tech and steel industry competitiveness

Technology and Steel IndustryCompetitiveness

June 1980

NTIS order #PB80-208200

—- -—

Library of Congress Catalog Card Number 80-600111

For sale by the Superintendent of Documents, U.S. Government Printing OfficeWashington, D.C. 20402

Foreword

A severe downturn in the domestic steel industry in 1975-76, coupled withcontinued increases in steel imports, led to widespread concern about the indus-try’s future. In October 1977, the House Ways and Means Committee’s Subcom-mittee on Trade requested that OTA examine how technology might be used to im-prove the industry’s international competitiveness. The brief recovery of 1978-79appears to be over and, with another downturn on the horizon, the following con-cern expressed in the Subcommittee’s original request seems just as relevanttoday:

While it is possible that some short-range solutions to the current world steelcrisis may be developed in the near future, the need for a long-range policy will re-main,

This report focuses on the creation and adoption of advanced technology inthe U.S. steel industry. Although it is not a comprehensive study of the industry, itdoes examine nontechnological factors that shape the environment in which newtechnology is created and adopted.

OTA finds that a number of technological opportunities exist for improvingthe competitiveness of the domestic steel industry. The industry consists of dif-ferent types of firms with markedly different performances, and this report iden-tifies the opportunities for new technology and new policies that apply to each. Itexamines the costs and benefits of specific Federal policy options, and constructsseveral scenarios for the next 10 years to assess how these options would affectthe industry and the Nation.

The domestic steel industry remains vital to the economic well-being and na-tional security of the United States. However, technology alone cannot solve all ofthe industry’s problems. Given the complexity of these problems, the technology-related policy options in this report should assist any congressional debate on anational policy for renewal of the domestic steel industry.

JOHN H. GIBBONSDirector

. .I l l

Steel Industry Assessment Advisory

Gordon H. Geiger, ChairmanUniversity of Arizona

Edmund AyoubUnited Steelworkers of America

James CannonCitizens for a Better Environment

Robert W. CrandallThe Brookings Institution

Milton DeanerNational Steel Corp.

Steward G. Fletcher*William E. Dennis

American Iron and Steel InstituteWilliam B. Hudson

Davy, Inc.Robert R. Irving

Iron Age MagazineF. Kenneth Iverson

NUCOR Corp.

Betty JardineLeague of Women Voters

Ruth MacklinThe Hastings Center

Peter F. MarcusPaine, Webber, Mitchell, Hutchins, Inc.

Donald R. MuzykaCarpenter Technology Corp.

Mary Ann RitterGeneral Motors Corp.

Roger E. ShieldsChemical Bank

Edward A. StantonDiocese of YoungstownCatholic Charities

Caroline WareBoard—National Consumers League

NOTE: The Advisory Panel provided advice and comment throughout the assessment, but the members do not necessarily approve, disapprove, orendorse the report, for which OTA assumes full responsibility.

*After February 1980 replaced by Dr. Dennis because of retirement from AISI.

Acknowledgments

This study was initiated in the OTA International Security and Commerce Program. Theassistance of Henry Kelly, former Program Manager, and Dorothy Richroath and Helena Hassellof the administrative staff is acknowledged.

iv

Steel Industry Assessment Project Staff

Lionel S. Johns, Assistant Director, OTAEnergy, Materials, and International Security Division

Audrey Buyrn, Materials Program Manager

Joel S. Hirschhorn, Project Director

Antoinette B. Kassim, Analyst

Administrative Staff

Carol A. Drohan Patricia A. Canavan

Stanley Hampton Michelle Landy Margaret M. Connors

Contractors

Adams and Wojick AssociatesG. K. BhatJ. K. BrimacombeFrank A. CassellJ. A. ClumSven EketorpRichard W. HeckelArthur D. Little, Inc.

OTA Publishing Staff

John E. Newman, Research AssistantGustave J. RathCharlene Semer, EditorSterling Hobe Corp.Karen StoyanoffGeorge R. St. Pierre and AssociatesPhillip Townsend Associates, Inc.

John C. Holmes, Publishing Officer

Kathie S. Boss Debra M. Datcher Joanne Heming

. . —

Participants— OTA Seminar on New Techniques in Steelmaking, May 2 and 3,1979

Robert N. AndersonSan Jose State University

D. ApelianDrexel University

M.D. AyersMetal Innovations, Inc.

Thomas E. BanMcDonnell-Wellman Co.

G. K. BhatCarnegie-Mellon Institute of

ResearchJ. K. Brimacombe

University of British ColombiaJames Cannon

Citizens for a BetterEnvironment

Jack W. ClarkWestinghouse Research &

Development CenterJames A. Clum

University of Wisconsin—Madison

Donald H. CooksonDravo Corp.

R. S. DalalNUCOR Corp.

John F. ElliottMassachusetts Institute of

TechnologyStewart G. Fletcher

American Iron and SteelInstitute

Gordon H. GeigerUniversity of Arizona

William R. GrayInland Steel Co.

Peter L. GulliverFoster-Wheeler Ltd.

A. J. KleinAmerican Can Corp.

J. A. LepinskiAllis-Chalmers Corp.

Lawrence C. LongArmco, Inc.

Donald R. MacRaeBethlehem Steel Corp.

Stanley V. MargolinArthur D. Little, Inc.

Donald R. MuzykaCarpenter Technology Corp.

H. W. PaxtonUnited States Steel Corp.

Richard K. PitlerAllegheny Ludlum Steel Corp.

Y. K. RaoUniversity of Washington

Kenneth J. ReidUniversity of Minnesota

Gerhard ReuterLurgi Chemi u Huettentechnik

GmbH.Stephen R. Satynski

Rensselaer PolytechnicInstitute

George St. PierreOhio State University

Andres J. SyskaWingaersheek, Inc.

Edward M. Van DornickM. K. Witte

UOP, Inc.

vi

Contents

Chapter Page1.

2.

3.4.5.6.7.8.

9.100

11.12.

Summary . . . . . . . . . . . . . . . .. .. s ......000...0000060 .O o. c o”””” 3

Policy Options . . . . . . . . . . .9 .. .. .. .0 $..O. $..OS $00 ..O*OOOOG”GO 27Problems, Issues, and Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73The Domestic Steel Industry’s Competitiveness Problems . . . . . . . . . . 115Past and Future DomesticUse of Steel. . . . . . . . . . . . . . . . . . . . . . . . . . 155New Technologies for the Steel Industry . . . . . . . . . . . . . . . . . . . . . . . . 185Technology and RawMaterials Problems . . . . . . . . . . . . . . . . . . . . . . . 221Technology and Industry Restructuring . . . . . . . . . . . . . . . . . . . . . . . . 247

Creation, Adoption, and Transfer of New Technology . . . . . . . . . . . . . 267Capital Needs for Modernization and Expansion . . . . . . . . . . . . . . . . . 309Impacts of EPA and OSHA Regulations on Technology Use . . . . . . . . . 331Employees and the Development and Use of New Technology . . . . . . . 363

vii

CHAPTER 1

Summary

Contents

International Competitiveness Problems oft h e U . S . S t e e l I n d u s t r y • • ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● 4

Policy Options *aes*** *a** ***s **** s* **v* 5

Futree Chamges in Technology . . . . . . . . . . . . . 9Continuous Casting.. . . . . . . . . . . . . . . . . . . . . 9Direct Reduction of Iron Ore . . . . . . . . . . . . . . 11Other Future Technologies... . . . . . . . . . . . . . 13

Capital Needs for Modernization and● **0e*9* **** **m ***********s 13

Different Estimates of Capital Needs . . . . . . . . 14

Industry Restructuring_. . . . . . . . . . . . . . . ● . . . 15

Steel Use and Future Demand ● *a. ****e**** 16A Future Steel Shortage? . . . . . . . . . . . . . . . . . 17

Problems With the Creation, Use, and Saleof Technology ● ● ● ● ● ● ● ● ● ● ● ● ● ● * ● ● * ● ● ● ● 17

Raw Materials Problems ● ● ● ● . ● ● ● ● Q ● ..• ● ● ● 1 9Coke and Coke Ovens ● . ● , ● , ● . ● ● . . ● . ● ● 0, ● c, 19Ferrous Scrap ● *.****.*******..********* 19

Impcts of EPA and OSHA Regulations onTechnology Use ● ● ● ● ● . ● ..•,.• ● ● ● *• ● ● ● ● 20

Impacts of Regulations on Industry.. . . . . . . . 21Cost Effectiveness of Control Technologies . . . 21Industry Expenditures on Controls . . . . . . . . . 22

Employment Practices and New Technology . 22Technical Workers. . . . . . . . . . . . . . . . . . . . . . 22Hourly Workers . . . . . . . . . . . . . . . . . . . . . . . . 22

List of TablesTable No. Page1.

2.

3.

Projected Growth in Direct Reductioncapacity, ViqMOOO**•• ● ● ● . ● ..• ● , ● ,0. # 12U.S. and TradePerformance *•* ● *•* ● .•• ● ● ● * ● ., ● ● * ● ● ● ● 18Estimated Decline in Actual Productive Capability of Coke Oven Plants in theUnited States: 1973 v. 1979. ● . ● ● . ● * ● o ● ● ● 1 9

I

List of Figures II iFigure No. Page1. U.S. Exports-Share of World Steel

3.4.

5.

6*

Trade, l945-77 . . . . . . . . . . . . . . . . . . . . . . . . 4U.S. Trade Balance in Iron and Steel1927-70 . , ● . ● . , ‘ . . ● ● ● J. , . ● ● , , , , ● ● ● ● , ● 4Continuous Casting Apparatus . . . . . . . . . . . 10The Diffusion of Continous Casting, 10Countries, 1962-78 . . . . . . . . . . . . . . . . . . . . . 11Schematic Diagram of Direct ReductionProcesses . . . . . . . . . . . . . . . . . . . . . . . ~.. . 12Annual Gapital Costs for ProductiveSteelmaking Facilities Under ThreeModernization Scenarios. . . . . . . . . . ., . . . “ 14

7. Range of Projected Domestic Demand forSteel. 1980’-90• ● ● . . ● .. .,,, ● ● ● .,. * , ● ● ● ● 16

CHAPTER 1

Summary

Summary

Steel will probably remain the world’smost important engineering material, and thesteel industry is vital to the Nation’s securityand economic prosperity. It is possible, how-ever, that continued low profitability andsome Federal Government policies, such aslong depreciation times for new facilities, willcause the domestic steel industry to contractsubstantially. Many jobs could be lost and theNation might become vulnerable to scarceand high-priced imports, which by 1990 couldaccount for 40 percent of the domestic mar-ket, compared with recent levels of about 15percent,

The U.S. steel industry can be revitalizedthrough increased investment in researchand development (R&D) and the adoption ofnew technology. For that to happen, how-ever, steelmaker must increase their capitalspending on production facilities by at least50 percent during the next decade, to approx-imately $3 billion per year (1978 dollars), inorder to modernize existing mills, expand ca-pacity modestly, and bring profitability up tothe level of most other domestic manufactur-ing industries. Supportive Federal policiesare needed to generate at least $600 millionof this additional capital per year. The indus-try estimate for modernization and capacityexpansion is $4.9 billion per year.

Small nonintegrated steel plants that relyon ferrous scrap rather than iron ore to pro-duce the simpler steel products could nearlydouble their market share (now at about 13percent) in the coming decade, provided thatadequate electricity and scrap are availablein specific market areas. Considerable near-term potential also exists for increased ex-ports by the highly competitive alloy/specialtysteelmaker in the next 10 years, if the new

Multilateral Trade Agreement is enforcedvigorously.

After a decade of restructuring, moderni-zation, and expansion, the industry couldadopt major new steelmaking innovations ifthe Federal Government supports basic re-search in steelmaking (which barely exists to-day), provides incentives for more industryR&D, and assists in pilot and demonstrationprojects. Major process innovations around1990 could then give the domestic industry acompetitive advantage, rather than mere par-ity with foreign industries. This is the type oflong-range strategic technology planning thatthe industry has neglected in the past.

A well-designed and vigorously imple-mented government policy has nurtured theJapanese s teel industry’s expansion andadoption of new technology. The U.S. steel in-dustry, on the other hand, has been hurt by along series of Federal Government policiesthat have frequently been uncoordinated,contradictory, and inattentive to critical is-sues. A Federal policy that coordinates the in-dustry’s needs, the Nation’s interests, andspecific technical concerns is an importantoption.

Neither technology nor capital, alone, willsolve the steel industry’s problems. New tech-nologies could be adopted by the domestic in-dustry if problems of insufficient capital anduncertain levels of imports are resolved. Onesuch technology already used by major for-eign competitors is the continuous casting ofmolten steel, which reduces energy consumpt-ion, increases productivi ty, and expandssteelmaking capacity. Another, the coal-based direct reduction of iron ore to producea low-cost substitute for ferrous scrap and

NOTE: Generally, data throughout this report are expressed in metric units for ease of comparison with data supplied by interna-tional organizations.

3

4 ● Technology and Steel Industry Competitiveness

blast furnace iron, may be developed com- For a graphic and abbreviated summary ofmercially within the next 5 to 15 years. Poten- the problems and solutions discussed in thistial advantages include reduced capital costs, report see the diagram on pages 6 and 7.reduced pollution, and increased use of coal.

International Competitiveness Problemsof the U.S. Steel Industry

Although world steel demand has morethan doubled during the past two decades,domestic steel production has increased byonly 20 percent during the same period andactual domestic capacity has been decreas-ing recently. By comparison, the Japanesesteel industry increased production seven-fold, and Common Market production wentup by 70 percent. Substantially increased im-ports and constant export levels also testifyto the declining role of the U.S. steel industryin the international market. (See figures 1and z.)

1945 1950 1955 1960 1965 1970 1974 1977Year

NOTE One U.S. ton = 0.907 metric tonne

SOURCES. American Iron and Steel Institute, Sfeel Industry and Federal In-come Tax Policy, June 1975, p 46; U.N. Secretary of EconomicCommittee for Europe, Statistics of World Trade in Stee/, 1913-59,Geneva, 1967

Figure 2.— U.S. Trade Balance in Iron andSteel, 1925.70a

750

500

250 [

0

-250

-500

-750

– 1 ,000

—1,250

—1,5001925 1940

aExcluding the war years 1941-45

1945 1970

SOURCE. W. H. Branson and H. B Tunz, Brookings Papers on Economic ACtiv-ity, 2:1971 (based on U.S. Department of Commerce and U.S. Bureauof the Census data)

Unlike foreign firms, domestic steelmakerhave financed capital investments largelyfrom retained profits or through equity fi-nancing. Foreign governments play a more di-rect role than does that of the United States in

Ch. 7—Summary ● 5

facilitating industrial access to capital mar-kets and public funds. Historically, the do-mestic steel industry’s indebtedness levelshave been relatively low compared to foreignsteel industries.

The deteriorating world market position ofthe U.S. steel industry may be attributed to anumber of factors. The domestic industry’smost recent expansion started earlier andwas of much shorter duration than that ofcompetitive foreign industries, particularlyJapan’s. Furthermore, impeded in part bylack of capital, the industry has been slow inadopting certain productive new steelmakingtechnologies. Consequently, U.S. plants tendto be older, smaller, and less efficient thanthe steelmaking facilities of some foreign in-dustries, although there are a number of old,inefficient plants in Western Europe as well.The tradeoff between maintaining employ-ment and losing profitability and efficiency isreceiving much attention in the United Statesand some Western European nations.

Despite major technological and economicdifficulties, domestic steel industry profitlevels have been higher than those of foreignsteel industries, although they are only abouthalf the U.S. manufacturing average. How-ever, the resource-poor Japanese steel indus-try, benefiting from post-World War II tech-nological, economic, and government policyadvantages, has been the world’s low-costproducer since the early 1960’s. Japan has

had extensive s teel industry expansion,based largely on new plant construction. Thishas given it superior technology and cost-competitive steelmaking capability. Some lessdeveloped steel-producing countries, such asSouth Korea, are also becoming increasinglycost competitive.

Raw materials, including energy, continueto be the most costly input factors. Foreignsteel industries have brought down their unitcosts for raw materials during the past dec-ade, despite major price increases. By con-trast, domestic raw materials unit costs haveincreased. Virtually all steel industries areexperiencing declining employment levels. Al-though it still has high labor productivity,domestic steel industry unit labor costs arehigher than those in Japan, though they arestill lower than those in Europe.

Predictions of future supply and demandfor steel products are uncertain, but highsteel demand and barely adequate world ca-pacity are possible by the mid- to late 1980’s.Under those conditions, if domestic capacityis replaced with modern facilities, the U.S. in-dustry can claim its share of increased de-mand and thereby finance new capacity. If atleast limited expansion and modernization donot start immediately, however, the UnitedStates will become dependent on importedcarbon steel at increased prices during cyclicperiods of high domestic demand which coin-cide with high worldwide demand,

Policy Options

It is in the Nation’s interest to have astrong domestic steel industry that makes ef-fective use of domestic iron ore, coal, andscrap. Technology alone is not sufficient toreverse the slow shrinkage of U.S. steel ca-pacity. Nor can new technology immediatelyhelp those parts of the industry that use old,inefficient, or poorly located plants.

Nevertheless, short-term Federal policiesthat fail to encourage technological innova-tion and modernization would be only tempo-

rary and superficial remedies. The ability ofthe large integrated steelmaker, who havebeen especially hard hit by aging facilities,poor capital recovery, and high costs of envi-ronmental regulations, to supply most of theNation’s steel while maintaining profitabilityhas probably reached its limits. Even thoseparts of the industry that are profitable, com-petitive in the domestic market, and wellmanaged, need continued technological mod-ernization to maintain and improve their com-

— — ..—— ——


This diagram is a simplified graphic summary of the major issues and options discussed in the full report.It illustrates the complexity and interrelationships of the problems facing Government and industry.

The domestic steel industry

I What is itspresent position? 1

Why?

Imports

I

IWhy?

1 ,Where is it headed?

IWhy?

is a majorsource of

ISuch as?

Why?

Why?

technologyand

Why?I


What might be done to help?

T

By Federal Government By industry

How? (options) 1 How? (options)1

1

[

How? (options)I

1

I In what?1

[How?

1

ISuch as7 I

Integratedsteelmaking


petitive positions, particularly in the interna-tional market.

The creation and adoption of new technol-ogy are hampered by a number of factors, themost important of which are inadequate capi-tal formation, inadequate R&D, high regula-tory compliance costs, and the threat of un-fairly traded imports. In a world in whichmost foreign industries are owned or heavilysupported by their governments, the U.S.steel industry is at a disadvantage because itmust generate the capital it needs for mod-ernization and expansion from profits. PastFederal policies have affected costs andprices, and hence profitability; yet most steel-maker have been slow to pursue cost reduc-tions through better technology in order tocope with those policies. The superior techno-logical and economic performance of somedomestic s tee lmaker demons t ra t e s thepotential for improvement in other compa-nies; but both Federal and industry policieshave led to underinvestment in capital plant,R&D, and innovation. The industry itself hasnot emphasized long-range planning for tech-nological innovation, nor has it kept its costsas low as might have been possible. It haschosen to pay high dividends, even duringperiods of declining profits. The domestic in-dustry has also been adversely affected byunfairly traded foreign steel, both in the do-mestic market and in third-country marketswhere U.S. producers could have competed.

Substantial trade and tax issues exist withregard to the steel industry, and Federal pol-icies on these issues need examination. Pol-icies are also needed to deal directly withtechnology issues. OTA uses three scenariosfor the next decade to examine costs and ben-efits of policy options. The “Liquidation” sce-nario implies an extension of present policiesand a continued shrinkage of domesticcapacity and employment. The “Renewal”scenario considers policy options linked tomoderately increased capital spending formodernization and expansion to revitalize theindustry. The “High Investment” scenario ex-amines policies compatible with greatly in-

creased capital spending to quickly modern-ize integrated steelmaking facilities. OTA’sanalysis suggests the following possible op-tions for Federal policy with regard to thesteel industry:

●

s

●

●

●

●

●

●

●

Provide greater capital formation to beused for investment in s teelmakingthrough, for example, faster deprecia-tion, investment tax credits, loan guar-antees, or subsidized interest loans.Provide incentives for industrial R&Dand increase Federal support of basicresearch and large-scale demonstrationprojects, particularly those which useenvironmentally cleaner technologies.Coordinate Federal energy developmentprograms with the needs of industry—for example, the development of synfuelor coal gasification technology might becoordinated with requirements of directreduction of iron ore.Reach a better understanding of the ben-efits of Federal environmental and occu-pational health and safety regulationson the one hand and, on the other, of thecosts to communities of a shrinking in-dustry, the industry’s capital and mod-ernization needs, and the regulatorybarriers to technological innovation.Examine the costs and benefits of limit-ing the export of energy-embodying fer-rous scrap.Examine the feasibi l i ty and adverseimpacts of Federal targets for ferrousscrap use, and compare these targetswith alternative mechanisms such as in-centive investment tax credits for adopt-ing new technology that uses less ener-gy.Reexamine trade practices, particularlyto assess the impact of unfairly tradedsteel imports on the industry’s ability tomake long-term commitments to newtechnology and additional capacity,Promote increased exports of high-tech-nology steels.Emphasize long-term assistance to steelplants capable of technological rejuve-nation, and at the same time provideshort-term assistance to workers and


communities impacted by closing old fa-cilities.

New Federal policies, however, would beineffective without appropriate shifts in theattitudes and policies of industry. For exam-ple, industry would have to reexamine its pol-icies of using capital for diversification out ofsteelmaking, emphasizing short-term benefitsfrom relatively minor improvements in tech-nology, quantifying the costs but not the bene-fits of regulations, and resisting industry re-structuring by ignoring the benefits of expan-sion by small, scrap-based steelmaker.

The present state of the industry and thepressing need for a critical examination ofpolicy options are, in large measure, a conse-quence of a long series of uncoordinated Fed-eral Government policies. These policies havenot been properly related to each other or toa well-considered set of goals for the indus-try, goals which satisfy both national inter-ests and industry needs. The lack of policy co-ordination and the failure to designate a leadagency to implement such policies have led toa situation where policies are often at cross-purposes with each other and thus ineffec-tive, where the interaction of Governmentand industry is adversarial rather than coop-erative, and where critical issues are not ad-dressed. Examples of conflicting Governmentpolicies include:

s promoting energy conservation while notallowing adoption of continuous casting(see next section) to qualify for the ener-gy investment tax credit;

● encouraging the domestic industry to usemore scrap, which requires capital in-vestment, without providing realisticcapital recovery; and

● attempting to hold prices down, while atthe same - time using the trigger-pricemechanism, which leads to price in-creases.

Thus, perhaps the greatest need is for acareful examination of the costs and benefitsof a Federal policy for the steel sector thatwould first establish a set of goals consistentwith national and industry needs and then aset of coordinated, reinforcing actions thatwould effectively and efficiently help achievethose goals. The most important lesson to belearned from the past experience of the inter-national steel industry is that such sectorpolicies may be needed for major domestic in-dustries if international competitiveness is tobe achieved. Foreign governments, particu-larly the Japanese, have adopted sector pol-icies to build competitive industries. Withouta coordinated policy, improvement effortsmay be at cross-purposes or fail to addresscritical issues. For example, the steel in-dustry’s emphasis on the need to raise ade-quate capital for modernization and capacityexpansion ignores the need for additional ef-forts in R&D and innovation. Domestic poli-cies that deal effectively with only one ofthese areas would not help, in the long run, toensure a profitable and competitive industry,nor would trade policies that deal effectivelywith import problems but fail to support tech-nology, innovation, and the means of produc-tion. The risks of adopting a steel sector pol-icy include an overemphasis on the welfare ofthe steel industry to the exclusion of other do-mestic industries, insufficient attention tosocial or environmental goals and impacts,and possibly insufficient attention to smallersteelmaker.

Future Changes in Technology

Continuous Casting casting. This process replaces with one oper-ation several steps in steelmaking: ingot cast-

The most important technological change ing, mold stripping, heating in soaking pits,for integrated steelmaker during the next 10 and primary rolling. (See figure 3.) Continu-years will be greater adoption of continuous ous casting also increases the yield of fin-

,– – -

10 . Technology and Steel Industry Competitiveness

Figure 3.—Continuous Casting Apparatus

Molten metal

Tundish

1

Mold

Solidified bar

Supportrolls

Motor ized pu l l ro l l 1

SOURCE: Technology Assessment and Forecast, Ninth Report, U.S. Depart-ment of Commerce, March 1979.

ished steel. Although it is the preferred proc-ess for most steels, the ability to continuouslycast some types of steel has not yet been de-veloped.

The main benefits of continuous castingare:

●

●

●

Considerable energy is saved both byeliminating energy-intensive steps insteelmaking and by increasing yield.Capital costs per tonne of output are low-er because the increase in yield allowsmore shipped steel to be produced with-out increasing capacity.

Labor productivity is higher becausethere are fewer process steps, higheryields, better working conditions, andshorter production times.

●

●

●

The quality of steel is higher becausethere are fewer steps and greater auto-matic control of the process.Pollution is reduced by eliminating soak-ing pits and reheating furnaces, usingless primary energy, and exposing lesshot steel to the atmosphere; also, be-cause of higher yield, less primary iron-making and cokemaking are required.More scrap would be used domesticallybecause it would be needed to replacethe home scrap eliminated by higheryields; insofar as scrap embodies the en-ergy that was used to produce it, its do-mestic use saves energy that might havebeen shipped abroad.

These advantages are not being fully ex-ploited by the domestic steel industry. Al-though domestic adoption of continuous cast-ing is increasing, the United States has fallenbehind almost all other steel-producing na-tions in the extent to which this process isused. (See figure 4.) For example, in 1978,Japan reached a 50-percent level—that is, 50percent of the liquid steel made was continu-ously cast— and the European Communitycontinuously cast 29 percent of its steel; theU.S. level was only 15 percent.

This figure for the United States concealswide differences in the extent of use in thesteel industry. Nonintegrated producers, whomake steel in scrap-fed electric furnaces, usemore than 50-percent continuous casting.However, integrated producers, who firstmake iron from iron ore in blast furnaces andthen steel from the iron, use only 9-percentcontinuous casting and account for about 85percent of domestic steel production. Thus,the adoption of continuous casting lags evenmore than published figures indicate.

The reasons for the low domestic adoptionrate of continuous casting include the follow-ing:

●

●

an inadequate amount of discretionarycapital with which to replace existing,and perhaps not fully depreciated, ingotcasting facilities;the costs and difficulties of substantiallymodifying an operating plant;

Ch. 1—Summary ● 1 1

Figure 4.—The Diffusion of Continuous Casting,10 Countries, 1962-78

Percent

50 [

45

40

35

30

25

20

15

10

5

01960 1965 1970 1975 1978

Year

SOURCE: Organization for Economic Cooperation and Development

the additional capital costs of down-stream faci l i t ies to process the in-creased production of semifinishedsteel;technical problems with using the proc-ess for some types of steels and for smallproduction runs;difficulties in expediting EnvironmentalProtection Agency (EPA) permits, andthe costs of regulatory compliance oncethe permits are granted; anduncertainties over the extent to whichfuture steel imports will capture do-mestic markets.

The OTA analysis indicates that, on bal-ance, the overall economic benefits of con-tinuous casting justify increasing its use,although recent economic conditions have tosome extent justified industry’s short-termfocus, which has not favored investments incontinuous casting. A key question is howmuch continuous casting could and should be

adopted by the domestic steel industry, and inwhat time frame. To prevent drastic erosionof cost and technological competitivenesswith foreign producers, the whole industrywould need 50-percent continuous casting by1990. This goal appears to be technicallyfeasible.

Even though returns on investments in con-tinuous casting could be 20 percent or morebefore taxes, there is probably insufficientcapital now and in the foreseeable future(with present price levels, import levels, andFederal policies) for this increased adoptionof continuous casting.

Direct Reduction of Iron Ore

Another important new steel technology isdirect reduction (DR) of iron ore. DR refers toa number of processes (four of which are il-lustrated in figure 5) that are alternatives tothe blast furnace and coke oven for the pro-


Figure 5.—Schematic Diagram of DirectReduction Processes

Waste gas

Reducing gasPelletslump ore

A

Fuel

Sponge ironretort

HyL

gas

t Pellets

7

lump ore

f.. .!:.. . .. ...%. . . .. ..;;: Reducing- .. -,.gas

1Sponge ironshaft furnaceArmcoMidrexPurofer

Pelletslump ore

Sponge iron Sponge ironrotary kiln fluidized bedKrupp HIBSL-RN FLOR

SOURCE K H. Ulrich, “Direct Reduction by Comparison With the ClassicalMethod of Steel Product ion,” Metallurgical Plant and Technology,No. 1, 1979

duction of iron. These processes typicallyoperate at lower temperatures than blast fur-naces and they convert iron ore to iron with-out melting. DR is compatible with other newtechnological developments, and direct re-duced iron (DRI) can also be used as a substi-tute for scrap.

DR is undergoing rapid expansion, partic-ularly in the Third World and in nations withabundant natural gas (see table 1). The size ofsome foreign gas-based DR plants, includingone being built in the Soviet Union, hasreached that of large integrated plants—several million tonnes annual capacity.

Natural gas is the simplest reductant formaking DRI, but low-grade coals can also be

Table 1 .—Projected Growth in Direct ReductionCapacity, 1975-2000 (millions of tonnes)

North ThirdYear America Japan EEC World Mid East

1975. . . . 2.0 1.2 0.7 ‘4.0 o.o-

1980. . . . 2.9 4.1 3.6 11.2 4.41985. . . . 5.3 6.3 6.6 21.2 9.61990. . . . 9.5 7.7 9.4 33.9 15.31995. . . . 13.3 9.0 11.9 45,2 20.32000. . . . 15.3 9.7 13.2 . 51.2 22.9

SOURCE: G.S. Pierre for OTA --

used directly as the reductant, as can theproducts of coal gasification. A number offoreign firms are aggressively developingnew coal-based processes, some of which of-fer significant energy savings. Several ofthese processes have already been used for anumber of years with varying levels of suc-cess, particularly in South Africa and Brazil.

When these coal-based processes are morefully commercialized, the capital costs of DRmay become more attractive to domestic pro-ducers, particularly for small plants present-ly using scrap. The extent to which the UnitedStates can and should use DR based on low-grade coals (which the United States has inabundance) or coal gasification is still un-clear. Much depends on the pace of technicaladvances in DR and in the competitive proc-ess of blast furnace reduction.

The Nation could benefit from greater useof DR in a number of ways:

●

●

DRI can be used in combination withscrap in the increasing number of elec-tric furnaces as well as in basic oxygenfurnaces. The partial substitution of DRIfor scrap could help to prevent a poten-tial shortage of domestic scrap and con-sequent steel price rises. It would alsoallow the production of higher qualitysteels in electric furnaces.DRI can also be used in blast furnaces tosubst i tute for some iron ore, whichwould improve furnace productivity andreduce coke consumption; it might alsobe possible to base DR on available coke-oven gas, with a further net economicadvantage.

Ch. l—Summary 1 3

●

●

Increased use of DR would reduce thegrowing dependence on imported cokeand reduce coke-related pollution.DR might be used by integrated steel-makers in conjunction with coal gasifica-tion plants to create new steel capacityat competitive cost and with fewer steel-making pollution problems.

DRI, like steel and scrap, is already becom-ing a world-traded commodity. Its availabilitywill increase greatly in the years ahead, espe-cially from the developing nations of theThird World. If the U.S. steel industry doesnot build domestic DR facilities, DRI mayhave to be imported as scrap becomes moreexpensive and nonintegrated mills expandproduction. Conversely, the huge domesticreserves of coal could be used to satisfy U.S.steelmaking needs and perhaps to developand export coal-based DR technology. Insteadof exporting scrap, the United States couldexport DRI.

There are several reasons why there hasbeen relatively little domestic interest in coal-based DR: 1) integrated companies are com-mitted to blast furnaces and coking, which

uses company-owned metallurgical coal; 2)the supply of relatively low-cost scrap hasthus far been plentiful; 3) future DRI importlevels are uncertain; and 4) limited capital isavailable for R&D.

Other Future Technologies

In addition to wider use of continuous cast-ing and DR, several radical changes in steel-making could occur during the 1990’s:

●

●

●

●

direct casting of sheet and strip frommolten steel, which would save consider-able energy, time, and labor;direct, one-step steelmaking (from ore tomolten steel), which might reduce allcosts;plasma arc steelmaking, which may of-fer a lower capital cost alternative to theblast furnace, particularly suitable formaking alloy steels and for use by smallplants; andformcoking, which offers the possibilityof an environmentally cleaner way ofmaking coke from low-grade coals whilestill producing valuable byproducts.

Capital Needs for Modernization and Expansion

Inadequate capital has frequently beencited as the most critical barrier to the in-creased adoption of new technology by thedomestic steel industry. The historical record—declining capital expenditures, coupledwith trends of decreasing capacity, decreas-ing technological competitiveness, very mod-est gains in productivity, and increasing ageof facilities—offers some support for thisassertion. However, the real issue is the ex-tent to which capital spending actually re-sults in new technology and new capacity.

Capital spending has declined during thepast two decades in terms of real dollarsspent on productive steelmaking facilities pertonne of steel shipped. However, such capitalspending has been cyclical, with peaks oc-curring every 7 to 8 years, following peaks in

net income by 1 or more years. Increasingamounts of capital have been used to expandnonsteel activities and to maintain cash divi-dends to stockholders even in periods whensales and profitability have been depressed,

There are three routes to revitalizing thetechnological base of the industry: 1) modern-ization and replacement; 2) expansion of ex-isting facilities; and 3) greenfield (new plant)construction. OTA’s analysis of the minimummodernization and expansion needs for thecoming decade indicates that the most cost-effective approach may be to expand capaci-ty at existing integrated plants and to con-struct more electric furnace facilities, par-ticularly in nonintegrated companies thatproduce a limited range of products. The highcapital costs of building new integrated

— — —.


plants based on best available technology arenot sufficiently offset by reduced productioncosts. Major technological changes in inte-grated steelmaking may change this situationin the long term. Should massive rebuilding ofthe large integrated segment of the domesticindustry take place in the near term—an op-tion favored by the integrated steelmakers—the large capital costs would have to be offsetby a combination of Federal policy changespromoting greater capital recovery plus sanc-tioning of real price increases for domesticsteel.

Different Estimates of Capital Needs

The steel industry, in the High Investmentscenario of the American Iron and Steel In-stitute (AISI), finds a need for a 150-percentincrease in capital spending during the next10 years over the average for the past dec-ade. OTA, in its Renewal scenario, projects aminimum 50-percent increase in spending toachieve the same increase in productivesteelmaking.

Because AISI, the major trade associationfor the domestic steel industry (its membersrepresent about 90 percent of domestic pro-duction), has performed a detailed analysis ofthe future needs of the industry as seen bythe industry itself, OTA included AISI’s sce-nario as one of the three scenarios it analyzed(figure 6). But where AISI’s High Investment

Figure 6.—Annual Capital Costs for ProductiveSteel making Facilities Under Three Modernization

Scenarios (1978 dollars)

Liquidation $2.0 billion per yeara

I Renewal (OTA)I

$3.0 billion per year

scenario predicts that a $4.9 billion annualcapital expenditure will be required, the OTARenewal scenario calculates that approxi-mately $3 billion annually could meet the min-imum goals for modernization, replacement,and expansion. Both scenarios attempt to in-crease the profitability of the industry tomake it comparable to other domestic manu-facturing industries, and both scenarios pro-ject additional nonproductive capital require-ments of $1.5 billion annually. The chief dif-ferences between the two, which account forthe lower capital needs of the OTA scenario,are that: 1) where AISI has emphasized ex-panded capacity in the integrated segment ofthe industry, OTA has stressed the expansionof capacity in the scrap-based nonintegratedplants, which have lower capital costs; and 2)OTA has assumed lower capital costs in gen-eral for modernization and replacement.

The OTA analysis of capital sources andneeds indicates a capital shortfall of at least$600 million per year through 1988. Thelarger projected deficits of the AISI scenariowould have to be offset by substantial priceincreases, even if a much accelerated depre-ciation schedule became available. If mod-ernization and expansion lead to the modest2-percent saving in production costs assumedin the Renewal scenario, then return on equi-ty could increase to about 12 percent (fromthe 1978 level of 7.3 percent) and could pro-vide a basis for more vigorous long-termgrowth and expansion. However, under theOTA scenario, there would be a substantialneed at the end of the decade to invest in newintegrated plants because of the relativelylow spending for replacement of integratedfacilities during the preceding period. AISIbelieves that deferring investment for a dec-ade in new integrated plants would lead to anunacceptable level of obsolescence in plantsproducing the preponderant share of the U.S.supply of steel.

aRepresents a continuation of capital Investment trend for the past 5 to 10

years

SOURCE Off Ice of Technology Assessment

OTA also finds that the international capi-tal cost competitiveness of the domestic in-dustry has suffered relative to Japanese and

Ch. l—Summary ● 1 5

European steelmaker. Some reasons for this factors, such as design and equipment suppli-are outside the control of the industry; other er choices, are within its control.

Industry Restructuring

A permanent restructuring is taking placein the domestic steel industry. The size andimportance of the nonintegrated carbon steelproducers and alloy/specialty steel producersare increasing. These companies tend to bemore profitable and are expanding more rap-idly than the larger integrated steelmaker,whose capacity is actually decreasing. Never-theless, integrated steelmaker account forapproximately 85 percent of the domesticshipments and, even though this may de-crease during the next decade, they will re-main the source of most domestic steel.

Both profitability and growth stimulate theadoption of new technology, which furtherenhances profitability and cost competitive-ness by improving productivity and reducingproduction costs. Nonintegrated and alloy/specialty steelmaker use, and are continuingto adopt, more continuous casting than do in-tegrated facilities. Both have also been quickto adopt new and efficient electric furnacesteelmaking,

The nonintegrated companies are movingin the direction of supplementing ferrousscrap with DRI and may spur coal-based DRtechnology in the United States. Noninte-grated producers are also expanding theirrange of products to include higher qualityand higher priced steel products, formerlymade only by the integrated companies. Thepotential development of small-scale rollingmills to make flat products not currentlymade in these plants will further expandtheir markets. During the past decade, thissegment’s capacity has tripled. If adequatescrap and electricity are available, much ofthe domestic growth in steel capacity couldcome from these producers, whose tonnageincrease for the next decade could equal theincrease for the past decade. Significantforeign investment in these companies has

already taken place and assisted growth; thismay accelerate in coming years.

Alloy/specialty producers will benefit fromever-increasing use of high-technology steels.Demand for these steels is growing and theemerging steel-producing countries have littlecapability to produce them; this creates ex-port opportunities for U.S. producers. If thenew Multilateral Trade Agreement is vigor-ously enforced, domestic alloy/specialty steel-maker are sufficiently cost competitive toenter this world market.

The favorable prospects for export inghigh-technology steels are based on U.S. com-parative advantages over many other coun-tries’ industries, including:

●

●

●

a large supply of relatively inexpensivecoal and iron ore;a sophisticated industrial base, includ-ing substantial science and technologyskills and R&D activities; anddomestic labor costs that are now com-petitive with those of European indus-tries.

The major problems in developing greater ex-ports in this area are:

● dependence on foreign sources for mostimportant alloying materials,

● lack of experience and infrastructurefor exporting, and

● less governmental support for steel ex-ports than is found in other industrial-ized nations.

The United States was, in fact, a net ex-porter of alloy and specialty steels in 5 of thelast 15 years, although it has been a net im-porter since 1974. Domestic producers aremost competitive for 90 percent of the steelsin the alloy and specialty category, and leastfor tool and stainless steels. They have done


well in the remaining alloy and specialty steelexport markets, and domestic markets forthese steels have been impacted least byimports. In 1978, for example, importsamounted to just over half of domestic ship-ments for tool steels and almost 17 percentfor stainless steels, but only 6.5 percent of theremaining alloy and specialty steels. How-ever, this was when quotas were still in effectfor some of these steels. (Imports of carbonsteels were nearly 22 percent of domesticshipments in 1978. )

Finally, the United States has an opportuni-ty to export more high-technology steel be-cause worldwide demand is rapidly increas-ing. Higher quality and performance capabili-ties are justifying the greater use of thesemore costly steels in a broad range of applica-tions, including advanced energy production,manufacturing, and higher quality consumerproducts.

Steel Use and Future Demand

Steel remains the most important engineer-ing material in American society. There is lit-erally no aspect of private or public life thatdoes not in some way depend on steel. Never-theless, steel is usually taken for granted. It isnot generally considered to be technology in-tensive, changing in nature, or particularlycritical for economic or military security. Yet,steel is all these things. It plays a pervasiveand vital role in all primary manufacturingand construction, and it is and will remain astrategic material for the Nation.

Domestic consumption of steel continues toincrease (see figure i’) but at a slower ratethan during the early phases of industrializa-tion. The use of aluminum and plastics hasgreatly increased in the past several decades,but the per capita consumption of these mate-rials is only about 60 and 140 lb, respectively,compared to steel consumption of approxi-mately 1,000 lb per capita. Steel may be bet-ter able to compete in the materials market asa result of future changes in energy and rawmaterial costs, which will have strongeradverse impacts on aluminum and plasticsthan on steel.

Although it may appear, according to somemeasures, that the use and role of steel aredeclining, for many applications there areno cost-competitive performance substitutesfor steel. For example, steel is essential inbridges, buildings, railroads, primary manu-

Figure 7.— Range of Projected Domestic Demand’for Steel, 1980.90

140

130

110

100

.

●

I 1 1 11978 1980 1985 1990

(actual)Y e a r

aDemand = total consumption = domestic shipments – exports + imports

SOURCE Off Ice of Technology Assessment composite of projections fromGovernment Industry and academic sources See table 66 of themain report for detailed data

facturing facilities, and many other physicalstructures. Many observers believe there willbe a surge in domestic steel demand for con-

Ch. 1—Summary . 17

struction as structures such as bridges, build-ings, and manufacturing facilities wear out.

A frequently mentioned area in which sub-stitutes for steel are being used increasinglyis the automotive industry. Driven by energyconservation measures to produce lightervehicles, automobile manufacturers are re-ducing the amount of steel used in each auto-mobile, and steel consumption for this use islikely to be steady or decline. It is possible,however, that a reduction in the steel contentof automobiles could be offset by an increasein the number of cars manufactured in theUnited States by foreign companies, whichmay use domestic steel.

A Future Steel Shortage?It is distinctly possible that the demand for

steel will increase enough in the future thatdomestic steelmaking capacity will be inade-quate to reverse the trend of increasing im-ports. Modernization and expansion pro-

grams for the next decade (discussed in chs. 2and 10) assume that domestic demand forsteel will increase by only 1.5 percent peryear. Should that projection be too low, thecapacity planned would be inadequate. If de-mand-growth forecasts of 2 percent or moreprove accurate, the United States would haveto import 20 percent of domestic consump-tion, or 27 million tonne/yr. This would beabout 50 percent more than any previousmaximum tonnage of imports. Without anymodernization and expansion, and assumingthe higher demand level, domestic capacitywould likely be so low by the end of the 1980’sthat more than 44 percent of the steel wouldbe imported, compared to 15 percent over thepast several years. The current overcapacityin the world steel market may soon disap-pear, and such a degree of steel import de-pendence would raise economic and nationalsecurity problems for the United States notunlike those now encountered with petro-leum.

Problems With the Creation, Use,and Sale of Technology

The domestic steel industry has a well-established record for internal generation ofproduct innovations, but this record does notextend to the internal creation of new produc-tion processes. The industry prefers to adoptproven technologies that have a record ofsuccessful commercialization and, to the ex-tent that this strategy reduces risk and R&Dcosts and provides near-term payoffs, it is auseful approach. It does have major draw-backs, however: it leads to dependence ontechnologies that may not be well suited todomestic needs, it reduces learning opportu-nities for innovative applications, and, mostimportantly, it does not enable the industry to

stay ahead— or even abreast—in the interna-tional market.

That domestic steelmaker lag in adoptingnew process technologies, such as continuouscasting and the basic oxygen furnace, can beexplained by: cautious attitudes about newtechnology, an aging steel industry plant,sluggish industry growth rates, and lack ofcapital.

New technology increases the potential forreducing raw materials use and productioncosts, and for improving quality. Independentcreation of new technologies and their suc-cessful application would enable the domes-

18 ● Technology and Steel Industry Competetiveness

tic industry to gain technological advantage,rather than merely the delayed parity thatwould result from the adoption of foreign in-novations. The industry’s competitive positionin domestic and international markets wouldbe enhanced if such an advantage wereachieved.

Research, development, and demonstrationplay an important role in the creation of newtechnologies. Domestic steel industry R&D ex-penditures, as a percentage of sales, have de-clined over the years, and they are lowerthan for most other basic industries in theUnited States (see table z). Expenditures forbasic research are particularly low. There isno trend of declining dividends as a fractionof aftertax profits comparable to the trend ofdeclining R&D spending, even though theseuses of funds are related. For example, R&Dinvestments can be viewed as a means to im-prove future earnings and capital gains tostockholders, and thus an alternative to divi-dends. The industry’s reluctance to invest inR&D may be attributed to a number of fac-tors, including: low profitability, cautiousmanagement at t i tudes towards research,high costs of demonstration projects, and thedownward trend in the industry’s share ofthe domestic market. Industry R&D, includ-ing environmental technology research, ismatched by an even more limited amount ofsteel R&D in the Federal Government andacademic sectors.

Foreign steel R&D is generally more vigor-ous because more money is devoted to it, be-cause industry places more emphasis on it,and because steelmaking has more prestige inthe academic sector. It also receives govern-ment support, particularly for high-risk proj-ects whose benefits promise to be wide-spread. Many foreign steel industries supportand carry out steelmaking research throughmultisectoral institutes.

Japan, West Germany, Austria, and GreatBritain develop and transfer significantamounts of innovative steelmaking technolo-gies to other countries, but U.S. technologyexports are limited. They are largely handled

Table 2.—U.S. R&D Intensity and Trade Performance

Trade balanceexports-

R&D imports, 1976intens i ty (mi l l ions

Description (percent) of dollars). . --— . .

Above-average R&D intensityCommunications equipment. . . .Aircrafts and parts . . . . . . . . . . . .Office, computing equipment . . .Optical, medical instruments . . .Drugs and medicines . . . . . . . . . .Plastic materials. . . . . . . . . . . . . .Engines and turbines . . . . . . . . . .Agricultural chemicals. . . . . . . . .Ordinance (except missiles) . . . .Professional and scientific instr.Electric industrial apparatus . . . .Industrial chemicals. . . . . . . . . . .Radio and TV receiving

equipment . . . . . . . . . . . . . . . . .Average . . . . . . . . . . . . . . . . . . .

Below-average R&D intensityFarm machinery . . . . . . . . . . . . . .Electric transmission equipmentMotor vehicles. . . . . . . . . . . . . . . .Other electrical equipment . . . . .Construction, mining . . . . . . . . . .Other chemicals . . . . . . . . . . . . . .Fabricated metal products. . . . . .Rubber and plastics . . . . . . . . . . .Metalworking machinery . . . . . . .Other transport . . . . . . . . . . . . . . .Petroleum and coal products. . . .Other nonelectric machines . . . .Other manufactures . . . . . . . . . . .Stone, clay, and glass. . . . . . . . . .Nonferrous metals . . . . . . . . . . . .Ferrous metals . . . . . . . . . . . . . . .Textile mill products. . . . . . . . . . .Food and kindred products . . . . .

Average . . . . . . . . . . . . . . . . . . .

15.2012.4111.619.446.945.624.764.633.643.173.002.78

2.57—

2.342.302.151.951.901.761.481.201.171.141.111.061.020.900.520.420.280.21—

$ 793.76,748.31,811.4

369.6743.5

1,448.01,629.2

539.3553.0874.8782.5

2,049.4

– 2,443.41,223.0

696.2798.1

-4,588.6311.2

6,160.41,238.51,525.7– 478.8

736.472.1

NA3,991.3

-5,137.4-61.3

-2,408.9-2,740.4

40.3-190.0

2.0

aMeasures of R&D intensity and trade balance are on product-line basin theratio of applied R&D funds by product field to shipments by product class,averaged between 1968-70

SOURCES: Department of Commerce, BIERP Staff Economic Report, U SBureau of the Census

by equipment firms and are mainly in thearea of raw materials handling. Foreign steelindustries are increasing their efforts intechnology transfer in order to offset theirdeclining exports of steel products. To amuch greater degree than domestic steelmak-er, foreign companies have design, consult-ing, and construction departments that ag-gressively pursue the sale of both hard andsoft technology to other nations, particularlythe less developed countries.


Raw Materials Problems

Coke and ferrous scrap are among the rawmaterials essential to steelmaking. Unlikeother materials, such as iron ore, which theUnited States possesses in abundance, theadequacy of future supplies of both coke andscrap is uncertain, but for different reasons.

Coke and Coke Ovens

Most coke is produced by the integratedsteel companies in byproduct ovens usinghigh-grade metallurgical coals. The coke isthen used as a feedstock in ironmaking. Do-mestic consumption of coke has been higherthan production during 3 of the past 6 years;in 1978, domestic consumption was 51.7 mil-lion tonnes, 16 percent more than U.S. pro-duction, with the gap filled by imports. Theshortfall was caused not by a shortage of met-allurgical coal, which the United States has inabundance, but by declining coke oven capac-ity. (See table 3.)

About one-third of all domestic coke ovensare considered old by industry standards.These older ovens are less efficient, morepolluting, and tend to produce poorer qualitycoke than the newer ones. The domestic in-dustry has a much higher coke oven obsoles-cence rate than do the industries in other ma-jor steel-producing countries. The productivecapability of U.S. coke ovens has declined byclose to one-fifth since 1973, primarily be-cause the construction of new ovens has beendiscouraged by high capital costs and by reg-ulatory requirements. The shortage of ovens

has contributed to rising coke imports and todeclining employment in this phase of steel-making. It has been estimated that by 1985,the coke oven shortage will increase to about9.1 million tonnes, or 20 percent of domesticproduction, because of continuing capacitydecline and demand growth.

There are several technology and businesschoices that, with varying degrees of effec-tiveness, could help stabilize or reduce cur-rent coke shortages. These include: con-structing more coke ovens, importing morecoke, developing formcoking, using DRI, im-porting more semifinished or finished steelproducts, increasing the use of electric fur-nace steelmaking, and improving the cokerate in blast furnaces. Federal policy changeswhich would alleviate coke shortages includeimproved capital recovery and greater incen-tives for developing environmentally cleanercoke-free ironmaking processes. Relaxationof environmental standards to deal with theshortage, although possible, would imply thatincreased carcinogenicity of coke oven airpollution is the appropriate way to achieveadequate steelmaking capacity.

Ferrous Scrap

The steel industry is a major consumer offerrous scrap, and most near-term techno-logical changes in steel production will tendto increase the use of scrap: growing use ofelectric furnaces and continuous casters,changes in the basic oxygen furnace that in-

Table 3.—Estimated Decline in Actual Productive Capability of Coke Oven Plantsin the United States: 1973 v. 1979a (millions of tonnes)

Capability change..—Capability 1973-79 1979-85-est.

1973 1979 1985 est. Tonnes Percent Tonnes” -” - Percent ‘-

—————.. —..Capacity in existence. . . . . . . 68.0 ‘ -5 7 . 5-” ”— - —% 2 : 7 10.5 15,5 4 . 8 - 8.3Capacity in operation. . . . . . 61.2 51.8 — 9.4 15,4Actual productive capability

— —57.6 47.6 42.6 10,0 17.3 5.0 10.4

aComparison of estimated average levels for 1973 and levels on July 31, 1979, as determined by Ford ham University survey

SOURCE: William T Hogan, Analysis of the U.S. Metallurgical Coke Industry, 1979.


crease the proportion of scrap used, and thegrowing demand for high-performance spe-cialty steels. Scrap prices have doubled since1969, and there are some concerns in thesteel industry about the future availability,price, and quality of scrap, Other factors,such as scrap industry processing capabilityand the availability and cost of railroad carsto ship scrap, either are not problems forscrap suppliers or are problems that arebeing remedied. The main concern is physicalavailability of high-quality scrap.

Scrap supply projections range from ade-quate at much higher prices, to inadequate atany price. Demand for scrap does not declinesignif icantly when supplies decl ine andprices increase. This places the steel industryin an increasingly difficult position, becauseit has few potential substitutes for scrap. Thenonintegratedmost severelyproblems.

domestic producers will beaffected by price and supply

Options to offset scrap supply problems, inaddition to maintaining existing inventories,include expanding DRI use and monitoringexports or imposing export controls on scrap.Scrap exports have been relatively stablethus far, but they are expected to increasebecause of worldwide increases in electricfurnace use. Favorable exchange rates havemade U.S. scrap attractive to many foreignbuyers. Increasing domestic use of scrap hasprompted steel industry interest in control-ling exports, but the scrap industry is op-posed to such a measure.

Statutory resource-conservation targets at-tempting to increase the use of domesticscrap have not been well directed in the past.They fail to differentiate scrap-use opportuni-ties and problems by industry segment. Fur-thermore, on a plant basis, these targets arenot always feasible for economic or technicalreasons. The targets may also act as a disin-centive for development of beneficial coal-based DR technology.

Impacts of EPA and OSHA Regulationson Technology Use

The steel industry is one of the largestsources of pollution in the Nation, with the in-tegrated steelmaker accounting for close toone-fifth of all domestic industrial pollution.The industry also has very high rates of occu-pational injury and illness. The harmful emis-sions of steel plants are a greater hazard forsteelworkers than the general population;consequently, the Federal and State Govern-ments have created a large number of regula-tions to protect workers as well as the public.There can be no argument against the goalsof reducing environmental pollution andoccupational risks; however, the impact ofthese regulations on the creation and use ofsteelmaking technology merits examination.For technological innovation, regulations canact as either a barrier or an incentive. Whileindustry has tended to emphasize the barriereffect, there are opportunities for the regula-

tions to serve as incentives for technologicalinnovation. Because of the scope of this study,the impact of regulations on the steel industryhas been emphasized. But this does not meanthat the impact of pollution on workers andthe general public is thought unimportant.

Thus far, EPA policies have had a greaterimpact on the s teel industry than thoseadministered by the Occupational Safetyand Health Administration (OSHA). However,OSHA policies will grow in importance asmore of its regulations become operational.Applicable regulations administered by EPAand OSHA will impose major capital invest-ments and operating changes on the industryby the mid-1980’s. The various environmentalstatutes and the Occupational Safety andHealth Act encourage the use of technology-


based performance standards, but althoughthese standards allow for industry flexibilitythey do not provide direct assistance for in-dustrial innovation. Available regulatory in-centives, such as delayed compliance, do notappear to have been used effectively by in-dustry in promoting innovation.

Impacts of Regulations on Industry

Regulatory requirements have acceleratedindustry decisions to phase out and replaceaging facilities. Economic and regulatoryforces have thus tended to reinforce eachother. Regulatory policies have had the mostsevere impact on integrated facilities, whichgenerally have a higher proportion of agingcokemaking, ironmaking, and steelmakingequipment as well as high production costs.The impact on relatively new nonintegratedelectric furnace plants has been less severe.Furthermore, they have been able to complyin a more cost-effective reamer by installingabatement equipment at the time of construc-tion.

Three policies are favorably affecting theadoption of new steel technology:

●

●

●

The

the revised offset policy, which allowstradeoffs of pollution from differentsources within geographical regions;the bubble policy, which extends the off-set concept to a particular steel plant;andthe limited-life facilities policy, whichgives a steelmaker time to prepare a so-lution to a compliance problem or pre-pare for closing down a plant by a cer-tain time (usually 1982-83).

revised offset policy creates difficultiesfor companies wishing ‘to expand, becausethey will be required to create a pollutionreduction or somehow “buy” emission reduc-tions from another source of pollution withina given region. The bubble concept, which isbeing debated in Congress, could make facili-ty replacement and modernization more fea-sible and cost effective. However, the trade-off between more and less hazardous pollut-ants within a bubble area requires assess-

ment. The limited-life policy forces hard deci-sions between modernization and shutdownfor older plants generally having the poorestprofitability; these decisions are now gener-ally in favor of plant closing.

Cost Effectiveness of ControlTechnologies

There has been considerable disagreementconcerning the economic and technical feasi-bility of regulatory technologies that Federalagencies consider attainable at specified con-trol levels. Judicial decisions have directedEPA to give greater weight to economic con-siderations when identifying feasible controltechnologies for nontoxic pollutants. If apending Supreme Court decision supports theprivate-sector position, OSHA may be thefirst Federal agency required to undertakecost-benefit analyses of major proposed regu-lations. With respect to technological feasi-bility, EPA continues to have fairly broad au-thority that allows for diffusion of the latestenvironmental technologies; OSHA’s technol-ogy-transfer authority is much more limited.

Congress has expressed a strong interestin improved regulatory technologies that willbe more cost effective and will further reducepublic health hazards. It is the steel indus-try’s position that available control technolo-gies are generally capable of meeting regula-tory standards; Federal agencies suggest thatconsiderable R&D is still needed. Regulatorytechnology R&D by the private sector suffersin part because of the high costs and limitedprivate gains associated with it, Steel indus-try environmental R&D spending is rathermodest—about $75 million per year, a consid-erable amount of which appears to be engi-neering work. EPA spends less than $1 mil-lion per year on steel-specific R&D but muchlarger sums on environmental R&D that is ap-plicable to the steel industry, yet even theseamounts may still be inadequate for the rapidchanges in the industry which the regulationsdemand.

.


Industry Expenditures on Controls

Without adjusting downward for regula-tory overlap, EPA- and OSHA-related capitalinvestments during the 1970’s were about$365 million per year, or about 17 percent oftotal annual steel industry capital invest-ment. These expenditures have placed great-er limits on steel industry modernization thanhas been the case with other basic industries.Annualized capital and operating costs forenvironmental requirements presently addabout 6 percent to steel production costs andprices.

Industrial development bonds (IDBs) havein the past been used for half of all environ-mental capital spending by the steel industry.Assuming this pattern continues, the steel in-dustry will need to generate between $235million and $400 million annually, in additionto IDB financing, to meet EPA and OSHA reg-ulatory requirements through the mid-1980’s.These expenditures are relatively modestcompared to the massive total capital needsthat the industry expects during the next sev-eral years.

Employment Practices and New Technology

Technical Workers

A technical manpower shortage is now de-veloping in a few areas in the steel industry,and it could become more serious and morewidespread if the industry were to embarkupon vigorous modernization, R&D, and inno-vation programs. The most likely shortageswould be of metallurgists, electrical engi-neers, and computer scientists.

The number of research personnel in steeldeclined during the early 1970’s and hassince slowly climbed back to 1970 levels. Onlyabout 18 percent of all steel industry salariedtechnical personnel are now engaged in engi-neering R&D, and even smaller numbers insteelmaking R&D. This is partly because con-siderable research manpower is absorbed inenvironmental R&D. Research personnel areprimarily engaged in market-oriented re-search leading to evolutionary changes inprocess and product, rather than in funda-mental research that might produce radicalchanges.

Steel-related research in foreign nationsprovides more long-term intellectual and pro-fessional opportunities for R&D personnelthan is the case in the United States. This maybe attributed to greater foreign governmentsupport for research and also to the greaterinvolvement of foreign steel companies in the

sale of machinery and technology. Sabbati-cals and industry-university-Government ex-changes are not very common in the domesticindustry. In addition, there is only a negligiblemovement of technical personnel from otherhigh-technology industries into steel. Thesedeficiencies limit opportunities for personnel-based technology transfer.

Hourly Workers

The training, skills, and performance ofsteelworkers have not, on the whole, impededthe development and use of new technologies,The industry has developed and marketednew products successfully, although its rec-ord of process improvements is not as strong.But when new equipment is introduced, steel-workers are generally cooperative. Prevail-ing manpower-use patterns reflect the indus-try’s concern with production capabil i tyrather than an emphasis on changing and im-proving technology.

Job classification schedules for hourlyworkers appear to have incorporated most ofthe changing skill requirements associatedwith technological change. Furthermore, the2-B “local practices” clause that is in moststeel industry labor contracts gives manage-ment the right to change unilaterally pastpractices concerning crew size and other

Ch. 1—Summary 23

staff ing arrangements when required by leadership is concerned with technological“changed conditions, ” including technologi- displacement, but does not resist the intro-cal innovation. However, it appears that the duction of new technology. With the possible2-B clause makes it difficult to extend new exception of a few plants, difficulties with thepractices to adjacent production areas not work force have no limiting effect on indus-directly involved with the new equipment; try’s adoption of new steelmaking technol-such changes are subject to negotiation with ogies.the local union affiliates. National union

Notice to the Reader

The reader should be apprised that the General Accounting Office(GAO) will complete a complementary study of various aspects of steelindustry problems during the summer of 1980. GAO’s study will placespecific emphasis on: an evaluation of the effectiveness of past and cur-rent Federal programs and policies related to steel, and an in-depthevaluation of steel consumers and their attitudes and concerns regard-ing problems of the domestic steel industry.

CHAPTER 2

Policy Options

———— —

ContentsPage

summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Reconciling Congressional and IndustryConcerns . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Learning From the Steel Industry ., . . . . . . . . 32

A Governmental Steel Industry Sector Policy. 33The OTA Study . . . . . . . . . . . . . . . . . . . . . . . . . 34

Three Scenarios for the Future. . . . . . . . . . . . 35Liquidation Scenario . . . . . . . . . . . . . . . . . . . . 35Renewal Scenario . . . . . . . . . . . . . . . . . . . . . . . 37High Investment Scenario . . . . . . . . . . . . . . . . 37

Implications of the Scenarios forCongressional and Industry Concerns. . . . . 38

Implications of the Scenarios forthe 1990’s . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

Overview of Possible PoIicy Options . . . . . . . . 42R&D and Innovation Activities . . . . . . . . . . . . . 43Capital Formation. . . . . . . . . . . . . . . . . . . . . . . 45Regulatory Compliance Costs. . . . . . . . . . . . . . 49Raw Materials . . . . . . . . . . . . . . . . . . . . . . . . . 53Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

Foreign Government Policies Toward SteelIndustries ● *..,*** ● **,,,.*. . . . . . . . . . , 58

International Comparison of Cost RecoveryAllowances . . . . . . . . . . . . . . . . . . . . . . . . . . 58

Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60Japan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65Third World and Developing Countries . . . . . . 68

List of Tables

Table No.4.

5.

6.

7.

8.

9.10.

11.

12.

13.

14.

15*

Congressional Interests and SteelIndustry Needs . . . . . . . . . . . . . . . . . . . .Characteristics of Three Scenarios forthe Next 10 Years of the Steel Industry.How Scenarios Affect Three IndustrySegments . . . . . . . . . . . . . . . . . . . . . . . . .How Congressional Concerns AreAffected by Three Scenarios . . . . . . . . .How Industry Needs Are Satisfied byThree Scenarios . . . . . . . . . . . . . . . . . . .Major Policy Options for Two ScenariosFeatures of Four Federal Options forIncreasing Capital Formation in theDomestic Steel Industry . . . . . . . . . . . . .Regulatory Change: Policy Options andConsequences ... .... . . . . . . . . . . . . .Increased Federal Support forRegulatory Compliance and R&D: PolicyOptions and Consequences . . . . . . . . . . .Ranking of Factors for Government-SteelIndustry Relations. . . . . . . . . . . . . . . . . .Comparison of Cost RecoveryAllowances in the Steel Industry . . . . . .Distribution of R&D Projects Funded byECSC, 1979 . . . . . . . . . . . . . . . . . . . . . . .

Page

31

36

37

39

3940

45

51

52

58

59

63

CHAPTER 2

Policy Options

Summary

It is in the Nation’s interest to have astrong domestic steel industry that effectivelyuses domestic resources such as coal andscrap materials. However, technology aloneis not sufficient to reverse the decline in steel-making capacity, nor can new technology im-mediately help those parts of the industrythat use old, inefficient, or poorly locatedplants.

Nevertheless, Federal policies that at leastindirectly facilitate technological innovationand modernization are necessary to avoidtemporary and superficial remedies. Eventhose segments of the industry that are profit-able, competitive in the domestic market, andwell managed need more and continued tech-nological modernization to maintain and im-prove their competitiveness in the domesticand world markets.

The creation and adoption of new steeltechnology are hampered by a number of fac-tors, the most important of which are inade-quate capital formation, inadequate R&D,high regulatory compliance costs, and thethreat of unfairly traded imports. In a worldin which most foreign steel industries areeither owned or heavily supported by theirgovernments, the U.S. steel industry is at adisadvantage because it must generate fromprofits the capital it needs for modernizationand expansion. Past Federal policies have af-fected steel costs and prices, and hence steelindustry profitability, Most of the industryhas been slow to adopt cost-reducing newtechnology as a means of coping with Federalpolicies. The superior technological and eco-nomic performance of some steelmaker dem-onstrates the potential for improvement inother companies. Both Federal and industrypolicies have contributed to industry’s under-investment in capital plant, R&D, and innova-tion.

The industry has alsofected by imports of steelport potential affected bytries. For the most part,

been adversely af-and has had its ex-foreign steel indus-however, steel im-

ports have led to complaints about Federalpolicies rather than to increased emphasis onR&D, innovation, and improved competitive-ness. Some domestic market imperfectionshave resulted from foreign government poli-cies favoring their steel industries, and it isapparent that substantial trade and tax is-sues exist with regard to the steel industry.Federal policies on these issues need exami-nation, but policies are also needed to dealdirectly with technological issues.

OTA uses three scenarios for the next dec-ade to examine costs and benefits of policyoptions. The Liquidation scenario implies theslow shrinkage of domestic capacity and em-ployment. The Renewal scenario considerspolicy options linked to moderate increases incapital spending for modernization and ex-pansion to revitalize the industry. The HighInvestment scenario examines policies com-patible with greatly increased capital spend-ing to quickly modernize integrated steelmak-ing facilities, OTA’s analysis considers thefollowing possible options for Federal policytoward the steel industry:

● p r o v i d e g r e a t e r c a p i t a l f o r m a t i o nthrough faster depreciation, investmenttax credits, loan guarantees, or subsi-dized interest loans;

● increase support of basic research andlarge-scale demonstration projects, andprovide incentives for industrial R&D;

. coordinate energy development pro-grams with the needs of industry—forexample, development of synfuel or coalgasification technology might be coor-dinated with requirements of direct re-duction processes;

27


●

●

●

●

●

●

reach a better understanding of the ben-efits of Federal environmental and occu-pational health and safety regulationson the one hand and, on the other hand,the costs to communities of a shrinkingindustry, the industry’s capital and mod-ernization needs, and the regulatorybarriers to technological innovation.explore the controversial issue of limit-ing the export of energy-embodying fer-rous scrap;examine the feasibility and adverse im-pacts of targets for ferrous scrap use,and compare targets with alternativemechanisms such as incentive invest-ment tax credits for adoption of newtechnology that may use more energy;reexamine trade practices, particularlyto assess the impact of unfairly tradedsteel imports on the industry’s ability tomake long-term commitments to newtechnology and investment in additionalcapacity;promote the export of high-technologysteels; andemphasize long-term assistance to steelplants capable of technological rejuve-nation, and at the same time provideshort-term assistance to workers andcommunities impacted by closing old fa-cilities.

New Federal policies, however, would beineffective without appropriate shifts in theattitudes and policies of industry. For exam-ple, industry would have to reexamine its pol-icies concerning using capital for diversifica-tion out of steelmaking, emphasizing short-term benefits from relatively minor improvem-ents in technology, wanting to quantify thecosts but not the benefits of social regula-tions, and resisting industry restructuring, in-cluding the expansion of small, scrap-basednonintegrated steelmaker.

Perhaps the greatest need is for a carefulexamination of the costs and benefits of a

Federal policy for the steel sector that wouldfirst establish a set of goals consistent withnational interests and industry needs andthen initiate a set of coordinated, reinforcingactions that would effectively and efficientlyhelp achieve those goals. The most importantlesson to be learned from the past experienceof the steel industry is that such sector poli-cies may be needed for major domestic indus-tries if international competitiveness is de-sired. Foreign governments, particularly Ja-pan’s, appear to use sector policies to achievecompetitive industries. Without such a sectorpolicy, improvement efforts may be at cross-purposes or fail to address critical issues. Iso-lated policies that deal effectively with cap-ital formation or imports, but fail to encour-age additional efforts in R&D and innovation,would not ensure a profitable and competi-tive industry in the long run.

The risks of adopting a steel sector policyinclude an overemphasis on the welfare ofthe steel industry to the exclusion of otherdomestic industries, insufficient attention tosocial goals and impacts, such as pollutionabatement and worker safety, and possiblyinsufficient attention to smaller steelmaker.

Understanding the greater support thatforeign governments give their private andpublic steel industries provides important in-sights for the examination of U.S. policies.Foreign governments have coordinated sectorpolicies that link support for R&D and innova-tion with capital formation, protection ofhome markets, and the export of steel tech-nology. The United States provides a muchlower level of direct and indirect supportthan Japan, Western Europe, and ThirdWorld nations. The U.S. steel industry maynever achieve international competitivenessunless Federal policies become more compa-rable to the policies of other countriestowards their steel industries.

Ch. 2—Policy Options ● 2 9

Reconciling Congressional and Industry Concerns

The past several decades have witnessed areversal in the condition of the Americansteel industry. Before World War II, and forthe decade following, the domestic industrywas the world leader in steelmaking technolo-gy and production. It supplied domestic needsand was a net exporter of steel, Its profitabil-ity, though rarely as high as most domesticmanufacturing industries, was markedly bet-ter than in recent years, During the last 10years, however, a turnabout has occurred.The domestic industry shifted from technol-ogy leader to follower and from net exporterto dependent importer. Its profitability, mod-erate in the 1950’s, became unacceptable bydomestic standards in the 1970’s. Domesticsteelmaking capacity declined and a substan-tial percentage of this capacity (about 20 per-cent) became obsolete, All this happened dur-ing a period of phenomenal world growth insteelmaking capacity and demand, New tech-nology, as a means to reduce costs and energyconsumption, received greater attentionabroad than in the United States.

Japan has emerged as the new worldleader in steel technology and production,and it exports much of both. Although Euro-pean steel industries have generally followedthe U.S. pattern of decline, a number of devel-oping nations have acquired considerablemodern steelmaking capacity, much of it pur-chased from Japan. Japan, Europe, and ThirdWorld countries have used their steel exportsto sustain domestic employment and obtainforeign currency; their industries have notbeen particularly profitable, however, evenby U.S. steel industry standards.

The American steel industry, faced with in-creasing foreign capacity as well as unprece-

dented technological and cost competition,must also face a variety of Federal policies,carried out by a variety of agencies, that ad-dress a variety of national concerns. Thesepolicies, with their disparate but relativelynarrow individual objectives, have added tothe industry’s problems. The Federal Govern-ment has contributed to the loss of interna-tional competitiveness in the following ways:

1.

2.

3.

4.

5.

6.

Cost-price policies:formal and informal limits on domesticsteel prices;long capital-recovery periods that do notrecognize the rising costs of buildingnew steelmaking capacity; andenvironmental and worker health andsafety regulations that increase thecosts of steelmaking.

Trade and monetary policies:● international trade policies that have

allowed steel imports to capture a largeshare of the domestic market; and

● little monitoring or control of the exportof domestic ferrous scrap, a valuablesource of both iron and energy.

Very low levels of support for research insteelmaking.

Contributions to international sources thatmake loans to foreign steel industries,which then export steel to the UnitedStates.

A loan policy aimed at maintaining employ-ment in troubled companies, rather thanmodernizing or expanding steel capacity.

Monetary policies that, until recently, hadthe effect of keeping the dollar overvaluedrelative to major foreign currencies andthereby made domestic steel less competi-tive in world markets.

30 Technology and Steel Industry Competitiveness

On the other hand, events and policies inthe steel industry itself have also contributedto the industry’s problems:

I. The cost-price squeeze and profitability:a tendency to emphasize the size ofsteelmaking facilities rather than theirprofitability;wage increases that have exceeded in-creases in productivity and have there-fore resulted in higher real labor costs;the tendency of some major companies topay high dividends even during periodsof low earnings;insufficient attempts to reduce capitalcosts through the use of lower cost for-eign steelmaking equipment, less costlydesigns, and more inhouse engineeringand design;costly attempts to delay compliance withenvironment regulations;slowness in maximizing the use of do-mestic scrap; andminimal attempts to export the technolo-gy-intensive steels in which the industryis technologically and cost competitive.

2. Technology:●

●

●

●

●

minimal spending on R&D;an emphasis on product rather thanprocess R&D, and on short-term payoffsrather than long-range benefits fromhigher risk, major innovations;few attempts to employ technical andmanagerial personnel from other domes-tic industries that have been successfulin technological innovation and export-ing;insufficient long-range strategic plan-ning for technology to minimize futureproduction costs; andinsufficient matching of steelmakingprocesses with product characteristicsto obtain optimum product mixes.

All these public- and private-sector actionsand policies together, have shaped the in-dustry’s current problems and congressionalconcerns about them. The present time is crit-ical in the history of the domestic steel indus-try—modern, competitive steelmaking capac-ity takes years to build, so what happens now

will determine the shape of the industry fordecades to come.

Congress has diverse and sometimes con-flicting concerns about steel. Table 4 con-tains a summary of congressional concernswithout reference to particular geographical,economic, social, or trade problems. Thetable also lists industry needs drawn from amajor policy statement by the American Ironand Steel Institute (AISI), whose membercompanies produce about 90 percent of do-mestic steel. (Not all of the nonintegratedscrap-based steelmaker, who account forabout 13 percent of domestic production,belong to AISI.)

Rising imports, for the most part, are anissue on which the Government and industryare in accord. Dependence on steel importswould threaten national security because ofthe critical role of steel in this society. Thesteady loss of employment caused by im-ported steel is also of major concern to theNation, particularly for regions with concen-trations-of older steelmaking facilities. Steelimports also contribute significantly to thetrade-balance deficit. Imports may offer alow-price source of steel during brief periodsof world oversupply, but their long-term neteffect on the economy will probably be nega-tive. Industry wants to limit imports in orderto improve its domestic competitiveness andincrease its profitability so that it can expandand modernize. As long as there is great un-certainty about future imports, however, in-dustry will be reluctant to make major invest-ments in steelmaking technology. For corol-lary reasons, increasing steel exports is anissue on which Congress and industry shouldalso have common interests.

The increasing age and obsolescence of do-mestic facilities should be a matter of con-cern both to industry and Government insofaras it affects competitiveness. But comparedto the risks of building new, modern plant ca-pacity which imports might leave idle, operat-ing old facilities can appear attractive for theshort term. In some cases, the continued oper-ation of older facilities, even at low levels of

Ch. 2—Policy Options . 31

Table 4.—Congressional Interests and Steel Industry Needs

Congressional interests .

T r e n d Effects

Rising imports National security lossIncreased competitionLower pricesPotential inflationTrade deficitUnemployment

Declining exports Trade deficitUnemployment

Aging facilities Productivity loss

Decreasing capacity National security lossUnemployment

Diversification out of Competitiveness losssteel making Diversion of capital

Declining R&D and Competitiveness lossinnovation

Rising steel prices lnflation

Improved environmental Public well-beingeffects of steelmaking Increased costs of(increased regulatory steel makingcompliance) Force new technology


—Industry needs

Maintain/improve cost Increase Modernize Increase

competitiveness capacity technology profitability— —.Accord

Accord

Accord

Conflict

Conflict

Accord

Accord

Conflict

profitability, provides a cash flow to supportdiversification out of steelmaking. To the ex-tent that such diversification reduces capitalinvestment, R&D investments, and capacity,it adds to congressional concerns.

In many cases, companies do not continueto operate old facilities, nor do they replacethem with an equal or greater amount of newcapacity. Some companies choose to becomecompetitive and profitable by closing mar-ginal or unprofitable facilities and modern-izing only their best plants. These companiesa re among the l a rges t s t ee lmaker , andalthough the smaller companies are expand-ing, the net effect, of concern to Congress,has been a loss of domestic capacity and jobs,

There are areas of both conflict and ac-cord with regard to declining R&D and inno-vation. Willingness to develop and use inno-vations in steelmaking can improve competi-tiveness, consistent with congressional con-cerns. However, the industry’s desire to in-

Accord Accord Accord

Accord Accord Accord

ConfIict Accord Accord

Accord ConfIict ConfIict

Conflict ConfIict ConfIict

ConfIict Accord Conflict

ConfIict Conflict Conflict

Conflict Accord ConfIict

crease profitability by investing in modern-ization and expansion may actually reduce in-vestments in R&D and innovation.

Nor is the industry sympathetic with con-gressional desires to limit inflation by holdingdown steel prices. To the extent that control-ling prices improves demand for domesticsteel and thereby contributes to high rates ofplant utilization, this policy supports costcompetitiveness. But to the extent that itdiminishes profitability and thereby discour-ages capacity expansion and modernization,it will undermine long-run competitiveness.

Similarly, the congressional interest inenforcing Environmental Protection Agency(EPA) and Occupational Safety and HealthAdministration (OSHA) regulations conflictswith industry’s concerns about cost competi-tiveness, profitability, and capital formation.Technology, however, may be a better way toreduce costs than relaxing these regulations.


Learning From the Steel Industry

The steel industry may be only the first ofseveral domestic industries to face a declinein technological preeminence and economicprosperity. As the less industrialized nationsbegin to produce at lower costs and to con-sume more, they become more attractive thanhighly industrialized countries as a locationfor industry. The decline of established in-dus t r i e s in advanced na t ions may a l soresult from a partial loss of domestic mar-kets through product substitution; moreover,these industries may not produce sufficienttechnological innovations to reduce produc-tion costs markedly or improve products dra-matically. These explanations may not ap-pear as valid in today’s world economic orderas they once did: the policies of variousgovernments have introduced so many imper-fections to the free-market and free-tradesystem that the role of traditional economicfactors in international competition has beenfundamentally changed, When each of theabove factors is examined for the domesticsteel industry, it is found that none of themcan adequately explain its decline,

In the first place, no major foreign steel in-dustry has had a more advantageous combi-nation of labor costs, energy costs, raw mate-rials costs, and industrial and technologicalinfrastructure than the United States. Atbest, foreign steel industries have had slightadvantages in one or two of these factors.Generally, such advantages have been short-lived and insufficient in themselves to ac-count for those industries’ penetration of ex-port markets, particularly the U.S. market.What has occurred is that foreign govern-ments have adopted policies that providemany direct and indirect benefits to theirsteel industries: many foreign steel industrieshave been built with public funds to serve so-

cial and political goals, Even though foreigndemand for steel has increased substantially,foreign-produced steel is often exported rath-er than used to satisfy domestic needs.

Secondly, although steel has faced increas-ingly stiff competition from other materials—notably aluminum, concrete, and plastics—itstill possesses a unique combination of prop-erties, forms, and costs that ensures it sub-stantial and growing markets. There hasbeen no major technological displacement ofsteel in the marketplace.

Thirdly, contrary to accepted wisdom,there have in fact been major technologicalchanges in domestic steelmaking and prod-ucts during the past several decades, and allsigns are that this will continue. Unfortunate-ly, some domestic firms have justified theirlack of progress with the “mature industry”concept, and have become defensive and an-tagonistic toward Federal Government pol-icies rather than changing their corporatepolicies to meet changing social, economic,and political conditions. Others, in the mean-time, have moved ahead with optimism andeven boldness—taking risks, investing in thenewest technology, and capturing the profitsthat are there to be made.

The lesson to be learned from the steel in-dustry’s experience is that private industriescan find themselves losing price competi-tiveness because Federal Government pol-icies are not comparable to those of other na-tions. Foreign government policies have dis-torted the workings of the marketplace, some-times in ways unique to a particular industri-al sector. The steel experience has shownthat Federal policies can actually improve theprofitability of foreign industries while hav-ing adverse impacts on domestic producers.


A Governmental Steel Industry Sector Policy

Steel market imperfections have led tounderinvestment in three areas— equipment,R&D, and innovation— and policy changesthat dealt with only one of these areas ofunderinvestment would be inadequate in thelong run, The choice of policy options is fur-ther complicated by the fact that the domesticsteel industry is undergoing a restructuring.The impact of policy options on this restruc-turing process requires careful examination.

It is often contended that the steel industryshould not be singled out for Federal help andthat legislation affecting all domestic indus-try is sufficient. However, steel has a uniquecombination of problems and assets, and ithas already been uniquely and adversely af-fected by many Federal policies. Singling outthe steel industry for a sector policy presentspolicymakers with difficult choices and op-portunities for several reasons:

● The industry is essential to both thedomestic economy and national security,but it is contracting and diversifying outof steelmaking. which can only result inincreased imports.

. The industry’s cost-price squeeze andcapital shortfall are the result of pricesthat are too low to provide adequate re-turn on investment, or costs that havenot been kept low enough, or both; ofFederal policies that have led to highregulatory costs; and of unfairly tradedimports, which have captured a largeshare of the domestic market and con-tributed to artificially low prices.

c There is a nucleus of companies whoseplants are highly competitive in costsand technology and who could contrib-ute positively to the trade balance by ex-porting more steel.

●

●

There are many short- and long-termtechnological opportunities for strength-ening the industry and recapturing thepremier status it once possessed.The industry has available to it the do-mestic material resources of iron ore,coal, and ferrous scrap, and a highlycompetent labor force, a large domesticR&D infrastructure, and a reservoir ofmanagerial and entrepreneurial talent.

The most critical policy option may be thatof a governmental steel industry sector pol-icy, that is, for a coherent set of specific pol-icies designed to achieve prescribed goals.The present state of the industry and theneed for critical examination of policy optionsare, in large measure, a consequence of along series of uncoordinated policies. Thesepolicies have not been properly related toeach other or to a well-considered set of goalsfor the industry, goals that satisfy the needsof both the Nation and the industry. The lackof a sector policy and the designation of alead agency to implement such a policy hasled to policies that often conflict with oneanother, create an adversarial relationshipbetween Government and industry, and fail toaddress critical issues. Examples of conflict-ing policies include: 1) the attempt to have do-mestic industry use more scrap, which re-quires capital investment, without providingrealistic capital recovery; 2) the use of thetr igger-price mechanism, which leads toprice increases, while attempting to holddown prices; and 3) the promotion of energyconservation, while not allowing continuouscasting to qualify for the energy investmenttax credit.

A recent attempt by the Government to for-mulate a sector policy for the domestic steelindustry was the report by Anthony M. Solo-


men, Undersecretary of the Treasury, en-titled “A Comprehensive Program for theSteel Industry, ” which was issued in Decem-ber 1977. A number of this report’s recom-mendations materialized, notably the trigger-price mechanism for steel imports, the loanguarantee program of the Economic Develop-ment Administration (EDA) of the Departmentof Commerce, and a slight reduction in thedepreciation schedule for new machineryand equipment (from 18 years to 15 years).However, the Solomon report paid little atten-tion to issues related to the development andadoption of new technology, and it formulatedno clear strategy for the future developmentof the domestic steel industry. Although itrecognized the problem of providing morecapital for modernization, it made no detailedanalysis of what those modernization needswere or of what the costs would be. Events ofthe past 2 years have shown that the policychanges stemming from the Solomon reporthave not succeeded, even though they were apromising attempt at a sector policy.

The report was an attempt to deal quicklywith a crisis situation; as such, it containedlittle independent analysis of the situationand it made no recommendation for a central-ized coordination of the diverse Governmentpolicies affecting the industry, The agenciesplaying dominant roles in steel policy as a re-sult of the Solomon report were the Depart-ments of Commerce and the Treasury, neitherof which concentrated on problems relatingto R&D, innovation, or restructuring. Theestablishment of the Tripartite Committee ofindustry, labor, and Government, while satis-fying a need for better communication, hasnot facilitated decisive policymaking in Gov-ernment, nor has it provided a mechanism fordetailed and independent analyses of criticalissues and options, focused on long-rangeproblems and opportunities.

At present, a large number of people andagencies in the Government deal with steel,but they do not reinforce each other’s worknor do they provide an accessible source ofexpertise and guidance for the industry or fa-cilitate its efficient interaction with the Gov-

ernment. The waste of resources by both Gov-ernment and industry in dealing with such di-vided and compartmentalized bureaucraciesis enormous. The preeminence of the Japa-nese steel industry is in large measure due tothe creation and execution of an effectivesteel sector policy. The Federal Governmentmay seek reasons for the loss of internationalcompetitiveness in the steel industry, but itsown lack of a sector policy also deserves ex-amination.

The chief difficulty in establishing a steelsector policy is obtaining qualified personnelwho are acceptable to all parties involved,and who could perform an ongoing analysis ofthe industry. There is also the jurisdictionalproblem of obtaining sufficient cooperationbetween existing agencies and whatever of-fice or agency is assigned the responsibilityfor designing and implementing such a policy,The historically prevalent inattention to tech-nology by both the Federal Government andindustry would have to be addressed. Finally,there would be a risk that the interests oflarge steelmaker would dominate those ofsmaller companies, that the benefits of socialregulations would be obscured by their costs,and that the interests of the steel industrywould overshadow the interests of other in-dustries.

The OTA Study

The overriding theme of OTA’s study of thesteel industry has been how technology en-ters into both its problems and their solutions.OTA interprets technology broadly technol-ogy includes the specifics of technical knowl-edge, the means for implementing that knowl-edge, and the factors that promote or discour-age its creation and adoption. Consequently,technological issues cannot be isolated, ThisOTA study deals with related issues, such astrade, capital allocation, and profitability, tothe extent that they affect technology, De-tailed aspects of marketing and pricing havenot been pursued, nor have the details of theliterally thousands of Federal policies, regu-lations, laws, and agreements that affect thesteel industry. The purpose of the following


analysis of policy options is thus to deal withmajor trends, goals, and alternatives, ratherthan to give a detailed, quantitative analysisof current and future policies. The OTA anal-ysis is more conceptual and strategic than itis tactical. It presents a framework, based onanalysis, assessment, and forecasts of tech-nology, in which Congress can examine its op-portunities and its policy choices with regard

●

to the U.S. steel industry.

A critical methodological feature of theOTA study is its treatment of domestic steelindustry as three segments, based on a com-bination of process and product differences,rather than as a single entity. These segmentsare:

●

●

Integrated steel producers, who makecommodity carbon steels with conven-tional ironmaking and steelmaking tech-nology: iron ore is converted to iron inblast furnaces using coke; the iron isthen converted into steel in either a ba-

sic oxygen, open hearth, or electric fur-nace. To a limited extent, ferrous scrapis used with virgin iron in the first twotypes of furnace; the electric furnaceuses ferrous scrap exclusively. Thesecompanies a l s o p r o d u c e a l i m i t e damount of higher quality, higher pricedalloy/specialty steels.

Nonintegrated steel producers, who pri-marily make simple carbon steels withscrap-based electr ic furnaces. Theirproduct range is more limited than theintegrated steelmaker; their plant ca-pacities are generally about 10 percentof the size of integrated operations.

Alloy/specialty steel producers, who pri-mari ly use scrap-based electr ic fur-naces to produce relatively small quanti-ties of the highest priced, most technolo-gy-intensive steels. Neither they nor non-integrated producers engage in primaryironmaking.

Three Scenarios for the Future

OTA has developed three scenarios thatpostulate future possibilities for the domesticsteel industry. Summary information on thesescenarios is provided in table 5. The timeframe for each is the next 10 years—thereare too many uncertainties about generalconditions to go beyond that period, except inthe most qualitative terms. Nevertheless,events in this time period will have implica-tions for the years beyond, and these are alsoexamined.

Liquidation Scenario

In this scenario, no substantial changes inGovernment policy, improvements in industryprofit; profitability, or changes in corporate objec-tives occur during the next decade. Thetrends of the past 5- to l0-year period con-tinue. Faced with low profit levels, many ofthe larger steel companies diversify out ofsteel making, and capital investment in pro-

ductive steelmaking facilities declines. * Prof-it levels themselves signify a decreasing real-dollar investment level.

Industry restructuring continues. The inte-grated steel producers’ share of domesticproduction continues to decline, and that ofthe more profitable nonintegrated and alloy/specialty producers expands, depending onhow effectively the new Multilateral TradeAgreement is enforced.

*The following examples illustrate the trend to diversifica-tion. According to Armco’s 1979 Annual Report and publicstatements of company officia1s, the percentage of the firm'snet alssets related to steel was 73 percent in 1976 and 62 per-rent i n 1979, and will be 49 percent by 1983. Armco has beenthe leading large integrated steelmaker using diversification toimprove corporate profits. The Nation’s largest steelmaker,U.S. Steel Corp., also has been experiencing large losses fromits steelmaking operations; according to its 1979 Annual Re-port, 37 percent of its invest mens during the past 5 years havebeen for expansion and growth of nonsteel businesses. In theindustry's High Investment scenario, 11 percent of total capitalspending is allocated to nonsteel investment.

36 . Technology and Steel Industry Ccompetetiveness

Table 5.—Characteristics of Three Scenarios for the Next 10 Yearsof the Steel Industry

Scenario

HighCharacteristics Liquidation Renewal Investment

Degree of capital investment . . . . . . . . . . . . .—-——.

Low” Moderate HighDegree of Government assistance. . . . . . . . Low Moderate HighNeed for policy change . . . . . . . . . . . . . . . . . None Moderate HighInvestment in R&D . . . . . . . . . . . . . . . . Very low High UncertainCapacity change. . . . . . . . . . . . . . . . . . . . . . . . Decrease Moderate Moderate

increase increaseDegree of new technology

Short range (1980-90) . . . . . . . . . . . . . . . . . . . . Low Moderate ModerateLong range (post-1 990). . . . . . . . Low High Moderate

Furtherance of industry restructuring . . . . . . High High Low

aHigh restructuring means increasing market shares for non Integrated and alloy/specialty steelmaker


No new Government policies provide director indirect assistance to the industry: no loanguarantee programs, no revisions in capital-recovery periods, no substantial change inimport protection, no increase in Federal sup-port of R&D or demonstration projects, andno great freedom to increase prices to levelsthat would raise return on investment in steelto the all-industry average or provide suffi-cient capital to allow extensive moderniza-tion and capacity expansion.

Only relatively small technological im-provements are made, and these are concen-trated in the best of existing facilities. Thus,though capacity would probably decline, re-maining capacity steadily improves in techno-logical competitiveness. However, the long-term prospects for creating and adopting ma-jor new technology would not be good,

If domestic capacity does not expand sig-nificantly and domestic demand grows ateven moderate rates, it is possible that, by theend of the 1980's, imports could more thandouble. Domestic demand could range from122 million to 132 million tonnes: domesticshipments might be only 82 million to 91 mil-lion tonnes, Steel employment would declineby about 20 percent, or some 90,000 workers,from the 1978 level. At 1978 prices ($440/tonne), the steel trade deficit would rise tobetween $14 billion and $22 billion annually,

compared with under $6 billion in 1978. * (Bycomparison, the total balance-of-paymentsdeficit in 1978 was $13,5 billion.) Moreover,forecasts of world demand and capacity sug-gest that by the mid- to late 1980’s there willlikely be little overcapacity. Hence, steel im-ports, if obtainable, could be priced muchhigher than domestic steel; past experience in1973-74 suggests that, in such circumstances,prices of imports could be 15 to 35 percenthigher than domestic prices.

Although the money not invested in steelwould go to other domestic uses, which wouldpartially offset steel-related losses in employ-ment, capital investment, and taxes. the neteconomic effect of this scenario is unlikely tobe positive. The trade deficit would weakenthe dollar, aggravate inflation, and drain do-mestic capital; the real increase in steel im-port prices would add further inflationarypressures. Since steel employment in older fa-cilities is geographically concentrated, em-ployment substitution would be difficult. Cap-ital would be diverted to manufacturing sec-tors with lower labor and capital intensitythan steel. Moreover. because capital mar-kets set rates on the expectation of futureevents, anticipation of higher trade deficits,prices, and unemployment. and of steel short-ages affecting other domestic industries,could raise capital market rates and increasecurrent capital costs.

*All sums in this chapter are expressed in 1978 dollars un-

less otherwise noted.


Renewal Scenario*

In this scenario, the level of capital invest-ment for modernization and capacity expan-sion is sufficient to accommodate a relativelymodest (I.5 percent per year) increase indomestic steel demand while keeping importsto 15 percent of domestic consumption (ap-proximately the same tonnage as 1978). Cap-ital investment in productive steelmaking fa-cilities is 50 percent higher than the priordecade’s annual average (approximately $3billion per year, versus $2 billion). The capi-tal shortfall for minimum renewal amounts toat least $600 million per year, which could beobtained through a number of Federal actionssuch as reducing capital recovery time fromthe present 15 years to 5 years. A slightlyhigher 2-percent-per-year increase in domes-tic demand, which is possible, could raise thecapital deficit to $1 billion per year. A reduc-tion in depreciation time could also generatethis much additional capital, and other meansof Federal assistance, discussed below, mightbe used as well.

Under this scenario, the next 10 years seethe adoption of continuous casting increasefrom the present 15 percent to about 50 per-cent, primarily through the modernization ofold integrated mills and the construction ofadditional nonintegrated plants. Productioncosts are not reduced sufficiently, relative tohigh capital costs, to justify constructing newintegrated plants, The market share for thenonintegrated companies rises from their1978 level of 13 percent to as much as 25 per-cent (an addition of almost 10 million tonnesof shipments) as they broaden their productmix, adopt new production equipment, and

*See ch. 10 for an estimate of future capital needs based onthis scenario.

begin using direct reduced iron (DRI) to sup-plement ferrous scrap (see table 6). This ex-pansion of the nonintegrated segment is con-tingent, however, on adequate supplies of fer-rous scrap and electricity in specific geo-graphical areas.

Domestic steelmaker maintain their mar-ket share under the Renewal scenario, andthey improve their technological and costcompetitiveness. Profitability also rises: givena modest 2-percent reduction in productioncosts as a result of modernization and expan-sion, return on equity should rise from its1978 level of 7.3 percent to the average levelfor all domestic manufacturing industries,about 12 percent. Although no major newtechnology is adopted during the lo-yearperiod, the domestic steel industry becomesprofitable enough to participate in the devel-opment of new technology for the 1990’s; bythat time period, new integrated processesshould reduce production and capital costsenough to justify building large new inte-grated plants at a time when the limits fornonintegrated steel mills are being reached.Under this scenario, the 1980’s are the dec-ade of growth for the smaller nonintegratedsteelmaker and the 1990’s--with increasedcapital investment—the decade for growth oflarger, integrated producers.

High Investment Scenario

AISI recently created a scenario for thenext 10 years that is based on the same as-sumptions about domestic demand and ship-ments as the Renewal scenario, ] although its

‘American Iron and Steel Institute, Steel (If the (3wssrwlds:The American Steel ln(iustr} in the 1980”s, 1980. OTA purpose-ly used the same basic production param[?ters in designing itsRenewal scenario to permit close comparison of the two: bothscenarios are described in det;~il in (h. 10.

Table 6.— How Scenarios Affect Three Industry Segments

Scenario

Liquidation . . . . . . . . . . . . . . . .Renewal. . . . . . . . . . . .High Investment, . . . . . . . . . .

Industry segment—.—.Integrated Non integrated Alloy/specialty

Very harmful Slightly harmful UncertainBeneficial Useful Useful

Very beneficial Useful Useful


.


modernization and expansion paths differconsiderably. The AISI scenario forecasts aneed for $4.9 billion per year for moderniza-tion and expansion, a nearly 150-percent in-crease over the previous decade’s averageannual spending. The main reasons why AISIfound greater capital requirements than OTAare: 1) AISI assumed higher unit capital costsin calculating the total needed for moderniz-ing and increasing the capacity of integratedplants (nearly as costly as building newplants), 2) it assumed fewer nonintegratedplants would be built and at higher cost, and3) it allocated greater sums to reducing theaverage age of facilities.

The capital shortfall in the High Invest-ment scenario is approximately $2,3 billionper year, assuming no increase in industrydebt or equity and no change in existing cap-ital-recovery rules. The industry would re-quire considerable financial and policy as-sistance from the Government to meet its cap-ital needs. AISI favors faster capital-recov-ery periods and marketplace steel pricing;the combination of price increases and im-proved capital recovery should give a returnon equity comparable to other domestic in-dustries.*

*The price increase would be at least 10 percent of the 1978average price per tonne of steel. Such an increase would great-ly increase the profits of nonintegrated producers, or allowthem to capture a greater market share with more competitiveprices than integrated producers. More importantly, greatertrade protectionist measures would be necessary to preventlower priced foreign steel from entering the domestic market.

The long-term consequences of the High In-vestment scenario, however—with its great-er capital spending level and its emphasis onreplacement and expansion of integrated fa-cilities during the 1980’s—make the adoptionof major new integrated steelmaking technol-ogy in the 1990’s less likely than under theRenewal scenario. The additional $2 billionper year investment would create enoughnew integrated capacity (using present tech-nology) to satisfy future demand without con-structing new facilities in the 1990’s. The Re-newal scenario, on the other hand, by delay-ing new integrated construction, ensures thatthese facilities will incorporate the newesttechnologies when they are built. This conclu-sion is based on a relatively constant, lowrate of growth in steel demand for the nextseveral decades; should demand growth behigher, opportunit ies for new integratedplants in the 1990’s would exist under bothscenarios.

The High Investment scenario leads to lessrestructuring of the industry than the Renew-al scenario. There is no indication that themarket share for nonintegrated companies(as opposed to the nonintegrated plants of in-tegrated companies) would increase signifi-cantly, if at all (see table 6). Should noninte-grated companies fail to expand during the1980’s, they might do so in the 1990’s, furtherdiscouraging the construction of high-costimproved-technology integrated facilities.

Implications of the Scenarios forCongressional and Industry Concerns

The impacts of the three scenarios on thecongressional concerns discussed earlier aresummarized in table 7. The Liquidation sce-nario fails to deal satisfactorily with mostcongressional concerns; all of the adversetrends that have led to those concerns con-tinue. At best, steel exports might improveslightly because of the already enacted Multi-lateral Trade Agreement, which would openup foreign markets for the alloy/specialty

steels in which U.S. producers have cost andtechnological competitiveness. Rising and in-flationary steel prices would be stabilized,consistent with present policy. The impact onregulatory compliance is uncertain; there iscontinuing debate on the benefits of demand-ing increased compliance, and a congres-sional role that acknowledges the costs ofcompliance might slow the loss of capacity inthe integrated segment.


Table 7.— How Congressional Concerns Are Affected by Three Scenarios

Congressional concerns

Rising imports . . . . . .Declining exports . . . . . . . . . . . . . . . . . . . .

Aging facilities . . . . . . . . . . . . . . . . . . . . . . . . .

Decreasing capacity; decreasing employment.Diversification out of steel making . . . . . . . . . . .

Declining R&D and innovation . . . . . . . . . . . . . .Rising steel prices—inflation. . . . . . . . . . . . . . .Increasing compliance with EPA/OSHA

regulations . .


The Renewal scenario generally deals withcongressional concerns in a satisfactory man-ner. By improving profitability and encourag-ing modernization, expansion, and R&D with-out the need for real-dollar price increases, itstrengthens the industry sufficiently in thenear term to reverse most of the threateningtrends of the past decade.

The High Investment scenario, with two ex-ceptions, also deals with congressional con-cerns quite satisfactorily. Those two excep-tions are continuing diversification out ofsteelmaking and rising steel prices. Under theHigh Investment scenario, more capital isplanned for diversification than in previousyears. Moreover, the lack of emphasis ontechnology and R&D suggests either a weaklong-range commitment to steelmaking, orshortsightedness. Financing the rather largeannual capital deficits that result from thisscenario’s high spending will require signifi-cant price increases, even after the most fa-vorable anticipated reduction in capital-re-covery schedules.

——Scenario— ——

HighLiquidation Renewal Investment——— ——- . —..—Worsens Stabilized StabilizedImproves Improves Improvesslightly

Worsens Improves Greatlyimproved

Worsens Improves ImprovesIncreases May decrease May increase

slightly slightlyWorsens Improves May improveUncertain Constant Increases

Uncertain Improves Improves——

The impacts of the three scenarios on in-dustry needs are summarized in table 8. TheLiquidation scenario meets only one of thestated industry needs; that is, profitabilitywould increase for the portion of the industrythat survives the continued contraction, be-cause capital spending would have been fo-cused on the best plants. Long-range profitability is less certain. With rising imports anddeclining technology and R&D, the integratedsector can hardly expect to retain its competi-tiveness or profitability; the nonintegratedand alloy/specialty companies might remainreasonably profitable. The argument thatmore imports at low prices would benefit con-sumers and help f ight inf lat ion may beflawed; a variety of factors suggest that ma-jor foreign steel production responds morereadily to world market prices than to costs.

The Renewal scenario would satisfy all in-dustry needs, and for the l0-year scenarioperiod the High Investment scenario wouldsatisfy them even better. But because of thecombination of higher prices, reduced long-

Table 8.— How Industry Needs Are Satisfied by Three Scenarios—

Scenario————Industry needs Liquidation Renewal High Investment

Maintain/improve cost competitiveness.—— ———.——

Worsens Improves Improves greatIyIncrease capacity . . . . . . . . . . . . . . . . Worsens Improves ImprovesModernize existing plants . . . . . Worsens Improves Improves greatlyIncrease profitability. . . . . . . . . . . . improves Improves Improves greatIy



term R&D commitments, and minimal restruc-turing of the industry, most of the benefits ofthe High Investment scenario accrue to the in-tegrated companies. Foreign creation andadoption of major new steelmaking processesmight well lead, in the long term, to a furtherloss of competitiveness and the need for addi-tional Government assistance at a later date.

Major policy options for the Renewal andHigh Investment scenarios are summarized intable 9. Options in each of the policy areasexcept pricing (capital formation, R&D, regu-lations, raw materials, and trade) are dis-cussed and analyzed in detail in the following

section. The policy aspects of the two scenar-ios differ considerably in the amount of free-dom they accord to the industry. The industryfaces a tradeoff between corporate freedomand support ive Government intervention.From a national point of view, the social re-turns on Government investments in the do-mestic steel industry must be traded offagainst industry’s freedom to choose its owncourse of action, including asking for inter-ventions it thinks beneficial. The Renewalscenario, together with its policy options, isan attempt to channel Government assistanceinto those industry segments and technologiesthat offer both near- and long-term benefits to

Table 9.—Major Policy Options for Two Scenarios

P o l i c y - a r e a

Capital information .

R&D . . . . . . . . . . . . . . . . .

EPA/OSHA regulations .

Raw materials . . . . .

Trade . . . . . . . . . . . . . . . .

Steel prices. . . . . . . . . . .

.—.—Renewal scenario

-Improve through one or more of the following:. more rapid capital recovery,. loan guarantees,. industrial development bonds,● investment tax credit,. subsidized interest loan, or● emphasize technological rejuvenation of

viable plants.

Increase Government support of basicresearch and demonstrate ion of major newtechnology. Provide incentives for industryR&D.

Correlate regulations with industry’s capitaland modernization needs.

Explore the controversial issue of limiting theexport of energy-embodied ferrous scrap.

Examine the feasibility and adverse impactsof Federal targets for ferrous scrap. Com-pare targets with alternative mechanismssuch as incentive investment tax credits foradoption of new technology which usesmore scrap.

Reexamine trade policies. Assess the impactof unfairly traded steel imports on the in-dustry’s ability to make long-term com-mitments to and investment in newtechnology and additional steelmaking.

Not examined

High Investment scenario

‘–More rapid capital recovery.

Increase Government support of researchand costly pilot demonstration plants.

Regulatory framework be modified to mandateonly those requirements that aredemonstrably necessary to protect publichealth, and that can be rationally justifiedon a cost-benefit basis.

Let market forces rather than Governmentmandate determine international trade.

Need vigorous enforcement of U.S. trade lawsand improved mechanism for keeping importlevels consistent with other nation’s limits.Trigger-price mechanism should be changed.Favors International Safeguards Code, useof OECD Steel Committee, bilateral tradepolicies with LDCs and centrally plannedeconomies, international commodity tradepolicy.

Market forces would establish the level ofsteel prices, rather than Government pricecontrols.

—-—SOURCE: Office of Technology Assessment


the Nation and the industry. It does imposesome constraints on industry—for example,with regard to diversification out of steelmak-ing and long-term commitments to R&D—andthese are legitimate issues for discussion. Thedangers of superseding the discipline of themarket are considerable, and the fears thatincreasing Government intervention will haveunfavorable impacts on the private sector arelegitimate.

Both the Renewal and High Investment sce-narios accept as a basic premise that long-standing market imperfections have causedunderinvestment by the domestic steel indus-try in capital plant, R&D, and technologicalinnovation. These market imperfections haveresulted from foreign and domestic Govern-ment policies that have affected investments,costs, and prices.

If the international competitiveness of theAmerican steel industry is to be markedly im-proved, Federal policies, which constitute thesocioeconomic environment in which the in-dustry operates, must be comparable withthose of other governments, To be effective,the policies must also address the totality ofunderinvestment. The industry emphasizesits need for Federal assistance in redressingunderinvestment in capital plant, but OTAfinds an equally great need to deal with un-derinvestment in technology—in R&D and in-novation.

Implications of theScenarios for the 1990’s

The Liquidation scenario would probablymake it difficult for the domestic industry torejuvenate technologically at the end of the1980’s. A large degree of its capability fortechnology improvement would be lost, par-ticularly the R&D personnel and facilitiesneeded to originate innovations. Most nega-tively affected would be integrated steelmak-ing which is vital for the large-scale process-ing of iron ore,

The High Investment scenario requiresspending enough capital on existing technol-ogy to ensure a relatively modern industry by

the end of the 1980’s. The industry wouldthen be more efficient and productive by to-day’s standards, but the real issue is whetherthe industry might by then be technologicallyobsolete because of newly developed technol-ogy, or whether (having already spent somuch on new plants) its opportunities foradopting new technology in the 1990’s wouldhave been lost. Only very rapidly rising de-mand for steel would reverse these adverseeffects,

The Renewal scenario, on the other hand,sets the stage for a major rejuvenation of theindustry in the 1990’s based on basic innova-tions in process technology. This would neces-sitate high capital expenditures in the 1990’s,particularly for new integrated steelmakingfacilities. There is no guarantee that a radi-cal change in integrated steelmaking will oc-cur. But there are indications that it may, be-cause the seeds of radical change are alreadyplanted.

Basic innovations, which create profoundlynew industrial processes, products, and in-dustries, occur not in a continuous mannerbut in clusters.’ Research on coal-based di-rect reduction (DR), direct one-step steelmak-ing, and plasma steelmaking suggests that aradically different way of making steel mightbe commercially possible by 1990 (see ch. 6).Furthermore, major breakthroughs in any ofthe several areas of energy production (suchas economical large-scale coal gasification,magnetohydrodynamics, or even fusion) couldcreate an opportunity to combine steelmakingwith energy production and gain unprece-dented efficiencies.

The risks associated with the Renewal sce-nario appear to be minimal. Even if no waveof basic innovations in steelmaking occurs,the domestic industry should be well posi-tioned for an expansion based on the bestavailable technology. The ability and readi-ness to take advantage of new technology inthe 1990’s could lead to a considerable com-petitive advantage over foreign steel indus-tries. The Japanese and European steel indus-

G. Mensch. Stalemate in Technology--Innovations Over-come Depression Cambridge Mass.: Ballinger Press, 1979).


tries both have invested heavily in new plantsin recent years; they already have consider-able excess capacity as well as poor recordsof profitability. Third World steel industrieswill likely expand considerably during the1980’s using current technology; this invest-ment will make it difficult for them to adoptradically new technology in the 1990’s and itwill be some time before their scientific andindustrial infrastructures actively contributeto the adoption of basic innovations.

Problems will develop under the Renewalscenario if demand grows faster than antici-pated, if shortages develop in electricity orferrous scrap, or if nonintegrated producersfail to expand their product mix. All of thesewould lead to insufficient domestic capacityduring the 1980’s, which would result in thesame negative effects anticipated for the Liq-uidation scenario.

If the United States is to reap maximumbenefits from basic innovations in steelmak-ing in the 1990’s, it must participate in theirdevelopment during the 1980’s. Adopting in-novations developed by foreign steel indus-tries would at best give the domestic industrytechnological parity, not technological advan-tage or leadership. This points to the need tolink economic assistance with efforts to spurdomestic development and early adoption ofbasic innovations. Government policies thatfail to encourage technological innovationand modernization, at least indirectly, wouldonly be temporary and superficial remedies.

With the moderate capital spending of theRenewal scenario there would be a need atthe end of the decade for substantial invest-

ment in integrated steelmaking plants, partic-ularly for new facilities to replace old plantswhich are too costly to modernize. The sce-nario delays investment in integrated plantsby emphasizing expansion in the noninte-grated segment and by minimizing facility re-placement. Although the rate of growth fornonintegrated mills is the same as for the pastdecade, the implementation of this scenario iscontingent on the availability of ferrous scrapand electricity in specific market areas. Dataon domestic scrap supplies indicate that ifpresent export tonnages are used domestical-ly and a few million tonnes of DRI becomesavailable there should be no major problems,although the price of scrap might rise sub-stantially. The increased demand for electric-ity would amount to less than 1 percent ofcurrent domestic industrial usage; spreadover a number of plantsites during a l0-yearperiod, with some concentration in the Southand Southwest, this is unlikely to be a majorbarrier to nonintegrated growth, except forfirms in the industrialized areas of the North-east and Midwest.

The Renewal scenario is linked to a coor-dinated set of policies encouraging R&D andcapital formation. AISI’s High Investmentscenario gives less weight to remedying cur-rent deficiencies in R&D efforts; its economicscenario runs linearly for 25 years, apparent-ly without emphasizing the creation or adop-tion of profoundly new technology during thatperiod. The executive summary of the AISIpolicy report does not mention R&D; its threerequests for Government action do not in-clude R&D; increased Federal R&D assist-ance is discussed in three pages of an appen-dix.

Overview of Possible Policy Options

Steel’s competitive problems are primarily try’s competitiveness. These options arein the areas of technological innovation, cap- aimed at:ital formation, regulatory compliance, rawmaterials, and international trade. The fol-

. increasing R&D and innovation,

lowing sections discuss policy options that ● encouraging pilot- and demonstration-could be instrumental in improving the indus- plant testing of new technologies,


●

●

●

●

facilitating capital formation,reducing the adverse economic costs ofregulatory compliance,improving the availability of scrap, andconstraining steel imports and facilitat-ing certain exports.

R&D and Innovation Activities

Investment in R&D and innovation activ-ities in steelmaking would be stimulated bythe following Federal policy options:

●

●

●

●

●

increased support of basic research,increased support of large-scale demon-stration projects for new technologies,changes in antitrust policies to permitgreater industry cooperation in appliedR&D activities,improved coordination of existing Fed-eral programs with industry needs, andchange in tax laws to provide an incen-tive for industry R&D. -

All available data show that the amount offunding for basic research in steelmaking isvery low, The industry itself spends very littleon basic research, just 7 percent of its totalR&D budget, which itself is a very low frac-tion of sales compared to the R&D spending ofother domestic industries. However, the in-dustry’s R&D spending as a percent of profitsis relatively high. Federal support of basicresearch also appears minimal, not only in in-dustry but in the academic sector and in Gov-ernment laboratories; total annual spendingon basic steelmaking research by all sectorsis probably less than $5 million. The factorsthat have led to the generally low levels ofbasic research are discussed in chapter 9.

A bill has been introduced (H.R. 5881, theBasic Research Revitalization Act) to providea tax incentive for basic research sponsoredby industry and carried out in the academicsector. The Act provides a tax credit for 25percent of the amount contributed in cash toa basic research reserve, with the maximumcredit limited to 5 percent of the taxpayer’sbusiness income. An income deduction is al-lowed for payment from the reserve. This Actcould provide approximately $50 million per

year for basic research for the steel industry,a tenfold increase over present spending.There has been little public discussion of theAct’s potential utilization by industry or prob-lems with implementing it, but it is a good ex-ample of a creative policy approach to a criti-cal problem.

The option of providing the steel industrywith an incentive to carry out its own R&D ac-tivities also merits examination. One ap-proach would be to increase investment taxcredits for R&D facilities; another would be toallow rapid depreciation of such investments;both could be contingent on the activities be-ing steel-related, Because the level of steelR&D is so low, even substantial increases inR&D activities would cause a relatively minorloss of tax revenues.

Federally Sponsored Research Centers

It is widely accepted that the Federal Gov-ernment is justified in correcting private-sector underinvestment in basic research,and OTA finds ample evidence that basic re-search in steelmaking could have substantialbenefits in the long term. A feasible and at-tractive option would be the creation of feder-ally sponsored research centers at universi-ties. Such centers should have close workingrelationships with industry to ensure that re-search leads to results that are useful. Addedbenefits would be university/industry person-nel exchanges and the maintenance of anadequate academic base for training techni-cal personnel for industry (both are impor-tant manpower benefits—see ch. 12). Indus-try could help support such centers, althoughmost of the funds would likely have to comefrom Government; funding for each such cen-ter would be $1 million to $3 million annually.

Several such centers could be designedaround specific technologies such as inte-grated or nonintegrated steelmaking proc-esses, the use of low-grade coals, and the useof new energy forms. The National ScienceFoundation is already well organized to pur-sue such activities: it has sponsored a plan-ning grant for a center dealing with researchin nonintegrated steelmaking, although in this


case the center appears oriented toward ap-plied research.

Pilot and Demonstration Plants

Because of the scale of steelmaking and itsreliance on well-established technologies, theneed for pilot-plant demonstration of newtechnologies is great, In recognition of the in-dustry’s limited profits and its underinvest-ment in demonstrations, the Federal Govern-ment could provide more funds than the smallsums it now devotes to such activities. Fur-ther, the present focus of demonstration sup-port is energy conservation, only one of manyindustry needs; other worthy goals includeshifting to different resources, reducing capi-tal costs, reducing pollution, improving laborproductivity, and using new forms of energygeneration.

Although direct grants for demonstrationpurposes are an accepted means of support,other options should also be considered. Someof these options might help to minimize theGovernment’s role in deciding which technol-ogies to support. For example, where Govern-ment funds the demonstration directly, an al-ternative especially important for small firmswould be buyback arrangements for the re-covery of Federal costs after the technology isproven.

Changes in patent and antitrust policiesmight also effectively promote demonstrationprojects. Although progress has been made inpatent and licensing arrangements betweenthe Government and industry, such arrange-ments still appear to involve confusion andbureaucratic delays. There is little doubt thatindustry expects to obtain some form of pro-prietary ownership or advantage to justify itscosponsorship or use of personnel in suchdemonstration projects. By promoting licens-ing, the Government can deal with the objec-tion that Federal assistance can lead to un-fair competitive advantage for some compa-nies.

Large demonstration projects are extreme-ly expensive, and it is difficult for any onecompany to justify an investment of that size

and nature. In some cases, a joint industry ef-fort might eliminate the need for direct Feder-al support, but the legality of joint participa-tion by several companies needs clarificationwith respect to antitrust regulations. The an-titrust issue also applies to the feasibility ofjoint industry efforts in traditional R&D activ-ities: there are a number of areas, such as en-ergy conservation and pollution abatement, inwhich the social returns would be sufficientto sanction joint efforts that would not be par-ticularly anticompetitive.

Other Federal Options

There are opportunities for the Govern-ment to coordinate existing Federal R&D anddemonstration programs more closely withthe needs of the domestic steel industry.Large sums are now being allocated to a num-ber of energy-related technologies withoutmuch apparent attention to their possible ap-plication to steelmaking. For example, Feder-al activities in coal gasification and synfuelscould be examined for their ability to supplythe necessary technology for providing gase-ous reductant fuels for direct reduction ofiron ore. Similarly, a systems approach to thecombination of steelmaking with energy gen-eration could lead to low capital costs andhigh efficiencies.

There also appears to have been inade-quate examination of the potential ways inwhich Bureau of Mines facilities, formerlyused for research in steelmaking, could beresurrected for R&D activities and possiblyused for pilot plants as well. The apparentpolicy shift away from joint industry/Govern-ment work and the present Bureau policy ofnot performing ironmaking and steelmakinginvestigations appear to preclude using thismeans to assist in the modernization of thedomestic steel industry. *— — - . —*"One example of the lethargy of the steel industry towardR&D is last April’s shutdown of the experimental blast furnaceat Bruceton, Pa., a cooperative venture involving the Bureau ofMines , and a consortium of private steel companies organizedas Blast Furnace Research, a nonprofit corporation. This fur-nace had been responsible for most of the developments in iron-making in recent years. In the 4 years of its existence, it wascredited with saving the iron industry some $350 million per

Ch. 2—Policy Options ● 45

Scenario Differences

The Liquidation scenario would maintainthe current low levels of Government and in-dustry support for R&D and demonstrationplants. The most likely consequence of thispolicy would be further loss of technologicaland cost competitiveness for the domesticsteel industry. Both the Renewal and High In-vestment scenarios would support more pilotand demonstration testing of new technolo-gies. The High Investment scenario does notdifferentiate between basic and applied re-

search, nor does it specifically consider R&Dpolicies. The Renewal scenario emphasizesnear-term basic research to support long-term innovation, with greater Governmentsupport for R&D. The Renewal scenario alsosees a need for policies to support more in-dustry R&D, coordinated with policies affect-ing capital formation and trade.

Capital Formation

Four Federal policy changes could in-crease capital formation in the domestic steelindustry without sanctioning significant priceincreases:

c reduced capital-recovery periods (accel-erated depreciation),

● investment tax credits,● loan guarantees, and● subsidized interest loans, including in-

dustrial revenue bonds.

Summary information on these four ap-proaches is given in table 10.

Faster Capital Recovery

Accelerated depreciation continues to re-ceive the greatest amount of attention fromboth the steel industry and Congress. TheJones-Conable Capital Cost Recovery Act of1979 (H. R. 4646) typifies the interest in reduc-ing capital-recovery times for all industry. Ifenacted, this proposal would allow steelmak-ing machinery and equipment to be depreci-ated over 5 years instead of the present 15.Because the Act applies to all industries,however, its cost to the Federal Governmentin lost tax revenues would likely be very high.The administration has forecast a net reve-nue loss of $35 billion annually by 1984,

Table 10. —Features of Four Federal Options for Increasing Capital Formation in the Domestic Steel Industry

Federal option

Accelerated depreciationJ o n e s - C o n a b l eCertificate of necessity

Investrnent tax creditIncrease capaciltyModernizationInnovation

Loan guaranteeI n c r e a s e c a p a c i t yModernizationI n n o v a t i o nSubsidized interest loanIncrease capacityModernizationInnovation

SOURCE: Office fo Technology Assessment

G o v e r n m e n t

c o s t

HighModerate

ModerateModerateModerate

S l i g h t

S l i g h t

M o d e r a t e

S l i g h t

S l i g h t

S l i g h t

A d m i n i s t r a t l v e

b u r d e n

LowL o w

LowLowHigh

M o d e r a t e

M o d e r a t e

H i g h

M o d e r a t e

M o d e r a t e

H i g h

Bias against

s m a l l f i r m s

YesYes

NoYesNo

YesYesYes

NoYesNo

P r o m o t i o n o f A p p l i e s t o

n e w t e c h n o l o g y s t e e l m a k i n g o n I y

No NoNo Yes

No YesNo Yes

Yes Yes

Yes YesYes YesYes Yes

No YesNo YesYes Yes


which would rise until 1988 and then stabi-lize, assuming the measure takes effect in1980. ‘

The administration forecasts that by 1984Jones-Conable would give the steel industry atax saving of around 16 percent of projectedinvestment, or some $1 billion for a projectedinvestment of $6.7 billion per year, 4 a levelcorresponding to that of the High Investmentscenario. Based on the Renewal scenario in-vestment of $3 billion per year on productivesteelmaking, the tax saving would amount toapproximately $500 million in 1984, but pre-sumably would rise thereafter. Thus, the lev-el of capital-recovery increase accomplishedthrough the reduction in depreciation timefrom 15 to 5 years is almost the same as the$600 million per year capital deficit projectedin the Renewal scenario.

The Jones-Conable Act has the advantageof creating a relatively low administrativeburden, but it can be criticized on severalother grounds, One is that this approach doesnot promote investment in truly new, high-risk technology. Another is that it does nottake into account the idiosyncrasies of anyparticular industry. For example, this gener-al approach to improving capital formation isbiased in favor of the large integrated steel-maker and against the smaller noninte-grated producers, The integrated companiesalready have a large capital base and coulddirect a large amount toward modernizingtheir facilities. Though they are less profit-able than many small companies, they havelarger absolute profits against which the in-creased tax offset can be applied, For smallercompanies, with smaller capital and profitbases, the increased capital recovery cannotoffset enough taxes for the large investment

“1’[?slimt)ny of G. Willi{~m hfillcr, Sf?creliirv of th[? ‘1’rwlsury,Iwf{)rc the Sutxomrnit tcc 011 ‘1’~ix{~li[)n an(i Wh[ Nf;inagem(?nt of11](? St?n{]tc F’in:)n((? (;(~mmit 1(?(:, ()(:1. 22, 1979. ‘1’he loss is [] fler/in i] ssumd fc[dbil (’k cffc( I t hv w h i(’h some 30 permm t () f thest:l t i(’ r[:vcnuc 10ss is t u rn(?d in I {) ;ldd i t ion;] 1 ttl x rx?m!ipts [)s :1 re-sul t of I ho (x>on{]m i(’ [? x p:) nsion induu?d hy ! he t:) x rt?du(:t ions.

‘j{)r~(:s-(;on:lt)lc; (J{)uld Ic:]d to even ~rc~itt?r ttlx s:]vings. (Jsingthe 5-vt!iI r wril(v)f[ for e(luipmcnt on [In ;l((x;lcri] led tx]sis,coupled wi I h I he c1 ist ing 1 O-percent investrnen t t;] x (Ir[?dit,w [ju 1( I Icii(t to g rc{i t [:r It] R s; I v ings I hti n i f the e(lu ipmen t kvcrct:xp(?ns(xi in th[’ first v[~i] r. (Irorl Age. Nov. 12, 1979, p. 30. )

needed for a rapid rate of growth. That is, ina high-growth situation profits lag behindcapital investment, and thus the faster depre-ciation cannot be fully utilized when it be-comes available. Accelerated depreciation isbiased in favor of a linear rate of capital in-vestment growth. Furthermore, many largesteel companies have nonsteel business thatis more profitable than steelmaking, so theycan write off more profits than smaller, lessdiversified companies. An indirect, but verysubstantial, benefit for the steel industry of ageneral reduction in capital-recovery sched-ules would be the overall national increase incapital spending. Nearly two-thirds of steeluse is for capital projects, so domestic de-mand for steel should be boosted.

An alternate accelerated-depreciation op-tion would be to use a limited-term approachthat would apply to steelmaking investmentonly. This corresponds to the existing certfi-cate-of-necessity reduction in capital-recov-ery periods during times of national emergen-cy. This would place a limit, perhaps 10years, on the time for taking advantage of ac-celerated depreciation, and it would pertainto steelmaking investment only. This optionwould have the same built-in bias againstsmall steel companies, and it would not spe-cifically promote investment in innovativetechnology, Applied to a particularly troubledindustry like steel, however, it could make alarge difference in profitability in the longrun. Hence, the long-term costs to the Govern-ment would be low, because it would morethan recoup in additional taxes whatever themeasure had cost in initial tax losses,

A third option for accelerated depreciationwould be to apply it to certain types of invest-ment in steelmaking, Admittedly, this in-creases the administrative burden and influ-ences the industry’s freedom of choice. Nev-ertheless, criteria could be established for in-vestment objectives such as capacity expan-sion or the adoption of innovative technology,energy-saving technology, and technologymaking greater use of abundant domesticresources.

Ch. 2—Policy OptIons ● 4 7

Investment Tax Credits

Investment tax credits are another tax ap-proach to increasing capital formation, Gen-eral investment tax credits have proven ef-fective in raising the Nation’s investmentrate, and more narrowly focused tax creditshave also been recognized as a useful meansto accomplish specific aims like conservingenergy. For the steel industry, several typesof investment tax credits are possible, includ-ing credits for increasing capacity, mod-ernizing facilities, or introducing innovativetechnology (see table 10). Focused tax creditswould cost the Government less than generalones.

Clearly, the innovation option could beused to promote investment in new technol-ogy, although defining such activities wouldbe a substantial administrative burden. Agreater credit might be offered for high-riskinnovative activities. The modernization op-tion would be more advantageous to large in-tegrated companies than to smaller compa-nies with a smaller capital base, but creditsfor capacity increases and adoption of inno-vat ive technology would be less biasedagainst sma11 companies than the acceler-a ted-depreciation option. Under current pro-cedures, however, credits cannot be takenuntil the investment project operates, so itcould still be difficult for companies with highdebt-to-equity ratios to obtain capital.

A further advantage of tax credits overaccelerated depreciation is that they couldmore easily be designed to accomplish thespecific goals Congress deems most relevantto improving capital formation in the steel in-dustry: however, they would be more difficultto administer. Industry clearly prefers theJones-Conable approach, which providesmaximum flexibility to industry to use addi-tional capital for whatever purposes i tchooses, Companies could even choose to di-versify out of steelmaking and realize a taxadvantage from diversification.

Guaranteed Loans

The third major option for increasing capi-tal formation in the steel industry is the loanguarantee. Unlike tax approaches, whichshift revenues from the Government back tothe private sector and have little advantagefor low-profit industries, loan guaranteesplace the burden of capital supply on theprivate money market and better meet theneeds of less profitable companies. More-over, a loan guarantee enables companieswho would otherwise have trouble obtainingreasonable loans, if any at all, to borrowcapital at low interest rates. In this respect, itfavors the less profitable steel companiesover more profitable ones; in the context ofsteel, that would amount to a bias against thesmall, profitable nonintegrated and alloy/spe-cialty companies.

The costs to the Government of a loan guar-antee are slight (assuming no defaults), be-cause borrowers pay a small interest fee tothe Government. Loan guarantees can easilybe designed to apply to steelmaking only and,defined in terms of specific objectives, couldbe aimed at the objects of particular congress-ional concern. Even nonspecific industryloans would promote the introduction of inno-vative technologies, however, because theGovernment shares the risk of failure.

EDA Special Steel Program.—The adminis-tration established a loan guarantee programfor the steel industry in 1977, under EDA ofthe Department of Commerce. This program,which is just now ending, did not focus on theadoption and development of new technolo-gies, and it has been criticized by a number ofsteelmaker because of its orientation towardhelping unsuccessful companies.

The EDA special steel program was estab-lished in response to recommendations by the1977 Interagency Steel Task Force. Its pur-pose is to help improve the efficiency andcompetitiveness of financially troubled steelcompanies. The task force stated that:

The use of EDA loan guarantees (would be)the simplest and most direct way to assurethat viable modernization projects of (eligi-

48 Technology and Steel Industry Competltlveness

ble) firms actually receive the funds neces-sary for their completion. f

The program has no mandate to promote in-novative technology; its primary objective isto stabilize or increase employment levels incertain designated areas, *

The EDA program represents a substantialamount of Government assistance. Neverthe-less, its funding level of slightly more than$500 million is modest compared to steel in-dustry capital investment needs. At the pres-ent time, the Department of Commerce has noplans to extend or expand the EDA steel loanguarantee program: to do so would require aspecific budget request and congressional ap-propriation, and no such special request wasincluded in the administration’s proposedbudget.

During its year of operation, the specialsteel program has had mixed results. Imple-mentation has been slow, in part because ofindustry concerns about the program’s possi-ble anticompetitive effects in the market-place. Section 702 of the Public Works andEconomic Development Act prohibits EDAfrom providing assistance to companies ifthat assistance might lead to unfair competi-tion in the marketplace. Unfair competitioncould be brought about if Government-sup-ported corporate investments in new technol-ogies gave the assisted firms an undue cost orprice advantage, As a result, the program hasnot encouraged industry to adopt innovativetechnologies: instead, it has emphasized pol-lution control equipment and incremental im-provements in existing facilities and conven-tional technologies.

On the whole, the program can be best de-scribed as one of tradition-oriented renewal

‘Intcr[]gency Task F[)rcc, ~c~)ort to the Presi(ien t: A (;(mpr[~-hrns]ve Pr(~gram for the Stw~l ]nd[lstry. 1977, p. 12.

*’I’ht; program gu:]rt]nt[?cs I():]ns nnd leases fln;lnced bv pri-v{) te lending institutions i) t f;ivornble int(?rest rt+tes to SIC 3312firms ulth f:i(ilities hi]vlng ;]n [~nnual production (:iparltv of at1(’:~st 2 2 5 , 0 0 0 tonnes o f raw s tee l . I’he m i n i m u m capacitv rc?-

qu i remen t e] im intl t(’s :i numtwr of min imllls. I!] igible firms hai’eto l)t~ 1[)(’[i ted in rcd[?v(?lopmt?nt a re;ls with [In un(?mplo}rnentr{l tc of ~1 t 1(:, ist 6 p(?rr[?nt, or In spe(’i:]l imp[i(t ,~ re[+s havin~(!I t her substantial unemployment iw :]n i](’tui~ I or thren tenediibrupt rise in un(’mpl[)ym[?nt du[? to the cl(wing or curt: ]ilm[>ntof,} malor sourf’[? [)f (?mplo~”m(?nt. [ 1,) (;F’R pt~rts .10’2-304, )

aimed at responding to contemporary eco-nomic and environmental problems. Thisshould come as no surprise. The umbrella Of-fice for Business Development Assistance,itself, does not have a “modernization’” man-date. Furthermore, the Interagency SteelTask Force recommendations, and particu-larly the implementing guidelines, make itquite clear that genuine modernization cannever play more than a limited role in thespecial steel program.

Loan Guarantees—A Summary.—It wouldbe desirable to examine the benefits of a lim-ited-term loan guarantee program that wouldrequire: 1) evidence of the company’s inabili-ty to raise capital through any conventionalmeans, including new stock issues; 2) a de-gree of risk and innovation that is propor-tional to relative profitability, so that suc-cessful firms would be encouraged to developrisky, long-range, major innovations, whilestill allowing the less profitable firms to sharein the Federal assistance program; and 3)commitments to delay diversification out ofsteelmaking until companies meet certain mu-tually agreed-on objectives for such factorsas capacity, productivity, energy use, or pol-lution abatement. This approach, thoughcomplex, would least disturb the relativecompetitiveness of domestic companies,while providing a means of restoring domes-tic steelmaking capacity and technologicalleadership compared to foreign industries.

Subsidized Interest Loans

The fourth major option for increasing cap-ital formation is the use of subsidized interestloans, including industrial developmentbonds, which could be designed for specificpurposes. Like loan guarantees, this ap-proach places the financing burden on theprivate money market and costs the Govern-ment a relatively modest amount. Here too, tothe extent that this approach increases theborrowing ability of unprofitable companies,it is biased against those that are profitableor have not reached a debt-to-equity ratio pri-vate lenders consider the upper limit for bor-rowing,


Considering the level of capital shortfallunder the Renewal and High Investment sce-narios, loan guarantees or subsidized interestloans might not be well received by the pri-vate financial sector. The increased burdenon the private money market could be infla-tionary. However, the same argument can bemade for accelerated depreciation and in-vestment tax credits, which lead to reducedGovernment revenues and, under the assump-tion of unaffected Government spending lev-els, increased Government borrowing. Loanguarantees and subsidized loans bypass thenormal budget process, because they are notexpenditures and do not cause losses in taxrevenues.

Summary of Capital Formation Options

In summary, all four of these approachesto improve capital formation within the do-mestic steel industry involve costs and bene-fits. Quantifying them for the near and longterms would require considerable analysis.Qualitatively, OTA finds that focused invest-ment tax credits, or accelerated depreciationfor capacity expansion and technological in-novation, or risk-related loan guaranteescould be used to raise the capital called for inthe Renewal scenario. The additional capitalrequired by the High Investment scenariowould have been raised through steel priceincreases. There is a minimal risk in these op-tions that capital will be used for purposesthat would not address congressional con-cerns and that would have adverse impactson small steel companies. The costs and diffi-culties of administering focused Federal as-sistance would be significant, but not insur-mountable. Helping already healthy compa-nies is best done through tax relief programs,The near-term direct costs of any of theseprograms would likely be offset by increasedtax revenues after the rejuvenation of the do-mestic industry.


The Liquidation scenario would extendpresent policies and capital spending on pro-ductive steelmaking facilities would continue

to decline, which would lead to further loss ofcapacity and increased obsolescence of facil-ities, The High Investment scenario is basedon obtaining the benefits of the accelerateddepreciation for facilities and a substantialincrease in steel prices in order to maximizenear-term investment in current technology.The Renewal scenario is dependent on policychanges that would generate at least $600million annually; it considers a number ofpolicy options that could accomplish this goal,but would be best accomplished by those op-tions that assist modernization and expansionof steelmaker that are profitable. The Re-newal scenario also favors policy changesthat promote technological innovation in thelong term and relatively low investment incurrent technology in the near term.

Regulatory Compliance Costs

The steel industry is one of the largestsources of pollution in the Nation, with the in-tegrated steelmaker accounting for close toone-fifth of all domestic industrial pollution.The industry also has very high rates of oc-cupational injury and illness. The harmfuland toxic emissions of steel plants are agreater hazard for steelworkers than the gen-eral population. Consequently, the Federaland State governments have created a num-ber of regulations to protect both workersand the public. There can be no argumentagainst the goals of reducing environmentalpollution and occupational risks; however,the impact of these regulations on the crea-tion and adoption of new technology meritsexamination. Regulations can act as either abarrier or an incentive to innovation, Whileindustry has tended to emphasize the barriereffect, there are opportunities for the regula-tions to serve as incentives for technologicalinnovation. Because of the nature of thisstudy, the impact of regulations on the steelindustry has been emphasized; but this doesnot mean that the impact of pollution on work-ers and the general public is thought unim-portant.

Complying with Federal environmentaland, to a lesser extent, occupational hazard

50 . Technology and Steel Industry Competitveness

regulations has imposed additional capitaland operating cost demands on the steel in-dustry. These promise to increase because ofmore stringent requirements that will becomeeffective during the coming years. Further-more, EPA is in the process of reviewing Am-bient Air Quality Standards and steel indus-try effluent guidelines, And finally, the num-ber of EPA and OSHA regulations applicableto the steel industry is steadily increasing.

States and regions have some flexibility inconsidering economic and technical con-straints facing individual steel plants. How-ever, industrywide changes would requireFederal action, The trend of increasing regu-latory costs may be hal ted or reversedthrough changes in regulatory policies orthrough increased Federal support of steel in-dustry efforts to meet current standards. Inaddition to reducing the regulatory costs,some available options could also foster re-placement or expansion of steel capacity, Themajor options for changes in regulatorypolicies are:

●

●

●

●

●

●

●

●

congressional endorsement of the “bub-ble concept, ” which allows air qualitycontrol on a plant rather than a point-by-point basis:more even distribution among differentindustries of the cost of offset policytradeoff requirements;relaxation of the limited-life facilitiespolicy for plants owned by companiescommitted to replacing faci l i t ies orotherwise providing for regional eco-nomic growth:relaxation of fugitive air emissions re-quirements;use of administrative penalty paymentsfor environmental technology R&D fund;improved coordination of OSHA compli-ance deadline when a company is con-sidering innovation;improved coordination of EPA innova-tion waivers; andcost-benefit analysis of major proposedregulations.

The major options for increased Federal sup-port

●

●

●

●

●

are:

additional acceleration of the deprecia-tion schedule for pollution abatementequipment;*increased investment tax credit for pol-lution abatement equipment;loan guarantees, provided on a continu-ing basis;extension of industr ial developmentbonds to cover in-process changes; andincreased regulatory technology R&Dand demonstration.

Regulatory Change

Regulatory cost impacts would be reducedunder both sets of options, but changing en-forcement approaches would not affect di-rect Federal costs. A few of the changescould also promote new regulatory technolo-gies or facilitate replacement or moderniza-tion (table 11). Small integrated companieswould benefit from such policy changes morethan other industry segments.

Congressional endorsement of the bubbleconcept, which allows pollution offsets withina plant, would improve EPA’s ability to applythis approach across the board to existingand replacement facilities. By varying thedegree of control with the costs involved forindividual point sources while still attainingair performance standards on a plant basis,companies could reduce their compliancecosts by 5 to 20 percent (see ch. 11). However,the tradeoff between more and less hazard-ous pollutants within a bubble area requiresassessment.

The offset policy requires that companiesadding new, polluting plant capacity in agiven geographical area offset that additionto the area’s pollution by reducing pollutionfrom another facility in the same area. Be-cause of the steel industry’s complex industri-

*Suggestions also have been made to eliminate the sales taxon pollution abatement equipment. Such changes would have tobe made at the State level.


Table 11. — Regulatory Change: Policy Options and Consequences

Regulatory change

Bubble concept

Distributing cost of tradeoffrequirements (offset policy)

Extension of limited-life facilitiespolicy while replacing steelfacilities or otherwise providingfor regional economic growth

Fugitive emissions

Use of administrative penaltypayments for environmentaltechnology R&D fund

Improved coordination of OSHAcompliance deadlines

Improved coordination of EPAinnovation waivers

Cost/benefit analysis

NA - not applicable

—.Promotion of

Social impacta new technology

Modest

None; increased equity amongexpanding firms innonattainment areas

Modest; at least partially offsetby strengthening regionaleconomy

High

None, but goal change in favorof R&D

Modest

Modest

Varies with cost-benefittradeoff

Yes

No

Yes

No

Yes

Yes, if given ascondition for

extendeddeadlines

Yes

No

Regulatorycost impact

Reduction

Reduct

Reduct

ion

ion

Slow downgrowth rate

Transfer of costs

None

None

P o t e n t i a l

r e d u c t i o n

Capacity

FaciIitatesreplacement

Facilitatesexpansion

Replacement/expansion

NA

NA

NA

NA

NA

aSocial impact is defined as Increased environmental degradation or occupational risk resulting from regulatory relaxation


al processes, it has paid a disproportionatelyhigh price (compared to many other indus-tries) for economic growth and capacity ex-pansion in industrialized areas. Redistribut-ing the “purchase cost” of emission offsetscould help improve the steel industry’s unfa-vorable compliance cost position. The Depart-ment of Energy’s (DOE) energy entitlementprogram, aimed at equalizing the cost of ex-pensive imported oil among domestic refin-ers, is one approach that could be consid-ered.

The limited-life facilities policyphaseout of marginal facilities byless they have been retrofittedment equipment. Relaxation of

calls for the1982-83 un-with abate-this policy

would enable steel companies to benefit froman extended period of continued operation.This approach could coupled with replace-ment, modernization, and expansion pro-grams, perhaps at other plants.

Relaxation of fugitive air emission stand-ards regulating conventional pollutants fromsteel plants would help slow down antici-pated increases in compliance costs (see ch.11), Such relaxation could put undue pres-sure on regional air quality, however, and in-hibit economic growth potential as a result.Relaxation of standards or compliance datescould be especially problematic in heavilypolluted regions of the country.

Administrative penalty payments made bythe steel industry for noncompliance with en-vironmental regulations are presently re-ceived by the U.S. Treasury. These fundscould be used for public- or private-sectorregulatory technology RD&D in presently un-derfunded fields such as research on innova-tive process or control technologies capableof improved protection or regulatory cost re-duction.

OSHA compliance schedules and deadlineslack uniformity and are inconsistent in their


consideration of industry economics andtechnology development. EPA innovationwaivers for air and water also lack uniformi-ty. Improved coordination could encouragethe industry to make use of innovation waiv-ers and technology development provisions.

A cost-benefit requirement for major regu-latory policies could help clarify the tradeoffbetween the economic costs and the socialbenefits by placing the economic impacts in abroader social framework, To the extent thatit is difficult to quantify the social benefits ofregulations, such an approach may not befeasible.

Increased Federal Support

Some options, if applied without any ac-companying regulatory relaxation, would in-crease Federal costs in varying degrees. Reg-ulatory costs would be reduced in all cases,and new regulatory technologies would bepromoted in a few cases (table 12), Capacitywould not be affected by any of these policyoptions, except to the degree that they im-prove capital formation. These options wouldindirectly tend to benefit small integratedcompanies more than any other industry seg-ment because of those companies’ proportion-ately greater regulatory costs.

Industrial development revenue bond (IDB)financing is presently a more attractive op-tion for pollution abatement equipment thanis the use of available fiscal incentives. IDBfinancing makes large sums of capital avail-able to industry at relatively low cost to theTreasury. Thus, one option would be to ex-pand the scope of IDB financing to includespecif ical ly the f inancing of in-process

changes for environmental compliance pur-poses whether or not there are cost savings.However, increased use of IDBs would in-crease pressure on the municipal bond mar-ket, which could inhibit capital projects forlocal governments.

As an alternative, some IDB financingcould be replaced by a continuing flow of fed-erally guaranteed loans or by more effectivefiscal incentives. Fiscal incentives could in-clude allowing higher investment tax creditsfor regulatory investments (currently 10 per-cent) or further reducing the accelerated de-preciation schedule for regulatory compli-ance equipment (from the present 5 years toperhaps 1 year). Fiscal options would likelyentail higher Federal costs than either in-creased IDB or federally guaranteed loan fi-nancing.

RD&D of innovative regulatory technolo-gies and cleaner steelmaking technologies arenot receiving sufficient public- and private-sector support. Consideration should be givento a strengthened program to increase directFederal cost-sharing support of regulatorytechnology RD&D not readily undertaken bythe steel industry.


The Liquidation scenario assumes a contin-uation of current policies—continued strictenforcement of existing laws and standards.The likely effect would be a moderate in-crease in capital spending and productioncosts related to EPA and OSHA regulations,which would influence the profitability of do-mestic steelmaker. For those f irms witholder, inefficient facilities, this could contrib-

Table 12.—increased Federal Support for Regulatory Compliance and R&D: Policy Options and Consequences—

Promotion ofIncreased Federal support Federal cost new technology Regulatory cost impacts—Improved accelerated depreciation High No, unless specified ReductionIncreased investment tax credit Modest No, unless specified ReductionLoan guarantees Modest No ReductionExtend IDB coverage for regulatory equipment M o d e s t . p r e s s u r e o n Y e s I m p r o v e s c a p i t a l

to in-process change municipal bond markets availability yIncreased Federal regulatory technology R&D Modest Yes Reduction

SOURCE: Office of Technology Assessment

Ch. 2—Policy Options 53

ute to plant closings and a further loss of do-mestic capacity. The High Investment and Re-newal scenarios both make use of the cost-benefit approach to determine the extent towhich the social goals of EPA and OSHA reg-ulations are also consistent with the goalsand needs of industry modernization and ex-pansion. The Renewal scenario provides amore thorough examination of policy optionsthat would reconcile industry and nationalneeds, with particular attention to the need topromote technology change and innovationleading to cleaner steelmaking technologies.

Raw Materials

Potential future shortages of coke and fer-rous scrap have raised the general problemof inadequate data and analysis of such sup-ply problems. In the cases of coke and scrap,the Government has had to rely on limiteddata from different segments of industry. Be-cause of differing interests in the problem,there are contradictory findings concerningfuture domestic supplies. This uncertainty isacting as an incentive for the development ofDR and other technologies. Existing legisla-tion relating to ferrous scrap affects both de-mand and supply, but not necessarily in acons is tent manner.

Scrap Use

On the demand side, two legislative actshave been passed that attempt to maximizethe use of scrap and other waste sources ofiron genera ted in steel plants. The require-ments of the two acts may he summarized asfollows:

● Section 461 of the National Energy Con-scrvation Policy Act (Public Law 95-619)of 1978 mandates that DOE set targetsfor the use of recovered materials forthe entire ferrous industry —ironmakersand steelmaker, foundries, and ferro-alloy producers. Such targets, now set,are voluntary, but steel producers areconcerned that they might become man-datory.

● Section 6002 of the Resource Conser-vation and Recovery Act (Public Law 94-

580) of 1976 amends the Solid WasteDisposal Act and deals with Governmentprocurement, It requires that Govern-ment procuring agencies shall procureitems composed of the highest percent-age of recovered materials practicable,and it instructs the EPA Administratorto promulgate guidelines for the use ofprocuring agencies in carrying out thisrequirement. It also requires suppliersto the Government to certify the percent-age of recovered materials used in theitems sold. As yet, EPA has not set theseguidelines, nor has it proposed a sched-ule.

Although instigated by the scrap industry,these acts have satisfied neither scrap usersnor suppliers, Users believe that targets orguidelines for scrap use do not make econom-ic or technical sense on an industrywide ba-sis, and suppliers believe that the Govern-ment targets have been too conservative.OTA finds both are correct.

Although it is in the national interest tomaximize the use of recovered materials inorder to save energy, the setting of scrap-usetargets or guidelines presents a number ofproblems; it may not be technically or eco-nomically feasible in all cases to use recov-ered materials to the extent suggested or re-quired by the Government. There has been noapparent recognition by DOE and EPA of thedifferences between steel industry segmentsand the unique constraints and opportunitiesthey have in regard to scrap use. Anotherproblem is that a numerical target rests onmany assumptions about future scrap avail-ability and use, as well as total steel demandand changes in technology, all of which arehighly controversial in themselves.

Targets could, in fact, be counterproduc-tive to the original goals of maximizing recov-ered materials use and saving energy, ‘Unre-alistic targets could be circumvented, for ex-ample, by companies selling their home scrapto others and purchasing other firms’ homescrap.* If targets and guidelines increase de-— . — . —

* This could be a paper transaction unless prohibited by the target legislation since physical transport of scrap would becostly in most cases. See ch. 7 for a full discussion of futuresupply, demand, and uses of scrap.


mand for scrap, and thereby raise prices, theimpact on nonintegrated companies would bemuch worse than on integrated steelmaker;if this led to a decrease in nonintegrated out-put, it could result in even less total scrapuse. Technically and economically, it wouldbe extremely difficult for integrated steel-maker to increase substantially their use ofrecovered materials in existing facilities; andif they modified their equipment to use morescrap in basic oxygen furnaces, they wouldprobably use more oil or natural gas as well.Targets and guidelines are irrelevant forelectric furnace steelmaking; this processpresently uses nothing but scrap.

With the advent of DR and the availabilityof DRI, a technology that may offer benefitsfor both the industry and the Nation (see ch.6), electric furnace steelmaker could useless scrap. Hence, targets or guidelines couldactually discourage the introduction of DR.Even though the percentage of scrap used perunit of output would decrease in electric fur-nace shops using DRI, it can be argued thatthe use of DRI in conjunction with scrapwould promote an expansion of electric fur-nace steelmaking, with the net result that thetotal use of purchase scrap would increase.

Is it necessary for the Government to setany targets or guidelines for ferrous scrapuse? OTA finds no compelling reason to leg-islate broad goals for the industry. The eco-nomic advantages of using scrap have beensufficient incentive to increase scrap use,especially by the nonintegrated producerswho rely solely on ferrous scrap. Even the in-tegrated companies have changed their atti-tudes and recognized the economic benefitsof maximizing their use of scrap to the degreetheir facilities and capital permit. A moredirect and fruitful approach to increasingdomestic use of domestic scrap would be toprovide a financial incentive for adoptingscrap-using processes. For example, a specialinvestment tax credit could be offered foradoption of equipment that allows an existingplant to use more scrap. Because scrap is em-bodied energy, it might only be necessary toredefine some terms to qualify such equip-

ment for special energy conservament tax credits.

Ferrous Scrap Exports

tion invest-

Perhaps the most critical area for policyanalysis is the issue of ferrous scrap exports-.Domestic steelmaker are uncertain about fu-ture scrap supply and maintain that exportsgreatly influence domestic prices. The scrapindustry favors free export of scrap. It con-tends that there is sufficient domestic scrapfor export, that more scrap becomes avail-able as market forces increase prices, andthat historically the integrated steel pro-ducers have not attempted to maximize theiruse of scrap, To some extent the latter hasbeen true, although the situation appears tobe changing.

The importance of examining policies af-fecting the supply and demand for ferrousscrap is shown by data demonstrating the in-flationary effect of scrap on steel prices. Dur-ing the past 2 years, when scrap exports havereached very high levels, so too have scrapprices, The increase in the producer price in-dex for ferrous scrap from 1977 to 1979 was52 percent, compared to increases of 21 per-cent for labor, 6 percent for metallurgicalcoal, 16 percent for iron ore pellets, 18 per-cent for electrical power, and 33 percent forfuel oil. For the same period the price in-crease for the entire steel mill product mixwas 21 percent, but the price for reinforcingbars (which unlike the other products aremade entirely from scrap) rose 37 percent.Available data point to direct relationshipsbetween scrap exports and domestic scrapprices and between scrap prices and finishedsteel prices.

