07-06-2002

ECONOMICS: Big Steel Has a Year to Downsize, Maybe

The Bush administration's imposition of tariffs on steel imports in
March-a response to the rapid rise in foreign shipments that bankrupted a
number of U.S. steelmakers-granted the domestic industry a reprieve, but
only a very temporary one. The idea behind the Bush tariffs was to give
domestic steel companies three years to downsize and restructure so they
would be better able to compete after the tariffs were lifted. But this
window of opportunity is likely to slam shut by next summer. That's when
the World Trade Organization-in a case brought by the European Union and
others-is expected to declare that the U.S. tariffs violate international
rules. (The WTO has repeatedly invalidated similar duties imposed by
others.)


Even in the unlikely event that the WTO sides with the United States,
industry analysts forecast continued pressure on domestic steel producers.
Imports of steel are expected to keep rising as purchasers of steel in
this country exploit exemptions in the new tariffs or shift to steel
produced in nations, such as Canada and Mexico, not covered by the new
duties. Higher imports, in turn, will lead to falling prices, which could
result in even more bankruptcies and layoffs at domestic steel
mills.


Unfortunately for steel producers and their workers, the time required to
complete their needed downsizing may be longer than the year that now
seems available to them. Even worse, steelmakers never got any relief from
the high costs of paying the health care expenses of retirees and laid-off
workers. Large integrated steel producers, in particular, need this relief
if they are to successfully restructure. Unless the industry makes
significant progress on downsizing and finds creative solutions to the
health care costs, another steel crisis looms next summer.


So domestic steelmakers have much to do but little time to do it, and no
assurance of success. "The U.S. steel industry remains one of the
most fragmented in the world," said Michael Gambardella, a steel
analyst and the managing director of J.P. Morgan Securities. "But
it's moving toward rationalization of inefficient capacity and
consolidation."


As part of this restructuring, Brazilian steelmakers are angling to buy
Bethlehem Steel's Sparrows Point facility in Maryland, and U.S. Steel may
buy Bethlehem's plant in Burns Harbor, Ind., if someone else doesn't buy
it first. Nucor, a mini-mill, has already bought a number of other small
domestic producers.


Much more consolidation of the industry is needed, but the market may be
working against such restructuring. The recent run-up in steel
prices-thanks to the tariffs and the rebounding U.S. economy-has induced
steelmakers to bring shuttered facilities back on line. International
Steel Group has already reopened some of the bankrupt LTV Steel plants.
Other bankrupt companies are likely to follow suit. As a result, J.P.
Morgan forecasts that U.S. steel-making capacity will actually grow by 7
million tons in the 12 months following the March 2002 imposition of
tariffs. That is not what the U.S. market, burdened by overcapacity,
needs. No wonder the Bush administration demanded in late June that
steelmakers produce an interim progress report on restructuring by
September and a follow-up report in March 2003.


Whatever happens with downsizing, the billions of dollars steel companies
owe in health care obligations to retirees and laid-off workers-the
so-called legacy costs-will return to political center stage in Washington
next year. "We can't restructure with these costs hanging over our
heads," complained one industry executive.


If tariffs are the Band-Aid for domestic steel, legacy costs are the
wound. But the White House refused to treat it this year because of the
high cost involved, the administration's ideological opposition to
subsidies, and the fear that other industries would demand similar
bailouts. Nevertheless, political pressure to get health care costs off
company books will mount if the WTO disallows tariffs, imports surge, and
domestic steel prices tumble.


If the White House continues to resist a comprehensive solution, Congress
will be forced to find a piecemeal remedy. The big steelmakers estimate
that up to 40 percent of their legacy health care costs go to pay for
prescription drugs. If Congress passes a generous drug benefit program by
next summer, it will serendipitously boost the competitiveness of much of
the domestic steel industry. In addition, the White House could revive an
idea it toyed with early on: tax credits that would enable retirees and
laid-off workers to buy health insurance on their own, possibly married
with an old Clinton administration proposal to allow those over age 55 to
buy into Medicare.


In the face of the coming train wreck in the steel industry, such an
initiative makes political sense for the White House. "The president
stands to score greater political points by allowing bankruptcies to run
their course," said steel analyst Gambardella, "and then coming
out with some type of Medicare-like assistance for displaced
workers." Bush would then endear himself twice to voters in steel
states-where in 2000 he got only 38 of the 101 available electoral
votes-once because of the tariffs and again by solving the legacy-cost
problem. And Bush could do so a year closer to the 2004 election.


But that would be too cynical an interpretation, right?


Bruce Stokes

National Journal