II. Abandoning Steel: Capital Finds the Better Way
It's going to take a lot more than publicity campaigns about the evils of foreign steel to get U.S. mills on the road to recovery. It's going to take some $15-30 billion to modernize and...
...1978, p. 51...
...Our investigations have demonstrated that many producers are steadily moving out of the steel business...
...Higher dividends are a way of holding investors during this search period...
...Steel has built mills in Brazil and Colombia and has been supervising the construction of Taiwan's integrated steelworks at Kaohsiung.25 A GLOBAL SHIFT Who are the villians behind the decline of the U.S...
...Last year alone, shortterm lending to steel increased 17% over 1977 lending, far greater than the industrial average of 2%.17 By the end of 1978, most analysts agreed that the steel companies had reached the "bottom of the barrel" as far as further borrowing was concerned.'" How have U.S...
...The engineering firms which are providing foreign steelmakers with the latest word in steel technology...
...Steel's Clairton coke works: "The skin fell off that leg...
...9. Business Week, August 21, 1978, p. 91...
...SPENDING THE COMPANIES' PROFITS But what, you may ask, are the steel corporations doing with the profits they do have...
...One prevalent explanation is that they need to do it in order to enhance the attractiveness of their firms on Wall Street...
...World Business Weekly, November 27-December 3, 1978, p. 53...
...AND NOW FOR THE BAD NEWS If the situation for the U.S...
...China Steel Co...
...Steel was responsible for pouring about two million tons of soot and dust into the air, mostly in highly populated, urban areas, in 1968...
...To say the least, none of the above can feel too self-righteous about pointing the finger at foreign producers...
...Allegheny Ludlum, one of the more profitable specialty steel producers, expected its nonsteel sales to rise to 66% of total sales by the end of 1978.10 As for "Big Steel," it is rapidly becoming Big Cement, Petrochemical and Natural Gas, Inc...
...Steel, see Hogan, op...
...BANK LENDING TO FOREIGN STEEL COMPANIES 1977-1978 Country Steel Company Bank (USS millions) Amount Algeria Societe Nationale de Siderurgie Argentina SOMISA Brazil Acominas COSIPA COSIPA Cia...
...banks have been instrumental in providing the steel industries of Brazil, South Korea, Taiwan and others with essential working capital...
...against U.S...
...In 1976 fully one-third of all U.S...
...9 Most steel companies are diversifying into raw materials (traditionally a strong suit with the steelmakers), petroleum and related activi14JanlFeb 1979 15 ties, and various industrial products and services...
...2 Which leads us to question what they have been dedicated to all these years...
...Business Week, August 21, 1978...
...With average capital expenditures on steel at approximately $650 million a year over the past 7 years, it is currently considering non-steel investments which far surpass that sum...
...2 The banks are particularly enthusiastic about Japan's strategic ability to supply the growing Chinese demand for steel as well as helping China build its own steel capacity...
...steel firms have "borrowed up to their limit" in the eyes of U.S...
...Capital and technology are flowing to those areas where profits can be maximized and leaving those industries in the advanced capitalist countries where they are tending to decline...
...Steel's foreign mining operations are extensive...
...Humor aside, our study of investment and lending trends in the steel industry points to the development of a new international division of labor in the world...
...It mines nickel and cobalt in Indonesia, copper, zinc, manganese, iron ore, ferrochrome and ferromaganese in South Africa, manganese in Gabon, coke in Germany, iron ore in Canada and ferromanganese in France...
...Foreign bank lending to all Japanese industries increased by 67% between 1974-1976...
...2 (May 1973...
...engineering firms, and even U.S...
...Steelmakers argue that it should come from higher prices...
...steel industry has experienced since the early 1960s originated with both a reintroduction of competition into a highly monopolized market and a general restructuring of industry on a world scale...
...George J. McManus, "American Steel Doesn't Lag in Technology...Just in Capital," Iron Age, September 11...
...On the other hand, it couldn't happen to a nicer industry...
...ABANDONING STEEL 1. New York Times, November 10, 1978...
