U.S. steel mills want tariffs; suppliers would suffer, car prices could rise

The big 7
The auto industry's 7 biggest steel suppliers, ranked by 1999 automotive sales

1. AK Steel

2. U.S. Steel

3. Bethlehem Steel*

4. LTV Corp.*

5. Ispat Inland Inc.

6. National Steel

7. Rouge Industries

*Sought Chapter 11 creditor protection

Source: Steel companies

National Steel Corp.

Founded: 1929

Employees: 9,100

2000 revenue: $3.0 billion.

Headquarters: Mishawaka, Ind.

Annual production: 6.5 million tons

Auto customers: Ford, Chrysler, GM, Toyota, Mitsubishi

Source: National Steel

Here on the floor of the hulking Great Lakes Steel complex along the Detroit River, a visitor sees few signs of the steel industry's ill health.

Thousands of tons of red-hot steel slabs race along mill lines with barely a sign of human help. Great Lakes Steel's corporate parent, National Steel Corp., has spent $1 billion to upgrade the 75-year-old complex in Ecorse, Mich., says National Steel Vice President Dan Joeright. The result: "We're losing a ton of money."

Why? The answer can be found in the heavily laden ships that lumber up the Detroit River past Zug Island. Every day, freighters haul cheap steel to the United States from China, Russia and Brazil. Imported steel now accounts for one third of total U.S. demand. And those imports have triggered a brutal price war.

Domestic steel makers are pressuring the Bush administration to impose tariffs as high as 40 percent on imported steel. The price war already has pushed 26 steel makers into Chapter 11 bankruptcy, and a tariff would give them time to recover. But some automotive customers complain that the cost of steel could rise up to $60 per vehicle.

The tariff dispute - plus a newly proposed merger of six U.S. steel makers - will play a decisive role in the steel industry's fast-approaching consolidation. And since the steel used in each U.S.-built vehicle averages $900, the auto industry has a huge stake in the outcome.

National Steel's woes are fairly typical for the steel industry. Thanks to a costly modernization drive, the company can boast of dramatic productivity gains.

From its Zug Island blast furnaces to its nearby finishing mills, the company requires just two man-hours to produce a ton of steel, down from 10 hours in the 1980s. Three thousand workers now toil at the complex, down from 11,000 two decades ago.

The plant has become one of the most efficient steel mills on the continent. Yet National Steel lost $372 million in the first nine months of this year.

Plunging steel prices

In the three-month period ending Sept. 30, National Steel typically charged $397 for a ton of steel. Compared with the same period a year earlier, that is a drop of $71 per ton. A chronic worldwide steel glut has caused this price war. Many countries subsidize massive steel plants to preserve jobs, even if those plants lose money.

The glut grew especially acute in 1998, when Asia's economy tanked and Russia's currency collapsed. Plants in South Korea, China and Russia produced more steel than their economies could absorb, and they exported steel to the United States.

In June, President Bush asked the International Trade Commission to determine whether foreign steel makers were threatening the health of the industry by "dumping" steel in the U.S. market. Dumping occurs when a company sells products abroad at lower prices than in its domestic market. Companies dump products to eliminate a surplus or gain an edge on foreign competition.

On Dec. 7, the commission recommended a range of tariffs of as much as 40 percent and quotas on steel imports. The commission is scheduled to send its recommendations to the White House this week, and Bush is expected to make a decision in February. Bush could act without congressional approval.

Congress has indicated it supports limits on imported steel. Enough members have co-sponsored legislation that a measure could pass easily, at least in the House.

A favorable White House ruling could save the steel industry billions of dollars a year. But auto parts suppliers fear that the price they pay for steel will rise - and that could translate into higher prices to the Big 3.

The Big 3 have been mostly silent about the threat of new tariffs, although General Motors has helped U.S. steel makers document claims of steel dumping.

The steel industry needs protection "to strengthen their financial position," says Ron Schuster, GM's director of steel and metal forming.

Ford Motor Co. has not taken a public position, and a DaimlerChrysler executive declined comment.

Nervous executives

But auto executives admit they are nervous about the impact of a megamerger recently proposed by U.S. Steel. Auto executives are likely to fight such a merger if it leads to significantly higher steel prices. "I want to see a healthy steel industry, but not a cartel," said Chrysler group CEO

Dieter Zetsche.