Scrap exports make a positive but relative-ly small contribution to the Nation’s tradebalance; for 1979, they equaled only about 15percent of the net steel-related trade deficit.By exporting scrap, moreover, a valuablesource of both iron and embodied energy[about 17 million Btu/tonne) is being exported.The more scrap used domestically, the lessenergy, time, money, and labor will be ex-


pended to mine, process, and reduce iron ore.When scrap is exported, these savings are re-alized instead by foreign steelmaker, whosegovernment-subsidized steels then return tocompete in the domestic market. To the ex-tent that steel and steel-intensive productsare imported, such as automobiles, the Na-tion may eventually add to the domestic scrapsupply at the expense of that in steel-export-ing nations, like Japan; at present, however,these nations are able to buy back their scrapfrom the United States. These scrap exportscause the domestic price of scrap to rise, giv-ing foreign producers a net price advantagebecause of the devalued dollar and their in-herently greater energy costs.

Present-day steelmaking processes usemore scrap and produce less, than did previ-ous methods. Steelmaker are becoming moredependent on purchased scrap, which is de-clining in quality. The domestic demand forscrap is so great, and increasing so rapidly,that the scrap industry may have no long-range economic need to export; it is even pos-sible that a domestic shortage of ferrousscrap may develop during the next decadeunless DRI becomes available. Perhaps themost significant long-range consequence ofcontinued scrap export is the possible detri-mental impact on the nonintegrated steel pro-ducers, who depend on electric furnace steel-making. If formal or informal Governmentprice controls on steel cannot be releasedquickly enough to offset quickly rising scrapprices, these companies may be caught in acost-price squeeze that could drive them outof the market. This impact is particularlyacute now, when DR is in the early stages ofdomestic introduction and DRI is not yet read-ily available as an import.

The Export Administration Act of 1979 of-fers a means for monitoring and controllingscrap exports. To the extent that substantialmarket imperfections exist as a result of U.S.and foreign government policies, interferencewith free trade can be rationalized. The long-range consequences of permitting unlimitedexports of scrap for the competitiveness ofthe domestic steel industry are sufficiently

serious to warrant responsible implementa-tions of the Export Administration Act. Thewelfare of the domestic scrap industry mustalso be considered, however, and to this endany limits placed on scrap exports could, inthe near term, be balanced by appropriateFederal incentives for increased domestic useof scrap by, for example, special investmenttax credits for the adoption of continuouscasting and certain modifications to steel-making furnaces.


The Liquidation scenario implies a continu-ation of existing policies with regard to fer-rous scrap, resulting in continued problemsdue to uncertainty about future supply anddemand. Moreover, policies related to scrapcould remain controversial and to a large ex-tent contradictory. There is particular needto balance control of scrap exports with pro-motion of domestic scrap use. The High In-vestment scenario allows market forces to de-termine raw material supply and demand anddoes not deal with specific policy changes.The Renewal scenario emphasizes better co-ordination, which would include examinationof policy changes that link incentives for in-creased domestic use of ferrous scrap withappropriate monitoring and, if needed, con-trol of scrap exports. The Renewal scenarioalso supports DR technology, which would of-fer a substitute to ferrous scrap in electricfurnace steelmaking in the future.

Trade

Although worldwide trade in steel is notthe central focus of OTA’s study, certain as-pects of that trade do affect technologicallevels in the industry. OTA has addressedtwo of these aspects:

● the impacts of the new Multi lateralTrade Agreement* on the export of tech-nology-intensive alloy/specialty steels,and

*This new international trade treatv. signed by most of theindustrialized and increasing numbers of Third World nations,promotes trade under equitable, competitive conditions.

56 ● Technology and Steel Industry Competetiveness

s the impact of uncertain levels of steel im-ports on investment decisions relating tomodernization, capacity expansion, andinnovation.

Vigorous enforcement of the MultilateralTrade Agreement, which will govern much ofthe world’s trade and other domestic tradelaws and policies, such as the trigger-pricemechanism, * is necessary but not sufficientfor bringing about a revitalization of the do-mestic steel industry. Lax enforcement, how-ever, is sufficient to perpetuate presenttrends and to assure the slow but inevitabledemise of much of the industry.

Even if the new trade agreement is vigor-ously enforced by the United States and itstrading partners, it could do little to solve thefundamental problems of the domestic steelindustry. At best, there would be an uncer-tain amount of decline in imports and an in-crease in exports. The most important benefitof an effective trade agreement would be toreduce domestic steelmaker’ uncertaintyabout both their potent ial for capturinggrowth in domestic demand and their re-wards for long-term investments in technol-ogy, If the new trade agreement is not vigor-ously enforced, other policy changes aidingthe industry could be nullified by surges inunfairly traded imports, or by the producers’fear of such surges.

Of the issues related to the MultilateralTrade Agreement, the subsidy issue is themost critical. Domestic steel producers haveexpressed concern that the definitions andimplementation of the subsidy provisions willresult in increased penetration of the domes-tic market by imports at prices kept low byforeign government subsidies of their steelproducers, According to C. William Verity,Chairman of Armco.

The steel industry’s other major concernhas been about the effect of the negotiationson our domestic laws governing internationaltrade. We’re specifically concerned that theinternational codes on subsidies and coun-

*This procedure attempts to detect dumped steel quickly bysetting a price below which imports are examined for dumping,

tervailing duties and anti-dumping, and thelegislation necessary to implement thesecodes, could weaken our present statutorydefenses against dumped, subsidized orotherwise damaging imports—thus making itmore difficult for American manufacturersto obtain relief from unfair or injurious im-ports.’

The proposed process to establish whether asubsidy is illegal is complex:

The (subsidies) Code provides for tworoutes (or tracks) of redress for parties whoclaim they are being injured by foreign sub-sidy practices or claim that their interna-tional trading interests are being prejudicedby the payment of foreign subsidies in viola-tion of the Code’s obligations. The first trackis domestic action intended to prevent injuryto national industries through the traditionalmeans of countervailing duties. The secondtrack provides a multilateral mechanismthrough which signatory countries can en-force their rights under the Code. The secondtrack would be used, for example, when acountry is losing a share of a third-countrymarket to subsidized exports from anothersignatory country.“7

This issue arises because, increasingly,most industrialized countries are subsidizingtheir exports by providing loans, loan guaran-tees, interest subsidies, and related assist-ance to exporters. A recent report by the Con-gressional Research Service provides a com-prehensive summary of such subsidies.” Inbrief, the programs of major exporting coun-tries are as follows:

s France. The report judged that theFrench “have the broadest and mostconfessional’ program. Private bankscan make medium-term, fixed-interest-r a t e expor t l oans and then bor rowagainst such loans under “attractive re-financing arrangements” at the Frenchcentral bank. In addition, the govern-

‘ (1. Willi[]rn \~eritV, “1nternF]ti0n(]1 ‘1’ri;de P[ict—steel”s\Tlf;~,,‘‘ Trade Negotktiun Panel. AISI Press Cmference, !Wiy1979.

*"Wrapping Up the MTN Package. ” Business Amcrica, Apr.23, 1979, pp. 4-5.

(i{~ongre~sjona 1 Reset] r~h Service, F:xpor ! S tim UIU ti(~n Pr(~-

grums in the M(]jor [ndustri(ll Ckun tries, U’ashington, LI. c.,1979.


ment provides direct loans to finance upto 85 percent of long-term (over 7 years)loans. Exporters can also often obtainforeign-aid loans with 3-percent interestrates and 25-year repayment periods forsome shipments to developing countries.Finally, the government offers insuranceto protect exporters against politicalrisks and the impact that inflation or ex-change rate changes could have on theircosts.

“ Japan. The Japanese Export-Import Bankoffers direct credit for about half thevalue of exports financed with medium-and long-term loans; the interest rates (6to 9 percent) are close to market rates.The Japanese also mix foreign-aid credit[with interest rates of 4 to 6.75 percentand maturities up to 25 years) with nor-mal export loans and guarantee privatebanks against losses on export loans.

● Great Britain. The Export Credit Guar-antee Department (ECGD) provides sub-sidies on private bank loans to export-ers; that is, the private bank makes afixed-interest-rate loan at below-marketrates, and the ECGD makes up the differ-ence. The ECGD provides such subsidiesnot only in pounds but also in other cur-rencies, including the dollar. It also pro-vides insurance and guarantees againstlosses on export loans.

● Italy. “On paper, ” the report says, “theItalians have a highly confessional ex-port financing system, but in practicethe actual level of government support islimited by budget shortages in the ad-ministering agencies, ” The Italians pro-vide interest-rate subsidies for privatebank loans as well as insurance againstexport loan losses; in 1976, however,only about 9 percent of Italy’s exportsbenefited from insurance protection.

● West Germany. Most export financing ishandled privately through a consortiumof private banks, but some medium-termcredits (generally 2 to 5 years) can berefinanced through the central bank. Agovernment agencypercent of long-term

provides up to 45export loans to de-

veloping countries, and Hermes, a pri-vate company supervised by the govern-ment, writes insurance and guaranteepolicies.Ne ther lands and Swi tze r l and . Bo thcountries leave export financing largelyto private banks, although the Dutchhave a small program that allows exportloans to be refinanced at the centralbank and the Swiss Government writesexport insurance. In 1976, however, onlyabout 9 percent of Switzerland’s exportsused this insurance.

In the past, the United States’ attempts tosubsidize exports have been relatively lim-ited. Recently, there has been significantchange in this policy by the Export-ImportBank of the United States (Eximbank).’ Insummary,

The Eximbank offers both direct loans andprotection against losses on private loans.Through the Foreign Credit Insurance Corpo-ration (FCIA, a consortium of the Eximbankand private insurance companies), it offersinsurance for U.S. exporters that financetheir own overseas sales; if the foreign buyerdoesn’t meet its payments, the insurance willcover the exporter’s losses. There’s a similarguarantee program for banks if the foreignbuyer doesn’t repay the loan, the Eximbankmakes up the loss. Banks can also discountloans at the Eximbank; that is, they can bor-row at the Eximbank against one of their ownexport loans. And finally, there are directloans, which the Eximbank makes either toforeign buyers or foreign banks.

Eximbank’s role in providing export sup-port has been increasingly significant in re-cent years. In the fall of 1979, its outstandingcommitments were about $27 billion, butthese were concentrated in only a few manu-facturing sectors of the economy: power-plants—$7 billion; civilian aircraft—$6 bil-lion; and heavy industry—$5 billion. The do-mestic steel industry has had no support fromthe increased Eximbank activities.

‘%ee: Robert J. Samuelson, “The Export Credit SubsidyGame—If You Can’t Lick ‘em, Join “em,”” Nutional Journal. Apr.14, 1979, PP. 597-602.

.- i



Since there is so much going on at presentin the trade policy area, it is difficult to tellwhat the Liquidation scenario (based on con-tinuation of existing policies) implies in thisarea. The main problem has been the uncer-tainty domestic steelmaker face with re-spect to future imports of steel. Vigorous en-forcement of the new Multilateral TradeAgreement could remedy this uncertainty;

both the Renewal and High Investment sce-narios require such enforcement, as well asother trade policies that promote greater cer-tainty about steel imports in order to makecapital investments rational, but this is not anarea that the OTA analysis has dealt with indetail. The Renewal scenario places some ad-ditional emphasis on the potential for in-creased exports of the high-technology steelsin which the United States already has tech-nological and cost competitiveness.

Foreign Government Policies Toward Steel Industries

It is not within the scope of this study togive an exhaustive review and analysis of for-eign government policies toward their steelindustries. However, it is clear that othergovernments have played a very large role inthe international steel market and that theirpolicies tend to be better coordinated thanare U.S. policies.

Table 13 uses eight general factors to rankrelations between government and industry infour geopolitical regions. Japan emerges ashaving the most beneficial policies toward itssteel industry; following Japan, but with lessdifference among them, are Third World na-tions, the European Community, and theUnited States. The ranking system uses theperspective of industry and what would bemost desirable from the corporate viewpoint

toward maximizing management’s freedom ofchoice, minimizing costs, and maximizingprofits.

International Comparison ofCost Recovery Allowances

Table 14 presents a more specific interna-tional comparison of capital cost recovery al-lowances for major steel-producing coun-tries. The table includes all special allow-ances, investment credits, grants, and deduc-tions generally permitted in each country; re-gional incentives, if any, have been excluded.

The data presented in the first column,“representative cost recovery period, ” referto the total number of years required to re-cover 100 percent of the cost of an asset, in-

Table 13.—Ranking of Factors for Government-Steel Industry Relations

Factor — United States EEC ‘Japan Third WorldStature of steel industry. . . . . . . . . . . . . . . . .~-. . . . . . . . . . . . . . .

— .1 2 3 3

Good Government/industry relationship(adversarial v. cooperative). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 3 3

Minimum Government involvement in steelmaking decisions. 3 2 3 1Government protection of domestic steel markets. . . . . . . . . . . 2 3 3 3Availability of emergency funds . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 3 3Government support R&D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 3 1Producer’s pricing freedom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2 3Low pollution abatement requirements . . . . . . . . . . . . . . . . . . . . 1 1 1 3Ability to lay off workers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2 1 1

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 18 23 19

NOTE Ranking has been interpreted from the perspective of what IS desirable from Industry viewpoint, with the highest numerical value representing the most advan-tageous Government poIicy.



Table 14.—Comparison of Cost Recovery Allowances in the Steel Industry

Representative cost Aggregate cost recovery allowances (percentage of cost assets)

recovery periods (years) First taxable year First 3 taxable years First 7 taxable years

Australia a b . . . . . . . . . . .Belgium a c . . . . . . . . . .Canada a d. . . . . . . . . . . .France e

f . . . . . . . . . . . . .

West Germanyg h . . . . . .Italy a j. . . . . . . . . . . . . . . .Japan j k . . . . . . . . . . . . .Netherlands m . . . . . . . .Sweden a n . . . . . . . . . . . .United KingdomO P . . . . .Uni ted States qr . . . . .

10927

106

11841

11aNo special relief provisions are available for pollution control facilitiesbCapital cost recovery iS computed on a straight Iine or accelerated (150-per.

cent D.B.) basis with an additional 20-percent deduction available in the year ofacquisition (40 percent prior to 6/30/79) 150-percent D B depredation over a10 year period plus the additional first year depredation has been assumedAustralia s sole steel manufacturer may have negotiated a special cost re-covery arrangement

cCapital cost recovery Is computed on a straight Iine or accelerated (200-percent D B.) basis As a temporary measure to promote Investments, a onetimespecial deduction of 15 percent IS allowed on certain acquisitions of fixed as-sets made during 197980 The special deduction wiII be allowed to the extentthat 1979 or 1980 investments in fixed assets exceed the average annual in-vestments for the years 197476 The 15 percent deduction IS applicable to amaximum of 40 percent of the total new investments 200. percent D Bdepredation over a 10 year period plus the additional first year depredationhas been assumed

dCapital cost recovery may be claimed at a rate of 50 Percent in the Year of ac-quisition and the remainder in the next succeeding year A 7-percent (5 percentif certain Iegislation IS not extended during 1979) Investment tax credit may beclaimed in the year of acquisition and has been Included in the table computa-tion Investment tax credits reduce the cost of property for purposes of com-puting cost recovery allowances Based on proposed Iegislation, Investmenttax credits of up to 20 percent may be available depending on the Iocation ofthe asset

eCapital cost recovery IS computed on a straight Iine or accelerated (250 per-cent D.B.) basis. Based on proposed Iegislation an additional 10 percent deductlon may be claimed on the net increase in assets over the preceding yearwithout reducing the Increase in assets over the preceding year without reduc-ing the basis for regular depredation Over an 8-year period 250 percent D Bdepredation plus the additional 10-percent deduction has been assumed

fThrough 1980. pollution control facilities attached to building in existence priorto 1/1/76 wiII qualify for a 50 percent special cost recovery allowance in theyear acquired The tax basis of such facilities are reduced by the special allow.ance for purposes of computing regular cost recovery If the pollution control

SOURCE: Richard M. Hammer. National Office, Price Waterhouse & Co , June 1979

eluding the tax benefit of any investment taxcredit or other allowances. The useful livesused are considered representative for thecountry for which the depreciation computa-tion is made. The present value of cost re-covery allowances has not been taken into ac-count. Note, however, that in some countriesinvestors must agree with the tax authoritiesas to the rate of depreciation and other bene-fits available before they invest in fixedassets; such agreement would, in many cases,have the effect of substantially increasing theallowances presented in the table.

35%2663412525313748

10035

5 9 %

55109

785875555786

10057

88%86

10910587

1008497

11810086

—facilities do not qualify for the special allowance described above, regular costrecovery may be claimed over a shorter useful Iife than iS generally allowed forother assets (e. g , 6 Instead of 10 years)

gCapltal cost recovery iS computed on a straight Iine or accelerated (250-per-cent D.B.) basis Regional Investment grants of up to 20 percent of the cost ofcertain assets may be claimed in the year of acquisition. Over a 10-year period250-percent D.B. depredation has been assumed

hA special Capital cost recovery allowance IS available for Pollution control fa-

cilities purchased or constructed between Jan. 1, 1975, and Dec. 31, 1980 Acapital cost recovery of 60 percent may be claimed in the year of acquisitionand 10 percent in each of the 4 following taxable years

ICapital cost recovery IS allowed at a rate of 10 percent per year plus an addi-tional deduction of 15 percent for each of the first 3 taxable years

ICapital cost recovery IS computed on a straight line or accelerated (206-percentD B ) basis A 10-percent Investment tax credit IS available in the year of acqui-sition Over a 14-year period 206-percent D B depreciation plus a 10-percent in-vestment tax credit IS assumedkA sspecial capital cost recovery allowance is provided in lieu of Investment ‘ax

credit for pollution control facilities at one-thlrd of the cost in the year of ac-quisition This special allowance reduces the cost of the facility for purposesof computing regular cost recovery discussed in footnote (j) above

ICapital cost recovery is computed on a straight line basis Investment tax cred-

it ranging from 7 to 23 percent IS available in the year of acquisition dependingon the type of asset Straight Iine depredation over a 10 year period plus a 13-percent Investment tax credit IS assumed In addition, where production capac-ity or the number of jobs IS Increased grants of up to DF L 5 milIion are available

‘If a particular business IS subject to air pollution regulations which are moresevere than would be expected for the type of business, the government mayindemnify the business for the extra cost Incurred This subsidy IS determined on a case by case basis, without Iimitation and reduces the cost of thefacility for purposes of computing the Investment tax credit discussed in foot.note (1) above

The data indicate that the United Statesand Japan have the largest representativecost recovery period—l1 years. In Canada,the representative period is only 2 years, inSweden, 4 years. The aggregate cost recov-ery allowance (percentage of cost of assets)for the first 3 taxable years is a significantmeasure of the attractiveness of capital in-vestments in steel. The United States, with a57-percent recovery, has a lower rate thanmost other nations. Only Japan and Belgiumhave smaller recovery allowances; a numberof countries have much larger allowances.


Europe

The EEC Commission

The discussion of government policies forthe steel industries of Europe is made com-plex by the combination of individual policiesof nations and the presence of the Commis-sion of the European Economic Community(EEC), which has absorbed most of the policyfunctions of the European Coal and SteelCommunity (ECSC). Management of the Euro-pean steel industry is now conducted throughthe EEC Steel Directorate. The supranationalpolicies of the group are discussed first. Itshould be noted, however, that the policies ofthe ECSC and EEC are not always followed bymember nations, although there appears tobe increasing agreement on policy implemen-tation.

The Davignon Plan. —Current policies ofECSC have one major emphasis—that of over-coming the crises of the European steel indus-try, which resulted in job loss for more than100,000 workers between 1974 and 1979 andmay lead to an additional 80,000 lost jobs in1980. The state of the European steel marketin the spring of 1977 was described in thesewords:

The present situation is that production isfalling, new orders are continuing to stag-nate, the rate of utilization of productioncapacity is running at no more than about 60percent, prices are low, exports slack andstocks large, and short-time working is at al-most the same level as during the most dif-ficult period of the earlier recession, ’”

At a special meeting on March 16, 1977,the Commission adopted a new set of policyguidelines which set forth the group of steelpolicy measures that came to be known as the“Davignon plan.” The proposed policy wasaccepted a few days later by the EuropeanCouncil—the heads of state and govern-ment—which issued the following declara-tion:

The European Council has considered thesituation in the steel sector, on the basis of a

‘(lBul)etin of the European Community, No. 3, 1977, p. 28.

communication from the Commission. Thissector is experiencing a depression moreserious than at any time in the history of theCoal and Steel Community, The heads ofstate and government have taken this oppor-tunity to reaffirm their resolve to restore tothe steel industry through the appropriatemeasures, the viability and competitivenessessential to the maintenance of a truly Euro-pean industrial potential.

The European Council expresses its ap-preciation of the efforts being undertaken bythe Commission to put forward at an earlydate practical proposals and initiatives forshort-time remedial measures to stabilize themarket, for a longer term structural reorga-nization of the European Steel industry andfor measures in the social field to assistworkers adversely affected by such reorga-nization.

The European Council expresses the wishthat the Council of Ministers gives its urgentattention to the Commission’s proposals andinitiatives on these issues.1 1

The new policy guidelines, aimed atstrengthening the Community’s crisis meas-ures, were grouped into four main categories:1) preservation of the unity and openness ofthe market, 2) accomplishment of a modern-ized production capacity, 3) market interven-tion, and 4) retraining and redeployment ofworkers. ’z Most (but not all*) of the policies ofthe Davignon plan have been accepted by theEuropean steel-producing countries, and theCommission has obvious strength in formulat-ing and executing supranational policies af-fecting the steel industry in Europe.

The present powers of the EEC Steel Direc-torate include:

●

●

●

veto power over new investments insteel;the power to enforce or waive major an-titrust rules;setting minimum prices;

“Ibid. p. 29.“Ibid.*For summary of the pr~blems fa~in~ D~vignon plan see:

“Davignon Plan Fate at Stake,”’ American Metui Market, Aug.16, 1979, pp. Iq,


setting production quotas for each coun-try and suggesting production ceilingsfor each company;negotiating voluntary quotas for exportsof steel to the EEC by Japan and EasternEuropean and Third World nations;consolidating industrywide confidentialdata on their operations and plans;making projections of planned capacityset against l ikely demand for everycategory of steel;providing supplemental funds to dealwith displaced workers; andveto power over all government subsi-dies to steel; however, the Steel Direc-torate cannot force a company to close afacility.

in addition to the policies to minimize prob-lems arising from the currently acute overca-pacity of European steelmaker, the Commis-sion has implemented other important poli-cies. It has for many years helped financecapital investment programs. As an entity,the Commission is able to borrow funds atlower rates of interest, in part because of itsauthority to levy a tax on the value of steeland coal produced within the EEC. It thenloans the funds it borrows in the open marketto steel enterprises within the EEC at lowerinterest rates and longer payback terms thanthey could otherwise command on the basis oftheir individual credit. Between 1954 and1974, the Commission granted a total of $2.4billion in low-interest loans to EEC endeavors.This averages $120 million annually, includ-ing $65 million that is distributed directly tothe iron and steel industry. During 1974alone, the Commission granted low-interestindustrial loans totaling $42.2 million to fi-nance such production facilities for high-grade and specialty steels, environmentalequipment for the steel industry, moderniza-tion of coal facilities and iron ore mining, anda research center for specialty steels.

The Commission also has significant long-range planning functions and has recentlyformulated i ts “General Objectives for1980-85” for the iron and steel industry. Thisstatement sets priori t ies and establishes

guidelines for the EEC iron and steel indus-tries through 1985, with particular stress onthe areas of specialty steel and raw materials(scrap, iron ore, and energy). The objectiveswere developed by a steering committee com-posed of representatives from major iron andsteel producers, national governments, andthe Commission. While these objectives aredescribed as “guidelines,” they are none-theless real objectives since they constitutethe framework for the Commission’s exten-sive financial investment program.

The Commission has also extended its in-fluence beyond Europe by establishing formalties with the Organization for Economic Coop-eration and Development (OECD). The OECDAd Hoc Working Party on the Iron and SteelIndustry, set up at the request of the EEC toprovide a forum for discussions of the worldsteel crisis, was transformed into a perma-nent Steel Committee 13 a year later for thefollowing stated purposes:

●

●

●

●

continuously follow the evolution of na-tional, regional and world steel industrieswith regard to employment, profits, invest-ments, capacity, input costs, productivity,and other aspects of viability and competi-tiveness;develop common perspectives regardingemerging problems or concerns in thesteel sector and establish, where appro-priate, multilateral objectives or guide-lines for government policies;regularly review and assess governmentpolicies and actions in the steel sector inthe light of the current situation, agreedmultilateral objectives and guidelines andthe GATT and other relevant internationalagreements;identify deficiencies and gaps in existingdata needed by the Committee with a viewof improving national inputs to the Com-mittee and cross-national comparability ofdata.

OECD’s responsibilities for policymaking aredistinctly limited. Nevertheless, OECD canadvocate certain policies related to steel in-

‘ ‘See “Problems of the Steel Industry: And a Search for Solu-tions,’” OECD ohserwr, November 1978.


dustries in member countries, including theUnited States and Japan.

Regulatory Policies. —Regulatory compli-ance costs for European steel companieshave generally been at levels similar to thoseexperienced by domestic producers. How-ever, European steelmaker enjoy rather fa-vorable fiscal incentives and attractive fi-nancing to help them meet those costs. Fur-thermore, there is a considerable level of pub-lic support for regulatory technology R&D inall areas of steelmaking.

The less competitive steel industries of Bel-gium and France have experienced relativelylow environmental compliance costs. ShouldEuropean steel-producing nations, as ex-pected, adopt future environmental require-ments similar to those in the United States,then French and Belgian regulatory costs willgradually approach U.S. levels. ”

European steelmaker generally benefitfrom preferred rates for accelerated depre-ciation of pollution abatement equipment.This places these industries at a significantadvantage over U.S. producers, particularlybecause their general depreciation schedulesfor industrial equipment are already morefavorable. They also have ready access toloans made available by the ECSC or nationalgovernments. Moreover, since 1975 the ECSChas supported research on environmentalprotection and occupational risk reductiontechnologies at levels two to three timeshigher than U.S. levels. *

R&D.—The ECSC has funded a consider-able R&D “effort, particularly in the technicalaspects of steel production and in pollutionabatement and occupational health issues.Funding of production-related R&D activities

‘‘OECD, “Emission Control Costs in the Iron and Steel Indus-try,’” Paris, 1977. p. 95-96; and Hans Mueller and E. Kawahito,“The International Steel Market: Present Crisis and Outlookfor the 1980’s.”’ Middle Tennessee State University, conferencepaper No. 96, 1979, pp. 26-27.

*From 1974 to 1978, ECSC provided $2.2 million annually forthis purpose, For the next 5 years, starting with 1979, ECSChas made $3.8 million annually available for regulatory tech-nology R&D. (Official Journal of the European Communities: In-formotion and Notices, June 13, 1979, No. C147.)

was initiated shortly after ECSC was estab-lished in 1951. The basic purpose is:

. , . to encourage the development of newtechnology for subsequent incorporation inthe construction and operation of steel plantand equipment and to advance the quality ofthe wide range of semifinished and finishedproducts that are manufactured within theCommunity’s industry. The ultimate objec-tive of this effort is to enhance the ability ofthe European steel producers to compete inboth home and export markets.15

ECSC support for R&D activities has variedover time but has averaged from $15 millionto $20 million per year. The funds are allo-cated through the Iron and Steel TechnicalResearch Committee, staffed by ECSC mem-ber country iron and steel experts who evalu-ate R&D proposals and make recommenda-tions. The scope of the research is con-siderable: in 1979, for example, ECSC allo-cated $24.75 million to 73 different R&D pro-jects whose total costs were $79 million; table15 provides a partial breakdown of theseprojects. ECSC funding does not rule outdirect support by individual governments.

National Policies

There is extensive government ownershipof European steel industries. For example,approximately 80 percent of the United King-dom’s and 70 percent of France’s steelmakingcapacity is government owned. These indus-tries are far from profitable. The approxi-mate 1978 losses per tonne of shipped steelwere $55 for the United Kingdom and France.These and other foreign steel industries aresustained by the favorable financial, export,and tax policies of their governments.

Conflicts Between National Subsidies andEEC Policies.— In light of relatively weak de-mand for steel products worldwide, most ifnot all subsidy and procurement policies inthe EEC have been directed towards reducingcapacity by early closure of older mills and by

.‘iCommission of the European Communities, “Memorandum

on the Implementation of an Iron and Steel Research Program,With a View of Obtaining Financial Aid Under Article 55(2)(c)of the ECSC Treaty, ” February 1979, p. 1,


Table 15.— Distribution of R&D Projects Funded by ECSC, 1979— ————.

Funding total(millions ECSC aid (millions Subject area

of dollars) of dollars) percent of total

$ 7.5 —.———— — .——

Ironmaking . . . . . . . . . . . . . . . . . . . . . . $ 4.50 9.5%Steelmaking . . . . . . . . . . . . . . . . . . . . . 47,8 6.70 60.5Rolling mills and related areas . . . . . . 2.3 1.38 2.9Measurements and analysis. . . . . . . . 4.6 2.76 5.8Properties and service performance

of steels . . . . . . . . . . . . . 16.8 9.41 21.3

Totals. ., . . . . . . . . . . . . . . . . . . . . $79.0 $24.75 1OO.OO/O

SOURCE: - Commission of the European Communities’. Memorandum on the Implementation of an Iron and Steel ResearchProgram With a View of Obtaining Financial Aid Under Article 55(2)(c) of the ECSC Treaty.’ February 1979.

early retirement of workers. These policiesare in direct conflict with those of some mem-ber countries, however. The British SteelCorp. (BSC), for example, has had plans forconsiderable expansion. In June 1978, BSC’sexpansion plans involving continued invest-ment of $2 billion annually were slashed bythe Labor Government. But since then, a newinvestment revival has taken place, and theConservative Party plans to continue it.

British Steel’s investment plans are notlikely to be halted by the conservative gov-ernment. The corporation is near completionof the biggest spending program on steelplants ever seen in Europe. Work is so far ad-vanced that it could not be stopped. Spendingwill continue at a rate of about $1 billion ayear until 1980 but should fall away sharplyin the early 1980s. British Steel will be thebiggest and most modern equipped steel com-pany in Europe with more than 22 milliontons of highly productive capacity. It willalso be the third biggest steelmaker in thewestern world, after U.S. Steel and NipponSteel. ”

In Belgium, where government policies arecontrolled by labor unions, a new policytoward the steel industry has been adoptedthat clearly conflicts with the ECSC plan formember countries. The key elements of thispolicy are increasing employment levels, low-ering nonwage labor costs such as social se-curity contributions, keeping wage increasesin line with inflation, and linking publicspending to gross national product levels.

“ Skxl wreck, h!:l}’ 7, 1979, p. 7.

Likewise, but to a lesser extent, the Gov-ernments of West Germany, Austria, andItaly have been under union pressure eitherto continue and even expand operations oftheir steel mills in order to provide employ-ment opportunities. This in turn has resultedin significant national subsidy payments invarious forms to the steel industry.

Loans and Subsidies. —National govern-ments are extensively involved in financingsteelmaking production. The Fond de Devel-opment Economique et Social (FDES) is an im-portant source of low-interest, long-termcredit in France. FDES loans, which are ad-vanced by the national treasury, are given toprivate borrowers through the Credit Nation-al. Applications must be approved by the Re-gional Development Agency or the Ministry ofIndustry. As a basic industry, iron and steelreceives special consideration in grantingthese loans; for example, FDES is lendingroughly one-third of the total project cost of a$1.75-billion steel complex at Fos-en-mer.These loans bear an interest rate of only halfthe market rate and require no payment ofprincipal or interest charges for 5 years.

Italy is another country where the govern-ment is extensively involved in the iron andsteel sector. The Instituto per la Reconstru-zione Industriole (IRI), a state holding institu-tion, is contributing 80 percent of the capital(in the form of government-guaranteed low-in-terest loans) to increase the capacity at theTaranto steel complex at a cost of $2.5 billionover a 5- year period. The $1,6-billion Cala-brin steel complex at Giora Taura is alsoheavily funded by IRI. Loans for these proj-


ects are classified as being used for regionaldevelopment purposes.

In Belgium, government has for a numberof years aided the steel industry under a pro-gram administered by the Comite de Concer-tation de la Politique Siderurgique (CCPS).Under the CCPS program, approximately$101.6 million in grants and low-interestloans has accrued to the Belgian steel indus-try during the lasts years.

In 1972 the British Government reducedthe equity obligation of BSC by writing off al-most $480 million of public dividend capitalheld by the government. Thereafter the gov-ernment also wrote off the equivalent of $360million in loans that had been due to the Na-tional Loans Fund. The statutory corpora-tions bill (financial provisions), published inMay 1975, will raise British Steel’s borrow-ing limit by $1.7 billion to a total of $4.5 bil-lion.

Export Incentives. —Export credits financ-ing and export insurance are widely em-ployed methods of stimulating exports thathave been particularly effective in WesternEurope. For example, the British Governmenthas set interest rates for export credit fi-nance since 1972. Clearing banks that pro-vide export credit are furnished with refi-nancing for any such lending beyond 18 per-cent of their current account deposits; moreimportantly, the government guarantees thatbanks can earn a return on export loans thatis 1.25 points above the average of their rateson treasury bills and loans to nationalized in-dustries. Interest rates for export credit aremuch lower than those charged for domesticworking capital, with the government makingup the difference.

British insurance is primarily handled byan autonomous government agency that main-tains credit ratings for foreign firms. In-surance is available against default by thebuyer, government action that blocks or de-lays transfer of payments, imposition of newimport-licensing restrictions in the country ofpurchase, war, or “any other cause” of lossoccurring outside the United Kingdom and not

within the control of the exporter. There arealso policies to cover goods being processedor goods being held in stock abroad,

Italy offers export credit/financing throughseveral banks and institutions and keeps me-dium- and long-term export financing at fa-vorable rates. Export credit rates are cur-rently about 6.5 percent, in contrast to 10.25percent for nongovernment financing. Thisform of preferential or export financing mustbe approved by the Ministry of ForeignTrade, with extensions for longer than nor-mal periods of time requiring approval by theTreasury. Insurance at low premium rates isgranted by a public agency that implementsdecisions adopted by an interministerial com-mittee, which in turn operates within theframework of the Institute of Foreign Trade.

In Belgium, the central bank helps firms ob-tain export credit at preferential rates by is-suing special “visas, ” which make the accep-tances eligible for rediscounting with a semi-public organization. Interest rates for exportcredit range between 5.2 and 6.0 percent.Credit Export, an organization formed as a fi-nancing pool by public agencies and privatebanks, operates in the field of long-term ex-port financing. Insurance at favorable premi-ums is available for exporters from a publicinstitution that insures against commercialand political risks.

The French Government actively encour-ages exports through low-cost export credits.Medium- and long-term credit is available ata special Bank of France rediscount rate of4.5 percent for exports destined to countriesoutside the EEC. Insurance is granted by aquasi-public firm, at government-guaranteedpremiums, and covers commercial and politi-cal risks, currency fluctuation, unretrievedcosts of advertising and promotion in foreigncountries, and increases in costs of produc-tion.

The West German Government grants ex-port insurance through an authorized syndi-cate, which receives applications and pre-pares them for approval by the Interministe-rial Committee for Export Guarantees. This


committee includes representatives from theMinistry of Economics, the Ministry of Fi-nance, and the Ministry of Foreign Affairs.Coverage includes both commercial and polit-ical risks.

Tax rebates are another way foreign gov-ernments stimulate exports. The value-addedtax rebate, which is prevalent in WesternEurope, provides a competitive edge for ex-porters, because it permits them to avoid con-ventional income tax as well as the value--added tax. The following list reflects the per-centage of value-added tax rebate on ex-ported products by European governments:

Austria . . . . . . .Belgium . . . . . .France . . . . . . .Italy . . . . . . . . .Luxembourg. . .Netherlands. . .Norway. . . . . . .United KingdomWest Germany .

Other forms

. . . . . . . . . . . . . . . . . . . . . . . . . . 16

. . . . . . . . . . . . . . . . . . . . . . . . . . 18

. . . . . . . . . . . . . . . . . . . . . . . . . . 20

. . . . . . . . . . . . . . . . . . . . . . . . . . 12

. . . . . . . . . . . . . . . . . . . . . . . . . . 10

. . . . . . . . . . . . . . . . . . . . . . . . . . 16

. . . . . . . . . . . . . . . . . . . . . . . . . . 20

. . . . . . . . . . . . . . . . . . . . . . . . . . . 8

. . . . . . . . . . . . . . . . . . . . . . . . . . 11

of direct export assistance inthe United Kingdom include financial supportfor trade missions, exhibitions, market re-search, and export promotion schemes.Grants are also available to United Kingdom-based exporters to set up offices, warehous-ing, and related sales facilities for jointoverseas marketing ventures.

Raw Material Supply. —In the United King-dom, the National Coal Board operates a sys-tem of direct government subsidization whichaverages between $20 million and $30 millionannually. Added to this are substantial sumsbeing received from the ECSC, which has alsosubsidized coking coal production for severalyears. In 1973, the EEC Commission author-ized the Governments of the United Kingdom,Belgium, West Germany, France, and theNetherlands to grant subsidies to the coal in-dustries in their respective countries. Themore than $800 million in subsidies grantedin 1973 was significantly higher than pre-vious years.

Japan

The socioeconomic and cultural environ-ment in which industrial policies are madeand carried out by the Japanese Governmentdiffers markedly from that of the UnitedStates. This affects their steel industry inseveral ways. First, the Japanese steel indus-try, like most other sections of the Japaneseeconomy, specializes in its own area of busi-ness to a much greater degree than does itsU.S. counterpart. Second, there is consider-able cooperation between Japanese steelf irms and related enterprises. Third, al-though the Japanese Government does notown its steel industry, it has close relationswith it through the Ministry of InternationalTrade and Industry (MITI), which guides theoperations of the industry and creates finan-cial conditions that enable it to compete effec-tively in the world market. These unique as-pects of the Japanese steel industry’s socio-economic environment are well summarizedclearly in a recent book by Ezra F. Vogel:

Virtually all major Japanese firms special-ize in a single sector like banking, trading,real estate, department stores, heavy indus-try, electric appliances, petroleum, andtextiles. This pattern—developed partlythrough bureaucratic guidance—to encour-age the most competitive performance isvery different, for example, from Americanconglomerates, which spread over severalsectors and leave and enter various industri-al sectors with relative ease. Given the spe-cialization of Japanese firms in a given indus-trial sector, the aggregation of interests cantake two directions. One is the organizationof all firms from a single industrial sector,which maximizes the cooperation that comesfrom looking after their common interests inbuilding up their sector. The second is theorganization of firms into “groups” consist-ing of one firm from each sector. A firm in agroup has the advantage of special Zaibatsu(literally, “financial clique”) groups (likeMitsui, Mitsubishi, and Sumitomo) link firmsformerly united under their prewar holding


company, and non-zaibatsu groups (like Fugi,Sanwa, Daiwa, and Dai-ichi Kangyo) centeraround large banks.

In addition to these two types of organiza-tion, a third type combines virtually all firmsof given size in all sectors: Nikkeiren (Japa-nese Federation of Employers), for example,deals with labor problems of all large firms,Keidanren (Federation of Economic Organi-zations) and the either other regional asso-ciations deal with all issues aside from laborconfronting big business, and the Chamber ofCommerce (composed of all companies) in-cludes all firms but now particularly repre-sents small business.

Depending on the issue and the extent ofcommon interests, trade associations, or adhoc groups of companies in a sector, look outfor a range of interests impossible to repre-sent in the United States, where antitrustlaws are more rigid, To make sure that theyhave entree when politicians consider issueslike tax rates, consolidation and rationaliza-tion of firms, industrial and safety stand-ards, and protection against foreign indus-trial threats, they make regular collectivepolitical contributions as a sector. On moredetailed issues they deal regularly with thebureaucracy, and major trade associationsinclude staff members who were elite bu-reaucrats in big ministries, creating smoothrelationships with the bureaucracy, The as-sociations discuss virtually every issue con-sidered by MITI in their sphere, for even ifMITI eventually resolves the issues, it wouldnot do so without fully understanding thedominant views of the sector. 17

As a “priority sector, ” Japanese steel pro-ducers obtain loans from private lending in-stitutions with relative ease and apparentlywith implicit assurance of government sup-port in the event of default on such loans. TheJapanese Government also has provided itsdomestic steel industry with governmentloans during crucial time periods such as theearly reconstruction period after World WarII and during the first modernization program(1951-55). In the 1960’s, the aid fell to a lowlevel but then rose again beginning in 1971,

“Ezra F. Vogel, Japan Has Number One Lessons for America,Cambridge, Mass., (Harvard University Press, 19w), pp.108-199,

mainly for environmental protection expendi-tures. Until 1961 these loans were made at in-terest rates that were typical ly 1.3 per-centage points lower than the prime ratescharged by private long-term credit banks; insubsequent years, the rates were the same. InJapan, however, loans are allocated throughan informal rationing system applied by theBank of Japan and the large city banks, a sys-tem that has assured the Japanese steel in-dustry the capital it needs for modernizationand expansion.

Because of this financial leverage, MITIand other government agencies play a majorrole in all other aspects of steelmaking. Forexample, MITI’s long-term forecasts of de-mand govern the expansion of the steel indus-try. As a rule they are submitted on a periodicbasis to the Industrial Structure DeliberationCouncil (an advisory body to the Prime Minis-ter), and the Council’s decisions normallybecome established as government policy inthe industrial sector. Another planning tech-nique is the “target production goal:” MITIestablishes quarterly and annual productionlevels after consultation with steel industryrepresentatives and a review of market con-ditions. Although this is referred to as a“guideline, “ in practice it allows the govern-ment to coordinate production and stabilizeprices.

MITI is also instrumental in the procure-ment of supplies and in the creation of car-tels. In order to assure a supply of raw mate-rials, MITI has established the StockpileCouncil, which makes industrywide recom-mendations for raw material acquisition. Atthe beginning of 1975, under the guidance ofMITI, the industry established a JapaneseFerrous Scrap Stockpiling Association, whichhandles both imported and domestic scrap. Itis expected that in the first 3 years a total of450,000 tonnes of scrap will be stockpiled.Proposals call for purchases and releases tobe arranged among steelmaker, the FerrousScrap Council, and scrap processors.

In addition to economic stockpiling, theMinistry of Finance and MITI have alsofunded surveys and studies of overseas min-


eral development, sea-bottom mineral re-sources, metal deposits, and stable importsources. They also grant credits , issuedthrough the Bank of Japan, to domestic pro-ducers of raw materials that are hard hit byrising inventories of ore and concentrates im-ported under long-term contracts.

Beyond these f inancial assistance andplanning functions, MITI also funds anddirects the activities of the Agency of Indus-trial Science and Technology (AIST), one ofthe principal R&D centers in Japan, whichundertakes large-scale R&D projects and en-courages industry to innovate. Four policieshave been enacted and are administered byAIST for this last purpose:

● subsidies for R&D effort,. tax credits for increased R&D expend-

itures,. low-interest loans for the commercializa-

tion of new technology, and● establishment of a research association

to promote mining and manufacturingtechnology.

AIST itself operates 16 research laboratorieswith a staff of 3,800 and annual budget of 32billion yen ($133 million at 240:1).

Another policy area in which the Japanesediffer substantially from the United States isthe promotion of exports. The cornerstone ofJapanese steel export policy is an orderly in-ternational market in steel, with stable pricescontrolled by the governments of steel-pro-ducing countries. The Financial Times of Lon-don has commented that:

The Japanese were among the first to beconverted to the idea of controlling the worldsteel trade, a notion which is anathema toemerging low-cost steel producers such asSouth Korea. In fact, it was Nippon Steelchairman Yoshihiro Inayama who manyyears ago introduced the term “orderly mar-keting” to the world trade vocabulary.

Yuzuru Abe, the executive vice presidentof that same company, in a recent U.S.speech went so far as to say, “Until the cur-rent significant demand-supply gap can beclosed . . . some coordination is necessary inorder to maintain fair international trade.

Conventional principles of free trade are notenough to cope with the additional tonnagefrom the emerging nations or the continuedflow from government controlled steel pro-ducers, ”

The trigger price mechanism “can belooked upon as the notable first step for-ward,” Mr. Abe said, adding that some loop-holes and drawbacks remain.

Higher U.S. prices under controls, steelmen argue, will help the U.S. industry gen-erate the revenues needed to carry out muchneeded large-scale replacement and im-provement of plant and equipment. In thelong run, the Japanese say this will benefitconsumers even though they are now com-plaining bitterly about the high steel price.At the same time, the Japanese chide the U.S.industry for not having taken full advantageof previous periods of Japanese self-restraintto strengthen its position in the late 1960’sand early 1970’s.18

In addition to the export of steel products,the Japanese policy has also been to exportsteelmaking technology, particularly to lessdeveloped countries. In this regard the fol-lowing statement by T. Dahlby is of consider-able interest:

In the s teel industry, the guidingphilosophy now is to beef up divisions han-dling design and to build integrated steelworks for developing countries by offeringpackage deals, including technology licens-ing, feasibility studies, construction andengineering advice. By selling experiencegained in building their own highly-efficientindustry, Japan’s Big Six steelmaker arehoping to makeup for the expected low levelsof crude steel demand in the comingyears . . . .

Restrictions now in effect on exports to theU.S. and Europe, as well as the strengtheningof the yen, have cut deeply into steel compa-nies’ earnings. Severe price competitionfrom South Korean and Australian produc-ers has registered an additional blow, thoughJapanese makers feel safe in the short termsince the capacity of these rivals is stillrelatively small.

‘financial Times of London, “Steel Japan No. 1 and StillGaining, ” vol. 2, No. 17, Apr. .30-May 6, 1979.


“At times of recession, ” says HisaoKuzuoka, general manager of Kawasakisteel’s international department, “competi-tion naturally intensifies, but we also realisethat we cannot continue to export largeamounts of crude steel. Therefore, the in-dustry is putting emphasis on exports oftechnology to countries like China, Brazil andthose in Southeast Asia, ”19

This drive for technology export, conductedby several Japanese firms working in consor-tium and with significant assistance fromMITI and other government agencies, hasachieved considerable success.

Regulatory Policies

From 1971 to 1977, Japanese capital costsfor environmental compliance were 65 per-cent higher than U.S. levels. These higher in-vestments were closely linked to capacity ex-pansion taking place during that time; morerecent expenditures have been below U.S.levels .20 As is the case in Europe, Japanesesteelmaker also benefit from favorable fis-cal and loan policies for industrial equipmentin general, and pollution abatement equip-ment in particular.

Third World and Developing Countries

The two principal policy tools of the devel-oping countries are long-range planning anddirect government assistance. Mexico, for ex-ample, has established a Steel CoordinatingCommission to organize and advise both pri-vate and public companies engaged in theproduction of iron, coal, coke, and steel. Thecommission includes representatives fromthe Council of Non-Renewable Resources, theMinistry of Industry and Commerce, the Min-istry of Finance, and the Office of the Presi-dency. The commission has helped plan twolarge steel plants, including the developmentof raw material supplies, transportation fa-cilities, and housing. Significantly, the capac-ity of these and other steel facilities, whencompleted, will exceed the present demand

“Tracy Dahlby, “J~p~n seeks a Long-Term Strategy for Pros-perity,” For Eastern Economic Review, Aug. 2!5, 1978,

‘(’Hans Mueller and K, E, Kawahito, op. cit., p. 27.

for steel products within Mexico, and it is ex-pected that much of it will be earmarked forexport markets.

Brazil’s Conselho Nacional de Nav Fer-rosos e de Siderurgia coordinates and super-vises the national steel plan, which aims to in-crease steel capacity to 20 million tonne/yr by1978-79. To reach this goal the Brazilian Gov-ernment is expanding its holdings into the re-mainder of the private steel sector and is in-volving itself extensively in raw materialsthrough the National Department of MineralProduction,

Venezuela, Peru, India, Iran, South Korea,Turkey, and Egypt have all developed 5-yearplans aimed at expanding steel productions.Most of these plans are initiated, monitored,and implemented by the governments.

Financing

Mexico provides an excellent example ofhow developing countries use government-financed assistance in support of their steelindustries. Both national and internationalfinancing organizations invest in Mexicansteel. Siderurgica Lazaro Cardenas—LasTruchas SA (SICARTSA), a Mexican public-sector enterprise established in 1969, isbuilding a steel plant with a first-stage pro-duction capacity of 1.2 million tonnes. Finan-cial arrangements include a World Bank loanand a long-term loan, guaranteed by the Mex-ican Government, from a group of industrialnations. Related facilities, such as a railroadspur, enlargement of port facilities, and hous-ing for workers, will be financed directly bythe government. SICARTSA is 51-percentcontrolled by the government, 25 percent byNational Financier (a government financingagency), 12 percent by Altos Hornos de Mex-ico SA (71.5 percent of which is governmentcontrolled), and 12 percent by private capitalsources,

Specialty steel production in Mexico is be-ing expanded by the same type of financingarrangements. Mexinox SA, a joint French-Mexican venture to establish Mexico’s firstintegrated stainless steel complex, has ob-


tained financial assistance from the Interna- ment-owned mills. Participants in the financ-tional Finance Corporation (IFC), a World ing of these projects include the World Bank,Bank affiliate, and the National Financier. the Inter-American Development Bank, the

Agencia Especial de Financiamento Industri-Brazil has initiated a broad program to in- al (a Brazilian government agency), other

crease its raw steel production capacity from local sources, and (by credits) certain foreign7.2 million to 20.2 million tonnes by 1980. The governments. Loans are guaranteed by theprogram will be carried out by three govern- Federal Republic of Brazil.

CHAPTER 3

Problems, Issues, and Findings

Contents

P

81

81

82

83

84

85

86

88

Page

Impacts of New Technologies on the U.S.Steel Industry ● *. ******D**..**.*****,, 86

18. How would technological changes affectthe restructuring of the domestic steelindustry?. . . . . . . . . .,,0, s . . . .,,....,, 88

19. How will future technological changesaffect the amount and type of energyused by the domestic steel industry? ., . . . 90

20. To what extent can technologicalchanges reduce increasing U.S. relianceon foreign coke? ● . . . . . 0,, .,, .0.,.,.., 91

21. How will technological changes affectthe cost and availability of ferrousscrap? ● **. *.. .. O.*,..*.**, . ● ● ● ● ● . . ● 91

22. How do& changing technology affect thetiming and strategy of capacityexpansion? . . . . . . . . . 0 . .,.,...,, .., ,, 92

Financial, Regulatory, and InstitutionalBarriers to the Adoption of NewTechnology . .* . . . . . . . . . .* ,* .* .******* 94

23. To what extent is insufficient capital abarrier to the increased use of newtechnology?. , . . . . .*****..,.*.*...*** 94

24. Do steel companies use effective long-range strategic planning for technologicalinnovation in order to gain competitiveadvantage over domestic and foreignproducers? ., . . . . . , ., . . . . . ... , , , , ., . 95

25. Is there sufficient steel-related R&Dinthe United States to meet the goal offuture technological competitiveness? . . . 96

26. Does the domestic steel industry employenough technical personnel and usethem effectively to enhance itstechnological competitiveness?. ., , , , . . . 97

27. What are the impacts of EPA and OSHA

28

regulations on steel industrymodernization?., ● ,*. .. O., .**, ,* *O*,*, $8How might labor practices affect theintroduction of innovative technology? , . . 99

.

Pagepolicy Considerations .*. **. .*. ***. ******a 9929. Can the domestic steel industry stay

competitive without changes in Federalpolicies? . . . . . . . . , . . . **,.*.*.*,,.*.* 99

30. Can the experiences of the steel industry

31.

32.

33.

contribute to the formulation of moreeffective Federal policies for otherdomestic industries?. ., , ... , ., . . . . 100● . . .Should the steel industry be singled outfor a sector policy?

● ● ● ● ● ● ● * ● ● . * * ● ● . . ● ● 101How do foreign government policiesaffecting their steel industries compareto U.S. policies?

● ● ● * ● ● ● ● . * ● ● ● ● ● * ● ● ! ! ● .102What will be the effect of the newMultilateral Trade Agreement on thedomestic steel industry?. . . . . . . . ... ....103

Policy options ● *.*, .., **. .***, *e** ***e*e 10434. How can increased Federal assistance to

the steel industry be justified?. ...... ...10435. Is there a need for direct Federal

financial assistance to the steelindustry?. . . . . . . . . . . . . 0,, . .,, ,, ...., 105

36. What effect would changes in Federaltax laws have on capital formation? .. ...106

37. Should there be more Federal support ofsteel R&D and innovation?. . . . . . . . . . . .. 107

38. What regulatory changes could beconsidered that are simultaneouslyaimed at improving environmental andoccupational protection and atrevitalizing the steel industry?. . ........108

39. What will be the affects of continuing toexport ferrous scrap?. . . . . . . . . . . . . . . . . 109

40. Are Federal Government targets forutilization of ferrous scrap and otherrecovered materials needed, feasible,and the best approach? ● *.*, ,* , .* . , ,** 110

CHAPTER 3

Problems, Issues, and Findings

Introduction

This chapter discusses 40 topics which,taken together, give a detailed view of the en-tire report supplementing the brief summaryin chapter 1. Each of the 40 discussions isself-contained and usually draws from sever-al chapters of the report.

Because each topic stands alone, the read-er may tackle them in any order and may skipquestions without sacrificing comprehension.Within each of the eight groups of topics, the

higher priority problems or issues are ad-dressed first.

The question-and-answer format shouldpromote a fresh look at a number of long-standing and much publicized topics. More-over, by defining a relatively large number ofquestions, attention is given to importantproblems, particularly of a long-range na-ture, which are normally hidden by short-range, crisis-type questions facing Govern-ment and industry.

Reasons for Congressional Concern

1 What does competitiveness mean?

The term “competitiveness” does not havemuch meaning when it is taken out of context.One oversimplified meaning of competitive-ness is how much of a product is sold by oneproducer relative to another; in this sense,market share becomes the dominant measureof competi t iveness. There are, however,many ways to sell more of a product than acompetitor does, especially if maximizingprofit is not a goal.

If profits are a secondary consideration,then prices are not necessarily linked tocosts. A steel company may be price competi-tive and, indeed, may have a price advantageover other firms in the same marketplace,rather than mere parity with them; but it stillmay not be cost competitive. Cost competitive-ness is determined by many factors, only oneof which is the production technology; otherfactors include management, labor, capitalinvestment, financial structure, marketingstrategies, strength of national currency,Federal regulatory costs, and ownership of

physical resources and technology. In manycomplex ways these other factors are alsolinked to technology.

Technological competitiveness refers to thetype of technology used, the extent to whichnew technologies have been adopted, and theresources and infrastructure related to thecreation of new technology, such as R&D fa-cilities, staff, and funding levels.

In addition to price competitiveness, costcompetitiveness, and technological competi-tiveness, there are considerations of productquality, performance, dependability, consist-ency, and range. Technology plays a role insome of these factors, too, particularly in thesense that the technology used to make steelswill, to some extent, determine the physicaland chemical characteristics of the steelsproduced. Customer service, including techni-cal services, financing, and deliverability, isalso important.

Lastly, Federal Government policies canaffect competitiveness, particularly in the in-ternational market. Direct and indirect Fed-

73


eral support to steel producers can easily off-set any competitive disadvantage a companyor industry may have (see Topic 30). Policiesthat have the effect of limiting increases incapacity also limit the opportunities foradopting new technology and achieving max-imum technological competitiveness.

2 Is the U.S. steel industry homogene-ous?

Three factors can cause confusion in ananalysis of the U.S. steel industry:

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●

●

There are a great number of companiesinvolved in ferrous materials that arebest not considered as part of the domes-tic steel industry.The domestic steel industry is not homo-geneous.Some companies usually treated assteelmaker have diversified out of steeland are continuing to do so.

Companies not considered part of the do-mestic steel industry in this analysis include:foundries, ferroalloy producers, steel distri-bution companies, steel fabricating compa-nies, companies producing or processing rawmaterials only (e.g., coal, iron ore, scrap,coke); and the design, construction, consult-ing, and equipment companies that servesteelmaker. In this analysis, the U.S. steel in-dustry includes only those firms that at onepoint in their production sequence make mol-ten steel and subsequently sell mill forms andperhaps some primary products.

Because the industry is not homogeneous,OTA has found it useful for purposes of anal-ysis to distinguish three major segments:

● integrated steelmaker,● nonintegrated steelmaker, and● alloy and specialty steelmaker.

The first group, integrated steelmaker, con-vert iron ore to molten iron in blast furnaces,with coke as the reducing agent, and thenconvert the molten iron to commodity carbonsteels in either basic oxygen, electric arc, oropen hearth furnaces. The second group, non-

integrated steelmaker, do not have ore con-version facilities; they depend mainly on fer-rous scrap to feed electric arc furnaces, andproduce a relatively small range of simple,low-price carbon steels. The third category,alloy/specialty steelmaker, use a variety ofprocesses to make higher priced, higher per-formance steels than those produced in theother segments.

Some companies may have plants in morethan one of these three categories, and thismakes company classification difficult: someintegrated companies are installing scrap-based electric furnaces, and both integratedand nonintegrated facilities may also makealloy or specialty steels, Nonintegrated com-panies may be able to install direct reduction(DR) facilities to convert iron ore into solidiron that is substitutable for and superior tosome grades of ferrous scrap in electric fur-naces (see Topic 16). A company taking thisroute could become integrated, whereas acompany purchasing direct reduced iron(DRI) would remain nonintegrated.

It is also difficult to classify steel pro-ducers by size. The term “minimill” was orig-inally coined to describe nonintegrated pro-ducers who made relatively small amounts ofsteel, on the order of 45,000 tonne/yr. Manyof these companies have grown substantiallyand now produce in the same range as thesmaller integrated companies (up to 1 milliontonne/yr); these facilities are now sometimescalled “midimills” or market mills.

Diversification of steel companies out ofsteelmaking has made analysis of some issueseven more difficult, particularly analysis offinancial performance and R&D activities.(See Topic 8.) How a steel company that pro-duces its own raw materials, such as coaland iron ore, figures its steelmaking costsgreatly affects its profitability. Its input costsmay be based on market price, actual produc-tion cost, or something in between. For somecompanies, the profitability of their steelmak-ing business is actually much worse thanavailable data indicate, because the profitsfrom their nonsteel operations offset steel

Ch. 3—Problems, Issues, and Findings ● 75

losses. For example, according to one analy-sis, U.S. Steel Corp., the Nation’s largeststeelmaker (with 21 percent of domestic ship-ments), actually lost over $15/tonne shippedin 1978, although the corporation as a wholeshowed a net profit on investment of 5.3 per-cent.

3 Are other engineering materials dis-placing steel?

Steel has been and remains the most impor-tant engineering material in American soci-ety. It plays a vital role in all primary manu-facturing and construction and is a strategicmaterial that is especially and increasinglycritical for economic and military security.

Domestic consumption of steel continues toincrease, though at a slower rate than duringthe early stages of industrialization. In realterms, however, the consumption of steel hasdeclined: during the 1950’s, 230 lb of steelwere consumed annually per $1,000 of grossnational product (GNP) (in constant 1971dollars), 194 lb during the 1960’s, and 176 lbfor 1970-77. The consumption of aluminumand plastics per $1,000 of GNP increasedsubstantially during the same period. In re-cent decades, the growth rate in steel con-sumption has been approximately 2 percentper year; in aluminum, 6 percent; and in plas-tics, 8 percent. Nevertheless, the per capitaconsumption of aluminum and plastics is onlyabout 60 and 140 lb annually, respectively,compared to approximately 1,000 lb of steel.

Although the use and role of steel appearto be declining according to some measures,many analysts believe that there will be asurge in steel demand as the steel-using struc-tures, such as bridges, buildings, railroads,and primary manufacturing facilities, built inthe United States during the last 50 yearswear out. Furthermore, in many applications,there are still no cost-competitive perform-ance substitutes for steel.

One frequently mentioned case in whichother materials are being substituted forsteel is in automobile manufacture. The need

to reduce vehicle weight in order to meet fuel-economy standards has driven manufactur-ers to substitute plastic and aluminum forsteel, even though these substitutes may in-crease costs. Much of the steel in an automo-bile cannot be economically replaced or elimi-nated, however, and the use of steel alloys tomake strong, lightweight components is limit-ing further substitution of nonferrous materi-als. If automobile sales grow enough to out-weigh the reduction in steel per automobile,there might even be a small net increase insteel consumption. If foreign automobile com-panies continue to increase their U.S. manu-facturing operations and use domestic steel,this too could increase the consumption ofsteel for automobiles. It is still likely, how-ever, that the use of steel in the automobilemarket will be steady or decline.

To the extent that aluminum, plastics, andcement can be substituted for steels, the con-sumption growth rate differences amongthese materials may reflect price differences.During the past two decades the averageprice for steel increased by about 30 percentin constant 1971 dollars, while prices for ce-ment and aluminum stayed about the same,and prices for plastics decreased by about 40percent. However, prices vary greatly withineach material category.

Steel’s future price competitiveness withother materials may improve as a result ofenergy and raw material cost changes, whichhave much stronger adverse impacts on alu-minum and plastics. Aluminum prices havealready started to increase sharply and willcontinue to do so as electricity costs increasein the future. The aluminum industry also isvery dependent on imported raw materials,although new technology and increased recy-cling may lessen this dependence. Prices ofplastics are dependent on natural gas and pe-troleum prices. Here, too, technologicalchanges may improve the situation. In con-trast, cementmakers can switch from oil andgas fuels to coal, and new cement technologyreduces energy use by nearly half. Steelmak-ing already depends primarily on domestic


coal and can use domestic ore and scrap asraw materials.

4 To what extent has the U.S. steel indus-try lost its ability to compete in domes-tic and foreign markets?

On the basis of price, product quality, cus-tomer service, and dependability, all threesegments of the domestic steel industry arestill competitive for the vast majority of steelsin most domestic markets (see Topic 2). Euro-pean steelmaker have higher productioncosts than U.S. companies, and althoughsome foreign producers, such as Japan and afew developing nations, may have lower pro-duction costs for some steels, these cost ad-vantages are not great enough to offset trans-portation and other costs associated with ex-porting to many inland U.S. markets. Butother nations sometimes sell steel belowcosts—and possibly below their domesticprices—suffering economic losses in order toachieve social goals such as maintaining em-ployment levels. Domestic trade laws and pol-icies have not, from the industry’s perspec-tive, successfully eliminated “dumped” or un-fairly traded steels from the market.

U.S. technological disadvantage, while se-rious, is not yet overwhelming; most innova-tions are not so unique as to rule out competi-tion from older processes or products. Thus,although the domestic steel industry has verylow levels of adoption for a number of newtechnologies and a very high percentage ofobsolete facilities, it does have market andproduct competitiveness at the present time.The industry could be on the brink of losingits competitiveness in domestic markets, how-ever, because it has little proprietary tech-nology, low adoption rates for existing tech-nologies, and insufficient capital for an am-bitious program of plant modernization, ex-pansion, and construction. In contrast, someforeign steel industries have already modern-ized considerably and are still expanding,using the latest innovative technology. In afew cases, where foreign producers also haveabundant resources of energy, raw materi-

als, and relatively low-cost labor, they couldsoon achieve a cost and price advantage overAmerican producers in some domestic mar-kets. Currency exchange rates also play animportant role; a declining dollar in worldmoney markets somewhat reduces foreigncost and price competitiveness.

The domestic industry’s future ability tocompete in its home markets will depend on:1) the degree to which old, obsolete facilitiesare closed, 2) the level of investment in mod-ernizing remaining plants, and 3) the rate ofconstruction of new facilities based on tech-nologies innovative enough to offer net costreductions. With present limits on capital forinvestment, these steps can be carried outonly with a net reduction of domestic steel-making capacity; the remaining capacity,however, will probably be cost competitive inthe domestic market. The closing of obsoletefacilities is most likely in the integrated seg-ment of the industry; in the other two seg-ments, continued modernization and expan-sion are far more likely.

Domestic steelmaker are not competitivein foreign markets, with the exception ofsome technology-intensive high-priced alloyand specialty steels. Domestic producers ofmost commodity carbon steels do not havesufficiently lower production costs to be com-petitive after adding transportation costs andother costs of marketing in a foreign nation.Domestic producers of the high-technologysteels lack experience in exporting and facetrade restrictions in many nations, as well asstiff competition from other nations whose in-dustries are often less profit-motivated thanU.S. companies. Many foreign steel industriesare directly or indirectly supported by theirgovernments, especially in export activities(see Topic 32). Currency exchange ratechanges may also favor the competitivenessof some foreign industries, and the unpredic-tability of these changes tends to dissuadedomestic firms from developing export busi-ness. Nevertheless, the recently completedMultilateral Trade Agreement could facili-tate exports by domestic steel companies;much depends on how effectively this agree-


ment can be implemented and enforced (seeTopic 33).

5 How does the R&D effort of the U.S.steel industry compare to that of for-eign industries?

There has been a steady decline in domes-tic industrial R&D in steel (see Topic 25). Thecurrent emphasis is on using existing technol-ogy to solve immediate problems in order tosecure a fast payoff rather than creating newknowledge, new technology, and major newopportunities. In this respect the UnitedStates is more similar to the Japanese steel in-dustry than to the West German, French,British, or Swedish. These European indus-tries place great emphasis on new knowledgeand major innovations. Japanese “innova-tion, ” on the other hand, is more an efficient(and often brilliant) application of technicalknowledge to a particularly well-chosen prob-lem, in order to obtain maximum economicbenefits rather than a profoundly new scien-tific concept. But despite this conceptual simi-larity, the United States lacks Japan’s closelyintegrated, symbiotic industry-government-university R&D infrastructure, and this mayprevent its reaching the level of success theJapanese enjoy.

In the U.S. steel industry, R&D personnelusually do not have a major role in the stra-tegic planning decisions of the firm, not eventhose regarding adoption of new technology(see Topics 24 and 26). The R&D function isnot well integrated into the corporate struc-ture: the emphasis is on new products, andR&D is more closely connected to sales and

marketing than to production or corporateplanning. Produc t ion p rob lems may beworked on and solved by R&D, because pro-duction problems quickly manifest them-selves in poor corporate performance; but thestrong, continuous flow of creative ideas anduseful information from production to R&D,which could stimulate innovative work, islacking. This is in marked contrast to Japanand some developing nations, where there isa much closer relationship between produc-tion and R&D personnel. R&D programs havethe prestige to attract capital and talent inJapan; except for a few companies in theUnited States, R&D is regarded as a servicefunction, particularly technical service tocustomers, rather than a long-term invest-ment for the future.

In European steel industries there is moremobility of technical personnel among firms,universities, and government facilities than inthis country. Working on R&D is highly re-garded in all of these sectors, and the verybest scientific and technical personnel are at-tracted to R&D activities. The economic plightof these industries seems to intensify theiruse of R&D, rather than to diminish its impor-tance as in the United States. Much of R&Deffort in European universities and researchinstitutes is government funded; in the UnitedStates, there has been a decline in academicsteelmaking programs largely because of alack of Government support. There are no na-tional institutes for steel R&D, such as thosein West Germany, in which companies joinwith university personnel in long-range R&Dprojects, including a great deal of basic re-search.


Consequences of Continuing Loss of Competitiveness

6 In future periods of strong world de-mand , wha t would be the conse -quences of contraction of the U.S. steelindustry and increased imports ofsteel?

Contraction of the domestic steel industrycan improve the profitability of individualcompanies. However, increased dependenceon imports could, in periods of strong worlddemand, place the United States in a shortageand price situation similar to that stemmingfrom the dependence on foreign oil. Manyanalysts contend that consumers benefit fromlow-priced imported steels and that importsshould be allowed to increase. The attempt tohold down unfairly traded imports throughthe trigger-price mechanism has also had theeffect of raising import prices.

The industry view is that, except in timesof world oversupply, domestic steels arecheaper than most imports and that, in timesof tight world supply, import prices are mark-edly higher than those permitted for domesticsteels. This was the case during 1973-74,when import prices were as much as $110/tonne higher than domestic prices. The indus-try also notes that increasing dependence onimports reduces domestic employment, makeslong-term investments in technology difficult,affects national security adversely, and con-tributes significantly to the trade deficit.

The cyclical nature of the domestic andworld steel industries determines importprices. During the past several years, importshave risen to relatively high levels—about 18percent of domestic consumption, not count-ing the steel in imported products such as au-tomobiles. Domestic demand and capacity uti-lization have been relatively high, but worldmarkets have been depressed, foreign capac-ity utilization has been low, and steel hasbeen in oversupply. Thus, after the 1973-74short-supply period, imports have been rela-tively cheap.

However, there is a distinct possibility thatworldwide supply will tighten within the next5 to 10 years. Even as demand steadily in-creases, many industrialized nations (includ-ing Japan, apparently) will be maximizing ca-pacity utilization and profitability by closingobsolete facilities, reducing the number ofproducts made, and designing modern capac-ity for largely domestic demands. Many steelindustries, particularly in Europe, would liketo avoid the large losses that have occurred inthe past, when capacity was geared to ex-ports and peak demand levels. The large in-crease in Third World steelmaking capacitywill also turn traditional exporters towardtheir domestic markets. The result could be avery tight supply situation in the worldwideexport market, with excess capacity to befound only in a few energy-rich less devel-oped countries (LDCs). Even if steel importsshould be available in such a period, theirprice would probably rise dramatically, bothbecause of normal market forces and be-cause steel from recently built plants (withhigh fixed financial costs) will cost more thansteel from old plants.

7 Do the low profits of the domestic steelindustry make it an unattractive in-vestment?

The profitability of the steel industry, com-pared to other domestic manufacturing indus-tries, is poor and getting worse. The averagereturn on equity for the steel industry duringthe 1950’s was 10.7 percent; during the1960’s, 7.8 percent; and during 1970-78, 7.6percent, as compared to 11.3, 11.2, and 12.5percent, respectively, for all manufacturing,Thus, the ratio of steel profitability to that ofall manufacturing industries was 95, 70, and61 percent for the above periods. Even thoughsteel sales and profits are cyclical, the indus-try’s better years do not offset its poor years.


Compared to those few foreign steel indus-tries operated for profit, however, the U.S. in-dustry is one of the most profitable. Compari-sons with Japan are difficult to make becausethe Japanese industry is so highly debt fi-nanced, almost twice as much so as the U.S.steel industry, with banks having ownershipin the form of loans so that return paymentstake the form of interest rather than divi-dends. Only the much smaller Canadian steelindustry, with its much shorter depreciationschedule (2-1/2 years v. 12 years in the UnitedStates) is significantly and consistently moreprofitable than the U.S. steel industry.

When the industry is disaggregated into itsthree major segments, the financial data re-veal that the nonintegrated and alloy/special-ty producers have markedly higher profitsthan integrated companies. For example, in1978 the average return on investment for 12integrated companies (accounting for 63 per-cent of domestic shipments) was 6.2 percent;for 6 nonintegrated producers (accountingfor 61 percent of their segment’s shipments)the average was 12.3 percent; and for 9 of themajor alloy/specialty companies the averagewas 11.1 percent. (For the last segment im-port quotas were in effect for several years.)

The financial data for the integrated com-panies are somewhat misleading becausesubstantial nonsteel business is generally in-cluded. Without nonsteel profits, financial re-sults for integrated companies would be sub-stantially worse; indeed, for some companiessteelmaking itself generally loses money. Incontrast, the best performing of the noninte-grated and alloy/specialty companies haveprofitabilities considerably above the aver-ages for their segment and are often consid-ered growth companies. (For example, an out-standing nonintegrated producer has had anannual growth rate of close to 40 percent forearnings and production during the past 10years. ) These are precisely the companiesthat use the latest technology.

Most steel companies have increased theirborrowing, although their debt limits mayhave been reached. The low-profitability

companies are generally viewed as poor in-vestment opportunities, but it can be arguedthat this is a consequence rather than acause of their underinvestment in new tech-nology, since investment capital is generallylinked to perceptions of future success ratherthan past performance.

There is considerable evidence of con-tinued financing of foreign steel industries byU.S. banks and financial institutions. How-ever, it is not clear that, as some industryleaders have asserted, domestic steelmakerhave been unable to secure comparable fi-nancing from the same sources. During thepast 10 years, the debt-to-equity ratio for theentire steel industry rose from 36.5 to 44 per-cent, indicating that financing has been avail-able. In this same period, stock dividends re-mained relatively stable and high, totaling$5.3 billion as compared to $4.1 billion for in-terest and charges on long-term debt.

Foreign investments in and purchases ofdomestic steel companies have been increas-ing as a result of undervalued stocks, a weakdollar, decreasing domestic competition andcapacity, increasing domestic demand, rela-t ively abundant domestic resources. andhighly efficient labor. This trend toward in-creased foreign participation in U.S. steelcompanies is likely to accelerate, particularlyfor nonintegrated companies with good prof-itability.

8 What will be the impact of continueddiversif icat ion into nonsteel opera-tions by domestic steel companies?

There is some controversy about the im-pact of diversification on steelmaking capaci-ty and investment in new technology. On theone hand, industry maintains that nonsteelprofits help finance steelmaking. On the otherhand, critics outside the industry contendthat diversification siphons off investmentcapital needed for new technology and con-tributes significantly to the decline of domes-tic steelmaking capability.


For the past 2 years, domestic capacity hasdeclined by at least 1.8 million tonnes, or 1.5percent of raw steel capacity, per year. It ap-pears likely that this rate of decline will con-tinue for the next several years as unprofit-able plants continue to close. The actions ofthe Nation’s two largest steelmaker, U.S.Steel Corp. and Bethlehem Steel Corp., ac-counted for much of this capacity reduction.During the past 3 years, U.S. Steel’s nonsteelassets grew by 80 percent, to $4.7 billion,while steel assets increased only 13 percent,to $5.9 billion, and capacity actually de-creased. Although Bethlehem Steel has notundertaken major diversification, it has re-duced its steelmaking capacity by closing ob-solete facilities to improve its profitability.U.S. Steel is apparently now doing the same,

Diversification out of steel is likely to con-tinue. This contributes to declining, but moremodern and competitive, domestic steelmak-ing capacity. The net result, however, is likelyto be a further increase in imports. The non-integrated producers (whose profi ts arehealthy) may continue to expand, but they aretoo small to reverse the decline in overallcapacity.

Industry argues that, without diversifica-tion into profitable nonsteel activities, moreplants and perhaps whole integrated compa-nies would simply shut down. In this case, thedemise of the Nation’s steel industry would bemuch faster and more dramatic than if pres-ent slow shrinkage continues, and the socialdislocations would likely be severe enough torequire substantial Government intervention.

9 Does the domestic steel industry havethe capability to innovate, or has it be-come dependent on buying proven for-eign technologies?

Innovation requires new knowledge, inven-tions, capital, highly competent and creativepeople, risk-taking, determination, and ex-cellent insights into existing and potential

markets. The steel industry knows enoughabout domestic markets and its own processneeds to utilize market-pull insights, but itdoes not appear to have sufficient profitabili-ty to support a level of capital formation thatwould create an R&D base strong enough forfuture innovation. Considering the low levelsof basic research and R&D in the industry it-self, as well as in universities and Govern-ment laboratories, it is doubtful whether thedomestic industry now has the capability tocreate major process or product innovations(see Topics 5 and 25). However, it undoubted-ly has a significant capability to create incre-mental innovations.

Because the industry lacks adequate capi-tal for high-cost innovation, it leans towardspurchasing patent rights, technology, andknow-how from foreign steel companies, fromforeign research, consulting, and technologytransfer companies, and from domestic de-sign, consulting, construction, and equipmentcompanies. Often, these latter domestic com-panies are acting as agents for foreign-ownedtechnology. Foreign technology, if adopted ata sufficiently rapid rate, can provide competi-tive parity, but not competitive advantage.

Paradoxically, during the past few years,when the U.S. steel industry has been moreprofitable than almost all foreign steel in-dustries, foreign R&D and innovation have ac-celerated. There has been a steady stream offoreign inventions and innovations that arelikely to place foreign industries at a distinctadvantage and to exacerbate American de-pendence on foreign technology. Developingnations have produced impressive numbersof innovations that place great emphasis onsuiting their fast-growing industries to the ef-ficient use of local resources and conditions.Some developing nations are pursuing strate-gies of exporting their production rather thanmerely using this production at home and re-ducing imports. These countries also exporttechnology to industrialized and less devel-oped nations.


Factors Affecting Competitiveness

10 What factors are most important indetermining total production costs,both domestically and abroad?

Unusually large cost increases for raw ma-terials were responsible for most of the 133-percent increase in domestic steel productioncosts during the 1970’s, Although hourly em-ployment costs are higher than the all-manu-facturing average and recent increases havebeen considerable, the relative significanceof unit labor costs is declining as a result ofskyrocketing raw material costs, particularlyfor energy. During the past decade, raw ma-terials (including energy) were responsiblefor almost 60 percent of the total costs of pro-ducing a tonne of steel in the United States;labor, for slightly more than 30 percent; andfinancial costs, for about 9 percent.

Although financial expenditures are gener-ally a small fraction of production costs, theyhave important indirect effects on the pro-ductivity of equipment, labor, and energy. Inturn, improved factor productivity plays animportant role in determining total produc-tion costs. Thus, the indirect impact of finan-cial costs on total costs is much greater thantheir share of total production costs would in-dicate, because increased capital expendi-tures decrease the per-unit costs of other in-puts. American steelmaker have also bene-fited from high operating rates and a declin-ing dollar over the last decade (see Topic 13).

Foreign steel industries have a roughly sim-ilar breakdown of production costs. Duringthe early 1970’s, both materials and financialcosts abroad were a somewhat larger share,and employment costs a smaller share, of to-tal production costs than in the United States.During the past decade, however, despite ma-jor increases in raw material costs, particu-larly for energy, all major producing coun-tries except the United States have slightlyreduced the proportion of raw material costsin total costs. Only in the United States havematerials and energy costs increased at a

much faster rate than either employment orfinancial costs. This is probably a conse-quence of lower domestic energy prices(which are only now reaching internationallevels), smaller energy conservation improve-ments than in some other countries, andgreater foreign financial costs.

Major European and Japanese steelmak-er, since at least the late 1960’s, have madelarger capital investments than U.S. produc-ers relative to their total steelmaking costs. InEurope, financial costs hovered between 13and 17 percent of total production costs dur-ing most of the decade. Japan, already bur-dened with a financial cost component of 20percent, was the only major producing coun-try in which financial costs increased fasterthan either employment or raw materialcosts.

Many of these differences result from thehigh debt-to-equity ratios of foreign indus-tries and the higher value of new assets re-quiring financing. This is particularly true ofthe Japanese steel industry, whose acceler-ated investment has resulted in the construc-tion of larger plants with optimum layout andprocess control and, consequently, higherproductivity of raw materials, energy, and la-bor. The fact that Japanese producers con-tinue to have lower production costs, despitecurrency changes favoring U.S. producers,can be explained largely by their investmentstrategies.

The average 1978 cost of Japanese steel(f.o.b. Japan) was about $385/tonne (materi-als, labor, capital costs) —some 10 to 20 per-cent below U.S. production costs. But the ad-ditional costs for exporting the steel—includ-ing transportation, warehousing, sales, andmarketing— must be added to productioncosts. These costs are substantial, and trans-portation costs in particular are steadily in-creasing, These export costs may offset anyadvantage in production costs, as is usually


the case for Japanese steel exports to theUnited States, especially for inland locations.

During the next several years, total pro-duction costs (in dollars) for the major pro-ducing countries are expected to draw closer,with an approximate 15-percent margin be-tween the highest (France) and lowest costs(Japan). In local currencies, Japanese andWest German total production costs have in-creased at a much slower rate than U.S.costs. Japan is expected to retain its presentleadership in total production costs, andWest Germany and Japan are expected tocontinue as leaders in the more efficient useof raw materials, with cost increases at onlyabout half the U.S. rate. Furthermore, materi-als costs in these countries are expected toremain a smaller proportion of total coststhan in the United States.

With respect to near-term capital invest-ments, Japan is expected to continue its cur-rent strategy of slowing down its plant con-struction program, while continuing to intro-duce more energy-saving equipment. Depend-ing on actual operating rates, Japanese finan-cial expenditures will decrease or only mar-ginally increase during the next few years.Relative to their current production costs, theFrench and British steel industries are ex-pected to be the major benefactors of restruc-turing and modernization among major steel-producing nations. Nevertheless, these coun-tries will likely remain noncompetitive.

11 What are the impacts of environ-mental regulations on the competi-tiveness of the U.S. steel industry?

Compared to other basic industries, steel isfaced with a major environmental cost bur-den. This may be attributed in part to the factthat most steelmaking processes were devel-oped (and most facilities constructed) duringa time when environmental considerationswere an insignificant factor in equipment de-sign. There has been little recent construc-tion, which might allow the incorporation ofenvironmental technology, and the industry

has been forced to follow the less efficientretrofit approach.

The steel industry has reported environ-mental equipment expenditures from 1969 to1978 averaging $280 million per year, orabout 13 percent of annual capital invest-ments. Future regulatory investments will in-crease to between $550 million and $800 mil-lion annually, according to Federal and indus-try estimates respectively. In addition, the in-dustry will incur substantial costs in operat-ing and maintaining environmental controlequipment, particularly for increased energyuse. Steelmaker have estimated that futureenvironmental costs will be about 20 percentof the industry’s total capital investments peryear.

Industry claims that regulatory costs havecontributed to low profitability and capitalformation, particularly because the regula-tions apply to the large number of old plants,not just new ones. This claim cannot be disre-garded, but neither can the important bene-fits of health and environmental regulationsfor steelworkers and society as a whole. Newplants benefit from optimal control technol-ogies and lower compliance costs, but theU.S. industry is not likely in the foreseeablefuture to build completely new integratedplants like those in Japan and the LDCs. Tosome extent, compliance with environmentalregulations can even be used by managementto justify reduced investments. The Environ-mental Protection Agency (EPA) stresses com-pliance, while the industry is concernedabout modernization. Both are worthy socialgoals, and it may be possible to reconcilethem through innovative technology that isenvironmentally cleaner than existing proc-esses.

U.S. regulatory costs are expected to in-crease over the next several years becausefirms are still in an earlier stage of compli-ance; Japanese steelmaker, whose pollutionabatement investments have until recentlybeen higher than U.S. levels, are beginning toenjoy an opposite trend. If other major steel-producing countries should in the future face


similar levels of environmental costs, the fi-nancing of environmental expenditures couldbecome an important factor affecting inter-national competition. In the United States, en-vironmental costs are borne directly by pro-ducers and indirectly by consumers only tothe extent that Government and the market-place permit these costs to be passed on inthe form of higher steel prices. Industryclaims that Government has not permittedenough of the costs to be passed on, and to theextent that Government has limited price in-creases and allowed the entry of unfairlytraded imports, industry’s claim is justified.Steel producers in other major industrializednations generally do not need to rely on themarket mechanism to distribute their envi-ronmental costs, because those industriesoften are government owned or financed. Di-rect or indirect government support pro-grams help them finance environmental ex-penditures, perform environmental R&D, orgain more favorable tax laws.

As steelmaker from developing nations,such as Venezuela, Mexico, Brazil, and SouthKorea, increase their share of the interna-tional market, these producers will join thosein the European Economic Community (EEC)in having an international trade advantageover the United States in the form of lower en-vironmental costs or greater government as-sistance to meet compliance costs. In a worldindustry in which profitsenvironmental costs canthough they may amountcentage of total costs.

are low or absent,be significant evento only a small per-

12 What are the potential impacts ofOSHA regulations on the steel indus-try?

The Occupation Safety and Health Admin-istration (OSHA) was established by Con-gress in 1970, but thus far OSHA regulatorycosts have been rather limited. They are thesteel industry’s greatest regulatory uncer-tainty: the costs to industry of OSHA regula-tions are not well understood, and informa-tion on future costs is speculative. As en-

forcement activities gain momentum and reg-ulatory costs increase during the next severalyears, more detailed reporting systems andanalyses will probably be developed.

The industry reported OSHA-related ex-penditures of about $4 I million for 1977, Ex-penditures in 1978 and 1979 are estimated tohave totaled about $80 million, When judicialchallenges are settled, and the Agency beginsactively enforcing major regulations affectingthe steel industry, these expenditures may in-crease considerably. In a number of cases,however, environmental and occupationalregulations overlap, so that combined regula-tory costs will be less than those for EPA andOSHA evaluated separately and summed.Cokemaking will remain the industry’s mainoccupational health hazard for the foresee-able future. Thus, integrated producers, es-pecially the older and smaller ones, will beaffected more severely than others in thenear future. However, anticipated revisionsin noise and metallics standards could have asubstantial impact on all industry segments.

OSHA has little specific statutory guidanceon questions of technological or economic fea-sibility. It can require the transfer of promis-ing abatement technologies between indus-tries, but it cannot require major private-sector R&D to develop such technologies. Itsstandards may not be “prohibitively expen-sive” or disrupt a whole industry, but OSHAis not required to consider the impact of itsregulations on the profit margins or viabilityof individual companies. Under these circum-stances, the industrial sector has developed astrong interest in cost-benefit analysis. Al-though the industry is able to provide costdata, the Government and labor interestshave had difficulty providing a dollar figurefor safety and health benefits. A SupremeCourt ruling is expected soon on this contro-versial subject.

Another problem is how the costs of OSHAregulations should be distributed. To the ex-tent possible, the industry passes these costson in the form of higher prices. However, in-dustry claims that Government policy re-stricts price increases.


There is inadequate information on the ef-fect of OSHA’s regulations on internationalcompetitiveness. On the whole, producers inother industrialized nations are also facedwith increasingly stringent regulations, butthey generally enjoy government assistanceor tax privileges in financing health and safe-ty expenditures. Thus, for comparable re-quirements, U.S. steelmaker are typically ata competitive disadvantage. At least for thetime being, producers in developing countrieshave the greatest advantage because theyhave the fewest occupational health and safe-ty requirements.

13 What is the impact of domestic laborproductivity on international costcompetitiveness?

There is considerable disagreement on in-ternational comparisons of labor productivi-ty. However, most sources suggest that theU.S. steel industry no longer leads its interna-tional rivals in labor productivity as meas-ured by man-hour requirements per tonne ofsteel. Japan has overtaken the United Statesas the world’s leader in labor productivitybecause of differences in labor/managementrelationships and because of Japan’s greaterinvestment in new technology.

Since at least the early 1960’s, the U.S.steel industry has had a lower labor produc-tivity growth rate than the average either forother U.S. manufacturing industries or forforeign steel industries. Nevertheless, actualdomestic labor productivity levels remainedcompetitive with international rivals until themid-1970’s. Japanese steel labor productivityprobably exceeded that of the United Statesfor the first time in about 1975.

Looking into the mid-1980’s, it is expectedthat labor productivity growth rates will bethe highest in Europe, followed by the UnitedStates and Japan. Even assuming a continuingphaseout of older U.S. plants, Japan is likelyto maintain its lead in labor productivity. Be-tween now and the mid-1980’s, Japaneseman-hour requirements are expected to be

reduced by 3 percent per year; by then theywill be only 90 percent of U.S. requirements.Of the major European countries, only WestGermany is in a position to approach overallU.S. labor productivity levels by the mid-1980’s.

Because labor productivity is closely re-lated to the capability of the equipment beingused, it is a good measure of the technologicalcompetitiveness of the domestic steel indus-try. What matters even more on the interna-tional market, however, is the interaction be-tween labor productivity, hourly employmentcosts, and currency values. These factors,taken together, determine unit (per tonne)labor costs,

From 1969 to 1978, the declining value ofthe dollar has had a major offsetting impacton high hourly employment costs, and U.S.steelmaker experienced small improvementsin unit labor costs compared to other steel-producing countries. U.S. labor productivityimproved modestly compared to its majorcompetitors, but foreign hourly employmentcosts (in dollars) rose 1-1/2 to 3 times fasterthan in the United States. As a result, U.S.unit labor costs moved from highest to secondlowest, and they are currently only about 25percent higher than Japan’s, which remainedthe world’s lowest during the entire period.

The United States generally has enjoyedmore favorable capacity utilization ratesthan its competitors during recent years. Dur-ing the past 7 years, U.S. operating rateshave been very high—more than 85 percent—while EEC and Japanese rates averagedslightly more than 70 percent. High operatingrates increase equipment and labor efficien-cy and reduce unit labor costs.

The United States is not expected to main-tain its favorable international position withrespect to unit labor costs into the mid-1980’s. Assuming the European steel industryreduces capacity and narrows its productlines, West Germany and perhaps Englandare expected to reduce their cost below theUnited States; Japan is expected to continueits clear lead until well into the mid-1980’s.

Ch. 3—Problems, Issues, and Findings . 85

Depending on actual operating rates, U.S. crease in value relative to the dollar at anear-term productivity growth rates will con- much lower rate than during the past decade;tinue to be no more than half of Japanese and if so, international monetary changes wouldWest German growth rates. Furthermore, favor U.S. steel producers less than they havesome foreign currencies are expected to in- previously.

New Technologies for U.S. Steel making

14 Can new technology help solve ma-jor industry problems of competi-tiveness, capacity, and capital?

Long-range planning for and expedientadoption of a variety of new steel technol-ogies could effectively reduce productioncosts, thereby improving competitiveness andslowing the rate of decline in domestic steel-making capacity. The new technologies alsomight have lower capital requirements thanmore conventional technology for similar lev-els of capacity replacement or expansion.

There is particular need to recognize theself-fulfilling aspect of the description of steelas a “mature” industry (see Topic 24). The in-dustry must recognize that the economic, so-cial, and political world in which it operatesis changing and that technology must be usedto cope with externalities as well as to pro-duce steel. There are substantial opportuni-ties for change and innovation. New technol-ogies, some already commercially availableand others with significant likelihood of suc-cessful development and demonstrat ion,could potentially reduce energy consumption,improve yield, reduce use of coke, improvelabor productivity, reduce capital costs ,allow greater use of domestic ferrous scrapand low-grade coals, permit faster construc-tion of new plants, and offer greater flexibil-ity for importing certain raw materials andsemifinished steels rather than finished steelproducts.

15 What is the most important techno-logical change for domestic steel-making during the next decade?

Two major changes in steelmaking have de-veloped since World War II. Basic oxygensteelmaking has already been widely adoptedby the integrated segment; continuous castinghas not, even though it is a well-proven andaccepted technology.

Simply put, continuous casting replaceswith one operation the several steps of ingotcasting, mold stripping, heating of ingots insoaking pits, and primary rolling of ingots intovarious shapes. The basic concept in continu-ous casting is the use of an open-ended moldto cast an indefinite length of the desiredcross section. The molten steel solidifies fromthe outer cooled surfaces inward during thecasting process, and the semifinished slab,bloom, or billet that emerges can be cut intodesired lengths.

The main benefits of continuous castingover ingot casting are:

● It saves a considerable amount of energydirectly by eliminating energy-intensivesteps and indirectly by reducing scrapand thereby increasing yield; the sum ofdirect and indirect energy savings is ap-proximately 3.3 million Btu/tonne cast,or almost 10 percent of total steelmakingenergy consumption.


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It increases process yield, in that morefinished steel is produced from the sameamount of liquid steel, thereby reducingall unit costs.

It improves labor productivity by elimi-nating a number of steps, increasingyield, improving worker conditions, andsharply reducing production time.

It produces a better quality of steel be-cause it requires fewer production stepsand allows greater automatic control ofthe process.

It reduces pollution by eliminating soak-ing pits and reheating furnaces, reduc-ing primary energy requirements, reduc-ing exposure of hot steel to atmosphere,and requiring less primary ironmakingand cokemaking because of the increasein yield.

It reduces capital costs compared to in-got casting and, considering the overallyield and economic advantages, com-pared to other means of increasing steel-making capacity.

It increases the use of purchased scrap(where iron output is constant and steeloutput increases) to replace the scraplost because of improved yield (see Topic21).

These advantages are not being fully cap-tured by the domestic steel industry, becauseit has fallen behind almost all other steel in-dustries in the adoption of continuous cast-ing. For example, in 1978, Japan continuouslycast 50 percent of its steel, the EuropeanCommunity 29 percent, but the United Statesonly 15 percent. Although U.S. adoption is in-creasing, so is that of foreign industries.

Nonintegrated facilities, by and large con-structed quite recently, continuously cast atleast 52 percent of their raw output in 1978,but they produce less than 10 percent of do-mestic raw steel. For the integrated compa-nies who produce approximately 87 percentof raw tonnage, the lag in adoption of continu-ous casting is even worse than the publishedfigures indicate.

The reasons for the low domestic adoptionrate of continuous casting include the follow-ing:

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The industry has inadequate discre-tionary capital with which to replace ex-isting, and perhaps not fully depreci-ated, ingot casting facilities.Substantially modifying an operatingplant is difficult and costly.Additional capital costs would be in-curred in constructing downstream fa-cilities to process the increased semi-finished steel production.There are technical problems with sometypes of steels and perhaps with smallproduction runs.There are difficulties in expediting EPApermits and compliance costs linked tothe granting of such permits.Uncertainties exist about the extent towhich future steel imports will capturedomestic markets.

Nevertheless, the overall economic bene-fits of continuous casting justify greateradoption. A key question is how much con-tinuous casting could and should be adoptedby the American steel industry, and in whattime frame. OTA finds that, to achieve in-creased technological competitiveness at aminimum cost, 50-percent continuous castingis needed for the whole industry by 1990.Technically, this goal appears to be feasible;but even though returns on investments inthis technology could be approximately 20percent or greater, there is probably insuffi-cient capital now and in the foreseeable fu-ture (given present price levels, import levels,and Federal policies) for this large an in-crease in the use of continuous casting.

16 What other major new technologiescould aid the domestic industry dur-ing the next 10 to 20 years?

During the 1990’s, several radical changesin steelmaking could occur:

● direct casting of sheet and strip frommolten steel, which would save consider-able energy, time, and labor;


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direct, one-step steelmaking (from ore tomolten steel), which might reduce allcosts;plasma arc steelmaking, which may of-fer a low-cost alternative to the blastfurnace, particularly suitable for mak-ing alloy steels and for use by smallplants; andformcoking, which offers the possibilityof an environmentally clean way to makecoke from low-grade coals, while stillproducing valuable byproducts (seeTopic 20).

But the technological development with thegreatest advantages and best possibility oflimited commercial adoption within 5 to 15years is coal-based DR of iron. DR refers to anumber of processes that are alternatives toblast furnaces for converting ore to iron. DRprocesses typically involve lower tempera-tures than do blast furnaces and use solid-state ore conversion. Natural gas is the sim-plest reductant to use, but low-grade coals(which the United States has in abundance)can be used directly as the reductant, as canthe products of coal gasification. The capitalcosts of DR plants would be relatively low,and by replacing both blast furnaces andcoke ovens DR could revitalize integratedplants. DR might have a greater impact onnonintegrated steelmaking than continuouscasting, particularly if small units becomecommercialized, if merchant DR plants areconstructed, or if imported DRI becomesreadily available.

There are several ways in which the Na-tion could benefit from greater use of DR:

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DR might be used by integrated steel-maker in conjunction with coal gasifica-tion plants to create new ironmaking ca-pacity at competitive cost.DRI can be used as a substitute or com-plement for scrap and could have a mod-erating effect on scrap prices as demandrises and less usable scrap is generated.DRI also can be used as a substitute forore in blast furnaces to improve theirproductivity and thus reduce the amountof coke required to fuel them; greater

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Yet,

use of DR would reduce our growing de-pendence on imported coke and wouldreduce pollution from coke burning, thegreatest source of dangerous pollution insteelmaking; DR might also be based onavailable coke oven gas, with a net eco-nomic advantage.DR can be used with other technologicaldevelopments that are on the horizon, in-cluding nuclear steelmaking, which theJapanese are developing for the year2000, and magnetohydrodynamic steel-making, expected in the 21st century.

there has been little domestic investmentin DR, largely because: 1) integrated compa-nies are committed to blast furnaces and cok-ing, which uses company-owned metallurgi-cal coke, 2) relatively low-cost scrap is readi-ly available, 3) future steel import levels areuncertain, and 4) R&D capital is limited. Somedomestic companies have studied DR technol-ogy and have attempted to develop gas-basedprocesses, but thus far the results have notcompared with those of improving blast fur-nace efficiency.

Gas-based DR is undergoing rapid expan-sion in nations with abundant natural gas;several such plants exist in Canada and Mex-ico. Several coal-based DR processes havebeen used for a number of years on a relative-ly small scale, particularly in South Africaand Brazil, with varying levels of success. Anumber of foreign firms, especially in Swe-den, are aggressively developing new proc-esses based on coal, some of which promiseenergy savings. A very attractive Americancoal-based DR process—the Calderon Ferro-cal process—is now ready for demonstration.

DRI is likely to become a world-traded com-modity in the years ahead, especially by na-tions like Venezuela and Mexico that havelarge supplies of natural gas, If the U.S. steelindustry does not build domestic DR facilities,it may find itself importing DRI in greatquantities as nonintegrated mills expand andscrap becomes more expensive. With DR fa-cilities and huge reserves of coal, the UnitedStates could satisfy its own steelmakingneeds and perhaps export coal-based DR


technology; instead of exporting scrap, itmight export DRI.

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17 What incremental or evolutionarytechnological changes will be signifi-cant for the next several decades?

Literally hundreds of incremental techno-logical changes are likely during the nextseveral decades, including the creation of ●

new steels. The following are most significanton the basis of likelihood of successful devel-opment, economic benefits, energy savings,and large-scale applicability to most of thedomestic steel industry:

● External desulfurization, which removes ●

sulfur from molten pig iron rather thanhaving it removed in the blast furnace,could be used very widely. This processcan use high-sulfur coal and thereby re-duce coke use.

● High-temperature sensors would allow ●

better control of crucial variables dur-ing the finishing stages, and thus offer

improved quali ty control , increasedyield, energy savings, and improved la-bor productivity y.

Energy recovery techniques are pos-sible—for example, the use of blast fur-nace top-gas pressure to generate elec-tricity, the use of steelmaking furnacegases, and the recovery of waste heatfrom furnaces.Continuous (direct/inline) rolling couldavoid intermediate cooling and reheat-ing of ingots, slabs, or billets by rolling orforming continuously cast products with-out any break in the processing se-quence.Self-reducing pellets, which are a com-bination of finely divided iron oxide fromores or wastes, carbonaceous material,and fluxes, can be used in blast furnacesor in DR furnaces to obtain iron in rela-tively short times.Computer process control (automation)can improve process eff iciency andproduct quality.

Impacts of New Technologies on the U.S. Steel Industry

18 How would technological changesaffect the restructuring of the do-mestic steel industry?

Industry restructuring refers to shifts inmethods of production, nature of products,size of firms, rate of technological change,raw materials used, or types of marketsserved. A significant restructuring of allthree segments of the industry—integrated,nonintegrated, and alloy/specialty produc-ers —is already in progress. Technologicalchanges are playing an important role in thisrestructuring, which is best understood as achange in the relative importance of each seg-ment and a trend toward decentralization ofthe industry. Restructuring is also shapingtechnological needs.

The dominance of integrated plants is de-clining. This results from increasing advan-

tages of plants of the other two types andfrom structural changes in the integratedfirms themselves. These changes include: 1)shifts in the raw material used, primarilyfrom original domestic sources of iron ores tothe lower grade taconite ores and to importedore; 2) shifts in markets from the Northeastand North Central States to those in the Southand West; 3) increasing concerns over heavi-ly concentrated sources of pol lut ion; 4)greater oscillations in market demand; 5) agradual physical deterioration of old plantsand inadequate capital to construct newplants; and 6) significant changes in the tech-nology of steelmaking, which require a funda-mentally new plant layout to achieve max-imum efficiency.

The steadily increasing growth of noninte-grated firms is difficult to quantify precisely

Ch. 3—Problems, Issues, and Findings w 89

because accurate and comprehensive datadistinguishing nonintegrated from integratedproducers are not collected by Federal agen-cies or trade associations. However, duringthe past decade this industry segment hasroughly tripled its output. In 1978 the noninte-grated producers accounted for approxi-mately 10 percent of raw steel tonnage and13 percent of all domestic shipments; theirdollar share is smaller because their plantsproduce lower price steels.

Factors promoting growth of the noninte-grated segment include: 1) markedly lowercapital costs per tonne of annual capacityand much shorter construction times than in-tegrated plants; 2) the availability of relative-ly low-cost, local ferrous scrap; 3) increasingnumbers of large local markets; 4) risingtransportation costs, which improve competi-tiveness of local suppliers using local re-sources; 5) relatively low-cost electricity (incomparison to integrated steelmaking fuels)and low energy consumption; 6) highly effi-cient, and improving, process technology con-sisting primarily of electric arc furnaces andcontinuous casters; 7) use of nonunion laborin less industrialized regions; 8) high laborproductivity; 9) less import competi t ionamong the lower value steels; 10) fewer envi-ronmental problems and lower control costs;11) an advantage over integrated producersin times of slack steel demand because thecost of scrap declines, whereas the cost ofiron ore does not; and 12) relatively low entrycosts,

The future growth of the nonintegratedsegment will depend on shifting their produc-tion to more complex and higher pricedsteels, including perhaps alloy and specialtysteels. This trend is already beginning, but itwould be accelerated by introducing DR facil-ities in nonintegrated plants; by increasingthe number of merchant DR plants, whichserve many steelmaker; or by importing DRI.The use of a combination of DRI and scrapwould have technical and economic benefitsthat would promote the expansion of noninte-grated firms. The next mostnological development would

important tech-be the introduc-

tion of small rolling mills for sheet and stripsuitable for nonintegrated plants, which donot now make flat steel products. This is be-ginning. Even in the absence of flat productmanufacture, nonintegrated f irms couldgreatly increase their production, perhaps by100 percent in the next 10 years, but cost andavailability of scrap and electricity will be im-portant determinants. Very low R&D levelsmay inhibit future growth and cost competi-tiveness.

The alloy/specialty segment is increasinglargely because of the ever-increasing use ofsuch steels for demanding applications. Dur-ing the past 10 years, shipments of alloysteels increased from 9.4 to 12 percent of alldomestic shipments. Technologically, thefirms in this segment are advanced, innova-tive, responsive to market demands, and com-petitive with any foreign industry. Apparent-ly, they used several years of import quotaseffectively to improve their competitiveness.They tend to be the lowest cost producers forthe domestic market and for many foreignmarkets as well. Specific new technologiesthat offer promise for these companies are:powder rolling for the direct production ofsheet and strip from alloy powders, plasmaarc melting furnaces for improved meltingand alloying efficiencies, and greater usethan at present of recycled high-alloy-contentwaste materials. It is noteworthy that someintegrated companies have shifted towardproducing more alloy and specialty steels.

The alloy/specialty segment might also beable to export more of its products, althoughthere is some uncertainty about the future.Quotas on imports of steels in this segmentare being removed; foreign producers wouldlike to export these higher priced, higherp ro f i t p roduc t s , and s ign i f i can t excessforeign capacity exists for producing some ofthese steels. Domestic companies are con-cerned that the Government vigorously en-force the new Multilateral Trade Agreementto support exports and prevent the entry ofunfairly traded imports (see Topic 33).

, ,– ‘ , - - –


19 How wi l l future technolog ica lchanges affect the amount and typeof energy used by the domestic steelindustry?

The steel industry is the single largest in-dustrial user of energy in the Nation, ac-counting for close to 5 percent of total con-sumption. Just over 60 percent of the energyused in steelmaking derives from metallurgi-cal coal, approximately 20 percent comesfrom natural gas, somewhat more than 5 per-cent is from oil, and about 5 percent is pur-chased electricity. The steel industry is thesecond largest user of electricity after thealuminum industry.

In 1978, integrated plants used an averageof 35 million Btu/tonne of shipped products,whereas nonintegrated plants making carbonsteels used an average of 10 million Btu/tonneshipped. It must be noted, however, that non-integrated plants do not reduce iron ore toiron and generally make simpler productswhich require less processing than others. Agoal established pursuant to the Energy Pol-icy and Conservation Act is to reduce thesteel industry’s energy use by 9 percent by1980. The industry indicates that it will meetthat target. Even without that motivation, theindustry has a financial incentive to reduceenergy use. Ten years ago, energy accountedfor about 10 percent of steelmaking costs; to-day, it is more than 20 percent.

A great many technological changes arehelping the industry to reduce energy con-sumption. The most significant is the increas-ing use of continuous casting, which can leadto almost a 10-percent reduction in energyuse for integrated plants. The second mostimportant change is the ever-increasing useof scrap-based electric furnaces, which, be-cause they do not require the production ofnew iron units from ore, use considerably lessenergy than integrated production. The shiftto more continuous casting reduces coal, fueloil, and natural gas consumption; and al-though the shift to electric furnaces increasesthe industry’s use of purchased electricity, itreduces total energy use.

One of the factors pushing the industry tomore electric furnace use is the substantialincrease in the cost of constructing new cok-ing facilities; these are largely environmentalcompliance costs. Replacement of old cokingfacilities has lagged so much that a consider-able amount of coke is being imported (seeTopic 20).

The increasing costs of coking and of met-allurgical coals have also made the potentialuse of DR (which uses the cheaper, lowergrade steam coals) increasingly attractive.Critics of DR point out that the process offersno apparent energy savings, but large-scalecoal-based DR technology is only in its in-fancy and further experience could lead toenergy savings. Moreover, numerous innova-tions are taking place in this technology, someof which should lead to significant improve-ments in energy efficiency. Developments incoal gasification and synfuels could also pro-mote DR; Brazil and West Germany are in-vesting in development of coal-gasification-based DR.

Many other incremental and major techno-logical changes during the next several dec-ades should do much to reduce steel industryenergy consumption. Greater adoption ofavailable new technologies could reduce en-ergy consumption by one-third. The continuedclosing of old, obsolete, and energy-inefficientplants will perhaps have an even more signifi-cant effect on the industry’s energy consump-tion.

The degree to which improved technologyand energy conservation measures can re-duce energy consumption is illustrated by theremarkably low energy use of the Japanesesteel industry. In 1976, Japan used 70 percentas much energy as the United States on a per-tonne-shipped basis, and West Germany 85percent as much. The Japanese at tr ibutemuch of their energy savings to continuouscasting and concerted energy conservationefforts.


20 To what extent can technologicalchanges reduce increasing U.S. reli-ance on foreign coke?

In 1972 , the Uni t ed S ta te s impor ted168,000 tonnes of coke, mostly from Canada;in 1978, 5,190,000 tonnes were imported, 70percent of which came from West Germany.Coke imports contributed nearly $500 millionto the U.S. balance-of-trade deficit in 1978,and this amount increases as imported cokeprices rise. Moreover, when coke is imported,there is a loss of increasingly valuable coke-making byproducts, such as coke oven gas,tars, and distillates, which the steel industryuses itself or sells. Domestic cokemaking ca-pacity decreased from 55.9 million tonnes in1974 to 47.6 million tonnes in 1978. Associ-ated with this decrease has been a loss of5,000 jobs in the steel industry and 9,500 jobsin the coal industry. Forecasts indicate a fur-ther loss of 4.8 million tonnes of coke capacityby the end of 1985, with a possible domesticshortfall of 7.3 million to 10.9 million tomes.Other analyses, however, predict no shortageof domestic cokemaking capacity in the nearfuture,

The industry’s explanations for decreasingdomestic cokemaking capability include: 1) alarge fraction of domestic cokemaking facil-ities are very old and reaching the end oftheir useful lives, 2) the cost of a new cokeplant has increased 150 percent in the last 10years and 40 percent in the last 5 years,3) from 22 to 30 percent of the plant costs arefor unproductive regulatory compliance,4) many old plants cannot be cleaned up atreasonable costs, 5) enforcement of EPA reg-ulations has reduced plant capacities and ef-ficiencies, 6) there are limitations on sites fornew plants, 7) capital is scarce and uncer-tainty exists about long-range opportunitiesto meet domestic demand, and 8) there is un-certainty about future regulatory require-ments and their impacts on technologychoices.

In addition, relatively cheap foreign cokehas been available on the world market be-cause most foreign steel industries, particu-larly those in Europe, have been in a de-

pressed state. But as foreign steel industriesreach higher levels of capacity utilization,domestic producers fear that coke will be-come less available and much more costly. Ifcoke is not available from foreign sources insufficient quantity, steel imports might haveto increase instead.

Other than importing more coke and steel,or constructing more conventional coke facil-ities, the ways in which coke shortages can bealleviated include: 1) increasing the use ofscrap-based electric furnace steelmaking tothe extent that scrap is available; 2) introduc-ing coal-based DR to supplant blast furnacetechnology based on coke; 3) modifying blastfurnace processes to reduce the amount ofcoke used; and 4) promoting the use of cheap-er nonmetallurgical grade coals, includinghigh-sulfur coals, by adopting new, environ-mentally cleaner formcoking technology.

Formcoking is the generic name given to anumber of processes, as yet unproven on alarge scale, to convert low-grade coals intocoke. It is possible that these processes mayoffer economic benefits to domestic steelmak-er, and environmental advantages for someformcoke processes are possible. Large sumswill be required for demonstration plants,however, and it will be a considerable timebefore results are sufficient to affect domes-tic cokemaking.

21 How will technological changes af-fect the cost and availability of fer-rous scrap?

There are four technological developmentsthat will affect the demand for and availabili-ty of ferrous scrap: 1) an increase in the useof electric arc furnaces by integrated andnonintegrated steelmaker; 2) the introduc-tion of DRI, which can substitute for scrap;3) greater use of continuous casting and otherprocess changes that will allow more use ofpurchased scrap; and 4) continuing increasesin the use of alloy steels and nonferrous mate-rials in automobiles and certain improve-ments in domestic manufacturing, both ofwhich may reduce the supply of readily avail-able and easily processed scrap.


Technological changes within integratedsteelmaking will increase the demand for fer-rous scrap. The two most important changesare: 1) the increased use of continuous cast-ing, which reduces inplant scrap generationand makes it necessary to use more pur-chased scrap to supply steelmaking furnaces,and 2) changes in basic oxygen steelmakingfurnaces that allow them to use more ferrousscrap, at perhaps a 40- to 50-percent levelrather than the present 30 percent, but alsoincrease energy consumption.

Electric arc furnace processes use signifi-cant amounts of scrap, and the use of electricfurnaces by integrated and nonintegratedsteelmaker is increasing at a rapid rate.During the past 10 years the amount of do-mestic carbon steel made in electric furnaceshas nearly doubled, and the trend is similararound the world. This has offset the declinein scrap use that resulted from open hearthfurnace shutdowns. Many steel analysts be-lieve that one-half of the domestic capacity in-stalled during the coming decade will useelectric furnaces, assuming that adequateelectricity is available. Electric furnace steel-making is certainly not a new technology, butfor several reasons its benefits are more sig-nificant today than ever before. These rea-sons include: 1) a relatively low cost for fer-rous scrap during the past several decades,although users have found it difficult to copewith the large gyrations in scrap prices; 2) arelatively low energy requirement, becausescrap embodies energy (nearly as much ener-gy is used to convert iron ore to iron as tomake steel from iron); 3) a high labor produc-tivity, which has improved more for electricfurnace steelmaking than for any other proc-ess of the steel industry—nearly 50 percentduring the past decade, compared to 13 per-cent for blast furnaces and 26 percent forother types of steelmaking furnaces; 4) mini-mal pollution problems; 5) very low capitalcosts; and 6) relatively short constructiontimes.

Because the competitiveness of electricfurnace steelmaking depends on the cost andavailability of ferrous scrap, domestic non-

integrated steelmaker are sensitive to theuncontrolled export of ferrous scrap. Histori-cal data show a connection between exportsand cyclic changes in scrap prices. It is alsobelieved that exports of scrap help feed for-eign steel exports to the United States andthreaten future domestic avai labi l i ty ofscrap. The scrap industry argues that thereis a large domestic supply of scrap, particu-larly a great deal of obsolete scrap, such asdiscarded automobiles and appliances scat-tered around the Nation, and scrap in wastesand garbage. The cost of retrieving suchscrap is very high, however, and ferrousscrap in general is becoming more costly tocollect, process, and distribute. The increas-ing use of alloy steels, especially in automo-biles, is making scrap processing more dif-ficult and costly, and impurities and minoralloy additions build up as more and morescrap is repeatedly recycled. The generaltrend in manufacturing—to improve processefficiency and reduce raw material and ener-gy costs—means that less industrial scrapwill reach the market.

The most likely competition for ferrousscrap is DRI, which offers a number of tech-nical advantages over scrap and has greaterprice stability. As scrap prices rise, DRIbecomes more competitive; conversely, lowscrap prices act as a disincentive to the de-velopment of DR. Thus, the price of DRI,whether imported or manufactured domesti-cally, is a potential way for the marketplaceto stabilize scrap prices. In the long run, DRIavailability will likely be a decisive determi-nant of increased electric furnace use (seeTopic 16).

22 How does changing technology af-fect the timing and strategy of ca-pacity expansion?

The technological and cost competitivenessof domestic integrated companies suffersfrom the exceedingly small amount of new fa-cilities added during the past several dec-ades. Industry argues, and correctly so, thatoptimum technology and efficiency require


new plants with proper layouts that willallow new technologies to be introduced andintegrated into all phases of the steelmakingprocess. The major obstacle to the construc-tion of new integrated plants is their extreme-ly high capital cost (about $1,320/tonne of an-nual capacity) and the large plant size neededto capture economies of scale; capital costscould reach many billions of dollars perplant. Considering the industry’s capitalshortage, uncertainties over future Govern-ment policies affecting capital formation, andthe continuing problem of imports capturingdomestic markets, it is quite unlikely that newintegrated plants, based on modern blast fur-nace technology, will be built in the nearfuture.

Even if sufficient capital and financingcould be obtained, i t can be quest ionedwhether such costly capital projects shouldbe built. Such plants take many years to com-plete, and by that time new and innovativetechnology, with greater production cost sav-ings, and possibly with reduced capital costs,may be available and perhaps may even beadopted by foreign steel industries. It can beargued that this is exactly what happened tothe domestic steel industry in the 1950’s and1960’s, when considerable plant constructionand expansion took place before basic oxygenfurnace and continuous casting technologies,the two most important developments afterWorld War H, were proved on a large scale.Important technological developments maybe commercialized within the next severaldecades. One distinct possibility is the large-scale use of some form of DR (see Topic 16).There are so many current developments inthis area that success is likely, especially ifU.S. companies, much like the Japanese, cre-atively apply available foreign research to de-velop major innovative technologies by theend of the century.

An alternate strategy, then, is to modernizeand expand capacity at existing plants. Thecapital cost per tonne of annual capacity forthis approach is generally about half that ofbuilding a new plant, but varies considerably.Naturally, there are limits to the amount ofnew capacity that could be added by thismeans. When coupled with new plant con-struct ion in the nonintegrated segment,which is proceeding at a significant pace, thiswould probably create enough additional ca-pacity for the next decade. Capital costs ofnew nonintegrated plants range from $154 to$275 per annual tonne today—about 10 to 20percent of the cost for new integrated plants—and although they cannot produce the fullrange of steel products, expansion of theirproduct mix is occurring with moderate in-creases in capital costs.

A domestic strategy based on modernizingand expanding existing plants and construct-ing new nonintegrated plants during the nextdecade could lead to a distinct technologicaladvantage. There will be little steelmakingcapacity expansion in Western industrializednations, and the present large-scale expan-sion of steelmaking in the Third World andCommunist-bloc countries is based on eitherblast furnace steelmaking or first-generationgas-based DR processes. Thus, by developingone or more major domestic technological in-novations before building new integratedplants, the United States could gain techno-logical superiority. By adopting foreign inno-vations, the domestic industry would avoidrepeating the past mistake of investing inrapidly outdated technology that it could notafford to replace quickly. Thus, even theworst case means the United States obtainstechnological parity with foreign industries,something it does not have now.

— — — .


Financial, Regulatory, and Institutional Barriers tothe Adoption of New Technology

23 To what extent is insufficient capitala barrier to the increased use ofnew technology?

Industry contends that its problem is notlack of adequate technology to improve costcompetitiveness, but rather insufficient capi-tal to adopt new technology. This position hasconsiderable merit. Industry argues that ifcompanies had sufficient capital, they couldselect and use the best technology for mod-ernizing existing plants and constructing newones. Industry also maintains that Govern-ment policies have contributed to low profit-ability and insufficient capital for new tech-nology by: 1 ) keeping steel prices too low,2) requiring high, nonproductive regulatoryexpenses, 3) permitting unfairly traded im-ports, and 4) not providing adequate tax in-centive for investment, such as faster depre-ciation schedules. Capital is surely necessaryto utilize technology, and there have been rel-atively low levels of capital available to theindustry from its own profits.

Both OTA and the American Iron and SteelInstitute (AISI) have analyzed the industry’scapital needs for a major program of modern-ization and expansion for the next 10 years.Both analyses assume the same increase inshipment tonnage capability by 1988, bothagree on the need to improve profitability,and both assume no radical technologicalchanges. They do assume a very large in-crease in continuous casting, elimination ofopen hearth furnaces, substantial moderniza-tion of blast furnaces and finishing mills, andreplacement of about half of the present cokeovens.

The differences between the scenarios aremore instructive. The OTA analysis assumes:1) a greater expansion of nonintegrated steelcompanies at relatively low capital costs, and2) lower modernization and replacementcosts for integrated plants. The AISI analysis

projects a need for nearly $5 billion per year(in 1978 dollars) during 1978-88 for invest-ment in productive steelmaking, an increaseof 150 percent over the annual average forthe past decade; OTA finds a need for only $3billion per year, an increase of 50 percent.The OTA analysis of future capital formationleads to a projected deficit of at least $600million per year for the modernization and ex-pansion program. Unlike the OTA scenario,the AISI analysis concludes that substantialreal price increases will be needed, regard-less of other impacts on capital formation, inorder to achieve improved profitability at thehigher levels of investment.

The real issue is not whether the industrybuys any modern technology with its availa-ble capital for modernization and new plants,but rather how much of what types of newand innovative technology its limited capitalwill buy. A key issue is whether new technol-ogy can reduce production costs sufficientlyto justify large capital expenditures. TheOTA scenario delays investment in large inte-grated plants until the 1990’s, which is madepracticable by renewing the industry in the1980’s through minimum-cost modernizationand replacement and maximum expansion ofnonintegrated companies.

Integrated companies, part icularly thelargest ones, have the lowest propensityamong the three industry segments to usecapital for risky, major types of innovativetechnological changes. Nonintegrated steel-maker generally show more inclination t oadopt rapidly the newest types of technology;however, their technological opportunitiesare fewer because of their dependence onscrap and their smaller range of products.The alloy/specialty producers generally ex-hibit the greatest tendency to use capitalfor rapid adoption of major technologicalchanges and for development of proprietary


innovations for both processes and products;however, the demanding applications fortheir products are more conducive to tech-nological change than is the case for the othersegments. The greater inclination of both thenonintegrated and alloy/specialty producersto use new technology is also linked to theirgreater profitability and, to a lesser degree,to their more rapid growth. Profitability andexpansion may be a consequence of usingnew technology, however, rather than acause of it.

Virtually all calculations of likely levels ofcapital formation indicate that, for the next10 years, domestic integrated steel compa-nies will not have sufficient capital (at cur-rent levels of profits and borrowing) to createand adopt enough new technology to maintaindomestic capacity and competitiveness. Thefour most likely means of providing this addi-tional capital are: 1) raising domestic steelprices substantially, 2) changing tax and de-preciation laws, 3) providing direct Federalsupport such as loan guarantees or industrialrevenue bonds, and 4) greatly reducing reg-ulatory demands. Raising equity capital, in-creasing borrowing from the private bankingand financial community, and greatly reduc-ing dividends are also possible, but most ana-lysts doubt that these methods could be effec-tive, Foreign investment is increasing, how-ever, and could be a significant (if uncertain)source of equity capital. Should the capitalshortfall not be met by any of these means,however, it is possible that steel imports (ifavailable) will claim 40 percent or more of theU.S. market by the end of the 1980’s.

24 Do steel companies use effectivelong-range strategic planning fortechnological innovation in order togain competitive advantage over do-mestic and foreign producers?

More often than not, steel industry execu-tives express a desire to be second with prov-en technology, not first with new technology.This attitude is clearly a barrier to innovationthat does not exist in many other industries.

Under the currently accepted definition ofinnovation—the first successful commercialuse of a technological invention—most do-mestic steel companies, with the exception ofsome alloy/specialty producers, do not ap-pear to emphasize innovation in their long-range strategic planning.

The steel industry apparently perceivesthe advantage of innovation (over “modern-ization” with available new technology) as in-sufficiently rewarding. This is evidenced bythe industry’s relatively low levels of spend-ing for R&D and for the more expensivestages of pilot and demonstration work, aswell as its historical record of importingforeign innovations. These factors combine toform a second barrier to innovation. The easeof buying new technology from foreignsources encourages reemphasis of domesticinnovation, and lack of sufficient capital isused to justify this trend. Domestic firms alsotend to sell whatever innovative technologythey do create, as quickly as possible, inorder to maximize immediate profits, insteadof keeping the technology proprietary andthereby gaining a competitive advantage. In-dustry claims that this is also done by foreignfirms.

This lack of emphasis on technological in-novation may be symptomatic of a generallylow level of planning by steel management orsimply unsuccessful planning that does notsufficiently appreciate the potential of tech-nology. Historical studies of the domesticsteel industry have examined several issuesindicative of poor planning: 1) the rapid de-cline of profitability and eminence afterWorld War II, 2) the lack of response to rap-idly rising steel demand in Third World andindustrialized nations, 3) the lengthy andcostly resistance to compliance with environ-mental regulations, and 4) the large inte-grated producers’ lack of attention to demo-graphic changes and opportunities for localmarkets. One explanation for these and othersuch shortcomings is a lack of dedicated,long-range strategic planning by domesticsteel companies, particularly by integratedproducers.


Industry needs to develop appropriatescenarios, risk/reward analyses, and corpo-rate options in order to anticipate and re-spond to major changes in both the domesticand world economies, as well as to changes inFederal policies. The AISI scenario is a firststep in this direction. Domestic steel industrymanagement must examine the consequencesof continuing to concentrate on low-risk, in-cremental technological changes; defensiverather than aggressive business strategies;product rather than process changes; tradi-tional domestic markets rather than exports;promoting from within, rather than recruitingpersonnel from other industries, universities,and Government; and making profits fromtheir raw materials (iron ore and metallurgi-cal coal) investments. It appears that much ofthe industry, and particularly the integratedsegment, has endorsed the self-fulfilling no-tion that steel is a low-technology, “mature”industry, with little potential for growth orsubstantial technological changes. The conse-quences over the last 20 years have been adecline in capacity, a fivefold increase in im-ports, and numerous missed opportunities inboth technology and foreign trade. Neitherthe industry nor the Nation can afford theconsequences of another 20 years of poorplanning and missed opportunities.

25 Is there sufficient steel-related R&Din the United States to meet the goalof future technological competitive-ness?

The total amount of industry, Government,and university R&D devoted to steel in theUnited States is woefully inadequate for fu-ture technological competitiveness. Withinthe industry itself, what little R&D exists is fo-cused on short-range, quick-payoff activities;very little goes into basic research. The indus-try does not aggressively pursue major tech-nological changes and innovations for long-term growth, and even spending for incre-mental improvements is minimal. What isoften termed R&D in the steel industry wouldnot be accepted as such in other industriesbecause the work is too applied and tied so

closely to manufacturing or sales. The indus-try does emphasize R&D in raw materialsprocessing and products, but for research inironmaking and steelmaking processes it de-pends on foreign producers and domesticequipment suppliers.

The steel industry insists that it lacks ade-quate funds to invest heavily in long-rangeR&D, both because of generally low levels ofavailable capital and because of other de-mands on that capital. R&D spending levels insteel appear to be geared to the low part ofthe business cycle; when net income is mark-edly greater than in preceding years, there isno corresponding increase in R&D spending.

The total amount of steel industry spendingon R&Din 1978 was $259 million. In 1977 and1978, steel industry R&D spending was 0.5percent of industry sales; in 1975 and 1976, itwas 0.6 percent; and during 1963-71, it was0.7 percent. These are very low figures: theonly domestic manufacturing industry with alower level of R&D spending is the textile in-dustry; the aluminum industry spends abouttwice as much. Steel R&D spending measuredas a fraction of industry profits appears morereasonable, but it is still about half of the na-tional industry average. In addition, muchsteel R&D is aimed at dealing with Govern-ment regulations; about 20 to 25 percent ofR&D personnel work on environmental prob-lems (see Topic 27).

Steel-related R&D in universities and Gov-ernment facilities also appears to be minimal.AISI funds only about $1 million of researchper year at universities, and Federal fundingis also very low, accounting for only 1.5 per-cent of steel R&D in 1977. By comparison, theFederal Government funds 9 percent of R&Dfor the chemical industry, 14 percent for themachinery industry, 47 percent for the elec-tric equipment industry, and 78 percent forthe aircraft industry.

There are no hard data available to deline-ate the difference among the three industrysectors with regard to R&D spending, but itappears that at least some alloy/specialtyproducers are much more involved in R&D


than most firms in the other two segments.The integrated steelmaker spend very littleon R&D; the nonintegrated producers, whohave become quite dependent on equipmentmanufacturers for technological develop-ments, appear to spend even less.

Although the U.S. steel industry is one ofthe world’s most profitable, it appears to lagbehind foreign steel industries in R&D spend-ing; the Japanese, for example, now spendabout 1 percent of sales on R&D. Much of for-eign R&D in steel is directly or indirectly sup-ported by governments. At the present time,for example, $36 million is spent annually onsteel R&D by the Commission of EuropeanCommunities, of which $20 million is suppliedby governments. In Japan, there also appearsto be significant government support of uni-versity research in steelmaking.

26 Does the domestic steel industry em-ploy enough technical personnel anduse them effectively to enhance itstechnological competitiveness?

The steel industry has been criticized forits loss of technical leadership, slow adoptionof new technologies, and low levels of R&D. Itis therefore relevant to consider industry useof technically trained personnel. In compari-son to average employment levels of technicalpersonnel by domestic manufacturing indus-tries, the steel industry’s use of technical per-sonnel is low. As a percentage of its total em-ployees, steel employs only about one-thirdthe number of scientists and engineers in thepetroleum, refinery, and chemical industry,and about half the number in the electricalequipment industry.

Moreover, for the entire steel industry onlyabout 18 percent of all technical personnelare used in R&D. Engineers typically start inR&D and reach higher levels of managementby moving to other areas. This practice hasthe potential disadvantage of driving many ofthe best technical people out of R&D, becausethey can achieve higher salaries and greaterprestige in other departments. These techni-cal personnel may not have the appropriate

expertise for business management and pol-icy work; on the other hand, they have a bet-ter understanding of the technological basisof the company and the effective use of tech-nical knowledge for process improvementand market development.

The steel industry draws few technicalpersonnel from high-technology industries.There appears to be a trend toward retiredsteel personnel going from industry to Gov-ernment and universities; there appears to belittle return flow of midcareer professionalsto the industry, however, as is typical of inter-sectoral mobility and training in West Ger-many.

There is also some criticism of the industrybecause training and development of techni-cal staff are geared to managerial and execu-tive development rather than to technical spe-cialties. Most companies have tuition supportprograms for undergraduate and graduateeducation, but there is generally much lesssupport for publishing in professional jour-nals or for sabbaticals at domestic and for-eign universities. While technical personnelin R&D are given some opportunity to attendmeetings and conferences, those in othercompany areas have fewer such opportuni-ties. This treatment of technical personnelappears consistent with the “mature indus-try” image accepted by most integrated com-panies— why upgrade technical skills whensteel technology will not change in majorways? (See Topic 24. )

Industry representatives seem satisfiedwith the availability of new technical person-nel, but college recruiters are concerned thatmore growth-oriented industries may be at-tracting the best technical talent. Personnelavailability may be adequate to present in-dustry needs, given its limited R&D and itscurrent use of technical people: but shouldthe industry choose to change its strategies, itcould face difficulty in recruiting the num-bers and types of people it will need. Unlikeother nations, where steel research is re-garded as important and exciting, the U.S. in-dustry could have problems attracting thebest technical people away from high-tech-

98 . Technology and Steel Industry competitiveness

nology, R&D-intensive, high-growth indus-tries.

27 What are the impacts of EPA andOSHA regulations on steel industrymodernization?

Social regulations do have an impact onsteel industry modernization, and environ-mental regulations have a greater impactthan do occupational regulations, for severalreasons. First, environmental regulationshave been actively implemented since the late1960’s, but implementation of OSHA regula-tions has been limited until recently. Second,EPA regulations have an impact on the entirerange of production technologies, while thoseof OSHA have had their greatest impact oncokemaking. Future OSHA regulations maymore significantly affect the entire range ofoperations, but OSHA has a certain degree ofadministrative flexibility. OSHA compliancedeadlines, unlike those of EPA, are not pre-scribed in authorizing legislation. This givesOSHA greater potential for successfully inte-grating industry modernization programswith regulatory compliance schedules.

Both sets of regulations have both positiveand negative impacts on the steel industry.On the positive side, both EPA and OSHA areforcing the industry to consider technologi-cal improvements or substitutes for existingsteelmaking processes. An indirect, near-term consequence of regulatory enforcementhas been increased use of electric furnacesand an accelerated phaseout of aging and in-efficient facilities. An unanticipated, long-range consequence of social regulations maybe increased incentive to develop safer andcleaner new processes that are also morecost effective. Continuous casting and DR areamong future alternatives showing promisein this regard.

On the negative side, the expenditures(capital and operating) required to complywith environmental regulations divert corpo-rate funds from modernization investmentsthat might otherwise be undertaken. Industryreports suggest that in recent years steel

companies have invested about $450 millionannually in environmental control facilities.Environmental expenditures are mainly forretrofitting existing equipment and involvegradual improvements in control technology,and to a lesser extent for in-process changes.Because of limited replacement and expan-sion activity during the past decade, therehas been little opportunity to integrate envi-ronmental expenditures with new plant con-struction, and expensive retrofitting has oc-curred instead. In fact, regulations have beencited as a cause of some capacity reduction,especially in cokemaking, in which import de-pendence has become a growing concern.The next decade may offer more opportu-nities.

Available incentives, in and of themselves,have not stimulated industry management tochoose technological innovation rather thandelay as a cost-effective response to regula-tions. EPA’s incentives are limited to ex-tended compliance schedules and penalty-payment exemptions which allow, to some ex-tent, for new technology development by thesteel industry. The Agency does not provideregulatory guarantees or financial supportshould the innovative approach fail to meetregulatory requirements. OSHA’s regulatoryincentives are not strongly oriented towardsstimulating industrial innovation either.Although OSHA may issue variances in re-sponse to operational constraints within thesteel industry, stimulating innovation is not aspecifically authorized goal in the issuance ofthese variances. OSHA’s only specific author-ity to stimulate innovation is through its judi-cially interpreted “technology forcing” poli-cy, which allows it to require the adoption ofpromising new pollution abatement technolo-gies or practices that have been developed byother industries. Such forced transfers mustbe limited to the regulation of toxic materialsin the workplace, however, and they may notinvolve new equipment or controls that wouldnecessitate major industry R&D.

A final important consideration is thatneither EPA nor OSHA can complement theirregulatory requirements with significant eco-


nomic incentives to encourage the industry todevelop more cost-effective technologies. EPAdoes have a limited environmental technologyRD&D program that involves industry costsharing. Both agencies lack vigorous anticipa-tory RD&D programs designed to developgreater Government and industry awarenessof the environmental implications of emergingsteelmaking technologies. This is particularlysignificant because some new process tech-nologies could be less polluting or hazardousthan conventional ones.

28 How might labor practices affect theintroduction of innovative technol-ogy?

The adoption of new steelmaking equip-ment or technology affects steelworkers inseveral ways: retraining may be needed, jobclassifications may need to change to accom-modate skill changes; and local practices mayneed to allow for flexibility in work assign-ments. On the whole, however, it appearsthat labor conditions have not been a con-straint to the adoption of improved steelmak-ing equipment. Job classification schedules,periodically updated, are sufficiently flexibleto accommodate gradual shifts in skill re-quirements result ing from technological

change. There is some concern, however,particularly among those in the academiccommunity, that apprenticeship and retrain-ing programs do not adequately train peoplefor changing job requirements associatedwith the adoption of new technologies.

There is a consensus that the work forcegenerally cooperates with management whenmodern equipment is introduced. The 2-B “lo-cal practices” clause in most labor contractsgives management the right to unilaterallychange past practices concerning crew sizeand other staffing agreements when suchchange is required by “changed conditions, ”including technological innovation. However,it appears that the 2-B clause makes it dif-ficult to extend past practices to adjacentproduction areas not directly involved withthe new equipment. Such changes are subjectto negotiation with local union affiliates. Na-tional union leadership is concerned withtechnological displacement, but does not re-sist the introduction of new technology. Theindustry’s view is that—with the possible ex-ception of a few plants—there are no difficul-ties with steelworkers when new technologyis introduced. Thus, it appears that the 2-Bcontract provision has had no limiting effecton industry adoption of new steelmaking tech-nologies.

Policy Considerations

29 Can the domestic steel industry staycompetitive without changes in Fed-eral policies?

The need for policy support of the steel in-dustry varies among its three segments. Byalmost any measure of economic and techno-logical health, the integrated segment issteadily declining. There are trends towardmore dependence on steel imports (althoughthey did decline in 1979), less employment,only modest gains in steel demand, aggressivecompetition from other engineering materi-als, lower profitability, high debit-to-equityratios, less investment in R&D, more depend-

ence on foreign technology, a higher propor-tion of obsolete facilities, smaller domesticsteelmaking capacity, and inadequate capitalformation for modernization.

Not even large domestic demand and highcapacity utilization are likely to reverse theslow decline of the integrated segment. Thesituation may have already deteriorated tosuch an extent that profitability cannot bemarkedly reversed, nor sufficient capital gen-erated, without changes in Federal policies.The only major external factors that mightchange this pattern are: 1) a large influx offoreign investment and equity capital, and 2)


a devaluation of the dollar significant enoughto reduce imports and spur substantial do-mestic expansion.

Cur ren t t r ends migh t be r eve r sed bychanges in Federal policies that permit sub-stantially higher steel prices, fewer unfairlytraded imports, and faster capital recovery,or policies that provide more support for R&Dand innovation and more direct financial sup-port, such as loan guarantees. (Topics 34through 40 deal in detail with these policy op-tions.)

The future looks less bleak for the othertwo segments of the industry. The noninte-grated segment should grow, remain profit-able, serve more markets with a greaterrange of steels, and provide increasing andnecessary competition to the larger inte-grated firms. (Such intra-industry competi-tion will probably have even greater benefitsthan the competition presently provided byimports. ) This segment, too, could gain fromchanges in Federal policies, part icularlythose affecting the supply and cost of elec-tricity, but it is likely to prosper even underpresent policies. There will still be a need fora large domestic ironmaking base to convertiron ore to new iron units.

The alloy/specialty producers are in a peri-od of adjustment to changing Federal policieswith regard to imports. It remains to be seenwhether the loss of protective import quotasand the enforcement of the new MultilateralTrade Agreement will be adequate to ensurethe continuation of this segment’s healthyeconomic condition. Without direct Federalsupport, however, high-technology steel ex-ports are not likely to increase dramatically.

30 Can the experiences of the steel in-dustry contribute to the formulationof more effective Federal policiesfor other domestic industries?

The steel industry may be only the first ofseveral domestic industries facing a declinein preeminence and prosperity. As the less in-dustrialized nations begin to lower produc-

tion costs and to consume more commodities,they become more economically attractivethan highly industrialized countries as a loca-tion for established industry. Established in-dustries in industrialized countries may alsodecline if they lose domestic markets throughproduct substitution or replacement, or ifthey do not produce sufficient technologicalinnovations to reduce production costs or im-prove products.

These explanations do not appear as validin today’s world economic order as they oncewere, because government policies have in-troduced so many imperfections to the free-market and free-trade system that the impactof traditional economic factors on interna-tional competitiveness has been fundamental-ly changed. None of the above factors canadequately explain the decline of the domes-tic steel industry.

In the first place, no major foreign steel in-dustry has enjoyed a more advantageouscombination of labor costs, energy costs, rawmaterial costs, and industrial and technologi-cal infrastructure than the United States. Atbest, foreign steelmaker have had slight ad-vantages in one or two of these factors, butsuch advantages have generally been short-lived and insufficient in themselves to ac-count for penetration of export markets, par-ticularly the U.S. market.

What has occurred is that foreign govern-ments have adopted policies that providemany direct and indirect benefits to theirsteel industries, and many of these industrieshave in fact been built with public funds toserve social and political goals. Even thoughforeign demand for steel has increased sub-stantially, foreign steel is often exportedrather than used to satisfy domestic needs.This has promoted growth, but not necessar-ily prosperity. The American steel industry,as a private, profit-motivated enterprise, isbecoming increasingly unique in the interna-tional market (see Topic 32).

Secondly, although steel has faced stiff andincreased competition from other materials—notably aluminum, concrete, and plastics—it

Ch. 3—Problems, Issues, and Findings 101

still possesses a unique combination of prop-erties, forms, and costs that ensure it sub-stantial and growing markets. There hasbeen little technological displacement of steelin the marketplace.

Thirdly, contrary to accepted wisdom,there have been major technological changesin domestic steelmaking and steel productsduring the past several decades. All signs arethat this trend will continue. Some domesticfirms have justified their lack of progress onthe basis of the “mature industry” image (seeTopic 24); others, in the meantime, havemoved ahead with boldness and optimism,taking risks, investing in the newest technol-ogy, and capturing the profits that are thereto be made.

One lesson to be learned from the steel in-dustry’s experiences, then, is that domesticindustries can find themselves losing pricecompetitiveness because Government policiesare not comparable to those of other nations.Foreign government policies have distortedthe workings of the marketplace, sometimesin ways unique to a particular industrial sec-tor. The steel experience has shown that Fed-eral policies can improve the profitability offoreign industries while depressing those athome. But in spite of Government policies thathave not permitted domestic prices to equalimport prices in periods of strong demand,that have limited capital recovery and hencerestricted capacity replacement and expan-sion, and that have not provided R&D assist-ance comparable to foreign governments, theAmerican steel industry is still the most prof-itable major steel industry in the world. Sure-ly, more competitive Government policiescould help make steel and other “sick” in-dustries well.

High-technology industries have capturedmuch of the public’s attention, and basic in-dustries like steel have lost stature. Theircritical role in the economy and nationalsecurity has been overlooked. Governmentpolicies must be reexamined to determinewhether they allow industries to wither andsave only the inept and unprofitable, orwhether instead they create a climate in

which competent and profitable companiescan grow. There is a need to examine, forsteel as well as domestic industry in general,the long-term benefits of closing plants thatare inefficient, poorly located, or possiblymismanaged. The costs Government incurs indealing with local, short-term social disloca-tions may be less in the long run than those ofcontinuing Federal assistance to industrialfacilities incapable of technological rejuvena-tion.

Another lesson to be learned from the pastexperience of the steel industry—and per-haps the most important lesson—is that sec-tor policies may be needed for major domesticindustries if international competitiveness isto be achieved. Foreign governments, particu-larly the Japanese, have adopted sector pol-icies to build competitive industries. Withouta coordinated policy, improvement effortsmay be at cross-purposes or fail to addresscritical issues. For example, the steel indus-try’s emphasis on the need to raise adequatecapital for modernization and capacity ex-pansion ignores the need for additional ef-forts in R&D and innovation. Domestic pol-icies that deal effectively with only one ofthese areas would not help, in the long run, toensure a profitable and competitive industry,nor would trade policies that deal effectivelywith imports but fail to support technology,innovation, and the means of production. Therisks of adopting a steel sector policy include:1) an overemphasis on the welfare of the steelindustry, particularly large integrated steel-makers, to the exclusion of other domestic in-dustries and smaller steel producers, and 2)insufficient attention to social goals and im-pacts, such as environmental protection, pol-lution control, and worker safety. Such risksmust be examined for any industry for whicha sector policy is considered.

31 Should the steel industry be singledout for a sector policy?

Some critics contend that the steel industryshould not be singled out for Federal help andthat legislation affecting all domestic indus-


try should be sufficient. Steel has a uniquecombination of problems and assets, how-ever, and it has already been uniquely andadversely affected by many Federal policies.For the following reasons, not all of which ap-ply to any other domestic industry, singlingout the steel industry for a sector policypresents difficult choices and opportunitiesfor policymakers:

● The industry is essential to the domesticeconomy and national security, but it iscontracting and diversifying out of steel-making, which can only result in in-creased imports.

● The current cost-price squeeze and capi-tal shortfall are, to a substantial extent,the results of prices that are too low toprovide adequate profits, Governmentpolicies that have led to high regulatorycosts, and unfairly traded imports thathave captured domestic market growthand con t r ibu ted to a r t i f i c i a l ly lowprices.

● There is a nucleus of companies withplants that are extremely competitive incosts and technology, and these couldcontribute positively to the trade bal-ance by exporting more high-technologysteels or impeding imports of commoditysteels.

. There are many short- and long-termtechnological opportunities for strength-ening the industry and recapturing thepremier status it once possessed.

● The industry has available to it the do-mestic material resources of iron ore,coal, and ferrous scrap and the humanresources of a highly competent laborforce, a large national R&D infrastruc-ture, and a reservoir of managerial andentrepreneurial talent.

32 How do foreign government policiesaffecting their steel industries com-pare to U.S. policies?

Most foreign governments have placed con-siderable strategic and economic emphasison developing and preserving their steel in-

dustries, which they view as national assets,essential for industrialization, economic de-velopment, and economic stability. In fact, 45percent of world steelmaking capacity, andmore than 50 percent of European capacity,was government-owned in 1979. Foreign gov-ernments support their steel industries in anumber of other ways, as well, including gov-ernment planning and financial assistance,favorable tax policies, direct export incen-tives, tariff and nontariff barriers to steel im-ports, and the subsidizing and stockpiling ofraw materials . American steelmaker seethese forms of government support and own-ership as trade-disturbing practices thatshould be met with equivalent U.S. policies.

Foreign governments support their steel in-dustries to such an extent because their in-dustries are not just instruments of produc-tion and profits: they also have a role in so-cial, economic, and foreign policy. Their in-dustries are used to:

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sustain employment levels,train technical and management person-nel for industrialization,maintain social stability in certain geo-graphical areas,make use of domestic natural resources,provide a cheap feedstock for other in-dustries,obtain foreign currency through exports,gain access to international industrialactivities,reduce dependence and improve negoti-ating positions with other nations,enhance their national images, andimprove their military and economic se-curity,

The steel industries in Japan and WestGermany are mostly privately owned, as inthe United States. Unlike those countries,however, the United States: 1) lacks a nation-al consensus to preserve and modernize itssteel industry, 2) enacts laws and regulationsthat have considerable costs for its steel in-dustry, without providing offsetting direct orindirect benefits, 3) does not use trade lawsvigorously to prevent unfairly, or even fairly,


traded imports, and 4) provides little supportfor the development and export of new tech-nology.

Japan makes maximum use of governmentplanning and a coordinated steel sector pol-icy. Through its Ministry of InternationalTrade and Industry, it provides its steel in-dustry with marketing guidance, long-rangeforecasts, target production goals, plans fordomestic and export cartels, support forRD&D, assistance in procuring raw materi-als, and, most importantly, financial assist-ance in conjunction with the Japanese bank-ing community. The United States has no com-parable programs.

The EEC has been particularly active inproviding government financial assistance,some through individual governments andsome through regional programs. Such assist-ance takes the form of: grants-in-aid for anti-pollution compliance, technical aid, and re-search: low-interest and preferential-interestloans: and writeoffs of bad debts. Althoughthe United States has used loan guarantees toa small degree, financial assistance here is ata far lower level than in other countries. Do-mestic producers must rely on direct credit,and they are subject to all the financial testsof the free enterprise system. Moreover, do-mestic firms argue that U.S. private and pub-lic funds, such as Export-Import Bank financ-ing, often go to foreign steel industries at farlower financial costs than domestic compa-nies can obtain.

Direct export incentives used by foreigngovernments include: export credit and fi-nancing, including guarantees to privatebanks of a favorable interest rate; export in-surance with liberal coverage against lossesnot within the control of the exporter; tax re-bates, generally in the range of 10 to 20 per-cent of the value-added tax in Europe and alike percentage of the export sales price orexport value in developing nations; govern-ment assistance for trade missions, exhibi-tions, market research, and export promotionschemes; and assistance to exporters for jointforeign marketing efforts, offices, warehous-ing, and sales facilities. The United States

has been a very attractive export market forforeign steel industries, with markedly fewerand lower tariff and nontariff barriers to im-ports than most other nations. Although theUnited States has the Export-Import Bankand appears to be embarking on a more ag-gressive export incentives program, the do-mestic steel industry is not particularly ex-perienced in or inclined toward exports.Some domestic companies are attempting tosell technology, particularly in the raw mate-rials area, but direct incentives to export donot match those of many foreign nations.

Foreign governments are also giving moreattention to raw materials subsidization andeconomic stockpiling. European nations haveheavily subsidized their coal industries, andmost developing nations have state-owned oreand energy resources that provide substan-tial benefits to steel exporters. Governmentstockpiling of critical alloying elements, suchas nickel, chromium, cobalt, and tungsten, isalso widespread. Japan grants bank creditsto domestic producers of raw materials, espe-cially coal, under adverse economic condi-tions. Sweden has a program of tax creditsfor steel companies that stockpile raw mate-rials and finished steel during periods of de-clining prices. The United States subsidizesenergy resources through controlled energyprices, but this has benefited the domesticsteel industry only slightly since over 60 per-cent of its energy comes from coal, and in anyevent U.S. energy prices are being graduallydecontrolled. The level of assistance providedin energy-rich developing nations with rapid-ly growing steel industries, such as Mexico, isvery great, and energy costs in such nationsare far below their market value.

33 What will be the effect of the newMultilateral Trade Agreement onthe domestic steel industry?

Vigorous enforcement of the trade agree-ment is necessary, but not sufficient, to bringabout a revitalization of the domestic steel in-dustry. Lax enforcement is sufficient to ex-


tend present trends and to ensure the slowbut inevitable demise of much of the industry.

Even if the new trade agreement is vigor-ously enforced by the United States and itstrading partners, it could do little to solve thefundamental problems of the domestic steelindustry, At best, there would be an uncer-tain decline in steel imports and an increasein exports. The most important benefit of an

effective trade agreement would be to reducesteelmaker’ uncertainty about their poten-tial for capturing domestic growth in demand;this could offer them clearer rewards forlong-term investments in technology. If thenew trade agreement is not vigorously en-forced, other steps to aid the industry couldbe nullified by unpredictable surges in unfair-ly traded imports or by the industry’s fear ofsuch surges.

Policy Options

34 How can increased Federal assist-ance to the steel industry be justi-fied?

The steel industry is necessary for militaryand economic security. It is also a majorsource of employment. Other materials couldnot even theoretically substitute for moststeels; where theoretical substitutions exist,they could not be implemented in any reason-able period of time at manageable cost. Andto become dependent on foreign steel is com-parable to becoming dependent on foreignfood or energy.

There are arguments to be made for pro-viding more Federal assistance to the steel in-dustry, but there is an equally valid case tobe made for the industry’s fundamentalstrength. The industry is not, as some argue,composed entirely of inefficient, mismanagedfirms using inefficient industrial processes.The industry has an extremely strong infra-structure, an excellent labor pool, access toone of the world’s best markets and toabundant domestic resources, a high-qualityknowledge base, and a number of highly prof-itable, well-managed companies upon whichto base industry reinvestment, restructuring,and growth. It can thus be argued that theU.S. steel industry has comparative advan-tages over many foreign steel industries andthat these advantages should be used to re-juvenate the industry.

Any Federal policy that helps the steelindustry invariably brings objections fromother domestic industries or from steel com-panies that may not benefit equally. The chiefobjection is that such policies disturb free-market competitive forces either within thesteel industry or between steel and competingmaterials. Other direct Government actionsaffect various industries unequally, however,and past Government actions have contrib-uted to steel’s present problems. The industrycan point to market imperfections and uncer-tainties, resulting from both domestic and for-eign policies, that have led to its current lowprofitability, poor capital formation, and ap-prehension about high-risk ventures.

A free-market economy for steel has not ex-isted in the United States for some time.There is indirect control of import and domes-tic steel prices through Government importpolicies, particularly the trigger-price mecha-nism used in the past. The Government hasused jawboning to keep steel prices withinlimits that policymakers believe to be non-inflationary. At the same time, rising costshave reduced steelmaker’ profits. The loanguarantee program of the Economic Develop-ment Administration (EDA) has provided as-sistance to selected companies that have eco-nomic problems, operate in areas of high un-employment, or need assistance with environ-mental compliance; but stronger and larger


steel companies, despite low profitability orinadequate capital, generally have not bene-fited from this program. They and othershave expressed concern that such a programmerely postpones the collapse of fundamen-tally unsound companies.

