Steel Industry Research Paper
The economic effects of the steel labor unions on the steel industry in the U.S. after World War II
The analysis of current situation in the world steel industry and particularly in the US steel production shows us that there have been witnessed a significant downfall in this industry since World War II; a lot of companies are at the threat of closure, the workers’ wages are being reduced, the competitive ability of the firms is reducing as well. At the same time the power of labor unions in powerful industries and the mechanism protecting the level of life of workers in this industry are rather strong compared to other industries. Though currently the role of labor unions is somewhat decreasing, they are playing a leading role in the formation of production costs; and it is natural that a lot of researchers state that it was primarily the formation of labor unions and the consequence of their actions that the companies started losing in efficiency and competitive force.
The aim of this research paper is to analyze the factors that influence the development of steel industry in USA after World War II. Main thesis of the research paper is that labor unions were only partly responsible for the downfall of steel industry and that current situation depends mostly on the factors that are not related with the actions of labor unions. The statistical evidence illustrating the output in steel industry in different groups of countries is given to support the thesis and the main driving forces of international and local steel production are analyzed. The role of labor unions and other factors is compared and the conclusion is made that current situation in steel production is defined mostly by the global relation between capacity and demand for steel, and other corresponding factors.
1. History of steel industry in the USA after World War II After World War II, the United States was the incontestable leader in steel industry, producing totally nearly two thirds of the global raw steel output. In spite of its huge size, the U.S. production had quite a lot of small and obsolescent complex factories. These factories were hard to extend and reconstruct. This would have be a good time to close these old, awry located factories and redirect available funds into more productive sphere. Nevertheless, hidden social demand and the military needs of the War in Korea made influence on the production to extend rapidly. In such a situation, the president of the US, Truman asked the assistance of exporters from Western Europe in order to lessen the closeness of the market. The building or rebuilding of steel production in the countries, which were main competitors and rivals of American companies in the world market such as Europe, Japan, the USSR, led to the decrease of the market share of the US from 40 percent in 1955, to 20 percent in 1970, and resulted in 12 percent last year. While the production increased about 50 million ingot tons capacity in 1950s, the major part of this increasing was the result of the expansion of existing factories (5, p.68). Substantial amounts were spent on factories that were constructed many years ago and naturally decreased in size and were poorly equipped. As a rule, they were frequently not well located as markets were mainly concentrated in Southern and Western parts of the US. The only plant built at that period of time in the country, was the US Steel Fairless works in eastern Pennsylvania. Its capacity was about 4 million tons. The similar trend was observed during the next decade when one more plant was built on the southern shore of Lake Michigan and it was Bethlehem’s Burn’s Harbor works. By the way, the company was not unique. There were also a few other quite large companies that worked in the region. Actually, during 1960s-70s, the U.S. complex steel-makers producers continued their policy of spending investment funds for technological modernization and environmental protection over a significant number of different factories (5, 124). It would in any case have taken extraordinary tolerance on management, if there were no depression conditions, it could be hardly possible to shut down old factories basically situated in remote and isolated regions and were vitally important for local communities, which, in fact, existed only due to these factories. Such closures became easier when they could be accused in foreign commerce practices permanently engendering protests from the part of union officials, local political forces, and other politically and socially active part of the communities.
2. History of labor union movement in steel industry
After the war the country was overwhelmed by a number of strikes which involved practically the whole nation. Employers stood on the ground that unions had too much power. Fortunately for them, Congress supported their position. As a result, it passed laws according to which “closed shop” agreement, which required from employers to hire only union members, became illegal. Congress also permitted states to enact “right-to-work” laws, according to which workers could freely choose whether to join the union or not after they had been hired. So, after the World War II steel managers have been involved in an exhausting struggle with labor unions, mainly the United Steel workers, over demands for higher salaries. Also fringe benefit added for more union control over the work place. Naturally, being in such a problematic situation, American government entered the confrontation since it had put influence on the companies. Such reaction seemed to be quite natural because it was more preferable for the government to do this in order to prevent strikes organized by unions which could deteriorate if not destroy economy of the whole country. Together, unions and the government could produce much more significant influence on the companies. Specialists in steel production were mainly interested for how long time complex mills could continue to exist paying highest wages and, at the same time, being limited by fringe benefits in the manufacturing sector, on the one hand, and on the other hand, comply with the union’s system of work rules. Today, the term “legacy cost” is generally reserved for the huge liabilities that unionized steel mills which presuppose an ample financing of retiree pensions as well as healthcare plans. It is noteworthy that it was time when executives working in the complex sector could not yet foresee the significant reduction of their workforce while healthcare costs remained quite manageable. A wave of plant closures in the 1980s reinforced by a policy of early retirement led to the expansion of the retired population. It has to be taken into consideration that now in different steel companies the number of retires may be three or six times larger than the active workforce of the companies. Many companies could not afford such conditions and they cannot keep financing of their programs in pace with time. A metals analyst put the U.S. production’s unfunded portion of the liabilities at $15 billion.(1,p.137) This financial weight has eroded the companies’ position on the market and the level of their competitiveness that consequently significantly reduced their attractiveness as target companies for mergers. Should government share these expenses? Steel producers that are not burdened with this type of legacy cost, mini-mills in particular, have raised objections to such governmental help, because the subsidy would give a competitive advantage to their competitors. Generally speaking, the problem that should be solved could be formulated as the problem of other taxpayers who could expect only social security pensions and Medicare and at the same they had to finance privileged pensions and healthcare plans for retired steelworkers. Also there was one more serious problem, he problem of precedent, since people working in other industries could demand the same guarantees and funding from the part of the government as those who worked in steel industry had.
