The Steel Industry Can Turn a Profit

January/February 1988
The Steel Industry Can Turn a Profit

By Milton Deaner

Milton Deaner is president of the American Iron and Steel Institute, Washington, D.C.

In 1987 the domestic steel industry demonstrated its potential to return to profitability, based on its strenuous efforts over the past few years to modernize production processes and-reduce overall production costs. But encouraging as this may be, the events of the past year also have shown that the industry must overcome serious obstacles if it is to enjoy substantial and sustained profitability following five years of record-high losses.

By standard statistical measurements, 1987 was only slightly better than 1986. Raw steel production was 86 to 87 million net tons, compared with 81.6 million in 1986, a year heavily affected by a major strike. Also, steel mill shipments of finished product were about 74 million tons, compared with 70.3 million in 1986.

Imports in 1987 were about the same as the 1986 level of 20.7 million tons, a figure that represents about 22 percent of the domestic market supply. The nation's persistent trade imbalance also has brought tremendous tonnages of steel imports contained in automobiles, machinery, manufactured parts, and other products. The result is that total imports, both direct and indirect, filled about a third of this nation's total steel demand in 1987, the same as in the previous three years.

These facts add up to the same sobering conclusions. First, the steel industry may have seemed more prosperous this year, but the fundamental factors of production and sales are still below the 1979 to 1981 totals. Second, the apparent profitability of the industry in 1987 was based on short-term transitory factors, and the industry still has a great deal to do to establish its future health and profitability. Certainly after five years of losses--aggregating $11.7 billion--the appearance of small net profits for the steelmaking segments of the companies is welcome and encouraging. But remember that some of the 1987 apparent "profits" come from one-time refunds of investment tax credits.

The modest operating profits that have shown up in 1987 are the result of the lower production costs the industry has achieved through better productivity and process modernization and some price increases which have partially restored some of the huge discounts at which steel has been selling since 1982. The trade press and analysts say that realization in the spot market are up, but the price of steel is still only about 80 percent of the 1981 prices. The industry won't fully feel the 1987 increases until this year.

The outstanding factor in the cost-reduction formula has been the introduction of more continuous casters, which now process over 60 percent of the raw steel produced, compared with about 50 percent a year ago. Computerized controls, reduced energy consumption, and quality control and uniformity in the rolling-mill area have also helped to reduce costs.

More efficient labor use is another important part of this formula. "World Steel Dynamics," by PaineWebber, Inc., shows that manhours per tons came down 30 percent between 1977 and 1986, and estimates for 1987 are even lower.

The result of these efficiency factors is that the net yield of finished product by steel mills was more than 86 percent in 1987, compared with about 72 percent 10 years ago. The domestic industry's raw steel production capability reached a record high of 160 million tons in 1977, and was down to 112 million tons for 1987.

Although the steel industry looked relatively good in 1987, its long-term health depends on recovering investment by capital-intensive consuming industries: producers durables such as construction, industrial and agricultural machinery, transportation equipment, oil, and other extractive industries. The industry is also making a strong effort to retain and expand its position in consumer-goods industries by developing special grades, coated sheet, and more economical processing qualities for automotive and other uses and by approaching more vigorously the container market.

The single most important task facing domestic steel companies is the continued modernization of production processes. The industry has spent much more in the past 20 years on plant modernization than it has realized in cash flow. In the recession years of 1982 through 1986, capital expenditures totaled almost $8 billion, despite huge losses. In 1986, capital expenditures were below $1 billion for the first time in more than a decade. Preliminary estimates indicate that the 1987 total was higher--probably over $1 billion--but still an annual $2 billion below the required level if the industry is to remain competitive with foreign competition. Total U.S. demand for steel remains stable and on a slight uptrend since 1980, with the result that total demand for 1987 was about 110 million tons. The big question remaining is how much of this market domestic mills will fill, and how much both direct and indirect imports will fill.

In 1987 the domestic steel industry demonstrated its potential to return to profitability, based on its strenuous efforts over the past few years to modernize production processes and-reduce overall production costs. But encouraging as this may be, the events of the past year also have shown that the industry must overcome serious obstacles if it is to enjoy substantial and sustained profitability following five years of record-high losses.