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Current Status of Supply and Use of Iron, Steel, andFerroalloysFREDERICK J. SCHOTTMAN aa Division of Ferrous Metals , U.S. Bureau of Mines , 2401 E Street, NW, Washington, D.C,20241Published online: 10 Jun 2010.

To cite this article: FREDERICK J. SCHOTTMAN (1988) Current Status of Supply and Use of Iron, Steel, and Ferroalloys, MineralProcessing and Extractive Metallurgy Review: An International Journal, 3:1-4, 45-54, DOI: 10.1080/08827508808952614

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Mineral Processing and Extractive Metallurgy Review. 1988, Vol. 3. pp. 45-54Photocopying permitted by license only© 1988 Gordon and Breach. Science Publishers lnc.Printed in Great Britain

Current Status of Supplyand Use of Iron, Steel,and Ferroalloys

FREDERICK J. SCHOTTMAN

Division of Ferrous Metals, U.S. Bureau of Mines, 2401 E Street, NW.Washington, D.C. 20241

After. nearly 30-yeor period of expansion after World War II, the iron and steelindustries in the older industrialized countries have suffered from overcapacity since1974. The overcapacity was caused by on unexpected change in the growth of demandfor most materials following the rapid increase in petroleum prices. Capacity has heenreduced by the major industrialized countries. New capacity continues to be installedin developing countries to produce steel for growing demand in those countries and forexport to the industrialized world. The bulk fcrroalloys industry in the major steelproducing countries has also declined because of overcapacity and because ofcompetition from new capacity in countries with local ore or low cost electric power.Although most iron and steel companies ore still financially unhealthy, their conditionis likely to improve as better balance is restored between supply and demand.

Iron and steel make up about nine-tenths of the metal consumed in the UnitedStates. Tbis poper is primarily concerned with the steel industry that produces rolledand forged steel products. Problems such as decreased demand, substitution. andimport competition have also affected the foundry industry that produces iron andsteel castings. The ferroalloy metals are those that have major consumption inproducing iron and steel. In most cases, they also have otber important applications,

All of the metals discussed here have been in more or less continuous oversupplysince about 1974. The primary reason has been a much slower growth rate in demand,Many older producers of the metoIs have also been hurt by new competitors. Twogeneral trends can be noted, One is the increased intemutionalization of markets. Thischange is particularly important for steel, which is a more or less finished product.lrnproved communication, in the sense both of movement of information and ofmovement of goods, has made it more practical to acquire goods such as steel fromdistant suppliers. Also, various barriers such as tariffs arc generally lower today, Asecond trend is the movement of metal producing industries from the olderindustrialized countries to the less developed countries.

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46

BACKGROUND

FREDERICK J. SCHOn'MAN

Between the end of World War II and the early 1970's there wasrapid, relatively steady growth in the iron and steel industries.Production of steel in the market economy countries increased bya factor of five between 1946 and 1974, with only short-term down­turns. The United States emerged from World War II with an intact,and enlarged, steel industry. In the postwar period, the steelindustries of Japan and Western Europe were rebuilt and greatlyexpanded. By 1974, they were comparable in size to the industry ofthe United states and, on the whole, were more modern because oftheir more recent expansion.

Exports were important markets for the modern steel industriesof Japan and Europe. Developing countries, which lacked sufficientproduction capacity of their own, absorbed much of these exports.Although the United States was a major exporter of steel in theimmediate postwar period, imports of steel from Japan and Europebecame a matter of concern to the domestic industry in the late1960's.

In early 1974, which can now be seen as the last truly good yearfor the western world steel industry, demand was strong and theindustry was producing near its effective capacity of 500 millionmetric tons per year. Shortages were feared and prices were high, soexpansion projects were started or planned. Although the generaltrend of steel demand was downward after 1974, production capacitydid not peak in Japan and the United States until 1977, and in theEuropean Economic Community (EEC) not until 1980. However,continuing weak demand and financial losses forces reductions incapacity. By 1986, capacities in the EEC and the United States hadbeen reduced by about one-sixth and that of Japan by about one­tenth. Meanwhile, however, demand and production capacity con­tinued to increase in the developing countries.

DEMAND

After 1974, Western World steel demand stagnated. In very largepart, the demand weakness can be traced to the direct and indirecteffects of the jump in oil prices in the early 1970's.

