Triblive: Foreign imports add to woes for U.S. steel industry

October 13, 2015


The contract disputes between steel companies such as Allegheny Technologies Inc. Flat-Rolled Products and their union employees involve a third, silent party.

[Reposted from TribLive  |  Tom Yerace  |  October 11, 2015]

That would be foreign competition, particularly from China, whose manufacturers have been flooding the markets for years with steel, including stainless grades such as ATI makes.

The steel usually is sold for less than what it costs to produce, according to industry observers.

One reason is the Chinese have built so much steelmaking capacity that it dwarfs its domestic demand for steel.

David “Skip” Hartquist, counsel and spokesman for the Specialty Steel Industry of North America, an association of American steel companies, said that situation poses challenges to the industry.

“There is very serious concern throughout the industry about the import situation,” Hartquist said. “It looks like there is widespread dumping, and there appears to be a lot of government subsidization — especially in China — among our competitors.”

Lower-priced, government-subsidized foreign steel draws American buyers and makes it more difficult for companies like ATI and U.S. Steel to compete.

John Delaney, dean of the Katz School of Business at the University of Pittsburgh, said foreign governments get into subsidizing industries as a means to employ people even if the product being made is sold at a lower cost elsewhere than it is at home.

“Here, if U.S. Steel, ATI, AK Steel don't make money there is going to be a problem,” Delaney said. “But (China's) production is just going to continue because of the subsidy.”

Delaney said those kinds of economic pressures have affected contract negotiations between ATI, U.S. Steel, ArcelorMittal and the United Steelworkers Union, as the companies attempt to reduce costs.

ATI's contract with 2,200 union workers at 13 plants in six states — including 1,000 at the Harrison, Gilpin (Bagdad) and Vandergrift plants — expired July 1.

Negotiations have been stalemated despite the participation of a federal mediator and a lockout the company instituted Aug. 15.

Another more recent factor that favors Chinese steel producers is the recent devaluation of the yuan, China's currency, according to Andrew Lane, a metals industry analyst with the independent investment research firm Morningstar Inc.

“Chinese manufacturers enjoy a better cost structure when the Chinese yuan depreciates in comparison to the U.S. dollar,” Lane said. “Local cost deflation has helped Chinese stainless mills enjoy a more favorable cost structure compared to U.S. manufacturers.”

He said Chinese steel producers buy raw materials and pay for labor using the yuan, but sell the products in other markets such as the U.S. for higher valued currencies such as the dollar.

“It has been allowed to depreciate only modestly compared to the dollar,” Lane said, “but if that is allowed to continue, then that could support higher export volumes from China. And export volumes from China already serve as a major headwind to the U.S. stainless industry.”

Legal remedy

One remedy available to U.S. steel companies is filing an unfair trade practice complaint against China and other countries who engage in dumping.

The drawback is that such cases can take years to be resolved.

An example of that was in 2010 when American steel producers filed a complaint with the World Trade Organization regarding heavy tariffs placed on U.S. grain-oriented electrical steel imported to China.

The Chinese claimed the imports were damaging their steel industry and imposed anti-dumping duties that were as high as 65 percent. The tariffs cost American companies an estimated $250 million and they argued that the tariffs violated WTO rules.

Two years later, the WTO ruled against China.

But the Chinese refused to comply and issued a redetermination to justify keeping the tariffs in place.

That prompted a continuing challenge by the U.S., which finally ended this year when the Chinese revoked the tariffs.

“As a trade partner they are always doing something to undermine the rules,” said Gary Hubbard, a spokesman for the United Steelworkers International Union in Washington, D.C. “You've got to defend your market or they'll steal it from you.”

The USW, whose members work at ATI and AK Steel, joined those companies in bringing a complaint against China for dumping electrical steel on the U.S. market. That case is pending an appeal before the International Trade Commission.

Changing products

Given the depressed state of commodity stainless steel markets, producers like ATI have turned more attention to “value-added” alloy products using components such as titanium, nickel and zirconium that sell at higher prices than commodity stainless.

“You have a number of companies that have gone well beyond stainless to the nickel-based alloys and titanium,” Hartquist said. “The tighter the market on regular stainless, the more the incentive for companies to turn to the high value alloys. A number of companies have done that and will continue to do so.”

Lane said one thing that makes that market segment attractive is customers buying high-value alloys are not always focused on price.

“Customers are unwilling to change providers on the basis of cost alone,” he said. “A good example of a component to which that would refer to is a titanium component for a jet engine.”

Such components have to withstand extremely high temperatures and be really durable, which makes the use of the highest quality metals critical.

Future looks bright

Delaney, Pitt's business school dean, sees that as an advantage for U.S. companies, particularly those in the Pittsburgh region such as ATI.

“I think what we have in our favor is that the quality of our products is really high and I think that is important when it comes to the high value products,” he said. “I think we are positioned better than many other places because of the workforce and the investments that have been made here.”

An example of that is the $1.2 billion ATI spent to build a new hot strip mill at its Harrison facility.

Industry observers and company officials have described it as the most powerful rolling mill in the world, capable of rolling any metal ATI produces thinner and in wider measures than its competitors.

Delaney remains optimistic about specialty steel's future.

‘I am positive about the outlook here in the region,” he said. “I think it is difficult to find the quality of the workers that we have here in other places, and that just doesn't spring up overnight.”

Despite the shift toward high-value alloys, Hartquist, the steel industry spokesman, doesn't think that signals the end of commodity stainless steel production in America.

“A lot of our members have substantial investment in commodity products and they sell a lot of it,” he said. “They need the commodity products as kind of a base for the other metals they produce.

“We just have to get things straightened out as far as the import situation,” Hartquist said.

What will help that, he said, is the Chinese economy improving so that their domestic demand for steel increases “to soak up more of their production rather than exporting.

“I think the feeling of the domestic producers is that they are very competitive, particularly in the United States, but many of them have had substantial exports, so the feeling long-term is optimistic,” Hartquist said.

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