INTERNATIONAL STEEL: SOME ISSUES AHEAD

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP83B00851R000100050001-0
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 14
• Document Creation Date: December 19, 2016
• Document Release Date: February 16, 2007
• Sequence Number: 1
• Publication Date: July 1, 1982
• Content Type: REPORT

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Directorate of Confidential
Intelligence
International Steel:
Some Issues Ahead
An Intelligence Assessment
MASTER FILE COPY
CIO '.,?;:' i GIVE JJT
OR MARK ON
Confidential
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Q
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Directorate of ConfidentW
Intelligence
International Steel:
Some Issues Ahead
This paper was prepared b Office
of Global Issues. Comments and queries are welcome
and may be directed to the Chief, Economics
Division
Confidential
GI 82-10145
July 1982
1 25
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International Steel:
Some Issues Ahead
0
Key Judgments The developed country steel producers face tough sledding in the decade
ahead. Although a shake-out has occurred in the industry during the last
several years, especially in the United States, the problem of massive
excess capacity remains. With economic activity in the mature economies
shifting away from steel intensive activities, there is little chance that
developed country steel industries will regain adequate rates of profitability
until at least the end of the decade.
The USSR is the largest single OECD export market and appears to offer
the greatest potential for expansion. The USSR currently accounts for
15 to 18 percent of EC and about 6 percent of Japanese steel exports. We
believe that non-Communist steel producers, particularly in the EC where
the need for new business is greatest, will continue to exploit this market by
offering the lowest possible prices and subsidized credits. They obviously
hope that Moscow will channel these savings-which could amount to
several billion dollars over the 1981-85 period-into increased steel
purchases. However, the Soviets may use the savings to increase hard
currency imports of other commodities, such as grain, in equally high
demand
Net steel exports to the LDCs have not increased since the mid-1970s and
probably will remain stagnant. The LDCs are continuing to develop their
own steel industries, and their level of self-sufficiency issteadily increasing.
Moreover, some LDCs are beginning to compete with developed countries
in the world steel market, and this competition will gradually increase.
A fiercely competitive steel market will keep most OECD steel producers
financially weak for years. The situation will be least serious in Japan and
most severe in Europe. The EC does have a fair chance to carry out its
planned termination of subsidies by the end of 1985 if closer cooperation
among the steel producers continues to strengthen domestic steel prices.
Nevertheless, EC steelmakers will still face a fragile situation and will
remain heavily dependent upon the EC Commission to enforce steel
production quotas and steel price guidelines and to restrain imports.
Information available as of 30 June 1982 has been used in
the preparation of this report.
Confidential
GI 82-10145
July 1982
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OECD: Steel Consumption Per
Million Dollars of GNP at 1978 Prices
I I I I I I I I I 1
1970 71 72 73 74 75 76 77 78 79 80 81
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International Steel:
Some Issues Ahead
0
The steel industry in the developed countries remains
in deep recession. Crude steel production slumped to
388 million tons last year, leaving one-third of capaci-
ty idle. Output is now 15 percent below the 1974 peak.
EC firms lost about $4 billion in 1981-most of which
was covered by government subsidies-while profits
for Japanese producers sagged to their lowest level in
years. The industry shake-out has already led to some
600,000 steel-related job losses in the developed coun-
tries since 1974. The West European steel industry
experienced the sharpest decline, and in many re-
spects is struggling with more severe adjustment
problems than either the Japanese or the US industry.
Demand Problems Ahead
Most industrial country steel firms expect demand
within the developed countries to remain weak
through the mid-1980s at least. The Japanese Iron
and Steel Federation, for example, recently revised its
1985 production forecast downward to 110 million
tons of finished steel-no higher than the 1973
record. A recent study by the EC Commission esti-
mates that in 1985 steel consumption in the Commu-
nity will reach only some 96 million tons of finished
steel. If these assessments materialize, overall demand
for developed country steel in the mid-1980s probably
will be little or no higher than in the peak years
1973-74. Capacity has expanded substantially since
then, and continuing heavy overcapacity appears like-
ly through much of the decade.