3. The development of steel industry in USA in the following periods: protectionist policy
In the 1960s the situation was deteriorated by the appearance of new players on the market, they were imports and domestic mini-mills which could become serious competitors for the complex mills. The strike of the Union of Steel Workers in 1959, which lasted 116 days and produced a highly negative the US steel trade balance. However, the deficit had not been very significant during several years though it could not last forever. In 1965 and 1968, when new contracts with the USW were in the process of negotiating, it increased dramatically. (4,p. 117) In such conditions the major part of American export came from Western Europe and Japan. The increase of imports can also be explained by several factors, among which the overvalued dollar and the progress made by offshore producers with the cost and quality of their products. In the conditions of low profit management and labor joined together to put the blame on increasing imports. By 1969, the system of government-negot quotas on imports from European Common Market and Japan was introduced as a result of political lobbying. Not surprisingly, in a few years a strong, global expansion of steel demand made the quotas excessive. But when the market entered a downturn in the middle of the ten years, imports again increased and the lobby demanded renewed protection. At the same time steel production lawyers were working hard to transform U.S. commerce law into a very serious tool which could be used in order to cope with imports. In 1978, practically all imported still was subjected to the so-called Trigger Price Mechanism that was a system of minimum prices similar to Japanese output costs [3, p. 84], which presumably was the lowest in the world. By the early 1980’s, the price-control system was brought down by widening gaps between American and Japanese costs, which were caused by weak demand and strong dollar. The complex steel sector then made use of the more strict commerce law to treat commerce cases in general, with some assistance from the U.S. Commerce Department. In order to avoid a direct attack against its allies at a time of the intensification of the Cold War, the U.S. government negotiated a system of import quotas covering many countries and products. The quotas isolated the U.S. market from low international prices until world export prices began to rising fast in the late 1980s. Soon after the quota system was eliminated in the beginning of 1990s, the U.S. steel production filed numerous commerce cases against all main exporters of sheet and late products. At this respect the industry victory against basically imported plate and galvanized sheet products was absolutely essential, particularly in 1993, when steel-consuming capacity was taking a critical ascending turn.(1,p.189) During the next several years, an extending U.S. economy consumed more steel that was imported form other countries than ever before to cover the increasing gap between the domestic steel industry’s limited capability and the needs of America’s steel-using industries. Small steel mills have been existing for more than a hundred years. Building on the continuous billet caster along with electric arc furnace improvements, a new kind of mill appeared in the early 1960s. These companies, soon named “mini-mills”, could transform scrap into rods, bars, or sections much faster compared to integrated producers. In such conditions the mini-mills permanently progressed mainly due to low scrap prices, reasonable electric power rates and complex sector’s high unit costs and territorial concentration. Moreover, now they supply about forty percent of all the steel made in the US. Table I Market shares of US steel producers and imports: 1981, 1991, 1997, 2000, and 2001 (in percent of total consumption) Year 1981 1991 1997 2000 2001 Mini mills and Specialty Steel Producers 13.2 31.1 33.9 35.7 39.2 Integrated Mills and Slab-Rerollers 68.6 54.8 48.3 42.9 41.4 Imports by Steel Users and Service Centers 18.2 14.1 17.8 21.4 19.4 (11,p.78) Sources: AISI, Metal Bulletin After mini-mills had conquered most of the product markets, one of the most successful, Nucor, started to use the technology developed in Germany, namely it was the thin-slab caster. Soon, in 1989 the company began to produce wide hot-rolled coils. The progress was unstoppable and a few years later cold rolling and galvanizing were introduced. Nowadays Nucor has extended its sheet coil capacity to over eight million tons. Four other ‘market players’, all of them with more or less significant participation, added a combined sheet capacity of seven million tons. Furthermore, some of the seven EAF-based plate mills, among which four were controlled by foreign companies, can also roll sheet gauges. Despite the fact that by the end of 2001 Nucor was the largest American steel company and individual factories can turn out well over two million tons of coils or sections per year, the term mini-mill continues to be applied to EAF-based carbon steel companies and their factories. Last year, about 35 such companies, operating 50 factories, accounted for 43 percent of raw steel output and 40 percent of domestic shipments. Their share of American steel market (apparent steel consuming