FROM CCWERCE DEPARTMENT REPORT ON "STA3E OF THE INDUSTRY" FOR STEEL ADVISORY GOMttTIEE

Transcription

1 FROM CCWERCE DEPARTMENT REPORT ON "STA3E OF THE INDUSTRY" FOR STEEL ADVISORY GOMttTIEE ** F. Present Condition of the U.S. Steel Industry The last three sections of this paper discussed supply and demand conditions in the U.S. steel market and the role of international trade (see Tabs D-F). Taken together the steel supply situation, cyclical and secular demand trends, increased import penetration (particularly from developing countries), and price trends have had a negative impact on the health of the domestic steel industry in recent years. This is reflected in indicators of financial performance such as stock prices and return on investment, capital investment levels and employment trends. 1. Financial Performance Since 1970, major integrated manufacturers of steel have suffered low returns on shareholders' equity and steel company stocks have significantly underperformed the market. The Standard & Poor's index of stock prices of steel companies (comprised of the eight largest integrated manufacturers) rose until 1976 and then fell by roughly the same amount over the remainder of the period, finishing at approximately the same level at which it began (see Figure 1). In contrast, the Standard & Poor's composite index of 500 industrial stock prices doubled over the same period, and the consumer price index rose by about 160 percent. This means that an investor who purchased a representative portfolio of steel company stocks would have incurred a capital loss of over 60 on each $1 invested during the period, after allowing for inflation. The performance o.f the stock price of steel companies over the period would have been worse except for the diversification of steel producers into other lines of business. By the third quarter of 1983, non-steel assets accounted for over 47 percent of the book value of the 32 largest steel companies. According to an industry survey by Price Waterhouse, since 1979, the annual rate of return on non-steel assets of these companies have averaged 4.2 percent, compared to -1.6 percent on steel assets. The ratio of the market value of all outstanding stock to the book value of shareholders' equity is.5 for the eight major steel companies compared to 1.5 for all 500 manufacturers used in the Standard & Poor's composite index. This suggests that market investors believe that returns on historical investment will continue to be low in the steel industry. As a result, new investment in the industry is not likely to be financed by sales of stock because such issues would be priced so low that the equity of existing shareholders would necessarily be diluted by additional*issues. Return on the equity of steel companies peaked at 17.1 percent in 1974, -and has averaged 6.0 percent from Return on equity was percent in 1982, with significant losses also incurred in 1983 (see Table 1). In contrast, the average return on equity of all manufacturing corporations substantially exceeded that of the steel industry in every year since 1974.

2 Steel Sales Table 1 Industry Total Corporate Financial History in billions of current dollars Net Income (3.2) (3.7) Stockholders Equity ( ) denotes negative number Source: American Iron and Steel Institute Income/ Stockholders Equity (percent) (17.7) (19.7) Long Term Debt As a result of declining profitability and significant capital expenditures, the industry's debt-to-equity ratio increased from 39.8 percent in 1970 to 97.9 percent in Steel segment debtto-equity increased from 43.3 percent in 1981 to 82.4 percent in In the case of the steel segment figures, the increase in the debt-to-equity ratio is more attributable to reductions in the value of stockholders' equity than to increased long-term debt. More than two-thirds of the debt incurred by the industry as a whole between 1981 and 1983 was for non-steel related purposes. The rising ratio of debt in a highly cyclical industry -- coupled with a history of low return on investment -- increases the cost of borrowing funds. A recent Price Waterhouse survey sponsored by AISI covering steel companies accounting for 86 percent of 1983 steel production revealed the devastating impact on these firms of the steel recession. Taking account only of the steel segment of the companies' operations for the period , the survey revealed the fo.llowing: in terms of cash flow, the total of steel capital spending and stockholders' dividend payments far exceeded cash from steelmaking. Excluding dividends, capital spending still exceeded cash flow. The companies' income statements revealed aggregate losses on steel of $6 billion, taking into account operating losses and write-offs of abandoned facilities. These huge losses resulted in severe deterioration of the steel equity position

