Steel: The Eternally Infant Industry
Brian Doherty | October 30, 2006, 7:15pm
It's an old story, but always worth revisiting: how government actions allegedly meant to "help domestic industries" hurt
other domestic industries. See today's
Los Angeles Times for a
report on industry complaints about steel anti-dumping duties, that punish foreign steel suppliers for allegedly selling at too low a price. Southern California metal stamping companies complain that the duties have doubled their prices on galvanized steel; "U.S. and foreign automakers have joined other U.S. steel consumers to persuade the U.S. International Trade Commission to revoke the duties when it meets in mid-December."
Domestic steel makers say the car makers and steel users are being big crybabies and that, although the steel makers are in the scratch now (after, as the story notes, "shifting much of their multibillion-dollar pension liabilities to the government"), the domestic steel industry hovers always, in its own poormouthing estimations, on the abyss of economic doom: "they say the addition of capacity in China and India could lead to another steel glut and price-slashing if the global economy hits a rough patch."
An exec from Aggressive Engineering Corp., a Southern California metal stamping company. complains:
he had lost two of his biggest customers — a home electronics firm and a fitness equipment company — to competitors in China since the duties were imposed. He said his foreign competitors had access to cheaper steel and were able to produce and ship parts to the U.S. for the same price it costs him for raw materials.
Whole story of steel-sellin' men and the steel-usin' industries they are holding up
here.
tarran | October 30, 2006, 9:52pm | #
The steel industry has been asking for government protection from foreign competition on and off since the 1820's! Certainly the most ardent protectionist must have to ask how long does it take for an industry to get to its feet?
Joking aside, the steel industry suffers from some interesting problems. First, because it produces materials used solely in production, demand varies very wildly throughout the business cycle. The busts are worse and the booms are more heady. The industry also suffers from very high capital costs. Blast furnaces and rolling mills are expensive and time consuming to set up. Additionally the older companies are groaning under pension obligations that they cannot meet. The first steel company I worked at, LTV steel had I think 7 retirees drawing a pension for every active employee in the final year before it went bust. The unionised companies generally suffer from inefficient procedures and sclerotic management.
Steel is also an inherently political industry. The large pool of pensioners form a powerful political block. There are issues of national pride (eg. "the steel in our warships should come from America!"). So unfortuantely, rather than letting the industry contract gradually, the politicians interfere and meddle, postponing and worsening the inevitable downturn.
Having worked in both an old-school integrated mill and at a lean and mean minimill I have llong felt that the best thing to do is to stop propping up the steel industry. We have so much steel making capacity in the world that the market clearing price is below the manufacturing costs in the U.S.
If we allow the price of steel to fall, production will shift from making steel to consuming it to produce other goods. This will have the benefit of allowing workers who formerly worked in the steel mills to transfer their labor to more profitable and sound industries, and will increase the range of goods available for purchase within the U.S.
The most serious problem is the question of what to do with the pensioners who lose their pensions as their former employers go bust. There is no easy answer to this problem. I have, however, taken the lesson to heart that I will not ever structure my finances to be dependent on a pension. (It was hell, my phone number in the integrated mill was one digit off from the hotline for retirees. Some of the guys who accidentally called my number were facing utter ruin since they were too infirm to work. Very heart rending.)
