In This Issue
Spring Bridge on the US Metals Industry: Looking Forward
March 29, 2024 Volume 54 Issue 1
In this issue of The Bridge, guest editors Greg Olson and Aziz Asphahani have assembled feature articles that demonstrate how computational materials science and engineering is leading the way in the deployment of metallic materials that meet increasingly advanced design specifications.

The Rise of the US Steel Industry

Tuesday, April 9, 2024

Author: Raymond Monroe

While the use of steel in US manufacturing grew over the course of the twentieth century, current policies prevent
the US steel industry from truly flourishing.

Bridges have been made from stone and concrete since the beginning. Iron bridges, however, were not erected until the industrial age began. The first iron bridge crossing the River Severn in Shropshire was completed in 1779. This bridge is still standing and is open to foot traffic.[1] Larger bridges that have been made since the late eighteenth century are often dependent on steel for their construction and performance. There are five iconic bridges in the world that are made of steel: Sydney Harbour Bridge, Forth Bridge, Ikitsuki Bridge, Chaotianmen Bridge, and Akashi Kaikyō Bridge. Our infrastructure, exploiting the opportunities of the new technology for the production of steel available during the Industrial Revolution, made both skyscrapers and large bridges a reality. While the use of steel in US manufacturing grew over the course of the twentieth century, current US public policy prevents the steel industry from truly flourishing.

Monroe Fig 1.gifThe Ascent of Steel in the United States

The use of steel in the US economy has grown since the late nineteenth century, as shown in figure 1. The increase was due both to wider applications of steel from 1800 to the 1950s and the increase in population during that period and continuing until today. Today the per-capita use of steel in the United States is around 800 kg (1800 lb) per person.

While the demand for steel has generally increased, there are notable peaks and valleys. It is useful to try to understand the variability of demand based on cost and availability. Figure 1 depicts a valley every thirty years, around 1930, 1950, 1980, and 2010. What is the explanation for these drops that are followed by rapid growth?

There appears to be a cyclical pattern for capital-intensive industries like steelmaking. This cyclical pattern is seen in figure 2. One way of understanding this is that when demand is high and customers and manufacturers cannot get enough steel, the price goes up as individual purchasers are willing to pay more to get their needed steel on time. In bridge construction, the need to meet the schedule may force the fabricator to pay a premium to get the steel required. To ensure an adequate steel supply for their business, multiple orders are released by pur­chasers to different steel producers. To meet market demand, the producers begin to invest to increase capacity. Prices, production, and profits allow a capital investment cycle that creates the capacity for this peak demand and overshoots the post-boom need.

Monroe Fig 2.gifThis is seen in the cycles captured in figure 2, which plots the value of steel and construction equipment. The price movement, as documented by the producer price index for these commodities, is divided by the gross domestic product implicit price deflator to give a relative value for the product. After World War II, the consumer economy invested to shift production from military needs to consumer products. The peak of the value of steel mills and construction materials was in the mid-1950s. After that peak, incremental investments were made in capital investment with each three-to-five-year business cycle as commodity prices remained stable and producers tried to invest and gain quality and market share after each downturn. The cycle ended as this incremental reinvestment could not keep pace with the growth in population and increased usage. A new major investment cycle began in the 1970s. Increasing inflation and interest rates stimulated growing investments in capital-intensive industries and in basic infrastructure like bridges.

Contrary to normal economic theory, low interest rates and stable prices do not incentivize investment in capital-intensive industries. The lack of capacity that triggers increasing prices due to demand exceeding current capacity leads to rising inflation and interest rates. This drives new capital investment. In a time when capacity is inadequate, inflation makes the current purchases of capital equipment more valuable in the future and makes the money required to later repay the loans cheaper, so investment becomes a compelling decision. Rising inflation, interest rates, the growth of global demand, the idea that economic and national security depended on manufacturing, and the concerns triggered by the oil crisis about the limits of natural resources drove the capital investment boom from 1972 until 1981. This can be seen in figure 2. Much of our current infrastructure, including bridges, was produced during this time of investment, as seen in figure 3.

To control the inflationary pressures of the late 1970s, Paul Volker, who served as chairman of the Federal Reserve at the time, dramatically raised interest rates. This coincided with the peak at which capital investment created capacity for most steel segments that exceeded normal demand. The demand for steel fell sharply after 1980. Production of steel mill products that had ­exceeded 100 million tons in 1978 fell to less than 60 million tons in 1982.

The investment in steelmaking capacity continued after 1980. The change from integrated steelmaking, using blast furnaces that melt ore and convert iron to steel in basic oxygen furnaces and casting ingots for rolling to final products, to electric arc furnace (EAF) melting, which feeds continuous casting operations that directly produce the final mill product from liquid steel, is seen in figure 4. While declining integrated mills had other challenges and not all EAF steel production was in mini mills with con­tinuous casting, these technologies were more economical and resulted in a revitalization of the steel industry.