3 of stockholders, which fell by almost $5 billion from 1981 to Steel related long-term debt rose from $6.4 billion in 1981 to $8.2 billion in In the meantime, the companies 1 carry forward of unused investment tax credits rose to $1.2 billion and net operating loss carry forward to $5 billion at the end of The financial distress of the steel industry in reflected not only a collapse of market demand but also a deterioration in transactions prices (as.opposed to list prices) of steel mill products. As noted earlier, definitive data on actual transactions prices are unavailable, but industry analysts generally reported widespread discounting of producer list prices beginning in 1982 and continuing, with some abatement in late 1983, to the present. Marcus estimates that the steel industry as a whole lost an average of $45 per ton on steel shipped during that year. Losses continued at a somewhat lower rate during most of (See Tab E for a more detailed discussion of price trends.) The mini-mill sector of the industry has consistently shown a higher rate of return than have the integrated companies. Comparative sample data for both groups, cited by Barnett and Schorsch show mini-mills averaging a 15.8 percent return on equity for and 17.0 percent in In contrast, the integrated group averaged 9.1 percent and 5.6 percent, 'respectively.!./ 2. Capital Investment Performance, Gross capital investments of U.S. steel producers on steel and non-steel operations (not allowing for depreciation) exceeded $38 billion during the period (see Table 2). Although many modernization projects were carried out, they were selective and not the complete plant renovations needed to incorporate the latest technology throughout the production process. Some of these investments -- particularly during the 1970's -- were dictated by environmental requirements. Other investments emphasized installations designed to yield the greatest immediate cost benefits (i.e., continuous casting and annealing lines) resulting in major plants that were a mix of new and nearly obsolete facilities. The very low replacement rate for steel facilities left the American steel industry with an average age of equipment of 17.5 years in 1979 (the latest data available) as indicated in Table 3. Since 1979, some of the oldest plants and facilities have been permanently closed and others have been modernized. Thus, for some facilities the-average age of capacity may be lower today than it was in I/The mini-mill figures were based on a sales weighted average of return on equity for Nucor, Northwestern Steel and Wire, Florida Steel and Cascade Steel Rolling Mills. The integrated figures are based on a raw steel production weighted average return on equity for U.S. Steel, Bethlehem Steel, Inland' Steel and Republic Steel.

4 Table 2 Steel Industry Corporate Capital Investments (millions of dollars) Year (3 quarters) Dollars 1, , , , , , , , , , , , , , Source: Data through 1978 is from AISI Statistical Yearbook, data for 1979 through the third quarter of 1983 is from a recent report prepared by Price Waterhouse for AISI and is more comprehensive than previously available data. Coke Ovens Open Hearth Furnaces Basic Oxygen Furnaces Electric Furnaces Plate Mills Wire Rod Mills Hot Strip Mills Cold Strip Mills Galvanizing Lines Aggregate Table 3 Average Age and Age Distribution of U.S. Steel o<-«plant and Equipment as of January 1, 1979 Average Age of Capacity Age Distribution % (Years) Source: The World Steel Industry Data Handbook Vol. 1, the U.S.; and American Iron and Steel Institute

5 In 1984, the industry estimated that based on a 4.4 percent annual replacement rate (compared to an average of 3.3 percent in , 2.5 percent in and 2.0 percent in ) and environmental requirements of $400 million per year, average annual gross capital outlays of $5.5 billion would be required to maintain finished product capability of approximately 100 million net tons per year. Required annual expenditures decline to $5.0 billion if a 4.0 percent annual replacement rate is assumed. Actual capital investment expenditures have been far below either of these levels. Long term debt within the steel segment of the industry increased from 43 percent of stockholders' equity in 1981.to 82 percent in 1983, making additional borrowing more expensive and issuance of new stock unattractive. The industry has maintained its capital spending at an admittedly inadequate level through asset sales, equipment leasing arrangements and customer financing. Data for steel segment expenditures alone is available only since 1979 (see Table 4). A recent study prepared by Price Waterhouse for AISI shows that gross corporate expenditures from 1979 through the third quarter of 1983 averaged $3.4 billion, or 6.7 percent of total Steel Segment* Total Expenditures Steel Segment as Percent of Total Table 4 Capital Expenditures: Steel Segment vs. Total (millions of dollars) Three Quarters " 2,591 3,977 2,789 3,817 2,584 3,752 2,315 4, ,590 2,664 *Includes expenditures of firms totalling approximately 86 percent of industry shipments. Source: Price Waterhouse report prepared for AISI corporate sales. Steel segment capital expenditures in of these firms (accounting for about 86 percent of total U.S. basic steel shipments) averaged $2.5 billion annually, or 6.8 percent of sales of steel products only. Net steel segment capital expenditures in (after allowing for depreciation) averaged $0.9 billion per year. In contrast, new plant and equipment expenditures in 1983 for all manufacturing industries totaled $112 billion, or 5.4 percent of sales. At the time of passage of the Economic Recovery Tax Act of 1981, which provided tax benefits to industry, many steel producers announced expanded capital expenditure programs which within a year 60