It can also be argued that, because steelhas been so dependent on coal, it has bene-fited less than some other industries fromFederal energy policies that maintain rela-tively low prices for other energy sources.The aluminum industry, for example, reliesextensively on the low-cost Government-con-trolled hydroelectricity of the Pacific North-west. Similarly, the plastics industry has ben-efited from low petroleum feedstock prices.

The social benefits of environmental andoccupational safety regulations are inargu-able, but the costs of compliance have notbeen equitably distributed because they havenot been fully passed on to the consumer.Limitations on prices, coupled with substan-tial regulatory costs, have contributed to thesteel industry’s loss of profitability and ca-pacity. Many other industries also have sub-stantial regulatory costs, but the very natureof the steelmaking process, the industry’slarge proportion of old facilities, and the lackof Federal support for long-range develop-ment of cleaner technologies have all imposedmore severe regulatory costs on steel than onmost other manufacturing industries.

Other reasons for increasing the FederalGovernment’s support of steel include: 1) nei-ther the low-profitability integrated compa-nies nor the small nonintegrated firms areable to support long-term, risky innovations,even though such innovations may have sub-stantial social and economic benefits; 2) im-ported steel contributes significantly to a neg-ative trade balance, but steel and technologyexports could offset some of this deficit; and3) the lack of Federal policy support, espe-cially compared to foreign support of theirsteel industries, reinforces the perceptionthat the United States is losing its leadershipin technology and industry, and this con-tributes to a weakened dollar and a further

decline in U.S. influence in the internationalbusiness community.

A possible long-range negative conse-quence of more favorable Federal policiestoward the steel industry is that they couldlead to Federal subsidization or even owner-ship. Critics argue that such policies led tothe nationalization of many foreign steel in-dustries and that, generally, these industriesare inefficient and operate at a large loss.This is not a necessary outcome of Federal as-sistance, however, if policies are designed tohelp private steelmaker regain sufficienteconomic health to once again be viable prof-itmaking enterprises.

35 Is there a need for direct Federal fi-nancial assistance to the steel indus-try?

Clearly, a number of steel industry prob-lems result from inadequate capital for mod-ernization with the newest available technol-ogies and investment in future innovations.The situation has not yet become criticalenough to justify broad, direct Federal sub-sidies to support normal operations and in-vestments, but an argument can be made forselective Government assistance to promotemodernization as long as profit levels are low.

Loan guarantees and industrial revenuebonds have become popular forms of Federalassistance because they are not expendituresand bypass the normal budget process. Infact, Government usually shows a profit fromthe low interest recipients pay. The problemwith loan guarantees is that they could dis-rupt normal competitive forces among indi-vidual producers. There are very large differ-ences in costs and profits among companies,as well as among industry segments. Loanguarantees that offer assistance to the leastprofitable companies act as disincentives toother firms to manage and invest so as tomaximize profits. Federal assistance policiesalso need to provide incentives to companiesthat are relatively strong, both economically


and technologically, and are able to share therisks with Government.

The EDA loan guarantee program, now inits last stages, did not specifically focus onthe adoption of new technologies, and it hasbeen criticized by a number of steelmakerfor its tendency to help unsuccessful compa-nies. If loan guarantees are to be offered, itwould be more efficient to use them to en-courage and reward high-risk innovations, in-creased capacity, better use of domestic re-sources, products for export, reduced energyconsumption, increased overall productivity,and environmentally cleaner processes.

The terms of such a technology-stimulat-ing, limited-term loan guarantee programmight require: 1) evidence of the company’sinability to raise capital through all conven-tional means, including selling new stock is-sues; 2) a degree of risk and innovativenessproportional to the relative level of past prof-itability, so that successful firms would bestimulated to develop risky, long-range, majorinnovations, while less profitable firms wouldstill be able to share in Federal assistance;3) commitments to delay diversification out ofsteelmaking until companies meet certain ob-jectives, such as achieving mutually agreed-upon steelmaking capacities, productivityimprovements, energy-use reductions, or pol-lution-abatement improvements. This ap-proach, though complex, would least disturbrelative competitiveness among domesticcompanies while still providing a means of re-gaining domestic capacity and internationalcompetitiveness.

Industrial revenue bonds benefit the com-panies by providing lower interest rates, butthey have an indirect cost to the Governmentin the form of reduced taxes. There are alsoproblems with defining the social benefits oftechnology-related investments and with allo-cating such bonds among competing needs.

36 What effect would changes in Fed-eral tax laws have on capital forma-tion?

Insufficient capital to modernize, expandcapacity, and innovate is an increasinglycritical problem for most of the steel industry,which has long argued that changes in Feder-al tax policies could help to correct its capitalshortfall. There is little doubt, for example,that appropriately designed investment taxcredits or reduced depreciation schedulescould yield large amounts of addit ionalcapital. Furthermore, these methods do notrequire expenditure of Federal funds andtherefore bypass the Federal budget process.Tax credits already exist for energy-savinginvestments; they could also be directedtoward other specific steel-related objectivessuch as increased scrap use, increased directuse of coal, or plant demonstrations of majorinnovations.

In the area of the reduced depreciationperiods, the Jones-Conable Capital Cost Re-covery Act of 1979 (H.R. 4646), if enacted,would allow machinery and equipment to bedepreciated over 5 years instead of the pres-ent 15. The Department of the Treasury hascalculated that, 5 years after its passage, thisAct would generate an additional $0.5 billionto $1 billion per year for the steel industry.This amount would probably provide suffi-cient investment capital over the next decadeto achieve the minimum degree of moderniza-tion and expansion that is needed to improveprofitability and competitiveness.

If tax assistance of any kind were providedto the steel industry, there is no assurancethat the additional capital gained therebywould be used for: 1) steelmaking operationsof companies already committed to diversifi-cation out of steel, or 2) more innovative andrisky technologies. While diversification can-not be prevented, it may be blunted by policy


changes that the industry perceives to befavorable. Technological innovation could beencouraged by targeting tax assistance fortechnologies that are likely to result in re-duced pollution, lower energy use, greaterlabor productivity, lower capital costs, or in-creased use of abundant domestic raw mate-rials and wastes. Critics of legislation thatdeals directly with technological choices,rather than performance objectives, point tothe difficulty and undesirability of having theFederal Government evaluate technology.Those in favor of such legislation point to therisks involved in not requiring the bene-ficiaries of Federal assistance to emphasizetechnologies with long-range national andcorporate benefits, rather than those that areless risky and more likely to increase theshort-term profits of individual companies.

37 Should there be more Federal sup-port for steel R&D and innovation?

The Nation’s commitment to the future in-ternational competitiveness of the domesticsteel industry would be demonstrated mostclearly and most effectively by increased Fed-eral support of research. There is a severelack of basic steel research, especially inuniversities, and any truly radical innova-tions in steelmaking will be based on newknowledge. New knowledge might emanatefrom totally undirected research, but it ismuch more likely to be produced in basic re-search programs that focus on the needs ofsteelmaking.

An attractive approach for improving thelevel of basic steel research would be to cre-ate federally supported research centers, lo-cated at universities but with close relation-ships with industry to ensure eventual use ofthe research by steelmaker. Financial sup-port for such centers could also be solicitedfrom industry (after clarification of antitrust

laws). Because of their low profitabilities andtheir need for fast paybacks, individual com-panies are not likely to spend significant sumson basic research; they might, however, con-tribute to joint efforts. The National ScienceFoundation has taken a step in this directionby funding a planning grant for a center deal-ing with research for nonintegrated steelmak-ing.

Funding is also needed for pilot- and dem-onstration-plant evaluations of the new proc-ess technologies that are vital for the near-term survival of the industry. Policy changesin this area would also require more liberalinterpretations of antitrust laws, as well aseither assurances of appropriate licensing toall interested companies or provisions togrant proprietary or financial rights to par-ticipating firms. Proponents of such fundingargue that the lack of sufficient discretionarycapital in the industry has limited appliedevaluation programs in the past. Risky, large-scale projects generally require many hun-dreds of millions of dollars for evaluationbefore commercialization can proceed, andfew individual companies can mount such ef-forts. The cost to the Government could beminimized by using a buyback agreement thatallows a company or consortium to purchasethe facility upon successful demonstration.

Opponents contend that the Governmentshould not interfere with the private sector’sability to choose, evaluate, and fund projects,and that in any event Government lacks suffi-cient experience and expertise to make thecritical choices. They argue that sufficientlyworthwhile projects that offer adequate re-turns on investment will, regardless of risk,attract venture capital. The determination ofrisk and return on investment for new steeltechnology is filled with uncertainty, how-ever, and the present lack of favorable condi-tions for capacity expansion worsens the


risk/reward assessment. Furthermore, biasesand attitudes toward the industry can beused to make a promising technology lookmore risky or less beneficial than it really is.OTA has found that even worthwhile projectsare damaged by the generally negative viewsof those outside the industry and the pessi-mism of steel executives who do not believe inthe feasibility of technological innovations.For these reasons, the arguments againstGovernment assistance are not compelling,although they do identify concerns whichshould be examined in policy formulation.

An equally important role for Governmentmight be the coordination of steel R&D withother federally sponsored research activities.A good example of such linkage would bewith activities in coal gasification and syn-fuels, which might supply the necessary tech-nology for handling reductants in coal-basedDR processes. This linked technology couldyield the extremely advantageous combina-tion of a wise, efficient use of abundant do-mestic resources and a cleaner, low-capital-cost steelmaking process.

Government could also give greater en-couragement to innovative efforts by smallfirms and individual inventors who are out-side the basic steel industry and have littleaccess to its resources. It is well known thatsmall firms have a very high rate of success-ful innovation compared to large corpora-tions. OTA has found a surprising number ofsuch firms and individuals with new steel-making inventions and processes that arepromising, but difficult to assess. Their dif-ficulty is insufficient funding at the pilot anddemonstration stage to fully prove or dis-prove the new technology or to assess accu-rately its operating and capital costs. TheCalderon Ferrocal process, a form of coal-based DR, is an example of a promising inven-tion that is having difficulty obtaining ade-quate funding for demonstration. It is diffi-cult to envision how means other than directFederal funding could be used to assist suchefforts.

The facilities of the Bureau of Mines,formerly used for research in steelmaking,

could be resurrected by the Government witha minimal investment to establish an effectiveRD&D program with industry, especially thesmall nonintegrated companies. Both theformer Bureau policy (which apparently pre-vented cooperative research with industry)and the present policy (which prevents re-search in the materials production area)seem to ignore the needs and opportunities ofdomestic steelmaking.

38 What regulatory changes could beconsidered that are simultaneouslyaimed at improving environmentaland occupational protection and atrevitalizing the steel industry?

Environmental policy should be reexam-ined taking into consideration the uniqueneeds, problems, and technological opportu-nities of the different steel industry segments.

The social goals of environmental andworker safety and health are fundamentallysound. Nevertheless, industry’s concern overthe long-term economic effects of such regula-tions are also legitimate. For instance, indus-try investment in EPA- and OSHA-mandatedtechnology and facilities is a considerablyhigher percentage of total capital investmentthan for other manufacturing industries andmay continue to increase during the next sev-eral years, Costs of operating these facilitiesare also very high. In addition, needed im-provements in environmental technologieswill assume growing importance as toxic pol-lutant guidelines affecting the steel industryare issued within the next few years.

Possible changes in environmental policythat merit examination and evaluation in-clude:

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Giving industry more flexibility in select-ing the most effective means to attain en-vironmental compliance, such as by reg-ulating emissions on a plant rather thanan individual process basis.

Analyzing the regulation of pollutantswith the goal of providing tradeoffs be-


tween economic costs and environmen-tal benefits.Providing regulatory options for margi-nal plants with a limited life expectancy,so that environmental goals can be bet-ter coordinated with both near-termplant phaseouts and the maintenance ofdomestic capacity.Using EPA and OSHA penalty paymentsfor noncompliance to fund R&D in theseareas.Clarifying the industry’s responsibilitiesconcerning RD&D for improved controltechnologies that will meet EPA stand-ards.Complementing the existing regulatoryapproach, as embodied in the innovationwaivers, with economic incentives to en-courage industry RD&D of needed im-provements in environmental technol-ogy,Increasing Federal support of environ-mental technology R&D, particularlywith respect to in-process changes.Increasing emphasis by regulatory agen-cies on innovative steelmaking technolo-gies and process changes that present anumber of advantages in addition to im-proved pollution abatement and workersafety and health.

39 What will be the effects of continu-ing to export ferrous scrap?

U.S. scrap exports are a positive contribu-tion to the Nation’s trade balance, but theyare relatively small, in terms of both dollarsand tonnage, compared to imports of steel,ore, and coke. For 1979, scrap exports prob-ably equaled about 15 percent of the netsteel-related deficit. The scrap industry fa-vors free export of scrap, contending thatthere is sufficient domestic scrap to export,that more scrap becomes available as pricesincrease, and that historically the integratedsteel producers have not attempted to max-imize their use of scrap. To some extent thelatter has been true, but that situation ap-pears to be changing (see Topic 21).

By exporting scrap, the United States is ex-porting a valuable domestic resource. Scrapis a source of both iron and embodied energy(about 19 million Btu/tonne). The more scrapused in domestic steelmaking, the less energy,time, money, and labor are expended to mineand process iron ore and then make iron inblast furnaces.

Some of the exported scrap is used by for-eign steelmaker to produce government-sub-sidized steels, which are then sold back to theUnited States, with adverse impacts on thedomestic steel industry. Scrap exports driveup the domestic price of scrap, but foreignproducers can still obtain a net advantage be-cause of the devalued dollar and their inher-ently greater energy costs. Domestic produc-ers must contend with both high scrap costsand price controls on their output, which putthem in a cost-price squeeze.

Continuous casting and other improve-ments have decreased the amount of home(inplant) scrap being produced; simultane-ously, the greater use of electric furnacesand the modification of basic oxygen fur-naces have increased the demand for scrap.As a result, steelmaker are becoming moredependent on purchased scrap, which how-ever is declining in quality as “tramp” con-taminants build up over numerous recycling.The domestic demand for scrap is so greatand growing so rapidly that the scrap indus-try may have no long-range economic need toexport. As nonintegrated electric furnacesteelmaker expand in the 1980’s, it is evenpossible that a domestic shortage of ferrousscrap may develop.

Perhaps the most significant long-rangeconsequence of continuing to export scrap isthe possible detrimental impact on the nonin-tegrated steel producers. If formal or in-formal Government price controls cannot bereleased quickly enough to offset rapidly ris-ing costs, quickly rising scrap prices (drivenby high foreign demand) may put a substan-tial cost-price squeeze on these firms andeven drive them out of the market. This im-pact is particularly acute now, when coal-


based DR has not been developed domestical-ly and when DRI is not yet readily availableas an import.

40 Are Federal Government targets forutilization of ferrous scrap andother recovered materials needed,feasible, and the best approach?

The Government has been reluctant to putcontrols on scrap exports, but two legislativeacts have attempted to maximize the use ofscrap and other waste sources of iron gener-ated in steel plants . These acts foresawneither the difficulty of setting meaningfuland feasible targets nor the long-range conse-quences of this approach. For purely econom-ic reasons, scrap use by the steel industry hasbeen increasing. As an alternative to settingtargets, the Government could consider di-rect incentives to the industry, such as an in-vestment credit, to adopt technology thatwould use more scrap (see Topic 21).

The requirements of the two acts may besummarized as follows:

● Section 461 of the National Energy Con-servation Policy Act (Public Law 95-619)of 1978 mandates that the Departmentof Energy set targets for the use of recov-ered materials for the entire ferrous in-dustry, including ironmakers and steel-maker, foundries, and ferroalloy pro-ducers. Such targets, which have nowbeen set, are voluntary, but steel produc-ers are concerned that they might be-come mandatory. The target set for 1987was almost met in 1979.

. Section 6002 of the Resource Conser-vation and Recovery Act (Public Law94-580) of 1976 amends the Solid WasteDisposal Act and deals with Governmentprocurement. It sets forth the require-ment that Federal procuring agenciesshall procure items composed of thehighest percentage of recovered materi-als practicable, and it instructs the EPAAdministrator to promulgate guidelinesfor the use of procuring agencies in car-rying out this requirement. It also re-

quires suppliers to the Government tocertify the percentge of recovered mate-rials in the total material used in theitems sold. As yet, EPA has not set theseguidelines, nor has it proposed a sched-ule.

Although it is in the national interest tomaximize the use of recovered materials inorder to save energy, the setting of scrap-usetargets or guidelines presents a number ofproblems. It may not be technically or eco-nomically feasible in all cases to use recov-ered materials to the extent suggested or re-quired by the Government. A major problemhas been that DOE and EPA do not appear torecognize the different steel industry seg-ments and the unique constraints and oppor-tunities they each have in regard to scrapuse. Another problem is that a numerical tar-get rests on many assumptions—about futurescrap availability and use, as well as totalsteel demand and changes in technology—which are themselves highly controversial.

Targets could, in fact, be counterproduc-tive to the original goals of maximizing recov-ered materials and saving energy. Unrealistictargets could be circumvented, for example,by companies buying and selling one anoth-er’s home scrap on paper. Should targets andguidelines be effective in increasing demandfor purchased sc rap , and the reby ra i seprices, the impact on nonintegrated com-panies would be much worse than on inte-grated steelmaker; if this led to a decreasein nonintegrated output, it could ultimatelyresult in lower total scrap use. Technicallyand economically, it would be extremely dif-ficult for integrated steelmaker to increasesubstantially their use of recovered materialsin existing facilities, and the modification toincrease scrap use in basic oxygen furnacesalso increases the consumption of oil or natu-ral gas. Credits for scrap-enhancing changesin facilities would thus appear to be more ef-fective than targets, since they ensure that in-vestments would be productive and economi-cally justified.

With the advent of DR and the availabilityof DRI, electric furnace steelmaker could


use less scrap. Hence, targets or guidelines unit of output would decrease in electric fur-could act as a disincentive to the introduction nace shops using DRI, it can be argued thatof DR, a technology that may offer benefits the use of DRI in conjunction with scrapfor both the companies and the Nation. Indus- would promote an expansion of electric fur-try cannot totally rely on scrap, so it needs nace steelmaking, resulting in a net increaseDR, which produces new iron units from ore. in the use of purchased scrap (see Topic 16).Even though the percentage of scrap used per

CHAPTER 4

The Domestic Steel Industry’sCompetitiveness Problems

Contents

Pagesummary ● . * . * * * * * * * . * . * * * * * * 9 * * * * D W * * * 115

Decline of the U.S. Position in World SteelProduction and Trade . . . . . .. ...........116

profitability and Investment in the SteelIndustry ● **** *e. .**. ***********e***** 119

Trends undomestic Steel Industry Profits. .. .119Financial Performance of the Steel

Industry Segments . . . . . . . . . . . . . . . . . . . . 119Trends in Steel Industry Investment . .......123

ownership and Financial Performance ofForeign Steel Firms... ....... ..........124

Factors in International Competitiveness. ... 128Technology . . . . . . . . . . . . . . . . . . . . . .......128Comparative Production Cost Data . ........134Labor Costs. . . . . . . . . . . . . . . . . . . . . . ......135Raw Materials and Energy. . ..............140Capital Investment and Financing Costs .. ...142Macroeconomic Changes. . ...............143

Shifts in Coat Competitiveness... ..........144

Future Trends in Competitiveness,Supply-Demand, and Trade ............. 145

Steel Shortages in the Mid-1980’s . .........145Potential for Exports. , . ..................146Future Costs and Productivity . ............147World Steel Trade . * * * * * . . * . . . . **,*...** 149

List of Tables

Table No. Page16. Raw Steel Production: Total World, “

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25.

26.

EEC Countries, Japan, and the UnitedStates, 1956-78 . . . . . . . . . . . . . . . . . . . ● 116Selected Countries’ Steel Exports as aPercentage of Their Total Raw SteelProduction, 1955-78 . . . . . . . . . . . . . . . . 117U.S. Imports and Exports of Steel MillProducts, 1956-78 . . . . . . . . . . . . . . . . . . 118U.S. Iron Ore and Steel Import andExport Levels, 1971-78 . . . . . . . . . . . . . . 118Trends in Steel Industry Profits,195478 . . . . . ● . . . . . . . . . . . . . . . . . . . . 120Selected Financial Highlights, Iron andSteel Industry, 1950-78 . . . . . . . . . . . . . . 120Selected Financial Data, U.S. SteelIndustry, 195478 . . . . . . . . . . . . . . . . . . 121Index of Steel Industry Prices andCosts,1965-78 ...... o... . . . . . . . . . . . 122Steel Company Profitability by IndustrySegment, 1977-78 ... ... ... ... ..e. .o 122Replacement Rates for Domestic SteelProduction Facilities, 1950-78 . . . . . . . . 123Government Ownership of Raw SteelFacilities, Selected Countries . . . . . . . . . 125

27.

28.

29.

30.

31.

32,

33.

34.

35.

36.

37.

38.

39.

40.

41.

42.

Comparison of Productivity and LaborCosts in the U.S. Iron and SteelIndustries With Four Other Countries,1964,1972-77 ....., . . . . . . . . . . . . . . .Capacity Utilization in Several SteelIndustries ... , , ., . . . . . . . . . ., . . . . . .Steel Industry Net Income as aPercentage of Net Fixed Assets, FiveCountries, Averages for 1969-77 . . . . . .Financial Statistics, Selected SteelCompanies, 1978 ..., . . . . . . . . . . . . . . .Average Profitability for SteelIndustries in Six Nations and Europe,1978. . . . . . . . . . . . . . . . . . . . . . . . . . . . .Comparative Trends in Raw SteelProduction in Electric Furnaces,1964-78 . . . . . . . . . . . . . . . . . . . . . . . . . .Age Distribution of Domestic SteelProduction Facilities, 1979. . . . . . . . . . .Integrated Steel Producers’ Capacitiesin Selected World Areas, 1976. . . . . . . .Estimates of U.S. and JapaneseSteelmaking Costs, 1976 . . . . . . . . . . . . .U.S. Steel Industry Employment,Productivity, and Compensation,1960-78 . . . . . . . . . . . . . . . . . . . . . . . . . .Labor Productivity at Actual OperatingRates, Selected Countries, 1969-84 . . . .Employment Costs for Domestic SteelCompanies, 1978. . .......;....,.. . .Carbon Steel Production Costs, FiveCountries, 1969 and 1978. . . . . . . . . . . .Steel Industry Hourly EmploymentCosts, Five Countries, 1969 and 1978. .,Unit Costs for Inputs,United States andJapan, 1956-76. . . . . . . . . . . . . . . . . . . . .Coke Consumption per Tonne of PigIron Produced, ll Countries, SelectedYears, 1958-78 . . . . . . . . . . . . . . . . . . . .

126

126

126

127

43.

44.

45.

46.

47.

Capital Expenditures per Net Tonne ofRaw Steel Production, Five Countries,1972-77 . . . . . . . . . . . . . . . . .***, . , . ,0 143Production Costs per Tonne ofCarbon Steel Shipped: percentageIncrease 1969-78. ....,.. . . . . . . . . . . . 144World Raw Steel Supply-DemandForecasts, 1980-2000.,.. . . . . . . . . . . . 146Potential Impact on World Steel Supplyby Less Developed Countries . . . . . . . . . 148Import Dependence of the JapaneseSteel Industry, Selected Years, 1955-78. 149

127

129

130

133

135

136

138

139

140

140

141

142

List of FiguresFigure No. Page

8.

9.

10.

11,

12.

13.

14.

15.

U.S. Exports—Share of World Steel “Trade, 1945-77 . . . . . . . . . . . . . . . . . . . . 117U.S. Trade Balance in Iron and Steel,1925-70 . . . . . . . . . . . . . . . . . . . . . . . . . . 118Steel Industry Annual Average Ratesof Return and Annual Rates ofInflation, 1949-78 . . . . . . . . . . . . . . . . . . 121Rates of Investment in Major SteelIndustries, 1963-76. . . . . . . . . . . . . . . . . 128Capital Expenditures in SteelManufacturing as Percent of GNP,Selected Steel-Producing Countries,1960-78, . . . . . . . . . . . . . . . . . . . . . . . . . 128The Diffusion of Oxygen Steelmaking,12 Countries, 1961-78 . . . . . . . . . . . . . . . 130The Diffusion of Continuous Casting,10 Countries, 1962-78 . . . . . . . . . . . . . . . 131Apparent Steel Consumption Indexesby Region, 1973-78 . . . . . ...+..... . . . 148

. .

CHAPTER 4

The Domestic Steel Industry’sCompetitiveness Problems

Summary

Although world steel demand more thandoubled during the past two decades, domes-tic steel production increased by only 20 per-cent during this time. In this same period, theJapanese steel industry increased productionsevenfold, and Common Market steel produc-tion went up by 70 percent. The declining roleof the U.S. steel industry in the internationalmarket is reflected in substantially increasedU.S. steel imports and flat export levels. De-spite major technological and economic diffi-culties, domestic steel industry profit levelshave been higher than those of foreign steelindustries. Nevertheless, steel profits wereonly about half the U.S. manufacturing aver-age.

Historically, the domestic steel industry’sindebtedness levels had been relatively lowcompared to foreign steel industries. Unlikeforeign firms, domestic steelmaker have fi-nanced capital investments largely from re-tained profits or through equity financing.Foreign governments play a more direct rolethan the U.S. Government in facilitating in-dustrial access to capital markets and publicfunds.

The U.S. steel industry’s market declinemay be attributed to a number of factors. Itsmost recent expansion started earlier andwas of a much shorter duration than that ex-perienced by competitor industries, particu-larly that in Japan. Furthermore, the domes-tic industry has adopted certain productivenew steelmaking technologies at a relativelyslow rate. As a result, U.S. plants tend to beolder, smaller, and less efficient than the

steelmaking equipment of many competingforeign steel industries.

The resource-poor Japanese steel industry,benefiting from post-World War 11 technologi-cal, economic, and government policy advan-tages, has been the world’s low-cost producersince the early 1960’s. Japan has had a long--lasting steel industry expansion, based large-ly on new plant construction. As a result, Ja-pan now has superior technological steelmak-ing capability and a strong competitive posi-tion. Some steel-producing less developedcountries (LDCs), such as South Korea, arealso becoming increasingly cost competitive.

Raw materials, including energy, continueto be the most costly input factors. Foreignsteel industries have brought down their rawmaterials unit costs during the past decade,despite major materials price increases. Do-mestic raw materials unit costs actually in-creased. Virtually all steel industries are ex-periencing declining employment levels. Thedomestic industry no longer has the highestlabor productivity, and U.S. unit labor costsare higher than in Japan but lower than in Eu-rope.

Predictions of future supply and demand ofsteel products are uncertain, but high steeldemand and barely adequate world capacityare possible by the mid-1980’s. Under theseconditions, if domestic capacity is replacedwith modern facilities, increased demand canbe met and financed. If limited expansion andmodernization do not occur, the United Stateswill become dependent on carbon steel im-ports at high prices during cyclic periods ofhigh demand.

115


Decline of the U.S. Position inWorld Steel Production and Trade

Up to and throughout World War II, theUnited States maintained an unapproachablelead in steel technology and production. How-ever, the postwar rebuilding and expansionof European and Japanese steel mills pro-vided foreign producers with great competi-tive leverage. U.S. steel firms did not buildenough new plants or expand existing capaci-ty sufficiently to capture a portion of therapidly rising world demand for steel.

The dramatic decline in the growth rate ofthe U.S. steel industry, compared to that ofother countries, is revealed in world produc-tion figures. From 1956 to 1978, the U.S.share of total world output of steel droppedfrom 37 to 17.5 percent and domestic produc-tion increased only 10 percent. During thisperiod, Japan increased its production nearlytenfold (table 16). Japan and the EuropeanEconomic Community (EEC) experienced acombined growth rate from 1950 to 1976 that

was 10 times greater than that of the UnitedStates.

That the domestic industry did not capital-ize on burgeoning post-World War II interna-tional steel demand is shown by the fact thatsteel exports from the United States have re-mained constant during the past 30 years,even though worldwide exports increasedmore than tenfold during that time (figure 8).In 1978, the United States exported only 2.5percent of its total domestic raw steel produc-tion, while West Germany exported 53.7 per-cent; Japan, 36.8 percent; Italy, 37.6 percent;and the United Kingdom, 21.5 percent (table17). Clearly the industries in these countrieswere built with the export market in mind, be-cause their capacities far exceed the volumeneeded to satisfy their domestic needs.

Not only have domestic steel exports failedto keep pace with growing world steel de-

Table 16.—Raw Steel Production: Total World, EEC Countries, Japan, and the United States, 1956-78— —.—

Millions of tonnesU.S. share of totalworld production

Year— .—

Total world EEC Japan - United States (percent)1956. ., , . . . . . . .; ~-, . . . . . . . . . 2 8 3 . 8 77.9 12.0 104.5 36.81957. . . . . . . . . . . . ., . . . . . . . 291.8 82.0 12.5 102.2 35.01958, . . . . . . . . . . . . . . . . . . . . . 270.9 78.0 12.1 77.4 28.51959. ....., . . . . . . . . . . . . . . . 305.8 84.0 16.6 84.7 27.71960. .., . . . . . ... . . . . . . . . 346.1 97.9 22.1 90.1 26.01961 ....., ... . . . . . . 353.8 96.1 28.3 88.9 25.11962. . . . . . . . . . . . . . . . . . . . . . . 357.4 94.0 27.6 89.2 24,91963. ..., . . . . . . . . . . . . . . . . . 382.9 96.5 31.5 99.1 25.91964. . . . . . . . . . . . . . . . . . . . . . . 434.5 109.9 39.8 115.3 26.51965. . . . . . . . . . . . . . . . . . . . . . . 456.3 113.8 41.2 119.3 26.11966. ....., . . . . . . . . . . . . . . . . 470.8 110.2 47.8 121.6 25.81967. ...., . . . . . . . . . . . . . . . . 496.7 114.5 62.1 115.4 23.21968. ....., . . . . . . . . . . . . . . . 528.3 125.3 66.8 119.3 22.61969. . . . . . . . . . . . . . . . . . . . . . . 573.2 134.7 82.1 128.2 22.41970, . . . . . . . . . . . . . . . . ., . . . 593.4 137.5 93.3 119.3 20.11971 ...., . . . . . . . . . . . . . . . . . . 580.4 128.2 88.5 109.2 18.81972. . . . . . . . . . . . . . . . . . . . . . . 629.9 126.2 96.9 120.8 19.21973. . . . . . . . . . . . . . . . . . . . . . . 697.1 150.1 108.2 136.8 19.61974. ........, . . . . . . . . . . . . . 710.0 155.5 117.1 132.1 18.61975. . . . . . . . . . . . . . . . . . . . . . . 645.8 125.3 102.3 105.8 16.41976. . . . . . . . . . . . . . . . ... . . . 683.1 134.3 107.4 116.1 17.01977. ......, . . . . . . . . . . . . . 673.9 125.3 102.4 113.1 16.71978. . . . . . . . . . . . . . . . . . . . . . . 711.7 133.1 102.1 124.3 17.5

SOURCE: Compiled from data published by the American Iron and Steel lnsitute.

—

Ch. 4— The Domestic Steel Industry’s Competitiveness Problems ● 117

Figure 8.—U.S. Exports—Share of WorldSteel Trade, 1945-77

117.9

L

f108.8 I99.8

45.4

36.3

27.2

18.1

9.1

IWorld exports /

\

/

1945 1 9 5 0 1 9 5 5 1960 1965 1970 1974 1977

Year

mand, but steel imports into the United Statessince the late 1950’s have also grown at therate of 10 percent per year [table 18). * Theincreasing gap between domestic steel ex-ports and imports has a negative effect on theU.S. trade balance. Steel imports exceededexports in dollar value for the first time dur-ing the late 1940’s and in volume during thelate 1950’s (figure 9, table 18). Since thattime, imports have captured much of thegrowth in domestic steel consumption. In1978, steel exports were only 20 percent ofimports, and iron ore exports were a mere 6percent of imports. These trade patternshave led to a very high annual trade deficit(table 19), second only to petroleum as asource of trade deficit. Although exports offerrous scrap reduce this deficit by a rela-tively small amount, imports of coke increaseit.

SOURCES: American Iron and Steel Institute, Steel Industry and Federal In-come Tax Policy, June 1975, p 46, U N Secretary of Economic Com-mittee for Europe, Statistics of World Trade in Steel, 1913.59,Geneva. 1967

*It is generally recognized that the prolonged steel strike in1959 played a role in the dramatic shift of the United Statesfrom being a net exporter to a large net importer of steel.

Table 17.–Selected Countries’ Steel Exports’ as a Percentage of Their Total Raw Steel Production, 1955-78—. ———

Year Total world—— - - —1955 . . . . . . . . . . . . . . . . 13.01956 . . . . . . . . . . . . . . . . 12.81957, . . . . . . . . . . . . . . . . 14.11958 . . . . . . . . . . . . . . . . . 14.41959 . . . . . . . . . . . . . . . . . 14.11960 . . . . . . . . . . . . 15.01961 . . . . . . . . . . . . . . . . . 14.51962 ..., . . . . . . . . . . . . . 15.91963 . . . . . . . . . . . . . . . . . 15.81964, ... ... . . . . . . . 16.11965 ......., . . . . . . . 17.31966 . . . . . . . . . . . . . . . . . 16.61967 . . . . . . . . . . . . . . . . 16.91968 . . . . . . . . . . . . . . . 18.41969 . . . . . . . . . . . . . . . . 18.71970 . . . . . . . . . . . . . . . . . 19.01971 . . . . . . . . . . . . . . . . 21.41972 . . . . . . . . . . . . . . . . . 20.71973 . . . . . . . . . . . . . . . . 20.81974 . . . . . . . . . . . . . . . . . 23.51975 ........, . . . . . . . . 22.51976 . . . . . . . . . . . . . . . . . NA1977 . . . . . . . . . . . . . . . . . NA1978 . . . . . . . . . . . . . . . . . NA

EEC

30.330.13 1 . 6

3 2 . 9

36.1

3 4 . 7

3 6 . 3

3 6 . 5

3 6 . 2

36.1

3 9 . 8

3 9 . 9

4 2 . 3

4 2 . 7

4 0 . 8

3 9 . 0

4 6 . 8

4 7 . 6

4 8 . 2

5 3 . 2

54.1

N A

NANA

Japan

25.012.99.4

17.312.013.510.618,422.521.930.826.418.725.525.325.234.928.727.836.637.744.741.936.8

UnitedStates—.

4.6 –

5.06.34.62.54.02.82.82.73.63.51.71.82.25.07.13.22.93.65.43.42.82.22.5

Selected EEC countries -

Rest of Westworld

6.86.97.97.47.48.48.0

10.510.310.49.8

10.310.711.011.111.311.812.212.011.211.5NANANA

Germany

16.220.426.326.728.230.632.833.133.029.634.536.543.541.437.435.943.742.346.555.753.747.253.253.7

Italy

8.515.414,717.417.317.612.913.311.618.525.720.716.619.315.513.724.025.722.126.738.243.837.837.6——

UnitedKingdom

17.1 —

16.018.117.418.616.919.020.019.818.719.219.121.322.119.919.927.324.321.419.821.521.621.521.5—

NA = Not availableaSemifinished and finished steel exports converted t. raw steel equivalent by dividing exports by O.75 Data include intra-EEC exports for EEC and European nations.

For EEC in 1978 exports outside the member nations amounted to 25 percent of raw steel production, and Imports from outside member nations was 13 percent of ex-ports

SOURCES U S Congress, Senate Committee on Finance, Steel Imports, December 1976, American Iron and Steel Institute, Annual Statistical Reports, and U.N. Eco-nomic Commission for Europe, The Steel Market.


Table 18.—U.S. Imports and Exports of Figure 9.— U.S. Trade Balance in IronSteel Mill Products, 1956-78 and Steel, 1925-70a

1956 . 1.21957 . . . . . 1.11958 . . . . . . 1.51959 . . . . . . 4.01960 . . 3.11961 . . . . 2.91 9 6 2 . , 3.71963 ., . . . . 4.91964 . . . . . . 5.81965 9.41966 . . . . . . 9.81967 . . . . . . 10.41968 . 16.31969 . . . . . . 12.71970 . . . . . . 12.21971 . . 16.61 9 7 2 16.11973 . 13.81974 . . . . 14.51975 . . . . . . 10.91976 . . . 13.01 9 7 7 . . . 17.51978 . . . . . . 19.1

3.94.82.51.52.71.81.82.0

1.71.52.96.14.74.75.66.9

750

500

2 . 3 10.31.5 10.91.52,04.76.42.52.63.75.32.72.41.82.2

12.216.713.713.817.916.612.413.413.514.117.818.1

SOURCE Compiled from official statistics of the US Department ofCommerce

Table 19.—U.S.Iron Ore and Steel Importand Export Levels, 1971-78(millionsofdollars)

-—

Imports ExportsCombined

tradeYear – Ore Steel Ore Steel deficit

—

–1

–1

2 5 0 + f\ \

–11925 1940 1945 1970

1971. ... $ 476,4 $2,636 $36.1 $ 576 $2,5001972. . . . 441.4 2,794 24.9 604 2,607 aExcluding the war years 1941-451973. . . . 564.0 2,821 35.7 1,004 2,3451974, . 798.3 5,116 38.2 2,118 3,758

SOURCE: W.H. Branson and H.B. Tunz, Brookings Papers on Economic Activ-

1975. . . . 1,017.3 4,093 56.3 1,862ity, 2 1971 (based on U S Department of Commerce and U S Bureau

3,192 of the Census data)1976. . . . 1,078.0 4,025 70.0 1,255 3,7781977. . . . 970.5a 5,531 55.4a 1,037 5,4091978. . . . 1,000.0 a 6,917 60.0a 1,329 6,528aPreliminary estimateSOURCES Ore—Using Import/export tonnage data and average annual prices

In U S Bureau of Mines, “Iron Ore, ” MCP-13, 1978; steel—U.S. De-partment of Commerce, U .S. Industrial Outlook 1978.

Ch. 4—The Domestic Steel Industry’s Competitiveness Problems ● 119

Profitability and Investment in the Steel Industry

Domestic steelmaker’ limited exports andthe country’s growing imports are indicativeof the decline in the competitiveness of theU.S. steel industry in the international mar-ket. Competitiveness is based on technologi-cal capability and its interaction with macro-economic developments and inputs of labor,raw material, and capital. It is axiomatic thatno matter how much technological knowledgeexists, it will not be used unless capital ismade available to finance applications of thatknowledge.

Trends in Domestic SteelIndustry Profits

To a significant extent, the problems thatthe domestic steel industry presently facescan be traced to longstanding low profitabili-ty, which according to many people has dis-couraged equity investment in the industry.Aggregate financial data support this conten-tion. Nevertheless, the domestic steel indus-try has had a far better financial perform-ance than have many foreign steel produc-ers.* Still, given the prevailing profit status ofmany domestic steel firms, they will be signif-icantly short of the capital they would need tomodernize, solve environmental problems,and no more than maintain current capacitylevels, much less expand them.

Conventional comparisons of domesticprofitability, measured as aftertax profits asa percentage of stockholder equity, show lowsteel industry profits compared to other sec-tors. In only 4 years (1955-57 and 1974) dur-ing the past 25 did this measure of steel in-dustry profit exceed the average for all do-mestic manufacturing firms (table 20). Steelindustry profitability has been lower thanprime interest rates for 5 of the past 10 years.

Although total revenue for the domesticsteel industry has increased steadily, from

*International profitability comparisons should be madewith caution since foreign government ownership and directand indirect support make measures of profitability used forprivate U.S. firms difficult to apply to all foreign firms.

$9,534.6 million in 1950 to $46,877.3 millionin 1978, so have its operating expenses andcapital expenditures. Industry net incomefluctuated widely during the 1950-78 period(table 21). The real rate of return has de-clined to very low levels, finally becomingnegative during the past few years as infla-tion rates exceeded steel industry profit mar-gins (figure 10), Dividend payments have beensurprisingly stable, however, even in years ofvery low profitability. In addition, capital ex-penditures as a percentage of net internallygenerated cash funds have been relativelyhigh (table 22).

One of the industry’s explanations for itsshrinking profitability and growing capitalproblem is the “cost-price’” squeeze, that is,the situation in which steelmaking costs risemore rapidly than do steel prices. The data intable 23 confirm that this has been the case,particularly for all forms of energy and forlabor. This trend started in the early 1960’sand has continued to the present. Of particu-lar importance has been the inability of theindustry to raise prices when it needed tomatch cost increases and when the worldcompetitive situation would have toleratedhigher prices for steel. The industry hasalways been a prominent target for Govern-ment “jawboning” when it announces priceincreases. During the periods of worldwidesteel shortage, the Government directly con-trolled and held down domestic steel prices.In 1973-74, for example, imported steel reput-edly was selling for from $55 to $110/tonnemore than domestic steel (at $330/tonne).

Financial Performance of theSteel Industry Segments

The nonintegrated and alloy/specialty steelproducers have exhibited much better finan-cial performance than have integrated com-panies in recent years (table 24). There iswide variation in profitability among inte-grated companies, however, which seems toreflect major differences in technology, age

120 “ Technology and Steel Industry Competitiveness

Table 20.–Trends in Steel Industry Profits, 1954-78

aBased on equity at beginning of year. bData influenced by Bethlehem Steel’s plant closing and large loss.

SOURCES: American lron and Steel lnstitute; Citibank Corp.

Table 21.—Selected Financial Highlights, lron and Steel industry, 1950-78 (dollars in millions)—

Total NetYear revenues income

1950, . . . . . . . . . . . . . . . .1951 . . . . . . . . . . . . . .1952 . . . . . . . . . . . . . . . . .1953 . . . . . . . . . . .1954 . . . . . . . . . . . . . . . . .1955 . . . . . . . . . . . . . .1956 . . . . . . . . . . . . . . . . .1957 . . . . . . . . . . . . . . . . .1958 . . . . . . . . . . . . . . . . .1959 . . . . . . . . . . . . . . . .1960 . . . . . . . . . . . . . . . . .1961 . . . . . . . . . . . . . . .1962 . . . . . . . . . . . . . . . . .1963 . . . . . . . . . . . . . . . . .1964 . . . . . . . . . . . . . . . . .1965 . . . . . . . . . . . . . . . . .1966 . . . . . . . . . . . . . . . . .1967, . . . . . . . . . . . . . . . .1968 . . . . . . . . . . . . . . . . .1969 . . . . . . . . . . . . . . . . .1970 . . . . . . . . . . . . . . . . .1971 . . .1972 . . . . . . . . . . . . . . . . .1973 . . . . . . . . . . . .1974 . . . . . . . . . . . . . . . . .1975 . . . . . . . . . . . . . . . . .1976 . . . . . . . . . . . . . . . . .1977 . . . . . . . . . . . . . . . . .1978 .

$ 9,534.6 $ 766.911,845.010,858.213,155.810,593.314,049.315)271.815,592.112,551.314,233.314,221.313,295.413,980.614,612.616,357.117,971.718,288.416,880.418,679.619,231.019,269.520,357.822,555.728,863.238,243.633,676.336,462.439,787.446,877.3

682.2541.0734.9637.3

1,098.61,113.31,131.6

787.6830.6810.8689.6566.4782.0992.3

1,069.31,075,3

829.8992.2879.4531.6562.8774.8

1,272,22,475.21,594.91,337.4

23.2b

1,291.9

— —

NetIncome as apercentageof revenues

8.05.85.05.66.97.87.37.26.35.85.75.24.15.46.15.95.94.95.34.62.82.83.44.46.54.73.70.062.8

Stock-holders’equity a

$ 5,458.36,037.96,373.06,780.97,139.67,920.28,664.79,465.69,898.2

10,248.410,545.110,646.910,676.111,008.311,393,412,031.912,045.112,168.512,617,512,836.012,966.013,281.413,674.514,513.516,243.217,192.218,027.317,603.718,403.3

NetIncome as a

percentage ofstockholders’

equity

14.111.39.5

10.98.9

13.912.811.48.08.18.26.55.37.18.78.98.96.88.27.04.14.15.89.3

17.19.87.80.17.3

— ——-

Workingcapital

ratio

2.12.01.92.22.02.02.12.31.92.02.12.72.92.72.42.42.32,22.01.81.91.91.91.91.82.01.91.81.7

—.

Long-termdebt

$ 763.11,029.61,447.31,485.71,485.71,546.51,567,71,801.52,144.82,303.22,488.22,968.52,853.62,694.82,874.23,120.13,782.34,205,34,60144,608,25,13395,14445,22964,96294,65125,70536,96657,93077,7389

Captialexpenditures

$ 505.31,050.91,298.3

987.8608.9713.7

1,310.61,723.01,136.9

934.31,520.7

959.5911.4

1,040.01,599.51,822.51,952.72,145.72,307,32,046.61,736.21,425.01,174.31,399.92,114.73,179.43,252.92,857.62,5383

aAs of January 1 of each year. bReflects substantial impact of Bethlehem Steel plant closings.

Ch. 4—The Domestic Steel Industry’s Competitiveness Problems . 121

Figure 10.—Steel Industry Annual Average Rates of Return and Annual Average Rates of Inflation, 1949-78

A. Rates of return and inflation

15

Annual percent change inconsumer price index

10

Net income/net assets5 0

/0

- -

0 , 1 I1949-54 1955-59 1960.64 1 9 6 5 - 6 9 197074 1 9 7 5 . 7 8

Year

SOURCE American Iron and Steel Instlfute, U S Bureau of Labor Stattstlcs

Year

1 9 5 4 . . . , :1 9 5 5 ,1 9 5 6 ,1957, . . . .1 9 5 8 .1 9 5 9 . ,1 9 6 0 . . . . ,1 9 6 1 . ,1962 . . . . .1963 . . .1 9 6 4 . . . . . ,1 9 6 5 ,1966 .1967 . . . . . . . . .1 9 6 8 .1969, . . . . .1 9 7 0 ,1971 . . . . . .1 9 7 2 . ,1973 . . . . . . . . .1974 . . . . . . . . .1975 . . . . . . . . .1 9 7 6 .1 9 7 7 . . ,1978 . . . . . . . . .

B. Real rates of return

n

t

1949.54 1955-59 1960-84 198589 1970-74 1975-78- 5 Real return

— 1 0 -

Table 22.—Selected Financial Data, U.S. Steel industry, 1954-78 (dollars in millions)—

Captia lexpenditures

as a percent ofnet internally

Profits Depreciation, Gross Cash Net Capital generatedafter taxes depletion, etc.a cash flow dividends cash flow expenditures funds$637 ‘ $703 — $1,340

1,099 783 1,8821,113 794 1,9071,132 816 1,948

788 713 1,501831 653 1,484811 840 1,651690 749 1,439566 958 1,524782 1,034 1,816992 1,046 2,038

1,069 1,117 2,1861,075 1,199 2,274

830 1,444 2,274992 1,316 2,308879 1,173 2,052532 1,128 1,160563 1,123 1,686775 1,196 1,971

1,272 1,329 2,6012,475 1,553 4,0281,595 1,591 3,1861,337 1,614 2,951

22 1,888 1,9101,292 2,010 3,302

$343(53.8)b

437(39.8)508(45.6)566(50.0)540(68.5)553(66.5)564(69.5)557(80.7)508(89.8)433(56.6)462(46.6)468(43.8)483(44.9)481(58.0)452(45.6)489(55.6)488(91.7).390(69.3)402(51.9)443(34.8)675(27.2)658(41.5)637(47.6)555C

533(41.3)

$ 9971,4451,3991,382

961931

1,087882

1,0161,3731,5761,7181,7911,7931,8561,5631,1721,2961,5692,1583,3542,5282,3141,3552,769

$ 609714

1,3111,7231,136

9341,521

960911

1,0401,6001,8231,9532,1462,3072,0471,7361,4251,1741,4002,1153,1793,2532,8502,538

61.149.493.7

124.7118.2100.3139.9108.889.775.7

101.5106.1109.0119,7124.3131.0148.1110.074.864.963.1

125.8140.6210.3

91.7

alncludes changes in reservesbNumbers in parentheses are dividends as of percent of after taxcredltscThe industry percent was 104, omitting Bethlehem Steel because of its extraordinary one time Ioss. For Bethlehem itself, dividends represented 146 percent ($65.5

million) of the net loss ($448.2 million)

SOURCE: American Iron and Steel Institute

l,— — - - J


Table 23.—index of Steel Industry Prices and Costs, 1965-78

Producer price indexes

W h o l e s a l e

price index Metal lurg ica l

C o n s u m e r f o r i n d u s t r i a l Steel mill c o a l Iron ore Steel Electr ica l

Year p r i c e i n d e x c o m m o d i t i e s p r o d u c t s ( h i g h v o l u m e ) ( p e l l e t s ) as c r a p p o w e r Fuel oil W a g e sb

1965 . . . . . .1966 . . . . . .1967 . . . . . .1968 . . . . . .1969 . . . . . .1970 . . . . . .1971 . . . . . .1972 . . . . . .

94.597.2

100.0104.2109.8116.3121.3125.3

96.498.600.002.506.010.013.917.927.0

97.598.900.002.507.4

96.8 NA 112.698.4 NA 106.600.0 NA 100.001.8 NA 93.010.2 100.0 110.8

07.705.000.095.793.325.566.058.890.4

94.0597.37

100.00105.76112.97119.31131.59148.70161.43

03.099.800.000.902.206.615.523.932.6

14.3 150.9 105.1 138.823.0 185.3 111.1 114.630.4 198.4 111.1 121.834.1 216.5 116.4 188.0973 . . . . . . 133.1

974 . . . . . . 147.7 153.8 170.0 232.8 140.3 353.2 172.3 485.4 190.79975 . . . . . . 161.2 171.5 197.2 622.1 181.2 245.6 193.2 495.5 222.57976 . . . . . . 170.5 182.5 209.7 657.8 201.6 259.0 226.9 451.7 246.82977 . . . . . . 181.6 195.1 229.9 671.3 220.2 233.7 257.2 521.4 273.76

1978 . . . . . . 195.4 209.3 254.5 704.9 230.1 278.2 279.7 496.8 300.36

NA = Not available aDecember 1969 base. blncluding fringe benefits.

SOURCES: U.S. Department of Labor, American Iron and Steel Institute

Table 24.—Steel Company Profitability by Industry Segment, 1977-78

Steel sshipped Pretax profits from steel only(thousand net tonnes) Return on Investment (percent) (dollars per tonne shipped)’

Company 1977 1978 1977 1978 1977 1978integrated companies –United States Steel 17,868Bethlehem Steel 11,251L T C 4,427National Steel : : 6,912Inland Steel 5,067Wheellng.Pittsburgh Steel : 2,477Kaiser Steel 1,440M c L o u t h S t e e l 1,286CF&l Steel 1,009Interlake 738

AverageR e p u b l i c S t e e l 6,038Armco. ., 4,973

Nonintegrated companiesNorthwestern Steel & Wire 763N u c o r . . . 563Florida Steel 418Keystone Consolidated

Industries 461Laclede Steel. : 397A t l a n t i c S t e e l . 346

Average “. —Alloy and specialty steel companiesc

Sharon Steeld 965Cyclops 776Allegheny-Ludlum Industries 344C o p p e r w e l d 297W a s h i n g t o n S t e e l 42Carpenter Technology —L u k e n s S t e e l —Athlone Industries (Jessop

Steel). ., –Eastmet (Eastern

Stainless Steel) ., —A v e r a g e —

18,86611,8594,8817,4385,6612,6551,4431,466

980787

6X015,457

5.39.35.8829.7631.65.26.6

6.210.410.4

- 530- 1 0 4 8– 1168

9.451538

– 1327- 840– 1873

2040418

6.36- 402

– 1. 04a

26.60a

5.26b

25.66a

36.24a

8.80- 1 2 2 5

7 .36b

11.64– 31. 64b

23.35a

12.79a

1,077 7.2 139718 16.7 250600 48 138

33384169854

53.3370042727

497 0.2 23471 42 94430 4,0 9 6

— 6.2 123

– 14.88- 0 9 9

3.00—

1.35b

16642098—

1,055 10.6 153666 55 103357 52 85351 111 84

45 93 116— 168 169— 100 9.6

29.38161447.7577.41

150.29NANA

5783411163305413

190. 29b

NANA

— 7.5 9.9 NA NAf,I NA

—— 6.0 90— 9.1 11.1

NA—

aSource: World Steel Dynamics, Business Week (Sept. 17, 1979) has given data on U S Steel Indicating a 1978 loss of$15.00/tonne of steel shipped.

bFrom Steel Form 10-k reports. (U.S. Securities and Exchange Commission.)CAIIoy and specialty steels account for more than 10% of the steel shipments of these companies.dAlthough Sharon Steel is Integrated, most of its business is in alloy and specialty steels.

SOURCE Iron Age, May 7, 1979


and scale of facilities, and management prac-tices. Although the financial performance ofmany domestic fully integrated steel firms isrelatively poor when compared to other do-mestic manufacturing sectors, their overallperformance appears to be far superior tomajor steel producers in other nations.

Several factors account for the far betterfinancial performance of the nonintegratedand alloy/specialty companies compared tothe integrated companies. Importantly, thealloy/specialty mills and many of the noninte-grated mills use advanced and efficient tech-nologies to a greater extent than do inte-grated plants, and these technologies tend toyield higher profit margins than do oldermethods. Alloy/specialty mills, since 1973,have been provided with effective quota bar-riers against competing imports. Further-more, their comparatively high-priced prod-ucts have intrinsically greater profit marginsthan the products the other segments pro-duce. Nonintegrated firms have lower coststhan integrated firms because they use fer-rous scrap almost exclusively as a raw mate-rial, they make a smaller range of simplerproducts, and they have lower marketing andother overhead costs.

Trends in Steel Industry Investment

The steel companies’ net income has beeninsufficient over time to meet all of their cap-ital needs and the industry has been forced toborrow extensively for investment in newequipment. The industry’s long-term debt in-creased tenfold between 1950 and 1978, from$763.1 million to $7,738.9 million. One of theprincipal reasons for the increasing debt hasbeen the steady growth in capital expendi-tures in actual dollars. In real dollars, theseexpenditures have fluctuated widely (table25).

In the same 1950-78 time period, stockhold-ers’ equity increased only by a factor of threefrom $6,812,6 million to $17,603.7 million (seetable 21). As a result, the debt-to-equity ratio

increased from 11.2 percent in 1950 to 44.0percent in 1978. The debt-to-equity ratio is animportant variable, which significantly af-fects industry’s ability to enter equity mar-kets. With a ratio of nearly 45 percent andlow profits, most steelmaker cannot issuenew stock or increase their debt.

Table 25.—Replacement Rates for Domestic SteelProduction Facilities, 1950-78

Capital expendituresCapital expenditures on steelmaking

on productive facilities per tonnesteelmaking of finished steel Replacement

facilities (millions shipped (1978 dollars rateb

Year of 1978 dollars) per net tonne) (percent)

1950 . . . . . . $1,181 $19.03 1.731951 . . . . . .1952 . . . . . .1953 . . . . . .1954 . . . . . .1955 . . . . . .1956 . . . . . .1957 . . . . . .1958 . . . . . .1959 . . . . . .1960 . . . . . .1961 . . . . . .1962 . . . . . .1963 . . . . . .1964 . . . . . .1965 . . . . . .1966 . . . . . .1967 . . . . . .1968 . . . . . .1969 . . . . . .1970 . . . . . .1971 . . . . . .1972 . . . . . .1973 . . . . . .1974 . . . . . .1975 . . . . . .1976 . . . . . .1977 . . . . . .1978 . . . . . .Annual averages

1950-58. . 2,065 31.57 2.871950-78. . 2,245 31.68 2.881959-68. . 2,565 36.30 3.301969-78. . 2,089 27.06 2.46

aCapital expenditures less environmental expenditures and estimated non steelcapital expenditures. Current dollars (adjusted by using the GCP Non-residential Investment Implicit Price Deflator) Capital expenditures shown arefor American Iron and Steel Institute reporting companies only

bCapital expenditures (1978 dollars) on productive steelmaking facilities per

tonne of shipments divided by replacement cost of facilities per tonne ofshipments. Replacement facility cost per tonne of shipments assumed to be$1,100 (1978 dollars)

SOURCE: D.F. Barnett, American Iron and Steel Institute

2,2682,7492,0551,2581,4472,4843,0942,0451,6472,6751,6981,6001,8112,7603,1073,4053,3673,5762,8692,2141,7051,2651,6302,1632,6842,5992,0541,706

32.5645.8728.7122.3319.3634.1043.8938.1727.2843.0129.3725.9627.3937.0738.8343.4546.4244.6636.5229.3723.1016.2817.1623.5440.4834.9827.7221.67

2.964.172.612.031.763.103.993.472.483.912.672.362.493.373.533.954.224.063.322.672.101.481.562.143.683.182.521.97


The relative profitability of the U.S. steelindustry compared to foreign steel industries,the large size of the domestic market, and thesizable proportion of imports in domesticsteel consumption have made domestic steelmills and steel distributors attractive targetsfor foreign investment and outright purchase.

The existence of stocks that are underval-ued relative to book value and exchange ratesfavorable to foreigners add to the relative at-tractiveness of domestic steel mills to foreigninvestors. As a result, a number of small non-integrated mills have been purchased or builtby foreign interests; these include ChaparralSteel (50-percent interest) and Raritan Steel,by Co-Steel International Ltd. of Canada;

Auburn Steel, by Japanese interests; Korf andGeorgetown Steel, by West German interests;Atlantic Steel, by Ivaco Ltd. of Canada; BaySteel by VoestAlpine of Austria; New JerseySteel and Structural, by Van Roll of Switzer-land; Azcon and Knoxville Iron, by Consoli-dated GoldFields of the United Kingdom;Phoenix Steel (50-percent interest) , byCreusot-Loire of France; Judson Steel, byAustralian interests; and Schindler Bros.Steel Co. by West German interests. In No-vember 1979, Kaiser Steel Corp. held discus-sions with Nippon Kokan KK concerning po-tential takeover. These particular negotia-tions were discontinued, but further take-overs of domestic steel producers by foreigninvestors are expected in the future.

Ownership and Financial Performanceof Foreign Steel Firms

The financial performance of the domesticsteel industry is somewhat difficult to com-pare with that in other nations because of thesignificantly different economic settings inwhich foreign steel firms operate. The princi-pal difference is that many foreign steel firmsare at least partly owned and/or controlled bytheir governments (table 26). Furthermore, inmany countries, government support of steelis based on public policy considerations, suchas employment stability or growth of other in-dustries, rather than steel industry profitabil-ity alone. The same type of socioeconomicconsiderations in some foreign countries atleast partly account for the lower labor pro-ductivity in their steel industries compared tothe United States (table 27).

The domestic steel industry generally haslower production costs than foreign indus-tries and recently has had higher rates of ca-pacity utilization (table 28). As a result, mostforeign steel producers havtl been less profit-able during the past decade than domesticsteel producers, particularly if the compari-

son is with the best performing U.S. firmsrather than with industry averages (table 29).Only the Canadian steel industry has beenconsistently more profitable than the U.S. in-dustry but the Canadian industry is muchsmaller. Data on world rank by size, produc-tion, sales, and profitability for a number offoreign steel firms are given in table 30.These data underestimate financial losses,because the most unprofitable companies,often state-owned, generally do not publishtheir financial results. World Steel Dynamics(1979) has estimated that, for 1978, Westernworld steel exports represented a loss of $4billion, suggesting that considerable dumpingis occurring and that foreign steel industriesare being operated at rates for purposesother than profitmaking.

Summary data on profitability of steel in-dustries in Europe, several foreign nations,and the United States are given in table 31.These data show that the U.S. industry hasbeen much more profitable than Europe’s,which has experienced large losses. Thoughthe technological and cost competitiveness of


Table 26.—Government Ownership of Raw SteelFacilities, Selected Countries

(percent government owned)

1 9 7 4Country product ion 1 9 7 8 a.C a n a d a .Brazil . . . . .Mexico ...Venezuela . . ., . . . . .Other Latin America ., . . .F r a n c eW e s t G e r m a n yItaly ,,,U n i t e d K i n g d o mSpain. .Netherlands. . . . .S w e d e n .Belgium . . . . . .Austria . . . . . . . . . . .Other Western Europe .,Republic of South AfricaOther Africa. . . . .India . . . . . . . . . . . . . . . . . . . .Taiwan . . . . . . . . . . . . .S o u t h K o r e aOther Asia . . . . . . . . . .Oceania . . . . . . . . . . . . . . . . .

Total non-Communistcountries . . . . . . . . . . . . .

Total Communist countries.

Total world. . . . . . . . . . . . . .

NA = not available

17

6 0

4 7

8 6

N A

o

11

5 7

9 0

4 5

9 3

21

0

100

N A

8 7

N A

1 0 0

1 0 0

1 0 0

N A

N A

19100

07575

NANA75

0757550257550

100NANANA75

NA75

NANA

NANA

1979capacity

136874855669

9577939

NA59

NANA6072708212

NA7530

30100

44 - NA “45—

aProductlon or capacity not stated (probably capacity), numbers apparentlyrounded off to 0, 25, 75, or 100%.

SOURCES 1974 production—D.F. Barnett The Canadian Steel Industry in aCompetitlve World Environment Canadian Government. 1977:1978 production – The Economlst Dec. 30, 1978 and 1979 capac-lty—American Iron and Steel Institute

the Japanese steel industry cannot be re-futed, it still has not been very profitable. Anumber of factors explain this relatively lowprofitability: low capacity utilization (about70 percent for the past several years), highfinancial costs, increasing energy prices andlabor costs, and high transportation costs forraw material imports and finished steel ex-ports. With the exception of Canada, * foreign——— ———.

*For the three largest Canadian (integrated) steel compa-nies, The Steel Co. of Canada, Dominion Foundries & Steel, andAlgoma Steel, the average returns on equity for 1974 to 1978were 11.6 percnt. 12.9 percent, and 10.8 percent respectively.The best performing large U.S. integrated firms for this periodwere Armco with 11.3 percent and Inland with 11.2 percent re-turn on equity. (‘‘The Steel Industry of America. ” Price Water-house & Co., 1 979. )

steel industries continue to suffer either largelosses or only moderate profits. Nevertheless,as a result of government support, many for-eign steel-producing firms have experiencedconsiderably greater expenditures than havedomestic steel firms both on a per-tonne basisand as a percentage of the countries’ grossnational products (GNPs) (figures 11 and 12).

Japanese companies are about 83-percentdebt-financed, compared to an average of 44percent for U.S. steelmaker. Japan’s closegovernment/business cooperation, aimed atmaintaining a strong, export-oriented steel in-dustry, provides Japanese steelmaker withconsiderable access to external funds. TheJapanese Government, through the Bank ofJapan and indirectly through commercialbanks, facilitates loans to steel companies tofinance modern capacity additions in order toincrease production or permit economies ofscale. This capital is not a subsidy: the com-panies pay interest at a rate slightly lowerthan the prevailing rate. *

The steel industries of developing countrieshave been given considerable help from in-ternational organizations. For example, theU.N. International Development Organization(UNIDO) has considered underwriting the ex-pansion of ironmaking and steelmaking inLDCs, and the World Bank has made avail-able many loans for this purpose. A UNIDOreport argues that steel firms in developedcountries are planning to build up productionof semifinished steel in LDCs. The reportstates:

Steel industry projects in developing coun-tries in many parts of the world are beingpursued steadily . . . The shift presents thedeveloping countries with an exceptional op-portunity. They are able to pursue their owndevelopment schemes with technical assist-ance and deliveries of equipment more readi-

*The rate paid is about 1/2 to 1 percent lower than the mar-ket interest rate in Japan. A subsidy of this magnitude would beless than $0.55/tonne on a $330/tonne product.

. .


Table 27.—Comparison of Productivity and Labor Costs in the U.S. Iron and Steel IndustriesWith Four Other Countries, 1964,1972-77

Measure United Japan West Germany United Kingdom Franceand year States Minimum Maximum Minimum Maximum Minimum Maximum Minimum MaximumOutput per hour1964 . . . . . . 100 46 53 53 60 48 51 48 521972 . . . . . . 100 85 101 76 84 51 54 62 691973 . . . . . . 100 94 112 73 80 48 51 59 661974 . . . . . . 100 95 113 80 88 43 46 61 681975 . . . . . . 100 103 123 82 91 43 46 61 681976 . . . . . . 100 108 128 82 91 48 51 63 701977 . . . . . . 100 104 123 81 89 43 46 64 72Hourly labor costs1964 . . . . . . 100 16 16 35 35 29 38 34 351972 . . . . . . 100 33 34 58 58 33 34 44 441973 . . . . . . 100 41 42 71 71 33 34 54 541974 . . . . . . 100 44 46 78 78 35 36 55 651975 . . . . . . 100 44 46 76 76 37 38 63 631976 . . . . . . 100 44 45 72 72 33 34 63 631977 . . . . . . 100 49 51 78 78 33 34 64 64Unit labor costs1964 . . . . . . 100 24 30 59 67 57 61 66 721972 . . . . . . 100 32 40 68 75 62 67 64 711973 . . . . . . 100 37 45 88 97 66 71 83 911974 . . . . . . 100 39 48 88 97 81 82 981975 . . . . . . 100 36 44 83 92 80 87 97 1071976 . . . . . . 100 34 42 79 87 65 70 92 1011977 . . . . . . 100 40 40 88 97 72 77 90 99

SOURCE U.S. Bureau of Labor Statistics.

Table 28.—Capacity Utilization in Several Steel Industries (percent of capacity)

United United West ECSC (sixYear States Canada Japan Kingdom Germany France countries) Total EEC

Annual averages1956-65 . . . . . . . . . . . . . . . 75.8 86.8 84.2 – — — 89.81966-75 . . . . . . . . . . . . . . . 86.5 88.7 85.0 – — — 81.5 =1956-75 . . . . . . . . . . . . . . . 81.1 87.7 84.7 – — — 85.6 –

Annual1973 . . . . . . . . . . . . . . . . . 97.5a 85.8 92.5 84.2 90.0 86.31974 . . . . . . . . . . . . . . . . .

—93.5a ~ 77.7 80.3 88.1 88.5 — 86.9

1975 . . . . . . . . . . . . . . . . . 76.2 — 67.3 74.2 64.3 64.0 — 66.11976 . . . . . . . . . . . . . . . . . 80.9 — 66.6 77.7 64.4 69.7 — 67.91977 . . . . . . . . . . . . . . . . . 78.4 — 61.1 70.9 57.6 66.4 — 62.81978 . . . . . . . . . . . . . . . . . 86.8 — 67.3 73.6 60.0 68.5 — 65.9

aEstimate.

SOURCES: Averages—D.F. Barnett, ’’The Canadian Steel industry in a Competitive World Environment,” Canadian Government, 1977,annualdata—American Iron andSteel lnstitute, Eurostat, European Coal and Steel Community, and Japan’s Ministry of International Trade and lndustry.

ly available from developed countries than atany time during the past ten years. As thedeveloping countries make rapid progresswith their steel industries, they will reducetheir dependence upon imports, improvetheir balance of payments, and create asound basis for further industrialization. ’

1U.N. International Development Organization, Progress Re-port on the World Iron and Steel Industry (draft, no date, Vi-enna, Austria).

Table 29.—Steel Industry Net Income as aPercentage of Net Fixed Assets, Five Countries,

Averages for 1969-77

Net income/Country net fixed assets

United States. . . . . . . . . . . . . . . . . . . . . . . . . . 6.7Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7West Germany. . . . . . . . . . . . . . . . . . . . . . . . . 2.9United Kingdom . . . . . . . . . . . . . . . . . . . . . . . – 5.3France (1972-76) . . . . . . . . . . . . . . . . . . . . . . . – 8.3

SOURCE. International Iron and Steel Institute


Thus, it is clear that the privately owned ly better access to capital but that are noand financed U.S. steel industry is largely more profitable, and in many cases less prof-competing in an international market with itable, than the U.S. industry.foreign steel industries that have significant-

Table 30.— Financial Statistics, Selected Steel Companies, 1978

1978 Sales Profits after taxes 1978 return1978 production 1978 1977-78 1978 1978-77 on book

world (mill ions (millions (percent (millions (percent valuearank of tonnes) of dollars) change) of dollars) change) (percent)Company

British Steel . . . . . . . . . .Creusot-Loire . . . . . . . . .FINSIDER . . . . . . . . . . . .

Dalmine. . . . . . . . . . . .Italsider. . . . . . . . . . . .

Thyssen. . . . . . . . . . . . . .Krupp. . . . . . . . . . . . . . . .Klockner-Werke . . . . . . .Salzgitter. . . . . . . . . . . . .COCKERILL . . . . . . . . . .ESTEL (Hoogovens and

Hoesch). . . . . . . . . . . .Empresa Nacional

Siderurgia . . . . . . . . . .Nippon Kokan. . . . . . . . .Nippon Steel . . . . . . . . . .Sumitomo . . . . . . . . . . . .Kawasaki . . . . . . . . . . . . .Kobe Steel. . . . . . . . . . . .Stelco. . . . . . . . . . . . . . . .Dominion Foundries . . .Algoma Steel. . . . . . . . . .Broken Hill. . . . . . . . . . . .Steel Authority of India .Tata Iron & Steel . . . . . . .South African Iron

& Steel . . . . . . . . . . . . .Comp. Siderurgia

Nacionale . . . . . . . . . .

Country

United KingdomFranceItalyItalyItalyWest GermanyWest GermanyWest GermanyWest GermanyBelgium

Netherlands

SpainJapanJapanJapanJapanJapanCanadaCanadaCanadaAustraliaIndiaIndia

South Africa

Brazil

4—

6——9

23282920

21,22

255178

16243334141847

19

43

16.7 $ 5.882.0 3 -$690.0– 85.0

—– 75.0

-419.666.0

– 10.5– 38.6– 52.0

– 0.2

-146.6

– 174.149.3

216.172.983.365.4

101.380.058.795.533.1

9.5

– 84.4

– 2.2

NMNM

-32–362,974.8

—630.2

2,941.512,086.16,556.31,882.53,464.23,294.4

171.513.0——

11.85.14.13.95.3

5.3,5.1

4.913.431.212.012.0

7.15.03.33.07.66.31.9

6.1

2.1

—4

1512

713

5NA

—NMNM– 18NMNMNMNA

—–81- 6 6

4– 1

– 14- 1 6NA

5,571.7 8 NM -11

1,390.15,523.8

11,526.34,918.34,591.14,223.91,496.9

994.5728.5

2,680.21,798.8

426.1

NM98

1851831569533398562

NA– 3 6

NA6

10101111121613

4NA

8

7– 4

4636

23222611NA

9

1,306.1 24 NM – 7

865.8 48 NM – 2

NM = not meaningful, NA = not availableaBook value IS common equity at end of fiscal year

SOURCES Rank and production—international Iron and Steel Institute, other data–Business Week, July 23, 1979

Table 31.— Average Profitability for Steel Industries in Six Nations and Europe, 1978

1978 dollars 1978 profit (percent)

Profit per Pretax profit perCountry/area tonne raw steel tonne shippeda Sales Return on equity

Europe. . . . . . . . . . . . . . . –21 .19 (1977 = –25.86)b — 1.6 —Japan . . . . . . . . . . . . . . . . 6.43 (1 977= 2.45) 9 7.6 3.2cCanada. . . . . . . . . . . . . . . 21.24 (1977= 15.32) — — 13.7France . . . . . . . . . . . . . . . – 56.67 – 4 8 —West Germany . . . . . . . .

—– 1.41 – 2 —

United Kingdom . . . . . . .—

– 41.32 – 5 0 —United States . . . . . . . . .

—10.48 (1977 = 4.81)d 31 2.8 7.3

aFrom World Steel Dynamics, September 1979, for commodity carbon steels made m integrated plants only.bFrom data in Fortune, Aug. 13, 1979, for 17 European steelmaker representing897 million tonnes of raw steel, 1978 production (only 3 firms showed proflt).CThe average of 96 percent for the five firms was normalized to 32 percent in order to compensate for the widely different debt-to-equity ratio, assuming that for the

United States the ratio IS4060 and for Japan it IS8020dExcludes extraordinary losses of Bethlehem Steel and their raw steel production.

SOURCE American Iron and Steel Institute data. except as noted


Figure 11.— Rates of Investment in Major SteelIndustries, 1963-76

U.S. dollar per tonne

Figure 12.—Capital Expenditures in SteelManufacturing as Percent of GNP, Selected

Steel-Producing Countries, 1960-78

Percent of GNP

30 r 25.4

20

10

0U n i t e d J a p a n W e s t C a n a d a F r a n c e I t a l y U n i t e d

States Germany K ingdom

SOURCE U N. International Monetary Fund

1960 1965 1970 1975

Year

SOURCES. Organization for Economic Cooperation and Development, Interna-tional Iron and Steel Institute

Factors in International Competitiveness

The production factors—capital, labor,and raw materials—are combined in variousways, through technology, to produce steel.The productivity of these inputs is partly de-termined by the technologies in use. Theirproductivity and prices, in turn, determineproduction costs, a major element of the prof-itability needed to attract capital.

Technology

Technology has direct and indirect effectson total steelmaking productivity because in-vestments in up-to-date processing equipmenthelp slow down real production cost in-creases. * During the 1960’s, the domesticsteelmaker made major technological gains

*Adoption of new technology is discussed more thoroughly inch. 9.

in hot wide-strip mills, rod and bar mills, andin secondary refining. * The use of low-costelectric furnaces also increased consider-ably, driven mostly by the construction of do-mestic nonintegrated plants that take advan-tage of locally available scrap. The produc-tion of raw steel from electric furnaces iscomparable to that in Japan, greater thanthat in West Germany and France, but lowerthan that in the United Kingdom (table 32).

The Federal Trade Commission (FTC) hasconc luded tha t the U .S . s t ee l indus t ryadopted new basic oxygen and continuouscasting technology more rapidly than any

*One of the newest U.S. hot strip mills. computer-controlledfrom start to finish, requires only 32 workers on each shift com-pared to about 80 in other facilities. (U.S. Department of Labor.Bulletin No. 1856.)

Ch. 4—The Domestic Steel Industry’s Competitiveness Problems 129

Table 32.—Comparative Trends in Raw Steel Production in Electric Furnaces, 1964-78 (percent of total production)—

Total world(excluding the

Year United Kingdom France West Germany Japan United States United States)—.1964 . . . ~ . .

—— — — — 9.98 —

1965 . . . . . . — — — — 10.50 —1966 . . . . . . — — — — 11.09 —1967 . . . . . . — — — 18.3 11.86 —1968 . . . . . . — — — 18.2 12.79 —1969 . . . . . . — — — 16.7 14.25 13.71970 . . . . . . 18.9 — — 16.7 15.33 14.61971 . . . . . . 17.5 — 10.0 17.6 17.39 14.71972 . . . . . 18.9 — 10.2 18.6 17.80 15.51973 . . . . . 19.4 10.7 10.4 17.9 18.40 15.61974 . . . . . . 22.9 11.5 10.8 17.8 19.67 16.21975 . . . . . . 26.9 14.2 12.6 16.4 19.44 17.21976 . . . . . . 29.7 14.2 12.4 18.6 19.23 19.11977 . . . . . . 30.0 14.5 13.0 19.1 22.25 18.51978 . . . . 34.7 15.0 14.5 21.9 23.53 17.3

SOURCES American Iron and Steel Institute Ministry of Industry and Trade, Japan, Statistlches Bundesamt, West Germany. Iron and Steel Statistics Bureau, United——

Kingdom

other nation. z However, FTC only consideredthe degree to which new steelmaking capaci-ty used new technologies, not the extent towhich total steelmaking used new technol-ogies.

The replacement of still usable and unde-preciated facilities by new technology re-quires ample justification. Domestic steel-making equipment, largely of the 1950’s andearlier vintage, in the industry’s view, hadnot depreciated enough by the late 1960’s andearly 1970’s to warrant replacement. Yet itwas inefficient compared to large Japaneseintegrated plants and some recently acquiredEuropean and Third World facilities. Coupledwith an alleged unwillingness in the mid-1950’s* to adopt advanced, but not widelyproven steel production processes, U.S. pro-duction capability has not kept pace with con-stantly modernized Japanese mills and somenew production facilities in developing na-tions. For example, Japanese production in-creased 5 percent between 1962 and 1978,and capacity increased 50 percent; whileU.S. production in this period increased 3percent, and capacity increased 1 percent.

It appears, in retrospect, that domesticproducers did not adequately project the fu-

U.S. Federal Trade Commission, “The U.S. Steel Industryand Its International Rivals, ” November 1977.

*This is a highly controversial topic.

ture economic advantages of certain techno-logical options. In particular, they did not ful-ly predict the rising costs of energy, labor,and capital. When these increases did hit,along with environmental control costs, thesteel companies were not in a good position fi-nancially to adopt available technology. * Asof 1978, 26 percent of steel industry plantand equipment was reported to be technologi-cally outmoded, as compared to 12 percentfor domestic durable goods industries. ’ Amore recent estimate is that 20 percent ofsteel facilities is obsolete.4 The age of facil-ities is particularly high for open hearths,blooming mills, and plate mills, followed bycold strip mills and coke ovens (table 33).

Adams and Dirlan have criticized the U.S.fai lure to adopt new technology rapidlyenough. s They argue that since the 1960’s do-mestic steelmaker have lagged behind other

* . . . much of the steel industry’s apparent unwillingness toinvest in energy-conserving equipment can be made to appearcompletely rational (i. e., consistent with profit maximization)by using constant, rather than steadily increasing energyprices. ” F. T. Sparrow, “A Public-Private Sector InteractiveMixed Integer Programming Model for Energy ConservationPolicy,” Purdue University, 1979.

‘McGraw-Hill. “HOW Modern Is American Industry?” No-vember 1978.

“International Iron and Steel Institute, 33 Metal Producing,January 1980, p. 9.

‘Walter Adams and Joel B. Dirlan, “Big Steel, Invention andInnovation” Quarterly r Journal of Economics (May 1966), p.167ff.


Table 33.—Age Distribution of Domestic SteelProduction Facilities, 1979

Averageage Percent older than—

Facility (years) a 30 years 25 years 20 yearsCoke ovens . . . . . . . . 17.3 14.2 25.6 45.9Open hearth furnaces 33.2 43.0 78.5 100.0Basic oxygen

furnaces. . . . . . . . . 11.0 0.0 0.0 2.3Electric furnaces. . . . 14.3 6.1 13.8 25.3Plate mills . . . . . . . . . 25.6 40.8 45.1 53.6Wire rod mills. . . . . . . 13.7 12.6 17.3 17.9Hot strip mills . . . . . . 19.0 11.6 16.1 31.5Cold strip mills . . . . . 21.2 14.7 29.2 54.1Galvanizing lines. . . . 18.8 4.4 8.9 40.1Aggregate . . . . . . . . . 17.5 12.5 20.4 33.3aAs of Jan 1, 1979SOURCE: American Iron and Steel Institute, The World Steel Industry Data

Handbook, vol. 7.

major producing nations in the adoption ofcertain high-performance steelmaking tech-nologies. Basic oxygen steelmaking* waspioneered in Europe, and adopted faster in

*Basic oxygen steelmaking and continuous casting are dis-cussed fully in ch. 9.

Europe and Japan than elsewhere from thelate 1950’s onwards (figure 13). All new U.S.steelmaking facilities built since 1957 havebeen either basic oxygen or electric furnaces,but the percentage of total steelmaking capa-city that uses basic oxygen has not increasedas rapidly as in some other countries becausethe U.S. industry was already so much largerthan the others (see table 16). Japan, for ex-ample, which was not replacing old facilitiesbut expanding its total industry, was able toadvance its use of basic oxygen, as a percent-age of all facilities, quicker and easier thanwas the United States.

Continuous casting did not achieve fullcommercial success, on a worldwide basis,until the late 1960’s, and domestic steel-maker were involved in its development.Again, new steelmaking facilities built sinceabout 1968 have incorporated continuouscasters, but few previously existing ingot

Figure 13.–The Diffusion of Oxygen Steelmaking, 12 Countries, 1961.78

I — L u x e m b o u r go.- — B e l g i u m

.~”

_ Nether lands

. _ — A u s t r i a8 — J a p a n

*. — F r a n c e

“-WA

.. ~West Germany

.“..“..

. — U n i t e d S t a t e s— C a n a d a

- — U n i t e d K i n g d o mF -*

..#” ”. . 0 - - — S w e d e n

d

r.“ .“ ~ :.:#z-:00/ — I t a l y

SOURCES” Organ lzatton for Economtc Cooperation and Development; International Iron and Steel Instttute


casting facilities have been replaced (figure14). Also by the late 1960’s, Japanese andWest German rolling mill builders had out-paced domestic engineering design firms spe-cializing in this field, and they have installedthis new technology with its higher outputs.

The major innovations during the 1960’swere productivity enhancing, so failure toconstruct plants incorporating any givenhigher output process cost the United Statessome of its competitive edge in world mar-kets.’ Clearly, expansion opportunities, tim-ing of new investments, and the size and costof new steel plants are among the most impor-tant factors affecting technological produc-tivity and competitiveness.

‘Jonathan Aylen, “Imovation, Plant Size and Performance: AComparison of the American, British and German Steel Indus-tries, ” a paper presented at the Atlantic Economics Associ-ation Conference, Washington, D. C., Oct. 12, 1979, pp. 34.

Expansion Opportunities

Steel producers in industrialized nationshave on several occasions benefited from pe-riods of rapid demand growth, which havejustified capacity expansion. The most recentdomestic expansion period took place from1960 to 1965, when production increasedabout 20 percent (see table 16). Nevertheless,U.S. steelmaking capacity increased onlyabout 1 percent per year during the 1962-78period. Domestic steelmaker have empha-sized the removal of bottlenecks in existingplants. Such investments do not produce pro-ductivity gains as large as does constructionof greenfield plants, but they also require lesscapital.

The most recent European expansion tookplace during a longer period than that in theUnited States, lasting from about 1956 to1975. Japanese post-World War II steelmak-ing capacity was limited, and capacity in-

Figure 14.—The Diffusion of Continuous Casting, 10 Countries, 1962-78

Percent

50

45

40

35

30

25

20

15

10

5

0

1960 1965 1970 1975 1978

Year

SOURCE: Organization for Economic Cooperation and Development

132 . Technology and Steel industry Competitiveness

creased in subsequent years more than in anyother major steel-producing country. Duringa 15-year timespan between 1962 and 1978,Japanese steelmaker added approximately50-percent new steelmaking capacity.

In the early 1970’s, foreign steel producersplanned expansion programs for the decadeto follow in such a way as to maintain rapidgrowth patterns. To a large extent, realizingthese plans depended on offers of assistanceby governments who shared their industries’desires to break into new markets. This op-timism about expansion for the late 1970’s,which no doubt stemmed from the 1973-74steel shortages, was premature. Demand in1975 fell below the peak demand of the short-age years, creating an overcapacity for pro-duction. The events of 1975 and thereafterseem to have daunted most expansion plansin steel-producing nations, including Japan,and the EEC and LDCs. Capital investmentshave declined since 1975, but generally in-creasing world steel demand has succeededin broadening the export market for foreignsteel-producing countries, and they expect tohold that market,

Japan’s steel industry has been a promi-nent part of her postwar industrial develop-ment. Japan has recognized that the steel in-dustry is critical to the manufacture of capi-tal goods and is an important source of for-eign exchange. Japanese steelmaker havebenefited more than those in any other steel-producing nation from a rapid and sustainedgrowth in capacity. Based on a strategy forbuilding a large and internationally competi-tive industry, and aided by their financialstructure 7 and economic philosophy, the Japa-nese have maintained and increased theirlarge capital investment in steel mills. Manylarge greenfield plants, with excellent infra-structures and access to deep-water ports,have been constructed in Japan during thepast 20 years. The infrastructure of these

7See Caves and Masu Uekusa, “Industrial Organization in Ja-pan, ” in Asia’s New Giant, High Patrick and Henry Rosovsky,eds., The Brookings Institution, 1976; and Bank of Japan, Eco-nomic Research Department, The Japanese Financial System,July 1970.

new plants is such that they can be “roundedout” on a cost-effective basis, thereby reduc-ing average unit production costs after ca-pacity increases. Furthermore, Japanesesteelmaker with their newer facilities havenot had to replace outdated equipment to theextent that U.S. and European producershave. As a result, Japanese investments inlarge, efficient facilities have more than off-set comparatively significant cost increasesfor input factors.

Efforts in LDCs to attain economies of scalehave contributed to the creation of steelmak-ing capacity in excess of current world de-mand. * South Korea in particular has an am-bitious steel production program and lowlabor costs. The Central Intelligence Agencyhas estimated that steelmaking capacity inLDCs will total 112 million tonnes in 1985, ascompared with 64 million tonnes in 1978. 8

UNIDO estimates that Brazil, Iran, Argen-tina, Venezuela, India, and South Korea willcollectively contribute 54 million tonnes of ad-ditional steelmaking capacity between 1979and 1985. Steel consumption in LDCs is ex-pected to increase 6.5 percent per year andthose industries should reach a capacityutilization level of 85 percent by 1985.

Timing of Investments in New Technology

The process of substituting capital forlabor started much earlier and went furtherin the domestic steel industry than in Europe.The older U.S. plants were designed during aperiod of labor scarcity and, for that time,relatively high wages, and the industry’s cap-ital equipment was highly mechanized by thestandards of its day. Now, however, its age isclearly reflected in the declining labor pro-ductivity growth rate of the U.S. steel indus-

*LDCs benefit from indigenous steel production. For exam-ple, the cost of importing steel products to LDCs is from 15 to 30times greater than the revenues gained from the sale of ironore, However, many of these countries will remain net im-porters of steel for the foreseeable future. (Ingo Walter, Tradeand Structural Adjustment Aspects of the international Ironand Steel Industry: The Role of the Developing Countries,prepared for the U.N. Trade and Development Board, NewYork, 1978. )

‘Central Intelligence Agency, “The Burgeoning LDC Steel In-dustry: More Problems for Major Producers, ” 1979.


try. Without new investments in more produc-tive steelmaking technologies, the domesticsteel industry may lose its technological andcost competitiveness.

For the time being, domestic steel industryproductivity may have reached a plateau,while some other major producing nationshave a much higher rate of productivitygrowth, helped along by improved technologyand enlarged plants. Newer plants, embody-ing newer techniques, are likely eventually toachieve higher output rates than older plants.As “learning” occurs, efficiency should in-crease at a faster rate with respect to time.Thus, it is expected that the newer foreignplants will have higher trend rates of produc-tivity growth and ultimately achieve higherproductivity levels, even though they may ini-tially start up at lower levels of productivitythan their more mature, long-commissionedU.S. rivals.’

Size and Cost of Steel Plants

Many U.S. steel plants have smaller capac-ities than foreign plants, particularly those inJapan (table 34). As of 1979, domestic basicoxygen furnaces had about 20 percent lesscapacity than those in the United Kingdomand about 25 percent less than those in WestGermany, U.S. and West German blast fur-naces are of similar capacity, while Britishfurnaces average 5 percent more capacity.U.S. hot wide-strip mills have an average ca-

‘AVlen, OP. cit., pp. 17 and 21.

pacity about 25 percent more than Britishmills, but about 63 percent less than WestGerman mills. ’O Japanese steel plants, onaverage, have more capacity at all stages ofproduction than either domestic or Europeansteel plants.

Domestic steel plants are generally smallerbecause they are older. Additional factorshave also been thought to encourage smallplant size, including high transportationcosts, the lower capital intensity of the small-er scale, management policies, and labor re-lations practices assoc ia ted wi th l a rgeplants. Because domestic producers, on aver-age, operate smaller plants than some of theirforeign counterparts, they are less able torealize economies of scale and have higheroperating costs than they would with largerplants.’ ]

In addition to differences in plant size,there are also marked differences amongcountries in median per tonne capital costsfor plants. * This is largely because of differ-ences in construction labor costs and con-struction efficiency. In 1976, domestic steel-maker had pe r tonne cap i t a l cos t s fo requivalent technology that were about 44 per-cent higher than in Europe and as much as 41percent higher than in Japan. ’z These capitalcost differences are probably smaller today,but their pattern is similar to that of 1976. In

“’Aylen, op. cit., table 1.1lAylen, op. cit.*Capital costs are discussed more fully inch. 10.1-Aylen, op. cit.

Table 34.—Integrated Steel Producers’ Capacities in Selected World Areas, 1976— — -——— ——— —.

Raw steel tonnes of capacity——— — ——Average per

Number Plants Approximate Average Average plant amongArea of firms per firm total per firm per plant 10 largest—-—Canada ~~! . . . . . . . . . . . . . 4 1.0 13.0 — 3.3 3.3 – NAUnited States. . . . . . . . . . . . . . . 20 2.5 115.0 5.8 2.3 5.9Japan . . . . . . . . . . . . . . . . . . . . . 8 2.5 120.0 15.0 6.0 11.5European Coal and Steel

Community (six countries). 40a 1.8 135.0 3.1 1.8 6.4

‘Estimated—

NOTE All numbers are approximate

SOURCES Average for 10 largest plants–H G Mueller, “Structural Change in the International Steel Market, ” 1978, all other data—D F Barnett, ‘The Canadian SteelIndustry in a Competitive World Environ merit,” Canadian Government. 1977


contrast to the U.S. capital cost disadvan-tage, the domestic steel industry has an ener-gy cost advantage— albeit a slowly erodingone—because it is able to use domestic coal.

In conclusion, domestic steelmaker havehad less incentive than their internationalcompetitors to adopt new technologies to re-place open hearth steelmaking, dated-tech-nology blast furnaces, and conventional cast-ing facilities.13 High capital costs have en-couraged the substitution of other factors ofproduction for capital improvements. Butwith ever-increasing energy and raw materi-als costs and a rate of productivity improve-ment insufficient to offset rising employmentcosts, domestic steel companies cannot ex-pect aging equipment to remain profitable. In-vesting in new, more efficient, though moreexpensive equipment may be justified if thenew equipment entails sufficiently lower pro-duction costs.

Comparative Production Cost Data

Available steel production cost data sufferfrom two major shortcomings: lack of accessto specific confidential industry data andnoncomparability among sources. Thus, stud-ies differ in industry cost performance datafor s imilar industry segments and t imeframes. Even if total cost figures per tonne ofsteel for materials, labor, and capital areroughly similar, it is not uncommon to find adifferent breakdown for these inputs in thevarious studies. The most extensive steel pro-duction cost estimates are those prepared bythe World Steel Dynamics (WSD) organiza-tion. 14 However, that model is based on largereconomies of scale for integrated plants thanmay exist in reality, particularly for U.S.plants. * Thus, total factor productivity maybe overestimated somewhat using the WSDdata.

1‘Aylen, op. cit.14World Steel Dynamics, Core Report J, September 1979.*The WSD U.S. and European cost data are associated with

a 3-miHion- to 4-million-tonne/yr integrated plant and the Jap-anese data are based on a 5-million- to 6-mi]]ion-tome/yr in-tegrated plant.

In addition to the WSD study, comprehen-sive steelmaking cost analyses have beenmade by FTC, the American Iron and Steel In-stitute (AISI), Mueller and Kawahito, andThorn. 15 FTC, Thorn, and Mueller and Kawa-hito took similar approaches by relying on ag-gregate confidential cost data and/or infor-mation supplied by foreign government agen-cies concerned with steel industries. Only theWSD data are based on models of large inte-grated plants producing a mix of carbon steelproducts. The WSD simulation model com-pares costs in major producing countries(United States, Japan, West Germany, UnitedKingdom, and France), going back as far as1969 and projected to 1984.

Available cost studies may differ with re-spect to both total steelmaking costs and in-put factors. For instance, the WSD 1974,1975, and 1976 Japanese cost estimates arehigher by 7.6 percent, 10.4 percent, and 13.6percent, respectively, than those presentedby AISI. The WSD data do not include trans-portation costs, and the same appears to bethe case for the AISI data. The AISI estimatesalso do not include marketing costs, but theWSD data do appear to include them. Bothsources deal with average costs for carboncommodity steels only.

The WSD and Thorn data differ in inputcosts. In comparing 1973 Japanese cost datato those of the United States, the two sourcesshow an almost opposite condition for materi-al and capital costs. There is an even greaterdissimilarity between the 1973 West Ger-man/U.S. comparisons by WSD and Thornthan between their Japanese/U.S. cost com-parisons. The WSD data show an $1 l/tonneWest German disadvantage relative to U.S.producers, and the Thorn da ta show a$33/tonne advantage. Of the major inputs,

}~u.s. Federa] T’rade Commission, ‘‘U.S. Steel Industry andIts International Rivals,’” November 1977: American Iron andSteel institute, “Economics of International Steel Trade,” 1977:Hans Mueller and K. Kawahito, “The international Steel TradeMarket: Present Crisis and Outlook for the 1980’s,”’ conferencepaper No. 46, Middle Tennessee State University, May 1979:and R. S. Thorn, “Changes in the international Cost competi-tiveness of American Steel, 1966 -197 S,” working paper No. 8,University of Pittsburgh, February 1975.


employment and capital costs contribute mostto the discrepancies.

Sets of U.S./Japanese data by WSD, FTC,and Mueller and Kawahito for 1976 also illus-trate the limitations of developing compa-rable steelmaking cost estimates. For theUnited States, WSD shows the lowest totalcost estimates, followed by Mueller and Ka-wahito, and FTC. The Mueller and Kawahitoenergy cost estimates are about 25 percentlower than those in the other two sources.And finally, WSD shows a different energy-iron cost balance than do the other twosources (table 35).

The methodologies of the various studiesdiffer in several other respects, as well. TheWSD data exclude electric furnace produc-tion. Thus, scrap costs tend to be under-estimated and energy costs overestimated. ’GThe FTC and WSD data are based on marketprices for raw materials, while Mueller andKawahito incorporate company-owned mate-rials prices. Less verifiable differences in thestudies include possible differences in indus-try definitions and adjustments for productmix.

The following discussion is in many in-stances based on WSD cost data. * It shouldbe kept in mind that the WSD total U.S. cost

“>George R. St. Pierre, “lmpads of New Technologies and E~-ergy/Raw Materials Changes on the U.S. Steel industry, ” Of-fice of Technology Assessment, contractor report, 1979.

*Transportation costs are not included in the discussion inthis section. Unless otherwise noted, all references in this sec-tim are to U.S. dollars at actual operating rates.

data appear to be underestimated relative tothat of other countries—perhaps by as muchas 5 to 10 percent in the cases of WesternEurope and Japan, respectively. ’

Labor Costs

A significant portion of the cost of produc-ing steel is labor cost. This cost can rise as aresult of increases in hourly wage rates andfall as a result of increases in labor produc-tivity.

Declining Employment andIncreased Skill Requirements

Domestic steel industry employment hasdeclined by 21.4 percent during the past twodecades, from about 550,000 employees in1960 to about 450,000 in 1978.** From 1962to 1966, employment levels rose slowly, about1 percent annually. Since that time, however,

*This conclusion is based on findings such as:● The Council on Wage and Price Stability found that

1972-77 WSD U.S. cost data were between 1 and 6 per-cent lower than comparable industry data (Council onWage and Price Stability, “Prices and Costs in the UnitedStates Steel Industry, ” 1977, p. 25):

. WSD Japanese 1974-76 cost estimates were between 7

and 13 percent higher than comparable AISI estimates:and

. WSD has lower 1976 U.S. cost estimates than eitherMueller and Kawahito or FTC, even though WSD, unlikeMueller and Kawahito, uses higher market prices forraw materials.

* *Based on AISI data. Steel industry employment data aretypically about 22 percent lower than U.S. Department of La-bor, Bureau of Labor Statistics, data. Unlike BLS, AISI does notinclude smaller establishments primarily engaged in the finish-ing of purchased iron and steel.

Table 35.—Estimates of U.S. and Japanese Steel making Costs, 1976 (dollars per tonne)—— .——

Input costs

Study Country Iron ore and scrap Energy Labor Total a

———FTC. . . . . . . . . . . . . . . . . . . . . . United States $72.97 $92.80 $157.85 $323.62

Japan 54.57 68.40 57.98 180.95WSD . . . . . . . . . . . . . . . . . . . . . United States 71.84 94.89 115.84 282.57

Japan 33.51 88.14 59.37 181.03Mueller. . . . . . . . . . . . . . . . . . . United States 63.10 71.10 155.54 289.74

Japan 52.92 73.64 61.16 187.73

aTotals exclude miscellaneous materials and supplies, and capital costs.SOURCES U S Federal Trade Commision,‘U.S. Steel Industry and Its International Rivals,”November 1977, World Steel Dynamics, Core Report J. 1979, H Mueller

and K. Kawahito, “The International Steel Market’ Present Crisis and Outlook for the 1980’ s,” Middle Tennessee State University, conference paper No 46,1979

.


steel industry employment has droppedsteadily, by an average of almost 2 percentper year (table 36). U.S. Bureau of Labor Sta-tistics (BLS) projections for 1985 indicate thatsteel employment is expected to continue itsdownward trend, but with a somewhat lowerrate of decline—about 0.5 percent annually. 17

Declining steel industry employment maybe attributed to a number of factors, includ-ing growing steel import penetration, in-creased labor productivity, and product sub-stitution. With the exception of France, steelindustry employment in other major producercountries also has decreased to varying de-grees, beginning at least in the 1960’ s.* TheU.S. decline has been greater than that gener-ally experienced abroad.

Steel industry job content and occupationalrequirements also have changed considera-

“BLS Bulletin No. 1856, footnote 22,* 1978 West Germ:]ny: 205,000 employees, down by 4.5 per-

cent since 1960: 1978 France: 135,800 employees, up by 3,12percent since 1960; 1978 England: 170,000 employees, down by14.01 percent since 1974; 1978 Japan: 302,487 emplo)rees,down by 5.48 percent since 1965. (U. S. Department of Labor,unpublished data. )

bly in recent years. These changes, broughtabout mainly by new technologies, are re-flected in the relative employment levels ofproduction and nonproduction workers. Thenumber of production workers employed insteel hit a peak in 1965 and since then has de-clined steadily; nonproduction worker em-ployment increased continuously from 1964to 1970 and then dropped sharply. From 1966until 1978, production worker employmentdeclined almost twice as fast as did nonpro-duction worker employment. For the entire1960-78 period, employment of productionand nonproduction workers fell, on average,1.36 and 0,58 percent per year, respectively(see table 36).

Among production workers, craft and re-lated workers have remained about the samein number over the past two decades, andskilled workers have increased relative to op-erators and laborers, whose part in the pro-duction process has been slowly diminishing.The increasingly complex machinery and in-struments used in steelmaking require craftand maintenance workers who are more high-ly skilled and trained than those required

Table 36.—U.S. Steel Industry Employment, Productivity, and Compensation, 1960-78—————— —.

Compensation per employee-hourAverage number of employees Output per (annual rate of change)—

employee-hour(annual rate

Year Total Product ion Non production of change) Actual Inflation adjusted——1960 . . . . . . 571,552 449,888 121,664 - 5 . 2 1.1 – 0.11961 . . . . . . 523,305 405,924 117,381 2.6 3.3 2.51962 . . . . . . 520,538 402,662 117,876 4.3 3.2 2.61963 . . . . . . 520,289 405,536 114,753 4.0 1.7 0.61964 . . . . . . 553,555 434,654 118,901 4.0 0.6 – 0.71965 . . . . . . 583,851 458,539 125,312 3.9 1.4 – 0.11966 . . . . . . 575,457 446,712 128,835 3.5 0.81967 . . . . . . 555,193 424,153 130,990 - 322’ 3.1 0.41968 . . . . . . 551,557 420,684 130,873 3.5 4.7 0.51969 . . . . . . 554,019 415,301 128,718 1.5 7.9 2.11970 . . . . . . 531,196 403,115 128,081 - 2 . 7 5.4 – 1.11971 . . . . . . 487,269 403,115 120,287 4.9 10.6 4.51972 . . . . . . 478,368 364,074 114,294 6.5 16.3 9.61973 , . . . . . 508,614 392,851 115,763 10.8 13.8 3.61974 . . . . . . 512,395 393,212 119,183 0 22.6 3.51975 . . . . . . 457,162 339,945 117,217 -15.9 28.3 7.31976 . . . . . . 454,128 339,021 115,107 6.9 19.5 4.41977 . . . . . . 452,388 337,396 114,992 1.1 18.0 1.71978 . . . . . . 449,197 339,155 110,042 5.1 30.0 5.8Average rate of change 1960-78 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.90 10.82 2.62

SOURCES: 1%0-77-American Iron and Steel Institute. Annual Statistical Reports 1969; 1978—Department of Labor, Bureau of Statistics, Steel SIC 331, May 1979, unitlabor costs, October 1979 (unpublished)


for simpler equipment. However, complexitydoes not necessarily increase the number ofworkers required, For instance, the more ad-vanced oxygen furnace takes one-fifth asmuch labor to process heat as is required bythe open hearth process.

The proportion of nonproduction (whitecollar) workers in steel employment also hasincreased somewhat since 1960, Nonproduc-tion workers now make up nearly 25 percentof the entire steel industry work force. Ingeneral, the need for technically trained per-sonnel is growing as more advanced instru-mentation, computer controls, and pollutioncontrol devices come into use. These person-nel include control engineers, programmers,laboratory testers, and R&D specialists, Thenumber of managerial, administrative, andsales personnel also has increased substan-tially during the past decade.

Productivity

Labor is only one of several input factors ofproduction. Labor productivity, measured byemployee hours required to produce a tonneof steel, reflects the joint effects of many in-fluences, including new technology, capitalinvestment, capacity utilization, energy use,managerial skills, and the skills and efforts ofthe work force. When operating rates arelow, labor productivity measures understatethe technological capability of steelmakingequipment. Nevertheless, labor productivityat actual operating rates is a reasonable ap-proximation of the technological competitive-ness of the domestic steel industry on the in-ternational market.

Both BLS and WSD have developed data oninternational steel labor productivity. * It ap-pears that BLS slightly underestimates U.S.steel industry labor productivity relative tothat of foreign steel industries, while Marcusslightly overestimates U.S. productivity lev-els, The BLS unpublished steel productivityseries are based on a 1967 product mix and

have not incorporated the U.S. shift towardproducing more lightweight and specialtysteels since that time. The Marcus data as-sume larger economies of scale than exist inreality, particularly in the United States.

The domestic steel industry frequently issingled out for its low productivity improve-ment rate (see table 36), which has been wellbelow that of other U.S. industries since atleast the late 1940’s. As overall industriallabor productivity and capital investmenthave declined since the mid-1960’s, the gapbetween steel industry labor productivity im-provement rates and those of other industrieshas narrowed somewhat. During the 1965-70period, productivity growth rates for manu-facturing and for the total private economyboth slipped to 2 percent, but that for steelfell more sharply, averaging a minimal 0.2percent annually. In 1971, when wages beganincreasing substantially productivity alsomoved upward. From 1971 to 1978 the aver-age annual increase was 2.4 percent. Benefit-ing from high operating rates in 1978, U.S.steel labor productivity improved 5 percent.

The wide gap between U.S. and Japanesesteel industry productivity improvement ratesis of particular significance. During the pasttwo decades, Japanese steelmaking labor pro-ductivity has improved faster than that in theUnited States, and it appears that their pro-ductivity level exceeded that of the domesticsteel industry for the first time in about1973. * According to WSD data for integratedplants, U.S. steel labor productivity growthsince the early 1960’s has been only abouthalf that of the Japanese, although it is stilldouble the West German rate. BLS data,which appear to be valid, show sizable laborproductivity improvements for West Ger-many, as well as Japan, relative to domesticsteelmaking (see table 37). The favorablelabor productivity improvement rates for Ja-pan and West Germany have substantially re-duced or eliminated the output-per-employee-

*International comparisons are difficult because of the dif-ferent use of contract labor, level of fixed annual employment,level of capacity use, and product mix.

*BLS data suggest that Japanese steel labor productivitylevels exceeded domestic levels in 1973. WSD data indicatethat this would not occur until 1984. The 1977 FTC report ac-cepts the BLS findings.

1- i - + _ 1 ,-,


Table 37.—Labor Productivity at Actual operating Rates, Selected Countries, 1969-84(employee hours required per tonne of carbon steel shipped)

Year United States Japan West Germany United Kingdom France1969 . . . . . . . . . . . . . . 10.53 14.69 12.76 22.73 19.381970 . . . . . . . . . . . . . . 10.39 13.67 13.85 21.49 18.031971 . . . . . . . . . . . . . . 10.50 13.75 15.05 23.60 18.061972 . . . . . . . . . . . . . . 9.76 12.82 12.76 22.82 16.621973 . . . . . . . . . . . . . . 9.25 10.13 11.59 20.06 16.201974 . . . . . . . . . . . . . . 9.16 9.60 10.82 21.99 15.511975 . . . . . . . . . . . . . . 9.57 10.29 12.90 25.62 17.791976 . . . . . . . . . . . . . . 9.08 9.91 12.48 21.47 16.271977 . . . . . . . . . . . . . . 9.34 10.01 12.88 23.74 15.411978 . . . . . . . . . . . . . . 8.63 9.79 11.82 23.21 14.121979 . . . . . . . . . . . . . . 8.56 9.20 — — —1980a . . . . . . . . . . . . . . 8.37 8.54 —1985a . . . . . . . . . . . . . .

— —7.19 6.48 — —

Average annual—

change 1969-79 . . . . –1.8770 –3.7370 –0.90% 0.23% –3.010/oaEstimate

SOURCE World Steel Dynamics, Core Report J,1979.

hour advantage long held by U.S. steel pro-ducers.

This shift in the U.S./Japanese labor pro-ductivity relationship may be attributed inpart to continuing U.S. dependence on rela-tively small, old, and poorly laid-out plants.Such plants do not use labor efficiently. .18 Fur-thermore, expansion of existing plants (typi-cal among domestic steelmakers) offers lowerproductivity growth potential than does newplant construction. Relatively old facilitiescannot handle the higher workload that anew facility in the same plant can. Thus, bet-tlenecks develop. Labor-management atti-tudes about productivity improvement andemployment security also can affect growthrates. For instance, occasional delays in set-ting incentive rates can constrain potentialproductivity improvements associated withthe use of new equipment.

Wages and Unit Labor Costs

Both here and abroad, s teel industrywages are often higher than the all-manufac-turing average.19 In the United States, the gapbetween steel industry and manufacturing in-dustry average wages narrowed during thelate 1960’s in response to increased import

‘Aylen, op. cithp. 17.19Ernp10yeeS of the major Japanese stee] COMPEInk?S I’eCf3ive

about 33 percent more in wages than the average for allindus-trial companies in Japan (WSD, p. J-1-14, 1979).

competition and reduced profitability in thesteel industry; but in the 1970’s and particu-larly since 1974, the lead held by steel indus-try wages again increased significantly. 2 0

Hourly earnings in 1977 in the steel industrywere estimated to be 55 percent higher thanthe all-manufacturing average.21 U.S. hourlyemployment costs in the steel industry haveincreased by 10 to 15 percent since 1960,with higher than average increases during re-cent years. * The 1979 total yearly increase insteel industry wages appears to have beenabout 11 percent. 22

Employment cost data for companies in thethree segments of the domestic industry aregiven in table 38. There is clearly a largeemployment cost difference among integratedproducers, generally about a $55/tonne dif-ference between the high and low labor costcompanies. (The very low value for theMcLouth Co. is related to its 100-percent use

1(’The substantial increases in the 1974 steel labor settle-ments were granted in exchange for the union’s support of theExperimental Negotiating Agreement (ENA). This agreementwas negotiated in an environment of declining U.S. imports,booming demand for U.S. steel products, and sharply escalat-ing world steel prices. In such a situation, management waseager to avoid disruption of production. Cost of living clausesare a part of the Agreement. (Council on Wage and Price Sta-bility, “Prices and Costs in the U.S. Steel Industry,” 1977.)

*’Ibid.*AISI data show a 15-percent annual increase since 1960.

BLS data show a 10-percent annual increase since 1960.“Bradford, op. cit., p. 14.


Table 38.—Employment Costs for Domestic Steel Companies, 1978

Employment costsNet income as a Employment costs as dollars per tonne Capacity utilization

Company percent of investment a percent of sales shipped (percent)IntegratedU.S. Steel Corp. . . . . . . . . . . . . . . . . . . 5.3 40.6 $238 76.1Bethlehem Steel. ., . . . . . . . . . . . . . . . 9.3 41.2 214 84.8National, . . . . . . . . . . . . . . . . . . . . . . . . 8.2 30.2 152 82.4Inland. . . . . . . . . . . . . . . . . . . . . . . . . . . 9.7 30.0 172 95.0Wheeling-Pittsburgh . . . . . . . . . . . . . . 6.3 36.5 160 92.4Kaiser . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6 49.4 243 65.2McLouth . . . . . . . . . . . . . . . . . . . . . . . . 5.2 25.0 116 79.3CF&l. . . . . . . . . . . . . . . . . . . . . . . . . . . 6.6 44.7 214 82.2Interlake . . . . . . . . . . . . . . . . . . . . . . . 3.7 33.1 386 82.0Republic a ., . . . . . . . . . . . . . . . . . . . . . 10.4 33.8 180 76.3Armco a . . . . . . . . . . . . . . . . . . . . . . . . 10.4 28.3 226 81.6NonintegratedNorthwestern . . . . . . . . . . . . . . . . . . 13.9 34.2 117 65.5Nucor. . . . . . . . . . . . . . . . . . . . . . . . . . 25.0 18.7 51 96.0Florida. . . . . . . . . . . . . . . . . . . . . . . . . 13.8 19.7 58 73.5Keystone. . . . . . . . . . . . . . . . . . . . . . . 2.3 42.4 306 90.8Lacledo. . . . . . . . . . . . . . . . . . . . . . . . . 9.4 39.8 177 91.9Atlantic ..., . . . . . . . . . . . . . . . . . . . . . 9.6 28.3 114 78.0

Alloy/specialtySharon. . . . . . . . . . . . . . . . . . . . . . . . . . 15.3 26.3 122 90.5Cyclops . . . . . . . . . . . . . . . . . . . . . . . . . 10.3 29.4 258 87.1Allegheny-Ludlum . . . . . . . . . . . . . . . . 8.5 33.3 619 73.5Cooperweld. . . . . . . . . . . . . . . . . . . . . . 8.4 32.3 385 82.6Washington . . . . . . . . . . . . . . . . . . . . . 11.6 22.1 497 66.0CarpenterTechnology. . . . . . . . . . . . . 16.9 32.6 NA NALikens . . . . . . . . . . . . . . . . . . . . . . . . . . 9.6 41.4 NA 81,9

NA = not availableaBoth of these flrms make substantial amountsofalloy/specialty steels.

SOURCES Income. employment. and production data from Iron Age, May 1979; capaclty data from International lron and Steel institute Commentary, January-February1979, data for Nucor from company

of continuous casting.) A considerable spreadin employment costs also exists among thenonintegrated steelmaker and, as might beexpected because of major product differ-ences, among the alloy/specialty steelmaker.The nonintegrated producers have a loweremployment cost than the integrated steel-maker, an average of $144 versus $210, re-spectively, per tonne of steel shipped.* Al-though a relationship between profitabilityand employment costs might be expected,none is found. For the integrated producers,there is also no relationship between employ-ment costs and capacity utilization, althoughthere is a strong correlation (a coefficient of0.772) between profitability and capacityutilization.

‘The nonintegrated segment of the steel industry generallydoes not have contracts with the United Steelworkers of Amer-ica. Their labor costs are reported to be about one-third lessthan for unionized companies.

A major reason for the rise in labor costsper tonne of steel is that wage increases haveonly to a small degree been offset by laborproductivity gains or other efficiency im-provements in total unit production costs. Inthe U.S. steel industry, real and nominal com-pensation increased annually between 1.5and 5.5 times faster, respectively, than laborproductivity (table 36). Foreign steel industryunit labor costs increased at an even fasterrate than in the domestic industry during the1969-78 period because of currency changesand because of wage increases that exceededthose in the United States. *

From 1969 to 1978, West German and Jap-anese employment costs increased 345 and299 percent, respectively, compared with 117percent in the United States (table 39). Never-

*Foreign producers, particularly the British and French,probably also experienced labor productivity y gains insufficientto offset increased hourly employment costs.


Table 39.—Carbon Steel Production Costs, Five Countries, 1969 and 1978

Total Employment Financial MaterialsDollars/ Dollars/

Country and year tonne tonneUnited States

1969 ....., . . . . . . . . . . . . . . . . . . . .1978 . . . . . . . . . . . . . . . . . . . . . . . . . .Percent change, 1969-78 . . . . . . . . .

Japan1969 . . . . . . . . . . . . . . . . . . . . . . . . . .1978 . . . . . . . . . . . . . . . . . . . . . . . . .Percent change 1969-78. . . . . . . . . .

West Germany1969 . . . . . . . . . . . . . . . . . . . . . . . . . .1978 . . . . . . . . . . . . . . . . . . . . . . . . . .Percent change, 1969-78 . . . . . . . . .

United Kingdom1969 . . . . . . . . . . . . . . . . . . . . . . . . . .1978 . . . . . . . . . . . . . . . . . . . . . . . . . .Percent change, 1969-78 . . . . . . . . .

France1969 . . . . . . . . . . . . . . . . . . . . . . . . . .1978 . . . . . . . . . . . . . . . . . . . . . . . . . .Percent change, 1969-78 ........,

$169.39395.65133.57

$124.95410.51229.85

$126.48438.12246.38

$146.37460.64214.70

$152.22456.33199.78

SOURCE World Steel Dynamics,Core Report J. 1979

$ 48.33127.18117.86

$ 25.41101.60229.84

$ 30.10134.23245.94

$ 37.87135.28257.22

$ 42.45143.10237.10

Percent——

3 4 . 4 3 %

32.11

20.4124.74

23.7930.63

25.8729.36

27.8831.35

Dollars/tonne Percent

$ 17.4630.9177.03

$ 18.9381.87

332.48

$ 21.3760.02

180.86

$ 21.4258.36

172.45

$ 25.8671.77

177.53

theless, in 1978, U.S. hourly costs were still30 percent higher than West German costsand 40 percent higher than Japanese costs(table 40), but it can be seen that annualemployment cost increases in local curren-cies were much lower than in dollars. Thus,the rapid foreign labor cost increases of thepast decade have not yet eliminated the unitcost advantage held by foreign steelmaker(see table 27). 0nly 1978 was unexceptionalyear, with relatively low U.S. unit labor costsbecause of very favorable operating rates.

Raw Materials and Energy

Key raw materials for steelmaking are:iron ore, scrap, coal and other sources of

10.30%7.81

15.2119.94

16.8913.09

14.6312.66

16.9815.72

Dollars/tonne Percent

$ 93.60 55.25%237.66 60.06153.91

$ 80.11 64.37227.03 55.30183.39

$ 75.01 59.30243.87 55.66225.11

$ 87.09 59.49267.00 57.96206.57

$ 83.91 55.12241.47 52.92187.77

energy, limestone and other fluxes, alloy ad-ditives, refractories, and oxygen. Raw mate-rials comprise more than half of all inputcosts for steelmaking (table 39). During thepast decade, the cost per tonne of raw mate-rials for domestic steel has increased by 5percent annually and now represents 60 per-cent of all input costs.

Within the materials component, direct en-ergy costs have risen most (275 percent) andnow account for almost 40 percent of rawmaterials costs (table 41) or 24 percent oftotal steelmaking costs for integrated opera-tions. About two-thirds of the energy used tomake steel from ore comes from coal. Of themajor producing countries, Japan has made

Table 40.—Steel lndustry Hourly Employment Costs, Five Countries, 1969 and 1978

Average annual1969 1978 percent increase

Local - - Local LocalCountry Dollars currencies Dollars currencies Dollars currenciesUnited States. . . . . . . . . . . . . . . $5.54 $5.54 $14.73 $14.73 18.43% 18.43%Japan . . . . . . . . . . . . . . . . . . . . . 1.73 625.00 yen 10.42 2,169.00 yen 55.81 27.44West Germany. . . . . . . . . . . . . . 2.36 9.25 DM 11.34 22.73 DM 42.27 16.19United Kingdom. . . . . . . . . . . . . 1.66 LO.70 5.83 L3.04 27.91 33.71France . . . . . . . . . . . . . . . . . . . . 2.18 fr11.32 10.09 fr45.44 40.31 33.49

SOURCE World Steel Dynamlcs, Core Report J. September 1979


Table 41 .—Unit Costs for Inputs, United States and Japan, 1956-76 (dollars per tonne of steel produced)

Total Iron ore Scrap Coking coalUnited United ‘United United

Year States Japan States Japan States Japan States Japan1956 ......, ., ... . . . $110.84 $119.83 $17.51 ‘—

———$25.78 $ 3 5 . 1 5 $ 1 2 . 1 5 $ 2 0 . 0 1

1957, ... . . . . . . . . . . 110.00 133.21 18.17 31.55 10.95 37.98 12.73 23.031958, . . . . . . . . . . . . . 122.18 98.65 19.75 21.20 9.94 19.37 13.09 16.751959 . . . . . . . . . . . . 113.98 90.04 17.25 18.08 10.87 24.59 10.93 13.031960 ....., . . . . . . . . . . . 120.18 85,08 19.47 17.91 8.24 23.16 11.48 11.501961 ... . . . . . . . 122.50 91.59 20.58 18.54 9.45 30.09 10.21 11.851962 . . . . . . . . . . . . . . . . . 118.74 81.56 19.93 18.97 6.83 17,43 10.17 12.331963 . . . . . . . . . . . . . . . . . 116,01 79,03 19.60 17.80 7.39 18.12 9.16 10.991964 . . . . . . . . . . . . . . . . . 114.97 75.20 20.41 16.73 8.25 19.27 9.74 10.051965.. . . . . . . . . . . . 112.99 76.38 19,92 18.63 9.56 16.75 9.78 10.941966, . . . . . . . . . . . . 113.21 71.86 19.95 18.14 7.72 14.88 9.99 10.841967 . . . . . . . . . . . . . . . . . 117.70 69.53 20.10 16.68 6.73 15.73 10.83 10.271968 . . . . . . . . . . . . 119.40 67.78 20.65 16.99 6,71 12.16 10.69 10,911969 . . ., . . .,, ..,...,, 125.25 69.93 20.34 16.66 8.60 14.00 10.29 11.721970 . ., ., ., ...,.,.,, 137.23 78.05 21.54 17.47 10.05 16.05 12.80 14.651971 . . . . . . . . . . . . . . . . . 145.98 81.28 22.85 19.43 8,53 9.06 15.15 16.761 9 7 2 , . . . , . . , . ,..,, 155.11 83.56 23.84 16.97 11.26 12.04 16.08 14.651973 . . . . . . . . . . . ,..,. 161.21 100.97 24.42 17.62 17.08 23,38 17,44 15.181974 . . . . . . . . . . . . . . . . 215.55 147.30 29.66 21.65 34.10 33.65 29.20 29.841975 . . . . . . . . . . . . . . . . . 270.27 159.26 37.58 27.85 18.98 17.23 52.40 43.181976 ......, . . . . . . . 294.65 161.93 44.51 26.87 21.82 22.72 53.73 41.38

———-———————————Fuel oil

—.——Electric power Noncoking coal Natural gas

Year United States Japan

1956 . . . . . . . . ,1957 . . . . . . . . .1 9 5 8 , . , . , . . .1959 . . , . . . , . .1 9 6 0 . . ,1961 ., . . . . .1962 . . . . . . . . .1963 . . . . . . .1964 . . . . . . . . .1 9 6 5 . , . .1966 . . . . . . . . .1967 .....,...1968, ..,,...,1969 ..,, ..,,1 9 7 0 . . . . . . ,1971 .1972 . . , . . . , . .1 9 7 3 . , . . .1974 . . . . . . .,1975. .,1976 . . . . . . . . .

$2.261,971.991.781.801.741.591.581,411.281.141,051.090.941,231.541.601.915.024.955.05

$2.854.272.542.092.302.041.922.041,921.931.751,871.741.441,812.732.473.439.018.666.84

United States

$4.153.733.963.473.924.274.714.734.484.644.905.305.745.836.497.707.608.09

10.2114.0315.84

Japan United States

$6.07 $0.746.29 0.756.72 1.076.61 0.806.44 0.856.50 0.896.28 0.835.87 0.735.88 0.635.70 0.635.33 0.634.92 0.635.02 0.614.80 0.514.74 0.565.31 0.625.45 0.546.04 0.54

10.54 0.7612.41 0.8514.47 0.85

Japan——$3.31

3.311.940.610.750.630.540.450.370.310.240.130.100.100.110.000.000,000.000.000.00

United States

$1.581.462.282.192.592.993.293.193.013.092.933.163.563.543.744.554.644.405.678.609.31

SOURCE US Federal Trade Commission Staff Report on the United States Steel industry and its lnternatlonal Rivals,” 1977.p 113

the greatest improvements in energy-efficient The cost of iron ore and scrap metal wentsteelmaking. Coke rates in Japan are present- up by about 120 percent during the past dec-ly 25 percent more efficient than those in the ade and is now 26 percent of raw materialsUnited States’] (table 42) costs, according to WSD. 24 Ore costs, since

1974, have been pushed up at an annual rate‘I~Jiipi]n [hetiwragccokc rate isnowiihoul 4.2okg/tonneof

[Jig Ir(m. wIt~ (Jnlv t~bout 40 liters ofoil injected. I n the LJniled of nearly 10 percent as a result of large in-S1,1[(!s, the (f}ke r:ltc WI:]S 585 kg’tonne l:]st vear, with onl} creases in energy and labor costs in mining, aslightl~ l e s s (JII used. [)nl} tho 13elhlehcm Steel “1,’” hlasl fur- decline in the quality of ore obtained, andn[~[[;i~t Spilrrmvs Point has:]rhievcxi a cokf? rate similar 10 th~tIn Jilpiln. (Br/](~for(~, op. rit., p . 1 7 . ) *WSD,op.cit.,p.J-l-49,


Table 42.–Coke Consumption per Tonne of Pig Iron Produced, 11 Countries, Selected Years, 1958-78(kilograms/tonne)

Year

1958 . . . . . . . . . . . . . .1960 . . . . . . . . . . . . . .1965 . . . . . . . . . . . . . .1970 . . . . . . . . . . . . . .1971 . . . . . . . . . . . . . .1972 . . . . . . . . . . . . . .1973 . . . . . . . . . . . . . .1974 . . . . . . . . . . . . . .1975 . . . . . . . . . . . . . .1976 . . . . . . . . . . . . . .1977 . . . . . . . . . . . . . .1978 . . . . . . . . . . . . . .

WestGermany France

922 1,023834 980672 780559 629521 595487 563494 558517 551497 531482 —484 —486 —

TheNether-

Italy lands

750 839680 787633 559524 484526 475509 456518 475500 465479 467

— —— —— —

Belgium

890852658586569559557564545

———

Luxem- Unitedbourg Kingdom

1,100 8801,092 820

860 680730 610683 604645 590601 576538 597525 609

— —— —— —

Japan

667619507478451442432442443432434429

UnitedStates Canada

780 —720 —650 585636 544629 495610 486599 486608 484610 491592 475595 451597 432

Sweden

675650555545550540550

—

—

SOURCES: Statistical Office of the European Community, Iron and Steel Yearbook, 1976, for the six original EEC countries for all years and the United Kingdom for1973-75; data for United States and Canada, for 1958-70 forward, were calculated from data available in various issues of the Annual Statistical Report of theAmerican Iron and Steel Institute; for Japan, Japan Iron and Steel Federation, Tekko Tokei Yoran, various issues; Bo Carlsson, “Scale and Performance ofBlast Furnaces in Five Countries—A Study of Best Practice Technology,” Stockholm mimeo, March 1975; Statistiches Bundesamt, West Germany, U.S.Bureau of Mines

sharply higher costs for ore-processing capi-tal equipment. Increased steel demand andlimited coking capacity encouraged produc-ers during the 1970’s to substitute scrap forvirgin metallics. Following the elimination ofgeneral price controls in 1974, scrap pricesincreased rapidly as domestic producerscompeted with potential foreign scrap buyersin a strong worldwide market. 25

During the past decade, the United Stateswas the only major steel-producing country inwhich raw materials price increases ex-ceeded the average increase in total produc-tion costs. As a result, it was also the only ma-jor producing country where raw materialscosts became a larger proportion, by 5 per-centage points between 1969 and 1978, oftotal production costs. In other countries,raw materials became a smaller element ofproduction costs by 2 to 9 percent (see table39). It is noteworthy that the materials costdifferential between the United States and Ja-pan widened sharply from 1975 to 1977,when very large increases in the costs of cok-ing coal and iron ore were recorded.

Capital Investment andFinancing Costs

A number of factors influence steel indus-try investment decisions; some are quantifi-

Zscouncil on wage arid Price Stability, op. Cit.

able and others more speculative. Marketsize and rates of growth; the relative costs ofcapital, labor, and fuel; the absolute cost ofcapital; and Government taxation and subsi-dy policies all influence the potential profita-bility of investment projects. Other factors,such as attitudes towards risk, time horizons,and time preferences, also influence invest-ment in less conspicuous ways.

There are considerable differences be-tween the capital-attracting abilities of theU.S. steel industry and foreign industries. Do-mestic steel companies rely heavily on inter-nal sources, namely aftertax profits, for in-vestment funds and can only attract outsidecapital if they are reasonably profitable. For-eign companies, often with the assistance oftheir governments, have easier access to ex-ternal capital sources.

The U.S. industry’s aftertax profits dependin part on the depreciation rate the InternalRevenue Service (IRS) allows on capital ex-penditures. The faster capital assets can bedepreciated, the greater the deduction fromthe gross profits, the lower the tax burden,and hence the higher the level of aftertax pro-fits. The IRS has, for many years, requiredthat capital investment in steel be depreci-ated over 18 or more years, although mostother U.S. industries are allowed to write offtheir capital investments much faster, e.g.,


plastics in 9 years and aerospace in 7 years.By comparison, the Canadian steel industry isable to write off capital investments in 3years. This puts the U.S. industry at a disad-vantage in attracting capital on the basis o fprofitability.

During the 1970’s, real capital spending b ythe U.S. steel industry was 20 percent lowerthan during the preceding decade (table 25). *On a per tonne basis, U.S. capital expendi-tures also lagged behind that of foreign pro-ducers. From 1972 to 1977, domestic steel in-dustry capital spending was, according to in-dustry estimates, about 73 and 79 percent,respectively, of Japanese and West Germansteel industry investment levels (table 43).

Table 43.—Capital Expenditures per Net Tonne ofRaw Steel Production, Five Countries, 1972-77

(dollars)

Country Expenditures

United States. . . . . . . . . . . . . . . . . . . . . . . . . . $19Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26West Germany. . . . . . . . . . . . . . . . . . . . . . . . . 24United Kingdom . . . . . . . . . . . . . . . . . . . . . . 35France (1972-76) . . . . . . . . . . . . . . . . . . . . . . 28

SOURCE International Iron and Steel Institute

The reliance of the U.S. steel industry o ninternal financing does leave it with a lowerfinancial cost burden than some foreign in-dustries have. As a percentage of total pro-duction costs, the U.S. industry’s direct finan-cial costs were about 9 percent during m o s tof the decade. In Europe, they hovered b e -tween 13 and 17 percent of total productioncosts. Japan had a higher financial cost com-ponent than any of its international compet-itors, at 20 percent of total production costs.It was the only major producing country withfaster rates of increase in financial c o s t sthan either employment or raw material costs(see table 38). These higher Japanese finan-cial costs are the result of higher debt-equityratios and higher investment levels than arefound elsewhere.

*Required environmental capital expenditures (10 to 16 per-cent of total U.S. steel industry capital investment during thepast few years) have had a downward effect on the productiv-ity-improving potential of new capital investment. Other majorproducing nations have had similar experiences.

Though financial expenditures are gener-ally a low fraction of direct production costs,the capital expenditures they represent h a v eimportant effects on improving equipment, la-bor, and energy productivity. Improved totalproductivity plays an important role in deter-mining total steel production costs per tonneof output. Thus, though financial costs maydirectly increase total costs, they may indi-rectly reduce unit costs, so their influence ismuch greater than their share of total pro-duction costs would indicate.

Macroeconomic Changes

Two major external factors influence steelindustry production costs cons ide rab ly—changes in operating rates and changes incurrency values. Operating rates tend t ochange cyclically, but often currency valueschange abruptly. Both are strongly affectedby general economic conditions such as GNPgrowth rates and inflation.

Operating Rates.—High operating rates in-crease the efficiency of steelmaking equip-ment with respect to raw m a t e r i a l s a n dlabor, particularly in integrated plants. U.S.steelmaker have enjoyed higher capacity uti-lization rates than their international compet-itors during recent years. During 6 of the past10 yea r s , U .S . ope ra t i ng r a t e s we re moret h a n 8 5 p e r c e n t —a high level .26 D e p r e s s e dope ra t i ng r a t e s fo r i n t eg ra t ed p l an t s havebeen a s eve re hand i cap fo r J apanese ando t h e r f o r e i g n p r o d u c e r s , w h o s e o p e r a t i n grates have been below U.S. levels for 7 of thepast 10 years. 27

Even at comparable operat ing rates , do-mestic producers have one advantage not en-joyed by most foreign producers—that is ,more flexibility in employment levels. Euro-pean unit labor costs increase signif icantlyduring per iods of low demand because oftheir industr ies’ l imited abil i ty to lay off

“WSD, op. cit.“Ibid. For example, in 1977 when the Japanese rate was 69

percent and the U.S. rate 78 percent, U.S. production costswere 12 percent greater than the Japanese; but in 1978, withthe Japanese rate at 66 percent and the U.S. rate at 86 percent,U.S. costs were 3 percent less than the Japanese.


workers during those times. * The Japanesesteel industry is relying more and more oncontractors. However, the Japanese lifetimeemployment system does have an upward ef-fect on unit labor costs at low operating ratesbecause of the difficulty of laying off workersduring a slowdown.

Currency Values.—Recent dollar devalua-tions have had a favorable effect on the inter-national competitiveness of the domestic steelindustry. Monetary changes have made mostforeign steel production costs more expensive

*The European disadvantage has been offset somewhat dur-ing the past few years because of government transfer pay-ments.

than domestic costs. For instance, during thepast decade, U.S. steelmaking costs in-creased at a higher rate than Japanese andWest German costs in home currencies, butat a much lower rate in dollars (table 44).

Table 44.—Production Costs per Tonne of CarbonSteel Shipped: Percentage Increase 1969-78

HomeCountry currencies U.S. dollar——United States. . . . . . . . . . . . . . . . . . 133% 133%Japan . . . . . . . . . . . . . . . . . . . . . . . . 92 229West Germany. . . . . . . . . . . . . . . . . 72 246United Kingdom . . . . . . . . . . . . . . 291 214France . . . . . . . . . . . . . . . . . . . . . . . 160 199

SOURCE World Steel Dynamics, Core Report J 1979

Shifts in Cost Competitiveness

From 1946 to 1959, the international steelmarket was dominated by U.S. exports. In the1960’s, however, several European countriesand Japan became lower cost producers ofsteel .28 Two additional competitive shifts havetaken place since about 1973. The Japanesehave lost some of their cost advantage rela-tive to the United States, * and European pro-ducers lost their advantage altogether. Com-pared to other major s teelmaking nat ions,U.S. raw material and employment costs pertonne of steel are somewhat high and capitalcosts somewhat low (see table 38).

U.S. s teelmaking costs increased by 133percent between 1969 and 1978, largely as ar e s u l t o f r a p i d l y r i s i n g p u r c h a s e d e n e r g ycosts and wage rates. 29 Japanese steelmakingcosts increased by as much as 230 percentduring this period as a result of dollar-pricedraw materials, devaluations of the U.S. dol-lar, and the greater impact of rising energyprices on Japanese producers . Nevertheless ,WSD data show that major Japanese produc-ers have had a cost advantage of about 15

‘“Mueller and Kawahito, op. cit., p. 4.*only Mueller and Kawahito suggest [hat Japan recently has

been able to increase its cost advantage over the United Statesto pre-1973 levels.

‘qBradford, op. cit., p. 14.

percent over U.S. steel firms for a decade orm o r e . T h e J a p a n e s e c o s t a d v a n t a g e d e -creased from about 27 to 12 percent between1969 and 1977 (see table 38). For the U.S.s teelmaker , 1978 was a unique year: totalp roduc t i on cos t s we re rough ly s im i l a r t othose in Japan because of the unusually fa-vorable U.S. operating rate compared to Ja-pan. In 1979, U.S. steel production declinedby about 10 percent because of reduced de-mand fo r s t ee l p l a t e s and s t ruc tu ra l s t ee lp r o d u c t s , 30 and by the first quarter of 1979,Japanese s teelmaker again had lower costs .Although their operating rate was still far be-low that of the United States, Japanese pro-ducers benefited from a weakening of the yencombined with a lower inflation rate than theUnited States.’ ]

At the present time, the EEC steel industryis characterized by far greater diversi ty instructure and performance than those of Ja-pan and the United States. The West Germanindustry does well, on average, with respectto technology and product ivi ty; but newer ,larger, and better located steelworks can befound in Italy, France, and England. Most ofthe individual EEC steel industries have pock-

“)Bradford, op. cit., p. 6‘]WSD, op. cit., p. J-l-5.


ets of less-than-average efficiency, and theseaffect adversely the average performance ofthose industries and of the EEC steel industryas a whole.32 From 1969 to 1972, U.S. produc-tion costs were generally 5 to 15 percenthigher than European costs, but the Europeanadvantage evaporated in about 1973-74 be-cause of currency changes, increased laborcosts, and insufficient offsetting improve-ments in 1abor productivity. From 1972 to1977, U.S. costs were about 5 to 15 percentlower than European costs, and they wereabout 9 to 22 percent lower during the earlypart of 1979. West German steelmaker areamong the most efficient European produc-ers. In 1978, their costs were 1 to 7 percent

‘N!ucller and Kii\\:)hito, op. cit., p. 34.

higher than U.S. costs, while French costswere 10 to 15 percent higher (see table 38).

On the international market, raw materi-als, labor, and capital costs only partly deter-mine competitiveness. The costs of exporting,including transportation costs, warehousing,sales, and marketing, are also relevant. Japa-nese steelmaker have made impressive effi-ciency gains in transportation costs. Never-theless, ocean freight costs increased during1978 by as much as 55 percent because ofskyrocketing oil prices. Total export cost for1979 added about 25 percent to the cost ofJapanese steel products—up by 5 percentagepoints from 1978.

I{WSD, report A, p. A-3-8, 1979,

Future Trends in Competitiveness,Supply-Demand, and Trade

The cost factors that favored domestic pro-ducers in the 1970’s, along with changes indemand and investment activity, will con-tinue to affect future steelmaking costs, butin uncertain ways. High operating ratesthroughout the world are likely by the mid-1980’s, and Japan is expected to continue asthe world’s lowest cost producer of steel, TheUnited States has a potential for the selectiveexport of high-technology domestic steels, butits cyclical import dependence may grow inimportance.

Steel Shortages in the Mid-1980’s

There are major problems in forecastingboth future steel demand and future capaci-ty. Rates of economic growth, actual newplant construction, and capacity utilizationrates are major uncertainties. A low-demand-growth scenario could create a favorableU.S. cost position, because fixed-cost obliga-tions affect domestic steelmaker less thanthey affect foreign competitors. Rapid de-mand growth and the associated high operat-ing rates could benefit foreign steelmaker

more than U.S. firms. In the immediate fu-ture, from 1980 to 1983, there probably willbe excess steel-producing capacity in mostcountries of the world and for the UnitedStates, even assuming improved economicconditions and the continued closing (ration-alization) of older European facilities. Butafter 1983, there could be a worldwide short-age of steel products. By shortage is meant avery close matching of supply to demand inmajor areas of the world that causes substan-tial increases in export prices.

The domestic industry is aware that ashortage could occur, and that its compara-tive cost position would be vulnerable in thatcase. According to George Stinson, Chairmanof National Steel:

We are not crying wolf, nor are thesescare tactics to gain public or governmentsupport . . . Our analysis concludes thatthere is a good possibility that the world willface a steel shortage beginning in the mid-1980’s . . .

The industry view has also been supported bya majority of steel experts in Government and


financial communities, who have been notingthe steady decline in U.S. capacity as olderplants are closed. * However, some expertsclaim that a steel shortage is not likely. DavidG. Tarr, senior economist of FTC, for exam-ple, states that:

The imminent (steel) shortage has beenpredicted by industry spokesmen for at leastfive years. Every year or two the onset of theshortage is pushed back by a year or two.The projections of shortage are wrong, Ibelieve. The industry is cyclical, and if a si-multaneous worldwide boom occurs therewill be a shortage. But it will be temporarynot secular .34

Most forecasts indicate that by the mid-1980’s capacity utilization would have to

*Almost all steel specialists in the financial community seethe possibility of worldwide steel shortages after 1982. See,e.g., any of the current industry analyses by Peter F. Marcusfrom Paine, Webber, Mitchell, and Hutchins, Inc.; Joseph C.Wyman of Shearson Hayden Stone, inc.: and Father Hogan ofFordham University.

“Correspondence between David G. Tarr and Bernard L.Weinstein, Special Study on Economic Change, U.S. Congress,Joint Economic Committee, July 30,1979.

reach 85 percent to satisfy demand, and thiswould represent the production level atwhich pricing reflects a shortage condition.Table 45 summarizes some of the major de-mand-supply forecasts.

Potential for Exports

If worldwide steel shortages do developthere may be opportunities for the U.S. pro-ducers to export steel. However, this possibil-ity raises a number of issues. The UnitedStates does not possess a clear productioncost advantage in commodity carbon steels;additional shipping costs also will constrainsuccessful competition in foreign marketswith commodity carbon steels. Domestic pro-ducers may be able to expand their exports ofhigh-technology steels in which the UnitedStates is clearly cost and technologically com-petitive. However, several factors are likelyto mitigate against this expansion. Amongthese are a lack of international trade ex-perience among many domestic producers,

Table 45.—World Raw Steel Supply-Demand Forecasts, 1980-2000 (millions of tonnes)

Capacity DemandSource of data Year Western Total Western TotalChase a . . . . . . . . . . . . . . . . . . . .Marcus b . . . . . . . . . . . . . . . . . . .HoganC . . . . . . . . . . . . . . . . . . . .Marcus . . . . . . . . . . . . . . . . . . . .Ilsld . . . . . . . . . . . . . . . . . . . . . . .IlSl. . . . . . . . . . . . . . . . . . . . . . . .AISle . . . . . . . . . . . . . . . . . . . . . .Marcus . . . . . . . . . . . . . . . . . . . .Chase . . . . . . . . . . . . . . . . . . . . .IlSl. . . . . . . . . . . . . . . . . . . . . . . .AISI . . . . . . . . . . . . . . . . . . . . . . .Hogan. . . . . . . . . . . . . . . . . . . . .Bureau of Minesg. . . . . . . . . . . .Chase . . . . . . . . . . . . . . . . . . . . .Chase . . . . . . . . . . . . . . . . . . . . .AISI . . . . . . . . . . . . . . . . . . . . . . .Marcus . . . . . . . . . . . . . . . . . . . .Bureau of Mines . . . . . . . . . . . .

197719771977197919791980198019831985198519851985198519861990199020002000

625637

—613698715675696—

730730794781791h

—

aMichael F Elliott-Jones (Chase Econometrics), “Iron and Steel in the 1980’s:The Crucial Decade,” speech at George Washington University Steel Seminar,Apr. 19, 1979.

bWorld Steel Dynamics, Apr. 25, 1979.cW.T. Hogan, "Steel Supply and Demand in the Mid-1980’s, ” Center Lines, May

1979.dlnternational Iron and Steel Institute, 33 Metal Producing, December 1979, p.

38.eAmerican Iron and Steel Institute, “Steel at the Crossroads: The American

Steel Industry in the 1980’ s,” 1980: assuming operating rate = 0.85.fHogan has given the following summary for total world steel demand in 1985:

— 430 —— — —

815 — —— — —— 484 755— 480 760

926 608 —— — —— 588 —— — —

926 691 —890 — 900f

— — 840— 614 —— — —

1,200 776 —— — —— — 1,350

Date of forecast Millions of tonnesAMAX 3178 919Citibank 6178 890Cleveland Cliffs 7/78 920Metals Society (United Kingdom). 5178 1,015Stanford Research ., 4179 970Wharton. . . 10/77 896

9Bureau of Mines, Iron and Steel, MCP-15, 1978hExtrapolated from 1983 using given growth rate of 1.8 Percent Per Year


and tariff and nontariff trade restrictions bymany countries.

There is a growing shift of strategy amongsteel companies in industrialized nations,which may result in a growing cyclical de-pendence on steel imports. Industrialized na-tions appear to be aiming at higher averagecapacity utilization by scaling capacity tomeet normal steel demand rather than cycli-cal peak demands and to supply domesticrather than export demand. Future exportsmay emphasize technology rather than steel,including the export of high-price, technology-intensive steels, rather than commodity car-bon steels. The net result of these changescould be that in future periods of high domes-tic demand, domestic capacity would be in-adequate and the United States would bemore dependent than at present on steel fromLDCs, which have distinct energy and laborcost advantages,

The role of LDCs in the world steel supplyand demand situation is critical. Their ratesof growth in steel consumption are very high(figure 15). Depending on their rates of eco-nomic growth and of new steel plant con-struction, their impact on world exportscould be substantial (table 46). Specific LDCsare likely to develop increasing capability toexport semifinished steel and direct reducediron to industrialized nations if these industri-alized nations make major capital invest-ments in LDCs. For the United States, energy-and iron-ore-rich Latin America presents sin-gular uncertainties.

Future Costs and Productivity*

In home currencies and at high operatingrates, U. S., French, and British steelmakingcosts are expected to increase by about 8 per-cent, while Japanese and West German costsmay increase by less than 4 percent, from1980 to 1984. ’5 Depending on operating rates,Japanese steelmaking costs may be about 14

*Cost projections in this section are based on WSD cost data,adjusted by 5 to 10 percent for methodological reasons. Theyare limited to raw material, labor, and capital costs, andshould be viewed as indicators of trends rather than specificdevelopments.

I’WSD, op. cit., p. J-l-25

to 17 percent lower, and West German costsmay be 2 to 6 percent higher than domesticsteelmaking costs.

During the mid-1980’s, West German andespec ia l ly Japanese s t ee lmaker a re ex -pected to continue as leaders in making fur-ther improvements in the efficient use of rawmaterials, and their costs would then in-crease at only about half the U.S. rate. Fur-thermore, materials costs in these countriesare expected to remain a smaller proportionof total steelmaking costs than those in theUnited States. It is expected that by 1985 thecost to domestic steelmaker of oil and cokingcoal will reach world market levels. The com-bined U.S. unit cost for oil and coal is ex-pected to be $3/tonne higher than in Japanbut about the same as in the EEC. HigherAmerican unit costs for iron-bearing materi-als would be approximately offset by lowerelectricity costs.36

It appears that U.S. producers did not ex-perience any improvements in labor produc-tivity during 1979 because of increased re-pair and maintenance requirements causedby bringing old equipment back into the pro-duction stream. As a result of anticipated re-ductions in the work force, gains in U.S. pro-duct ivi ty into the mid-1980’s should bearound 2.5 percent annually. This is higherthan recent domestic labor productivi tygrowth rates but lower than those expectedfor major producers abroad. As a result ofmajor cost reduction efforts, the largest laborproductivity gains are projected for Europe[4.5 percent annually), followed by Japan (3.5percent). Thus, barring major technologicalimprovements in the United States, Japan willincrease its lead over the domestic industryin having lower man-hour requirements dur-ing the mid-1980’s. Of the major Europeanproducers, only West Germany is likely to ap-proach U.S. labor productivity levels.

It is projected that unit labor cost dif-ferences will widen, and by the mid-1980’sdomestic cost levels may be 8 to 10 percenthigher than Japanese unit labor costs.37 This

“Mueller and Kawahito, op. cit., pp. 29-30.‘“wSD, 1979.

148 . Technology and Sfeel Industry Competitiveness

Figure 15.—Apparent Steel Consumption Indexes byRegion, 1973”-8

1973 1974 1975 1976 1977 1978

Est imatedYear

NOTE. Eastern-bloc countries include North Korea and China.

SOURCE International Iron and Steel Institute

deterioration in the U.S. unit labor cost posi-tion is expected for several reasons, includ-ing declining U.S. productivity growth ratesand increasing hourly employment costs. Atthe same time, anticipated increases in the

operating rates of Japanese and Europeansteel producers will increase their labor pro-ductivity and restrain upward pressures onunit employment costs. The U.S. industry, op-erating at close to full capacity now, hasalready exhausted these economies.38

Whereas the U.S. steel industry’s presentcapacity is almost the same as it was in 1967,one-third of steelmaking capacity in the EECand two-thirds of that in Japan has been putin place since that year. Thus, a considerablylarger portion of steelmaking capacity in theUnited States will need to be replaced by1985 or soon thereafter than in Japan or inthe EEC. Maintenance costs can also be ex-pected to be higher in the United States thanin the EEC or Japan because of the differencein average age of plant and equipment.

Domestic steelmaker are expected to adda number of continuous casting facilities andnew electr ic furnaces, thus bringing on-stream new and efficient capacity. * In gener-al, the scrap-based producers have modern,highly automated facilities and use con-tinuous casting extensively. These factorsshould enable the scrap-based producers tocope with rising labor and energy costs moreeffectively than can the integrated produc-e r s .39 H o w e v e r , limited scrap availabilitycould reduce the growth potential of this low-

‘“Mueller and Kawahito, op. cit.. pp. 28-29: Bradford, op. cit.,

p. 16.

*These and other components of modernization are dis-cussed in ch. 10.

‘(’Bradford, op. cit., p. 5.

Table 46.—Potential Impact on World Steel Supply by Less Developed Countries (in crude steel equivalents)

Steel capacity Steel product ion Net Imports-—— Apparent Degree of

(mi l l ion (mi l l ion (percent of (mi l l ion (percent of c o n s u m p t i o n s e l f - s u f f i c i e n c y

Year and growth assumption tonnes) tonnes) c o n s u m p t i o n ) tonnes) consumpt ion) (mi l l ion tonnes) (percent)

1960 1 0 0 8.7 ‘ 4 1 4 ‘ 1 2 , 3 - 5 8 . 6 2 1 . 0 4 1 . 41 9 6 5 2 0 0 16.1 5 0 . 2 16.0 4 9 . 8 32.1 5 0 . 21970 : : : 2 8 . 0 2 1 , 6 5 3 . 2 1 9 . 0 4 6 , 8 4 0 . 6 5 3 . 21 9 7 7 5 8 . 0 41 7 6 0 9 2 6 . 8 39.1 6 8 . 5 6 0 . 9

1985 pro jected at :

30% GNP growth 110-115 92 92 8 8 100 924% GNP growth ~ ~ ~ ~ 1 1 0 - 1 1 5 93 86 15 14 108 865 % G N P g r o w t h . 110-115 95 79 25 21 120 796 % G N P g r o w t h , 110-115 95 73 35 27 130 737 % G N P g r o w t h 110-115 98 68 47 32 145 68

SOURCE: Central Intelligence Agency. "The Burgeonlng LDC Steel lndustry More Problems for Major Steel Producers 1979

Ch. 4— The Domestic Steel Industry’s Competitiveness Problems ● 149

cost segment of the U.S. steel industry, unlessdirect reduced iron becomes available. Thiscannot happen before 1983 at the earliest.Partly as a result of the shift to electric fur-nace steelmaking, integrated producers areexpected to reduce costs by consuming 15percent less coke in 1980 than in 1979. ’()

Japanese producers are likely to derivelong-term benefits from their decision to putmost of their investment funds into the con-struction of modern greenfield plants. Thesebenefits include low-cost production and sta-bilizing capital costs in the 1980’s for re-placement and pollution control.” Japaneseand to some extent European steel companiesnow have sufficient modern infrastructure toadd 9 million to 14 million tonnes of capacityat a relatively moderate cost. Nevertheless,Japan is expected to continue its currentstrategy of slowing down its steel industryplant construction program while continuingto introduce more energy-saving equipment.42

The Japanese steel industry is very depend-ent on raw material and energy imports(table 47), which has caused many of the rawmaterial and energy prices in Japan to besomewhat higher than in the United States.The only raw material the U.S. steel industryimports in substantial amounts is iron ore—about one-third of iron ore is imported. Nev-ertheless, unit costs per tonne of steel pro-duced in Japan have been markedly lower

*’Ibi~.. p. 18.‘] Mueller and K~wahito, op. cit., pp. 30-31.“Ibid., pp. 34-35, Moreover, it is predictable that at some

point in the future the Japanese steel industry will face many ofthe same difficulties as those currently confronting the U.S.steel industry. At some future t ime (probably beyond1990-2000), Japan will face substantial capital replacement.These replacement needs will place a considerable burden onJapanese steel producers, especially because some of the im-portant advantages the Japanese presently enjoy will no longerbe operative.

than those for most plants in the UnitedStates (see table 41). This is a consequence ofthe newer facilities and more modern tech-nology in Japan,

During the next several years, Japan is ex-pected to continue as the world’s lowest coststeel producer. Some developing nations withlower labor cost and modern plants are nowbecoming almost as competitive as the Japa-nese. Indeed, they now pose a threat to theJapanese market; this is especially true ofSouth Korea.

