The U.S. steel industry in many respects is the backbone of the construction industry in this country, supplying plate, shapes and structural members for all kinds of projects. So the ripples spread far and wide when it is in trouble, as it is now. It is not the first time. The steel industry has a history of booms and busts, many of them self-inflicted. But things are different this time and the steel industry deserves a more sympathetic hearing than in the past, but not an open federal checkbook.

During the last great crisis in 1974, the industry was inefficient and dependent on antiquated technology. Since then, the industry has reduced its work force from 500,000 to 141,000 and invested $60 billion in modernization. Highly efficient minimills, which make steel from scrap, also increased their market share from 20% of total U.S. production to 50%.

Today, the U.S. steel industry is one of the most efficient in the world, with productivity that matches that of Germany and Japan. That is what makes the current crisis so troubling. "If you are inefficient and losing money, you know what to do. But if you are efficient and losing money, you are in trouble," says John Anton, steel analyst for DRI-WEFA.

The current crisis was triggered by outside events. The Asian financial collapse of 1997, followed by a similar crisis in Russia and Latin America, dried up world demand for steel. Desperate foreign producers turned to the U.S. as a market of last resort. Despite healthy sales volume, the surge in imports drove prices below costs, eventually forcing 34 U.S. steel companies into bankruptcy, affecting 35% of total U.S. capacity. Domestic producers claim steel imports were being "dumped" in the U.S. and that foreign competitors were resorting to unfair trade practices.

The controversial issue of dumping and unfair trade aside, having such a large percentage of U.S. capacity at risk raises national security issues at a time when security is at the top of the nation's agenda. Some specialty steel used for military applications was created through joint research and development between the Dept. of Defense and domestic steel producers. This proprietary technology can't be transferred overseas. Domestic steel mills need a large volume of commercial business in order to support the relatively low, but critical, levels of steel needed for defense.

President Bush responded to the steel crisis by imposing a 30% tariff on imports last March. Tariff protection will last three years and be ratcheted down to 24% next year and 18% in 2004. Tariffs are intended to give U.S. producers time to restructure and also to create leverage for trade negotiations aimed at reducing the global overcapacity.

ENR's Third Quarterly Cost Report shows the tremendous impact the tariffs have had on prices (see p. 31). Products covered by tariffs have seen a 41% price increase since last March, while those excluded had only a 3% price increase. Some economists say the tariffs may be working too well.

The domestic steel industry argues that it needs time to consolidate in order to compete with larger foreign companies. The most significant proposed merger would combine U.S. Steel Corp., Bethlehem Steel Corp., Weirton Steel Corp. and Wheeling-Pittsburgh Steel Corp. But consolidation faces a major hurdle called "legacy costs." Partly due to its effort to downsize, the domestic steel industry carries a huge financial burden in pension and medical costs for its retirees. And this makes most proposed mergers uneconomical.

The steel industry is lobbying the federal government to pick up its legacy costs so that the critical consolidation can go forward. The industry argues that the government will pay for legacy costs one way or the other if companies go under and retirees go on the dole.

We believe the steel industry raised a legitimate point when it claimed that overseas producers had an unfair advantage. Many of those producers are subsidized by and even owned by governments. Like steel producers in the U.S., they are viewed as a strategic asset that must be protected. In some cases, they also are treated as a "status" industry to show the world that a nation has "made it" economically.

But the U.S. operates under a free enterprise system and the steel industry can't have a socialistic bailout and free markets at the same time. This is what the firms were complaining about in the first place. We believe that the proposed legacy-cost bailout is a form of extortion that U.S. taxpayers should not tolerate. If the remaining steel companies can't shake off their troubles in bankruptcy at the expense of their shareholders, then new companies should take their places. The steelworkers' union retirement package is one of the most generous in the nation, if not the world. If it no longer can be supported by current economic events, then the parties that negotiated it should deal with it.

The U.S. steel industry must act quickly because higher prices are luring production capacity back into the market. Most notably, bankrupt LTV Corp. has reappeared as the International Steel Group, bringing back 4 million tons a year of steel with it. Through the bankruptcy courts, ISG shed its "legacy costs," eliminated excess capacity and won work-rule concessions from the unions. It is now in a position to undercut other U.S. mills on price. Supply, demand and price is what capitalism comes down to, sooner or later. Big steel basically got what it wanted, and has to live with it.