...In 1977, one of the worst years for the U.S...
...Facts are facts, though, and it is true that steel industry profit margins have declined over the past twenty years, from "comfortable" levels in the mid-1950s to low levels in the 1970s (relative to other industries...
...Prices have been so low, complains Armco's chairman, that "during the period of 1975, 1976 and 1977, consumers around the world ate the steel company's lunch...
...And, sure enough, when one looks at steel company investments in the last few years, the conclusions are unmistakable: the steel companies are abandoning the steel business and moving into greener pastures...
...banks...
...4. Wall StreetJournal, March 28, 1978...
...Pohang Iron & Steel China Steel Co...
...cit., IV, p. 1665...
...Steelmakers spent nearly $2 billion on pollution control measures in the 1970s, approximately 12V 2 % of their total investment...
...On diversification in U.S...
...Seamless steelmills are not a strong point in U.S...
...Itabira CAP CAP Antara Steel Fundidora de Monterrey Pohang Iron;& Steel Korea Integ...
...Consortium led by Continental Illinois 5-bank syndicate Consortium led by Chase Manhattan Consortium led by Morga Guaranty Consortium led by Bank of America Consortium led by Chemical Bank Consortium led by Bankers Trust Consortium led by Wells Fargo Bank Manufacturers Hanover Consortium led by Bank of America Citicorp Chase Manhattan Chase Manhattan Consortium led by Citicorp Consortium led by Crocker Nat'l Bank Morgan Guaranty Mellon Bank Sources: Metal Bulletin, Development Finance, Asia Monitor, The Economist and World Business Weekly of Cleveland, recently so reticent when it came to helping Cleveland climb out of its fiscal tar pits, saw no problem in guaranteeing a sizable loan to Brazil's state-owned steel mills...
...They will loan to sectors of industry which have the best long-term outlook, whether in the United States or elsewhere...
...Some analysts go further and argue the following: Corporate financial managers will often pay out higher-than-average dividends when their companies are "buying time" to look around for new investments outside their original sphere...
...World Business Weekly, November 6, 1978, pp...
...Source: Oriental Economist, March 1976 and Decem- ber 1977 banks to the six largest steel companies in Japan between 1975 and 1977...
...Oriental Economist, December 1977, p. 11...
...steel industry seems dismal, there are indications that it may be getting worse...
...bankers...
...Iron Age, May 22, 1978...
...See Table II) Foreign steel firms have found their friends at Chase, Citibank and the other large New York-based banks...
...Once again, solidarity and sacrifice is demanded of the working class while branches of capital pursue their own independent interests...
...banks and consortia led by U.S...
...from countries where unions are relatively well developed and wages and conditions relatively high to countries where unions are outlawed, weak or coopted and wages are abysmally low...
...3. Iron Age, May 22, 1978...
...Declining profit margins in steel have had a profound effect on the industry's ability to attact investors and raise needed capital...
...13 JanlFeb 1979NACLA Report U.S...
...The steel companies have steadily groused that a large part of that investment was eaten up by unproductive expenditures on pollution control equipment...
...According to the CIA, "Japan has the competitive clout to capture practically all of the world market for net steel imports, while making inroads into the domestic market of West European and North American steel producers...
...2 2 The other bright spot for Japanese steel as far as foreign investors are concerned is its ties to the burgeoning steel mills in the underdeveloped capitalist world, particularly Brazil...
...In other words, with the steel companies doing so poorly, investors must have some reason for holding on to their shares of stock...
...trade accounts in general and in steel in particular...
...firms...
...So great are the environmental control demands, they argue, that it is often cheaper to scrap their old plants entirely rather than clean them up...
...Armco's strongest area, in terms of profits, is in the production of oil field equipment and products, but it showed an interest in the lucrative energy field by acquiring Corban Industries which constructs fiberglass pipes for the cooling towers of nuclear power plants...
...Steel Corporation, 10K Report, 1977...
...8. U.S...
...A researcher sampling the water outside U.S...