The largest European production cost im-provements will result from programs de-signed to make the industry more efficient.Apparently West Germany will be most likelyto succeed in cutting back its share of the 27-million-tonne capacity reduction planned forCommon Market producers. Capacity reduc-tion may be accelerated if foreign govern-ments adopt implementing legislation for theMultilateral Trade Agreement subsidy code,which limits governmental aid to ailing pro-ducers and boosts payments to terminatedworkers. 43

World Steel Trade

The domestic steel industry periodicallystates that the U.S. competitive position inhome markets is eroded by the below-costpricing of exports by Japan, as well as by Eu-ropean countries.44 However, steel industry

“WSD,4~putnam, Ha yes and Bartlett, Inc., The Economic ImP~iCfJ-

tions of Foreign Steel Pricing Practices in the U.S. Market,prepared for American Iron and Steel Institute. Newton,Mass., 1978.

Table 47.—import Dependence of the Japanese Steel Industry, Selected Years, 1955.78 (percent imported)

Industry 1955 1960 1965 1970 1974 1976 1977- —.——— —-Iron ore . . . . . . . . . . . . . . . . . . . ~. . 84.7 92.0– 97.1 99.2 99.4 98.7 98.8Coking coal. . . . . . . . . . . . . . . . . . . . . 22.0 35.9 55.1 79.2 86.1 88.6 89.7Iron and steel scrap . . . . . . . . . . . . . 19.5 28.6 15.5 13,4 12.9 4.4 3.9

SOURCE: Japan's Iron and Steel Industry, Tokyo, Kawata Publicity, Inc. 1973 Edition, pp. 249, 250, 1975 Edition, p. 35: and 1978 Edition. p 48 –


findings of below-cost pricing have been dis-puted by many analysts, including FTC.45

There is a consensus that at the presenttime most U.S. steel companies are price com-petitive for comparable steel qualities in thedomestic market . Nevertheless, Japanesesteel producers have been able to secure asignificant share of the U.S. steel market.Some analysts claim that Japanese steel pro-ducers rely on agressive, even countercycli-cal, export programs to stabilize their highlyleveraged positions. Others correctly disputethis allegation.46 Some analysts and consum-ers believe that Japanese steel—made inmore modern plants—is of high quality and isfor this reason more competitive than othersteels in the domestic market. There mayhave been times at which some Japanese steelwas sold in the United States at below-costprices, but most available data support thebasic cost advantage of the Japanese. Al-though Japanese producers’ profits may besmall and their financial structure difficult tocomprehend, the dumping of Japanese steeldoes not appear to be a valid issue.

As the amount of Japanese imports in theU.S. market declined in 1978 and early 1979,EEC and LDC exports to the United States in-creased. European producers have lost theircost competitiveness during the past severalyears. WSD cost data suggest that many Eu-ropean producers may have been selling inthe American market below cost, becausetheir costs are higher than U.S. costs buttheir prices are equal to or below U.S. prices.

“FTC criticized a major AISI-sponsored study as follows:“Thus (Putnam, Hayes and Bartlett) have estimated the costs ofmaking all steel and compared these costs with the price of car-bon steel alone. Ignoring special steels in the price seriesresults in a series bias in favor of finding below-cost pricing.Since PHB have not removed this bias from their data andestimates, one cannot conclude from their estimates thatbelow-cost pricing has occurred. ” (FTC, “Staff Report on theUnited States Steel Industry and Its International Rivals:Trends and Factors Determining Competitiveness, ” 1977, p.244.)

‘A study undertaken by the Council on Wage and Price Sta-bility, “Prices and Costs in the United States Steel Industry,”October 1977, states: “We conclude that a major reason for thesuccess of the Japanese steel industry cannot be found in acountercyclical dual-pricing approach to domestic and worldmarkets. Japanese exports have grown at phenomenal ratesduring good times and bad for the home economy.” (p. 90).

LDC finished products have also, to someextent, replaced Japanese steel imports. EECcountries, exceptionally sensitive to imports,established a policy in 1977 to cut importsfrom developing countries like Mexico, SouthAfrica, and South Korea. Japan traditionallyhas resisted significant imports of steel prod-ucts. Thus, the United States provides themost accessible market for steel exports fromall foreign countries. Exports of semifinishedsteel and direct reduced iron to the UnitedStates also could become significant in thefuture.

The trigger-price mechanism has been theGovernment’s method of monitoring unfairlytraded imports. According to the TreasuryDepartment, the trigger-price mechanism hasachieved its twin objectives of reducing steelimports and preventing dumping. * It has alsoled to price increases. However, the domesticiron and steel industry and some Governmentanalysts do not share the Treasury Depart-ment’s enthusiasm. The net effect of the sys-tem has been 1) to allow the least profitable,highest cost foreign steelmaker, especiallythe Europeans, to obtain higher export pricesand to reduce, but not eliminate, their losses;and 2) to give the Japanese greater profits. Atthe same time, any benefits the United Statesrealizes from low import prices have beenlargely eliminated, because the mechanismacts to set price levels. For example, during1978, every tonne of finished steel importedfrom Europe that could have been producedin the United States would have generated adomestic profit of more than $22/tonne. In-stead, European exports to the United Statesunder the trigger-price mechanism reducedEuropean losses by $3/tonne.

*For example, steel imports were discussed extensively inthe 2 days of steel talks on Feb. 7 and 8, 1979, which openedwith Treasury Undersecretary Anthony Solomon’s report tothe Senate steel group on improved industry performance sincethe inception of the trigger-price mechanism. Import penetra-tion dropped from 20 to 17 percent in the final 8 months of1978, when the plan was in effect, and in December it droppedto 14 percent.


The situation has been summed up byRoger E. Alcaly, senior economist with theCouncil on Wage and Price Stability:

In short, the major impact . . . was on im-port prices, with most of the gain accruing toforeign producers, while the effects on thedomestic steel industry were too small toreverse the long-term trends.47

Over the 2 years of the trigger-price mecha-nism, carbon steel import prices rose 39 per-cent, while the domestic producer price indexfor steel mill products rose 21 percent. ’8

Because of the industry’s skepticism aboutthe trigger-price mechanism, it has made aconsiderable effort to have the new Multilat-eral Trade Agreement vigorously enforced,particularly its provisions against direct ex-port subsidies. The domestic steel industryalso feels that the Government’s handling ofthe existing trade laws has been “less thanvigorous’ and tha t en forcement powersshould be transferred to another Governmentagency. * Further , the domestic industrywould like to have the burden of initiating un-fair trade practice agreements lifted from in-

~~Amerjcan Metal Market, Dec. Z4, 1979.~8c. A. Bradford, “steel Industry Quarterly Review,”’ Merrill,

Lynch, Pierce, Fenner & Smith, Inc., February 1980.*In July 1978 the Treasury Department was stripped of most

of its international trade responsibilities. The Undersecretaryfor Trade at the Commerce Department now administers inter-national trade programs such as the trigger-price mechanism.

dustry and handled by the responsible Fed-eral agency.

The steel industry feels that Governmentdecisions regarding the enforcement of tradelaws should allow for more trade associationand labor union input. Also of importance tothe industry is a new definition of injury to anindustry that would extend and codify thelimits within which dumping can be prohib-ited. Given active foreign government partici-pation in their steel industries, effective im-plementation of the subsidy code will alsogrow in importance.

The new Multilateral Trade Agreement in-cludes many of the industry’s objectives, butthe details and specifics of the agreement re-main to be implemented. Its actual impact onthe domestic iron and steel industry cannotbe precisely determined at this time, A defi-nite possibility exists that selected, high-tech-nology U.S. steels would be more easily ex-ported under a well-enforced MultilateralTrade Agreement and some domestic alloy/specialty steel producers might be able tocapitalize on this opportunity. * It is clear,therefore, that Government policies withinthe context of the Multilateral Trade Agree-ment are of paramount importance to the do-mestic iron and steel industry, both for pre-venting unfairly priced imports and for ob-taining fair trade in export markets.

*Discussed more fully in ch. 8.

Chapter 5

Past and Future DomesticUse of Steel

Contents

PageSummary ● . * . .** . , ,* ,**** . , . .****** .* ,* 155

The Importance of Steel . . . ... ...,.....,,.156

Steel Compared to Aluminum, Plastics,Cement, and Wood, . . . . . . . . . . . . . . . . . . . 156

Comparative Properties of Materials . ......156Comparative Economic Trends . ...........158Comparative Innovation Trends. . ..........164Impacts of Changes in Energy Costs on

Steel and Other Engineering Materials. .. .166Four Energy Price Scenarios . .............167Energy Use Factors. . . . . . . . . . . . . , . . . .. ...168

Trends in Domestic Consumption of Steeland Competing Materials. . .............172

General Trends. , . . . . . . . . . . . . . . . . . . . . .. .172Domestic Markets. . . . . . . . . . . . . . . . . . .. ...173

Domestic Supply-Demand Forecasts for Steel 179

List of Tables,Table No. Page48. Comparison of Material Properties (I):

Stiffness . . . . . . . . . . . . . . . . . . . . .......15849. Comparison of Material Properties (II):

Strength . . . . . . . . . . . . . . . . . . . . ., .. ...15950. Comparison of Material Properties (III):

Environmental Behavior. . .............16051. Equivalent Prices for Engineering

Properties by Material, 1976...........16052. Equivalent Prices for Engineering

Properties by Material, Year 2000 . . . .. .16153. Inflation and Parity Pricing of

Engineering Properties by Material,Year 2000, ., . . . . . . . . . . . . . . . . . .. ....161

54. OTA Data on Future Energy Costs. .. ....16755. Four Energy Cost-Growth Scenarios .. ...16756. Energies Used to Calculate Energy Costs

to Produce Domestic and Imported Steeland Domestically Produced Aluminum, “Plastics, and Concrete . ...............168

57. Estimated Energy Costs for Shipment ofMaterials Involved in the Production ofU.S. Consumed Steel. . . . . . . . . . . . . . ... , 169

Table No.58. Projected Year 2000 Energy Cost for

Domestic and Imported Steel and forDomestic Aluminum, Plastics, andConcrete, Using Four Price Scenarios

59. Production Energies for ReinforcedConcrete . . . . . . . . . . . . . . . . . . . . . . .

60. Steel Shipments by Selected Market,1967-78 . . . . . . . . . . . . . . . . . . . . . . . .

61. Historical Growth Rates for Steel

Page

.., . 170

. . * * 171

*.. . 174

Product Shipments by Markets, Imports,Exports, and Apparent Consumption,1951 -77 . . . . . . . . . . . . . . 0.............176

62. Material Consumption in Passenger Carsas Percentage of Total Weight, 1978-87 .. 176

63. Steel Usage in Passenger Cars and LightTrucks, 1978, 1985, 2000 . . . . . . . . . . . .. .177

64. Estimated Usage of Iron and SteelConstruction Materials . . . . . . . . . . . . . . .178 ,

65. Summary of Materials, Energy, andLabor Used in Comparative Floor BayConstruction. . . . . . . . . . . . . . . . . . . . . , .. 178

66. U.S. Steel Demand and Capacity,Comparison of Various Forecasts,1980-2000 . . . . . . . . . . . . ..............180

List of Figures

Figure No. Page16. Real Price Trends in Engineering

Materials . . . . . . . . . . . . . . . . . . . . . . . . . . 16217. Percent Growth in Per Capita

Consumption of Plastics, Aluminum, andSteel in Selected Countries, 1974-78.....170

18. Trends in U.S. Apparent Consumption ofSteel, 1950-77 . . . . . . . . . . . . . . .........173

19. Trends in U.S. Apparent Consumption ofAluminum, 1960-77, . . . . . . . . . . . . .. ....173

20. Trends in U.S. Apparent Consumption ofPlastics, 1952-77 . . . . . . . . . . . . . . .......173

21. Effects of Rising Fuel Costs on theShipping Costs of Steel Products FromJapan, Europe, and Brazil to Los Angelesand New York. . . . . . . . . . . . . . . . . . . . . .. 174

-=7

CHAPTER 5

Past and Future Domestic Use of Steel

Summary

Steel is the most important engineering ma-terial in American society. There is literallyno aspect of private or public life that is not insome way dependent on steel. Nevertheless,steel is taken largely for granted. Steel is notgenerally considered to be technology inten-sive, changing in character, or especially crit-ical for economic or military security, Yet,steel is all these things. It plays such a per-vasive and vital role in all primary manufac-turing and construction that it will remain astrategic material for the Nation. With re-gard to military security, the strategic role ofsteel is increasing. In 1967 President LyndonB. Johnson commented that “steel . . . is basicto our economy and essential to our nationalsecur i ty ;1 that statement is still valid today.

Domestic consumption of steel continues toincrease, although at a slower rate than dur-ing the early phases of U.S. industrializationwhen there were large increases in per capi-ta income. Although the use of aluminum andplastics has greatly increased in the past sev-eral decades, the per capita consumption ofthese materials is only about 60 to 140 lb, re-spectively, compared to approximately 1,000lb per capita consumption of steel, Steel com-petitiveness may improve as a result of futureenergy and raw material cost changes, whichwill have stronger adverse impacts on alumi-num and plastics than on steel.

Although it may appear, according to somemeasures, that the use and role of steel aredeclining, it must be recognized that for manyapplications there are no cost-competitiveperformance substitutes for steel. One fre-quently mentioned exception is the use of

‘Presidential Proclamation 3778, Apr. 8, 1967.

steel in automobiles. Driven by the need toreduce vehicle weight, automobile manufac-turers are reducing the amount of steel usedin each automobile. Steady or decreased de-mand for steel in this market is likely. To theextent that foreign automobile companiesproduce more of their automobiles in theUnited States and use domestic steel, the de-cline in steel use per car may be partially off-set by an increase in the number of cars pro-duced. Some observers believe there will be asurge in steel demand for capital reconstruc-tion of physical structures such as bridges,buildings, railroads, and primary manufac-turing facilities, as those built during the past50 years wear out.

Inadequate domestic steel capacity in thefuture is a distinct possibility. The moderniza-tion and expansion program for the 1979-88period proposed by the industry, through theAmerican Iron and Steel Institute (AISI),assumes a very low rate of increasing domes-tic demand for steel (1.5 percent per year).Should that projection be too low, the capaci-ty planned for would be inadequate, and, ac-cording to other, higher demand growth fore-casts, imports could rise to 20 percent of do-mestic consumption, or 27 million tonne/yr.This would be about 50 percent greater thanany previous import tonnage. Without themodernization and expansion program the in-dustry deems necessary, low domestic capac-ity might require the import of more than 44percent of U.S. steel by the end of the 1980’s.The current overcapacity in the world steelmarket is likely to disappear soon and that de-gree of import dependence could expose theUnited States to economic and national secu-rity problems not unlike those the Nation hasencountered with petroleum.

155


The Importance of Steel

Steel has generally been considered a ba-sic industry. There is good reason for this.Virtually every sector of the economy and allaspects of human activity depend on steel insome direct or indirect way. When steel is notused directly, it invariably has been used inthe equipment that made the nonsteel mate-rials being used and that transported themfrom original source to final application.Steel is the backbone of any industrializedsociety. From rails, to machines, to girders inbuildings, to beverage containers, to eatingutensils, steel is ubiquitous. Yet, steel is nolonger thought of as a critical material insociety. Overshadowed by high-technologyproducts and industries, steelmaking is gen-erally taken for granted and considered to bea simple and unchanging technology.

In fact, steelmaking has undergone greatchanges and continues to do so. Steel prod-ucts have also changed dramatically as newalloys and coatings for steel have greatlyenlarged its range of properties and applica-tions. Other engineering materials, notablyaluminum and plastics, have given stiff com-petition to steel, but by and large steel has

Steel Compared toCement,

For one material to be used in place ofanother, the substitute must perform ade-quately in a specific application. If it does,then economic considerations—both cost andprice factors—play an important role in thecompetition between the materials. Finally,trends in technological innovation will in-fluence the materials selection. *

Comparative Properties of Materials

To some extent, a particular steel mayhave unique properties that determine its

● More detail on steel innovation is provided in otherchapters, particularly ch. 6.

held its own and remains the most importantengineering material in society.

Steel is particularly important from a na-tional security viewpoint. It is irreplaceablein military hardware like tanks and guns, butmilitary needs for steel go far beyond the ac-tual steel in weapons. Like the economy itself,the military establishment depends totally onsteel for the manufacture and transportationof all its supplies. The Federal EmergencyManagement Agency estimated in 1979 thatin a 3-year non-nuclear war, 26 percent ofsteel industry output would be required fordirect military purposes.2 This assumes thatsuch an effort would be preceded by mobil-ization of both military and industrial re-sources. Another 56 percent of domestic steelwould be needed for essential purposes insupport of the military effort, leaving 18 per-cent for civilian purposes, The correspondingestimates in 1969 were 6 percent, 66 percent,and 28 percent respectively, an indicationthat the strategic role of steel has increasedduring the past decade.

‘Communication from P. Kruger of the Federal EmergencyManagement Agency, Jan. 15, 1980.

Aluminum, Plastics,and Wood

selection, but more often it competes on thebasis of cost with other materials capable ofsatisfying the requirements of the applica-tion. The two properties chosen for compar-ison here are strength and stiffness, but manyother properties may be important in a givenuse. Although those properties have the sameunits (MPa), they represent quite differentcharacteristics of a material. Strength rep-resents material’s resistance to breakage(breaking or tensile strength) or to permanentdeformation (yield strength). Stiffness on theother hand represents a material’s resistanceto temporary deformation while a load orstress is being imposed on it—such deforma-

Ch. 5—Past and Future Domestic Use of Steel ● 157

tion as the deflection of a stairtread whenstepped upon or the coiling of a spring. Usingabsolute values, steel can have a wide rangeof strengths, but all steels have approximate-ly the same stiffness. However, the stiffnessof one class of materials is generally quite dif-ferent than another class; for example, steelsare about three times as stiff as are alumi-num alloys—even though, contrary to the gen-eral impression, some aluminum alloys arestronger than some steels.

The stiffness of material should be appro-priate to its design application. For example,if an automobile were made of some flexiblematerial, its doors might fit very snugly whenempty but very poorly when loaded with pas-sengers. Most plastics would be unsuitablefor such an application because of their lowstiffness. However, when very low stiffnessplastics are combined with a very stiff mate-rial, such as graphite or glass fibers, then thereinforced plastic may have a composite stiff-ness as good as or better than steel.

Strength is important in materials applica-tions, either in terms of yield strength (forductile material) or breaking strength (for abrittle material). A ductile material has ayield strength below its breaking strength. Abrittle material’s yield strength is the same asits breaking strength, Once the strength isknown, a material can be chosen for an appli-cation so that only some fraction of either theyield or breaking strength is realized in serv-ice. When the service condition involves anapplied stress level greater than the designstress (an overload), then the material mayfail, causing loss of function. Failure may bepermanent (plastic) deformation, such as in abent wheel, or actual breakage, such as inbroken glass. The ability to deform prior tofracture is normally an asset; for example,some autos are designed to deform ratherthan break under low-speed impacts so thatlittle or no damage occurs to the critical partsof the auto or to the passenger. The metal de-formation absorbs some of the energy of theimpacts.

As a general rule, materials with muchstiffness, such as graphite fibers, are also

brittle. An auto made of graphite would breakinto pieces upon overload. When the stiffgraphite fibers are mixed with the more flexi-ble plastics, the composite material is morelikely to stay in one piece on overloading. Theadvantage that most metals have is that theycombine reasonable stiffness with reason-able ductility. An auto made of steel will per-manently bend when overloaded but usuallywill not break into pieces.

The properties of yield strength and stiff-ness can be given on an absolute and on aspecific basis. The specific strength or speci-fic stiffness shows the “strength-to-weight”or “stiffness-to-weight” ratio of each mate-rial. These ratios provide a means of compar-ing the size, volume, or mass of materials withdifferent properties required to perform in anequivalent manner. For example, a largepiece of a weak material may respond in thesame way to the same load as a smaller pieceof a stronger material.

Tables 48 and 49 present comparisons ofthe stiffness and strength, respectively, ofsteel, aluminum, cement, plastics, lumber,and composite materials. Table 50 providesdata on temperature and chemical environ-ment limitations to the use of these materials.Breakeven price indexes were also calcu-lated for these materials. The indexes indi-cate the amount paid for alternative materi-als to steel, on a weight basis, for equivalentstiffness or strength. At prices below the in-dex prices (determined by multiplying the in-dex by the cost of steel), the alternative mate-rials cost less than steel for equivalent stiff-ness or strength. Note that this index meas-ures only one cost; comparisons among mate-rials require consideration of a multitude offactors, including the practical means of ob-taining the desired form and shape of thematerial.

Table 51 presents actual breakeven stiff-ness and breakeven strength prices for thevarious materials competitive with steel in1976, and compares these prices with actualprices. From this limited type of considera-tion, it is found that certain plastics and ce-ment could be more competitive than steel.


Table 48.—Comparison of Material Properties (l): Stiffness

Elastic Equivalent stiffness (steel = 1.000)

modulus Specific Specific Thickness BreakevenMaterial (MPa x 103) gravity modulus a ratio b Weight ratioc price indexd

Steel . . . . . . . . . . . . . . . . . . . . . .Aluminum. . . . . . . . . . . . . . . . . .PlasticsThermoplasts

6/6 nylon. . . . . . . . . . . . . . . . .HDPE . . . . . . . . . . . . . . . . . . .ABS . . . . . . . . . . . . . . . . . . . .

ThermosesEpoxies. . . . . . . . . . . . . . . . . .

Wood (clearwood)Softwood

Douglas fir (green). . . . . . . . .Douglas fir (12% H2O). . . . . .

HardwoodWhite oak (green). . . . . . . . . .White oak (12°\0 H, O). . . . . . .

CompositesPortland Cement concrete

(reinforced). . . . . . . . . . . . . . .Fiber-reinforced plastics

S-glass/Epoxy (60% fiber,filament wound). . . . . . . . .

Graphite fiber/EpoxyThornel 300 (resin-

impregnated strand) . . .-.

207.069.0

2.830.832.10

6.90

8.149.66

10.4215.73

34.50

31.70

227.50-.

7.8702.699

1.1000.9501.060

1.100

0.4000.430

0.6400.720

2.410

1.990

1.740aSpecific modulus = modulus •/• specific gravitybThickness ratio = (steel modulus + alternative material’s modulus) one.third

power, derived from deflection of simple cantilever beamsFor attainment of a desired stiffness with an alternative material, multiply

thickness of steel by the thickness ratio, e,g., aluminum must be 1 442 timesthicker than steel to provide stiffness equivalent to steel

CWeight ratio = thickness ratio X (specific gravity of alternate material +specific gravity of steel)

Determines the weight of an alternative material which wiII give stiffnessequivalent to steel, e g , for aluminum need O 495 of the weight of steel


Table 52 presents actual breakeven pricesfor engineering properties by material in theyear 2000, assuming real rates of inflation insteel prices of 1, 3, and – 1 percent per yearfrom 1976 to 2000. The inflation rates (in realterms) that will lead to parity pricing (for en-gineering properties of steel) of other materi-als—given the steel inflation rates assumedin table 52—are presented in table 53. Onlysome plastics and cement could undergo larg-er cost increases than steel and still remaincompetitive for the properties considered.

Comparative Economic Trends

Because the competitiveness of steel is nor-mally related to price, as well as to engineer-ing properties, it is useful to review the past

26.30 1.000 1.000 1.00025.60 1.442 0.495 2.020

2.57 4.182 0.585 1.7090.87 6.295 0.760 1.3161.98 4.619 0.622 1.608

6.27 3.107 0.434 2.304

20.40 2.941 0.149 6.71122.47 2.778 0.152 6.579

16.28 2.708 0.220 4.54521.85 2.361 0.216 4.630

14.30 1.817 0.556 1.799

15.93 1.869 0.473 2.114

130.40 0.969 0.214 4.673dBreakeven price index = reciprocal of the weight ratio

The multiplier of the steel price which is used to calculate the upper Iimit ofhow much may be paid for an alternative material to achieve same stiffness assteel, e.g., if steel costs $0.20/lb then aluminum must sell for $0 404/lb, or less,to compete with steel strictly on the basis of stiffness, Average 1976 pricesused.

NOTE: S.I. metric units of Mega Pascals (M Pa) may be converted to customaryEnglish units (pounds per square inch, lb/in2) by the following factor: 1MPa = 145 lb/in’, e.g., the elastic modulus of steel at 207 x 103 MPa con.verts to 207,000 MPa x 145 lb/in2/MPa = 30 x 106 lb/in 2.

pricing of steel and its competitor materials.Figure 16 presents price indexes in realterms for five engineering materials. From1956 through 1972, steel prices in real termswere relatively constant. Cement and alumi-num prices in real terms were, in general, de-clining, but plastic prices were plummeting.Lumber prices were quite level through thesecond half of the 1960’s, after which theirvolatility increased. Since 1972, steel has ex-hibited relatively small price increases,

Capital costs, energy costs, the rate oftechnological change, and Federal and Stateregulations are all important elements in thecost of engineering materials, although lum-ber is to a considerable extent an exception.

Ch. 5—Past and Future Domestic Use of Steel 159

Table 49.—Comparison of Material Properties (II): Strength—-., . . ., ,, ,-. . . . ---

Tensile Specific Equivalent strength (HSLA steel = 1.000)

strength Specific tensile Thickness Breakeven(M Pa) gravity strength a ratio b Weight ratioc price indexd

— —Material

Steel (wrought)Plain carbon (1010) ... . . . . . .HLSA (970X). . . . . . . . . . . . . . .Stainless (301) . . . . . . . . . . . .Aluminum (wrought)Commercial purity (1060-H18)Alloy

Single-phase (5052-H38) . . . .Multiphase (7178-T6). . . . . . .

PlasticsThermoplastics

6/6 nylon. ., . . . . . . . . . . . . . .HDPE . . . . . . . . . . . . . . . .ABS . . . . . . . . . . . . . . . . . . .

ThermosesEpoxies. . . . . . . . . . . . . .

Wood (clearwood)Softwood

Douglas fir (green). . . . . . . . .Douglas fir (12% H2O). . . . .

HardwoodWhite oak (green). . . . . . . . . .White oak (12% H2O). . . . . . .

CompositesPortland Cement concrete

(reinforced). . . . . . . . . . . . . . .Fiber-reinforced plastics

S-glass/Epoxy (60% fiber,filament wound). . . . . . . .

Graphite fiber/EpoxyThornel 300 . . . . . . . . . . . .

365.44483.00

1,275.58

131.0

289.59606.76

81.3627.5848.27

68.95

24.8243.44

31.7245.51

34.50

877.00

2,654.00

7.8707.8707.870

46.4361.37

162.08

1.1501.0000.615

1.1501.0000.615

0.8701.0001.626

2.699 48.54 1.920 0.659 1.519

1.2910.892

0.4430.306

2.2583.268

2.6992.699

107.30224.81

1.1000.9501.060

73.9629.0345.53

2.4374.1853.163

0.3410.5050.426

2.9361.9802.347

0.370 2.7031.100 62.68 2.647

0.4000.430

62.05101.02

4.4113.334

0.2240.182

4.4605.489

3.1513.355

0,6400.720

49.5663.21

3.9023.258

0.3170.298

2.410 14.32 3.742 1.146 0.873

0.742

0.427

0.188

0.094

5.329

10.602

1.990

1.740

440.71

1,521.20aSpecific tensile strength = tensile strength - specific gravity.bThickness ratio = (HSLA strength – strength of alternative material), one-half

power, as derived from formula for maximum surface stress in a cantileverbeam

For attainment of a desired strength (Ioad.bearing capacity) with a materialother than HSLA steel by the thickness ratio, e g , a 1010 plain carbon steelmust be 1.15 times thicker than HSLA while a 301 stainless steel need be only0.615 times as thick as the HSLA.

CWeight ratio = thickness ratio X (specific gravity of alternate material +specific gravity of HSLA)

Determines the weight of a given material which wiII provide the load.bearing capability of a piece of HSLA steel, e.g., for 7178-76 aluminum only

0.306 kg of that material would be needed to replace 10 kg of HSLAdBreakeven price index = reciprocal of the weight ratio

The multiplier of the HSLA steel price which determines the upper Iimit thatshould be paid for an alternate material in order to gain the same load bear-ing capacity as the HSLA steel, e.g., if HSLA steel costs $0 50/lb then 7178-76aluminum must cost less than $1.634/lb to be competitive Average 1976prices used

NOTE S I metric units of Mega Pascals (M Pa) may be converted to customaryEnglish units (pounds per square inch, lb/in2) by the following factor: 1M Pa = 145 lb/in2, e g the elastic modulus of steel at 207 x 103 MPa con-verts to 207,000 MPa x 145 lb/in2/MPa = 30 x 106 lb/in2.


Steel per tonne of iron produced has been droppingsteadily, and promises to continue to do so.Second, low-grade coal is coming into use forcoking. The Japanese in particular have beenusing lower quality coals for coking, theUnited States is beginning to explore activelythe use of formcoke technology that will per-mit the use of abundant low-grade coals, andthe Soviet Union’s development of dryquenching may also provide a technology forusing lower quality coals. Coal-based directreduction (DR) may also become commercial-

The steel industry is the Nation’s largest in-dustrial consumer of energy. However, risingoil prices will affect steel less than they willmost other energy-intensive industries. Mostof the energy used in steelmaking is in theform of coal in coking operations, and domes-tic coal is abundant. World prices for coking,or metallurgical-grade, coal are likely to re-main low relative to other energy sources forseveral reasons. First, consumption of coke


Table 50.–Comparison of Material Properties (Ill):Environmental Behavior

Range ofservice Resistance

temperature to chemicalMaterial (0C )a environmentSteel (wrought)Plain carbon (1010) 430 / – 20HSLA (970X) . . . . . . . . . . . . . . . . . 500c / -50Stainless (301) . . . . . . . . . . . . . . . 540/ NoneAluminum (wrought)Commercial purity (1060). . . . . . . 105/ NoneAlloy

Single-phase (5052) . . . . . . . . . 105/ NoneMultiphase(7178). . . . . . . . . . . 200c/ None

PlasticsThermoplastics

6/6 nylon . . . . . . . . . . . . . . . . . . 150 / 20HDPE. . . . . . . . . . . . . . . . . . . . . 60125ADS . . . . . . . . . . . . . . . . . . . . . . 100C/25C

ThermosesEpoxies . . . . . . . . . . . . . . . . . . . 180/ N.A.

WoodSoftwood

Douglas fir . . . . . . . . . . . . . . . . 200d/N.A.Hardwood

White oak . . . . . . . . . . . . . . . . . 200d/N.A.CompositesPortland Cement concrete

(reinforced). . . . . . . . . . . . . . . . 1,170/ NoneFiber-reinforced plastics

S-glass/epoxy . . . . . . . . . . . . . . 100/ N.A.Graphite fiber/epoxy

Thornel 300 . . . . . . . . . . . . . . 100C/N.A.

F / PG / P

VG/VG

VG/VG

VG/VGG / G

G / EG / EG / E

VG/I E

Ge

VGe

F / VGf

Fg

Fg

aService temperature Iimits due to (elevated temperature creep/low temper-ature brittle failure)

bChemical environment resistance for (acidic/baste) environments; ratlng scaleP = Poor; F = Fair; G = Good; VG = Very good; E = Excellent,

cEstlmateddUpper seervice temperature Iimit for wood defined as ignition temperatureeWood measured in terms of decay resistancefPoor in contact with alkali cations, reinforcing bar attacked by chloridesgSusceptible to moisture or ozone or ironlzing radiation damage at fiber.resin

interface; otherwise the acid/base resistance IS as stated for epoxies

SOURCE: Office of Technology Assessment.

ized (see ch. 6). Finally, the recent opening ofAustralian mines has made major additionsto world supply of coking coal. Problems withinadequate domestic coke capacity, dis-cussed in chapter 7, appear to be only of ashort-term nature.

Electric power costs are also important tosteel industry costs. Electric power is in-creasingly being used to melt scrap and makesteel in electric furnaces, to produce oxygen,and to operate high-horsepower rolling millsand other equipment. Thus, the apparenttrend toward closing the gap between indus-tr ial and residential power rates in theUnited States has important implications forU.S. steelmaking costs.

Capital costs for steel are very high for in-tegrated greenfield (new plant) capacity, butincreased electric furnace capacity costs agreat deal less than new integrated plants, asdo expansions at existing plants. One way ofobtaining steel capacity is to improve the millyield on raw steel. Continuous casting (dis-cussed in ch. 9) is clearly the most importantroute to such improvements. Computer con-trol and new high-temperature sensor tech-nology will also improve yields and providesavings both in raw steel and in labor costs aswell. Future changes in steelmaking are fullyanalyzed in chapter 6. In the long term, theseare promising developments that could offersubstantial production and capital cost sav-ings.

Table 51 .—Equivalent Prices for Engineering Properties by Material, 1976 (in cents per pound)

Breakeven stiffness price Breakeven strength pricerelative to carbon steel relative to carbon steel

Material Actual 1976 price Hot-rolled sheet Cold-rolled sheet Hot-rolled sheet Cold-rolled sheetCarbon steel

Hot-rolled sheet. . . . . . . . . . . 13.2¢ N.R. N.R. N.R. N.R.Cold-rolled sheet. . . . . . . . . . 15.2 N.R. N.R. N.R. N.R.

Aluminum mill product. . . . . . . 65.0 26.7¢ 30.7¢ 23.O¢ 26.5¢Plastics

HDPE . . . . . . . . . . . . . . . . . . . 28.0 17,4 20.0 30.0 34.6ABS. . . . . . . . . . . . . . . . . . . . . 46.0 21.2 24.4 35.6 41.0

Portland Cement . . . . . . . . . . . 1.8 23.7 27.3 13.2 15.3

N R. = not relevant.


Ch. 5—Past and Future Domestic Use of Steel . 161

Table 52.—Equivalent Prices for Engineering Properties by Material, Year 2000 (in 1976 cents per pound)

Forecast year 2000 prices

Assumed steel Breakeven stiffness price Breakeven strength priceproduct price relative to carbon steel relative to carbon steelinfIation (per- Actual Forecast year Hot-rolled Cold-rolled Hot-rolled Cold-rolledcent per year) 1976 price 2000 price sheet sheet sheet sheet

Carbon steelHot-rolled sheet. . . . . . . 10/0 13.2¢ 16.8¢ N.R. N.R. N.R. N.R.Cold-rolled sheet. ., . . . 1 15.2 19.3 N.R. N.R. N.R. N.R.

Aluminum mill product. ., 1 65.0 N.R. 33.9¢ 39.0¢ 29.3¢ 33.7¢Plastics

HDPE . . . . . . . . . . . . 1 28.0 N.R. 22.1 25.4 38.2 43.9ABS. . . . . . . . . . . . . . . . 1 46.0 N.R. 27.0 31.0 38.2 52.1

Portland Cement . . . . . . . . 1 1.8 N.R. 21.3 34.7 16.9 19.4Carbon steel

Hot-rolled sheet. . . . . . . 3 13.2 26.8Cold-rolled sheet. . . . . . 3 15.2 30.9

Aluminum mill product, . 3 65.0 N.R.Plastics

HDPE . . . . . . . . . . . . 3 28.0 N.R.ABS. . . ... . . . . . . . . . 3 46.0 N.R.

Portland Cement . . . . . . . . 3 1.8 N.R.Carbon steel

Hot-rolled sheet. . . . . . . – 1 13.2 10.4Cold-rolled sheet. . . . . . – 1 15.2 11.9

Aluminum mill product, . - 1 65.0 N.R.Plastics

HDPE ., . . . . . . . . . . . . . – 1 28.0 N.R.ABS. . . . . . . . . . . – 1 46.0 N.R.

Portland Cement . . . . . . . . – 1 1.8 N.R.N R = not relevant SOURCE: Office of Technology Assessment.

N.R. N.R.N.R. N.R.54.1 62.4

35.3 40.743.1 49.748.2 55.6

N.R. N.R.N.R. N.R.21.0 24.0

13.7 15.716.7 19.118.7 21.4

N.R.N.R.46.8

61.072.326.9

N.R.N.R.18.2

23.728.110.4

N.R.N.R.54.0

70.383.431.0

N.R.N.R.20.8

27.132.111.9

Table 53.—inflation and Parity Pricing of Engineering Properties by Material, Year 2000(in percent per year or average annual compound growth rate)

Inflation rates for other materials that yield parity pricing with steel in 2000Assumed steelproduct price Stiffness Strength

inflation Hot-rolled Cold-rolled Hot-rolled Cold-rolled

N.R. N.R.– 2.7% – 2.1 %

– 1.0 - 0 . 4– 2.2 - 1 . 610.8 13.1

Material (percent per year) sheet sheet sheet sheet

Carbon steel . . . . . . . . . . . 10/0Aluminum mill product . . . 1Plastics

HDPE. . . . . . . . . . . . . . . . . 1ABS ., . . . . . . . . . . . . . 1

Portland Cement ... . . . . 1

Carbon steel . . . . . . . . . . . . . 3 ’Aluminum mill product . . . . 3Plastics

HDPE. . . . . . . . . . . 3ABS . . . . . . . . . . . . . . . . 3

Portland Cement . . . . . . . . 3

Carbon steel . . . . . . . . . . . – 1Aluminum mill product . . . . – 1Plastics

HDPE, . . . . . . . . . . . . . . . . – 1ABS . . . . . . . . . . . . . . . . . . – 1

Portland Cement . . . . . . . . . – 1

N.R. N.R.– 0.8 – 0.2

1.0 1.6- 0 . 3 0.314.7 15.4

N.R. N.R.– 4.6 – 4.1

– 2.9 – 2.4– 4.1 3.610.2 10.9

N.R. N.R.–3.3% –2.7%

1.3 1.9– 0.1 0.5

9.8 10.4

N.R. N.R.– 1.4 – 0.8

3.3 3.91.9 2.5

11.9 12.6

N.R. N.R.– 5.2 – 4.6

- 0 . 7 – 0.1- 2 . 0 – 1.5

7.6 8.2

N R = not relevant SOURCE Office of Technology Assessment—


300

250

200

175

150

125

100

75

50

Figure 16.— Real Price Trends in Engineering Materials

1955 1960 1965 1970 1975Year

SOURCE: Office of Technology Assessment.

AluminumLike steel, aluminum suffers from very high

investment costs for new capacity relative tohistorical costs. Unlike steel, no major techno-logical alternatives exist or appear likely inthe future for producing primary aluminum.The aluminum industry is and will continue tobe almost totally dependent on imports of ore(bauxite) or down-line products. The cheapestform of additional aluminum capacity will beincreased recycling and growth in the sec-ondary smelting industry.

The most likely source of scrap is the two-piece beverage can. In 1978, of the 1.1 milliontonnes of aluminum sheet that went into cans,some 270,000 tonnes, or 25 percent, were re-cycled. The price paid for scrap was one-third of that for ingot. The ceiling on the recy-cle rate is probably 75 to 80 percent, judging

from the experience of the Adolf Coors Co.,which requires distributors to recycle cansand reports recycle rates of 75 percent. A re-cycle rate of 75 percent in two-piece bever-age cans in 1978 would have supplied on theorder of 10 percent of total apparent alumi-num consumption.

Electric power costs are at least 20 percentof the manufacturing costs of aluminum ingot,and they increased by a factor of three from1950 to 1977, from 16.6 to 51.3 cent/lb. Al-though smelters now use considerably lesselectric power per pound of aluminum thanformerly (see the section on comparative in-novation trends), the rate of change is slow.A new Alcoa process promises lower powerconsumption, but commercialization is atleast a decade away, judging from public pro-nouncements. About one-third of the primary


smelting capacity in the United States islocated in the Pacific Northwest and useselectric power from the Bonneville Power Ad-ministration’s hydroelectric plants. Supplycontracts between Bonnevil le and thesesmelters will begin to expire in the early1980’s. The industry clearly will not be ableto renew the contracts at rates based on hy-droelectric generating costs. * At best, thesmelters in the area will pay a weighted aver-age cost of electric power from hydroelectric,coal, and/or nuclear rates. However, therates are structured in such a way that one-third of the aluminum industry’s smelting ca-pacity will suffer a severalfold increase inthe cost per kilowatthour.

A conservative estimate is that these in-creases alone will double the average cost ofelectric power for the entire U.S. aluminumindustry. As a result, aluminum prices are ex-pected to rise very sharply in the future. In-deed, in the past year, prices have alreadybegun to increase sharply.

Plastics

Capital costs are important in plastics pro-duction, but with feedstock prices set by thealternative-use values for liquid and gaseoushydrocarbon fuels, plastics prices are verysensitive to imported oil prices. Technologicalchange in resin and monomer production ismore rapid for plastics than for more tradi-tional materials and provides some cushionfor these materials. U.S. natural gas pricingpolicy will set the prices for the feedstocks ofthe most important monomer, ethylene. U.S.gasoline demand and Government policies onoctane additives will be critically importantto the other major class of derivatives, thearomatics. It is reasonable to expect that theprices of the thermoplastics, which have re-mained relatively stable in the past (for sometypes of plastics, i.e., high-density polyethyl-ene and polypropylene), will increase signifi-cantly in the future.

*The total price per kilowatthour paid for hydroelectricpower does not even pay for the fuel required to generate akilowatthour with coal.

Cement

The cement industry is capital intensiveand new capacity is likely to set prices inmost regions. Although capital costs are anundeniably strong upward cost pressure oncement prices, several favorable cost influ-ences are also at work on future prices. AfterWorld War II, cement producers switchedfrom coal to fuel oil to provide the requiredprocess heat. They are now in the process ofswitching back and will benefit from the abili-ty to use high-sulfur coals, which will be arelatively low-priced and available fuel dur-ing the next two decades.

Even though raw materials for cement areubiquitous, and their cost is equal only to on-site extraction costs, an even cheaper rawmaterial may be available. Pollution controlof coal-fired electric power generation pro-duces a cementitious material on which utili-ties can “make” money by giving it away toavoid disposal costs. It is unlikely to be free,but it will no doubt be inexpensive. Not allgrades of cement can be produced from thismaterial, but it is an important cost factornevertheless.

In spite of these factors, cement prices,which increased less than steel in the lastthree decades, are expected to rise, princi-pally because of increasing capital costs.

Lumber

The most important factors in lumberprices are U.S. Government forestland man-agement strategy and homebuilding trends.Recent forestland practices have tended toremove more land from active forest manage-ment, reducing the supply of lumber andpressuring prices upward. These practicesare currently going through a major policyreview. As other factors drive new homecosts up, pressure increases to free moretimber in order to keep building costs down.

Prices have increased in the last two dec-ades by a factor of three for Ponderosa pineand slightly less for Douglas fir and Southernpine. They can be expected to increase morerapidly in the future unless economic condi-


tions significantly dampen housing construc-tion.

Comparative Innovation Trends

Opportunities for technological gains maybe found in the way materials are processed,in the quality of their performance, and in theforms in which they are marketed. Advancesin material processing can play a major rolein reducing production costs; modification orbetter control of the composition, structure,and properties of materials can make themeasier to form, stronger, more resistant t ocorrosion, and the like; and new methods offabrication can open up new markets or wid-en old ones.

Material Processing

Electric power consumption per pound ofaluminum ingot and coke consumption pertonne of iron have decreased gradually overthe past decades. Average data like thesereflect a mix of new state-of-the-art plantsand older plants with varying degrees of effi-ciency. As an industry matures, the rate ofcapacity replacement slows and with it therate at which technological improvements,other than those that can be accomplishedthrough retrofit, can be implemented on anindustrywide basis. This has been a particu-larly acute problem for domestic steel.

In the post-World War II period the basicoxygen process effected steel productioneconomies. By using oxygen and reducing thetime required per heat (batch), the basic ox-ygen furnace made continuous casting feasi-ble on the scale required for commercial de-velopment, The main advantage of continuouscasting is that it improves yield by about 10percentage points. This improvement in yieldreduces unit energy, capital, labor, and pollu-tion control costs. *

Electric arc furnace capacity can be addedin much smaller increments than can oxygenfurnaces. Their smaller scale and lower capi-

*The adoption of these two major technological changes insteelmaking is reviewed in ch. 9, and future changes are dis-cussed fully in ch. 6.

tal costs per annual tonne reduce the risk inbuilding a mill. Rolling mills too have becomemore efficient with the installation of multi-stand continuous mills. The continued evolu-tion of process-control computers, coupledwith better gauge-detection technology, willimprove yields significantly.

In aluminum production, electric powerconsumption rates have improved, and therehave been substantial gains in labor produc-tivity in rolling and drawing operations—about 5.5 percent per year during the last two

decades. Continuous casting has also foundits niche in the aluminum industry, one that islikely to widen. Scale gains have been impres-sive: for continuous casters, the productionrate has grown from 1 tonne/hour in 1960, to1.7 in 1970, to 4 in new units. These gains fol-lowed increases in the diameter of castingrolls and the width of slabs.

The main reason continuous casting hashigher yields than the ingot pouring method(for both aluminum and steel) is quite simple.The ends of ingots must be cropped for prop-er performance in finishing operations; metalis lost on each end of each ingot. In process-ing a slab, metal is lost only at the beginningand the end of a long, continuous strand ofmetal. The slab ends are squared off properlywhen they are severed from the continuousstrand. Future process innovations are possi-ble for aluminum, but a broader range of ma-jor steelmaking changes may be commercial-ized during the next decade,

Fo r p l a s t i c s , t e chno log i ca l change hasbeen rapid, as is to be expected for a new in-dustry . From the ear ly 1950’s through theea r ly 1970’ s , t he r ea l dec l ine i n p l a s t i c sp r i ce s was subs t an t i a l . Lower p r i ce s we rethe result of several factors:

●

●

●

product standardization made it m u c heasier for new producers to enter themarket, which widened competition;

a c c u m u l a t e d e x p e r i e n c e l o w e r e d t h emanufacturing costs in a dramatic way :

a n d

m a r k e t g r o w t h p e r m i t t e d p l a n t - s c a l eeconomies that brought substantial sav-


ings in capital costs per annual pound ofproduct .

The final two factors are technological innature, but market growth and size were es-sent ial to both. The experience curve is awell-documented phenomenon repeated in in-dustry af ter industry. Mathematical ly, valueadded in real terms for a particular productor group of products is stated as a function ofcumula t ive expe r i ence ; t he r e l a t i onsh ip i s

usually stated in terms of the percent declinein real value added for each doubling of pro-duct ion. Typical for average industr ies areexperience curves of 15 to 20 percent; petro-chemicals, in particular the commodity ther-moplast ics , have achieved decl ines in realvalue added of 20 to 30 percent, with somemonomers and polymers boasting gains overdecade-long periods of 40 to 50 percent.

Scale gains are part icularly important inplastics production, Sharing of infrastructureis an important element in these gains. Insome industr ies , rules of thumb have beenworked out to est imate the relat ionship ofscale to total capital costs, The capital cost ofa plant double the size of another plant willbe only about 1.5 times the capital cost of thesmal ler plant . Each pound of product f romthe larger plant will therefore have to bearonly three-fourths of the capital costs—prof-it, interest, and depreciation—carried by theproduct from the smaller plant.

Probably the most significant future proc-ess innovation for plastics will be the use ofnonpetroleum feedstocks. Although this canremove a dependency problem, i t may notlead to actual cost savings for qui te sometime.

For lumber, the most important technologi-ca l ga in s have come in l and managemen tp r a c t i c e s a n d t h e d e v e l o p m e n t o f f a s t e rgrowing species, In the cement industry, theregional nature of markets limits the scale ofp l an t s , and no g rea t s ca l e economies a r eavailable, anyway. The development of sus-pension preheat ing has lowered costs , andflash calcining is expected in the coming dec-ades, but no major technological changes thatprofoundly affect costs are likely for cement,

Materials Performance

Technological innovations in productiontechniques or in al loys and addi t ives thatmodify material propert ies can have majormarket impacts by influencing the choice ofmaterial and by changing the amount of mate-rial required for a particular application.

In steel, perhaps the most talked about newmate r i a l i s h igh - s t r eng th l ow-a l loy s t ee l ,which is not real ly new. The use of thesesteels in automobiles to reduce weight offsetspart of the decline in steel use per vehicle inthe United States. Their effect on total steeldemand is important in this one market alone.

The ever-increasing awareness of the mas-sive cost of corrosion has major implicationsfor nat ional materials policy. One steel in-dustry response to this problem was the de-velopment of one-sided galvanized steel. Gal-vanized s teel has been avai lable for years ,but only with the costly coating on both sides.Galvanizing only one s ide has lowered thecost of corrosion resis tance. (This is dis-cussed more fully in ch. 9.) More new steelsare on the horizon. Dual-phase steels, whichare s trengthened as they are formed, offerusers a material easier to form than othersteels but just as strong when finished. Thisproduct, which is just coming onto the mar-ket, might account for significant tonnages ofsteel in the coming decades. Another majors teel product innovat ion just evolving frommuch basic research is amorphous or glassy(noncrystalline) steels. They may offer a hostof new properties, but major commercial useis probably several decades off.

In aluminum, one of the most interestinglines of development is the search for an alloyusable for both body and end stock. The effortwould have the major benefit of enabling alu-minum cans to be recycled into high-valuea luminum can shee t . Th i s wou ld no t on lylower the cost of can sheet, it could also raisethe price for used aluminum cans, thereby in-creasing the recycle rate. This could have avery positive effect on U.S. aluminum supply.

In the early years of its commercial use, amajor problem in using polyvinyl chlor ide


(PVC) for residential siding was the heat ex-pansion of extruded PVC. Because of thisproblem, only light colors of siding could beproduced. Now, recently introduced additivespermit the use of a broad range of colors,which greatly enhances the marketability ofPVC siding.

A particularly attractive market to h igh -density polyethylene producers is the 55-galdrum market, now held primarily by steel.One method of producing plastic drums is ro-tational casting. This process has very lowtooling costs and is appropriate for short pro-duction runs of specially designed containers.To be able to take advantage of this competi-tive edge, though, a more expensive grade ofcross-linked polymer is required. Plasticsprocessors believe that in time they maylearn enough about rotational casting to usethe regular grade of polymer, which is consid-erably less expensive than that now used.

An enormous number of examples of plas-tics innovation could be cited. Two particu-larly important ones for high-strength appli-cations are fiber reinforcements and fabrica-tion techniques, like reaction injection mold-ing with faster curing times. These develop-ments prove that gains in technology will bethe result of progress both in material prop-erties and in fabricating practices.

Fabrication of End-Use Products

Innovations in this area affect materialsdemand through materials substitution andthrough changes in material consumption perproduct. Metal cans are an example of how

new forms affected the choice of materials.Before the advent of the two-piece aluminumcan for beverage packaging, the three-piece,tin-plated steel can held that segment of themarket. When the aluminum can hit the mar-ket, the use of metal cans for beverage pack-aging grew, and aluminum took most of thatgrowth and some of the existing market awayfrom steel. But steel producers began to ex-periment . They produced a s teel two-piececan, but they could not match the operatingeff iciencies achieved in aluminum can pro-duction. The difference is now minimal, andsteel is making a comeback in the beveragecan market. The steel two-piece can is firstreplacing the steel three-piece can, then alu-minum. Most can plants now include severallines for aluminum cans and several lines forsteel . This dual tool ing approach is beingadopted in other industries as well; some autoplants have tools designed to work with eithersteel or aluminum.

The auto industry offers the most conspicu-ous example of how fabrication affects mate-rials demand, but there are many others. Forexample, unt i l recent ly the s tandard 55-galdrum sported sides of 20-gauge steel and atop of 18-gauge steel. By making both the topand bottom out of X)-gauge steel, producerssaved 4 lb of steel per drum (thickness de-creases as gauge rating increases), Althoughimpact of that change on total steel demand isrelatively minor, the cumulative effect of allsuch changes is quite substant ial , and theyplay an important, if unquantified, role in thedecline in per capita consumption of steel indeveloped economies.

Impacts of Changes in Energy Costs on Steel andOther Engineering Materials

OTA has estimated the effects of some pro- gy costs have been estimated and added in forjected fuel price changes on the costs of pro- imported steel. In addition, the energy costsducing steel in: 1) U.S. integrated plants, 2) involved in the domestic production of alumi-U.S. nonintegrated plants, and 3) plants in Ja- num, engineering plastics, and reinforcedpan, Europe, and Brazil. Transportation ener- concrete are compared with the energy costs


of domestically produced steel. In all cases,technology was assumed not to change andall electrical energy is user plantsite energy.

Four Energy Price Scenarios

Many possible combinations of high andlow pr ice -g rowth rates for five fuels arelisted in table 54. From these combinations,four scenarios were selected for comparisonof future energy costs ; these are shown intable 55.

T h e s e s c e n a r i o s a p p e a r t o b e l o g i c a lchoices to show relat ive changes in energycosts in 2000. Scenario A reflects a scarcityof natural gas, which results in a substantial-ly higher pr ice-growth rate for i t than forother fuels. Scenarios B and C reflect a scar-city of both natural gas and oil, but in sce-

nario B, electricity prices are independent ofoil and natural gas, implying coal and nucleargeneration of power. Scenario C has a highelectr ic price-growth rate too, which couldresul t f rom the high capital costs of con-s t ruc t i ng nuc l ea r and env i ronmen ta l l y ac -ceptable coal-burning powerplants . ScenarioD reflects a shortage of coking coal.

Other possibilities were not selected for avariety of reasons. In a situation where coaland coke have high pr ice-growth ra tes , theother rates would be high also, so there wouldbe no relat ive change in pr ices among thevarious fuels . A price scenario with a lowprice-growth rate for s team coal , but highrates for coke and electricity, would closelyapproximate an all-high growth-rate scenariobecause l i t t le s team coal is used d i rec t ly t o

produce engineering materials.

Table 54.—0TA Data on Future Energy Costs (in 1976 dollars)— ——— ———— — — -— —

3rd-Annual cost quartergrowth rates 1976 1980 1985 1990 2000—————— .—.—— — actual

Energy source Low High Item Base Low High Low High Low High Low High 1979a

E l e c t r i c i t y 1 0 / 0 4.7% ¢/kWh 1.9 2 . 0 2 . 3- – 2 . 1 2.9 2.2 3.6 2.4 5.7 2.37$/MBt u 5.57 5.86 6.74 6.15 8.50 6.44 10.55 7.03 16.70 6.94

Natura l gas 4% 5% $/103 ft3 1.31 1.53 1.59 1.86 2.03 2.26 2.59 3.35 4.22 1.81$/MBtu 1.27 1.48 1.54 1.80 1.96 2.19 2.51 3.24 4,09 1.76

Oil 1 ,70/o 4.80/. @US gal 28.6 30.5 34.4 33.2 43.6 36.2 55.1 42.8 88.1 35.7. . . . . . . .$/MBtu 1.66 1.77 2.00 1.93 2.53 2.10 3.19 2.48 5.11 2.07

Steam coal. . . 1 % 5% $/tonne 32.6 33.9 39.6 35.6 50.5 37.4 64.5 41.4 105.0 36.0$/MBt u 1.31 1.36 1.59 1.43 2.03 1.50 2.59 1.66 4,22 1.45

Coke. . . . . . . . 1 % 5% $/tonne 74.3 77.3 90.3 81.2 115.2 85.4 147.0 94.3 239.5 82.05$/MBtu 2.60 2.70 3.16 2.84 4.03 2.98 5.14 3.30 8.38 2.87

aFrom Energy Information Agency, monthly energy report for all Industry, January 1980. Steel Industry costs for natural gas and electricity are Iikely somewhat less thanaverage prices paid by al I domestic Industry

NOTE The original projections were made in early 1979 before very large Increases in 011 prices occurred The actual 1979 third.quarter data show that 011 prices haverisen much faster than originally anticipated but the results of the analysis are not affected qualitatively


Table 55.—Four Energy Cost-Growth Scenarios (percent annual increase)

ScenarioA: B: c: D:

all low low rate only all high high rate onlyEnergy source growth rates for electricity growth rates for cokeElectricity. . . . . . . 1 .OO/O 1 .OO/O 4.70/0 1 .OO/ONatural gas. . . . . . 4.0 5.0 5.0 4.0Oil . . . . . . . . . . . . . 1.7 4.8 4.8 1.7Steam coal . . . . . . 1.0 5.0 5.0 1.0Coke . . . . . . . . . . . 1.0 5.0 5.0 5.0



Energy Use Factors

Energy Used to Produce Domestic andImported Steel

The quantities of the various energies usedto produce steel are shown in table 56. TheU.S. integrated plant assumed here is a largemultimillion-tonne-per-year type. Energy datafor a nonintegrated, scrap/electric arc fur-nace plant were obtained by adding finishingenergies to the energy needed to produce liq-uid steel. The nonintegrated plant is assumedto produce 0,9 million tonne/yr.

All the foreign data were taken in aggre-gate form. The European data listed in table56 represent an average for the United King-dom, France, and West Germany. Data fromBrazil are incomplete: no natural gas datawere available; it is not certain whether theelectricity is total or purchased; and the val-ue per tonne of steel of the biomass energythat Brazil uses was unavailable. The UnitedStates, Japan, Europe, and Brazil all have dif-ferent production yields, mostly because eachcountry has a different product mix and vari-ous adoption rates of continuous casting.Therefore, all energy values have been nor-

Table 56.—Energies Used to Calculate Energy Costs to Produce Domestic and Imported Steeland Domestically Produced Aluminum, Plastics, and Concretea

Steel Other engineering materials (U. S.)

United Statesb Aluminum Plast ics d Concre teNon integrated (poly-

Energy source Integrated (scrap/EAF) Japan EuropeC Brazil (ingots) ethylene) (reinforced)Electricity (106

Btu/tonne) (buss bar) . 1.61 4.05 1.93 1.82 3.02e 64.1 N/A 0.274Natural gas (106

Btu/tonne) . . . . . . . . . . 6.43 5.53 — 3.24 N/A 12.98 N/A 1.11Oil (106 Btu/tonne). . . . . . 3.46 2.55 4.79 6.03 6.69 40.3 95.5 0.466Coal (106 Btu/tonne) . . . . 1.01 — — N/A — 0.57 N/A 0.476Coke f (106 Btu/tonne) . . . 19.16 0 15.62 18.36 11.1 9 14.04 N/A 1.386

aEnergy per tonne of steel shipped IS for common 70% yield from Iiquid steel eWhether this IS total or purchased electricity is unknownbFrom World Steel DynamicscAverage of United Kingdom, West Germany, and FrancedBased on yield of oil feedstock to produce polyethylene processing energy

not available

realized to a common yield of 0.64 tonneshipped per tome produced. A common yieldstatement corresponds somewhat to a com-mon shipped product, such as cold-rolledsheet.

Transportation Costs to Ship Steel tothe United States

The transportation costs of shipping steelfrom Japan, Europe, and Brazil were esti-mated from daily operating costs reported byGi lman .3 Gilman’s data include daily fuel,capital, labor, and maintenance costs at seaand in port for various freighters . He alsoprovides f reight dock-handl ing charges forJapan, England, the Third World, and theUnited States. Using Gilman’s data, it is esti-

‘S, Gilman, J~urnrd of Transport Economics and Policy, VO1.11,No. 1 (1977).

fDoes not include energy to make cokegBrazil uses fair amount of biomass, amount unknown


mated that fuel costs in 1976 dol lars areabout $0.64/tonne/1,000 statute miles. Fixedcosts , which include maintenance, deprecia-t ion, and crew, are about $2.12/ tonne/ l ,000statute miles. All fuel for transportation wasassumed to be oil.

Table 57 shows the average shipping dis-tance and oil cost to ship steel products andvarious steelmaking materials to the UnitedStates . The dis tances from Japan, Europe,and Brazil are an average for shipping to theU.S. east coast and west coast. Shipping costsfor ore were also considered. For Japan, thedistance used is the average of South Amer-ica to Japan, and Australia to Japan. A factorof 1.45 tomes of ore per tonne of steelshipped was used. One-half of Europe’s ore isassumed to be imported from a shipping dis-tance that is the average for South Africa and


Table 57.—Estimated Energy Costs for Shipment of Materials Involved in the Productionof U.S. Consumed Steela (per tonne of steel delivered)

.——Production country

U.S. integrated Japan Europe BrazilDistance ‘Distance Distance Distance

Item of shipment (1,000 miles) Cost ($) (1,000 miles) Cost ($) (1,000 miles) Cost ($) (1,000 miles) Cost ($)

Product to UnitedStates b. . . . . . . . . . . . . — 9.5

Ore to production sitec. . 1.0 $1-00 14.0Coking coal to

production site . . . . — — 6.0Oil to production site . . . 0 0 12.0

Total costs. . . . . . . $1.00

aIn 1976 dolIarsbAverage distance used from production site to east and west coasts of the

United States Estimated shipping cost was $0.58/tonne/1,000 mile


South America to Europe. The shipping dis-tance for the United States is for Great Lakesshipping. Japan’s coking coal is assumed to beimported from Canada and Australia, andher oil from the Middle East. Domestic sup-plies or relatively short shipping distanceswere assumed for the rest of the fuels. Anestimate of the total shipping costs was madefor dock-to-dock imported steel product. Anin-port rate of $0.73/tonne/d is used for anassumed total in-port time of 9 days. Freight-handling charges per tonne of steel are esti-mated from Gilman at $0.73, $1.82, and $1.21between the United States and Europe, Japan,and Brazil, respectively.

Figure 17 shows the effect of rising fuelcosts on the cost of shipping steel both to LosAngeles and to New York City. Two fuel costcurves are shown for each port-of-entry cityin accordance with a 1.7- and 4,8-percent an-nual increase in fuel oil prices. The relativeshipping distances are readily apparent inthe shipping rates, with Japan to New YorkCity being the longest and Europe to NewYork City, the shortest. These costs comparefavorably with U.S. Federal Trade Commis-sion (FTC)-reported shipping costs from Japanto New York City of $48/tonne.’ However,estimated shipping rates of $33 to $40/tonnefrom South America appear to be slightly

‘U.S. Federal Trade Commission, “rrhe U.S. Steel Industryand Its International Rivals, ” November 1977.

$ 5.04 6.8 $3.58 8.0 $4.1211.80 4,8 2.00d o 0

2.75 0 0 — —1.00 0 0 — —

—$20.59 $5.58 $4.12

‘CLast figure includes correction for amount of item per tonne steel shippeddAssume one half of European ore iS Imported

lower than FTC values. Fuel costs appear tobe relatively a small fraction of the total ship-ping costs of imported steel, from 10 to 15percent of the totals in 1976 for the six ship-ping routes shown. Depreciation is the high-est single cost, ranging from 45 to 50 percent.Freight handling is about 20 percent of thetotal cost.

The import (or export) of iron ore has lowerdock-to-dock shipping rates because of auto-mated loading and unloading equipment.With reduced in-port time and handling costs,the fuel cost of shipping ore becomes a largerfraction of the total shipping costs than it isfor finished steel products.

Energy Used to Produce Aluminum,Plastics, and Concrete

Table 58 shows the energies needed in thedomestic production of aluminum, plastics,and reinforced concrete. The aluminum dataare for ingot production. The production ofaluminum alloys from ingots requires an addi-tional 25 percent of energy of unknown typefor milling and heat treating; these processesmostly use electrical and oil-based energies,and additional use of electrical and oil ener-gies will have little influence on the compari-sons among materials.

Industrywide energy consumption data forplastics production is difficult to find because

—


Figure 17.— Percent Growth in Per Capita Consumption of Plastics, Aluminum,and Steel in Selected Countries, 1974-78

Percent

180

160

140

120

100

80

60

United StatesPlastics

Austria

Switzerland

WestGermany

Italy

Japan

Sweden

Spain

Britain

France

Norway

1974 1978

SOURCE: Economist Intelligence Unit.

1975 1978 1974 1978

Year

Table 58.—Projected Year 2000 Energy Cost for Domestic and Imported Steel and for Domestic Aluminum,Plastics, and Concrete, Using Four Price Scenarios (in 1976 dollars per tonne)

—Scenario A S c e n a r i o B Scenario C Scenario D

Item 1976 cost

Steel; U.S. integrated(BF-BOF). . . . . . . . . . . . .

Steel; U.S. non integrated( s c r a p - E A F ) . .

Steel; Japan . . . . . . . . . . . .Steel; Europe. . . . . . . . . . .Steel; Brazil . . . . . . . . . . . .Aluminum (ingot). . . .Plastic (polyethylene) . .Reinforced concrete. . . . .

$ 74.7

33.779.977.660.9

506.0168.0

8.4

Low: all

Totalenergygrowth

2000 cost ratea

$107.0 1 .5%

54.5 2.0108.0 1.3107.0 1.380.8 1.2

682.0 1.2252.0 1.7

12.9 1.8

High: gas, oil

Totalenergygrowth

2000 cost rate

$120.0 2.00/0

65.9 2.8123.0 1.8135.0 2.3104,9 2.3806.0 2.0518.0 4.8

15.5 2.6

High: gas,oil, electricity

Totalenergygrowth

2000 cost rate

$ 135.0 2.5%

104.0 4.8142.0 2.4152.0 2.8134.0 3.3

1,470.0 4.5518.0 4.8

18.1 3.2

High: coke

Totalenergygrowth

2000 cost rate—

$204.0 4.3%

54.5 2.0187.0 3.6200.0 4.0137.0 3.4758.0 1.7152,0 1.720.4 3.8

aGrowth rates are average annual growth rates for 19762000

SOURCE Office of Technology Assessment

of the multiproduct integration, the variety ofproduction processes, and the product mixthat characterize the petrochemical industry.The most common engineering plastic is ny-lon, and the most common reinforced struc-tural plastic is thermosetting polyester. Thestarting monomer for polyester is p-xylene.Overall, the most used polymer is polyeth-ylene, with ethylene as the monomer. Overthe past few years, the cost of benzene, p-xylene, and ethylene has been steadily rising.Because these monomers are byproducts ofcrude oil refineries, their prices for the mostpart are controlled by crude oil prices. Thelimited data found for polyethylene produc-tion was used for purposes of comparisonwith other materials, even though bulk poly-ethylene is only about 40 cent/lb and bulk en-gineering polymers are generally twice as ex-pensive. The yield of ethylene from oil was de-termined from published data for the C. E.Lummus process, which produces half of theworld’s ethylene. No statement could befound for other process production energies.The yield of polyethylene from ethylene isessentially 100 percent on a weight basis. Theamount of electrical energy used in polymeri-zation is minimal compared to the energy con-tent of the polymer. The assumption can bemade that no coal or coke is used in plasticproduction.

The energies required to make reinforcedconcrete were determined by using a typicalcomposition of a structural concrete found in

the Concrete Construction Handbook. Table59 presents this composition and the relativeamounts of each energy used to produce eachcomponent. The largest single energy item inconcrete is the coke required to produce thesteel reinforcing rods.

Projected Energy Costs

The energies listed in table 56 and energycosts in tables 54 and 57 were used to esti-mate total energy costs in 2000 according tothe four price scenarios. Table 58 presentsthese estimates and also lists effective annualenergy cost-growth rates.

In the steel projections, the deficiencies inthe Brazilian data make it difficult to com-pare the Brazilian results with those for theUnited States, Japan, and Europe. All fourprice scenarios show little relative change inenergy costs in 2000 for Japan, Europe, andthe United States (integrated plant). In pricescenarios with high oil price-growth rates (Band C), European and Japanese energy costsare the highest of any in 2000 because ofadded shipping costs. Japan’s high coke effi-ciency is reflected in scenario D with an ener-gy cost saving of about $16/tonne by 2000. Be-cause the reductant energy for iron ore is notincluded in the U.S. nonintegrated (scrap/electric furnace) plant data, those energycosts are substantially lower than the otherestimates.

Table 59.—Production Energies for Reinforced Concrete——

Volume “ Weight – E l e c t r i c i t yItem percent percent (buss bar) Natural gas Oil Coal Coke Total energy——Steel (rod) . . . 2.9% 90/o 0.195 0.619 0.283 0.098 1.386 2.58Cement ... . . . 12.0 15 0.066 0.487 0.183 0.378 0 1.11Water. . . . . . . 16.8 7 — — — — — —

Gravel . . . . . . . . . . 43.8 45 0.010 0 0 0 0 0.01Sand . . . 23.5 24 0.003 0 0 0 0 0.003Air 1.0 0. . . . . . . . . . . . . — — — — — —

Totals ... . . 100.0 100 0.274 1.106 0.466 0.476 1.386 3.70Percent . . . . . . . 7.4 30 13 13 37 100.4

———— . — .——-———— —— —SOURCE Off Ice of Technology Assessment.

—


Comparing absolute energy cost values forsteel, aluminum, plastics, and concrete ismuch more risky than comparing values with-in the steel industry. Because of the widevariety of common applications for these en-gineering materials, the amounts of energyand material required to manufacture a spe-cific product can vary immensely from mate-rial to material. As a result, the price per unitof weight or volume is not as significant as therate of energy cost increases. Using scenarioA, there is little difference in relative energycosts between 1976 and 2000. The annual en-ergy cost-growth rates vary between 1.2 per-cent for aluminum and 2.0 percent for steelfrom a nonintegrated plant. Plastic (polyethyl-ene) is clearly at an economic disadvantage inthe high oil cost-growth rate scenarios, as issteel from an integrated blast furnace plantin the high coke rate scenario. Because themost energy-intensive component of rein-forced concrete is steel rod, the cost-growthrates for concrete parallel the cost rates of

steel. Scenario C is probably a good estimateof how aluminum is likely to lose competitive-ness relative to steel made in integratedplants.

Conclusion

When a static technology for engineeringmaterials is assumed, U.S.-produced steelwill have the most energy cost advantageover imported steel if the prices of oil andnatural gas increase worldwide at a higherrate than those of coal or coke (scenarios Band C). Steel will have the most energy costadvantage over aluminum and plastics if theprices of electricity, gas, and oil increase at agreater rate than coal and coke. Conversely,the worst situation for U.S. (integrated) steelwill be if the price of coke is high, relative toall other energies (scenario D). This could bethe situation if domestic coke capacity con-tinues to decline and imports increase (seech. 7).

Trends in Domestic Consumption of Steeland Competing Materials

General Trends

All sectors of the economy use steel andwill continue to do so in the future. Further,because of technological developments in theproduction of alloy and specialty steels, ap-plications of these products are increasing.Nevertheless, as shown in figure 18, steelconsumption in some industrialized countriesis declining relative to consumption of alumi-num and plastics. In large measure, the effortto reduce automobile weights and, in somecases, lower prices for other materials arebehind the deceleration in steel consumption.

Trends in per capita steel consumption inthe United States (figure 19) show a veryslight increase from 0.420 to 0.450 tonnes be-tween 1950 and 1977. Measured in terms oftonnes consumed per $1,000 of real gross na-tional product (GNP) (figure 19), however,

steel consumption has declined slightly from0.120 to about 0.074 tonnes per $1,000 of realGNP between 1950 and 1977. Comparabledata for aluminum and plastics consumptionare shown in figures 20 and 21. In absoluteterms, the growth rate of steel consumptionduring the last several decades in the UnitedStates has averaged about 2 percent per yearas compared to 6 percent for aluminum and 8percent for plastics.

This slow-growth trend in steel consump-tion will probably continue. A recent, con-servative analysis projects a growth rate ofabout 1.6 percent per year from 1977 to2 0 0 0.5 (Future supply-demand forecasts areconsidered in detail in the next section. ) It is

‘Robert K. Sharkey, et al., “Long-Term Trends in U.S. SteelConsumption: Implications for Domestic Capacity,” IndustrialEconomics Review, U.S. Department of Commerce, vol. I, May1979, pp. 11-24.


Figure 18.—Trends in U.S. Apparent Consumption ofSteel, 1950-77

.60 r A1

I

1972$

1950 1955 1960 1965 1970 19751977

Year

Aluminum, 1960-7770 ~

Per $1,000 ofreal GNP in1972$

1960 1965 1970 1977

Year

200

100

50

40

30

20

expected that plastics will continue to cap-ture some steel markets in the future, but alu-minum could lose competitiveness in somemarkets. However, neither material, nor anyother, can to a significant degree replacesteel as the principal engineering material inany of the major steel-using sectors of theeconomy, and the demand for steel iS likely tOincrease over time (see the next section).

Domestic Markets

The “service centers and distributors, ”which serve a multitude of users, are thelargest market for steel. The next largest isthe automobile industry, which consumed21.7 percent of domestic steel shipments in1978, and then building construction, whichconsumed 13.7 percent. Other importantmarkets for steel mill products are equipmentand machinery manufacturers, with 10.9 per-cent of total shipments in 1978, and containerand packaging manufacturers, with 6.7 per-cent (see table 60). It is generally acceptedthat about 60 percent of steel consumption isrelated to capital expenditures.


Figure 21 .—Effects of Rising Fuel Costs on the Shippinq Costs of Steel Products From Japan, Europe, andBrazil to Los Angeles and New York

Annualgrowth /

50 — rate

0

Japan to New York City —Japan to Los Angeles ---

10 —

0 I I I 1

10 -

0 . 1 1 [ 1’75 ’80 ’85 ’90 ’95 2000 ’75 ’80 ’85 ’90 ’95 2000 ’75 ’80 ’85 ’90 ’95 2000

Year Year Year

NOTE. Due to the actual Increases in petroleum prices m 1979, shipping costs are shifted along the same axis to the right


Table 60.—Steel Shipments by Selected Market, 1967-78 (in thousands of tonnes)

TotalSteel service ship-

centers Automotive Construction Containers Machinery Rails ments

Tonnes Percent Tonnes Percent Tonnes Percent Tonnes Percent Tonnes Percent Tonnes Percent Tonnes

1967 . . . . 12,127 15.9 14,955 19.7 12,234 16.1 6,580 8.6 8,534 11.0 2,925 3.81968 . . . . 12,797 15.4 17,477 21.0 12,902 15.5 7,167 8.6 8,858 10.6 2,765 3.31969 . . . . 14,315 16.8 16,576 19.5 12,649 14.9 6,481 7.6 8,771 10.3 3,033 3.61970 . . . . 14,535 17.7 13,129 15.9 12,111 14.7 7,052 8.5 8,153 9.9 2,810 3.51971 . . . . 13,083 16.6 15,857 20.1 12,346 15.6 6,541 8.3 7,824 9.9 2,725 3.41972 . . . . 15,235 18.3 16,523 19.8 12,375 14.9 6,001 7.2 8,761 10.5 2,476 2.91973 . . . . 18,487 18.3 21,058 20.8 15,591 15.4 7,085 7.0 10,404 10.3 2,928 2.91974 . . . . 18,503 18.6 17,168 17.3 15,971 16.1 7,454 7.5 10,468 10.5 3,099 3.11975 . . . . 11,519 15.9 13,799 19.0 10,926 15.1 5,490 7.6 7,959 11.0 2,859 3.91976 . . . . 13,298 16.4 19,365 23.9 10,893 13.4 6,271 7,7 8,739 10.8 2,772 3.41977 . . . . 13,909 16.8 19,493 23.6 10,886 13.2 6,092 7.4 8,964 10.8 2,936 3.61978 . . . . 15,760 17.8 19,277 21.7 12,127 13.7 5,497 6.7 9,667 10.9 3,224 3.6

aincludes agricultural and electrical

SOURCE American Iron and Steel Institute

76,09583,31385,14682,35478,94383,267

101,06799,29172,52181,12882,90688,827


The automobile market for steel is growingat a rate of 1.5 percent per year, the buildingconstruction market at 2.1 percent, the equip-ment and machinery market at 1.7 percent,and the container and packaging market at0.8 percent (table 61). Major declines in steelconsumption are occurring in transportation,oil and gas, military goods, and export mar-kets. Steel imports have grown spectacularly,but there are no statistics on how that steel isused. Commonly used data on steel consump-tion also do not take into account the steel em-bodied in other imported products, such asautomobiles.

Automotive Industry

The automobile industry is an importantsteel market not only for the amount it con-sumes but also for the form of its consump-tion. The type of steel demanded has an im-portant bearing on the technologies used insteel production. Automotive applications ac-count for more than 40 percent of sheet andstrip shipments and the auto industry isclearly the key segment in future sheet de-mand. Thus, it will play a major role in deter-mining the kind of raw steel capacity the steelindustry needs to add. This is an especiallypertinent point because the requirements forsteel by domestic motor vehicle producerswill continue to grow, albeit at a more modestrate than in the past.

The fundamental reason for the slowdownin future steel demand by the automobile in-dustry is the need to manufacture lighter carsthat will meet Government fuel-efficiencyregulations. Although there has been littlechange in average steel consumption for vansand light trucks in the past few years, theytoo will be affected by increasing fuel costsand energy-conservation measures that willmake steel substitutes attractive. There is acontinuing effort to find appropriate lighter-than-steel substitutes like graphite-rein-forced plastics, glass-reinforced polypropyl-ene, and aluminum. In 1960, the average au-

tomobile incorporated 25 lb of plastics, and in1979, approximately 200 lb; the forecast isthat in 2000a car will contain 750 to 1,000 lbof plastics.

A number of factors may mitigate the rapidrate of substitution for steel in cars, Otherusable materials have higher productioncosts and lower rates of production per unitof time than steel. Potential supply shortagesof aluminum and the dependence of plasticson petroleum feedstocks are also significantfactors. The cycle of automobile modelchanges and tool design also make any shift tonew materials a gradual process. Table 62presents a recent General Motors forecast ofaverage material consumption per passengercar from 1978 to 1987. Such forecasts tend tochange frequently, but this one shows declin-ing steel consumption to be a function ofdown-sizing, not of major materials substitu-tion, Steel’s share of the vehicle net materialweight remains relatively constant, eventhough the amount of steel used decreasessubstantially.

New technologies in steel materials forautomotive applications also make steel morecompetitive with aluminum and fiber-rein-forced plastics. The longstanding emphasis ofthe domestic steel industry on product couldhave substantial future payoffs in this mar-ket. Substitution for steel by other materialsis, and will continue to be, offset by the avail-ability of new types of alloy steel, such ashigh-strength low-alloy and dual-phase steels,and eventually perhaps by superplastic steelsand amorphous alloys.

New fabrication techniques being consid-ered also will sustain the use of steel in auto-mobiles. These combine steel, aluminum, andplastics in relatively low-cost composites.Steel/plastic sandwich constructions, all-steel honeycomb constructions, and steelchannel sections filled with polyurethaneplastic foam all provide suitable combina-tions of strength and stiffness with reduced


Table 61 .—Historical Growth Rates for Steel ProductShipments by Markets, Imports, Exports, and

Apparent Consumption, 1951-77 (percent per year)

Average annualcompound growth rate

CompoundMarket segment Trendlinea analysisa

— — — .Building construction . . . . . . . . . . 1.9% 2 . 1 %Automobile . . . . . . . . . . . . . . . . . . . 1.6Air, sea, and rail transportation. . . – 0.5 – 0.8Equipment and machinery

(industrial and electrical) . . . . . . 1.8 1.7Agriculture and mining. . . . . . . . . . 1.4 1.2Oil and gas industry . . . . . . . . . . . . – 1.8b

– 1.8 b

Containers and packaging. . . . . . . 0.8 0.8Consumer and commercial

products . . . . . . . . . . . . . . . . . . . 0.6 0.4Military. . . . . . . . . . . . . . . . . ... -1 .1 – 3.6Service centers and distributors. 1.7 1.6Steel converters . . . . . . . . . . . . . . . 0.7 0.9Other shipments. . . . . . . . . . . . . 4.1 4.4

Total domestic shipments. ., . . . . 1.4 1.3Steel mill product exportsc . . . . . -0 .1 – 0.3Total U.S. mill shipments. . 1.4 1.2Total exportsd ., . . . . . . . . . . . . . . . 0.6 0.6Total imports. . . . . . . . . . . . . . . . . . 8.6 13.1Apparent U.S. consumption . . . . . 2.1 2.0

aBoth methods are based on annual average consumption during 5-year periodsfrom 1951.75 The compound analysis IS simply the average annual rate ofchange required to Increase (or decrease) average annual consumption fromthe level prevalent in 1951.55 to that in 1971.75 The trendline growth rate IS de-rived from regression analysis of 5-year annual average shipment data, trend.line analysis of annual data yields almost Identical results

blnnacurate due to the importance of imported products and service centers insupplying this market segment

CAs reported by the American Iron and Steel Institutedlncludes steel mill product exports


weight. Because of such developments in fab-rication techniques and the developments innew materials, steel will likely continue todominate the automobile market, even thoughthe use of aluminum and plastics will grow.One forecast indicates 1985 steel use in theautomobile sector at about the same level asin 1978.6

The projected growth of automobile indus-try consumption of steel to 2000 is shown intable 63. The projections were calculated byassuming growth rates for passenger carsand light trucks. Future steel consumption forthese vehicles is then compared to 1978 con-sumption (determined by the same method) toderive the implied growth rate for steel. Thepresent economic instability and various ex-ogenous factors, such as future oil pricesand import penetrations, subject any projec-tion to considerable uncertainty, and this oneshould be regarded with suitable caution.

A more general belief is that total steel con-sumption will decrease. One recent forecast,for example, indicated a decrease by 1985 of1,185 lb in the conventional iron and steel

‘J. J. Tribendis and J. P. Clark, “An Analysis of the Demandfor Steel in the U. S.: 1978-1985,” Matericds and Society, vol. 3,No. 4, 1979.

Table 62.–Material Consumption in Passenger Cars as Percentage of Total Weight, 1978-87(net materials consumption as percentage of net weight)

—1978 1979 1980 1981 1982 - 1983 1984 1985 1986 1987

Steel. . ~. . . . . . 59.5% 60.00/0 60.2% 60.0% 60.2% 61.3% 60.4% 60.50/o 60.60/0 59.90/0

Cast iron . . . . . 1 7 . 9 17.1 1 6 . 2 1 6 . 0 15.1 1 2 . 9 1 2 . 2 1 0 . 7 1 0 . 5 10.4Aluminum . . . . 2.9 3.2 3.6 3.9 4.2 4.8 5.5 6.1 6.3 6.4Plastics . . . . . . 5.4 5.6 5.7 5.9 6.6 6.7 7.6 8.3 8.5 9.0Glass . . . . . . . . 2.7 2.3 2.7 2.7 2.6 2.7 2.8 2.8 2.8 2.8Other . . . . . . . . 11.6 11.9 11.5 11.6 11.2 11.6 11.5 11.7 11.4 11.5

Total. . . . . 100.0 100.1 99.9 100.1 99.9 100.0 100.0 100.1 100.1 100.0Steel weight (lb/unit)

Gross a . . . . . 2,871b 2,831 2,763 2,734 2,715 2,666 2,526 2,385 2,364 2,316Net. . . . . . . . 2,083 2,057 2,004 1,986 1,958 1,936 1,825 1,736 1,721 1,688

aGross weight = amount of steel purchased Net weight = amount of steel in automobileb1978 steel usage for pickups and vans was.

Pickups VansGross 3,525 3,428Net 2,580 2,596

SOURCE General Motors Corp , administrative services engineering staff, Apr. 2, 1979

Ch. 5—Past and Future Domestic Use of Steel . 177

Table 63.—Steel Usage in Passenger Cars and Light Trucks, 1978,1985,2000—— ———— —----

Passenger cars——-1978 baseUnit production (1 ,000) . . . . . . . . . . . . . . .Gross steel consumption per unit (kg) .Gross steel consumption (1 ,000 tonnes).1978-85Case A—cars: 2.5% growth

trucks and vans: 3.0% growthUnit production (1 ,000) . . . . . . . . . . . . . . .

G r o s s s t e e l c o n s u m p t i o n p e r u n i t ( k g )

G r o s s s t e e l c o n s u m p t i o n ( 1 , 0 0 0 t o n n e s ) .

Case B—cars: 1.5% growthtrucks and vans: 3.0°A growth

Unit production ., . . . . . . . . . . . . . . . . .Gross steel consumption per unit (kg) .Gross steel consumption (1 ,000 tonnes).Case C—cars: 2.5% growth

trucks and vans: 3.0% growth—700/. steel reduction in vans

and trucksUnit production . . . . . . . . . . . . . . . . . .Gross steel consumption per unit (kg)Gross steel consumption (1 ,000 tonnes).1978-2000Case A—cars: 1.5% growth

trucks and vans: 2.0% growthUnit production (1 ,000) . . . . . . . . . . . . .Gross steel consumption per unit (kg)Gross steel consumption (1 ,000 tonnes).Case B—cars: 1.O% growth

trucks and vans: 1.5% growthUnit production (1 ,000) . . . . . ... .Gross steel consumption per unit (kg)Gross steel consumption (1 ,000 tonnes).

Growth rates are average annual compound rates -

N R = not relevantSOURCE Off Ice of Technology Assessment

9,1531,302

11.917

11,1521,082

12,062

10,3111,082

11,152

11,1521,082

12,062

13,943974

13,576

12,947974

12.606

materials that go into an average automobile.The loss would be partially offset by an in-crease of 450 lb in high-strength low-alloysteel. 7 A factor which most forecasts have nottaken into account is the possible growth indomestic production of automobiles nowmade in other countries. This could lead to anet increase in purchases of domestic steel,especially for foreign-owned plants in inlandlocations in the United States. However, onestudy foresees no growth in automobile steeluse in the 1980’s even if Japanese plants inthe United States buy one-half their steel do-mystically.8

“Iron Age, Jan. 8, 1979, p. 25. Another forecast, by ArthurAnderson & Co., leads to the same level of steel use per auto,1,400 lb, but by 1990; American Metal Market, Dec. 24, 1979.

‘C. A. Bradford, “Steel Industry Quarterly Review,”’ Febru-ary 1980, hferrill, Lynch, Pierce, Fenner & Smith, Inc.

ImpliedPickups Vans Total steel growth—.——

2,791 698 N.R. N.R.1,599 1,555 N.R. N.R.4,462 1,085 17,708 N.R.

3,536 884 N.R. N.R.1,599 1,555 N.R. N.R,5,652 1,374 19,099 1.1 %

3 , 2 7 0 8 1 8 N.R. N.R.1,599 1,555 N.R. N.R.5,227 1,272 17,651 0.1 0/0

3,536 884 N.R. N.R.1,559 1,555 N.R. N.R.5,088 1,237 18,388 0.6%

4,749 1,190 N.R. N.R.1,295 1,260 N.R. N.R.6,164 1,498 21,238 1 .0%

4,421 1,105 N.R. N.R.1,295 1,260 N.R. N.R.5,726 1,391 19,724 0.50/0

Building Construction

Materials competition in the constructionsector is considerable. The amount of steelconsumed in building and construction is un-derstated because some is purchased by serv-ice centers and distributors, and then sold tobuilders. Service center steel shipments toconstruction markets are not reported direct-ly, but various sources which include esti-mates for these shipments, indicate the ac-tual amount of steel used in construction isvery large (see table 64). The proportion ofshipments to this sector as a percentage oftotal steel shipments has remained relativelystable over the last three decades, and avail-able information suggests that the volumeconsumed in construction activity will con-tinue at the historical rate. However, if major


Table 64.—Estimated Usage of Iron and Steel Construction Materials (1,000 tonnes)

1974 1975 1976 1977

Concrete reinforcing bars . 4,624 3,325 3,516 3,790Galvanized sheets. . . . . . . . . . . 5,537 3,374 4,698 5,131Cast iron pipe

Pressure. . . . . . . . . . . . . . . . . 1,776 1,138 1,210 1,456Soil . . . . . . . . . . . . . . . . . . . . 702 539 597 619

Fabricated steel products . 4,141 3,932 3,372 3,162Plates and structural shapes 16,507 15,901 16,354 10,793Piling. . . . . . . . . . . . . . . . . . . . . 600 385 299 318

Total . . . . . . . . . . . . . . . . . . 33,887 28,594 30,046 27,856

SOURCES “Iron and Steel, ” MCP-15 Mineral Commodity Profiles, Bureau of Mines, U S Department of the Interior, July 1978“Iron and Steel, ” a chapter from Mineral Facts and Problems, 1975 edition, Bureau of Mines reprint from Bulletin667, U S Department of the interior“Steel MiII Products, ” Current Industrial Reports, MA-33B (76).1, issued September 1977. Bureau of the Census,U S Department of Commerce“Iron and Steel Products Shipments, Bookings and Backlog,” Bureau of Mines, U S Department of the Interior,January/February 1978

capital spending for the U.S. industrial baseoccurs during the next decade, then this mar-ket could consume increased amounts ofsteel. Much steel for construction is used as acomponent of concrete in the form of rein-forcing bar. Three basic types of commercialconstruction use steel in different amounts:

● standard steel construction, in which afloor deck is concrete and strong enoughto span the high-strength steel beams onwhich it rests;

● composite construction, in which steelshear connectors are welded throughthe concrete deck to the steel beamsbelow; and

. concrete construction, in which a greatmany steel reinforcing bars are used totake care of tensile stress.

Table 65 shows the variation in the amountof steel, energy, and labor used in these threetypes of construction. In spite of these differ-ences, an analyst notes that “assuming alarge project with many repetitive sections,

Table 65.—Summary of Materials, Energy, and LaborUsed in Comparative Floor Bay Construction

Labor Energy Materials

Commercial Man- Btu X Steel Concretebuilding bays hours/ft 2 103/ft2 Ib/ft2 ft3/ft2

Standard steel . 0.49 284 10.3 0.33Composite steel 0.44 250 8.9 0.33Concrete. . . . . . 0.36 172 5.7 0.80

SOURCE B. Hannon, “Materials, Energy, and Labor Impacts in Typical Building Floor Bay Assembles, ” University of Illinois, August 1978

the dollar costs of the three systems are ap-p rox imate ly the same . ’9 In general , thechoice of system is made for other reasons,including material availability, labor avail-ability, and scheduling needs.

Containers and Packaging

This segment of the steel market has con-sumed a constant share of steel shipments.Nevertheless, steel’s share of the total pack-aging market has declined in the last quartercentury. From 1972 to 1975, aluminum’sshare of the can market increased from 13 to25 percent.10 The growth of both aluminumand plastics has relied heavily on this market.For instance, containers and packaging ac-counted for 10 percent of total aluminumshipments in 1960 and 20 percent in the mid-1970’s; packaging accounts for 25 percent oftotal plastics use, The growth of aluminumand plastics in packaging has come in partfrom new products and from products not ap-propriate for steel, but both materials havealso penetrated steel markets.

Because aluminum prices may escalatesharply, it may not continue to displace steelin the container market at the historical level;thinner steels are being used to retain themarket share on a unit basis. One study hasforecast a 1985 consumption level of steel for

‘B. Hannon, “Materials, Energy and Labor Impacts in Typi-cal Building Floor Bay Assemblies, ” University of Illinois, Au-

gust 1978.“’U.S. Bureau of the Census,


this market at about 10.4 million tonnes, a 30-percent increase over 1978. ’1

Equipment and Machinery

For most equipment and machinery appli-cations, steel has no major competitors. Thismarket has become somewhat less steel in-tensive over time, though. In large part, this isbecause of the rapid growth of computer-aided machinery, which uses less steel perunit of output than machinery relying on me-chanical components. Also, the United Stateshas lost some of its export market in machin-ery, and domestic industrial capital spendinghas been at relatively low levels. No signifi-cant growth is expected in this sector through1985 unless there is a turnaround in capitalspending .12

Other Consumers of Steel

Agriculture and Mining.—Steel has almostno substitutes for agricultural and miningequipment. Nevertheless, that market hasonly retained its share of total steel productshipments.

Air , Sea, and Rai l Transportat ion.—Thetransportation market segment has declinedin relation to total steel demand. Little newrail mileage has been laid in the United Statesin recent years, and railroad expenditures

“Tribendis and Clark, op. cit.“Ibid.

for maintenance have been severely de-pressed by that industry’s economic malaise.This trend appears to be changing now, andrails could represent a growing steel marketin the next decade.

Because of weight restrictions, use of tita-nium and aluminum is more important thansteel in aircraft manufacture.

Although the worldwide shipbuilding in-dustry has enjoyed intermittent booms intanker construction, particularly growth intanker size, the U.S. industry has not cap-tured much of this market. The Japanese steelindustry reaped major benefits from the Japa-nese shipbuilding industry’s role in tankerconstruction. In fact, demand for steelplateserved as a “base load” for new steel capaci-ty during the 1960’s and 1970’s. However, thefuture trends in domestic steel demand forthis use are expected to continue at the his-torical rate.

Consumer and Commercial Products.—Therate of household formation directly affectsdemand for steel because it governs thecourse of appliance sales. Plastics, however,have provided steel with competition in somemajor appliance components, such as refrig-erator door liners and washing machine tubs.The best estimate of future demand for steelby the consumer sector indicates a continua-tion of past trends, with relatively littlegrowth.

Domestic Supply-Demand Forecasts for Steel

There are many uncertainties in supply-de-mand forecasting for a commodity such assteel, which is very sensitive to general do-mestic economic conditions and world supplyfactors. Nevertheless, relatively good agree-ment exists among various steel demand fore-casts. Table 66 shows forecasts from severalsources and, with the exception of Wyman’sforecast,’ ] the range is not wide. For 1985, thedemand forecasts vary from a low figure of

—1‘Shearson Hayden Stone and J. C. Wyman, “Gold, Technol-

ogy and Steel, ” February 1979.

114,7 million tonnes, representing the opinionof industry itself, ” to a high of almost 133.4million tonnes projected by Tribendis andC l a r k15 on the basis of a high-economic-growth scenario. For 1990, the industry pro-jects steel demand in the United States at125.0 million tonnes and Chase Econome-

“American Iron and Steel Institute, “Steel at the Crossroads:The American Steel Industry in the 1980s, ’” 1980: U.S. SteelCorp., Steelweek, Feb. 11, 1980.

1-Tribendis and Clark, op. cit.


Table 66.—U.S. Steel Demand and Capacity, Comparison of Various Forecasts, 1980-2000 (millions of tonnes)Demand (total consumption = domestic shipments – exports + imports) Capacity

Bureau Shearson WorldCom- Hayden Industry Steel

Year M i n e sa C h a s e b DRIc m e r c ed Stone’s analysts f A I S lg MITh C h a s eb Dynamics’ AISl g MITh

1980. . . . 110.5T 111.0 141.3 105.2 107.1 105.5 94.1111.7C

1981 . . . . 145.91982. . . . 150.71983. . . . 155.6 106.61984. . . . 160.61985. . . . 119.3 124.7T 119.4 165.9 117.9 114.7 133.4 High 111.8 115.8

124.1 C 121.7 Base112.0 Low

1986. . . . 126.8 117.81990. . . . 137.3 137.1T 129.3 131.5 125.0 129.6 121.8

129.4C1995. . . .2000. . . . 151.1

aBureau of Mines, Iron and Steel, MCP-15, JUIY 1978, p. 25.bMichael F Elliot-Jones, “Iron and Steel in the 1980’s The Crucial Decade,”

Chase Econometric Associates, Inc. Apr. 19, 1979 (assumes yields from raw:1977 = 72, 1986 = 74, 1990 = 77)

CDRI Long Range Forecasting Model cited in (d), T = trend, C = cycle.dRobert K. Sharkey, et al, “Long Term Trends in U.S. Steel consumption: lmli-

cations for Domestic Capacity, ” Industrial Economics Review, U S Depart-ment of Commerce, vol. 1, May 1979, pp. 11-24

eShearson Hayden Stone and J C Wyman, “Gold, Technology and Steel, ” Feb.ruary 1979 (Includes Indirect steel Imports and steel used in foreign industriesto construct factories producing exports to the United States

tries” at 137.3 million. Only one steel demandprojection, that of the U.S. Bureau of Mines, 17

is available for the period beyond 1990. Thisforecasts steel demand in the United Statesfor 2000 at 151.1 million tonnes.

The low projections of AISI and the U.S.Department of Commerce18 are based on lowgrowth rates in steel demand, 1.5 percentand 1.6 percent annually, respectively. TheTribendis and Clark low-growth-rate scenar-io calls for a 1.9-percent annual increase insteel demand, their high-growth scenario hasa growth rate of 3.7 percent annually.

The methodologies used in these projec-tions vary. For example, the Bureau of Minesused the following methodology:

In a mature economy, such as that of theUnited States, it is believed that iron andsteel demand closely follows population. Thedemand forecasts were therefore based on acurvilinear regression of steel demand (steelmill shipments plus imports) on population.The relatively rapid rise in steel usage at the“Michael F. Elliot-Jones, “Iron and Steel in the 1980s: The

Crucial Decade,” Chase Econometric Associates, Inc., Wash-ington, D. C., Apr. 19, 1979.

‘“U.S. Bureau of Mines, Iron and SteeI, MCP-15, July 1978, p.25,

‘HR. K. Sharkey, et al., op. cit.

‘Cited In (d)gAmerlcan Iron and Steel Institute, S/ee/ at the Crossroads The Arnerjcan Stee/

/ndustry In 1980’s, 1980, assuming raw yields of 1960 = 72, 1985 = 74, 1990= 77 and an operating rate of 900/shJ J Tlbendls and J p Clark, “An Analysls of Demand for Steel In the U S

1978.1985,” A4aferia/s and Soc/ety, VOI 3, No 4, 1979 Demand based on threeeconomic scenarios with Imports a variable Capacity calculated from maxi.mum domestic shipments (mln Imports of 140/. ) assuming 900/. operatingrate

‘World Steel Dynamics, Apr 25, 1979 (assuming raw yields of 1980 = 72, 1983= 73)

beginning of the 20th century, caused by theadvent of the automobile, was eliminated bybeginning the regression line with 1915 data,establishing a 62-year trend. The demandprojections for 2000 were based on Bureauof the Census population projections Series I-111, Although the demand data used in the re-gression included exports, the projectionswere made on the basis of domestic con-sumption excluding exports, Exports wereassumed to remain at the average of 3 per-cent of steel demand (including exports) es-tablished over the past few years. 19

Apparently the Bureau of Mines did not takeinto account any surges in capital spending.

T h e D e p a r t m e n t o f c o m m e r c e f o r e c a s tmethodology was as follows:

The forecast model for apparent steel con-sumption for 1980, 1985 and 1990, developedby the Office of Industrial Economics (OIE)for this study, is a partial adjustment multi-ple linear regression model with three ex-planatory variables: (1) residential fixed in-vestment, (2) non-residential fixed invest-ment, and (3) motor vehicles and parts,

One advantage of using major componentsof GNP as as explanatory variables is that

W.S, Bureau of Mines, op. cit., P. 23.

—


they have been projected through 1990 usingthe Data Resources, Inc., (DRI) long-termmacroeconomic model. The DRI model pro-vides alternative growth paths for the econ-omy. The higher growth rate scenario istermed “trend,” which is a stable growthlong-run simulation of the DRI quarterly mod-el of the U.S. economy, and a lower growthrate is termed “cycle,” which is a less op-timistic view of long-term growth embodyingperiods of recession and strong growth.’”

The reason for the high-demand forecast ofWyman can be found in several unusual, butpe rhaps u l t ima te ly co r r ec t , unde r ly ing a s -sumptions:

In assessing the real amount of steel usageassociated with the U.S. economy, one mustcount both the indirect imports of steel andthe steel used to construct the factories inwhich the foreign cars used in the U.S. werebuilt. Similarly, steel used for overseasplants that exported steel directly to the U.S.must be included, as well as the shipyardswhich were “exported” from the U.S. Inshort, we end up noting that since 1955, i.e.,since capital spending of the industrial worldbegan to outpace that of the U. S., domesticsteel consumption statistics became progres-sively understated.

. . . whereas it typically is assumed thatsteel consumption has grown by 2.39 percentannually since 1955, we think it, in fact, hasgrown by more, and perhaps by as much as3.26 percent. The latter figure still would bewell below the actual 5.15 percent annualgrowth for the Free World . . . Thus, our cal-culations indicate that U.S. steel consump-tion grew 36.7 percent less quickly than thatof the Free World (instead of 53.6 percent).Steel consumption of the U.S. should havegrown at a slower rate than that of the FreeWorld because the U.S. is the more matureeconomy and because substitution of steel byother materials is probably much more ad-vanced in the U.S. than in other areas. How-ever, a U.S. consumption growth rate of lessthan half that of the Free World, as the tradi-tional statistics show, is much harder to un-derstand than a growth rate of somewhatless than two-thirds of the Free World’s.Therefore, we think our estimated growth

‘[’R. K. Sharkey, et al., op. cit.

rate is more plausible than the traditionallyassumed growth rate for steel consumptionin the U.S.21

There are few domestic steel produc t ioncapac i t y p ro j ec t i ons . Such p ro j ec t i ons i n -volve major uncertainties: the extent of im-port penetration and of investment, moderni-zation, and expansion in domestic capacity.World Steel Dynamics 22 has projected domes-t ic s teel industry capacity at 106.6 mil l iontonnes in 1985. Chase Econometr ic Associ-a tes23 estimates capacity will be 117.8 milliontonnes in 1986 and 129.6 million tonnes in1990, and industry” itself forecasts 100.7 mil-lion tonnes in 1985 and 109.7 million tonnes in1990. The industry forecast assumes that as u b s t a n t i a l m o d e r n i z a t i o n a n d e x p a n s i o nprogram takes place (see ch. 10).

To compare the capacity and demand pro-jections, it is necessary to assume an operat-ing rate; a 90-percent operating rate assump-tion yields a realistic production level. Thedemand projections exceed those for domes-tic production, and the difference is made upby imports . Most forecasters assume somelevel of imports, but Tribendis and Clark usedthe i r mode l ing t echn ique t o gene ra t e im-p o r t s .25 Their model predicted an import levelof 18.1 million tonnes for 1979, when the ac-tual value was 15.9 million. 26 In their modera-te-growth case and without import controlsother than the t r igger-price mechanism, im-ports capture 26 percent of the domestic mar-ket in 1985, a very high fraction; domesticsteel shipments would then be 90.1 mil l iontonnes. If they assume a lower level of im-ports, 141 percent, domestic shipments wouldbe 104.2 million tonnes in 1985. AISI fore-c a s t s a s s u m e a 1 5 - p e r c e n t i m p o r t l e v e l ,which results in domestic shipments of 102million tonnes in 1985.

Zlwyman, op. cit. Wyman arrived at his U.S. steel demandprojections by extrapolating 1956-76 data by use of “best fit”curves.

22 Wor1d Steel Dynamics, Apr. 25, 1979.2JM. F. Elliot-Jones, op. cit.~iAmerican Iron and Steel Institute, op. cit.zsTribendis and Clark, oP. cit.ZbAmerjcan Meta~ Market, Jan. 31, 1980.


The various supply-demand projectionssuggest two alternate possibilities for thenext 10 years.

1. The AISI low-demand-growth (1.5 per-cent) forecast with current levels of im-ports (15 percent) , i f incorrect , couldlead to inadequate domestic steel capac-ity— if demand is higher because of asubstant ial capi tal-spending period orfaster economic growth, for example.With 1990 steel consumption of 137 mil-lion tonnes (forecast by Chase Econome-trics and DRI) and capacity of 122 mil-lion tons (by AISI), imports would be 20percent, or 27 million tonnes; this wouldbe about 50 percent more than the maxi-mum of actual imports to date . I f theworld steel oversupply of the past fewyears does not persist, and this is quitelikely, then imports would be both costlyand difficult to obtain, Operating ratesand profitability for the domestic indus-try would be high, particularly if Gov-ernment policies al low domestic pricesto rise to meet high import prices. TheAISI fo r eca s t p r e sumes a subs t an t i a l

modernizat ion and expansion programfor the next 10 years . Without such ap rog ram domes t i c c apac i t y wou ld beonly 85 million tonnes in 1988 (AISI).W i t h a h i g h d e m a n d o f 1 3 7 m i l l i o ntonnes, this would lead to a more than44-percent level of imports in 1990.

2. Alternatively, the domestic capacity in1990 might be greater than the AISIforecast. This could result from aggres-s ive non in t eg ra t ed p l an t cons t ruc t i onand possibly from an influx of foreigncapital into s teelmaking. If the ChaseEconometrics capaci ty forecast of 130million tonnes is coupled with the low-de-mand forecast of AISI, then either im-ports would drop to 7 percent with a do-mest ic operat ing rate of 90 percent orope ra t i ng r a t e s wou ld dec rea se t o 82percent while imports are maintained at15 percent, If the Chase capacity fore-cast is coupled with their high-demandforecast of 137 million tonnes, the 15-percent import level is compatible with adomestic operating rate of 90 percent.

CHAPTER 6

New Technologiesfor the Steel Industry

Contents

PageSummary ,*. *.** ... ****e*************** 185

Introduction and Background . ............186Steel Industry Technology . ...............186Technological Change in the Industry. .. ....187Impacts of Changes in Raw Materials,

Energy Sources, EnvironmentalRequirements, and Capital Requirements .. 188

International Comparisons of Productionand Energy Consumption . . . . . . . . . . . . . . . 189

Energy Consumption in the Domestic SteelIndustry. . . . . . . . . . . . . . . . . . . . . . .......191

Characterization of New Technologies. .. ...192Definitions. . . . . . . . . . . . . . . . . . . . . . .......192Potential Technological Changes and

Opportunities . . . . . . . . . . . . . . . . . . . . .. ..193

Radical and Major Technologies . ..........194Direct Reduction. . . . . . . . . . . . . . . . . . . . . .. .194Direct Steelmaking. . . . . . . . . . . . . . . . . . . . . .208Plasma Steelmaking . . . . . . . . . . . . . . . . . . . . .209Direct Casting. . . . . . . . . . . . . . . . . . . . .. ....210

Incremental Technologies . ...............211External Desulfurization . ................211Self-Reducing Pellets . . . . . . . . . . . . . . . . . . . . 211Energy Recovery. . . . . . . . . . . . . . . . . . . . . .. .212Continuous Rolling . .....................212

PageHigh-Temperature Sensors . ..............213Computer Control . . . . . . . ................213Processing of Iron Powders . ..............213Plasma Arc Melting . ....................213

Long-Range Opportunities ... ... .* C...00 ..214

Changes in Steel Products .. .. .. ... ... ...”214Incremental Product Developments. . .......215Major Product Developments. . ............215Development problems. . .................216Summary . . . . . . . . ......................217

List of Tables

Table No. Page67. Capacities of Steel Plants in the United

States, 1978 . . . . . . . . . . . . . . . . . . . . . . . 18768. Unit Material and Energy Inputs per

Tonne of Steel Shipped, United States,1977 .................0.. . . . . . . . . . 190

69. Steel Product Mixes for VariousCountries, 1976 . . . . . . . . . . . . . . . . . . . . 190

70. Comparison of Operating Parameters,1976 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190

71. Aggregated Industry Apparent EnergyConsumption for Steelmaking byCountry, 1976. . . . . . . . . . . . . . . . . . . . . . 191

.

Table No. Page72. The American Steel Industry and the

Nation’s Energy Consumption. . . . . . . . . 19173. Steel Industry Energy Consumption by

Source . . . . . . . . . . . . . . . . . . . . . . . . . . . 19174. The Mix of Energy Sources . . . . . ... , . . 19275. Potential Technological Changes in the

Steel Industry● ● ● ● ● ● ● ● ● ● * * ● ● ● ● ● ● ● ● ● ● 193

76. Direct Reduction Plants Constructed orScheduled for Completion by 1980 ...,. 196

77. Distribution of World Direct ReductionCapacity, 1980

● ● ~ * ● ● ● ● ● ● ● ● ● * ● ● ● ● ● ● . 19878. Operating Direct Reduction Plants Based

on Coal or Coke Breeze. , . . . . . . . . . . . . . 19779. Characteristics of Direct Reduction

Processes and Electric FurnaceConsumption 9 * * * . . * * * * * * . * ...*,..,* 197

80. Energy Consumption of Gas DirectReduction Processes ., . . . . . . . . , ... , . 198

81. Energy Consumption of Direct ReductionRotary Kilns

● . . . . . . . . . . . . . . . . . . . . . . 19882. Energy Costs for Direct Reduction

Processes Based on OTA Energy Costs. . 19883. Three New Swedish Steelmaking

Processes● ● ● ● ● ● ● ● * * * ● ● * ● ● ● * ● * * * ● ● ● 201

84. Capital Costs of Direct ReductionProcesses * * ● ● ~ @ * ● ● ● ● ● . ● . * ● ● ● ● ● ● ● * ● 202

85. Total Steelmaking Costs in 1978Dollars per Tonne of Raw Steel. . . . . . . . 204

86. Capital Costs for Different SteelmakingRoutes * ***..........**,,,,****,**, 204

87. Typical Specifications for DirectReduced Iron Used in Steelmaking 205

88. Projections for Direct Reduction Growth 208

List Of Figures

Figure No. Page22. Schematic Flow Chart for Integrated and

Nonintegrated Steelmaking. . . . . . . . ,., 18823. Schematic Diagram of Direct Reduction

Processes ● . * * * *, * *, * ., . *,, ...**.** 19524. Projected Energy Costs to Produce a

Tonne of Direct Reduced Iron . . . . . . . . . 18925. Two New Coal Direct Reduction

Processes ● ● ● ● ● ● ● . ● ● ● ● ● ● * . ● * : . ;“. ● ● ● 20026. Three New Swedish Ironmaking

Processes ~ * ● ● * ● ● ● ● ● ● ● ● ● ● ● . ● ● 0. ● ● . + 20227. Specific Investment Costs per Tonne of

Direct Reduced Iron. ., .. ., . ....,,.., 20228. Specific Investment Costs for Different

Routes of Steelmaking per Tonne of RawSteel Capacity ● ● ● ● ● ● ● ● ● ● ● ● ● ● * ● ● ● ● ● + 203

29. Steelmaking Costs Upstream andExclusive of Continuous Casting forDifferent Production Routes per Tonne ofRaw Steel . . . . . . * ... , . . . . . . . . . . e . . . 203

30. Comparison of Coal Gasification DirectReduction Steelmaking to ConventionalBlast Furnace and NonintegratedSteelmaking . . . s . . . . . . . . . . . . ● . . . . . . 203

31. Schematic Diagram of DirectSteelmaking System . ● ● . ● ● . ● ● ● . ● ● . ● ● . 208

32. Plasma Steelmaking System . . . . . . . . . . 210

CHAPTER 6

New Technologies for the Steel Industry

Summary

Steel technology has entered a period ofpart icular vi tal i ty, Whether new processesare being stimulated by raw material and en-ergy changes or whether they are creat ingopportunit ies to use new raw materials andenergy sources is not important: the technol-ogy of the industry is not static. Relativelysmall integrated systems based on coal re-ductants and electr ical energy are feasiblenow, and the opportunity to add capacity insmall increments, where i t is needed, canlower the industry's capital intensity. Largeexist ing integrated systems can adopt newtechnologies that wil l increase eff iciency,productivity, and product quality. The rootsof the steel industry have also spread; the di-versity and wide geographical distribution ofsteel plants in the United States are strengthswith which the industry can face the chang-ing conditions of the coming decades.

It is expected that changes in the availabil-ity and cost of raw materials, fuels, and ener-gy sources will provide impetus for buildingnew steel plants and modifying existing ones.Integrated companies face some difficult de-cisions about replacing or drastically alteringoperating systems; about using new raw ma-terials, fuels, and energy sources; and abouthow to fulfill often noncomplementary objec-tives. But for the industry has a whole, therich variety in plant size, location, and char-acter will ease the industry’s adjustment tonew raw materials and energy sources andits adoption of new technologies.

Technological developments that offer flex-ibility in the choice of inputs are more attrac-tive than those that depend on single sources.Also, new technologies that can be adoptedrapidly in efficient-sized modules, that can beconstructed in a variety of locations, and thatcan fulfill regional market requirements, willreceive more attention than larger, less flexi-ble systems.

The followingappear to offersteel industry:

●

●

●

●

●

●

●

c

●

●

●

●

●

alternatives

technological developmentsparticular promise for the

to metallurgical coke as ablast furnace feed material;continuing improvement in coal-baseddirect reduction (DR) systems, includingthose that utilize coal gasification andthose that use coal directly:continuing development of DR systemsthat allow for the use of alternate fuelsand energy sources, including biomass,hydrogen, and nuclear sources;improved methods of increasing scrapand sponge iron use;increased availability of direct reducediron (DRI) as a substitute for scrap;increased availability of suitable ironoxide/carbon composites (pellets, bri-quettes) as “self-reducing” materials;continuing development of systems forsolid-state processing (the direct conver-sion of metallic powders into structuralforms);alternate electric furnaces such as plas-ma systems;continuing development of high-speedmelting, refining, processing, and trans-fer equipment;secondary or ladle steelmaking proc-esses that allow separation of meltingand/or primary refining from final com-position control;improved instrumentation and controlprocedures;continuous casting and direct rolling;andimproved methods for using waste mater-ials and heat.

Several of these technologies are exploredin this chapter to illustrate the range of op-portunities available to the steel industry.

185


Introduction and Background

Steel Industry Technology

“The steel industry” is composed of thosecompanies that produce steel products fromferrous raw materials including ore, pellets,sinter, sponge iron and other DRI, pig iron, *recycled iron and steel scrap, and a variety ofwaste products. Conventionally, the iron andsteel foundry industry is considered separatefrom the steel industry, although substantialoverlap occurs in many technical areas. Dif-ferences in scale and product make it possi-ble to distinguish the two industries clearly.In 1978, the steel industry had approximately156.9 million tonnes of annual capacity, andthe foundry industry 18.1 million tonnes.’ Thefoundry industry produces only about 1.8 mil-lion tonnes of steel castings per year, about 2percent of the total national steel production;its remaining capacity is used to produce ironcastings. z

In 1978, the steel industry was composedof 93 companies operating 158 individualplants.’ The industry may be divided intothree categories, based on the type of pri-mary operations, products, and marketing ap-proach of the individual companies: inte-grated companies, alloy/specialty companies,and nonintegrated companies.

Integrated companies have primary rawmaterial and ironmaking facilities (blast fur-naces), ** steelmaking units, and finishing

*DRI designates the metallized products that come under thegeneral heading of direct reduced iron. The term “sponge iron”describes a common type of DRI, DRI is formed from iron oxidewithout fusion. Frequently, such iron is porous and appearsspongelike under the microscope. Pig iron is solidified blast fur-nace iron: the term originates from the appearance when castfrom a common feeder of liquid iron and one or more rows ofsmall castings result.

‘Institute for Iron and Steel Studies. “Plant Locations andCapacities. ” 1978: D. H. Desy, “Iron and Steel.”’ Mineral Com-modity Profiles. MCP-15, U.S. Bureau of Mines, July 1978;American Iron and Steel Institute, “Annual Statistical Report,”’1978.

‘Institute for Iron and Steel Studies, op. cit.; American Ironand Steel Institute, op. cit.

‘Institute for Iron and Steel Studies, op. cit.**A new class of integrated plant is emerging based on di-

rect reduction. as discussed later.

mills. Alloy/specialty companies produce al-loys and special products from steelmakingunits; usually they do not deal with primaryraw material or engage in ironmaking activ-ities. Nonintegrated companies operate melt-ing and casting units and fabrication mills,and produce a limited range of products for aregional market. The term “minimill” is usedto describe some of these nonintegrated activ-ities, although it is now conventional to re-strict that term to plants with capacities lessthan 544,200 tonne/yr.

Table 67 shows that the majority of inte-grated plants are in the size range of 0.9 mil-lion to 8.2 million tonne/yr; most noninte-grated plants are in the 90,700- to 907,000-tonne range; and most of the specialty plantsin the range of 9,070 to 108,840 tonne/yr. Thefinal column of the table lists the total num-ber of plants in each size range operated byall three categories of companies.4 The UnitedStates does not have a single steel plant witha capacity of 9.1 million tonne/yr, althoughtwo are between 7.3 million and 8.2 milliontonnes. In contrast, Japan has eight post-World War II steel plants with capacities ofabout 9.1 million tonne/yr.5 The heaviest con-centrations of U.S. steel mills are in the Pitts-burgh and Chicago areas; only three fully in-tegrated plants are in the Western States.

Although plants vary widely in characterand size, it is helpful to use current inte-grated plants to describe steelmaking tech-nology. Figure 22 shows a flow line of steel-making. All of the major material inputs andoperations are indicated, but many of the sec-ondary operations, materials-handling opera-tions, and environmental control operationsare not, nor are any of the inspection andquality control operations. An integrated

‘Additional discussion of the characteristics and distributionof steel plants is contained in a report prepared for OTA in July1979: G. R. St. Pierre, C. E. Mobley, C. B. Shumaker, and D. W.Gunsching, “Impacts of New Technologies and Energy/RawMaterial Changes on the Steel Industry,” July 17, 1979.

‘K, L. Fetters, “Innovation-The Future of the Iron and SteelIndustry,’” Journal of Metals, June 1979, pp. 7-13.

Ch. 6—New Technologies for the Steel Industry ● 187

Table 67.–Capacities of Steel Plants in the United States, 1978

Number of plants operated by the—

Size range raw steel 17 integrated 33 specialty 43 scrap/DRl Total number ofcapacity tonnes/yr companies companies companies plants in size range

7,256,000-8,162,9996,349,000-7,255,9995,442,000-6,348,9994,535,000-5,441,9993,628,000-4,534,9992,721,000-3,627,9991,814,000-2,720,999

907,000-1,813,999816,300- 906,999725,600- 816,299634,900- 725,599544,200- 634,899453,500- 544,199362,800- 453,499272,100- 362,799181,400- 272,099144,190- 181,399126,980- 144,18990,700- 126,97968,025- 90,69945,350- 68,02422,675- 45,349

0- 22,674

Total number . . . . . . . . . . . . . . . .

211349

1115

1o111221000200

57

SOURCE Institute for Iron and Steel Studies

plant would have many of the indicated oper-ations; a nonintegrated plant would have onlya few. A nonintegrated steel plant might haveelectric furnaces for melting scrap, continu-ous casting units to produce slabs or billets,and rolling mills. A specialty steel plant mighthave only electric furnaces with some sec-ondary steel-refining equipment such asvacuum degassing units, electroslag remelt-ing equipment, argon-oxygen decarburization(AOD) units, in addition to special formingand rolling facilities. Most of the various op-erations can be performed on a widely vary-ing scale, but several are inefficient and cost-ly on a small scale. Blast furnaces and sheet-rolling mills are examples of units that cannotbe scaled down economically. Where productdemand or capital availability is too low tojustify constructing a blast furnace, scrap-based electric furnace steelmaking or DRironmaking can be used.

Steelmaking, even in the simplest form,consists of a number of processes. Iron fromthe mine may go through more than 20 proc-

0 0 20 0 10 0 10 0 30 0 40 0 90 1 123 0 180 0 11 1 20 1 13 3 71 3 51 4 61 5 82 14 182 6 92 4 6

10 9 193 2 5

10 9 195 0 53 0 3

47 54 158

essing steps and transfers before it becomesa finished product. Ore is ground, benefici-ated, reconsolidated into pellets, indurated,reduced, desulfurized, refined, cast, and fi-nally subjected to a series of forming andheat-treating steps. Technological develop-ments that can eliminate these operatingsteps or establish a more continuous flowclearly have the greatest potential benefits.

Technological Change in the Industry

Major developments in ironmaking andsteelmaking include:

1. pneumatic steelmaking—first the Besse-mer process, and more recently the ba-sic oxygen converters;*

2. hot-blast techniques that permit “con-tinuous” production of liquid iron in theblast furnace;

3. the electric arc furnace (EAF);4. continuous casting; and

*These processes are discussed inch. 9.


Figure 22.—Schematic Flow Chart for Integrated and

Possible major routes:

In tegrated: cok ing-b las t furnace-bas ic oxygen- ingot

cast ing- f in lsh lng.

Non integrated: scrap-e lec t r ic fu rnace-cont inuous cast ing

f in ishing,

Semi . in tegrated: d i rec t reduct ion + scrap-e lec t r ic fu rnace-

cont inuous cast ing- f in ish ing.


5. continuous rolling facilities to produce awide range of flat and structural prod-ucts.

Very recently, DR processes have also takenon importance.

The 20th century has seen many lesser de-velopments in steelmaking as well: cokingprocedures, low-cost systems for producingoxygen, ore beneficiation and pelletizing pro-cedures, rapid analytical and control tech-niques, and a host of others. Along with theseprocess developments came a multitude ofproduct developments based on a fuller un-derstanding of the relationships betweencomposition, microstructure, and propertiesof steel. Of necessity, steelmaking also be-came more sophisticated in the areas of com-position and structure control.

A review of technological change in thesteel industry during the period 1963-76 re-

veals the adoption of more than a hundreddifferent developments during a 10- to 15-year period.’ Although this information mustbe interpreted carefully, two conclusions areevident:

● information on technological develop-ments in the steel industry is transmittedvery rapidly; and

● each new technology has characteristicsthat provide opportunities in markedlyvarying degrees to individual companies.

Impacts of Changes in RawMaterials, Energy Sources,

Environmental Requirements,and Capital Requirements

The overall conversion or dissociation ofiron ore (hematite, Fe2O3), to metallic iron (Fe)may be represented as, Fe2O

3- 2Fe + 3/2O2.The minimum theoretical energy requirementto convert Fe20 3 to Fe is about 7 million Btuper tonne Fe. Expressed in another way, theconversion of Fe2O 3 to Fe represents the for-mation of a new “fuel” by a matching con-sumption of another fuel or energy source.The replaced fuel might be coal, oil, naturalgas, hydrogen, combustible biomass, combus-tible wastes, another metal (e.g., aluminum inthe thermite process), or combinations andderivatives of all of these. Potential energysources include electrical energy introducedby a variety of techniques (electric arc, plas-ma, high-frequency induction, etc. ) and ob-tained from a variety of sources (fossil fuels,hydro systems, wind, solar, nuclear, etc.).

The conversion of Fe2O 3 to Fe cannot be ac-complished with energy alone—the thermo-dynamic stability of iron oxide is too great. Atemperature of several thousand degrees Cel-sius is required to bring about spontaneousdissociation to form metallic iron. Materialreactants must be used to drive the dissoci-ation at moderate or practically attainabletemperatures. All of the common fossil fuelsand their derivates can act as suitable reduc-

“R. K. Pitler, “Wurldwide Technological Developments andTheir Adoption by the Steel Industry in the United States, ”American Iron and Steel Institute, Apr. 13, 1977.

Ch. 6—New Technologies for the Steel Industry . 189

ing agents; however, there are strict thermo-dynamic requirements that limit the efficien-cy with which C, CO, and H2 can be used. Forexample, the value of CO as a reducing agentis pract ical ly exhausted when the CO 2/ C Oratio is about three to one. * The minimummaterial requirement of CO corresponds toan equivalent carbon requirement of about0.43 tonne of carbon per tonne of Fe.**

One common procedure for assess ing thecombined r equ i r emen t s i s c a l l ed “ the rmo-chemical balancing.”’ For any particular sys-tem, thermochemical balancing can be usedto find optimal operating modes for the lowestpossible energy and material consumption.

Changing conditions stimulate the develop-ment of new processes and the adoption ofnew technologies , Examples may be founda m o n g c h a n g e s i n r a w m a t e r i a l s , e n e r g ysources , env i ronmen ta l r equ i r emen t s , andcapital availability.

Raw Materials.— Iron ore and scrap are thetwo major sources of iron units for steelmak-ing, As scrap availability increases, incen-tives are created for adopting technologiesthat use more scrap. The replacement of openhearth with basic oxygen furnaces permittedan expansion of scrap-based electric furnacesteelmaking. On the other hand, a limited sup-ply of high-quality scrap may lead a scrap-based steel company to seek sources of DRI ofknown quality or to construct new DR facil-ities of its own. Future developments in thearea of amorphous materials may create situ-ations in which entirely new steelmaking andcasting sequences will be needed.

Coal, coke, and natural gas are the princi-pal reductants available for the conversion ofiron ore. If coking coal is not readily availableand natural gas is, there is clear incentive toadopt gas-based DR processes in place ofblast furnace ironmaking. Current blast fur-

*To fix the precise value, one must consider the individualreduction steps (Fe2O 3 - Fe, O,, FeO - Fe) and the effective tem-perature of each.

* *This is surprisingly close to recent record coke consump-tions in ironmaking: however, those records are achieved through the injection of otherr reductants (tar, oil, etc.).

naces also depend in part on injected oil toachieve high production rates and low coke-consumption rates. If oil is in limited supplyor very expensive, alternatives must be con-sidered.

Energy Sources.— If the availability of con-ventional fuels is limited, development of newprocesses such as those using plasma andmagnetohydrodynamics (MHD), which makedirect use of electrical energy, becomes im-portant.

Environmental Requirements.—As pressureto meet stringent environmental constraintsincreases, processes are needed that aremore amenable to physical enclosure and re-quire lower volumes of waste discharge. Forexample, dry methods can replace aqueousmethods, as they have in coke quenching, andcountercurrent flow processes like cascaderinsing become attractive. The need to pro-duce low-sulfur steel can foster changes inthe mode of operation of an integrated steelplant, External desulfurizers can be in-stalled, secondary steelmaking units can beadded, and blast furnace practices can bealtered drastically.

Capital Requirements.—For a new technol-ogy to be adopted it must represent a sounduse of limited financial resources. Processesthat have high throughputs per unit volumeand that depend on a minimum of auxiliarysupport equipment may meet such require-ments.

International Comparisons ofProduction and Energy Consumption

Tables 68 through 71 contain informationon raw material, energy, and labor consump-tion in the international steel industry. Thedata in these tables represent a composite forintegrated plants and do not reflect the widedifferences in process configurations, age ofplant, available raw materials, and productrequirements of individual plants. Table 68presents unit inputs per tonne of U.S. steelshipped in 1977. Table 69 compares product

. . .


Table 68.—Unit Material and Energy Inputs perTonne of Steel Shipped, United States, 1977a

Data sourceUnit input (tonnes or as noted) AISl b WSD b

Iron ore . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.33 1.68Coking coal . . . . . . . . . . . . . . . . . . . . . . . . 0.7666 1.01Noncoking coal . . . . . . . . . . . . . . . . . . . . . 0.033 0.033CokeC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.538 0.643Scrap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.292 0.14Natural gas (103ft3) . . . . . . . . . . . . . . . . . . 6.96 6.17Fuel oil (U.S. gallons) . . . . . . . . . . . . . . . . 20.50 21.13Electricity (kWh) . . . . . . . . . . . . . . . . . ...537.00 452.00Oxygen (103ft3 . . . . . . . . . . . . . . . . . . . . . 3.04 NAFluxes and alloys. . . . . . . . . . . . . . . . . . . . 0.304 NANA = not available.a113,939,091 tonnes raw steel produced; 82,860,909 tonnes raw steel shipped,

yield (shipments/production) = 72.7%.bAmerican iron and steel Institute, actual operating data for entire US. indus-

try, World Steel Dynamics idealized model based on 10° tonne/yr integratedplain carbon steel plant

cCoke is produced from coking coal, and thus represents a double counting ofinputs in this table Coke usage is included for comparison with data in subse-quent tables

SOURCE: G. St. Pierre for OTA.

mixes for major steel-producing countries, *table 70 provides country comparisons on awide range of operating parameters for sev-eral types of steelmaking units, and table 71deals with energy consumption per tonne ofsteel shipped. All these data point to techno-logical opportunities for the domestic steel in-dustry, but without full investigation of capi-tal requirements and return-on-investmentfactors for both replacement and expansion,information of this type can be badly mis-interpreted. A clear distinction must be madebe tween t echno log ica l oppor tun i ty andfeasibility.

*Product mix for any nation varies with time. For the UnitedStates, there is a trend toward making fewer flat products,which are very energy and capital intensive.

Table 69.—Steel Product Mixes for Various Countries, 1976 (percentage of total shipments)

Country

Product type United States Japan United Kingdom West Germany France

Hot-rolled sheet, under 3mm thick . . . . . . . . 51.9 43.1 28.6 22.3 34.9Light sections. . . . . . . . . . . . . . . . . . . . . , . . . 15.9 19.1 19.4 14.0 16.0Heavy plate . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.0 15.5 11.0 11.0 8.7Strip . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5 2.1 7.4 7.6 6.9Wire rods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.9 8.2 9.0 10.3 11.6Heavy sections . . . . . . . . . . . . . . . . . . . . . . . . 4.7 7.1 11.2 6.3 6.1Semis for sale . . . . . . . . . . . . . . . . . . . . . . . . . — 5 . 3a

9.2 6.2Medium plates. . . . . . . . . . . . . . . . . . . . . . . . . (b) 1.7C

2 . 2 11.1 3 . 7

Percent total production . . . . . . . . . . . . 94.6 96.8 94.1 91.8 94.1Sheets (< 3mm) and strip. . . . . . . . . . . . . . . . 58.4 45.2 36.0 29.9 41.8aDeliveries blncluded in heavy plates. cFrom 3 to 6 mm.

SOURCE: Annual Bulletin of Sfeel Statistics for Europe, vol. V, 1977, U.N. Economic Commission for Europe

Table 70.—Comparison of Operating Parameters, 1976

CountryUnited United WestStates Japan Kingdom Germany France Brazil

Raw steel produced, million tonnes . . . . . . . . . . . . 116.4 107.4 22.3 42.4 23.2 9.2Apparent yielda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69.9% 8 4 . % 76.80/o 80.7% 83.8% 81 .8%Average blast furnace

( tonne coke .b . . . . . . . . . . . . . . . . . . . . .) 0 . 6 0Coke rate tonne pig ironS t e e l m a k i n g p r o c e s sc

BOF . . . . .. : . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62.50/oOH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.2EF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.2

Continuous casting of raw steel . . . . . . . . . . . . . . . 10.5NA = not available.aApparent yield is the ratio of steel shipments to raw Steel production. This

ratio is dependent on the range and type of final products shipped, Therelatively low apparent yield value for the United States is associated, in part,with its relatively large fraction of thin products and limited use of continuouscasting.

bThis coke rate (tonnes coke/tonnes pig iron) reflects only the actual cokecharged to the blast furnaces and is not the blast furnace fuel rate (i.e., tonnefuel/tonne pig iron). It IS estimated that the fuel rates for the non-U.S. countries

0.43 0.60 0.48 0.52 NA

8 0 . 9 % 5 1 . 4 7 % 7 3 . 3 % e 80.1% NA0.5 18.1 14.3 5.6 NA

18.6 30.3 12.4 14.2 NA35.1 9.4 28.3 18.0 12.1are about 0.05 units greater than the coke rates cited

c1975 world steel production by process was 51 1 percent by BOF, 17.1 percentby EF, 305 percent by OH, balance (1 3 percent) by Thomas and other proc-esses

d 0.1 percent of steel made by “other” unspecified ProcesseseIncludes 14 percent steel production by Thomas (airblown) converter process.flncludes 11.8 percent steel production by Thomas (airblown) converter process.

SOURCE: G. St Pierre for OTA.

Ch. 6. 6—New Technologies for the Steel Industry 191

Table 71 .—Aggregated Industry Apparent Energy Consumption for Steel making by Country, 1976(million Btu/tonne steel shipped)

—United United West

Fuel States Japan Kingdom German y France Brazil

Coking coal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24.62 20.02 23.85 a 22.22’ 23.22 a 21.91Steam coal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.01 — — — — 0.98Natural gas.... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.64 — 2.57 4.00 1.92 6.96Fuel oil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.71 3.99 6.63 4.07 5.13 3.08Electricity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.86 1.61 1.95 1.14 1.67 1.83

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36.84 25.62 35.00 31.44 31.94 34.76

Total b . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.75 21.52 26.88 25.37 26.77 25.27Relative energy consumption. . . . . . . . . . . . . . . . . . 100 84 104 98.5 104 98

United States, 1976 = 100aCokinq coal consumption is estimated from known coke consumption. Typically 1.45 tonne of coking coal is used to produce 1 tonne of coke.bThe total energy per tonne of steel produced is the product of the total energy per tonne steel shipped and the apparent yield for each country


Energy Consumption in theDomestic Steel Industry

Tables 72 through 74 summarize energyconsumption in the U.S. steel industry. Al-though the industry consumes about 4 per-cent of the total U.S. domestic energy, most isin the form of coal. Steel processing accountsfor only about 0.6 percent of total domesticpetroleum consumption and about 3.2 per-cent of domestic natural gas consumption.However, the trend is toward increasing theuse of petroleum (from 6.2 percent of steel-making energy in 1972 to 11 percent in 1979)and decreasing the use of coal (from 69 per-cent in 1972 to 63 percent in 1979). After ad-justing for the decrease of 8 percent in totalenergy use, the petroleum energy used insteel production increased by 63 percent dur-

Table 72.—The American Steel Industry andthe Nation’s Energy Consumption

Steel industryas percentage

Consumption (quadrillion Btu)of total

domesticYear Steel industry Total domestic economy

1972 . . . . . .1973 . . . . . .1974 . . . . . .1975 . . . . . .1976 . . . . . .1977 . . . . . .1978 . . . . . .1979 . . . . . .

3.133.453.422.943.052.912.982.88

71.6374.6172.7670.7174.5176.5478.15NA

4.4%4.64.74.24.13.83.8NA

NA = not available

SOURCES. American lron and Steel lnstitute, Annual Statistical Report Depart.ment of Energy, “Monthly Energy Review “

ing this period while coal energy use de-creased by 16 percent.

Table 73.—Steel Industry Energy Consumption by Source

Percent from each source

Source of en erg y 1972 1973 1974 1975 1976 1977 1978 1979

Coking coal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64.0% 64.50/. 62.1 % 66.8% 65.7% 62.4°10 56.30/o NAOther coal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5 3.4 2.9 2.6 2.4 2.9 2.4 NAOutside coal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 1.7 2.8 (1 .5) (0.9) 0.9 5.8 NA

Subtotal from coal. . . . . . . . . . . . . . . . . . . . . . . 68.8 69.6 67.8 67.9 67.2 66.2 64.5 63.0

Natural gas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.7 19.0 20:0 20.0 19.9 19.9 20.5 21.0Petroleum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 6.9 7.6 7.3 7.8 8.6 9.4 11.0Liquid petroleum gas. . . . . . . . . . . . . . . . . . . . . . . . . — — — 0.1 0.1 0.1 0.1 NAPurchased electricity . . . . . . . . . . . . . . . . . . . . . . . . 4.3 4.5 4.6 4.7 5.0 5.2 5.5 5.0

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

NA = not available

SOURCE American Iron and Steel Institute, Annual Statistical Report.


Table 74.—The Mix of Energy Sources

Total Steel industry 1972-78 average

Energy source domestic 1978 Direct Adjusted

Coal . . . . . . . . . . . . . . . . . 18.20/o 67.5% 69.6%Natural gas . . . . . . . . . . . 25.3 20.0 20.8Petroleum . . . . . . . . . . . . 48.6 7.7 8.5Nuclear . . . . . . . . . . . . . . 3.8 — 0.4Hydro and other . . . . . . . —Electricity . . . . . . . . . . . . (a) 4.8 (a)

Total. . . . . . . . . . . . . . . 100.0 100.0 100.0

alncluded in sources above. The adjusted mix for the steel Industry distributes the 48 percent purchased electricity to the

primary fuels in proportion to primary fuels consumed by the electric utility industry during the 1972.78 period.

SOURCES. American Iron and Steel Institute, Annual Statistical Report, Department of Energy, “Monthly Energy Review.“

Characterization of New Technologies

Definitions

Developments in the steel industry can bedivided into four broad groups:

● radical and major technologies;● incremental technology developments;● regulatory technology developments;

and● developments from other industries.

The term “radical” is used to describe aprocess modification that eliminates or re-places one or more of the current steelmakingprocesses or creates an entirely novel optionfor ironmaking and steelmaking.7 DR is thus aradical ironmaking change because it is analternative to the traditional coke oven-blastfurnace sequence. Direct steelmaking proc-esses are radical changes because they com-bine several processes into a single reactor.Continuous casting is radical because it re-places ingot casting and shipping, reheating,and blooming mill operations. Rolling of pow-ders to strip is also radical.

“Incremental” technology developmentsinclude process modifications that improveefficiency, increase production, improveproduct quality, or lower operating costs. En-

ergy conservation measures and the recy-cling of waste materials fall into this cate-gory. So too does external desulfurization ofblast furnace iron, although it involves add-ing a new operating unit. Secondary steel-making processes including AOD also are in-cremental technologies. * The economic im-pact and technological significance of incre-mental developments may be great.

Developments in environmental technologyinclude add-on systems that do not alter thesteelmaking process. Examples are biologicaltreatment of waste waters, pipeline chargingof coke ovens, and fugitive particulate collec-tors.

Developments from other industries can beused in many ways. Analytical and controltechniques are transferred to the steel indus-try on a broad basis. The adoption of coal gas-ification processes in conjunction with DRmight represent a type of technology transfer,although the steel industry has had long ex-perience with generating, cleaning, and usingfuel gases in coke oven operations, in therecycling of blast furnace top gas, and morerecently in the collecting of carbon monoxidefrom steel convertors.

Piller. op. cit.: J. Szekely, “Toward Radical Changes in Steel-making. Technology Review, Massachusetts Institute of Tech-nology, F’ebruarv 1979, pp. 23-29. *AOD is a case study in ch. 9.


Potential Technological Changes The entries in the table represent differentand Opportunities process designs such as DR. The adoption

projections in the table should be interpretedTable 75 lists potential technological Technology, (J. Szekely, chairman), Apr. 24-25, 1978: OTA

changes to steelmaking identified in OTA seminar on “New Technologies in Steelmaking, ” Washington,workshops, seminars, and reports and in the D. C., (J. Hirschhorn, chairman), May 2-3, 1979; S. Eketorp and

current technical and commercial literature.8 M. Mathiesen, “Direct Steelmaking—A Review of ProcessesUnder Development. ” report to OTA, 1979: J, T. Strauss and T.

‘St. Pierre, et al., op. cit: ()’rA workshop on “Radically Inno- W, Heckel, “Future Potential of Ferrous Powder Metallurgy.”va tive S teelmaking Technologies. Massachusetts Institute of report to orrA, August 1979.

Table 75. —Potential Technological Changes in the Steel IndustrySignificant adoption

possible within:

Technological processa Category 5 yr 10 yr 20 yr

Plasma arc steelmakinga . . . . .Direct steelmakinga. . . . . . . . . .Liquid steel filtration. . . . . . . . .Continuous steelmakinga. . . . .

Secondary refining systemsa.Hydrometallurgy production

of iron . . . . . . . . , .Nuclear steelmakinga. . . . . . . .Hydrogen systemsa. . . . . . . . . .Direct reduction processes . .

Coal gasification . . . . . . . . . . .Preheating of coking coal/

pipeline charging. . . . . . . . . .

Dry quenching of coke . . . . . .

BOF/Q-BOP off gas utilization .High top pressure BF

electricity generation . . .Evaporative cooling. . . . . . . . . .External desulfurizationa . . . . .

Induction heating ofslabs/coils . . . . . . .

Catalytic reduction process. . .

Blast furnace fuel injection . . .

Direct casting of steel. ... . . .Continuous casting. . . . . . . . . .

Formed coke . . . . . . . . . . . . . . .Biomass energy systems . . . . .Self-reducing pellets and

briquettes. . . . . . . . . . . . . . .

Powder metallurgy steel sheet

Direct/inline rolling . . . . . . . . . .Computer modeling/control. . .High-temperature sensors . . .

1121

2

1111

4

2,3

2,3

2,3

22,32

2

2

2

11

12

2

1

22,42,4

——?

—

x

———x

‘?

x

x

x

?xx

x

—

x

—x

——

—

?

7

xx

—???

x

?

—

?

x

x

x

x

x

?

xx

x

?

x

?x

7

?

?

x

xxx

?7

?

?

x

x?

xx

x

x

x

x

xxx

x

x

x

xx

xx

x

x

xxx

—. . .Pncipal features

Fast reactions, small units.Eliminates cokemaking.Improves product quality.Conserves energy and reduces number of reactor

units.Improves product quality.

Low-temperature processes.Alternative energy source for steel making.Alternate fuel/energy source.Low-temperature solid-state reduction of iron ore

to iron.Alternate fuel/energy source.

Reduces pollution and conserves energy incokemaking operation.

Reduces pollution and conserves energy incokemaking operation.

Energy conservation measure.

Energy conservation measure.Improved cooling system, saves water usage.Allows improved product quality and increased

blast furnace productivity.

Reduces scale formation, increases yield, andconserves energy.

Used with coal-based reduction processes toincrease reaction rate.

Use of alternative fuels to replace coke (possibleenergy conservation).

Eliminates mechanical forming and heating.Direct conversion of liquid steel to solid slabs and

squares. Major energy conservation measuresand increased yield.

Replaces metallurgical coal/coke.Alternate fuel source.

Iron ore/carbon flux is intimately mixed to allowreduction in the pellet.

No melting or reheating required, mini millconcept.

Eliminates holding and reheating steps.Applies to any unit/process operation.Units to measure and control high-temperature

iron making and steel makinq process variables.Categories I-radical, 2-incremental 3-environmental, 4-transfer ?-slgnlflcant adoption possible if pilot efforts show promise. X-significant adoption possibl.

- .

alncludes a variety of processes


194 ● Technology and Steel industry Competitiveness

with care: a question mark indicates that a significantly adopted within the time period;significant adoption is possible within that a dash, that adoption within the time period istime period if current pilot efforts show prom- improbable. A number of the technologies areise; an X-entry, that the technology should be currently adopted or near adoption.

Radical and Major Technologies

Four major new technologies-direct re-duction, direct steelmaking, plasma steelmak-ing, and direct casting—are described andassessed in this section. * These technologiesare in markedly different stages of research,development, demonstration, and adoption.The first process is in use throughout theworld; the last three have not advanced be-yond the R&D stage.

Direct Reduction

Description.— DR processes convert ironore (fines, pellets, sinter, etc. ) into spongeiron at temperatures well below the meltingpoint of iron.** These processes distinctlydiffer from the conventional blast furnaceprocess in two major respects: solid metal-lized product is produced, rather than molteniron;*** and a wide variety of reductantsmay be used in place of metallurgical-gradecoke. DRI is normally porous, or in some caseshas a filamentary form, and must be proc-essed in steelmaking units that convert it intoa usable product. If the starting oxide materi-al is finely divided, the resulting DRI does nothave the characteristic spongelike structurebut consists instead of finely divided particlesof iron. Subsequent processing involves con-solidating the reduced or metallized powdersby either compression and sintering into fin-ished forms, as in the powder metallurgy in-

*TWO other major changes, formcoke and continuous cast-ing, are fully described and discussed in ch. 9.

**The principal concepts of DR were presented by WilliamSiemans in 1869; however, elementary direct reduction usingchar was practiced by ancient ironmakers,

***The degree of metallization describes the fraction of theiron content of the ore which is converted to metallic iron.

dustry, or direct rolling of these powders intosheet products.

Another type of DR process is based oncombining the reducing agent with the ironoxide as a charge material. For example, itmay use a self-reducing pellet or briquette inwhich finely divided iron ore or mill scale ismixed with a carbonaceous reductant materi-al and fluxes. This pelletized or compactedmixture contains all of the reactants for DR,and it is only necessary to provide the heatfor metallization. If the particles are veryfinely divided and well mixed in the pellet orbriquette, reactions can be very fast; for ex-ample, a number of reports indicate thatunder favorable heat transfer conditions 95-percent metallization can occur within 4 to 5minutes at temperatures of about 1,3000 C.

The fuel requirements in the DR processesare very different from those in conventionalblast furnace ironmaking. Current blast fur-nace practices require high-grade metallurgi-cal coke, which is produced in coke ovensfrom selected blends of coal. Current DRprocesses use a variety of fuels and reduc-tants, including coal without prior coking,natural gas, oil, or gases produced from anyof these fossil fuels. DR processes also maybeof many mechanical designs: there are batch-type processes in which preheated, pre-formed reducing gases are passed over astatic bed of iron oxide material; other de-signs are based on concurrent or countercur-rent flows of gases and solids in a shaft. Flu-idized beds have also been used for DR, ashave rotary kilns with countercurrent or con-current flows of gases and solids. Figure 23 isa schematic diagram of several of the princi-pal DR systems.

.


Figure 23.—Schematic Diagram of Direct ReductionProcesses

Sponge ironretort

HyL

Sponge ironrotary kiln

KruppSL-RN

HIBF/OR

SOURCE: K.H. Ulrich, “Direct Reduction by Comparison With Classical Methodof Steel Product Ion,” Mefallurgical Plant and Technology, No. 1,1979.

In all of these systems, the operating tem-peratures must be controlled so that the ma-terial moves uniformly through the systemwithout sticking, agglomerating, or clinker-ing; the gases and solids must have adequatecontact for fast reactions and heat and masstransfer; and the design must allow the mate-rials to be discharged and cooled properly.

About 20 different DR processes are in usethroughout the world.9 (See table 76.) Most ofthe processes have not spread widely: only

‘]. R. Nliller, “Use of Direct Reduced Iron Ore and BalancedIntegrated Iron and Steel Operations,”’ Ironmaking (Ind StWJ-m(lkin,q, 1977, No. 5, pp. 257-264; ‘Crrhe Inevitable Nlagnitudesof Meta Hized Iron Ore,’” iron ond Steel Engineer, December1972.

three processes have been adopted in morethan four plants. The most prevalent process,the Midrex, was first built at Oregon SteelMills in 1969; the remaining 16 Midrex plantsare widely scattered and include several 2.3-million-tonne/yr plants in the U.S.S.R. The 14HyL plants are also widely dispersed. All ofthe Midrex and HyL plants use natural gas asa reductant. The coal-based SL-RN processhas been adopted at six plants. Additional in-formation on the distribution of operating DRplants is given in table 77. A number of U.S.steel companies are showing substantial in-terest in adopting DR: at least six plants havebeen constructed, and at least another fourare planned.

Tables 76 and 78 show that most of the cur-rent DR systems, whether based on coal orgas, have been built in units of less than362,800 tonnes nominal capacity; however,several larger units are being planned andmodules of 1.2 million tonne/yr are probablein the next decade. Several DR plants have in-dividual capacities in excess of 907,000tonne/yr. 10 Some representative character-istics of major DR processes are shown intable 79.

Energy consumption figures for the fourmajor natural gas DR processes vary signifi-cantly, as table 80 shows. The lower energyprocesses are the more prevalent ones.

Table 78 presents general information onthree categories of operating coal-based DRprocesses: direct use of coal, coke breeze,and gasified coal. The third category is reallya separate breed, because the coal gasifica-tion processes can, in principle, be coupledwith any of the gas-based processes.ll Such a

“’’” Saudi Resour(ws and Korf Technology Combine to Createa Dessert Steel hlill, ”” 33 Metal Producing, Nlat 1979. pp. 54-57:W. Loewe. “DR Unit Construction Due in Six Nlonths. ” M’ash-ington Pos[. Mav 31, 1979.

“j. W’. Clark, “Integrated Steelmaking Based on Coal Gasifi-cation and Direct Ore Reduction,”” L1’estinghouse R&D Center.Pittsburgh, Pa,, Dec. 8. 1979; OTA seminar. Llav 2-3.1979.


Table 76.—Direct Reduction Plants Constructed or Scheduled for Completion by 1980

Number Year of Year of Capacity,Process of plants original plant last plant Countries Reductant 103 tonnes Type b

Hoganas. . . . . . . . . . . 3 1954 1954 1,2 Coke breeze 63-154Wiberg . . . . . . . . . . . . 4

—1954 1964 1,3 Coke breeze 9-82

Rotary kiln . . . . . . . . . 1—

1957 1957 3 Coal 22 R.K.HyL . . . . . . . . . . . . . . . 14 1957 1980 4, num. Natural gas 91-1,905 St. BC

Highveld kiln . . . . . . . 2 1968 1977 5 Coal 272-907 R.K.Midrex . . . . . . . . . . . . 17 1969 1980 2, num. Natural gas 272-2,268 S.F.Kawasaki . . . . . . . . . . 3 1969 1977 3 Coke breeze 65-227 R.K.SL-RN . . . . . . . . . . . . . 6 1970 1978 6, num. Coal 54-327 R.K.Purofer. . . . . . . . . . . . 4 1970 1980 7, num. Natural gas, CO 136-726 S.F.Koho . . . . . . . . . . . . . . 1 1971 1971 3 Coke breeze 44 —Armco. . . . . . . . . . . . . 1 1972 1972 2 Natural gas 300 S.F.Krupp . . . . . . . . . . . . . 1 1973 1973 5 Coal 136 R.K.HI. . . . . . . . . . . . . . . 1 1973 1973 8 Natural gas 590 FI. B.Sumitomo . . . . . . . . . 1 1975 1975 3 Coal 218Kubota . . . . . . . . . . . . 1

—1975 1975 3 Coal 190

ACCAR . . . . . . . . . . . . 2—

1975 1976 9 Coal, oil, gas 45-218 R.K.FIORD . . . . . . . . . . . . . 1 1976 1976 8 Natural gas 363 FI. B.NSC . . . . . . . . . . . . . . 2 1976 1977 3 Oil 136-218Kinglor-Metor . . . . . . 1

—1976 1976 10 Coal 36

Azcon C . . . . . . . . . . . . 1 1978 1978 2 Coal 91 R-K.

a1-Sweden, 2-united States, 3-Japan, 4-Mexico, 5-South Africa, 6-New Zealand, 7-West Germany, 6-Venezuela, 9-Canada, 10-ltaly.bR, K, = rotary kiln, St.B. = static bed, S F = shaft furnace, FI. B. = fluidized bed (See text)CNow known as Direct Reduction Corp. (DRC).


