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Big Steel Has a Year to Downsize, Maybe

Author: Bruce Stokes
July 6, 2002
National Journal

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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?

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