The Biggest Loser: Steel Consumers

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It would appear that a modified Buy America clause has made it through the legislative process and will receive support via the stimulus package. This has largely been a result of intense lobbying by the steel mills (and the USW) desperate to increase mill utilization levels and hence achieve an early return to profitability. The steel mills are not, let us be honest, motivated particularly by a desire to protect American jobs or the economy. The steel industry has a long record of trying to rig the market in its favor by blocking imports and taking advantage of exports whenever the opportunity arose ” regardless of the effect it had on domestic consumers. (There are now additional rumblings of some large anti-dumping cases being filed courtesy of US steel producers). But, after all, it is the job of company managers to maximize profits for their shareholders, just as it is the job of government to ensure a fair and level playing field for all not just for the few.

So to what extent are the mills justified in lobbying for a Buy America clause and how far should it go? On the face of it mill capacity utilization at 36.3% in January 2009 according to CRU; down from 90% in August 2008 must be at or close to the lowest ever. If materials for projects will be paid for by the taxpayer, then the funds should find their way to US companies goes the argument. Most of this stimulus money will be earmarked for projects over the next two years. The current capacity utilization levels are largely to blame for the losses at US mills and have been badly exacerbated by the supply chain de-stocking. The market hasn’t suddenly halved its consumption of steel, but the mills are seeing the cumulative effect of consumers and distributors running stocks down to a minimum. It won’t last forever. As the year goes on, the mills will see a gradual uptick in demand as the supply chain cautiously re-stocks. In the meantime, prices are still around those prevailing for much of 2007 and apart from Nucor, most of the majors are vertically integrated meaning if they were profitable in 2007 using their own iron ore and coal they should be profitable now ” capacity utilization notwithstanding. Over the next six months demand will pick up, it won’t come roaring back to the point where mills ran at their 2006-2008 average of 85% capacity utilization, but bear in mind they enjoyed large export business in 2007/8 which is why they were able to put the squeeze on domestic consumers by doubling prices and earning record profits.

It is not the job of government to protect the profitability of any particular industrial sector but if Buy America they were able to engineer a rapid return to a sufficient level of capacity utilization that all those furloughed workers returned to full employment, then the stimulus funds could be said to achieve the objective of boosting employment and allowing consumers to get the economy moving. But, and here is the big but, where does this leave the steel buyer? Let’s keep in mind that for every steel worker there are many more steel consumers. In research following the debacle of George W Bush’s import tariffs in 2001 it was widely concluded that more jobs were lost among, and more damage was done to, steel consumers than benefits attributed to steel producers. At the time the Consuming Industries Trade Action Coalition reported West Virginia had 9 times more jobs based on consuming steel than those based on producing steel. In Pennsylvania the ratio was 16-1, in Ohio 20-1. States with significant manufacturing but lower steel production were even more badly affected, like Missouri 125-1 and Iowa 127-1.

Buy America will channel steel purchases to US Big Steel. It will help to raise capacity utilization and hence an earlier return to profitability for the shareholders of US steel companies. Moreover, it will help a few thousand workers return to work sooner than they may otherwise do. It will not spread the benefit of the stimulus package as widely by allowing steel component suppliers the freedom to buy from the best total cost source and as a result it will concentrate the benefit into the hands of a few rather than the many.

It’s funny how this story never made it into the mainstream news debate.

–Stuart Burns

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