Leibowitz: Setting the record straight on steel consumption

My colleague and friend Alan Price wrote last week about steel production and production capacity. In responding to my thoughts about the impact of tariffs on steel and consuming industries, he missed a vital point.

Alan views steel producers as so vital they must have government punish their own customers. In my view, this is dangerous and unsound. Steel manufacturers are at least as important, if not more important. The current tariff policy ignores them.

I agree with Alan the ability to meet domestic demand should be measured but capacity is no more valid than production. Idle production means more than imports crowding out domestic producers. In addition, capital equipment must be repaired or replaced, and critical shortages in many steel products must be encouraged.

Capacity is more than a furnace number

Defining capacity is essential because the term can mean many things. Alan did not discuss his definition, only pointing to figures from the American Iron and steel Institute (AISI) as a given.

The Federal Reserve defines capacity as the “attempt to capture the concept of sustainable maximum output, the greatest level of output a plant can maintain within the framework of a realistic work schedule…”. Capacity as defined by the Federal Reserve does not assume unrealistic production over long periods of time. Maintenance requires shutdowns of machinery, and mills cannot operate 24/7-365.

Does Alan or the AISI accept the Federal Reserve definition of capacity? Assuming they do, they must accept the limits of capacity as defined by AISI, which reports only the capacity to make raw steel. Raw steel means product that comes out of a furnace.

In other words, it is limited to capacity to produce steel that is used to make finished steel products which manufacturers or consumers use. It is for the ability of furnaces (BOF or EAF) to produce. But not all raw steel is useful in making all downstream products, such as sheet or rails. Specifications matter, and Alan does not address this key point.

The gap between tariff policy and market reality

With these facts in mind, the disconnect between current tariff policy and economic reality becomes clear. ‘Steel’ is not one product but thousands. Consumers, whether industrial or personal, sometimes demand products that steel mills don’t make.

An effective argument for tariffs must consider whether domestic producers make the raw steel needed to produce downstream products and whether domestic downstream producers (rerollers, rod and wire producers, pipe producers, etc.) can make those downstream products in quantities sufficient to meet domestic demand.

At the very least, a workable tariff policy would require that tariffs result in more domestic production of products that imports now supply, much of which are products not available from domestic producers. If tariffs are to work, there must be viable competitors in the US. If not, tariffs make no sense.

As an example of the benefit of tariffs, Alan pointed to one mill in California, the first in the West in decades. While he assumed that tariffs were responsible for promise of a new mill, the news is a ripple rather than a wave.

This little EAF mill in California, which is termed a ‘micromill’ because its stated production would be less than 500,000 tons per year, will make merchant bar and rebar, standard products used in construction.

Ironically, there is ample domestic production of these very basic steel products in the US (thanks to substantial foreign investment, by the way). However, because of government interference in the shipping market, the expense of transporting steel bar from the eastern US to the West is vastly higher than the cost of transporting these products across the Pacific Ocean.

Don’t blame imports for that—blame the Jones Act and related legislation that sharply penalizes domestic shipment. This is hardly a trend.

Alan did not discuss the declining economic and national security importance of steel in the US. Steel intensity measures the importance of steel to an economy. The decline has been dramatic for decades, showing steel, while still important, is less than in the past. In addition to stifling growth in downstream industries, rising prices for steel will cause customers to search for alternatives. Some will find those alternatives. We need solutions that will benefit the economy as a whole, which are not what we have now.

The national security case needs a closer look

The government has been loath to study such general economic issues, perhaps because they challenge ingrained ideas and political doctrine. It is left for people outside the government to estimate the likely impact of steel tariffs on the broader economy and to the warmaking capacity of the nation.

As far as national security is concerned, we have a similar picture.

A glance at the headlines these days, with Ukrainian, Russian and Iranian drones filling the sky along with offensive and defensive aircraft and missiles, and satellites to guide them, shows this clearly.

None of those products use appreciable amounts of steel. There is ample capacity in the US to make the traditional weapons that require steel, such as naval ships and some armored vehicles. If there is an emergency requiring a rapid buildup (which is not likely), the best way to do that is to subsidize the buildup, not to tax imports.

Alan wrongly blames small importers and steel traders for creating a need for the tariffs, alleging that they have a stranglehold on prices. There is not the slightest evidence that I know of to support this claim and after nearly 50 years in this area I think I would have seen it.

I think China is more to blame than steel traders for these trends.

A better path: Incentivize the products America needs

I’d like to see a program that would really spur production in such products as X80 grade plate for line pipe, ultra-thin gauge steel sheet, just two examples of many where domestic production lags demand.

The steel exclusion program was a partial and imperfect solution to this problem. It demonstrates how many products are needed in this country that are not ‘reasonably available’ from domestic sources. The answer is not to jack up prices for products where there are little or no domestic availability and no prospect of further development.

That is the situation we have now. Alan may not like it, but it is impossible to show that hundreds of thousands of approved exclusions were all based on fake specifications.