US Steel and Nippon Steel

It’s bad enough that the Steelers have only won one playoff game in the last thirteen years; now their namesake, US Steel, is about to be purchased by a Japanese steel company. Talk about adding insult to injury! The recent news that Nippon Steel is in negotiations to purchase US Steel for something a little less than fifteen billion dollars has caused massive consternation locally and has attracted significant interest nationally.

In 1901 J. P. Morgan orchestrated the merger of Carnegie Steel, Federal Steel, American Steel and Wire, and a number of smaller companies, creating United States Steel, the largest corporation in the world, with a value of 1.4 billion dollars (equivalent to 50 billion dollars today). That year they had 168,000 employees and produced nine million tons of steel. The company grew steadily, peaking out with 340,000 employees in 1943. Their biggest year for steel production was 1953, when they produced 35 million tons of steel. At this point their value was about 100 billion dollars. The perception of US Steel that most of us in Pittsburgh have is based on a memory of those days. It is hard for us to realize that this mammoth company of our youth has shrunk to 22,000 employees producing 16 million tons of steel a year and worth only 15 billion dollars.

Even worse than this is the fact that steel production worldwide has skyrocketed in the intervening years, and that our nation’s percentage of world production has shrunk dramatically. In 1967 we produced 115 million tons of steel, about 29 % of the world’s total of 400 million tons. By 2020 the world’s production total was about 1.8 billion tons; our total was 73 million tons, a mere 4 %. The biggest difference of course is China, which produced over one billion tons of steel that year, thirty times as much as US Steel at its peak!

In the interim most of the other major American steel companies, including Bethlehem, J & L, and National Steel, disappeared completely, with many of their facilities being shut down entirely and the rest acquired indirectly by Cleveland-Cliffs, the apparent loser in the competition to buy US Steel. A new group of companies arose, focusing solely on recycling scrap in “mini-mills”. Nucor and Steel Dynamics are the largest firms in this category. Mini-mills have become the darlings of the environmentalists, because they are able to produce steel without the pollution inherent in conventional integrated steel mills. Traditionally, steel is produced by refining pig iron which has been produced in blast furnaces from a combination of iron ore (iron oxide), coke (carbon), and limestone. In addition to dramatically reducing pollution, mini-mills are capable of producing steel more cost-effectively than traditional integrated mills, as long as the price of scrap is low enough. Their competition, combined with the importing of cheaper foreign steel, is the primary reason that US Steel’s annual production today is about half of what is was seventy years ago.

If that is the case, why don’t we listen to the environmentalists and convert all of our conventional steel making facilities to mini-mills? The problem is the availability of scrap. We already recycle as much steel as possible, enough to provide raw materials for about 500 million tons of finished steel from mini-mills each year. Like it or not, the remaining 1.3 billion tons must come from integrated mills – coke ovens and blast furnaces producing pig iron, and basic oxygen furnaces to refine it. This year alone, twenty-one new blast furnaces were built in Asia (the most recent one in the United States was built in 1980 by now-defunct Bethlehem Steel).

Another reason US Steel’s number of employees has shrunk is the consequence of technology. In 1985 my employer, the Dravo Corporation, built a modern electric arc furnace/rolling mill facility for the Timken Company, to produce high quality steel for tapered roller bearings. In addition to improving the quality of their product, this facility reduced the number of man-hours required to produce steel from 9.0 to 2.0. In the 1950s US Steel needed 340,000 employees to produce 35 million tons of steel a year (106 annual tons per employee). Last year they produced 16 million tons with 22,000 employees (727 annual tons per employee). This 700 % increase in productivity, not foreign competition, is the principal reason Braddock and Homestead are cursed with unemployment.

Nonetheless, foreign competition is difficult. In addition to the fact that their facilities are new enough to eemploy technologies that have taken advantage of great leaps forward in productivity, their labor costs are still a tiny fraction of ours. Average income in the United States is six times that in China and thirty-two times that in India. Couple that with the remarkable cost-effectiveness of trans-oceanic shipping today and it is easy to see why American firms have problems trying to compete with the developing nations.

So, why is Nippon Steel interested in paying a premium to acquire US Steel? I suspect their management is aware of several basic truths. Two thirds of the steel currently produced world-wide is by traditional integrated plants. The global demand for steel will continue to grow more rapidly than the availability of scrap to be remelted. Consequently, modern coke plants and blast furnaces will increase in value. US Steel owns half the coke plants and blast furnaces in the United States. The most cost-effective way for Nippon to acquire this value is to purchase US Steel.

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