Monroe Fig 3.gif

The newer steel plants, using EAF or continuous casting for mill products, dramatically reduced the investment required and the cost of production. The significant reduction in the marketplace value of steel mill products from 1980 to 2000 was due to a combination of the reduction in the cost of production from new technology and the dramatic drop in demand as the economy had to absorb and eventually liquidate the excess capital investment stimulated by the economic boom of 1971–1981.

Monroe Fig 4.gif

Conditions of Limited Supply and Excess Capacity

During times of economic expansion, when capacity is inadequate for the current market, prices rise as cus­tomers are willing to bid higher prices to secure the capacity and products they need. Since there are more willing buyers than capable suppliers, buyers bid for the last increment of available capacity. This market-clearing price is reflective of the value customers place on the product. Results of the conditions of limited supply include:

1. Prices increase to market value.

2. Production throughput becomes the critical measure of success.

3. Inventory, including spare parts, is an asset and ­increases in value.

4. Additional staff is valuable because downtime and production shortfalls are costly.

5. Purchasers are willing to consider and buy alternative products and try new processes.

6. Suppliers make and purchasers support adding ­capacity.

7. Increases in inventories, lead times, interest rates, and inflation are systematic.

8. Purchasers consider and invest in captive capability.

During the expansion, demand exceeds stable needs because the capital-intensive industries are not only producing the end products needed; they are also making the materials needed for the equipment and structures needed to increase capacity. When the peak of the boom occurs, the system is overbuilt with substantial in-process inventory and excess capacity. Prices drop as there are now more willing and capable suppliers than purchasers. The market price drops from the price of the product of the last willing supplier with capacity to the price of the product offered by the last willing purchaser with needs. This price is set not by the value of the product in service but by the cost of production. The conditions of excess capacity are:

1. Prices are stable or declining due to the cost of ­production.

2. Profitability is dependent on being a low-cost ­producer.

3. Inventory is a cost with a declining value.

4. Minimizing staff is necessary to minimize the cost of production.

5. Profitability is low, so investment is limited.

6. Capacity is liquidated with closures or restructuring.

7. There are low interest rates, inflation, inventories, and lead times.

8. Purchasers close captive operations to improve their ROI by making the “I” smaller.

In figure 2, the ten-year capital boom from 1971 to 1981 exhibited all the characteristics of limited supply. The twenty-year liquidation from 1981 to 2001 showed all the features of excess capacity.

The period after 1972 became more volatile. There was a shift to more macroeconomic control with the abandonment of the gold standard and the institutionalization of inflation by the central bank, which was meant to manage the business cycle. These efforts plus continuing changes in the geopolitical system that included the increasing scope and cost of government policy did not reduce cyclical variability but exacerbated it.

It seemed reasonable to expect that the liquidation cycle for obsolete capital investment characteristic of the 1999–2003 recession would initiate a subsequent new capital boom. Growth in the world economy along with the removal of residual capacity in the United States could lead to limited supply, which would spark a new investment cycle like in 1971–1981. However, shifts in public policy to protect financial actors resulted in ­volatility and investments globally rather than a re-investment in the United States. From a public policy standpoint, globalization encouraged large original equipment manu­facturers (OEMs) and government agencies to diversify their suppliers to exploit the lower costs from other countries. Many OEMs wanted to gain a market share in China, which was rapidly growing and promised to provide more growth and profitability than the relatively stagnant ­markets of the developed West.

Monroe Fig 5.gifChallenges for the US Steel Industry

US steelmakers are the world leaders in making steel efficiently, using less energy and labor and fewer raw ­materials than competitors, and to the highest performance standards. The challenges for the industry are the costs of ­public policy and the exploita­tion of globalization by ­others to gain market dominance through nonmarket practices. In the US economy, goods-­producing industries comprised 17.6% of the GDP in the first quarter of 2023, and services were 70.9%. Manufacturing is only 10.9% of the GDP (US Bureau of Economic Analysis 2024). ­Government spending is 38.5% of the GDP, twice the level of goods production.

In international trade, steel producers in the United States are at a fundamental disadvantage. Other countries view their steel industry as an essential tool for national and economic security. The United States, as the guarantor of global trade, negotiates trade agreements to strive for free and fair trade. Neither of these economic concepts are realized in our current arrangements. The United States has a stake in trade agreements that protect services like finance, entertainment, and software development. This outweighs any interest in ensuring steel production is treated fairly. Fair trade in trade agreements is not about reciprocity (e.g., I treat Canada the way Canada treats me); it is defined by evenhandedness (e.g., I treat China the way I treat Canada).

One major challenge of globalization was the failure to recognize the nonmarket nature of global trade. The economic justification for free trade is that market ­value should make the most efficient use of resources and secure the best economic outcome. The global challenge is that international trade is inevitably mercantilist and is not good at discovering market values.

