Glut of Steel

A sharp fall in world demand

The steel crisis exists and is getting worse in every respect--orders, costs, profits." So said Viscount Etienne Davignon, the European Community industrial affairs commissioner. Other leading industrial nations are also feeling the worldwide steel crisis. The U.S. last month reintroduced the trigger price mechanism to protect the domestic industry against cheap imports that were undercutting U.S. prices. American steel output in the first ten months of the year was 22% below the same level of 1979, and the industry has laid off 86,000 steel-production workers, almost one-quarter of its labor force, in the past year. Japanese steel firms have been shutting down facilities, and now one out of three blast furnaces is idle.

The steel industry is tightly tied to the ups and downs of the economy, and generally sluggish growth in most industrial countries has reduced demand. The International Iron and Steel Institute reports that in the first seven months of this year production in 29 industrialized and developing nations was down 5.5%, and is expected to fall even faster for the rest of the year in the industrialized countries.

Moreover, the steel market is suffering from excess capacity. In recent years, developing countries from Saudi Arabia to South Korea have rushed to build their own steel plants, thus cutting imports from the U.S., Japan and Western Europe. Brazil, a traditional importer, has even begun to export raw steel products. While steel production in the industrialized countries is expected to fall by 8.1% during the fourth quarter, it will increase by 7.1% in the developing nations. At the same time, some industrial countries like Italy and West Germany have continued to build new, more efficient plants, even though the international steel market was weak. David Roderick, chairman of U.S. Steel, estimates that world steelmaking capacity is 60 million to 80 million tons in excess of demand.

The steel glut is worst in Western Europe. Says Common Market Commission President Roy Jenkins: "The steel industry is in a state of manifest crisis." While stockpiles have been climbing, prices have dropped about 10% to 15% since last year. In the past five years the industry has lost an estimated 145,000 jobs. The Europeans have long had a thinly veiled cartel arrangement that included voluntary quotas on steel production. But when the market went into a free-fall slump early this year, the agreement fell apart, and many companies began scrambling to undercut their competitors. Firms were often selling steel for much less than it cost to produce. Last month the Common Market threatened to impose mandatory production cutbacks in order to stop the steel free-for-all.

Any quota system would fall hardest on West Germany, which has invested more than $1 billion annually since the 1950s on new steel facilities and is Europe's most efficient producer. Says West German Economics Minister Count Otto Lambsdorff: "Our industry must not be penalized for having been in the forefront of modernization." But after weeks of bitter wrangling, the Europeans overcame West German objections and last week agreed to an unprecedented Common Market quota system that will reduce overall production by an average of 13% to 18% for nine months. The West Germans bluntly doubt that the plan will work and expect price cutting to continue. Said Lambsdorff: "Such a system can only last a limited time, and then it will break down." Until the international economy picks up in perhaps 18 months steelmakers are likely to continue facing a sales slump and stiff competition.

This file is automatically generated by a robot program, so viewer discretion is required.