Comparison of the United States and Chinese Steel Industries
Vol. 3, No. 6
order to provide some temporary relief to the United States
steel industry, the Bush administration has recently imposed
tariffs of up to thirty per cent on steel imports. This article
examines the reasons why a tariff-centered strategy will not
resolve the fundamental problems of the American steel industry.
It will also analyze the underlying weaknesses of the American
steel industry and will suggest some possible solutions. Finally,
it will review China's steel industry.
Section 201 of the United States Trade Act of 1974
201 of United States Trade Act of 1974 (Global Safeguard Investigations)
offers import relief for domestic industries. Under section
201, domestic industries which have been seriously injured
or are threatened with serious injury by increased imports
may petition the United States International Trade Commission
(USITC) for import relief. Section 201 does not require a
finding of an unfair trade practice, as do the antidumping
and countervailing duty laws and section 337 of the Tariff
Act of 1930, but Section 201 does include the presumption
that the protected domestic industry will go through restructuring
to regain competency.
March 5, 2002, President Bush announced that the United States
would introduce up to thirty per cent tariffs on most imported
steel products. The safeguard measures came into effect as
of March 20, 2002 and are to remain in place for three years.
The president, however, will review his decision in September
1. Steel Tariff schedule
name Tariff and/or quota
Flat products 30%
Tin mill products 30%
Certain tubular products 15%
Fittings & Flanges 13%
Stainless steel bar 15%
Stainless steel rod 15%
Stainless steel wire 8%
Slabs 30% on out-quota; Tariff-rate-quota = 5.4m short tons
Bush has determined that Free Trade Agreement (FTA) partners,
such as NAFTA partners, Mexico and Canada, should be excluded
from this tariff scheme on all steel products. Developing
countries, including South Africa, which export less than
three per cent of their steel to the United States and which
are World Trade Organization (WTO) member states are also
excluded from the tariff. The countries hardest hit appear
to be the European Union (EU) countries, Russia, Ukraine,
Taiwan, Japan and South Korea.
Bush retains the discretion to consider requests for product
exclusions within one hundred and twenty days of the date
of the March declaration and will consider requests for product
exclusions each year thereafter.
United States produces approximately eighty per cent of its
domestic steel demand and utilizes installed production capacity
at around eighty per cent. In 2001, the United States produced
ninety million tons of crude steel and imported twenty-seven
million tons (Note: the measurement "ton" in the
article refers only to "metric ton"; one metric
ton equals to approximately 1.1 short ton) in steel products.
Steel imports into the United States peaked in 1998 at 38
million tons and have since decreased by thirty per cent.
Industrial globalization has made the steel market so international
that around forty per cent of global steel production is shipped
across borders each year. The United States is now the second
largest net steel importer, after China.
It is expected that Section 201 will not heavily influence
imports of semi-finished products. The import quota for semi-finished
products is 4.9 million tons in addition to the material imported
from Canada and Mexico. In effect, the major existing slab-exporters
(Brazil and Russia) can even expect to increase the level
of exports over the levels they achieved in 2001.
201 is targeting finished steel products. The United States
imports finished steel products from a large number of countries.
The EU has been the biggest exporter to the United States,
as it shipped about five million tons to the United States
in 2001. Canada is the second largest exporter shipping four
million tons, followed by South Korea (two million tons),
Japan (1.8 million tons) and Mexico (1.5 million tons). Turkey,
Brazil and China exported approximately seven hundred to eight
hundred thousand tons each in 2001. Russia and Taiwan exported
approximately five hundred thousand tons each. (Source: Financial
a result of the March declaration, annual imports of finished
steel products into the United States are estimated to decrease
from 17m tons to 11m tons or even more in 2002.
world steel market may feel the chill from the United States
as the diversion of steel products may pull down prices worldwide.
However, the negative effects of the tariff imposition might
not be as bad as feared.
demand for steel products is projected to grow at CAGR (Cumulative
Average Growth Rate) 1.4% in the next ten years as long as
the growth rate of demand is as high as four per cent provided
the economies in the United States and other major developed
countries will be improving. In other words, global apparent
crude steel consumption is estimated to increase from 820m
tons in 2001 to 852m in 2002.
the other hand, worldwide crude steel production in 2002 is
projected to be 818m tons versus 845m tons in 2001. The recent
high-level Organisation for Economic Co-operation and Development
(OECD) steel meeting reported the prospect of a capacity reduction
of nearly one hundred and twenty million tons being affected
by 2005. The exception is China which will see a large increase
in steel production as well as steel consumption.
eight million tons of diverted steel products from the United
States to the international market may be not that significant
in the dynamics of the demand and supply described above.