In particular, China has a strategy to dominate the world in steel production. With their ascension to the World Trade Organization in 2001, they pursued an effort to rapidly grow their steel production. As seen in figure 5, China went from parity with the major steel-producing countries to constituting more than half the world’s production in twenty years. China has no resource or obvious economic advantage that would make them the lowest-cost or market-dominant producer. They have been clear in their intent to use public policy to establish dominance in most of the materials needed in a modern economy. This has been evident in lithium, pig iron, rare earths, etc.

Manufacturing is disadvantaged by tax policies like depreciation, regulatory costs, liabilities with no statute of limitations, and trade policies that allow other countries to violate and abuse our trade laws with no clear remedy for industries that are affected. In the ­wealthiest ­economy in the world, domestic investors are not ­attracted to ­capital-intensive industries like steel production. In 2022, the United States had a net-positive foreign direct investment of $1,326 billion ($6,581b out and $5,255b in) for all categories except for primary metals, for which there was a net negative of -$73 billion ($45b out and $118b in). It is clear from the flow of foreign direct investment that these policies need to be changed.

Steel production is necessary for our national and economic security.

Considerations for the Future of Steel

The United States recognizes the need for the private sector to provide both the materials and the wealth required to support the economy and carry the public policy costs for the programs promised. To strike this balance, public policy is developed to extract as much public benefit from private manufacturers as possible beyond the economic and national security they must provide. This reduces the profitability of capital-intensive industries like steelmaking, limiting their ability to provide lower costs and higher-quality products. Unfortunately, our industrial policies are a legacy practice that makes manufacturing, especially capital-intensive manufacturing, an ­unattractive investment.

Monroe Fig 6.gif

There is growing recognition that change is needed to make capital investment industries attractive and ­profitable. The challenge is not that US producers are not competitive, but that the public policies for taxes, regulations, trade, and financing all weigh against profitability. It is encouraging that there is a growing recognition of the capabilities of our steelmaking industry, its leadership in technology, and its foundational role in national and economic security. Making domestic steel producers the low-cost, high-value suppliers to industries like bridge design and construction is both necessary and valuable for our future.

Even with all the trade challenges, legacy costs, and cultural misconceptions, the US steel industry is ­aggressively pursuing new technologies, new materials, and new processes. The US steel industry is competitive and capable of reducing the impact of steelmaking on the climate.

In figure 6, US steelmakers had a low carbon intensity compared to the other major steel-producing countries. China is the largest emitter of CO2, relying on non-EAF melting with twice the emissions per ton of steel produced, and the largest steel producer by a factor of ten (Hasanbeigi 2022).

Steel technology remains an opportunity to improve our lives by providing higher performance and supporting our needs for infrastructure like bridges and modern transportation systems. The Steel Founders’ Society has worked with Congress and the defense industry to provide significant funding for the development of new alloys and new processes. As can be seen in figure 4, the steel industry has routinely and rapidly adopted new technology in melting and casting. New opportunities like additive manufacturing, ICME alloy development, and automation allow us to effectively work towards a strong place for steel in the future of our manufacturing needs.

Steel technology has great opportunities for innovation. Collaborating with public policy makers, designers, fabricators, users, and investors is essential for us to move forward. Recognizing that steel is fundamental to our national and economic security requires policies that allow the profitability needed to support investments for current and future needs. Investments in technology need to be supported by programmatic strategies that recognize the importance of being the leader in technology and the production of the most advanced steels.

References

Hasanbeigi A. 2022. Steel Climate Impact - An International Benchmarking of Energy and CO2 Intensities. Global Efficiency Intelligence. Florida, United States. https://www.globalefficiencyintel.com/steel-climate-impact- international-benchmarking-energy-co2-intensities.

Schaeffler D. 2020. A brief history of steelmaking. Metalforming­magazine.com.

Toubia E, Emami S. 2016. Performance Comparison of Structural Steel Coating Systems. The Ohio Department of Transportation, Office of Statewide Planning & Research. Dayton, Ohio.

US Bureau of Economic Analysis. 2023. Direct Investment by Country and Industry, 2022, BEA 23-32. July 20. https://www.bea.gov/sites/default/files/2023-07/dici0723. pdf.

US Bureau of Economic Analysis. 2024. Value Added by ­Industry: Private Services-Producing Industries as a ­Percentage of GDP [VAPGDPSPI], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/VAPGDPSPI, January 26.

US Bureau of Labor Statistics. 2024. Producer Price Index by Commodity: Metals and Metal Products: Steel Mill Products [WPU1017], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/WPU1017, February 2.

World Steel Association. 2022. Data collected from annual reports, 1997-2022. https://worldsteel.org/steel-topics/­statistics/steel- data-viewer/.

 


[1]  https://www.english-heritage.org.uk/visit/places/iron- bridge/

About the Author:Raymond Monroe is executive vice president, Steel Founder’s Society of America.