Statement of SMA Members

Attending Meeting with Commerce Secretary Evans

Point One:                 Need to Continue the 201

            The domestic steel industry has entered a critical make-or-break phase of the President’s Section 201 adjustment program.  US minimills produced over one half of the steel made in the US last year.  They have taken radical steps to effect a successful adjustment. 

Summary of Minimill Industry Adjustment Actions

·                     We are continuously restructuring our company organizations to insure that we have lean unlayered operations;

·                     We have improved our use of manpower, energy and raw materials, markedly increasing unit efficiency of our major inputs.  This progress has been partly offset by rising prices for energy and scrap inputs.  The price of scrap, our main raw material for steel making, has risen 24% from the year ago level. 

·                     We are providing effective financial production line incentives to our workers, which has increased plant productivity;

·                     We have imposed tougher standards applying to the utilization of available capital, to attain better returns per investment, and more viable debt ratios in a highly cyclical industry.  Nonetheless, given our low earnings, our access to investment capital remains limited.

·                     We have developed new technologies for in-plant applications;

·                     We are targeting to achieve high variable/low fixed cost ratios to assure the flexibility we require in highly cyclical steel markets.

·                     We are engaging in massive mergers and acquisitions in an historic effort to improve our industry’s efficiency through rationalization actions. 

Market Conditions and Financial Performance

            US steel demand remained flat at relatively low levels through the summer.  As an example, hot-rolled sheet sales averaged $270 per ton in August, about 32% below the peak level in July, 2002.  Overall, a market basket of eight steel mill products is selling at prices 14% lower than a year earlier.  At the same time we have been caught in a squeeze of rocketing upward scrap prices and substantially higher natural gas prices.  Scrap, our principal material input, has been in heavy demand offshore due to higher world steel production and lack of European ability to ship scrap on their heat-depleted river systems..

            There has been very little change in the amount of steel available in the US economy due to the 201 program.  Given the low domestic level of demand, US steel producers have had little opportunity to increase prices, and thus improve their pre-tax margins.  Second quarter pretax income, therefore, has been at the lowest level in the past seven years. (Bradford Research data) An anticipated rise in capital investment and commercial construction spending in the US economy will reverse this trend. 

At this point, the 201 program, if allowed to continue to its full term, simultaneously with the recovery of the US economy, will result in substantial adjustment success.  Alternatively, if terminated prematurely, the program will have produced the adjustment pain, but only marginal gain.  Its loss will dry up industry access to capital and will adversely impact plant employee morale, causing a decline in unit productivity.

            US minimills are acknowledged as efficient world steel producers.  Even the most vociferous opponents of the 201 program support this view.  Nonetheless, even the US minimills, the growing and most efficient majority segment of our industry, will not be able to withstand the flow of imports that could occur if the 201 program is prematurely terminated.  Cutting short the program, or substantially weakening the 201 relief, will push several more companies into bankruptcy, cost jobs, and hurt the economy.  The fact is US steel prices are still very low by historic standards, and also by current international price comparisons, resulting in break-even or loss operations in many US companies.

Point Two:                Factors Affecting the 201 Program

            We know that several key actions will affect the future of the 201 program:

First:                 You will receive a progress report and analysis on the 201 program from the International Trade Commission in September, 2003;

Second:            You have appealed the WTO decision that the US 201 relief was illegal under WTO rules, and will receive a final WTO ruling on the appeal late this year;

Third:               US government agencies and officials involved in the 201 program are assessing how to respond or avoid the retaliation threatened by other countries, principally the EU and Japan.

Point Three:            Risk of Dumping the 201

            The prospect of an Administration announcement this year terminating the 201 program, premised upon the following two assumptions:

·                     The steel industry’s adjustment has been successfully accomplished;

·                     An international steel subsidy agreement has, or is about to be finalized, solving the world excess capacity problem;

would be a disaster for the US steel industry.  Why?  Our adjustment, while at a stage of substantial progress, is also at a critical stage, since it has not yet produced the necessary results.  We need time under the 201 program to complete it.  Otherwise it could fall apart, swept aside by numerous countries that will dump their excess steelmaking capacity in the US market, given the slightest opportunity.  In particular, their excess steel will enter the US with a vengeance…if the US economy begins to recover, simultaneously with the possible termination of the 201 program.

            As to the Steel Subsidy Agreement, we are strong supporters of any program that eliminates or diminishes, any, and all subsidies to steel companies, worldwide.  That is why we have strongly opposed the provision of subsidies in the form of loan guarantees to US steel companies by US government agencies, including the Department of Commerce.  But there are enough loopholes for developing countries in the current draft of the Steel Subsidy Agreement for us to conclude at this stage that it is not the panacea it was intended to be.  Thus, we still need 201 continuation, at least until the US economy has achieved a strong recovery.

Point Four:               Concerns with 201 Threatened Retaliation

            Notwithstanding what we are saying, we are fully aware the US government has a problem internationally from threatened retaliation, even though it is clear to US officials our government’s 201 decision was valid under WTO rules.  We are asking you to stand firm and retain the 201 program so we can conclude the rationalization of our industry and emerge from the 201 program into a fully recovered US economy.  The worst action we believe you can take is to shut down the 201 program prematurely this year.  It would be a disaster for us and for the rest of the US steel industry.

Neither we, nor the Administration, should want to confront the market and employment disruption that inevitably will occur if the 201 program is terminated prior to the completion of our adjustment and the recovery of the US economy.

            We would like to meet with you and other key Administration policy officials again to work out a plan to retain the 201 program relief over the second half of its three-year term.

Point Five:                 We Continue to Urge the Administration to Reject

Emergency Steel Loan Subsidy Requests

            Emphasizing a final point, in March and June, 2003 the SMA wrote to you, Mr. Secretary, opposing a $175 million loan request for Weirton Steel.

·                     We strongly assert that market forces, not governments, should determine who produces steel in the world industry.  This approach is in accord with the policies of your Administration in support of market forces as the basis for sustained economic growth.

·                     Injecting artificial life support, through subsidies to inefficient, bankrupt US steel producers, is totally inconsistent with the objectives for the steel sector announced by this Administration, including the elimination of subsidies in a world steel agreement, an effort initiated by the US.

We continue to urge the Administration and the Loan Board to avoid according subsidy loans and/or loan guarantees to steel companies.  They will not be repaid.   

        Steel Bankruptcy’s 1998 – Present