It's going to take a lot more than publicity campaigns about the evils of foreign steel to get U.S. mills on the road to recovery. It's going to take some $15-30 billion to modernize and expand a tired, worn-out industry. The question is: Where will the money come from? Steelmakers argue that it should come from higher prices. Prices have been so low, complains Armco's chairman, that "during the period of 1975, 1976 and 1977, consumers around the world ate the steel company's lunch."(1) Yet, with lower-cost imports competing in U.S. markets, domestic firms can no longer raise prices at will.
Producers adamantly assert that the capital needed for expansion cannot be found in their profit columns, which they describe as "pretty dismal." In fact, many producers have urged their compatriots to "rededicate themselves to profitability." (2) Which leads us to question what they have been dedicated to all these years.
Facts are facts, though, and it is true that steel industry profit margins have declined over the past twenty years, from "comfortable" levels in the mid-1950s to low levels in the 1970s (relative to other industries). Steel ranked at the bottom of 41 manufacturing industries in terms of return on net worth for most years in the 1970s.(3)
(Lower profits obviously don't affect all concerned to the same degree despite the USWA's stress on a "community of interests" between labor and capital. In 1977, one of the worst years for the U.S. steel industry in its entire history, a year in which more than 20,000 steelworkers were laid off, the chairmen of the six major steel firms saw their salaries rise an average of 13 %. With a net loss of $448 million for the year, Bethlehem Steel nonetheless saw fit to raise the base salary of its chairman by 17% to $296,000.(4) We should all be so unprofitable!)
Declining profit margins in steel have had a profound effect on the industry's ability to attact investors and raise needed capital. Capital flows to where the profit rate is highest, and steel in the United States is no longer its Mecca.
SPENDING THE COMPANIES' PROFITS
But what, you may ask, are the steel corporations doing with the profits they do have? In general, profits are either plowed back into the business or paid out to shareholders in the form of dividends. In the last article we noted that steel companies invested about $1.7 billion a year (from both profits and borrowed funds) in capital expenditures. The steel companies have steadily groused that a large part of that investment was eaten up by unproductive expenditures on pollution control equipment. So great are the environmental control demands, they argue, that it is often cheaper to scrap their old plants entirely rather than clean them up. Steelmakers spent nearly $2 billion on pollution control measures in the 1970s, approximately 12 1/2 % of their total investment. On the other hand, it couldn't happen to a nicer industry.
Steel was responsible for pouring about two million tons of soot and dust into the air, mostly in highly populated, urban areas, in 1968. This represented one-fifth of all industrial particulate pollution and more than twice the contribution of any other single manufacturing industry.(*)(5)
Moreover, there is very little to the argument that pollution-control expenditures represent an unfair advantage for foreign competitors. In fact, between 1971-1976 alone, Japanese steel companies spent over $3 billion on pollution controls, an average of 16% of their total capital investments.(6) Pollution control expenses have not tipped the balance against U.S. firms. ________________________________________
*In the early 1970s Bethlehem's Sparrows Point works was discharging an average of 324 lbs. of arsenic and 5,469 lbs. of cyanide a day into Chesapeake Bay. A researcher sampling the water outside U.S. Steel's Clairton Coke Works accidentally stepped out of his boat and one leg sank up to the knee in muck. The next day, according to the researcher, "the skin on that leg fell off." _________________________________________
The other portion of the "accumulation fund" - that which is left after all expenses and taxes have been paid-is used to pay out dividends to shareholders. Interestingly, steel companies have been paying out a higher than average portion of profits to dividends. From 1970-1976 the industry paid out 43% of after-tax profits in dividends.
How can we explain these high dividends when steel producers are complaining of a capital shortage? One prevalent explanation is that they need to do it in order to enhance the attractiveness of their firms on Wall Street. In other words, with the steel companies doing so poorly, investors must have some reason for holding on to their shares of stock.
Some analysts go further and argue the following: Corporate financial managers will often pay out higher-than-average dividends when their companies are "buying time" to look around for new investments outside their original sphere. Higher dividends are a way of holding investors during this search period. And, sure enough, when one looks at steel company investments in the last few years, the conclusions are unmistakable: the steel companies are abandoning the steel business and moving into greener pastures.
