Order Code RL32333
Steel: Price and
Availability Issues
Updated April 16, 2004
Stephen Cooney
Industry Analyst
Resources, Science, and Industry Division
*RL32333*
*RL32333*
Steel: Price and Availability Issues
Summary
The end of the steel safeguard tariffs under Section 201 of the Trade Act of 1974
has not led to the lowering of steel prices. This has disappointed many industries that
use steel products, and some Members of Congress, who had wanted the tariffs
reviewed. Rather, the price of steel mill products has continued to rise. By the end
of the first quarter of 2004, prices for steel are double the level of mid-2003.
Furthermore, many users complain that adequate quantities of steel are difficult to
find, from either domestic or import sources. On March 10 and 25, 2004,
Representative Donald Manzullo chaired hearings of the House Committee on Small
Business that focused on small and medium-sized steel users’ problems relating to
prices and supply of steel and other metals.
Many of the price increases are labeled as temporary surcharges, which steel
producers say reflect higher costs that they must pass on to customers. The rising
price of ferrous scrap has been especially notable: almost fourfold between early
2002 and March 2004. As scrap is the main input of minimill operations, its
increasing price has especially disfavored them, as against the integrated mills, which
produce steel from iron ore and coke. However, rising coke, iron ore, and natural gas
prices have had a major impact on the costs of integrated operations.
The rapid growth of both steel production and demand in China is widely
considered as a major cause of the increases in both steel prices and the prices of
material inputs. China is now both the leading producer of steel and the leading steel
importer. It is also by far the leading importer of steel scrap from the United States.
China is the world’s leading exporter of coke and coking coal, including to the U.S.
market, but now appears to be limiting its own exports. Meanwhile, there have been
disruptions to the U.S. domestic coke supply. This combination has dramatically
increased the cost of this critical input for domestic integrated mills.
Both integrated steel mills and minimills recorded poorer financial
performances in 2003. Some industry participants and analysts argue that a strong
steel price recovery is necessary to allow the steel industry to continue to consolidate
and modernize its operations. Others have noted restrictions placed on scrap exports
by other countries and urged that the Commerce Department should consider similar
“short supply” export controls, as provided under Section 7(c) of the Export
Administration Act of 1979. Some representatives of steel consuming industries
have also urged consideration of the termination of U.S. antidumping and
countervailing duties (AD/CVD) on steel imports, citing the “changed
circumstances” provision of U.S. trade remedies law. Another option is suggested
by supporters of H.R. 3716, a bill that would overturn U.S. policy and allow CVD
petitions to be filed against “non-market economies” – a proposal aimed at China.
Conversely, Members of Congress critical of President Bush’s ending of the
safeguard tariffs have introduced legislation to reinstate them (H.R. 3699 and S.
1997). Some Members also supported a change in AD/CVD margins, to include the
costs of safeguards remedies, and thus raise penalty tariffs, but the Commerce
Department rejected this option on April 6, 2004. This report will be updated as
warranted by developments.
John Williamson, Technical Information Specialist in the CRS Resources, Science
and Industry Division, assisted in producing Figure 1 and Table 1. Figure 2
reproduced by permission of American Metal Market.
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Current State of the Steel Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Termination of Steel Safeguard Tariffs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Steel Price Rises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Steel Supply Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
The Impact of the Growth of China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Steel Input Materials Supply Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
The Steel Scrap Price Rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Rise in the Costs of Other Steel Inputs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
The Rising Cost of Coke . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Rising Cost of Minerals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
The High Cost of Natural Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Steel Profit Recovery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Policy Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Option: Short Supply Export Controls on Steel Scrap . . . . . . . . . . . . . . . . . 19
Option: Application of “Changed Circumstances” to Trade Remedies . . . 21
Option: Application of CVD Laws to Non-Market Economies . . . . . . . . . 22
Option: Reinstatement of Steel Safeguard Tariffs . . . . . . . . . . . . . . . . . . . . 23
Option: Adding Safeguard Tariffs to AD/CVD Margins . . . . . . . . . . . . . . . 24
List of Figures
Figure 1. Sources of U.S. Steel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Figure 2. Rise in Ferrous Scrap Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
List of Tables
Table 1. Leading U.S./Canadian Steel Producers . . . . . . . . . . . . . . . . . . . . . . . . . 4
Steel: Price and Availability Issues
Introduction
Many American businesses find that they are being suddenly and adversely
affected by a recent strong rise in the price of steel, and some reported shortages.
Their problems are resonating with some Members of Congress, especially those who
were previously concerned that the steel safeguard tariffs, imposed by President Bush
under the terms of Section 201 of U.S. trade law, could have been keeping steel
prices artificially high. Before those tariffs were terminated on December 4, 2003,
the costs of raw materials and other inputs in steelmaking were starting to increase,
thus creating a cost-driven increase in the price of steel. But after the tariffs were
removed, the price increase nevertheless accelerated.
The problem has been exacerbated by a strengthening of the U.S. economic
recovery and global economic growth, which have increased demand for steel. The
growth of China, in particular, has contributed to a large increase in demand for both
steel and steelmaking inputs. China has become both the world’s largest steelmaker
and its largest steel importer.
This report reviews the pattern of U.S. domestic steel prices over recent years
and the current status of U.S. steel production. It also analyzes the impact of the
growth of China. The report reviews the rising prices of steel scrap and other inputs
as contributory factors. It will also consider the role of profit recovery in the steel
industry as may be needed to finance further consolidation and technological
modernization. Finally, the report reviews some policy options that have been
proposed with respect to steel pricing and availability issues.
Current State of the Steel Industry
One of the stated purposes of the presidential action on steel safeguards was to
effect a restructuring of the domestic steel industry.1 To a great extent, that
restructuring has been achieved, with the development of two dominant players
among the integrated companies, and one, in particular, among the minimill
producers. But during the period of the 2002-3 safeguards, two important long-term
historical trends were at least temporarily reversed. The integrated side of the
1 “I have determined that the safeguard measures will facilitate efforts by the domestic
industries to make a positive adjustment to import competition...[including] consolidation
of United States steel producers...” President George W. Bush. Memorandum on “Action
under Section 203 of the Trade Act of 1974 Concerning Certain Steel Products” (Mar. 5,
2002) in Message to Congress (House Doc. 107-185), March 6, 2002, p.56.
CRS-2
industry regained the lead from minimills as the largest U.S. steel producers.
Secondly, the rising role of imports was reversed.
Figure 1 illustrates how the long-term trends in production and imports of steel
have recently been reversed. The production of the large integrated mills using
mostly basic oxygen furnaces (the last U.S. open hearth plant closed in 1991)
hovered around 60 million tons per year in the 1990s, then fell substantially below
that figure after 2000.2 The integrated mills produce steel from iron ore, using coke
and other inputs. They are characterized by unionized workforces and, in competing
with both minimills and imports, believe that they have been burdened with high
levels of employee and retiree benefit costs.3 Although no steel mill is small,
integrated mills are generally larger than minimills and may make a wider variety of
products at one location.
Minimills employ electric-arc furnaces (EAFs), a newer technology, which has
been widely employed only since 1970. Although they may use various forms of iron
ore input, most rely primarily on steel scrap, a generally cheaper source, which they
remelt. The minimill sector is largely non-union, and, by contrast with the integrated
mills, provides a defined-contribution employee pension package instead of benefits
defined by union contract.
Figure 1. Sources of U.S. Steel
2 All tonnage figures in this report are “short tons” (2,000 lbs.), as commonly used in the
U.S. steel industry, unless otherwise indicated.
3 The so-called “legacy cost” issue is discussed in CRS Report RL31748, The American
Steel Industry: A Changing Profile, pp. 25-29.
CRS-3
Minimills steadily increased production after the recession of 1991 and gained
market share. Figure 1 shows that their production topped 50 million tons for the
first time in 2000, when it reached 47% of domestic raw steel production, up from
37% at the beginning of the 1990s. Output from both integrated steel works and
minimills fell in 2001. In 2002, minimills overtook basic oxygen furnace (BOF) steel
production for the first time, by 50.8 million tons to 50.1 million tons.
In 2003, however, the situation was reversed. For the first time in recent
decades, EAF production declined, while integrated mill production increased. This
was sufficient for integrated mills to regain their traditional role as production leader,
by 50.9 million tons to 48.8 million tons. As will be discussed later in this report, a
rise in scrap prices has especially affected the competitiveness of minimills, but the
integrated mills have also seen increases in input costs.