Additionally, strong cycles occur in steel prices and the
prices are now on an upward curve. In the three months since
the imposition of the United States' tariff, prices in the
United States and in the international market had both gone
Effects on the United States Steel Industry
will the controversial tariffs bring to the United States
steel industry? This topic is divided into two parts. The
first section will examine effects on the United States integrated
steel mills which have been aggressively looking for help
from the government. The second section will look at effects
on mini-mills in the United States which have consistently
grabbed domestic market share from the integrated mills and
have also been quite competitive by global standards.
steel mills" are comprehensive steel works that convert
iron ore, coke and other raw materials to steel products and
"mini-mills" are nimble steel mills that melt scraps
to produce steel products. The capital expenditure of the
integrated steel mills, which have existed for more than one
hundred years, is much greater than that of the young mini-mills.
Integrated Steel Mills
United States integrated steel mills now make up fifty-five
per cent of all domestic production and have been troubled
for the last two decades. Since the early 1980's the integrated
steel mills have sought Chapter 11 protection. After emerging
from bankruptcy in the early 1990's, these mills rushed into
bankruptcy courts again in late 1990's. There are about thirty
integrated steel mills now in Chapter 11. LTV, one of the
top steel mills, has been liquidated.
immediate effects of tariffs are reflected in decreases in
imports and increases in prices. The integrated steel companies
might start to see their profits return, but they will not
have enough cash flow from operations to modernize plants
and to sort out liabilities to the retirees, which is known
as the "legacy cost". The companies might have better
short-term financing for the use of working capital; nevertheless
the capital market will remain unfriendly to them because
of the short-term nature of tariff protection, the issue of
the legacy cost and the uncertainties of the political environment.
bankrupt steel companies will prefer to stay in Chapter 11
for a while for two reasons. One reason is to avoid spending
newly improved cash flow on interest expense payments and
the other is to prove to the government that further help
is still needed.
do not change the fundamentals of the integrated steel companies
and they will essentially remain the same after the termination
of tariffs. The presumption underlying the exercise of section
201 is that the protected industry is to go through restructuring.
However, the United States steel industry as a whole does
not have the ability to restructure itself.
steel mills have known this fact from the very beginning.
Their initial request for government help was forty per cent
tariffs and twelve billion dollars of financial assistance
on legacy costs. The request was too high for the Bush government
which could then be faced with similar requests from other
industries such as timber and clothing.
so, these tariffs have attracted huge domestic and international
criticisms and the WTO verdict is due next March. The Bush
administration has been under tremendous pressure to remove
the tariffs and it excluded one hundred and seventy-nine imported
steel products on August 22, 2002. Meanwhile, the USITC ruled
against domestic steel mills on the cold rolled steel anti-dumping
case which has left the mills wondering how much they can
count on Washington in the future.
United States steel industry is extremely fragmented. There
are more than a dozen integrated steel mills, the biggest
of which is US Steel (NYSE: X) with annual production of 13m
tons. The rest are all in the class of millions of tons per
year. However, 160m tons of total European production are
shared by several major steel groups. Acelor, the world's
biggest steel company in Luxembourg, contributes 55m tons
per year while Anglo-Dutch Corus Group makes 20m tons per
year. German Thyssen Krupp and Italian Riva are dominant steel
players in their own countries with production of 17m tpy
and 16m tpy respectively.
with most of the other downstream and upstream industries,
the global steel industry is also fragmented indeed. The top
four steel companies on the earth grab only fifteen per cent
of the global market whilst the percentage for the nickel
industry, one of the upstream industries, is sixty per cent.
The top six in the downstream auto industry have global market
share of eighty-five per cent.
The bargaining power of United States steel companies is generally
weak because of industry fragmentation, which leads to the
steel companies' inability to capture value. The value that
could have been retained by steel companies has been diverted
to both downstream and upstream industries.
perception that integrated steel companies are unable to capture
value or to add value to shareholders scares away many investors.