6 aggregated $7 billion. However, as the industry slipped into the devastating recession, many ambitious spending plans were.ancelled or deferred indefinitely. The low rate of return in the steel industry does not justify new "greenfield" construction of integrated steel facilities in the United States. Instead, purchase of existing facilities presents a much more viable option to a steel company contemplating expansion, as was recently demonstrated in the J&L-Republic Steel merger. Faced with costs of new integrated capacity of approximately $1700 per annual net ton of capacity, LTV preferred to pay less than $100 per ton for existing Republic plant. 3. Employment and Unemployment Steel employment for SIC 331 declined by 40 percent between 1979 and 1983, from 570,500 to a level of 343,100 employees (see Table 5) less than half of the peak recorded in The number of production workers fell by 43 percent, from 451,300 to 258,000, and the number of non-production workers fell by 29 percent, from 119,200 to 85,100. Though production has picked up somewhat since the recession low, employment as of May 1984 (seasonally adjusted) was still only 347,000. Employment in blast furnaces and steel mills (SIC 3312) fell from 478,500 workers in 1979 to 279,100 in Employment in blast furnaces and steel mills has increased only slightly in 1984.,teel employment losses were geographically widespread. Losses in top steel-producing states between 1979 and 1983 varied from 27 percent in Indiana to 65 percent in Alabama (see Table 6). The Great Lakes States (Ohio, Indiana, Illinois and Michigan) lost 37 percent of their steel work force. Mini-mills have continued to be built since 1979 but they failed to offset the declines in the larger, integrated producers. Mini-mills are scattered throughout the country to take advantage of local demand and scrap supplies. The large integrated producers are located primarily in the Great Lakes Region and close to the coasts. Unemployment in the steel industry was only 3 percent in It rose to a post World War II peak of 36 percent in the first quarter of 1983, dropped to 15 percent by the fourth quarter, and averaged 26 percent for the year. According to the AISI, there were 94,000 steel industry employees on layoff as of December 31, Additionally, thousands of steelworkers have been working shorter hours, and tens of thousands of others have been given early retirement or have had their present employment permanently terminated. BLS data show that steel industry unemployment declined to 13 percent in the second quarter of 1984.

7 Industry 1979 Blast furnace and basic steel products (SIC 331) Production workers Non-production workers Blast furnaces and steel mills (SIC 3312) Steel pipe and tube (SIC 3317) Other i/ Table 5 Steel Industry Employment, Number, in thousands Percent change ' 1/Electrometallurgical products (SIC 3313), steel wire drawing and steel nails and spikes (SIC 3315) / and cold rolled steel sheet, strip, and bars (SIC 3316). Source: U.S. Department of Labor, Bureau of Labor Statistics, June State Pennsylvania Ohio Indiana Illinois Michigan Maryland New York California Kentucky Alabama Source: U.S June 1984 Table 6 Steel Industry Employment in the Ten Largest Steel-producing States (SIC 331) Number, in thousands Percent chanae Department of Labor, Bureau, of Labor Statistics,

8 8 The 1983 unemployment rate for steel was the highest among the major manufacturing industries. It was more than double the average for the durable goods sector and nearly three times the rate for all experienced wage and salary workers (see Table 7). An average of 124,000 steelworkers were unemployed in 1983, up from 17,000 in Table 7 Unemployment Rates in Selected Sectors, (in percent) Group All civilian workers Experienced wage and salary workers I/ Manufacturing Durable goods Primary metal industries (SIC 33) Blast furnace and basic steel products (SIC 331) ^/Unemployed persons classified by industry according to their last full-time job lasting 2 weeks or "more. Source: U.S. Department of Labor, Bureau of Labor Statistics, June Regional unemployment data are not available for the steel industry. However, regional unemployment data for the total primary metal industries "(Table 8) -- steel accounted for '40 percent of primary metal employment in show that the East South Central states (Kentucky, Tennessee, Alabama, Mississippi) were hardest hit, followed by the Middle Atlantic (New York, New Jersey, Pennsylvania) and East North Central states (Ohio, Indiana, Illinois, Michigan, Wisconsin). All of these regions had unemployment exceeding 20 percent in the primary metal industries. The severe effect of the 40 percent decl-ine in steel jobs from 1979 to the present on workers, their families, and their communities are magnified by the locations of the hardest-hit segments of the industry. The nation's older steel mills are principally located in the Buffalo region of New York; Pittsburgh, Johnstown, Philadelphia and surrounding communities in Pennsylvania; the Youngstown, Canton, and- Cleveland regions of Ohio; the "Downriver Detroit" section of Michigan; the Chicago-Gary complex in Illinois and Indiana and the East St. Louis area of Illinois; the Birmingham region of Alabama; Northeast Texas and Houston; and San Bernardino County, California. Each of these regions has lost thousands of jobs, mostly in communities built around steel mills. There has been little, if any, industrial growth in these cities to replace shut-down steel facilities.