Unlike the Big 3, some Japanese automakers are publicly objecting to higher tariffs. "If you cut off the supply of imported steel, that leaves the domestic producers with no competition," says Dennis Cuneo, senior vice president for Toyota Motor Manufacturing North America Inc. in Erlanger, Ky. "What's anybody going to do when they no longer have any competition? They're going to raise their prices."

Nissan North America Inc. declined to comment on proposed steel import curbs. But company executives have hinted that Nissan might favor future plant expansions in Mexico, which does not restrict steel imports.

To some degree, the Big 3 are shielded from higher steel prices by long-term contracts. The Big 3 do not buy steel on the spot market, where quality sometimes is suspect, and where the impact of tariffs would be felt first.

The Big 3 generally rely on domestic steel makers to supply high-quality sheet steel for vehicle body panels, while suppliers often use cheaper imported steel for stamped components. That means higher tariffs on steel could hurt suppliers more than automakers, especially makers of stamped parts - and the stampers are squawking.

According to the Consuming Industries Trade Action Coalition, a lobby group that represents steel customers, higher tariffs could add as much as $60 to the price of a new vehicle.

Fearful suppliers

"The burden of higher prices will fall mostly on companies like mine," Jim Zawacki, president of GR Spring & Stamping Co. of Grand Rapids, Mich., testified at the trade commission's hearing in November. "We cannot stand it. To survive, I'll have to relocate in a country where I can get steel at globally competitive prices."

G&R, which has 200 employees and buys 20,000 tons of steel per year, is a relatively small player. But rising steel prices would hurt the entire stamping industry, which employs more than 300,000 workers.

In any case, the status quo is not an option for the steel industry. Even high tariffs will not solve the industry's ills; steel makers are ripe for consolidation. Big Steel's assets are so cheap that foreign rivals may be tempted to acquire American steel mills, says Tom Watters, an analyst for Standard & Poor's. "If it doesn't happen now, I don't know if it will ever happen,'' he says.

Takeover targets

Indeed, National Steel's Japanese owner wants to sell the company. On Dec. 9, NKK Corp. confirmed that it has entered negotiations to sell National Steel to U.S. Steel.

The proposal comes at a time when integrated steel companies - those that start with iron ore, not scrap steel, to produce their product - are considered cheap takeover targets.

Shares of auto industry supplier Rouge Steel Industries Inc. of Dearborn, Mich., hit a 52-week low of 58 cents per share in October; National Steel reached a 52-week low of 86 cents per share in November. Both companies' share prices more than doubled after word of industry merger talks.

Wall Street has all but lost interest in the sector because U.S. steel makers have become so small and unprofitable. Merrill Lynch & Co. dropped coverage of five steel makers, including Rouge and Bethlehem Steel, according to Bloomberg News Service. Bethlehem was a member of the Dow Jones industrial average as recently as 1997.

In fact, a buyer could acquire the entire American steel industry for less than $7 billion. But investors are not racing to snap up these companies. The steel industry is burdened with heavy operating debts, massive environmental liabilities and huge pension obligations.

These liabilities could deter potential buyers such as U.S. Steel. "If we were to buy someone, we would have to cover their unfunded pension," said Peter Peterson, U.S. Steel's director of automotive marketing.

But the steel industry seems likely to consolidate sooner or later, because they are under pressure to serve their customers around the world.

New alliances

Foreign steel companies are consolidating and hunting for new markets. The Japanese steel giant NKK has developed a global presence. NKK purchased 70 percent of National Steel, upgraded the American company's technology and introduced it to new customers such as Toyota.

NKK is considering other alliances, too. It plans to merge with Japan's Kawasaki Steel Corp. and has held talks with German steel giant ThyssenKrupp to broaden their alliance.

Another global player is Japan's Nippon Steel Corp., which signed a 10-year global alliance with French steel maker Usinor to develop sheet-metal products. Meanwhile, U.S. Steel last year acquired VSZ, a steel company in the Slovak Republic.

Last hope

In the long run, an affiliation with a global steel maker is National Steel's only realistic hope to compete in the global steel market. It is a humbling fate for a plant that enjoyed historic links to the auto industry. Its Zug Island blast furnaces once supplied metal for famous nameplates such as Hudson and Packard. During World War II, its plants produced steel for Quonset huts and tanks.

But National Steel's Joeright does not spend much time thinking about Zug Island's history. Says Joeright: "Right now we're just focusing on survival."

Staff Reporters Harry Stoffer and Lindsay Chappell contributed to this report

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