...Barron's, March 20, 1978...
...The banks which are providing foreign steel companies, GLOBAL SH including the Japanese, with the billions of GLOBAL T: dollars they need to modernize their industries...
...It is this shift which underlies the growing imbalance in the U.S...
...steel companies themselves, have provided the technology and engineering expertise to build steelmills around the world...
...Producers adamantly assert that the capital needed for expansion cannot be found in their profit columns, which they describe as "pretty dismal...
...But they have not been lacking in support from smaller regional banks...
...1 At the moment, it is angling for a $1 billion joint venture in the MiferguiNimba iron ore mines in Guinea.'" Thus the steel companies, while screaming bloody murder about their inability to find money to invest in steel operations, seem to be finding the funds to diversify into more profitable areas...
...steelmakers, U.S...
...We have been able to document over $1 billion in loans to foreign steel companies by U.S...
...7 U.S...
...As we will see in the next article, while U.S.based banks are lending money to Japanese steelmills, the Japanese banks are putting together a massive financing program to aid Brazilian steel...
...markets, domestic firms can no longer raise prices at will...
...6 Pollution control expenses have not tipped the balance *In the early 1970s Bethlehem's Sparrows Point works was discharging an average of 324 lbs...
...steel industry...
...New York Times, February 29, 1976...
...In general, profits are either plowed back into the business or paid out to shareholders in the form of dividends...
...BANKING ON THE LEADERS U.S...
...5. For a comprehensive, if dated, discussion of steel industry pollution, see Council on Economic Priorities, "Environmental Steel," Economic Priorities Report, Vol...
...engineering firms (Wean United, Wilputte Corporation, Pullman Swindell, Blaw-Knox, Arthur G. McKee) have been contracted to build steelmills from Algeria to Yugoslavia...
...From 1970-1976 the industry paid out 43% of aftertax profits in dividends...
...The internationalization of capital-the spread of the multinational corporation, the remarkable upsurge in foreign lending by banks, the creation of unregulated, "offshore" money marketsreflects and bolsters a shift in manufacturing in general from the advanced to the underdeveloped capitalist countries...
...Meanwhile, U.S...
...banks have also been scrambling to lend money to the nascent steel industries in the Third World...
...Banks from the heart of steel countryPittsburgh National, West Pennsylvania National, the Continental Bank of Chicago and others-have been generous creditors to the steelmakers of Australia, Taiwan and Yugoslavia...
...cit., p. 24...
...That same year, while the United States exported a total of $115 billion in merchandise, majority-owned foreign affiliates of U.S...
...National Steel has moved heavily into aluminum and magnesium, having purchased major companies in the field, as well as picking up some well-established firms in building construction, containers and packaging...
...The next day, according to the researcher, "the skin on that leg fell off...
...and Wall StreetJournal, October 6, 1978...
...Even the Central National Bank 16 NACLA ReportTABLE II U.S...
...New York Times, December 7, 1978...
...In the past three years, they have added $3.3 billion to their long-term debt, which now stands at approximately $8.5 billion.' 5 As a group, the eight largest steelmakers increased their long-term debt by more than 50% in the last eight years.'16 Short-term lending to the steelmakers (i.e., lending from private banks) has also gone up rapidly in the 1970s...
...Iron Age, May 15, 1978...
...Steel manufacturing itself was U.S...
...Acos Esp...
...3 (Lower profits obviously don't affect all concerned to the same degree despite the USWA's stress on a "community of interests" between labor and capital...
...In the case of some companies, such as LykesYoungstown Sheet & Tube, this lending has all the look of bank "redlining...
...multilateral and bilateral funding...
...Through its various operating divisions, U.S...
...Special Steel Kangwon Indus...
...Export-Import Bank, Press Releases, various dates...
...workers, but first we will examine the spread of the steel industry from the advanced to the underdeveloped capitalist countries...
...This may not seem like anything to write home about, but it is highly significant when a steel company no longer wants "steel" to appear in its handle...