THE DIVINE LAW OF PROFITS: DIVERSIFICATION
In the middle of 1978 Armco Steel Corporation quietly dropped "Steel" as its middle name. This may not seem like anything to write home about, but it is highly significant when a steel company no longer wants "steel" to appear in its handle. And this is only an indication of a significant attempt by the major steelmakers to diversify their holdings The reason for the shift from steel is straight forward: profits are higher elsewhere. Armco's steel sales accounted for 68% of its revenues in 1977 but only 41% of its profits.(7) U.S. Steel had a pre-tax income of $175.5 million in 1977, but that was only because its non-steel holdings brought in $220.5 million. Steel manufacturing itself was U.S. Steel's big loser.(8) So they are moving out of steel. After all, according to Armco's manager of economic research, "there is no divine law that says we were put on this earth only to make steel."(9)
Most steel companies are diversifying into raw materials (traditionally a strong suit with the steelmakers), petroleum and related activities, and various industrial products and services. Armco's strongest area, in terms of profits, is in the production of oil field equipment and products, but it showed an interest in the lucrative energy field by acquiring Corban Industries which constructs fiberglass pipes for the cooling towers of nuclear power plants. National Steel has moved heavily into aluminum and magnesium, having purchased major companies in the field, as well as picking up some well-established firms in building construction, containers and packaging. Allegheny Ludlum, one of the more profitable specialty steel producers, expected its non-steel sales to rise to 66% of total sales by the end of 1978.(10)
As for "Big Steel," it is rapidly becoming Big Cement, Petrochemical and Natural Gas, Inc. Through its various operating divisions, U.S. Steel has expanded into cement companies in the United States and abroad, railroads, ocean transport, seabed mining, pipeline and oil field drilling equipment, titanium, real estate, engineering, consulting and finance. Its biggest plans, however, are in offshore gas and oil leases and petrochemicals. The company, which is continually arguing that it doesn't have enough money for its steel operations, is currently considering one of its largest investments ever: the purchase of a $500 million ethylene facility.(11)
Most domestic steel firms are moving swiftly to shore up their control over raw materials. U.S. Steel's holdings, for example, are absolutely staggering. As of 1977 it owned or leased properties containing about 3.4 billion tons of coal, 3.3 billion tons of limestone, 4.2 billion tons of iron ore, and, for good measure, a uranium mine in Texas. U.S. Steel's foreign mining operations are extensive. It mines nickel and cobalt in Indonesia, copper, zinc, manganese, iron ore, ferrochrome and ferromaganese in South Africa, manganese in Gabon, coke in Germany, iron ore in Canada and ferromanganese in France.(12) At the moment, it is angling for a $1 billion joint venture in the Mifergui-Nimba iron ore mines in Guinea.(13)
Thus the steel companies, while screaming bloody murder about their inability to find money to invest in steel operations, seem to be finding the funds to diversify into more profitable areas. The case of U.S. Steel is significant. With average capital expenditures on steel at approximately $650 million a year over the past 7 years, it is currently considering non-steel investments which far surpass that sum. And the 1977 steel crisis has only served to fuel the fires of diversification.
AND NOW FOR THE BAD NEWS
If the situation for the U.S. steel industry seems dismal, there are indications that it may be getting worse. Our investigations have demonstrated that many producers are steadily moving out of the steel business. Simultaneously, however, the banks which have serviced the tremendous capital needs of domestic steel are rapidly increasing their lending both to steel companies in Japan and in the less developed capitalist countries.
Foreign bank lending to all Japanese industries increased by 67% between 1974-1976; lending by foreign banks to the Japanese iron and steel industry shot up by 274% in the same period.(14) Table I demonstrates a 270% increase in loans from private U.S.-based banks to the six largest steel companies in Japan between 1975 and 1977.
