200-More Steel Capacity. Why?
China’s Anshan Iron and Steel Group has announced plans to invest in up to five new steel mills along with a U.S. domestic partner. The last time I looked, the U.S. was swimming in excess steel capacity. So why would this company enter the U.S. to add to an already over-supplied market? This is a political decision, not an economic one. Though, politics will obviously translate into dollars and cents eventually.
Anshan is partnering with Steel Development Company, a U.S. corporation, to invest $175 million in an initial “micro-mill” in Mississippi. Despite its cost, this is really a small investment. (See “Audio Tip #196: Why Economies of Scale Exist” on StrategyStreet.com.) The capacity of the mill is 300,000 metric tons. This mill will make reinforced metal bar. It adds relatively little to total capacity. The U.S. rebar market has 8 to 10 million short tons of capacity in the U.S. Nor does the new capacity add much to Anshan’s total capacity. Its total capacity in China totals 25 million metric tons.
This is a political investment. The U.S. government is under pressure from U.S. steelworkers. They charge that China competes unfairly in the steel industry. This investment is a partial response to that political problem.
We’ve seen this before. In the 1970s, I worked on a study to determine where a major Japanese electronics manufacturer should establish its first U.S. manufacturing facility. That new U.S. facility was not going to be a lower cost facility than those the company already had in Japan. But it would short-circuit arguments that the Japanese company was dumping its electronic products on the U.S. market. The Japanese automobile manufacturers, notably Honda and Toyota, did the same thing at roughly the same time. Over time, the Japanese auto plants were able to supply the domestic market economically. The domestic plants of the Japanese automakers, of course, have been operating under the cost umbrella held up by the United Autoworkers’ union wage rates and work rules. The U.S. steel industry has a lower union cost umbrella, so we are unlikely to see big foreign investments bringing a lot of new capacity to the U.S. steel industry. That is, we won’t see much more than is needed for political expediency. (See the Perspective, “Must the Cycle Start Again?” on StrategyStreet.com.)
The US steel industry continues to add capacity, especially low cost minimills, with investments from both US and foreign companies. The US capacity operates under protective tariffs, producing high prices. The industry’s labor productivity has stagnated for many years.
For well over 10 years the US has been a net importer of steel. The US maintains tariff protections for its domestic manufacturers, which results in higher steel prices in the US than in the rest of the world.
The US industry consists of over 100 facilities, including nine integrated mills and many minimills. The minimills, which produce the majority of US steel, recycle used steel and have a low cost of production. These minimills are Predator Price Leader facilities who have come to dominate the industry. See HERE for more perspective.
According to U.S. Census Bureau data, steel producers recorded $29.6 billion in profits in 2021, compared with $2.7 billion in 2020, as capacity utilization reached the highest level since 2007. High prices and the likelihood of greater demand due to planned infrastructure investment have drawn investments that are expected to add 8% to industry steelmaking capacity.
Direct employment in steel manufacturing has declined by 49%, from 257,200 workers in 1990 to 131,400 workers in 2021. However, the new mills have not led to improved productivity; steel mill tonnage per employee has been generally flat for nearly two decades
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