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SUPPLY AND USE OF IRON AND STEEL 47

Besides the direct effects of draining off income from non-oilactivities to the oil producers, the oil price increases worsened in­flation and thereby led to policies that dampened economic growthin order to restrain inflation. In addition, much of the internationaldebt problem of some developing countries is related to inflation, andassociated high interest rates, and to the weakened demand for goodscaused by the economic problems of the industrialized countries.

The oil crisis also contributed to changes in how materials areutilized. Higher prices led directly to demand for more energyefficiency. In the case of automobiles, this meant smaller automobilescontaining less steel.

The oil crisis also offered evidence for the idea that resourcedepletion was threatening the world. This and related ideas wereinvolved in attitudinal changes that tended to reduce materialsconsumption. There was a weakening of the belief in bigness itself asa virtue. In industry, there was stronger emphasis by managementand engineering on efficient designs and on minimizing the consump­tion of materials.

Other factors not related to oil prices also tended to affect steeldemand. These include the general trend toward services as a largerpart of the economy, substitution of other materials for steel, and,in the United States at least, a trend to import a larger share ofsteel-intensive manufactured goods. Overall, although some of thechanges resulting from higher oil prices may be reversed if the currentlower prices hold, steel demand will probably not grow as rapidly asthe economy.

CURRENT STATUS OF THE INDUSTRY

The steel industry can be divided into three sectors. The integratedmills start with iron ore and other raw materials and process themthrough to finished products. Minimills remelt scrap iron and steel tomake finished products. Specialty steel mills also usually remelt scrapas their raw material but produce certain high-quality, high-valueproducts such as stainless steels and tool steels. Steel companies maybe involved in more than one sector.

In the United States, the integrated steel companies have sufferedthe most damage since 1974. Several factors have made it difficult for

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48 FREDERICK J. SCHOITMAN

them to reduce costs during this period of weak demand. Workers inmost integrated companies are represented by strong unions, usuallythe United Steelworkers of America, and have for decades receivedwages and benefits significantly higher than those of the averageworker. A history of adversarial attitudes between labor and manage­ment and the desire of the unions to maintain jobs have resulted inrigid job descriptions and work rules.

A second problem of the integrated producers is the relative ageand obsolescence of their facilities. Many integrated mills were builtbefore more recent technical innovations such as the basic oxygenfurnace and continuous casting. Although management recognizesthe need to modernize, weak demand and low prices have oftenmade it financially impractical to do so. In addition, many integratedmills were built in locations that are now uneconomical because oftransportation costs.

A third problem for the integrated mills is their cost of rawmaterials. To a large extent, the companies are integrated back totheir raw materials and cannot avoid the fixed costs associated withthese operations. Even if low-priced raw materials are available fromoutside sources, in many cases it is preferable for them to use theircaptive supplies.

The integrated sector of the steel industry has been changeddrastically by its financial problems. Plants have been closed andcapacity cut back. Both hourly and salaried employment have beenreduced even further than capacity. Corporate structures have beenchanged by mergers and sales. In two cases, plants owned by majormultiplant companies have been spun off as independent companies,in both cases with lower cost labor contracts.

For over 30 years, the leading steel companies conducted labornegotiations as a group. The negotiating group had been losingmembers and was finally disbanded in 1985. The separate contractsbeing negotiated in 1986 will be more diverse and will be tailored toeach company's financial condition. New contracts made public sofar have included a moderate hourly cost reduction and increasedwork rule and job assignment flexibility in exchange for greater jobsecurity. In one case, the contract includes a no-layoff policy forcurrent employees. Some sort of profit sharing plan will probablybe included in most contracts.

Two changes have further internationalized the domestic industry.

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SUPPLY AND USE OF IRON AND STEEL 49

First, foreign companies, principally Japanese, have invested in theU.S. industry, either by buying an interest in an existing companyor by entering a joint venture with a U.S. company to build a newfacility. Second, there have been increased imports of semifinishedsteel, which is then further processed by a domestic mill. In a recentdeal, the United States Steel Corp. sold one-half interest in itsPittsburg, California, rolling mill to Pohang Iron & Steel Co., Ltd.,of the Republic of Korea. At the end of 1989, steel production atGeneva, Utah, which currently supplies Pittsburg with semifinishedsteel, will probably be cut back, and Pittsburg will process coil boughtfrom Korea.

In contrast to the integrated mills, the minimill sector has beendoing well since 1974. Although some minimills have failed duringthis period, as a whole the sector has expanded.

