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Wednesday, 6 March, 2002, 16:26 GMT
Steel sector stares into the abyss
A US steel plant in Georgetown, North Carolina
America's steel firms no longer lead the world
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By James Arnold
BBC News Online business reporter
line
Things were so different a century ago.

In 1901, the financier JP Morgan paid $250m for the Carnegie Steel Company, making Andrew Carnegie one of the richest men in the world.

Steel was - literally - at the heart of the confident American superstate that emerged at the beginning of the 20th century, forging its bridges, skyscrapers and railroads, and making massive fortunes in the process.

Now, the industry that built America is in ruins. One-third of firms are on the verge of bankruptcy, and tariff barriers are needed to fight off competition from the likes of Kazakhstan and South Korea.

How did this happen?

Twilight of the gods

The decline of the industry has been slow.

Andrew Carnegie
Getting rich from steel was easier a century ago

Since the 1970s, it has been struggling to come to terms with overcapacity: total employment among major producers was 2.4 million in 1974; now, it is less than 900,000.

In Britain, a steel industry that once supported 200,000 jobs now employs fewer than 30,000.

At first glance, the industry is merely suffering from the sort of malaise affecting all manufacturing in developed countries - unbeatable cost competition from the burgeoning developing world.

But the current crisis in the steel industry is altogether more critical.

Dysfunction

It is more complex than a matter of straight overcapacity.

Instead, the mismatch between supply and demand is exacerbated by the apparent inability of producers and governments to do anything about it.

In the US, the world's biggest market for and third-biggest producer of steel, companies and government have worked hand in glove since Mr Carnegie's day.

Steel industry employment

An industry that once epitomised free-market dash now relies on financial support and trade protection from the state, and has developed one of the noisiest lobby groups in Washington to help shore up that support.

This dependency left the industry either unable or unwilling to react to the seismic change that has shaken up the steel industry since the beginning of the 1990s.

The collapse of the Soviet Union created six major steel producers where once there was just one.

Each of these countries - Russia, Ukraine, Kazakhstan, Moldova, Belarus and Uzbekistan - was inclined to produce as much steel as possible, and to push as much as possible out onto world markets in their search for precious hard currency.

Competitive advantage

At the same time, the emerging economies of Asia, especially China, the world's biggest steel producer, found the financial muscle and corporate will to boost exports.

Steel workers in Bangalore, India
Making the most of low labour costs

This meant that, while total world output and demand remained roughly static during the 1990s, the amount exported to major consumption centres surged, pushing down prices.

Even at low prices, exporting made sense for producers in the former Soviet Union and other emerging economies.

Production costs are lower. While it costs $293 to produce a ton of hot rolled coil steel in the US, it costs just $212 in the former Soviet Union, and $185 in Brazil.

Coupled with that, the devaluations of many emerging market currencies in the Asian and Russian crises of 1997-98, made exporting to dollar economies worthwhile, even at very low prices.

Grumpy about dumping

This emerging-market advantage leads American firms to cry foul.

Steel production

They complain that foreign producers are selling steel below cost price on the US market, a violation of international trade rules known as "anti-dumping".

More than one-third of anti-dumping complaints filed by World Trade Organisation members relate to the steel industry, a far greater share than any other sector.

The effect on US producers, lobbyists argue, has started to become intolerable.

Late last year, Bethlehem Steel, a Carnegie-era veteran and the country's third-biggest firm, went bankrupt.

The wrong scapegoat

Hence this week's announcement of punitive tariffs.

A US steel protester
Picking the wrong target

But a glance at the precedents offers little hope of a quick renaissance for the industry.

First, steel imports to the US - the bugbear of protectionist activists - are not as mountainous as some make out.

Last year, the US imported 27.4 million tons of steel, down from more than 34 million tons in 2000.

Imports account for only one-third of US steel consumption, and their share in the total market has not risen noticeably in recent years, despite the mounting controversy.

Too little effort

Second, US steel firms themselves are loath to help themselves.

Unlike most other heavy industries, which endured waves of painful but healthy consolidation over the past 20 years, the steel sector has remained defiantly fragmented.

Steel prices

This has encouraged a suicidally short-term view among major producers.

In 1998-99, when tariff barriers were raised to protect the industry against cheap imports from Russia, producers opportunistically hiked output in order to cash in on the temporary breathing-space.

It might have made more sense to tackle some of the industry's endemic problems, such as inept management, duplication of capacity, over-mighty unions and crippling pension costs.

In Europe, after similar foot-dragging, three big producers last year combined to form Arcelor, the world's biggest private steel firm - but there have been few signs of the Americans following suit.

'Death spiral'

Third, the tariff barriers will do little to support prices.

American firms may behave in the same way now as they did in 1999, boosting output in the absence of foreign competition.

This will eliminate the price boost that reduced imports should bring.

But in any case, the plentiful volumes from Russia, China and the rest will have to find a home somewhere, and increasing exports to Europe and developed Asia will simply drag down world prices even faster than before - a phenomenon called a "death spiral" by Brian Levich of Metal Bulletin Research.

Demand, linked closely to industrial output and gross domestic product, is not expected to surge: the International Iron and Steel Institute predicts growth of 2.5% this year, after an equivalent-sized contraction in 2001.

Sooner or later, the chilly realities of the industry will have to be faced.

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