capacity) was 35 percent, versus 24 percent in 1990, 11 percent in 1980, and 6 percent in 1970. (11, p.110) These data do not include the share of stainless and tool steel producers. In 1967 the American Iron and Steel Institute launched its first main campaign for general protection from steel imported from other countries. According to AISI the US steel production needed a “breathing space” from import influences, during which it could revitalize its facilities. On October 20, 2003 AISI president John Roche, testifying before the Senate Finance Committee, listed “the availability of substantial unused steel producing capacity elsewhere in the world and the policies of certain foreign nations with respect to this capacity, first among the basic forces driving the growth of imports.” He also estimated that in the case of the continuation of the rise of steel import “the most dangerous consequences would be to national security”. (2, p. 221) These are the arguments, which were also used after the World War II to justify the protectionist policy concerning domestic steel producers; and until nowadays this argument serves as a shelter for many shortages of domestic steel-makers. It is obvious that the main cause of the shortage is the low capacity itself. It results in high prices and longer delivery periods. On the contrary, excess capacity does not cause a surfeit, it is the chief company officers that determine the utilization degrees of steel mills. Steel company managers are under influence from the cost side to keep factories operating at high degrees. However, despite the effect on costs, during a recession in demand operating rates need to be reduced or the result will be obligatory a surfeit, even in the case of low or no excess capacity. Lacking elasticity of the demand of steel, the price cut caused by excessive output can and probably will result in greater losses than a reduction in output and the related increase in unit costs. This problem of adjusting output to decreasing demand could be resolved by firms commanding a large share of the market, as it is in European Union or Japan. A particular feature of the American steel market is the fact that prices will decrease even when imports have no significant influence in the conditions of intensive competition among domestic sellers. It can be reinforced by the absence of seller discipline, which also can be a threat to steady to steady prices even when excess output is quite small. Thus, discipline, or the lack of it, along with capacity play an extremely important role in determining excess output .
4. Factors influencing the development of steel companies
4.1. Closure threats
I suggest to divide the main iron producing nations into groups according to the threat of closure faced by iron0ore mines in the respective country. There is evidence that in nations where mines faced no threat of closure, the production of the iron ore had little or no productivity gain over ten years, and in nations where, on the contrary, mines faced a large threat of closure, the production had extremely high productivity gains that range from 50 to 100 percent. These productivity increase is no the result of introduction of new technologies or of closing of low productivity mines but it was the result of the work of continuing mines that used existing technologies and increase their productivity only for their own sake in order to stay in operation. The top eight iron-ore producing nations in 1980, in order of output in 1980 (in millions of metric tons), were Brazil (114.7), Australia (90.8), the United States (70.7), Canada (49.1), India (41.9), France (28.9), Sweden (27.2) and South Africa (26.3). (4, p.175). It is important to analyze the formal definition of threat of closure faced by mines and use it to forecast the threat faced by these national industries. Under this definition, two factors determine this threat for a mine: the location of the mine and the cost of producing iron-ore at the mine. The first factor, location, was critical because the global steel market downfall was mainly a downfall in steel production in the Atlantic Basin and because the critical cost of transportation of iron-ore is very high compared to its initial value at the mine. The steel crisis put Atlantic iron-ore producers at a disadvantage relative to Pacific producers. The importance of the cost of producing ore at the mine, requires no explanation. The conclusion about the relation between the threat of closure and productivity gains can be made basing on the following facts: · Mines were subjected to very different threats of closure; · Real output, and hence productivity, is easily measured in this production; · The global steel downfall, which triggered different threats of closure was an “exogenous” event as iron-ore producers treated it. The global steel collapse was initially Atlantic Basin. Since the marginal costs of transporting iron-ore are very high to its price at port of export, it means that threats of mine closure were higher in the Atlantic Basin. The 20 percent reduction in steel output between 1979-1982, as it is shown in Figure 1, was nearly entirely concentrated in the Atlantic Basin.(12, p.72)