The minimills have an advantage corresponding to each disad­vantage of the integrated mills. First, many are not unionized andgenerally have lower hourly labor costs, although the costs are stillrelatively high compared with those of other industries. Good laborrelations and flexible management have resulted in high productivity.Second, most of the plants are relatively new and the companies havegenerally been profitable enough to maintain investment. Capitalequipment costs are also relatively low, making it easier to expand ormodernize. Third, scrap, the sector's principal raw material, has beenreadily available at costs below the cost of producing iron from ore.

Despite their relative health, minimill companies have sufferedfrom competition from imports and from expanded domestic capac­ity. One strategy to avoid this competition has been to diversify therange of products. Although the minimills dominate the U.S. marketfor lower quality bars and smaller sections, some minimills havemoved into higher priced products such as high-quality bars and pipeand tube. Some are also trying to develop technology that will givethem the ability to economically produce sheet, strip, and plate.

The specialty steel mills have had difficulty because of overcapacityand imports. They have reduced costs where possible through lowerlabor rates and improved productivity. The most successful com­panies have produced many nonstandard products for which pre­mium prices are charged.

The weakness in demand for steel in the United States has beenaggravated by increasing imports. The domestic industry responded

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50 fREDERICK J. SCHOTTMAN

to the loss of market share by filing trade complaints under varioussections of the trade laws. Currently, restraint agreements have beennegotiated with most major exporting countries not to exceed a fixedshare of the U.S. market. Although the agreements have stabilizedthe loss of market, imports, including semifinished products, willprobably supply about 24% of the market until the agreements expireat the end of 1989.

In Western Europe, the major steel producing countries aremembers of the EEC. The steel industry within the EEC is a mix ofprivate and state ownership. The state-owned industries in France,Belgium, and Italy are politically powerful because of their economicimportance and have been supported financially by their respectivegovernments.

The EEC steel industry has operated with controls set by the EECCommission for several years. These have included minimum prices,production quotas, limitations on new investment, and forced retire­ment of excess capacity. Imports have been limited by bilateralagreements with exporting countries. The EEC has also supervisedthe amounts and types of financial aid the individual governmentscould give their respective steel industries. As of the beginning of1985, state subsidies for current operating expenses were forbidden.Limited aid for research, pollution control, and the costs of layoffsassociated with plant closings was permitted. Production quotas havebegun to be phased out as the EEC moves toward a more openmarket.

Overall, the arrangement has worked reasonably well for the EEC,considering the diverse views that the various national governmentstake about the role of government in industry. The industry hasreduced its capacity by about one-sixth since 1980 and has therebyimproved its operating rate. Although the state-controlled steelcompanies in France and Italy continue to suffer heavy losses, mostof the privately owned companies of the Federal Republic ofGermany and the drastically thinned, state-owned British Steel Corp.are profitable or nearly profitable. The EEC has a privately ownedminimill sector that generally has been hurt by the EEC marketrestrictions that have not allowed the minimills to compete freely.

With its protected home market and relatively high effectiveoperating rate, the outlook for the EEC steel industry is quitefavorable. However, it is concerned with the possible loss of ex-

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SUPPLY AND USE OF IRON AND STEEL 51

port markets in the United States because of trade restrictions andwith loss of markets in developing countries because of outsidecompetition.

The major steel companies in Japan have trimmed capacity, andthe Japanese Government has encouraged the closure of some lessefficient minimills. Overall, capacity has been reduced by about 9%from its peak. The industry has accepted that it will need to competein export markets by offering better quality and performance ratherthan lowest price. Japan is no longer the lowest cost producer, andimports, though still small, are increasing for standard gradeproducts.

Steel production capacity continues to grow in developing coun­tries desire at least some steel production to supply local require­ments. Major developments are taking place in three types ofcountries. The first type, for example, Brazil, has local ore suppliesand growing home markets as the country industrializes. A secondtype, for example, Indonesia, is building an iron or steel industryto produce export earnings from unexploited natural resources.Indonesia is using natural gas to produce direct-reduced iron forthe merchant market. A third type, exemplified by the Republic ofKorea, is following the Japanese model. Despite a lack of domesticraw materials, Korea is building large integrated mills on deepwaterports. The low cost of modern bulk ocean transportation for rawmaterials allows Korea, with low wages and an aggressive, well­disciplined work force, to compete in world markets. In general,demand is growing faster in the developing countries than in theindustrialized countries and they are still net importers of steel.

