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.'F\J }fFl 0 November 4, 1977 Can SteelCompete? u.s. steel consumption has risen only 15 percent over the past decade because of intermittent recessions, the loss of markets to substitute materials, and the recent slack in demand for capital goods. But to add to the domestic industry's problems, foreign imports in the past decade have siphoned off a major portion of this modest market growth. . The Administration acknowledges the seriousness of the import problem, but tends to disapprove of the use of mandatory quotas or formal marketing agreements to restrict the flow of low-cost steel into the u. S. market. Administration spokesmen argue that such restrictions would only raise the price of foreign and domestic steel without attacking the basic causes of the import threat, namely, excess worldwide production and relatively high domestic production costs. Consequently, the Administration is likely to put less emphasis on import barriers than on tax benefits and other measures to encourage plant modernization and cost reduction. Meanwhile, several producers have petitioned the Treasury for relief under laws which call for the imposition of duties on foreign products found to be in violation of antidumping statutes-that is foreign products sold in the u. S. market at less than cost or home-market prices. This raises the question as to whether the domestic steel industry is in fact a relatively high-cost pro- ducer and, if so, whether these cost differentials are sufficient to account for the wide disparity between foreign and domestic steel prices in the u.S. market. Import upsurge Since the Second World War, the U.S. steel industry has watched its position in the world steel market steadily decline. In 1950,the United States was the largest steel producer in the non-Communist world, accounting for 56 percent of total production. In 1976, it was still the largest single producer, but its share of the total had dwindled to 25 percent, just slightly larger than that of Japan and somewhat less than the share of the European Economic Community. Domestic production moved irregulady upward over the 1950-65period from 97 to 132 million tons, remained at approximately that level until the 1973 boom-but is presently running at an annual rate of only around 125 million tons, approximately the 1964 level. Steel imports gained their first real foothold in the u.S. market in 1959, when a prolonged strike turned the United States into a net importer of steel. The foreign share of the market continued to rise as dollar became increasingly overvalued under the then-prevailing system of fixed exchange rates, with imports reaching 18 million tons by 1971, equivalent to 18 percent of total U.S. apparent consumption. Imports then receded after the 197173 dollar devaluations, but another (continued on page 2) JD)®JP>©llfltm:m<eml It IF®cdl®1 f@ll §@ITil IF Opinions expressed in this newsletter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco, nor of the Board of Governors of the Federal Reserve System. -_. import upsurge began in the mid1970's, with foreign steel reaching 16 percent of total u.s. apparent consumption in January-July 1 977and 20 percent of the total market in August, when the flow reached an annual rate of 22 million tons. As a consequence of the increase in imports over the 1964-76 period, foreign producers captured nearly all of the growth of the u.s. market. In 1976, about 56 percent of u.s. steel imports came from Japan and another 22 percent from the European Economic Community. Comparative costs Comparative steel-production costs, as developed recently by the Council on Wage and Price Stability (COWPSL help to explain how Japanese producers were able to increase their penetration of the u.S. market in recent decades. Historical cost data are scantier for European producers, but the available data suggest that U. S.-European cost differentials alone cannot explain their inroads into the u.s. market. I ndeed, the data show that total production costs per ton of raw steel are roughly comparable in Europe and the U.S., and that the costs of transporting steel from Europe to the u. S. raise their delivered costs far above those of domestic producers. Raw-material cost data show that the U.S. steel industry has gradually lost its earlier comparative advantage over Japanese producers. Ac- 2 cording to COWPS estimates, the costs of purchased raw materials per ton of raw steel currently are about $5 less in Japan than in the u.S. The Japanese advantage is somewhat less if both purchased and company-produced materials are included, since the largest u.S. firms produce most of their own raw materials. Unit labor-cost data show that the traditional labor-cost advantage held byJapanese producers. has narrowed over time, but remains large nonetheless. Output per manhour more than doubled in the Japanesesteel industry Qver the 1964-76 period, while the productivity gain in the u.s. industry amounted to only about 18 percent due to a much slower growth of output. In contrast, hourly compensation rose nearly six-fold in the Japanesesteel industry over that same period, while it increased about 142 percent in the u. S. industry. Yet despite the narrowing