Many integrated steel companies have not raised funds by issuing
equity for many years. Meanwhile the risk premium for integrated
steel companies in the corporate bond market is huge, especially
given the fact that more than 30 companies are now in Chapter
the funds to modernize the old equipment, United States integrated
steel mills have lagged in technology. With other burdens
such as high labor costs and legacy costs, most of these companies
cannot compete in the growing international market at all.
The only market left for them is the domestic market, which
has a negative cumulative average growth.
the one hand, the wages of steelworkers in the integrated
steel mills are quite high, as most of the workers are unionized.
On the other hand, the costs of benefits for retirees and
their dependents are more than these companies can afford.
One hundred fifty thousand steelworkers have to take care
of seven hundred fifty thousand people.
legacy cost issue is the greatest headache for the United
States steel industry. It requested twelve billion dollars
in federal subsidy for this expense, which was later declined.
Any prospective investors or acquirors will hesitate to consolidate
the steel industry if they are obligated to cover these huge
United States integrated steel companies have been quite resistant
to the wave of globalization. They do not leverage cheap resources
abroad, explore international markets or follow key customers'
footprints around the world.
United States steel companies do not have any overseas productions
except US Steel, which has a subsidiary in Czech. Their rivals
in Europe, however, have established production sites in Asia
and South America. Corus, for example, just acquired $1.8
billion Brazilian CSN to leverage cheap iron ore sources.
Thyssen Krupp set up joint ventures in China to benefit from
the cheap labor costs and huge market.
focus of the United States integrated steel companies has
been only on their domestic market and they do not have independent
sales and marketing capacity in the international market.
Although the United States market is very lucrative, demand
has been decreasing and this trend will continue. These companies
will have to develop appropriate globalization strategies
to address these issues sooner or later.
inability to serve global customers across borders costs United
States steel companies millions of dollars. Many of their
customers in the United States, such as auto companies, are
global. The steel companies could have secured business abroad
from their customers' overseas subsidiaries by appropriately
managing customer relationships.
is very difficult for United States integrated steel mills
to compete on the global platform without further consolidations.
Legacy costs are a great hurdle. The United States government
cannot be expected to step in and save the steel companies
because there are too many political and economic issues.
and reemerging as new companies may be the only effective
method left for United States steel integrated steel mills.
The new companies owned either by specialized distressed asset
management companies or by other steel companies will have
no legacy costs when the social security system takes over
benefit payments to their original workers.
& Associates, a bankruptcy management company, acquired
LTV's assets and created a new competitive steel company -
International Steel Group (ISG). The new company will start
production in late 2002 and hire twenty per cent less people.
ISG is projected to be a quite competitive steel company and
will put great pressure on existing integrated steel mills.
approach will be opposed by workers, who have a strong political
voice in Congress. However, the government is not in the position
to use taxpayers' money to help some entities meet their obligations.
Although workers and creditors may suffer, social resources
can be allocated efficiently. It is the essence of a "market
shareholders might also be against the "liquidating and
reemerging" approach since they do not want to see the
shares in their hands become worthless. However, a key question
to ask is "how much is the equity of those companies
worth?" Before the debut of tariff protection in March,
the market capitalization of the top six integrated steel
mills was less than that of one mini-mill, Nucor, although
the steel production of Nucor is about one-third of theirs.
The share prices are now higher as a result of tariffs, which,
however, are not sustainable at all. The nightmare will come
sooner or later. After all, destroying the value of a company
is worse than liquidating the company.
United States steel mills can reduce costs through globalization.
It might be a good idea to move some production outside of
the United States to leverage cheap labor and low environmental
costs. Mexico should be the top choice on the list as it is
a member of NAFTA and geographically close to the United States.
markets can also be attractive to some integrated steel mills,
especially the high-end products for global customers. The
steel mills might need some marketing savvy to establish key
customer management programs and to follow the footprints
of their key customers. In the long run, foreign markets are
the place where United States steel mills will have to be
because domestic demand for steel has been decreasing for
United States steel companies can also connect with some global
steel alliances to start co-operation in research and development,
operations, purchasing and other areas. There are already
two key global alliances, one of which is Acelor-Nippon Steel-POSCO-Baosteel
with production of 120 metric tons per year (mtpy) and the
other is ThyssenKrupp-Kawasaki-NKK with 45 mtpy production.
United States steel mills can chose to join existing alliances
or to initiate their own global alliances.
States mini-mills are the real winners. They already compete
with global players without protection from the government.