...steel industry in its entire history, a year in which more than 20,000 steelworkers were laid off, the chairmen of the six major steel firms saw their salaries rise an average of 13 %. With a net loss of $448 million for the year, Bethlehem Steel nonetheless saw fit to raise the base salary of its chairman by 17% to $296,000.4 We should all be so unprofitable...
...How can we explain these high dividends when steel producers are complaining of a capital shortage...
...steel industry in international competition will inevitably make borrowing more difficult, while banks throw money at their foreign competitors...
...4, No...
...Steel's Clairton Coke Works accidentally stepped out of his boat and one leg sank up to the knee in muck...
...Metal Bulletin, October 13, 1978...
...As of 1977 it owned or leased properties containing about 3.4 billion tons of coal, 3.3 billion tons of limestone, 4.2 billion tons of iron ore, and, for good measure, a uranium mine in Texas...
...6. Mueller and Kawahito, op...
...cit., p. 8. 22...
...Armco's steel sales accounted for 68% of its revenues in 1977 but only 41% of its profits...
...Capitalist enterprises are established in order to make a profit, and banks, as capitalist firms par excellence, are no exception...
...This represented one-fifth of all industrial particulate pollution and more than twice the contribution of any other single manufacturing industry.* 5 Moreover, there is very little to the argument that pollution-control expenditures represent an unfair advantage for foreign competitors...
...Steel ranked at the bottom of 41 manufacturing industries in terms of return on net worth for most years in the 1970s...
...Yet, with lower-cost imports competing in U.S...
...banks know a good thing when they see it...
...Not to be outdone, U.S...
...In the last article we noted that steel companies invested about $1.7 billion a year (from both profits and borrowed funds) in capital expenditures...
...Steel's holdings, for example, are absolutely staggering...
...9 The president of Wheeling-Pittsburgh Steel likewise noted that private financing was unavailable for steel companies in the United States while "one large Japanese steel company with an 85% ratio of debt to capitalization and little or no earnings, obtained a loan of over $100 million in this country...
...The final article in this issue will consider the impact of this process on U.S...
...The company, which is continually arguing that it doesn't have enough money for its steel operations, is currently considering one of its largest investments ever: the purchase of a $500 million ethylene facility...
...Capital flows to where the profit rate is highest, and steel in the United States is no longer its Mecca...
...2 4 If U.S...
...Steel has expanded into cement companies in the United States and abroad, railroads, ocean transport, seabed mining, pipeline and oil field drilling equipment, titanium, real estate, engineering, consulting and finance...
...BANK LENDING TO THE SIX LARGEST JAPANESE IRON AND STEEL COMPANIES, 1975-1977* (In U$S millions) Bank April 1975 March 1977 Citibank $ 55.6 Bank of America 21.2 Chase Manhattan Bank 55,9 Morgan Guaranty Trust 12.5 Manufacturers Hanover 23.6 Continental Illinois -- - Chemical Bank 11.6 Bankers Trust 28.7 United California Bank 3.3 1st Nat't Bank of Chicago 5.9 Wells Fargo Bank 5.9 Others 54.8 Total $279.0 142.4 204.2 124.2 40.6 33.6 82.4 50.9 19.6 7.7 46.2 62.4 $1033.5 *Japanese firms are Nippon Steel, Nippon Kokan, Kawasaki Steel, Sumitomo Metal, Kobe Steel and Nisshin Steel...
...Here, we would only note that, despite the growing concerns of U.S...
...It's going to take some $15-30 billion to modernize and expand a tired, worn-out industry...
...Data from the corporations' annual reports and 10K reports...
...The other portion of the "accumulation fund"-that which is left after all expenses and taxes have been paid-is used to pay out dividends to shareholders...
...The question is: Where will the money come from...
...Moodys Industrials, 1978, annual reports...
...In fact, many producers have urged their compatriots to "rededicate themselves to profitability...
...Nippon Steel has already been given a $2 billion contract to build a new integrated plant for China at Paoshan, near Shanghai, has sent a technical mission to install equipment at the Wuhan Steel complex, is modernizing the Anshan Steel works, and is under consideration for a number of other gargantuan projects...
