The Capacity Trap

The Capacity Trap

No single statistic has cast more gloom over--or caused more talk about--the state of the economy than the weekly operating rate of the steel industry. When the rate, expressed as a percentage of the total capacity of the industry, started to drop last winter, it stirred the first major doubts about the course of business; its failure to rise has amplified recession fears. Last week the rate was scheduled at 51.7% of capacity, the lowest level for a nonholiday week in 1960.

Is the weekly percentage-of-capacity figure the best measure of the condition of steel? Many steelmen and economists do not think so. Said A. S. Glossbrenner, President of Youngstown Sheet & Tube Co.: "The use of capacity figures has hurt the economy of the whole country, as well as that of the steel industry. Some other form of measurement should be substituted." Percentage of capacity does not reflect the fact that capacity has constantly risen for the past 12 years. Thus, this year's operating rates, since they are figured on a higher capacity base (which is adjusted every Jan. 1), actually represent more tons of steel produced than the same rates last year.

To reach its expected output of just over 100 million tons in 1960, the steel industry will have to operate at about 70% capacity for the year. Yet the industry operated at 100.9% of capacity in the Korean wartime year of 1951 to produce only a shade more--105.2 million tons.

Despite the low operating rate, the steel industry in 1960 is having its sixth-best year in history.

Overexpanded? Some critics complain that the industry has overexpanded. In the face of this criticism, most steelmen are now making capital outlays--at the rate of more than $1 billion a year-- chiefly to modernize their plants, put in improvements that will produce better or less expensive steel. One example: the oxygen process, by which oxygen and gas are shot into a furnace to speed up the burning of impurities. An invariable but often unintended result is extra capacity: the oxygen process can raise capacity of furnaces 10% to 20%. The new processes also push some older equipment into reserve; about 10% of all steel capacity is represented by older or less profitable equipment that steelmen use only in times of extraordinary demand.

Actually, the steel industry does not like to operate much above 90% of capacity, and its average rate is 75% to 80%. A rate near 100% not only puts a big strain on facilities, but means much overtime work, cuts into profits.

"We Failed." Few other industries use --or can calculate--rate of capacity as an output measure. Instead, they measure their output solely in units of production, e.g., pounds, carloadings, etc. If the auto industry used rate of capacity, it would be producing now at only about 50% of capacity on a round-the-clock basis--the same basis on which the steel industry computes its capacity. That figure would completely misrepresent Detroit's present fast production clip.

When the steel industry began reporting production as a percent of capacity on a monthly basis in 1926 and on a weekly basis in 1933, it was a good yardstick because capacity did not change greatly from year to year. With its great postwar expansion, the industry realized that the rate figures did not give a fair year-to-year comparison of output. About three years ago, it began issuing a weekly index of production based on the 1947-49 average, which more clearly represents the gains steel production has made. It also stressed actual tonnage figures.

But the industry had already trapped itself; the capacity figures were such an easy way to express production that almost everyone continued using them. "We tried everything we knew to get people to use the index," says an official of the American Iron and Steel Institute, "but we failed. The rate has just been around too long."

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