Figure 1 also shows the import trend generally increasing through the 1990s, at
least until the 1998 import surge to more than 40 million tons. The movement of
imports has been up-and-down since that peak, but under the pressure of the
safeguard tariffs fell in 2003 to 23.1 million tons, the lowest level since 1993.
To some extent, the recovery and stabilization of the integrated industry’s role
in domestic steelmaking may be attributed to industry consolidation. This
development has affected both sides of the U.S. industry. Table 1 shows the effect
of consolidation in the industry in recent years. Three companies together, one of
which is the largest minimill operator, could produce about half of the raw steel
produced in the United States in 2004, or more than 50 million tons.
Nucor became the largest domestic steel producer in 2002, passing U.S. Steel,
which had held the title for a century. It now operates 15 minimills in 12 states and
poured 17.4 million tons of steel in 2003. In recent years, Nucor has expanded
mostly by acquisitions, notably through buying financially struggling Birmingham
Steel Corporation in 2002, then the second-largest U.S. minimill operator. On the
integrated side, Table 1 shows that US. Steel acquired another major integrated
company, National Steel, in 2003. Together, the two companies poured almost as
much steel as Nucor during the year. The third-largest domestic steel producer, and
number-two integrated mill operator, is the International Steel Group (ISG). This is
a new company, formed in 2002 by acquisition of the assets of LTV Steel out of
bankruptcy liquidation. It added the assets of Bethlehem Steel, another bankrupt
integrated operation, in 2003. In early 2004, ISG is negotiating to acquire the assets
of yet a third bankrupt integrated steel company, Weirton Steel.
Consolidation is continuing apace throughout the sector. Among the integrated
companies shown as producers of more than two million tons in Table 1, Ispat Inland
is already part of the worldwide network of steel mills operated by Lakshi Mittal of
India. His LNM Group is now the world’s second-leading steel producer. Rouge
Steel, originally founded by Henry Ford to supply his Detroit motor vehicle
manufacturing operation, has been acquired by a large Russian company, Severstal.
The remaining U.S. independent integrated mills are AK Steel, which has both
minimill and integrated steel operations, and Wheeling-Pittsburgh. The latter was
recently in bankruptcy and is using an Emergency Steel Loan Guarantee to secure
CRS-4
financing to build a new minimill. The remaining three integrated companies on the
list, Dofasco, Stelco and Algoma, are Canadian companies.
Table 1. Leading U.S./Canadian Steel Producers
(Millions of short tons, net)
2002
2003
Nucor Corp. a
11.622
17.441
U.S. Steel*
11.535
17.314
International Steel Group**
3.081
14.641
Bethlehem Steel Corp.**
8.956
- - -
AK Steel Corp.
6.000e
6.000e
National Steel Corp.*
5.755
- - -
Stelco Inc.
5.149
5.135
Gerdau AmeriSteel Corp.a
3.130
5.019
Ispat Inland Corp.
5.691
4.997
Dofasco Inc.
4.835
4.697
Ipsco Inc.a
3.007
3.217
North Star Steel Co.a
3.075
3.179
Steel Dynamics Inc.a
2.390
2.817
Rouge Steel Co.
3.060
2.700b
Weirton Steel Corp.
2.759
2.670
Algoma Steel Inc.
2.416
2.445
Wheeling-Pittsburgh Steel
2.530
2.360
Commercial Metals Co.a
2.003
2.093
a. minimill operator
b. A M M estimates
* National Steel acquired by U.S. Steel in 2003; table shows combined prod uction.
**Bethlehem Steel acquired by ISG in 2003; table shows combined prod uction.
Sou rce: American Metal Market, March 29, 2004.
Other minimill operators, besides Nucor, are also consolidating. Gerdau of
Brazil acquired a Canadian-based minimill operator, Co-Steel, plus one mill from the
Birmingham Steel Group. Together with its own North American operations, it has
created Gerdau AmeriSteel, the second-largest North American minimill operator.
Steel Dynamics has also expanded with recent acquisitions. Ipsco, a minimill
operator of Canadian origin, has moved its headquarters to the United States, and
built two new minimills here. On the other hand, North Star, controlled by the
Cargill Inc. group, has sold one mill to Nucor, and has reportedly been seeking to exit
the steelmaking business.4
4 For a more detailed discussion of industry developments and consolidation, see CRS
(continued...)
CRS-5
Termination of Steel Safeguard Tariffs
On March 5, 2002, President George W. Bush established temporary duties of
up to 30% on a wide range of steel imports under “Section 201” safeguard
procedures (19 USC §2251-54).5 These safeguard duties were scheduled to be in
place for three years, but were successfully challenged under World Trade
Organization (WTO) rules by a number of U.S. trading partners. After receiving a
mid-point review from the U.S. International Trade Commission in September 2003,
as required by law, President Bush on December 4, 2003, rescinded the safeguard
tariffs in full.6 He took this step just before retaliatory tariffs by the European Union
against a wide variety of U.S. exports were scheduled to enter into effect. By this
action the President immediately eliminated tariffs of 24% that were being applied
to most flat-rolled imports from major producing countries, plus tariffs from 7% to
24% that were applied to imports of many long, tubular and stainless steel products.7
Steel Price Rises
Notwithstanding the removal of the safeguards, which had been heavily
criticized by many steel-consuming industries and their representatives in Congress,
the price of steel has moved up, not down, since the President’s action. Most
economists would expect that, everything being equal, removal of the safeguard
tariffs would encourage importation of steel into the domestic market, more
competition with domestic steel producers, and, consequently, lower prices. But
instead the price of steel in early 2004 rose sharply. This was only the latest, though
perhaps the most extreme, price movement in a steel market that has been volatile in
recent years.
Earlier, the price of steel rose around the time that President Bush announced
the safeguards in early 2002, though by mid-2003 it had fallen again. For example,
the U.S. International Trade Commission (ITC), in its mid-point review of the
Section 201 tariffs, reported that the weighted average price for a commercial grade
of U.S.-produced hot-rolled carbon steel was $319/ton (T), as of the second quarter
of 2000. By the last quarter of 2000, the price had fallen to $242/T, as the industry
sought relief, and it declined further to $222/T one year later, in late 2001, for a total
30% fall from the 2000 peak. It was at this low point when the ITC, acting following
requests from the President and Congress under Section 201 rules, recommended that
the President undertake safeguard action.
4 (...continued)
Report RL31748, pp. 8-16.
5 The Section 201 steel safeguard tariffs are described in full in CRS Report 31842, Steel:
Section 201 Safeguard Action and International Negotiations.
6 President of the United States. “Proclamation 7741 of December 4, 2003,” Federal
Register, Vol. 68, no. 235 (Dec. 8, 2003), pp. 68463-64.
7 By law, safeguard tariffs must be progressively reduced. The safeguard tariffs ranged from
8% to 30% in the first year of operation. They had been reduced to 7% to 24% as of March
2003.
CRS-6
Following the imposition of safeguard tariffs in March 2002, and other
developments that reduced supply, such as the liquidation of LTV Steel, a major U.S.
producer, the price recovered to more than $330/T by late 2002. But by the first
quarter of 2003, the last date covered in the ITC report, the price had fallen back
below $300, to $292/T.8 LTV, reorganized into ISG together with Acme Steel and
Bethlehem Steel, had come back on line, and U.S. production levels were stable at
around 100 million tons per year. By July 2003, according to the Monthly Steel
Report of Global Insight, a private economics consultancy, the spot price of hot-
rolled sheet was still falling, to $260/T.9
But prices again started to rise in that latter half of 2003. As President Bush was
considering the future of the safeguard tariffs following the ITC’s mid-point review,
the benchmark hot-rolled spot price reported by Global Insight reached $300/T by
November, and was $310 in December 2003.10
Despite the President’s decision to remove the tariffs, the rise in the price of
steel then accelerated. Citing tightening input material supplies (steel scrap
especially for minimills, coke especially for integrated mills) and higher natural gas
prices, steel producers have added an array of “surcharges” in addition to a base price
increase. By March 2004, American Metal Market, the industry trade newspaper,
reported that “[Such] moves ... effectively lift spot market prices for hot-rolled sheet
to about ... $580 a ton ... for May deliveries.” That level is double the average price
reported by the ITC for one year previously.11 Other grades are more finished, and,
consequently, higher-priced.
