Recession in Steel

What is wrong with the steel industry? When the year began, almost everyone expected the industry, freshly recovered from a strike, to run for months at or near full capacity. But one of the paradoxes of the economy is that, while such big steel-users as the auto industry are running at close to a record rate, steel is undergoing its own private recession. Last week steel production was scheduled at 66.9% of capacity, the lowest nonstrike rate in 20 months--and the rate is due to drop more. U.S. Steel, biggest U.S. producer, announced that it will close down its plant in Clairton. Pa., and curtail output at its. Edgar Thomson works outside Pittsburgh. Other companies are cutting back production and closing plants, have already laid off an estimated 25,000 to 30,000 steelworkers.

The basic reason for the industry's slump is not that most steel-users are using less steel, but that they are holding up on new orders while they work off the huge inventories built up right after the steel strike. Despite the auto industry's heavy production schedule, many auto firms still have an inventory of 30 to 45 days, v. the normal 20-day supply. Instead of ordering new steel to keep pace with production, they are taking half their current needs from inventory. Appliance, farm-machinery and construction-machinery industries are also raiding their large inventories instead of ordering steel at their production rates. The oil industry is one of the few that are actually using less steel. Because of the slowdown in drilling, it has substantially cut the use of steel for tubing, casing and drill pipe.

Misleading Rates. The steel industry expects production to drop still further before reaching bottom, perhaps to 60% of capacity or lower. Some steelmen fear that the steel industry in 1960 may not, as earlier expected, top igss's record output of 117 million tons. None of them seems really alarmed about the state of steel, and Jones & Laughlin Chairman Avery C. Adams is convinced that 1960 will still be a record year. Says he: "I'm going to stick with my prediction that we'll produce at 80% of capacity and establish a new record of 120 million tons in 1960." Adams believes that the talk about percentage of capacity can be misleading, since the normal rate is 75% of capacity, and anything above that is "abnormally good," anything below it, "not good."

To Inland Steel Chairman Joseph Block, industry's pruning of its steel inventories is a "natural reaction" to tight money, high interest rates, and the knowledge that steel is easy to reorder. Big Steel Chairman Roger Blough does not completely agree. He thinks that many corporations have changed their inventory policy, confident of a quick and sure supply at a time when one-third of steel's capacity is idle. Stockpiles of steel among users now total about 16 million tons. Blough and other industry leaders are convinced that users cannot reduce their inventories much below 15 million tons and maintain their present rate of production.

Workers' Pinch. Since steel production runs several weeks behind orders, the steel industry's current low production. rate reflects a low point in orders reached in April. On an unadjusted basis, the rate of industry-wide orders has already started to turn up (see chart). U.S. Steel has noted the pickup in orders which, says Roger Blough. "are coming through in good shape." Most steelmen expect a real order pickup in August. By then many industries will have to replenish inventories.

The auto industry, which consumes about 20% of all U.S. steel, will have begun buying steel for its 1961 models.

Steel's cutbacks have been hard on steelworkers. Many companies have cut their work week to four days rather than lay off workers, but paychecks are smaller. Financially, the industry itself is not suffering too badly. The 1958 recession showed that it can make healthy profits at a rate of 60% of capacity or lower.

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