In Figure 1, the top panel, we plot noncommunist steel output in the Atlantic and Pacific Basins over 1950-1996. Steel output in the region of the Atlantic Basin fell nearly 100 Mmt between 79 and 82, essentially the entire world reduction in output. Moreover, Atlantic output had barely climbed back to its 1979 level by the middle 1990’s. In contrast, Pacific output fell little between 79 and 82 and by the middle 1990’s output, compared to 1979, was almost one-third time greater. The reasons for the much stronger Pacific steel market included the strong US dollar reinforced by the rapid growth of developing Asian economies. However, from the point of view of iron-ore producers, these territorial developments in steel market were exogenous. They could not change such events for they were too weak. In four years between 1979-1982, the sum of US and Canadian steel output fell by over 40 percent, while in West Germany, France and the UK it fell by 20 percent. At the same time output in such Asian countries as Japan, South Korea and Taiwan, fell very little. The mines located in the Atlantic Basin, with the important exception of Brazil, had the highest production costs in the whole world. Though Brazil, along with Australia and India had much lower costs than other top producing nations, with Brazil the lowest cost producer in the world. There are three main types of iron-ore: lump, concentrates and pellets. It is a well-known fact that production of a ton of pellets requires more labor than production of a ton of other two iron-ores. Consequently, a possible source of productivity gain in the 1980s as compared to the 1970’s was that a country produced less pellets in the 1980’s.
Over the period 1970-90, there was a shift toward pellets in Canada, the US and Sweden. For instance, in Sweden, pellets accounted for 27.7 and 24.6 percent of output in 1975080; in 1985-90, they increased to 43.1 and 50.1 percent. So, everything else equal, productivity in these nations in the 1980’s should have been lower than in the 1970’s.(11, p.122) Until World War II, the output of iron-ore typically involved the mining soft, particularly high graded iron-ore, i.e. lump iron-ore that required little further processing before it could be used in blast furnaces. The demands of World War II for steel led to a significant reduction in these high-grade deposits, especially in the US. At the same time, Australia, being not a big producer of pellets, possessed vast deposits of lump ore. Actually, Australia withdrew from the output of pellets over the period of 1970-90, its output falling from 11.6 to 4.2 percent of output. Except the development of pellets, there were no other significant changes in the technology for producing iron-ores in the last fort years. Naturally, there have been a gradual development and improvement of technology that resulted in much better iron-ore products and higher productivity. Among the examples of such a kind of increase may be found in size of equipment and the gradual integration of computers in the process of production over the last thirty years. However, no radical changes in technology occurred. Basically, the technology in this mature production changes very slowly.
4.2 Long Term Effects: Higher Unit Costs and Lost Market Opportunities
Modernizing existing factories was an inexpensive and fast way to add more capacity. Over the longer period of time, it pushed both investment and operating costs above the new factories having the modern equipment and embodying more effective ideas. An investment strategy focusing on long-term efficiencies was practically absent, costs were wasted on the continual improving oldest facilities; when many of such factories had no other choice but shut down during subsequent downturns. By 1980, American industry had 14 complex factories in the 1-2 mt size range, compared to only one in Japan; at the same time the USA operated four factories with a capacity of more than 6 million tons, compared to 12 in Japan. All the large factories in Japan had modern straight-line layouts and deep-water access for both raw materials and finished products. It is quite noteworthy that the majority of foreign producers, including Europe and Japan had new American designed equipment which was capable of turning out steel of more consistent specifications than many of their American competitors [2, p. 105]. The conservative investment policy of the complex US producers had another negative result, an excessive concentration of steel-making capacity in the country’s northeastern quadrant. Newly appearing markets in the Southwest West and South were to a significant extent disregarded, except during downturns when demand in the mills’ home market had weakened. These disregarded markets offered good possibilities for offshore competitors and for domestic mini-mills that had appeared in all regions of the country since the early 1960s. Both groups suggested their clients more reliable and frequently lower-cost supplies than the complex mills in the eastern and mid-western states. In general, the complex sector’s conservative investment policy (which does not actually deserve to be called a strategy) had the result of not stimulating the development of the old factories and concentrating too much capacity into one region of the country. This policy left a lasting negative impact on the industry and domestic competitiveness.
