US stell industry on the move, but still lagging
America's still troubled steel industry isn't waiting for the Reagan administration's economic recovery programs to take effect. Instead, steel already is investing heavily in crash modernization programs.
but even with this quickened pace, the industry still has some ground to cover before its investment in modernizations reaches the level necessary to catch up with foreign competition.
US steelmakers are banking on government policy changes to make it possible to pay for the improvements out of future earnings. One such change is already economic fact. The tax bill signed by Mr. Reagan means steelmakers can write off their new investments in modern equipment over five rather than 12 to 15 years. This change also should encourage steel customers to make new investments, which will swell the steel industry's order books.
Steelmakers made their commitments when the new tax breaks were still just promises. American Iron and Steel Institute (AISI) figures show that since Reagan's election, 24 steel companies have launched modernization programs together worth more than $5 billion. That commitment, AISI chairman William J. De Lancey explained after Mr. Reagan signed the tax bill, is the result of industry's early optimism, "generated by the Reagan economic program."
Mr. De Lancey, also chairman of Republic Steel Corporation, warned, however, that the industry won't have the cash to pay for its modernization plans unless the Reagan administration does turn the economy around as promised.
Steel's $5 billion commitment falls short of the $6 billion to $7 billion that recent government and industry reports estimated steelmakers should spend every year to replace obsolete equipment and catch up with overseas competitors. Yet the $5 billion, according to the same reports, still is $1 billion more than the industry has to spend at the present time.
To make up the difference, the industry counts on a three-way boost from tax changes, looser environmental regulation, and tighter controls.
A January 1980 AISI report stressed the urgent need for changes in these three areas. Very quickly, the AISI formula for reviving the steel industry won backing from the Congress's nonpartisan Office of Technology Assessment (OTA). Soon the General Accounting Office (GAO) and the Reagan campaign picked up the theme that the American steel industry isn't uncompetitive through incompetence or laziness but rather as a result of counterproductive government policies.
The OTA report concluded that "a well-defined and vigorously implemented government policy has nurtured the Japanese steel industry's expansion and adoption of new technology. The US steel industry, on the other hand, has been hurt by a long series of federal government policies that have frequently been uncoordinated, contradictory, and inattentive to critical issues."
The GAO study identified "priority policy action areas for industry revitalization" as:
* "Assistance with capital formation to promote modernization investment.
* "An effective trade policy to ensure reasonable control of steel imports.
* "Increased flexibility in administering environmental laws."
Reagan's new tax measures seem to answer the first point. Speedier depreciation will free more capital for investment in the new equipment needed to modernize US plants. The changes don't provide the direct government support available to Japanese and European steelmakers. Nor do they provide the 30 -month write-off that enables Canadian companies to build the "greenfield" steel plants still out of reach for US firms. But, says De Lancey, "the new depreciation allowances, long advocated by the steel industry, should trigger a substantial industrial renaissance in the US."
As well, steel counts on other changes. The next Reagan promise steel wants honored is on the environmental front. The AISI calls for "elimination of governmental regulation that is not cost-effective and which goes beyond necessary protection of public health and safety." Stell is confident Congress's action in passing the "stretch out" bill for air pollution deadlines will be followed by further loosening for all environmental requirements. The result says United States Steel Corporation chairman David M. Roderick, is that "funds which otherwise would have been spent now on nonproductive facilities will be available for modernization projects."
Along with gains on the tax and regulatory fronts, the steel industry has experienced a dramatic recovery over last year's slump in sales and profits. Steelmakers reported impressive second-quarter earnings and a return to operation at more than 80 percent of capacity, well up from last year's 56 percent trough.
The chief remaining problem is imports, which now supply more than 18 percent of the US market. "We can only conclude that this increased market penetration results from a renewed effort to move dumped and subsidized steel into the US market," says AISI chairman De Lancey.
With their other two concerns being met, US steelmakers are stepping up pressure on the Reagan administration to monitor steel imports far more closely.
AISI projections point towards steel imports capturing 40 percent of the US market by 1988 if government policies don't change in the areas of taxation, regulation, and import controls. That would be unacceptable, the steel industry argues, both because a strong domestic steel industry is strategically important and because overseas suppliers would be able to jack up steel prices OPEC-style once US steel firms had been weakened.