TIME: Almanac 1993/TIME Almanac 1993.iso/time/021389/02138900.015

Text File | 1992-09-23 | 5.3 KB | 106 lines

                                                                                BUSINESS, Page 61

Big Steel Is Red Hot Again


So why do mills want barriers against foreign competition?

By Christine Gorman

    As if he were playing with a child's Erector Set, the crane
operator maneuvers a ladle filled with 230 tons of molten iron
toward a giant furnace and pours into its maw a glowing glob of
3000 degrees F metal. After 45 minutes in the oxygen-fired
furnace, the iron turns into liquid steel, which a
computer-controlled casting machine quickly forms into slabs 40
ft. long. Presto! In just 3.8 worker-hours, one-third less than
the U.S. industry's average, this modern plant has produced a
ton of steel. It is one of the most efficient mills in the
world, but this one is not owned by the West Germans or
Japanese. This is the Gary flagship of USX, the largest U.S.
steel producer. And its success is no fluke. Twelve miles down
the road, in Burns Harbor, Bethlehem Steel operates a mill that
is every bit as competitive.

    After years of clanking toward the scrap heap, Big Steel is
staging an impressive comeback. Last week USX said the operating
profits at its steel division reached $501 million in 1988, in
contrast to $125 million the previous year. The industry piled
up total profits estimated at $2 billion in 1988, and is
expected to match that performance this year. But the revival
has ignited a bitter lobbying battle between Big Steel and its
customers. The mills claim they need import restraints to keep
the good times rolling. But major buyers, notably the
manufacturers of automobiles and heavy machinery, argue that
such protectionism is inflationary and vow to oppose it in
Washington.

    Not long ago, the U.S. steel industry was floundering in its
worst recession since the 1930s. One reason: since the
mid-1970s, global demand for steel has stagnated at about 475
million tons a year, but mills have been producing an average
700 million tons annually. The huge oversupply sent prices and
profits into a tailspin. In the U.S. the years of reckoning
were 1982 through 1986, when losses amounted to $12 billion.

    To avoid annihilation, Big Steel had to slash its costs.
"Our labor alone put us out of the ball game," says USX
Chairman David Roderick. In 1980 the U.S. industry's workers
made $17.46 an hour, vs. $9.63 for their Japanese counterparts.
Big Steel embarked on a wholesale payroll-cutting campaign in
which 60% of the industry's 428,000 workers lost their jobs.
Those who remained gave generous pay concessions. Last year
U.S. steelworkers earned $22.63 an hour -- equal to $15.48 in
1980 dollars -- vs. $18.52 in Japan.

    To make more steel per worker, the industry carried out a
long-overdue modernization drive. As recently as 1974,
one-quarter of all steel in the U.S. was still being produced by
old-fashioned open-hearth furnaces, which take eight hours to
turn molten iron into steel, compared with 45 minutes for the
more efficient oxygen-fired furnaces. Since 1982, American
steel companies have poured $9 billion into upgrading their
mills. Open hearths now produce only 5% of domestic steel.

    Stoking the smokestack revival even further, in 1984 the
Reagan Administration negotiated voluntary restraint
agreements, which limited imports to about 20% of the 100
million tons sold annually in the U.S. The justification was
that the worldwide steel glut had forced many foreign
governments to subsidize their mills, allowing them to charge
artificially low prices in the U.S. In exchange for the VRAs,
U.S. steelmakers agreed not to bring trade suits against
overseas competitors and promised to plow excess cash into
modernizing.

    President Bush promised during the election campaign to
extend the VRAs when they expire next fall, but steel buyers
like Caterpillar complain that prolonging the VRAs will boost
costs. According to industry analyst Peter Marcus of
PaineWebber, steel prices have risen 6% since early 1988, to
$509 a ton, although after adjustment for inflation, they
remain $40 less than five years ago. Critics are also concerned
that a new set of VRAs will bring back Big Steel's complacency.

    Not so, says USX's Roderick. "If we can rely on another five
years to put virtually billions of dollars into additional
modern facilities, then I think we can go back to trying to
live without VRAs," he argues. Without the market stability the
VRAs provide, Roderick contends, modernization would falter,
bringing about "catastrophic" long-term consequences. The best
solution, some experts suggest, is a compromise that would
gradually wean the industry from trade barriers.

    One major factor in U.S. steel's improving fortunes has been
the decline of the dollar, which has made imports more
expensive. But foreign competitors have trimmed costs and
boosted efficiency with almost the same zeal as the U.S. mills.
The resurgent Japanese steel industry has cut its work force
18% in the past three years, to 228,000. Europe's steel
industry, subsidized to the tune of $57 billion since 1975, is
now largely self-sufficient owing to higher productivity.
Because of such moves, says Walter Williams, chairman of
Bethlehem Steel, "we'll never be able to go back to the good old
days." Big Steel has finally realized that the less comfortable
it is, the brighter its future will be.