They are nimble, entrepreneurial, and less burdened. Some
mini-mills, such as Nucor, are considered among the best steel
works in the world.
make them even better. Sales revenue is increasing as well
as profit margin. The P/E ratio of Nucor in March was 40 (March
15, 2002), higher than that of GE (20) and most other manufacturing
companies at the same time.
United States mini-mills will keep grabbing market shares
from imports under the tariff protection and from the integrated
mills although integrated steel mills cannot be replaced by
mini-mills entirely. Some steel products cannot be made through
mini-mills because of quality issues. The limited availability
of scraps and the slow growth of demand will also limit the
consumption of steel from mini-mills.
Review of China's Steel Industry
is now the number one steel producing country with an output
of 149m tons in 2001 versus 128m tons in 2000. Most Chinese
steel mills are integrated as the development of mini-mills
is constrained by the availability of scraps. The biggest
mini-mill in China, Pearl River Steel, has to import some
scraps to feed its electric arc furnaces.
booming economy makes China a behemoth in consumption of steel
products. Demand in 2001 reached 160m tons and the growth
rate is projected to be five per cent for the next several
years. Many foreign steel companies put their hopes on huge
consumption from China, which is supposed to stabilize and
even lift international prices when economies in the rest
of the world are declining. China imported 25m tons net in
2001 and became the biggest steel net importing country, followed
by the United States (23m tons).
exported 700k tons of steel to the United States in 2001 and
the effects of the tariffs have been limited. Although diverted
steel from the United States to the international market can
be a negative factor on steel prices in China, China's strong
economy and recovering economies in other regions can easily
digest the extra production.
history and the status quo of the United States steel industry
are good lessons for China's steel industry.
China's Fragmented Steel Industry
were one thousand and forty-five steel companies in China
in 2000, thirty-four of which had production of more than
one million tons. The top four companies (Baosteel, Anshan,
Capital and Wuhan) represent only thirty per cent of all of
China's production. (Source: China Steel Yearbook, 2001)
the United States, the top six companies produce around fifty
per cent of all domestic production. The percentage for the
top five in Japan is seventy-five per cent and for the top
three in Russia it is fifty per cent. POSCO alone produces
sixty-five per cent of Korean steel while one major steel
mill represents almost all the production of a whole country
in France, UK and Italy.
steel companies have been trying to consolidate the industry.
However, most attempts have been fruitless. The root of the
problem is multi-level government ownership. For example,
Anshan belonging to the central government tried to acquire
Fushun Steel held by the local municipal government. The local
government was unwilling to sell Fushun Steel as local officials
were reluctant to see decreases in their authority and local
tax revenues. Handan Steel and Wuhan Steel met similar problems
and integration challenges later when acquiring Wuyang and
Daye respectively. The smooth acquisition of Shanghai Steel
and Meishan Steel by Baosteel are probably the only exceptions.
government ownership and administration structure will have
to be modified to address the agency problem of those officials.
The tax revenue sharing scheme between the central and local
governments will also have to be restructured to take away
the barriers of acquiring state-owned companies. Meanwhile
the equity market should be strengthened so that the private
sector can also actively be involved in the consolidation
of state-owned companies.
Labor Productivity and Efficiency
productivity is quite low in China's steel industry, which
hired two million people to produce 140m tons of steel in
2001. The industry would require only 300,000 employees to
match the average global standard of five hundred and forty
tons per employee and one hundred and forty thousand employees
to match the advanced international standard of one thousand
tons per employee. This comparison implies massive layoffs
ahead through modernizing China's steel industry.
example, Wuhan Steel, one of China's top four steel giants,
makes 6.6m tons through the efforts of one hundred thousand
persons (66t/person.year) while China Steel in Taiwan produces
9m tons per year with nine thousand employees (1,000t/person.year).
Wuhan Steel will have to let go of ninety per cent of its
workforce if it wants to match China Steel's standard.
the gap, state-owned steel companies in China have tremendous
difficulties in dismissing employees as the government is
concerned about social stability and therefore enforces strict
restrictions on layoffs. But any world-class steel companies
must strategize to improve labor productivity and efficiency.
China's steel companies can cooperate with local governments
to establish long-term mutual-beneficial de-manning schemes,
for example, offering career-training opportunities and raising
severance packages. Meanwhile, steel companies should not
promise more future benefits to employees and ex-employees
than it can afford. Otherwise they will later be troubled
by the similar legacy costs that United States steel companies
are currently facing.