These levels are based on spot prices, meaning those paid by buyers outside
contractual arrangements, either from steel mills directly or from metals service
centers. The actual average transaction price may differ considerably, as many large
customers purchase steel from mills under longer term supply contracts, although
these contracts must be periodically renegotiated, and customers have to consider the
risk of locking in higher prices to secure supply. This is especially notable for the
“Big Three” Detroit-based car manufacturers, who generally purchase steel by such
contracts for themselves and their “Tier 1” suppliers.12 “Surcharges,” as opposed to
base price increases, may also be added to contract prices, but it is not clear that all
8 ITC. Steel: Monitoring Developments in the Domestic Industry (Investigation no. TA-204-
9) and Steel-Consuming Industries: Competitive Conditions with Respect to Steel Safeguard
Measures (Investigation no. 332-452), issued together as Publication no. 3632, Vol. 1, Table
II-27.
9 Global Insight. Monthly Steel Report (September 2003), Table 3.
10 Ibid. (January 2004), Table 3.
11 American Metal Market (AMM), “Steel’s Wild Price Ride Far from Over” (March 1,
2004), p. 3; see also “CSI Adding Up to $150/T to Flat Rolled for May,” in the same edition,
indicating even higher prices on the West Coast.
12 This system is described in Al Wrigley, “Car Talk: Wheeling and Dealing Steel in
Detroit,” AMM, Dec.23, 2002 print ed., p. 3.
CRS-7
customers are paying them.13 General Motors has reportedly resorted to legal action
to roll back higher prices from suppliers of steel and steel products that it claims it
is being forced to pay in violation of contract commitments.14
In testimony at a recent House hearing, representatives of smaller steel
consuming businesses indicated that they generally cannot buy from metals service
centers or mills until they receive orders from their own customers. They said that
they are facing the full brunt of price increases.15 The road and transportation
construction industry noted that its members, many of them smaller businesses,
generally face a gap of 8 to 10 months between when a contract bid is calculated and
when steel for a project is ordered. As the price has risen substantially in recent
months, a witness for this industry stated that contractors were frequently faced with
a choice between defaulting on contracts or completing that at a substantial loss, due
to the high price of steel.16
Similar pricing pressures have also begun affecting the stainless steel sector.
U.S. production in 2003 was just under 2.0 million tons, but stainless and specialty
steels are high value-added products. Some were included in the Section 201 steel
safeguards. Import penetration is high in the sector, ranging from 20% to 60% across
product lines, but imports fell by 7% in 2003, while domestic production increased.
Prices in early 2004 reportedly rose 4% to 10% on a monthly basis.17
Steel Supply Issues
Some businesses are also indicating that they cannot obtain adequate supplies
of steel. Witnesses at the March 10, 2004, hearing complained about supply
curtailments. For example, Lester Trilla, head of his family-owned steel drum
manufacturing firm, said:
13 See, for example, AMM articles, “Contract Customers Wage Fight over Steel Surcharges”
(Feb. 3, 2004); “Court on Steel Price War: Keep Delphi Parts Rolling” (Mar. 8, 2004); and,
“Republic, Delphi Resolve Dispute on Steel Supply” (Mar. 12, 2004).
14 John Porretto, “Steel Firms Gouging, GM Says,” AP wire story (Mar. 24, 2004); AMM,
“GM Pays Higher Tags; Files Suit Against SDI, Textron” (Mar. 24, 2004).
15 U.S. House. Committee on Small Business. Spike in Metal Prices – What Does it Mean
for Small Manufacturers? Hearing, March 10, 2004. Statements of Kyle Martinson, Revco,
Inc.; Barbara Hemme, Youngberg Industries; and, Lester Trilla, Trilla Steel Drum Corp., at.
16 U.S. House. Committee on Small Business. Spike in Metal Prices – Part II Hearing,
March 25, 2004. Statement of Patrick P. Loftus, High Steel Structures, representing the
American Road and Transportation Builders Association, p. 2. On April 9, 2004, the Federal
Highway Administration of the Dept. of Transportation informed “industry and state
officials that it cannot legally allow federal funds to be used to reimburse contractors now
facing higher steel costs unless adjustment clauses were part of the original contract.”
Bureau of National Affairs. Daily Report for Executives (DER), “Federal Highway
Administration Turns Down Industry Plea for Help with Rising Steel Costs” (April 12,
2004).
17 AMM, “Tickets, Please” and “Stainless Imports Shed Some Shine,” March 29, 2004 print
ed., pp. 4-5.
CRS-8
At the prices we are being quoted, there should be more steel produced, but this
is not the case. Last month, our steel supplier cut the volume of steel they would
supply to us ... and we have no place to go for more steel ... I was already facing
a major shortage ... This will force me to cut back on production ... Faced with
the bleak supply picture I just described, we contacted two other domestic steel
mills in our area, but to no avail. Everyone seems to be short of steelmaking
materials and domestic steel producers seem to be either unable or unwilling to
sell to new customers. Steel warehouses do not have steel, because they are not
being supplied by their sources. We have contacted the foreign steel mill that we
used to do business with before the imposition of steel tariffs, but they won’t
even return our calls.18
Figures released by the American Iron and Steel Institute (AISI) indicate
increasing production levels for the domestic industry. Preliminary twelve-month
figures for 2003 show that total mill shipments were 105.6 million net tons (external
shipments by steel mills). This represented a 6.5% increase over 2002, and only a
little below the 2000 level of more than 109 million tons. However, approximately
one-third of this increase was accounted for by exports, which grew from 6 million
tons to 8.2 million tons in one year.19 Export growth was concentrated in the first
part of the year, when domestic prices and demand were still low.
Production increased marginally in early 2004, but more significantly, the
unique “capability utilization” measure reported by AISI took a sudden jump. AISI
reported capability utilization at 85% at the beginning of 2004. It stayed below that
level until the last week of February, when it suddenly moved to more than 90%, as
domestic steel mill shipments increased to more than 2 million tons per week.20
However, as noted by one observer, most of the increase in capability utilization was
accounted for by a sudden statistical reduction in capacity of 5%, not increased
production.21 This nominal capacity decline may be partly offset in the future by a
planned reopening of the basic oxygen furnace at ISG’s Cleveland West works, idled
when LTV was liquidated, although there will be no additional blast furnace
capacity.22
Increased domestic production in 2003 was counterbalanced by a decline in
imports. For 2003, the only full year for which imports were affected by the Section
201 safeguard tariffs, the Commerce Department reported a one-year tonnage decline
of 29%, to less than 21 million metric tons (MT), or 23.1 million short tons.
According to AISI data, this was the lowest level of imports since 1993, before the
18 Trilla, statement, pp. 3-4.
19 American Iron and Steel Institute (AISI). “Selected Steel Industry Data” (March 2004).
The export increase was primarily in the first half of 2003, when the domestic market was
slow.
20 AMM, (Mar. 11, 2004), “Steel Output” table on p. 4.
21 Charles H. Blum, “USA Tightens Its Capacity Numbers,” Steel Business Briefing (Mar.
5, 2004).
22 AMM, “West Side Story, Part Two: ISG to Restart Shuttered Site” (Mar. 12, 2004). See
also House Small Business Comm. hearing (Mar. 10, 2004), Statement of Wilbur L. Ross
(International Steel Group), p. 5.
CRS-9
current round of financial difficulties of the American steel industry is said to have
begun.23 With the safeguard tariffs lifted, observers might normally expect that
resurgent imports would quickly supplement available supply. After President Bush
ended the safeguards, imports in January 2004 rose 35% above the December 2003
level. However, almost immediately, U.S. importers of foreign steel raised prices by
up to $100 per ton. Moreover, imports reportedly fell again in February 2004.24
The Impact of the Growth of China
Possibly the growth of China and its emergence as a major, market-oriented
economic power are having more of a global economic impact on steel markets than
anything else today. However, the impact of China has evolved differently than
expected by many steel industry participants.
China was the number one threat on the horizon as seen by many steel industry
veterans three years ago, when the U.S. industry was entering a downturn. With
China’s large, if largely outdated, steel industry, as well as low labor and
environmental compliance costs, U.S. industry leaders saw no way that they could
match a flood of low-cost imports from China.25 In addition, China’s government
has maintained a fixed exchange rate against the dollar, leading many U.S.
manufacturers to claim that in direct trade this is unfair, because China’s currency
value does not reflect the country’s growing industrial competitiveness.26 But
Chinese steel imports, once a significantly growing factor, are now a small share of
the U.S. market. Imports from China were as high as 1.4 million MT in 2000, but
were only 582,000 MT in 2003, less than 3% of total U.S. imports.27
Instead, China has become the world’s largest steel producer and the largest
importer. According to Global Insight’s Monthly Steel Report, based on preliminary
International Iron and Steel Institute data, China’s 2003 raw steel production was 242
million short tons, 36% higher than the combined total of the European Union, and
more than double the output of the United States. China’s production increased by
44 million tons over 2002, accounting for 64% of the world production gain.28 The
main reason that China has had an impact on the U.S. industry is that the rapid
23 See CRS Report RL31748, The American Steel Industry: A Changing Profile, pp. 2-4 and
Figs. 1-2. Trade data for 2003 from U.S. Dept. of Commerce. Bureau of the Census,
Foreign Trade Division, “Steel Imports” (Dec. 2003 Final).