differential, unit labor costs are still about $36 less in the Japanese steel industry than in the u.S. industry, per ton of raw steel. Th is advantage is due mainly to the fact that wage rates in Japan are still only about one-half American rates. Output per manhour is only slightly higher in Japan than in the U.S., despite the more rapid gains made in Japan over the 1964-76 period. Combining these raw-material and labor-cost differentials-and converting them from a raw-steel to a Millions of Net Tons 120 U.S. APPARENT CONSUMPTION 100 80 60 40 20 1959 61 63 65 finished-product basis-results in about a $73 per ton (25 percent) comparative advantage for Japanese over domestic producers. However, the Japaneseadvantage is narrowed somewhat when capital costsand other expenses are added. The overall cost advantage held by Japaneseproducers is further reduced when their inbound rawmqterial transportation costs and outbound finished-steel transportation costs are included. The Japanese import most of their raw materials, while U.S. firms obtain most of their raw material inputs from domestic sources. Japaneseinbound transportation costs a're therefore about $2 per ton higher than for U.S. producers, while freight, loading, insurance and duty charges incurred by Japaneseproducers in U.S. marketing activities range between $44 and $54 per ton. Indeed, subtracting all these transportation costs from the Japanese production-cost advantage, suggeststhat Japaneseproducers can sell steel in the u.s.at only a modest overall discount below U.S. producer costs and still make a profit. Counterattack Domestic producers argue, however, that foreign producers have been selling steel in the United Statesat prices that are much lower than would be warranted on the basisof their comparative advantage-in fact, have been sell- 3 67 69 71 73 75 77 ing steel at a loss in order to raise their operating rates and employment above levels that would otherwise prevail. They claim, furthermore, that foreign steelmakers are able to do this because deficits sustained during periods of weak demand are offset by stiff premiums during periods of strong U.S. demand, and also because Japanese firms are subsidized by their nonsteel subsidiaries. These charges are still being investigated, but the fact that the Treasury recently ruled tentatively in favor of a small Pacific Northwest producer, suggeststhat domestic steel companies may have a good chance of winning their legal case against foreign producers. Whatever the outcome, it is clear that domestic firms will be operating in an intensely competitive environment for several years to come. Consumption of steel in the non-Communist world is expected to grow at an annual rate of around 4 percent over the 1976-80 period. World capacity is expected to grow at an even slower rate as financially-distressed European and other producers sharply modify their expansion plans. Still, this slowdown in the growth of capacity may not be sufficient to raise overall operating rates substantially above current depressed levels. Thus, given their comparative cost advantage, Japaneseproducers may well continue to focus on the U.S. market as an important outlet for increased exports. Yvonne levy • 4Eln . • EpEAaN .o4 EPI !!EMEH " E!uJOJ!IE:J .. EUOZPV 0 E)jsEIV 4ImIW1 ·J!Ii!::>IO;)SpUa?.I:l1 Ui!S (;S,", · ON lRWtEic:i OUVeI ·s·n lAVW 55Vl::> lSMI:I BANKING DATA-TWELFTH fEDERAL RESERVE DISTRICT amounts in Il'llllll'''''' Selected Assets and liabilities large Commercial lSanks Amount Outstanding 10/19/77 - Loans (gross, adjusted) and investments* Loans (gross, adjusted)-total Security loans Commercial and industrial Real estate Consumer instalment U.S. Treasury securities Other securities Deposits (less cash items)-total* Demand deposits (adjusted) U.S. Government deposits Time deposits-total* States and political subdivisions Savings deposits Other time depositst Large negotiable CD's 101,240 78,989 2,132 23,924 26,087 13,742 7,864 14,387 98,903 28,516 457 68,159 5,316 31,804 28,803 10,955 Weekly Averages of Daily Figures Week ended 10/19177 Member Banl<Reserve Position ExcessReserves(+)/Deficiency H Borrowings Net free(+)/Net borrowed H Federal Funds-Seven large Banks Interbank Federal fund transactions Net purchases (+)/Net sales H Transactions with U.S. security dealers Net loans (+)/Net borrowings H Change from year ago Dollar Percent Change from 10/12/77 + + + + + + - 442 307 161 246 140 48 218 353 1,556 1,039 152 285 64 33 251 418. + + + + + + + + + + + + + + + 10,777 10,096 571 1,602 5,139 1,910 919 1,600 8,551 2,611 10 5,609 222 3,489 1,990 141 Week ended 10/12/77 + + + + + + + + + + + + + + + + 11.91 14.65 36.58 7.18 24.53 16.14 10.46 12.51 9.46 10.08 2.24 8.97 4.36 12.32 7.42 1.30 .comparable year-ago period 37 1 38 39 162 201 + 118 107 11 + 902 + 277 + 12 + 426 + 480 + 114 *Includes items not shown separately. tlndividuals, partnerships and corporations. Editorial comments may be addressed to the editor (William Burke) or to the author . . . • Information on this and other publications can be obtained by calling or writing the Public Information Section, Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco 94120. Phone (415) 544-2184.
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