Meanwhile, U.S. steel firms have "borrowed up to their limit" in the eyes of U.S. bankers. In the past three years, they have added $3.3 billion to their long-term debt, which now stands at approximately $8.5 billion.(15) As a group, the eight largest steel-makers increased their long-term debt by more than 50% in the last eight years.(16) Short-term lending to the steelmakers (i.e., lending from private banks) has also gone up rapidly in the 1970s. Last year alone, short-term lending to steel increased 17% over 1977 lending, far greater than the industrial average of 2%.(17) By the end of 1978, most analysts agreed that the steel companies had reached the "bottom of the barrel" as far as further borrowing was concerned.(18)
How have U.S. producers reacted to the bankers' practice of "aiding and abetting the enemy" in the midst of a trade war? In the case of some companies, such as Lykes-Youngstown Sheet & Tube, this lending has all the look of bank "redlining." Banks are cutting back their loans to Lykes (which had grown dependent on bank financing in the 1970s) and lending instead to Japanese steel firms.(19)
The president of Wheeling-Pittsburgh Steel likewise noted that private financing was unavailable for steel companies in the United States while "one large Japanese steel company with an 85% ratio of debt to capitalization and little or no earnings, obtained a loan of over $100 million in this country..."(20)
Is this another instance of "unfair competition" or another illustration of capitalist reality? Capitalist enterprises are established in order to make a profit, and banks, as capitalist firms par excellence, are no exception. They will loan to sectors of industry which have the best long-term outlook, whether in the United States or elsewhere. The weakened position of the U.S. steel industry in international competition will inevitably make borrowing more difficult, while banks throw money at their foreign competitors. Once again, solidarity and sacrifice is demanded of the working class while branches of capital pursue their own independent interests.
BANKING ON THE LEADERS
U.S. banks know a good thing when they see it. According to the CIA, "Japan has the competitive clout to capture practically all of the world market for net steel imports, while making inroads into the domestic market of West European and North American steel producers."(21) The banks are particularly enthusiastic about Japan's strategic ability to supply the growing Chinese demand for steel as well as helping China build its own steel capacity. Nippon Steel has already been given a $2 billion contract to build a new integrated plant for China at Paoshan, near Shanghai, has sent a technical mission to install equipment at the Wuhan Steel complex, is modernizing the Anshan Steel works, and is under consideration for a number of other gargantuan projects.(22)
The other bright spot for Japanese steel as far as foreign investors are concerned is its ties to the burgeoning steel mills in the underdeveloped capitalist world, particularly Brazil. As we will see in the next article, while U.S.- based banks are lending money to Japanese steelmills, the Japanese banks are putting together a massive financing program to aid Brazilian steel.
Not to be outdone, U.S. banks have also been scrambling to lend money to the nascent steel industries in the Third World. In the following article we will examine the development of these industries and the role played by U.S. multilateral and bilateral funding. Here, we would only note that, despite the growing concerns of U.S. steelmakers, U.S. banks have been instrumental in providing the steel industries of Brazil, South Korea, Taiwan and others with essential working capital. We have been able to document over $1 billion in loans to foreign steel companies by U.S. banks and consortia led by U.S. banks. It is very probable that the total being lent to foreign steel firms is considerably higher. (See Table II)
Foreign steel firms have found their friends at Chase, Citibank and the other large New York-based banks. But they have not been lacking in support from smaller regional banks. Banks from the heart of steel country-Pittsburgh National, West Pennsylvania National, the Continental Bank of Chicago and others-have been generous creditors to the steelmakers of Australia, Taiwan and Yugoslavia. Even the Central National Bank of Cleveland, recently so reticent when it came to helping Cleveland climb out of its fiscal tar pits, saw no problem in guaranteeing a sizable loan to Brazil's state-owned steel mills.(23)
BUILDING THE WORLD'S STEEL MILLS
When capital by itself is not enough, U.S. engineering firms, and even U.S. steel companies themselves, have provided the technology and engineering expertise to build steelmills around the world. Some of the largest U.S. engineering firms (Wean United, Wilputte Corporation, Pullman Swindell, Blaw-Knox, Arthur G. McKee) have been contracted to build steelmills from Algeria to Yugoslavia. Seamless steelmills are not a strong point in U.S. domestic production, but Aetna-Standard Engineering Co., has built nearly 90% of the world's most advanced mandrel mills, including those in Japan.(24)
If U.S. steel companies are squaking about their foreign competitors, they should examine their own order books, for they, too, have participated in the construction of numerous foreign mills. For example, Armco has built steel mills in Argentina; U.S. Steel has built mills in Brazil and Colombia and has been supervising the construction of Taiwan's integrated steelworks at Kaohsiung.(25)
A GLOBAL SHIFT
Who are the villians behind the decline of the U.S. steel industry? The corporations which for years neglected to use their monopoly profits to modernize the industry and now are beginning to desert it? The banks which are providing foreign steel companies, GLOBAL SH including the Japanese, with the billions of GLOBAL T: dollars they need to modernize their industries? The engineering firms which are providing foreign steelmakers with the latest word in steel technology? To say the least, none of the above can feel too self-righteous about pointing the finger at foreign producers.