24 AMM, “Imported Steel up $100/Ton; Supply Worries Drive Buyers” (Feb. 23, 2004);
“Absent ‘201,’ Steel Imports Up 35% in January” (Feb. 26, 2004); and, “U.S. Steel Imports
Slide in February; Gain vs. ‘03 Slower Than Expected” (Mar. 31, 2004), p. 5.
25 Interview with Van Reiner, Bethlehem Steel – Sparrows Point plant manager (August
2001).
26 CRS Report RS21625, China's Currency Peg: A Summary of the Economic Issues, by
Wayne M. Morrison and Marc Labonte. Also CRS Report RL32179, Manufacturing Output,
Productivity and Employment: Implications for U.S. Policy, pp.45-48.
27 CRS Report RL31748, p. 21, and Dept. of Commerce, “Steel Imports” (Dec. 2003),
Exhibit 2, for 2003 annual data.
28 Global Insight. Steel Monthly Report (January 2004), Table 2.
CRS-10
growth of its own steel industry has absorbed increasing amounts of the world supply
of scrap and other inputs, while also replacing the United States as the largest
importer of steel. China’s rapidly growing appetite for steel, which will probably
surpass 300 million tons in 2004, has also drawn in high levels of imports from other
major Asian producers such as Japan, Korea and Taiwan, probably diverting them
from the U.S. market.29 The consequence has been not only higher prices for
steelmaking inputs in the United States, but also lower availability of imported
finished steel at competitive prices – and U.S. steel-consuming industries are
increasingly having to compete with products from Chinese suppliers.
Steel Input Materials Supply Issues
The Steel Scrap Price Rise
A recent and extraordinary rise in the price of steel scrap has especially affected
the minimill sector of the U.S. steel industry. Steel scrap is generally the major input
in electric arc furnaces (EAFs), the production technology used in minimills. By
2002, total U.S. EAF production had overtaken the output of basic oxygen furnaces,
the steelmaking technology of integrated mills that produce raw steel from iron ore,
coke and other materials.30 But in 2003, as scrap prices accelerated their recent
climb, EAF shipments fell 4.1%, while that from integrated mills increased by 6.2%,
and again became the major source of domestic steel production.31 While scrap is
usually the principal input in minimill furnaces, scrap is also frequently added to iron
in making steel at integrated mills (up to 25-30%), historically because it enables
them to produce a more competitively priced product, especially where absolute
purity of the steel is not a prerequisite. Thus, all parts of the industry are affected by
changes in the scrap price, though the minimills more than the integrateds. A less
competitive minimill price enables the integrated mills to raise their prices as well
in a tight market.
Figure 1 illustrates the rise in scrap prices over the past two years. In early
2002, the price of scrap was about $65 per ton, the composite price for “no. 1 heavy
melt scrap,” a common commercial category, as calculated by American Metal
Market. The price recovered to a plateau of about $100/T from mid-2002 through
mid-2003. Then the price rise accelerated to $160/T by the end of 2003, and climbed
even more steeply to an average of more than $237/T by early March 2004. More
premium grades commanded higher prices, up to reports of more than $300/T.
29 China’s total of finished steel imports surpassed the U.S. total by 24m. MT in 2002 vs.
22m. MT (the United States also imported 8m. MT of semi-finished steel, principally slabs);
see discussion in CRS Report RL31748, p. 21. China’s 2003 total, when reported, will
almost certainly be close to double the U.S. import level.
30 See CRS Report RL31748, pp. 8-16, esp. Fig. 2, for an analysis of the competition and
development of the U.S. integrated and minimill steel industries.
31 AISI, “Selected Steel Industry Data” (March 2003).
CRS-11
Figure 2. Rise in Ferrous Scrap Price
Many in the industry ascribe the rising price and reduced availability of
domestic steel primarily to the rise in scrap prices, driven in turn by rising global
demand, especially in China. As one witness testified at the March 10, 2004, House
Small Business Committee hearing:
Steel prices are skyrocketing, due to rising U.S. steel scrap exports ... Steel
scrap prices have grown astronomically and are at or above $300 per ton,
according to industry reports [because] ... steel scrap exports from the
United States are increasing, due to surging foreign demand ... U.S. steel
scrap exports have almost doubled since 2000, rising from 6.3 million tons
in 2000 to approximately 12 million tons in 2003 ... Meanwhile, U.S.
domestic scrap demand has remained steady since 2000 and is increasing
as the U.S. recovery improves.
In particular [this witness continued] China and South Korea are
purchasing greatly increased quantities of U.S. steel scrap. [Among more
than 50 importing countries], these two countries alone account for
approximately half of all [U.S. ferrous scrap] exports. China purchased
3.3 million tons and South Korea more than 2.5 million tons of U.S. steel
scrap in 2003.32
The view that scrap prices are exceptionally and uniquely high was challenged
by a representative of scrap recyclers at the same hearing. Emanuel Bodner, head of
a privately owned recycling company, said that scrap was not in short supply, nor was
32 House Small Business Comm. Hearing (March 10, 2004). Statement of Robert J. Stevens
(Impact Forge Inc. and President, Emergency Steel Scrap Coalition).
CRS-12
it at a record high price on a constant-dollar basis. He emphasized that “scrap
surcharges” by steel producers included transportation costs, and that these costs had
also gone up. Bodner believes that scrap prices “have likely reached, and perhaps
passed, their peak.”33 His views with regard to the current level of scrap prices were
substantially supported by an independent witness, Wayne Atwell of Morgan Stanley
Equity Research, who said, “We believe scrap prices will peak in 1-2 months and
drive steel prices down in mid-2004.”34
Trade data and other evidence reinforce this view that prices and demand for
U.S. scrap, especially in the international market, may have peaked. Based on
Commerce Department trade data, American Metal Market reported on March 16,
2004, that January 2004 ferrous scrap export totals (785,000 MT) were only slightly
higher than December 2003 and that both were significantly lower than the
November 2003 total of 833,000 MT. Moreover, January 2004 ferrous scrap exports
were 18% lower than in January 2003. Exports were down to all markets except
China, which reported a large increase, and Thailand. There was even anecdotal
evidence that the Chinese scrap market had “cooled.”35
In early April 2004, both Nucor and Steel Dynamics announced reductions of
$30 per ton in their scrap surcharges. But so far, this has not had an effect on overall
steel prices, which may still be rising. As an anonymous southern-based steel buyer
quoted in American Metal Market said, “Supply and demand are driving the market
right now; surcharges really are not.”36
Rise in the Costs of Other Steel Inputs
Ferrous scrap is hardly the only input that has risen in price and contributed to
higher steel prices. At the March 10, 2004, hearing, Wayne Atwell stated his view
that the “primary driving factors” were:
! “The weak dollar has driven up the cost of imports, which has
provided a pricing umbrella over the domestic steel industry.”
! “China’s steel consumption has grown much faster than anticipated
and has put a strain on the global raw-material industry.”
33 Ibid. Statement of Emanuel Bodner (Bodner Metal and Iron Corp., and Institute of Scrap
Recycling Industries), esp. pp. 4-7 and Fig. 4, and oral testimony.
34 Ibid. Written presentation of Wayne Atwell (Morgan Stanley Equity Research), p. 2.
35 AMM, “Ferrous Scrap Exports Hit Asian Wall,” including tables (March 16, 2004).
36 Quoted in AMM, “Steel Plate, Flat-Roll Prices Head Up as Surcharges Fall” (Apr. 14,
2004); see for other examples in ibid., “Steel Prices Strong Despite Scrap Slip” (Apr. 6,
2004); “Steel Plate in West Tops $700/ton as Supply Thins” (Apr. 7, 2004); “Ferrous Scrap
Prices Sink Across US” (Apr. 8, 2004); “New Math: Mills Shuffle Surcharges, Price Hikes”
(Apr. 9, 2004).
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! The metals industry as a whole has been insufficiently profitable and
has therefore not been able to expand capacity, e.g., there has been
“underspending on infrastructure.”37
Wilbur Ross, the founder of ISG, testified at the same hearing regarding a wider
range of higher costs faced by integrated steel companies, such as his company. He
stated that these costs accounted for most of the higher price of steel delivered to the
customer. He computed that assorted raw material input price increases alone added
$178 since 2001 in production costs per ton (T) of steel produced at an integrated
mill. Iron ore pellet costs had increased from $50-55/T of steel produced to almost
$65, while coke costs per ton produced had increased from $25-30 to almost $150.
