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April 20,1973

Cyclical industries, almost by
definition, suffer seriously when the
economy is in the doldrums, but
conversely, when business turns
around, their prospects become
rosy indeed. Consider the outstand­
ing example of steel. Industry
profits jumped 37 percent in 1972,
to $759 million, after two straight
years of recession-level earnings,
and they are almost certain to
register another very large gain
this year.
Profits will not regain the peak level
of $1.07 billion reached in each of
the Vietnam boom years, 1965 and
1966, but the improvement from
recent depressed levels will be
substantial nonetheless. The credit
for the present rosy picture goes
principally to the nation's industrial
boom, but the bright prospects for
the future also reflect the stemming
of the import challenge and the
signing of an agreement which
promises prolonged labor peace.
The steel industry historically has
been subject to wide swings in
demand, generated not only by
cyclical movements in general
economic activity but by a boomand-bust cycle of inventory
accumulation and liquidation
associated with the industry's
pattern of labor negotiations.
During the 1970-71 period, the
industry experienced serious
production losses as a result of
both of those factors.
Production reached a record 141
million tons in 1969, but then fell

sharply in 1970 when activity slowed
cyclically in several of its key
consuming industries. Output
soared during the first half of 1971
under the influence of strike-hedge
buying, only to plunge downward
again when customers liquidated
excess inventories following a
peaceful labor settlement in the
industry. For 1971 as a whole,
production totaled only 120 million
tons.
Why the boom?
The first three quarters of 1972 did
not look especially strong in com­
parison with the year-before
inventory-accumulation period,
but business for the year as a whole
was quite healthy, especially in
view of the upsurge in orders from
two of the industry's largest
customers— the auto and appliance
industries. Production during 1972
rose nearly 11 percent above the
1971 level to 133 million tons, while
shipments of finished steel in­
creased by 6 percent to almost 92
million tons. But neither production
nor shipments regained their record
1969 levels.
The import tide meanwhile receded,
because of the quota agreement
reached with foreign producers in
May, together with the growing
world-wide demand for steel.
Imports dropped to 17.7 million
tons, below the record level of 18.3
million tons reached during the
strike-hedge buying period of 1971.
As a result, the share of the market
supplied by foreign producers
declined slightly from 18 to 17
(continued page 2)




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percent. The product mix was
heavily weighted in favor of highvalue products, however, so that
the dollar value of these imports,
at $2.8 billion, was the highest on
record.
Steel prices increased by an average
of 6 percent in 1972, reflecting a
first-quarter boost in quotations for
most sheet and strip products.
Prices remained stable during the
remainder of the year, however, as
the nation's producers voluntarily
agreed not to raise prices again
before January 1973. Yet even with
the relatively modest improvement
in sales, earnings jumped 37
percent, in large part because of
very determined cost-cutting efforts
throughout the industry. Today, the
industry is using 8 percent fewer
employees to produce more steel
than it did at the 1971 peak.
Further momentum
This year the recovery has gained
further momentum. Weekly steel
production has risen almost without
interruption since the beginning of
the year, and early this month was
running at a record annual rate of
154 million tons. During the first
quarter, steel producers poured
about 37 million tons of raw steel.
Production was 20 percent higher
than output during the comparable
period of 1972, and 7 percent above
the tonnage achieved during the
stockpiling period of first-quarter
1971.
The steel boom started with an
upsurge in orders from the auto
and appliance industries, and was
2



thus centered initially in the sheet
market. But orders from the con­
struction and machinery industries
have picked up in recent weeks, so
that delivery times have now
lengthened for plates, pipe, bar,
tube and other products as well.
With business plant-equipment
expenditures projected to rise about
14 percent this year— the largest
gain in capital outlays since 1966—
the outlook for continued strength
in these markets is good.
Based on the heavy flow of orders,
industry officials are now revising
their earlier estimates upward.
Assessing overall business pros­
pects, it now seems reasonable to
expect expenditures for durable
goods and structures in real terms
to increase at least 11 percent for
the year, which would generate
record steel consumption in the
neighborhood of 113-114 million
tons— up from 105 million tons
in 1972. U.S. consumers also
may try to add at least 2 million tons
to their inventories, so that total
domestic demand could reach as
much as 116 million tons.
How much imports?
Whether or not this range of steel
demand will seriously tax the do­
mestic industry's capacity will
depend upon the level of imports.
Imported steel in 1972— at 17.7
million tons— accounted for 16.6
percent of total supply. But this
year there is reason to believe that
foreign steel will fall substantially
below this level, despite the fact
that imports during the JanuaryFebruary period were 21 percent

higher than a year earlier. February's
dollar devaluation, along with price
increases posted by a number of
foreign producers, have sub­
stantially narrowed (and in some
instances eliminated) the price
differential between domestic and
imported products.

replacement and modernization
just to remain competitive in world
markets. In addition, the Council
on Environmental Quality estimates
that the industry will have spent as
much as $3.5 billion on air-and waterpollution abatement equipment by
1976 to meet Federal standards.