What we have seen is that the problems which the U.S. steel industry has experienced since the early 1960s originated with both a reintroduction of competition into a highly monopolized market and a general restructuring of industry on a world scale. The internationalization of capital-the spread of the multinational corporation, the remarkable upsurge in foreign lending by banks, the creation of unregulated, "offshore" money markets reflects and bolsters a shift in manufacturing in general from the advanced to the underdeveloped capitalist countries; from countries where unions are relatively well developed and wages and conditions relatively high to countries where unions are outlawed, weak or coopted and wages are abysmally low.
It is this shift which underlies the growing imbalance in the U.S. trade accounts in general and in steel in particular. In 1976 fully one-third of all U.S. imports originated in sales from majority-owned U.S. subsidiaries abroad. That same year, while the United States exported a total of $115 billion in merchandise, majority-owned foreign affiliates of U.S. corporations exported (from their host countries) nearly $144 billion.(26) We have met the enemy and he is us!
Humor aside, our study of investment and lending trends in the steel industry points to the development of a new international division of labor in the world. Capital and technology are flowing to those areas where profits can be maximized and leaving those industries in the advanced capitalist countries where they are tending to decline. The final article in this issue will consider the impact of this process on U.S. workers, but first we will examine the spread of the steel industry from the advanced to the underdeveloped capitalist countries. ______________________________________
REFERENCES ABANDONING STEEL
1. New York Times, November 10, 1978.
2. Metal Bulletin, April 21, 1978.
3. Iron Age, May 22, 1978.
4. Wall StreetJournal, March 28, 1978.
5. For a comprehensive, if dated, discussion of steel industry pollution, see Council on Economic Priorities, "Environmental Steel," Economic Priorities Report, Vol. 4, No. 2 (May 1973).
6. Mueller and Kawahito, op. cit., p. 24.
7. Armco Steel Corporation, 10K Report, 1977.
8. U.S. Steel Corporation, 10K Report, 1977.
9. Business Week, August 21, 1978, p. 91.
10. Data from the corporations' annual reports and 10K reports.
11. On diversification in U.S. Steel, see Hogan, op. cit., IV, p. 1665; New York Times, February 29, 1976; Barron's, March 20, 1978; Metal Bulletin, October 13, 1978; and Wall StreetJournal, October 6, 1978.
12. U.S. Steel Corporation, 10K Report, 1977.
13. World Business Weekly, November 6, 1978, pp.53-54.
14. Oriental Economist, December 1977, p. 11.
15. Business Week, August 21, 1978; Iron Age, May 15, 1978.
16. Moodys Industrials, 1978, annual reports; 10K reports for the corporations.
17. Business Week, October 16, 1978, p. 147, 160.
18. Business Week, August 21, 1978.
19. Edward F. Kelly, "Lykes and its Bankers," xerox report from the Ohio Public Interest Campaign, 1978.
20. Iron Age, May 22, 1978.
21. CIA, op. cit., p. 8.
22. Business China, August 17, 1977; World Business Weekly, November 27-December 3, 1978, p. 53; Metal Bulletin, October 3, 1978.
23. Export-Import Bank, Press Releases, various dates.
24. George J. McManus, "American Steel Doesn't Lag in Technology...Just in Capital," Iron Age, September 11. 1978, p. 51.
25. Export-Import Bank, Active Authorizations by Supplier as of February 28, 1978; Metal Bulletin, October 26, 1976; New York Times, December 7, 1978.
26. Survey of Current Business, April 1978.