Table 77.—Distribution of World Direct ReductionCapacity, 1980

By processMidrex . . . . . . . . . . . . 38.5%HyL . . . . . . . . . . . . . . .38 .1SL-RN . . . . . . . . . . . . . 5.6Purofer. . . . . . . . . . . . 4.2Others . . . . . . . . . . . .13 .6

By reductant sourceNatural gas . . . . . . . . 87.40/~Coal . . . . . . . . . . . . . .11 .1Gas/fuel oil. . . . . . . . . 1.5

By process typeShaft furnace. . . . . . . 44.6%Static bed. . ........38.9Rotary kiln . ........12.6Fluidized bed. . . . . . . 3.9

By countryVenezuela . . . . . . . . . 24.8%Iran . . . . . . . . . . . . . . .14 .2Mex ico . . . . . . . . . . . .10 .7Canada. . . . . . . . . . . . 8.7United States. . . . . . . 6.1Japan . . . . . . . . . . . . . 6.1Others . . . . . . . . . . . .29 .4

SOURCE: R.J. Goodman, ‘iDirect Reduction Processing—State. of-the. Art,”Skillings Mining Review, vol. 68, No 10, March 1979

coupling would involve producing clean fueland reducing gas by pressurized gasificationof nonpremium, high-sulfur coal; using thegas as a reductant in the chemical reductionof iron ore; using the offgas from ore reduc-tion either as a fuel for combined-cycle powergeneration or as an auxiliary energy sourcefor gasification and reduction plants; andthen melting and refining the DRI in an elec-tric furnace with electricity from the com-bined-cycle powerplant. Several coal gasifi-

cation processes might complement othersteel processes.12

Table 81 summarizes energy consumptionin coal DR kilns. There is a wide range in theenergy consumption figures for coal-based ro-tary kiln DR because of the flexibility in theoperation of rotary kilns. In particular, coalsof varying ash and moisture content and oresof varying quality can be processed. The lowconsumption figures are for coals of low mois-ture and ash content with ores [pellet, lump,fines) of low gangue and moisture and highiron content. Energy consumption in shaftunits is about the same as in rotary kilns.13

The consumption in static beds is almost 50percent greater, and in fluidized beds may be75 percent greater, than in kiln and shaft sys-tems.

Total consumption of energy in coal gasifi-cation processes might be as low as 12.1 mil-

‘iE. J. Smith and K. P. Hass, “Present and Future Position ofCoal in Steel Technology,”’ lronmaking ono’ Steelmoking, 1979,No. 1, pp. 10-20,

‘ ‘D. S. Thornton and D. I. T. Williams. “Effects of Raw Mate-rials for Steelmaking on Energy Requirements, Zronmokingand Steelmuking, No. 4, 1975, pp. 241-247.

Ch. 6—New Technologies for the Steel Industry 197

Table 78.—Operating Direct Reduction Plants Based on Coal or Coke Breeze—

Process

Plants-using-coal directlySL-RN. . . . . . . . . . . . .SL-RN. . . . . . . . . . . . . . . .SL-RN. . . . . . . . . . . . . . .SL-RN. . . . . . . . . . .SL-RN . . . . . . . . . . . . . .SL-RN/Krupp. . . . . . . . .Azcon–DRC, ... .Kinglor-Metor . . . . . . . . .K i n g l o r - M e t o r . . .S u m i t o m aHighveld .ACCAR. . . . . . . . . . .

Plants using coke breezeHoganas . . . . . . . . . . .Hoganas . . . . . . . . . .Wiberg . . . . . . . . . . . . .Kawasaki . . . . . . ...Kawasaki. . . . . . . . . . .Sumitomo . . . . . . . . . . .Rotary kiln. . . . . . .

Plants using gasified coalNSC . . . . . . . . . . . . . . . . .

NA = not avaflable

Capacity ProductLocation Company and country (tonnes) Startup usea

N.W. OntarioArizonaRio GrandeFukuyamaGlenbrookBenoniTennesseeCremonaMonfalconeKashimaWitbankOntario

Steel Co. of CanadaHecla Mining, United StatesAces Fines Pir., BrazilNipon Kokan, JapanNew Zealand SteelDunswart, South AfricaAzcon Corp., United StatesDanieli, ltalyDanieli, ltalySumitoma, JapanAnglo-Am. Corp., South AfricaSudbury, Canada

362,80054,42058,955

317,450108,84090,70090,70036,280

9,070195,912907,000226,750

136,05032,65221,76854,42054,420

217,68043,536

136,050

19751975197319741970197319781976NA

197519681976

AcABAAAAABB

NA

Hoganas Hoganas AB, SwedenOxelosund Granges AB, SwedenSandriken Sandrik AB, SwedenChiba Kawasaki, JapanChiba Kawasaki, JapanWakayama Sumitomo, JapanMuroran Nippon, Japan

1954195419541969NA

1975NA

cccBBBB

1977 BHirohata Nippon, Japan

aProduct use: A = steel making feed B = ironmaklng feed C = specialty product

SOURCE Department of Commerce ‘Production of Iron by Direct Reduction,’ May 1979

Table 79.—Characteristics of Direct Reduction Processes and Electric Furnace Consumption——

SL-RN

Furnace ., . . KilnReductants o u r c e . Coal

Energy, 106 Btu/tonne DRI. . . 13.1

Feed, type . . Coarse ore,pellets

Productmetallization. 900/o

Elect ric-f urn aceconsumption chargeSponge . . . 75%Scrap . . . . 25Hot metal . 0

Power,k W h / t o n n e . 555

Y i e l d . . 91 %

Armco

Shaft

Natural gas

13.1Pellets

90%

200/03050

27284%

Midrex Purofer HyL

Shaft Retort

Natural gas Natural gas

HIB FIOR-ESSO

Shaft

Natural gas

11.9Pellets

92-960/0

700/030

0

55093°/0

Fluid bed Fluid bed

Natural gas Natural gasor oil

15.1Ore fines

13.1 15.5Coarse ore, Coarse ore,

pellets pellets

95°/0 85-900/0

17.9 -19.9Ore fines

90%. 920/o

500/o 600/050 40

0 0

583 625— 92.40/.

75%25

0

———

535—

——

SOURCE: E.J. Smith and K.P. Hass, Present and Future Position of Coal in Steel Technology.” Ironmaking and Steelmaking, 1976, No 1, pp. 10-20

lion Btu/tonne of DRI. The most favorable en- count is taken of all inputs and outputs.14

ergy consumption figures for blast furnaces Waste heat losses are 0.5 million to 5.0 mil-are about 14.3 million Btu/tonne of iron. The lion Btu/tonne for steel production by the cokehigh efficiency of modern blast furnaces is

“Clark, op. cit.: R. S. Barnes, “The Current State of Iron andundisputed, and it is unlikely that any DR sys- Steel Technology. ” Ironm(]king ond Steelm(lking, 1975, No. 2 ,tern will consume less energy when proper ac- pp. 82-88: Thornton and Williams, op. cit.

.


Table 80.—Energy Consumption in GasDirect Reduction Processes

Reductant Electricityenergy 106 consumption Total 106

Type Btu/tonne kWh/tonne Btu/tonneShaft . . . . . . . . 10-12 33-135 11.1 -12.8Retort. . . . . . . . 12.5 20 136Kiln. . . . . . . . . . 13-20 35-45 13-20Fluidized bed . 15-18 40 14.7

SOURCE G St Pierre for OTA

Table 81 .—Energy Consumption ofDirect Reduction Rotary Kilns

ConsumptionItem Low HighCoal, Btu/tonne . . . . . . . . . . 14.3 x 1 o’ 22.0 x 10’Electricity, kWh/tonne. . . . . 38.5 49.5Total energy, Btu/tonne. . . . 14.4 x 10’ 22.2 x 10’

SOURCE: G St Pierre for OTA

oven-blast furnace-basic oxygen furnace(CO-BF-BOF) sequence and 11.8 millionBtu/tonne for the direct reduction-electric arcfurnace (DR - EAF) sequence using 20 per-cent scrap.15 The latter figure is likely to im-prove as technological advances occur, butfor energy consumption from ore to metal itwill be difficult to better the performance of a

‘sBarnes, op. cit.

modern blast furnace system; however, capi-tal and operating costs may be improved withDR systems.

A comparison of coal-based DR system en-ergy costs with other types of DR systems hasbeen prepared using OTA energy prices andprojected rate of increase, (See ch. 5.) The re-sults are presented in table 82 by specificprocess and in figure 24 by type of process. Afavorable situation is predicted for coal-based DR systems in the United States.

New DR Processes.— A number of new DRprocesses are under development. In theUnited States, the Midrex Corp., originator ofone of the two leading natural gas DR proc-esses, has also developed a direct coal DRprocess. It is fundamentally different fromthe coal kiln processes in use for some years.The principle of the electrothermal process iselectrical resistance heating of the iron oreand coal mixture; this is shown in figure 25A.This process is now in the pilot stage and isexpected to be marketed for plant sizes of181,400 tonne/yr within the next 5 years. Be-cause of its relatively simple design, the proc-ess appears to offer good process control andreliability, with a relatively low capital cost.

Table 82.—Energy Costs for Direct Reduction Processes Based on OTA Energy Costs

OTAenergy

cost andannual Allis- Cost averagescost Chalmers Armco FIOR HIB HvL Krupp Midrex Puro fer S L- R N Fluid Retort

Energy sourcea increase kiln shaft fluid fluid retort k i l n shaft shaft kiln bed shaft Kiln

Electricity 10° Btu/tonne ., . . . — 0.17 ‘ 0 . 1 2 0.15 (d) 0.08 0,15 0.51 0.38 (d)$ in 1976 $5.57 0.95 0.67 0.84 (d) 0.45 0.84 2.84 2.12 (d) – – –Low $ in 2000 ~ ~ ~ ~ ~ ~ ~ ~ 1.0% 1.22 0.84 1.04 (d) 0.57 1.04 3.60 2.71 (d)High $ in 20()(). . . . . 4.7% 2.88 2.01 2.49 (d) 1.38 2.49 8.55 6.39 (d)

N a t u r a l g a s 1 06 B t u / t o n n e 12.65 16.06 19.86 13.75 11,90 1320 (d)$ in 1976 $1.-27 (b) 16,07 2040 25.15 17.46 —Low $ in 2000” ~ ~ ~ ~ ~ ~ ~ ~

15.11 16.76 (d)4.0% 41.18 52.58 64.46 4476 37.87 42.97 (d)

High $ in 2000. . 5.0°10 51.81 65.78 81.10 56.32 48.73 54.07 (d)C o a l 1 0 ° B t u / t o n n e . 18.OC

$ in 1976 ... ., $1- 3118.OC 18.O C

23.8 – – – – 238 – – 23.8 – —Low $ in 2000 . . . . . . . 1.0% 30.2 30.2 30.2H i g h $ i n 2 0 0 0 . . 5.0% 76.7 76.7 76,7

Total energy costs per tonne1976. , . . . . ($) 24.8 16.7 21.2 25.2 17.9 24.6 18.0 15.3 25.8 23.2 16.7 24.42000; a l l low increases, . . . . ($) 31.4 42.0 53.6 645 45.3 31.2 41.5 45,7 30.2 59.1 43.1 30.92000; low electricity, high natural

gas, low coal. . . . . . . ($) 314 52.7 66.8 81.1 56.9 31.2 52,3 56.7 30.2 74.0 53.9 30.9

a1976 dollars, no coke or 011 used; energy consumptions from R.J. Goodman, “Direct Reduction –State-of-the-Art, ” Skillings Mining Review, Mar. 10-17, 1979bAllis-Chalmers unit can use natural gas, oil, and coal. Coal used herecAn average value of 18 106 Btu/tonne was used tO represent a readily available coal Typical of kiln processes and assumed to be used in each Process‘Data not available

SOURCE: G St Pierre for OTA (see tables 54 and 55)


Figure 24.—Projected Energy Costs to Producea Tonne of Direct Reduced Iron

100

50

20

shaft

(natural gas)

101976 1980 1990 2000

Year

Key,

High-curve: 5 percent Increase natural gas costs, 1 percent coal,

1 percent electricity

Low-curve 4 percent Increase natural gas costs. 1 percent coal,

1 percent electricity

Reactor type

Fluid bed: average of FIOR & HIB process dataKiln average of All Is-Chalmers, Krupp, and SL-RN dataShaft furnace and retort: average of Armco, HyL, Midrex, and

Purofer.


A rather ingeniously designed coal-basedDR process has recently been described by itsAmerican inventor. ” (See figure 25 B.) Al-though pilot testing has not yet been carriedout, the proposed process uses well-acceptedchemical reactions, simple design, andalready proven technologies and materialsfor its components. It is a good example ofdesigning a new technology to suit contem-porary concerns, constraints, and opportuni-

11A. Calderon, “Program for Reconstruction of U.S. Steel In-dustr},” Calderon Automation, Inc., Cleveland, Ohio, February1980. (Patents applied for.)

ties. The basic features of the Calderon Fer-rocal ironmaking process are:

●

●

●

●

●

●

any grade of coal is mixed with any typeof iron ore, including domestic low ironcontent taconite ores;the mixture is put through a heating-reduction vessel consisting of a verticaltower made up of several cells, each in-sulated from the others and tapereddownward;the inside of the cells are made of alloysteel which serves as a susceptor for in-duction heating, with the induction coilssurrounding the outside of the tower;induction heating of the cells leads to atemperature at which there is combinedcoal gasification and solid-state reduc-tion of the iron ore; the hot gases risethrough the tower and preheat the nextbatch of the ore-coal mixture before be-ing collected, processed, and used forheating, electrical generation, or sale;a portion of the solid metallic iron isperiodically pushed out of the bottom ofthe tower into an induction-heatedholding vessel of liquid iron, in whichslag is formed and removed and desul-furization is accomplished; andmolten iron is periodically removed anddelivered to either a basic oxygen orelectric arc steelmaking furnace in thesame way that pig iron is delivered in aconventional integrated plant.

This process has several advantages thatmake it highly attractive, It could be adoptedby present scrap-based nonintegrated plants,but it can also use the raw material and steel-making facilities in existing integrated plants,It uses low-cost iron ores and coals, but unlikeconventional DR processes it produces hotliquid iron which can be used in existing in-tegrated facilities. It is a closed system withminimal environmental problems. It has highthermal efficiency, and, because it producesenough medium-Btu gases to generate elec-tricity in considerable excess of the demandsof its induction units, it is adaptable to thecogeneration of electricity. Present cost esti-mates also indicate considerable savings:


Figure 25. —Two New Coal Direct ReductionProcesses

C o a l p l u slimestone I

Electricpowersupply

Direct reduced iron plusash plus lime with sulfurto magnetic separator

capital costs (exclusive of electricity cogener-ating facilities) may be only one-half those ofcoke ovens and blast furnaces; the modulardesign allows higher utilization rates at lowercapacity levels; and there might also be sav-ings in both construction time and mainte-nance costs. Return on investment could be ashigh as 25 percent.

A pilot plant has been designed to produce4.5 tonne/hour. It would cost approximately$5 million to construct and operate for atleast several months. Since the process hasbeen invented by someone outside of a steelcompany, although with considerable experi-ence with the industry as a designer andbuilder of steelmaking facilities, pilot evalua-tion which requires a steelmaking plant mayprove to be difficult. At this stage the technol-ogy provides an excellent example of theproblems facing the introduction of major in-novations into the steel industry. This Amer-ican invention or something similar to it couldbecome the most important innovation for do-mestic integrated steelmaking in the comingdecades.

SOURCE: Midrex Corp.

B. Calderon Ferrocal Ironmaking Process

SOURCE: Calderon Automation, Inc.


A number of new ironmaking processes arealso being developed in Sweden, All arebased on the concept of using partial (lowdegree of metallization) DR followed by asmelting operation that melts and further re-fines the material to produce the equivalentof the pig iron. Descriptive information onthree of these processes is given in table 83.Some of them appear to offer a potential forconsiderable energy savings, both in energyunits and in costs. This results from the use oflow-grade coals rather than coke. All produceless environmental pollution because of theirrelatively simple design (figure 26). Severalprocesses and plants based on the same ap-proach of prereduction and smelting were de-veloped in the United States; but for manyreasons, including the difficulty and expenseof testing new steelmaking technology in pilotand demonstration plants by firms that arenot steelmaker themselves, they were notsuccessful. 17

Apparently the Hofors plasma process isrelated to a recently announced, more tradi-tional DR process producing DRI rather than

“See, e.g., T. E. Ban. “Effective Energy Utilization ThroughDirect Electric Smelting of Hot Prereduced Iron Ore, ” SkillingsMining Review, Sept. 14, 1974.

pig iron. The DR process, called Plasmared,uses plasma heating and can burn oil, gas, orcoal as the energy source.18 A small plant isnow under construction in Sweden.

Costs.—An important aspect of evaluatingnew DR processes is their capital costs. Re-ported capital costs for a number of DR proc-esses are given in table 84. The cost for pres-ently used natural gas processes is relativelylow, generally about $110 per annual tonne ofDRI capacity. This compares to two to threetimes that cost for coke ovens and blast fur-naces to produce pig iron. The capital costs ofusing coal gasification, direct coal, or cokeoven gas are higher than those for naturalgas, but they are still quite competitive withthe conventional coke oven-blast furnaceroute. The capital costs for the new Swedishprocesses that produce pig iron are also quitecompetitive with the conventional route (seetable 83).

More detailed data for a particular directcoal, kiln DR process and a typical gas-basedprocess as a function of plant size are shownin figure 27. This illustrates the savings re-

“{Americon Met(]l Murket, Sept. 21.1979, and Aug. 8, 1979.

Table 83.—Three New Swedish Steelmaking Processes—

Capital costs($1979)/tonne Production Energy use

annual costs ($ 1979)/ 106 Btu/tonneProcess capacity tonne pig iron pig irona

ELRED.—Reduction stage uses coal in a fluidized bed. Final smelting-reduction stage is in an electric arc furnace. Flue gases from bothstages generate electricity. NA NA 15

Hofors. —Reduction in fluidized beds followed by smelting reduction in aplasma-heated shaft furnace. Gas for first-stage reduction fromsmelting operation using coke. Outlet gas from first stage used fordrying and preheating of materials. The plasma-heating requirementcan be reduced by injection of oxygen or oxygen-hydrocarbon mixturein second stage. $140

Low- and high-electricity versions within about 3 percent of eachother. 10

INRED. -First-stage reduction-smelting using coal which is partiallyburned, the remainder forming coke. Second-stage uses coke fromfirst-stage and prereduced iron in an induction-heated furnace.Electricity is produced from steam formed by cooling of first stagefurnace. Coal is sole energy source. 178 125 16

NA = not availableaFor comparison purposes the energy for a blast furnace ranges from 11.8 106 Btu/tonne of pig iron for a new blast furnace to 15.4 106 Btu/tonne for an existing one.

SOURCES: ELRED from P. Collin and H Stickler. “EL RED-A New Process for the Cheaper Production of Liquid Iron, ” provided by ASEA Corp. Others from SEketorp, et al “The Future Steel Plant—A Study of Energy Consumption,” Nat tonal Swedish Board for Technical Development, 1979

$116

I

.


Figure 26.—Three New Swedish IronmakingProcesses

I I

i ron

Table 84.—Capital Costs of Direct ReductionProcesses (1979 dollars per tonne of DRI)

Process cost

IN RED

Prereduction

Final reduction;

iron

CO/H 2

Prereducedmaterial

Coke

SKF process(Hofors)

~ I r o nSOURCE S Eketorp for OTA

Figure 27.—Specific Investment Costs per Tonne

$220

198

of Direct Reduced Iron (Krupp coal process,price basis, 1978)

1 module

Gaseous directreduction

1320 0 1 8 0.36 054 0.72 091

Annual production of sponge iron 10 6 t o n n e / y r

SOURCE: K.H. Ulrich, “Direct Reduction by Comparison With Classical Methodof Steel Production,” Metallurgical Plant and Technology, No 1,1979


suiting from scaling up DR processes, whichis just now beginning.

Another way of examining the potentialeconomic advantages of new processes is toconsider the costs to produce steel ratherthan DRI, Capital costs as a function of an-nual capacity for a direct coal, kiln DR proc-ess and conventional blast furnace based onsteelmaking are shown in figure 28. For ca-pacities less than 907,000 tonne/yr, DR ap-pears to have a distinct capital cost advan-tage. A similar result holds for productioncosts, as shown in figure 29.

A comparison of both capital and produc-tion costs for conventional steelmaking withseveral variations of a coal gasification steel-making process, shown in figure 30, showsconsiderable savings possible.

A comparison of the Swedish ELRED proc-ess production costs with both conventionalblast furnace steelmaking and a typical natu-ral gas DR system is shown in table 85. Thecomparison with the conventional route isvalid, and it shows a saving with the ELREDprocess at this relatively low annual capaci-ty, but the comparison with the gas DR plant

Fiqure 28.—Specific Investment Costs for Different‘Routes of Steelmaking per Tonne of Raw Steel

Capacity (price basis, 1978)

0.45 0.9 135 18 225

Annual production of Iiquid steel 10 6 t o n n e / y r

SOURCE K H Ulrich, “Direct Reduction by Comparison With Classical Methodof Steel Production,” Metallurgical Plant and Technology, No 1,1979

Figure 29.—Steelmaking Costs Upstream andExclusive of Continuous Casting for Different

Production Routes per Tonne of Raw Steel(price basis, 1978)

- and electric arc furnacesteelmaking

I I Iu 045 0.9 135 18

Annual production of Iiquid steel 10 6 t o n n e s / y e a r

Coking coal: $72/tonne DR-coal : $33/ tonne

(respective coke price Oi l : $72/ tonne

depending on size of Electric power. $0.02/kWh

coke oven plant)

SOURCE K H Ulrich. ‘“Direct Reduction by Comparison With Classical Methodof Steel Product Ion,” Mefallurgical Plant and Technology No 1,1979.

Figure 30.—Comparison of Coal Gasification Direct‘Reduction Steelmaking to Conventional Blast

Furnace and Nonintegrated SteelmakingCoal-gas processes yield steel at $128to$134/tonne

C(


Table 85.—Total Steelmaking Costs in 1978 Dollarsper Tonne of Raw Steel (for 050,000 tonne/yr of raw steel)

ShaftBlast furnace

furnace (sponge(sinter) ELRED iron) + arc+ BOF + BOF furnace

Iron raw materiala . . . $51.6 $33.5 $60.0Energy b. . . . . . . . . . . . 54.4 16.8 47.6Processing. . . . . . . . 37.5 38.0 51.6Capital costsd . . . . . . 39.0 45.7 44.3Unforeseen costs . . . — 11.0 —

Total steel makingcosts. . . . . . . . . . $182.5 $145.0 $203.5

Relative total costsas a percentage. . . 100% 80% 112%

aConcentrates and pellets, respectively, alloying element, cooling pellets,

bCoke, coal, oil, minus energy credit plus electricity in steel mill ($181 tonne)CLabor operation, repairs, and maintenance), electricity, electrodes, Iime, oxy-

gen. refractories, desulfurizing (for ELRED)dFor the ironmaking and steelmaking plants Plants assumed to be in Europe.

SOURCE P. Collin and H. Stickler, “EL RED-A New Process for the CheaperProduct Ion of Liquid Iron, ” ASEA Corp.

is not quite so meaningful because the cost ofgas purchased in Europe would be high.

To help put the potential capital cost ad-vantages of DR in better perspective, costdata for steelmaking capacity for a number ofdifferent process routes, including conven-tional steelmaking, are given in table 86. Al-though steelmaking based entirely on naturalgas is not likely to be practicable for theUnited States, it is being adopted by foreignnations with domestic sources of gas andwithout large supplies of scrap. The costs areless than for blast furnace technology. Thetwo more likely cases for the United Statesare the use of a combination of coal DR andscrap-based steelmaking and the use of coalgasification DR ironmaking. Because coalgasification is just now being commercial-ized, there are no reliable cost data for theUnited States. However, the data for a Bra-zilian plant based totally on coal gasification,and the data shown in figure 30, suggest thatthis is a viable option for future domesticsteelmaking. The most intriguing possibilityfor the near term (within 5 to 10 years) is thecombination of scrap-based steelmaking witheither direct coal or coal gasification. Agreenfield plant using a combination of scrapand DRI (discussed more fully in ch. 8) wouldcost much less than expanding an existing in-

Table 86.—Capital Costs for Different SteelmakingRoutes (1979 dollars per annual tonne steel

product capacity)

Process route cost

Conventional new plant (greenfield). ... ... ... ... .. $1,320Integrated blast furnacea. . . . . . . . . . . . . . . . . . . . . . 275Nonintegrated scrap-electric furnacea. . . . . . . . . . . 275

Combined scrap non integrated with coal DRb

Direct coal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 385Coal gasification. . . . . . . . . . . . . . . . . . . . . . . . . . . . 418

Integrated gas DRc

0.45 million tonne/yr, Midrex process Argentina . . 6601 million tonne/yr, unstated process and Iocatione. 5500.85 million tonne/yr, Midrex process,

Saudi Arabiaf. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8140.6 million tonne/yr, unstated process, Egyptg . . . . 725

Coal gasification-DR integratedUnstated DR with Koppers-Totzek gasifier

in Brazilh. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,011

aFrom ch. 10 Value for nonintegrated plant IS for a broader product mix than iscurrently true for most such plants

bAssumes 50-percentt use of DR plant to produce 1 tonne of steel Less then 50percent of DRI would be used with scrap, but because of Incomplete metalli-zation of the ore and yield uncertainties extra DR capacity IS accounted forThe unit cost for direct coal DR IS $220/tonne and for coal gasification$3301 tonne The value for the base steelmaking plant IS $2751 tonne

CAssumes a product mix corresponding to a domestic nonintegrated producerdAmerican Metal Market, Aug 281979eAmerican Metal Market, Aug. 21, 1979 (by French Society of Steel Studies)f33 Metal Producing, May 1979gArnerican Metal Market, June 11 1980.hAmerican Metal Market, Aug. 19, 1979.

tegrated plant or constructing a new inte-grated plant. Costs for the latter are dis-cussed in chapter 10.

Labor requirements for DR systems rangefrom 0.4 to 0.6 employee-hours per tonne.19

For DR with EAF, the range is 1.6 to 1.9 em-ployee-hours per tonne.20 In contrast, theCO-BF-BOF sequence uses around 2.6 em-ployee-hours per tonne.

Product Use.— In the steel industry DRI hasthree major uses:

● feed to ironmaking units (BF, cupola,electric smelting);

c feed to steelmaking units (BOF, EAF);and

● feed to metal powder processes.

In addition, DRI may be used for a variety ofspecial applications such as the recovery ofcopper from water streams. DR processesmay be used to recover other constituents in

‘“H, W. Lownie, Jr., “Cost of Making Direct Reduced Iron,”’SME-AIME Fall Meeting. Florida, Sept. 11.1978,

“’Clark, op. cit.


an ore feed, and in the extreme case DRI maybe a lesser value byproduct.

The composition of DRI determines its suit-ability for various applications. Some DRIproducts have relatively low degrees of met-allization (less than 90 percent, and even 80percent in a few cases); these are suitableonly for ironmaking. Other DRI products havea relatively high carbon content. Frequently,DRI is marketed on the basis of its carbon-tinoxygen ratio, which—depending on the par-ticular steelmaking operations—is a very im-portant factor in the selection among avail-able DRI products.

One advantage of DRI is that it is free ofthe so-called “tramp” elements that often ap-pear in recycled scrap. Recycled scrap con-tains a variety of alloying elements, includingcopper from copper-bearing alloys, tin andzinc from coated products, and many others,all of which can pose problems in steelmak-ing. On the other hand, DRI can have the dis-advantage of a high sulfur content.

Desirable composition specifications ofDRI are given in table 87. It must be recog-nized, however, that off-specification materi-al may be used in blending batches of DRI.DRI is normally used in conjunction withscrap, and an optimal ratio of DRI to scrapcan be established for any particular situa-tion. 21 In one estimate of EAF energy con-sumption, it was found that energy consump-tion decreased linearly from about 770 kWh/tonne at 80-percent metallization to 500kWh/tonne at 96-percent metallization.22

Most studies have shown that EAF productiv-

“’Ironmakin~ by Direct Reduction-A Review of the Detroithfeet ing, ”’ ]ron ond Steelm{lking, May 1979, pp. 44-45; D. H.Houseman, “Direct Ironrnaking Processes, ” Steel Times, April1978: B. Rollinger, “Steel Via Direct Reduction, ” Iron ond,$teelmaking, January 1975, pp. 8-16: J. W Brown and R. L. Red-dv. “E1ectric Arc Furnace Steelmaking With Sponge Iron,”’lronmokin~ (Ind Steelm[]kmg, No. 1, 1979, pp. 24-31: F. Fitzger-ald, “Alternative Iron Units for Arc Furnaces, ” lronmoking~lnd Stwlm~lkmg, No, 6, 1976, pp. 337-442: K. Shermer, “Im-prc~ved ‘1’echnologv for Pr(wessing Sponge Iron in the ElectricArc h’uranrc, ’” lr~mm{lkin~ (Ind Steclm(lking, No. 3, 1975, pp.1 18-92; J. 11. 1)’ Entremont, Armco Slcel Corp., paper presenteda I 1979 conference.

- E?rom’n and Reddv, op. r:lt.

Table 87.—Typical Specifications forDirect Reduced Iron Used in Steelmaking

Item Specification (by weight)

Metallization . . . . . . . . . . . . . . . More than 95%Total iron . . . . . . . . . . . . . . . . . . More than 93%0Metallic iron. . . . . . . . . . . . . . . . More than 88%Gangue a . . . . . . . . . . . . . . . . . . . Less than 6%Sulfur . . . . . . . . . . . . . . . . . . . . . Less than 0.03°/0Phosphorus . . . . . . . . . . . . . . . . Less than 0.05%Carbon . . . . . . . . . . . . . . . . . . . . Between 0.8 and 1.7°ASize b . . . . . . . . . . . . . . . . . . . . . VariableStrength and density. . . . . . . . . Variable

aThe gangue specification would take into account the balance of basic oxides(CaO, MgO, etc ) over acidic oxides (SiO2, AI2O3. etc). The former are desirable,while the latter are undesirable from the standpoint of slag formation and re-fractory Iining life in steelmaking

bFor example, for Midrex processes. 100 percent less than 0.75 inch and no

more than 5 percent less than 0.13 inch


ity peaks at an optimal ratio of DRI to scrapcorresponding to about 45 percent DRI.23

Siting.—The selection of optimal siteswithin the United States for coal-based DRplants is a complex problem. Site selectiondepends on whether the plant is to operate inassociation with contiguous ironmaking andsteelmaking operations or is to transport andmarket DRI. In the former case, it is impor-tant

●

c●

●

●

to consider:

distance from ore and coal sources;availability and price of scrap;site, labor, and environmental con-straints;cost of electricity; anddistance to steel product market centers.

In the latter case, important factors include:

● distance from ore and coal sources;● labor, environmental, and climatic con-

straints; and● distance from iron and steelmaking cen-

ters.

There is almost no region within the continen-tal United States that would be entirely un-suitable for a DR operation in some form. Par-ticularly attractive opportunities appear toexist in the Southwest and Gulf States, theAppalachian States, the Northern GreatLakes region, and the Canadian borderStates.

-’Rollinger, op. cit.


Alternate Energy Sources.—In addition tocoal, other inexpensive solid reactants maybe used for DR systems. These include bio-mass, peat, lignite, wood and paper wastes,and municipal and industrial wastes. Bio-mass, which embraces a large variety of veg-etable and animal wastes, and the other ma-terials have similar advantages and draw-backs as reactants. They cost little, are gen-erally available, and are regenerable. Theyalso contain little inorganic matter, such asash, and few of the elements, such as sulfurand phosphorus, that are undesirable insteel. In addition, these materials frequentlyprovide very reactive sources of carbon; bio-mass, for example, may consist of cornstalks,nutshells, and perhaps pulp and skin from avariety of food-processing operations.

The chief disadvantages of these materialsare their high moisture content and low bulkdensity. The direct charging of wet, low-den-sity materials into iron production units, suchas rotary kilns, causes a substantial loss ofproductivity, which translates into higher en-ergy, labor, and capital costs per tonne ofproduct. Both problems can be overcome bypretreating (drying, carboning, etc.) and com-pacting the materials, although this too takesenergy. Ironmaking operations present an at-tractive site for processing these materials.Most large steelmaking plants have low-tem-perature waste heat available. Transferringthat heat is not very efficient, however, andthe bulky equipment is costly.

If inexpensive methods can be found toconvert all of these materials into a productroughly equivalent to sub-bituminous coal inmoisture, density, and transportability, thentheir use by DR plants within a reasonabledistance might follow. The pretreatment tech-nologies are broadly recognized and areunder intensive investigation throughout thecountry; significant advances should occurduring the next decade.

Advantages of DR Systems.—DR systemsoffer an advantageous alternative to the blastfurnace process for the production of ironfrom iron ore and recycled iron oxide, and toscrap in the manufacture of steel products in

the electric furnace. Not all of the potentialadvantages of using DR would apply to everyeconomic or regional enterprise. Further, it isapparent that there is a wide variety of DRprocesses from which to choose, and eachhas its particular advantages and disadvan-tages. The following advantages, then, shouldbe treated as opportunities presented by thedevelopment of DR systems:

●

●

●

●

●

●

●

●

●

●

DR units can be built on a variety ofscales, to use a variety of charge oxidesand reductants, and in a variety of loca-tions;scrap-based companies can manufac-ture high-grade steels from DRI, which,unlike scrap, has a known, uniform com-position;DRI can be transported and handledeasily and can be charged to furnaces ona continuous basis;DRI can be used as a feed material forblast furnaces and basic oxygen steel-making units;DR processes do not require metallurgi-cal-grade coke;DR systems do not pose environmentalproblems as severe as those of cokeoven-blast furnace systems;24

DR processes can be coupled with sever-al energy-generation systems (nuclear,MHD, etc.);DR processes can be coupled with coalgasification systems;DR systems can be constructed withcomparatively low capital costs; andDR systems have competitive operatingcosts.

The DR processes provide attractive oppor-tunities for all three segments of the steel in-dustry. The integrated segment could in-crease ironmaking capacity in incrementsmuch smaller than is economical for the blastfurnace, and could do so without the need tobuild additional coke capacity or purchasecoke. Both integrated and particularly scrap-

“L. G. Twidwell, “Direct Reduction: A Review of CommercialProcesses,”’ Environmental Protection Agency, 1979.


based producers would benefit from havingDRI as an alternative to purchased scrap. *Nonintegrated plants using DRI could pro-duce higher grade steels and control theiroperations more readily. In addition, DR facil-ities would allow this segment to integrateoperations from ore to steel product. The al-loy/specialty steel companies, too, would ben-efit to some extent by the opportunity to sub-stitute high-grade DRI for scrap.

In general, the substitution of DRI for scraplowers residual element (“tramp”) levels, fa-cilitates material handling and charging, andenhances product quality. In addition, DRIenables steelmaker to write tighter specifi-cations for iron units than is usually possiblewith scrap. Although DRI use does not re-quire special arc furnaces, many develop-ments are likely in electric furnace design foradaptation to DRI.

Difficulties With DR Systems.—Like D R ’ sadvantages, not all of its disadvantages applyto each DR system or economic region:

DR processes have higher energy andmaterial requirements than blast fur-naces;DR processes cannot be built on a scaleequivalent to a large modern blast fur-nace;DRI is a solid product that cannot substi-tute significantly for “hot metal” as afeed to BOFs;DRI must be handled, stored, andcharged in a different manner fromscrap;in coal-based DR processes, special pro-vision must be made for sulfur control;solid waste materials (lime, ash) fromcoal-based DR processes must be dis-posed of in a different manner than slagfrom a blast furnace;the variety of DR options, many not yetproven on a commercial scale, makes itdifficult to select an optimum process fora given set of conditions;off-specification DRI (high-oxygen, alka-li, silica contents, fines) can damageelectric furnaces;

*Also discussed in chs. 7 and 8.

without special provisions, DRI usemight increase the generation of fugitiveparticulate emissions around electricfurnaces; andsome coals are not suitable for direct usein coal-based DR systems and must begasified in separate units.

Forecast .—The capaci ty of DR plantsthroughout the world has grown at a rate ofabout 30 percent per year since 1965; how-ever, this growth rate has been achieved in arelatively early stage in the technology’s de-velopment and adoption, when DR capacity isstill less than 5 percent of total world steelproduction. Nevertheless, forecasts of futuregrowth in DR plant capacity have used ratesas high as 13 percent per year for the period1980-85 and 4.7 percent per year for the peri-od 1990-2005.25 The latter may still be too low,in view of expected steel production growthrates of 7.5 percent in the developing coun-tries and 3.2 percent in the developed coun-tries for the same period.

Worldwide, it is estimated that about 40new DR units are planned for operation be-tween 1981 and 1985. About one-half will usenatural gas, one-quarter will use coal direct-ly, and the remainder will use liquefied natu-ral gas, gasified oil, gasified coal, or byprod-uct gas.

The figures shown in table 88 are conserv-ative estimates for the growth of DR capacity.All of these projections might be influencedmarkedly by shifting practices in the UnitedStates and Japan or by industrial activity inChina. The table also shows data on actualproduction of DR plants and it can be seenthat production has been far below capacity.This has resulted from a depressed worldsteel market, startup problems in developingnations, and a combination of high naturalgas costs and low scrap prices in the industri-alized nations.

-“H. W. Lownie, Jr., “Prospects for the Future, ” draft of ch.13 for forthcoming book on direct reduction edited by J. R.Miller: Lownie’s estimate agrees closely with the median esti-mate established by the Hamersley Delphi study.


Table 88.—Projections for Direct Reduction Growth (millions of tonnes)

Capacity a Production

North Third — Free Free FreeYear Rate* America Japan EEC World Mid East world world b world c

1975 . . . . . . 27.8 2.0 1.2 0.7 4.0 0.0 8.0 2.7 2.71979 . . . . . . NA NA NA NA NA NA NA 7.2 9.01980 . . . . . . 13.1 2.9 4.1 3.6 11.2 4.4 27.3 10.1 14.41985 . . . . . . 9.3 5.3 6.3 6.6 21.2 9.6 50.6 19.0 NA1990 . . . . . . 5.7 9.5 7.7 9.4 33.9 15.3 78.9 NA NA1995 . . . . . . 2.4 13.3 9.0 11.9 45.2 20.3 104.1 NA NA2000 . . . . . . – 15.3 9.7 13.2 51.2 22.9 117.2 NA NA

“Annual compound growth rate (%) projected for succeeding 5 years

SOURCES aG. St. Pierre for OTAbA.B. Jensen, “New Alternates for Charge Metal lie,” Ferrous Scrap Consumers Coalition Symposium, February 1980cDepartment of Commerce, “Production of Iron by Direct Reduction, ” May 1979

Direct Steel making

Description.— Direct steelmaking is theconversion of iron ore to steel in a single reac-tor system. This would represent a radical ormajor technological advance, because itwould replace several operations in eitherthe CO-BF-BOF orIncluded in this classtinuous steelmakingsteelmaking systemsscribed separately inchapter.

DR-EAF sequences.26

of technology are con-systems and plasma

The latter are de-a later section of this

In essence, direct steelmaking allows thereduction, melting, and refining functions tooccur and be controlled in a single (perhapsdivided) reactor. Figure 31 is a schematic dia-gram of a proposed system, which has not ad-vanced beyond pilot-plant exploratory work.Furthermore, none of the proposed systemsrepresents the application of new basic prin-ciples.

Advantages of Direct Steelmaking.—The ad-vantages of direct steelmaking may be sum-marized as follows:

● ore is converted to steel in a single reac-tor, rather than first making iron andthen making steel;

-%. Eketorp, ‘“Decisive Factors for the Planning of FutureSteel Mills, ” Iron and Steelmaker, December 1978, pp. 37-4 1;D. H. Houseman, “Continuous Steelmaking Processes,”’ Stee)Times, May 1978, pp. 457-462; A. K. Syska, “The S-Process,”’OTA seminar, Mav 2-3.1979.

Figure 31 .—Schematic Diagram of DirectSteelmaking System

SOURCE S. Eketorp for OTA

●

●

●

consolidation of fumes, transfer of liquidproducts, and environmental problemsare reduced;less land area, equipment, and capitalare required; anda variety of raw materials (iron oxideand reductant) may be used.

Suitability for Industry Segments.—Directsteelmaking processes provide an opportuni-ty for integrated steel plants; however, it isunlikely that significant adoption by alloy/specialty or scrap-based companies would oc-cur rapidly.


Disadvantages of Direct Systems.—None ofthe pilot-plant efforts on direct steelmakinghas yet been successful. Specific technicalproblems exist that require major research,development, and demonstration efforts,such as:

wall refractories are needed that canwithstand severe chemical and mechani-cal erosion;procedures are needed for controllingsteep chemical potential gradients (e.g.,simultaneous injection of reductant andoxygen);injection refractories that can operatecontinuously must be developed;uniformity of product must be main-tained over a significant period; andsteel output per unit of reactor volumemust be increased to compete with alter-native routes to steel.

Forecast.—The idea of going from oxideconcentrate directly to steel in a continuous,smooth operation has excited imaginationsfor many years. Europeans, Americans, andmany others have spent a great deal of moneyon small pilot efforts, but none of these ef-forts, has been particularly successful from aresearch standpoint, and none has been car-ried to commercial scale. The problem hasbeen that the different functions cannot beisolated properly: all the equipment must betied up in a single strand, and the system haslittle flexibility with respect to either processvariables or product requirements.

The major recent gains in improving thespeed, efficiency, and productivity of steel-making systems have been accomplished byseparating rather than combining the dif-ferent parts of ironmaking and steelmaking.In integrated systems, for example, substitu-tion of a desulfurization station between theblast furnace and the steelmaking units canresult in the increased productivity of each ata relatively low capital cost. In the develop-ment of the AOD system, adding another unitto separate the melting function from therefining function has markedly increased theproductivity of stainless steel and high-alloyproduction systems.

Although major advances in the rates ofreduction, melting, and refining and in thethroughput per unit volume of equipmentmust be made, it is very unlikely that anydirect, continuous single-reactor process willassume commercial significance in the nextdecade.

Plasma Steelmaking

Description.— Plasmas are already usedcommercially for steel melting and refining,but they can also be used for reduction reac-tions. 27 A plasma is generated in a steelmak-ing reactor either from “inert” gases likeargon or nitrogen or from reactive gases likehydrogen or methane, and fine iron oxide par-ticles and solid reductant are then fed intothe plasma. While most plasma smelting sys-tems use the plasma as an intense and effi-cient source of energy, some experts nowthink that the plasma also participates inunique reactions with the oxide undergoingreduction. Figure 32 is a schematic diagramof a plasma smelting (reduction) system forsteel production. Bench-scale and small pilotsystems have been operated, and several arereported in the literature. These systems in-clude:

● the extended arc flasher at the Univer-sity of Toronto;

● the falling film reactor at BethlehemSteel Corp.;

● the SKF Hofors plasma reduction proc-ess;

● the rotating plasma process; and● the expanded precessive plasma fur-

nace.

Advantages of Plasma Steelmaking.—Theadvantages of the plasma steelmaking sys-tems are similar to those of the direct steel-making processes, but with several additionaladvantages:

● the plasma provides an intense, concen-

I’, L. Gulliver and P. ]. F, Gladrnan, ‘‘F’l:]sm:] l-’urn;~(’e Pro(’-essing, ”’ ()’1’A serninnr, Nl;j} 2-3. 1979: 1). R. hlrRt]e, ‘‘Plasrni]Reduction of Iron Ores to RHW Steel.”’ (YI’A spmln~lr. lf:~t 2-J.1979, popt?r No. 15; h. ]. Red, “l)ircrt Stc[?lm;lklng ~;lst?~i onSolid-Plasma Intcra(t ions,”’ ()’I’A smnin[) r. hlt)t 2-i. 1979.paper No. 16.

.


Figure 32.-Plasma Steelmaking System

Expanded precessive plasma processusing closed-bottom reactor

Refractory

Slag Metal i n s u l a t i o nmMeta l ox ide concent ra te

and reductant

Carbonmonoxide

1Anode connection

SOURCE. Tetronlcs Research & Development Co., Ltd, United Kingdom and

●

●

●

foreign patents pending.

trated source of energy for endothermicreactions;the plasma system is ideally suited forthe conversion of finely divided solids;plasma processes may involve someunique gas-solid-liquid reactions thatare not encountered during conventionalprocessing; andplasma “reactions” may be very fast.

Suitability for Industry Segments.—If suc-cessful development of the plasma steelmak-ing processes occurs, they could provide ma-jor opportunities for all three segments of theindustry. Alloy/specialty companies mightbenefit in a most significant manner by beingable to produce highly alloyed steels directly

from oxide charge materials rather than fromferroalloys.

Disadvantages.— All of the disadvantagesof the direct steelmaking processes apply tosome degree to the plasma systems. An addi-tional difficulty is that the engineeringdevelopments and control procedures forplasma systems are still in an early stage.Also, the reported power requirements andof fgas volumes are very high.

Forecast.—Some commercial developmentof plasma steelmaking systems is likely to oc-cur by 2000. The first adoptions are likely tobe for the manufacture of alloy steels.

Direct Casting

Description.— Direct casting is the pouringof liquid steel directly into thin solidified sec-tions suitable for conversion into strip prod-ucts. While continuous casting producesslabs that must be hot and cold rolled intothin-gauge products, direct casting wouldproduce a thin product ready for final rollinginto suitable gauges.

Advantages of Direct Casting.—Direct cast-ing would eliminate the necessity to produceslabs for hot rolling. Some unique propertiesmight be developed, particularly if an amor-phous material can be produced in the cast-ing step.

Suitability for Industry Segments.—Allthree segments of the industry would benefitfrom the development of this technological op-portunity.

Disadvantages.— Flexibility in the controlof properties and gauges of sheet productsmight be lost.

Forecast.—The need for development anddemonstration is so extensive and costly thatit will take many years to bring such a tech-nique to the point of adoption on a significantscale.


Incremental Technologies

From literally thousands of advanced in-cremental technological opportunities thatare or will be available to the steel industry, afew have been selected for illustrative pur-poses, These have particularly wide ap-plicability during the next 10 years.

External Desulfurization

External desulfurization refers to all proc-esses that lower the sulfur content of hot ironafter it leaves the blast furnace and before itenters a steelmaking unit. It may be accom-plished in torpedo cars or in ladles by intro-ducing a sulfur-capturing reagent throughplunging or lance injection. Many reagentshave been used, including calcium oxides,calcium carbides, soda ash, and magnesium-impregnated coke (mag-coke). Special han-dling, injection, or plunging equipment mustbe used to provide a fast, efficient reaction.In addition, pollution abatement equipment isusually required.

The principal advantages of external de-sulfurization are that:

s the blast furnaces can be operated withless basic slags and at higher productionrates;

● lower sulfur-content hot metal can pro-duce low-sulfur steels in BOF processes;and

● capital requirements are modest com-pared to the alternatives.

External desulfurization is a proven tech-nology available to the steel industry in avariety of engineering “packages. ” It benefitsintegrated and alloy/specialty steel compa-nies that use the CO-BF-BOF sequence.Continuing adoption by integrated steel com-panies is expected through the early 1980’s.

Self= Reducing Pellets

Self-reducing pellets are prepared from afinely divided iron oxide concentrate, a solidreductant such as char, and lime (for sulfurabsorption). 28 They contain all required reac-tants for iron production. The pellets may becold- or hot-bonded, but heat is required forthe endothermic reduction reaction. In addi-tion, porosity is required to eliminate gaseousreduction products (Co, Co2).

The principal advantage of self-reducingpellets is that no gaseous reactant is re-quired. It is only necessary to establish suit-able heat transfer in a reactor to producesponge iron. In addition, the pellets could beused as supplemental feed to a BF system.The principal disadvantages are that the pro-duction, handling, and conversion techniquesare unproven commercially, although somelimited tests appear promising. Abrasion andimpact resistance is important from both ahandling and a processing standpoint. Anoth-er disadvantage is that the sponge iron quitereadily absorbs sulfur from the carbonaceousreductant.

The development of self-reducing pelletscould benefit all segments of the industry,and it is likely that development will proceedas an adjunct to DR developments during thenext decade.

‘“E, M. Van Dornick, “Furnace Reduction of Pelletized Fer-riferous Materials,”’ U.S. patent No. 3,340,044, Sept. 5, 1967;G. D. McAdam, D. J. O’Brien, and T. Marshall, “Rapid Reduc-tion of New Zealand Ironsands, ” Ironmclking ond SteeImoking,No. 1, 1977, pp. 1-9; K. Schermer, “Improved Technology forProcessing Sponge Iron in the Electric Arc Furnace, ” lronrnuk-ing and Steelmoking, No, 3. 1975, pp. 118-92.

212 c Technology and Steel Industry Competitiveness

Energy Recovery

Energy recovery technologies in the steelindustry have advanced significantly duringthe past 10 years.29 The pressures of rapidlyrising energy prices and declining availabilityhave served as major incentives. Energy nowrepresents nearly 20 percent of the cost ofproducing steel; 10 years ago it was 10 per-cent. There are a number of energy recoveryopportunities available to the steel industry,and some new ones may be on the way. Nip-pon Steel Co. of Japan has demonstrated theeffectiveness of energy recovery and conser-vation. In 5 years (1974-78) they achieved atotal energy savings of 11.4 percent. Of thistotal, 3 percent resulted from energy-savingequipment installation, 6 percent fromchanges in operation, and 2.4 percent frommodernization of facilities such as the use ofcontinuous casting. 30

Various estimates have been made of thepotential for energy conservation in the steelindustry. A North Atlantic Treaty Organiza-tion study indicated a potential for energysavings of up to 40 percent.31 A study in theUnited Kingdom concluded that a savings of30 percent was possible.32 This would besomewhat applicable to the United States.Another study indicated that 15 to 20 percentof present energy consumption could besaved within the next decade. That studynoted that two-thirds of the heat input to anintegrated plant is wasted: 13 percent inwaste gases, 16 percent in cooling water, 13percent in sensible heat in residual mattersuch as slag and coke, and 24 percent lost tothe ambient atmosphere.

Electric power could be generated by gas-expansion turbine generators operating onhigh-pressure top gas from BFs. The technol-

%4. h40rleV, “Industry is Making Its Energy Work Harder, ”[ron Age, Aug. 27, 1979.

‘(’Nil)pfm Steel News, December 1979.“E, G. Kovach (cd,), 7’echnoiogy of Efficient Energy Utiliza-

tion, Pergamon Press, 1974.“G. Leach, “A Low Energy Strategy for the United King-

dom,’” Intern[itionfll Institute for the Environment (Ina’ Develop-ment, 1979.

“H. G. Pottken, et al., Met(]Jlur~i{;(il Plunt and Technology,V()]. 4, 1978, p. 47.

ogy has been demonstrated in Japan, butadoption is difficult and economically ques-tionable for most older BFs. Similarly, hot off-gases from coal-based DR kilns are beingused to produce steam for electrical genera-tion.34

Another demonstrated technological op-portunity is in BOF offgas collection.35 Carbonmonoxide is released intermittently fromsteelmaking units, and its collection and usefor fuel purposes have been adopted by someEuropean, Japanese, and American oper-ators. Hood design is the most critical param-eter in modification for this purpose.

Adoptions of this nature are likely to con-tinue through the 1980’s along with the de-velopment and demonstration of new con-cepts for recovery of sensible heat from proc-ess materials (coke, slag, sinter, and steel),

Continuous Rolling

If slabs from continuous casting units couldbe rolled directly without the necessity of re-heating, a considerable amount of energycould be saved. However, the technology isdifficult to develop and the capital costs couldbe high. In addition, the effect on cold-rollingoperations and the ability to control finalsteel properties with such processing are un-proven. Until research efforts show the feasi-bility of this technology, and until the compo-sition and cleanliness of liquid steel fed tocontinuous casters are controlled more tight-ly, any major development effort is unlikely.With continued developments in secondaryrefining36 and perhaps filtration, direct roll-ing may become an attractive technologicalopportunity.

“33 Metal Producing, February 1980.“+’ Potential for Energy Conservation in the Steel Industry to

Federal Energy Administration, ” Battel]e, Co]umbus Labora-tories, May 30, 1975; U. K. Sinha, “Recenl Developments in theIron and Steel Industry in the Light of Energy Conservation,’”Steel Times, January 1978. pp. 61-71.

‘“J. C. C. Leach, “Secondary Refining for Electric Steelmak-ing, ” Ironrnuking and Steelmoking, No. 2, 1977, pp. 58-65.

‘-R. L. Reddy, “Some Factors Affecting the Value of DirectReduced Iron to the Steelmaker,’” 38th AlhlE Ironmaking Con-ference, Detroit, Nlich,, 1979.


High= Temperature Sensors

It is difficult to determine the composition,cleanliness, and temperature of liquid ironand steel on a continuous, reliable basis.Although immersion thermocouples and oxy-gen-potential probes have been developed forintermittent measurements, no instrumentsare available for long-term continuous con-trol. ‘H The difficulty lies not in the primary in-struments but in the severe conditions underwhich they must operate. Under reactive con-ditions at 1,550° C, “protective” materialsfail rapidly. Hence, developments in this areadepend on the development of immersion ma-terials and/or major innovations in remotesensors.

If continuous control measurements of tem-perature, composition, and cleanliness can bedeveloped, significant increases in productiv-ity and overall quality could be achieved. Asis always the case, improvements of this na-ture lead to decreased energy and raw mate-rial consumption per tonne of steel productshipped. Contact and remote sensors for hotsolid products in process are available andunder continuing improvement. The major re-search problem is in the liquid steel process-ing area. All sectors of the industry wouldbenefit, and the impact would be significant.Breakthroughs on a selective basis are ex-pected during the next two decades.

Computer Control

This subject is very broad and complex.From a “black box” point of view, the steel in-dustry appears no more complex than otherbasic industries. The complexities arise whenthe inputs must be fully characterized andthe process mechanism (reaction and trans-formation rates, heat and mass transfer,electrical and electromechanical character-istics, and process variables) must be fullydescribed. Despite major effort, the surfacehas only been scratched. 39

“{l. P. Ryan and R. R. Burt. “Oxvgen-Sensor Based Deoxirfa-tion Con[ro],’” lrf~n ond Steelm[lking, Februarv 1978, p. 28.

‘“C. 1,. Kusik, hl. R. Nlournier, and C. J. Kucinkas, ‘+ State-of-the-Art Review of (;ornputer C(~ntrol in the Steel Industry, ” A.

Processing of Iron Powders

The potential advantages of avoidingvery high temperatures associated withuid steel processing and the potential

theliq-op-

portunities - for making difficult alloy comp-onents with iron powders have provided in-centives for many ventures in iron powderprocessing. The powdered metal industry hasdeveloped proven technology for convertingiron oxide to metallic products through pow-der processing,40 but powder processing hasnot competed with liquid processing for majorsteel markets. Efforts to roll quality ironpowder directly into thin-gauge steel sheetcontinue,’ ] The technology must advance tothe point where wide strip with a uniformthickness and structural quality can be pro-duced before significant demonstration canoccur. Cost competitiveness might beachieved through major energy and fuel sav-ings in the 1990’s.

Plasma Arc Melting

In the Soviet Union and East Germany,plasma melting of steel scrap has become anindustrialized process.42 Plasma arc furnaceswith capacities of 27.2 to 90.7 tonnes are inoperation there, replacing conventional EAFsused to melt and refine steel scrap. The fur-naces may also be used for melting DRI.

In the conventional EAF, electric arcs areignited between carbon electrodes and thefurnace charge. Heat is transmitted by con-vection and radiation. Plasma arc furnaces

D. Little, Inc., contractor report for the Department of Energy,June 1979; Central Intelligence Agency, “Foreign Developmentand Application of Automated Controls for the Steel Industry, ”S.K. 79-10010, January 1979; Iron Age, Feb. 4, 1980: H. Okada,“Background to ‘technological Advance in the Japanese SteelIndustry, ” Workshop on Innovation Policy and Firm Strategy,Dec. 4-6, 1979.

“Strauss and Heckel, op. cit.“M. Ayers, “New Technology for Steel Strip Production, ”

OTA seminar, May 2-3, 1979, paper No. 11: P. Witte, “An Ener-gy Efficient, Pollution Free Process for the Production of SteelSheet from Iron Concentrates,” OTA seminar. May 2-3, 1979.paper No. 12.

‘-Eketorp and Mathiesen, op. cit.: A. S. Borodachev. G. N.(lkorokov, N. P. Pozdev, N. A. Tulin, H. Fiedler, F. Muller, andG. Scharf, “Melting Steel in Plasma Electric Furnaces, ” Stol,1979, pp. 115-17.

.


have bottom electrodes under the charge. Theplasma arc is generated by forcing a streamof argon or nitrogen gas through an electricarc, which ionizes the gas and raises its tem-perature. The gas may reach temperaturesas high as 13,7000 C. The arcs of injected gasthrow plasma streams through ports in thefurnace walls into the charge.

The advantage of the plasma arc furnace isthat the plasma process transfers heat muchmore rapidly to the metal being melted andrefined. Radiation and convection are muchmore efficient. According to reports, the pow-er coefficient is 96 percent, which is consid-erably higher than in the EAF, where typicalvalues are on the order of 75 percent.

Long-Range Opportunities

Perhaps the two most significant opportu-nities on the horizon for the steel industryare:

●

●

complete elimination of the need forfossil fuels through the production of hy-drogen by water hydrolysis; andadaptation of steelmaking to the poten-tials afforded by advanced nuclear reac-tors, high-temperature gas-cooled reac-tors, and, further off, fusion or MHDreactors .43

For the first opportunity to become a reali-ty, energy from nuclear reactors must beavailable at costs well below those for fossilfuels. Hydrogen can then be used as a substi-

“J. Cushman, “Nuclear Steel: Long Wait for the Birth of anIndustry,’” Steel Week, Nov. 26, 1979.

tute for other gaseous reductants in most ofthe DR processes. For the second opportunityto emerge, the steel industry must work close-ly with the nuclear industry and take advan-tage of related developments in plasmas andMHD.”44Although the Japanese have made thefirst major move, * a U.S. energy-chemical-steel consortium is underway. 45 By the turn ofthe century, experts expect a demonstrationplant to be operating. By combining the bestfeatures of available technology, it might bepossible to achieve very fast oxide reductionand melting in DR and melting units.

“R. W. Anderson, “Application of MHD Power and MHD Ex-haust Gas Sensible Heat,<’ OTA seminar, May 2-3, 1979,

*See ch. 9 for discussion of the Japanese nuclear steel mak-ing program.

‘Wushman, op. cit,

Changes in Steel Products

Perhaps the major factor affecting the de-velopment of steel mill products is the energyshortage. Steel products play a large role inenergy production (e.g., in tubing for petrole-um production and transport and in materialsfor fossil fuel processing equipment and forelectricity generation), and the increasedneeds of the energy sector will place greaterdemands on steel products. At the same time,the role of steel in the transportation industrywill be one of helping to conserve energy (e.g.,by decreasing vehicle weights to save fuel orby increasing the efficiency of electricalequipment such as motors and transformers).

In these energy-related areas, steel productswill have to achieve higher levels of perform-ance in such characteristics as strength,toughness, corrosion resistance, fabricabil-ity, weldability, and formability. (See ch. 5 fora discussion of these properties.)

Such characteristics have always beenconsidered in the development of steel alloycomposition and processing. Except for thespecialty steels (such as high-alloy steels,stainless steels, and tool steels), productioncosts, when weighed against properties, havegenerally led to the use of carbon as the ma-


jor modifier of properties. That is, it has beenpossible to satisfy most markets by using therange of properties attainable from carbonsteels in either the hot-rolled, cold-rolled, orheat-treated condition.

The combinations of characteristics thatwill be needed to meet future performance re-quirements are not readily attainable withthe plain carbon steels. Consequently, steelmetallurgists have been using a combinationof strengthening mechanisms to develop ma-terials with greater strength and tough-ness—a difficult combination. A number ofnew products have already been marketed toa limited degree or are in advanced stages ofdevelopment. In some cases, barriers in proc-essing technology are affecting or are likelyto affect the product developments.

Incremental Product Developments

High-strength low-alloy (HSLA) steels arealready marketed for energy production andautomotive applications. In these steels,alloying elements such as titanium, vanadi-um, columbium, molybdenum, manganese,nickel, or cobalt are added. Carbon content isreduced in order to achieve high strengthalong with good toughness, better weldabili-ty, and better corrosion resistance. Theprecipitation of fine alloy carbides, which aresmaller and better distributed than the car-bide in commodity steels, improves the prop-erties of the steel. This alloying effect andcontrolled rolling and heat treatment, whichcreate small gains in strength and toughness,are the basis of the HSLA steels.

Dual-phase steels are on the market on alimited basis in automotive applications.These steels take advantage of the strength ofa high-hardness crystalline form of iron (mar-tensite) but use it in a mixture of very finegrains of relatively soft, virtually carbon-freeiron. The combination of grain hardness andfine grain size, which can control the defor-mation pattern of the mixture, makes thedual-phase steels especially useful in sheetmetal applications. The original material forsheet metal is relatively soft and easily

shaped, but as it is being formed into shape, itattains the high strength needed for finalservice. This strengthening during the defor-mation process, or work-hardening, of a finegrain size material is a major alternative tothe heat-treatment process for HSLA steels.The lack of carbide precipitates in the dual-phase steels generally gives them betterweldability, formability, and corrosion re-sistance than conventional HSLA steels.

Superplastic ferrous alloys are less devel-oped than superplastic nonferrous alloys, butthere are some mainly small-scale test appli-cations, primarily for the automotive andpackaging industries. These ferrous alloysextend the concept that very fine-grainedsolids are both stronger and tougher thanconventional steels by using ultrafine grains.The grains in these alloys are extremely fine(0.lµ to 5.0µ) mixtures of two crystallinephases, one iron (austenite) and the other aceramic iron carbide (cementite). When thismaterial is deformed at a moderately ele-vated temperature, it can be shaped, like atypical organic polymer plastic, into intricatepatterns with very little applied force. Thepotential savings in design of dies and opera-tion of presses for forming of sheet metalcould be substantial. Moreover, by using suchalloys in bulk form, such items as gears mightbe formed in a small number of simple extru-sion steps with significant savings of energyand material compared to current machiningpractices.

One-side galvanized steel is described anddiscussed in chapter 9.

Major Product Developments

Amorphous ferrous alloys are under devel-opment in some small-scale test applications,primarily in electromagnetic devices. Theamorphous ferrous alloys demonstrate thereduction of grain size taken to the limit, sothat the aggregates of atoms no longer haveany of the ordered characteristics of crystal-line solids; they are amorphous solids likeglass. Such materials have very useful prop-erties, such as high strength, corrosion resist-


ance (higher than ferrous alloys such asstainless steels), and easy magnetization(equal or better than materials such as per-malloy). 46 The ferrous metallic glasses, asthey are commonly called, can be obtainedonly by an extremely rapid cooling from theliquid to the solid state (1060 C/see). They donot have compositions typical of steels, al-though they have iron contents ranging from3 to 93 percent. The greatest potential forthese materials seems to be in transformercores or in electric motors. The ease ofmagnetization would greatly increase trans-former and motor efficiency.

According to a recent description of the po-tentially large impact of metallic glass:

The random structure gives metallic glassunique magnetic properties that translateinto vastly improved transformer efficiency,And, if scientists can learn to use this sub-stance in the transformer’s moving counter-part—the electric motor—Americans even-tually could save up to $2 billion annually inenergy costs.

According to the U.S. Department of Ener-gy, metallic glass will begin to tap enormousquantities of wasted electric energy beforethe decade ends.47

The National Academy of Sciences has notedthat commercial exploitation of these materi-als will stimulate much R&D during the next 5to 10 years.

Development Problems

These steel products or potential productsface some common problems in further devel-opment and use, problems which reflect thehigher quality level of those products. Twoare general problem areas: control of meltchemistry; and ability to carry out complexand/or tight-specification thermomechanicalprocessing.

The melt chemistry problem involves thecontrol of both impurities and alloy additions.

‘“J. J. Gilman, “Ferrous Metallic Glasses. ” MetaLs Progress,Juiy 1979, pp. 42-47.

‘ Freeman, ‘“Science and Technology—A Five Year Out-look. ” National Academy of Sciences, 1979.

The role of impurities, such as sulfur, oxygen,nitrogen, hydrogen, and in some cases evencarbon, in affecting the properties of furtherprocessing of steel is well known. Control ofthose impurities requires more extensiveprocessing such as vacuum remelting, or de-gassing, as well as better process monitoringand control procedures [e.g., the use of solid-state oxygen detectors for rapid chemicalanalysis). The control of alloy additions re-quires similar attention. It is noteworthy thatthe newer low-alloy steels are called “micro-alloyed” steels, which reflects the low levelsof alloy addition as well as the need to controlthose levels within narrow ranges.

The problem of thermomechanical process-ing is central to all the materials that havebeen discussed. Facilities to carry out suchprocessing, or the lack thereof, will signifi-cantly affect the marketing of the new steelproducts. These facilities will affect the prod-uct costs in two ways: the more complex andmore closely controlled processing that thesematerials require will raise operating costs;and the equipment and facilities for produc-ing the higher quality products will not bepart of the existing plant of most steel mills,so production will require investment in newfacilities. It is reasonable to assume thatthose mills with the more sophisticated ther-momechanical processing capability will bein the most competitive position to participatein the market for these products.

The new products also have some individ-ual disadvantages:

s Both HSLA and dual-phase steels posesome problems in die design if they areto be properly formed. For HSLA, themajor problem is that its great strengthcauses “spring-back;” that is, the steeldeforms elastically, but then springsback after the die pressure is removed.For dual-phase steels, the problem is tohave the die contour control strain dis-tribution so that sufficient hardeningoccurs. In both dual-phase and HSLAsteels, corrosion resulting from the useof thinner gauges of steel is of some con-cern. The use of more extensive corro-


sion protection methods will probablycompensate for that potential disadvan-tage.Superplastic ferrous alloys are as easyto form as plastics, but like plastics theyalso have a low forming rate: it takeslonger to form one piece of the super-plastic alloy than to form an ordinarysteel sheet. Additionally, the fine grainsize of the superplastic alloys is likely tolower their corrosion resistance.The amorphous ferrous alloys sufferfrom two significant disadvantages withrespect to structural applications. Theyare relatively brittle (have very low duc-tility), and they are currently only avail-able in very limited shapes and sizes.Perhaps the biggest potential problem inapplying the amorphous alloys is thatthey are extremely susceptible to crys-tallization or devitrification if service isat elevated temperatures.

Summary

There are a number of steel mill productdevelopments that indicate a continued com-

petitiveness for steel products. Althoughproduct development continues to improvethe applicability of the materials, there areneeds to be met in the processing technologyat the mills before full advantage of the po-tential markets can be realized, Of specialnote are the need to gain greater control overchemical composition and metallurgicalstructure in order to produce uniformly high-performance materials, and the need to de-velop the procedures and facilities to carryout the more complex processing needed toobtain the desired metallurgical structures.Mills that have the financial and technical re-sources to meet these needs should be at anadvantage in developing the markets.

The steel industry has played the dominantrole in the development of HSLA, dual-phase,and superplastic steels; but chemical compa-nies, universities, electrical equipment firms,and commercial research organizations havebeen very active in innovating in the glassysteels. There is a high probability that newcompanies will become the dominant pro-ducers of glassy steels.

CHAPTER 7

Technology andRaw Materials Problems

.

Contents

Pagesummary ● ***.*....,***,****.**.**.**** 221

Coke Supply and Demand. ................222U.S. Metallurgical Coke Industry: Process

and Age Distribution. . .................223Actual Productive Capability and Declining

Capacity . 0 . . . . . . . . . . . . . 0 . 0 . .,,,,...0 224U.S. Production and Consumption: A

Growing Shortage . . . . . . . . . . . . . . . . . . . . 225Coke Imports and Declining Employment. .. ..227Future Coke Shortages. ., ... , . ...........228Potential Solutions to Coke Shortages . ......229

Ferrous Scrap Supply and Demand. ... .....236U.S. Ferrous Scrap Industry. . .............231Supply, Demand, and Price . ..............232Availability Concerns. ... , . . . . . . . ., , ... , , 234Scrap Exports: Growing World Demand and

Price Impact . . . . . . . . . . . . . . . . . . . . . . . .Impacts of Technological Change on

Scrap Demand,.. . . . . . . . . . . . . . . . . . . . .Targets for Increased Use of Ferrous Scrap.Future Scrap Shortages. . . . . . . . . . . . . . . . .

List of Tables

Table No.89. Geographic Distribution of U.S. Coke

Oven Capacipacity. . . . . . . . . . . . . . . . . . . . . .

● 235

239: 241, 243

Page

223

90. Age Distribution of U.S. Coke OvenCapacity . . . . . * O * * * . * ! . . . . . . . . . . . . .

91. Estimated Decline in Actual ProductiveCapability of Coke Oven Plants in theUnited States: 1973 v. 1979. . . . . . . . . . . .

92. U.S. Coke Consumption. . . . . . . . . . . . , , .93.U.S. Imports of Coke by Country of

Origin, 1972-78 . . . . . . . . . . . . . . . . . . . . .94. Measures of U.S. Ferrous Scrap Use,

1969-78 . . . . . . . . . . . . . . . . . . . . . . . . . . .95. Selected Data on Iron and Steel Scrap:

Ferrous Scrap Relative to ScrapConsumption and the Impacts of ScrapExports on Scrap Supply and Price , . . . .

List of Figures

Figure No.33. Flowchart of Ferrous Metallics . . . . . . .34, Scrap: Price and Export Levels; Domestic

Purchased Scrap Requirements, 1971-79

.,

224

225225

228

232

236

Page231

238

CHAPTER 7

Technology and Raw Materials Problems

Summary

Coke and scrap are essential raw materi-als for the steel industry: coke is the basis forreducing iron oxide to metallic iron in blastfurnaces; scrap is the major input to electricsteelmaking furnaces. The adequacy of fu-ture supplies of both is uncertain.

A shortage of cokemaking facilities, not ofmetallurgical coal from which to make coke,is the problem. Coke, used by the integratedsteel companies as a feedstock in ironmaking,is mostly produced in byproduct ovens fromhigh-grade metallurgical coals. About one-third of all domestic coke ovens are consid-ered old by industry standards. These olderovens are less efficient than newer ones andtend to produce a poorer quality coke. The do-mestic steel industry has a much higher cokeoven obsolescence rate than do other majorsteel-producing countries, and the actual pro-ductive capability of U.S. coke ovens has de-clined by almost one-fifth since 1973. The ma-jor reasons for this capacity decline aregrowing capital costs and regulatory require-ments, both of which discourage new cokeoven construction.

As cokemaking capacity declines, coke im-ports are growing and employment is fallingoff in this phase of steelmaking. Domesticcoke consumption has been higher than pro-duction during 3 of the past 6 years. In 1978,domestic consumption was 5.4 million tonnes,an amount 16 percent higher than domesticproduction. One estimate is that by 1985, thecoke shortage will increase to about 9 milliontonnes, or 20 percent of domestic production,as capacity declines further and demandgrows. However, a different study indicatesthat ample domestic cokemaking capacity ex-ists,

Several options, witheffectiveness, could helpcurrent coke shortages.

varying degrees ofstabilize or reduceThese include: im-

porting more coke, using more direct reducediron (DRI), importing more semifinished or fin-ished steel products, increasing the use ofelectric arc steelmaking (which would alsorequire more scrap), and improving the coke-use rate in blast furnaces.

The steel industry is also a major consumerof commodity ferrous scrap. Although scrapprices have doubled since 1969, in real termsscrap remains an economical source of ironinput for steelmaking. However, the futurephysical availability of high-quality scrap andits price are matters of some concern. Scrapindustry processing capability and the availa-bility and cost of transportation may affectscrap supply; however, the problems that ex-ist in these areas are being remedied to someextent.

Scrap supply projections range from ade-quate, though at higher prices, to inadequate,even at higher prices. Because the substitu-tion opportunities for scrap are limited, de-mand does not decline significantly when sup-plies diminish and prices increase. Mostnear-term technological changes will tend to

increase the use of scrap; these changes in-clude the growing use of electric furnacesand continuous casting and the modificationof basic oxygen furnaces to increase the pro-portion of scrap used. At the same time, de-mand is growing for high-performance spe-cialty steels, which incorporate a higher pro-portion of alloy and other materials that makescrap recovery difficult.

The growing demand for scrap places thesteel industry in an increasingly difficult posi-tion. The energy-efficient, nonintegrated pro-ducers will be affected most severely byscrap price increases and supply problems.There are statutory resource conservationtargets that apply to scrap, but these do notdistinguish scrap-use problems by industry

221


segment. Furthermore, for economic or tech-nical reasons, these targets are not alwaysfeasible on a plant basis.

Options that might be used to offset scrapsupply problems and to maintain existingscrap inventories include expanding the useof DRI and imposing scrap export controls.Scrap exports have been relatively stable sofar, but they are expected to increase be-cause of worldwide increases in electric fur-nace use. U.S. scrap is attractive to many for-eign buyers because of favorable currencyexchange rates. The bleak outlook for scraphas prompted steel industry interest in exportcontrols, but the scrap industry opposes suchmeasures.

Iron ore supplies do not appear to pose asubstantial problem that calls for, or affects,new technology. Although about one-third ofiron ore is imported, the United States hassubstantial domestic ore resources and mod-ern, efficient ore mines and processing facili-ties. Nevertheless, industry economics aresuch that imports will continue, ’ Observa-tions by World Steel Dynamics confirm thisoutlook:

The North American iron ore business hasa unique industrial structure, resulting fromthe combination of economics (huge capital

‘Iron Ore, Bureau of Mines, MCP-13, May 1978.

and economy of scale requirements), tradi-tional factors, and the longer-term strategicperceptions of the various players.

Until the 1960’s there was always a majoradvantage for the steel producer to operateits own iron ore mines. And these mines weredeveloped jointly in view of the huge capitalrequirements, economy-of-scale factors, andlong lead times, The self-producers’ advan-tage eroded during the 1960’s as numerousforeign ore properties were developed andtechnological changes brought down trans-portation expenses. However, the nationali-zation of iron ore properties was importantfor long-term economic survival. There arenot many iron ore properties in North Amer-ica whose output is sold on a year-to-yearbasis to the highest bidder. The mentality ofsteel producers is that they have preferredlong-term arrangements,

Today, with steel production at high levelsin the United States and inventories depletedby the iron ore strikes, demand is strong forthe output of North American iron ore prop-erties. Should the Western World economybe stagnant in the years ahead, economicforces will push down the profit margins ofNorth American iron ore producers—as wasthe case during the 1960’s and early 1970’s.Conversely, if Western World economy isstrong, Rotterdam iron ore “spot” prices willrise sharply within the next few years.2

‘World Steel Dynamics, Core Report A, ch. 12, 1979.

Coke Supply and Demand

A recent study for the Government con-cludes that the United States faces a shortageof metallurgical coke that is expected toworsen in the next 3 to 5 years.3 Coke is anessential, coal-based industrial material usedprimarily in the steel industry’s blast fur-naces to reduce iron ore to iron, which is sub-sequently refined into steel. The UnitedStates holds the most favorable world posi-

3Most of the material on coke presented in this chapter wasobtained from William T. Hogan, S. J., and Frank T. Koelbe,Analysis o~ the U.S. Metallurgical Coke Industry, prepared forthe Economic Development Administration and Lehigh Univer-sity, October 1979.

tion in terms of the size andcoking-coal reserves and thecapability for their commercial

quality of itstechnologicaldevelopment.

Nevertheless, as a result of coke oven obso-lescence and declining capacity, the Nation’smetallurgical coal reserves are being under-utilized. Domestic coke producers are unableto satisfy consumer demand and substantialquantities of coke are being imported to sup-ply the domestic deficit. Under current condi-tions, it is possible that this situation will notimprove and that dependence on importedcoke will increase, in which case domesticiron and steel production may eventually be

Ch. 7— Technology and Raw Materials Problems 223

curtailed. Alternatively, the use of steelmak-ing technologies not based on coke will in-crease and improvements in the technologywill result in ample domestic cokemaking ca-pacity.’

U.S. Metallurgical Coke Industry:Process and Age Distribution

The U.S. coke industry consists of 34 com-panies with 59 plants in 21 States. The cur-rent annual capacity of these plants is about57.5 million tonnes (table 89). Forty-six ofthese plants are “furnace” plants, operatedby iron and steel companies that producecoke primarily for use in their own blast fur-naces; the other 13 are “merchant” plantsthat generally sell their coke on the open mar-ket to foundries and other consumers. Fur-nace plants produce 93 percent of the Na-tion’s coke output (table 90).

Ninety-nine percent of all domestic “oven”coke is produced in byproduct ovens. * By-product ovens use a distillation process thatheats metallurgical coals to high tempera-tures to drive off their gaseous content. Theresulting coke is hard, porous material, high

‘C. A. Bradford, “The Phantom Coke Shortage, ” MerrillLynch Pierce Fenner & Smith, 1980,

*An alternative coking method, the beehive process, is usedby only two plants. They produce relatively minor quantities of“beehive” coke, most of which is marketed for blast furnaceuse and classified separately for statistical reporting purposes.

in fixed carbon and low in ash and sulfur,which is used as a reductant in the blast fur-nace for the ironmaking phase of steelmak-ing. A major advantage of byproduct cokeovens is that they permit the recovery of sala-ble, petroleum-type products, whose value israpidly increasing.

About one-third of total coke oven capacityis 25 or more years old, and nearly one-fifth isin the 20- to 25-year age category (see table90). Domestic coke oven obsolescence ratesare high compared to those in other majorsteel-producing countries. About two-thirdsof all coke ovens in the European EconomicCommunity (EEC) countries are less than 20years old, and in Japan nearly 70 percent ofthe coking capacity is less than 10 years oldand none of it is more than 25 years old.5

The generally accepted standard for thenormal, effective lifespan of a coke oven is 25to 30 years. Compared to newer coke ovens,those installed 25 to 30 years ago are less effi-cient, generate more pollution, require great-er maintenance, produce lower quality coke,and contribute less to the overall productivityof the blast furnaces using that coke. Basedon this standard, facility obsolescence is anacute problem for the domestic coke indus-try.’

‘International Iron and Steel Institute Survey, 33 Metal Pro-ducing, December 1979.

6Hogan and Koelbe, op. cit., p. ix.

Table 89.—Geographic Distribution of U.S. Coke Oven Capacity—

Number of Number of Number of Capacity inStates plants batteries ovens existence Percent of total

Alabama . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 25 1,215 5,182,338 9.02California, Colorado, Utah . . . . . . . . . . . . . . . . 3 14 710 3,273,472 5.70Connecticut, Maryland, Massachusetts,

New Jersey, New York. . . . . . . . . . . . . . . . . . 4 18 1,074 4,987,013 8.68Illinois. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 7 326 1,807,560 3.14Indiana . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 25 1,076 9,926,684 17.27Kentucky, Missouri, Tennessee, Texas. . . . . . 5 10 415 2,094,916 3.64Michigan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 8 508 3,338,690 5.81Minnesota, Wisconsin . . . . . . . . . . . . . . . . . . . 1 2 100 163,210 0.28Ohio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 35 1,878 8,619,017 14.99Pennsylvania . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 46 2,962 14,679,309 25.54West Virginia . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 9 519 3,411,191 5.93

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 199 11,413 57,483,400 b 100.00

aTonnes of Potential maximum annual capacity in existence on JUIY 31.1979, as determined by Fordham University survey.b51.8 million tonnes are in operation, while actual p[roductive capacity has been estimated at 476 million tonnes (see table 98)

SOURCE William T Hogan, Analysis of the U.S. Metallurgical Coal Industry, 1979


Table 90.—Age Distribution of U.S. Coke Oven Capacity

NumberAge in yearsa of batteries Number of ovens Capacityb Percent of totalFurnace plants0-5 . . . . . . . . . . . . 24 1,437 12,028,221 22.665-10 . . . . . . . . . . . 7 526 4,687,077 8.8310-15 . . . . . . . . . . 6 330 1,583,767 2.9815-20 . . . . . . . . . . 20 1,225 5,737,183 10.8120-25 . . . . . . . . . . 40 2,383 10,746,376 20.2425-30 . . . . . . . . . . 37 2,216 9,793,931 18.4530-35 . . . . . . . . . . 17 1,071 5,072,425 9.5635-40 . . . . . . . . . . 12 650 2,728,886 5.14Over 40 . . . . . . . . . 6 238 705,809 1.33

Total . . . . . . . 169 10,076 – 58,083,675 100.00 -

—-Merchant plants0-5 . . . . . . . . . . . . 4 242 901,132 20.485-10 . . . . . . . . . . . 2 95 419,778 9.5410-15 . . . . . . . . . . 4 201 827,638 18.8115-20 . . . . . . . . . . 1 60 217,834 4.9520-25 . . . . . . . . . . 0 0 0 0.0025-30 . . . . . . . . . . 7 298 947,810 21.5430-35 . . . . . . . . . . 1 47 86,074 1.9635-40 . . . . . . . . . . 3 100 256,899 5.84Over 40 . . . . . . . . . 8 294 742,556 16.88

Total . . . . . . . 30 1,337 4,399,721 100.00

aAge dates from first entry into operation or from last date of rebuilding.bTonnes of potential maximum annual capacity in existence on July 31, 1979, as determined by Ford ham University survey.

SOURCE Willlam T. Hogan, Analysis of the U.S. Metallurgical Coke Industry, 1979

Most of the coking equipment being retiredis 25 to 30 years old. Many ovens in this criti-cal age category cannot be upgraded to meetpending environmental regulations and havebeen earmarked for abandonment.’ Pennsyl-vania, Indiana, and Ohio are the sites of 57percent of total in-place coking capacity (seetable 89) and would be affected most by fu-ture plant closings.

Actual Productive Capabilityand Declining Capacity

When discussing coke oven capacity, it isimportant to differentiate between severalmeasures of available or effective capacity.First, 5 to 10 percent of all ovens are offlineat any point in time for rehabilitation or ma-jor repairs. Second, coke ovens will seldom, ifever, sustain a 100-percent operating rateover an extended period of time; periodically,they must be shut down for maintenance andminor repairs. Thus, some additional percent-age of ovens will be temporarily out of service

at any time. In recent years, pollution controlhas required a number of output-reducingmodifications in coking practice. As a conse-quence, the maximum annual operating rateattainable by active coke plants throughoutthe industry is currently about 92 percent oftheir aggregate capacity.’

Coke oven capacity may be measured inthree ways, according to operating condi-tions:

●

●

●

capacity in existence (gross capacity, in-cludes ovens out of order for rebuildingand major repairs, used to measure his-torical trends and age of equipment);capacity in operation (potential maxi-mum productive capacity, excludes fa-cilities that are offline for rebuilding andmajor repairs); andactual productive capability (excludesovens shut down for minor repairs andmaintenance, in addition to those out forrebuilding and major repair).

‘Ibid., p. 48, ‘Ibid., p. 43.

Ch. 7—Technology and Raw Materials Problems ● 225

Existing capacity has declined by 15 percentsince 1973 and is now 57.5 million tonnes. Adecrease of similar magnitude has takenplace in operating capacity, which is now51.8 million tonnes. Actual productive capa-bility has fallen since 1973 by an even greateramount—17 percent. This may be attributedto the aging of cokemaking facilities and tothe expansion of regulatory requirements af-fecting cokemaking. During the past 6 years,10 million tonnes of capability have been lost,and current actual productive capability is nomore than 47.6 million tonne/yr (see table 91).

U.S. Production and Consumption:A Growing Shortage

Total coke production has declined consid-erably since 1950—and dramatically since1976. Production decreased by 20 percent be-tween 1950 and 1976, and by 33 percent be-tween 1976 and 1978. * Coke consumption

*Earlier production decreases were largely the results of im-

also declined during this time, but at a muchslower rate: 23 percent between 1950 and1978. More importantly, consumption hasbeen higher than production during the pastfew years. During 1978, for the first time innearly 40 years, the coke industry producedless than 44 million tonnes of coke, thus fall-ing almost 15 percent below the Nation’s con-sumption of 51.3 million tonnes (table 92).

The loss of coking capacity has resultedfrom a number of interrelated economic,technical, and regulatory causes, the mostsignificant of which are:*

. long-term limitations on market growthand producer profits, which restrict theflow of investment capital into coke ovenreplacement and modernization;

● the consequent problems of coke ovenage and obsolescence, reduced operat-

proved blast furnace efficiency; more recent decreases arealso the result of capacity reduction.

*These causes are listed without regard to ranking or degreeof importance.

Table 91 .—Estimated Decline in Actual Productive Capability of Coke Oven Plantsin the United States: 1973 v. 1979a (millions of tonnes)

—Capabi l i ty change ‘ “—

Capability 1973-79 1979-85 est.

1973 1979 1985 est. Tonnes Percent Tonnes Percent

Capacity in existence. . 68.0 57.5 52.7 10.5 15.5 4.8 8.3C a p a c i t y i n o p e r a t i o n . 61.2 51.8 — 9.4 15.4 — —Actual productive capability 57.6 47.6 42,6 10.0 17.3 5.0 10.4

—aComparison of estimated average levels for 1973 and levels on JuIy 31, 1979, as determined by Ford ham University survey

SOURCE William T Hogan, Analysis of the U..S Metallurgical Coke Industry, 1979

Table 92.—U.S. Coke Consumption (thousands of tonnes)

DomesticYear Total production Imports Exports Net stock change consumption

1950 . . . . . . . . . . . 65,955 397 361 – 598 66,5891955 . . . . . . . . . . . . 68,299 114 482 – 1,132 69,0631960 ., . . . . . . . . . . . . 51,907 114 320 + 51 51,6501965 . . . . . . . . . . . . . 60,637 82 756 + 663 59,3001970 . . . . . . . . . . . . . . 60,338 139 2,248 + 901 57,3281971 . . . . . . . . . . . . . . 52,094 158 1,369 - 5 0 6 51,3891972 . . . . . . . . . . . . 54,880 168 1,117 – 532 54,4631973 . . . . . . . . . . . . . . 58,343 978 1,265 – 1,594 59,6501974 . . . . . . . . . . . . . . 55,854 3,210 1,159 – 226 58,1321975 . . . . . . . . . . . . . . 51,887 1,652 1,155 + 3,688 48,6941976 . . . . . . . . . . . . . . 52,908 1,189 1,193 + 1,356 51,5481977 . . . . . . . . . . . . . 48,533 1,658 1,126 –43 49,1091978 . . . . . . . . . . . . . . 44,074 5,189 629 -2,674 51,309

NOTE Totals may not add due to roundingSOURCE U S Departments of the Interior Commerce, and Energy

— ——— — — .— - —. —


ing efficiency, and increased oven emis-sions;the fluid state of cokemaking technologyand the uncertainty of investing in unfa-miliar equipment that may soon becomeobsolete;the escalating capital costs of coke ovenfacilities, attributable to inflation andthe need to install complex pollution con-trol and occupational safety equipment;additional obstacles to investment thatderive from regulatory uncertainty as tofuture rules governing coke oven facil-ities;environmental control regulations whichhave contributed to the closing of oldercoke plants and to the curtailment of op-erating rates and output levels in re-maining plants; andenvironmental restrictions on the con-struction of new and replacement cokeovens in certain geographic areas.

Capital Investment Requirements.—Cokeoven costs have increased considerably dur-ing the past few years. These sharp cost in-creases have contributed to the shortage ofcoke ovens and coke. In 1969, the cost of in-stalling a tonne of annual coke oven capacitywas $82 to $94, or a total of $82 million to $94million for a million-tonne battery of cokeovens. Installing a tonne of coke capacity nowcosts between $198 and $220, or between$198 million and $220 million for a million-tonne battery. This represents almost a 150-percent increase in 10 years, which partly re-sults from the inflation that has driven up allcapital costs.

Regulatory Requirements.—About one-fourth of the total capital investment in cokefacilities is for environmental and occupa-tional safety equipment. A recent estimatesuggests that the capital cost for regulatoryequipment may be as high as 30 percent.9 Theimpact of regulations has been dramatic incertain elements of the cokemaking process,for example, on the quenching cars that re-ceive the coke as it is pushed from the oven. Anew car with gas-cleaning equipment in-

’33 Metal Producing, May 1979, p. 69.

volves an investment of $6.5 million, com-pared with $150,000 for a conventionalquenching car purchased 10 years ago. TheEnvironmental Protection Agency (EPA) main-tains that environmental regulations haveplayed a secondary role to economic andother causes in the loss of coke capacity; how-ever, there is at least a similarity of timing be-tween environmental regulations and capac-ity shutdowns.

Most of the Nation’s coke oven batteriesare located at steel plants that are in poor airquality, nonattainment areas. EPA has devel-oped strict requirements for these areas. Themost stringent requirements apply to new orrehabilitated coke oven batteries, but old fa-cilities also have to be retrofitted with costlycontrols. In a number of cases, companieshave decided that it would be more econom-ical to shut down an operation and procurecoke from outside sources because the re-maining life of a battery was too short.

A considerable percentage of existing cokeovens is either in compliance with environ-mental standards or moving toward that goal.Batteries that have a number of years of liferemaining have been or are being retrofittedwith pollution control devices. The installa-tion of pollution control equipment often re-quires increased energy consumption. Theequipment may also require changes in oper-ating practices, and these have slowed downthe coking process considerably.

Environmental regulations have also con-tributed to limiting plans for cokemaking ca-pacity expansion. Current industry plans callfor less than a complete replacement of thoseovens scheduled to be abandoned, and thereare no announced plans to add capacity.

To install new coke oven capacity or re-place existing ovens* in poor air qualityregions, the following conditions must be met:

. high-performance environmental tech-

*If a battery that has been in operation is torn down to be re-placed by the same capacity, this is considered a new source ofpollution that will have to meet the most stringent require-ments.


nology, providing the least attainableemission rates, must be used;

● a company desiring to add a new instal-lation must have all of its facilities with-in a State in compliance with EPA stand-ards, or be under agreement to bringthem into compliance; and

● the company must demonstrate continu-ing progress in reducing particulate mat-ter so as to attain applicable air qualityrequirement levels.

In addition to these requirements, a com-pany planning to expand cokemaking capac-ity in a nonattainment area must offset theadditional pollution with pollution reductionsin that area. This condition poses a seriousproblem for a new company moving into anarea in which it has no other facilities forwhich pollution can be reduced. Even if acompany has the necessary funds to build acoke oven battery in a nonattainment area, itmay be difficult to make arrangements for apollution tradeoff. * The increasing value ofcoke byproducts, however, is making suchnew ventures more attractive.

Coke Imports andDeclining Employment

As a result of declining coke oven capacityand coke shortages, virtually every majorsteel producer has had to resort to imports—particularly since 1973. Coke imports, inturn, have contributed to reduced employ-ment opportunities in the steel industry. Cokeimports are expected to continue as presentcoke oven capacity is reduced.

Imports of MetaHurgical Coke.—Annualcoke imports averaged about 16,326 tonnesbetween 1950 and 1972 and nearly 1,814,000tonnes between 1973 and 1977. In 1978 theyjumped to 5.2 million tonnes (table 92) or 10percent of U.S. requirements, with almost 70percent coming from West Germany. The bal-ance came in relatively small amounts rang-ing from 12,000 to 300,000 tonnes from sever-al other countries, including The Nether-lands, Japan, the United Kingdom, Argentina,

*For additional comments, see ch. 11.

and Italy (table 93). * This marked the sixthconsecutive year that imports were near orabove the million-tonne level. Despite recent,temporary improvements in domestic availa-bility and the current slowdown in steel ac-tivity, 1979 also saw a high level of imports.

The need for the United States, with thelargest and best coking-coal reserves in theindustrial world, to import substantial quan-tities of coke on a regular basis is an anomaly.It represents an example of the Nation’sgrowing dependence on foreign suppliers foran industrial source of energy. This depend-ence on foreign coke may also present supplyand price problems when steel industries inexporting countries are operating at a highrate. During the 1973-74 worldwide steelboom, U.S. companies imported a substantialamount of coke for $138/tonne, which wasover $55/tonne more than it cost to producecoke domestically at that time. At the heightof the 1974 boom, prices for spot sales were$143 to $154/tonne, and in one instance roseas high as $180/tonne. Should an increase insteel operations develop abroad, there is areal question as to whether the United Statescould count on obtaining coke from foreignsources. However, the present closing ofmuch European steelmaking capacity and theThird World’s ever-increasing use of directreduction (DR) could make more coke avail-able.

Trade and Employment Effects.—The 5.2million tonnes of coke imported in 1978, in-cluding freight and insurance charges, costclose to $500 million. These imports contrib-uted about 10 percent to the steel-related bal-ance-of-payments deficit. Importing coke pro-duced in part from foreign coal also carried ahigh price in the loss of job opportunities. Ifthe 5.2 million tonnes of imported coke hadbeen produced in this country from domestic-ally mined coal, there would have been an ad-ditional 3,400 jobs at the coke ovens, plus asmany as 6,000 jobs in the Nation’s coal mines.It can also be argued that the loss of coke

*Steel plants in Western Europe and Japan did not operateat maximum levels in 1978 as did domestic producers. As aconsequence, they had excess coke capacity available.


Table 93.—U.S. Imports of Coke by Country of Origin, 1972-78 (thousands of tonnes)

Country of origin 1978 1977 1976 - 1975 1974 1973 1972

West Germany. . . . . . . . . . 3,604 1,108 808 1,259 2,505 664The Netherlands . . . . . . . .

—304 67 15 91 57

Japan . . . . . . . . . . . . . . . . .— —

259 8 10 8United Kingdom . . . . . . . .

— — —213 17 — 44 347 8

Argentina . . . . . . . . . . . . . .—

211 27 19 —Italy. . . . . . . . . . . . . . . . . . .

— — —191 158 — 39 7 29

Canada. . . . . . . . . . . . . . . .—

119 109 122 134 177 263 155France . . . . . . . . . . . . . . . . 84 138 102 — 2Australia . . . . . . . . . . . . . . .

— —54 — — —

Norway . . . . . . . . . . . . . . . .— — —

45 — — — 51Belgium-Luxembourg. . . .

— —36 16 102 4

South Africa... . . . . . . . . .— — —

33 — 11 54 31Sweden . . . . . . . . . . . . . . . .

— —24 10 — 4

Austria . . . . . . . . . . . . . . . .— — —

12 — — —U.S.S.R. . . . . . . . . . . . . . . . –

— — —— — — 26

Czechoslovakia . . . . . . . . . —— —

— — — 11NewZealand . . . . . . . . . . . —

— —— — — 7

Hungary . . . . . . . . . . . . . . . —— —

— — — 3Others . . . . . . . . . . . . . . . . . —

— —— — 15 — — 13

Total . . . . . . . . . . . . . . 5,189 1,658 1,189— —

1,652 3,210 978 168

SOURCE:US Departments of Commerce and the Interior

oven byproducts caused the use of more im-ported energy and an additional loss of jobs inthe petrochemical industry.

Future Coke Shortages

Anticipated reductions in domestic cokeoven capacity will force the domestic steel in-dustry to depend on imported coke wheneversteel demand is high. It has been estimatedthat coke imports are indispensable when-ever the steel industry has an operating rateof 83 percent or more—as is expected to bethe case often during the next several years.The current supply-demand imbalance is ex-pected by some to lead to an annual shortageof 7 million to 11 million tonnes in domes-tically produced coke by 1985. Given likely in-creases in world steel demand, coke importsmight not be readily available, or availableonly at high prices, unless additional cokeoven capacity is constructed in the meantime.

Decline in Capacity.—Based on the excessof scheduled domestic coke oven abandon-ments over installations, it is expected thatan additional 4.8 million tonnes of annual ca-pacity (8.3 percent) will be lost by the end of1985, thereby reducing total existing capac-ity to 52.7 million tonnes (see table 91), Ninety

percent of this scheduled capacity loss is ex-pected to occur by the end of 1982, when en-vironmental control deadlines must be met.Of more immediate concern is the fact that 2million of the 4.8-million-tonne loss is ex-pected to occur by the end of 1980. Given thepresent decline in domestic steel consump-tion, however, this much reduction in coke-making is not necessarily critical in the nearterm.

Actual productive capability is expected todecline even more than total existing capac-ity. When production losses from facilitiesscheduled to be rebuilt or repaired, frommaintenance operations, and from environ-mental constraints are taken into account, itis estimated that the industry’s actual pro-ductive capability will decline by 10.4 per-cent by 1985, to a maximum level of approxi-mately 42.6 million tonnes.

Increased Demand.—Assuming a 2-percent-per-year growth rate in domestic steel outputand the need for 0.56 tonne of coke to make 1tonne of pig iron, approximately 53.5 milliontonnes of coke would be needed to meet de-mand in 1985. The domestic coke shortfallwould be about 11 million tonnes. Barringcoke importation, a shortage of that magni-

Ch. 7—Technology and Raw Materials Problems . 229

tude would result in a 15.4-million-tonne de-cline in the amount of blast furnace ironavailable for steelmaking; raw steel outputwould then be short of demand by some 26.3million tonnes, the equivalent of 19.5 milliontonnes of finished steel products. * A l-per-cent-per-year increase in domestic demandfor steel would require 49.9 million tonnes ofcoke in 1985, leaving a shortfall of 7.3 milliontonnes of coke from domestic sources, enoughto have a significant negative effect on pigiron and steel production. Without coke im-ports and without an increase in domestic ca-pacity, the steel industry could have finishingfacilities that are standing idle while thecountry imports the steel it needs.

Changing Technology.—A recent analysis10

concludes that even with a steel boom in 1985domestic demand would only be 41.7 milliontonnes of coke, which implies that adequatecapacity would exist. The critical differencebetween this analysis and others is its opti-mism about future reductions in the amountof coke needed to produce a tonne of pig ironin blast furnaces: it forecasts a usage rate of0.50 tonne of coke per tonne of pig iron for theUnited States in 1985. Modernization of exist-ing blast furnaces appears likely, and thisforecast may thus be correct. Other factorswhich lead to the conclusion of ample cokecapacity include the increasing replacementof open hearths with electric furnaces, andcontinued improvements in existing cokemak-ing facilities to provide greater capacity.

Although OTA has not performed its owndetailed analysis of future cokemaking capac-ity and demand, the above conclusions areconsistent with other OTA findings: the in-creasing use of electric furnace steelmaking(especially by nonintegrated steelmaker),and a modernization and expansion programfor the coming decade aimed at improving theperformance of existing integrated facilities(see ch. 10). Hence, although there is uncer-tainty about future coke shortages, only the

*This projection for 1985 is based on the following assump-tions: growing emphasis on scrap-based electric furnace steel-making: no major use of direct reduction; 0.580 of iron outputfor each tonne of steel output.

“’Bradford, op. cit.

combination of very low capital spending andhigh domestic steel demand would likely leadto a severe coke shortage in the coming dec-ade.

Potential Solutions to Coke ShortagesDomestic coke shortages, should they oc-

cur, could be remedied in part by purchasingcoke elsewhere. An active worldwide steelmarket, however, could significantly reducethe likelihood that imported coke would beavailable, and whatever coke did becomeavailable would be at very high prices.Another alternative would be for steel con-sumers to import up to 19.5 million tonnes offinished steel products. Occurring at a timewhen steel demand is expected to be high allover the world, this would also mean exorbi-tant prices for steel imports. * A third alterna-tive would be to increase domestic coke ovencapacity. This course would make the steel in-dustry more self-sufficient by reducing cokeimports, would improve the Nation’s balanceof payments, and would increase domesticjob opportunities. The ever-increasing priceof petroleum may also provide ample motiva-tion for expanding coking capacity, becausethe coke byproducts that can substitute forpetroleum products in some uses will havemore value. Byproduct sales would help to re-duce the real cost of coke for blast furnaceuse.

Additional solutions to the coke shortageare available, but each presents problems ofits own:

● The use of electric furnace steelmakingbased on scrap iron could be increased.The limitations to this option are that itdoes not use virgin ore and thus does notadd to the available iron supply; a short-age of scrap iron may occur, or marked-ly higher prices may reduce the competi-tiveness of this steelmaking technol-ogy; ** and there may be inadequate do-mestic supplies of electricity.

*Whenever steel imports enter the United States under do-mestic shortage conditions, rather than in competition with do-mestic steel, prices reflect what the market will bear. This wasborne out in 1974, when import prices for steel were between$55 and $110/tonne higher than domestic production prices.

**See following section on scrap.


DR could supplant or complement blastfurnace technology based on coke. Avail-able projections suggest that the use ofDR will increase. However, constructionof domestic DR facilities will depend on cadditional coal-based DR technology be-coming available for large integratedplants or small nonintegrated plants, orboth. The availability of imported DRIdepends on developments in a number ofless developed countries and is still ●

somewhat speculative. (See ch. 6.)Semifinished steels could be imported tobypass the need for domestic blast fur-nace operations. It would be better to im-port semifinished rather than finishedsteel, because domestic capital invest-ment for primary ironmaking and steel-making would be greatlv reduced while

and finishing would be done domestical-ly. Nevertheless, imports of semifinishedsteel would still add to already sizablebalance-of-trade deficits.Blast furnace-based plants could changeprocesses to reduce the amount of cokethey use. Such changes might have a ma-jor impact because of the large numberof old and small domestic blast furnacescurrently in use.Formcoke technology could be adoptedto promote the use of cheaper, nonmetal-lurgical-grade coals. This technologymay offer environmental advantages,but it has not yet been demonstrated ona large scale. Furthermore, there are in-dications that capital costs and energyuse may be high. *

profitable secondary steel processing -*See case study of formcoke in ch. 9.

Ferrous Scrap Supply and Demand

Recent testimony by the chairman of theFerrous Scrap Consumers’ Coalition providesan introduction to the issues that currentlyconfront the domestic steel industry with re-gard to the demand and supply of ferrousscrap:

The recent rate of United States ferrousscrap exports has reached record levels.Current exports parallel those experiencedin 1973 and 1974, a period in which Com-merce imposed export restraints, During1978, domestic consumption of ferrous scrapapproached the 100-million-ton level, 54 per-cent greater than in 1977. Japan accountedfor almost all of the increase in the UnitedStates exports. Between 1977 and 1978 do-mestic exports of ferrous scrap to Japan in-creased by 208 percent to more than 3 mil-lion tons. Scrap exports to Canada, Italy,Mexico, Taiwan, South Korea and Spain alsoincreased. During the last six months of1978, as domestic demand rose and exportsskyrocketed, inventory stocks of industrial

ferrous scrap purchased on the open marketdeclined by 6 percent.ll

Ferrous scrap is an important raw materi-al in steelmaking, and the demand for it isgrowing rapidly, partly as a result of increas-ing worldwide use of the electric furnace.Scrap can be viewed as embodied energy; assuch, it is a valuable domestic resource, andthere are advantages to maximizing its do-mestic use. However, to produce high-qualitysteels with minimum impurities, it is neces-sary to have the domestic steel industry con-vert ore into new iron units, some portion ofwhich will eventually become available asferrous scrap. There are also limits to in-creased domestic steel production unless newiron units are produced from ore.

The availability and quality of scrap willalso affect the development and adoption of

“W, J. Meinhard, testimony before International FinanceSubcommittee of Senate Banking Committee, Mar. 12, 1979.

Ch. 7—Technology and Raw Materials Problems 231

new steelmaking technologies. DRI, for in-stance, could partially substitute for scrap,and the possible development of domesticcoal-based DR technology and the availabilityof foreign DRI may reduce the future demandfor scrap. Scrap availability and price, inturn, will determine to some extent how vi-able DR will be.

U.S. Ferrous Scrap Industry

Ferrous scrap is often defined as the por-tion of ferrous material that can be econom-ically recycled. This economic definition issignificant because scrap is not a homogene-ous commodity. Ferrous scrap normally origi-nates from three sources:

● Home or revert scrap is discarded mate-rial generated in the iron and steel in-dustry itself during the primary and sec-ondary steelmaking operations.

● Obsolete or capital scrap is wornout ordiscarded material from diverse sourcessuch as industry, consumers, or munici-pal dumps. This scrap is often mixed andcontaminated with other materials. Sev-eral of these materials, such as copper,are difficult to remove and are deleteri-ous to the steelmaking process or thefinal steel products.

● Prompt industrial or process scrap isdiscarded material generated in manu-facturing operations using steel, whichcannot be recycled in the same plant.

Home and prompt industrial scrap general-ly represents higher quality iron than obso-lete scrap. It is estimated that about 45 per-cent of all scrap in North America is home orprompt industrial, and 55 percent is obsolete.Because it is such a heterogeneous commodi-ty, scrap is classified according to a complexset of specifications based on such factors asphysical-chemical properties, origin, and con-sumer requirements. * Scrap that requires a

*More than 10 different grades of scrap are widely used.These grades have various characteristics with respect to bulkdensity, size coating, and chemical impurities.

great deal of treatment to improve its physi-cal or chemical characteristics may be an un-economic source of iron units.

The scrap industry is noted for its involved,integrated market structure (figure 33). The

Figure 33.— Flow Chart of Ferrous Metallics

I rv– - f

I I f – - 1I I

I . II I The steel Iron and steel I

industry foundriesI

II

Steel mill Iron and

I products steel

Iscrap scrap

c a s t i n g s

1 IE x p o r t s I m p o r t s Expor ts Impor ts

I Fahrlcated [ Exports Imports

‘ Exports Imports

I Nonrecoverable

I 1 Iron and steel

I

Reservoir of Inventory of ironiron and steel — and steel products

available for scrap in use.

SOURCE U S Department of Commerce

industry can be divided into four discretefunctions—collection, dealing, brokerage,and processing. These functions may be com-pletely segregated in different firms or com-bined in firms with some degree of vertical in-tegration. A collector gathers the scrap andsorts it into useful and nonuseful material;most collection is now carried out by dealerswho classify the scrap before processing it tomeet customer’s requirements. A broker gen-erally acts as the middleman between dealerand customer, making arrangements on be-


half of a customer for the purchase of speci-fied grades of scrap on a contractual basis.Scrap processors are usually fully integratedcompanies that process material, such asautos and appliances, into acceptable gradesfor use in steel production. Scrap processingis a major business, often involving high in-vestment in such processing equipment asshears, slabbers, crushers, and shredders.

Supply, Demand, and Price

The steel industry is the major consumer offerrous scrap, although other consumerssuch as foundries offer competition for scrapsupplies in many areas. Total scrap consump-tion has gradually increased over the years,while home scrap production has declinedsomewhat. Scrap prices fluctuate considera-bly with demand and availability, althoughthe general trend has been upward, with amore than twofold increase in price from1969 to 1978 (table 94).

Not all types of scrap are equally impor-tant when considering availability, Homescrap is not a primary concern. It is complete-ly internal to the steel mill and bears no rela-tionship to the price of scrap, except that areduction in home scrap could lead to greaterdemand for purchased scrap. Purchased

scrap is a mixture of obsolete and prompt in-dustrial scrap. The availability of obsoletescrap, particularly, is at the core of the ques-tion of whether the U. S. steel industry hasadequate supplies of domestic scrap. The ma-jor and contradicting views on this questionhave been presented in the Nathan study forthe research arm of the Institute for ScrapIron and Steel12 and the Fordham Universitystudy for the American Iron and Steel Insti-tute (AISI).13 The Nathan study was con-ducted for scrap suppliers and the Fordhamstudy for scrap users.

The main thrust of the Nathan study is thatadequate domestic supplies of obsolete scrapexist and that a shortage is unlikely, althoughprices could increase substantially. Nathanstarted with a 1955 estimate of the total poolof domestic obsolete scrap14 and added to ithis estimates of subsequent annual iron and

IZRobert R. Nathan Associates, Inc., Price-Vo/ume Rela tiOn-ship for the Supply of Scrap Iron and Stee~: A Study of the PriceElasticity of Supply, for the Scrap Metal Research and Educa-tion Foundation, Washington, D. C,, Jan. 8, 1979.

“William T. Hogan, S. J., and Frank T. Koelbe, PurchasedFerrous Scrap: United States Demand and Supply Outlook, forAISI by Industrial Economics Research Institute, Fordham Uni-versity, New York, June 1977.

‘+Battelle Memorial Institute, “Identification of Opportuni-ties for Increased Recycling of Ferrous Solid Waste, ” for ScrapMetal Research and Education Foundation, Washington, D, C,,1972.

Table 94.—Measures of U.S. Ferrous Scrap Use, 1969-78

Total domestic Purchased scrap Purchased scrap Purchased scrappurchased scrap a for steelmakingb for steelmakingc for Steelmakingd

Year Total pig iron Pig iron in steel Raw steel Steel shipments1978 . . . . . . . . . . . . .53 .36 .22 .311977 . . . . . . . . . . . . .52 .34 .21 .291976 . . . . . . . . . . . . .48 .32 .20 .291975 .., . . . . . . . . . .48 .32 .20 .291974 . . . . . . . . . . . . .54 .38 .24 .32Average. . . . . . . . . .51 .34 .21 .301973 . . . . . . . . . . . . .44 .32 .21 .281972 . . . . . . . . . . . . .47 .33 .21 .311971 . . . . . . . . . . . . .42 .28 .18 .251970 . . . . . . . . . . . . .37 .28 .18 .261969 . . . . . . . . . . . . .39 .28 .18 .28Average. . . . . . . . . .42 .30 .19 .28

aFor regression fit between ratio and time, correlation coefficient = 0.86, growth rate = 0.017 per year.bFor regression fit between ratio and time, correlation coefficient = 0.74, growth rate = 0.008 per year.CFor regression fit between ratio and time, correlation coefficient = 0.63, growth rate = 0.004 per year.dFor regression fit between ratio and time, correlation coefficient = 0. 55, growth rate = 0.004 per year

SOURCES Total domestic Purchased scrap from Bureau of Mines, other data from American Iron and Steel Institute


steel discards. * This made it possible toestimate current total obsolete scrap re-serves. The Nathan study indicates that therewere 577 million tonnes of potential reservesat the end of 1975 and 609.8 million tonnes atthe end of 1977. This study used the conceptof “potential reserves” of obsolete scrap,defined as quantities recoverable with theuse of existing technology at high but realisticprices—that is, prices possibly several timeshigher than present levels. Specifically, thedefinition of potential reserves implies a posi-tive price-supply relationship. At any givenprice above the present price, an additionalamount of scrap will move into the hands ofprocessors and, through them, to the iron andsteel industry. Thus, price increases triggerlarger supplies of difficult-to-process scrap,although not necessarily in a linear relation-ship—dramatically higher prices would berequired to extract the last increment ofscrap from potential reserves and place thatincrement in the ferrous supply system.

Hogan and Koelbe, in the Fordham study,reached the converse conclusion, that scrapwould be in short supply in the early 1980’s.Unlike Nathan, they did not use the total poolof obsolete scrap reserves as the basis fortheir current and 1982 estimates of availabledomestic scrap. Rather, they looked at thediscarded materials from the Nation’s totaliron and steel inventory that it would be ec-onomically and technically feasible to recy-cle. They determined the current and 1982projected iron and steel inventory by makingannual additions to a 1954 Battelle estimate.They then estimated the portion of recyclablematerial by using the 1974 maximum dis-carded-materials withdrawal rate of 1.63percent. This approach led to the conclusionthat there will be a shortage of 9.9 milliontonnes of obsolete scrap by 1982.

Like the Nathan study, the Fordham studyconsidered the effect of scrap price on sup-ply. The Nathan data showed greater sensi-tivity to changes in price than did the Ford-

*There has not been a net withdrawal from the total pool ofdomestic obsolete scrap since 1956.

ham data. Using 1973-74 data, Hogan andKoelbe found that a 100-percent increase inprice would yield a 7-percent increase inscrap supply. The Nathan report found that aprice increase of that magnitude would yieldan increase of somewhat more than 83 per-cent in the supply of obsolete scrap. * Thus,Nathan’s finding of significant supply elas-ticity for scrap supports his conclusion thatscrap supplies would be adequate under con-ditions of rising prices, while the finding oflimited supply elasticity underlies Hogan andKoelbe’s prediction of a future scrap short-age. Neither study, however, is impressive inits methodology or precision.

Very little attention has been paid to de-mand elasticity for scrap. Rossegger foundthat the demand for scrap is price inelastic. ”In other words, demand for scrap is quite in-sensitive to changes in price, because the pos-sibilities of substituting other materials arepresently quite limited. Increases or de-creases in the price of scrap will trigger onlyvery modest decreases or increases in de-mand. Rossegger’s findings have been con-firmed in recent years, when demand forscrap has not decreased with high prices. Infact, several measures of domestic scrap useindicate that the trend is toward increasingconsumption (table 94). The proportion ofscrap to either pig iron (blast furnace output),raw steel (steelmaking furnace output), orsteel shipments over the past decade has in-creased significantly.

Thus, on the basis of these studies, scrapsupply can be expected to range from inade-quate to adequate (at much higher prices)and scrap demand to grow regardless ofprice. The steel industry, as a major scrapconsumer, has few options. To reduce the im-pact of cyclical shortages, it could maintainscrap inventories. In the long run, it couldsubstitute other raw material, such as DRI,and support the imposition of export con-trols. **

*Nathan’s data show a supply elasticity of 0,83 for obsoletescrap for the 1961-76 period. For 1973-74 the elasticity washigher than 1.0.

“J. Rossegger, Human Ecology, vol. 12, November 1974.**See below for a discussion of the latter two options.

,- —. .


As a rule, steel companies do maintain sub-stantial inventories, in absolute terms and inrelation to use, in order to offset short-termscrap supply and price problems. As pricesrise, inventories decline, and when pricesfall, inventories increase. This requires sub-stantial investment: the domestic steel indus-try invests more than $500 million annually incarrying scrap inventories, and more in pro-viding space and facilities to handle those in-ventories.

Recently, increasing demand for scrap hasaltered this traditional pattern of curtailingscrap purchases when prices are high. Scrapinventories are drawn down during periodsof rising price, but net purchase receipts ofscrap by steel mills and other consumershave continued to move upward to satisfy theless flexible requirement for scrap. Thistrend appears attributable to the increasinguse of electric furnaces and to the growingexports of scrap.

Availability Concerns

Future availability at reasonable prices isnot the only concern with regard to scrap.Other concerns include the adequacy of thescrap industry’s processing capabilities inthe face of growing demand; the availabilityof railroad cars to ship scrap; the structure offreight rates; and finally, the effect on the useof scrap of fiscal incentives for mineral explo-ration and mining. Some of these problemsappear to have little effect on scrap suppliesand steel production costs; others are now be-ing remedied.

Processing Capabilities of the Scrap lndus-try.-A recent Battelle report concludes thatpresent scrap-processing facilities can easilyprocess enough scrap even when the demandis much greater than current levels. ’G No con-sideration is given to questions of cost andprice. The report claims that 47.3 milliontonnes of scrap were processed (operating anaverage of 50 hours per week) in the peakyear of 1974. The report also claims that an

“7Battelle-Columbus Laboratories, The Processing Capacityof the Ferrous Scrup Industry, Columbus, Ohio, Aug. 10, 1976.

additional 41.7 million tonnes or more ofscrap could be processed under the followingconditions:

●

●

●

●

optimum raw material supply and mar-ket demand: 9.1 million to 11.8 milliontonnes;improved scrap operations and mainte-nance programs: 7.3 million to 9.1 mil-lion tonnes;addition of a full second shift: 22.7 mil-lion to 27.2 million tonnes; andimproved materials handling and plantflow: 2.7 million to 4.5 million-tonnes.

The report predicts that by 1980, 131.2 mil-lion tonnes of ferrous scrap could be proc-essed annually. Thus, this report (without ad-dressing the scrap cost issue adequately) sup-ports the position that adequate scrap sup-plies exist for the future if scrap-processingcapabilities are viewed as the primary prob-lem. But because scrap suppliers are fore-casting scrap shortages, the Battelle report’sconclusions can be questioned.

Gondola Railroad Cars.—Scrap is moved viarail in gondola cars. Because most scrap ismoved from scrap processors to steelmakerby rail, the gondola supply is a critical link inthe availability of scrap. Many incidents offerrous scrap supply shortages have been at-tributed to the unavailability of gondola cars.

The pool of gondolas available to scrapprocessors has been declining for sometime. ’7 Every year, more gondolas are retiredthan are added. From 1970 to 1979, therewas a 23-percent decrease (37,878 cars) inthe number of general-purpose gondolas. Dai-ly shortages during 1978 were in the 3,000-to5,000-car range.

One of the Interstate Commerce Commis-sion’s (ICC’s) regulatory responsibilities un-der the Interstate Commerce Act is to makesure that railroads supply sufficient cars tosatisfy shipping needs. To increase the gondo-la supply, ICC has approved an incentive perdiem (IPD) system, although its decision is be-ing appealed. IPD adds to the basic gondola

‘ Phoenix Quurter]y, September 1978,

Ch. 7—Technology and Raw Materials Problems “ 235

rental fee an extra cost that simultaneouslypenalizes railroads borrowing gondolas andrewards those railroads investing in gondo-las.

The gondola-supply situation appears to beimproving. In 1979, 6,000 replacement carswere scheduled for construction by 1980.This would slow down the loss of gondolas.Continued increases in rail capability forscrap shipment may occur but are not cer-tain. 18

Railroad Freight Rates.—A longstandingissue is whether railroad freight rates dis-criminate against ferrous scrap shipmentand, hence, limit the supply of scrap. ICCrecently found that discrimination againstferrous scrap exists in some parts of thecountry. 19 A study by OTA concluded that dis-crimination against scrap exists but that theeffect on supply is small:

The conclusion of this analysis is that sub-stantial discrimination against secondarymaterials is found, if one adopts cost-basedor equivalency-based railroad ratemaking.

For example, a 36-percent decrease in therail rate for iron and steel scrap would in-crease rail shipments by an estimated 0,2million to 1 million tons (about 0.5 to 2.9 per-cent), but would cause a reduction in railrevenues of $100 million to $110 million peryear. This loss is equivalent to about $100 to$550 per ton of additional scrap moved, andis not economically justifiable from the rail-road’s perspective when iron and steel scrapis selling in the neighborhood of $50 to $100per ton.20

Tax Disparities.— Federal tax regulationsexplicitly encourage exploration for mineralsand the mining of virgin ores. The regulationsthat have most significance for scrap use are:

● depletion allowances—i. e., flat percent-age deductions from gross income—foriron ore mining operations;

●

●

●

expensing of exploration and develop-ment costs—i.e., immediate deductionsfor iron ore exploration and develop-ment expenses;capital gains tax rates on royalty pay-ments to landlords that lease land forproduction of iron ore; andtax credits for payment of foreign taxes.

To the extent that these tax regulations applyonly to the exploration and mining of virginore, they implicitly discriminate against theuse of iron scrap. But a number of studiesundertaken by various Federal agencies aswell as by industry suggest that the impact ofthis discrimination is not substantial. For ex-ample, the 1975 total tax benefits from usingvirgin ore to produce a tonne of raw steelwere found to be $1.38, or 1.7 percent of thecost of producing the raw steel,21 an amountthat could only marginally affect the use offerrous scrap. The Department of Treasuryrecently concluded that “it is extremely un-likely that the tax subsidies could reduce theamount of recycling of scrap steel by morethan one percent. 22

Scrap Exports: Growing WorldDemand and Price Impact

Whether or not current and future exportsof scrap by the United States will have ad-verse impacts on the domestic steel industryis an acute, highly debated issue. Scrap ex-ports had been fairly stable since at least1969, but they rose sharply in 1979 to approx-imately 10 million tonnes (table 95). Unlike theUnited States, many, if not most, of the steel-producing nations have very limited domesticsupplies of scrap, and eight countries (Japan,Italy, Spain, Mexico, Canada, South Korea,Turkey, and Taiwan) accounted for 85 to 90percent of U.S. scrap exports between 1973and 1979.

‘nAmerican Metal Market, Aug. 9, 1979.“)Interstate Commerce Commission, “Further Investigation

of Freight Rates for the Transportation of Recyclable or Recy-cled Materials,”’ Apr. 16, 1979.

Wlffice of Technology Assessment, Materials and EnergyFrom Municipal Waste, July 1979.

“Booz-Allen and Hamilton, “An Evaluation of the Impact ofDiscriminatory Taxation on the Use of Primary and SecondaryRaw Materials,’” 1975.

“U.S. Department of the Treasury, Federal Tax Policy undRecycling of Solid Waste Materials, February 1979, p. 87.


Table 95.—Selected Data on Iron and Steel Scrap: Ferrous Scrap Relative to Scrap Consumption andthe Impacts of Scrap Exports on Scrap Supply and Price (thousands of tonnes)

—

Total scrap Home scrapYear consumption – production +

1969 . . . . 85,998 51,0521970 . . . . . . 77,602 47,6861971 ... , . . 74,888 44,5961972 . . . . . . 84,687 46,4241973 . . . . . . 93,955 52,4265-yearaverage. . 83,426 48,437

1 9 7 4 95,673 50,1121975 . . . . . . 74,674 41,7601976 . . . . . . 81,548 45,3741977 ., . . . . 83,885 44,9191978 (p) . . . . 89,889 47,1105-yearaverage. . 85,134 45,855

Change inconsumer Domestic netinventories = scrap receiptsa

– 1,206 33,740+ 1,012 30,928+ 749 31,041- 295 37,968- 977 40,552

– 143 34,846

+ 1,000 46,561+ 421 33,335+ 1,374 37,548– 488 38,478- 979 41,800

+ 266 39.545

Exports as aFerrous percent ofscrap Total scrap total

exports b shipments shipments8,322 42,062 19.89,401 40,329 23.35,674 36,715 15.56,697 44,665 15.0

10,210 50,762 20.1

8,061 42,907 18.7

7,887 54,448 14.58,714 42,049 20.77,365 44,913 16.45,602 44,080 12.78,197 49,997 16.4

7,553 47,098 16.1—

aGross shipments minus shipments by consumers, receipts by mills and foundingb1979 exports 10 million tonnescDomestic net scrap receipts plus ferrous scrap exports(p) Preliminary

SOURCES Bureau of Mines (scrap consumption, production, etc.): U S Bureau of Census (exports), and Bureau of Labor Statistics (price index)

About 75 percent of all scrap traded inter-nationally is from the United States.23 A sworldwide use of electric furnaces grows, sowill demand for ferrous scrap, and additionalpressure will be placed on the United Statesto export more scrap. A recent analysis fore-casts a 30-percent increase in foreign de-mand for U.S. scrap by 1982 (excluding Can-ada and Mexico) .24 A recent article on thisissue stated:

Whatever future export demand will be, itcan be certain that world scrap require-ments are going to grow. Preliminary resultsof a detailed study on ferrous scrap by theSteel Committee of the Economic Commissionfor Europe (ECE) underline future expansionin scrap requirements. The ECE indicatesthat the world requirement for obsoletescrap will increase (measured from 157 mil-lion tons in 1974) by 39 percent to 218 milliontons by 1985 and by 50 percent to 235 milliontons by 1980,

‘ll. M. J. Kaplan, “The Consumer’s Viewpoint, ” paper pre-sented at the Ferrous Scrap Consumer’s Coalition symposium,Atlanta, Ga,, February 1980.

“W. W. Blauvelt, “A Free Market: Ferrous Scrap Demandand Supply, ” paper presented at the Ferrous Scrap Consum-er’s Coalition symposium, Atlanta, Ga., February 1980.

BLS scrapprice index,1967 = 100

1 lo:5-

138.9114.6121.8188.0

134.8

353.2245.6259.0231.2264.6

270.7

Considering the expected growth in worldscrap requirements, we can reasonably an-ticipate in the future strong demand for U.S.ferrous scrap exports. If history is a guide,demand should show sharp cyclicality, andat some point, market conditions that ap-proximate the tight supply situation of 1970and the exceptional period of 1973-74 (hope-fully not too much like 1973-74). As yourecall, increasing steel production in the U.S.and the rest of the world led to significantlyincreased demand for scrap.

The composite price of No. 1 heavy meltingscrap increased 25 percent from $43 per tonin December 1972 to $54 per ton in June 1973and then by another 46 percent to $79 perton by December 1973, reaching a high of$145 per ton in April 1974,25

Some exporters contend that exports ofscrap do not result in increased domesticscrap prices. * The fundamental reason forthis contention is that there exists in theUnited States a considerable volume of obso-lete scrap that could be added to the supplyas the demand increases, although the cost of

‘5D. R. Gill, Exports of Ferrous Scrap, Iron and Steelmaker,March 1979, p. 30,

*For additional comments, see the discussion of the Nathanstudy above.

Ch. 7— Technology and Raw Materials Problems ● 237

retrieving such scrap could be very high.Others, including most of the domestic steelcompanies led by AISI, argue forcefully forcontrols of scrap exports:

. . . accordingly, it is the view of the U.S.steel industry that continuous monitoring ofscrap exports by the U.S. government is es-sential. The industry has urged that the Con-gress revise the Export Administration Actof 1969 to require such monitoring. Addi-tionally, the industry has recommended thata study be undertaken of policies other gov-ernments have implemented over the pastdecade with respect to exports of their fer-rous scrap. Such a study should evaluate theextent to which the U.S. economy has beenadversely affected by such policies.

It can no longer be assumed that the U.S.can supply a growing world need for ferrousscrap while the rest of the world carefullyguards its internal supplies. This policy willcause unacceptable domestic inflation, as isthe case today, and if unchecked, will ulti-mately lead to domestic steel shortages. Asthe leading world supplier, the U.S. must as-sume a role of responsible leadership withrespect to world access to the supply of fer-rous scrap on a non-discriminatory, most fa-vored nation basis conditioned upon full sat-isfaction of home demand.26

The proponents of scrap export controlsalso point to the conditions prevailing in the1973-74 period. Steel demand was very high,and this caused large demand for both for-eign and domestic scrap. Prices were veryhigh. On July 2, 1973, the U.S. Department ofCommerce imposed export restrictions on fer-rous scrap under the “short supply” provi-sions of the Export Administration Act of1969. No new orders for more than 454tonnes of ferrous scrap could be accepted forthe balance of 1973. Individual allocationswere distributed according to exporter, coun-try, and grade, based on each exporter’s his-tory of scrap exports during the base period,from July 1, 1970, to June 30, 1973.

Almost all of the domestic steel producerscontend that the high prices of scrap experi-

-fAmerican Iron and Steel Institute, Ferrous Scrop Supplyund Demand (h tJook, June 1979.

enced in the 1973-74 period will be repeatedin the future unless some control of scrap ex-ports is enacted. The domestic scrap export-ers, on the other hand, argue that scrap ex-ports have been stable over time, and there-fore control of scrap is not necessary. Indeed,exports of ferrous scrap have been relativelystable when measured against total ship-ments. Furthermore, scrap exports make arelatively small, but positive, contribution tothe balance of trade. In answer to the bal-ance-of-trade argument, domestic scrap con-sumers point out that price increases spurredby exports more than offset the value of ex-port tonnage. Moreover, much exportedscrap contains valuable alloying elementswhich the United States must import. How-ever, scrap with alloying elements is general-ly less marketable domestically than conven-tional carbon steel scrap.

Although scrap exports have been fairlystable, they do appear to correlate with priceand price volatility of scrap (figure 34). A re-cent study of this issue states that:

This study is intended to provide addi-tional insight into the rapid escalation inprices which has characterized the UnitedStates market for purchased ferrous scrapwithin the last year. Its focus is on measuringthe relative influence of U.S. exports and do-mestic demand on domestic ferrous scrapprices. The results of a number of statisticalanalyses directed at this end indicate thatthe foreign component of total demand,which is represented by U.S. exports, hashad a substantially greater impact on U.S.ferrous scrap prices than has domestic de-mand during the last two years (January1977 through January 1979). The influence ofthe domestic component of total demand forferrous scrap on domestic prices was foundto be statistically insignificant .27

An earlier study, which examined the de-pendence of U.S. scrap prices for 1973-78 on25 factors, found that the most statisticallysignificant correlations were first with for-eign scrap prices and second with EEC steel

‘“Economic Consulting Services, Inc., The Impnct of U.S. Ex-ports of Fer rous .%rclp on U.S. Ferrous Pri(:es: An Empir ica lAnulysis, Washington, March 1979.


Figure 34.—Scrap: Price and Export Levels; Domestic Purchased Scrap Requirements, 1971-79Index4.0 ‘

3.0 —

2.0 —

AMMI #1

3-city composite

Year

SOURCE: American Mefal Market, U.S. Bureau of Labor Statistics

mill operating rates.28 The latter variable wasmore significant than domestic operating rateor domestic scrap consumption. A methodo-logical problem with findings relating exportsto domestic prices, however, is that the pricesmay not be representative of all or most scrapmarkets. Data on scrap prices for cities fromwhich exports are significant distort the pic-ture for the entire country, which includesmany markets not influenced by exports.

Perhaps the most significant long-rangeconsequence of increasing scrap exports tomeet greater foreign demands is the possiblydetrimental impact of such exports on thenonintegrated steel producers, the Nation’smost efficient low-energy and low-cost steel-maker. Rising scrap prices, driven by high

‘“World Steel Dynamics, Core Report A, November 1978.

79

foreign demand, would put a substantial cost-price squeeze on these firms and could drivethem out of the market, especially if steelprices are subject to formal or informal Gov-ernment controls that cannot be releasedquickly enough to offset rapidly rising costs.This impact is particularly acute now, whenDR is not widely used domestically and whenDRI is not readily available as an import.

When domestic demand and export de-mand for scrap impact the market at thesame time, the issue of adequate supply fordomestic use becomes acute. Foreign nationshave been much more restrictive of scrap ex-ports than has the United States. The UnitedKingdom presently has a licensing systemunder which the quantity and grades of scrapexported are controlled from time to time.


Norway, Belgium, and Canada monitorand/or license scrap exports. Denmark, Ire-land, and Italy ban scrap exports outside theEEC. Japan imports most of its scrap. The newExport Administration Act gives the U.S. De-partment of Commerce the right to ensurethat an adequate supply of domestic ferrousscrap is made available to domestic consum-ers. Domestic steelmaker have already re-quested that permanent monitoring be estab-lished, but the scrap industry opposes thisstep.

Impacts of Technological Changeon Scrap Demand

Four technological developments will af-fect the price of and demand for ferrousscrap:

●

●

●

●

the growing use of electric arc furnacesby integrated and nonintegrated steel-maker;greater use of continuous casting andchanges in the basic oxygen furnace;further increases in the use of high-quality, high-performance steels, whichimpose more stringent requirements onscrap quality while reducing the futuresupply of low-alloy scrap, desirable formost scrap applications; andincreasing use of DRI as an input substi-tute for scrap.

Scrap-Based Electric Furnace Steelmaking.—The use of electric furnace processing is in-creasing rapidly in the United States andthroughout the world because it has relative-ly low capital and operating costs. This proc-ess uses a higher proportion of scrap inputthan do other processes; it also reduces theamount of prompt industrial scrap generatedper melting unit. Thus, increased use ofscrap-based steelmaking will increase the de-mand for scrap, while putting additionaldownward pressure on available scrap sup-plies.

Domestically, the use of the electric fur-nace is growing rapidly among nonintegratedsteelmaker, and some of the integrated steel

mills are beginning to use more electric fur-naces in combination with their other steelproduction facilities. Presently, about one-quarter (22.7 million tonnes) of domestic steelis made in electric furnaces. Although fer-rous scrap consumption in open hearth pro-duction in the United States has declined, thistrend will be offset by growth of scrap con-sumption in electric furnaces by 1982, whennew electric furnace installation, now under-way or planned, will have been completed. Itis likely that as much as half of future domes-tic new capacity will eventually be based onelectric furnaces.29

Electric furnace use has grown at an evenfaster rate abroad. In the last 10 years, worldelectric furnace steel production has in-creased by nearly 75 percent, or almost 39million tonne/yr. Almost 30 percent of thegrowth in world steel production has been inthe electric furnace. One forecast suggeststhat worldwide electric furnace use will in-crease by more than 50 percent from 1978 to1985, and by 1985 will account for 38 percentof the increase in world steel output .30

Continuous Casting and Basic Oxygen Fur-nace Changes.—These technological changesalso have increased steel industry use of pur-chased prompt industrial and obsolete scrap.The increased yield from continuous cast-ing, compared to conventional ingot casting,causes less inplant scrap to be produced.Thus, purchased scrap must replace “lost”home scrap in order to maintain liquid-iron-to-scrap ratios for steelmaking furnaces. Thisalso assumes increased shipments of finishedsteel at existing levels of iron production (seech. 9). In 1978, 32 percent or 28.5 milliontonnes of all steel shipped was derived frompurchased scrap. If continuous casting wereincreased to a 50-percent level on the 1978base and produced a 12-percent increase in

‘gHogan forecasts an increase in electric furnace raw steelfrom 29.2 million tonnes in 1978 to 46.3 million in the mid-1980’s. (W. T. Hogan, “Growth of the Electric Furnace, ” paperpresented at the Ferrous Scrap Consumer’s Coalition symposi-um, Atlanta, Ga., February 1980. ) A supplier of electric fur-naces forecasts that “by IWO, half of all the steel will be madein electric furnaces, ” (Iron Age, Feb. 4, 1980, p. MP-7. ]

‘OAmerican A4etrd Market, Jan. 17, 1980.


yield, then an additional 5.7 million tonnes ofscrap would have to be purchased to satisfysteel production needs. * Under such circum-stances, 36 percent or 34.3 million tonnes ofall steel shipped would be derived from pur-chased scrap.

Equipment changes in basic oxygen steel-making furnaces (BOFs) also permit a sub-stantial increase in the amount of scrap usedin production. These changes allow tradi-tional scrap charges of 28 percent or less tobe increased to 30 or 40 percent. Using a com-bination of preheating and silicon carbide,for instance, scrap use could be increased tothe 35-percent level, with a net cost saving.31

The economic advantage depends on the costof scrap compared to that of hot metal fromthe blast furnace. For plants attempting to in-crease steel output without incurring the cap-ital costs of installing new blast furnacecapability, this approach may be attractive.

A more recent variation is to remodel BOFswith bottom as well as top blowing equipmentand to modify Q-BOP (a proprietary version ofa bottom-blown BOF) furnaces to allow forthe preheating cycle.32 This system, inventedby a West German company and known asthe OBM-S (advanced basic oxygen processwith scrap preheating), is being adopted bythe National Steel Corp. Increases of 27 to 42percent in the amount of scrap used havebeen reported, as well as reductions in proc-essing time. The capital cost of this retrofit-ting option is relatively high (about $10 mil-lion per furnace), so companies taking thisroute are likely to optimize scrap use in orderto reduce total production costs.

Quality of Scrap.—While the need for in-creasingly higher quality scrap to make high-er performance steels is mounting, the qualityof the available scrap is declining. The in-creased use of alloy steels and recycled

*Assuming an average yield of 0.92.“W. F. Kemner, “The Operating Economic and Quality Con-

sideration of Scrap Preheating in the Basic Oxygen Process, ”Proceedings of American Iron and Steel Institute technicalmeeting, Philadelphia, 1969.

’133 Metal Producing, June 1979, p. 56; November 1979, p.67-71.

scrap, as well as the greater use of nonfer-rous materials in automobiles, has resulted inscrap containing more nonferrous elementssuch as zinc, copper, nickel, chromium, andmolybdenum. These impurities, called“tramp,” generally cannot be removed in thesteelmaking process. Steel made from a 100-percent-scrap charge is only as “clean” asthe scrap it is made from. Steel made with pigiron or DRI, along with scrap, does not havethis cleanliness problem if the scrap percent-age is sufficiently low.

The problem that the domestic steel indus-try may face in the future because of poor-quality scrap is spelled out in the results of arecent industry survey:

The consensus of the returns was that thequality of ferrous scrap, as judged by trampalloy contaminants, is generally declining,and that it could become a serious problemby 1985. The majority of the respondentsstated that their customers will be seekingperformance characteristics in steels by1985 which are significantly to substantiallyhigher than those which can be commerciallyachieved today. Further, this requirement isfelt to be closely linked to scrap quality, Mostof the respondents consider the tramp alloycontent of their scrap to be a high-priorityconcern in this connection.

The survey yielded considerable detail inregard to the tramp element which the re-sponding mills routinely monitor, The impli-cations of the rapidly-increasing usage ofhigh-strength, low-alloy steels by scrap con-sumers turned out to be a controversial anduncertain matter to steelmen, Regarding thepossibilities of consuming a significant vol-ume of scrap recovered from municipal solidwaste, a minor percentage replied “yes” anda minor fraction said “no,’” while the majori-ty hedged with the answer “possibly.”

The consensus seemed to be one of doubtthat technological developments in scrapprocessing and in steelmaking will compen-sate for the build-up of tramp elements inscrap, Closely related to this, the majorityseemed to feel that direct reduced iron mightbecome essential, in order to dilute the risingcontaminant levels.


All-in-all, the attitudes expressed regard-ing a long-range build-up of tramp alloy con-taminants in ferrous scrap represents a stiffchallenge to the scrap industry and its sup-porting sectors. It would seem to be crucialto lose no time in mounting an intelligent,well-coordinated campaign, nationwide, toattack this problem. The best results willdoubtlessly require close cooperation be-tween scrap suppliers and steelmakers. 33

To reduce the tramp-element problem, low-grade purchased scrap ideally should be usedin BOFs, and home scrap mixed with high-quality purchased scrap should be used inelectric furnaces. However, industry struc-ture does not permit such optimization; forexample, electric furnaces are not alwaysclose to the sources of home scrap, Theoreti-cally, there are three additional points of at-tack on the tramp-element problem:

. Product design. —Even though materialsin products are becoming more sophisti-cated, products could be designed withrecycling in mind. These products bytheir very design would facilitate identi-fication and separation of varioususable materials upon recycling.

● Improved scrap processing techniques,—This refers to better (more reliable,faster, more discriminating, and moreeconomical) techniques of separatingand identifying usable materials at theprocessing plant.

. New steelmaking techniques. —This re-fers to techniques of operation thatwould allow some impurities to be re-moved in the steelmaking process.

The steel industry’s ability to influenceproduct design as a means of reducing thetramp-element problem is limited, at best.The scrap-processing and steelmaking indus-tries could pursue the second and third op-tions, and they have incentive to do so be-cause they are directly affected by the tramp-element problem. Scrap-processing improve-ment may have more potential than changing

“R. D. Burlingame, “Trends in Scrap Quality for the 1980s,’”Iron ond Steeimaking, February 1979, p. 18.

steelmaking techniques, but there is somechance for innovations in the latter area.

Direct Reduction. * —Of all current techno-logical changes affecting the demand andprice for scrap, DR is the only one that can re-duce demand for scrap and thus reduce itsprice. Thus, a way to alleviate growing de-mand pressures on scrap and to moderatescrap price increases may be to produce orimport DRI. This “clean” material can substi-tute for ferrous scrap in electric furnacesteelmaking, and it also offers certain techni-cal advantages.

Recent technological advances in DR sug-gest that it could become economically viableand could supplement ferrous scrap supply ata price competitive with that of scrap. Theuse of DRI can also help avoid some of the an-ticipated problems of tramp alloy contami-nants in scrap. At the present time, DR facil-ities are limited in the United States (account-ing for less than I percent of steel made), butthis is not so in other countries. In the past,scrap availability and low scrap prices in theUnited States have acted as a disincentive todevelopment of DR. As scrap prices rise, DRIwill become more competitive. **

Targets for Increased Useof Ferrous Scrap

It is in the national interest to maximize theuse of recovered materials, in part to save en-ergy. It has been generally accepted thatscrap embodies the energy (18.7 million Btu/tonne) that was originally used to convert theiron ore to iron. Two statutory provisionshave been enacted that deal with maximizingthe use of scrap and other waste sources ofiron generated in steel plants. These provi-sions do not adequately consider the long-range consequences of attempting to maxi-mize the use of scrap and other recoveredmaterials. The relevant provisions are:

*DR is described and discussed in ch. 6, and its role in thegrowth of nonintegrated steelmaker in ch. 8.

**The price of DRI, whether imported or manufactured do-mestically, will in the long run be a decisive determinant of in-creased electric furnace use.


● Section 461 of the National Energy Con-servation Policy Act (Public Law 95-619)of 1978, which mandates that the De-partment of Energy (DOE) set voluntarytargets for use of recovered materials tobe observed by the entire ferrous indus-try—ironmakers and steelmaker, foun-dries, and ferroalloy producers.

● Section 6002 of the Resource Conserva-tion and Recovery Act (Public Law94-580) of 1976 amending the SolidWaste Disposal Act, which requires thatGovernment procuring agencies procureitems composed of the highest practic-able percentages of recovered materialsand instructs the EPA Administrator topromulgate guidelines for the use of pro-curing agencies in carrying out this re-quirement, it also requires suppliers tothe Government to certify the percent-age of recovered materials in the totalmaterial used.

The setting of targets or guidelines pre-sents a number of problems. It may not betechnically or economically feasible in allcases to use recovered materials to the extentsuggested or indicated by the Government.The methodology and assumptions used tocalculate targets can be tenuous and highlycontroversial. Steel producers are especiallyworried about infeasible voluntary targetsthat could become mandatory,

One problem with legislative attempts tomaximize the use of ferrous scrap is that theyapply indiscriminately to all segments of thesteel industry and to all types of productionprocesses. Moreover, many types of compa-nies would find targets relatively easy to cir-cumvent. For example, targets for purchasedscrap could be circumvented if companiessell their home scrap to others and purchaseother firms’ home scrap. * In addition, setgoals could in fact be counterproductive tothe original objective of maximizing recov-ered materials use and saving energy. Shouldtargets and guidelines effectively increasedemand for purchased scrap, this would

*Such an activity might only occur on paper through inter-mediaries, Actual transportation costs could be prohibitive.

raise scrap prices. The impact of higherscrap prices on nonintegrated companieswould be much worse than on integratedsteelmaker. This could lead to a decrease insteel made by nonintegrated producers andless total scrap used. Additionally, integratedproducers using more scrap in BOFs mustalso use more natural gas and electricity fornecessary process modifications, thereby in-creasing energy use at least on a temporarybasis.

Technically and economically, it is ex-tremely difficult for integrated steelmaker toincrease their use of recovered materialssubstantially. They would most likely incurcosts that do not improve productivity. An im-portant exception is an integrated companythat increases its steel production, without in-creasing blast furnace capacity, by investingin technology to increase scrap use in BOFsor in electric furnaces that use purchasedscrap almost exclusively. Even then, these in-vestments must be sound economically inthemselves on a plant-by-plant basis; targetsbased on industry averages maybe inapplica-ble.

Scrap targets or guidelines are not rele-vant for electric furnace steelmaking becauseat present that process uses only scrap. Withthe advent of DR and the availability of DRI,however, electric furnace steelmaker coulduse less scrap, so targets or guidelines couldact as disincentives to the introduction of DR.Though the proportion of scrap used in anyone electric furnace shop would decrease if italso used DRI, an expansion in electric fur-nace steelmaking, even using both scrap andDRI, could increase the total amount of pur-chased scrap used. The new average amountof scrap used in nonintegrated companies orelectric furnace shops of integrated produc-ers would likely be greater than the averagefor conventional integrated operations usingBOFs.

It appears that EPA, for some of the rea-sons given above, will not actively pursue thesetting of guidelines for ferrous scrap use.The Department of Energy has already settargets, but they appear to be quite low. For


the entire ferrous industry, the target for1987 is that 41 percent of steel shipments bemade from purchased prompt industrial andobsolete scrap. The actual value for 1978 was40 percent, and for 1979 it appears to havereached 41 percent. OTA analysis indicatesthat if the use of continuous casting were in-creased to 50 percent on the 1978 base, scrapuse would be 44 percent. If a 2-percent an-nual increase in steel production is added toa 50-percent continuous casting scenario,scrap use would be 48 percent by 1987.Changes in BOFs would increase the scrap-use rate still further.

Future Scrap Shortages

There can be no unequivocal answer to thequestion: will there be a shortage of ferrousscrap in the United States? A shortage is de-fined as a market situation in which there is arapid and substantial rise in the price ofscrap at the quality level required by a sub-stantial fraction of users, but shortages canvary with geographic or cyclical aspects offerrous scrap supply and demand. It is ap-parent that a number of major factors will in-fluence the average supply and demand offerrous scrap in the United States, and there-by either promote or reduce the likelihood ofa general domestic shortage.

Physical Supply.—Although more and moresteel scrap will exist in some form within theUnited States, steel consumption is growingat a relatively low rate and, hence, so is themagnitude of the scrap supply. The portion ofthe supply that is readily and economicallyretrievable will decline as: less scrap is pro-duced in manufacturing, less steel is used inautomobiles, less scrap is concentrated in arelatively small number of geographicalareas, the cost of transporting scrap by anymeans increases, more and more nonferrousmaterials become intimately part of andmixed with ferrous materials, and productlifecycle considerations lead to longer life-times for steel products. Thus, these factorsfavor a future shortage of usable scrap.

Exports to Foreign Electric Furnace Steel-makers.—As the domestic and foreign trendstoward more electric furnace steelmakingcontinue, foreign steelmaker will put greaterdemand pressure on U.S. scrap, and this willincrease the likelihood of a scrap shortage.Should the current shortage of domestic cokecontinue, it would likely result in even greateruse of scrap-based electric furnace steelmak-ing, although inadequate electricity genera-tion could reverse this trend.

From an international point of view, thegeneral shift of steelmaking capacity (espe-cially from Europe) to the Third World willtend to reduce foreign demand for U.S. scrap,because steelmaking in those countries willbe based on DRI. On the other hand, the rela-tively high level of foreign steel productioncosts, particularly in Europe, will make high-priced U.S. scrap competitive with alternateoverseas sources while raising costs for do-mestic steel producers. And finally, an impor-tant factor that is often overlooked is the ef-fect of currency exchange rates. As the dol-lar weakens against other currencies, U.S.scrap becomes more attractive to foreignbuyers. Thus, foreign steel producers can bidup domestic scrap prices and still have an at-tractively priced raw material, but domesticraw materials costs will be adversely af-fected. Conversely, strengthening of the dol-lar could reduce foreign demand.

New Technologies.—Although the ex-pected near-term increase in the use of con-tinuous casting and scrap-use-enhancingchanges in BOFs would increase the likeli-hood of a domestic scrap shortage, the devel-opment of coal-based DR would greatly re-duce it. DRI clearly could be the most effec-tive substitute for scrap and the most compet-itive means of limiting scrap price increases.However, until and unless scrap prices risesufficiently to allow the lowest cost DR tech-nology available to compete in the market-place, DR is not likely to be adopted on a sub-stantial scale in the United States. DRI im-ports seem to offer greater near-term poten-

244 ● Technology and Steel industry Competitiveness

tial than does domestic adoption of the tech-nology. The increased development of DR inless developed countries with cheap naturalgas could provide worldwide trade in DRI. Itis distinctly possible that within the next dec-ade DRI imports could obviate a domesticshortage of scrap. Farther in the future, moreradical steelmaking technologies, such asnuclear steelmaking, magnetohydrodynamicsteelmaking, plasma steelmaking, or direct(one-step) steelmaking, which could econom-ically convert iron ore to steel, would greatlyreduce the likelihood of scrap shortages.

Federal Policies.—A number of policy op-tions could either increase or reduce the like-lihood of ferrous scrap shortages. In partic-ular, policies that would increase transporta-tion costs, increase domestic demand forscrap, and facilitate scrap exports (includinga declining dollar) could promote a domesticscrap shortage. Policies that could stimulatethe development of new steelmaking technolo-gies, such as DR and formcoking, could helpprevent scrap shortages. In the absence ofany policy changes, and without the influx ofenough capital to construct major new blastfurnaces, a scrap shortage is likely to occur ifthere is a continued steady growth of domes-tic demand for steel. An analysis by the presi-dent of a successful nonintegrated companyappears valid:

. . . scrap is going to be more valuable andin shorter supply.