Total
319
398
444
444
United States
99
101
101
100
Japan
75
117
135
154
EC
112
135
155
150
Others
33
45
53
54
There are only a few bright spots in the demand
outlook. Increased military spending in the United
States will boost US demand for steel somewhat.
Currently, military uses account for only 3 to 4
percent of US steel consumption, amounting to no
more than 2 to 3 percent of total capacity. Industry
experts believe that the pipe and tube market will
recover from its current slump and strengthen as time
passes; because the demand for tubular goods is
heavily concentrated in the United States, US firms
should benefit from strong demand for these products.
In 1981, an exceptionally good year for the pipe and
tube market, US consumption increased by about 3.5
million tons; American firms supplied about one-third
of the increase.)
Several factors contribute to the sluggish growth in
demand. Economic growth has moderated, averaging
only about 3 percent annually in the OECD during
the last business cycle. Beyond this, however, the
intensity of steel usage has fallen sharply in OECD
countries since 1970 for a variety of reasons:
? A shift in economic activity toward services and
consumer goods with little steel content.
? A slowdown in the construction of heavy industry.
? The downsizing of passenger automobiles and the
substitution of lighter materials for steel.
? The depression in shipbuilding.
The LDC Problem
In contrast to the early 1970s, developed country steel
firms can no longer count on the LDC market as an
outlet for large quantities of their steel. During the
last decade, the LDCs installed about 50 million tons
of new capacity and are continuing to add new
facilities fairly rapidly. As a result, LDCs will ac-
count for all of the net steel capacity expansion taking
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1974
1979
1982 b
1985 Projections a
(At Annual Average 1983-85
Economic Growth Rates of:)
3.0 Percent 4.0 Percent
5.0 Percent
Total
355
340
290
335 350
365
Domestic consumption
315
300
250
295 305
315
a Projections assume continued decline in steel intensity matching
that of the 1970s.
b Projected.
place in non-Communist countries through the mid-
1980s. Based on projects now under way, total LDC
capacity probably will reach 110-115 million tons by
the end of 1985, up from nearly 76 million tons in
1980. About half of the new development will be in
Latin America; most of the rest will be in Asia .I
Given this increase in capacity, we believe the LDCs'
production growth should roughly match their con-
sumption increases at least over the next five years.
Consequently, developed country firms probably will
be unable to boost exports to the group much, if at all.
Between 1970 and 1975, by comparison, exports to
the LDCs jumped by nearly 20 million tons. Indeed,
as LDC production outstrips demand in several pro-
ducing countries, exports to developed countries-
particularly of basic grades of steel-will begin to
rise.
LDC steel exports are already beginning to have an
impact on the developed country steel industries.
Most LDC steel exports are sold in other Third World
countries, but 4-5 million tons are now shipped annu-
ally to the developed countries. LDCs export predomi-
nantly basic carbon steel products, but they also sell
some of the more sophisticated products in the alloy
and stainless steel categories. Until recently, no LDC
was a consistent net steel exporter. Now, South Korea
is establishing itself as a net exporter; most of its
exports go to other LDCs, but significant amounts are
shipped to Japan and to the United States.
EC Steel Problems
The EC steel industry is facing a crisis. Problems of
excess capacity, declining markets, and unemploy-
ment are more severe there than in either Japan or in
the United States. Although the US industry is being
hit hardest by the current recession, with capacity
utilization falling below 45 percent at times, during
most of the period since 1974 the United States has
been able to occupy 75 to 90 percent of its steel
industry. The Japanese, on the other hand, have never
exceeded a 75-percent operating rate during this
period while the EC industry has fallen below 70
percent of capacity. Since 1974 nearly 250,000 EC
steelworkers have lost their jobs, a reduction in force
of over 30 percent. In an attempt to bolster the
industry, the EC Commission and member govern-
ments have:
? Pumped about $20 billion in financial aid to the
industry over the past seven years.
? Established production quotas to restrict supply and
shore up prices.
? Established minimum prices and price guidelines for
both domestically produced and imported steel.
? Negotiated export restraint agreements with most
of the countries exporting steel to the EC
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Economics of the LDC Steel Industries
LDC governments promote steel industry develop-
ment because it offers substantial economic benefits.