In my opinion, the creation of labor unions and the demands of the workers concerning generous pensions, medical care and other social privileges, only made a rather modest contribution to the witnessed downfall of steel industry in the USA. There were several factors, discussed above, that served as the major driving forces of the steel industry crisis, for example, the protectionist policy concerning domestic steel producers and the conservative policy in regard to the integrated factories. Let us consider steel imports: in 1978 America imported 21.1 million tons of steel, in 1981 it was 19.9 million tons. Though the amount of import was actually reduced, 75,580 steelworkers lost their jobs in the same period – an estimated 16.5 percent of the total workforce.(1, p.99) And while protection of a given industry may temporarily protect jobs in that sector, it shifts unemployment to another sector, depressing the economy and affecting the “protected” industry. The U.S. steel industry has been protected for 20 years. The result was not more jobs, but more profits for the steel companies. Another factor is the practice of applying other countries’ policies without matching them properly to the domestic environment. The US economy was in a respectively good position after the end of the war and is industrial production soared after 1946. A new policy, known as New Deal helped trade unions’ power along with Congress grew to the point that the former had to limit them under the Taft-Hartley Act of 1947 and the Landrum Act of 1959.(2, p.87).In such conditions and relations existing between labor and capital, an adversarial, not cooperative, spirit has pervaded U.S. labor relations. And, during recent years, as inexpensive, high-quality manufactured products labeled “made in Japan” captured markets previously the domain of American firms, the government looked overseas for answers to our problems of lagging productivity instead of within. Today, as U.S. firms once again experiment with industrial democracy in the form of quality of work life programs and similar efforts, the past warrants a second look. Although most of the earlier attempts at labor management co-operation did not endure, they were not necessarily undertaken in vain. One historian has described presidential labor management committees as “productive failures,” perhaps an appropriate definition for the vast majority of participatory management committees in the past. They produced favorable consequences when they were necessary and only failed when social, economic, or political conditions changed. In today’s economy, there are certain market conditions that can allow unions to thrive The American steel industry through much of the 1970s found collective bargaining agreements tolerable for a few reasons. First, there were very few and very large steel companies. Due to high costs of entry, it would have been unthinkable for a new company to enter the market and cut prices. Since all steel mills were unionized, labor was not an important cost differentiator among the mills and they competed in other ways. The worst thing that could happen was for a steel mill to have to sustain a strike. In that market environment it was much cheaper to buy labor peace with the unions. Through the two decades following World War II, the system worked well. Steel-makers simply passed on the higher labor costs through in higher steel prices to buyers who had no real alternatives. Everything worked until (at first) Japanese steel and then other foreign steel became cost-competitive even after the cost of shipping the product here. There are other market conditions that are favorable to unions. They thrive in public sector employment where government entities have been willing to pass on high labor costs to taxpayers. It’s no surprise that unions are fighting policy innovations such as outsourcing and school choice. As in manufacturing, union wages are most at risk where they result in labor costs that are significantly higher than prevail in competitive markets.
Another important factor obtained during the analysis, is that the industries that were at the threat of closure, had the super-profits, and the corporations, in fact, were stimulating imports to increase their profits, and ignored the fact that such policy is destabilizing the country’s economy, creates unemployment and leads to a general depression in the industry. I think it is important to stress that such situation in steel industry is witnessed not only in the USA, but also in the whole world due to the changes in the structure of mineral resources and their amount, and also due to the relation between global demand and supply of steel. Given the market’s cyclical nature, steel producers cannot be excepted to anticipate future global demand growth with any degree of accuracy. The government officials can hardly be better qualified to determine the capacity levels that will be adequate for hardly predictable future consumption levels. The world’s steel producers would be quite contented if world capacity fell short of peak requirements that would probably serve as a guarantee of record profits for several years. Steel users and consumers would be angered if projections made by bureaucrats resulted in significant capacity shortfalls. The latter is particularly important because capacity is a determining factor for shortage which may have many negative consequences such as high prices and extended delivery periods. There can be several ways out of the existing situation on steel market. One of possible methods that could induce greater price discipline among American steel producers could be increase of the level of concentration of the industry, its consolidation that is one of the conditions stipulated by the Bush administration in order to provide the Section 201 protection. Also it would be quite effective if mini-mill managers modify their historic method of expansion. In such a situation it would be quite difficult for Western European steel markets to manage to balance their potentially conflicting needs. At the same time national and supra-national competition laws should find the balance between interests of customers, national producers as well as between quality-price range. However, American industry would be a bit retarded in its development due to its past experience and traditions, particularly if the fact, that most mini-mills have begun to share the steel lobby’s views at international scale, is taken into consideration. Probably the only thing that can break such a mentality is the large steel using manufacturers which would engage themselves more intensively in politics in opposition to trade barriers.
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