9 Table 8 Unemployment Rates by Region, Primary Metal Industries (SIC 33), 1981 and 1982 (in percent) Region U.S. total Northeast Total New England Middle Atlantic North Central Total East North Central West North Central. I/ I/ South Total South Atlantic East South Central West South Central West Total Mountain 5.0 i/ Pacific i/data do not meet BLS publication standards. Source: U.S. Department of Labor, Bureau of Labor Statistics Some of the steelworkers caught in the layoffs through 1981 did find jobs in other parts of the country. However, many of them were again laid off in the 1982 recession lending added discouragement to those whose steel jobs disappeared in 1982 and Laid-off steelworkers confront a difficult dilemma as they search for other employment. Many prospective employers are reluctant to hire them as long as they may be recalled to the steel mill. Yet to sever their steel company employment permanently means a substantial sacrifice of quite valuable pensions and other benefits, accumulated by the investment of many years' work. The actual probability of any worker's recall is affected by a number of forces, including some over which the worker has little influence and a limited ability to predict. Even in instances where steel mills are permanently shut, if the mill belongs to a large multi-plant company, workers have recall rights to vacant jobs in other mills of the same company, which may be preserved if the employee wishes. Most of the idle mills are not permanently closed, but work sporadically as orders are received. The workers of the LTV South Side Mill in Pittsburgh, for example, have worked 7 months of the last 25. Most of them are now ineligible for unemployment insurance benefits, and will soon exhaust any remaining benefits under their labor agreement.

10 10 A third quarter 1983 survey of a typical group of laid-off steelworkers from the Duguesne Works of U.S. Steel, near Pittsburgh, found that of a sample of 440 steelworkers who had been laid off for approximately 15 months at the time of the survey 9 percent had been able to find full-time jobs with 19 percent more securing part-time work. Of these 121 workers, 83 percent described their earnings as "decreased significantly;" while another 14 percent described their earnings as "decreased moderately." Unemployment compensation had run out for 44 percent of the workers surveyed and was scheduled to run out within three months for 26 percent more. Company-paid health insurance had ended for 287 of the steelworkers. Of these, 20 percent were either covered by spouse's policies or other outside health insurance. At the time of the survey 14 percent had changed residences since being laid off because they did not meet payments. for mortgages, utilities, taxes or rent in the case of renters. Some 80 percent of these steelworkers are experiencing psychologically-related distress: 45 percent of the workers experienced mental depressions at least once a week; another 25 percent were depressed at least once a month; 5 percent had seriously considered suicide. The condition of unemployed steelworkers is repeated in the case of iron ore miners in Upper Michigan and northern Minnesota, where employment is now less than 50 percent of 1979 levels, and in the case of metallurgical coal miners in Pennsylvania, Ohio, West. Virginia, and elsewhere. Unemployment in steel also affects the steel mill machinery and equipment industry. One leading supplier closed its operations and went into bankruptcy in 1983, while others have closed most of their production facilities. The massive unemployment in steel and its supplying industries has impacted on workers and families who previously enjoyed, for the most part, middle-class incomes. In the older steel communities of the Northeast, the Midwest, and Alabama they normally were members of families associated with the steel industry for several generations. The cyclical fluctuations of steel production and employment had previously been cushioned by unemployment insurance and supplemental unemployment benefits provided under labor agreements. Health insurance under labor agreements continued during cyclical layoffs. The traditional financial support systems for the unemployed have been exhausted for many unemployed steelworkers. For the first time in several generations many thousands of steelworker families have been forced to turn to local welfare agencies for subsistence. To attempt to alleviate hunger in the hardest-hit areas, churches, unions and other local groups have operated food banks for the unemployed. The Pittsburgh Community Food Bank, for example, coordinates supplies for 247 smaller food banks in Allegheny County,

11 11 Pennsylvania, as well as 10 satellite distribution agencies in surrounding counties. In January, 1984 it allocated 600,000 pounds of food to its affiliates. Frequently these voluntary efforts have also been affected, however, as their contributors have followed the recipients on to unemployment rolls. Local government finances have been strained in the steel districts more than at any time since the 1930's, because of the loss of tax revenues from workers and companies coupled with the need for increased socal services. The four-county area aroung Pittsburgh provides a comparative example. In its worst prior post-world War II recession, , the area lost 17,400 manufacturing jobs. Some 11,000 of these were restored in the recovery up to From 1980 to 1983, manufacturing jobs in the four counties dropped from 256,800 to 166, a decline of almost 90,000 jobs.