...Edward F. Kelly, "Lykes and its Bankers," xerox report from the Ohio Public Interest Campaign, 1978...
...In the following article we will examine the development of these industries and the role played by U.S...
...domestic production, but Aetna-Standard Engineering Co., has built nearly 90% of the world's most advanced mandrel mills, including those in Japan...
...534. 14...
...producers reacted to the bankers' practice of "aiding and abetting the enemy" in the midst of a trade war...
...of arsenic and 5,469 lbs...
...Metal Bulletin, October 3, 1978...
...Steel's big loser.a So they are moving out of steel...
...The weakened position of the U.S...
...Business Week, August 21, 1978...
...What we have seen is that the problems which the U.S...
...2 3 BUILDING THE WORLD'S STEEL MILLS When capital by itself is not enough, U.S...
...China Steel Co...
...50 80 100 30 15.5 150 30 10 10 100 50 10 50 17 JanlFeb 197918 NACLA Report which for years neglected to use their monopoly profits to modernize the industry and now are beginning to desert it...
...The corporations Brazil Brazil Brazil Chile Chile Malaysia Mexico S. Korea S. Korea S. Korea S. Korea Taiwan Taiwan Taiwan $33.6 $25 200 n.a...
...After all, according to Armco's manager of economic research, "there is no divine law that says we were put on this earth only to make steel...
...2 6 We have met the enemy and he is us...
...of cyanide a day into Chesapeake Bay...
...imports originated in sales from majority-owned U.S...
...corporations exported (from their host countries) nearly $144 billion...
...Metal Bulletin, October 26, 1976...
...lending by foreign banks to the Japanese iron and steel industry shot up by 274% in the same period.14 Table I demonstrates a 270% increase in loans from private U.S.-based TABLE I: PRIVATE U.S...
...Business China, August 17, 1977...
...It is very probable that the total being lent to foreign steel firms is considerably higher...
...Business Week, October 16, 1978, p. 147, 160...
...20 Is this another instance of "unfair competition" or another illustration of capitalist reality...
...Steel had a pre-tax income of $175.5 million in 1977, but that was only because its non-steel holdings brought in $220.5 million...
...CIA, op...
...Export-Import Bank, Active Authorizations by Supplier as of February 28, 1978...
...7. Armco Steel Corporation, 10K Report, 1977...
...Banks are cutting back their loans to Lykes (which had grown dependent on bank financing in the 1970s) and lending instead to Japanese steel firms...
...Most domestic steel firms are moving swiftly to shore up their control over raw materials...
...For example, Armco has built steel mills in Argentina...
...10K reports for the corporations...
...THE DIVINE LAW OF PROFITS: DIVERSIFICATION In the middle of 1978 Armco Steel Corporation quietly dropped "Steel" as its middle name...
...Interestingly, steel companies have been paying out a higher than average portion of profits to dividends...
...In fact, between 1971-1976 alone, Japanese steel companies spent over $3 billion on pollution controls, an average of 16% of their total capital investments...
...Steel Corporation, 10K Report, 1977...
...subsidiaries abroad...
...2. Metal Bulletin, April 21, 1978...
...Steel is significant...
...Simultaneously, however, the banks which have serviced the tremendous capital needs of domestic steel are rapidly increasing their lending both to steel companies in Japan and in the less developed capitalist countries...
...The case of U.S...
...steel companies are squaking about their foreign competitors, they should examine their own order books, for they, too, have participated in the construction of numerous foreign mills...
...And this is only an indication of a significant attempt by the major steelmakers to diversify their holdings The reason for the shift from steel is straight forward: profits are higher elsewhere...
...Survey of Current Business, April 1978...
...Some of the largest U.S...
...And the 1977 steel crisis has only served to fuel the fires of diversification...
...Its biggest plans, however, are in offshore gas and oil leases and petrochemicals...
Vol. 13 • January 1979 • No. 1