Moreover, the cost of natural gas, used as a fuel in steelmaking, after spiking twice
since 2000, had attained a third cost spike of nearly $22/T of steel produced in the
winter of 2003-4, compared to a cost of less than $10/T produced for much of 2001-
2.38 To these increases, Ross added $10 in other costs and “incremental interest
expenses.” Finally, he noted that as 56% of ISG’s steel is sold under contracts “that
do not escalate rapidly, the spot price half of the business must go up faster to avoid
insolvency.”39
The Rising Cost of Coke. Noteworthy in Ross’ list of input cost
increases was the price of coke, driven by recent U.S. shortages in coking coal.
These shortages are both domestic and international in nature. According to the
Department of Energy, U.S. domestic production of coke, derived from a grade
known as metallurgical coal and used almost exclusively in blast furnaces by
integrated steel mills, was 22 million tons in 1997. It was more than 20 million tons
annually from 1998 through 2000, 18 million tons in 2001 and less than 17 million
tons in 2002. It continued at a slightly higher rate through the first three quarters of
2003.40
The major domestic coke producer is U.S. Steel, which produces coal for its
own use in Clairton, Pennsylvania. With other integrated steel operations generally
closing their own coking operations, U.S. Steel supplies many other companies from
Clairton. Clairton buys its coking coal comes from two mines, one in West Virginia,
formerly owned by U.S. Steel, but now spun off as a separate company. In late 2003,
a major fire shut down the West Virginia mine, which suspended fulfilment of the
contract it had maintained with U.S. Steel, citing force majeure. This meant that
Clairton could no longer meet its own outside contracts, and it also declared force
majeure. These falling dominoes created a shock wave through the integrated steel
industry. According to one industry source, the cost of coke rose from $145/T to
$250/T between November 2003 and early 2004.41 The most seriously affected
37 House Small Business Comm. Hearing (March 10, 2004), Atwell statement, p. 2.
38 Ibid. Ross statement, Exhibits 6-9.
39 Ibid., p. 3.
40 U.S. Dept. of Energy. Energy Information Administration (EIA). “U.S. Coke, Production,
Imports Consumption, Exports and Stocks, 1995-2001” (Dec. 2003).
41 Scott Roberson, “For Some Steelmakers, a Lump of Coal Would be a Welcome Gift,”
(continued...)
CRS-14
company was Weirton Steel, which relied exclusively on coke from Clairton, and
was forced to shut down part of its operations. With Weirton already in bankruptcy,
the loss of a reliable, nearby coke source, even temporarily, may have precipitated its
sale to ISG, and its end as an independent company.42
Imports have not been able to resolve the recent domestic production shortage.
In 2001, U.S. domestic furnace coke producers brought an antidumping case against
imports from China and Japan. Though the ITC voted negatively as to whether the
domestic industry had been injured, the case is still being reconsidered after remand
from the U.S. Court of International Trade.43 Except for the low U.S. steel
production year of 2001, coke imports have run 3-4 million tons in recent years,
though the annual rate fell below that in the first three quarters of 2003.44
The surge in China’s own steel production has led to indications of a change in
policy for this major U.S. import supplier (China accounts for 80% of world coke
trade). As more Chinese coke output is being used in domestic steel production,
exports have flattened out, or may even be falling.45 One recent report is that despite
a 25% 2004 coke production increase in China over the same period in 2003, licenses
for coke exports, required under Chinese law, will be reduced from 11 million MT
in 2003 to 9 million MT in 2004.46 Wayne Atwell in his testimony before the House
Small Business Committee summarized:
The rapid growth in China’s steel industry has forced the Chinese to cut
back coke exports. The Chinese coke export price has risen from $55 per
ton to between $200-300 per ton ... last month China was actually a net
importer of [coking] coal versus a typical net exporter of one million tons
per month.47
Rising Cost of Minerals. Wilbur Ross, as well as many industry analysts,
cite the rising price of iron ore and other minerals used in alloys, as increasing cost
41 (...continued)
AMM print ed. (Mar. 15, 2004), p. 3. The information on the price rise is from industry
consultant Charles Bradford, in Tom Balcerek, “Back Behind the Wheel,” AMM print ed.
(Feb. 9, 2004), p. 6. The thrust of the article, however, is that higher scrap prices have made
the integrated industry overall more competitive against minimills.
42 AMM, “Weirton Details Staggered Cuts in Plants, Staff” (Jan. 16, 2004); “Arneault Offers
Plan to Ease Weirton Cash, Coke Troubles” (Jan. 29, 2004); and, “Weirton, Union Applaud
$255M Proposal by ISG” (Feb. 19, 2004).
43 See CRS Report RL31792, Steel: Legislative and Oversight Issues, p. 10.
44 EIA. “Coke Production, Imports” (Dec. 2003).
45 A Chinese official has stated that, “China would limit coal exports in 2004 to meet the
increasing domestic demand;” “China Coal Policy,” China Business News On-Line (Jan. 29,
2004). See also “China Coke Exports Seen Even Lower,” Platts International Coal Report
(December 8, 2003).
46 AMM, “China Looks to Stoke Supplies via 20% Coke Export Quota Cut,” (Mar. 19,
2004).
47 House Small Business Comm. hearing (March 10, 2004), Atwell statement, p. 2.
CRS-15
factors in producing steel. The World Bank’s commodity prices tracking data, for
example, reported that iron ore, stable at an average price around 30¢ per dry metric
ton unit (dmtu)48 in 2002-3, rose to almost a 38¢/dmtu price in January-February
2004.49 A January 2004 pricing agreement between CVRD of Brazil, the world’s
leading iron ore producer and Arcelor of Europe, the world’s largest steel producer,
was expected to set this price as a benchmark for 2004, which would be an 18.6%
increase over the previous standard price.50 Various forms of iron substitutes, such
as pig iron, can be used by minimills instead of steel scrap, but rising prices,
stimulated also by demand from China, may keep them from becoming more
competitive as inputs. A contributing cause to the rising price of iron ore is a relative
shortage of dry bulk shipping and limitations in port infrastructure.51
Prices of alloying metals rose even more sharply. Nickel increased from
$6,772/MT in 2002 to $9,629/MT in 2003, and $15,236/MT in January-February
2004. Tin, used especially for steel cans, rose from $4.06/kg to $6.58/kg over the
same period, and zinc, used in galvanizing, increased from 77.9¢/kg in 2002 to
105.2¢/kg in the most recent period.52 Meanwhile, Eramet, the sole domestic
producer of silicomanganese, a mineral compound used in steelmaking, announced
that, due to “production problems,” it would cut back output by 70-80% for six
months, reportedly driving the price from 34-36¢/lb. to nearly $1/lb.53 On March 25,
2004, the House Small Business Committee held a second hearing on the “spike” in
metals prices, which focused primarily on non-ferrous metals. Again, a principal
conclusion was that new demand from China, possibly including government
subsidization of metals-consuming industries, may be enabling them to outbid U.S.
companies for metallic scrap and ores.
The High Cost of Natural Gas. Another factor that has bedeviled the steel
industry because of its inconsistency in recent years, is the price of natural gas.
Natural gas is not generally the primary energy source in steelmaking. EAFs, as the
name implies, use electrical power, generally off the local grid (a large Nucor mill
in Berkeley County, South Carolina, for example, consumes 20% of the power used
in the state every year54). Integrated mills use coking coal in their blast furnaces.
However, gas is usually used to reheat steel during rolling operations.55 Natural gas
also plays a critical role as a fuel in various minimill processes, especially those
48 The dmtu is a unit used to equate prices of ore with differing iron content.
49 World Bank, Prospects for Development, “Commodity Price Data (Pinksheets)” (March
2004).
50 AMM, “CVRD-Arcelor Accord on Iron Ore Sets Benchmark for Pricing in ‘04” (Jan. 14,
2004).
51 House Small Business Comm. hearing (March 10, 2004), Atwell statement, p. 2.
52 World Bank Pinksheets (March 2004).
53 AMM, “Silicomanganese Prices Soar as Eramet Reduces Deliveries” (Feb. 10, 2004); and,
“Silicomanganese Heading to $1/lb.; Eramet Struggles” (Feb. 20, 2004).
