Preventing another steel crisis

Krishnan Thiagarajan

IN JULY, the US Commerce Department announced a comprehensive strategy to guard against a recurrence of the 1998 steel crisis that took a heavy toll on the US steel industry.

In a 240-page report to the President on Global Steel Trade: Structural Problems and Future Solutions, every aspect of the steel crisis was examined -- the analysis of relevant economic data; consultation with US steel producers; workers and unions; foreign steel producers and their workers; foreign governments and embassy officials; trading companies, steel service centres and other steel consumers; and a number of industry experts.

According to the report's highlights, the following short-term and long-term factors contributed to the 1998 steel crisis:

Short-term factors: The 1997-98 financial crisis was the immediate short-term event that precipitated the steel import crisis. The financial crisis resulted in lost steel consumption, sharp declines in real income and depreciating currencies in Asia, Russia and Latin America. Combined with strong US demand, this led to a flood of low-priced imported steel into the US market.

Long-term factors:

Structural factors in key steel-producing countries enabled them to sell low-priced exports and forestall downsizing adjustments mandated by the market. Examples include:

*Russia: The emergence of Russia as one of the world's top steel producers was a significant factor leading upto the 1998 crisis. Russian producers have been able to weather a substantial downturn in the domestic market and turn increasingly to exports. This was, in large part, due to many Russian steel mills bartering their products, not paying their bills and producing steel regardless of market demand. Much of this steel was sold for export at prices that did not reflect the true market cost of production.

*Japan: Another structural problem involves Japan's non-competitive steel market. The apparent co-ordination among major integrated steel producers allows Japanese producers to charge high prices for their products at home. Higher profits on domestic sales can be used to export at low prices and weather downturns in the economy. In 1998 and 1999, the US Department conducted anti-dumping investigations on a variety of steel products from Japan. Anti-dumping margins in these cases ranged from 18 per cent to 67 per cent for hot rolled (HR) steel, 32 per cent to 65 per cent for heavy structural steel, and 37 per cent to 58 per cent for stainless cold rolled (CR) sheets from Japan.

*Korea: Unsound bank lending practices was the top structural issue in Korea. The financial difficulties of the Korean steel industry as a whole in the 1990s can be traced to overborrowing to fund overinvestment in underperforming capacity.

*Brazil: Brazilian producers enjoy the advantage of a domestic market insulated from full market competition. Brazilian producers are able to leverage the advantage of an insulated home market to sell at low prices abroad.

As a part of this report, the US Department of Commerce identified three players -- China, India and the Ukraine -- as potential threats to the global steel market's stability, given the continued aid of their respective governments. In particular, the report questions the Indian government's assistance (to SAIL and the high debt burden of other private steel producers), import barriers in the form of floor prices and export subsidies in the form of special import licences, export promotion of capital goods scheme and the duty entitlement pass book scheme. Hence, most anti-dumping investigations against Indian exports will probably be along these lines.

Based on the short- and long-term structural problems facing the steel industry, the main elements of the strategy evolved by the Department of Commerce are:

*Early warning of import surges and changes in industry conditions. Key steel trade data will continue to be released on an expeditious basis. The Department of Commerce will webcast information to steel workers and producers.

*Faster relief for industries, workers and communities when import surges occur. Anti-dumping investigations will be expedited and the early determination of critical circumstances will allow for the imposition of duties. To address the impact of import surges on workers and communities, the Administration has requested funding to establish an inter-agency rapid response team.

*Steps to address the root causes of instability in global steel markets. Working with other agencies, the Department of Commerce will continue or initiate bilateral engagement with major steel producing countries. The focus will be on the long-term structural factors that contributed to the speed and severity of the crisis.

*Reinvigorate the international steel policy agenda. The Department of Commerce will seek broader international attention and sensitivity to steel trade agency issues. This includes seeking a moratorium on Multilateral Development Bank lending that expands global steel capacity and proposes that the OECD Steel Committee address difficult issues, such as steel market reforms in Russia and the Ukraine and the elimination of formal and informal barriers to steel around the world.

Excerpted from a US Department of Commerce press release and selected extracts from the Global Steel Trade: Structural Problems and Future Solutions report. The complete report can be read at www.ita.doc.gov