State of Business: The Economics of Steel

• Share

Always in times past and ten times since World War II, the U.S. Steel Corp., biggest company in the nation's basic industry, has been able to set prices in steel. Its crushing defeat when it attempted to do so last week had complex causes. The two most important:

> Hard economic factors, as well as political pressure, cracked steel's monolith.

> All steelmen agreed that higher prices were desirable, but many figured that slower, spaced-out boosts would have been more realistic. And many had grave doubts as to the economic feasibility of Big Steel's abrupt, across-the-board raise.

Productivity & Profits. Big Steel's basic problem was one that struck a responsive chord in the heart of many a U.S. businessman. For four years, argued U.S. Steel Chairman Roger Blough, his company's production and labor costs have been inching up. but its prices have increased not at all—partly because American steel has been meeting increasing competition from lower-cost foreign steel and domestic steel substitutes, such as aluminum, concrete and plastics.

Against this, President Kennedy argued that steel's bill for raw materials is cheaper now than in 1958; iron ore has remained level, while coal and steel scrap have dropped sharply. More important, the President declared that the productivity of steel workers has risen enough so that the labor costs of producing a ton of steel have not increased since 1958, and will actually slip a bit this year. Productivity is an elusive and much disputed statistic. Kennedy's estimates of productivity gains in steel were roughly double the industry's own estimate of 2% yearly.

Apart from labor costs, the heart of U.S. Steel's case was its claim that profits are too low to supply the huge investment—some $400 million a year—that the company feels it needs to modernize its costly plants. It was an argument not to be lightly dismissed. Though U.S. Steel's profit margins have consistently bettered the average for U.S. manufacturing as a whole, its after-tax earnings have shrunk from $302 million in 1958 to $190 million last year, lowest since 1952. But the rest of the industry has done better; taken as a whole, earnings of the ten next biggest companies went from $403 million in 1958 to $412 million in 1961.

The fact that its profits had run below the industry average suggested that U.S. Steel might well be losing its eminence as the nation's most efficient steel producer. But the prime reason for Big Steel's smaller profits last year was a $362 million drop in sales because of poor demand. Even though the steel industry has learned to earn some profit while operating as low as 50% capacity, it contends that it needs far higher profits than other manufacturing industries to support its uncommonly high capital investment. And it can show such high profits only when demand is so brisk that plants operate at close to full blast. The industry earned a thumping 14% on assets when it poured at 94% capacity during the first quarter of 1960.