In how short supply? We have made an ex-haustive study of this covering seventeenvariables including such things as scrap gen-eration, plant construction, market growth,the utilization yield and imports of coke, de-velopment of continuous casting, direct re-duced iron production and imports, andmany others. We’ve tried to evaluate all ofthese but manifestly with so many variablesthere can be many answers. Nevertheless,within what we believe to be reasonable pa-rameters, a scrap surplus which has recent-ly been allowing 10,000,000 tons a year to beexported will by the year 1985 allow only5,000,000 tons which leads quickly to no sur-plus at all. I should emphasize that I see this

drop in exports resulting from domestic pricecompetition, not from government embargo.34

Of particular importance in the above state-ment is the viewpoint that increasing domes-tic demand, rather than Government exportcontrols, will reduce exports. Even more in-teresting is a scrap supplier’s expectation ofa domestic scrap shortage under conditionsof continuing exports:

For the 18 months preceding August 1979, . . domestic scrap demand . . . equalled thescrap demand during 1973 and 1974. As apractical matter, we had reached the bal-ance between supply and demand, . . . Threeto four years from now, we will be hardpressed to find enough No. 1 (high quality)grades of scrap to meet the demand.

When such a shortage occurs, what will hap-pen?

1. Scrap can be diverted from export, butwho will pay the extraordinary freightcharges to move this scrap to regions ofdomestic shortage? And, what will be theeffect on our nation’s friends who are themajor consumers of our export scrap?

2. Direct reduced iron can be purchased inthe United States or imported, But whowill invest the hundreds of millions of dol-lars required to build these plants? Fur-ther, who will commit to pay $150 to $175per gross ton for the product ?

3. Integrated steel production can be in-creased. But who will invest the billionsrequired and take the environmental risksassociated with this solution?

4. Finally, we can do nothing and our in-creased domestic demand for steel will besatisfied by importing 25 percent or moreof our needs by the mid-1980s.35

Concluding that there will be a scrap short-age some time during the next decade is risky.The number of uncertainties on both the sup-ply and demand sides of the issue are so greatthat any forecast must be equivocal. Thisvery uncertainty about future domestic scrapsupplies makes policy decisions affectingscrap use, supplies, and exports quite dif-ficult (see ch. 2).

“W. W. Winspear, president, Chaparral Steel Co., speech toNational Association of Recycling Industries, September 1979.

‘5Blauve1t, op. cit.

—— —- — —.

CHAPTER 8

Technology and IndustryRestructuring

Contents

PageSummary . * . * , , * , . * . , . . , * , * . . * , , * , , * , . * 247

Internal Adaptation . . . . . . . . . . . . . . . . . . . . . 248

Nonintegrated Steelmakers. . .............251Fundamental Advantages and the Role

of Technology . . . . . . . . . . . . . . . .........251Future Changes. . . . . . . . . . . . . . . . . . . . . . . . .252Future Expansion Forecast . ..............256

Alloy/Specialty Steelmakers ., ............257Growth of Domestic Alloy/Specialty Steel Use. 258Potential for Exports of Alloy/Specialty Steels 260Technological Improvements in Alloy and

Specialty Steelmaking . ................262

Integrated Steelmakers . . . . . . . . . . . . . . . . . .262

List of Tables

Table No. Page96. Summary Data on Steel Industry

Segments, 1978. .......,.. . . . . . . . . . 24897. Approximate Plant, Capacity, and

Shipment Data for Nonintegrated Mills 251

Table No.98. Electric FurnaceUseofDirectReduced

Iron: Advantages and DisadvantagesCompared to Using All Scrap. . . . . . . . .

99. 0TA Estimate of Potential Productionfor Nonintegrated Steel Companies,1978 . . . . . . . . . . . . . . . . . . . . . . . . . . . .

100. Domestic Shipments of Alloy/SpecialtySteels, 1969-78 ● *.**.. ?*,*..*, ● * S . *

101. Domestic Consumption ofAlloy/Specialty Steels, 1969-78 . . . . . . .

102. Imports as a Percentage of DomesticConsumption, 1969 and1978. . . . . . . . .

103. U.S. Exports as a Percent of Imports. . .104. Japanese Production and Export of

Alloy/Specialty and Carbon Steels,1965-77 .s.0.0. ● . * * . * * . ...0..,, ● , ,

105. Percentage of Domestic Yields,1969 and 1978 . . . . . . . . . . . . . . . .fi...

106. Percentage of Raw Steel Made inElectric Furnaces, 1969 and 1978. . . . .

List of Figures

Figure No.35. Correlation of Product Lifecycle Stages

for Steelmaking Plants. . . . . . . . . . . . . .

Page

255

257

258

259

259260

261

262

262

Page

249

CHAPTER 8

Technology and Industry Restructuring

Summary

The structure of the domestic steel in-dustry is changing. What is meant by struc-tural change? Broadly speaking, structuralchanges in industries refer to permanentchanges in the character and competitivepositions of industry participants. Tech-nology mixes, supply-demand relationships,geographical patterns of company locations,costs of entry into the industry, and raw ma-terial use may all be components of a struc-tural change.

Structural changes can result from bothregulatory and technological influences. ’ Forexample, deregulation changed the nature ofthe U.S. securities industry by freeing com-mission rates; this led to many mergers andacquisitions within the industry, an increasedconcentration of capital, and the virtual elim-ination of some types of companies. Similarly,deregulation of the airline industry is clearlybringing about a rapid growth of small re-gional carriers and the need for new Govern-ment policies for this industry segment. Anexample of technology-related structuralchange, on the other hand, is in the watch in-dustry, where the introduction of solid-statetechnology by American and Japanese com-panies brought about a permanent change inthe industry. In 1970, the Swiss had a 70-per-cent share of the world market; by the late1970’s, it was falling below 30 percent. En-tirely new companies had entered the indus-try with new manufacturing technology andnew products.

Permanent structural changes within anindustry alter the impact of Government pol-icies on the industry and create new needsthat may require new policies. But even pro-found structural changes are difficult to rec-

‘R. R. Osell, “Structural Versus Cyclical Change—Implica-tions for Strategic Planning, ” paper presented at American In-stitute of Mining, Metallurgical and Petroleum Engineers an-nual meeting, February 1979.

ognize while they are taking place. One rea-son why OTA has examined the steel industryas separate segments was to be able to deter-mine whether structural changes are occur-ring in the steel industry and, if so, to analyzetheir nature. OTA found that restructuring isin fact taking place, and that it may acceler-ate because of a number of factors, includingnew technology. This restructuring consistsof growing competitiveness, expansion, andprofitability of the two smaller segments ofthe industry: the nonintegrated carbon steelproducers and the alloy/specialty steelmak-er. As a result, traditional market shares insteel are shifting, and the industry is becom-ing decentralized.

Part of the emergence of the two smallersteel industry segments can be attributed tointernal, technical adjustments within indi-vidual companies; that is, the extent to whichcompanies match the nature of their produc-tion (its type and scale) with the type andquantity of products they manufacture. Forexample, the unprofitable integrated compa-nies may be attempting to make too wide avariety of products, using steelmaking tech-nology better suited to large-volume produc-tion of a few commodity products. Noninte-grated and alloy/specialty companies gener-ally have a good match between productiontechnology and product mix, and this en-hances their profitability.

External forces have played some part inits restructuring. Demands for alloy/specialtyproducts have increased. At the same time,nonintegrated companies in particular havenot been reluctant to expand their productlines and move into markets dominated by in-tegrated producers. The structure of the steelmarket reflects these factors. The marketshare of integrated producers is decliningand, by 1990, it could drop from the present

247


85 percent to about 70 percent. Noninte-grated steelmaker have tripled their outputin the last decade. In 1978, they accountedfor 13 percent of domestic shipments, and ifadequate ferrous scrap and electricity areavailable they could account for 25 percentby the end of the 1980’s. Because the domes-tic consumption of alloy/specialty steels is in-creasing at a rate about double that of carbonsteels, alloy/specialty production is likely toexpand by about a third during the next dec-ade. (Table 96 presents recent productionand financial data for the three industrysegments.)

New technologies have and will continue toinfluence the shift in the structure of the steelindustry. Electric furnaces and continuouscasters have reduced production costs and si-multaneously enabled the small companies to

capitalize better on local markets for theirproducts. It can be argued that technologicalchanges would also enable the integratedcompanies to take better advantage of theirprocess capabilities, but substantial obsta-cles deter the adoption of such changes.These obstacles include inadequate capitaland conservative management,

The most important future technologicaldevelopments for nonintegrated producerswill be the introduction of rolling mills tomake flat products, such as strip, and the useof direct reduced iron (DRI) to supplementscrap and facilitate the production of higherquality steels. The alloy/specialty steel-maker have excellent technological and costcompetitiveness and potential for exportingtheir technology-intensive steels.

Table 96.—Summary Data on Steel Industry Segments, 1978

Raw steela Steel shipmenta Steel only—Return on pretax profits Employment costs

1 ,000 tonnes) Percent (1,000 tonnes) Percent Invest mentb ($/tonne shipped)b ($/tonne shipped)c

Integrated. . . . .: . 107,889 8 7 ‘– - - - - 7 5 , 5 2 2 - - - - - ‘ – -8 5– - - - — - ‘ - 6 . 9 $9.60 $209Nonintegrated . . . 12,274 10 11,291 13 12.3 31.60 138Alloy/specialty . . . 4,125 3 2,014 2 11.1 81.33 341

Total d . . . . . . . . 124,288 100 88,827 100 7.3 $22.00 $163SOURCES. aBased on data and approximations provided by AISI OTA has assumed an average yield for Integrated companies of O 70 and for nonintegrated companies

of 0.92bFrom table 23cFrom table 23dFrom AISI, financiat data includes nonsteel activities.

Internal Adaptation

An analysis of process and product stagesof manufacturing companies permits a usefulunderstanding of differences among them. Agiven company or industry segment is eitherprocess- or product-oriented; that is, process-focused firms tend to find the market for theirproduct and process, while product-focusedcompanies try to fit the best process andproduct to market opportunities:

Companies in the major materials indus-tries—steel companies and oil companies,for example—provide classic examples ofprocess-organized manufacturing organiza-

tions. Most companies that broaden the spanof their process through vertical integrationtend to adopt such an organization, at leastinitially. Then again, companies that adopt aproduct- or market-oriented organization inmanufacturing tend to have a strong marketorientation and are unwilling to accept theorganizational rigidity and lengthened re-sponse times that usually accompany cen-tralized coordination.

Most companies in the packaging industryprovide examples of such product- and mar-ket-focused manufacturing organizations.Regional plants that serve geographical mar-

Ch. 8—Technology and Industry Restructuring ● 249

ket areas are setup to reduce transportationcosts and provide better response to marketrequirements. 2

A hidden assumption in the above analysis,however, as in almost all descriptions of thedomestic steel industry, is that there is one,single steel industry. This is not the case:although the largest segment of the industry,the integrated steelmaker, fits the descrip-tion of process-organized companies, theother two segments far better match the de-

‘R. H. Hayes and S. C. Wheelwright. “Link Manufacturingand Process Life Cycles,’” Harvard Business Review, January-February 1979.

scription of companies that have a product ormarket orientation.

A manufacturing company’s products canbe characterized along a continuum thatranges from one-at-a-time production to con-tinuous-flow production. For a company tohave an optimum, low-cost production sys-tem, its stages along these continuums mustmatch. Figure 35 illustrates this idea, usingthe relative product and process positions ofdifferent types of steel companies. The goal isto be on the diagonal of the matrix, so that acompany’s product stage is consistent with itsprocess stage. The worst cases would be for a

Figure 35.—Correlation of Product Lifecycle Stages for Steelmaking Plants

Product structureProduct Iifecycle stage

Process structureProcess lifecycle stage

IJumbled flow(job shop)

II

v o l u m e - l o w l [ p r o d u c t s ,standard i- ~ low volumezation, one I ]of a kind I I

I Disconnected line I Smallerflow (batch) alloy/specialty

*Ill IvFew major High volume-products, standardi-higher zation, r w

volume commodityproducts

~

IvContinuous flow None

None

Nonintegrated

Less successfulintegrated More

successfulintegrated

Nonintegratedbesttechnology

\

Flexibility.quality


company to try to produce a high volume ofhighly standardized products (product stageIV) with job-shop procedures (process stageI), or for a company with a continuous flowprocess (stage IV) to attempt to produce asmall number of unique products (stage I). Asa company or industry evolves, it does nothave to move along the diagonal, but it will bemore successful if it does.

According to this schematic, the low profit-ability of many integrated companies can belinked to the fact that they attempt to maketoo many different products in quantities un-suitably small for the nature of the steelmak-ing process they use. They do not capitalizeon potential scale economies. Integratedsteelmaking involves many steps that must becoordinated in order to produce at optimumlevels. The economy-of-scale advantage ofhaving a large blast furnace is negated byproducing small lots of a great many differentfinished steel products, because differentproduct types require different finishingequipment. This means investing in highlycapital-intensive equipment that will not befully or continuously used. Thus, unprofitableintegrated companies are not appropriatelyrationalized—their product lines are too vari-ous for large-scale production, and the capi-tal investment requirement for each productis too great to be justified by the size of themarket for that product. The plant closings ofseveral large domestic integrated steelmak-er in the past few years are consistent withthose companies’ attempts to get back on theproduct/process diagonal by narrowing thescope of their product lines. Generally, theyare halting production of products that arealso made by nonintegrated companies or canbe imported at competitive prices.

Some integrated companies, however, havethe opposite problem: their process stage is

too primitive for the high-volume productionof a few products. Their production technol-ogy does not take advantage of the scale econ-omies that high volume would allow, or theirsecondary processing is not volume-coor-dinated with primary processing, or both.The chief process deficiencies for these com-panies are small blast furnaces and ingot,rather than continuous, casting.

The nonintegrated companies are movingtoward expanding their range of products,but in doing so, they more often constructnew plants for specific products rather thanexpand existing plants. In the most efficientmills, there is a very smooth flow of materialsfor large-volume production of products by acombination of electric furnace steelmakingand continuous casting. The less efficientmills do not have the optimum process for theproduct stages they are in: the chief problemis the absence of continuous casting in plantsthat make a relatively narrow range of prod-ucts; but some plants that do have existingcontinuous casting equipment produce toomany products to allow long, efficient runs.

Alloy/specialty steelmaker vary consider-ably in their product stages, but generallytheir process and product stages are properlymatched. Some firms produce a large varietyof products, while others specialize in a fewproducts made in relatively large quantities.A significant trend is toward expanding millcapacity while maintaining product mix,which permits more continuous processingusing new technology. For example, manyplants use continuous casters, which permitvery rapid changeover to different sizes andshapes of products, and also offer consider-able production-cost savings in the form oflower energy consumption and greater yieldson expensive, high-alloy raw materials.


Nonintegrated Steelmaker

Fundamental Advantages andthe Role of Technology

Nonintegrated carbon steel producers areoften referred to as minimills, midimills, coldmetal shops, or special-market steel compa-nies. In some analyses, companies OTA clas-sifies as alloy/specialty companies are in-cluded in the nonintegrated category. Thisclassification may be correct in terms of theprocess technology these companies use, butit would not be correct in terms of the prod-ucts they manufacture.

A few small domestic minimills have beenoperating since the late 1930’s,3 more than 40were constructed during the 1960’s, andabout 10 more were added in the 1970’s.4 Theterm “minimill” derives from the very smallsize of the early generation of nonintegratedsteelmaker: most made no more than 43,350tonnes of product a year. Today, a number ofplants and companies have capacities in therange of 272,100 to more than 907,000 tonnes(table 97). As a whole, nonintegrated steel-making capacity and production have tripledin the past decade, and significantly more ca-pacity, probably 0.9 million to 1.8 milliontomes, is now in the construction or planningstages.

The nonintegrated companies are general-ly quite profitable compared to the larger in-tegrated companies. Their success has beenbased on their use of new technologies andfavorable product/market strategies:

. Nonintegrated mills have been quick toadopt promising technological changes:they spearheaded the adoption of elec-tric furnaces, furnace improvements,

‘A. Cockerill [“The Steel Industry: International Compari-sons of Industrial Structure and Performance, ” Cambridge,1974) noted that 40 mills were built in the United States duringthe 1960’s. In 1970, 42 plants were noted to be in existence (G.J. McManus, “Mini-Mills Leery of Midi-Mill Size, ” Iron Age,May 21, 1970). A 1978 listing includes 53 plants (HSS Commen-tary, January-February 1979).

‘C. G. Schmidt and R, B. Lelteren, “Mini-Steelplants in theU. S.: Some Technological and Locational Characteristics, ”Land Economics, vol. 52, No. 4, November 1976.

Table 97.—Approximate Plant, Capacity, andShipment Data for Nonintegrated Mills

Source

(1)(2)(3)(4)(5)(6)(7)

Number ProductYear of plants capacity Shipment

1967 341970 43 4,813,000 +1970 3,706,000

1 9 7 2 - 7 3 4 8 5,918,000 +1974 40 2,979,000 +1978 52 13,257,000

11,291,000

NOTE: Definitions and classifications of nonintegrated carbon steel mills havenot been Identical in sources of these data A ( + ) sign Indicates thatfigure appears to be based on less mills than those included in OTA sys-tem or on an admitted lack of complete data

SOURCES(I) C L Konir, “The Big Source of ‘Mini’ Steel Plants.” Iron Age, November

1967(2) G J McManus, “Mlnl-Mills Leery of Mldl-Mill Size,” Iron Age, May 21, 1970(3) G J McManus, “No More MiniMllls?” Industry Week, November 1971(4) Association. of Iron and Steel Engineers, “Directory of Iron and Steel

Plants,” 1975(5) Temple, Barker, and Sloane, “Analysis of Economic Effects of Environmen-

tal Regulations on the Integrated Iron and Steel Industry, ” July 1977(6) IIIS Commentary. January-February 1979 Assuming 90-percent yield from

raw steel capacity(7) Approximation based on data from AISI.

and continuous casting, all of which con-tribute to relatively low productioncosts, low energy consumption, low capi-tal costs, and high productivity. The rateof labor productivity improvement inelectric furnace steelmaking has beenparticularly high: employee-hours pertonne decreased 25.3 percent between1972 and 1977, compared with 6.9 per-cent in integrated steelmaking.5 Further,because electric furnaces use scrap,they consume far less energy than do in-tegrated steelmaking processes: in 1978,integrated plants used an average of35.2 million Btu to produce a tonne ofshipped product, as opposed to 9.9 mil-lion Btu for nonintegrated plants produc-ing carbon steels. In recent times theprice of scrap has been low relative tothe cost of making new iron units fromiron ore.

. Plant construction costs and leadtimesare low. The nonintegrated plants canbe built for 10 to 20 percent of the cost ofa greenfield integrated plant. The elim-

5U. S. Bureau of the Census data.


●

●

ination of primary ironmaking and fin-ishing facilities for flat products andcomplex steel products accounts formuch of this difference. The absence ofironmaking and the use of electric fur-naces also reduce the amount of pollu-tion abatement equipment needed. Thesimplicity of nonintegrated plants andthe common use of available technologyallow relatively quick new-plant con-struction, usually in 1 to 2 years.The product range of nonintegratedplants is narrow, consisting mostly ofsimple commodity steels in nonflatshapes such as reinforcing bar. Both ofthese factors permit long productionruns with simple equipment.Plants serve and draw upon relatively lo-cal markets. Plant locations are selectedto capitalize on the availability of localferrous scrap and local labor and toproduce for fast-growing local indus-tries, particularly construction compa-nies that use reinforcing bar. Their mar-ket strategy is to make special productsfor special markets, Confining their op-erations within small, surrounding geo-graphical areas also minimizes trans-portation, sales, and marketing costs.

As a result of these practices, noninte-grated mills are generally the lowest coststeel producers in the country, and oftentheir products are even priced lower than im-ports.6 At the same time, the nonintegratedcompanies have performed very well for theirowners and stockholders, so much so thatthey have become acquisition targets forother domestic and foreign industries.

The nonintegrated companies are some-times accused (by integrated producers) ofmaking the “easy,” lowest cost and pricesteel products. But these companies havecaused their products to become low-pricedby virtue of their low production and capitalcosts and their well-managed operations. The

‘)On the west coast, which has the greatest import penetra-tion (4o percent), imports have only 6 percent of the market forreinforcing bar, compared to more than 50 percent for struc-tural and sheet and strip products (Iron Age, July 31, 1978).

current trend among integrated companiestoward switching to the electric furnace-con-tinuous casting process is surely recognitionthat the nonintegrated companies have madesome wise choices.

The growth of nonintegrated steelmakerin the United States has been matched by sim-ilar growth in other countries. A Europeansteel expert has commented on the growth ofnonintegrated steelmaking in Europe:

In recent years a sizable expansion ofsteelmaking capacity has taken place only inthe scrap-based mini-mills. Representative isthe 5 Mill, tons capacity of the Bresciani inItaly, who were able to underbid the inte-grated steelmaker in front of their homedoors by a comfortable 50 dollars per ton innon-flat products, This development hasbeen caused by the disregard for the scrapmarket that was practised for many years bythe large integrated steelmaker.

As a result, the integrated steelmakerhave continuously lost market share in thenon-flat product areas.7

Future Changes

New Products

The initial success and growth of noninte-grated steelmaker and of new entrants intothe industry have been associated with pro-ducing simple products, notably reinforcingbar, but increasingly they are also producingmore complex products and higher qualitysteels. About half of the nonintegrated plantsproduce only merchant and reinforcing bar,but about one-fifth do not make merchant andreinforcing bar at all.

Many plants make special-quality bars,wire rod, and structural. A few plants makeplates, flange beams, I-beams, forging billets,and alloy bars. There is a clear trend towardmaking these higher grade products. Consid-er the following comments on one of the new-est plants, designed solely for wire rod:

‘W. H. Philipp, “Probable Course of Europe’s Steel Indus-try,’” paper presented at American Institute of Mining, Metal-lurgical and Petroleum Engineers annual meeting, NewOrleans, La,, February 1979.

1 Ch. 8—Technology and Industry Restructuring 253

“We will be the only rod mill in NorthAmerica producing strictly rods,” saysThomas Tyrrell, marketing vice-president.“We will have no wire drawing subsidiaries,no rebar line and no potential to shift rawsteel to other steel products, when marketconditions make them more attractive thanrods, ’

The concept of isolating markets is notnew to Co-Steel, which operates minimills in-ternationally. Raritan River’s market is larg-er than the traditional minimill’s, where mer-chant bars and rebar are typical products,the wire rod will be sold over the entire east-ern U.S. and possibly abroad. Another hall-mark of the minimill—low investment costsper ton—is common to Raritan, And combin-ing specific markets with efficient steelmak-ing is the key to minimill’s success.

“The whole minimill concept is operation-al, ” says Tyrrell, “since operations are thekey to cutting costs. As the theory goes, onceyou have the product at the lowest possiblecost the market comes naturally. Our ideagoes one step further, If our operations arethe very best, we should be able to commanda high price. ‘8

The future strategies of nonintegratedcompanies have been summarized as “up-grading product mix, concentrating on vari-ous shapes or sections that have been aban-doned by the major mills and/or specializingin chemistry modifications for selected cus-tomers. ”9

The most important characteristic of mostpresent products is that they are not flatproducts like sheet and strip. Because con-ventional rolling equipment for flat productsis generally geared for economic productionof several million tonnes annually, there is along-held belief that nonintegrated companiescould not move into this product area, andthat if they did the change would greatly in-crease their capital costs. However, this isnot necessarily the view within the noninte-grated segment. F. Kenneth Iverson, presi-dent of Nucor Corp., has stated that:

Mini-mills started with a relatively simpleproduct —refinforced bar. Now we makeplate and wire products, rails, even structur-al grades. The only thing you can’t do with amini-mill now is make sheet, but even thatmay not be out of the question in the future. 10

The minimum optimum scale for flat-rolledproducts in a nonintegrated plant rangesfrom 0.5 million tonne/yr for narrow strip to4.1 million to 4.6 million for very wide strip.’]

The low end of this range is consistent withlarger size nonintegrated plants.

New Small Rolling Mill Equipment

Of greater significance is the current inter-est in developing new types of flat-rollingequipment for nonintegrated plants: “Voest-Alpine is also developing a flat-rolling mill forwide strip and medium hot strip, capable ofproduction of 250,000 tons to 500,000 tonsper year of hot strip at minimum cost.”12 Itshould be noted that Voest-Alpine is an Aus-trian firm that sells continuous casting equip-ment worldwide and is also the owner of anew nonintegrated plant in New Orleans.

The most significant development in small-scale equipment for flat products is the hotreversing mill, which has already entered themarketplace. Sometimes called a Steckel mill,the reversing mill flattens steel by successive,back-and-forth passes through a single standrather than through many stands, which isthe method used in large sheet-rolling mills.The reversing mill eliminates the heat lossesthat occur when a flat strip travels through acontinuous mill. In the reversing mill, thestrip travels through the mill and is coiled in afurnace on the other side. Moreover, the sim-plicity of the reversing mill greatly reducescapital costs and shortens construction times.

A domestic equipment manufacturer hasalready sold several hot-reversing mills tononintegrated companies. A Canadian nonin-tegrated steel producer with 408,150 tonnesof steelmaking capacity will produce steel

‘Steelweek, Apr. 23, 1979.“World Steej Industry Data Handbook—U. S., McGraw-Hill,

1979.

“’American Metal Market, Dec. 31.1979.“D. G. Tarr, “The Minimum Optional Scale Steel Plant in the

Mid-1970’ s,” manuscript.“American Metal Market, Aug. 24, 1979.


pipe for a natural gas pipeline with thisequipment. The equipment will be used toproduce heavy-gauge flat-rolled high-strengthsteel, one-half-inch thick, in widths up to 72inches. 13

The cost of the Steckel mill is reported to beabout one-tenth the cost of a conventionallarge sheet-rolling mill. One domestic nonin-tegrated producer has been making steelplate in such a mill for a number of years. Thefollowing comments by the equipment manu-facturer point to the future potential of thisequipment for small steel producers:

In effect, we invented the mini-mill for flat-rolled products.

I question whether any big, 4-million-ton-a-year hot strip mills are ever going to be builtagain. The steel industry, instead of being allthings to all people and looking at a central-ized plant for meeting all markets, is nowcoming to a unit size plant, which might befor a half million ton a year.14

An excellent illustration of the potential forsmall steel companies to apply technology notwidely adopted domestically, and thereby tocapture a market abandoned by large inte-grated companies and deeply penetrated byforeign steelmaker, is the case of the BergSteel Pipe Corp. of Panama City, Fla., whichhas recently announced the opening of theNation’s largest diameter pipe mill. ’5 Hereto-fore, the United States Steel Corp. was thelargest domestic pipe producer with its 48-inch mill; the new plant will make pipe rang-ing from 20 to 64 inches in diameter, and willbe able to produce approximately 181,400tonnes annually, with an emphasis on pipe foroil and gas transmission and coal slurry pipe-lines. The use of the pyramid rolling processwill be the first domestic application of an es-tablished European technology. Its chief ad-vantage over the technology used in domesticmills is that changing production from onepipe size to another can be accomplished in alittle over 30 minutes, as opposed to from 8 to24 hours in conventional mills.

13G. J. McManus, “Steckel Mills Reverse Trends in Steelmak-ing,” Iron Age, Feb. 4, 1980.

“Ibid.IsAmerican Metal Market, Mar. 18, 1980.

Direct Reduced Iron

It is likely that a decade from now therather spectacular growth of nonintegratedsteel producers will be linked not only to theuse of electric furnace steelmaking and con-tinuous casting, but also to the commercialexploitation of DRI. * The introduction of DRIas a supplement to ferrous scrap in electricfurnaces will facilitate the manufacture ofproducts. Direct reduction (DR) also providesa means of introducing new iron units of highpurity into the steelmaking process, so thatelectric furnaces can make higher qualitysteels than they can with scrap. For a numberof years, several natural gas DR plants in theUnited States have supplied DRI for electricfurnace steelmaking, and imported DRI is be-coming increasingly available.

The advantages and disadvantages ofusing DRI plus scrap as opposed to using onlyscrap in electric furnaces are summarized intable 98. There is general agreement withinthe steelmaking community that the net bene-fits of using DRI are substantial: both proc-essing and the final steel products can be im-proved with the use of DRI, and it can lead toactual production cost decreases. Thus far,however, the relatively higher cost of DRIover scrap** and its limited availability havenot allowed widespread use.

Economically, scrap costs have been lowcompared to the cost of DRI, so as long as in-dustry growth could be maintained withoutgoing to higher quality products, the use ofDRI was not justified. But, as discussed inchapter 7, with further growth of electric fur-nace steelmaking by both nonintegrated andintegrated steel companies, ferrous scrapsupplies may not be adequate in the future:

The increasing problems faced by blastfurnaces and BOF’s—environmental andhigh capital costs—have caused a dramaticshift to, and increase in, electric furnacesteelmaking. This has and will put an in-creasing strain on scrap supply and has

*Direct reduction is discussed in ch. 6.**presumabllJ with increased R&D and improved DR Proc-

esses, the cost of DRI will decrease.


Table 98.—Electric Furnace Use of Direct Reduced Iron: Advantages and DisadvantagesCompared to Using All Scrap

Advantages Disadvantages—1. Higher purity steels can be made even with a relatively 1.

large proportion of scrap.2. Furnace productivity can be increased 10 to 20%

because DRI can be continuously fed to furnace. 2.3. Continuous feeding increases useful electrical power

10 to 14%. 3.4. Continuous feeding reduces wasted time 5 to 150/..5. Acoustical noise levels are reduced 10 to 15 dBa.6. Metallic yield is increased. 4.7. The variability of product chemistry is reduced.8. The cold formability of steels is improved due to lower 5

content of nitrogen and other residuals, and rates offinishing can be increased.

9. Product surface quality is improved and rejection ratesreduced.

10. There is a smoother, more efficient flow of materialfrom melting to finishing.

11. Less storage space, plant materials-handling equip-ment, and inventory are needed.

12. Lower grade scrap can be used to reduce costs ordeal with shortages or price fluctuations for high-quality scrap.

13. Price fluctuations should be less than for scrap.

Need access to water transportation for DRI importsor capital for DRI plant construction (unless domesticmerchant DRI plants are built).Higher cost than producers using scrap only, if scrapprices are less than DRI cost.Unless proportion of DRI in charge is kept relativelylow (30 to 40%), nonmetallic impurities can cause in-crease in energy, time, and fluxing agents.If bucket charging is used, nonmetallic cause lowerproductivity.Lack of alloying elements which may be desired re-quires greater use of alloy additions.

SOURCES R L Reddy, Some Factors Affecting the Value of DRI to the Steelmaker, ” AlME Ironmaklng Conference, Detroit, Mlch , March 1979; R A Redard, ‘Isthe Value of DRI to the Steelmaker Being Properly Assessed?” AlME Ironmaking Conference, Detroit, Mich , March 1979, R L Reddy, “Electric Arc Fur-nace Steel making With Sponge Iron, ” Canadian Mefallurgical Quarterly, vol. 1, pp. 1-6, 1979, J W Brown and R L Reddy. “Electric Arc Furnace Steel-making With Sponge Iron ‘ Ironmaking and Steelmaking, No 1, pp. 24-31, 1979

brought direct reduction to the fore. Its timehas come. Without it, there simply is notenough scrap in the world to support currentand projected electric furnace steelmaking.16

This increase in demand for scrap, along withhigher scrap prices and increasing produc-tion of higher quality products, may all com-bine to make DRI a necessary and economi-cally feasible raw material for nonintegratedproducers.

Imports of DRI are becoming more avail-able because a number of large-scale DRplants in natural gas-rich nations are becom-ing operational, and more are expectedwithin the next decade. A recent analysis andforecast by a domestic steelmaker showsworld trade in DRI increasing form 954,000tonnes in 1979 to 4,350,000 tonnes in 1985. 17

Abundant DRI could act as abundant scrapdid during the 1960’s to spur the growth of

“H, B. Jensen, “New Alternatives for Charge Materials,’”paper presented at Ferrous Scrap Consumers’ Coalition sympo-sium, Atlanta, Ga., February 1980.

“Ibid.

nonintegrated steelmakers.18 Much of the in-creased supply of DRI will be coming fromLatin America, especially Venezuela andMexico. It is generally accepted that theoften-cited problem in transporting DRI, itspotential to heat up and possibly ignite, eitherhas been solved or will be within the nearfuture. The fact is that bulk ocean shipmentsof DRI have been occurring for the past sever-al years.

In the near future, furthermore, domesticsteelmaker will probably have an alterna-tive to imported DRI. Small-scale, coal-basedDR plants may become available within thenext 5 to 10 years. These reduction plantswill need access to coal and iron ore, but theyshould be particularly attractive to the larger

“’’New greenfield direct reduction (DR) capacity is judged toamount to about 18 million tonnes during 1977-83-bringing to-tal DR capacity to about 35 million tonne/yr. However, shouldscrap prices continue to rise substantially in the years ahead[which would be principally the result of a strong economy inthe West), this could attract significant additional DR capacity.If our ‘judged doubtful” category were to materialize, another18 million tonne/yr of DR production capacity would be addedby 1983.” (World Steel Dynamics, April 1979.]


nonintegrated plants far from large domesticscrap markets. Yet another likelihood is theconstruction of domestic merchant DR plants.Although these might be coal-based facilities,a natural gas-based plant in Texas has beenunder discussion for some time. Because mostlarge integrated steel producers are increas-ing their electric furnace facilities, their in-creased demand is likely to spur the construc-tion of domestic DR plants.

The rapid rise in foreign electric furnacesteelmaking is also leading to increased inter-est in the use of DRI. For example, it has beenreported that Japan has already begun to im-port DRI from a new plant in Indonesia. ’g Thecost of the DRI is approximately $125/tonneincluding freight, compared to imported fer-rous scrap costs of $160 to $170/tonne. Ajoint industry consortium of 51 Japanese steelmills, with the Ministry of InternationalTrade and Industry, is studying the increaseduse of DRI. It is clear that DRI will likely be-come a world trade commodity whose pricewill be determined by the demands of a multi-tude of users. Domestically produced DRImight be exported in much the same way thatdomestic ferrous scrap has been, whichmeans that domestic steelmaker could faceproblems similar to those with scrap unlessthey have their own sources of DRI.

Future Expansion Forecast

Integrated steelmaker generally affect alack of concern about the inroads made bythe nonintegrated steel producers, but the fi-nancial community has become keenly awareof the growth and future importance of thisindustry segment at the expense of the inte-grated companies:

. . . potential for a considerable restruc-turing of the domestic industry exists—toward many mini-mills and away from mam-moth integrated plants.20

Scrap-based steelmaking (will) remain justabout the only true growth area in the steelindustry (because) they have more modern,“American Metal Market, Feb. 6, 1980.2(’J. C. Wyman, quoted in American Metal Market, Feb. 5,

1980.

more highly automated facilities than the in-tegrated producers and use continuous cast-ing more extensively.21

The nonintegrated producers themselvesare also expressing a high degree of optimismfor the coming decade. One producer has de-scribed nonintegrated companies as the newnucleus of a strong-again U.S. steel industry .22Quantitative forecasts in 1978 showed this in-dustry segment doubling its output in the nextdecade 23 and increasing its share of domesticsteel shipments to at least 25 percent by1990. 24

OTA finds these forecasts quite reasonablefor two reasons. First, the past growth of thenonintegrated companies has been very high,by approximately 9 million tonnes of ship-ments during the past decade (see table 97).Second, these companies’ record of success,excellent profitability, quick adoption of thebest new technologies, and ready access tocapital should permit this rate of growth tocontinue. It is reasonable to believe that thesesteelmaker could increase output by anotherg million tonnes of shipments during the1980’s.

Another way to assess the future potentialof the nonintegrated companies is to considerwhat percentage of major types of steel prod-ucts they will be capable of producing. Table99 presents OTA estimates, using 1978 datafor product mix and assuming that DRI willbe used and that some flat products will bemade on new types of rolling equipment. Theresult suggests that nonintegrated companiescould potentially double their market shareas well, to approximately 57 percent of theseproducts and 25 percent of total domesticshipments of all steel products. These esti-mates are probably conservative, becausethe product areas shown are expected to rep-resent an increasing proportion of all steelproducts and the estimates do not take thisinto consideration. What is most significant

“C. A, Bradforci, quoted in American Metal Market, Feb. 5,1980.

“F. Kenneth Iverson (Nucor Corp.), American Metal Market,Feb. 6, 1980.

“Forbes, Dec. 11, 1978,‘+ Fortune, Feb. 13, 1978.


Table 99.—OTA Estimate of Potential Production for NonintegratedSteel Companies, 1978 (thousands of tonnes)

— .Technically feasible and potential market

All- industry — for non integrated companies

1978 productiona Percent – - Tonnes

Bars (excluding reinforcing). . 10,992Reinforcing . . . . . . . . . . . . . . 4,267Wire rods . . . . ... . . . . . . . 2,316Wire products . . . . . . . . 2,277Structural shapes (heavy). ., 4,233Plates . . . . . . . . . . . . . . . . . . . 7,801Strip (hot-rolled). . . . . . . . . . . . 931Pipe and tubing . . . . . . . . . . . 7,031

Total . . . . . . . . . . . . . . . . . . . . 39,848b

aFrom AISI— —-

bRepresents 45 percent of total domestic shipments.CRepresents 25 percent of total domestic shipments.

about this finding is that for the next decade,most of the anticipated growth in domesticsteel production could be accounted for justby growth of nonintegrated steel companies. *

Other than the availability of scrap andDRI, the availability of electricity is the maindeterminant of the growth of nonintegratedsteelmaking. However, an increase of 9 mil-lion tonnes of shipments from this segmentwould lead to an increase in electricity pur-chases amounting to less than 1 percent of allelectricity used by all domestic industry, andless than 0.5 percent of all domestic uses ofelectricity. ** Such an increase spread over10 years and a number of locations, many of

*This possibility is considered in detail in the projection ofcapital needs for a modernization and expansion program forthe domestic industry presented inch. 10.

**At 605 kWh/tonne of raw steel, a 9. l-million-tonne in-crease in production would result in an increase in steel indus-try electricity consumption of 5.5 billion kWh, compared to1976 total domestic consumption of 257 trillion kWh, 1976 totalindustrial consumption of 103 trillion kWh, and 1976 steel in-dustry purchase of 44.3 billion kWh, of which about one-thirdwas for electric furnace steelmaking.

85100100100

1025252557

9,3434,2672,3162,277

4241,950

2331,758

22,568C

them in the South and Southwest, is not likelyto represent enough additional load on do-mestic electrical generation companies towarrant special consideration. Nevertheless,unless adequate domestic electricity is avail-able during the next decade, nonintegratedsteelmaking could not grow to its full poten-tial, particularly in major industrialized re-gions. Much depends on current plans andforecasts which will determine whether newelectrical generation plants will be con-structed.

Also noteworthy is that the analysis of fu-ture energy costs given in chapter 5 revealedthat under most future energy cost scenariosnonintegrated steelmaker would face morerapidly rising costs than integrated steelmak-er. Nonintegrated energy costs would stilllikely remain below those of the integratedsteelmaker because of their lower energyneeds, but the difference would be expectedto narrow over the next several decades, par-ticularly if these firms adopt DR and becomepartially integrated.

Alloy/Specialty Steelmaker

The alloy/specialty segment of the steel in-dustry is difficult to define precisely. In theOTA disaggregation of the industry, compa-nies in the alloy/specialty category are thosethat make the higher quality and higher

priced steel products rather than commoditycarbon steels. One recent compilation usingthis definition lists 33 such companies.25

~~Inst~tute for Iron and Steel Studies, ‘‘ Commentary,” Janu-ary-February 1979.

— . ———— ..—— — — — ———


There is little problem in identifying thesecompanies; the problem lies in measuringtheir output.

The terms “alloy” and “specialty” do nothave precise, generally accepted meanings,The only available data base is from theAmerican Iron and Steel Institute (AISI),which distinguishes four categories of steels:carbon, stainless, tool, and alloy. In the OTAdisaggregation, stainless and tool steels aredefinitely in the alloy/specialty category, butmuch stainless steel and many materials inthe alloy category used by AISI are made bycommodity carbon steelmaker (integratedfirms for the most part] and to a lesser degreeby nonintegrated producers, rather than byalloy/specialty steelmaker. The alloy steelsmade by the alloy/specialty steelmaker arethe higher alloy content, higher priced steelsmade in smaller quantities. Because thesecannot be distinguished, the data for alloysteels other than stainless and tool steelsoverestimate those alloy steels made almostsolely in alloy/specialty steel companies,probably by a factor of five. About half thestainless steel is made by integrated compa-nies. Finally, other types of higher quality,higher priced steels made by the alloy/spe-cialty steelmaker are not alloy at all, but

rather variations of carbon steel that aremade in small quantities compared to com-modity carbon steels; some of these are called“custom made” steels. Examples of thesesteels include electrical steels, clad plates,thick carbon steel plate, and coated strip.Such steels are included in the carbon steeldata of AISI and thus do not enter into OTAdata for alloy/specialty companies.

Growth of DomesticAlloy/Specialty Steel Use

The basis for the relative success andgrowth of the alloy/specialty steelmaker isthe increasing use of the steels these com-panies produce. Data on domestic shipmentsof alloy/specialty steels for the past decadeare given in table 100. Growth in domesticshipments of carbon steels has been quitelow—except for 1973 and 1974, domesticshipments remained virtually constant, witha 1.3-percent increase from 1969 to 1978.During this same period, shipments of alloy/specialty steels grew nearly 34 percent. Al-loys other than stainless and tool steels hadthe most growth.

Data on domestic consumption of alloy/spe-cialty steels are given in table 101. The use of

Table 100.—Domestic Shipments of Alloy/Specialty Steels, 1969-78

Stainless Tool Other alloy

Percent - Percent PercentYear 1,000 tonnes of total 1,000 tonnes of total 1,000 tonnes of total

1964. . . . . . . . . . . . . . . . . . . . . . . 705 0.9 93 0.1 5,8631969. . . . . . . . . . . . . . . . . . . . . . . 825 1.0 103 0.1 7,027 8.31970. . . . . . . . . . . . . . . . . . . . . . . 643 0.8 80 0.1 6,218 7.61971 . . . . . . . . . . . . . . . . . . . . . . . 651 0.8 71 0.1 6,291 8.01972. . . . . . . . . . . . . . . . . . . . . . . 775 0.9 82 0.1 6,972 8.41973. . . . . . . . . . . . . . . . . . . . . . . 1,029 1.0 101 0.1 8,400 8.31974. . . . . . . . . . . . . . . . . . . . . . . 1,220 1.2 102 0.1 9,130 9.21975. . . . . . . . . . . . . . . . . . . . . . . 687 0.9 63 0.1 7,589 10.51976. . . . . . . . . . . . . . . . . . . . . . . 924 1.1 69 0.1 7,285 9.01977. ........, ., . . . . . . . . . . . 1,014 1.2 77 0.1 7,869 9.51978. . . . . . . . . . . . . . . . . . . . . . . 1,080 1.2 83 0.1 9,492 10.71969-1978 percent change . . . . 30.9% -19.370 35.170

1979 (1st three quarters). . . . . . 937 1.3 66 0.1 7,649 10.8

Carbon steel percent change 1969-78 (77,191 -78,172 = ) 1.3%

All alloy/specialty percent change 1969-78 (7,955 - 10,655) = 33.9%

SOURCE Office of Technology Assessment.

Ch. 8—Technology and Industry Restructuring 259

Table 101. —Domestic Consumption of Alloy/Specialty Steels, 1969-78 (shipments + imports – exports)

Stainless Tool Other alloy

Percent Percent PercentYear 1,000 tonnes of total 1,000 tonnes of total 1,000 tonnes of total

1964. : . . . . . . .-~ . . . . . . 656 0.8- 99 0.1 5,724 7.21969. . . . . . . . . . . . . . . . . . . . . . . 912 1.0 114 0.1 6,811 7.31970. . . . . . . . . . . . . . . . . . . . . 727 0.8 94 0.1 5,923 6.71971 . . . . . . . . . . . . . . . . . . . . . . . 775 0.8 79 0.1 6,385 6.91972. . . . . . . . . . . . . . . . . . . . . . . 861 0.9 93 0.1 7,207 7.51 9 7 3 . . . . . , . . . . . . . . , . . . 1,058 1.0 114 0.1 8,520 7.71974. . . . . . . . . . . . . . . . . . . . . . . 1,255 1.2 118 0.1 9,076 8.41975. . . . . . . . . . . . . . . . . . . . . . . 769 1.0 78 0.1 7,687 9.51976.., ..., . . . 1,016 1.1 89 0.1 7,397 8.11977. . . . . . . . . . . . . . . . . . . . . . . 1,112 1.1 104 0.1 8,163 8.31978., . . . . . . . . . . . . . . . . . . . 1,196 1.1 122 0.1 9,712 9.2

1969-1978 percent change . . . 31.2% 6.3% 42.6%

1979 (1st three quarters). . . . . . 994 1.2 107 0.1 7,799 9.7

Carbon steel percent change 1969-78(85,296-94,770) = 11.1%

All alloy/specialty percent change 1969-78(7,836- 11,030)= 40.8%

SOURCE Officeof Technology Assessment

these steels increased about four times morethan carbon steels during 1969-78, and sincedomestic consumption outpaced domesticshipments, it can be concluded that importscaptured an increasing fraction of the domes-tic alloy/specialty market. Imports penetratedthe carbon steel market even more, however:domestic consumption of carbon steels from1969 to 1978 increased by 11 percent, butshipments went up by only 1 percent. Sum-mary data on imports as a percentage of do-mestic consumption are given in table 102.Imports made their greatest inroads on toolsteels and their least on stainless steels.Nearly 8 percent of all alloy/specialty steelsused in this country in 1978 was imported; forcarbon steels the figure was 19 percent. Ex-cept for tool steels, imports of all steelsdecreased significantly in 1979.

Table102.— Imports as a Percentage of DomesticConsumption, 1969 and 1978

1st three1969-1978 quarters

1969 1978 change 1979

Stainless . . . . . . . . . . 18.1 15.2 – 2.9 11.2Tool. . . . . . . . . . . . . . . 11.9 35.1 +23.2 40,7Other alloy . . . . . . . 4,5 6.6 + 2.1 5.7Al l a l loy /spec ia l ty 6.2 7,8 + 1.6 6.7Carbon . . . . . . . . . . . . 14.4 19.3 + 4.9 15.3

SOURCE Offlce of Technology Assessment

The worldwide use of alloy/specialty steelshas increased for several reasons:

advanced technology applications re-quire steels with high-performancecharacteristics, such as strength andtemperature resistance;energy conservation has dictated usingless steel and more alloy in making auto-mobiles;consumers are demanding durables withlonger lives and reduced lifecycle costs,built of materials with more corrosionand wear resistance;alloy/specialty steels have a compara-tive cost advantage over other high-per-formance materials because the othersare more energy-intensive in their proc-essing; andthe economic costs for and sociopoliticalproblems of minerals extraction are in-creasing, and this promotes the use ofsmaller amounts of higher technologysteel.

Over the 15-year period from 1964 to 1978,domestic consumption of all alloy/specialtysteels grew at an annual rate of 3.6 percent;this was more than double the 1.7-percentgrowth rate for carbon steel consumption.The growth rate of alloy/specialty steels islikely to increase in the years ahead. Thus, to


the degree that imports do not capture an in-creasing share of the domestic market, do-mestic alloy/specialty steelmaker should beable to expand at a rate more than double the1.5 to 2.0 percent per year anticipated for theindustry as a whole (see ch. 5).

One factor that OTA has not examinedwhich could limit alloy/specialty steel growthis the problem of shortages of alloying ele-ments, for which the United States is very de-pendent on foreign sources. This problem hasalready received considerable analysis else-where. 26

Potential for Exports ofAlloy/Specialty Steels

Exports have traditionally played a moreimportant role for alloy/specialty companiesthan for carbon steel producers. It is general-ly accepted that domestic alloy/specialtysteelmaker are both cost and technologycompetitive in the world market. One meas-ure of export competitiveness is the ratio ofexports to imports; such data are presentedin table 103 for the alloy/specialty steels, aswell as for carbon steels, for the period1964-78. Exports of carbon steels have notbeen large relative to imports, whereas ex-

2’)See, e.g., 7’echnical Options for Conservation of Metals, Of-fice of Technology Assessment, September 1979.

ports of alloy/specialty steels, other thanstainless and tool steels, have exceeded im-ports during 5 years of the 15-year period. Anumber of generic advantages have contrib-uted to the favorable competitive position ofdomestic alloy/specialty steelmaker:

●

●

●

●

●

●

They have a relatively strong technicalbase and probably a commanding ad-vantage over foreign competitors inproduct development and secondaryprocessing.The United States has relatively low en-ergy prices, an advantage that could in-crease if DR processes using coal be-come widely used.The United States has a good supply ofquality iron ore and ferrous scrap.The enormous domestic market, much ofit technology-intensive, has encouragedalloy/specialty steel product innovations.U.S. labor costs and productivities arecompetitive with European and possiblywith Japanese levels.The United States has a very sophisti-cated industry infrastructure. -

These advantages are offset to an extentby the greater level of assistance provided byother governments (particularly in the area oflow-cost financing for exports), and by someforeign industries’ experience in and infra-structure for export sales and marketing.

Table 103.—U.S. Exports as a Percent of Imports———.

Remaining AllCarbon Tool Stainless alloy/specialty alloy/specialty

1978 .., . . . . . . 9.3 10.6 36.0 65.6 56.71977 . . . . . . . . . 9.2 23.1 39.3 40.0 39.01976 .., . . . . . . 16.5 21.4 42.3 72.7 62.51975 . . . . . . . . . 22.4 32.0 45.5 74.5 64.91974 .., . . . . . . 34.1 34.6 77.8 115.2 100.51973 . . . . . . . . . 25.2 31.8 74.2 67.7 67.81972 . . . . . . . . . 15.4 20.0 42.3 40.2 40.21971 . . . . . . . . . 14.0 30.8 28.6 74.1 58.81970 . . . . . . . . . 49.2 11.1 47.5 198.5 141.31969 . . . . . . . . . 33.8 20.0 47.8 170.4 124.51968 . . . . . . . . . 11.2 15.4 51.2 43.2 45.31967 . . . . . . . . . 13,1 10.5 77.2 63.5 66.61966 . . . . . . . . . 14.4 11.1 65.0 80.4 69.61965 ......, . . 21.9 15.4 82.3 173.3 118.91964 . . . . . . . . . 49.1 22.2 168.4 315.5 225.8



Nevertheless, one major domestic producer(Armco) has demonstrated that aggressivemarketing can improve exports. In 1978, itexported 4.6 percent of its specialty steel,compared to 2.9 percent in 1977.27 This ex-port market change was the largest for anydomestic steel area, and is even more im-pressive when the depressed worldwide de-mand for steel in 1978 is considered. Mostforeign steel industries operated at low ratesin 1978 and were unprofitable (see ch. 4), butdomestic alloy/specialty producers werequite profitable. Another major domestic pro-ducer has reported that it regularly exports10 percent of its production.28

The growing worldwide demand for alloy/specialty steels has not gone unnoticed byforeign steelmaker, and foreign alloy/spe-cialty steelmaking capacity has been increas-ing. Data for the Japanese steel industry for1965-77 are given in table 104. Japanesegrowth in alloy/specialty steels has beengreat, nearly a fourfold increase in produc-

~ Armco, 1978 Annual Report; presumably the exports con-sisted mostl~ of electrical and stainless steels.

28R. P. Simmons, president, Allegheny Ludlum Steel Corp.,testimony before the Senate Banking, Housing, and Urban Af-fairs Committee. Nov. 19. 1979; presumably the exports con-sisted mostly of stainless steel.

tion and exports in the 12-year period. This isroughly twice the rate of growth for Japanesecarbon steel production and exports. Alloy/specialty steels imports have made less pene-tration into the Japanese market than havecarbon steel imports, by about half. Japan isthe single largest supplier in the world exportmarkets for both carbon and alloy/specialtysteels, and, except for some very narrowlydefined alloy/specialty steels made by othernations, it is the United States’ major com-petitor in those markets.

Stainless steels represent the single largesttype of alloy/specialty steel in production andin world trade, and they are also subject tothe most price competition. The Japanese andEuropean shares of this market totaled 82percent in 1976. In 1976, 47 percent of Swe-den’s stainless production and 39 percent ofJapan’s were exported, and the British SteelCorp. has planned to double its capacity andexport 40 to 45 percent of its stainless. It isdifficult to believe, however, that eitherGreat Britain or Sweden can be more com-petitive than domestic producers in a fairmarket. It must be recognized, however, thatthere is now considerable excess worldwidecapacity, which will make effective imple-

Table 104.—Japanese Production and Export of Alloy/Specialtyand Carbon Steels, 1965-77

1965 1977 1977/1 965

Alloy/specialty steel production (1,000 tonnes)Stainless . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 396 1,626Tool . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 207Other alloy/specialty . . . . . . . . . . . . . . . . . . 1,363 5,650

Total, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,869 7,483

All alloy/specialtyAs percent of total production . . . . . . . . . . . . . . 4.7 ”/o 8.4% 79%Production tonnage change 1965 -77 . . . . . . . . . 387Exports as percent production of total . . . . . . . 14.3 18.4 29Percent exports to United States . . . . . . . . . . . . NA 19.2Change in export tonnage 1965 -77 . . . . . . . . . . . 420Change in import tonnage 1965-77 . . . . . . . . . . . 78

Carbon steelsChange in production tonnage 1965 -77 . . . . . . . 165Exports as percent of total production . . . . . . . 27.6 38.6 40Percent exports to United States . . . . . . . . . . . . NA 20.7Change in export tonnage 1965-77 . . . . . . . . . . . 272Change in import tonnage 1965 -77. . . . . . . . . . . 184

NA = not availableSOURCE Japan’s Iron & Steel Industry 1978 Kawata, Tokyo. 1978

—- —-.— .


mentation of the new Multilateral TradeAgreement (see ch. 4) difficult. Nevertheless,the worldwide rate of growth for stainless de-mand (about 5 percent per year since 1964)should stay close to the 5.8-percent annualgrowth rate in foreign capacity, which hasheld since 1970. If the United States is to in-crease its stainless exports, then it must do soby making inroads on present foreign marketshares, especially those of Europe and Japan.

Technological Improvements inAlloy and Specialty Steel making

The alloy/specialty steel companies havemodernized considerably during the past sev-eral years, but even before this period theywere more technology- and research-orientedthan the rest of the domestic steel industry(see ch. 9). The increase in yield from raw tofinished steel (see table 105) is partly a resultof improving technology, primarily from in-creased use of electric furnaces (see table106), continuous casting, and other relativelynew steelmaking technologies. The yield foralloy/specialty steels remains lower than forcarbon steels, however, because alloy/spe-cialty steels are made in much smaller lots.

The role of technology in the future of al-loy/specialty steelmaker will likely remainimportant. This industry segment spends con-siderable funds on R&D (see ch. 9), and it islikely to continue to develop and adopt newprocess and product innovations. The use ofpowder metallurgy fabrication has alreadybegun to increase. Most significant is thelarger potential of powder rolling technology,which is an energy- and materials-efficient

Table 105.—Percentage of Domestic Yields, 1969and 1978 (shipments/raw steel)

1969 1978 ChangeAll alloy/specialty . . . . . . . . . . . 53.4 58.4 + 5.0Stainless . . . . . . . . . . . . . . . . . . 58.0 61.0 + 3.0Alloy (including tool). . . . . . . . . 52.9 58.1 + 5.2Carbon . . . . . . . . . . . . . . . . . . . . 68.2 73.7 + 5.5


Table 106.—Percentage of Raw Steel Made inElectric Furnaces, 1969 and 1978

1969 1978 ChangeStainless . . . . . . . . . . . . . . . . . . 100 100 0Alloy (including tool). . . . . . . . . 34.9 41.0 + 6.1Carbon . . . . . . . . . . . . . . . . . . . 10.7 19.5 + 8.8


way to produce sheet and strip products. Usu-ally prealloyed powder is made from moltenalloys. The powder is then rolled, cold or hot,and consolidated into a high-density, coher-ent metal. The process facilitates the produc-tion of very highly alloyed materials, whichpresent problems in casting and which havelimited plasticity for normal rolling of ingotsinto sheet and strip.

Another future development is the plasmaarc melting furnace, a variation of the con-ventional electric arc furnace, which is justnow being proven commercially. It appears tooffer great efficiencies, and it may also facili-tate the recycling of high-alloy-content wastematerials. Chapter 9 provides greater detailon the past adoption of other important newtechnologies, such as continuous casting andargon oxygen decarburization, by alloy/spe-cialty steelmaker.

Integrated Steelmaker

The future prospects for the nonintegratedand alloy/specialty producers appear quitefavorable. Nonintegrated producers may un-dergo a 100-percent growth during the nextdecade, and alloy/specialty producers arelikely to expand by about a third. In contrast,the growth of the integrated steelmaker will

likely be small, perhaps 10 to 20 percent dur-ing the next decade, depending on the rate ofgrowth of carbon steel consumption and theextent of imports. In addition to the shift ofcarbon steel production to the nonintegratedproducers and the trend toward more use ofalloy/specialty steels, the integrated segment


of the industry has experienced the followingstructural changes during the past decade:

There has been a shift in the raw materi-als used, primarily from original domes-tic sources of iron ores to the lowergrade taconite ores and imported ores,Markets have shifted from the Northeastand North Central States to the Southand West.Concern about heavily concentratedsources of pollution is increasing.There are greater oscillations in marketdemand and levels of profitability.Old plants are gradually deteriorating.Significant changes in the technologyof steelmaking require a fundamentallynew plant layout to achieve maximum ef-ficiency.

These changes, which increase costs andthe need for modernization, are continuing tocontribute to the loss of market share by theintegrated companies. Moreover, the ratio ofcapital investment to profitability for the inte-grated companies is the highest of the threesegments. It is conceivable that by 1990 theproducts of integrated steelmaker will ac-count for just over 70 percent of domesticsteel shipments, compared to 85 percent in1978. This does not necessarily imply that in-tegrated plants will close—a very low rate ofgrowth relative to the other industry seg-ments may account for much of this marketloss. However, it also does not imply thatplants will not close. A number of smaller andolder integrated plants would require verylarge sums to rejuvenate technologically,sums too large to be justified on strictly eco-nomic grounds.

CHAPTER 9

Creation, Adoption, and Transferof New Technology

Contents

PageSummary . . . . . ,0, ,0 . 00 . . . . . . . . . . . . . . . . . 267

Role of Technology in Solving Industry’sProblems ● ,.. .s. ..0. ..00 s 0 . . . . . . . . . . . 268

Parity Versus Advantage. . . . . . . . . . .......268Major Versus Incremental Innovation. .. ....270

Research and Development . ..............271Long-Range Strategic Planning for Innovation 271Domestic Funding and Structure . ..........272Foreign R&D Activities. . .................277R&D and Trade Performance. . . . . . . . . . . . . . 280

Adoption and Diffusion of New Technology—Case Studies of Six Technologies. . .......281

Adoption Strategies . . . . . . . . . . . . . . . . . . . . .281Six Case Studies of Technological Changes. .. 282Conclusions From Case Studies . ...........298

Technology Transfer . . . . . . . . . . . . . . . . . . . . 299From the United States. . . . . . . . . . . . . . . .. ..299By Foreign Industries. . ..................301Summary Comparisons. . .................305

List of Tables

Table No. Page107. Allocation of R&D Funding by Selected

Sectors of Industry, United States, 1975 272108. U.S. Steel R&D Spending. . . . . . . . . . . . . 273109. R&D Spending of Several U.S. Steel

Companies, 1976-78 . . . . . . . . . . . . . . . . 273110. Measure of Diversification of R&D

Efforts in Ferrous Companies . . . . . . . . . 274111. R&D Funds as Percentage of Net Sales in

Ferrous Metals, Nonferrous Metals,Chemicals, Petroleum Refining, andStone, Clay, and Glass ProductsIndustries, United States, 1963-77 . . . . . 275

112. Competitive U.S. Trade Performance inComparison With R&D . . . . . . . . . . . . . . 276

113. Federal Support of Industrial R&D, 1977 276

Table No. Page114*

115.

116.

117.118,

119.

120.121,

122.123.

124.

125.

126.

List

U.S. R&D Intensity and TradePerformance . . . . . . . . . . . . . . . . . . . . . . 281Summary Informationon Six OTA CaseStudies . . . . . . . . . . . . . . . . . . . . . . . . . . . 283Adoption of AOD Technology in VariousCountries of the World . . . . . . . . . . . . . . 284Percent Raw Steel Continuously Cast... 289Continuous Casting in Segments of U.S.Steel Industry, 1978 . . . . . . . . . . . . . . . . 290Economic Costs and Benefits of AdoptingContinuous Casting. . . . . . . . . . . . . . . . . 291Ten Most Promising Formcoke Processes 294High-Iron Waste-Recycling ProcessesCommercially Available in the UnitedStates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295Producers of One-Side Galvanized Steel 297Channels of Steel Technology TransferBetween the United States and Japan. . . 299Channels of Steel Technology TransferBetween the United States and OtherNations Except Japan . . . . . . . . . . . . . . . 300Major Japanese Steel TechnologyTransfer Projects Involving BarterTrade . . . . . . . . . . . . . . . . . . . . . . . . . . . . 302Features of Technology Transfer inDifferent Nations . . . . . . . . . . . . . . . . . . 306

of Figures

FigureNo. Page36. R&D and Environmental Expenditures,

Steel Industry, United States, 1965-78. . 27437. R&D Expenditures in Japan as

Percentage of Net Sales by Sectors . . . . 27838. Installed Argon-Oxygen

Decarburization Capacity. . . . . . . . . . . . 28439. Growth of BOF Installed Capacity . . . . . 28640. Continuous Casting Apparatus. . . . . . . . 28641. The Diffusion of Continuous Casting. ,.. 289

CHAPTER 9

Creation, Adoption, and Transferof New Technology

Summary

The domestic steel industry has a well-es-tablished record for generating product inno-vations, but it is less inclined to generate newsteelmaking processes. The industry prefersto adopt proven technologies that have a rec-ord of successful commercialization. Eventhen, its adoption rates for new products,such as one-side galvanized steels, is verygood; but it lags in adopting new process tech-nologies, such as continuous casting and eventhe basic oxygen furnace. This lag is mainly aresult of aging plant, poor industry growth,and lack of capital.

To the extent that adoption rather thancreation reduces risk and R&D costs and pro-vides near-term payoffs, it is a useful ap-proach. But it also has major drawbacks: itleads to industry dependence on technologiesthat may be poorly suited to domestic needs;it reduces learning opportunities for innova-tive applications; and—most importantly—itdoes not enable the industry to stay ahead inthe international market. Independent crea-tion of new technologies and their successfuladoption would enable the steel industry togain technological advantage, rather thanmerely achieve delayed parity, This advan-tage would enhance the industry’s competi-tive position in both domestic and interna-tional markets.

R&D expenditures by the domestic steel in-dustry, as a percentage of sales, have de-clined over the years and are lower than inmost other basic industries in the United

States. The industry’s basic research effort isparticularly small. The low level of steel in-dustry R&D may be attributed to a number offactors, including cautious management atti-tudes towards research, the high cost of dem-onstration projects, the industry’s decliningshare of the domestic market, high regulatorycosts, and low profitability.

Steel industry R&D has very little Federalsupport and is complemented by only a lim-ited amount of steel R&D carried out by theGovernment and universities. Foreign steelR&D, on the other hand, is generally in a morevigorous state because of larger budgets andstronger government support, particularlyfor high-risk projects whose likely benefitspromise to be widespread. Some foreign steelindustries also benefit from the work of multi-sectoral steelmaking research institutes.

Domestic steel technology exports are lim-ited. They are largely handled by equipmentfirms and are mainly in the area of raw mate-rials handling. Foreign steel industries are in-creasing their efforts in technology transferin order to offset declining steel product ex-ports. To a much greater degree than domes-tic steelmaker, foreign companies have de-sign, consulting, and construction depart-ments that aggressively pursue the sale ofboth hard and soft technology to other na-tions, particularly the less developed coun-tries (LDCs). Japan, West Germany, Austria,and Great Britain are major exporters of in-novative steelmaking technologies.

267


Role of Technology in Solving Industry’s Problems

In many industrial sectors in the UnitedStates and in foreign steel industries, tech-nology is viewed as one of the principalmeans of reducing costs, gaining competitiveadvantage, and meeting societal needs andobjectives. Some U.S. steel companies, how-ever, are ambivalent and occasionally nega-tive toward new technology and innovation.These attitudes are barriers to the develop-ment and adoption of new technology.Another impediment is the lack of emphasison basic and applied research. This short-range orientation may result in failure to de-velop beneficial new technologies and in slowadoption of successful foreign innovations.

Many steel executives consider theirs to bea classic example of an industry character-ized by a slow rate of technological change.They firmly believe that innovation is a riskyundertaking with uncertain returns and thatpurchasing proven technologies is more costefficient. This view, however, does not takesufficient account of the many recent majortechnological changes in steelmaking or ofthe changing competitiveness of the domesticsteel industry.

Industry spokesmen contend—with consid-erable justification—that the rarity of majortechnological changes in the steel industryresults from severe financial difficultieswhich prevent the construction of new facil-ities based on new technologies. However, noteven increased capital availability and profit-ability—perhaps brought about with the as-sistance of appropriate Government pol-icies—would ensure vigorous technologicalinnovation unless the prevailing industry at-titude toward new technologies also changes.

The robust and highly competitive Japa-nese steel industry can be used as a model ofthe maximum use of new technology: itachieved its premier position by applying in-novative processes widely and improvingthem constantly. The real lesson of the Jap-anese experience, however, is that if Govern-ment policies facilitating capital formation

are combined with a positive industry atti-tude toward the adoption of new technology,the widespread use of new steelmaking proc-esses will indeed take place.

The U.S. steel industry needs new technol-ogy to cope with the changing nature of theeconomic, social, and political world in whichit operates. New technology can improve thecompetitiveness of domestic steels with re-spect to quality and cost; it can also reduceindustry vulnerability to inflation and otherexternal factors. New and innovative technol-ogies, some already commercially availableand others with a significant likelihood of suc-cessful development and demonstration, offerpotential for:

reducing energy consumption, includingthe use of coke;making greater use of domestic low-grade coals;reducing production costs as a result ofimprovements in process yield (althoughyield improvements will also put upwardpressure on the price of scrap):using more domestic ferrous scrap andother waste materials containing iron;improving labor productivity;reducing capital costs per tonne of an-nual capacity;shortening construction time of newplants; andallowing greater flexibility in using im-ports of certain raw materials and in im-porting semifinished rather than fin-ished steel products,

Although new and improved steel technology,alone, is not sufficient to reverse unprofit-ability and inefficiency, it is an essential in-gredient for the future economic health andindependence of the steel companies.

Parity Versus Advantage

New technology may be developed throughtwo processes: by true innovation, consistingof the creation and first successful commer-

Ch. 9—Creation, Adoption, and Transfer of New Technology ● 269

cial use of new technology: or by the adoptionof innovations created by others. For produc-tion processes, most domestic firms stressadoption rather than innovation. They arguethat the cost and risks of innovation outweighthe benefits and that it is cheaper in the longrun to buy proven technology than to createit. Although the innovation process does infact produce failures as well as successes, italso offers an opportunity for gaining thecompetitive advantages of earlier marketpenetration, cost reductions, and the possiblesale of new technology.

Strictly economic analyses of the creationand adoption of new technology ignore twovery important issues: the unique circum-stances of the domestic steel industry, andthe benefits of an ongoing learning process.Innovations from external sources, especiallyforeign sources, may not lead to new technol-ogies appropriate to the particular charac-teristics and needs of the domestic steel in-dustry. Domestic steelmaker understandthis with regard to raw materials and prod-ucts, but they undervalue the importanceof developing unique process technologies,shaped by domestic resource opportunities.Furthermore, the domestic regulatory climateshould be viewed as a constraint which canbe dealt with most effectively through the cre-ation of new technology specifically geared tomeeting its requirements.

The industry admits that there is a gap inthe adoption of new technologies between theUnited States and its competitors, but itdenies that a knowledge gap exists. ’ The in-dustry gives little weight to the considerationthat the foreign knowledge base is responsiveto foreign needs and may be better suited toparticular foreign conditions. A uniquely do-mestic steelmaking knowledge base cannotexist without domestic innovation based onresearch (basic and applied), development,and demonstration that are shaped by thecurrent and anticipated needs and opportu-

IN. A. Robbins, proceedings of “The American Steel Industryin the 1980’s—Crucial Decade.”’ AISI, 1979.

nities of domestic steelmaker. Even the Japa-nese, once noted for using foreign researchand innovations, have now shifted their em-phasis to creating their own.

The secondary effects of innovation fromgreater R&D experience are also lost inadopting rather than creating new technol-ogies. The lessons learned in originatingtechnology allow a firm or industry to movemore rapidly up the learning curve of a majorinnovation. Japanese steelmaker, for in-stance, have benefited greatly from a con-stant flow of incremental innovations thatspill over from their extensive experiencewith a major new technology and from theirhigh level of improvement-oriented R&D onsteelmaking software. These incremental in-novations, based on new applications ratherthan on new fundamental knowledge, can sig-nificantly reduce production costs and in-crease productivity. The Japanese experiencewith continuous casting (discussed in a latersection) is the most recent example of turninganother nation’s innovation into a host of in-cremental new technologies for use and sale.The U.S. steel industry, on the other hand,has relatively low levels of R&D, adoption,and experience with new technologies. As aresult, the industry does not have the sameopportunities for movement along learningcurves or for incremental innovation.

Consequently, whatever new technology ispurchased from foreign sources still leavesthe purchaser one step behind the originator.By the time all is learned about the innova-tion, the foreign source is well on its way toexploiting the next one. It may be true thatthere is equality of knowledge among theworld steel industries concerning fundamen-tal innovations, yet it is an error to believethat knowledge about innovations is equiv-alent to innovating. Waiting to use someoneelse’s innovation is a strategy likely to spellcompetitive loss in the long run. It takes yearsfor steel plants to be designed and built, andthose who innovate tend to stay ahead oftheir competitors.


Major Versus Incremental Innovation

Possible technological solutions that mightbe considered for steel industry moderniza-tion are:

●

●

●

to modernize existing operations by add-ing existing technology;to build new plants using the best avail-able technology; orto develop and put in place at new plantsradically innovative new technology.

These solutions differ in two major re-spects: in their capital costs, and in theamounts by which they can be expected to re-duce production costs. The third, for exam-ple, is a high-cost, high-payoff solution; thesecond is somewhat less costly and somewhatless productive; the first is an incrementalsolution with incremental rewards. Thechoice among these solutions rests on how thecosts and payoffs balance out,

The first solution, the extension of existingoperations with available, improved technol-ogy (such as continuous casting), is generallyconsidered to have the best balance betweencapital costs and reduction of productioncosts. The second option, involving construc-tion of completely new plants using existingtechnology, would involve high capital coststhat cannot be expected to be sufficiently off-set by the limited production cost reductionsit would bring. The third option, constructionof new plants based on radically innovativetechnology, will not be technically feasible forat least a decade; once feasible, however,there is a possibility that high capital costscould be sufficiently offset by significant pro-duction cost savings. Thus, the first option,complemented with a vigorous research pro-gram in radical steelmaking innovations,could prepare the industry now for short-term revitalization with the potential for long-term, fundamental modernization.

Several important considerations argueagainst constructing new facilities usingavailable incremental improvements. The ma-

jor constraints are the high capital costs ofgreenfield construction and the need for im-mediate modernization and expansion. Thecapital costs of greenfield sites, estimated tobe well over $l,l00/tonne of annual capac-ity, * are very high compared to the other twoinvestment alternatives—” roundout” expan-sion costing about $550/tonne, and noninte-grated (minimill) expansion costing only $154to $275/tonne of annual capacity. Given thehigh cost of capital, any reduction in steelproduction costs gained by using advancedsteelmaking technologies in greenfield inte-grated plants is outweighed by significant in-creases in financial costs. The domestic in-dustry’s low profitability would make it diffi-cult to obtain the necessary funds for thistype of expansion.

The industry’s immediate need for capaci-ty replacement and expansion** also makesconstruction of new integrated plants less at-tractive than the roundout option. Conserva-tive estimates place the time required for de-sign, permit approval, and construction atabout 8 to 10 years, although plans exist forone greenfield plant to be built in half thattime. Such a timelag is incompatible with theindustry’s current needs, and the long con-struction time would also dim the prospect ofachieving technological parity through green-field expansion: during construction, majorsteelmaking innovations could become avail-able for commercial application elsewhere.Furthermore, once a substantial number ofnew domestic plants are in place, integratedsteelmaking technology in the United Stateswould be static for some years. The lifetimeof such plants is long, and the need for addi-tional steelmaking capacity will have beenlargely met for the immediate future; by thetime new capacity is needed, it is probablethat other nations will have moved aheadwith newer technologies.

*Detailed analyses of these costs are presented in ch. 10.* *Detailed analyses of this are presented in ch. 10.


Research and Development

Technological supremacy is most likely tobe achieved through deliberate and continu-ous research, development, and demonstra-tion. A recent analysis of radical steelmakingtechnologies suggests that several offer suffi-cient economic advantages to merit furtherresearch. z These include direct steelmakingand direct casting of steel. However, with aleadtime of approximately 10 to 20 years forthe development of these and other radicallyinnovative technologies, they would not haveany impact on the industry’s current prob-lems. Nevertheless, commitment to long-termtechnological competitiveness would dictateproceeding immediately with R&D activitiesaimed at developing and using radical steel-making technologies. This position has beensummarized by Bela Gold:

The very future of the domestic steel in-dustry over the long run depends on inten-sive programs to develop such (radical tech-nological) advances . . . . Such efforts mustbe combined with a more immediate programto modernize and expand the domestic steelindustry through effective utilization ofalready available technologies as well as ofrelatively straightforward extensions ofthem. To do nothing—as is implied by theCOWPS Report—or to wait until some mirac-ulous new technological advances are devel-oped (which could not be reasonably dupli-cated by foreign competitors in relativelyshort order) is likely to prove catastrophicnot only for the U.S. steel industry, but alsofor related industries and major geographi-cal areas.

In addition to developing radical innova-tions in the long term, it is important for thedomestic steel industry to adopt incrementalinnovations in the near term, using available

‘See Julian Szekely, “Raciically Innovative Steelmaking Tech-nologies. report submitted to OTA (no date), and ch. 4 of thisreport.

‘Bela Gold, “Some Economic Perspectives on Strengtheningan Industry’s Technological Capabilities: With Appllica tions tothe U.S. Steel Industry, ” prepared for the Experts Panel on Ex-ploring Revolutionary Steel Technologies, Office of TechnologyAssessment, meeting at the Nfass. achuset ts Institute of TechnoI-OKV, Apr. 25, 1978.

steelmaking technologies. This approachwould use the less costly roundout alternativefor increasing capacity and would calI forconstructing electric furnaces for use in com-bination with basic oxygen furnaces in nonin-tegrated plants (see ch. 10).

Long= Range Strategic Planningfor Innovation

A number of industry difficulties, pre-sented in chapter 4, might have been lesssevere had there been a well-prepared strate-gic plan for technological innovation. Theseproblems include:

●

●

●

●

●

increased production costs and declin-ing eminence after World War II;lack of exports to meet rapidly risingsteel demand in Third World and indus-trialized nations;lack of emphasis on exporting proventechnology, which could have justifiednew investments in R&D and innovationactivities:the large integrated steel producers’lack of response to demographicchanges and to opportunities for usingscrap in local markets by means of mini-mills; andlengthy and costly resistance to compli-ance with environmental regulations.

A number of studies4 suggest that one ofthe principal reasons for the lack of U.S.steelmaking innovation lies in the lack of in-dustry commitment to planning for technicalinnovation. Most domestic steel companiesappear to conduct strategic economic plan-ning, but few pay any attention to technologi-cal planning. This is reflected by their rela-tively low investments in R&D and pilot anddemonstration work, and by their heavy reli-ance on foreign innovations. These factors

‘For example, B. Gold, “Steel Technologies and Costs in theU.S. and Japan, ” Iron ond Steel Engineer, April 1978; and J,Aylen, “Innovation. Plant Site and Performance of the Amer-ican, British and German Steel Industries, ‘“ Atlanta EconomicsConference, October 1979.


combine to form a barrier against innovation.In addition, domestic firms are inclined to sellpromptly whatever innovative technologythey create: they maximize immediate profits,instead of keeping the technology proprietarylong enough to gain a competitive advantage.

Domestic steel industry management mustexamine the consequences of continuing toconcentrate on: low-risk, incremental techno-logical changes to the exclusion of high-risk,major changes; product rather than processchanges; promotion of R&D managerial per-sonnel from within rather than recruitmentfrom other industries, universities, and Gov-ernment; the enhancement of raw material(iron ore and metallurgical coal) profitability;traditional domestic markets; and defensiverather than aggressive business strategies.

Domestic Funding and Structure

The U.S. position of leadership in steel pro-duction and technology through World War IIand the decade thereafter was achieved asmuch by its size and economies of scale, andby its organization and business practices, asby technical innovation. A review of the prin-cipal technological contributions made by theU.S. steel industry during the past severaldecades indicates a practical orientationtoward labor efficiency improvement andproduct development, According to an indus-try survey of a relatively small sample oflarge steel companies in 1975, 81 percent ofsteel industry R&D funds were allocated todevelopment, 12 percent to applied research,and less than 7 percent to basic R&D work(table 107).5 However, the annual NationalScience Foundation (NSF) data series, R&D inIndustry, indicates that less than 2 percent ofsteel industry R&D spending is in basic re-search, compared to 3 percent for all domes-

‘The following comment on basic research appears to sum-marize the situation well for the domestic steel industry: “Fun-damental research is the most prominent casualty of the Amer-ican industry’s need to adapt to the realities of high costs andlow profits, a situation that has prevailed and worsened overthe past two decades. “ (33 Metal Producing, June 1979.)

Table 107.—Allocation of R&D Funding by SelectedSectors of Industry, United States, 1975

Percent Percent Percentbasic applied development

Steel . . . . . . . . . . . . . . 6.9 12.3 80.8Aerospace . . . . . . . . . 1.5 39.2 59.3Automotive . . . . . . . . 0.1 83.4 16.4Chemicals . . . . . . . . . 10.9 37.9 51.2Electronics. . . . . . . . . 2.1 27.0 70.9Instruments. . . . . . . . 5.3 7.7 87.0Office equipment,

computers . . . 1.9 5.3 92.8Paper . . . . . . . . . . . . . 1.4 21.1 77.5Textiles. . . . . . . . . . . . 0 9.0 91.0

SOURCE National Science Foundation, Support of Basic Research by Industry,1978, (based on sample of companies belonging to IndustrialResearch Institute (l RI) and a survey by IRI)

tic industry and nearly 4 percent for nonfer-rous metal companies, *

According to NSF data (table 108), steel in-dustry R&D increased by about 10.2 percentannually from 1963 to 1977, from $105 mil-lion to $256 million. However, annual realR&D spending increased by only about 22percent during this entire period. For all U.S.industry, the growth in real R&D spendingduring the same period was about 18 per-cent. 6 More importantly, expressed as a per-centage of sales, steel research actually de-clined from 0.7 to 0.5 percent during the sameperiod.

R&D data for several steel producers aregiven in table 109. These data illustrate sev-eral points: R&D spending as a percentage ofprofits is rather large and closer to other in-dustries than R&D spending as a percentageof sales; alloy/specialty steel producers spendmore than integrated companies on R&D; andthe trend of decreasing R&D spending in thepast few years shown by NSF data is con-firmed by company data.

*When using NSF data, it should be kept in mind that theytend to overstate steelmaking-related R&D somewhat. First.nonmetals R&D conducted by diversified steel companies ap-pears to be included in the NSF data for ferrous industry R&D.Secondly, the ferrous industry category also contains R&Dfoundries and other metals-processing facilities not included inthe scope of this study. Nevertheless, since NSF data are thebest available, they will be used.

‘National Science Foundation, R&D in Industry, 1977.

Ch. 9—Creation, Adoption, and Transferor New Technology ● 273

Year

1963 . . . . . .1966 .1967 . . . . . .1968 . . . .1969 . . . . . .1970 . . . . . .1 9 7 1 . ,1 9 7 21973 . . . . . .1974 . . . . . .1975 . . . . . .1976 . . . . .1977 ,,....1978 . . . . .

Table 108.—U.S. Steel R&D Spending (dollars in millions)

Ferrous industry

Ferrous industryR&D spending

$ 1 0 5 —

136134134135148142144159177a211252256259

R&D – steelPercent of total Steel industry industry

Percent of ferrous Federal R&D Federal R&D environmental environmentalindustry sales spending spending capital spending capital spending

0.7 -

$ 2 - -1.9 —

0.7 3 2.2 $ 5 6 2.430.7 1 0.7 94 1.430.7 1 0.7 102 1.310.7 2 1.5 138 0.980.7 1 0.7 183 0.810,7 2 1.4 162 0.880.6 3 2.0 202 0.710.5 4 2.5 100 1.59NA NA 2,2a 267 0.660.6 3 1.4 453 0.470.6 4 1.6 489 0.520.5b 4 1.5 535 0.480.5 5 1.9 458 0.57

NA = not availableacalculated from total of $181 million, assuming $4 million for Federal spendingbFirst 8 companies 0.5 next 12 companies 0.6.

NOTES 1) Federal R&D spending IS only for R&D in company Iaboratories, it does not include Federal R&D at Government facilities2} NSF data based on sample of companies in the following SIC categories 331 blast furnace and basic steel products 332 iron and steel foundries 3,398 metal

heat treating and 3,399 primary metal products not elsewhere classified. only the first is the traditionally defined domestic steel Industry as used in this assessment and for which AISI data apply One consequence of this IS probably that R&D spending for just the 331 category IS lower than that Indicated by theabove figures particularly on a percent of Industry sales basis

SOURCES R&D data from NSF environmental capital spending from AISI

Table 109.—R&D Spending of Several U.S. Steel Companies, 1976-78—

Millions of dollars

Company 1976 ‘- 1977 1978

Integrated ‘”U.S. Steel . . . . . . . . . . . . . . . . . . . $52.2 $49.8 $52.5Bethlehem . . . . . . . . . . . . . . . . . 43,7 42.7 37.1Republic Steel . . . . . . . . . 16.3 16,8 15.1

Average. . . . . . . . . .Alloy/specialtyAllegheny Ludlum ... . . . . . . . . . . . . . . . 9.2 10.7 13,3Carpenter Technology . . . . . . . . . . 7.5 9.2 9.4

SOURCES Business Week July 3 1978 July 2 1979, and company annual reports

During the past several years, steel indus-try expenditures on research aimed at im-proving technological performance and re-ducing production costs have been lower thanaggregate steel industry R&D spending levelsindicate. This is because some R&D must bedirected toward regulatory research necessi-tated by the Environmental Protection Agen-cy (EPA) and the Occupational Safety andHealth Administration (OSHA) policies. Ac-cording to one steel R&D executive:

There is a trend toward more defense tvpe

Percent of sales Percent of profits——.-——1976 1977 1978 – 1976 1977 1978 -

— —

0.6 0.5 0.5 66.2 36.1 21.70.8 0.8 0.6 26.0 - 9 . 5 16.50.6 0.6 0.4 24.7 40.9 13.5

0.7 0.6 0.5 40.0 22.5 17.2

1.0 1.1 1.0 131.4 42.1 34.92.8 2.8 2.4 30.3 32.2 27.8

meet government mandates and regulations,and less time being spent on the kinds of long-term, high risk, innovative projects whichwill lead to the new ways of making steel inthe future.

Part of the problem is that what we are do-ing with this money is not what everybodywould call research and development . , . butis pointed more toward short term objectivesfor a variety of reasons and not so much onthe real innovative work and the fundamen-tal research work that you might define asresearch and development .-

research . . . more time being spent on short- ‘Proceedings, “The American Steel Industry in the 1980’s—er range projects and projects designed to The Cruci~l Decacl[?, ”’ AISI, 1979.


There is no obvious relationship betweenR&D spending and environmental capital ex-penditures (see table 108), but the ratio of in-dustrial R&D funding to environmental spend-ing does appear to be related to the level ofcapital spending (figure 36). As capital spend-

Figure 36.— R&D and Environmental ExpendituresSteel Industry, United States, 1965-78

(R&D)Log e iE n

= 0 . 6 8 2 L o ge E n + 3 . 4 6

(Corre la tor coef f ic ien t ) r = - .973

10 I

1

–1.0 { 1 I I \4 4,5 5.0 5.5 6.0 6.5

L o ge Envi ronmenta l cap i ta l spending (En)

SOURCE Off Ice of Technology Assessment from data in table 108

ing for environmental needs increases, R&Dspending decreases relatively. That such astatistically significant relationship shouldhold over the 13-year period for aggregatedindustry data is curious: nondiscretionary en-vironmental spending because of governmen-tal regulations appears to be controlling thelevel of R&D spending. However, since envi-ronmental spending is in the capital categoryand R&D spending is in the expense category,the cause-effect relationship, if one exists,may not be as simple as this curve implies.

The rate of R&D spending is not uniformamong segments of the domestic steel indus-try. Alloy/specialty mills often allocate alarger proportion of their sales and profits toR&D than do large integrated steel companies(see table 109). Furthermore, integrated steelcompanies that have diversified are channel-ing a growing proportion of their R&D fundsinto nonsteel R&D spending. Using NSF data,apparent nonsteel R&D spending by steelcompanies increased between 1963 and 1977from 14 to 32 percent of total R&D spending(table 110). Thus, R&D spending as a percent-age of sales for diversified steel companiesdeclined by even more than the data in table106 indicate. Finally, it appears that noninte-grated steel companies spend much less on

Table 110.—Measure of Diversification of R&D Efforts in Ferrous Companies(dollars in millions)

Apparent nonferrous R&D spendingFerrous industry Ferrous product of ferrous companiesR&D spending field spending Dollars Percent of total

1963 . . . . . . . . . . . . $105 $ 90 $15 14.31966 . . . . . . . . . . . . 136 104 32 23.51967 . . . . . . . . . . . . 134 117 17 23.51968 . . . . . . . . . . . . 134 119 15 11.21969 . . . . . . . . . . . . 135 125 10 7.41970 . . . . . . . . . . . . 148 127 21 14.21971 . . . . . . . . . . . . 142 114 28 19.71972 . . . . . . . . . . . . 144 137 7 4.91973 . . . . . . . . . . . 159 158 1 .61974 . . . . . . . . . . . . 177 156 21 11.91975 ....., . . . . . . 211 144 67 31.81976 . . . . . . . . . . . . 252 163 89 35.31977 . . . . . . . . . . . . 256 172 84 32.8

SOURCE National Sc!ence Foundation

Ch. 9—Creation, Adoption, and Transfer of New Technology . 275

R&D than the other industry segments, al-though no published data on spending levelsare available to document this.

In addition to significant within-industryR&D spending differences, there are majorbetween-industry differences. Ferrous metalsR&D as a percentage of net sales has beenlower than that of other basic industries for15 years or more. Between 1966 and 1977,ferrous metals R&D was only one-sixth to one-half the level of other basic industries likenonferrous metals and chemicals (table11 l). * Steel industry R&D also ranks very lowamong a broader range of manufacturing in-dustries—at about 20 percent of the all-man-ufacturing average, it ranks above only thefood, textile, and lumber industries. Sim-ilarly, the number of R&D scientists and engi-neers per 1,000 employees is smaller for steel

‘Steel industry sources claim that the record understates ac-tual research efforts, since considerable research is for opera-tional and tax accounting purposes undertaken in productiondepartments and reported as a production expense, See, for in-stance, Frederick C. Lagenberg, president, American Iron andSteel Institute, “United States Steelmaking Technology-Sec-ond to None, ” in Proceedings of the Steel Industry EconomicsSeminar, AISI, 1977, p. 43.

The same tax laws also apply to other industries, and there-fore similar reporting practices could prevail in other indus-tries although the extent probably varies from industry to in-dustry. Valid conclusions can be made about the comparativestanding of steel industrv R&D.

than for any other industry except for textilesand apparel, about 15 percent of the averagefor all reported industries (table 112).

Low R&D levels relative to other industriesand declining R&D relative to sales can be at-tributed to a number of economic factors. Thepilot and demonstration plant stages of steel-making research are very expensive com-pared to R&D in other sectors of the economy,and the steel industry is thus exposed to amuch greater degree of risk than are other in-dustries. The decline in the steel industry’sshare of the domestic market has also in-creased the market risk of capital-intensiveR&D. Related to a declining market share hasbeen a real decline in steel industry invest-ments since about 1965 (ch. 3), which hasnarrowed the industry’s choices among pro-duction processes and equipment. And final-ly, as steel profitability declined professionalmanagers of iron and steel companies haveexercised considerable caution with respectto R&D activities. In the case of conglomer-ates, these managers must allocate R&Dfunds among various activities: they are un-doubtedly influenced by profitability trendsin these activities.

Nonindustry R&D.— Steel industry R&D iscomplemented by only limited efforts else-

Table 111.— R&D Funds as Percentage of Net Sales in Ferrous Metals, Nonferrous Metals, Chemicals,Petroleum Refining, and Stone, Clay, and Glass Products Industries, United States, 1963-77

Stone, clay, andYear Ferrous metals Nonferrous metals Chemicals Petroleum refining glass products

1963 ., . ~~• ..-

0.7 1.1 4.3 1.0 - 1.61966 . . . . . . . . . 0.7 0.8 4.4 0.9 1.51967 . . . . . . . . . 0.8 1.0 4.6 0.8 1.81968 . . . . . . . . . 0.7 1.0 3.8 0.8 1.61969 . . . . . . . . . 0.7 1.0 3.9 0.9 1.71970 . . . . . . . . . 0.7 1.0 3.9 1.0 1.81971. , . . . . . . 0.7 1.0 3.7 0.9 1.81972 . . . . . . . . . 0.6 0.9 3.6 0.8 1.71973 . . . . . . . . . 0.5 0.9 3.5 0.7 1.71974. , . . . . . . . 0.5 1.0 3.5 0.6 1.71975 . . . . . . . . . 0.6 1.2 3.7 0.7 1.21976 . . . . . . . . . 0.6 1.2 3.7 0.6 1.21977 . . . . . . . . . 0.5 1.1 3.6 0.7 1.2Annual averages1966-77, . . . . . . 0.6 1.0 3.8 0.8 1.51968 -72. . . . . . . 0.7 1.0 3.8 0.9 1.71973 -77. . . . . . . 0.5 1.1 3.6 0.7 1.4

SOURCE National Science Foundation


Table 112.—Competitive U.S. Trade Performance in Comparison With R&D.

‘Scientistsand engineers

engaged in R&DCompany R&D as Federal R&D as Total R&D as as a percentage

U.S. share of percentage of percentage of percentage of of employment,exports, 1962 sales, 1960 sales, 1960 sales, 1960 January 1961

Aircraft . . . . . . . . . . . . . . . . . . . . 59.52 2.6 19.9 22.5 7.71Scientific and mechanical

measuring equipment. . . . . . 36.52 4.1 7.7 11.8 NADrugs . . . . . . . . . . . . . . . . . . . . 33.09 4.7 0.1 4.8 6.10Machinery . . . . . . . . . . . . . . . . . 32.50 2.7 1.6 4.3 1.39Chemicals, except drugs . . . . 27.32 3.4 0.7 4.1 3.65Electrical equipment. . . . . . . . . 26.75 3.7 7.2 10.9 4.40Rubber products . . . . . . . . . . . . 23.30 1.4 0.7 2.1 0.95Motor vehicles and other

transport equipment. . . . . . . 22.62 2.4 0.7 3.1 1.14Other instruments. . . . . . . . . . 21.62 4.4 2.1 6.5 NAPetroleum refining . . . . . . . . . . 20.59 1.0 0.1 1.1 2.02Fabricated metal products. 19.62 1.0 0.5 1.5 0.51Nonferrous metals ... . . . . . . 18.06 0.9 0.2 1.1 0.64Paper and allied products. . 15.79 0.7 0.0 0.7 0.47Lumber, wood products,

furniture . . . . . . . . . . . . . . . . 12.26 0.5 0.1 0.6 0.03Textiles and apparel . . . . . . . . 10.26 0.4 0.2 0.6 0.29Primary ferrous products . . . . . 9.14 0.6 0.0 0.6 0.43Rank correlation with first column. . . . . . . . . . . 0.84 0.73 0.92Linear correlation with first column. . . . . . . . . . . . . 0.59 0.84 0.90

NA = not available—

SOURCE D B Keesing, “The Impact of Research and Development and U S Trade, ” J. Political Economy 75, 38-48, 1967

where in the private sector and in Govern-ment and academic institutions. The industryrelies heavily on its supplier industries andcompanies for technological developments,but for a variety of reasons, including the lowlevel of new steel plant construction in theUnited States, these supplier companies havebeen losing their share of the world marketand are themselves spending less on R&D.Federal contributions to support steel R&Dhave also been meager. On average, since1966, Federal agencies have spent $3 millionannually, or 1.9 percent of total steel industryR&D, to support ferrous metals and productsR&D (table 108), In fact, Federal support offerrous metals R&D is lower than for anyother category of industrial R&D (table 113).Commenting on this imbalance in FederalR&D, the administration’s major policy state-ment on the steel industry, the so-called Solo-mon report, notes:

Despite the fact that steel is an importantbasic industry, Federal contributions to thesteel industry’s R&D expenditures are low,

Table 113.—Federal Support of Industrial R&D, 1977—

Federal R&D funds(percent of total R&D)

Ferrous metals and products. . . . . . . . . . . . . 1.9Nonferrous . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4Aircraft and missiles. . . . . . . . . . . . . . . . . . . . 77.8Electrical equipment and communication . 45.5Motor vehicles. . . . . . . . . . . . . . . . . . . . . . . . . 12.5Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.0Instruments. . . . . . . . . . . . . . . . . . . . . . . . . . . 11.1

SOURCE National Science Foundation, R&D in Industry, 1977

representing only 1.9 percent of the indus-try’s R&D spending—compared with 9 per-cent for the chemical industry, 14 percentfor the machinery industry, 47 percent forthe electrical equipment industry, and 78percent for the aircraft industry,8

Academic institutions also make a limitedcontribution to steel R&D. The American Ironand Steel Institute (AISI) provides about $1million annually for university research pro-jects. Federal funding for steel-related R&Dat universities may approximate this level, al-

“Solomon Report, 1977.

Ch. 9—Creation, Adoption, and Transferor New Technology 277

though no detailed data on university re-search in ironmaking and steelmaking appearto be available. The relatively low level ofacademic effort devoted to this area can beinferred, however, from the research inter-ests of metallurgy and materials faculty: in a1976 survey, thought to be representative ofthe past decade, less than 3 percent of facultymembers listed interests in the areas of iron,steel, or ferrous research.9 There are largernumbers of academic researchers working onsubjects applicable to the steel industry thanthis figure would suggest, but they may beonly indirectly concerned with iron, steel, orferrous metals research. Low levels of steelresearch by professors also reflect the poorimage steel research has in the academiccommunity. The National Academy of Sci-ences has identified this low level of aca-demic activity in materials processing as abarrier to progress and innovation:

Materials-processing technology also suf-fers from insufficient attention in our engi-neering colleges. Fewer than 10 percent ofthe materials faculty (who themselves com-prise only a small fraction of the engineeringfaculty) are experts in materials processingand manufacturing. These fields do not enjoythe status accorded some other academicdisciplines, and little current research in theschools is relevant to major developments inmaterials processing. The near absence inour universities of research in materials-processing and manufacturing technologydenies the country a potential source of newideas and innovation. Furthermore, it meansthat the universities are not exposing youngpeople to current advances in the field. 10

It is apparent that steel R&D must bestrengthened, and that current R&D must beredirected, for the industry to lower its over-all costs, Some of the emphasis on improvinglabor productivity should be shifted toward

‘Metcl~lurg}/M~]teric]ls Education Yeorbook, American Socie-ty for Nletals. 1976. This represents 27 of the 936 listed facu]tymembers, 6 of whom mere a t Canadian schools; the remaining21 were at 16 U.S. schools. There were 92 schools representedin the survev.

‘{’National Academy of Sciences, Science and Technology—A Five Year Outlook, Freeman, San Francisco, Calif., 1979,p. 322.

attaining substantial raw material and ener-gy savings through technological changes.Capital cost reductions are also necessary.During the late 1960’s, U.S. raw materialscosts were low and labor costs high com-pared to European producers.]’ Under suchconditions, it was reasonable that consider-able U.S. steel R&D effort—mainly innovationin operating efficiency—centered on labor-intensive operations such as rolling. But aheavy emphasis on improvements in laborproductivity may no longer be appropriate.The costs of energy, materials, and capitalhave increased during the past decade tosuch a degree that they now deserve moreprominence in R&D strategies. This inappro-priate allocation of steel R&D effort is espe-cially serious in view of the U.S. steel indus-try’s need to modernize. More intensive re-search into and use of continuous casting andother raw-material-saving innovations wouldhave made this need less pressing. *

Foreign R&D Activities

Foreign steel-related R&D activities differradically from those in the United States: theyhave significantly larger budgets; they areconducted with considerable government as-sistance; and they are often undertaken inmultisectoral steel production research insti-tutions,

Foreign steel producers spend more onR&D than those in the United States. The U.S.steel industry’s steel-related R&D expendi-tures have been about 0.5 to 0.6 percent ofsales in recent years; in Japan, they areslightly more than 1 percent. Furthermore,Japanese steel-related R&D expenditures

“A. K. McAdams (“Big Steel, Invention and Innovation Re-considered,” Quarterly ]ournol of Economics, 91 :457-82, Au-gust 1967) provides the following data:

costs United States ECSCLabor, total ., . . . . . . . . . . . ., . . 400 u 20~ oEnergy, materials, supplies, . . . 45 70Investment and interest , ., . . . . 10 5h!iscellaneous. . . . . . . . . . . . . . . 5 5

*It is interesting to note that U.S. Steel Corp. in May of 1977formed a task force to develop a comprehensive procedure toensure that potentially attractive new steelmaking processesare effectivelv evaluated.


have grown gradually but steadily over time(figure 37), even though Japanese steel salesand profits have declined since 1974. In 1974,steel R&D occupied 3 percent of the totalnumber of researchers in Japanese industry,and accounted for 5 percent of total industryR&D spending; ’2 in 1973-75, the equivalentfigures for U.S. steel R&D were 0.9 and 1.3percent, respectively. 13 As in the UnitedStates, however, steel R&D ranks lower thanR&D expenditures in other sectors of the Jap-anese economy. French and West Germansteel industry R&D as a percentage of sales isroughly similar to U.S. levels,l4 but there issomewhat more difference in R&D spendingper net tonne of raw steel produced; in 1972,the United States spent $1.30, the EuropeanCommunity $1.46, and Japan $2.26 per tonneof steel output. ’s

IZA~ency for Industrial Science and Technology, 1977.1 INational Science Foundation, op. cit.‘+ Hajime Eto, “Relationship Between Basic and Improvement

Innovations—Development of Innovation Policy of Japan, ” pre-sented at IIASA, December 1979.

‘“H. Mueller, “Factors Determining Competitiveness in theWorld Steel Market, ” Atlanta Economic Conference, October1979.

Figure 37.— R&D Expenditures in Japan asPercentage of Net Sales by Sectors

0 I f’ I I1965 1970 1975 1977

Year

‘ E l e c t r i c a l m a c h i n e r y ~ Machinery

~ P r e c i s i o n I n s t r u m e n t ~ T o t a l‘ - - - - - C h e m i s t r y . . . . . . . . . . . . Iron and steel—. ● —Transpor t equipmenl

Regional and intersectoral (industry, uni-versity, government) steel R&D cooperation istypical in foreign steel-producing countries,but not in the United States. Here, joint R&Defforts by domestic steel producers are inhib-ited by Federal antitrust policies, but in manyother steel-producing countries such coop-erative efforts are encouraged. Further,much foreign steel research is undertaken byresearch institutes jointly supported by in-dustry, university, and government. The SteelDirectorate of the Commission of EuropeanCommunities has a mechanism for regionalR&D coordination. It arranges for significantsteel-related R&D funding, and the costs areshared among the steel companies and themember countries. At the present time, theannual funding level by the Steel Directorate,alone, is about $36 million. Member countrygovernments supply $20 million of this fund-ing, an amount about four times greater thanthe U.S. Government’s support of steel R&D.

JapanThe Agency for Industrial Science and

Technology (AIST) is the part of the Ministryof International Trade and Industry (MITI)that coordinates and influences R&D withinJapanese industry. The stated purpose ofAIST is the “promotion of R&D of industrialscience and technology and diffusion of ob-tained results.’’16 One of the many AIST pro-grams, the national R&D program, deals withlarge-scale projects that require “a greatdeal of expense, risks and long-range peri-od. ”17

When initiated in 1973, the policy criteriaguiding the selection of projects were that:

Projects should have a prospect for highsocial returns by providing technical ad-vances for a wide sector of the economy.Projects should be unable to be under-taken by private firms because of “mar-ket failure,” including an absence ofprofit motives and high risk.

“’’Agency for Industrial Science and Technology, ” MITI,1978.

“Agency for Industrial Science and Technology, op. cit.SOURCE Japanese Government 1979


Projects should use technologies thatcan be clearly specified: extensive basicresearch should not be required.Projects should be carried out coopera-tively by universities, government lab-oratories, and industry; projects involv-ing only one firm are usually rejected. 18

One of the major AIST R&D projects hasbeen the nuclear steelmaking program, withthe goal of a commercial nuclear steelmakingcapability by 2000. A sizable amount (about$54 million) was allocated for the first phaseof the program in 1973-79, and project imple-mentation continues on schedule.

Another part of AIST supports R&D activ-ities in private industry. There are four com-ponents of this program:

● Subsidies for R&D: “The total subsidiesgranted in (the) past 29 years . . .amounts to approximately 40.2 billionyen ($168 million) for 4,112 programs. ”

. Tax credits for increased R&D expendi-tures: “If R&D expenses exceed the larg-est amount of such expenses of any pre-ceding accounting periods since 1966, 20percent of such excess amount may bededucted from the corporation tax. Themaximum amount deductible is 10 per-cent of the corporation tax, ”

● Low-interest loans: AIST plays an impor-tant role in allocating long-term loansthrough the Japan Development Bank toencourage the use of new technologydeveloped by private enterprises. “Thesum of loans furnished in 1976 was ap-proximately 36 billion yen ($150 million)for 38 items. ”

. A research association for mining andmanufacturing technology: “for the pro-motion of joint research among privatecompanies and the research associa-tions, ” 19

AIST has been conducting technology as-sessments since 1975; the Japan IndustrialTechnology Association also helps dissemi-nate technical information by spreading R&D

results achieved mainly by AIST laboratoriesand institutions. In addition, AIST carries outfor industry a technological survey that de-fines R&D themes and describes ongoing R&Dactivities.

The AIST laboratories and institutes alsoplay a direct R&D role. There are 16 of these,and many, such as the National Research In-stitute for Pollution and Resources and theGovernment Industrial Development Labora-tory, carry out work of interest to the steel in-dustry. The Industrial Development Labora-tory, for example, has a project on high-pres-sure fluidized reduction of iron ore, as well asone on coal gasification.

The Japanese steel industry, during theperiod since World War II, has shifted frombasic research to very applied R&D. Thisshift, largely stimulated by demonstrated de-ficiencies in manufacturing and other tech-nologies, set the stage for Japan’s massive in-dustrialization after the war.

Japanese physicists developed high qualitysteel in the interwar period. But the Japa-nese production process of iron and steelwas inefficient for mass production, and lackof quality control resulted in big variance ofquality which cancelled out the theoreticallycalculated high quality. The basic innovationfounded on great physical discoveries wasfound useless without suitable productiontechnology.

* * *A great deal of effort was [therefore] put

into automation technology developmentrather than to improvement in quality of ironand steel itself. 20

A recent survey of Japanese steel industrypersonnel, apparently conducted by MITI,found that the most significant changes forthe iron and steel industry were expected tobe a future de-emphasis on market-driven in-novation and resource saving, and an in-crease in R&D in other fields. The latterwould appear to indicate a trend towarddiversification. Furthermore, nearly three-quarters of the industry personnel believed

‘nIbid.“41t]id. -“EIo, op. cit.


that there would be incremental innovationwithin 5 years, and 10 percent believed thatthere would be an epoch-making innovation inthe next 10 years. There are, indeed, indica-tions of a decline in private-sector R&D,which the respondents attributed variously tohigher costs, greater risks, declining profits,and a global stagnation in both basic re-search and technical innovation.

West Germany

The Federal Ministry for Education andScience in West Germany plays a strong coor-dinating and sponsoring role in the area of in-dustrial research. The attitude of the Germansteel industry is that basic research shouldbe done in the universities and the develop-ment work in the industry. The West GermanGovernment apparently accepts this divisionof labor.

As in Japan, government support for steel-related R&D can also be found in West Ger-many. Government-funded projects are estab-lished and supported on a long-term basis.Four-year projects are normal, with renewalperiods ranging from two to four years. Suchsupport creates a large core of people toguide R&D projects to successful outcomes,and German technology in steelmaking andprocessing normally stays abreast of competi-tion from other countries, This has helpedWest German steel plant equipment purvey-ors to capture a fairly large share of businessfrom both developed and developing coun-tries. Several research organizations alsodraw West German Government support tosolve steel industry problems:

●

●

●

●

Verein Deutscher Eisenhuttenleute(VDeh)Iron Works Slag Research Association(Reinhausen)Iron Ore Dressing Study Group (Othfres-sen)Iron and Steel Application Study Group( D u s s e l d o r f ) --

The aim of these groups is to find solutions topractical problems encountered by steelplant operators. Government funding is tied

to close cooperation between these researchorganizations, the steel plants, and the seniorfaculty at the universities and polytechnicalschools.

Sweden

The emphasis of Swedish R&D appears tobe on the alloy and specialty steels and on thedevelopment of major steelmaking innova-tions that can be exported to foreign steel in-dustries. Swedish research is particularly ac-tive in coal-based direct reduction, directsteelmaking processes, and plasma steelmak-ing.

In addition to significant, though recentlydeclining, private-sector R&D, the govern-ment funds a number of research establish-ments. These include the Swedish Institutefor Metals Research and the Royal Instituteof Technology, both in Stockholm, and theFoundation for Metallurgical Research(Mefos). Mefos was promoted for the Swedishsteel industry by Jernkontoret, the SwedishIron Makers Association, which is owned col-lectively by the steel works of the country.Mefos has 65 employees and an annual budg-et of $3.8 million. About 50 percent of its an-nual expenditures, outside of contract re-search, come from the Swedish Government.*’The foundation operates two full pilot plants,constructed and equipped for a total invest-ment of about $16 million.

R&D and Trade Performance

The export performance of an industry in-creases with increasing levels of private andgovernment R&D spending, as well as with in-creasing numbers of scientists and engineersengaged in R&D.22 The data of tables 112 and114, as well as more recent trade data,strongly suggest that increasing U.S. steel im-ports and decreasing participation in world

z IStee] Technology Bu]]etin, Swedish Trade Office, December1979,

Z-’ The causa] re]ation of R&D in determining export perform-ance was shown to be significant in W. H. Branson and H. B.Junz, “Trends in U.S. Trade and Comparative Advantage, ”Brookings Popers on Economic Activity, vol. 2, 1971.

Ch. 9—Creation, Adoption, and Transferor New Technology 281

Table 114.—U.S. R&D Intensity and Trade Performance

Trade balance Trade balanceexports- exports-

R&D imports, 1976I n t e n s i t ya (mi l l ions

R&D imports, 1976

Description (percent)in tens i ty (mi l l ions

of dollars) Description (percent) of dollars)

Above-average R&D intensityCommunications equipment. .Aircrafts and parts . . . . . . . . .Office, computing equipment . .Optical, medical instruments .Drugs and medicines . . . . . . . . .Plastic materials . . . . . . . . .Engines and turbines . . . . . . . .Agricultural chemicals. . . . . . .Ordinance (except missiles) . . . .Professional and scientific instr.Electrical industrial apparatus .Industrial chemicals. ... . . . . . .Radio and TV receiving equip.

Average . . . . . . . . . . . . . . . . . . .

15.2012.4111.619.446.945.624.764.633.643.173.002.782.57—

$ 793.76,748.31,811.4

369.6743.5

1,448.01,629.2

539.3553.0874.8782.5

2,049.4– 2,443.4

1,223.0

Below-average R&D intensityFarm machinery ., ... 2.34 696.2

Electric transmission equipmentMotor vehicles. . . . . . . . . . . . . . . .Other electrical equipment . . . .Construction, mining . . . . . . . . . .Other chemicals . . . . . . . . . . . . . .Fabricated metal products. . . . . .Rubber and plastics . . . . . . . . . . .Metalworking machinery . . . . . .Other transport . . . . . . . . . . .Petroleum and coal products. . .Other nonelectric machines .Other manufactures . . . . . . . . . . .Stone, clay, and glass. . . . . . . . .Nonferrous metals . . . . . . . . . . . .Ferrous metals . . . . . . . . . . . . . . .Textile mill products, . . . . . . .Food and kindred products . . . .

Average . . . . . . . . . . . . . .

2.30 798.12.15 – 4,588.61.95 311.21.90 6,160.41.76 1,238.51.48 1,525.71.20 – 478.81.17 736.41.14 72.11,11 NA1,06 3,991.31,02 – 5,137.40.90 –61 .30.52 – 2,408.90.42 -2,740.40.28 40.30.21 – 190.0— 2.0

aMeasures of R&D intensity and trade balance are on product line basis The ratio of applied R&D funds by product field to shipments by product class, averaged be

tween 1968-70SOURCES Department of Commerce, BIERP Staff Economic Report U S Bureau of the Census

export markets are linked to the domesticsteel industry’s relatively low levels of R&Dspending. A counter example can once againbe found in Japanese R&D and the connectionbetween Japanese performance in technologyand exports:

Japan, which has no significant natural re-sources, runs a positive trade balance. TheU. S., which has many natural resources,runs a large deficit. A key difference is in our

use of technology. The export accomplish-ments of Japan in optics, steel, automobiles,and consumer electronics provide obviousexamples of what the Japanese can do whenthey set technological and export goals. In allof these fields they have used their resourcesmore effectively than we . . . We shouldmatch it with our best efforts and people. z]

“J. B. Wiesner, The Chronicle of Higher Educ(ltion, Nov. 13,1978.

Adoption and Diffusion of New Technology—Case Studies of Six Technologies

Adoption Strategies

Any successful technological innovationhas certain benefits associated with it; thesemay be reductions in the costs of input fac-tors (like raw materials and labor) or im-provements in product quality. The change-over to new technology also has the attendantcosts of adjustments in employment levels,skill requirements, production quotas, andassociated supervisory arrangements. For an

innovation to be adopted, obviously, thebenefits should outweigh the capital andchangeover costs. The adoption decisionsmade by the management of individual firmscollectively determine the rate at which atechnological innovation diffuses throughoutan industry, and capital investment is a majorfactor in the firms’ adoption decisions. *

*A third variable, labor relations has generally not createdany difficulties with the introduction of new steelmaking equip-ment (see ch. 12).

.– i – 1- :.


The issue of capital formation, then, is acrucial one. A company’s sources of capitalfunds may be external, or they may be inter-nal—that is, generated from cash flow. Gov-ernments, by their tax policy, influence thecash flow companies have available for rein-vestment. If a company has sufficient discre-tionary funds, it will base its investment deci-sions on its evaluation of the return on invest-ment from alternate projects, the perceivedrisk of each project, and the urgency manage-ment associates with each project.

The diffusion of major innovations fallsinto one of three categories: those involvingcapacity addition, those involving replace-ment of obsolete facilities, and those involvingdisplacement of functioning facilities.24 Theeconomic considerations in a decision toadopt a technological innovation are quitesimilar for capacity expansion and for re-placement of obsolete facilities, but they areslightly different for displacement.

When management considers capacity ex-pansion or replacement to be necessary, it islikely to prefer new technology to establishedtechnology if the new technology offers eitherimproved product quality (and increased rev-enue) at little or no increase in cost, or equiv-alent product quality with at least a modestcost reduction. Both options, however, de-pend on the prior elimination of technologicaluncertainties about minimum acceptable per-formance; even in expansionary periods, theadoption rate of a new technology may re-main modest so long as its technical uncer-tainties outweigh prospective gains. More-over, if innovations offer advantages in only alimited range of plant sizes or only part of aproduct range, technological diffusion may bedelayed while methods are developed toadapt the technology to the remainder of thesize or product range. And finally, a shortsupply of inputs may delay rapid adoption oftechnology. Adoption rates would be ex-pected to rise sharply, then, as cumulative

~~B. Go]d, W. S, pierce, and G. Rosseger, “Diffusion of MajorTechnological Innovations in the U.S. Iron and Steel Manufac-turing,”’ The Journal of Industrial Economics, vol. 18, No. 3, July1970, pp. 218-41.

practical experience removes uncertaintiesabout acceptable performance and as furthertechnical advances allow the innovation to beapplied advantageously to a broad array ofproducts and facility sizes.

The economic criteria for adopting innova-tions that displace currently functioningfacilities are more stringent than for thosethat add to capacity or replace obsolete facil-ities. First, an innovative facility that is toreplace a functioning facility producing anequivalent product must produce at costscomparable to those of the technology it re-places. If a company has recently undertakenmajor modernization or expansion programs,any undepreciated investment must be writ-ten off, so management is less likely to adoptinnovative technology to replace functioningfacilities. In evaluating displacements, thechangeover costs associated with adjust-ments in employment levels, skill require-ments, production quotas, and associatedsupervisory arrangements must also be con-sidered. If the displacement of capacity is ef-fected with no increase in capacity, the po-tential gains may be lower than if capacitycan also expand. In such a case, direct dis-placement is likely to be substantial only ifthe older facilities have heavier requirementsfor input factors that are in short supply, or ifdemands increase for product qualities notattainable by the older facilities.

Six Case Studies ofTechnological Changes

The six case studies chosen examine majorinnovations representing different aspects ofsteel technology, different national origins,and different levels of adoption. Informationon the six innovations is summarized in table115.

Argon-Oxygen Decarburization (AOD)Process

This process is generally considered to be amajor process innovation of U.S. origin. Itbelongs to a class of pressurized-gas stainlesssteel processes developed during the mid-1950’s and early 1960’s, and has been in com-


Table 11 5.—Summary Information on Six OTA Case Studies

Type of innovation Stage of steel making Place of major Level of adoption

Casting- innovation World- UnitedInnovation Process Product Ironmaking Steelmaking fabrication activity wide States

A r g o n - o x y g e n d e c a r b u r i z a t i o n . X — — x — United States High Very highBasic oxygen furnace. . . . . . . . X — — x — Austria Very high Very highContinuous casting. . . . . . . . . . X — — — x West Germany High LowFormcoking . . . . . . . . . . . . . . . . X — x — — United States Very low Very lowSteel mill waste recycling. . . . . X — x — — Japan High Very lowOne-side galvanized steel. . . . . — x — — x United States Moderate High


mercial production since the late 1960’s.Other processes in this class include thebasic oxygen furnace (or “oxidation-reduc-tion”) process, the vacuum oxygen decarbur-ization (VOD or LD-VAC) process, and thesteam, ammonia/oxygen, or Creusot-LoireUddeholm (CLU) process.

An AOD furnace uses pressurized argonand oxygen to prepare molten alloy steel. Theuse of argon in combination with oxygenallows decarburization of the melt withoutexcessive oxidation of the chromium, which isquite expensive and has a high affinity foroxygen. In the AOD steelmaking and refiningprocess, less chromium is lost and lower costchromium charge material can be used,

The AOD process was invented in 1954 byUnion Carbide at their Niagara Falls facility.Several years of R&D followed, and UnionCarbide began a cooperative AOD develop-ment program with Joslyn Stainless Steels in1960. In conjunction with experiments in thearc furnace, Union Carbide continued to ex-plore the idea of using a separate refiningvessel, In 1969, 15 years after AOD’s originalinvention, Joslyn started a 100-percent, full-scale AOD system. The successful demon-stration and commercial operation at Joslynand the aggressive technical marketing effortby Union Carbide spurred the rather rapidadoption of this technology by U.S. alloy/spe-cialty companies.

Computer techniques for optimizing AODwere also developed in the United States andcame into use in 1972.25 This practice has

-’)R. K. Pitler, “Worldwide Technological Developments andTheir Adoption bv the Steel Industry in the United States, ” pre-pared for the General Research Committee of the AmericanIron and Steel Institute, Apr. 13, 1977.

since been widely adopted throughout theworld to about the same extent as in theUnited States.*’ The use of the AOD process isnow being extended to the manufacture ofother specialty alloys, such as tool-and-die,high-speed, and forging steels. A great manyfoundries have also installed AOD vesselswithin the last few years.

Since its first commercial use by a U.S.steel company, the AOD process has beenwidely adopted throughout the world for theproduction of stainless steel. Worldwide in-stalled AOD annual capacity increased from90,700 tomes in 197027 to 5,705,000 tonnesby mid-1978.28 Of this, about 40 percent, or2,282,000 tonnes, is in the United States,29

U.S. installation of AOD capacity since 1970has been almost double that of Western Eu-rope and more than double that of Japan (fig-ure 38); of all major steel-producing coun-tries, only Italy has adopted AOD technologyfaster than the United States (table 116). TheUnited States is clearly the leader, by far, ininstalling AOD technology.

U.S. adoption of AOD technology was en-couraged by the generally high domesticgrowth rate for stainless steel consumption.The overseas marketing effort was delayedpending the results in the U.S. domestic mar-ket, and this appears to have contributed todifferences in the rates of AOD diffusion forthe United States and other countries. Also,some plants in Japan and

— —‘hIbid.“Ibid.IBRichard Dai]y, “Round-Up of

Steelmaker, July 1978, pp. 22-29.~’Ibid.

Europe had recently

AOD Furnaces,’ Iron and


Figure 38.— Installed Argon-Oxygen DecarburizationCapacity

1965” 1970 1975 1980Year


Table 116.—Adoption of AOD Technology inVarious Countries of the World (in tonnes)

1974 production of1978 installed stainless steel

Country AOD capacity ingot

United States . . . . . . . . . 2,250,000 1,955,000Japan. . . . . . . . . . . . . . . . 762,000 2,037,000West Germany . . . . . . . . 454,000 688,000France . . . . . . . . . . . . . . . 272,000 570,000Sweden . . . . . . . . . . . . . . 390,000 519,000Italy . . . . . . . . . . . . . . . . . 372,000 311,000United Kingdom . . . . . . . 400,000 224,000Others . . . . . . . . . . . . . . . 554,000 446,000

Total. . . . . . . . . . . . . . . 5,454,000 6,750,000

SOURCES, Institute for Iron and Steel Studies, INCO World Stainless Steel Sta-tistics, 1976

adopted competing technology. For suchplants, a switch to AOD would offer only in-cremental cost savings, and in addition unde-preciated equipment would have to be writ-ten off. In some of the LDCs, the availabilityof industrial gases could be responsible forthe delay in adopting AOD technology.

The rapid growth of the AOD process canbe attributed to its reduction of raw materialcosts. The process permits refining almostany initial melt chemistry and achieves highrecoveries of almost all elements. High-car-bon chromium charge can replace more ex-pensive low-carbon ferrochrome. In additionto chromium, improved recoveries of manga-nese, molybdenum, nickel, and titanium havebeen reported. Other savings stem from less

overall silicon consumption, lower electricfurnace costs because of less power con-sumption, reduced electrode consumption,and less refractory wear.

AOD operating cost savings range from anestimated $55 to $110 or more per tonne ofstainless steel. Even larger savings are typi-cal for the higher chromium and other spe-cialty alloys. Between 20 and 30 percent ofthese stainless steel savings are attributableto lower energy-related costs. Payback peri-ods ranging from 6 months to 2 years havebeen estimated. In addition to allowing costeconomies, the process also improves productquality: sulfur content is lower, inclusion dis-tribution is improved, temperature and chem-ical homogenization are better, and final dis-solved oxygen, nitrogen, and hydrogen are re-duced.

Summary .—The main motivating factorsfor the rapid adoption of AOD technology are:

●

●

●

●

reduced raw materials cost, because ofimproved yields of alloying elements andthe use of lower cost raw materials;improved product quality;low-cost increases in capacity, becauseAOD vessels can be retrofitted in exist-ing melt shops; andan aggressive technical marketing effortby the process developer, a company inthe “supplier” category.

Some of the barriers are:●

●

●

the recent installation of competingpneumatic technology in Europe and Ja-pan, which reduced the economic incen-tive to switch to AOD when it becameavailable;the availability of industrial gases,which may have hindered adoption ofAOD technology in the LDCs; anddelays in government approval of li-censes in certain countries.

Basic Oxygen Process

The basic oxygen furnace (BOF) has revo-lutionized steelmaking, and it is generallyconsidered the most significant major process


innovation for steelmaking in modern times.Total BOF tonnage has grown faster in Japanand the European Economic Community (EEC)countries than in the United States. About 62percent of all U.S. steel, 75 percent of WestGerman and French steel, and 80 percent ofJapanese steel are made in the BOF,

BOF technology reduces costs and im-proves productivity. The BOF comprises avertical, solid-bottom crucible with a verticalwater-cooled oxygen lance entering the ves-sel from above. The vessel can be tilted forcharging and tapping. The charge is normallymade up of molten pig iron (“hot metal”) plusscrap and fluxes, although small quantities ofcold pig iron and iron ore may also becharged, The distinguishing feature is thatthe heat produced by the reaction of oxygenwith various constituents of the charge isused without other sources of energy to bringthe metal to the desired final conditions ofcomposition and temperature. Occasionally,the heat balance may be altered by the in-troduction of supplementary fuel to permitmelting of above-normal amounts of scrap.

In 1949, experimental results from a smallBOF pilot plant in Switzerland showed that itwas possible to refine iron by use of oxygenand to remove phosphorus and sulfur by theuse of basic linings and fluxes. In addition, asignificant proportion of scrap could beadded—close to half the weight of the iron insome cases. Scientists at VOEST continueddevelopment work on the BOF at Linz, Aus-tria, where the first successful heat wasmade in October 1949. This development re-sulted in the first commercial plant, which be-gan operation in 1952 with 32-tonne vessels.Many problems had to be met as growth con-tinued. Some of the improvements were car-ried out in Austria, and as other nationsbegan to use the BOF, they accelerated thepace of improvements. The BOF has grownfrom a 30-tonne novelty to the leading steelprocess in the world, with vessels more than10 times the original size. To achieve suchgrowth during 20 short years of industrial lifeis remarkable.

Most of the world’s BOF capacity came on-stream in the 1963-70 period, and the rate ofBOF installation has since declined sub-stantially. The earliest plants were installedin the early and mid-1950’s, with vesselsranging from 27 to 45 tonnes; none had a de-sign capacity exceeding the 73 tonnes ofJones and Laughlin’s BOF in 1957. There-after, the number of yearly installations andthe size of the vessels continued to increase,with four installations of over 200 tonnesstarting up by the end of 1962.

It has been pointed out that the U.S. in-dustry was more aggressive than Japan or theEEC in introducing this technology as oppor-tunities occurred to increase capacity; how-ever, only limited U.S. capacity expansiontook place during the 1952-76 period whenlarge numbers of BOFs were being installedthroughout the world. Until 1969, BOF adop-tion rates for the United States, Japan, andEurope were in fact roughly similar. Sincethat time BOF capacity in Europe and par-ticularly in Japan has continued to grow.Despite limited steel industry growth, the U.S.steel industry has had a reasonable growth-rate record for the BOF, largely as BOFsreplaced open hearth capacity. Europe andJapan, on the other hand, experienced sub-stantial capacity expansion during the post-war period, and more BOF capacity was putinto place in Japan and the EEC countriesthan in the United States (see figure 39). *

Most of the U.S. companies that haveadopted BOF technology are large integratedplants producing carbon and low-alloy steels,and most have hot metal available—a primerequirement for the BOF. U.S. companies caneasily purchase BOF technology from othercompanies and vendors, so it is not necessaryfor them to support extensive R&D work be-fore installing BOF capacity, nor do they needpilot or demonstration plants, A company candecide on the size of the equipment it needsand purchase it from the vendors, who will

*The higher Japanese and EEC growth rates for the installa-tion of BOFs has contributed to growing exports from thesecountries to the United States and the rest of the world.


Figure 39.—Growth of BOF Installed Capacity

1955 1960 1965 1970 1975Year

SOURCE. American Iron and Steel Institute

also provide technical and operating know-how. None of the operations in the UnitedStates, however, has received any Govern-ment assistance in adopting BOF technology,whereas in Europe and Japan a number ofcompanies received help from their govern-ments in securing capital for BOF adoption.

Continuous Casting*

Continuous casting was originally patentedin 1865 by Sir Henry Bessemer. However, en-gineering and equipment problems were notsolved and the process was not commercial-ized until the early 1960’s, when significantamounts of steel began to be continuouslycast in a number of the world’s steel indus-tries. Today, continuous casting is the pre-

*A detailed discussion of continuous casting has been givenin Benefits of Increased Use of Continuous Casting by the U.S.Steel Jndustry, OTA technical memorandum, October 1979.

ferred choice in new steelmaking plants,although there are still some types of steelthat have not been converted from the olderingot casting method to continuous casting.

Continuous casting replaces with one oper-ation the separate steps of ingot casting, moldstripping, heating in soaking pits, and pri-mary rolling. In some cases, continuous cast-ing also replaces reheating and rerollingsteps (figure 40). The basic feature of all con-tinuous casting machines is their one-stepnature: liquid steel is continuously convertedinto semifinished, solid steel shapes by theuse of an open-ended mold. Clearly, continu-ous casting makes long production runs of aparticular product easier and more efficientthan ingot casting. The molten steel solidifies

Figure 40.—Continuous Casting Apparatus

Molten metal

*

Tundish:’ m’

Mold

Solidified bar

Supportrolls

To ingot shearing andtransfer stations

Motorized pull roll

SOURCE. Technology Assessment and Forecast, Ninth Report, Department ofCommerce, March 1979.


from the outer cooled surfaces inward duringthe casting process, so that finally a fullysolid slab, bloom, or billet is produced. Thisproduct can then either be processed in a sec-ondary rolling mill or be shipped as a semi-finished steel product.

Energy Savings and Increased Yield.—Thecontinuous casting process saves energy di-rectly, by eliminating energy-intensive steps,and indirectly, by increasing yields. The elim-ination of intermediate casting steps reducesthe consumption of fuels (natural gas, oil, andin-plant byproduct gases) and electricity byapproximately 1.1 million Btu/tonne cast. InJapan, where one-half of all steel is continu-ously cast, the direct energy savings is appar-ently about 50 percent over traditional ingotcasting. Further energy is saved indirectly bythe substantial increase in yield from continu-ous casting, perhaps an additional 2.2 millionBtu/tonne.

Increased yield also means that less scrapis generated. End losses, typical with indi-vidual ingots, are eliminated, and oxidationlosses are reduced because less hot metal isexposed to the air. The simplicity and im-proved control of continuous casting also im-prove overall efficiency. All these improve-ments mean that more shipped steel can beobtained from a given amount of molten steel.When yield increases by 10 percent, an addi-tional tonne of shipped steel is gained foreach 10 tonnes of molten steel; continuouscasting increases yields by at least 10 to 12percent, and in some cases by 15 to 20 per-cent. The raw materials used to producethese “extra” tonnes of steel, including ironore and coke, have also been saved.

Total direct and indirect energy savingsaverage 3.33 million Btu/tonne continuouslycast, which can lead to a significant cost sav-ing. These are average energy savings formany types of steels, but although actual sav-ings may vary considerably the figure is prob-ably conservative. For example, one detailedanalysis showed a saving of 6.0 millionBtu/tonne for the traditional integrated steel-making route of blast furnace to basic oxygenfurnace, and 2.9 million Btu/tonne for the

scrap-fed electric furnace route used bynonintegrated mills. * It is probably safe tosay that the total energy savings because ofcontinuous casting are normally equal toabout 10 percent of the total energy used tomake finished steel products. A comprehen-sive survey by the North Atlantic Treaty Or-ganization of steel industry experts through-out the world, which considered 41 energy-conserving measures for steelmaking, con-cluded that continuous casting had the bestcombination of potential energy conservationand return on investment.30

Other Advantages and Benefits.—Continu-ous casting can also be recommended on thebasis of its potential for higher labor produc-tivity, better quality steel product, reducedpollution, lower capital costs, and the in-creased use of purchased scrap.

Because continuous casting eliminatesmany of the steps required by ingot casting,all of which require direct labor input, it re-sults in higher labor productivity. The De-partment of Labor reports that 10 to 15 per-cent less labor is required in continuouscasting than in ingot casting.31 Productivitygrowth also results from the increase in yieldof shipped steel, from improved working con-ditions, and from at least 5 hours reduction inproduction time from the pouring of moltensteel to the production of semifinished forms.Advances have recently been made in elimi-nating time losses that occur when productsof different size or composition must be madesequentially.

Most industry experts also report an im-provement in the quality of some continuouslycast steels, resulting from the reduced num-ber of steps and greater automatic control ofthe process. There have been steady improve-ments in the process, particularly in the pro-duction of slabs for flat products that requirehigh surface quality.

*This analysis (by J. E. Elliott, in The Steel Industry and theEnergy Crisis, J. Szekely (cd.), Marcel Dekker, N. Y., 1975, pp.9-33) assumes a 10-percent increase in yield, which is probablyconservative.

‘(’’’The Steel Industry, ” NATo/ccMs-47, 1977.“ U.S. Department of Lahor, Bureau of Labor Statistics Bul-

letin 1856, 1975, p. 4.


It is generally recognized that continuouscasting reduces pollution, as well. It elimi-nates soaking pits and reheating furnaces,and its lower energy requirements also re-duce pollution—hot steel is exposed to the at-mosphere for a shorter time than in ingotcasting, so there are fewer airborne particu-late. Increased yield also means that lessprimary steelmaking is required for any givenlevel of shipped steel, so less coke is manufac-tured in integrated plants using blast fur-naces; coking is steelmaking’s largest sourceof pollution, particularly for toxic sub-stances.

It is generally agreed that continuous cast-ing reduces capital costs because it elimi-nates intermediate processing equipment. Astudy of five new steel technologies by Re-sources for the Future concluded that contin-uous casting has the greatest potential forcapital cost saving* and recommended theadoption of continuous casting both in new fa-cilities and to displace existing ingot castingcapacity.

Finally, continuous casting increases theuse of purchased scrap. “Home” scrap (pro-duced in-plant) is normally recycled back tothe steelmaking furnaces or the blast fur-naces, or both. With higher yields, purchasedscrap must replace the lost home scrap inorder to maintain liquid-iron-to-scrap ratios.The price of purchased scrap has generallybeen lower than production costs for hot steelmade from new iron units; under such cir-cumstances, increased use of purchasedscrap is an advantage.

U.S. and Foreign Rates of Adoption of Con-tinuous Casting.—During the past severalyears, the Japanese have made frequent re-ports concerning the continued adoption ofcontinuous casting and its effects in reducingenergy consumption and increasing yield insteelmaking operations. Despite these advan-

tages, the United States has fallen behindalmost all foreign steel industries in adoptingthis beneficial technology. Continuous castinghas been adopted at a much faster rate incountries like Japan, West Germany, andItaly than in the United States, England, orCanada (figure 41). In 1978, Japan continu-ously cast 50 percent of all its primary steeland West Germany, 38 percent; in the UnitedStates the level was only 15 percent. TheSoviet Union has the only major foreign steelindustry with a lower level of continuouscasting than in the United States (table 117).This is explained by that country’s unusualcommitment to the open hearth process,which does not readily interface with contin-uous casting equipment. *

The high rate of adoption of continuouscasting by many countries, particularly Ja-pan, is largely explained by the considerableexpansion of their steel industries in the late1960’s and early 1970’s. The benefits of con-tinuous casting are so compelling that it is theobvious process to choose when new steelplants are constructed, More recent con-struction of steel plants in Third World na-tions has also revealed the unequivocal ad-vantages of continuous casting.

Although much of the increased use of con-tinuous casting in the Japanese steel industryhas been related to its expansion, in more re-cent years the Japanese have also pursued areplacement strategy. They will probablymeet their goal of 70-percent continuous cast-ing production within a few years. This willbe a remarkable achievement, particularly inview of a number of negative factors facingthat industry: low rates of capacity utiliza-tion, the closing of many older facilities, con-tinued loss of world export markets, and verylow profit levels. One reason these adversefactors have not impeded continuous castingadoption is that the Japanese Governmentand the banking system have channeled suffi-

*The other four technologies were: scrap preheating, directreduction based on natural gas, coal gasification for direct re-duction, and cryogenic shredding of automobilederived scrap.(W. Vaughan et al., “Government Policies and the Adoption ofInnovations in the Integrated Iron and Steel Industry, ” 1976,Resources for the Future. )

*The energy-intensiveness of the Soviet iron find steel indus-try is suggested by its 13-percent share of total energy con-sumption, compared to about 3 percent for the United States.This must be considered a consequence, in part, of its low useof continuous casting.

Ch, 9—Creation, Adoption, and Transfer of New Technology 289

Figure 41 .—The Diffusion of Continuous Casting

1960 1$65 1970 1975

Year

SOURCE Organization for Economic Cooperation and Development International Iron and Steel Institute

Table 117.— Percent Raw Steel Continuously Cast————

Country 1969 1975 1977 1978

United States . . . . . . . . . . 2 9 9.1 11.8 15.2a

Japan. . . . . . . . . . . . . . . . . 4.0 31,1 40.8 50.9b

Canada . . . . . . . . . . . . . . . . . 11.8 13,4 14.7 20.2West Germany . . . . . . . . . . . 7.3 24.3 34.0 38.0France. . . . . . . . . . . . . . 0.6 12.8 23.6 27.1Italy . . . . . . . . . 3.1 26.9 37.0 41.3United Kingdom. . . . . . . . . . 1.8 8.4 12,6 15.5U.S.S.R. . . . . . . . . . . . . . . . . . – 6.9 8.3 –

aAlSl has reported that for the first half of 1979 the full Industry usage rate was161 percent

bA lower value of 46.2 percent has been reported by the International Iron andSteel Institute, presumably this figure iS for calendar year 1978 while the 509percent figure iS for Japanese fiscal year 1978 (April 1978. March 1979) and IS

indicative of the rapidly Increasing usage

SOURCES AISI, IISI: Japan Steel Information Center, Iron and Sfeelmaker,1978

c i e n t c a p i t a l a t f a v o r a b l e i n t e r e s t r a t e s t o t h eJ a p a n e s e s t e e l i n d u s t r y .

T h e m o s t i m p o r t a n t f a c t o r e x p l a i n i n g t h e

low rate of U.S. adoption of continuous cast-ing is the low rate of new steel plant construc-t ion dur ing the pas t severa l decades . A s u b -stantial number of small new nonintegratedsteel plants using scrap-fed electric furnaces(“minimills’”) process all their steel by con-t inuous cas t ing . Th is segment o f the indust ry ,

however, represents onlv about 10 percent ofdomestic raw steel tonnage. Data-revealingthe significant differences in continuous cast-i n g u s e a m o n g t h e t h r e e m a i n i n d u s t r y s e g -

m e n t s a n d t y p e s o f p l a n t s a r e g i v e n i n t a b l e

118, Use by integrated steelmaker, just over

9 percent, is far below the nonintegrated car-bon steel producers’ use rate of nearly 52percent. The nonintegrated companies maysoon have the capacity to make 80 percent oftheir steel by continuous casting,

T h e m a i n i s s u e c o n f r o n t i n g t h e d o m e s t i c

s tee l indus t ry wi th regard to grea ter adopt ion

o f c o n t i n u o u s c a s t i n g i s : C a n r e p l a c e m e n t o fe x i s t i n g i n g o t c a s t i n g f a c i l i t i e s w i t h c o n t i n u -ous cas t ing be jus t i f i ed economica l ly? One in -t e g r a t e d s t e e l c o m p a n y , M c L o u t h , r e p l a c e da l l i t s i n g o t c a s t i n g w i t h c o n t i n u o u s c a s t i n g ,a n d a n o t h e r , N a t i o n a l S t e e l , h a s e m b a r k e d o ns u c h a c o u r s e . B y l a t e 1 9 8 0 , N a t i o n a l w i l lprocess 40 percent of its steel in this m a n n e r ,Recently, CF&I Steel Corp. announced its in-tention to increase its use of continuous cast-ing from 18 to 100 percent by replacing all ofits ingot facilities.


Table 118.—Continuous Casting in Segments of U.S. Steel Industry, 1978

Continuously PercentRaw steel cast (1,000 continuously

industry segment (1,000 tonnes) tonnes) cast

Integrated—carbon steelNonelectric furnace. . . . . . . . . . . . . . . . . . . . . 95,048 8,841 9.3Electric furnace . . . . . . . . . . . . . . . . . . . . . . . . 8,715 2,375 27.2

Integrated—alloy/specialty steelsa . . . . . . . . . . 4,125 680 16.5

Subtotal. . . . . . . . . . . . . . . . . . . . . ., . . . . . . . . . . 107,888 ‘-1 1,896 ‘11 .0

Non integratedCarbon steels . . . . . . . . . . . . . . . . . . . . . . . . . . 12,274 6,323 51.5Alloy/specialty steels. . . . . . . . . . . . . . . . . . . . 4,125 680 16.5

Subtotal. . . . . . . . . . . . . . . . . . . . . ., . . . . . . . . . . 16,399 7,003 ‘42.7

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124,287 18,899 15.2

aThe total of 9,096 raw steel tonnage and 1,499 continuously cast tonnage was split between Integrated companies producing

mostly carbon steels and companies considered as alloy/specialty producers

SOURCE. AISI, Including estimates on amount of steel made by integrated companies in electric furnace shops

A 1990 time frame appears realistic forsubstantial expansion of domestic continuouscasting capacity, considering the large size ofthe domestic industry, the long leadtimes forconstruction, the problems of capital avail-ability, and the possible need for Federalassistance, which would require extensivecongressional deliberation. There is no sim-ple calculation that can determine unequivo-cally how much continuous casting the do-mestic steel industry should use. At best, thefeasibility of several possibilities can be ex-amined. It appears that levels of from 25 to 50percent are feasible and that 50 percentwould be necessary to achieve even minimumcompetitiveness on the international market.The 25-percent level has been suggested inseveral recent analyses of the steel industry.However, this level reflects nothing morethan extrapolation of the past adoption ratefor the industry to about 1990.

A 50-percent level of adoption of continu-ous casting is physically achievable in theUnited States by 1990; that is, there are noengineering or technological reasons why thislevel could not be attained. OTA calculationshave shown that at this level of adoption thenational yield rate could be increased to at

least 76 percent. * The 50-percent goal can besupported by the following factors:

●

●

●

●

In 1974, when the domestic industry wasdoing exceptionally well, A.D. Little, onthe basis of a survey of industry opinion,concluded that by 1985 there would be53-percent use of continuous casting.The Japanese and U.S. steel industriesare similar enough in product mix andsize to suggest that if the Japanese canproduce 50 percent and probably 70 per-cent of their steel by continuous casting,then a level of 50 percent for the U.S. in-dustry is technically feasible.In a 1979 OTA-conducted survey of steelindustry opinion on future technologicalchanges, the respondents projected aU.S. level of 54-percent adoption by 1990and 74 percent by 2005.If appropriate Federal policies were de-signed to stimulate greater conversion tocontinuous casting by providing somemeans of obtaining the necessary capi-

*The yield of 76 percent may appear to be lower, especiallyrelative to that of the Japanese, as noted previously; but wehave not assumed any large-scale closing of older U.S. steelplants, which could increase the base yield for the industry atthe expense of capacity loss.


tal, then it would be economically feasi-ble to obtain the 50-percent use level(greater details on costs are given be-low).

One top major steel company executive whohas provided much useful information to theOTA assessment has suggested feasible tar-gets of 50 percent for 1987 and 70 percent for1990. Similarly, one long-time steel inanalyst on Wall Street has just sugges“the U.S. could get to 40 percent bythe money was available. ”

dustryed that1985 if

Economic Benefits of Adopting ContinuousCasting.—The economic justification for re-placing existing ingot casting facilities withcontinuous casting is not examined; summarydata are provided in table 119. There are twokey areas to be discussed and quantified be-fore proceeding to a calculation of return oninvestment: the significance of the increase inyield with regard to new steelmaking capac-

‘Charles Bradford of hlerrill, Lynch, Pierce, Fenner andSmith, in an interview in Steelweek, Sept. 24, 1979.

ity; and the direct production cost savingsprovided by continuous casting.

With higher yields, a given amount of rawsteel will produce more finished steel and lessscrap. Both are of significance for steel plantprofitability: the first allows capacity expan-sion at very low capital cost; the second in-creases reliance on purchased scrap atprices typically lower than the cost of homescrap. But what has not been fully appreci-ated by some U.S. steel industry and policyanalysts is that continuous casting is also aneconomical way to increase the steelmakingcapacity of existing plants. Building majornew integrated facilities in the United Statesappears impossible under existing or pro-jected economic conditions, and new mini-mills will still represent relatively small ton-nages. The substantial increase in yield fromraw steel to semifinished steel that continu-ous casting makes possible means that moresteel can be shipped from a given amount ofmolten steel.

Table 119.—Economic Costs and Benefits of Adopting Continuous Casting (CC)a

Incr. in CC Incr. in steel Total steeltonnage Energy shipped shipments New C Cb capital Total CC Deer cost/ Total annual Payback

Percent (thousands Incr. in (thousands (thousands industry cost capital cost incr. profitc benefitc c

Return on periodof tonnes) 1 012 Btu yield of tonnes) of tonnes) yield ($/tonne) ($ mill.) ($/tonne) ($ mill. ) Investment (years)

25——

1 3 , 4 2 4 44.1 0.10 1.342 9 0 . 1 6 9 0.73 $44 $ 592 $28 $185 0 3 1 ‘- — – -3 ?

012 1,611 90,438 073

50 44,496 147.2 0.10 4,450 93,277 0.75

012 5,340 94,167 076

aBase case 1978 CC usage = 142 percent or 17,648,000 tonnes of 124,287,000tonnes of raw steel production assumed to remain constant, total domesticshipments = 88,827,000 tonnes, yield = O 715, al I calculations done forreplacement of ingot casting in Integrated (blast furnace. based) plants by CC

bThree levels of capital cost for CC have been used $44/tonne is somewhatgreater than recent expenditures by National Steel for a major facility;$66/tonne has often been quoted and may be appropriate in those situationswhere ingot casting facilties to be replaced have not been fully deprecated orwhere more complex shapes are being cast, $88/tonne IS undoubtedly a highcost estimate but may be realistic for those cases where downstreamfinishing facilities must be added to take advantage of Increased capacity

4466664444666666884444666644

66

6688

592888888592592888888888

1,1841,9621,9622,9442,9441,9621,9622,9442,9442,9443,925

55285528552855838328552855285528558383

222185222192237192237281281613736613736638785638785932932

0380.210.250330.400.220.270,320240310.380210.250.330.400.220,270.32024

2 74 84,03.12.54 63.83.24 23.22 74.84.03.12 54.63.73.24.2

resulting from a greater yieldcDecreased cost/increased profit (for the increased steel shipped) resultin9

from the hot metal-purchased scrap differential and the normal operatingprofit

dTotal annual benefit IS calculated on the basis of a $11/tonne combined sav.ings for the additional CC tonnage and the product of the Increase in steel ton-nage shipped and the hot metal to scrap savings, the latter IS undoubtedly acrude but conservative estimate of the additional profit resulting from in-creased yield and capacity. there IS substantial company to company variationin both hot metal production cost and net income per tonne shipped



In view of the large amount of capacity lostto equipment obsolescence and industry con-traction, and the steady increase in domesticsteel consumption, an economical way to in-crease the capacity of existing plants offersconsiderable benefits, including the avoid-ance of increased dependence on imports.Past experience, such as in 1974, has shownthat import dependence during a period oftight world supply of steel and sharply esca-lating prices for imports can be a significantinflationary factor in the domestic economy.National security could also be threatened,because it might be difficult to obtain re-quired steel at any price.

Virtually all current analyses point to con-siderable shortfalls in capital for the domes-tic steel industry and a growing demand forsteel in the years ahead. At the same time, theworld supply of steel may be very tight by themid- to late 1980’s because of continued con-traction of Western European steel indus-tries, insufficient new capacity in ThirdWorld countries to meet their own rapidly in-creasing demand, and likely insufficient do-mestic capacity in Soviet bloc nations and thePeople’s Republic of China .33

Production Costs, Profits, and Return on In-vestment.—Although capacity increases fromhigher yield are a direct benefit of continuouscasting, increased yield may have a “hidden”cost that should also be considered: the needto purchase scrap to substitute for that notgenerated by the continuous casting process.The profit of the additional shipped tonnageis determined by the ratio of the cost of theliquid steel (“hot metal”) to that of the pur-chased scrap; the lower the cost of purchasedscrap relative to in-plant costs to produce theliquid steel, the greater the profit from the in-crease in yield and capacity. This ratio is dif-ficult to determine, but from many discus-sions with steel industry personnel it hasbeen determined that the cost of hot metal is

‘] See for example, CIA reports, “World Steel Market—con.tinued Trouble Ahead,” May 1977; “China: The Steel Industryin the 1980’s and 1990’ s,” May 1979; and “The BurgeoningLDC Steel Industry: More Problems for Major Steel Produc-ers,’” July 1979.

typically in the range of $132 to $198/tonne;and although the price of scrap varies consid-erably over time, it has generally been some-what less than $110/tonne.

Another factor to consider is the normaloperating profit that would accrue to the ad-ditional steel shipments from the increase inyield; this operating profit is typically $28 to$55/tonne. Because of the wide variations in

all cost and profit figures among companiesand among plants of any one company, andbecause of a desire to make conservative esti-mates of returns on investments, three levelsof profits are used —$28, $55, and $82/tonne—for additional steel shipments gainedthrough the greater yield of continuous cast-ing; two levels of yield increase are as-sumed—lo and 12 percent.

Before proceeding to the return-on-invest-ment calculation, an additional profit factormust be considered: the reduction in produc-tion costs for all the steel continuously cast.The decrease in energy consumption is theprimary source of these production cost sav-ings: 10 years ago, energy was approximately10 percent of steelmaking costs; today, it ismore than 20 percent. About one-third of theenergy saving from continuous casting for thedomestic steel industry results from reducedpurchases of electricity and fuels, such asnatural gas and oil; the other two-thirds isfrom in-plant energy byproducts that can beput to other productive uses. Because theprice of energy and its contribution to thecosts of steelmaking appear destined to rise,the future cost-reduction importance of con-tinuous casting will increase. Discussionswith industry personnel indicate that the to-tal reduction in production costs resultingfrom reduced energy use, improved labor pro-ductivity, and reduced environmental costs isat least $1 l/tonne cast for a typical plant. Formany plants, it would be two to three timesgreater.

Conclusions.— The results of a completeset of calculations for the return on invest-ment for substitution of continuous castingfor ingot casting in existing integrated plantsare given in table 119. Three levels of capital


costs for the casting equipment have beenused: $44, $66, and $88 per annual tonne ca-pacity. These have been chosen on the basisof limited published data and extensive dis-cussions with industry experts. Even withwhat is believed to be relatively conservativeassumptions, the economic rewards of such asubstitution are substantial. More than a 20-percent return on investment is likely, al-though the precise return will be plant spe-cific.

The calculations so far have assumed thatraw steel production remains static at the1978 level. A 2-percent annual increase indomestic shipments from 1978 to 1990 wouldrequire additional production of 23.9 milliontonnes of steel. Significantly, the attainmentof a 50-percent level of continuous casting (onthe 1978 capacity base) could supply 5.4 mil-lion tonnes of this increase without the needfor additional raw steel capacity, and thatlevel of continuous casting would also sub-stantially reduce the amount of additionalnew steelmaking capacity required to meetthe remainder of the increased demand.Hence, total capital needs for the industrywould be much lower than for simply addingnew steelmaking capacity.

Most integrated domestic steel companies,however, have not used their limited amountsof discretionary capital to install continuouscasting capacity. Instead, their investmentshave been for a variety of other purposes:

●

●

●

●

to finance short-range capital projectswith payback periods of 1 to 2 years, in-cluding technological improvements thatminimize capital expenditures as well asimplementation times;to replace old open hearth furnaces witheither basic oxygen or electric steelmak-ing furnaces, which may give olderplants a better return than continuouscasting would;to make needed repairs or replace worn-out equipment and to comply with regu-latory requirements; andto diversify out of steelmaking in order toimprove profitability or to compensate

for the cyclic nature of the steel busi-ness.