Bush administration has been friendly to the United States
steel industry, but not yet as friendly as the Chinese government
to China's steel industry. Up to thirty per cent tariffs and
frequent anti-dumping cases make the environment for Chinese
steel companies quite comfortable.
the Chinese government even forces output reductions by allocating
quotas when prices are perceived to be low. Cheap financing,
tax holidays and subsidies are also available to some major
state-owned steel companies. Some western analysts call the
Chinese government the friendliest government in the world
to its domestic steel industry.
problem is that the friendliness of the regulations in China
is temporary. Along with the reform process of Chinese government,
the role of regulation leans toward neutral rather than towards
favoring producers. In the future, the Chinese government
might not intervene to boost prices and cheap financing, tax
holidays and subsidies might become scarcer and scarcer. Tariffs
will also be decreased when China tries to meet its WTO promises
and competition in the domestic market will become more intense.
steel companies should leverage the "last" vestiges
of regulatory friendliness and secure cheap financing to lay
the foundation for intense competition in the future.
4.4 Low Cost of Capital
steel companies on earth except China's complain about difficulties
in raising funds from capital markets. The steel industry
has been infamous for its low returns on capital employed
for many years. Krupp-Thyssen Stahl, the top German steel
company, had to withdraw its initial public offering in 2001
because of low valuation and the Anglo-Dutch Corus Group had
to distribute a big chunk of retained earnings to shareholders
as dividends rather than keeping it within the company as
situation is not much better in the corporate debt market.
Most steel companies receive unfavorable ratings from credit
agencies and pay high premiums for their debt.
the contrary, Chinese steel companies have raised lots of
money from the Chinese stock market and banks. The required
return on equity is as low as around six per cent in China
while in the United States it is eleven to twelve per cent
on average. The cost of capital of some major Chinese steel
companies might be in the range of four to five per cent,
in light of cheap financing from Chinese banks as well.
is a great time for Chinese steel companies to modernize plants,
purchase new equipment and make overseas acquisitions. Chinese
steel companies can take over foreign steel companies which
are lacking financing to upgrade technology. As the sunk costs
are quite high in the steel industry, the effect of the "late-mover-advantage"
in the industry is obvious. Low costs of capital can place
Chinese steel companies in the position to acquire overseas
upstream ventures, such as iron ore, and steel productions.
the strategy works only as long as capital is controlled within
China. As soon as Chinese investors are allowed to invest
in overseas capital markets including the Hong Kong market,
the cost of capital will increase to an international level
adjusted with risks.
steel companies are lagging behind the United States steel
companies in globalization.
It is justified for Chinese steel companies to focus on the
domestic market though, which is the biggest steel market
in the world with strong growth. But globalization can bring
huge benefits to Chinese steel companies in the arenas of
management, research and development, environmental protection,
operations, supply chain and even finance and marketing skills.
the one hand, Chinese companies can introduce foreign partners
to leverage international know-how. Baosteel Group established
a joint venture with German Thyssen Krupp Group to produce
stainless steel in Shanghai. Taiyuan Steel outsources gas
production from the BOC Group (formerly Brin's Oxygen Company
the other hand, Chinese companies can step out of their borders
to acquire upstream ventures and steel production. It can
be an advantage for steel companies to secure some good quality
iron ore mines as the iron ore supplying industry is quite
consolidated. The Corus group just paid $1.8B for Brazilian
CSN (an all share deal) to get a hold on the mine under the
name of CSN. The iron ore issue is imperative to China as
it is set to import more and more iron ore given its limited
resources and huge demand for steel. Capital Steel and Baosteel
have gotten involved in mines in Brazil and Australia. Chinese
steel companies can leverage their low costs of capital to
grab an advantageous position in the international fight for
general, United States integrated steel mills cannot be restructured
to be modern and competitive unless the issues of legacy cost
and globalization are resolved. The new International Steel
Group might indicate one of the possible solutions. Meanwhile
on the other side of the globe, Chinese steel companies have
their own unique problems as well as some issues their United
States peers also face. With the right strategic moves, the
Chinese steel industry can become the strongest in the world
given the size, opportunities and resources available to it.
(The author is a global market analyst with the BOC group.
The author's view does not reflect that of the BOC group.)