The developing countries have lower labor pay rates than those inthe industrialized countries and in some cases inexpensive rawmaterials. With internationalization of the market, the developingcountries can be expected to increase their share of world produc­tion and to increase their exports to Europe, Japan, and the UnitedStates. The industrialized countries retain an advantage for theproduction of high-quality, high-value products because of their longexperience in steelmaking and their well developed system of tech­nical support. New technology for process control and automationwill help the industrialized countries reduce their labor cost per tonof steel. On the other hand, such technology will make it easier .fordeveloping countries to improve their steelmaking. When technique

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52 FREDERICK J. SCHOTfMAN

is embodied in computer programs or in standard procedures, pre­vious steelmaking experience of the operating crews becomes lessimportant.

Under current conditions, a major barrier to the growth of the steelindustry in the developing countries is the willingness of the presentproducers to sell at low cost. Except for political or other motiva­tions, only the most efficient producers in the developing countriescan justify the capital costs for a new plant while major excesscapacity remains.

OUTLOOK FOR THE STEEL INDUSTRY

The outlook is at least moderately optimistic for the U.S. steelindustry over the next several years. The U.S. market has absorbedexcess production from other countries since 1974. Worldwidegrowth in demand combined with a lower value for the U.S. dollarwill probably tend to take some of the pressure off the U.S. industry.The U.S. industry has absorbed much of the cost of shutting downless efficient plants and modernizing newerplants. Quality has beenimproved to justify higher prices over those of lower grade products.New products are coming on line to retain markets against potentialsubstitutes. Labor costs are being decreased by a combination ofmeasures including pay cuts and productivity improvements. Thefinancial condition of some domestic steel companies remains pre­carious, but most would be profitable with moderately higher pricesand shipments. Even with a market improvement, it is unlikely thatnew integrated steel capacity will be built in the united States in theforeseeable future. Companies will invest in processes such ascontinuous casting to improve the profitability of their currentintegrated capacity, but requirements for additional raw steel will bemet by electric furnaces or by imported semifinished steel.

FERROALLOYS

The ferroalloys can be divided into two groups. The bulk ferroalloys~those containing the metals manganese, chromium, and silicon­

'are consumed in the United States in quantities on the order of

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SUPPLY AND USE OF IRON AND STEEL 53

several hundred thousand tones per year. Other ferroalloys are con­sumed in much smaller quantities.

Historically, the bulk ferroalloy industry grew up in the olderindustrialized countries near its major consumers. The bulk ferroal­loys, with certain special exceptions, are produced in submerged arcelectric furnaces, and an adequate supply of electricity has alwaysbeen a requirement for siting such a plant. Despite its small steelindustry, Norway became the largest ferroalloy producer in WesternEurope because of its low-cost hydroelectric power.

Since 1974, the bulk ferroalloys industry, like the steel industry,has had overcapacity. With low prices, production had tended tomore away from the older producers toward less-developed countriessuch as the Republic of South Africa or Brazil with local ore or low­cost power.

Manganese consumption per ton of raw steel in the United Stateshas declined by about one-fifth in recent years because of technicalchanges in steel production and is unlikely to increase. Thus,ferromanganese consumption will at best rise only slowly with in­creasing steel production. Manganese's other major uses are inchemicals and dry-cell batteries. Consumption in batteries is grow­ing and expected to continue growing.

Chromium serves two major functions in steel. In alloy steels itis used for strengthening. This use is likely to decline slowly asmicroalloyed steels are used because of their lower heat treatingcosts. In stainless steel, chromium is the essential ingredient toprovide corrosion resistance. Chromium also has significant applica­tions in superalloys, chemicals, and refractories.

Ferrosilicon consumption is related directly to iron and steelproduction. Silicon metal, which is also produced in submerged arcfurnaces, has growing demand as an alloying metal for aluminumand as a raw material for chemicals.

SUMMARY

Persistent overcapacity in the steel and ferroalloy industries hasresulted in losses for many producers and a general shift of thesemetal-producing industries away from the older industrialized coun­tries toward less developed countries. The overcapacity was caused

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54 FREDERICK J. SCHon'MAN

by an unexpected change in the growth of demand for most materialsthat occurred beginning in 1974. The steel and ferroalloys industries,particularly in the older industrialized countries, will continue to befinancially unhealthy until better balance is restored between supplyand demand. Balance will probably be restored by capacity reduc­tions, most of which have taken place, and by rising demand.

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