Living Economics

The world's steel industry is highly fragmented. The top 10 steel producers combined have 25 per cent of the world market. In contrast, the top five carmakers now account for half the car market (The independent). Last year, the $240 billion world steel industry churned out 847 million tons of steel, about 40 million tons more than users could consume, continuing a trend that has depressed the world's steel prices.

In a mature industry with a saturated market such as steel, demand comes largely from replacement of existing products and normal growth. Generally, existing capacity that was inherited from the phase of explosive growth is much more than is necessary for current demand. Ideally, market competition should eliminate higher-cost producers in favor of lower-cost producers. However, all steel-producing countries have tried to preserve their production capacity regardless of cost efficiency considerations. In the U.S., for example, many factors have helped to delay consolidation of its steel industry:

• First, U.S. bankruptcy laws have unnecessarily delayed the steel industry consolidation process. Although 28 U.S. steel companies have filed for bankruptcy since 1997, including the nation's third and fourth largest, not many have actually gone out of business altogether. Chapter 11-bankruptcy protection often keeps the incumbent creditors at bay while allowing the bankrupt companies to receive new loans to continue production.
• In addition, the huge retiree benefit liabilities of weak companies have deterred potential acquisition by stronger companies. In an extraordinary bid to salvage the industry, USX-U.S. Steel Group proposed buying its troubled competitors Bethlehem Steel Corp., National Steel Corp. and Wheeling-Pittsburgh Corp. in early December 2001. But the $13 billion retiree healthcare and pension liabilities of the acquisition targets have stalled the consolidation process.
• Even weak steel companies may have out-sized political clout. The industry remains big in swing states of presidential elections such as Pennsylvania, Ohio and West Virginia, where a good portion of 600,000 retired steelworkers live. It is understandable that these states want to preserve the steel companies and their suppliers that provide local and state taxes and jobs.

Thus, even after 20 years of restructuring and 64% fall in industry employment, two-thirds of steel production in the U.S., about 110 million tons, still come from 12 companies (WSJ 12/14/01). To be fair, the U.S. has opened up its domestic steel market to foreign imports more than other countries. Imports into the US climbed to 26.4% of 1998 US steel consumption. And exactly because it is the largest importer of steel products in the world, it is in a position to demand capacity cutback from foreign steel exporters. In the December 2001 Paris steel summit attended by 40 steel-producing countries, foreign steel producers agreed to reduce their steel capacity by 97 million tons in three steps by 2010 provided that the U.S. government would not unduly raise its steel import tariffs¹. But this promised capacity reduction is less than half of what is necessary to eliminate current over-production.

By delaying the exit of inefficient steel producers, government relief of competitive pressure in the form of import tariff has thus prevented the redeployment of scarce resources for more productive use elsewhere.