The industry also cites other reasons for notreplacing more ingot casting with continuouscasting:

the difficulty of justifying replacement ofoperational ingot casting facilities thathave not been fully depreciated;the costs and difficulties of substantiallymodifying an operating plant;additional capital requirements fordownstream facilities to process in-creased semifinished steel production;technical problems with some types ofsteels and, in some cases, relativelysmall production runs;difficulties in expediting EPA permitsand costs of other modifications of facili-ties EPA may demand before grantingconstruction permits for continuouscasting; anduncertainties about the degree of compe-tition from imported steel. -

Formcoking

Formcoking is a process that makes blast-furnace-grade coke, of uniform size and qual-ity from low-cost, low-quality “noncoking” orsteam coals. Formcoke has an advantage overcoal-based direct reduction (see ch. 6)because the process generates valuable cokebyproducts such as coke oven gas. Formcoketechnology has several potential benefits:

●

●

●

●

●

the ability to use less expensive and/ormore available domestic feed coals;equipment that is less expensive andmore flexible than conventional byprod-uct ovens;assurance of high-quality product thatcan substitute for conventional metallur-gical coke;lower total production costs than withconventional methods; andreduction of pollution in the cokemakingprocess.

Many formcoking processes have been con-ceived in the last 40 years, but none of them


has yet achieved full commercial operation.Table 120 lists some processes that appearpromising in the near future on the basis oftechnical performance and commercializa-tion status.

A number of steel companies throughoutthe world have supported the development offormcoke technology. The United States led inthe early development, but most of the ongo-ing development is occurring abroad, particu-larly in countries that provide significant gov-ernment support of their domestic steel indus-tries: England, West Germany, the U. S. S. R.,and Japan. Eight of the ten leading formcok-ing processes and a score of less advancedconcepts have been developed outside theUnited States. Only the FMC Corp. has oper-ated a significant commercial plant produc-ing a formcoke that has been successfullytested in blast furnaces.

U.S. companies have spent considerablesums on formcoke development because of in-adequate coking capacity. The FMC processwill be evaluated on a demonstration-plantlevel by Inland Steel with assistance from theDepartment of Energy (DOE). Also supportedby DOE, U.S. Steel has been developing a lab-oratory-scale “clean coke process” with theintention of producing a number of otherchemical products, together with coke, fromnoncoking coals.

At this stage in its development, the mostimportant factors limiting the adoption offormcoke are technical in nature and are con-cerned with energy use and coke quality. Arecent EPA report noted that:

Although a new process called “formedcoke” has been developed that may meet en-vironmental and OSHA standards, this proc-ess is not a panacea because of its high ener-gy input and some uncertainties concerningits performance in large-scale blast fur-naces.34

However, it appears that the FMC processmay meet environmental standards.

Interruptions in coke supply have a signifi-cant impact on blast furnace performance, sooperating companies are rightly concernedabout the reliability of this undemonstratedtechnology. Another important factor is theprobably lower quality and quantity of by-products produced by formcoking processescompared with those produced by conven-tional byproduct ovens. * In the present peri-od of diminishing energy resources and risingaromatic chemical values, this possibility

“Environmental Protection Agency, Analysis of Economic A~-~ects of Environmental Regulations on the Integrated Iron andSteel Industry, vol. I, 1977, pp. 228-29.

*The FMC Formcoke process can yield a byproduct gas withan energy content of only 200 to 250 Btu-scf, compared to the400 to 500 Btu-scf gas produced by a byproduct coke battery.

Table 120.—Ten Most Promising Formcoke Processes

Process Developer CountryFMC formcoke . . . . . . . . . . .BFL . . . . . . . . . . . . . . . . . . . .

Consol-BNR process. . . . . .

Sapozhnikov process . . . . .ANCIT process. . . . . . . . . . .Sumitomo process. . . . . . . .HBN process . . . . . . . . . . . .

ICEM process. . . . . . . . . . . .Anscoke process ., . . . . . . .APCM process . . . . . . . . . . .

FMC Corm. United StatesBergbau-Forschung and Lurgi Mineralotechnik

West GermanyConsolidated Coal Co. with Bethlehem Steel, United States

National Steel, Republic Steel, Armco Steel,and C. Itoh and Co.

The Ukranian Coking Institute U.S.S.R.Eschweiler-Bergwerks-Verein West GermanySumitomo Metal Industries JapanLes Houilleres du Bassin du Nord et du France

Pas-d-CalaisICEM (Romania) RomaniaBroken Hill Proprietary Co., Ltd. AustraliaAssociated Portland Cement Manufacturers United Kingdom

and Simon-Carves, Ltd.

SOURCE A D Little for Off Ice of Technology Assessment

Ch. 9—Creation, Adoption, and Transferor New Technology . 295

may be a major impediment to adoption offormcoke technology by integated steelmak-er. Uncertain capital costs for formcokingprocesses make comparisons to conventionalbyproduct ovens difficult. The experiences ofthe British Steel Co. and Ruhrkohle in WestGermany have demonstrated the high cost oftrying to develop this new technology.Because of the limited experience in con-structing and operating formcoke plants,their costs are not well known and invest-ments in such technology pose a very realtechnical and economic risk.

In addition to these technical concerns, theabundance of domestic coking coals has givensome domestic steelmaker little reason to beinterested in developing formcoking proc-esses. U.S. steel companies have far less eco-nomic incentive to develop formcoking proc-esses than do steel companies in countriesthat do not have adequate domestic reservesof coking coal. A recent OTA survey of steelindustry technical personnel asked respond-ents to predict the domestic use of severaltechnological changes in coke manufacturefor the years 1990 to 2005. The majorchanges were improved coke oven design,coal preheating and hot charging, and form-coke. The respondents indicated that thefraction of coke made with these technologiesin 1990 would be 41, 32, and 10 percent, re-spectively. There is some indication thatformcoke may not develop quickly, but thatmodifications of existing technology will af-fect the industry substantially within the nextdecade. ’5

Steel Mill Waste Recycling

In an average good steel production year,approximately 11.8 million tonnes of high-iron wastes are generated annually. Thesewastes are found in flue dusts, mill scale, andvarious in-plant particulate. Historically,most of these wastes have been recycledwithin the steel mills, particularly in sinterplants. Many of these operations are beingcurtailed, however, because of environmen-

WITA, Survey of Technical Personnel, 1979.

tal considerations related to volatile organiccompounds and particulate matter emissions.

Japan is probably the only country in theworld where there is a strong emphasis on re-cycling those in-plant fines; it has been esti-mated that the Japanese recycle more than 70percent of their residues. Environmentalregulations force Japanese steelmaker toreuse their high-iron dusts. To comply withthe regulations, a Japanese steelmaker mayuse the resources of sister companies or forma joint venture to devise as economical aprocessing sequence as possible. The solutionthat evolves is a combination of carefulhousekeeping with the adaptation of processequipment borrowed from other technologies.The know-how acquired is for sale or license,should other steelmaker be interested in it.

Only in-depth studies can determinewhether any of the commercial fines-recy-cling processes is profitable on its own or isthe least expensive way to comply with localenvironmental regulations. Table 121 sum-marizes the dust-treatment processes thatare presently available in the United States.There are three categories of recycling proc-esses:

High-temperature reduction (dezincingprocesses). —If inplant fines are brought toabout 6000 C under oxidizing conditions, fol-lowed by a reducing action at around 1,000°to 1,1000 C, lead volatilizes as PbO in the firststage and zinc volatilizes as metallic vapor in

Table 121. —High-iron Waste-Recycling ProcessesCommercially Available in the United States

Commercially operated processes (all in Japan)● Kawasaki (1968). Sumitomo (1975). Ryoho Recycle (Mitsubishi and Toho Zinc Aen) (1975). Sotetsu Metals (Waelz process, Germany 1925) (1974)● Lurgi (SL/RN) (1974, Nippon Kokan)

Other potentially competing processes● Imperial smelting (United Kingdom)

Agglomeration processes at low or moderate temperatures● Berwind —Reclasource (United States). Grangcold—A. B. Granges (Sweden)● Aglomet —Republic Steel (United States)● MTU— Pelietech (United States)

SOURCE A D Little for Office of Technology Assessment


the second stage. An hour or two at the high-er temperature is usually sufficient to volati-lize 95 percent of the zinc present. The vapor-ized zinc and lead can be recovered as con-taminated oxides or, by more sophisticatedprocessing, can be recovered as metals. Theiron fraction is prereduced to some degree,but it may or may not be recovered for subse-quent reuse in steelmaking.

Agglomeration at low or moderate tem-perature (nondezincing).—These processesdo not change the chemical characteristics ofthe recycled materials. A binder, such as ce-ment clinker, calcium carbonate, or polymer-ized asphalt, is used to provide the physicalstrength needed during handling and furnaceoperations. These processes are compara-tively cheap, and they produce briquets orpellets containing all the carbon collected inthe various fines. The blast furnace is thenormal outlet for such products.

Hydrometallurgy. —A number of patentshave been granted on wet-mill-waste-recy-cling processes. Assignees include privatedomestic interests, the U.S. Government, andforeign interests, A great variety of schemeshave been proposed; there is no commercialapplication of any significance today.

Domestic acceptance of steel mill waste re-cycling will be predicated on mandatory reg-ulations set forth by EPA and State and localregulators. With its capital so limited, thesteel industry is reluctant to invest in thesetypes of processing technology and wouldprefer that third parties own and operate re-cycling facilities. Pelletech, Inc., is activelypursuing this approach, as Reclasource andAglomet did in the past. The foreign processdevelopers are not interested in third-partyarrangements.

By far the most important group of compa-nies who may seek to diversify into this busi-ness are the slag processors, who presentlywork along with the steel industry. Most steelplants, with the exception of a few owned byU.S. Steel Corp. and Bethlehem Steel Corp.,use a slag processor. Slag processors aresecretive about their business because their

supplies of raw materials are limited towhatever the steel mills give them and the de-mand for and prices of their products are lim-ited by the realities of the natural aggregatemarketplace in which the crushed slag com-petes. Some of the scrap processors have thefinancial resources to process steel dust aswell as scrap. Most of the companies are veryprotective of their positions with the steel in-dustry, and for defensive reasons they maywant to tie up steelmaking dusts for futureprocessing, by either themselves or others.

One-Side Galvanized Steel

The most important manufacturing proc-esses for producing one-side galvanized weredeveloped in the late 1960’s. Significantquantities of this product have been on themarket only during the last 5 years, and thefuture of one-side galvanized as a major steelproduct is still far from established. With theexception of one Japanese steel company, allone-side galvanized steel is produced by do-mestic steelmaker.

One-side galvanized steel differs fromother technological innovations examined inthese case studies in that it is a productrather than a process. In contrast to theadoption of new process technologies, whichare controlled by the producer or a third par-ty, adoption of a new product is determined inthe United States by the consumer. Althougha producer may offer a new product, it is thepotential purchasers who make the decisionsthat determine the extent of its acceptance inthe marketplace. In this case, market con-cerns about the large quantities of salt usedon pavement in this country led to Detroit’sinterest in a corrosion-resistant, paintablesteel. The call went out from domestic carmanufacturers to steel producers during thelate 1960’s for a steel product coated, prefer-ably with zinc, on one side only, and with thefollowing performance characteristics:

● resist rusting on automobile surfacesthat are normally exposed to corrodingelements, that is, the bottom of the car;

● accept a highly glossed paint coat, freeof spangles and other imperfections nor-


●

Thecall

really associated with galvanized steel;andprovide a zinc-free surface so that spotwelders can make strong welds and di-minish tip fouling.

steel industry responded quickly to thefor help from Detroit. Existing one-side

galvanizing processes were not consideredeconomically feasible for producing the mas-sive tonnages Detroit requires, * and the R&Dsections of the major steel firms began asearch for new processes. Each major steelproducer developed its own innovative andpatentable approach to producing one-sidegalvanized.

The processes can be grouped into fourgeneral categories: hot dip, differential hotdip, electrolytic, and a combination of hot dipand electrolytic. According to the most recentestimates, the U.S. steel industry in 1978 pro-duced 181,400 tonnes of one-side galvanizedby hot dipping and 317,45o tonnes by electro-lytic processes (including hot dip/electrolyticcombinations). These quantities were pro-duced by six independent steel companies. Alist of these companies, including the only for-eign producer of one-side galvanized, is givenin table 122.

Steelmaking companies that have success-fully adopted one-side galvanized technology

‘one steel producer, Sharon Steel Corp., had been manufac-turing one-side galvanized for a number of years for sale to theautomotive industry on a limited basis. Another steelmaker,U.S. Steel, had developed and pilot tested a one-side process inthe late 1950’s.

Table 122.-Producers of One-Side Galvanized Steel

Company Plant location Process

U.S. producersArmco Corp.. . . . . . . Middletown, Ohio Hot dipInland Steel Co. . . . . East Chicago, Ind. Differential hot dipNational Steel Corp. Portage, Ind. Hot dip/electrolyticRepublic Steel Corp. Cleveland, Ohio Hot dipSharon Steel Corp. . Sharon, Pa. ElectrolyticU.S. Steel Corp. . . . . Gary, Ind. Electrolytic

Foreign producersNippon Steel Corp. . Japan Differential hot dip

SOURCE A D Little for Office of Technology Assessment

share a number of characteristics. These in-clude the following:

●

●

●

●

●

●

All manufacturers of one-side galva-nized are integrated steel producerswho produce diversified lines of steelproducts. One-side galvanized repre-sents but one of their many products.They are mature companies. The pro-ducers of one-side include some of theoldest steel companies in America. Theonly foreign producer of one-side, Nip-pon Steel, is the oldest steelmaking firmin Japan.They possess organized R&D programs.Without these programs, the innovativeprocesses for producing one-side couldnot have been developed as rapidly asthey were.They possess the capital needed to in-vest in a new product like one-side with-out jeopardizing their survival shouldthe market for one-side galvanized dis-appear.They all had close connections with theautomotive industry prior to the develop-ment of one-side galvanized. The plantsin which one-side is produced are lo-cated in close proximity to automobilemanufacturers.They were all producers of galvanizedproducts prior to the development ofone-side and had expertise in zinc-coat-ing applications.

The willingness of company managementto take a risk on an unestablished product ap-pears to have been the most important char-acteristic behind the adoption of one-sidetechnology. Even today, the producers of one-side cannot be certain that in 10 years Detroitwill accept one-side galvanized as a manufac-turing material. In fact, it would appear thatthe domestic automobile industry is beginningto favor two-side galvanized over one-side be-cause of the increased corrosion protectiontwo-side offers. Interestingly, each of the pro-ducers of one-side galvanized also marketsZincrometal, a major competitor of one-side,to minimize the risks associated with De-troit’s uncertain attitude towards one-side.

.— I — - -


Unlike process technologies, insufficientcapital has not been important in determiningwhich companies adopted one-side galva-nized steel as a new product. Two categoriesof steel companies have not adopted one-sidetechnology: companies like Bethlehem Steel,which backed competing products; and com-panies like the European steelmaker, whichdo not feel that the product is worth manufac-turing until Detroit firmly decides on the typeof steel product it needs.

An enormous disparity exists between therates at which domestic and foreign steel pro-ducers have adopted one-side galvanizedtechnology. Until 2 years ago, only U.S. steelcompanies offered a one-side product. Thereason for this disparity can be traced direct-ly to the U.S. automotive industry, which isthe only automotive industry in the world thatdemands large tonnages of galvanized steel.Foreign steelmaker are only partially de-pendent on U.S. automakers as customers,and they can afford to wait until Detroit set-tles its mind before committing capital to newproduct ventures. Domestic steelmaker,much more vulnerable to the current fanciesof the domestic automotive market, could notafford the possibility of losing their biggestcustomer.

With regard to imported cars, only Japa-nese carmakers rely chiefly on zinc-platedsteel sheets to meet corrosion-resistance re-quirements, and then only on cars exported toCanada and the United States. This explainswhy the only producer of one-side galvanizedoutside of the United States is a Japanesesteelmaker. Nippon Steel first began shippingthe new product to major automotive manu-facturers in Japan and the United Statesabout 1976, and began full-scale marketing ofone-side galvanized steel sheets for automo-bile use in 1978. Although exact productionfigures are not available, it is safe to say thatNippon’s production of one-side galvanized isfar less than the combined production of U.S.manufacturers.

Nippon Steel uses a hot dipping method toproduce one-side. While passing through amolten zinc bath, one side of the basemetal

steel sheet is galvanized thinner than theother side. After galvanizing, the thinnercoating is mechanically brushed off in a con-tinuous process in order to completely removethe zinc film and produce a bare steel surfacewith adequate roughness. The well-controlledroughness of the uncoated side ensures excel-lent paint finish characteristics.

Conclusions From Case Studies

The slow pace of most domestic adoption ofprocess innovations is primarily a result ofthe industry’s financial problems and limitedgrowth. Both factors have slowed down BOFconstruction during the past two decades.The relatively slow adoption of continuouscasting by the domestic steel industry can beattributed indirectly to the impact of poorfinancial performance and directly to poorsteel industry growth. Construction of con-tinuous casting facilities is best undertaken ina new steel production facility; retrofittingexisting facilities with continuous casting ismore difficult and more expensive.

The rapid domestic diffusion of AOD tech-nology is attributable to the fact that thistechnology is used principally by the alloy/specialty steel segment. This segment has hadsignificantly better earnings and far betterfinancial status than the integrated segment.Significant production cost reductionsbrought about by the AOD process, combinedwith a rapid increase in the demand for al-loy/specialty steels, also contributed to thehigh adoption rate for this technology. Therapid adoption of one-side galvanized steelwas also unique in several ways. Domesticsteel industry R&D and innovation have al-ways emphasized product development,which requires far less capital than processinnovations. Furthermore, there was a closecollaboration between steel producers andthe domestic automotive industry, the con-sumer that represents the single largest mar-ket for domestic steel producers.

In addition to limited capital availability,the relatively old age of steel productionfacilities in the United States compared to

Ch. 9—Creation, Adopt/on, and Transfer of New Technology ● 299

those of its principal international competi-tors has contributed to the slow adoption ofprocess innovations. Obsolete facilities posetechnological as well as financial problemsfor the introduction of innovative technol-ogies within existing plants—the many se-quential steps of steelmaking create problemsof coordinating old and new facilities. Theage of domestic mills thus accounts for lags inintroducing continuous casters and is alsocited as one of the principal reasons why mill-waste-recycling technology has made rela-tively modest gains in the United States ascompared to Japan.

Another important factor is that many ofdomestic steel producers are unwilling to

adopt innovative technologies unless theyhave already had large-scale commercial suc-cess. Furthermore, domestic steel mills con-tinue to depend on established methods ofraw material supply. For instance, the histor-ical availability of excellent coking coal haslimited interest in formcoke development, andhistorically ample scrap supplies have led toonly marginal interest in waste recycling.Finally, service industries play a powerfulrole in creating and developing new technol-ogy and providing it to steel companies. It ap-pears that this dependency is unique to U.S.steelmaker; many foreign steel companies dotheir own design, engineering, construction,and equipment work.

Technology Transfer

There is very little steel technology trans-fer from domestic steel firms to other coun-tries, and the technologies that are trans-ferred are mostly related to raw materialhandling rather than steel production. To theextent that domestic steel production technol-ogies are transferred abroad, it is done bydomestic equipment manufacturing and engi-neering firms. Conversely, Japanese, and to alesser extent West German, steel companiesdevelop and transfer significant amounts ofsteel production technologies, equipment, andfacilities to other countries, including theUnited States.

From the United States

Earlier in this century, domestic steel com-panies had a strong role in the transfer of ma-jor U.S. steel production technologies to othersteel-producing nations. However, the direc-tion of this technology transfer has been re-versed since the end of World War II.

Most of the melting, refining, and ingotcasting technology presently used by U.S.steel companies had its origin in foreign coun-tries. The only major U.S. process technologythat has been quickly adopted by all domesticand foreign steel industries is the AOD proc-

ess, and this domestic technology was trans-ferred abroad, not by a domestic steel pro-ducer, but by a manufacturer of equipment.A large part of domestic steel technologytransfer to other countries similarly takesplace via domestic equipment manufacturersand engineering firms. In Japan and Europe,it appears that steel firms that create newtechnologies for their own use are the prin-cipal channels for subsequent technologytransfer. Tables 123 and 124 summarize thechannels of technology transfer to and fromthe United States as perceived by U.S. steel-maker.

There is some technology transfer from theUnited States to foreign nations by domestic

Table 123.—Channels of Steel Technology TransferBetween the United States and Japan

Type of channel Percentage use

Cross-licensing/licensing . . . . . . . . . . . . . . . 20Engineering/design firms. . . . . . . . . . . . . . . . 15Steel producers. . . . . . . . . . . . . . . . . . . . . . . . 40Retro engineering . . . . . . . . . . . . . . . . . . . . . 5Suppliers of manufacturing equipment . . . . 10Technical papers. . . . . . . . . . . . . . . . . . . . . . . 5All others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

aRefers to indirect access to foreign technology; no direct purchase availableInformation IS used to duplicate technology

SOURCE Survey of U S steel executives by Sterling Hobe Corp for OTA.


Table 124.—Channels of Steel Technology TransferBetween the United States and Other Nations

Except Japan

Type of channel Percentage use

Cross-licensing/licensing ., . . . . . . . . . . . . . 30Engineering/design firms. . . . . . . . . . . . . . . . 30Steel producer. . . . . . . . . . . . . . . . . . . . . . . . . 5Retro engineering. . . . . . . . . . . . . . . . . . . . . . 5Suppliers of manufacturing equipment . . . . 15Technical papers. . . . . . . . . . . . . . . . . . . . . . . 2All others . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

SOURCE Survey of U S steel executives by Sterling Hobe Corp for OTA.

steel mills. However, available data suggestthat such transfer is not substantial. Recent-ly, two major domestic firms, U.S. Steel andBethlehem, have been holding discussionsabout the export of U.S. steel technology toChina, but no sales had been concluded as of1979.

A major investment for scaling-up an inno-vative process is often required before its po-tential applicability and profitability can befully demonstrated and foreign sales made.This is a large obstacle in the U.S. steel in-dustry, with its low rates of new plant con-struction and lack of capital for demonstra-tion plants. Government capital assistancemay be the only way by which process devel-opment can be sustained by the industry.

Experience with the electroslag remelting(ESR) process illustrates the economic con-straints that tend to limit domestic technologyinnovation and transfer. The ESR processwas invented in the United States during the1930’s and 1940’s and became commerciallysuccessful around 1966. This process gainedlittle domestic recognition until a U.S. AirForce agency investigated the special claimsa Soviet research laboratory made for ESR.The Air Force awarded a 4-year ESR manu-facturing technology development contractfor less than $500,000 to Carnegie-Mellon In-stitute during the early 1960’s. The attentionthat was focused on the ESR process and theprompt dissemination of pertinent informa-tion to various segments of the industry re-sulted in an explosive growth in use of theESR process. U.S. capacity for ESR steelsclimbed from 5,442 tonne/yr to more than

163,260 tonnes—close to Soviet capacity lev-els—between 1965 and 1977. *

Interestingly, neither the original inventornor the company supporting the work re-ceived any benefits from ESR process growthin the United States, because the rights to thistechnology had been sold prior to its initialcommercialization in 1965, The technology ispresently owned by the Pullman-SwindellCorp. —an engineering, consulting, and man-ufacturing conglomerate. Pullman is now inthe process of acquiring certain Soviet ESRprocess rights and licenses for marketing inthe United States. Thus, a U.S. investor com-pany will be marketing in the United Statesthe Soviet refinements of a technology origi-nally invented and developed here. However,eventual success of the Soviet ESR technologyis far from certain. Thus far, the Soviets havehad only modest success in transferring thistechnology on a worldwide basis, mainly be-cause of their inability to provide proof of theeconomic viability of the technology.

The domestic steel industry has stronglyprotested the loans the U.S. Export-ImportBank (Eximbank) provides to foreign competi-tors to buy domestic steelmaking technology.Many U.S. steelmaker are concerned aboutthe Bank’s willingness to finance steel expan-sion abroad, arguing that low-interest ratesare permitting unreasonable investment inunneeded steel capacity, which results in un-fairly traded steel exports to the UnitedStates. In response to such concerns, theBank has noted that such loans are neededbecause they generate U.S. exports and do-mestic jobs—especially for firms selling tech-nology. According to John L. Moore, presidentand chairman of Eximbank:

The net positive economic impact in justthe steel products area is over 4,000 man-years of U.S. labor. These employment fig-ures become even more positive when the fa-vorable impact from the related exports ofU.S. coal and spare parts are added.36

*In 1965. domestic ESR steelmaking capacity was limited to5,442 tonnes of annual production, all of which was used byone company in the Pittsburgh area, compared to 181,400tonnes of annual ESR capacity in the Soviet Union.

“American Banker, Oct. 22, 1979, p. 2.


Domestic equipment makers have had op-posite concerns about Eximbank loans for thec o n s t r u c t i o n o f s t e e l p l a n t s a b r o a d . T h e s ecompanies have asserted that inadequate ex-port financing causes domestic firms to losesales of technology abroad. The Bank’s posi-tion has been that lack of price competitive-ness, rather than inadequate export financ-ing, has been the principal factor responsiblefor limiting technology exports. Along theselines, Bank representatives have noted that:

We found that most of the cases lost wereawarded to foreign firms because the Ameri-c a n e x p o r t e r w a s n o t c o m p e t i t i v e i n t h epr i ce o f fe red . In 51 o f our recent “ los t o f -fers,” the U.S. product was priced out of ther u n n i n g . I n f e w e r t h a n 1 0 p e r c e n t o f t h ecases did inadequate financing appear to bethe reason for los ing the b id—and most o fthose were lost against “foreign aid type” fi-n a n c i n g .

A distinct handicap for U.S. exporters oftechnology is the inability of the Bank to fi-nance loans to certain nations undergoingsubstantial steel industry expansion, includ-ing the People’s Republic of China and the So-viet Union. Eximbank representatives com-mented on the resulting decline in U.S. com-petitiveness in technology exports:

U.S. firms, however, are constrained fromcompeting in certain key countries of theworld, mainly the People’s Republic of Chinaand the U. S. S. R., because competitive financ-ing by Eximbank is not yet available to thosecountries. As a result, the Japanese and theGermans, particularly, have taken advan-tage of early entries into those countries andhave concluded contracts of major propor-tions to provide technology and equipment,financed by low-interest rate loans . . . Ex-cept for the sale of technology to the Rus-sians by one of the three U.S. producers hav-ing expertise in making that particular typeof steel, the United States has evidently lostout on all the potential equipment and engi-neering sales . . . [and also on] the longerterm benefit of actual experience of buildingthe most modern silicon steel plant any-where. 38

i Ibid.‘“Testimony of I). E. Stingel, Director, U.S. Export-Import

Bank, before Senate Subcommittee on International Finance,Nov. 19, 1979.

By Foreign Industries

Unlike the United States, most foreignsteel-producing nations, even those withsmall steel industries such as India or Aus-tria, practice aggressive transfer of theirsteel technologies. The undisputed leader isJapan.

Japan

Most major Japanese steel companies areengaged in steel technology transfer as wellas some design and construction. These com-panies have well-established ties with WestGerman, British, Austrian, Swedish, and U.S.companies engaged in technology transferprojects through licensing, equipment manu-facturing, and joint project efforts. The Japa-nese steel industry, working in partnershipwith the Japanese Government, has sold itssteel technology on a global basis more suc-cessfully than any other country. *

The Japanese, who move technologists toother countries to put their projects in place,are motivated by the need for technology ex-ports to compensate for the loss of steel ex-port markets. They are also aware of theneed for access to raw materials. The sac-rifices made by individuals engaged in suchventures are well rewarded by the companiesthey serve and by society in general. Timespent overseas on technology transfer proj-ects is viewed as a service to the country, andthe Japanese are proud of their contributionsto world technology and to the welfare oftheir own country.

Commenting on international steel trade,the general manager of Kawasaki Steel’s in-ternational department has noted that “Werealize that we cannot continue to exportlarge amounts of crude steel. Therefore, theindustry is putting emphasis on exports oftechnology, to countries like China, Brazil,and those in Southeast Asia." 39 The assimila-

*The success of this Japanese strategy is shown by the factthat in 1975 their steel industry’s technology exports werealmost twice as great as imports [a positive balance of 5,800million yen a year or $24 million at 240: 1). This probably hasimproved greatly in recent years,

W’, Dahlby. “Japan Seeks a Long-Term Strategy for Prosper-ity, ” Far Eastern Economic Review, Aug. 25, 1978, p, 45.


tion of designs and technical know-how fromdifferent sources has enabled Japanese com-panies like Nippon Kokan, IHI, Hitachi, DaidoSteel, and Mitsubishi to provide the mostmodern plants to developing countries. TheLDCs, in turn, promote the construction ofsteelworks using the electric furnace processor integrated steelworks employing the BF-BOF process or DR-EAF process, with theirtechnological choices dependent largely onprevailing domestic conditions, such as sizeof steel demand and existence of natural re-sources.

There appears to be little concern thatJapan is cutting its own throat by selling tech-nology that will strengthen developing coun-tries’ production capacities:

Steelmaker are selling basic technologywhile improving their own technology for theproduction of more sophisticated items suchas large-diameter steel pipe and higher qual-ity crude steel.

Even so, how long can the Japanese maintaintheir technological lead? The Kawasaki exec-utive replies that:

There are no major technological break-throughs on the horizon for the next 10 to 15years. Now we are only involved in a fairlysophisticated rounding out process by rais-ing the productivity per worker, but there isa limit.40

The search for raw materials and energyhas also stimulated Japanese steel compa-nies, in partnership with their governmentand other companies, to launch an aggressivecompensation-trade program based on barterwith developing countries. A number of suchprojects are presently underway in the Mid-dle East, Brazil, Indonesia, and several otherdeveloping countries (table 125), and Japan isaggressively pursuing the exchange of steeltechnology for Mexican oil. In the Japanesesteel industry, the guiding philosophy is tobeef up divisions handling design and to wincontracts in developing countries by offeringpackage deals, including technology licens-ing, feasibility studies, construction, and en-

*’Ibid.

Table 125.—Major Japanese Steel TechnologyTransfer Projects Involving Barter Trade

Abu Dhabi—A Government-Kawasaki Steel ioint venturesteel plant; $4 billion.

.

Qatar— Kobe Steel 20°10, Tokyo Boeki 10°/0, balance localfor Midrex DR and mini steel plant; $980 million.

Nigeria— Kyoei Saiko and Nissho-lwai, joint venture DR andministeel plant; reportedly $440 million.

Saudi-Arabia-Petromar DR plant; ownership: Italy, Mar-cona 40%, Estel 25%, Japan (Nippon Steel) 25%, UnitedStates (Gilmore Steel) 1OO/O; investment, unofficial, $950million. Project reorganized recently to include KorfGroup.

Sudan— Kyoei Seiko joint venture mini steel plant; $250 mil-lion.

Tunisia—C. Itoh (Japan), Korf Industries (West German),and Government of Tunisia; Midrex DR plant; investmentfigures unavailable.

Morocco—Kawasaki Steel 12.5%, Konematsu Goshu12.5%, balance local; ministeel plant; $200 million.

Iran— DR plant at Bandar Abbas; Japanese participation: C.Itoh, Marubeni, Mitsubishi, Kawasaki Steel. Acompensation-trade venture for over $800 million.

Indonesia —Ministeel plant; financial investment by C. Itoh74%, technology by Kowasaki steel 6%, balance by pri-vate Indonesian capital. A compensation-trade venturefor approximately $300 million.

Greece—Hellenic Steel; C. Itoh and Co. (Japan) 25°/0 andEstel (Netherlands) 20%; investment unavailable.

Brazil-Siderurgica Brasileira; Nippon Steel 490/.; Japaneseinvestment over $1.8 billion —Usiminas; Nippon Steel19%; investment unavailable.

SOURCE: OffIce of Technology Assessment

gineering advice. By selling the experiencegained in building their own highly efficientindustry, Japan’s major steelmaker are hop-ing to make up for the export markets theyhave lost through increased competition andthe relatively slow growth of demand in in-dustrialized nations.

Nippon Steel serves as a good example ofJapan’s commitment to steel technology ex-port.41 About 10 percent of its sales are tech-nology sales, and the company has promotedthe development of steel production in LDCsin particular. It recognizes LDC interest in

“U.S. Steel Corp. has recently signed a 3-year contract withNippon Steel for technical aid. “The contract with Nippon isU.S. Steel’s third, and by far the most extensive, call for helpfrom abroad, Although most other domestic steelmaker havebeen getting help from foreign steel companies for years, WallStreet analysts and industry insiders have long suspected U.S.Steel of harboring a corporate arrogance that led it to ignoreforeign technological developments. But the extent of the newcontract with Nippon confirms that LJ. S. Steel is prepared toscour the world for the best steelmaking technology available. ”(Wal) Street JournaJ, Feb. 14, 1980.)

Ch. 9—Creation, Adoption, and Transferor New Technology ● 303

such matters as the use of domestic re-sources, the role of a strong steel industry inaccelerating the growth of steel-consumingindustries, and foreign currency savings. Asof early 1979, Nippon Steel’s overseas engi-neering activities had extended to 37 nations,85 firms, and 285 projects.42

Kobe Steel has also accelerated its technol-ogy sales efforts. It has improved the qualityof its overseas activities, stepped up informa-tion exchange, and expanded the scope of itsactivities from mere product sales to invest-ment, procurement, plant construction, andmanagement and operation guidance. Thecompany employs qualified personnel andgives them language training in specialschools or sends them to schools in foreigncountries. Moreover, it exchanges personnelwith foreign companies and accepts foreigntrainees, 43 Kawasaki Steel Corp. ’s technologyexports in 1978 contributed only 5 percent ofthe company’s business, but it expects to in-crease them to 10 percent within 5 years.44

Japanese steel firms are also increasingtheir technology trade with China, whosemodernization plans offer an obvious marketfor Japanese exports. Under a long-termtrade pact signed early this year by Tokyoand Peking, Japan will export roughly $10 bil-lion worth of plants and construction machin-ery to China during the next 10 years. Thebiggest single export project involved is a $3billion deal for Nippon Steel to build a 5.4-mil-lion-tonne/yr steel mill in Shanghai, due forcompletion in 1980.45

West Germany

German steel technology has penetratedboth the industrialized and developing coun-tries. Important coke-producing, ironmaking,steelmaking, and metals-working technolo-gies have originated in West Germany andspread to different parts of the world. WestGerman technology transfer methods are as

“’Nippon Steel News, January 1978,“Kobe SteeI Report, January 1979.“’’Kawasaki Steel: Using Technology as a Tool to Bolster Ex-

port, ” Business Week, Jan. 29, 1979, pp. 119-20.‘iSteeJ Week, Oct. 23, 1978.

varied as the countries served. Technologysales have traditionally been pursued byWest German industry and government in ahighly competitive manner, using technolo-gies developed through the active participa-tion of the West German academic and re-search communities.

The West German Government offers sub-stantial incentives in the form of loan guaran-tees of up to 90 percent for the export of steeltechnology and equipment to developingcountries. Intergovernmental agreements areactively sought and implemented on a com-pensation-trade basis. Such barter agree-ments usually last from 5 to 10 years andhave provided for the establishment of entiresteel plant complexes in India, Brazil, Iran,Argentina, Venezuela, and Mexico. WestGerman credits extended in India during thepast 12 years have exceeded $1.32 billion, toIran $0.8 billion, to Brazil $1.63 billion.

West German steel plants and equipmentconstruction companies have comprehensiveagreements for technical cooperation withJapanese companies engaged in similar ven-tures. Often such cooperation overlaps withtechnology agreements with U.S. and Britishbuilders of steel-melting and metal-workingequipment.

Several West German companies are cur-rently engaged in the export of steel technol-ogy. Europe’s largest steel group, Thyssen,has a joint venture with Armco Steel in WestGermany, and it owns the Thyssen Puroferdirect reduction (DR) process, through whichit has interests in DR plants in Iran and Vene-zuela. The Thyssen Group also controls theDortmund-Horder degassing process, whichis used in U.S. and Japanese steel industries.

The United States has received a numberof steel-related technologies from West Ger-many. West German technology entered theUnited States during the 1960’s mostly in theform of licenses, know-how, and personnelexchange. During the 1970’s, successfulWest German corporations established jointventures, limited partnerships, and evenoperating companies in the United States for


timely transfer of steel technologies. TheWest German company of Laybold-Heraeusopened manufacturing, sales, and servicesubsidiaries in the United States during the1960’s; it has aggressively pursued the ap-plication of vacuum technology to solve a hostof steelmaking problems, as well as steeltreating and steel protection. In cokemakingand allied coal technology, Koppers Co. inthe United States has good access to WestGerman technology through cross-licensingagreements with Lurgi.

Another entrepreneurial West Germansteel company spreading its technology to theUnited States is the Korf Industries Group.This firm formed the Midrex Corp. in theUnited States, and has successfully promotedthe Midrex DR process, developed originallyby an American company. The Korf Grouphas successfully promoted minimills in theUntied States based on the use of scrap andDRI. Korf also has projects in Iran, Trinidad,Tunisia, and the U.S.S.R. for the installationof Midrex DR plants with capacities rangingfrom 227,000 to over 590,000 tonne/yr.

Demag is the leading German builder ofcomplete metallurgical plants and equipment,and it enjoys a worldwide reputation. It hasexcellent working relationships with U.S.companies, such as Mesta, Wean United, andBlaw-Know, and the technology transferredby Demag is reliable and up-to-date. Demagalso cross-licenses and shares its engineeringknow-how with American builders of rollingmills, forging presses, and other steel plantequipment. International cross-licensing andtechnology-exchange practices prevailing inmetallurgical equipment building make itvery difficult to assess the actual monetaryvalues of such technology transfers.

Austria

Austria sits between the East and West inEurope, and receives steel-processing tech-nology from both sides. It often serves as a“window” for Western industries to observeand assess steel technology developments inEastern European countries, including theU.S.S.R.

The Austrian steel industry originated theBOF steelmaking process and made it avail-able to several of the world’s steel industries.This technology was the forerunner of thepresent-day basic oxygen steelmaking proc-ess and of recent variations such as the Q-BOF.

Austria received technology transfer reve-nues from the United States of about $26 mil-lion during 1978. In turn, Austria has re-ceived less than $1 million worth of steel-re-lated technology from the United States.

The major Austrian steel technology ex-porter is Voest-Alpine. This government-owned steel conglomerate is well-knownworldwide for its plant design, engineering,and construction expertise. Voest-Alpine hasestablished joint ventures with other Euro-pean partners in the United States (the Lou-isiana-Bayou Steel Corp.), Turkey, India,Brazil, Argentina, Colombia, and Iran. OtherVoest companies have many technology li-censing arrangements with the U. S. S. R.,Czechoslovakia, Hungary, South Africa, In-dia, and the United States. Dravo Corp. ofPittsburgh is the principal holder of Voest li-censes for steel process technology in theUnited States. The technology portfolio ofVoest-Alpine claims to have more than 1,500patents related to steel technology.

United Kingdom

There are no barriers to technology trans-fer between the United States and the UnitedKingdom. Steel company interests on bothsides are engaged in acquisitions and jointventures for technology transfer and marketshares for products. Until about 5 years ago,British engineers and technologists, with ad-vanced technical and industrial skills, hadcomplete freedom to find employment in theUnited States, so advanced steel technologytransfer to the United States occurred largelythrough the mass movement of highly quali-fied and experienced engineers. Exceptthrough this source, the United States has notreceived any major steel technology from theUnited Kingdom during the last two decades.

Ch. 9—Creayfon, Adoption, and Transfer of New Technology ● 305

Many large British companies are engagedin integrated steel technology transfer. DavyAshmore has recently completed steel tech-nology transfer projects in the United States,Mexico, and Sweden. The company recent-ly acquired complete control of Arthur G.McKee Co. of Cleveland, a well-establisheddesign, engineering, consulting, and construc-tion company. This acquisition seems to havestrengthened both the technology base ofDavy Ashmore and the financial base of Ar-thur McKee.

Guest, Keen and Nettleford (GKN) has re-cently increased its engineering and technol-ogy transfer activities. The company is wellestablished, with steel technology transferprojects in West Germany and in Australiathrough its interest in John Lysaght, an in-tegrated steel producer. At present, GKN andJohn Lysaght are under the umbrella of Aus-tralia’s biggest company, the Broken Hill Pro-prietary Co. (BHP). BHP also owns PeabodyCoal Co. in the United States, and this owner-ship includes West German and Japanese in-terests under the name of Theiss CampierMitsui Coal Pty Ltd. This arrangement pro-vides all parties involved with good access tothe latest British, West German, U. S., andJapanese technologies related to coke, iron,steel, and transportation,

India

Moving away from an emphasis on domes-tic self-sufficiency, India has emerged duringthe past 5 years as an exporter of steel, Bythe end of this century, India plans to exportannually 9.1 million to 13.6 million tonnes,

The steel industry in India has made con-siderable progress in technology and is nowself-reliant, Countries in the Middle East,Africa, and Southeast Asia are looking to In-dia for major technical support for the devel-opment of metallurgical industries. The SteelAuthority of India has established one of thelargest consultancy and engineering organi-zations in Southeast Asia, with more than1,700 trained engineers and specialists invarious disciplines. This agency, named Met-

allurgical and Engineering Consultants (In-dia) Ltd. (MECON), is rendering services athome and abroad in the development of inte-grated steel mills, alloy/specialty steel plants,raw materials preparation and agglomerat-ion, sponge iron and DR plants, and otherchemical and metallurgical plants. MECONhas know-how licensing agreements in theUnited States, the United Kingdom, West Ger-many, Czechoslovakia, Sweden, East Ger-many, and Japan. *

Another Indian consulting organization, M.N. Dastur and Co., has gained a considerableinternational reputation for its expertise inpreparing feasibility and project reports.This company is advising governments andprivate industries in Venezuela, Brazil, Co-lombia, Libya, Iran, Saudi Arabia, Nigeria,Yugoslavia, and the developing countries ofSoutheast Asia. MECON and the Dastur Co.jointly plan and implement metallurgical andchemical industrial plant development withtechnology that is purchased from overseasservices, then “repackaged” and marketed todeveloping countries. Both organizationscompete with similar organizations from in-dustrialized countries for projects in any partof the world.

India has reportedly received steel technol-ogy transfer income in excess of $6 millionsince 1975. Raw technology purchases by In-dia from the United States during the last 5years reportedly amounted to $14.5 millionfor 69 agreements. West Germany has 413collaboration agreements with India in thesteel technology sector, 114 of which are jointventures, with the West German industriesholding more than 40 percent equity interest.All these projects have been initiated since1971.

Summary Comparisons

Technology transfer plays a critical role indetermining the technological competitive-ness among steel industries. Moreover, as

*Personal discussions of OTA contractor Dr. K. Bhat withMr. R. Dave, Manager, Bombay Office of M. N. Dastur and Co.,Ltd.


steel export markets are lost to expanding in- tria, the United Kingdom, and India are givendigenous industries, technology sales deter- in table 126. Generally, the nations that aremine to an increasing degree the economic most successful in steel technology transfersuccess of these industries. Nevertheless, have supportive government policies andthere is a dearth of detailed information on steel companies that have strong R&D pro-steel technology transfer. Summary descrip- grams and pursue technology transfer as antions of steel technology transfer in the integral part of their operations.United States, Japan, West Germany, Aus-

Table 126.—Features of Technology Transfer in Different Nations

Role of technologytransfer in steel Type of technology Salient aspects of

Country industry transferred Role of Government technology transfer

Japan. . . . . . . . . . . . . . . Integral part of mostmajor steel com-panies. Supplementto steel experts.

West Germany . . Moderate. Germanequipment and con-struction companiesactive.

Austria . . . . . . . . . . . . . Strong in State-ownedsteel company.

United Kingdom. . . . . . Slight. Mostly indesign/engineering/construction com-panies.

India . . . . . . . . . . . . . . . Strong in State-ownedindustry.

United States. . . . . . . . Moderate. A number ofdesign/engineering/construction firmsare active.

Basic ironmaking andsteel making.

Strong in secondaryfinishing and heattreatments. Directreduction.

Steel making.

Basic ironmaking andsteel making.

All phases.

Strongest in raw mate-rials processing andsteel products.

Strong—provides plan- Consists of all soft andning, advice, financ-ing.

Strong, assists withfinancing.

Strong because ofownership of steelindustry.

Minimal.

Strong because ofownership of steelindustry.

Minimal.

hard transfers, includ-ing construction andadvice.

Strong and complexassociations withforeign design/engi-neering constructioncompanies.

Very aggressive in ThirdWorld Western andEastern sections.

Weak because of declin-ing steel industry.

Very aggressive inAsian, Middle East-ern, and AfricanLDCs.

Strength lies outside ofall but a few largesteel companies.


Capital Needs for MCHAPTER 10

odernizationand Expansion

— —

Contents

Pagesummary ● . . * *, *, . * ., .,, ., * * * *,, **.*..* 309

Three Ways to Modernize and ExpandCapacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 310

Capital Requirements for Modernization andExpansion .*. **. *.**, .,. *a******..,.. 313

Unit CapitaI Costs for Modernization. . ......314Comparison of Capital Cost Estimates. .. ....315

Scenarios for Expansion . . . . . . . . . . . . . , .. .316Differences in Modernization Results , .. ....318Differences in Expansion Results. . . . . . . .. ..322Differences in Lower Spending Scenarios, .. .322

Total Capital Needs and Shortfalls . . . .. ....322Capital Needs . . . . . . . . . . . . . . . . . . . . .. ....322Capital Availability . . . . . . . . . . . . . . . . . . . . .323Capital Shortfalls in the OTA Scenario .. ....325International Capital Cost Competitiveness ., 325

List of Tables

Table No. Page127. Change in Steel Equipment Cost Index

Versus Other Cost and Price Indexes . . 310128. Cost or Price Increases Required by

Integrated Greenfield Expansion . . . . . 313

Table No.129. AISI and OTA Assumed Increases in

Domestic Steel Use and Reduction inImports, 1978 and 1988 . . . . . . . . . . . . .

130. Integrated Carbon Steel Plant CapitalCost Estimates for New ShipmentsCapacity. . . . . . . . . . . . . . . . . . . . . . . . .

131. Capital Costs for Nonintegrated CarbonSteel Plants. . . . . . . . . . . . . . . . . . . . . . .

132. Unit Capital Costs for Replacement andExpansion in Integrated and ElectricFurnace Plants. . . . . . . . . . . . . . . . . . . .

133. Eight Scenarios for Expansion and Modernization Strategies and Annual

Capital Costs for Actual ShipmentIncreases . . . . . . . . . . . . . . . . . . . . . . . .

134. Capital Cost Estimates for MajorFacility Replacements, 1978-88—Scenario F . . . . . . . . . . . . . . . . . . . . . . .

135. Projections of Annual Capital Needs. . .136. Average Annual Capital Sources and

Uses . . . . . . . . . . . . . . . . . . . . . . . . . . . .137.1968-79 Real Dollar Changes in

Profitability and Common StockPerformance for Selected SteelCompanies . . . . . . . . . . . . . . . . . . . . ., .

138. Estimates of Capital Costs for theUnited States, Japan, and a DevelopingNation. . . . . . . , , ... , , . . . . . . . . . . . . .

Page

313

315

315

316

317

319319

323

324

326

CHAPTER 10

Capital Needs for Modernizationand Expansion

Summary

The U.S. steel industry has a record of rela-tively low levels of capital expenditures, Thisrecord has been coupled with a history of de-creasing capacity, decreasing technologicalcompetitiveness, very modest gains in produc-tivity, and aging facilities. The industry fre-quently cites inadequate capital as the mostcritical barrier to the greater adoption of newtechnology, but the real issue is what its capi-tal spending buys in terms of new technologyand new capacity.

Although the industry’s capital spendinghas had a downward trend during the pasttwo decades in terms of real dollars spent onproductive steelmaking facilities per tonne ofsteel shipped, it is also cyclical, Peaks occurevery 7 to 8 years, and they follow peaks innet income by 1 or more years, The industryuses increasing amounts of capital for non-steel expansion activities and continues todistribute relatively large cash dividends tostockholders, even when sales and profitabili-ty are depressed.

There are three routes to revitalizing thetechnological base of the industry: mod-ernization and replacement; roundout or“brownfield” expansion of existing facilities;and new plant or “greenfield” construction.OTA’s analysis of the minimum moderniza-tion and capacity expansion needs for thecoming decade indicates that a cost-effectiveapproach is to maximize the use of roundoutexpansion at existing integrated plants and toconstruct more electric furnace steelmakingfacilities, particularly in nonintegrated com-panies producing a limited range of products.The high capital costs of greenfield inte-grated facilities based on the best availabletechnology are not sufficiently offset by re-duced production costs. This situation may

change eventually if major technologicalchanges are applied to integrated steelmak-ing.

The American Iron and Steel Institute(AISI) estimates that it will require $4.9 bil-lion’ annually to modernize and expand steel-making capacity. OTA calculates that mod-ernization and expansion could be achievedby spending approximately $3 billion annual-ly over the next 10 years followed by large ex-penditures for new integrated facilities in the1990’s. The industry scenario increases capi-tal spending for productive steelmaking by150 percent over the past decade’s average;the OTA scenario increases it by approxi-mately 50 percent. The AISI and OTA scenar-ios agree that approximately $2.2 billion an-nually will be needed for meeting regulatoryrequirements, nonsteel investments, andother increases in working capital. Total cap-ital spending is thus $7.0 billion annually byindustry estimate and $5.3 billion by OTA cal-culations.

Given the basic assumptions of this anal-ysis, such as increased steel shipments and,hence, increased total revenues, to what ex-tent can the industry meet its own capitalneeds? The industry has not provided ananalysis of capital formation and cash flow.The OTA analysis of capital sources andneeds points to a capital shortfall of at least$600 million annually through 1988, assum-ing 1978 levels of profitability, dividends, andnonsteel activities are maintained. This isconsiderably less than the deficits projectedby the industry analysis. If modernization andexpansion lead to a modest 2-percent saving

*Unless otherwise noted. all figures in this chapter are in1978 dollars.

309


in production costs, then by 1988 return on OTA finds that the international capitalequity could increase from the 1978 level of cost competitiveness of the domestic steel in-7.3 percent to about 12 percent, and could dustry has suffered relative to Japanese andprovide a basis for more vigorous industry European steelmaker. Some reasons for thisgrowth and expansion in the years beyond. are outside the control of the industry, butThe same reduction in production costs, other factors, such as design and equipmentcoupled with a Federal policy that added ap- supplier choices, are within its control.proximately $600 million to the industry’scash flow, would increase the return on equi-ty to almost 15 percent.

Three Ways to Modernize and Expand Capacity

Inadequate capital has probably hamperedthe adoption of new technology by the domes-tic steel industry. The rate of capital spend-ing has declined during the last two decades,from an average of $36.3/tonne shipped dur-ing 1959-68 to $27. l/tonne during 1968-78. ’But this is not the entire picture. During the1950-78 period, there was a cyclical patternto the industry’s capital spending, with peaksoccurring every 7 to 8 years. Thus, in 1952,1960, 1967, and 1975, the respective levelsof capital expenditures were $45.9, $43.0,$46.4, and $40.5/tonne shipped. The spendingpeaks correspond to replacement rates ofabout 4 percent, compared with the more typ-ical replacement rates for the past severaldecades of 2 or 3 percent. The peaks in capi-tal spending follow peaks in net income by 1or more years.2

A more fundamental issue is not when thecapital spending occurs or even its level, butthe extent to which it produces new technol-ogy and new capacity in the industry. Be-cause the costs of steelmaking equipment andfacilities have risen faster than the general

ID. F. Barnett, “Capital Requirements for Modernization,”Atlantic Economic Conference, October 1979. These values arefor productive steelmaking and exclude spending for regu-latory needs and nonsteel activities,

‘Cyclic capital investment linked to cyclic profits has beencited as a cause of underinvestment, “As a result of this cycli-cal investment policy, the industry has not been able to replaceits high-cost, outdated, inefficient, steelmaking capacity asfast as was necessary to remain competitive with foreign pro-ducers. ” (R. S. Thorn, “The Trouble With Steel, ” Challenge,

July-August 1967.)

level of inflation, capital expenditures buyless today than before. Table 127 compareschanges in the steel equipment cost indexwith changes in other price and productioncost indexes. Nominal inflation, shown by theconsumer price index, has been less than thatfor equipment, energy, and labor costs in-dexes. Steel prices have increased at a lowerrate than capital equipment costs but not

significantly so for the past 5 years. Thisslowdown in equipment cost increases maybe due to greater use of foreign-producedcapital equipment, which has generally be-come available in the U.S. market at consider-ably lower costs than from domestic equip-ment manufacturers. Also, relatively low lev-els of replacement and plant additions mayhave reduced domestic demand for capitalequipment and discouraged price increases.

As capital spending declined following the1975 peak, so did domestic steel capacity.

Table 127.—Change in Steel Equipment Cost IndexVersus Other Cost and Price Indexes

Ratio for Ratio forIndex 1978- 1965 1978 – 1973

Steel equipment costa. . . . . 2.79 1.95Consumer Price Index. . . . . 2.07 1.47Steel price index . . . . . . . . . 2.61 1.90Steel industry wagesb . . . . . 3.19 1.86Metallurgical coal . . . . . . . . 7.28 3.26Electrical power. . . . . . . . . . 2.71 2.11——

aFrorm World Steel Dynarnamics, April 1979, derived from ECSC data through 1976and estimated by WSD thereafter

bBased on dollars per hour includlng fringe benefits, from the U.S. Departmentof Labor

Ch. 10—Capital Needs for Modernization and Expansion ● 311

From 1977 to 1979, about 6.35 million tonnes,

o r 4 p e r c e n t , o f t o t a l r a w s t e e l m a k i n g c a p a c i -ty was lost. The loss would have been greaterwere it not for considerable increases in elec-

t r i c f u r n a c e s t e e l m a k i n g c a p a c i t y i n b o t h

i n t e g r a t e d a n d n o n i n t e g r a t e d c o m p a n i e s ,which par t ia l ly o f f se t the c los ing o f o lder in -t e g r a t e d p l a n t s . T o d a y ’ s p r o d u c t i o n c a p a c i t yi s about the same as i t was in 1960 , Because as i g n i f i c a n t p e r c e n t a g e o f s t e e l m a k i n g f a c i l -

it ies are obsolete (see ch. 4) , i t is l ikely that int h e n e a r t e r m , w h e n d e m a n d f o r s t e e l i s e x -

p e c t e d t o d e c l i n e a s a c o n s e q u e n c e o f a g e n -e r a l e c o n o m i c s l o w d o w n , t h e c l o s i n g o f o l d e r

a n d o b s o l e t e p l a n t s w i l l c o n t i n u e o r i n c r e a s e ,

S t e e l c a p i t a l s p e n d i n g i s g e n e r a l l y f o r t h ep u r p o s e s o f m o d e r n i z a t i o n , b r o w n f i e l d , o r

greenf ie ld expans ion . T h e s e t e rms maybe de-f i n e d a s f o l l o w s :

Modernization. —Traditionally, spending i n

t h i s c a t e g o r y h a s b e e n d i r e c t e d a t r e p l a c i n g

u n u s a b l e a n d w o r n o u t e q u i p m e n t i n o r d e r t o

m a i n t a i n t h e o p e r a t i n g c a p a c i t y o f a p l a n t .T h e t e r m s m a i n t e n a n c e a n d r e p l a c e m e n t a r ealso used. A point of confusion is whethercapi ta l spending in this category is associ-

a t e d w i t h c a p a c i t y e x p a n s i o n . S o m e a n a l y s t sa s s u m e t h a t c a p a c i t y d o e s n o t i n c r e a s e w h e nf a c i l i t i e s a r e m o d e r n i z e d , m a i n t a i n e d , o r r e -p laced , Al though i t i s t rue tha t these expendi -t u r e s a r e n o t p r i m a r i l y i n t e n d e d t o a d d c a -

p a c i t y , i m p r o v e m e n t s i n t e c h n o l o g y a n de q u i p m e n t d e s i g n d o r e s u l t i n i n c r e a s e d c a -pac i ty , genera l ly because o f h igher y ie lds ; ther e p l a c e m e n t o f i n g o t c a s t i n g w i t h c o n t i n u o u sc a s t i n g i s a n i m p o r t a n t e x a m p l e o f s u c h i n -

creases (see ch. 9). Also significant is the factt h a t w i t h n e w e r f a c i l i t i e s i t i s p o s s i b l e t oo p e r a t e a p l a n t a t h i g h e r s u s t a i n e d r a t e s o f

c a p a c i t y u t i l i z a t i o n .

B e c a u s e m o s t s t e e l m a k i n g e q u i p m e n t i slong- l ived , i t i s r easonab le to assume tha t by

t h e t i m e i t i s r e p l a c e d , t h e n e w e q u i p m e n t ,r e p r e s e n t i n g n e w e r t e c h n o l o g y , w i l l b e m o r eproduct ive than the o ld . Thus , rep lacement i s

l i k e l y t o i n v o l v e c a p a c i t y i n c r e a s e , u n l e s s a sa n e c o n o m y m e a s u r e t h e n e w e q u i p m e n t i s

s e l e c t e d p u r p o s e l y t o k e e p c a p a c i t y s t a b l e . I n

s o m e c a s e s , h o w e v e r , t h e c a p a c i t y i n c r e a s e

that new equipment makes possible may ap-ply only to a particular step of the steelmak-ing process; it does not necessarily affectc a p a c i t y f o r t h e e n t i r e p l a n t a n d c a n n o t

a l w a y s i n c r e a s e s t e e l s h i p m e n t s f r o m t h a t

p l a n t . S t e e l m a k i n g i s a s e q u e n t i a l p r o c e s s ,a n d p l a n t c a p a c i t y l e v e l s w i l l b e c o n s t r a i n e dt o t h e l o w e s t c a p a c i t y l i n k i n t h e s e q u e n c e .B u t g e n e r a l l y , c a p i t a l s p e n d i n g f o r m o d e r n -i z a t i o n e i t h e r l e a d s t o s i g n i f i c a n t i m p r o v e -

ments in capac i ty or se t s the s tage for fu turee x p a n s i o n b y r e m o v i n g i n d i v i d u a l “ b o t t l e -

necks” in the product ion process .

Roundout or Brownfield Expansion.—Theset e r m s h a v e b e e n u s e d t o d e s c r i b e c a p i t a ls p e n d i n g t h a t h a s a s i t s m a i n p u r p o s e i n -c r e a s i n g c a p a c i t y i n t h e t o t a l s t e e l m a k i n go p e r a t i o n . B o t h r o u n d o u t a n d b r o w n f i e l d e x -

pans ion occur on the s i t e o f an ex i s t ing p lant .O n e t y p e o f r o u n d o u t i s t h e i n s t a l l a t i o n o f

h i g h e r c a p a c i t y e q u i p m e n t a t o n e o r m o r e o ft h e “ b o t t l e n e c k ” s t e p s t h a t l i m i t c a p a c i t y f o r

t h e w h o l e p l a n t . I n s o m e c a s e s , p l a n t s a r ec o n s t r u c t e d a n d d e s i g n e d s o a s t o a n t i c i p a t ef u t u r e r o u n d o u t ; w h e n r o u n d o u t d o e s o c c u r ,

i t i s a n a d d - o n e x p a n s i o n , r a t h e r t h a n a r e -p l a c e m e n t . B r o w n f i e l d e x p a n s i o n i s a f o r m o fr o u n d o u t , u s u a l l y o n a l a r g e s c a l e , t h a t i n -v o l v e s b e t t e r b a l a n c i n g o f i n d i v i d u a l o p e r a -

t i o n s t h a n a s i m p l e r r o u n d o u t .3 A r a d i c a lf o r m o f b r o w n f i e l d e x p a n s i o n , t h e o r e t i c a l l y

p o s s i b l e b u t a p p a r e n t l y n o t u s e d o r c o n t e m -p l a t e d , i s t h e t e a r i n g d o w n o f a n e x i s t i n gp l a n t a n d t h e c o n s t r u c t i o n o f a n e w p l a n t o nt h e s a m e s i t e .

The ch ie f l imi ta t ion o f roundout as a meanso f i n c r e a s i n g c a p a c i t y i s t h a t t h e b a s i c t e c h -

n o l o g y a n d l a y o u t o f a p l a n t a r e m a i n t a i n e d .R o u n d o u t c o s t s l e s s p e r n e t i n c r e a s e i n c a -

p a c i t y t h a n n e w p l a n t c o n s t r u c t i o n , b u t t h e r ewill usually be fewer improvements in pro-

ductivity and efficiency of inputs. A plant de-signed from the ground up, on the other hand,may use new types of equipment throughoutand be designed to realize economies of scale.

New plants also allow optimizing geographi-cal location when markets and sources of

‘J. C. Wyman, “The Steel Industry: An American Tragedy?”Faulkner, Dawkins, and Sullivan, February 1977.


raw materials have shifted. For example, ac-c e s s t o m a j o r w a t e r w a y s i s m o r e i m p o r t a n tt o d a y t h a n i n p r e v i o u s d e c a d e s , b e c a u s emore use i s be ing made o f domest i c i ron oresl o c a t e d f a r f r o m m a j o r c e n t e r s o f s t e e l m a k i n gand por ts o f ent ry for impor ted ores .

T h e e x a c t c a p a c i t y i n c r e a s e t h a t r o u n d o u t

makes possible is a significant issue. A F o r d -ham University study in 1975 estimated thatr o u n d o u t c o u l d e x p a n d c a p a c i t y f o r f i n i s h e d

s t e e l p r o d u c t s b y 1 1 . 8 m i l l i o n t o n n e s .4 I n l a n dS t e e l e s t i m a t e d t h a t r o u n d o u t p o t e n t i a l l yc o u l d e x p a n d p r o d u c t c a p a c i t y b y 1 4 . 5 m i l -l i o n t o n n e s ,5 a n d i t s c h a i r m a n h a s s a i d t h a tr o u n d i n g o u t c a n s a t i s f y t h e i n d u s t r y ’ s g r o w -i n g n e e d s , p r e s u m a b l y a t c u r r e n t i m p o r t a n dd e m a n d g r o w t h l e v e l s , t h r o u g h t h e 1 9 8 0 ’ sw i t h o u t t h e n e e d t o b u i l d n e w p l a n t s .6 T h e

c h a i r m a n o f N a t i o n a l S t e e l h a s i n d i c a t e d t h a tb y 1 9 8 5 r o u n d o u t e x p a n s i o n c o u l d l e a d t o an e t i n c r e a s e o f 4 . 5 m i l l i o n t o 5 . 4 m i l l i o ntonnes o f product capac i ty , assuming that thecurrent ra te o f p lant c los ings cont inues .7 T h echairman of Bethlehem Steel has noted thathis company’s 4.5-million-tonne/yr plant atBurns Harbor, Ind., was designed to accom-modate expansion to 9.1 million tonnes. 8 A nA. D. Little study based on extensive interac-

t ion wi th the indus t ry s ta ted tha t :

O u r c a l c u l a t i o n s o f c a p i t a l r e q u i r e m e n t sto achieve capacity expansion were based ono u r a s s e s s m e n t o f t h e t y p e s o f f a c i l i t i e sn e e d e d t o a d d 4 0 m i l l i o n t o n s o f c a p a c i t yfrom the beginning of 1975 to 1983. We havea s s u m e d c o n s e r v a t i v e l y t h a t t h i s e x p a n s i o ncould be achieved largely by “rounding out”of p lants ra ther than bui ld ing more expen-s ive , new “greenf ie ld” p lants . The indus t ryanticipates that 40 percent of this growth inc a p a c i t y w i l l b e r e a l i z e d f r o m t h e i n s t a l l a -t ion o f new fac i l i t i e s , and tha t the ba lancewill be accomplished by the modernization or“rounding out’ of existing facilities. 9

‘Fordham University, “Financial Study of the U.S. Steel In-dustry, ” August 1975.

‘W. H. Lowe, “Capital Information in the Steel Industry, ”Proceedings of Steel Industry Economics Seminar. .41S1, March1977.

‘Fortune, Feb. 13, 1978, p. 129.‘industry Week, June 11, 1979, pp. 186-188.“Ibid.“’Steel and the Environment: A Cost Impact Analysis, ” A. D.

Little, May 1975.

This study estimated that roundout expansioncould produce 21.8 million tonnes of raw steelo r 1 6 . 3 m i l l i o n t o n n e s o f p r o d u c t c a p a c i t y , af igure conf i rmed by a t l eas t one o ther s tudy ;1 0

a t h i r d s t u d y r e s u l t e d i n r a t h e r l a r g e e s t i -m a t e s o f 2 7 . 2 m i l l i o n t o n n e s o f p r o d u c t c a p a c -i t y e x p a n s i o n f o r t h e U n i t e d S t a t e s a n d 3 6 . 3

m i l l i o n t o n n e s f o r J a p a n .l l

Greenfield Expansion.—This type of expan-s ion involves bui ld ing a new s tee l p lant on as i t e not prev ious ly used for s tee lmaking . I t i st h e h i g h e s t c o s t a p p r o a c h t o c a p a c i t y e x p a n -s i o n , e s p e c i a l l y i f c a p i t a l c o s t e s t i m a t e s f o rg r e e n f i e l d i n t e g r a t e d p l a n t s i n c l u d e t h e c o s t

o f r a w m a t e r i a l s p r o c e s s i n g c a p a c i t y . ( T h e r ea p p e a r s t o b e a c o n s e n s u s t h a t t h e p r o p e rmethodology i s to inc lude such cos ts , becauset h a t c a p a c i t y i s a n i n t e g r a l p a r t o f t h e p l a n t ;given a choice, OTA capital cost estimates in-

c l u d e t h e c o s t s o f r a w m a t e r i a l p r o c e s s i n gc a p a c i t y . )

I t i s a c c e p t e d t h a t g r e e n f i e l d e x p a n s i o n

p r o v i d e s t h e g r e a t e s t o p p o r t u n i t i e s f o r i n -s t a l l i n g o p t i m u m n e w t e c h n o l o g y a n d p l a n t

l a y o u t a n d o f f e r s m a x i m u m p r o d u c t i o n c o s t

s a v i n g s . T h e s e a d v a n t a g e s , h o w e v e r , u s u a l l yw i l l n o t o f f s e t t h e l a r g e c a p i t a l c o s t s . T a b l e1 2 8 s h o w s s e v e r a l c o m p a r i s o n s o f g r e e n f i e l dt o r o u n d o u t e x p a n s i o n . T h e r e i s a g r e e m e n t

t h a t g r e e n f i e l d e x p a n s i o n c a n n o t b e j u s t i f i e d ,e i t h e r o n t h e b a s i s o f t h e p r i c e n e c e s s a r y t oo b t a i n a n a c c e p t a b l e l e v e l o f p r o f i t a b i l i t y o rin terms o f the ne t increase in cos ts . The case

o f e n e r g y c o n s e r v a t i o n e x e m p l i f i e s t h i s c o n -c l u s i o n : b y s p e n d i n g $ 1 l / t o n n e o n r e t r o f i t

e q u i p m e n t , a s t e e l c o m p a n y c o u l d s a v e 1 . 1mi l l ion B tu/tonne ; a greenf ie ld rep lacement o f

t h e s a m e p r o d u c t i v e f a c i l i t i e s c o u l d s a v e 8t i m e s t h a t m u c h e n e r g y , b u t i t w o u l d c o s t a tl e a s t 1 2 0 t i m e s a s m u c h t o a c c o m p l i s h .l 2

G i v e n c u r r e n t p o l i c i e s a n d p r i c e l e v e l s , t h ec a p i t a l a n d f i n a n c i a l c o s t s a r e t o o h i g h r e l a -

t i v e t o t h e b e n e f i t s f r o m t h e b e s t a v a i l a b l e i n -t e g r a t e d s t e e l m a k i n g t e c h n o l o g y t o f a v o r

g r e e n f i e l d e x p a n s i o n .

‘(’E. Frank, quoted in Industry Week, May 15, 1978.“H. G. Mueller, “Structural Change in the International

Steel Market, ” Middle Tennessee State University, May 1978.“Iron Age, Nov. 12, 1979, p. 40.

Ch. 10—Capita/ Needs for Modernization and Expansion ● 313

Table 128.—Cost or Price Increases Required by Integrated Greenfield Expansion(dollars per tonne)

GreenfieldSource Comparison basis Greenfield Roundout difference

Marcus a ‘ - Price-1 3°/0 return on equity 1st year $541 $356 + $185midlife 431 333 + 98

price- 12% discounted cash flow,36% debt midlife 526 366 + 160

Republic Steelb Price-15% return on investment NA NA + 165COWPSc Manufacturing costs 573 396 + 177Mueller d Manufacturing costs 473 396 + 77

NA = Not availableaP. Marcus, ‘Steeling Against Inflation, ’ Mitchell, Hutch Ins, May 1977.b.W.J DeLancey, C.E.O. New York Times, June 181979cCounciI on Wage and Price Stability “Prices and Controls in the U S Steel Industry, ” 1977dH.G. Mueller Structural Change in the International Steel Market, Middle Tennessee State University, May 1978

An excellent example of how roundout canbe far more cost effective than new plant con-s t r u c t i o n i s t h e f o l l o w i n g c a s e o f b l a s t f u r -n a c e m o d i f i c a t i o n s . U . S . S t e e l C o r p . p a i d

$ 1 0 0 m i l l i o n f o r m o d i f y i n g a s - y e a r - o l d b l a s tf u r n a c e b e c a u s e i t h a d f a i l e d t o r e a c h i t s d e -

s igned capac i ty o f 5 , 900 tonnes o f i ron da i ly ; {w i t h t h e m o d i f i c a t i o n s i t i s e x p e c t e d t o p r o -

‘“rhe ~~{1~] Street Journal, F’eb, 14, 1980.

d u c e 6 , 8 0 0 tonnes da i ly . Assuming that 80

p e r c e n t o f t h e c a p a c i t y h a s b e e n r e a c h e d ,t h a t t h e n e w f u r n a c e w i l l o p e r a t e 3 0 0 d a y s /

yr , and tha t the y ie ld f rom b las t furnace i ronto f in i shed s tee l i s 70 percent , the cos t o f newf i n i s h e d s t e e l c a p a c i t y i s j u s t o v e r $ 1 1 l / a n -

nual tonne . This i s l ess than 10 percent o f the

cos t per tonne for a green f i e ld in tegra ted fa -c i l i t y .

Capital Requirements for Modernization and Expansion

Calculating future capital requirementsn e c e s s i t a t e s m a k i n g a g r e a t n u m b e r o f a s -

s u m p t i o n s a b o u t s u p p l y , d e m a n d , a n d u n i tc o s t s , A I S I h a s r e c e n t l y m a d e a m a j o r s t u d yof cap i ta l r equi rements in the s tee l indus t ry .14

O T A b e l i e v e s t h e A I S I s t u d y a s s u m p t i o n s a r er e a s o n a b l e a n d h a s u s e d t h o s e a s s u m p t i o n sa n d d e s i g n e d i t s s c e n a r i o s s o a s t o b e c o m -

parab le wi th the AISI s tudy . Both s tudies pro-j e c t c a p i t a l r e q u i r e m e n t s f o r t h e p e r i o d

t h r o u g h 1 9 8 8 , u s i n g 1 9 7 8 a s t h e b a s e y e a r .

D o m e s t i c s t e e l c o n s u m p t i o n i s a s s u m e d t o

i n c r e a s e b y a p p r o x i m a t e l y 1 . 5 p e r c e n t p e r

y e a r . T h i s i s a c o n s e r v a t i v e f o r e c a s t , w h i c hu n d e r p r e s e n t e c o n o m i c c o n d i t i o n s a p p e a r s

v a l i d , a l t h o u g h i t i s c o n c e i v a b l e t h a t a n e c o -nomic turnaround in the next few years and a

p e r i o d o f m a j o r c a p i t a l s p e n d i n g t h r o u g h o u ti n d u s t r y c o u l d p u s h c o n s u m p t i o n s i g n i f i c a n t -

“AISI, “Steel at the Crossroads:dustry in the 1980’s,”’ 1980.

The American Steel In-

ly higher (see ch. 5). The projected tonnagesof shipped steel for 1988 and the actual ton-nages for 1978 are given in table 129. Therei s a n e t i n c r e a s e o f 1 7 . 2 m i l l i o n t o n n e s o f d o -m e s t i c s h i p m e n t s d u r i n g t h e 1 0 - y e a r p e r i o d .I t i s a l so assumed tha t impor ts account for 15

p e r c e n t o f d o m e s t i c c o n s u m p t i o n t h r o u g h1 9 8 8 , a s c o m p a r e d t o 1 8 p e r c e n t o f d o m e s t i c

c o n s u m p t i o n i n 1 9 7 8 . T h i s i s a c r i t i c a l a s -sumpt ion , which depends on a combinat ion o f

G o v e r n m e n t p o l i c i e s a n d f o r e i g n e c o n o m i cc o n d i t i o n s a n d c h o i c e s . I f a p p r o p r i a t e c o n d i -

Table 129.—AISI and OTA Assumed Increases inDomestic Steel Use and Reduction in Imports,

1978 and 1988 (million tonnes of shipped steel)

1978 1988

Domestic shipments . . . . . . 89 106Exports ., . . . . . . . . . . . . . . . 2 3Imports . . . . . . . . . . . . . . . . . 19 18Domest ic consumpt ion . 106 121

——.-—. . . —SOURCE OffIce of Technology Assessment

.,


tions do not prevail, imports could rise sub-stantially above the assumed 15-percent levelbefore 1988 (see ch. 5).

AISI’s capacity expansion figures are fornet capacity increases; that is, capacity re-ductions at the current rate of decline (2 per-cent per year) are more than offset by in-creases stemming from the modernizationprogram. Capacity utilization is assumed toincrease from the 86.8 percent that prevailedin 1978 to an average of 90 percent in 1988.This is technically feasible, and perhaps con-servative. 15 During the past 2 years, therehave been sustained periods of capacity uti-lization well over 90 percent—during 1979,for example, the average operating rate wasmore than 93 percent from March throughmid-July. 16 Nevertheless, 90-percent utilizationof capacity would increase steel shipments by3.3 million tonne/yr.

AISI further assumes that modernizationwill improve the total yield of the steelmakingprocess from the present 71.5 to 77 percentby 1988, which will provide another 7.1 mil-lion tonnes of shipments per year. OTA findsthis assumption quite realistic if the industrysubstantially increases its use of continuouscasting and makes other improvements. AISIassumes that continuous casting will increasefrom the 15-percent level in 1978 to 45 per-cent in 1988. OTA believes that 50-percentuse of continuous casting is feasible andwould increase industry yields to 76 per-c e n t .

The 10.3-million-tonne total increase in ac-tual steel shipments obtained through re-placement of facilities in the AISI analysis isattributed to neither roundout nor brownfieldexpansion, but rather to modernization. Per-sonal communication with AISI personnel in-dicated that they refer to their modernizationprogram as brownfield expansion accom-

“Worid Steel Dynamics (April 1979) indicates that in 1978domestic effective or available capacity was 92 percent ofrated capacity, and for 1971-76 it was 95 percent.

lbAmerican Metal Market, Jan. 4, 1980, P. 3.“’’Benefits of Increased Use of Continuous Casting by the

U.S. Steel Industry, ” OTA technical memorandum, October1979.

plished in a piecemeal fashion, which leadseventually to the equivalent of construction ofnew plants. Four examples of the replace-ments in AISI’s modernization program arethe replacement of older blast furnaces withlarger and more efficient modern ones, thereplacement of all existing open hearth steel-making furnaces with electric furnaces andbasic oxygen furnaces on an equal tonnagebasis, the replacement of ingot casting withcontinuous casting, and the replacement ofone-half of existing coking capacity with newovens. These examples do not appear to beconsistent with previous use of the term“modernization’ within the industry, butthey are consistent with past definitions ofroundout activities. ’8 However, the unit capi-tal costs of the AISI modernization programare higher than most estimates for roundingout.

Unit Capital Costs for Modernization

Data on roundout and greenfield unit capi-tal costs for integrated plants from a numberof sources in addition to AISI are given intable 130. The table shows that the averageof the capital cost estimates from a number ofsources is in excellent agreement with thevalues used by AISI, although the AISI valuefor roundout is higher than all but one of theother estimates. In the table all dollar figuresfor years prior to 1978 have been convertedto 1978 dollars by the use of gross nationalproduct (GNP) implicit price deflators fornonresidential investment as provided by theU.S. Bureau of Economic Research. For bothroundout and greenfield costs, there is no sig-nificant difference between estimates for1975 and those for the past 2 or 3 years. Thisindicates that it is not necessary to adjustcosts to take into account the increase in thesteel equipment cost index, and the AISI anal-ysis does not use such an adjustment to ac-count for the lower purchasing power of in-

“’’’While rounding out usually connotes an expansion of ex-isting facilities, obviously’ the same logic applies to moderniza-tion through replacement of facilities in place.’” (Council onWage and Price Stability, “Prices and Costs in the U.S. Steel In-dustry, ” October 1977.)


Table 130.—lntegrated Carbon Steel PlantCapital Cost Estimates for New Shipments Capacity

(1978 dollars/tonne of capacity)

Source Year Roundout Greenfield

A. D. Littlea . . . . . . . . . 1975Fordham b . . . . . . . . . . . . 1975COWPSC . . . . . . . . . . . . . 1976U.S. Steeld . . . . . . . . . . . . 1976Marcus e. . . . . . . . . . . . 1976Inland Steelf . . . . . . . . . . 1977Mueller g. . . . . . . . . . . . . . 1978Republic Steelh. . . . . . . . 1979

Average . . . . . . . . . . . .(Standard deviation).

AISI I . . . . . . . . . . . . . . . . . 1980AISI—on actual

shipment basis (90percent of capacity) . . 1980

$628880710NA630520715372636

(160)743

825

$1,2961,4741,5021,2201,514

9561,2101,3671,317(190)

1,287

1,441

NA = Not availableaA.D. Little, “Steel and the Environment A Cost Impact Analysis,” 1975, these

estimates appear to Include a relatively small amount of nonintegrated millsbFordham University, “Financlal Study of the U S Steel Industry,” 1975Council on Wage and price Stability, “ Prices and Controls in the U S Steel ln-

dIndustry Week, Apr 15, 1976, P 11

eP Marcus, ‘Steeling Against Inflation, ” Mitchell, Hutch Ins, May 1977fW H Lowe, vice president for finance, “Capital Formation in the Steel Indus-try, ” Proceedings of the Steel Industry Economics Seminar, AISI, 1977.

gH G Mueller, “Structural Change in the International Steel Market, ” MiddleTennessee State University, May 1978

hW J Delancey, C E O , New York TimeS, June 181979

‘AISI, “Steel at the Crossroads The American Steel Industry in the 1980’ s,”1980, and personal communication that greenfield cost was $430/tonne of actu-al shipments and operating rate was 0.9, and that the roundout costs althoughnot called that are indeed of that nature even though they are Iisted in the ex-pansion category

v e s t m e n t s d u r i n g t h e p e r i o d o f t h e f o r e c a s t -ing .

Comparison of Capital Cost Estimates

C a p i t a l c o s t e s t i m a t e s f r o m a n u m b e r o fs o u r c e s f o r g r e e n f i e l d p l a n t s o f n o n i n t e -g r a t e d c o m p a n i e s a n d t h e A I S I f i g u r e f o re l e c t r i c f u r n a c e f a c i l i t i e s a r e g i v e n i n t a b l e1 3 1 . * H e r e t o o , t h e r e i s n o i n d i c a t i o n t h a t ,o ther than us ing the GNP def la tor , an ad jus t -

m e n t i s n e c e s s a r y d u e t o a m o r e s e v e r e i n -c r e a s e i n t h e e q u i p m e n t c o s t i n d e x . T h e r e l a -t i v e l y l a r g e v a r i a t i o n a m o n g t h e e s t i m a t e s f o r

n o n i n t e g r a t e d s t e e l m a k e r i s d u e t o r a t h e rl a r g e d i f f e r e n c e s i n t h e i r p r o d u c t m i x e s . I n

s e v e r a l c a s e s , t h e p l a n t s h a v e b e e n d e s i g n e dto make h igher grades o f s tee l s and products ,a n d t h u s t h e i r c a p i t a l c o s t s a r e g r e a t e r t h a n

*The much lower costs in table 131 as compared to table 130result largely from the absence of facilities to convert iron oreto metallic iron. Instead, ferrous scrap is charged to electricsteel making furnaces.

Table 131 .—Capital Costs for Nonintegrated CarbonSteel Plants (Greenfield) (1978 or 1979 dollars)

cost Annual(dollars product

per tonne capacityDollars capacity) (tonnes)

Fordham Univ.a. . . . . . . . 1978 $278 NAChapparal Steel Cob . . . 1979 320 450,000Huron Steel Co.C. . . . . . . 1978 220 225,000Bayou Steel Cod. . . . . . . 1979 211 550,000Raritan Steel Co.C. . . . . . 1978 207 450,000North Star Steel Co.e . . . 1979 193 350,000Florida Steel Co. f . . . . 1979 157 300,000Chapparal Steel Co.g . . . 1979 165 NANucor Corp.h. . . . . . . . . . 1979 154 300,000

Average . . . . . . . . . . . . 212AISI (apparently for

broader productmix of integratedcompanies) l. . . . . . . . 1979 545

NA = Not availableaFordham Unlversity, “Financial Study of the U S Steel Industry, ” 1975bAmerican Metal Market, Dec 7, 1979 (for a plant to produce more complex and

costly products such as plates and structural beams)clron and Steel Engineer, February 1978 (for a plant to produce special quality

bar products)dIron Age, Apr 23, 1979eAmerican Metal Market, Oct 4, 1979 (for a plant to produce special quality bar

products)fAmerican Metal Market, Nov 21, 1979gW W Winspear, president, Chapparal Steel, September 1979hAmerican Metal Market, Aug 5, 1979IAISI, “Steel at the Crossroads The American Steel Industry in the 1980’s”1980, and personal communication that the categories of electrical furnacefacility expansion corresponded to a green field plant

the traditional nonintegrated plant, whichemphasizes the production of such simpleproducts as reinforcing bar. The average costof $21 l/tonne for the nonintegrated plants ismarkedly less than the AISI figure of $544/t o n n e .

O n e r e a s o n f o r t h e h i g h e r c o s t f i g u r e s o fA I S I m a y b e t h a t t h e y a r e b a s e d o n e l e c t r i cf u r n a c e s t e e l m a k i n g i n i n t e g r a t e d c o m p a n i e s .

T h e s e c o m p a n i e s g e n e r a l l y h a v e h i g h e r c a p i -t a l c o s t s t h a n n o n i n t e g r a t e d c o m p a n i e s , b e -c a u s e t h e y p r o d u c e a b r o a d e r l i n e o f p r o d -u c t s t h a n d o n o n i n t e g r a t e d c o m p a n i e s ; t h i s

d i v e r s i t y r e q u i r e s e x t e n s i v e f o r m i n g a n d f i n -i s h i n g f a c i l i t i e s t h a t t h e e l e c t r i c s h o p s o f n o n -i n t e g r a t e d c o m p a n i e s d o n o t n o r m a l l y h a v e .T h e A I S I a n a l y s i s a p p a r e n t l y a s s u m e s t h a tt h e n o n i n t e g r a t e d c o m p a n i e s w i l l n o t e x p a n d

c a p a c i t y i n t h e f u t u r e ; h o w e v e r , c o n s i d e r i n gt h e r e c e n t r a p i d g r o w t h o f n o n i n t e g r a t e ds t e e l m a k e r ( s e e c h . 8 ) , t h i s i s a q u e s t i o n a b l e

a s s u m p t i o n .


Table 132 shows the unit costs and plantm i x u s e d i n t h e A I S I a n a l y s i s a n d t h e e q u i v -a l e n t f i g u r e s u s e d i n t h e O T A s c e n a r i o . F o ri n t e g r a t e d a n d n o n i n t e g r a t e d p l a n t s , O T Au s e d t h e a v e r a g e s g i v e n i n t a b l e s 1 3 0 a n d1 3 1 , a n d f o r t h e e l e c t r i c f u r n a c e f a c i l i t i e s o f

i n t e g r a t e d p l a n t s , t h e A I S I c o s t s . F o r t h er e p l a c e m e n t p r o g r a m , O T A h a s a l s o u s e d t h e

2 5 - p e r c e n t e l e c t r i c f u r n a c e f r a c t i o n i n i n t e -g r a t e d p l a n t s . O T A h a s a s s u m e d n o r e p l a c e -

ment o f f ac i l i t i e s in nonin tegra ted companies ,b e c a u s e t h e s e p l a n t s a c c o u n t f o r o n l y 1 0 p e r -

cent of present total capacity and most are

relatively new. The higher cost alloy and spe-cialty plants are omitted explicitly in both theO T A a n d A I S I c a l c u l a t i o n s . T h e s e p l a n t s a c -count for on ly about 3 percent o f domest i c ca -

p a c i t y , a n d t h e y h a v e b e e n m o d e r n i z i n g a n de x p a n d i n g d u r i n g t h e p a s t s e v e r a l y e a r s a n da p p e a r t o h a v e e x c e s s c a p a c i t y . T h u s , n o s i g -

n i f i cant e r ror wi l l be in t roduced by exc luding

t h e m f r o m t h i s 1 0 - y e a r p r o j e c t i o n a n d a n a l -y s i s .

Table 132.—Unit Capital Cost for Replacement and Expansion in Integrated and Electric Furnace(Integrated and Nonintegrated) Plants (1978 dollars per tonne)

Replacement Expansion

Average Integrated ——-–Gr~e~f!e~d-– ---- AverageIntegrated EF (int.) (25% EF) roundout EF (int.) EF (non int.) (50% EF)

AISlb

Actual shipments. . . . . $1,293 $550 $1,100 $825 $605 NA $677Capacity. . . . . . . . . . . . . 1,164 495 990 743 545 NA 644

OTAActual. . . . . . . . . . . . . . . 1,320 550 1,128 708 605 $234 564d

Capacity. . . . . . . . . . . . . 1,188 495 1,015 638 545 211 508d

Actual. . . . . . . . . . . . . . . 459e

Capacity. . . . . . . . . . . . . 413e

NA = Not available reduction plant Beggs has forecast an increase of about 25 million tonnes ofaUsing the AlSl procedure of replacement = 0.9 X greenfield costs direct reduced iron in the United States by 1985 and a total of $2 billion for cap-bAlSl, “Steel at the Crossroads The American Steel Industry in the 1980’s.” ital spending on direct reduction plants for the period 1980-90 Assuming that

1980 $1 billion IS used to obtain the 25 million tonnes, the capital cost per tonne ofCActual shipments = 0.9 of shipment capaCltY DRI IS about $330 (1978 $) It is more realistic to assume this increase in do-d50% nonintedgrated; 25% electric furnace Integrated; 25% intewatecf mestic DRI production and the predicted 73 million additonal tonnes of prod-e100% nonintegrated with the $413/tonne cost obtained as follows: assuming ucts made in electric furnaces for the 1978-88 period of the OTA forecast This

50% @ $275/tonne, 25% @ $440/tonne, and 25% @ $660/tonne for plants pro. corresponds approximately to about one-quarter of the additional electric fur-ducing higher quality/cost products on a capacity basis The justification for nace steelmaking using direct reduction (D Beggs, ‘ Issues and Answers onthe $660 cost IS as follows Half IS for the steel plants and half for a direct the Future of Direct Reduction in the U S ‘33 Metal Producing, January 1980.)


Table 133.—Eight Scenarios for Expansion and Modernization Strategies andAnnual Capital Costs for Actual Shipment Increases (million tonnes/year)

—-Modernization/replacement Expansion— .—.. .—

Net annual Total annualCost/Year tonnaqe Cost/year capital costs

Capacityaffected a

4.0%

(billionsof 1978$)

$4.4

increase Tonnageby 1988 increase

10.3 6 . 9 –

Cost/ (billionstonne of 1978$)

(billionsof 1978$)Cost/tonne

$1,100AISI b . . . . . .OTAc

$715 $0.5 $4.9

2.92.6

3.2

2.13.03.1

3.7

6.86.93.5

564708564564708564708464459

0.40.3 )0.40.40.3 I0.40.3 }0.30.3

S c e n a r i o A

S c e n a r i o B

2.0

2.0

98.9

1,128

1,128

25

2.2

2.2

2.5

10.3 6.9

6.8 {6.93.5Scenario C

6.8 {6.93.5Scenario D . . . 2.0

98.94.0

70828

708

1.42.72.8

Scenario E . . .S c e n a r i o F

Temple, Barker, &Sloane, 1975-83d

10.3 6.910,3 6.9

0 29.9 464 1.675.3 28 2.1

aEither a small fraction of currentt capacity can be replaced at a relatively high cost per tonne, or an alternative methodology is to assume a smaller per tonne spending

level on the entire capacity basebAISl Steel at the Crossroads The American Steel Industry in the 1980’ s,’ 1980cThe OTA scenarios incorporate the following assumptions

Modernization Expansion

A 200. replacement rate at cost Similar to AISI, operating rate at 90°. = 33 million 69 million tonne/yr from OTA variabletonne/yr yield increase = 35 millilon tonne/yr (1/2 AISI value) plant mix and 35 million tonne/yr

from integrated plant roundoutB Same as A except obtatain same 103 million tonne/yr as AISI at one-half the cost, 69 million tonne/yr form OTA variable

justified on basis of costs for five types of facilities replacement plant mixC Based on historical spending rates a cost per average tonne of actual shipment for Same as A

1979.88 levels to A resultsD 2% replacement rate using roundout cost for Integrated plants giving results of A Same as AE Cost per tonne from TBS study based on process step analysts gives AISI result 69 million tonne/yr using TBS

(10.3 million tonne/yr) expansion costF 4% replacement rate at Integrated plant round out cost gives 10.3 million tonne/yr 69 million tonne/yr from 100%

nonintegrated plant expansiondTemple Barker and Sloane Analysis of Economic Effects of Environmental Regulations on the Integrated Iron & Steel Industries, 1977

procedure are used (i.e., based on 90 percentof greenfieId integrated costs). The expansionprogram is the same as in scenario A.

OTA scenario E uses the unit costs andmethodology of the Temple, Barker, andSloane (TBS) study19 for the modernizationand expansion programs.

OTA created scenario F in order to includea scenario that represents a major change inthe structure of the domestic steel industry,yet a change consistent with minimal capitalrequirements. In this scenario, all expansionoccurs in nonintegrated companies. Thiscould happen even if the nonintegrated com-panies merely doubled their total annual ton-nage by 1988, not an unrealistic possibility(see ch. 8). However, this rate of noninte-g r a t e d c o m p a n y g r o w t h w o u l d l i k e l y e n t a i l

place in both nonintegrated and integratedelectric furnace steelmaking and in nonelec-tric integrated steelmaking (greenfield for theformer and roundout for the latter). In sce-nario A, to compensate for the lower capacityincrease from modernization, an additionalexpansion of capacity corresponds to moreintegrated roundout.

In OTA scenario C, modernization is basedon a capital spending average applied to thetotal steelmaking capacity base, rather thansome part of it; and unit capital cost of$25.3/tonne is derived from historical data.The expansion program is the same as thatfor scenario A.

In OTA scenario D, the modernization pro-gram is based on roundout costs for inte-

g r a t e d p l a n t s , a p p l i e d t o o n e - h a l f t h e c a p a c -ity base used in the AISI analysis—this incontrast to OTA scenarios A and B, in whichthe higher unit costs analogous to the AISI

“’remple, Barker, and Sloane, “Analysis of Economic Effectsof Environmental Regulations on the Integrated Iron and SteelIndustry, ” Environmental Protection Agency, July 1977.


capital cost increases for plants to makehigher quality steels and more complex prod-ucts; a small fraction of plants might evenintroduce direct reduction facilities to sup-plement scrap use after 1985. Thus, in thisscenario unit capital costs increase from$211/tonne of shipment capacity to $412 in1988. The modernization program is based onroundout of integrated facilities or replace-ment of specific facilities as discussed in thenext section.

Interestingly, the total annual capital costsare quite close to each other in all six OTAscenarios, ranging from $2.1 billion to $3.2billion per year and averaging $2.8 billion. Allare less than the AISI figure of $4.9 billionper year. Scenario F is considered the mostimportant option for the next decade.

Differences in Modernization Results

For the modernization category, an impor-tant difference between some of the OTA pos-sibilities and the AISI approach is the unitcapital cost. AISI used a relatively high mod-ernization cost, $1,100/tonne, applied to alarge base, an annual average of 98.9 milliontonnes of shipments. The OTA estimates werebased on lower unit costs consistent with pasttrends for roundout, which are lower thanthose for modernization. This lower unit costis applied either to the same capacity tonnagebase as is the AISI case, assuming a 4-per-cent replacement rate, or to half this tonnage,which results in markedly lower annual capi-tal expense. The AISI method leads to an an-nual modernization cost of $4.4 billion, thelargest single contribution to its estimatedtotal annual capital needs. All the OTA mod-ernization scenarios lead to additional capi-tal costs of between $1.4 billion and $2.8billion per year. While the OTA moderniza-tion program at $2.8 billion annually mightsuffice for the 1980’s, there would be a needin the 1990’s for large investment in new inte-grated facilities.

The lower estimates for modernization inthe OTA methods are consistent with pastper-tonne spending and the capacity expan-

sion that resulted from that spending. For thepast 10 years, the average annual industrycapital spending on productive steelmaking(excluding regulatory costs and nonsteelmak-ing activities) was just over $2 billion. The in-dustry maintains that this level of spendinghas been inadequate. During that period,however, very high operating rates were at-tained for sustained periods. Moreover, therewere also very large increases in the use ofcontinuous casting, continued replacement ofopen hearth furnaces with basic oxygen fur-naces, and substantial increases in electricfurnace steelmaking. The favorable effectsthese changes had on capacity were maskedto some degree by the loss of capacity fromclosing obsolete plants. But what has evolvedis more efficient capacity than before, capa-ble of operating at higher rates with lowerproduction costs.20

A more explicit way of obtaining modern-ization capital needs is to consider the actualcosts for replacement of particular technol-ogies and phases of steelmaking. Using sever-al categories of technologies discussed byAISI, OTA has estimated total modernizationneeds for scenario F (table 134). The total forthe 10-year period is $28 billion.

This total compares to $44 billion in theAISI scenario. A discussion with AISI offi-cials and industry representatives’ provideddetailed information on the anticipated usesof capital for the AISI scenario that was notprovided in the formal AISI report. AlthoughAISI and industry representatives agreedwith categories one through four of table 134,a major difference existed for category five,replacement of finishing mills. For this use,AISI used a cost per tonne of $550 applied to

~t~he effectiveness of past capital spending has been under-estimated by most analysts. For example, “The recent plantclosings have created a widespread impression of generaldecrepitude. But the steel industry has been extensively mod-ernized since 1960, with capital expenditures totaling $3o bil-lion. The best proof of its health is that the industry has man-aged, after all, to hold on to most of the business in the world’sleast protected major steel market, and has survived until nowwithout special government favors. ” (E. Faltermayer, “HOWMade-in-America Steel Can Survive, ” Fortune, Feb. 13, 1978. )

ZIMeeting on Mar< 13, 1980 with representatives of U.S. SteelCorp., Inland Steel, Bethlehem Steel, and AISI.

Errata Sheet

The reference on page 319 to table 135 was a typographical error. It shouldhave read table 134A. Table 134A was omitted and appears below.

Table 134A. -Capital Costs for Finishing Mill Replacement, Scenario F, 1978-88

Type of finishing mill

Unit capital costs10-Year capital

percent 1978 Approximate average annual costs for mill(1978$/tonne output) capacity shipments affectede

replacementH o g a na T B Sb OTAC replacedd Percent Tonnes (106) (1978$ billions)r —-——

Plate. . . . . . . . . . . . . . . . . . . . . . . . . ‘-” - - ‘ -- “ “”-. , .

.- .-

Hot strip. . . . . . . . . . . . . . . . . . . . . .Cold strip. . . . . . . . . . . . . . . . . . . . .Wire rod. . . . . . . . . . . . . . . . . . . . . .Galvanizing . . . . . . . . . . . . . . . . . . .Heavy structural . . . . . . . . . . . . . . .Rod, . . . . . . . . . . . . . . . . . . . . . . . . .Seamless pipe. . . . . . . . . . . . . . . . .Other . . . . . . . . . . . . . . . . . . . . . . . .

Weighted average. . . . . . . . . . . . . .Assuming 75-percent facility

availability y and 20-percentadditional replacement . . . . . . . .

$31095nana

528186396na

$288100321713

561

514na

$297

330660f

4625502204954409

$1.3.3

1.8

.3

.8

.31.4

$312

45 10 1017 17

29 19 1917 3 3

915g 5 520g 17 1715g 4 4

15 16Total. 100 98

227.0

$418 26 11.0

na = not available.aW. T. Hogan, et al., Financial Study of the U.S. Steel Industry, Department of Commerce, August 1975, baaed on company interview.bAttributed to Temple, Barker, and Sloane as given in P. Marshall, Report to the Council on Wage and Price Stability, World Steel Trade: Current Trends and Structral

Problems, Hearing, House Ways and Means Committee, Sept. 20, 1977.cOTA has used this value to calculate costs, as baaed on data of Hogan and TBS end other available information.dAmount over 25 yers old according to AISI, Steel At The Crossroads: The American Steel Industry in the 1980's, 1980.

eUsing product mix for 1978 se reported by AISI and rounding off.fThis may be highly overestimated since a new wire rod steelmaker (Raritan Steel Co.) has recently constructed an entire new steel plant for approximately $220/tonnecapacity, only half of which is likely to be for finishing.

gAssumed by OTA on the basis of both generally available information and confidential information from industry Sources.


Table 134.—Capital Cost Estimates for Major Facility (Technology) Replacements, 1978-88—Scenario F

ApproximateApproximate 1978 tonnage affected

Approximate cost capacity changed (annual million Total capital costChange per tonnea (1978 $) (percent) tonnes) . (billion 1978$)

1. Replacement of older, s-mall blast furnaces withlarger modern ones . . . . . . . . . . . . . . . . . . . . $110 250/. 27 $ 3

2. Replacement of open hearth furnaces withbasic oxygen furnaces . . . . . . . . . . . . . . . . . . . . 55 100 18 1

3. Replacement of ingot casting with continuouscasting . . . . . . . . . . . . . . . . . . . . . . . 88 35 32 3

4. Replacement of old coke ovens with new ones . 220 50 27 65. Replacement of old finishing mills with new

ones (in integrated plants) . . . . . . . . . . . . 418 26 25 116. Replacement of old electric furnaces . 83 33 9 17. Raw materials and miscellaneous . . . . . . . . . . . — — — 3

Total cost ., ... . . . . . . . . . . . . . . . . . . . . . . . . $28 -

aObtained from- discussions with Industry personnel news reports on plant construction, and by using data in “Analysis of Economic Effects of Environmental Regula-tions on the Integrated Iron and Steel Industry, ” Temple Barker and Sloane for EPA. 1977 (converted to 1978 dollars and rounded off)


40 percent of 1978 capacity and 36.3 milliontonnes. This results in spending $20 billion onfinishing mills, as compared to $11 billion forscenario F.

The details of the OTA calculation of fin-ishing mill replacement costs are given intable 135. The methodology consisted of usingunit capital costs for particular types of fin-ishing mills and specific amounts of capacityreplacement based on replacing the oldest fa-cilities, and applying these costs to the prod-uct mix reported by AISI for 1978. Adjust-ments were then made to compensate for 75-percent availability of finishing mill facilitiesand to increase replacement by 20 percent to

account for facilities that would reach ex-cessive age during the l0-year modernizationperiod.

Of the $16 billion difference in total mod-ernization capital needs between scenario Fand the AISI scenario, $9 billion is accountedfor solely by the difference in finishing millreplacement. Although there is no doubt thatthe greater spending by AISI would result inmore new finishing mill facilities at the end ofthe decade, three qualifications should benoted: the AISI scenario calls for spending $2billion annually on finishing mill replacement,a rate equal to the total capital spending onproductive steelmaking facilities for the past

Table 135.—Projections of Annual Capital Needs (1978 dollars in billions)——

Wyman a Inland Steelb U.S. Steelc AISl d

(1977) (1977) (1978) (1980) OTA

Increase in shipments (million tonnes) . . . . . . .Replacement/maintenance. . . . . . . . . . . . . . . . . $2.3 $2.2 $2.2 $4.4 $2.8Expansion . . . . . . . . . . . . . . . . . . . . . . . .7 1.6 1.7 .5 .3Regulatory compliance . . . . . . . . . . . . . . . . . 1.0 1.1 1.0 .8 .8Nonsteel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 .5 .4 .8 .7

Subtotal. . . . . . . . . . . . . . . . . . . . . . . . . . . .——

4.3 5.4 5.3 6.5 4.6Debt repayment/increase in working capital. . . .3 NA NA .5 .7

Total. . . . . . . . . . . ... . . . . . . . . . . . . . . . . . $4.6 $5.4 $5.3 $7.0 $5.3—.—

aJ.C. Wyman, “The Steel Industry: An American Tragedy?” Faulkner, Dawkins, and Sullivan, February 1977bThrough mid-1980’s, W H Lowe (vice president for finance, Inland Steel Corp.), “Capital Formation in the Steel Industry,” Proceedings of Steel Industry EconomicsSeminar, AISI, March 1977

cThrough mid-1980's B.D. Smith (vice president and comptroller, U S Steel Corp.), “Capital Formation in the Steel Industry,” proceedings “The American Steel In-dustry in the 1980’s—The Crucial Decade, ” AISI, April 1979, dollars converted to 1978 dollars by multiplying by O 87

dThrough 1988, the deflcit results from present Capital recovery periods; AISI, "Steel at the crossroads: The American Steel Industry in the 1980’ s,” 1980


10 years, of which only about 10 percent wasspent on finishing mills; although some steel-maker have old finishing mill facilities, theyare still more profitable than the industryaverage; 22 and the capital costs of finishingmills are probably lower today than in pastyears because of the availability of foreignequipment at prices considerably below thoseof some domestic equipment makers. The ten-fold increase in purchases of finishing millsfor the AISI scenario could probably not besupplied by domestic finishing mill manufac-turers; extensive use would probably have tobe made of foreign equipment. The averageunit finishing mill cost of $550 per tonne com-pares to the $418 value estimated by OTA.Use of the latter cost would decrease the AISItotal finishing mill replacement cost from $20billion to $15 billion.

After differences in spending for finishingmill replacements are accounted for, the re-maining $7 billion difference between theAISI scenario and scenario F results frommiscellaneous replacements and raw materi-als facilities. Category six in table 134 is forreplacement of electric steelmaking furnacesat a cost of $1 billion. AISI has indicated atotal of $4 billion for miscellaneous replace-ment capital spending, including electric fur-naces. Furthermore, AISI had indicatedspending of $7 billion for replacement of rawmaterials facilities. Category seven in table134 is for raw materials and miscellaneousspending with a cost of $3 billion.

OTA has found it extremely difficult todetermine specific needs for raw materialsfacility spending. Much of the spending forthis purpose is not reported by steel pro-ducers as part of their steelmaking opera-tions, and much is by companies outside ofthe steel industry, such as coal and iron orecompanies, and by foreign sources of im-ported iron ore who account for one-third ofdomestic ore use. Moreover, the industry has

For example, Inland Steel Co,, generally recognized to bethe most profitable large integrated producer, has some veryold finishing mills. Two of its three hot strip mills are over 40years old, and the average age for its four cold strip mills is 22years, [World Steel Industry Data Handbook—The UnitedStates, McGraw-Hill, 1978.)

spent considerable sums in this area duringthe past two decades, including much for ironore pelletizing facilities. If AISI is correct inits estimate for capital needs in the miscel-laneous category including electric furnacesand OTA is correct in its estimate for electricfurnace needs, this would mean that $3 bil-lion, or 15 percent of the annual capitalspending for the past 10 years, is actuallyneeded for miscellaneous spending. In thiscase, the $3 billion for raw materials develop-ment in scenario F would disappear. It maybe more realistic to assume that approxi-mately $2 billion would be available for rawmaterials spending in scenario F. This wouldbe equivalent to approximately 10 percent ofthe annual capital spending for the past dec-ade, rather than the 35 percent of the pastdecade’s annual spending in the AISI sce-nario.

In the TBS23 study based on AISI data onplants of member companies, most of the esti-mates for replacement capital needs are inapproximate agreement with the costs intable 134. The largest difference is for theraw materials area. Making suitable adjust-ments for capacity differences and other fac-tors to make the comparison valid, the TBSstudy found a need for $60 million annuallyfor raw materials, or less than 10 percent ofthe AISI figure and only 30 percent of theestimate of $200 million annually most likelyfor scenario F. The total annual capital needsfor replacement over a 10-year period in theTBS study is $23 billion, compared to $28billion in scenario F and $44 billion in theAISI scenario. In addition to having unusualaccess to the AISI plant operating data,which allowed a detailed process-by-processcost analysis for capital needs, a great manyindustry personnel were involved with theTBS study. Moreover, their analysis is basedon consideration of integrated plants onlyand extrapolation of this to the entire steel in-dustry. Hence, the effect of noninintegratedcompanies’ lower costs is not factored in.

With the level of spending for moderniza-tion in scenario F, the replacement cycle for

‘‘Temple, Barker, and Sloane, op. cit,

Ch. 10—Capital Needs for Modernization and Expansion 321

steelmaking facilities can be calculated. Thecycle is obtained by dividing the capital costper tonne of annual shipment by the annualcapital expenditure. With capital spending of$2.8 billion annually, the annual spending pertonne of shipments equals $25, which is theindustry average for 1969-78. There isgreater uncertainty as to the correct cost forthe replacement of shipment capacity. AISIuses a cost which is 90 percent of the capitalcost for constructing a new, greenfield facili-ty. On this basis, scenario F leads to a re-placement cycle of 37 years, * compared to 30years for the industry during 1959-68, 40years for 1969-78, (an average of 35 years forthe 20-year period), and 25 years for the AISIscenario. However, OTA cannot find any spe-cific way of justifying the use of the 90-percent figure in obtaining the replacementcapital cost. Considering the value of manyelements of existing plants that would con-tinue to be used, as well as the scrap value offacilities removed, it is likely that averagereplacement capital costs would be less than90 percent of greenfield costs; other analystshave estimated the ratio of replacement togreenfield costs to be 67 percent” or even aslow as 45 percent.25 For scenario F, if theratio is 80 percent then the replacement cycleis 33 years. for 75 percent the cycle is 31years, and for 67 percent it is 27 years.

In any event, the utility and relevance ofusing the facility replacement cycle are notbeyond criticism. Using average industrycosts and average industry age does not ac-curately describe the process of replacingportions of existing plants. Each type ofequipment is likely to have a different max-imum lifetime during which it performs at

*The calculation is based on using the integrated replace-ment cost of $1,129 tonne for 87 percent of the industry and thegreenfield cost for nonintegrated plants of $234/tonne for 13percent of the industry.

“P. Marshall, report to the Councd on Wage and PriceStability, “World Steel Trade: Current Trends and StructuralProblems,’” hearing of the House Committee on Ways andMeans, Sept. 20, 1977.

W. ‘I’. Hog~ln, et al., “Financial Study of the U.S. Steel In-dustry.<’ LT.S. Department of Commerce. August 1975.

design efficiency, and a different age becauseof prior replacement and modernization. Cur-rent facilities, although relatively old, mayhave costs that still allow acceptable profitlevels. * Advancing technology also limits theusefulness of average age: the age at whichspecific types of equipment become obsoletecan increase, depending on the originalchoices regarding design and construction, ordecrease, depending on the advent of radicalnew technology. Age may also be an invalidindicator of the need to replace because,more often than not, the facilities have notbeen operated at full or rated capacity for theentire chronological period corresponding toage. Furthermore, the quality of labor prac-tices combined with increasing use of com-puter control can reduce the wear and tearon facilities and extend their useful lives,

Nevertheless, it is pertinent to evaluatewhat the AISI modernization capital needswould be on the assumption that the replace-ment rate is kept at 4 percent, but the unitcost is reduced from the assumed 90 percentof greenfield costs to a lower value. Theresult for a 75-percent figure is that moderni-zation capital needs decrease from $4.4 bil-lion annually to $3.7 billion. The $2.8 billionannual spending of scenario F would be ob-tained if replacement costs are 57 percent ofgreenfield costs, which seems reasonablebased on the estimates cited above, assumingan increase in market share for the lowercapital cost nonintegrated producers.26

*The situation is analogous to an old automobile which hashad many of its critical components replaced at different times.How useful is it to describe the automobile as, for example, 30years old, if it is still functioning in an acceptable manner? Itmay still be less costly to replace parts rather than replace theentire automobile. The situation changes dramatically when amajor technological innovation occurs for a component that isnot compatible with the other, older components.

“)See especially Marshall, op. cit. Assuming a growth ofnonintegrated company market share from 13 to 25 percent forthe 10-year period, greenfield integrated costs of $ 1,253/tonne,and a 4-percent replacement rate, Marshall’s 67-percent ratioof replacement to green field costs leads to an annual replace-ment cost of $2.9 billion. Using his 67-percent figure and theslightly lower AISI unit cost of $1, 100/tonne and replacementrate of 3.25 percent, the annual cost of replacement would be$2.6 billion.


Differences in Expansion Results

OTA used lower unit costs than AISI forcapacity expansion, based on roundout coststhat are historically lower than greenfieldcosts for integrated plants. Moreover, OTAhas assumed the continued growth of the non-integrated electric furnace segment and fac-tored in their low capital costs in the total forcapacity expansion. When OTA assumed lesscapacity increase from modernization, ca-pacity was assumed to increase by an iden-tical amount through roundout expansion ofintegrated plants. In scenario F, capacity ex-pands as much as assumed by AISI, but en-tirely through greenfield construction of non-integrated plants (at greater unit cost be-cause of product-line expansion). This doesnot imply that integrated capacity does notexpand, only that it does so by means ofroundout rather than greenfield construction.

Neither the AISI study nor the OTA scenar-ios incorporate any greenfield construction ofintegrated plants, although the AISI moderni-zation costs are 90 percent of greenfield inte-grated unit costs. As previously noted, a con-sensus exists that integrated greenfield con-struction cannot be justified because of thehigher costs and higher prices it would entail(see table 128). The implicit assumption in theAISI analysis is that major changes in Gov-ernment policy, such as allowing faster capi-tal recovery, will enable the industry to spendat the high levels proposed in their scenarios.

Differences in LowerSpending Scenarios

There is another part of the AISI analysis(designated as their scenario 11) which is acontinuation of current trends. The annualcost for productive steelmaking investment isgiven as $3 billion. Although the spendinglevel is the same as OTA scenario F, the an-ticipated results differ. AISI asserts that thislevel of investment would lead to mainte-nance of existing production capability andthe same average equipment age if the unitcost is just under $1,100/tome (the figureused in their high replacement scenario sum-marized in table 133). That is, the replace-ment rate is under 2 percent but there is noimprovement in production capacity resultingfrom improved operating rate or increasedyield. However, it is also suggested that up to20 percent of production capacity would beeliminated because of low profitability.

This scenario seems questionable in viewof the experience and results within the in-dustry during the past decade, when annualspending was at the $2 billion level. While aloss in capacity has occurred during the pastdecade, the ability to produce more steel fromthe remaining capacity appears to have actu-ally increased, This is because the most obso-lete facilities have been closed, and substan-tial modernization was obtained at the $2billion per year level.

Total Capital Needs and Shortfalls

Capital Needs

To understand the significance of thesecapital cost calculations and of the differencebetween the OTA and AISI estimates, it isnecessary to examine the steel industry’stotal capital needs. Summaries of the AISIestimates and three earlier industry projec-tions of capital needs, as well as OTA find-ings, are given in table 135. OTA projectscapital requirements for modernization andexpansion at $3 billion annually; although

this finding corresponds to OTA scenario F, itis representative of the range for all the OTAscenarios. OTA concurs with the AISI esti-mate for the costs of compliance with Envi-ronmental Protection Agency (EPA) and Oc-cupational Safety and Health Administration(OSHA) regulations, $0.8 billion annually,although OTA believes that toward the end ofthe period OSHA-related costs will tend to begreater than the annual $0.1 billion assumedby AISI; but this difference should be offsetby declining EPA-related costs.


On the basis of unpublished survey data,AISI projected that $800 million would beneeded annually to finance nonsteel diversifi-cation. OTA put this amount at $700 millionbecause it is more consistent with the trend ofthe past decade. Barnett of AISI, on thegrounds that 22 percent of the capital spenton productive steelmaking facilities has beenspent on nonsteel activities, concludes thatthis need will absorb $660 million a year. Asshown in table 135, previous estimates fornonsteel spending range from $300 million to$500 million annually. ’

Adding in the amounts needed for in-creases in working capital—$().7 billion byOTA estimate, as compared to AISI’s $0.5 bil-lion annually—AISI arrives at a total capital

*There are no data to support a trend of increasing diversifi-cation of steel companies, but attention to such diversificationhas been increasing. Analysis of company annual reports andSecurities and Exchange Commission 10-K reports revealsvastly different diversification activities, from nearly none forsome companies to very considerable levels for others, Neitheris there an apparent link between diversification and steelprofitability. Nevertheless, the argument is often made that di-versification absorbs capital needed for steelmaking moderni-zation and expansion. The industry’s position is that profitablediversification provides a positive cash flow, which supportsless profitable steelmaking investments. Moreover. diversifica-tion provides stability to the normally cyclic steel business. Asteel industry modernization and expansion program that im-proves profitability could reduce interest in and need for diver-sification.

requirement of $7.0 billion annually, whilethe OTA scenarios find a total need of $5.3billion per year between 1978 and 1988. TheOTA total agrees with 1978 industry esti-mates of $5.4 billion and $5.3 billion, as wellas a 1977 estimate of $4.6 billion by a WallStreet analyst. ”

Capital Availability

The AISI study did not provide a detailedanalysis of capital formation and cash flow inthe steel industry. Personal discussion withAISI officials has revealed that the deficitunder the existing laws would be $2.3 billionannually. Table 136 compares results for theOTA scenario with an earlier analysis andwith an actual 1978 cash flow and cash useas derived from official AISI information for1978.

Net income has been adjusted upwards inorder to be consistent with the assumed in-crease in shipments for the 1978-88 period.Income as a percentage of revenues was atfirst held to the 1978 level of 2.8 percent, butthis cannot be the case if the modernizationand expansion program reduces productioncosts was assumed, which added $225 million

‘-Wyman, op. cit.

Table 136.—Average Annual Capital Sources and Uses (1978 dollars in millions)—

IndustryWyman (1977)’ actual 1978b OTA scenario

Aftertax profit (including deferred taxes). . . . . . $2,100 $1,452 $1,871’Depreciation, depletion. . . . . . . . . . . . . . . . . . . . 1,600 2,258 3,100Increase in long-term debt. . . . . . . . . . . . . . . . . . 600 451d

Cash dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . (800) (598) (650)

Net cash flow ... . . . . . . . . . . . . . . . . . . . . 3,500 3,112 4,772Capital expenditures . . . . . . . . . . . . . . . . . . . . . . 4,300 2,852 4,600Debt repayment and increase in working

capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300 260 746’Cash use . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,600 3,112 5,146

Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,100 0 574

aJ.C. Wyman, “The Steel Industry An American Tragedy ?” Faulkner, Dawkins, and Sullivan, February 1977; depredationtimes were greater in 1977 than now

bAlSl data (Annual Statistical Report—1!376) for companies representing 88.8 percent of domestic raw steel production havebeen converted to all industry figures by dividing by 089

CAssuming as does AISI, an average annual domestic shipment level of 991 million tonnes. and that prices and sleel/nonsteelcontributions are the same as 1978, yields total revenues of $58.8 billion if net income as a percent of revenues iS the sameas 1978 (2 8 percent) then profit (net income) is $1,646,000

dIf the stockholder's equity is assumed to increase (in constant dollars) at 1 percent per year, then the midterm equity in-

creases to $20.788 miIlion as compared to $19,779 million for 1978, and maintaining a debt-to-equity ratio of 44% provides anincrease of $451 million

elncrease in working capital IS approximated by taking 13 percent of increase In total steel sales


to the aftertax profit of $1,646 million (basedon 1978 profitability). The issue of cost sav-ings is discussed further in the next section.

The increase in depreciation results fromthe rising level of capital spending during theperiod, but present capital recovery rateshave been assumed. The increase in long-term debt has been calculated by assumingthat part of the increased capital spendingand modernization of the industry will be fi-nanced by a small increase in stockholder’sequity, and then applying the same debt-to-equity ratio of 44 percent that existed in1978. The average total net cash flow of $4.5billion represents these three items minusstock dividends, which have been increasedover the 1978 level by approximately 10 per-cent.

The issue of dividends and their relativeconstancy regardless of performance (see ch.4) is linked to the question of the potential forforming more capital through new equities.The industry usually maintains that it keepsdividends at relatively high levels, eventhough profitability is low and perhaps de-clining, in order to maintain stock prices.Despite this policy, however, the perform-ance of most steel company stocks, with theexception of those of some of the noninte-grated and alloy/specialty companies, has notbeen good. Data on real dollar trends for sev-

eral of the major steel companies are given intable 137. Real net income has fallen substan-tially during the past 10 years, and realreturn on common stock has decreased evenmore. The real cost of goods sold has risenmore than the real value of sales.

To illustrate the relationship of dividendsto performance, it is instructive to examinethe best and worst performing major steel-maker, Inland and U.S. Steel, respectively.The comparison in constant dollars will bemade for 1979 versus 1974, both years beingin the “up” business cycles for the domesticsteel industry. For Inland Steel earnings pershare decreased 47 percent and dividendsdecreased 30 percent; for U.S. Steel earningsper share declined by 130 percent but divi-dends dropped by only 26 percent. Interest-ingly, the most diversified major steelmaker,Armco, shows the least drop in earnings pershare at 27 percent, with exactly the samedecline in dividends per share. Armco gen-erally has the best economic performance aswell, for example in terms of net income as apercent of sales. This is due to its diversifica-tion, since data on its steelmaking operationsshow it to be less profitable than Inland Steel.Thus, there is a linkage between profitabilityand diversification on the one hand, and divi-dends which accurately reflect economic per-formance on the other.

Many analysts have concluded that it ishighly improbable that new equity issues

Table 137.—1968-79 Real Dollar Changes in Profitability andCommon Stock Performance for Selected Steel Companies

Change in1979/68 real Real growth

Real growth of return on Real growth of cost ofnet income common stock of sales goods sold

Company a (percent/year) (percent) (percent/year) (percent/year)

Bethlehem Steel . . . . . . . . . . . . -13.87 – 48.00 2.18 2.92National Steel . . . . . . . . . . . . . . – 2.80 – 45.84 5.60 6.49Republic Steel , . . . . . . . . . . . . . -1 .87 – 59.79 3.16 3.95U.S. Steel . . . . . . . . . . . . . . . . . . – 0.13 – 39.06 3.04 3.76Armco b. . . . . . . . . . . . . . . . . . . . 2.29 11.77 5.03 5.59Average of 100 largest U.S.

industrial corporations, . . . . 4.75 – 25.54 6.16 6.63

aThese Companies represent 56.4 percent of 1978 domestic shipments.— .

bArmco iS the most diversified of the major domestic steelmakers.

SOURCE Interactive Data Corp., Washington, D.C.

. .

Ch. 10—Capital Needs for Modernlzation and Expansion ● 325

would be successful, except for the noninte-grated and alloy/specialty companies with ex-cellent records of growth and profitability. Itis plausible, however, that the prospect of amajor modernization and expansion program,facilitated in part by supportive Governmentpolicies, would allow dividends to be reducedand the funds to be used to help finance mod-ernization and expansion. The perception ofgreatly improved future earnings might notonly prevent any dramatic decline in stockprices, but actually increase investor interestin obtaining capital appreciation rather thanincome. In such a scenario, new equity issuesmight be successful; the key factor would becoupling dividend reduction with major in-vestment in cost-cutting new technology forthe future.

Capital Shortfalls in the OTA Scenario

In the OTA scenarios, the total cash thesteel industry would need to finance capitalexpenditures for modernization and expan-sion, plus the increase in working capital,amounts to $5.3 billion annually for 1979-88.At the same profitability levels as 1978, theindustry would be about $600 million peryear short of this requirement. This is con-siderably less than the deficits projected byindustry analyses. If modernization and ex-pansion reduced total costs by an average of2 percent28 for the lo-year period, then about

‘nThe 2-percent reduction in total costs is conservative. Thefuture saving for continuous casting alone should give a 5-per-cent cost saving when replacin~ ingot casting. (OTA, “Benefits

$900 million would ultimately be added toannual net income, even after taking intocount the rise in financial costs caused bydebt increase, Return on equity would tincrease to about 12 percent.

theac-thehen

A policy option of accelerating deprecia-tion, which is discussed in chapter 2, couldprovide enough additional income to financethe $600 million per year deficit in the OTAscenario. If, in addition to such an increase incash flow, production costs are assumed re-duced by 2 percent in the OTA modernizationprogram, then return on equity would beclose to 15 percent and return on sales about5 percent. These returns would bring thesteel industry up to the average for all domes-tic manufacturing.

of Increased Use of Continuous Casting, ” technical memoran-dum, October 1979.) For the newest integrated mill in NorthAmerica, the Steel Co. of Canada projects that efficiencies ofnew technology will produce a cost savings of 15 to 20 percent,and of that amount, 10 percent will result from continuous cast-ing. (American Metal Market, Feb. 29, 1980. ) Applying a 5-per-cent cost savings for continuous casting to an increased adop-tion by 35 percent of the industry yields a 2-percent saving forthe whole industry. Crandall has suggested a 3-percent saving‘‘if all opportunities were exploited in the very near future, [R.W. Crandall, “Competition and ‘Dumping’ in the U.S. SteelMarket,” Challenge, July-August 1978). Gold’s analysis of theCOWPS study suggests an 8-percent saving in operating costs,which would have to be reduced by increased financial costs.(B. Gold, “Steel Technologists and Costs in the U.S. and Japan, ”Iron and Steei Engineer, April 1978. ) AISI’S analysis includes apotential savings in operating costs of 30 percent and in totalcosts of 15 percent after 25 years of the capital spending pro-gram already discussed. There is a lag between capital spend-ing and realized cast savings. Thus, the 2-percent savin~ usedhere appears reasonable for the first 10 vears of the pro~rarn.

International Capital Cost Competitiveness

The lower capital costs in foreign steel in-dustries have long been used to impugn therate of technological innovation by the domes-tic steel industry. Japan’s post-World War IIsuccess in steel has often been linked to itslow capital costs:

At an annual average cost of $1.2 billion, itm e a n t a d r a m a t i c c a p a c i t y e x p a n s i o n f r o m28 million tons at the end of 1960 to 115 mil-

lion tons at the end of 1970. The expansion of87 million tons compares to an estimated netexpans ion o f around 20 mi l l ion tons in theU.S. and Canada. For an annual average ex-penditure of $1.2 bill ion, Japan bought itselfa b o u t 4 . 5 t i m e s a s m u c h a d d e d c a p a c i t y a sthe U.S. and Canada did for an expenditureof $1.8 billion. 29

(’Wvman, op. cit.


One factor in this has been that steel millconstruction costs in Japan have been lessthan 40 percent of U.S. levels, for which thefollowing reasons have been given:30

●

●

●

●

●

The

lower wage and price levels in Japan,which result in cheaper building materi-als and equipment as well as lowerwages for construction workers;cost analysis on a facility basis, ratherthan on the basis of entire plants or proj-ects;faster construction times because thereis less labor trouble and because steelcompanies, rather than general contrac-tors or consultants, supervise all or mostconstruction;constant capacity improvement after, aswell as before, installation of equipment;anduse of larger economy-of-scale designs.

following additional factors also help toexplain lower Japanese costs:31

●

●

●

c

It

an overvalued dollar vis-a-vis the yenduring the postwar period;coastal locations, which eliminate manyinfrastructure expenditures;the absence of raw material resources,which led to imports rather than con-struction of raw material processing fa-cilities for or in integrated plants; andrationalization of the entire industrythrough cooperation between banks, in-dustry, and government, which pre-vented competing steel companies fromduplicating facilities, notably high-costfinishing mills.

is generally accepted that the dollar dif-ference between Japanese and U.S. capitalcosts has been decreasing. In part, this is be-cause labor costs are increasing more rapidlyin Japan than here, because the value of the

‘(’Gold, op. cit.‘lWyman (op. cit.) provides an interesting analysis of the

relationship between low domestic capital spending during thepast several decades and the monetary policy of the UnitedStates. An overvalued dollar, he believes, forced U.S. capitalspending overseas and has led to a ‘‘dismantling” of domesticindustry. “While ‘dismantling” its basic industry, the U.S.“created’ a high technology base. ‘“

dollar is declining, and because domesticcompanies are increasing their use of foreignsources of equipment and consultation. Table138 provides some recent data that illustrate

Table 138.—Estimates of Capital Costs for theUnited States, Japan, and a Developing Nation

(1978 dollars per tonne of product capacity)

Brownfield or Green fieldroundout additions integratedto integrated plant plant

United States . . . . . . . . . $715 $1,210Japan . . . . . . . . . . . . . . . 660 880Developing nation . . . . . 880 1,540

SOURCE H.G. Mueller, ‘(Structural Change in the International Steel Market, ”Middle Tennessee State University, May 1978

the diminishing difference between Japaneseand American capital costs, and also com-pares costs for a typical developing nation. Itshows a 27-percent advantage to Japan overthe United States, and a 27-percent advan-tage to the United States over the developingnation for a greenfield integrated plant. Thislast difference may be greater, because mostdeveloping nations usually have a substantiallack of basic industrial infrastructure.”

A comparison of the 1976 capital cost ofsimilar items of steel plant equipment in dif-ferent countries—correcting for differencesin plant size and design and for differences inconstruction cost, and based on prevailing ex-change rates—reveals that the United Stateshas the highest capital costs, Europe’s are inthe middle, and Japan has the lowest. West-ern Europe enjoys 22-percent lower coststhan the United States, while Japan’s are 41percent lower.33

Aylen’s analysis of American, British, andWest German capital costs34 has led him tothe following conclusions regarding the cap-

32A recent analysis has indicated that actual costs for green-field steel plants in developing nations are twice the originalestimates. (Iron & Steelmaker, December 1979, p. 37,)

1lA. J. Jarvis, “Inflation and Capital Investment in the UnitedKingdom, ” transactions of the 5th International Cost Engineer-ing Congress, Utrecht, November 1978.

“J. Aylen, “Innovation, Plant Size and Performance: A Com-parison of the American, British and German Steel Industries, ”Atlantic Economics Conference, October 1979.

— —


ital spending and costs of domestic steel-maker:

. . . the recognized investment series forU.S. iron and steel from the Bureau of Eco-nomic Analysis or the American Iron andSteel Institute overstate steel industry cap-ital spending on plant and equipment by asmuch as 180 or 190 percent when comparedwith European levels, owing to the combinedeffect of a broader definition of steel in-dustry activities, which include diversifiedactivities, and the relatively high cost of steelplant in America.

With regard to the generally low level of U.S.capital spending (described in ch. 4) and itsimpact on technology choice, Aylen notesthat:

The higher cost of steel plants in the U.S.provides one explanation as to why the in-dustry has invested at a relatively low rateper ton. High capital costs encourage substi-tution of other factors of production for capi-tal. In contrast to its absolute capital costdisadvantage, the American steel industryhas an absolute energy cost advantage. TheAmerican steelmaker has a stronger incen-tive than his European counterparts to hangon to old, energy-intensive processes such asopen hearth steelmaking, poor technologyblast furnaces, and conventional casting fa-cilities.

Aylen adds, moreover, that because of the im-pact of capital improvements on other inputs,the full impact of capital cost differencesamong nations goes beyond the actual contri-bution of capital costs to fixed steelmakingcosts:

Admittedly capital costs per se might notintroduce much absolute cost difference be-tween steelmaker. But they do induce differ-ences in investment behaviors with long runimplications for overall factor productivityand unit costs.

Using a hypothetical reduction of 20 to 30percent in U.S. capital costs for steel plants,Aylen simulated the effect of having capitalcosts similar to those in Europe. He found thatfrom $2.9 billion to $4.8 billion would havebeen generated from 1960 to 1978, or theequivalent of an extra 2 to 3 years” invest-

ment at average annual rates. He concludesthat, with replacement and roundout, theUnited States could have obtained an addi-tional 11.3 million tonnes of raw steel capaci-ty, or 8.6 million tonnes of actual shipments.“Such extra marginal investment would havebeen sufficient to improve innovation ratesand raise plant size in the American steel in-dustry to average OECD [Organization forEconomic Cooperation and Development]standards. ”

Aylen puts the capital investment of the do-mestic steel industry in perspective and dealsfairly and succinctly with the criticism it hasoften received:

. , . the American steel industry’s failureto invest and innovate can be seen as a per-fectly rational response to prevailing factorprices, rather than evidence of any inherentinefficiency. This is not to say that the steelindustry should not bear part of the blamefor the high costs of plants. Why must the in-dustry order such lavish plants by Europenstandards? Why have steel producers notbeen tougher clients when dealing with plantsuppliers? Why does the industry not buycertain items of equipment more widely fromEuropean or Japanese plant suppliers?

Although importing steelmaking equipment isclearly detrimental to the balance of pay-ments and to the welfare of domestic equip-ment manufacturers, it might be preferablein the long term to losing substantial domesticsteelmaking capacity, with a concomitant in-crease in steel imports.

In conclusion, there is a distinct differencein capital cost competitiveness between thedomestic and foreign steel industries. Thiscould be remedied in the future by:

●

●

●

●

making more steel in nonintegrated com-panies that use simpler, less costlyequipment, and whose capacity utiliza-tion rate would be very great (see ch. 8);using more lower cost foreign-designedand foreign-manufactured equipment;using more economy-designed and econ-omy-priced equipment in integratedplants;putting more pressure on equipment


●

manufacturers and design, engineering, Radical, long-term changes in steelmakingand consulting firms to achieve lower may also bring reductions in capital costs. Ifcosts; and domestic steelmaker take the lead in these

developments, it will increase the likelihoodundertaking more in-house equipment that the necessary capital equipment will bedesign and construction. manufactured in this country.

CHAPTER 11

Impacts of EPA and OSHARegulations on Technology Use

●

4

Contents

PageSummary● * * * * * * * * * * * * * * e * * * * * * * * * . * * * * 331

Introduction ● ***, *.** **** **** **.8 *****9 332

Statutes That Regulate Steelmaking ........ 334Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 334Statutes ● * . . . . * . * * * * * * * * . * * * * * ****.*.** 335Feasibility of Standards . . . . . . . . . . . . . . ● ...336Innovation . . . . . . . . . . . . . . . . . . . . . . ... *...338Conclusion . . . . . . . ......................339

Pollution Abatement R&D. . ...............339Summary ,..,.... .,******* ********* ● * * * 339Limited Private and Public Sector Efforts ....34OConstraints Affecting Regulatory

Technology R&D. . . . . . . . . . . . . . . . . . . . . .341Conclusion . . . . . . .............0.........344

Regulatory Cost Impacts . ................345Summary ,.. . , . . ● * * . . . . . ,.,..,0. . * . * * * * 345Past and Current EPA and OSHA Compliance

costs...*.*..*. . * O * ** . .+.*.*.** ● .*.*345Need for Improved Regdatory Cost

Projections .*.*,., ● *. .** .* ● *O., . .* ● . * 348Future Regulatory Cost Impacts. . ..........349Financing of Regulatory Equipment. . .......352Conclusion. ● *.***** .**.*...* *.****.*. . . 353

Regulatory Requirements and Modernization 354Summary . . . . . . . . . . . . . . . . . . . . . . . ..***.* 354Limited Modernization. . .................354Industry Differences. . ...................355Potential Modernization Problems. . ........356

Page● ****O*** ● ********* ● * * * * * 9 9 a 359

List of Tables

Table No. Page139. Occupational Health Hazards in

Steelmaking .**,**** .******** . . . . . 333140. Air and Water Pollution Abatement

Expenditures as Reported by the BasicSteel Industry, 1973-77 . . . . . . . . . . . . . 342

141. Total and Regulatory “Current CapitalCosts” for the U.S. Steel Industry,1969=79 ● . * * * * . * * * * * * . * . * *****..** 346

142. Pollution Abatement Investments as aPercentage of Total New Plant andEquipment Expenditures, Four U.S.Basic Industries, 1973-79 . . . . . . . . . . . . 346

143. Effect of Environmental Requirementson Steel Production Costs and Prices,1979-83 . * * , , , . * * * * * * . * * * * * , * * * * * * 340

144. Reported and Planned Investment inEmployee Safety and Health, Four BasicIndustries, 1972-82 . . . . . . . . . . . . . . . . 348

145. Annual Steel Industry Investments inAbatement Equipment; ProjectedIncreases, 197085.. . . . . . . . . . . . . . . . 349

146. Steel Industry Environmental ControlInvestment Outlays: United States andJapan, 1970-71 . . . . . . . . . . . . . . . . . . . . 351

147. Type-of-Plant Differences in PollutionControl Capital Costs. . . . . . . . . . . . . . . 356

CHAPTER 11

Impacts of EPA and OSHARegulations on Technology Use

Summary

In the past, the policies of the Environmen-tal Protection Agency (EPA) have had a great-er impact on the steel industry than those ad-ministered by the Occupational Safety andHealth Administration (OSHA). In the future,however, OSHA policies will grow in impor-tance as more regulations become operation-al.

Congress has expressed a strong interestin regulatory technologies that are more costeffective than present ones and that will fur-ther reduce public health hazards. It is thesteel industry’s position that available controltechnologies are generally capable of meetingregulatory standards, but Federal agenciessuggest that considerable environmental R&Dis still needed. EPA spends less than $1 mil-lion per year on steel-specific R&D, but muchlarger sums on environmental R&D that is in-cidentally applicable to the steel industry. In-dustry reports that its environmental R&Dspending is about $75 million per year, al-though a considerable amount of this appearsto be for engineering work. Regulatory tech-nology R&D by the steel industry suffers inpart because of the high costs and limited pri-vate gains associated with it.

Some regulatory approaches, such as theuse of technology-based standards, were de-veloped to encourage private-sector improve-ments in abatement technologies. Other stat-utory provisions go beyond encouragement byrequiring or “forcing” private-sector devel-opment of new regulatory technologies. Thevarious environmental statutes and the Occu-pational Safety and Health Act (OSHA Act)encourage the use of technology-based per-formance standards. Although these stand-ards allow industry more flexibility they havenot encouraged major industrial innovations

that are the subject of this report. Availableregulatory incentives, such as delayed com-pliance, have generally been inadequate inencouraging fundamentally new and cleanersteelmaking technologies such as continuouscasting or direct casting of sheet or strip.Regulatory incentives have been more suc-cessful in providing the initial impetus for in-cremental improvements in abatement tech-nologies. Examples include improved cokeoven controls.

There has been considerable disagreementabout the economic and technical feasibilityof the regulatory technologies that Federalagencies have identified as being capable ofattaining specified control levels. EPA’s tech-nology-forcing approach allows for diffusionof new environmental technologies that arenot yet commonly used by the steel industry,but judicial decisions have directed EPA togive greater weight to economic considera-tions when identifying feasible control tech-nologies for nontoxic pollutants. EPA has yetto develop guidelines for private-sector envi-ronmental technology R&D. OSHA’s technol-ogy transfer authority is more limited: OSHAmay not require major private-sector R&D ef-forts, but it may call for the diffusion of thelatest techniques within any given industrywhenever toxic or hazardous materials areinvolved.

The steel industry has reported EPA- andOSHA-related capital investments during the1970’s of about $365 million per year, orabout 17 percent of its total annual capital in-vestments. * These expenditures have placedgreater limits on steel industry modernization

*These estimates have not been adjusted downward for reg-u]a tory overlap between agencies.

331


than has been the case with other basic in-dustries. Annualized capital and operatingcosts for environmental requirements alonetypically add between 4 and 6 percent to pro-duction costs.

EPA and OSHA regulations applicable tothe steel industry will impose major capitalinvestments and operating changes on the in-dustry well into the mid-1980’s because ofstatutory requirements. Federal projectionsof steel industry regulatory investments dur-ing the 1980’s suggest only modest increasescompared to the 1970’s, while industry esti-mates suggest that average levels of regula-tory investment would almost double betweennow and the mid-1980’s. Differences betweenindustry and Government projections resultfrom differences in the assumptions underly-ing their estimates. Among the factors affect-ing future levels of regulatory investment are:facility replacement rate, expansion plans,technological choices affecting investmentdecisions, interpretation of regulations, thescheduling of regulatory investments, andbroader industry trends with respect to prof-itability and shipments.

EPA data indicate that industrial develop-ment bonds (IDBs) have in the past been usedfor half of all environmental capital spending.Assuming this pattern continues, industrywill need to generate from internal sourcesbetween $275 million and $400 million annu-ally, in addition to similar amounts financedwith IDBs to finance regulatory compliancethrough the mid-1980’s. These expendituresare relatively modest compared to the mas-

sive total capital needs that the industry ex-pects during the next several years.

The need for regulatory compliance has ac-celerated industry decisions to phase out andreplace aging facilities. Thus, economic andregulatory forces have tended to reinforceone another to some extent. Regulatory poli-cies have had the most severe impact on inte-grated plants, which have a high proportionof aging equipment and high productioncosts. The impact on nonintegrated electricfurnace facilities has been less severe. Thesenewer mills have a narrower and less com-plex range of processes to control, and mostof their control equipment was designed forinstallation at the time of construction.

Recent regulatory reform initiatives maybe more effective in encouraging steel indus-try development and use of improved regula-tory technologies. EPA’s “revised offset” pol-icy may create difficulties for companieswishing to expand, because it requires highabatement investments in existing plants tooffset future pollution increases for the newplant in the same region. The Agency’s “bub-ble” concept could make facility replacementmore cost effective, although some concernsremain about allowable tradeoffs betweendifferent types of pollutants generated in thesame plant. Moreover, EPA’s current “lim-ited life facilities” policy may require somehard decisions about the continued operationof marginal facilities by the early 1980’s. Andfinally OSHA appears to have a growing in-terest in using its authority to issue variancesto standards for innovative purposes.

Introduction

The direct and indirect effects of EPA and ited. Pollution abatement and hazard reduc-OSHA regulations on the domestic steel in- tion were therefore relatively minor consider-dustry are significant. In part this is because ations in the design of steelmaking equip-most of the process technologies the industry ment.uses were developed around the turn of thecentury, at a time when awareness of the im- The steel industry is one of the largestpact of industrial pollution on public and oc- sources of pollution in the Nation, with the in-cupational health and safety was very lim- tegrated segment alone accounting for nearly

Ch. 11—Impacts of EPA and OSHA Regulations on Technology Use ● 333

one-fifth of all domestic industrial pollution.The industry is increasingly coming into com-pliance. Nevertheless, more than half of thesteel industry’s operations but less than halfof its plants are now in compliance with envi-ronmental requirements. * Steel mills presenta wide range of environmental problems—conventional and harmful solid waste, excessliquids, gases, and noise. High-temperaturewater, zinc, manganese, lead, and suspendedoil and grease also present major difficulties.Coke ovens, blast furnaces, and sinter plantsin particular pose complex environmental

problems because they emit sulfur dioxide,tar vapors, coal, coke, dust, and other organiccompounds. The industry also has very highrates of occupational injury and illness, Steel-workers are exposed to a variety of harmfuland toxic emissions (table 139), generally inmuch higher concentrations, more frequent-ly, and for longer periods than is typical ofthe general population. ] This results in highmedical expenses, and high compensationpayments for death and disability among theindustry’s half a million employees. UnitedSteelworkers of America data indicate that

*For instance, 45 percent of domestic iron and steel facilitiesare out of compliance with air pollution control regulat ions. ‘E. J. Calabrese, Methoddogiad Approaches to Derivm~ En-(EPA, Industrial Analysis Branch, letter to OTA, Mar. 18, ~’ironment(d ond occupotion(d Health Stondurds, New York,1980. ) W’ilev, 1978, p. 223.

Table 139.—Occupational Health Hazards in Steel making

Operation Contaminants. . ., . ,.. .

.—Coking

Byproduct

Blast furnace

Steelmaking furnaces

Molten metal pouring

Rolling mill

Steel conditioning

Pickling

MaintenanceGalvanizing

Forging

Foundry

Coke oven emissionsHeatSilicaBenzeneCoal tar pitchOrganic chemicalsBlast furnace gasIron oxide fumesHeatMetal fumesNoiseHeatMetal fumesHeatLeadFluoridesAsbestosSilicaNoiseHeatOil mistMetal fumesMetal dustHydrochloric acidSulfuric acid

All hazardsZinc oxide fumesLeadNoiseHeatOil mistSilicaHeatNoiseOil mistOrganic chemicalsMetal fumes

M e d i c a l c o n d i t i o n

Cancer and respiratory diseaseHeat stroke and heat exhaustionSilicosisLeukemia and IymphomaSkin cancerLiver and nervous system damageCarbon monoxide poisoningSiderosisHeat exhaustionPossible cancer and siderosis

Asbestos is and masothelioma

Nose and throat irritation

Mucous membrane irritationMucous membrane irritationChemical pneumonitisHeart disease

Metal fume fever

SOURCE Unifed Steelworkers of America, Safety and Health Department


131 deaths took place from August 1977 toDecember 1979 as a result of occupationalhazards. Excess death rates have been re-ported for some phases of steelmaking. For in-stance, OSHA’s final environmental impactstatement (EIS) on coke ovens found an ex-cess of over 200 cancer deaths per yearamong coke oven workers.

Industry’s regulatory obligations haveemerged during a period of declining competi-tiveness on the international steel market (seech. 4). The U.S. share of the world exportmarket has declined during the past decades,while imports have grown in volume. The in-dustry’s most recent modest expansion tookplace during the early 1960’s, and a largenumber of domestic plants are now relativelyold, small, and inefficient. Projected capitalrequirements for regulatory compliance are arelatively small portion of total capital needsfor the next decade (see ch. 10), but the indus-try’s capital shortfall affects its efforts tomeet regulatory compliance goals as well asits larger modernization programs.

Dealing effectively with the particular haz-ards that accompany steelmaking raisesmany issues concerning: 1) the developmentand costs of fundamentally new regulatorytechnologies, and 2) the interaction betweenGovernment regulations and the operationand modernization of the industry. It may not

always be possible to carefully distinguishR&D for regulatory compliance from otherR&D efforts, capital investments for compli-ance from other capital investments, and, in-novations due to regulation from other inno-vations. In addition, comprehensive and veri-fiable cost data are not always available.

Consider also the following interconnectedfactors. The goal of Federal regulatory poli-cies is to encourage the development and useof improved abatement or process technolo-gies. Limited replacement and modernizationof facilities, however, may make the develop-ment of new technologies more difficult. Fed-eral economic and regulatory policies have amajor influence on industry’s levels of bothcapital spending and operating costs for mod-ernization and compliance. On the otherhand, a vigorous replacement and moderniza-tion program might make newer, more cost-effective compliance options available, there-by lowering those costs. In short, broadertrends of industry operation and profitability,as well as Federal tax, trade, and pricing pol-icies, have major impacts on both the develop-ment and the adoption of new regulatorytechnologies by the steel industry. Thus, Fed-eral environmental and occupational hazardregulations are contributing factors ratherthan forces singularly affecting and affectedby industry modernization.

Statutes That Regulate Steelmaking

Summary ments, but their impacts have been limited so

EPA regulations are based on a number ofspecific statutes, while OSHA is guided bygeneral authorizing legislation rather than aseries of specific statutes. Compared to cur-rent investment levels and industry practices,major regulatory technology investments andoperating changes will have to be made fromnow until the mid-1980’s to meet require-ments of the Clean Air Act, the FederalWater Pollution Control Act, and the Re-source Conservation and Recovery Act. TheOSHA Act also imposes certain require-

far and their future impacts are uncertain, inpart because of regulatory overlap.

A growing number of regulatory standardsapplicable to the steel industry are technol-ogy based. This allows industry some flexibili-ty and encourages innovation in complyingwith the regulations. Vigorous industry inno-vation has not yet been attained, however, inpart because the economic incentives appearlimited relative to potential benefits for com-panies considering abatement R&D. Recentregulatory reforms such as EPA’s “bubble”

Ch. 11—impacts of EPA and OSHA Regulations on Technology Use ● 335

policy, attempt to incorporate economic in-centives in regulatory measures. OSHA’s au-thority to issue variances to standards couldperhaps also play a greater role in technologydevelopment aimed at improved or cheaperregulatory compliance. In addition to stand-ards that encourage new technology, EPAand OSHA also have the authority to “forcenew technology” when toxic or hazardouspollutants are involved. EPA’s approach al-lows for the diffusion of the latest environ-mental technologies between industries whileOSHA may call for the transfer of promisingnew technologies within or between indus-tries such as steel.

Questions of economic and technologicalfeasibility have been of great concern in de-veloping standards. Compared to its earlieractions, EPA must now give greater weight toeconomic considerations. OSHA must nar-rowly consider the technological feasibility ofproposed standards. Both agencies have toassess economic impacts of proposed majorregulations in compliance with ExecutiveOrder 12044.

Statutes

The basic policy framework for steel indus-try regulation is provided by several statutes,particularly the Clean Air Act (CAA) andthe Federal Water Pollution Control Act(FWPCA). CAA and FWPCA will continue tohave considerable impact on steel operationsat least until the mid-1980’s, when high-performance abatement technologies or in-process changes will have to be installed.EPA’s Resource Conservation and RecoveryAct (RCRA) and the OSHA Act will also havea growing impact on existing steelmakingtechnologies.

EPA has an ongoing process of promulgat-ing air emission standards for specific steel-making processes in order to adequately pro-tect public health and property as requiredunder CAA. The Agency is also in the processof revising steel effluent guidelines for theregulation of waterborne pollutants so thatall pollution may be eliminated from naviga-ble waters by 1985, as required by FWPCA.

RCRA also is of growing importance to thesteel industry. This statute directs EPA toregulate the disposal of hazardous solidwaste, and final steel industry guidelineshave only recently been promulgated. Thislegislation may become the major impetustowards increasing the steel industry’s use ofrecycling and other in-process changes thatreduce the volume of solid, hazardous wasteit generates.

OSHA’s principal responsibility is to en-sure safe and healthful conditions in theworkplace. OSHA is guided by general au-thorizing legislation embodied in the Occupa-tional Safety and Health Act of 1970 ratherthan by a set of specific statutes, as is thecase for EPA. The OSHA general duty clause,hazard-specific standards, and judicial inter-pretations are the basis for most OSHA com-pliance requirements applicable to the steelindustry. Specific OSHA standards having animpact on the steel industry include thoseconcerning sulfur dioxide and machineguarding. The fire and electrical codes arealso significant. However, OSHA's impact onthe steel industry has thus far been ratherlimited because its major standards are nar-rower and more recent than those of EPA.The coke oven standard, for instance, hasonly been in effect for a short time, * and anumber of others are not yet fully operation-al, including the benzene standard and theproposed noise standard.** Some future im-pacts of OSHA standards have already beenfelt, to varying degrees, under environmentalregulations that apply to the same steelmak-ing processes, as in the case of the coke ovenstandard.

EPA and OSHA performance standardsare technology based to the extent this is pos-sible. Such standards identify demonstratedcontrol technologies and, to a lesser extent,in-process changes that are capable of meet-

*The final coke oven standard, promulgated in 1976, did notbecome enforceable until January 1980 because of extendedlitigation.

* *The benzene standard is being contested by a number ofindustries. The interim noise standard is based on voluntary in-dustry standards and OSHA has actively considered revisingthis and other interim standards.


ing minimum abatement levels. CAA andFWPCA call for three types of standards thatvary in degree of stringency. Steelmaking fa-cilities not emitting hazardous pollutants gen-erally must be equipped with environmentaltechnologies capable of meeting low- and me-dium-stringency levels in existing and newplants, respectively. Any steelmaking facili-ties or point sources emitting hazardous pol-lutants must be equipped with the high-strin-gency, high-performance environmental tech-nologies. Compliance schedules for the twolower stringency standards were set for thelate 1970’s, and standards regulating hazard-ous pollutants will have to be met by 1982-83.

