Steel Fights Murphy's Law

Prices and imports rise; output and earnings sink

Whatever U.S. industry generally does, steel these days seems to do the opposite. Through most of the recession that ended in mid-1975, steel profits climbed. But now, in the midst of recovery, steelmakers seem to be caught in the grip of Murphy's Law: if anything can go wrong, it will. They are beset by production cutbacks and layoffs, Government pressure to restrain price increases while spending heavily to comply with antipollution rules, and the industry's first sizable strike (by iron-ore workers) since 1959. Executives have also begun squabbling among themselves. Last week Armco Steel not only refused to go along with an industry price boost of 6% on structural steel, but announced that in the lower Midwest and Gulf Coast regions it would offer deeper discounts: $50 a ton, v. $30 formerly, off the list price of $320. Armco moved to match prices of imported steel, and its action points up the biggest trouble of all. Foreign competition is so intense that E. Bradley Jones, executive vice president of Republic Steel, says: "Basically, it gets down to whether the U.S. steel industry is going to survive."

Hyperbole aside, the steelmakers' troubles are real and severe. Their profits in the first half dropped 48%, while earnings for all manufacturing industry rose 8%. At U.S. Steel Corp., a 52% plunge in first-half profits has prompted the company to ask 10,000 nonunion and management employees to give up a cost of living raise averaging $19 a month that was due in August. Chairman Edgar Speer also indicated that some operations would be suspended at the company's Youngstown, Ohio, mill, and that construction of a $4.5 billion integrated plant in Conneaut, Ohio, might be postponed. At Bethlehem Steel, where first-half profits dived 88%, the board halved the quarterly dividend, to 250 a share, closed three small mills and made plans to lay off 7,300 out of 22,900 workers at plants in Johnstown, Pa., and Lackawanna, N. Y.

Argus Research Corp., the Wall Street investment analysts, predicts that such cutbacks will deepen--indeed, that the industry will reduce its production capacity by as much as 20% over the next five years, as it closes more and more marginal mills. In Argus' view, that would be good for steel: costs would be reduced and profits would eventually rise.

Many more mills may close--and much earlier--if the strike of 15,000 iron-ore workers that began Aug. 1 drags on. Though the industry is governed by a much praised agreement that bans strikes over "economic" issues, the miners contend that their demand for incentive pay (mainly bonuses for exceeding production norms) is a "local" issue, about which strikes are permitted. For now, mills can feed their blast furnaces with stockpiled ore, but if the strike continues another three or four months--and it could--they would start to run short.

The industry's principal troubles are longerrange. The relatively brisk pace of the economy is boosting demand in many steel-using industries, notably autos (sales hit a record 726,422 cars in August). But lagging business spending for new plant and equipment is holding down demand for many steel items. Worse, imports from Europe and Japan are rushing in at prices 10% to 15% below those charged by American mills. Imports through July climbed almost 30% from a year earlier, to 9.6 million tons, and now account for more than 15% of U.S. usage. Argus predicts a 25% share within a year or 18 months.

Foreigners can undersell American steelmakers partly because their labor costs are lower and their plants are more efficient than the often old U.S. mills. Merrill Lynch, Pierce, Fenner & Smith concludes that it costs a Japanese mill $241, or $84 less than a U.S. mill, to turn out a ton of finished steel. U.S. steelmen argue that the cost disparity is nowhere near that great. They claim that foreign mills are "dumping" steel in the U.S.--that is, selling it at prices lower than they charge in home markets. They demand that the Government exercise its authority under the 1974 Trade Act and impose mandatory quotas on imports that would guarantee an assured portion of the American market for U.S. producers. The Carter Administration wisely is reluctant to take that step because it would kick up prices by blocking imports and weaken the incentive for the industry to improve its competitive position.

The industry is unhappy about Government-mandated expenditures for devices to combat air and water pollution. U.S. Steel Corp. estimates that it will spend $144 million for environmental equipment this year, about a third of its capital budget. Steelmen also complain that Government jawboning has prevented them from raising prices as much as they need to meet climbing costs. Following the announcement of a 6% increase on structurals and 7% on tin-mill products this summer, President Carter signaled his displeasure by directing the Council on Wage and Price Stability to make a close study of steel pricing practices. Says one White House economist: "It's not clear why, in a situation of excess capacity, steel companies keep raising prices."

No complete solution to steel's troubles is in sight, but some breaks may come the industry's way before too long. Though there is no substitute for increased sales, the present round of cost cutting aimed at scrapping marginal plants and duplication of facilities is bound to pay off eventually in increased efficiency and earnings. Then, too, steelmakers could benefit from the Administration's tax reform program in the next few weeks. It is expected to contain much needed incentives--like easier depreciation rules--for greater capital formation. That should help steel and other hard-pressed industries to meet environmental demands while modernizing and expanding production facilities.

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