Despite the large amounts of capital required, the
steel industry is still fairly labor intensive and there-
fore provides sizable employment opportunities. In
addition, steelmaking requires only medium- to low-
level technology, which can be absorbed reasonably
well by many LDCs. The profitability of new steel
capacity in the LDCs, however, is difficult to assess
because of the current depressed state of world steel
prices and uncertaint concerning the outlook for
their recovery.
At today's steel prices, it is difficult to justify the
construction of new capacity in most of the LDCs. In
Brazil, the largest LDC producer and a good repre-
sentative of the group, the estimated cost of produc-
ing basic flat rolled carbon steel in a new mill ready
for initial production would be $500 to $550 per
finished ton (1980 prices). This estimate calculates
capital costs at full market value; at subsidized rates
of return closer to those actually prevailing in LDCs,
costs probably would be $20 to $30 lower. Even these
lower costs could not be fully covered, however. In
1980, basic flat rolled carbon steel products could
have been landed in Brazil for about $430 per ton.=
We estimate that about three-fourths of the direct
financial assistance has been used to cover the indus-
try's losses sustained since 1974. Substantial amounts
also have been extended to support investment spend-
ing for modernization and reorganization and to
support R&D. Additional aid, probably not included
in the $20 billion total, has been given to unemployed
steelworkers to finance retraining, relocation, and
early retirement. EC financial aid has taken a variety
of forms:
? Direct cash injections.
? Government loans both at subsidized and at market
interest rates.
? Loan guarantees.
In terms of the steel industry's contribution to the
balance of payments, however, substantial benefits
would accrue to the LDCs, even at current steel
prices. In the case of Brazil, we estimate that about
half of a new mill's material, fuel, and miscellaneous
supplies would be imported, while most of its interest
payments (and possibly some of its profits) would be
remitted abroad. Taking local currency costs into
account, we estimate that the foreign exchange costs
to produce steel domestically would be about half
that required to import steel.
In Far Eastern LDCs, however, steel production may
be profitable even in today's market, largely because
much lower wage rates reduce both mill construction
and operating costs. We estimate that production
costs in a new South Korean mill probably would be
more than $100 per ton lower than in Brazil. Taking
subsidized capital into account, total production
costs (at 1980 prices) could be as low as $360 per ton,
moderately below the cost of importing basic flat
rolled products from Japan.
? The conversion of outstanding government loans to
equity holPgs to reduce steel com an interest
payments.
Despite continuing squabbles, EC steel producers
have put together a fairly effective cartel over the past
year. Better cooperation between the major steel
producers and the EC Commission has yielded closer
adherence to production quotas and target prices.
Consequently, list prices have been raised and price
discounting has nearly ceased. Effective prices within
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Table 3
LDCs: Steelmaking Capacity
by Region and Major
Producer
in the Community's industry, recent surveys of com-
pany intentions indicate that capacity will decline
only marginally by 1985. Since the surveys have
regularly overestimated actual capacity levels we be-
lieve that crude capacity reductions will be somewhat
Total
75.5
113.5
Latin America
36.5
56.5
Brazil
16.5
27.0
Mexico
10.0
15.5
4.7
5.0
2.8
4.5
Others
2.5
4.5
Africa
2.5
8.0
Algeria
0.9
3.0
Nigeria
0.2
2.5
Others
1.4
2.5
Middle East
5.3
7.0
Iran
2.3
2.3
Egypt
1.8
2.6
Saudi Arabia
0.9
Others
1.2
1.2
Asia
31.2
41.0
India
15.2
19.0
South Korea
8.5
12.0
Taiwan
4.4
5.0
3.1
5.0
the Community have increased about 25 percent since
mid-1981, and early financial results indicate that the
EC industry as a whole may almost break even this
year. If this happens, we expect that subsidy pay-
ments by EC governments will drop sharply. In 1981
subsidies may have equaled 10 percent of the EC steel
industry's total sales.
