits filed by the US or against it by the EU or other members. In a December 4, 2001, letter to the President, Mr George W. Bush, the Senators highlighted that the US industry had filed 159 anti-dumping and countervailing duty cases and managed to get as much as 79 per cent of steel imports under anti-dumping orders. Anti-dumping suits provided a good hunting ground for trade lawyers but no relief to the steel industry. A number of countries demanded renegotiation of anti-dumping rules in the WTO Round and, prior to Seattle, the US was unwilling to re-open those enshrined in the Uruguay Agreement. Meanwhile, some of the WTO rulings, as in beef imports, went against the US.
Entering into MSAs to reduce the non-productive capacities, estimated at around 300 million tonnes, was the other option. Initially, the Clinton administration entered into bilateral agreements with Japan, Russia and Korea and fixed quotas or voluntary restraints on imports. But the tenability of these actions in the context of WTO obligations was always in doubt.
The MSA issue was taken up at a high-level OECD meeting on February 8, 2002, where it was decided to reduce capacities by 104-118 million tonnes by 2005. But the proposal hangs fire. The US was asked not to indulge in restrictive trade measures, by invoking Section 201. The next meeting is slated for April 19, 2002. It is unlikely that this would be held at all because of the US imposing tariffs and restrictions on March 6, 2002. The US was probably adopting twin-track diplomacy as it did in the Uruguay Round of appearing to negotiate at one level and working on unilateral action at another. More than 25 US steel companies, including the oldest one Bethlehem Steel, founded in 1904 have filed for bankruptcy. Thus, efforts to clean up the world steel market through anti-dumping suits and MSA have not worked.
(To be concluded)
(The author, a former Finance Ministry official, has extensive experience in international, financial and trade issues.)
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