The crisis in the domestic steel industry that pushed 34 steel producers into bankruptcy, leading President Bush to impose a 30% tariff on imports of several flat-rolled products, appears to be easing. Domestic producers took advantage of the tariff protection and quickly consolidated during the second quarter. However, a swing in exchange rates that dramatically weakened the dollar in recent months has been even more effective than the tariff in driving cheap imports out of the U.S. market. In fact, it has been so effective that products not under the protection of tariffs, such as structural steel, have seen some of the most dramatic reductions in imports.

"There is a huge correlation between the strength of the dollar and steel prices," says John Anton, the Washington, D.C.-based steel analyst for the forecasting firm Global Insights. "It may not explain quarter-to-quarter changes but if you look at it over the long-run there is no better determinant of pricing."

(Photo courtesy of Steel Dynamics Inc.)

Global Insights is predicting a modest upward trend in steel prices over the next ten years but it would be a downward trend if not for exchange rates, says Anton. "We expect the dollar to continue to weaken over the next decade," he adds. "It won’t fall as quickly as in recent months. That was the big move, but the trend will be downward."

"Imported structural steel is becoming a very minor factor in the marketplace," says Jim Wroble, manager of sales and marketing for Steel Dynamics Inc., Columbia, Ind. He estimates that foreign steel has fallen to less than 5% of the market after accounting for as much as 15 to 25% in recent years.

Wroble attributes most of the reduction in imports to the weak dollar but also notes that the major domestic producers of structural steel did their share by adding new low-cost capacity. Steel Dynamics, for example, opened its new $315-million structural and rail mill in Columbia City, Ind., last year and expects to ship 500,000 tons in 2003, mostly to the Midwest market. The plant will eventually be able to ship up to 1.2 million tons to its targeted Midwest customers.

With its major domestic competitors located in the South, Steel Dynamics believes it can offer fabricators in the Midwest a lower delivered price. "Freight is the most expensive component of delivered prices and we can reach the Chicago and Detroit markets by truck for $10 to $20 a ton compared to $50 to $70 per ton before," says Wroble.

The demise of imports has given some room for domestic structural mills to raise prices, which bottomed out at the beginning of this year. Since then, prices have bounced back with two published increases of $15 per ton, which is about a 10% increase, says Wroble. And some port areas may experience even bigger increases because they are no longer seeing "foreign fighter" discounts from domestic mills, he says. Nevertheless, prices still are not back to where they were before they dropped off in 2002, Wroble notes.

On the flat-rolled side of the industry, the second quarter was marked by several huge consolidations as integrated mills scrambled to take advantage of the protection afforded them by tariffs. International Steel Group Inc. acquired the assets of Bethlehem Steel Corp. to go ' with its earlier acquisition of LTV Steel’s assets in 2002. Also during the second quarter, U.S. Steel acquired the assets of the National Steel Corp. Both deals were done through the bankruptcy courts, allowing the firms to shed the "legacy," or pension costs, that had hampered profitability. Such consolidation was a major goal behind the initial tariffs but Anton believes it would have happened without tariffs since the major mechanism for change was the bankruptcy courts and not higher prices.

"We are rapidly approaching the state where the industry will be down to three or four major players on both the integrated and electric side," says Anton. Ironically, that could lead to more pricing stability by making it easier for the remaining players to vary production to meet demand rather than price. "I don’t think we will be seeing the wild variations that we have seen in the last few years," Anton says.

However, domestic steel producers are not out of the woods yet, especially the integrated mills that produce most flat-rolled and plate products. "Almost every input cost is higher than it was a year ago, including scrap, electricity, ore and coke," says Anton. "Companies will have to pass that ' eventually or go back into bankruptcy. It’s just a question of how much you can pass ' in a time of weak demand."

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