54 Interview with Ladd Hall, plant manager, September 2003.
55 Global Insight. “Steel,” excerpt from Demand Destruction: The Impact of Higher Natural
Gas Prices (2003), pp. 5-6.
CRS-16
which seek to use “direct reduced iron” (DRI) technology, as an alternative to
reliance on remelting steel scrap.56
Natural gas prices spiked in the early winter of 2003-4, but not as high as two
previous spikes since 2000. Nevertheless, rising and volatile gas prices are a
worrying long-term trend for the steel industry. From 1986 through 1992, the
wellhead price of natural gas annually averaged less than $2.00 per thousand cubic
feet (Mcf). From 1993 through 1999, the average price varied between $1.55/Mcf
and $2.32/Mcf. In 2000, however, the average price was $4.00/Mcf, and in January
2001, the wellhead price spiked at $6.82/Mcf. The price then fell back, and the 2002
annual average price was below $3.00. But the monthly price rose from a low of
$2.19 in February 2002 to a new high of $6.69 in March 2003. After dipping a little
later in the year, the monthly wellhead price was again more than $5.00 in January
and February 2004.57
Steel Profit Recovery
Because of the higher cost of inputs, whether the issue is primarily scrap costs
for the minimill industry or multiple input costs for the integrated steel industry, the
bottom line profitability of the American steel industry has not yet fully reflected the
rapid rise in steel prices.
As Wilbur Ross argued in his testimony at the March 10, 2004 House Small
Business Committee hearing:
The steel industry needs about $40 per ton of earnings before interest, taxes,
depreciation, and amortization (EBITDA) just to cover its debt service and make
net capital expenditures. [In 2001] ... EBITDA losses were about $8 per ton, so
$48 per ton of price increases were needed just to sustain operations. This level,
however, would not make up for the cumulative $132 per ton of industry losses
from 2001 through 2003. Cyclical industries must earn back in strong markets
the money they lost in weak markets or they will not survive. To recoup these
losses over the next five years would require an average of $26 per ton each year.
[Thus, including the cost increases enumerated earlier] ... the price had to go
from $209 [per hot-rolled ton of sheet steel] to at least $539, even without
recoupment of prior losses.58
56 An innovative but short-lived application of DRI technology was a 1.4 million ton
capacity plant in Louisiana, built by Midrex, a DRI specialist, for Birmingham Steel and GS
Industries. The plant was commissioned in 1998, but idled in 1999 after a downturn in the
U.S. steel market. It has since been acquired by Nucor with a view to future operation;
Metal Producing & Processing (Jan.-Feb. 2004). Such plants, if they are to be successful,
will require reliable supplies of natural gas at stable prices.
57 EIA. “U.S. Total Natural Gas Prices” (annual and monthly tables, as published March 17,
2004), and “Natural Gas Weekly Update” (March 11, 2004). For a detailed analysis of gas
pricing issues, see CRS Report RL32091, Natural Gas Prices and Market Fundamentals,
by Robert Pirog.
58 House Small Business Comm. hearing (March 10, 2004), Ross statement, p. 3 and exhibit
(continued...)
CRS-17
When Ross challenged the president of Bodner Metal and Iron on profitability
issues at the hearing, he was asked in turn whether his company was profitable:
“We’re not yet profitable,” he replied.59 For 2003, his company reported $3.5 million
in net income from operations for the year, and operating earnings of $53 million in
the fourth quarter. But the small annual net operating earnings figure was offset by
$51 million in net interest and other financial expenses. The total net loss on the year
was $23.5 million.60
Similarly, financial reports by other steel companies show losses or reduced
earnings for 2003. The other major integrated U.S. steel companies all reported
losses, though in some cases these losses were significantly affected by “legacy
costs” such as retiree health care costs and pension fund losses. After making a small
net profit in 2002, for example, U.S. Steel announced a full year net loss of $730
million in 2003. In continuing operations, which excludes retiree health care costs,
some financing costs, and similar expenses, the company was profitable for the
fourth quarter and the year in 2003, although this was mainly due to profits from
operations in Europe.61
More recently, Wheeling-Pittsburgh Corp., which received the largest loan
guarantee issued by the federal Emergency Steel Loan Guarantee program before
emerging from Chapter 11 bankruptcy in August 2003, announced an operating loss
for the fourth quarter of 2003 that was twice what it had lost in the same quarter a
year earlier ($21 million vs. $11 million).62 Wheeling-Pitt is using loans received
under the federal guarantee largely to build a new EAF, and to convert part of its
operations to a minimill-type technology.
Nucor, the leading minimill operator, reported net earnings of $63 million for
2003, almost $100 million less than in 2002 despite a 30% increase in net sales. The
net income figure was influenced by the costs of consolidating recent acquisitions
that contributed to the higher sales volume. Net earnings for the fourth quarter of
2003 were less than half those for the last quarter of 2002.63
58 (...continued)
10.
59 See a brief account of this exchange in the AMM “Potomac Pulse” column, March 15,
2004 print ed.
60 Securities and Exchange Commission. Form 10-K for International Steel Group (Fiscal
Year ended Dec. 31, 2003).
61 See table “Earnings Highlights” in U.S. Steel Corp., “United States Steel Corporation
Reports 2003 Fourth Quarter and Full-Year Results,” press release (Jan. 30, 2004).
62 Wheeling-Pittsburgh Corp. “Wheeling-Pittsburgh Corp. Announces 4th Quarter and Year
End Results,” press release (March 16, 2004).
63 Nucor Inc., “Nucor Reports Results for the Year and the Fourth Quarter of 2003,” press
release (Jan. 29, 2004).
CRS-18
Some steel company stock prices have shown strong appreciation64 and the
industry has made much progress in the restructuring efforts that it promised as a
concomitant of the Section 201 safeguard tariffs. For example, Nucor CEO Daniel
DiMicco on March 19, 2004 substantially increased his forecast of corporate net
income for the first quarter of the year to 80¢-$1.00 per share, as compared to 23¢ in
the same quarter of 2003.65 Also, in another harbinger of recovering profitability,
Texas Industries Inc., which operates steel minimills in addition to other construction
products businesses, announced that higher prices and stronger demand enabled its
steel business to lead a corporate turnaround in a quarter that ended in February 2004.
Its TXI Chaparral steel unit posted an $11.6 million operating profit, compared to a
loss of $12.5 million one year earlier.66 But the U.S. industry as a whole has not
produced a consistent period of strong and steady growth, such as would put it on
a firmer footing with respect to modernization of its capabilities, and enable it to
enter a new era of global competition.67
If an increase in prices and profits in the domestic industry is sustained, it may
be seen by industry analysts as a healthy trend that could finance more investment.
Speaking recently at an industry forum, analyst Michelle Applebaum emphasized that
new management and new owners in the industry “aren’t interested in making steel.
They are interested in making money.” She further said that, “I think you will see the
hot-rolled price remain above $500 for the next two to three years. What I believe
will happen is that new capacity will serve to cap prices. The U.S. has been steel
short for more than a decade, and I believe new capacity will come online to provide
equilibrium.”68
Policy Issues
Many Members of Congress have concerns about volatile steel price swings’
effect on steel-consuming businesses, whether price increases are caused by rising
input costs or steel earnings recovery. Because of the way steel contracts are
structured, the smallest companies may typically bear the brunt of higher spot market
prices. Spot prices tend to overshoot actual cost increases, because spot prices must
cover lower margins earned by steel producers on less flexible contract steel. In such
an environment, some policymakers argue that even temporary steel price increases
to present levels or beyond are forcing steel-consuming industries offshore, a
development that could ultimately undercut the domestic market base served by the
North American steel industry.
64 U.S. Steel’s one-year gain of 219% in 2003 ranked fifth among all companies on the
Standard & Poor’s 500 company index. Business Week, “The Best Performers,” (April 5,
2004), p. 80.
65 Bloomberg.com, “Nucor Raises 1st-Qtr EPS Forecast to as Much as $1” March 19, 2004.
66 AMM, “TXI’s Quarterly Results Bolstered by Higher Steel Prices, Demand” (Mar. 26,
2004), p. 4.
67 For a more fundamental review of the structure of the industry and its international
competition, see CRS Report RL31748.
