A Specter Haunts the Steel Industry

A Specter Haunts the Steel Industry

A Specter Haunts the Steel Industry

Moneybox
Commentary about business and finance.
March 1 1999 6:53 PM

A Specter Haunts the Steel Industry

In this new, fast-paced business world, it's supposed to be impossible to plan too far ahead. By the time the future arrives, we're told, it'll look nothing like what we imagined it would be. Steel makers, though, have a pretty good sense of what the future will look like. It'll look just like today. It'll still be ugly.

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Last week, for instance, General Motors announced that it had signed a four-year contract with 40 different global steel makers, committing itself to buy 18 million metric tons worth $11.7 billion. Normally, this might not be that big a deal. Long-term contracts have the same virtue for commodity producers as they do for commodity consumers: They provide security and allow companies to lock in prices for the foreseeable future. The only problem, from the steel makers' perspective, is that the prices they're locking in are the lowest for what's called cold-rolled steel (which auto manufacturers use more of than the hot-rolled variety) in more than a decade.

In other words, companies like Bethlehem Steel and Sumitomo Steel have agreed to produce steel until the year 2004 at prices that one wouldn't have thought were going to go much lower. Which means one of two things: Either prices are going to go lower, or the opportunity to guarantee business now was worth the risk of price spikes later. Neither scenario is particularly rosy, but the second scenario at least offers the prospect of further rationalization in an industry that still desperately needs it.

The U.S. steel industry has been in the news a lot lately complaining about foreign "dumping," which is another way of saying that foreign steel makers are selling steel here for a lot less than American companies can afford to sell it. It's a mistake to downplay the very real impact that the global economic crisis has had on steel makers here. Imports of Russian and Japanese steel have put a severe dent in the profit margins and bottom lines of companies like Bethlehem and LTV, even as the general deflation in commodity prices has made the possibility of a real rebound seem increasingly slight. And while the U.S. steel industry is far more efficient than it was in the early 1980s, when the death of the Rust Belt epitomized America's putative decline, it's still an industry in need of consolidation.

That's a terrible buzzword, of course, since behind it lurks the specter of mass layoffs and wage cuts. But there's simply too much steel-making capacity in the world relative to demand, and resources are continuing to be invested in mills that would be put to better use elsewhere. That doesn't mean that U.S. steel makers should just shut the doors. But it does mean that we probably need mergers in the industry. It also means that U.S. steel makers need to emphasize the production of higher grades of steel, which are less vulnerable to cheap imports. Much of the havoc that was wreaked in the steel industry during the 1980s was the result of the industry's failure to embrace technological change. A similar failure now would effectively spell the end of U.S. steel making. And in that sense, if there's anything hopeful in the GM contract, it's that there are no more excuses. Steel makers know what they have to look forward to. The question now is what they're going to do about it.