OSHA’s approach is similar to EPA’s inthat it also requires more stringent perform-ance levels for new facilities and for all ex-isting point sources emitting hazardous pol-lutants. Specification standards, commonlyadopted at the outset of the OSHA program,are now being revised to provide industrywith greater flexibility in attaining compli-ance. Recent OSHA standards have generallybeen of the performance type. It is OSHA’sview that the rigidity of existing specificationstandards is frequently overstated. Section6(d) of the OSHA Act enables employers toobtain a variance from any standard. Suchvariances allow employers among others toselect innovative means while providing foroptimum employee protection as required bythe standard. Such variances may apply to asingle location or they may be extended to allemployers within an industry, as in the caseof a soon-to-be published variance dealingwith arsenic and lead exposures in the auto-mobile industry.

EPA has the responsibility of stimulatingprivate-sector development of innovativeprocess or control technologies that will re-sult in greater pollution abatement or lowercost systems. To encourage the diffusion ofnew technologies, EPA may call for one indus-try to share an equipment development ituses if that equipment can be applied effec-tively in another industry. z When calling for

‘Suggested in-process changes do not have to be common in-dustry practice whenever toxic pollutants are involved. (EPA,office of the General Counsel, letter to OTA, Nov. 30, 1979.)

the transfer of such technology, EPA mustkeep in mind a proper balance betweenhealth impacts and questions of economicand technological feasibility.

The OSHA Act has given OSHA the generalauthority to require industry implementa-tions of regulatory technology that is “loom-ing on the horizon."3 If forcefully imple-mented, this approach could have the effectof stimulating the development of technolo-gies capable of improved or cheaper perform-ance whenever hazardous substances are in-volved. The scope of OSHA’S major technol-ogy-forcing mandate applicable to steelmak-ing is now being considered for review.

Feasibility of Standards

Industry feels that both EPA and OSHAhave gone too far with their technology-basedstandards,4 and its objections, often pre-sented before the courts, are generally basedon considerations of technical or economic un-feasibility. The American Iron and Steel In-stitute (AISI) and individual companies havechallenged a number of standards, includingthose governing water pollution and theOSHA coke oven standard. The statutes origi-nally appeared to have given EPA greater lat-itude than OSHA with respect to technolog-ical and economic requirements for the con-trol of toxic or hazardous pollutants; subse-quent court interpretations, however, seem tohave reduced the authority of both agencies.

In general, EPA now has to give greaterprominence to economic considerations, al-though it may still require technology trans-fer between industries. OSHA, on the otherhand, now has narrower authority over thestimulation of technological innovations thatreduce occupational risks. OSHA is consider-ing to promulgate an interpretive field memo-randum governing the steel industry thatcould place constraints on OSHA’s ability torequire major R&D efforts for improved coke

‘OSHA Act, Public Law 91-596, sec. 6(b)(5),“AISI, letter to OTA, November 1979.

Ch. 1 I—Impacts of EPA and OSHA Regulations on Technology Use ● 337

oven compliance, EPA notes on the subject offeasibility that:

Although the Court rejected all challengesto the technical and economic feasibility ofthe BPT [best practicable technology) limita-tions, it held that certain BAT (best availabletechnology) and NSPS (New Source Perform-ance Standards) limitations were “not dem-onstrated. ” In addition, the Court remandedall of the regulations because, in its view,EPA had not adequately considered the im-pact of age of plants on the costs or feasibil-ity of retro-fitting controls, or the impact ofthe regulations on water scarcity in arid andsemi-arid regions of the country.;

Commenting about court review of steel-fin-ishing effluent guidelines, EPA notes:

Here again, the Court rejected all chal-lenges based on technical feasibility. Buthere, too, the Court held that EPA had failedto adequately consider the age/retrofit andwater scarcity issues. In addition, the Courtheld that the agency had failed to adequatelyconsider ‘‘site-specific’ costs and the eco-nomic posture of the industry. (However,) theCourt’s remand was not based on the severi-ty of economic impacts, but on the groundthat EPA promulgated the regulations on thebasis of a draft economic analysis.’)

Thus, while EPA’s authority over questions oftechnological feasibility has been generallyunchanged, * these and other court caseshave given greater prominence to economicissues and local concerns.

State agencies can be more responsive tolocal concerns than EPA, because they havegreater latitude than EPA to consider the eco-nomic or technological implications of envi-ronmental requirements affecting specificplants in polluted areas, For instance, in thepast few years a number of States havegranted variances to individual steel plantssolely on the basis of economic burden or

~EPA, Office of the General Counsel, letter to OTA, Nov. 30,1979, p. 7 (basic steel effluent guidelines].

‘Ibid.*Informal comments from within and outside EPA occasion-

ally suggest that the Agency has not yet vigorously pursued its“technology forcing” mandate. For related comments, see“Limited Private and Public Sector Effects, ” p. 34o.

technological feasibility, while still planningto meet statewide goals for improved environ-mental protection. The role of State govern-ments in regulating steel plant constructionwill probably expand in response to a June1979 Federal court decision, while EPA islikely to be excluded from reviewing con-struction standards for smaller emittingsources.

OSHA considers both economic and tech-nical feasibility when developing proposedstandards. When several court rulings indi-cated that OSHA was not limited to issuingstandards based solely on devices alreadyfully developed,’ OSHA interpreted the rul-ings as enabling it to “force industry to devel-op control technology whenever quick actionis needed to regulate worker exposure to tox-ic and hazardous materials."8 The steel in-dustry, concerned about OSHA’s ability to re-quire industrial development of new technolo-gies as a means of improved compliance, initi-ated its own court challenge to the concept. Ina 1978 case, the court invalidated OSHA’sR&D requirement for coke oven engineeringand work-practice controls with respect tofundamentally new technologies.9

As a result of the appeals court decision,OSHA will not place an industrywide require-ment on steel companies to research and de-velop new technology for improved compli-ance with the coke oven standard. InsteadOSHA will require controls for noncomplyingbatteries in addition to those specified in thestandard as necessary and feasible for indi-vidual batteries. This may require the use ofadditional controls that have been shown tobe potentially adaptable to individual batter-ies being considered, OSHA is now preparingan interpretative field memorandum whichmay indicate that it can request of steel firms

‘Society o) Plastics industries v. Occupational Safety andHealth Administration, 509, F. 2d 1302, 1309 (1 975); AmericanFederation of Labor v. Brennan, 53o F. 2d log, 131 (1975):American Iron and Steel institute v. Occupational Safety andHealth Administration, 577 F. 2d 825,830-839 (1978).

“W. Grover, “OSHA Now Technology-Forcing Agency,”’ Oc-cupational Safety and HeaJth Reporter, p. 453.

The court also noted that the steel industry had not madesufficient effort to make use of already operating technologies.(AIS1 V. OSHA, 577 F. 2d 825,834-835 (1978 ).)


incremental improvements in engineeringand work-practice controls applicable to par-ticular batteries without requiring majorR&D efforts.l0As a result of these and otherchallenges to its technology-forcing powers, itappears that OSHA’sauthority to requiremajor private sector R&D efforts aimed at im-proved compliance with the coke oven stand-ard now has been reduced. 11

It is conceivable that in the long term EPAcould play a stronger role than OSHA in stim-ulating new technology when worker protec-tion from toxic materials is at stake. OnlyEPA, under narrowly specified conditions de-scribed in the 1976 Toxic Substances ControlAct, can require a firm to discontinue use oftoxic or hazardous materials. The need tosubstitute alternate raw materials could, un-der certain conditions, stimulate new processdesign and the development of safer substi-tute materials and processes.

OSHA’sinfluence over regulatory cost im-pacts may also be changing. Thus far, OSHAstandards have been judged economically in-feasible only if they are likely to cause seriousdisruption of an industry. But standards maybe deemed economically feasible even thoughthey are financially burdensome, reduceprofitability, or affect the continued viabilityof individual companies.l2In order to enforcea greater consideration of macroeconomic is-sues by OSHA, the petroleum industry hassued OSHA, asking that cost-benefit analysesbe required for major proposed regulationssuch as those concerning benzene. The steelindustry joined the petroleum industry as oneof six co-parties in this case. Industry arguesthat provisions analogous to risk assessmentor cost-benefit analysis are found in most en-vironmental statutes (including the OSHAAct), that most regulatory agencies under-take such analysis of major proposed regula-tions, and that OSHA should therefore do the

‘“Discussion with OSHA staff in the Office of Field Coordina-tion, Feb. 22, 1979.

‘t’’ Occupational Exposure to Lead, ” Federal Register, Nov.21, 1979, pp. 54474-54475,

lzlndustrial union Department, AFL-CIO V. Hodgson, C.A.D.C. 1974: 499 F. 2d 467; USCA 29655 (notes of decisions). Seealso OSHA legislative history.

same by identifying the tradeoffs betweenemployee protection and regulatory cost im-pact when developing standards. The Su-preme Court is now considering an OSHA ap-peal, which argues that the petroleum indus-try view is incorrect as a matter of both statu-tory mandate and policy. OSHA does not ac-cept the assumption that costs and benefitsfrom regulations are comparable since hu-man life and health do not have an applicabledollar value.

Innovation

The premise underlying technology-basedperformance standards is that they providean incentive to innovation by identifying,rather than prescribing, technologies capableof attaining specific standards. Such innova-tion, in turn, could help lead industry to useimproved or cheaper regulatory technologies.EPA and OSHA have therefore been con-centrating on technology-based performancestandards. Performance standards are peri-odically reviewed with the objective of revis-ing allowable emission limits in cases whereimproved abatement or process technologieshave been developed during a given timeframe.

Despite their inherent flexibility, however,performance standards alone do not appearto have been an effective mechanism for en-couraging industrial innovation of regulatorytechnologies. Instead of encouraging the de-velopment of new technologies, performancestandards may actually encourage the risk-averting strategy of adopting technologiesthat qualify under the technology-based limitsestablished by the agencies. At that pointthere is no further incentive for the privatesector to develop new technologies that mightmake possible more effective—or even cheap-er— environmental compliance. ’3

The following findings illustrate the limita-tions of the innovation incentives that per-formance standards have provided in prac-

13A, Merrick III, Freeman, The Benejits of Environmental Im-provement: Theory and Practice, Resources For The Future,Johns Hopkins University Press, 1979, pp. 56-57.


tice. A comprehensive 1977 review of EPA ef-fluent standards concluded that industry in-stalled abatement technologies equivalent toEPA-suggested technologies, rather than newequipment specifically designed for furtheri m p r o v e m e n t s i n c o m p l i a n c e .14 N e w t e c h n o l -

ogy deve lopment has a l so been ra ther s low in

t h e a r e a o f o c c u p a t i o n a l h a z a r d r e d u c t i o n .For instance, OSHA’s forthcoming require-m e n t s f o r n e w c o k e o v e n s a r e e x p e c t e d t o b e

s imi lar to those for ex i s t ing ba t ter ies becauset h e r e h a s b e e n s o l i t t l e s u b s e q u e n t d e v e l o p -

m e n t * o f n e w c o n t r o l t e c h n o l o g i e s .

I t i s p o s s i b l e t h a t r e c e n t r e g u l a t o r y r e f o r mi n i t i a t i v e s w i l l p r o v i d e s u p p o r t i n g i n c e n t i v e sn e e d e d t o m o r e e f f e c t i v e l y e n c o u r a g e p r i v a t e

sec tor innovat ion . But on ly a thorough rev iewo f t h e a p p l i c a t i o n o f t h e s e r e f o r m s o v e r t i m e

c a n p r o v i d e d o c u m e n t a t i o n c o n c e r n i n g t h e i rf u l l i m p a c t o n t h e d e v e l o p m e n t o f n e w t e c h -n o l o g i e s . S o m e o f t h e s e r e f o r m s , s u c h a sE P A ’ s b u b b l e a p p r o a c h a n d t h e o f f s e t p o l i c y

a r e e x p e c t e d t o p r o v i d e e c o n o m i c i n c e n t i v e s

t h a t c o n v e n t i o n a l r e g u l a t i o n s a p p e a r t o b el a c k i n g . T h e y g i v e i n d u s t r y t h e f l e x i b i l i t y t os e l e c t t h e l e a s t c o s t l y m e a s u r e s f o r p o l l u t i o na b a t e m e n t . 16 O S H A a l s o h a s s o m e r e g u l a t o r yf l e x i b i l i t y b y m e a n s o f v a r i a n c e s t h a t m a y b e

i s s u e d t o a p p l i c a b l e s t a n d a r d s u n d e r c e r t a i ncondi t ions . The f i r s t ma jor indus t rywide var i -

a n c e t o a s t a n d a r d i s e x p e c t e d t o b e i s s u e ds h o r t l y t o t h e a u t o m o b i l e i n d u s t r y . P r o c e -

“National Commission on Water Quality, staff report PH-68,1977.

*Incremental improvements such as magnetic lid lifters andwater-sealed sandpipe caps have been developed during thistime.

“Discussion with OSHA staff in the Office of Field Coordina-tion, Aug. 13, 1979.

“EPA, “Proceedings: First Symposium on Iron and Steel Pol-lution Abatement Technology,” Interagency Energy/Environ-mental R&D Program report, Chicago, Ill., 1979, p. 11.

dures may need to be developed for variancess p e c i f i c a l l y a i m e d a t n e w t e c h n o l o g y d e v e l o p -ment . Var iances could be i s sued on a case -by-c a s e - b a s i s . A n o t h e r a p p r o a c h w o u l d b e t o

cons ider the i s suance o f indus t rywide innova-

t i o n v a r i a n c e s b a s e d o n s t e e l m a k i n g e q u i p -m e n t r e p l a c e m e n t c y c l e s . I f p r o p e r l y a p p l i e d

a n d s u p p o r t e d b y e c o n o m i c a d v a n t a g e s , v a r i -ances a l so might prov ide more e f fec t ive inno-v a t i o n i n c e n t i v e s t h a n s o m e o f O S H A ’ s p r e -

v a i l i n g r e g u l a t o r y a p p r o a c h e s .

Conclusion

Statutory requirements administered byEPA have imposed definite compliance sched-u l e s r e q u i r i n g m a j o r s t e e l i n d u s t r y i n v e s t -ments through the mid- l980 ’ s . The indust ry i s

a l s o f a c e d w i t h a g r o w i n g n u m b e r o f O S H A -a d m i n i s t e r e d c o m p l i a n c e s c h e d u l e s . T h e s eh a v e b e e n s e t a d m i n i s t r a t i v e l y , h o w e v e r , a n d

r e a s o n a b l y c o u l d a l s o b e c h a n g e d a t t h a tl e v e l ,

A l t h o u g h t h e d e v e l o p m e n t o f c h e a p e r a n d

m o r e e f f e c t i v e c o n t r o l t e c h n o l o g i e s i s a n i m -p o r t a n t g o a l , t h e r e h a s b e e n l i t t l e s u c h a c t i v i -ty because o f l imi ted economic incent ives . In -s t e a d , i n o r d e r t o r e d u c e p r i v a t e - s e c t o r e n g i -n e e r i n g a n d d e v e l o p m e n t w o r k , i n d u s t r y h a sf o c u s e d i t s a t t e n t i o n o n t h e a d o p t i o n o f a v a i l -

a b l e r e g u l a t o r y t e c h n o l o g y . A s p a r t o f i t sc o s t - c u t t i n g g o a l s , t h e s t e e l i n d u s t r y h a s d e -ve loped a s t rong in te res t in cos t -benef i t ana l -

ys i s o f proposed technica l s tandards tha t reg -u l a t e s t e e l m a k i n g p r o c e s s e s . A p e n d i n g S u -preme Cour t dec i s ion should he lp reso lve th i s

i s s u e . R e c e n t r e g u l a t o r y r e f o r m i n i t i a t i v e sm a y b e a f i r s t s t e p t o w a r d s m o r e e f f e c t i v e i n -n o v a t i o n i n c e n t i v e s m a d e a v a i l a b l e t o t h e i n -

d u s t r y .

Pollution Abatement R&D

Summary about the cost effectiveness of regulatory re-quirements and about environmental and oc-

Congressional interest in R&D for regula- c u p a t i o n a l h e a l t h h a z a r d s . T h e r e i s a b e l i e ft o r y t e c h n o l o g y a n d l e s s p o l l u t i n g s t e e l m a k - t h a t n e w , h i g h - p e r f o r m a n c e r e g u l a t o r y o r

i n g p r o c e s s e s s t e m s f r o m g r o w i n g c o n c e r n s c l e a n e r p r o c e s s t e c h n o l o g i e s w i l l a l s o c r e a t e


additional flexibility for economic growth in

h e a v i l y p o l l u t e d r e g i o n s b y m a k i n g a t t a i n -m e n t o f e n v i r o n m e n t a l s t a n d a r d s m o r e f e a s i -ble. *

I n a d d i t i o n t o i m p r o v i n g p r o d u c t i o n e f f i -

c i e n c i e s , s e v e r a l m a j o r n e w s t e e l m a k i n gp r o c e s s e s r e v i e w e d i n t h i s r e p o r t a r e a l s ol e s s p o l l u t i n g t h a n c o m p l e m e n t a r y o r s u b -

s t i t u t e c o n v e n t i o n a l t e c h n o l o g i e s . P o l l u t i o n

a b a t e m e n t i s b r o u g h t a b o u t e i t h e r d i r e c t l yt h r o u g h r e d u c e d e n e r g y o r r a w m a t e r i a l s u s eo r i n d i r e c t l y t h r o u g h r e d u c e d d i s c h a r g e s .

C l e a n e r s t e e l m a k i n g t e c h n o l o g i e s s t i l l i n v a r i -o u s s t a g e s o f d e v e l o p m e n t a n d a d o p t i o n i n -c l u d e : c o n t i n u o u s c a s t i n g , c o a l - b a s e d d i r e c tr e d u c t i o n , d i r e c t c a s t i n g o f s h e e t a n d s t r i p ,

f o r m c o k i n g , a n d e l e c t r i c f u r n a c e s t e e l m a k -ing .

O f t h e m a j o r t e c h n o l o g i e s c o n s i d e r e d i n

t h i s r e p o r t , f o r m c o k i n g a n d e l e c t r i c f u r n a c es t e e l m a k i n g h a v e b e e n a f f e c t e d m o s t b y F e d -e r a l e n c o u r a g e m e n t . T h e f o r m e r p r i m a r i l y b ym e a n s o f D O E s u p p o r t a n d t h e l a t t e r m a i n l yb y E P A a n d O S H A . I n g e n e r a l , h o w e v e r , F e d -e r a l a g e n c i e s h a v e h a d a g r e a t e r i m p a c t o ni n c r e m e n t a l r a t h e r t h a n o n f u n d a m e n t a l

t e c h n o l o g y c h a n g e . M o d e s t t e c h n o l o g i c a l i m -provements have tended to resu l t f rom the in -

i t i a l “ p u s h ” p r o v i d e d b y F e d e r a l r e g u l a t i o n s .E x a m p l e s i n c l u d e : p u s h i n g e m i s s i o n c o n t r o l sa n d i m p r o v e d d o o r s e a l s f o r c o k e o v e n s . D e -v e l o p m e n t a l w o r k , i n d u c e d b y r e g u l a t i o n s , i ss t i l l u n d e r w a y i n a r e a s s u c h a s b i o l o g i c a lt r e a t m e n t o f c o k e o v e n p l a n t w a s t e a n d b a s i c

o x y g e n f u r n a c e ( B O F ) f u g i t i v e e m i s s i o n s c o n -t r o l t e c h n o l o g y . H o w e v e r , p r i v a t e s e c t o r e f -

for t s to make abatement s t i l l cheaper or more

e f f e c t i v e , h a v e g e n e r a l l y n o t b e e n w i d e -s p r e a d o r s u c c e s s f u l o n c e s t a n d a r d s h a v ebeen in ex i s tence for some t ime . For ins tance ,n o n f u g i t i v e e m i s s i o n s c o n t r o l t e c h n o l o g y f o rB O F s h a s n o t c h a n g e d s i g n i f i c a n t l y d u r i n gthe past 5 years. ”

*New facility construction can be most readily accommo-dated when regional environmental standards have been at-tained. OSHA does not have the authority to approve industryconstruction plans for regulatory impact, Thus, regional eco-nomic growth potential is not directly affected by OSHA poli-cies.

“Ibid,, p. 39.

T h e s t e e l i n d u s t r y e s t i m a t e s i t n o w s p e n d s

about 15 percent , o r $75 mi l l ion , o f i t s annualR & D b u d g e t o n e n v i r o n m e n t a l m a t t e r s . E P As u p p o r t s o n l y a s m a l l a m o u n t o f r e g u l a t o r ytechnology R&D, and OSHA mainta ins no pro-g r a m i n t h i s a r e a . A p p l i c a b l e s t a t u t e s i m p l yt h a t t h e p r i v a t e s e c t o r i s p r i m a r i l y r e s p o n s i -

b le for regula tory technology deve lopment , a l -t h o u g h t h e s e r e s p o n s i b i l i t i e s a r e n o t s p e c i -

f i ed . The s tee l indus t ry be l i eves the respons i -

b i l i t i e s s h o u l d f a l l m a i n l y o n e q u i p m e n t s u p -p l i e r s , b u t i t a l s o c o n t e n d s t h a t a l r e a d y a v a i l -a b l e t e c h n o l o g y c a n d e a l a d e q u a t e l y w i t h v i r -t u a l l y a l l e n v i r o n m e n t a l p r o b l e m s . T h e a g e n -c i e s a r g u e o t h e r w i s e .

T h e r e a r e s o m e m a j o r p r o b l e m s a f f e c t i n g

r e g u l a t o r y t e c h n o l o g y R & D , i n c l u d i n g : u n -

c l e a r E P A d i r e c t i v e s r e g a r d i n g p r i v a t e - s e c t o rR & D , a n e m p h a s i s o n c o s t l y “ e n d - o f - l i n e ”t e c h n o l o g y , i n a d e q u a t e r e g u l a t o r y i n c e n t i v e s ,i n c l u d i n g l a c k o f e c o n o m i c i n c e n t i v e s .

Limited Private and PublicSector Efforts

Regulatory technology RD&D is aimed atdeveloping improved control systems or in-p r o c e s s c h a n g e s t h a t w i l l m a k e s t e e l m a k i n g

p r o c e s s e s e n v i r o n m e n t a l l y o r o c c u p a t i o n a l l yl e s s h a z a r d o u s o r t h a t w i l l r e d u c e t h e c o s t o f

c o m p l i a n c e w i t h F e d e r a l r e q u i r e m e n t s . T h es t e e l i n d u s t r y h a s c o n d u c t e d r e g u l a t o r y t e c h -no logy research for many years , but i t i s d i f -f i c u l t t o a s c e r t a i n h o w m u c h w o r k h a s a c t u a l -

l y b e e n d o n e . A l i m i t e d a m o u n t o f e n v i r o n -

m e n t a l t e c h n o l o g y r e s e a r c h i s u n d e r w a y i nc o m p a n y l a b o r a t o r i e s a n d i n a n A I S I - s p o n -

s o r e d p r o g r a m .1 8 I n f o r m a l 1 9 7 9 A I S I d a t aw o u l d s u g g e s t t h a t a b o u t 1 5 p e r c e n t o f s t e e li n d u s t r y R & D e x p e n d i t u r e s a r e d e v o t e d t o

p o l l u t i o n a b a t e m e n t p r o j e c t s . W i t h a b o u t

$500 million of steel R&D per year, this woulda m o u n t t o a b o u t $ 7 5 m i l l i o n a n n u a l l y f o r r e g -u la tory R&D by the s tee l indus t ry . I t i s d i f f i -c u l t t o q u a n t i f y t h e e x t e n t o f t h i s r e s e a r c h ,

h o w e v e r , b e c a u s e o f t e n i t i s c o n n e c t e d w i t h

‘eDuring the past 5 years, the cost of the AISI program hasaveraged about $600,000 per year, AISI letter to OTA, Novem-ber 1979.

Ch. 1 I—impacts of EPA and OStiA Regulations on Technology Use ● 34 I

o t h e r p r o c e s s d e v e l o p m e n t p r o j e c t s . A c o n -

s i d e r a b l e p o r t i o n o f i n d u s t r y e n v i r o n m e n tR & D a p p e a r s t o i n v o l v e e n g i n e e r i n g w o r k .T h u s , a c t u a l e n v i r o n m e n t a l t e c h n o l o g y R & D

under taken by the s tee l industry i s l ike ly to bes ign i f i cant ly l ess than $75 mi l l ion annual ly . A

s m a l l a m o u n t o f O S H A - s t i m u l a t e d r e s e a r c h i su n d e r t a k e n i n u n i v e r s i t i e s , b y i n d u s t r y , a n d

b y t h e i n d u s t r y - s p o n s o r e d I n d u s t r i a l H e a l t hF o u n d a t i o n , w h i c h c o n c e n t r a t e s o n t e c h n i c a la s s i s t a n c e t o i n d u s t r y .

T h e i n d u s t r y f e e l s t h a t p o l l u t i o n c o n t r o le q u i p m e n t m a k e r s h a v e f i r s t r e s p o n s i b i l i t yf o r n e w r e g u l a t o r y t e c h n o l o g y d e v e l o p m e n t .

F u r t h e r m o r e , i n d u s t r y c o n t e n d s t h a t , w i t h

t h e e x c e p t i o n o f a f e w t e c h n i c a l l y c o m p l e xs i t u a t i o n s s u c h a s c o k e o v e n c o n t r o l s , t e c h -n o l o g y a l r e a d y e x i s t s t o h a n d l e s t e e l ’ s e n v i -

r o n m e n t a l p r o b l e m s .19 R e c e n t E P A s t u d i e s , o nt h e o t h e r h a n d , s u g g e s t a n o v e r w h e l m i n gn e e d f o r e n v i r o n m e n t a l t e c h n o l o g y R & D c o v -

er ing a var ie ty o f s tee lmaking processes .

v i r t u a l l y e v e r y p r o c e s s i n t h e i r o n a n ds t e e l i n d u s t r y c u r r e n t l y r e q u i r e s e n v i r o n -mental technology R&D to either improve thelevel of control, lower the costs or both. Themost s ign i f i cant concerns are for cokemak-i n g , b l a s t f u r n a c e s a n d b a s i c o x y g e n f u r -naces . Cont inued assessment o f d i schargesf rom the var ious s tee lmaking processes areurgent ly needed to uncover hazardous andt o x i c s i t u a t i o n s t h a t n e e d a p p l i c a t i o n s o fcontrols or RD&D if controls are not avail-a b l e .2 0

T h e F e d e r a l G o v e r n m e n t p l a y s a l i m i t e dro le in regula tory technology deve lopment for

s t e e l m a k i n g , O S H A o f f e r s t e c h n i c a l s u p p o r tt o o t h e r a g e n c i e s a n d i n d i v i d u a l c o m p a n i e sc o n c e r n i n g t h e f e a s i b i l i t y o f e n g i n e e r i n g c o n -

t r o l s n e c e s s a r y f o r c o m p l i a n c e .2 1 O S H A h a st h e g e n e r a l a u t h o r i t y t o c o n d u c t o r s p o n s o rr e s e a r c h a n d d e m o n s t r a t i o n p r o j e c t s r e l a t i n g

t o i n n o v a t i v e t e c h n i q u e s f o r d e a l i n g w i t h o c -c u p a t i o n a l s a f e t y a n d h e a l t h p r o b l e m s . *

H o w e v e r , O S H A ’ s i n t e r p r e t a t i o n o f t h e l e g i s -

“’Ibici.“’EPA, Industrial Environmental Research Laboratory, Met-

~llur~iml Processes Branch, letter to OTA, Nov. 13, 1979.L]OMB, U.S. Budget for FY 1979, p. 656.*29 U.S. Code 669,

l a t i v e h i s t o r y a c c o m p a n y i n g i t s a u t h o r i z i n gs ta tute i s that Congress d id not g ive OSHA as u b s t a n t i a l m a n d a t e f o r r e g u l a t o r y t e c h n o l -o g y R & D . * T h i s c o n s i d e r a t i o n , a l o n g w i t h

b u d g e t c o n s t r a i n t s , a p p e a r s t o h a v e b e e n r e -s p o n s i b l e f o r t h e l a c k o f a n O S H A r e g u l a t o r yt e c h n o l o g y R & D p r o g r a m , E P A , o n t h e o t h e r

h a n d , d o e s u n d e r t a k e a n d s p o n s o r s o m e e n v i -r o n m e n t a l t e c h n o l o g y R & D , S i n c e f i s c a l y e a r1 9 7 6 , E P A h a s p r o v i d e d s l i g h t l y m o r e t h a n

$ 5 0 0 , 0 0 0 a n n u a l l y o n a c o s t - s h a r i n g b a s i swi th the industry for improved environmenta l

c o n t r o l s , l a r g e l y f o r c o k e o v e n s . T h e A g e n c yalso cosponsors wi th AISI a very modest R&Dp r o g r a m .2 2 H o w e v e r , E P A d o e s s u p p o r t a

l a r g e r a m o u n t o f i n d u s t r i a l e n v i r o n m e n t a l

technology R&D that i s appl i cab le to the s tee li n d u s t r y .

T h e e l e c t r i c u t i l i t y i n d u s t r y a n d p o l l u t i o n

a b a t e m e n t e q u i p m e n t m a n u f a c t u r e r s h a v ed e v e l o p e d r e g u l a t o r y t e c h n o l o g i e s , s u c h a s‘ ‘ s c r u b b e r s , that are now be ing used by the

s t e e l i n d u s t r y . F o r e i g n s t e e l i n d u s t r i e s , p a r -t i c u l a r l y i n J a p a n , a l s o h a v e d e v e l o p e d s e v -

e r a l a d v a n c e d c o n t r o l t e c h n o l o g i e s . E P A c u r -r e n t l y h a s a f o r e i g n t e c h n o l o g y e v a l u a t i o n

p r o j e c t u n d e r w a y t o i d e n t i f y p o t e n t i a l a p p l i -c a t i o n s i n t h e d o m e s t i c s t e e l i n d u s t r y . T e c h -no log ies be ing eva lua ted inc lude cont ro l o f fu -g i t i v e a i r e m i s s i o n s f r o m t h e B O F , c o n t r o l o f

w a s t e w a t e r f r o m c o k e p l a n t s a n d b l a s t f u r -n a c e s , a n d g e n e r a l i d e n t i f i c a t i o n o f t e c h n o l o -gy to increase recyc l ing or reuse o f mater ia l s .

E P A h a s a l r e a d y i d e n t i f i e d s o m e e x e m p l a r yt e c h n o l o g i e s a n d w i l l s u p p o r t e n g i n e e r i n gw o r k t o d e t e r m i n e d o m e s t i c a p p l i c a b i l i t y ;f i n d i n g s a n d c o s t e v a l u a t i o n s a r e e x p e c t e d i n1 9 8 0 .2 ’

Constraints AffectingRegulatory Technology R&D

Regulatory technology R&D conducted by

o r f o r t h e s t e e l i n d u s t r y s u f f e r s f r o m s e v e r a l

*Discussion with staff at the OSHA Office of Solicitors. June2, 1980.

“This program has been funded during the past 4 years atapproximately $150,000 annually. (Nov. 13, 1979 EPA letter toOTA.)

-“EPA, Industrial Environmental Research Laboratory, Met-allurgical Processes Branch, letter to OTA. Nov. 13, 1979.


weaknesses, including limited policy guid-ance on private-sector R&D, emphas i s on

“ e n d o f t h e l i n e ” ( E O L ) c o n t r o l t e c h n o l o g i e s ,a n d l a c k o f e c o n o m i c i n c e n t i v e s .

Limited Policy Guidance on Steel IndustryR&D.—Although EPA has the authority tostimulate the development of innovative envi-r o n m e n t a l t e c h n o l o g i e s , t h e A g e n c y d o e s n o t

h a v e a n y g u i d e l i n e s d e t a i l i n g w h a t c i r c u m -

s t a n c e s c a l l f o r s t e e l i n d u s t r y e n v i r o n m e n t a l

t e c h n o l o g y R & D . T h i s o p t i o n c o u l d b e u s e d

w h e n e v e r a v a i l a b l e t e c h n o l o g i e s a r e i n a d e -

q u a t e f o r m e e t i n g n e w f a c i l i t y s t a n d a r d s o rc o n t r o l l i n g t o x i c p o l l u t a n t s . O S H A , a s a r e -

s u l t o f i t s 1 9 7 8 A I S I c o u r t c a s e , d o e s h a v ec l e a r p o l i c y g u i d a n c e . O S H A ’ s “ t e c h n o l o g yf o r c i n g ” p o l i c y c o n c e r n i n g c o k e o v e n s i s n o wl imi ted to the d i f fus ion o f marg ina l t echnolog-i c a l i m p r o v e m e n t s w i t h i n o r b e t w e e n i n d u s -

t r i e s ; t h i s d e c i s i o n c o u l d s e t a p r e c e d e n t f o r

o t h e r O S H A “ t e c h n o l o g y f o r c i n g ” r e g u l a -t i o n s .

Emphasis on EOL control technologies.—Both EPA and the steel industry concentratetheir R&D programs on EOL technologies thatc a p t u r e p o l l u t a n t s p r o d u c e d b y e x i s t i n g p r o c -e s s e s , r a t h e r t h a n t e c h n o l o g i e s t h a t m o d i f y

the processes so tha t they produce l ess po l lu -

t i o n i n t h e f i r s t p l a c e . V e r y l i t t l e w o r k h a s

b e e n d o n e o n m a j o r “ c h a n g e s i n p r o c e s s ”( C I P ) , s u c h a s r e c y c l i n g , a l t e r n a t i v e u s e s o fw a t e r , a n d m a t e r i a l s r e c o v e r y f r o m w a s t e -w a t e r s t r e a m s . L i m i t e d s t e e l i n d u s t r y r e -

p l a c e m e n t a n d e x p a n s i o n a c t i v i t i e s a l s o d i -

rect industry interest towards available ret-rofit technologies.

T h e p r e v a i l i n g E O L o r i e n t a t i o n i s r e f l e c t e di n p o l l u t i o n a b a t e m e n t c a p i t a l e x p e n d i t u r e s .F r o m 1 9 7 3 t o 1 9 7 7 , t h e i n d u s t r y r e p o r t e d

s p e n d i n g o n t h e a v e r a g e o n l y 5 p e r c e n t , o r

$ 2 5 m i l l i o n , o f i t s p o l l u t i o n a b a t e m e n t f u n d so n C I P e q u i p m e n t ( t a b l e 1 4 0 ) . C o m p a r e d t oE O L t e c h n o l o g i e s , C I P e q u i p m e n t l e a d s t om o r e c o s t - e f f e c t i v e e n v i r o n m e n t a l c o n t r o l b e -

c a u s e m o r e e f f i c i e n t u s e i s m a d e o f r a wm a t e r i a l s a n d w a s t e p r o d u c t s , b u t o f t e n i t

a l s o c a l l s f o r m o r e t e c h n o l o g i c a l l y c o m p l e xc h a n g e s . F u r t h e r m o r e , C I P e q u i p m e n t i s m o s te f f i c i e n t l y i n s t a l l e d a t t h e t i m e o f p l a n t c o n -s t r u c t i o n . B u t t h e s l o w p a c e o f s t e e l i n d u s t r ym o d e r n i z a t i o n a n d e x p a n s i o n h a s b e e n a m a -jor cons t ra in t on the pursu i t o f th i s more cos t -e f f e c t i v e a b a t e m e n t a p p r o a c h . I n d u s t r i a l

g r o u p s h a v e a r g u e d t h a t E P A e x c e e d s i t s

s t a t u t o r y a u t h o r i t y w h e n e v e r i t c o n s i d e r si n - p r o c e s s m o d i f i c a t i o n s . N e v e r t h e l e s s , t h eg r o w i n g c o n c e r n a b o u t t o x i c p o l l u t a n t s i sl i k e l y t o l e a d t o i n c r e a s e d r e s e a r c h a n d i n -ves tment in CIP technologies . *

O n e a r e a r e c e i v i n g e v e n l e s s a t t e n t i o n t h a nC I P r e s e a r c h i s t h e d e v e l o p m e n t o f p r o c e s sa l t e r n a t i v e s . * * For ins tance , EPA has not yet

*EPA’s fiscal year 1980 environmental research budget wasdoubled to almost $12 million to support a greatly increased in-dustrial wastewater program.

**Concerned about EPA’s concentration on immediate prob-lems, and responding to National Academy of Sciences andOTA findings, Congress directed EPA for the first time in 1977to allocate 15 percent of each R&D program to a separate long-term environmental R&D program.

Table 140.—Air and Water Pollution Abatement Expenditures as Reported by the Basic Steel Industry, 1973-77(millions of dollars)

Air Water Air and waterTotal EOL CIP CIP% Total EOL CIP CIP% Total EOL CIP CIP%

1973 ....., $142.0 $110.5 $31.3 22.18 $ 58.4 $ 54.1 $4.3 7.4 $200.4 $164.6 $35.8 17.861974 . . . . . . 179.2 155.9 23.3 13.0 105.3 101.7 3.6 3.41 284.5 257.6 26.9 9.471975 . . . . . . 302.5 295.2 7.3 2.41 279.0 17.5 2.8 1.0 581.5 312.7 10.1 1.731976 . . . . . . 339.7 325.1 14.6 4.29 301.9 26.4 7.3 2.41 641.6 351.5 21.9 3.411977 . . . . . . 317.5 302.9 14.7 4.62 283.4 29.9 3.1 1.09 600.9 332.8 17.8 2.96Annualaverage(1973-77) . . 256.18 217.28

NOTE: EOL—end-of-llne methods, involvlng the separation, treatment, or reuse of pollutants after they are generated but before they are emitted from the firm’s property. CIP—changes.in-process methods, involving the modification of existing production processes or the substitution of new processes to reduce or eliminatethe pollutants generated

SOURCE. U S Department of Commerce, Bureau of the census, Current Industrial Reports Pollution Abatement Expenditures, 1973.77, (table 2A)

Ch. 11I—Impacts of EPA and OSHA Regulations on Technology Use ● 343

issued air performance standards and cost-impact analyses for the promising new tech-n o l o g y o f c o n t i n u o u s c a s t i n g . O S H A d o e s n o t

h a v e a s t r o n g l o n g - t e r m r e g u l a t o r y r e s e a r c hp r o g r a m e i t h e r : a l t h o u g h i t h a s e n c o u r a g e d

smal l improvements in coke oven cont ro l t ech-no log ies , * i t has not ac t ive ly cons idered l ess

h a z a r d o u s p r o c e s s e s t h a t c o u l d r e d u c e i n d u s -

t r y ’ s d e p e n d e n c e o n c o k e m a k i n g . T h e l i m i t e di n i t i a t i v e s t h a t h a v e l a r g e l y b e e n t a k e n i n t h i s

a r e a h a v e b e e n t a k e n b y E P A , w h o s e r e g u l a -tory ac t ions have tended to re in force present -l y a v a i l a b l e o p t i o n s , s u c h a s t h e e l e c t r i c f u r -n a c e a s a p a r t i a l r e p l a c e m e n t o f c o k e - b a s e d

s t e e l m a k i n g , r a t h e r t h a n f u n d a m e n t a l l y n e wp r o c e s s e s ,

U n t i l l a s t y e a r , t h e N a t i o n a l i n s t i t u t e f o r

O c c u p a t i o n a l S a f e t y a n d H e a l t h ( N I O S H ) d i dn o t u n d e r t a k e a n y e v a l u a t i o n o f e m e r g i n g

t e c h n o l o g i e s , * * e v e n t h o u g h t h e I n s t i t u t e h a s

a c l e a r m a n d a t e t o e x p l o r e t h e s a f e t y a n dh e a l t h i m p l i c a t i o n s o f n e w p r o c e s s t e c h n o l o -g i e s .2 4 D u r i n g 1 9 7 7 c o n g r e s s i o n a l t e s t i m o n y ,

N I O S H r e p r e s e n t a t i v e s d i s c u s s e d a t t e m p t s t os t r ike a ba lance be tween shor t - and long- te rm

r e s e a r c h i n s u p p o r t o f f u t u r e s t a n d a r d s d e -v e l o p m e n t . N I O S H 1 9 8 0 p r o g r a m p l a n s i n d i -

c a t e t h a t a n u m b e r o f n e w t e c h n o l o g i e s w i l l

b e a s s e s s e d .2 5

E P A a l s o h a s s t a r t e d a m o d e s t a n t i c i p a t o r yR&D program a imed a t exp lor ing the env i ron-m e n t a l i m p a c t s o f f u n d a m e n t a l l y n e w p r o c -

e s s t e c h n o l o g i e s . F o r i n s t a n c e , E P A h a s e v a l -u a t e d c o a l - b a s e d d i r e c t r e d u c t i o n ( D R ) a n d

c o n c l u d e d t h a t p o l l u t i o n a b a t e m e n t c a p i t a lc o s t s a r e o n e - t h i r d l e s s a n d o p e r a t i n g c o s t s

o n e - f i f t h l e s s t h a n f o r t h e c o n v e n t i o n a l c o k e

*EPA's role has been equally—or more—important in thisarea, in part since the Agency has a longer history of enforce-able steel industry regulations.

**Some work is now underway on new energy technologies,but no long-term research has been proposed by NIOSH onemerging steelmaking technologies.

“The OSHA Act directs NIOSH to undertake special RD&Drelated to occupational safety and health as is necessary to ex-plore new problems, including those created by new technologyin occupational safety and health, which may require ameliora-tive action beyond that which is otherwise provided for in theoperating provisions of the Act, (OSHA Act, Public Law 91-596,sec. 20(a)(4). )

‘%Discussion with Dr. John Froines, deputy director, NIOSH,Aug. 22, 1979.

oven-blast furnace-BOF-hot metal route. Re-circulation of fuel gas is expected to bringabout even lower pollution levels compared toc o n v e n t i o n a l D R p r o c e s s e s . T h e e n v i r o n m e n -t a l c o s t a d v a n t a g e s o f c o a l - b a s e d D R s t e e l -making resu l t main ly f rom reduced water po l -

l u t i o n p r o b l e m s . R e d u c i n g s t e e l i n d u s t r y r e l i -a n c e o n c o k e o v e n s b y i n c r e a s i n g t h e u s e o f

e l e c t r i c a r c f u r n a c e s ( E A F s ) i n v o l v e s p r o c e s sc h a n g e s t h a t c a n m a k e a m a j o r c o n t r i b u t i o n

to the lowering of pollution levels .2’

I n c o n t i n u i n g s u p p o r t o f a n t i c i p a t o r y r e -

s e a r c h , E P A n o t e d i n i t s 1 9 7 9 R e s e a r c h O u t -look tha t :

E P A r e s e a r c h t o e x a m i n e t h e m i n e r a lproblem must shift from a focus on existingmineral processing industries to evaluationsof new technolog ies and the correspondingdevelopment of environmentally sound con-t r o l a p p r o a c h e s .

P e r h a p s e v e n m o r e s i g n i f i c a n t l y , t h e A g e n c ya d d e d t h a t :

In the long term, environmenta l c r i te r iamust become an inherent part of a design ofnew methods and technology for minera l sproduct ion .

C o m p a n i e s , s u c h a s 3 M i n i t s “ P o l l u t i o n

P a y s ” p r o g r a m , s t r o n g l y a d v o c a t e t h e i n t e -g r a t i o n o f r e g u l a t o r y c r i t e r i a i n t o t h e i n v e s t -m e n t d e c i s i o n m a k i n g p r o c e s s . T h i s a p p r o a c hcould a l so be cons idered by the s tee l indus t ryb e c a u s e p o t e n t i a l c o s t - s a v i n g a d v a n t a g e s a r ea s s o c i a t e d w i t h t h e t i m e l y c o n s i d e r a t i o n o fr e g u l a t o r y r e q u i r e m e n t s i n i n v e s t m e n t p l a n -

n i n g .

E P A n o w s u p p o r t s l i m i t e d R & D a i m e d a t

e v a l u a t i n g s u b s t i t u t e p o l l u t i o n c o n t r o l m e t h -o d s o r “ c l e a n e r ” s t e e l m a k i n g p r o c e s s e s . N e v -

e r t h e l e s s , n e i t h e r E P A n o r O S H A a r e i n as t r o n g p o s i t i o n t o e n c o u r a g e s t e e l i n d u s t r yd e m o n s t r a t i o n o r u s e o f t h e s e n e w s t e e l m a k -i n g t e c h n o l o g i e s . I n d u s t r y i s a l r e a d y c o n -c e r n e d a b o u t r e g u l a t o r y c o n s i d e r a t i o n o f i n -p r o c e s s c h a n g e s ; e v e n g r e a t e r r e s i s t a n c e

ZbThe EpA-sponsored report (600/ 7-76-034C) COmPares coal-based DR/EAF steelmaking with the conventional alternativecoke oven-blast furnace-BOF route, American Metal Market,Oct. 2, 1979.


could be expected should regulatory agenciesalso actively encourage the industry to adoptn e w p r o c e s s t e c h n o l o g i e s .

Limited Economic lncentives.—Perhaps themost important barrier to regulatory technol-ogy development by the private sector is thelack of strong economic incentives. Availabler e g u l a t o r y i n c e n t i v e s , i n a n d o f t h e m s e l v e s ,h a v e b e e n i n s u f f i c i e n t t o e n c o u r a g e l o w - p r o f -i t ab i l i ty indus t r i es to innovate in env i ronmen-

t a l t e c h n o l o g y . T h e s e i n c e n t i v e s , d e v e l o p e d

d u r i n g t h e e a r l y 1 9 7 0 ’ s , p r o v i d e f o r e x t e n d e dc o m p l i a n c e i n e x i s t i n g p l a n t s o r t e m p o r a r y

w a i v e r s f o r n e w p l a n t s t h a t w i l l i n c o r p o r a t ei n n o v a t i v e t e c h n o l o g i e s .2 7

U n l i k e E P A , O S H A i s n o t b o u n d b y s t a t u -t o r y d e a d l i n e s , a n d i t c a n s e t c o m p l i a n c e

d e a d l i n e s a d m i n s t r a t i v e l y , t a k i n g i n t o a c -c o u n t f a c t o r s s u c h a s o c c u p a t i o n a l r i s k s , i n -

d u s t r y e c o n o m i c s , a n d t e c h n o l o g y d e v e l o p -m e n t . T h e c o k e o v e n s t a n d a r d , f o r e x a m p l e ,

p r o v i d e s f o r d e l a y e d c o m p l i a n c e s c h e d u l e s o nt h e b a s i s o f e c o n o m i c f e a s i b i l i t y . O n c e d e a d -l ines have been se t , however , OSHA may onlyi s s u e v a r i a n c e s t o s p e c i f i c o p e r a t i o n s t h a tn e e d t i m e t o r e s p o n d t o m a t e r i a l , e q u i p m e n t ,

o r s t a f f i n g p r o b l e m s .28 A l t h o u g h i n n o v a t i o n i snot spec i f i ca l ly ident i f i ed , i t could perhaps be

s u b s u m e d u n d e r t h e a l l o w a b l e c a t e g o r y o f

e q u i p m e n t p r o b l e m s . T h u s f a r , h o w e v e r , t h es t e e l i n d u s t r y h a s n o t a c t i v e l y r e s p o n d e d t o

a v a i l a b l e r e g u l a t o r y i n c e n t i v e s l i k e d e a d l i n ee x t e n s i o n s . D u r i n g t h e p a s t f e w y e a r s , t h es tee l indus t ry has on ly submit ted two propos -

“The Clean Air Act gives EPA the authority to extend compli-ance of existing mills by 5 years (“delayed compliance order”)to allow for the demonstration of improved or cheaper controltechnologies. For new facilities demonstrating innovative proc-ess or control technologies, EPA may grant variances from ap-plicable standards for up to 7 years (innovation waivers).Should the new system fail during this time, the Agency willgrant an additional temporary compliance waiver to give thecompany time to install conventional controls. For innovativewater pollution abatement technology, EPA is authorized toissue a 3-year waiver for innovative production or control tech-nologies having the potential of industrywide application forcompanies wanting to replace existing production capacity.There do not appear to be any regulatory incentives for retro-fitting existing plants with innovative control technologies.(Public Law 95-95, sec. Ill(j), l13(d)(4); U.S. Code and AdminNews, legislative history of Public Law 95-95, p. 1276; U.S.Code and Admin News, Public Law 95-217, p. 4375.)

28U. S. Code AMotated 29, subsec. 655(d), Labor—Safety and

Health, “Variances From Standards.”

als to E P A for innovative controls in existingp l a n t s ; E P A d i d n o t a p p r o v e t h e s e p r o p o s a l s

b e c a u s e s i m i l a r c o n t r o l t e c h n o l o g i e s w e r ea l ready be ing used by o ther indust r ies .

I t i s c l e a r t h a t t h e t e m p o r a r y w a i v e r s a n dd e a d l i n e e x t e n s i o n s a r e n o t a t t r a c t i v e e n o u g ht o i n d u c e c o m p a n i e s t o a s s u m e t h e t e c h n i c a l ,f inanc ia l , and s t ra teg ic r i sks invo lved in inno-v a t i n g . T h e o n l y c o s t p r o t e c t i o n E P A ’ s i n n o -v a t i o n i n c e n t i v e s p r o v i d e t o p a r t i c i p a t i n g

c o m p a n i e s i s t o f r e e t h e m f r o m n o n c o m p l i -

a n c e p e n a l t i e s o f u p t o $ 2 5 , 0 0 0 p e r d a y w h i l ed e m o n s t r a t i o n w o r k i s g o i n g o n . N e i t h e r E P A

n o r O S H A l e g i s l a t i v e m a n d a t e s p r o v i d e r e g u -l a t o r y g u a r a n t e e s o r f i n a n c i a l s u p p o r t s h o u l dt h e i n n o v a t i v e a p p r o a c h f a i l t o m e e t r e g u l a -t o r y r e q u i r e m e n t s . T h e r e i s a l s o a s t r a t e g i cm i s m a t c h b e t w e e n p o t e n t i a l l y b r o a d e c o -n o m i c a n d e n v i r o n m e n t a l b e n e f i t s r e s u l t i n gf r o m s u c c e s s f u l i n n o v a t i o n a n d t h e l i m i t e d

p r i v a t e g a i n s t o b e m a d e b y t h e i n n o v a t i v ef i r m . U n d e r t h e s e c i r c u m s t a n c e s , i n v e s t m e n t

in such innovat ion may promise too much r i sk

a n d t o o l i t t l e p r o f i t f r o m a p r i v a t e p o i n t o fv i e w . T h e l o w r a t e o f n e w f a c i l i t y c o n s t r u c -

t i o n a n d r e p l a c e m e n t i s a l s o a m a j o r c o n -s t ra in t on the deve lopment o f improved regu-l a t o r y o r p r o c e s s t e c h n o l o g i e s . W i t h o u t e f f e c -

t ive publ i c -pr iva te r i sk shar ing , there i s l i t t l eincent ive to br ing new technolog ies on l ine .

Conclusion

T h e s t e e l i n d u s t r y h a s o n l y a l i m i t e d e n v i -r o n m e n t a l R & D e f f o r t , a c o n s i d e r a b l e p o r t i o n

of which appears to be devoted to eng ineer ingw o r k , a n d F e d e r a l R & D i s a l s o v e r y l i m i t e d .A p p l i c a b l e s t a t u t o r y p r o v i s i o n s f o r r e g u l a -

t o r y i n c e n t i v e s d e s i g n e d t o s t i m u l a t e t h e d e -v e l o p m e n t o f i m p r o v e d a n d c h e a p e r r e g u l a -

t o r y t e c h n o l o g i e s h a v e n o t b e e n v e r y s u c c e s s -

fu l , thus fa r , wi th the s tee l indus t ry . A num-b e r o f a p p l i c a b l e t e c h n o l o g i e s h a v e b e e n d e -v e l o p e d b y f o r e i g n s t e e l i n d u s t r i e s o r o t h e r

d o m e s t i c i n d u s t r i e s s u c h a s t h e e l e c t r i c u t i l i t yi n d u s t r y , S e v e r a l p r o c e s s m o d i f i c a t i o n s a n d

a l t e r n a t i v e s h o l d c o n s i d e r a b l e p r o m i s e f o r r e -duced pol lu t ion . Increased incent ives for R&D

a n d i n n o v a t i o n , p e r h a p s i n c l u d i n g p u b l i c -p r i v a t e r i s k s h a r i n g , m a y b e n e e d e d t o b r i n g

these t echnolog ies on l ine .

Ch. 1 l—impacts of EPA and OSHA Regulations on Technology Use ● 345

Regulatory Cost Impacts

Summary

EPA and OSHA regulations affect moderni-z a t i o n a n d c o m p e t i t i o n m o s t d i r e c t l y b y i m -

p o s i n g a d d i t i o n a l c a p i t a l r e q u i r e m e n t s a n d

i n c r e a s i n g p r o d u c t i o n c o s t s . H o w e v e r , i t i s

d i f f i c u l t t o m e a s u r e t h e e x t e n t o f t h e s e b u r -d e n s ; d a t a a v a i l a b i l i t y i s a p r o b l e m . D u r i n gt h e 1 9 7 0 ’S , t h e s t e e l i n d u s t r y r e p o r t e d s p e n d -i n g o n a v e r a g e 1 3 . 1 p e r c e n t , o r $ 2 8 0 m i l l i o n ,

o f i t s a n n u a l c a p i t a l i n v e s t m e n t s f o r e n v i r o n -m e n t a l c o m p l i a n c e a n d a b o u t 5 . 8 p e r c e n t , o r

$ 8 5 m i l l i o n , o f i t s a n n u a l c a p i t a l i n v e s t m e n t sfor indus t r ia l hea l th and sa fe ty purposes . Ac -

t u a l s p e n d i n g l e v e l s h a v e b e e n l o w e r t h a n f o r

s e v e r a l o t h e r i n d u s t r i e s , b u t t h e o p p o r t u n i t yc o s t o f r e g u l a t o r y r e q u i r e m e n t s v i s - a - v i s i n -d u s t r y m o d e r n i z a t i o n h a s b e e n h i g h e r f o rs t e e l b e c a u s e o f i t s r e l a t i v e l y l o w t o t a l c a p i t a ls p e n d i n g . A n n u a l i z e d c a p i t a l , o p e r a t i n g , a n dm a i n t e n a n c e c o s t s f o r e n v i r o n m e n t a l r e q u i r e -

m e n t s p r e s e n t l y a d d b e t w e e n 4 a n d 6 p e r c e n t

to product ion cos t s .

R e g u l a t o r y c o s t p r o j e c t i o n s a r e b a s e d o n

c o n s i d e r a b l e u n c e r t a i n t y . A v a i l a b l e c o s t - i m -p a c t s t u d i e s g e n e r a l l y s h o w d i f f e r e n t c o s t sf o r t h e s a m e p r o p o s e d r e g u l a t o r y r e q u i r e -m e n t s . F e d e r a l a g e n c i e s h a v e e s t i m a t e d t h a tE P A a n d O S H A c a p i t a l c o s t s f o r a i r , w a t e r ,

a n d c o k e o v e n c o m p l i a n c e w i l l t o t a l a p p r o x i -m a t e l y $ 5 5 0 m i l l i o n a n n u a l l y u n t i l t h e m i d -

1 9 8 0 ’ s , w h i l e A I S I h a s e s t i m a t e d t o t a l r e g u l a -

t o r y c a p i t a l c o s t s a t $ 8 0 0 m i l l i o n a n n u a l l y .2 9

R e l i a b l e c o s t e s t i m a t e s m a y n o t b e c o m e a v a i l -

a b l e u n t i l j u s t p r i o r t o i m p l e m e n t a t i o n o fs t a n d a r d s , w h e n r e q u i r e m e n t s w i l l b e f i n a l

a n d q u a l i f y i n g c o n t r o l t e c h n o l o g i e s w i l l b ek n o w n . F u r t h e r m o r e , c o s t s a v i n g s r e s u l t i n gf r o m i m p r o v e m e n t s i n r e g u l a t o r y t e c h n o l o -g i e s m a y n o t o c c u r u n t i l a f t e r t h e s t a n d a r d s

a r e p r o m u l g a t e d . A r e c e n t E P A r e p o r t u n d e r -

s c o r e s t h e p o i n t t h a t s t e e l i n d u s t r y e x p e n d i -

NE PA, The Cost of Clean Air and Clean Water, report to Lon-gress, 1979; D.B. Associates, Economic Impact of Coke OvenStandards, vol. 1, report prepared for OSHA, 1975. Federal es-timate is not adjusted downward for possible regulatory costoverlap; industry estimate includes a much broader range ofregulations than Federal estimate.

t u r e s f o r a b a t e m e n t e q u i p m e n t a r e g e n e r a l l yless than was expec ted on the bas i s o f pro jec -

t i o n s . T h e i n c r e a s e i n p r o d u c t i o n c o s t s a s ar e s u l t o f e n v i r o n m e n t a l c a p i t a l a n d o p e r a t i n g

c o s t s i s e x p e c t e d t o r e m a i n r a t h e r s t a b l e ,

r a n g i n g b e t w e e n 4 a n d 6 p e r c e n t . A b o u t 4 8p e r c e n t o f r e g u l a t o r y c a p i t a l c o s t s h a v e i nt h e p a s t b e e n f i n a n c e d t h r o u g h I D B s . A s s u m -i n g a s i m i l a r p a t t e r n i n t h e f u t u r e , b e t w e e n

$ 2 7 5 m i l l i o n a n d $ 4 0 0 m i l l i o n w i l l n e e d t o b eg e n e r a t e d a n n u a l l y o u t s i d e t h e b o n d m a r k e tfor inves tments in regula tory equipment .

Past and Current EPA and OSHACompliance Costs

T h e r e a r e s e v e r a l s e r i e s o f d a t a f o r s t e e l

i n d u s t r y r e p o r t e d c a p i t a l e x p e n d i t u r e s o nr e g u l a t o r y i n v e s t m e n t s . T h e D e p a r t m e n t o f

C o m m e r c e a n d A I S I h a v e s e r i e s r e l a t i n g t oe n v i r o n m e n t a l e q u i p m e n t , a n d M c G r a w - H i l l

h a s o n e r e f l e c t i n g i n v e s t m e n t s f o r o c c u p a -

t i o n a l h e a l t h a n d s a f e t y e q u i p m e n t . A l l t h e s e

s o u r c e s d e p e n d o n i n d u s t r y d a t a . R e p o r t i n gp r o c e d u r e s s u g g e s t t h a t c o s t s b e a l l o c a t e d o nthe bas i s o f the product ive or regula tory func -t ion the equipment serves , in an e f for t to l imi tt h e d a t a b a s e t o p u r e l y r e g u l a t o r y i n v e s t -ments . No a t tempt i s made to d i f f e rent ia te in -v e s t m e n t s r e q u i r e d b y s t a t u t e f r o m t h o s e

m a d e v o l u n t a r i l y o r t o d i f f e r e n t i a t e i n v e s t -

ments made in response to more than one reg-

u l a t o r y r e q u i r e m e n t . w h e n t h e s e s e r i e s a r ea d j u s t e d f o r d i f f e r e n c e s i n i n d u s t r y d e f i n i -t i o n , t h e e n v i r o n m e n t a l e x p e n d i t u r e r e p o r t sa r e f a i r l y s i m i l a r , w i t h t h e A I S I d a t a c o n -forming most c lose ly to the OTA def in i t ion o fthe s tee l indus t ry .

I n d u s t r y r e p o r t e d t h a t a n n u a l c a p i t a l i n -

v e s t m e n t s f o r r e q u i r e d e n v i r o n m e n t a l i n v e s t -m e n t s d u r i n g t h e 1 9 7 0 ’ s a v e r a g e d 1 3 . 1 p e r -

c e n t , o r $ 2 8 0 m i l l i o n , o f t o t a l c a p i t a l s p e n d -ing . po l lu t ion cont ro l inves tments have gradu-

a l l y i n c r e a s e d , p a r t i c u l a r l y s i n c e 1 9 7 5 . I n1 9 7 8 , t h e s t e e l i n d u s t r y r e p o r t e d t h a t e n v i -r o n m e n t a l c a p i t a l s p e n d i n g w a s a b o u t 1 8 p e r -c e n t , o r $ 4 5 0 m i l l i o n , o f t o t a l c a p i t a l i n v e s t -

) 1- – - -


ment ( tab le 141 ) . Assuming tha t ha l f o f the en-v i r o n m e n t a l i n v e s t m e n t w a s f i n a n c e d w i t h

IDBs , about $225 mi l l ion , or 9 percent , o f to ta lc a p i t a l s p e n d i n g m u s t h a v e c o m e f r o m i n t e r -

n a l l y g e n e r a l l y f u n d s , l o a n s , o r s t o c k o f f e r -ings. * E n v i r o n m e n t a l c a p i t a l e x p e n d i t u r e ss e e m t o h a v e b e e n m o r e b u r d e n s o m e f o r s t e e lthan for o ther ma jor po l lu t ing industr ies . The

c h e m i c a l , p e t r o l e u m , a n d e l e c t r i c a l u t i l i t y i n -d u s t r i e s s p e n t n o m o r e t h a n a b o u t 1 0 p e r c e n to f t h e i r t o t a l c a p i t a l i n v e s t m e n t o n p o l l u t i o n

a b a t e m e n t d u r i n g t h e 1 9 7 0 ’ s ( t a b l e 1 4 2 ) . R e l -

a t i v e l y h i g h e r r e g u l a t o r y s p e n d i n g m a y t osome ex tent h a v e a f f e c t e d s t e e l ’ s p r o f i t a b i l i t ya n d l i m i t e d i t s c a p i t a l s p e n d i n g f o r m o d e r n i -z a t i o n a n d R & D .

E P A a n d O S H A r e g u l a t i o n s , a l o n g w i t ht h e i r i m p a c t s o n c a p i t a l r e q u i r e m e n t s , h a v el e d t o c h a n g i n g e m p l o y m e n t r e q u i r e m e n t s .

W h e n e x t r a w o r k e r s a r e n e e d e d f o r t h e o p e r -

a t ion o f re t ro f i t equ ipment , l abor product iv i tyt e n d s t o d e c l i n e . I n o t h e r i n s t a n c e s , m a i n l y

w h e n l e s s p o l l u t i n g s u b s t i t u t e t e c h n o l o g i e s

s u c h a s c o n t i n u o u s c a s t i n g o r e l e c t r i c f u r -n a c e s a r e i n v o l v e d , l a b o r p r o d u c t i v i t y i n -

*Data provided by the EPA Office of Planning and Manage-ment suggest that the steel industry has in the past financedclose to half of all pollution abatement investments with IDBs,

Table 142.—Pollution’ Abatement Investments as aPercentage of Total New Plant and Equipment

Expenditures, Four U.S. Basic Industries, 1973=79(millions of dollars)

—Electric

Steelmaking Chemicals Petroleum utilitiesSic. . . . . 3311973. . . . $1,407

16.6%1974. . . . $2,030

12.1701975. . . . $2,926

13.5%1976. . . . $2,954

15.1701977. . . . $2,815

16.60/01978. . . . $2,622

16.8%

$4,32410.170$5,628

8.3%.$6,30010.8%$6,72311.3?40$6,90210.1 ‘/0$7,205

7.9%

$ 5,40910.9%

$ 7,86810.170

$10,94711.8%

$11,74410.8%

$14,1858.2%

$15,5608.3%

491$16,250

9.2%$17,649

8.9%$17,030

9.6%$18,942

10.5%$21,743

10.4%$24,590

10.O%1979planned $2,908 $8,106 $17,504 $27,308

18.4% 7.1 0/0 8.00/0 9.70/0

aAir, water, and solid waste.SOURCE: U.S. Department of Commerce, Survey of Current Business, June

1978 and June 1979.

c r e a s e s and there is a d e c l i n e in the totaln u m b e r o f e m p l o y e e s . A s e c o n d e m p l o y m e n t

e f fec t i s o f a d i s t r ibut iona l na ture . I f a p lantc loses down, perhaps in par t because o f regu-l a t o r y r e q u i r e m e n t s , e m p l o y m e n t w i l l d e c l i n ein the a f fec ted area . Th is dec l ine may be o f f -

s e t b y p r o d u c t i o n i n c r e a s e s i n o t h e r s t e e l

c o m p a n i e s , u n l e s s t h e o u t p u t o f t h e c l o s e d

Table 141.–Total and Regulatory “Current Capital Costs” for the U.S. Steel Industry, 1969.79

Pollutioncontrol

Pollution control as percentTotal capital Pollution control as percentage of of net Occupational healthinvestment Net capital investment capital investment income capital investments

income Percent ofYear Commerce AISI AISI Commerce AISI Commerce AISI AISI (million) total1969 . . . . . . . . . NA 2,046.6 $ 879.4 NA $138.0 NA 6.7 15.69 — —1970 . . . . . . . . . NA 1,736.2 531.6 NA 182.5 NA 10.5 34.33 – –1971 . . . . . . . . . NA 1,425.0 562.8 NA 161.5 NA 11.3 28.69 – –1972 . . . . . . . . . 1,174.3 774.8 201.7 NA 17.1 26.03 193.01973 . . . . . . . . . $1,407

12.31,399.9 1,272.2 $234 100.1 16.63 7.1 7.86 121.0 6.9

1974 . . . . . . . . . 2,030 2,114.7 2,475.2 245 198.8 12.06 9.4 8.03 92.0 3.51975 . . . . . . . . . 2,926 3,179.4 1,594.9 396 453.0 13.53 14.2 28.4 70.0 1.91976 . . . . . . . . . 2,954 3,252.9 1,337.4 146 489.2 15.09 15.0 36.57 34.0 0.91977 . . . . . . . . . 2,815 2,319.3a 377.3a 470 407.6 16.7 1 7.5a 108.0a 41.0 1.21978 . . . . . . . . . 2,622 2,538.3 1,291.9 441 457.9 16.8 18.0 35.44 41.0 1.21979 . . . . . . . . . NA NA 1,297.2 NA 650.9 NA NA 50.17 NA NA

aExcluding Bethlehem Steel, which incurred a $355 million loss in 1977 due to plant closings.NOTE: AISI estimates are for the steel industry proper, Commerce Department estimates are for all environmental expenditures by steel companies, including for occa-

sionally substantial nonsteel expenditures.

SOURCES Commerce—Survey of Current Business, June 1978 (survey started in 1973; solid waste for all years); AISI—Armual Statistical Report, 1978 (air and water)only; Special Survey (air and water only), McGraw HiII, Annual Surveys of Investments in Employee Safety and Health, vols. 1-7, 1973-79

Ch. 11—impacts of EPA and OSHA Regulations on Technology Use ● 347

plant is replaced by imports. The increasing

use of s c r a p a n d e l e c t r i c f u r n a c e s , a c c e l e r -a t e d b y r e g u l a t o r y c o n s i d e r a t i o n s , m a y a l s obe leading to a loss of jobs, or at least a shifto f employment f rom bas ic i ronworking to thes c r a p i n d u s t r y .

EPA expec ts the l eve l o f cap i ta l inves tment

f o r r e g u l a t o r y c o m p l i a n c e u n t i l t h e m i d -

1 9 8 0 ’ s to be lower than does AISI, but it ex-p e c t s t h a t a n n u a l i n v e s t m e n t s w i l l g r a d u a l l yi n c r e a s e over th i s per iod , whi le AIS I assumesroughly s imi lar l eve l s . Accord ing to E P A , b e -t w e e n 1977 and 1986 the steel industry w i l linvest $41.+1 bil l ion, or about $490 mill ion a n -n u a l l y , i n p o l l u t i o n a b a t e m e n t e q u i p m e n t t oc o m p l y w i t h c l e a n a i r a n d w a t e r r e q u i r e -

m e n t s .30 AISI , on the other hand , predic ted in1 9 7 8 t h a t 1 9 7 6 - 8 5 c a p i t a l i n v e s t m e n t s f o r

c o m p l i a n c e w i t h a l l e n v i r o n m e n t a l r e g u l a -t i o n s w o u l d b e $ 4 . 9 b i l l i o n , o r a b o u t $ 5 5 0m i l l i o n a n n u a l l y . 3 1 I n 1 9 8 0 , A I S I e s t i m a t e dt h a t e n v i r o n m e n t a l p l u s o c c u p a t i o n a l h e a l t hi n v e s t m e n t s w i l l a m o u n t to $ 8 0 0 m i l l i o n p e r

y e a r u n t i l 1 9 8 8 .3 2

Opera t ing and maintenance costs for regu-la tory equipment are an a d d i t i o n a l cost b u r -

d e n , a n d a s m o r e p o l l u t i o n a b a t e m e n t s y s -tems are installed these costs will increase .Using the 1978 AISI estimate, 1979 annual-ized air and water pollution abatement costs(capital recovery, operating, and mainte-nance) were about $2.5 billion.33 This is about$0.5 billion higher than comparable EPAestimates (table 143). The AISI data are an-nual averages of cumulative investment pro-jections, while the EPA data attempt toreflect actual capital investments expected tobe made each year. Thus, EPA estimates forcapital investment and annualized costs in-crease over time in accordance with antici-pated compliance with future regulatory re-quirements, and AISI projections show higher

‘EPA, The Cost of C)ean Air and Water, op. cit.31 ADL/AISI, Stee] and the Environment, 1978, p. 1 (1979 dol-

lars).32 AISI, Steej at the Crossroads, 1980, p. 44.“About $1.3 billion of this amount is for operating and main-

tenance costs only. This is in contrast to the $5OO million esti-mate for O&M in AISI’S Steei at the Cross Roads (republicat-ion draft), 1980, p. 11-7.

near-term capital recovery and operatingcosts than does EPA. The EPA estimates moreaccurately represent actual industry prac-tices, while the AISI data for annualizedpollution abatement costs overestimate cur-rent expenditure levels somewhat by includ-ing certain investments well before compli-ance deadlines.

Using industry estimates for annualized en-vironmental costs, one finds that they added6.4 percent to production costs in 1979. Usingthe lower EPA annualized estimates, reflect-ing in part lower current expenditure levelsrelative to future requirements, the figure is5.1 percent (table 143). *

OSHA-stimulated capital costs have on theaverage been considerably less than those forenvironmental regulations. Thus far, majoroccupational regulations have covered a nar-rower range of steelmaking processes, andimplementation of major OSHA regulations isa more recent development. Capital invest-ments for occupational safety and health dur-ing the 1970’s averaged $85 million per yearor about 5.8 percent of total capital spending,but there is no clear trend yet in these ex-penditures. In 1978, steelmaker reported in-vesting $41 million for industrial safety andhealth purposes (see table 141).

Steel industry investment levels for oc-cupational safety and health were on averageless than half those of other basic industries,such as the chemical and electric utility in-dustries, but they represented a higher pro-portion of total capital spending (table 144).Steel industry opportunity costs for occupa-tional safety and health have on the averagebeen higher than for other industries. Thus,compared to other basic industries, steel maybe under greater pressure to forgo invest-ments in new production equipment becauseof OSHA-related investments.

*EPA estimates that annualized capital and operating costsfor environmental requirements have in the past added 4.6 per-cent to steel production costs and prices. [EPA, Industrial Anal-ysis Branch, letter to OTA, Mar. 18, 1980.)


Table 143.-Effect of Environmental Requirements on Steel Production Costs and Prices, 1979-83 (1979 dollars)

P.A. asAnnualized percentage of P.A. as

Annualized P.A. costsa (millions) P.A. costs Production production percentage ofOperating and Capital per tonne costs per Total revenue costs per total revenuemaintenance recovery Total shipped b tonnec per tonne tonne per tonne

ADL/AISI1979. . . . . . $1,360.60 $1,151.30 $2,512.00 $27.08 $422.40 $467.50 6.4 5.81983 . . . . . . 2,261.50 1,926.00 4,188.50 41.88 574.20 605.00 7.3 6.9

EPA1979. . . . . . 1,260.30 734.64 1,995.04 21.50 422.40 467.50 5.1 4.61983. . . . . . 2,456.65 1,411.93 3,868.35 37.98 574.20 605.00 6.6 6.3

NOTE: P.A. = pollution abatement.1) Annualized P.A. costs; capital, operating, and maintenance costs for air and water requirements 1983 AISI estimate Includes fugitive emissions, but 1979

estimate does not.2)8% annual inflation assumed between 1979 and 1983.3) Shipments: 197992.5 million tonnes.

198399.8 million tonnes,aArthur D. Little (for AISI). Steel and the Environment: A COSt Impact Ana;ysis, 1978, p. 3.bEnvironmental Protection Agency, “The Cost of Clean Air and Water,” report to Congress, 1979cWorld Steel Dynamics, Core Report J. Steel Prices, Costs, and Proflts, 1979.

Table 144.-Reported and Planned Investment in Employee Safety and Health, Four Basic Industries, 1972-82(in millions of 1978 dollars and as percentage of capital spending)

1972 1973 1974 1975 1976

Iron and steel . . . . . . . . $193 12.3% $121 6.9% $ 9 2 3.5% $ 70 1 .90/0 $ 34 0.9%Chemicals. . . . . . . . . . . 72 2.1 89 2.0 119 2.1 200 3.2 234 3.5Petroleum. . . . . . . . . . . 68 1.3 196 3.6 216 2.7 263 2.5 128 1.1Electric utilities . . . . . . 203 1.4 144 0.9 229 1.3 170 1.0 150 0.8

All-manufacturingaverage . . . . . . . . . 52.1 3.0 67.0 3.2 87.6 3.4 92.2 3.1 64.6 2.2

1972-781977 1978 1979 planned 1982 planned annual average

Iron and steel . . . . . . . . $ 4 1 1 .2% $ 4 1 1.7% $ 4 1 1.4% $116 3.3% $84.5 4.O%Chemicals. . . . . . . . . . . 212 3.1 249 3.5 243 2.9 349 3.6 167.8 2.7Petroleum. . . . . . . . . . . 250 1.8 490 3.2 600 3.4 222 1.1 230.1 2.3Electric utilities . . . . . . 194 0.9 448 1.8 413 1.4 577 1.8 219.7 1.1

All-manufacturingaverage . . . . . . . . . 87.2 2.6 114 3.0 127.5 2.8 111.2 2.3 79.2 2.9

SOURCE McGraw-Hill, 1st through 7th Annual Surveys of Investrnent in Employee Safety and Health, (1973-79).

There are no comprehensive data on annu-alized operating and maintenance costs ofOSHA regulations or on the impact of theseregulations on cost and price competitive-ness. It stands to reason that the cost impactwill be far less than that of environmentalregulations. More importantly, there are nothorough analyses of the cost impact of EPAand OSHA regulations, together. The fullcosts of regulation will be less than the sum ofthe costs for meeting EPA and OSHA stand-ards separately, because standards overlapboth within and between the two sets of regu-

Need for Improved RegulatoryCost Projections

Steel industry capital expenditures for pol-lution abatement during the next few yearswill be concentrated in investments such ashigh-performance environmental equipmentfor the control of fugitive emissions and forthe treatment of carcinogenic or hazardousair and water pollutants, OSHA-related costincreases are expected to be associatedmainly with required process changes—suchas closed systems, improved ventilation,and acoustical redesign—and operational

lations. changes leading to reduced coking times.


Both EPA and OSHA conduct economic-im-pact analyses of major proposed regulations.In addition, EPA periodically prepares com-prehensive industry impacts of the cost ofregulations. The steel industry also sponsorseconomic-impact analyses of regulatory re-quirements. However, economic-impact stud-ies concentrate only on anticipated regula-tory costs. There is little or no effort to com-pare these costs with the benefits resultingfrom new or extended regulations, nor do thestudies compare the cost effectiveness of reg-ulatory control technologies for the steel in-dustry with those for other industries. Andfinally, these projections generally do not con-sider the offsetting effects (which can be con-siderable) of fiscal incentives or public-fi-nancing options on capital need estimates forregulatory compliance. Both planning and de-cisionmaking will be aided if future projec-tions take these factors into consideration.

Future Regulatory Cost Impacts

Available cost studies often show differentcost impacts for the same regulations. For in-stance, EPA annualized environmental costprojections for capital and operating expend-itures into the mid-1980’s are 8 percent lessthan those prepared by AISI for the same pe-riod (see table 143), while the Agency’s capi-tal expenditure projections are approximate-ly 20 percent lower than AISI’s (table 145).

Each successive projection has increasedthe predicted cost of regulatory compliance.A 1970 EPA report to Congress identified par-ticulate as the steel industry’s major pollut-ant and projected 1975 operating and mainte-nance costs for air pollution compliance to bearound $250 million.34 A 1979 report for EPAestimates that similar expenditures for the1981-86 period are expected to be $780 mil-lion per year.35 These increases over time andby the same agency are the result of inflation,better forecasting, and the installation of ad-ditional equipment needed to control hazard-ous pollutants.

Even regulatory cost projections developedaround the same time and covering approxi-mately similar regulatory areas frequentlyshow rather different estimates of futurecapital investments and operating costs. Dif-ferences between industry and Governmentprojections are largely attributable to dif-ferent assumptions concerning facility re-placement rates, expansion programs, tech-nological choices, interpretations of regula-tions, and the scheduling of regulatory in-vestments. The more extensive the industry’sinvestment in integrated facilities—as in theHigh Investment scenario discussed in chap-

“Department of Health, Education, and Welfare, The Cost ofClean Air, second report to Congress, March 1970, SenateDocument 91-65.

“EPA, The Cost of Clean Air and Water, op. cit.

Table 145.—Annual Steel Industry Investments in Abatement Equipment (air, water,coke ovens): Projected Increases, 1970-85 (millions of 1978 dollars)

Industry estimates Federal estimates1978 Pollution abatement $450.00 EPA $441.00

Industrial health 41.00 OSHA b

41.00$499.00 =1985 Pollution abatement 700.00 EPAc

Industrial health 1 0 0 . 0 0 OSHA d

$800.0068.00

$558.001978-85 increase 60% 1570

aAll applicable regulatory requreements.bSteel industry reported data since no Federal estimates are available.c1977-86.

d1976-85

SOURCES: Survey of Current Business, June 1978, McGraw-Hill, Survey of Investment in Employee Satety and Health, 1979, American Iron and Steel Institute, AnnualStatistical Report, 1979, Environmental Protection Agency, The Cost of Clean Air and C/can Wafer, Report to Congress, 1979, D.B. Associates, InflationaryImpact Statement Coke Ovens, report prepared for OSHA, 1976, American Iron and Steel institute, Steel at the Crossroads, 1980


ter 10—the greater regulatory capital costswill be. Technological choices and the facilityreplacement rate will also significantly in-fluence future regulatory capital costs: for in-stance, electric furnaces and continuouscasters require less regulatory investmentthan parallel conventional equipment, and ahigh replacement rate reduces the need forcostly retrofit equipment.

In addition to uncertainty about futurechanges in the economy, Federal policies, andindustry investment decisions, the followingfactors also contribute to differences in regu-latory cost projections:

● Different interpretations of regulatory re-quirements:—AISI cost projections are reported to in-

clude compliance costs for some facili-ties scheduled for shutdown by the early1980’s; only if shutdown took place after1982 would these facilities be subject toenvironmental regulations.

—AISI assumes a 20-percent coke oven ca-pacity increase will be needed to replaceexisting capacity expected to be lostunder a strict interpretation of thestandard; the OSHA-sponsored analysisappears to include only retrofitting ofexisting capacity .3’

● Unknowns about qualifying regulatorytechnologies:—Uncertainties about qualifying abate-

ment technologies have produced widelydifferent cost estimates for specific EPAstandards such as those concerning fugi-tive emissions, storm runoff, and BATrequirements for air- and water-qualitycontrol .37

—Industry-sponsored economic impactstudies of the proposed coke oven stand-

‘Federcd Register, Oct. 22, 1976 p. 4674846749; Temple,Barker, and Sloane, “The Financial Impact of Proposed CokeOven Standards on the U.S. Steel Industry, ” report preparedfor AISI n.d., p. 7; Policy Models, Inc. A Methodological Ap-proach for Use in Assessing Impact of Government Regulationof the Steel Industry, report prepared for the Council on Wageand Price Stability, 1977, p. A-33.

370rganization for Economic Cooperation and Development.Emission Control Costs in the Iron and Steel Industry, Paris,1977, p, 151.

●

●

ard included capital costs for automaticand remote control systems that, accord-ing to the United Steelworkers of Amer-ica, would only be required of new andrehabilitated batteries.38

Differing allocation of joint costs for pro-ductive and control equipment.—This isan issue whenever investments are madein new production processes simultane-ously aimed at improved productivity andenvironmental compliance. Examples in-clude capital costs for waste-product re-cycling systems and perhaps even electricfurnaces. Available time series on in-vestments in regulatory equipment attemptto allocate costs on a functional basis. Itappears, however, that steel companiestend to allocate joint costs disproportion-ately to the regulatory function, therebyoverestimating compliance costs. For in-stance, the EPA Enforcement Office arguesthat AISI charged the cost of facility clo-sures, modernizations, or replacements asenvironmental costs even though substan-tial production benefits may be realized. Ifsteel industry modernization programs arestepped up in response to growing demand,the issue of proper allocation of joint costswill grow in importance.

Lack of access to independent industrydata.—In its 1977 report on EPA, the Na-tional Academy of Sciences noted that:

EPA is inevitably dependent on the in-dustries it regulates for much of the tech-nical and economic information it uses indecision-making (among others with re-spect to) the assessment of the costs andtechnical feasibility of pollution processesto achieve pollution control. The impact ofmany decisions on industry creates a po-tential conflict of interest that may causeindustry either inadvertently or intention-ally to distort or withhold necessary in-formation.

The Academy recommended that:

EPA should develop sufficient scientificand technical expertise with the Agency

38Federa] Register, oct. 2 2 , 1 9 7 6 , P. 4 6 7 4 9 ; policy Models,Inc., op. cit., p, A-9; Federal Register. Oct. 22, 1976, p. 46748.

Ch. 11—impacts of EPA and OSHA Regulations on Technology Use 351

or through independent institutions (andthat EPA) should institute procedures toassure the quality, reliability, relevanceand completeness of data provided by in-dustry for EPA’s use.39

Similar observations very likely also apply toOSHA. Both agencies have taken steps tostrengthen their economic analysis activitiesin response to the growing interest in theeconomic implications of regulatory require-ments.

It is important to recognize that projectionsare essentially best available estimates ofpredicted industry regulatory investments.Not only do projections differ between spon-soring organizations and over time, they alsoappear to be higher than actual expenditurereports with they attempt to predict. EPArecently reported that steel producers spentless money meeting antipollution regulationsthan either the industry or EPA had pre-dicted. The Agency found that for the 1975-77period, industry investment estimates forwater pollution control were three timeshigher than actual costs incurred. EPA esti-mates were about 1-1/2 times higher than ac-tual steel industry regulatory expenditures. *

Future steel industry investment in regula-tory equipment is, according to Federal esti-mates, expected to increase by 13 percent toabout $550 million annually until the mid-1980’s. The industry, on the other hand, ex-pects that future levels will be almost doublecurrent investments, averaging $800 millionper year (see table 145).

“National Academy of Sciences, Decision Making in the Envi-ronmental Protection Agency, 1977, vol. II, p. 12.

*Washington Post, June 19, 1980, p. A7.

While U.S. regulatory investments are ex-pected to increase over the next severalyears, Japanese steelmaker are beginning toexperience the opposite trend. The financialburden of pollution abatement seems to havebeen highest in Japan from 1971 through1976 (table 146). These efforts were closelylinked to the installation of new equipment;upon completion of the last expansion proj-ects in 1977, the industry’s pollution controlexpenditures have declined significantly andrecently they have been below those of theAmerican industry. Because American steelfirms are still in an earlier stage of complyingwith regulatory requirements, their expendi-tures for this purpose are likely to remain forsome time at a considerably higher level thanthose of Japanese firms. In Japan, where alarge portion of capacity is of relatively re-cent vintage, antipollution devices could bedesigned to fit the new equipment. This hasled to lower costs per tonne of steel producedthan the retrofitting of such devices on oldequipment. Moreover, a greater effort wasmade in Japan than elsewhere to utilize cap-tured waste gases for power generation; thisreduces the requirement for purchased ener-gy and thus helps offset to some extent thecost of operating the antipollution equip-ment .40

Using AISI and EPA projections for thedistribution of regulatory investments overtime, 1983 annualized air and water pollutionabatement costs (operation and maintenance)are expected to be around $4.2 billion and

‘Hans Mueller and Kiyoshi Kawakito, The InternationalSteel Market: Present Crisis and Outlook for the 1980’s, MiddleTemessee State University, conference paper No. 46, 1979, pp.26-27.

Table 146.—Steel Industry Environmental Control Investment Outlays: United States and Japan, 1970-71(in millions of dollars and as a percentage of total capital expenditures)

1977 1976 1975 1974 1973 1972 1971 1970

United States $407.6 $489.2 $453.0 $198.8 $100.1 $201.7 $161.5 $182.517.5°h 15.OYO 14.2% 9.4% 7.1 % 17.170 11 .30/0 10.5%

Japan 555.3 920.1 685.2 555.6 367.9 284.4 219.2 NA15.2 20.6 18.4 18.6 17.3 13.4 8.9 NA

NA = not available

SOURCES American Iron and Steel Institute, Annual Statistical Report, 1978, Hans Mueller and Kiyoshi Kawakito, The International Steel Market Present Crisis andOutlook for the 1980’s, 1979, p. 27.


$3.8 billion, respectively. AISI 1983 capitalrecovery estimates for pollution abatementequipment are a higher proportion of total an-nualized regulatory costs than is the case forEPA estimates. This difference reflects thehigher cumulative capital investments andcapital costs assumed by the steel industry(see table 143). The AISI data show a 66-per-cent increase in annualized pollution abate-ment costs between 1979 and 1983, whileEPA data suggest that annualized costs willnot quite double during this period (see table143). The EPA trend may be the more accu-rate one because its data are based on gradu-ally increasing costs that anticipate compli-ance with the more stringent environmentalrequirements of the mid-1980’s.

EPA projections for cumulative 1979-83capital recovery and operating costs forclean air and water compliance are within 10percent of the AISI projections, and futuresteel production cost and price impacts areprojected to be rather similar. Using AISI andEPA data, annualized clean air and watercompliance costs are expected by 1983 to add7.3 and 6.6 percent, respectively, to steelmak-ing costs. If these regulatory costs are fullypassed on to consumers, steel prices are ex-pected to increase between 6 and 7 percent(see table 143).*

There are no comprehensive cost projec-tions for all OSHA standards applicable tothe steel industry, although individual futurecost estimates are prepared during the stand-ard-setting process. A major standard that ispresently operational is for the reduction ofcoke ovens emissions. An OSHA-sponsoredestimate suggested in 1975 that this standardwould impose annual capital and operatingcosts of at least $22o million.41 The benzene

*Preliminary EPA estimates suggest that air and water con-trol requirements will increase steel prices by no more than 4percent. (EPA, Industrial Analysis Branch, letter to OTA, Mar.18, 1980,)

‘)OSHA estimates annual capital and operating costs of $218million, and AISI estimates $1.28 billion. Expressed as a priceincrease per tonne of coke produced, OSHA anticipates a $2.75increase and AISI an increase of $14.62. OSHA attributes itsestimated increase largely to a projected 18-percent decreasein the productivity of the coking process, AISI’S estimate, on theother hand, is based on cost increases associated with reducedproductivity, external financing costs, and price increases to

standard, now being considered by the Su-preme Court, is not expected to impose addi-tional capital requirements on the steel in-dustry because of its compliance overlap withthe coke oven standard.42 If implemented inits present form, the benzene standard couldadd between $5.5 million and $6 million peryear in steelmaking costs. Cumulative annual-ized capital and operating costs for coke ovenand benzene standards are expected to bearound $275 million per year (1978 dollars).

Still further into the future are regulatorycosts for compliance with final OSHA noisestandards, which are still being developed.One source estimates a compliance cost im-pact of about $100 million annually. *

Financing of Regulatory Equipment

One important option often overlookedwhen analyzing steel industry regulatory cap-ital requirements is IDB financing.43 Such fi-nancing reduces the need for internally gen-erated capital for investments in regulatorytechnologies. IDBs make large amounts of out-side funds available at low cost and for longperiods of time.

All types of permanent facilities, such aspiping, pumping, and treatment units, can befinanced with such bonds. During the early1970’s, Congress authorized State and localgovernments to sell IDBs to help companiesobtain the financing needed to meet Federalpollution control requirements. The public en-tity issues tax-exempt revenue bonds, repay-ment of which is based solely on the credit ofthe business. The public entity is the nominalowner of the property which is conveyed tothe business under a lease, lease purchase,

raise the rate of return on investment to the manufacturing av-erage of 12.4 percent. (Federal Register, Oct. 22, 1976, p.46749; Temple, Barker, and Sloane, op. cit., p. 6: Policy Models,Inc., op. cit., p. A-33.)

‘zOSHA, EJS: Benzene Standard, vol. 1, pp. 5-6.*The final noise standards are expected to be quite different

from the proposed standards, and final cost projections arelikely to differ as well.

‘3For instance, OSHA- and industry-sponsored cost impactstudies of proposed coke oven regulations differed in theirtreatment of IDBs. (FederaJ Register, Oct. 22, 1976, pp.4674846749; Policy Models, Inc., pp. A-9-Io; Temple, Barker,and Sloan, op. cit., p. 7.


installment sale, or similar contract. Thebusiness may also obtain tax advantages,such as the 5-percent investment credit andaccelerated amortization. The Internal Rev-enue Service determines whether the interestpaid to bond purchasers is subject to incometax.44 On average, IDBs mature in 23 yearsand have an average interest rate of 6.8 per-cent. 45

All major industries have increasingly re-lied on low-cost IDB financing to help meetcapital requirements for regulatory compli-ance. Between 1971 and 1977, the steel in-dustry obtained at least $960 million in out-side funds through IDB financing. Thisamounts to 48 percent of past annual pollu-tion abatement investments. IDBs continue tobe more attractive to the steel industry thanavailable fiscal alternatives including a re-cent revision of the tax code which increasedthe investment tax credit for pollution abate-ment equipment from 5 to 10 percent. Thesteel industry’s potential tax savings fromthis source, estimated at $6.5 million for1978, are not likely to be realized because ofthe continued industry preference for IDBfinancing. 46 Continued IDB financing for en-vironmental equipment could reduce futurecapital requirements from internal sourcesby the same 48 percent, thereby reducingtotal internally generated capital needs. *

Future capital shortfalls that may result inpart from regulatory compliance are affectedby broader industry trends in shipments andprofitability. These trends are heavily influ-enced by industry investment strategy andalso by Federal price, tax, and trade policies.Regulatory costs are of concern to the steelindustry in part because these expendituresmay divert capital from the industry’s re-

~~EpA and the Council on Environmental Quality (CEQ), Fed-eral Assistance for Poilution Prevention and Control, 1979, p. 9.

“)EPA, Office of Planning Management, informal survey,1980.

A@To receive a 10.Percent investment credit, steel CrlmpalliE?S

must choose between IDB financing and 5-year amortization.(EPA and CEQ. Ibid, p. 9).

*See ch. 10, table 135.

placement and expansion plans. Capital di-version, however, is a relative concept. Sincethe Renewal scenario discussed in chapter 10projects lower total capital needs than theHigh Investment scenario for the 1978-88 pe-riod, the former would involve a greater pro-portionate diversion of capital from replace-ment and expansion to regulatory compliancethan the latter. Government and industry reg-ulatory capital need projections of $550 mil-lion and $800 million annually would be 18percent and 26 percent respectively of thetotal capital needs under the Renewal sce-nario, but 11 percent and 16 percent respec-tively under the High Investment scenario.However, since the Renewal scenario empha-sizes expansion by means of nonintegratedplants, regulatory capital needs may be lessthan even the $550 million of $800 millionprojections.

Conclusion

Federal projections for meeting OSHA andEPA steel industry standards suggest that by1985 annual investments for regulatory com-pliance will increase by 13 percent over 1978levels, to about $550 million, while the steelindustry predicts that by 1985 capital spend-ing for a broader range of regulatory require-ments will increase by 35 percent over 1978levels, to about $800 million per year.

Federal and industry regulatory invest-ment projections may be integrated with theRenewal and High Investment scenarios dis-cussed in chapter 10 to determine the magni-tude of future capital diversion from steel in-dustry modernization to regulatory compli-ance. Industry data suggest that in 1988, cap-ital diversion from modernization to compli-ance would have increased by 2 percent to atotal of 16 percent. Federal data, when inte-grated with the lower Renewal scenario, sug-gest that capital diversion could increase byas much as 4 percent to a total of 18 percent.However, when integrated with the morecostly High Investment scenario, Federal esti-mates of capital diversion from moderniza-tion to compliance could decline by more than2 percent to slightly below 12 percent.


These divergent conclusions arise in part reconciliation of these divergent conclusionsfrom differences in estimates of total capital may have to await the time, just prior to im-need and also from the omission of solid plementation of standards, when require-waste and other emerging regulatory costs ments will be firm and qualifying controlfrom available Federal projections. A final technologies will be known,

Regulatory Requirements and Modernization

Summary

Environmental policies have thus far had agreater impact on steel industry investmentdecisions than have those administered byOSHA. To the extent that industry has re-sponded to these policies by making invest-ments in retrofit equipment, they have gener-ally increased production costs, and modestlydecreased labor productivity. On the otherhand, the need for selective facility replace-ment has made it necessary to enter into envi-ronmental agreements earlier than mightotherwise have been the case. Industry eco-nomics are presently such that it can becheaper and more productive to replacerather than retrofit in order to comply withenvironmental standards. In this sense, regu-lations have accelerated industry moderniza-tion. Regulatory requirements have had theirmost serious impact on integrated companieswith a large proportion of aging facilities;they have affected nonintegrated electric fur-nace producers less than other industry seg-ments.

Three major policies are currently of spe-cial concern to the steel industry, all of whichpertain to EPA air quality matters. The costeffectiveness of the revised offset policy hasbecome well established, but potential dif-ficulties remain should a steel company wish-ing to expand have to “buy” emission offsetsto compensate for the additional pollution ex-pected from a planned facility, EPA’s bubbleconcept promises cheaper compliance op-tions for existing and replacement facilities,but there is some concern about possibletradeoffs between different types of pollut-ants within the same plant. And finally, thelimited-life facilities policy is of major concern

to the industry because there is no alternativephase-out schedule for marginal plants be-yond the 1982 statutory compliance date.

Limited Modernization

Regulatory policies, particularly those ofEPA, appear to have slightly accelerated thesteel industry’s modernization process. EPAissues construction permits for new or ex-panded facilities, while OSHA enforcementactivities are limited to inspection of existingproduction facilities; the latter do not directlyaffect construction or expansion plans.OSHA does have an indirect impact on indus-try modernization plans because regulatoryrequirements become effective as soon as anew facility is operational.

The most apparent effect of environmentalregulations on modernization has resultedlargely from recent EPA/industry settlements,which included the closing of old, heavilypolluting facilities and the construction ofmodern replacement facilities. For instance,during the fall of 1978 EPA concluded anagreement with Republic Steel committingthe company to the construction of a newelectric furnace shop and related facilities inone location while phasing out outdated cokebatteries, suiterplants, and blast furnaceselsewhere by 1982.

With a high proportion of outdated facili-ties, for which retrofitting is not cost effec-tive, the industry is poorly equipped to re-spond to present high demand for steel prod-ucts and the anticipated greater demand ofthe 1980’s. The need for facility replacementhas led the industry to comply by selectivelyupdating or modifying existing plants: most


commonly, outdated integrated facilities suchas coke ovens, blast furnaces, and openhearths have been replaced by less pollutingelectric furnaces requiring comparativelylow capital investments.

Both regulatory requirements and industryeconomics influence industry investment de-cisions. The industry reports that 1.3 percentof all steelmaking capacity was phased outbetween 1973 and 1975 because of regula-tory requirements; subsequent shutdowns forthis reason have been of a much smaller mag-

nitude. 47 A 1978 EPA survey, however, found

that market conditions and business con-siderations were major factors in phaseoutand replacement decisions that were in partspurred by environmental requirements. Thesurvey identified 28 facilities, owned by 12companies, with one or more processes thatmay close down or be replaced; it was foundthat contributing business factors includedthe availability and cost of transportation,changing market conditions, and corporateinvestment plans for replacing antiquatedfacilities or rounding out existing facilities. Insome instances, plants were found to b eeither so outdated or in such dire financialstraits that shutdown would simply be in-evitable regardless of EPA action.48

Industry’s view is that if compliance has tobe achieved, it should be accomplished bymaking “safe” investments that require com-paratively small layouts and fit into a plant’sexisting infrastructure. Along these lines,electric furnaces have frequently turned outto be an economically more attractive compli-ance option than extensive rehabilitation ofold facilities or replacing them with identicalnew facilities.49 Initial capital investment andoperating costs for electric furnaces are rela-tively low, and their return on investment asa replacement for outdated facilities is gener-ally very satisfactory.

iTMcGraw Hill, 1st through 7th annual surveys Of hvestmentin Occupational Safety and Hea~th, 1973-79.

4HEPA Enforcement Office, Steel Documentation Book, 1979.‘Steelmaking Today Supplement, Sept. 24, 1979, pp. 34A;

“Bethlehem Steel to Add Minimill Capacity,” New York Times,Aug. 7, 1979.

Industry Differences

EPA and OSHA regulations often affect dif-ferent steel companies and plants in differentways. OSHA regulations, in particular, havea greater impact on integrated plants than onnonintegrated or alloy/specialty companies.The degree of process integration and the ageof the facilities are two of the most significantdeterminants of regulatory expenditures dif-ferent companies face.

Degree of Process Integration.—It appearsthat environmental requirements are a moresignificant element in the cost of steel for in-tegrated plants than for the smaller noninte-grated plants, which involve a less complexrange of steelmaking processes. Further-more, pollution abatement in these plants isalready quite efficient because most of theircontrol equipment was designed for installa-tion at the time of construction.

AISI data show that environmental cost im-pacts are more severe for nonintegrated thanfor integrated plants, but independent OTAdata indicate there is little difference be-tween segments when considering environ-mental investments relative to replacementvalue. However, when considering sales theOTA data show a lower cost impact for nonin-tegrated plants. AISI data show that currentenvironmental costs are about 7 percent ofreplacement value for integrated plants and15 percent for nonintegrated plants. OTAdata show that nonintegrated environmentalcosts would be no more than 7 percent of re-placement value, approximating those of inte-grated mills. This comparison of environmen-tal cost relative to capital cost is clouded,however, by the fact that nonintegratedplants have lower capital costs per tonne ofsteel produced than integrated producers.Comparing the environmental costs relativeto shipments, AISI data suggest that the seg-ments are affected about equally, at about 5to 8 percent. OTA data, on the other hand,show that environmental costs can be as lowas 0.5 percent of shipment costs for noninte-grated plants equipped with wastewater re-cycling equipment (table 147).


Table 147.—Type-of-Plant Differences in Pollution Control Capital Costs (1979 dollars)

Capital costs (millions Percentage of Percentage of totalNumber of plants of 1979 dollars) replacement value shipment cost

Facility type AISI OTA AISI OTA AISI OTA AISI OTAIntegrated . . . . . . . . . . . . 33 — $4,572.0 6.9% — 7.6%Nonintegrated a. . . . . . . .

—8 5 54.0 $9-16 15.0 6.7% 5.0 0.4%

NOTE Investment levels reflect approximate 1979 practices The AISI data are based on 1975 information, validated in a 1978 study and adjusted for changes in the pro-ducer price index for capital goods.

aThese plants are all equipped with wastewater recycling equipment and have zero discharge. Thus, environmental capital and operating costs only pertain to meetingair quality standards.

SOURCES: Arthur D Little, Steel and the Environment. A Cost Imrpact Analysis,nonintegrated steel company

Changes in annual unit costs for emissioncontrol will be greatest for finishing facilitiesbecause fluctuations in the rate of capacityutilization are greatest for this equipment. Asthe operating rate goes down, the annual costof pollution abatement equipment per tonneof steel produced will increase.50

Age, Economies of Scale, Location, and Fi-nancial Performance.—In some instances, theoldest equipment bears a disproportionatecost burden because of comparatively highretrofitting costs. Frequently, compliance ismade easier by replacing outdated equipmentwith more efficient and less polluting facili-ties. Unit pollution abatement costs tend to belower for new facilities in part because theyare larger than the old facilities: various engi-neering estimates indicate that a 100-percentincrease in operating capacity can lead to a20- to 25-percent decrease in unit treatmentcosts for airborne pollutants. Economies ofscale for waterborne effluent control aresomewhat higher— 25 to 30 percent. 51 T h egeographic location of a firm’s steel-produc-ing capacity also can materially influenceregulatory cost impacts. Water pollution con-trol, for example, is often less costly in dryregions, where natural evaporation can inex-pensively reduce the volume of discharge.Smaller and older integrated firms are mostseverely affected by regulatory cost impactsbecause they frequently have limited, if any,financing options for investments in newerand safer steelmaking technologies. Finan-cially and technologically weak firms may

‘OECD, op. cit.“I bid., pp. 88-90.

1975, revised 1978; OTA data from confidential communication with major

have no choice but to undertake relatively in-expensive stopgap measures, which tend tobe counterproductive to the long-range goalsof a viable business enterprise.52 As a result,their relative positions in the industry mayslide even further.

Potential Modernization Problems

In response to private-sector concerns thatEPA’s offset policy for new facility construc-tion would preclude such activity in heavilypolluted areas, the Agency revised its policyin 1977. Under the revised offset policy, newconstruction is allowed if the new facilityuses very stringent emission controls and ifmore than equivalent reductions are madefrom existing sources owned by the same ordifferent companies in the same or contigu-ous States. Virtually all recent EPA/industryconsent-decree settlements have provided forindustry investment in new facilities thatfollow offset policy principles but attain somenet reduction in area emissions.

It is not expected that the revised offsetpolicy will inhibit new facility construction onthe basis of regulatory cost considerationsalone. There was concern that the require-ments for new facilities were too stringent,and thus too costly, compared to require-ments for existing plants. Following this rea-soning, the more stringent requirements gen-erally applicable to new steelmaking facili-ties could encourage firms to defer new con-struction. Thus, firms could continue operat-

3ZN. A. Ashford, Crisis in the WorkpIace: @cupationaI Dis-ease and Injury (a report to the Ford Foundation), Cambridge,MIT Press, 1976, p. 315-316.


ing their older, less efficient plants longerthan they might have in the absence of thesestringent requirements. This reasoning seemsto suggest that environmental requirementsalone can shape investment decisions. How-ever, investment decisions are based onoverall cost (rather than merely environmen-tal cost) for new or existing plants and on therate of return on alternate investments. Rela-tive stringency of environmental require-ments is only one of several factors influenc-ing such decisions,

A 1979 EPA-sponsored report analyzed in-vestment scenarios for certain steelmakingprocesses by comparing environmental costrequirements of retrofit with new facilityreplacement. 53 The authors found that onlytwo investment options were attractive (usingtypical industry criteria for return on invest-ment), and neither of these options favoredretrofitting as a favorable way to meet en-vironmental requirements. The preferred op-tions were: 1) replacement of conventionalcasting processes with continuous castingand 2) contraction of existing facilities cou-pled with construction of new electric fur-naces. Steelmaker are in fact actively pursu-ing the latter option, thereby implicitly con-firming EPA’s conclusion that replacementcan provide a more attractive return on in-vestment than the alternative of retrofittingaging equipment—despite the fact that suchreplacement facilities would have to meetmore stringent environmental standards.

The revised offset policy might still createdifficulties should a company decide to ex-pand its productive capacity to a point thatwould create additional pollution. Prelim-inary EPA findings, however, suggest thatmost steel plants will be able to find internaloffsets for expansion under the revised offsetpolicy, and the few plants unable to developinternal offsets would be able to trade offsetswith other plants.54 The major concern may

not be with the availability of tradeoffs butwith the cost of trading emission offsets be-tween companies. If unable to efficiently de-velop internal tradeoffs, a steel companymight have to “buy” emission offsets fromestablishments that are able to control pollu-tion more cheaply and effectively, thus plac-ing an extra economic burden on the indus-try. Although a “market” in offsets mightminimize the total cost of achieving emissionreduction in a region, steel producers wouldprobably pay a relatively high price becauseof the complexity and high cost of pollutionabatement in the industry.

Recently EPA also. adopted the “bubbleconcept” for existing plants and replacementfacilities. The bubble concept applies the off-set principle at the plant level and enablesEPA to regulate entire plants as singlesources rather than as a collection of sepa-rate emission points. This approach in-creases regulatory flexibility by enabling theindustry to impose stringent controls where itis least costly and to relax controls on emis-sion points with similar pollutants but highercontrol costs. Because it emphasizes cost ef-fectiveness, EPA expects that the bubble con-cept will provide industry with increased in-centive for innovation in environmental con-trol technology.

The bubble concept is particularly appro-priate for steel mills because of the manyemission sources in a typical plant. RecentEPA analyses suggest potential cost savingsof 5 to 11 percent, or $1.2 million to $1.9 mil-lion per year, for moderate controls on aver-age-size integrated plants in industrializedregions of the country. Potential cost savingsfor nonintegrated minimills are 20 percent, or$20 million per year, for stringent controls.55

The flexibility inherent in the bubble conceptwould also apply to equipment replacement:rather than replace old facilities and controlthe new source of emissions, managementcould opt to install other new equipment with

“Mathtec, Inc., “The Effect of New Source Pollution ControlRequirements on Industrial Investment Decisions,’” report pre-pared for EPA, 1979, p. 76.

“EPA, Industrial Analysis Branch, letter to OTA, Mar. 18,1980.

“Putnam, Hays, and Bartlett, “An analysis of the cost impactof plant-wide emission controls (the bubble concept) on four do-mestic steel plants, ” prepared for the Economic Analysis Di-vision of EPA, 1979.


tighter and less costly controls elsewhere inthe plants.56

The steel industry is also concerned aboutthe impact that the limited-life facilities pol-icy will have on modernization. This policydoes not provide the special treatment for ag-ing plants that industry has sought; it merelypermits the conditional operation of noncom-plying facilities for which there are agree-ments involving replacements or phaseoutsno later than December 1982.57 Implementa-tion of this policy may accelerate the closingof old, inefficient facilities and thereby in-crease the productivity of the industry. Theleadtime is short, however, possibly to shortfor the timely replacement of aging faciltieswith major new facilities. There is consider-able concern that large replacement expendi-tures crowded into short periods may overtaxthe financial capability of the industry andfurther capacity contraction.

Like EPA, OSHA does not exempt marginal,noncomplying facilities whose planned phase-out is beyond applicable compliance dead-lines. OSHA appears to have greater adminis-trative flexibility than EPA, however, be-cause the duration of variances for individualfacilities is not specified in the authorizinglegislation. An executive task force reviewingOSHA regulations has recommended that:

OSHA begin to identify standards forwhich compliance could be mandated in tan-dem with normal equipment replacement cy-cles instead of by retrofitting.58

OSHA may issue variances aimed at in-novative compliance approaches on a case-by-case basis or perhaps, industrywide by

’633 MetaJ Producing, January 1980, p. 23.Sqndustry sources suggest that large-scale retrofitting of old

facilities is less often required abroad than in the UnitedStates. Old plants, particularly in Japan, have to be retrofittedonly to meet the most serious violations. (AISI, Steel at theCrossroads, prepublication draft, 1979, p, II-7.)

‘“Interagency Task Force on Workplace Safety and Health,“Making Prevention Pay, ” 1978, p. I-3.

considering modernization rates. InformalOSHA comments suggest that, until recently,variances may have been under utilized.

Current enforcement and compliance ac-tivities may also have a serious impact on fu-ture coke and scrap problems if they fail togive sufficient consideration to new substi-tute steelmaking technologies. A number ofsteel companies have found it profitable toconstruct additional cokemaking capacity,because the use of company-owned coal andthe sale of coke byproducts generate fiscalbenefits and additional revenues that can faroutweigh the regulatory costs associated withcokemaking. However, a more prevalent re-sponse to regulatory and market forces hasbeen to install electric furnaces to replaceoutdated integrated equipment like coke bat-teries, sinter plants, and blast furnaces—in-dustry economics are presently such that it isoften cheaper to build electric furnaces thanto retrofit or make replacements in kind. As aresult, U.S. coking capacity declined from 61million to 49 million tonnes between 1975 and1978. Domestic coke supplies are now beingsupplemented with imported coke, some ofwhich is processed abroad from Americanmetallurgical coal. Growing use of scrap willhelp offset some of the anticipated coke short-age while undoubtedly also contributing to in-creases in the price of scrap. Industry andEPA alike have underassessed the long-termraw material pressures and the technologicalalternatives that could reduce the likelihoodof future shortages or price increases. One ofthese alternatives, continuous casting, re-duces the need for coke and other processmaterials by increasing yield. Improved cokerates in newer blast furnaces will also helpreduce the need for coke. Still another option,domestic or imported direct reduced iron,could be used as a superior complement tolimited scrap supplies. Although major inte-grated companies have made only minimal ef-forts in these areas, smaller firms are active-ly pursuing continuous casting and consider-ing the merits of direct reduction.

Ch. 11—Impacts of EPA and OSHA Regulations on Technology Use 359

Conclusion

Regulatory requirements have been andwill continue to be a major cost burden on thedomestic steel industry. As additional pollu-tion control equipment is installed during thenext few years, the industry’s capital, operat-ing, and maintenance costs will increase ac-cordingly. Future industry decisions regard-ing facility replacement, capacity expansion,and selection of steelmaking technologies, aswell as trends in productivity and shipments,will all have some influence on future capitalinvestments for regulatory compliance. Fed-eral agencies expect that regulatory invest-ments for air, water and coke oven pollutionabatement will increase modestly to around$550 million per year by the mid-1980’s.These estimates do not include anticipatedcapital investments for emerging require-ments, including those for noise abatementand hazardous solid waste disposal. Industryprojections suggest that regulatory capital in-vestment will increase by almost 60 percentto $800 million annually to meet all presentand future requirements. IDB financing,heavily used by the industry as a source ofregulatory capital, will help offset potentialfinancing problems. Once compliance hasbeen achieved by the mid-1980’s, pollutionabatement equipment investments could welllevel off, while operating costs—dependingon the replacement rate—could either leveloff or increase.

Had these requirements emerged during aperiod of vigorous industry renewal and ex-pansion, their costs would have been consid-erably less burdensome. Retrofitting, the pre-vailing compliance approach, is not a very ec-onomical way of responding to Federal man-dates. Additional RD&D is needed to find andencourage the use of more cost-effective,high-performance regulatory technologies.The potential private gains from regulatoryresearch are limited, however, and the indus-try prefers to use already available controlsystems. Future industry decisions regardingreplacement and expansion, its selection ofsteelmaking technologies, and trends in itsproductivity and shipments will heavily influ-ence future capital investment for regulatorycompliance.

Federal regulations, particularly those ad-ministered by the EPA, have in effect forcedcompanies that wish to modernize or expandto enter into compliance agreements with theAgency. This has accelerated industry phase-out and replacement of marginal facilities, sothat environmental and occupational policieshave had beneficial, as well as detrimental,effects on the industry. Economic considera-tions have recently been receiving greaterweight in the identification of qualifying con-trol technologies, and the industry hopes thatthe feasibility of future regulatory technolo-gies will also be fully considered.

CHAPTER 12

Employees and the Developmentand Use of New Technology

Contents

Page

Summary ● * * * * * * * * * * * * * * * . * * * * * * * * * * * * - 363

Technically Trained Personnel.... .... ....364Education . . . . . . . . . . . . . . . . . . . . . . . ● . . . . . 364Technical Manpower Use. . ...............366Differences Between Industry Segments. ....368Employment and Continuing Education .. ....369Present and Future Manpower Needs. .. ....369

Labor ● **9**** ● S******* 8******** ● s*..** 370Apprenticeships and Retraining . ..........370Job Classification .. .. ** *. .. .. ***. .371 *..37lLocal Work Practices. . . . . . . . . . . . . . . . ,..!371

Conclusion ● .****** ● **.***** ● ******** ● * 373

Llst of Tables

Table No. Page148. Steel Industry Technical Personnel

Proportion in Total Work Force: Tonnesper Technical Personnel, 1979 . . . . . . . 364

149. Technical Personnel Degree and WorkAssignment . . . . . . . . . . . . . . . . . . . . . . . 365

150. Technical Personnel by Degree andField . . . . . . + . . . . . . . . . . . . . . . . . . . . . 366

CHAPTER 12

Employees and the Developmentand Use of New Technology

Summary

An industry’s human resources are a vitalfactor in its ability to develop and adopt morecompetitive process technologies or to pro-duce improved products. Steel industry per-sonnel may be differentiated on the basis ofeducation and compensation method. For thepurposes of this study, technically trainedpersonnel are employees with academic de-grees in physical or computer sciences orengineering disciplines. Also included in thiscategory are nondegree salaried employees,such as “melters,” who have a high degree oftechnical expertise, training, and responsibil-ity. Employees in the labor category generallyhave lower levels of education than technicalpersonnel and are paid on an hourly basis.

The steel industry uses smaller numbers oftechnically trained personnel, and those per-sonnel have lower levels of education, than istypical of most other industries. Slightly morethan half of all technical personnel are em-ployed in production and quality control, fol-lowed by somewhat less than one-fifth in engi-neering and R&D. Integrated firms employlarge numbers of technical personnel in pro-duction, while alloy/specialty firms have ahigh proportion in quality control and market-ing. These differences in the use of technicalpersonnel are, to some extent, a reflection ofthe relative importance of these areas to thetwo industry segments. The nonintegratedsegment employs the fewest technical person-nel, consistent with the greater simplicity ofboth its processes and its products.

Research personnel are mainly responsiblefor market-oriented research that will lead toevolutionary changes in process and product.Their number declined during the early1970’s and has since slowly climbed back to

1970 levels. l Steel-related research in foreignnations provides more long-term intellectualand professional opportunities for technicallytrained personnel than in the United States.This may be attributed to greater governmentsupport for research abroad and also to thegreater involvement of foreign steel compa-nies in the sale of machinery and technology.

Opportunities for personnel-based technol-ogy transfer in the United States are limited,partly because movement by technical per-sonnel into steel from nonsteel high-technol-ogy industries is negligible, and partly be-cause the support given to continuing educa-tion by the steel industry is generally limited.A technical manpower shortage, now devel-oping in a few selected areas, could becomeserious if the industry were to embark on vig-orous modernization, R&D, and innovationprograms.

The adoption of new steelmaking equip-ment or technology affects steelworkers inthe labor category in several ways. Retrain-ing programs may be needed and job classifi-cations may need to be changed to accom-modate skill changes. Plant labor practicesneed to allow for greater flexibility in workassignments.

There is some concern, particularly amongthose in the academic community familiarwith the steel industry, that apprenticeshipand retraining programs do not adequatelytrain people for changing job requirementsassociated with the adoption of new technolo-gies. On the whole, however, it appears thatlabor conditions have not been a constraint

Bureau of the Census, “’The Number of Scientists ~nd Engi-neers in the Basic Steel Industrv, 1970-1977,”’ 1978.

363


on the adoption of new or more modern steel- sulting from technological change; and localmaking equipment. Job classification sched- practices do change, at least among those im-ules are periodically updated to accommo- mediately affected, to allow for the efficientdate gradual shifts in skill requirements re- introduction of new technologies.

Technically Trained Personnel

OTA’s information on technical personnelis largely based on a representative sample ofcompanies responding to a written surveyconducted by an OTA contractor. The compa-nies covered in the survey represent close to60 percent of the integrated producers, al-most one-fourth of the nonintegrated firms,and more than one-third of the alloy/specialtycompanies. The information gathered wasused to examine the adequacy of prevailinglevels of education and training, technicalmanpower use patterns, and present and fu-ture technical personnel needs.

About 10 percent, or 16,000 employees, ofthe integrated companies are technical per-sonnel. The greatest use of technical person-nel by integrated steel companies is made bylarge plants with advanced technologicalbases. For the other two industry segments,the percentage of technical personnel rangesbetween 3 and 4 percent (table 148).

These figures are consistent with data onthe profitability y of the three segments (see ch.4): the low employment costs of nonintegratedproducers contribute to their greater profit-ability, and the same appears true for the al-loy/specialty producers. The most likely ex-planation for this pattern is that these twosegments are largely free of the need for tech-nical personnel in the primary, ironmakingstages of the industry; moreover, there is evi-

dence that these two segments have madegreater use of equipment suppliers for muchof their technical support, particularly in thedevelopment of steelmaking furnaces.

The employment figures are also consistentwith the lower capital costs for moderniza-tion and expansion in nonintegrated versusintegrated plants (see ch. 10). As a result,OTA’s Renewal scenario, with its emphasison the nonintegrated segment, would havelower technical personnel requirements thanthe High Investment scenario, and its lowercapital costs would be paralleled by loweremployment costs.

Education

Compared to other manufacturing indus-tries, the steel industry employs small num-bers of technically trained personnel. Basedon its total work force, the industry employsonly about 60 percent as many scientists andengineers as the average manufacturing in-dustry. This compares to 220 percent for pe-troleum refining, zoo percent for chemicaland allied products, and 130 percent for elec-trical equipment.

The steel industry also relies more heavilyon scientists and engineers with 1 to 3 yearsof college than is typical of manufacturing in-

Table 148.—Steel Industry Technical Personnel: Proportion inTotal Work Force; Tonnes per Technical Personnel, 1979

Integrated Non integratedcarbon steel carbon steel Alloy/specialty Total

Percent of technical personnelin total work force. . . . . . . . . 9.60/. 3.3% 3.60/. 8.71%

Tonnes per technical employee 2,256.3 11,947.2 2,131.8 2,352.3

SOURCE: OTA contractor report by F A Cassell, et al,

Ch. 12—Employees and the Development and Use of New Technology 365

dustries in general.2 For example, about 5.4percent of the aluminum industry’s workforce has completed a 4-year college educa-tion in science or engineering, but this is thecase with only 3.9 percent of all steel industryemployees. Technical personnel with under-graduate degrees make up three-fourths ofthe steel industry’s technical staff. They arewell represented in production, but less so inengineering, R&D, and administration. Only12 percent of all technical employees havegraduate degrees— mostly at the Master’slevel. Larger companies tend to have morepersonnel with graduate degrees (table 149).Significantly, slightly more than 4 percent oftechnical employees have nondegree techni-cal training.

The largest numbers of technical employ-ees in the steel industry are mechanical and

electrical engineers and material scientists(including metallurgists). A much smallernumber are chemists and chemical engi-neers, and even fewer mining engineers andphysicists work for the steel industry. In re-cent years, steel companies have brought incomputer specialists, electronic engineers,and pollution engineers (table 150). With theexception of researchers, nearly all technicalpersonnel are recruited upon graduationfrom college.

For steel-related technical input, the steelindustry also relies heavily on domesticequipment manufacturers and engineering-construction firms, many of which are asso-ciated with foreign engineering firms and in-creasingly with foreign steel companies andequipment manufacturers. Domestic equip-ment companies have rather limited R&D pro-grams. They tend to promote from within andmaintain stable engineering groups, althoughtheir blue-collar work force may fluctuate

‘Bureau of the Census, 1970 Census of the Population: Indus-t r ia l Chclrocteristlcs.

Table 149.—Technical Personnel; Degree and Work Assignment. . -—

Employees in topmanagement

Number Percent

Total

Other Number PercentEngineer-ing R&D

I n t e g r a t e d -

Ph. D . . . . . . 222M.S./M.A. . 382B.S./B.A. . . . . . 1,041Associate ... 11N o n d e g r e e 11

Total. . . 1,667Percent of total (18.70/~)

Admin- Sales/ Pro- Qualityistrat ion marketing duct ion control

12 3 15 8104 43 199 53807 377 4,480 502

10 1 65 38 – 99 3

’94 1 424 4,858 569(10,6°/0) (4.80/~) (54.60/’) (6.5°/0)

564

347—

3

277845

7,56490

124

8,900 -

3.19.5

85.01.01.4

26 9.471 8.4

321 4.2— —

3 2.4421

(4.7°/0)419

(4.7°/0)

—4

311018

NonintegratedPh.D. . . . . . . —M.S./M.A, ... 4B.S./B.A. . 21Associate . . . . 3Nondegree . . . 5

Total. 33

0.57.8

58.79.7

23.3

1 100.08 50,0

20 16.5— —

1 2.1

(1 4.%0)

— — l — 116

1212048

206

2 – 3 325 9 23 12

— 3 4 —1 — 20 3——

28 12 50 18 81Percent of total (16.0°/0) (13,6°/0) (5.8°/0) (24.3°/0) (8.7°/0) (39.3°/0)

Alloy/specialt yPh.D. . . . . . . . 23M . S . / M . A . 24B.S./B.A. . . . . 137Associate . . . . 20Nondegree . . . 18

Total. . . . . -222Percent of total (19.8%)

2954

692

2741,120

2.64.8

61.8

24.5

6 10,72 3.7

51 7.4— —

1 0.4

(5.4%)

1 25 5

123 1019 9

62 69

200 186 -

(17.9%) (16.6°/0)

110

1902569

295(26.3%)

1 15 5

122 195 3

45 11

1 7 8 –

(15.9°/0) (3.5%)

SOURCE. OTA survey, 1979 The sample represents close to 60 percent of the Integrated producers, almost one. fourth of the non!ntegrated producers, and more thanone.third of the alloy/specialty producers


Table 150.—Technical Personnel by Degree and Field—.

Comp. Chem. -

Mat. sci. Chem. sci. Physics eng.—-— ————Integrated

—

Ph. D. . . . . . . 85 64 – 14 19M.S./M.A. . . . 99 80 15 18 81B.S./B.A. . 704 514 57 106 523Associate . 2 6 9 – 1Nondegree 6 12 11 2 4

Total. . 896 676 92 140 - 628

NonintegratedPh. D. . . . . . . 1 — — — –M. S./M.A. . . . 2 2 — — —B.S./B.A. . . . 18 7 9 – –Associate . . — — 8 – –Nondegree . — — 14 – ———

Total. . . 21 9 31 “ – –

Alloy/specialt yPh. D. . . . . . . 19 3 – 1 —M.S./M.A. 19 4 — 1 —B.S./B.A. . . . 139 34 9 11 22Associate . 3 1 3 1 —N o n d e g r e e . 2 2 6 17 — —

Total. . 202 48 29 14 22

Elect.eng.

—.——Mech. Ind. Miningeng. eng. eng. Other————— Total

277845

7,56490

124

8,900

116

1212048

670

1,0651616

1793

1,2717

12

479

597

634

158

60276

2,5694955

3.009

—6

1,173 1,400 686 198

—1

136

—

—4

2015

—2

1713

— —5

364

26

71

—1

——

123

—2

6552

20 30 206

2954

69271

2741,120

17

10886

519

22330

215

—2

6420

6

——16

——

92 130 74 16 492

SOURCE OTA survey, 1979 The sample represents close to 60 percent of the integrated producers; almost one-fourth of the nonlntegraled producers, and more thanone-third of the alloy/specialty producers

with changing business conditions. Many en-gineering-construction firms have broadlytrained staffs, skilled in developing, organiz-ing, and executing major projects from plan-ning to startup. These staffs are well in-formed about new technological develop-ments in steel and they know how such devel-opments can best be incorporated into exist-ing or new plants.

Technical Manpower Use

Production and Quality Control.—The steelindustry employs slightly more than half of allits technical personnel in production andquality control (table 149). The industry’s ori-entation toward engineering and product im-provement as important means of respondingto market needs gives these two functionalareas great importance. Employees with re-sponsibilities for technological problems tendto spend most of their time in the role of “fire-men, ” responding to particular problems atparticular shops or plants that are beyondthe capability of local operating and engi-neering managers to solve. Steel industrytechnical personnel are generally well

trained to perform in the existing environ-ment, which emphasizes incremental engi-neering and product improvements ratherthan major innovations based on new scien-tific or engineering knowledge.

Research and Development.—About 18 per-cent of all technical personnel in the steel in-dustry is employed in engineering and R&D(table 149). There has been no growth in thenumber of research personnel during recentyears. This may be attributed to a real dollardecline in steel R&D expenditures and to thevirtual standstill in new plant construction.Not all steel companies even have R&D de-partments; in some cases, consulting firmsare used instead of in-house technical R&Dstaff.

Steel industry research has been focusedfor the most part on cost improvement and onnew products and alloys, and the develop-ment of new processes has been undertakenmostly to achieve these ends. A considerableamount of process research is carried outjointly by several steel companies, the entireindustry, or by equipment manufacturers.

Ch. 12—Employees and the Development and Use of New Technology ● 367

Sometimes research personnel undertakespecific studies for the purpose of designingnew equipment, but more often they functionas troubleshooters in defining and solvingproblems that occur in the course of produc-tion with existing equipment. According to in-dustry sources, approximately 20 percent ofR&D staff works on meeting environmentalrequirements. For instance, U.S. Steel esti-mates that 12 percent of its scientists and 25percent of its engineers are currently en-gaged in environmental control activities. Theproportion of R&D personnel working on en-ergy-related technologies is unknown.

The industry’s orientation towards incre-mental, market-oriented R&D is generally re-inforced by a reward structure that does notencourage independent and creative re-search. Although R&D and engineering per-sonnel of steel companies may reach manage-ment positions by promotion in those units, amore typical route to higher levels of manage-ment is for a scientist or engineer starting inan R&D or engineering department to movefirst into other areas, such as marketing andproduction, where there are greater oppor-tunities. Thus, competent researchers maynot stay in R&D because they are more likelyto reach higher salaries and more prestigiouspositions through other departments. Themain disadvantage of drawing directly fromR&D staff for management is that technicalpersonnel may not have appropriate exper-tise for business and policy work. An ad-vantage, however, is that such promotionswill lead to greater awareness at the manage-ment level of the technological base of thecompany and a more effective use of techni-cal feedback for process improvement andmarket development.

Of the steel industry’s major internationalcompetitors, only the Japanese steel industryhas an R&D program that is as strongly mar-ket-oriented as that of the United States.France, England, and West Germany havemore diversified steel R&D activities, rangingfrom basic to applied research, than is thecase in either the United States or Japan.Foreign steel producers are often the ben-

eficiaries of publicly supported steel-relatedR&D, and they are also involved to a muchgreater extent in the sale of steelmakingequipment. All of these conditions combine tomake R&D less subject to short-term fluctua-tions in the business cycle and to create morenumerous long-term intellectual opportunitiesfor R&D personnel than is the case in theUnited States.

Top Management.— Only 5 percent of alltechnical personnel in the entire industryhave top management positions (table 149).Some steel industry analysts and customersargue that the overall influence of accountingand financial executives in the steel industryis far stronger than in the past; others dis-agree. If this is indeed the case, it is likely areflection of declining profit margins in theindustry and a resulting interest in tighter,more formal budgeting and proposal evalua-tion. Nevertheless, top executives of many ofthe most profitable and technologically com-petitive firms do have technical backgrounds.Although not heavily represented in top man-agement, research department personnel reg-ularly participate in the planning, concep-tualization, and specification stages of cap-ital proposals, Their primary functions in thisrole are to help anticipate technologicalchanges and to evaluate the technologicalfeasibility of various equipment features.

Technological change per se is generallynot a primary concern of steel executives.Managers usually make an investment deci-sion on the basis of the general necessity orwisdom of making such an investment, calcu-lated or at least justified in terms of the pro-fits and rate of return to be realized. Finan-cial considerations are given priority, operat-ing considerations are secondary, and tech-nology is at best ranked third. *

*Important factors encouraging new investment are growthin markets, followed by considerations about the price level ofsteel. Still another factor affecting the decision to invest in newfacilities is the rate of payoff from alternative investment op-portunities outside steel. Tax factors also affect the extent andtiming of investment in new facilities. The degree of technologi-cal change as it affects expected rates of return and risk alsohas considerable impact on the kind of equipment being ac-quired, but less so on the extent of investments being made. (D.L. Hiestand, High Level Manpower and Technological Changein the Steel Industry, New York, Praeger, 1974, pp. 29-30. )


Research personnel are sensitive to thereluctance of steel company executives toadopt new technologies. The receptivity ofparticular steel companies towards new tech-nology largely depends on the top executivesthemselves. If top management creates an en-vironment that is receptive to ideas and risktaking, those below them will be innovative; ifadventurous planning, operating, and engi-neering managers are penalized or their sug-gestions discouraged, they will hold back.3

Differences Between IndustrySegments

The major industry segments—integrated,nonintegrated, and alloy/specialty compa-nies —show some interesting variations intheir use of technical personnel (see table149). On the whole, these differences are re-lated to the greater complexity of integratedsteelmaking and the greater emphasis onquality control and marketing in the alloy/spe-cialty segment of the industry. The most sig-nificant differences are in the educationallevel of the technical staffs and in the waytechnical personnel are used.

Differences in Educational Level.—In gener-al, lower level technicians are more prevalentin the nonintegrated and alloy/specialty seg-ments of the steel industry, while integratedcompanies tend to require technicians withundergraduate and graduate degrees. Onlyabout 2.5 percent of all technical employeesin integrated companies have limited techni-cal training rather than full degrees. By com-parison, almost 35 percent of the technicalstaffs of nonintegrated companies and about30 percent of those in alloy/specialty compa-nies do not have baccalaureate degrees. Ofthose who do have degrees, about 3 percentof those in integrated companies, 8 percent innonintegrated companies, and 7 percent inthe alloy/specialty companies have advancedgraduate degrees. One-third of all R&D tech-nical employees in integrated companies have

‘D. L. Hiestand, High Level Manpower and TechnologicalChange in the Stee~ Industry, New York, Praeger, 1974, pp.29-30.

graduate degrees, compared with one-fifthfor alloy/specialty companies and only one-tenth for nonintegrated companies.

Differences in Use of Technical Personnel.—Nonintegrated and particularly alloy/spe-cialty companies employ a somewhat largerpercentage of technical personnel in adminis-tration (14 and 18 percent, respectively) thando integrated producers (11 percent). Ofgreater interest, alloy/specialty companiesuse proportionately more technical employ-ees in marketing and quality control than dothe other segments (30 percent as opposed to10 and 15 percent for integrated and noninte-grated firms). Alloy/specialty firms use aboutthree times more of their technical personnelin marketing than do the nonintegrated pro-ducers. This is a reflection of the relative im-portance of product quality and marketing toalloy/specialty producers.

Integrated producers use more than half(about 54 percent) of their technical employ-ees in production, twice the level for the othertwo segments (about 25 percent). To somedegree this difference occurs because inte-grated companies use more processes thanthe others, so the technical side of productionplays a more important role in their opera-tions.

Although the nonintegrated companieshave the smallest number of technical em-ployees in relation to total production, theyuse a greater fraction of them in top manage-ment than do companies in the other steel in-dustry segments. Fifteen percent of all tech-nical personnel in nonintegrated companiesare in top management, compared to aboutfive percent for the other segments. Noninte-grated companies thus appear to encouragegreater coordination between the economicand technological dimensions of manage-ment. One result of this may be the apparentrapid adoption of new technology made avail-able by equipment manufacturers (foreignand domestic) and the constant attempt toreduce costs through technological change.


Employment and Continuing Education

Most steel companies have tuition supportprograms for undergraduate and graduateeducation. There is generally much less sup-port for publishing in professional journalsand for sabbaticals at domestic and foreignuniversities. Technical personnel in R&D are

given some opportunity to attend meetingsand conferences, but technical people inother departments tend to have few such op-portunities, There is some criticism of the in-dustry because the training and developmentof technical staff are geared to managerialand executive development rather than toongoing education in technical specialties.These are the areas viewed by managementas the industry’s backbone, an or ientat ionr e f l e c t e d in mobil i ty pat terns that general lyreemphasize R&D.

The steel industry draws only small num-bers of technical personnel from high-tech-nology industries, such as aerospace, com-puters, and electronics, or from similar typesof process industries such as chemical, glass,and aluminum. There appears to be a trendamong steel technicians toward retiring toGovernment and university jobs; there is littleflow of personnel in the opposite direction.The U.S. steel industry also lacks strong linkswi th o the r i ndus t r i e s , un ive r s i t i e s , o r t heGovernment with respect to midcareer em-ployment or training, This limits the indus-try’s ability to draw on technological ideasoriginat ing in other areas or to otherwisestrengthen the professional background of itstechnical personnel. In Europe and Japan, onthe other hand, there are opportunities for in-tersectoral training and mobility of technicalmanpower; in West Germany, there is muchgreater opportunity than in the United Statesfor technical talent to move back and forthbetween Government and industry and be-tween basic and applied research. The un-derlying goal is to provide industrial activitieso r i en t ed t owards t he i n t e rna t i ona l marke twith a strong science and engineering basis.Clearly, this approach al lows and even en-courages considerable t raining and technol-

ogy t rans fer be tween d i f fe rent sec to r s o f t hee c o n o m y .

Present and Future Manpower Needs

The steel industry claims that it does nothave problems in meeting its current techni-cal personnel requirements . The industry’sability to attract technical personnel in suffi-cient numbers is in part related to improve-ments in steel industry pay scales during the1970’s. Starting salaries have become morecompeti t ive with those of other industr ies .Many steel executives make the fol lowingmanpower assumptions:

Most or all of the necessary manpower,with the required skills, is already pres-ent in the organization.If not already available, the necessaryskil ls can be acquired by present em-ployees through training, experience, orother means quickly enough to avoid hin-dering a project.If there are no present employees whocan acquire the needed ski l ls quicklya n d e a s i l y e n o u g h , t r a i n e d p e r s o n n e lcan be at tracted from elsewhere ei therto meet fully the company’s needs or tohelp develop existing employees.If all of the above are inadequate, someo t h e r o r g a n i z a t i o n c a n b e e n g a g e d o ncontract to meet al l of the company’sneeds or to develop the manpower re-quired.’

Other industry representat ives, part icular-ly college recruiters, are concerned that moregrowth-oriented industries may be attractingthe best technical talent. Clearly, the abilityto meet personnel requirements does not fullylay to rest the question concerning the per-formance of the industry’s technical person-ne l—par t i cu l a r ly when more soph i s t i c a t edequipment or processes are involved.

Occupational project ions by the Depart-ment of Labor show that demand for steel in-dustry professional technical personnel wil l

‘Ibid., p. 38


increase by 5.6 percent between 1976 and1985.5 The use of lower level technicians incontrol and monitoring of production prom-ises to enlarge. However, most growth and re-placement demand is expected to be forchemical, civil, electrical, and sales engi-neers. This is the result of an ongoing em-phasis on the development and application ofexisting steelmaking technologies.

Research activity in mining and metallurgi-cal engineering is virtually nonexistent; thisrepresents a national weakness in the prepa-ration of sufficient numbers of such person-nel . In addi t ion to the lack of manpower,funding is a problem. Given the growing de-m a n d f o r h i g h - p e r f o r m a n c e s t e e l s a n d t h egrowing use of computers in steelmaking, ad-ditional shortage areas are likely to includematerial scientists and electr ical engineersfamiliar with both the industry and processcontrol technology. Anticipated shortages ofmining and metal lurgical engineers and ofprocess control experts will make it difficultfor the steel industry to meet its needs for

‘F. A. Cassell, The Use of Technical Personnel in the steel in-dustry Including Comparison With Japanese and German in-dustries, contractor report for OTA, 1979.

cost reduction, energy economies, and envi-ronmental compliance.

The future availability of technical person-nel must also be viewed in terms of alterna-t ives to present industry s t rategies . Currentinvestment strategies entai l leadtimes fromconcept to installation of new capacity thatprovide technical personnel with suff ic ientopportunity to learn what needs to be knownabout the improved technology. Should the in-dustry decide to shift to a more extensive re-search program involving a greater emphasison basic research and accompanied by a vig-orous investment program in new steelmak-ing technology, i t is uncertain that presentstaff would be fully capable of making thet r ans i t i on . Fami l i a r i t y w i th fundamen ta l lynew technological concepts and completelynew skills could be required, and most steelt e chn i c i ans a r e no t now equ ipped t o dea lwith such new ski l l requirements . Further-more, the steel industry could face difficultyin recruiting some types of personnel. Unliket h e h i g h l y r e g a r d e d g o v e r n m e n t - s u p p o r t e dsteel industries in other countries, the U . S .steel industry could have problems in attract-i ng capab le domes t i c t e chn ica l pe r sonne lwho now are inclined to work in higher tech-nology, more R&D-intensive, a n d h i g h e rgrowth industries than steel.

Labor

Generally, steel industry employees in thelabor category have not impeded technologi-cal change. However, the job classif icat ionsystem and local union work pract ices , aswell as limited familiarity with new technol-ogies, are potential constraints on the flexibil-i t y needed t o i n t roduce new s t ee lmak ingequipment and processes.

Apprenticeships and Retraining

The median age of steel industry employeesis higher than the all-manufacturing aver-age. * Nevertheless, a number of companies

*In 1970, the median age for steel industry employees was

provide programs for the training or retrain-ing of workers for jobs made more compli-cated by new technologies.** At one compa-ny, a program has been in effect since 1962 toretrain electrical workers for efficient main-

43.9 years, compared to the all-manufacturing average of 39,9years. (Department of Commerce, Bureau of the Census, 1970Census of Population: Industrial Characteristics, table 32.) Be-cause of declining steel industry employment, it is likely thatthe industry’s median age has increased at a faster rate duringthe past decade than the all-manufacturing average.

**Entry into apprenticeship training does not guarantee sub-sequent employment in a craft. Training may be terminatedupon a substantial reduction in the number of required crafts-people within specific crafts as a result of technologicalchanges in steelmaking process, practices, or equipment,(Agreement Between U.S. Steel and the USWA, 1977, p. 205.)


tenance of modern electrical equipment andcontrols. These updating and upgrading pro-grams consis t of c lassroom and laboratorytraining of up to 5 years. Most companies con-duct some form of apprenticeship program tomeet their maintenance requirements . Therea r e s u c h p r o g r a m s f o r a b o u t 2 0 d i f f e r e n tcrafts in the steel industry, usually of 3 to 4y e a r s d u r a t i o n , consist ing mainly of shoptraining and classes.’ Apprenticeship t rain-i n g p r o v i d e s c o m p a n i e s w i t h t h e g r o w i n gnumber of craft workers that are needed intoday’s plants. An industry-labor committeedeve lops educa t i ona l a t t a inmen t and workachievement standards for the various typesof apprenticeships.

There is some concern, however, particu-larly among members of the academic com-munity familiar with the steel industry, thatt he se app ren t i c e sh ip s and r e t r a in ing p ro -grams are inadequate because the instruc-tors themselves may lack sufficient familiari-ty with new steelmaking technologies.

Job Classification

Generally, production processes and oper-ating procedures in the steel industry havechanged s l owly ove r t he yea r s . Neve r the -less , gradual technological and operat ionalchanges in steelmaking have created shifts injob content and occupat ional requirementsfor employees in the industry . During the1 9 5 0 ’S and 1960’s, the industry made majorinves tmen t s i n b l a s t f u rnaces , ba s i c oxy -gen furnaces, and computer-controlled proc-esses. A number of open hearths were gradu-ally phased out. These technological changesreduced the need for unskilled workers andinc r ea sed t he need fo r c r a f t worke r s andprocess-control special is ts . Fewer workersare now directly engaged in production proc-esses , and more nonproduct ion workers areneeded. *

‘Bureau of Labor Statistics, “Labor Productivity of the SteelIndustry in the United States, ” BLS report No. 310, 1966, p. 23.

*A 1969 Bureau of Labor Statistics study of the manpowerimplications of computer process control in blast furnaces,steel works, and rolling mills found that the major impact was achange in job duties rather than a change in the number em-ployed. Job changes among operators generally consisted of a

When such shifts in occupational require-ments occur, job classifications may changetoo. The job classification system used in thesteel industry describes ski l l requirementsfor 12 major job categories. These descrip-tions are developed and agreed upon by sepa-rate industry and union committees. A majoroverhaul of the job classification system tookplace in 1971 to bring job categories in linewith gradually changing skill requirements.

Local Work Practices

Changes in skill requirements and declin-ing steel industry employment levels** mayrequ i r e mod i f i c a t i ons o f e s t ab l i shed workpractices. These practices evolve from man-agement pol icy, supplementary agreementswith local unions, arbi trary decisions, andverbal understandings. Specif ic local prac-tices cover such issues as job content, work-load, crew size, seniority practices, and cof-feebreaks. By their very nature, local prac-tices may vary from plant to plant across thecountry .

A number of work practices go back manyyears in origin and during World War II aconsiderable number of local practices wereadded, either unilaterally by management orby agreement with local unions. At the heightof the postwar economic boom, plants wereope ra t i ng a t max imum ra t e s and domes t i cmarket condit ions were such that potent iall abo r i n s t ab i l i t y cou ld be more coun te r -productive to the industry than limited pro-tection for existing work rules. Local prac-t ices were given formal recogni t ion by thewell-known “local practices” (z-B) clause inlabor’s agreements with the major steel com-pan ie s . Mos t , bu t no t a l l , compan ie s nowhave this provision in their contracts; a few

shift from manual to automatic control of dials, levers, andother control devices, Nevertheless, unskilled jobs are beingeliminated wherever possible as labor-saving devices areadopted. For example, more efficient blast furnaces using proc-essed ores eliminate many unskilled jobs. (Bureau of Labor Sta-tistics, “Technological Change and Manpower Trends in FiveIndustries,” Bulletin 1856, 1975, )

**Steel industry employment levels have decreased by 21.4percent since 1960 as a result of limited growth and improvedproductivity. (See ch. 4.)


companies are bound by a weaker version of2-B. The 2-B clause regulates unilateral man-agement changes in local work practices. Itrequires management to maintain local prac-t ices unless change is required by contrac-tually defined “changed conditions, ” such astechnological innovations, or by union agree-ment with proposed changes. *

As t ime passes , the gap between currentconditions and those for which the local prac-t i ce s ru l e was o r ig ina l ly e s t ab l i shed maygrow wider . With the introduct ion of newsteelmaking technologies , there has been asudden surge in the number and gravi ty oflabor issues. During the late 1950’s, for in-stance, the various effects of automation onemployment, job content, and organization ofwork dominated collective bargaining.

Work rules may become dysfunctional froma productivity point of view, although theymay continue to serve the best interests of in-dividual workers. Herein lies the potential ford i s ag reemen t abou t t he va lue o f spec i f i crules. It is often difficult to determine whichlocal rules are inefficient, make-work rules.The U.S. Supreme Court has generally takenthe posi t ion that because make-work prac-tices sanctioned by union-management agree-ments are intended to protect labor, they areallowable. Most disagreements on local workrules are settled by arbitrators, and over theyears a sizable body of formal understandinghas developed from arbitration alone.

Regulations concerning the size of wholec rews a re t he l oca l p rac t i ce u sua l ly he ldr e spons ib l e fo r i ne f f i c i ency . Managemen tmade unsuccessful effor ts during the 1959steel strike to have the 2-B clause removedfrom contracts in order to increase flexibilitywhen using new technology such as fully au-tomated equipment. Instead, the 1960 settle-ment of the steel strike provided for establish-

*“The Company shall have the right to change or eliminateany local working condition if, as the result of action taken byManagement under Section 3, the basis for the existence of thelocal working condition is changed or eliminated, thereby mak-ing it unnecessary to continue such local working condition.Management’s action is subject to the grievance procedure. ”(Sec t i on 2-B, paragraph 4, of the basic steel industry agree-

merit. )

ing a joint committee to study local workingcondi t ions. 7 This committee never became ef-fect ive because the part ies were unable toagree on a neutral chairman. Nevertheless ,labor-management discussions cont inued onthe subject, During the 1965 contract negotia-t ions, the union made an unsuccessful de-mand for stronger union control over elimi-nating or changing job duties because of tech-nological change. Final ly, the 1974 Experi-mental Negotiating Agreement, the “no strikeagreement, ” r e t a ined t he un ion ’ s r i gh t t ostrike and management’s right to lock work-ers out a t a par t icular operat ion over localissues unique to that operation. *

Contractual changes relat ing specif ical lyto 2-B continue to be made at the plant leveld u r i n g f o r m a l b a r g a i n i n g o n l o c a l i s s u e s .These talks coincide with industrywide con-tract negotiations held every few years. Arbi-trators have in general interpreted the localpract ices sect ion in such a way as to givemanagement a free hand in introducing tech-nological changes and new equipment. Sub-stantial changes in production methods havealso been held to just i fy el iminat ing localpractices. An accumulation of small changesover a reasonable length of t ime has beenheld to have the same effect as a single sub-stant ia l change. When such changes occur ,arbitrators have upheld management’s unlim-ited right to make a fresh start in crew as-signments rather than to be held to assign-m e n t s i n p r o p o r t i o n t o f o r m e r w o r k l o a d s .Clause 2-B has been held to apply in manycontract areas, but it has been narrowly ap-plied in most cases. Most 2-B cases have beendecided in management’s favor. In part, thisis because unions have failed to screen arbi-tration cases, and in part because charges ofviolation of 2-B have tended to be thrown intocases in which local working conditions areat best a peripheral issue. These arbitration

“’Featherbedding and Union Work Rules, ” in Editorial Re-search Reports, vol. H, R. M. Boeckel (cd.), 1959, pp. 815,

824 -828 .

*The agreement aims to stabilize steel production and em-ployment in a cyclical economic environment faced with grow-ing import penetration by labor agreeing not to strike during in-dustrywide bargaining in return for cooperative contract nego-tiations.


decisions have encouraged most companies toconsider local working conditions no longer amajor barrier to eliminating inefficient workpract ices and certainly no barr ier to intro-ducing new technology.’

Companies differ in their ability to elimi-nate work rules that are inappropriate fornew, modern equipment. * Only in a few com-panies or plants do employee pressures pre-vent the effect ive and eff icient adoption ofnew equipment .9 Successful companies wise-ly attempt to make new equipment more at-t r ac t i ve t o t he i r employees : t hey deve lop

“G. L. Magnum, “Interaction of Contract Administration andContract Negotiation in the Basic Steel Industry,’” Labor LawJournu], September 1961, p. 856.

‘Nonunionized companies, such as smaller nanintegratedsteelmaker (“minimills”), are not bound by the 2-B contractprovisions. They have much greater latitude in changing localwork rules, regardless of whether such changes result from theuse of new technology or new operating procedures. However.such companies might also be fared with informal resistanceon the part of individual employees.

‘In conversation with Milton Deaner, vice president, Na-tional Steel Corp.

wages and other incentives that reward high-ly productive operation and that cover a largeproportion of their work forces. Establishedlocal pract ices do not prevent managementfrom making unilateral changes in local prac-tices such as reducing crew sizes if “condi-t ions change” as specif ied in 2-B. The in-s tal la t ion of new equipment , for instance,makes i t possible to change local pract icesand improve product ivi ty , a l though the 2-Bc lause makes i t d i f f i cu l t t o ex t end suchchanges t o ad j acen t p roduc t i on a r ea s t ha tare not directly involved with the new equip-ment. *

*The following arbitration issue illustrates justifiable andunjustifiable management actions under 2-B:

While introducing a new incentive plan in a butt mill, man-agement installed cooling table synchronization and reducedthe crew size in the process. At the same time, for purposes ofthe incentive program, management reduced the spell time andcrew size at a welder station on the same production line notaffected by the changed mechanical condition.

The arbitrator upheld the first action but reversed the sec-ond, [J. Stieber, “Workrules Issue in the Basic Steel Industry, ”Monthly Labor Review, March 1962, pp. 267-268. )

Conclusions

The training and skills of steel industry e m -ployees and their execution of responsibilitieson the whole have not impeded the develop-ment and use of new technologies. The indus-try has successfully developed and marketednew products, although its record of processdevelopment is less strong. Nevertheless,there is room for improvement with respect totechnical education and training, the use ofR&D personnel, and local staffing practices,

The proportion of technical employees inthe steel industry’s work force is lower thanthe all-manufacturing average, and their edu-cational attainment is somewhat lower thanfor other basic industries, Continuing educa-tion is generally adequate, although extensivecareer changes by means of sabbaticals orexchanges with universities and Governmentare not very common. Insufficient instructorfamiliarity with new steelmaking technolo-gies appears to be a constraint in apprentice-

ship and retraining programs. Assuming thatsteelmaking technologies continue to grow incomplexity and that product quality require-ments continue to increase, then it appearsthat a future manpower shortage in miningengineers, metallurgists, electrical engineers,and computer scientists is likely.

Prevailing manpower use patterns arefunctional in that they reflect the industry’sconcern about production capability. Thegreat majority of technical personnel em-ployed by integrated producers work in thisarea. The technical staffing patterns ofalloy/specialty companies place a greater em-phasis on quality control and marketing. Onlyabout 18 percent of all steel industry techni-cal personnel are engaged in engineeringR&D; an even smaller proportion is in steel-making R&D because of considerable engi-neering work and environmental R&D beingconducted by R&D staff.


Job classification schedules appear to have local unions must approve changes in pasti nco rpo ra t ed mos t chang ing sk i l l r equ i r e - staff ing pract ices in production areas adja-ments associated with technological change. cent to those where new equipment has beenStaffing flexibility at the plant level appears instal led.to be constrained, however, by the fact that

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