68 Quoted in AMM, “Steel Sheds Fear of Raising Prices in Exodus” (Mar. 18, 2004).
CRS-19
At the second House Small Business Committee hearing on the subject of high
metals prices, held on March 25, 2004, Chairman Donald Manzullo suggested a
range of policy options to be considered in response to surges in both steel and non-
ferrous metals prices that are affecting small manufacturers and thereby threatening
U.S. job creation. Some of the proposals discussed by Chairman Manzullo and
others at the hearing, such as possible trade policy action against Chinese foreign
currency peg, action on energy legislation, and regulatory changes on environmental
issues, are beyond the scope of this report. Other options, such as a national security
investigation on possible shortages of steel and other metals, and an ITC
investigation of reported shortages of scrap and coking coal, would be fact-finding
steps, with no likely short-term relief for steel consuming industries. The options
discussed below include those supported by Representative Manzullo that foresee
some direct action on this issue and others that have been proposed relative to the
steel issue.69
Option: Short Supply Export Controls on Steel Scrap
Some steel users heavily affected by higher steel prices are urging the
consideration of export controls on steel scrap. Under Section 7 of the U.S. Export
Administration Act (EAA) of 1979 (P.L. 96-72), the Secretary of Commerce may
establish controls over U.S. exports of products in short supply in the domestic
economy. Section 7(c) of the EAA specifically establishes a procedure by which the
Secretary may be petitioned to establish such controls by trade associations, firms or
unions representing “an industry or substantial segment [thereof] that processes
metallic materials capable of being recycled.”70
Some steel using industries seriously affected by the rising price of steel, having
identified as the principal cause the sharp increase in the rise of steel scrap, formed
a coalition to consider petitioning the Secretary of Commerce to take action under the
EAA. Steel minimills, acting through the Steel Manufacturers Association (SMA),
indicated support for the coalition, though the SMA has not formally adopted a
position calling for short supply controls on scrap. Representatives of the coalition
and the SMA have met with Commerce Department officials, including Secretary
Evans.71 As of early April 2004 no one has presented any formal petition to the
69 The most complete list of Rep. Manzullo’s suggested remedies are in a press release from
his office, “Manzullo Offers Potential Remedies to Reduce Surging Steel, Metal Prices”
(Mar. 25, 2004).
70 Technically, after several periods of renewal, the EAA has expired. However, EAA
regulations are enforced by executive order under the International Emergency Economic
Powers Act. The text of EAA §7 is at 50 USC App. §2406. Currently, short supply controls
are in place for domestically produced crude oil and timber from federal public lands, but
these controls were established by congressional mandates under different provisions of law.
71 An excellent summary of the views and the logic of the Emergency Steel Scrap Coalition
was presented at the House Small Business Comm. hearing (Mar. 10, 2004) by Robert
Stevens, CEO of Impact Forge, Inc., and co-founder of the coalition, in his statement, pp.
5-6. See also AMM, “Mini-mills, FIA May Lobby for Scrap Export Controls” (Feb. 6,
2004); “Cellar Dweller Hatches Plan on ‘Strategic’ Ferrous Scrap,” “Potomac Pulse”
(continued...)
CRS-20
Commerce Department requesting controls.72 Should a petition be presented, and the
Secretary of Commerce were to decide to take monitoring or controlling actions
(such as export restrictions and licensing), the entire process would require 135-150
days to be implemented.73
Other steel-producing countries have clearly been using formal or informal
regulations to curb their own scrap exports, and thus have contributed to a tightening
of supplies in the world market. Such actions have been most prevalent in eastern
Europe and the former republics of the Soviet Union, especially Ukraine and Russia.
But even countries such as South Korea, a major net importer of scrap that
nevertheless also exports some grades, have taken restrictive measures.74 Article XI
of the General Agreement on Tariffs and Trade 1994 (GATT 1994), the WTO
agreement which contains the fundamental rules of international trade, clearly
requires the general elimination of quantitative restrictions on exports as well as
imports. However, paragraph 2 of that article exempts “export restrictions
temporarily applied to prevent or relieve critical shortages of foodstuffs or other
products essential to the exporting contracting party.” And the “general exceptions”
in Article XX of the GATT 1994 include measures “essential to the acquisition or
distribution of products in general or local short supply,” subject to qualifications on
duration of such measures, treatment of trading partners and other considerations.75
Steel scrap export controls were applied in the United States in 1973-75, and the
experience of that era has contributed to a backlash against the proposal. The
imposition of controls at that time apparently led to an increase in the domestic price
of scrap. In his analysis of the controls, Robert Dale Shriner found that this was
perhaps because foreign scrap prices increased as U.S. scrap exports were restricted,
everyone knew that the controls would be temporary, and foreign and domestic
markets were not fully isolated from each other. U.S. recyclers reportedly withheld
71 (...continued)
column in print ed. (Feb. 9, 2004); and, “Evans, Regula Aware of Scrap Export Moves”
(Feb. 27, 2004).
72 However, on April 7, 2004, two industry groups formally petitioned that the Commerce
Department monitor and restrict exports of copper scrap and copper-alloy scrap; Washington
Trade Daily, “Limiting Copper Scrap Exports” (Apr. 8-9, 2004).
73 Interview with Bernard Kritzer, U.S. Department of Commerce, Bureau of Industrial
Security, March 12, 2004.
74 On eastern Europe, see Recycling Today, “No Scrap Zone: Eastern Europe Could Be a
Helpful Source of Supply for a Red-Hot Scrap Market, But Restrictive Export Strategies
Have in Effect Closed Its Docks to Exports” (Jan. 1, 2004). On Korea and other countries
more generally, AMM, “South Korea Plans to Restrict Exports of Steel Scrap, Rebar,” print
ed. (Mar. 8, 2004), p. 14. For a sample of other measures, see reports on trade regulations
in the Economist Intelligence Unit Views Wire regarding Thailand (Feb. 10, 2004); Sweden
(Nov. 25, 2003); and, Egypt (Aug. 19, 2003).
75 World Trade Organization. “General Agreement on Tariffs and Trade 1994,” Articles
XI:2(a) and XX(j).
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scrap from the domestic market, until prices here actually exceeded those abroad.76
Shriner’s findings were cited by Emanuel Bodner, who represented the Institute
of Scrap Recycling Industries, at the House Small Business Committee hearings on
March 10, 2004. But he was joined in opposing export controls by Wilbur Ross, who
suggested that China could then retaliate by reducing coke exports to the United
States. Moreover, he said, “in view of our staggering balance of payments deficit,
it would be ludicrous to reduce our exports.”77 On the whole, the idea has not had
broad support within the steel industry, with even the SMA seeming somewhat
ambivalent on actually applying such a policy.78
Option: Application of “Changed Circumstances” to Trade
Remedies
The Consuming Industries Trade Action Coalition (CITAC), a group of
companies and organizations that actively opposed the Bush Administration’s steel
safeguard tariffs, has suggested a broader resolution to the issue of rising steel prices
and tight availability. This would be to review existing antidumping and
countervailing duty (AD/CVD) orders on imported steel products under the “changed
circumstances” provisions of U.S. trade law. As argued by CITAC counsel Lewis
Leibowitz:
We think that the current market situation clearly constitutes changed
circumstances. Under the law, the Department of Commerce may remove
the duties in response to changed circumstances. We believe that such
removal is necessary and appropriate to alleviate the incredible shortages
and price increases that currently afflict American manufacturers.79
As noted in a March 2004 Congressional Budget Office analysis, the steel
industry is by far the largest user of AD/CVD orders. The CBO counted 131
AD/CVD orders against imports of steel mill products currently in place, plus a
further 30 orders against imported iron and steel pipe products, and 30 orders against
assorted other iron and steel products.80 Consequently, if the Commerce Department
or the ITC undertook a fundamental review of these orders with a view to their
76 Robert Dale Shriner, “Control Reversal in Economics: U.S. Scrap Export Restrictions,”
Business Economics, XII:3 (May 1977), pp. 14-17.
77 House Small Business Comm. hearings (Mar. 10, 2004); see Bodner and Ross statements;
the quote from Ross is on p. 5.
78 See Paul Schaffer, “Short Supplies, Export Angst,” AMM print. Ed. (February 23, 2004),
p. 2, for a useful summary of the existing state of the law and the pro’s and con’s of action
on the issue; also, AMM, “Scrap Wars Create Turmoil, Skepticism” (Mar. 3, 2004). No
SMA representative testified at the March 10 hearing.
79 CITAC. “Steel Shortage Causing Havoc for U.S. Manufacturers; CITAC Urges Lifting
of Trade Barriers,” press release, March 4, 2004.
80 Congressional Budget Office. “Economic Analysis of the Continued Dumping and
Subsidy Offset Act of 2000,” attachment to letter from Director Douglas Holtz-Eakin to
Rep. Bill Thomas, Chairman, House Ways and Means Committee (March 2, 2004), p.3.
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termination, the result could have a major impact on U.S. steel imports and the
domestic steel market.