If imports fall as low as 14 million
tons, as predicted by some analysts,
U.S. firms could find it necessary
this year to furnish as much as 102
million tons of finished product
for the domestic market, plus
another 2 million tons for export.
This level of output undoubtedly
will strain the industry's basic and
finishing capacity.

Since a long-term debt of $5 billion
has left the industry with little
unused borrowing power, raising
these vast sums could pose quite
a problem. As one step towards
raising the necessary capital this
year, the industry undoubtedly will
seek price relief. It has agreed
to hold the line on sheet and strip
pieces until June 1, but after that
date, producers are leaving their
options open.

Costly expansion
During the 1970-72 period, the
domestic iron-and-steel industry
spent an average of $1.6 billion
annually for new plant and equip­
ment— about 22 percent less than
it spent annually during the 1965-69
period. Spending for plant
modernization and additional
capacity in real terms dropped off
even more, since prices increased
overall, while outlays for anti­
pollution equipment accelerated
markedly to the point where they
now equal 10 to 15 percent of the
industry's total capital outlays.
Steel executives estimate that they
should be spending $2.0 billion a
year if they are to acquire the
additional 22 million tons of
capacity required to meet the
nation's 1980 levei of demand for
steel. They claim that they must
spend about $1.4 billion a year on
3



While 1973 is shaping up as a very
good year for steel, industry officials
see no reason why 1974 shouldn't
be strong also, particularly in view
of the likelihood of labor peace.
The steelworkers union recently
signed an historical and innovative
agreement to avoid the threat of a
nationwide strike when the current
contract expires on August 1,1974.
The new agreement calls for a
basic wage increase of 3 percent
per year, plus a $150 bonus per
worker in return for a no-strike
pledge and binding arbitration of
disputes not settled by April 15,
1974. But the real gain, for workers
as well as their employers, is the
elimination of the strike threat that
leads to hedge buying and heavy
importing, followed by a slump in
orders when customers liquidate
their excess stockpiles.
Yvonne Levy

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BANKING DATA— TWELFTH FEDERAL RESERVE DISTRICT
(D o llar amounts in m illions)
Selected Assets and Liabilities
Large Com m ercial Banks
Loans adjusted and investments*
Loans adjusted— total*
Co m m ercial and industrial
Real estate
Consum er instalm ent
U.S. Treasury securities
O ther securities
Deposits (less cash items)— total*
Dem and deposits adjusted
U.S. G overnm ent deposits
Tim e deposits— total*
Savings
O ther tim e I.P.C.
State and political subdivisions
(Large negotiable C D 's)
W eekly Averages
of D aily Figures
M ember Bank Reserve Position
Excess reserves
Borrow ings
Net free ( + ) / Net borrow ed (— )
Federal Funds— Seven Large Banks
Interbank Federal funds transactions
Net purchases ( + ) / Net sales (— )
Transactions: U.S. securities dealers
Net loans ( + ) / Net borrow ings (— )

Am ount
O utstanding
4/4/73

Change
from
3/28/73

71,145
53,653
19,427
15,607
8,056
6,371
11,121
69,789
21,211
1,152
46,056
18,137
19,039
6,303
8,576

+ 70
+ 117
+ 29
+ 52
+ 14
+ 129
— 176
+642
+420
— 198
+ 55
— 18
+ 94
— 1
+ 159

W eek ended
4/4/73

Change from
year ago
D o llar
Percent
+ 8 ,8 3 0
+ 9 ,5 6 7
+ 3 ,2 3 9
+ 2 ,5 8 6
+ 1 ,4 4 2
— 527
— 210
+ 8,322
+ 1,169
+ 298
+ 6 ,7 6 0
— 139
+ 4 ,3 9 7
+ 1 ,6 5 0
+ 3 ,5 8 8

Week ended
3/28/73

+ 14.17
+ 2 1 .7 0
+20.01
+ 1 9 .8 6
+ 2 1 .8 0
— 7.64
— 1.85
+ 1 3 .5 4
+ 5.83
+ 3 4 .8 9
+ 1 7 .2 0
— 0.76
+ 3 0 .0 3
+ 3 5 .4 6
+ 71.93
Com parable
year-ago period
33
0
33

70
43
+ 27

1
109
— 108

+

+325

— 91

— 888

+

+

+411

85

24

♦ Includes items not shown separately.

Inform ation on this and other publications can be obtained by callin g or w riting the
Adm inistrative Services Departm ent. Federal Reserve Bank of San Francisco, P.O . Box 7702,
Digitized for F R a S E R Francisc0' Califo rn ia 94120. Phone (415) 397-1137.


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