Under U.S. trade law, an “interested party” may request a review citing changed
circumstances.81 The point of a changed circumstances review is that market
conditions have changed, and that the penalized foreign action – dumping or
subsidization – is not occurring or not likely to recur. However, commentators have
noted that prevailing on either the Commerce Department or the International Trade
Commission to accept that a change of circumstances has occurred, or to otherwise
undertake an administrative review outside of the standard five-year “sunset reviews”
is difficult. In such cases the “burden of persuasion” that circumstances have
changed is on the petitioning party.82
Option: Application of CVD Laws to Non-Market Economies
As mentioned often in this report, the competitive demand of China for scrap
and raw materials has become a key issue for U.S. metals producing and consuming
industries. The growing competition from Chinese-made finished products in the
U.S. market exacerbates the concern faced by U.S. producers. At the March 25,
2004, House Small Business Committee hearings at least one witness, who
represented secondary aluminum producers, suspected that a broad range of Chinese
government subsidies to its industries enables Chinese competitors to outbid U.S.
companies for scrap and raw materials that are in short demand. Chairman Manzullo
noted that U.S. law, as it is currently applied and interpreted, does not allow industry
petitioners to seek redress through application of countervailing duty provisions
against subsidies in non-market economies. He therefore stated his support for H.R.
3716, which would explicitly change the law to allow such actions.83
H.R. 3716, a revised version of legislation introduced in previous Congresses,
would briefly add to Section 702 of the Tariff Act of 1930 (19 USC §1671(a)(1)) a
provision to specify application of the law to non-market economies as well as other
countries, and cover all industry petitions filed after date of enactment. The
Commerce Department in the 1980s determined that U.S. anti-subsidy trade remedy
law should not be applied to non-market economies. This determination was upheld
by the courts (Georgetown Steel Corp. v. United States, 801 F.2d 1308 Fed.
Cir.1986) in a steel-related case. China is still considered by the Commerce
Department as a “non-market” economy, although it has become a member of the
WTO, has absorbed large amounts of foreign investment, and has taken many steps
to modernize its industry and infrastructure. With the growing significance of China
in U.S. trade, Representative Manzullo, together with Representative Philip English,
who introduced H.R. 3716, argue that U.S. companies should have access to this
81 Tariff Act of 1930 §757(b), 19 USC §1675(b).
82 19 USC §1675(b)(3). See Raj Bhala and Kevin Kennedy. World Trade Law
(Charlottesville, VA: Lexis Law Publishing, 1998), pp.620-28.
83 House Small Business Comm. hearing, March 25, 2004. Statement of Edward Cowan,
Beck Aluminum Corp., p. 6; and, Opening Statement of Chairman Manzullo, p. 2.
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remedy against Chinese competitors.84 The legislation has 33 co-sponsors; no
committee action has been taken on the bill within the Ways and Means Committee.
A companion bill, S. 2212, was introduced on March 12, 2004, by Senator Susan
Collins and four co-sponsors.
Option: Reinstatement of Steel Safeguard Tariffs
The options discussed above are aimed at finding ways to reduce upward
domestic price pressures on steel. But some Members of Congress sympathetic to
the steel industry still believe that termination of the safeguard relief after 20 months,
instead of the initially planned three years, undermines the industry’s long-term
recovery and restructuring. In spite of the current relatively high prices of steel, they
have suggested policy options that may help sustain domestic steel prices against
import competition.
An example is legislation introduced to overturn President Bush’s decision to
terminate the Section 201 steel safeguards and to reinstate them. Almost
immediately after President’s decision was announced in December 2003,
Representative Peter Visclosky introduced H.R. 3699 and Senator Robert Byrd
introduced S. 1997, two short bills that would have this effect. In identical language,
the bills would reinstate the terms and conditions of the safeguard remedies as they
existed on December 4, 2003, including the temporary tariff schedule changes in
chapter 99 of the U.S. Harmonized Tariff Schedule. They also provide that the
presidential proclamation of December 4, 2003, would have no effect. As of March
16, 2004, H.R. 3699 had 76 co-sponsors; S. 1997 had two co-sponsors. Neither
house of Congress had acted on the measures.
Proponents argue that President Bush has inadequately justified his termination
of the safeguards. Senator Jay Rockefeller and Representative Sander Levin,
respectively the ranking members of the Senate Finance Committee’s International
Trade Subcommittee and the House Ways and Means Committee’s Trade
Subcommittee, sought from U.S. Trade Representative Robert Zoellick the legal
basis of the presidential action. They claimed that the justification given by
Ambassador Zoellick in response does not meet the “clearly specified, defined
circumstances” established in the law.85
84 Information on the rationale for H.R. 3716 provided in a statement from the office of Rep.
Philip English, “Background Information on H.R. 3716.”
85 For background, see Associated Press, “Indiana, West Virginia Senators Try to Revive
Steel Tariffs” (Dec. 9, 2003) and “Lawmakers Ask Zoellick to Provide ‘Legal Basis’ for
Steel Tariff Repeal” (Dec. 10, 2003). On January 8, 2004, Sen. Rockefeller and Rep. Levin
released a copy of USTR Zoellick’s response to their request, and a joint press release
indicating their views as to its inadequacy.
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Option: Adding Safeguard Tariffs to AD/CVD Margins
The Department of Commerce in September 2003 indicated that it was
considering the deduction of safeguard tariffs, when it calculates margins or subsidy
levels in AD/CVD cases. That is, in assessing the level of subsidy or dumping for
any imported product that was covered by a safeguard tariff during the period of
investigation, should Commerce subtract from the export price any U.S. safeguard
tariff that may have been applied, even if the safeguard remedies themselves have
subsequently been terminated?86
On March 26, 2004, 28 Representatives wrote Secretary of Commerce Evans
in support of this change to U.S. AD/CVD practice. Twenty-one Senators sent a
similar letter on the same day. In the view of the Members, U.S. antidumping law
specifically provides for the inclusion of import duties when calculating dumping
margins. In their opinion, this should mean all applicable duties, including any
safeguard duties that may apply.87
The Commerce Department received extensive comments on this proposal.
Many major steel-trading partners of the United States weighed in against the
proposal during the comment period, including the European Union (EU), Brazil,
Canada and India. The EU in particular noted that such a practice would “double the
impact of the remedial duty that is deducted.” It further claimed that its own
practices have been misrepresented and that it has recently adopted a policy to ensure
that AD/CVD and safeguard duties cannot be applied to the same imports.88
The Commerce Department is reportedly making determinations in one or more
forthcoming steel AD/CVD cases in which proponents of the policy change believe
that it could be applied. If the change in methodology were to be adopted, it could
apparently increase substantially the level of any AD/CVD penalties applied to
imports that had been covered by the safeguard remedies.
But the Commerce Department on April 6, 2004, announced that it would not
make this change, with specific reference to administrative review of an antidumping
order on stainless steel wire rod imported from Korea, the case which occasioned the
September 2003 policy review. The Department acknowledged that the law “clearly
requires the deduction of normal import duties for dumping calculations,” but further
concluded that “safeguard tariffs cannot be considered normal duties.” Similar to the
view expressed by the EU, the Commerce Department found that “Deducting
safeguard tariffs from the export price in calculating dumping margins would
effectively increase the safeguard remedy; in some cases providing a double remedy.”
86 68 Federal Register 174 (Sept. 9, 2003), pp. 53104-5.
87 Rep. Philip English, et al. and Sen. Barbara Mikulski, et al. Letters to Secretary of
Commerce Donald Evans (both dated March 26, 2004). See also Nancy E. Kelly,
“Lawmakers in Push for Duty Deductions,” AMM (March 29, 2004 print ed.), p. 2.
88 Petros Soumelis, Delegation of the European Commission. Letter to Assistant Secretary
of Commerce for Import Administration James J. Jochum (November 7, 2003).
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It also said that, if this policy were adopted, “fairly traded imports could become
liable for antidumping duties simply due to the imposition of safeguard tariffs.”89
89 The quotes are from U.S. Dept. of Commerce, Office of Import Administration. “Fact
Sheet: Decision Not to Include Safeguard Tariffs as Costs in Antidumping Duty
Calculations,” April 6, 2004. The full discussion of the issue and decision is in 69 Federal
Register 19153ff. (April 12, 2004), Dept. of Commerce, International Trade Administration,
case A-580-829, “Stainless Steel Wire Rod from the Republic of Korea: Final results of
Antidumping Duty Administrative Review,” Appendix I. See also DER, “Commerce
Decides Not to Deduct Safeguard Tariffs in Antidumping Calculations” (April 8, 2004).