The EC has had less success in its efforts to force the
scrapping of old, high-cost plants to achieve a better
balance between capacity and demand. EC crude
steel capacity in 1981 was estimated at 201 million
tons, down only slightly from the peak level of 203.5
million in 1979. Although the EC Commission be-
lieves there is about 30 million tons of excess capacity
greater but will not exceed 15 million tons
The Situation in Japan
In Japan steel producers have not needed direct
government financial aid because the industry has
shown a profit in almost every year since the steel
crisis began in 1975. The industry's efficiency and low
hourly labor costs (only about half that of the United
States) are the main reason for this achievement. In
addition, yen appreciation since 1976 has helped
reduce the cost of imported raw materials. Profits also
have been helped by the strong price discipline the
five major Japanese steelmakers maintain in their
domestic market, thus avoiding the cutthroat pricing
that at times has brought chaos to the EC markets
25
Because of its low costs, the Japanese steel industry
traditionally has faced no threat from imports. This
situation may now be changing as more steel from
South Korea, Taiwan, and some other LDCs enters
the Japanese market. Much of the Japanese steel
industry, however, appears to recognize this as inev-
itable. Japanese steelmakers are shifting output to-
ward higher value steel products in which they main-
tain a strong competitive advantage, and probably will
gradually surrender an increasing share of their do- 25
mestic market for the basic steel grades to LDC
suppliers.
Soviet Needs Ahead '
In sharp contrast to the West, the Soviet steel indus-
try faces greater requirements than it is able to
supply. Following declines in 1979 and 1980, produc-
tion of crude steel and rolled steel products registered
little improvement last year. Shortages of steel, espe-
cially high-quality products, are already holding back
the growth of civilian machine building. Shortfalls in
' For a detailed assessment of the Soviet steel industries, see DDI
Intelligence Assessment SON' 82-10089 (Confidential NF), June
1982, Sluggish Soviet Steel Industry Holds Down Economic
Growth. (u)
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Keeping Costs in Line
Technological development in the steel industry is at
best a gradual process and is slower still in bad
times. Steel industry investments are and are likely
to remain low for some time because there currently
are relatively few opportunities for profitable invest-
ments. No new capacity is needed-except possibly
new pipe and tube capacity. While many new cost-
cutting technologies are available, few will reduce
current inputs enough to justify the high ca ital cost
of fitting them into existing plants.
With demand slack, OECD steelmakers face an
uphill battle in their efforts to cut costs and buttress
profits. In the past, most gains in productivity came
from construction of integrated plants. Now steel-
makers are trying to improve cost performance
chiefly by:
? Constructing electric furnace capacity to use scrap,
thus eliminating the smelting of iron ore in blast
furnaces.
? Installing continuous casting to avoid ingot casting,
reheating, and primary rolling.
? Implementing operational modifications, including
improved maintenance and increased computeriza-
tion, and use of waste heat and gas.
steel will eventually force cutbacks in investment in
other key sectors of the economy such as electric
power, transport, and nonferrous metals.
These measures have been most successful in saving
energy. We estimate that average OECD energy con-
sumption per ton of steel will fall from 27 million
Btus in 1980 to 20 million or less by the end of the
decade-representing a cost reduction of around $30
per ton at current energy prices. Japan will approach
a rate of 16 million Btu/ton by 1990, while the US
average will decline from 33 million Btu/ton to 26
million. Because of its higher fuel prices, however,
Japan's energy costs per ton of output will remain
close to those of the United States.)
We believe the relative cost position of major OECD
steel industries probably will not change much
through the 1980s. As the construction of new mills
has almost stopped, labor productivity gains through-
out the OECD have slowed. Investment levels in the
EC, Japan, and the United States have been roughly
the same for several years, and we expect this to
continue as long as there is no fundamental change in
the market. In the United States, some further shake-
out of old capacity, the retreat of the dollar to more
normal levels, and completion in the adjustment of
fuel costs to world market levels will all help the
steel industry. Japan will keep pace, however, as it
continues to lead the way in labor and energy produc-
tivity gains
The root cause of the deteriorating performance of the
Soviet steel industry is inadequate investment in all
sectors-from mining to rolling and finishing steel
products. Although the Soviets have invested over 45
billion rubles in the steel industry since 1960-
7 percent of total industrial investment-these alloca-
tions have not been enough to support ambitious
development plans. In addition, lagging production of
coking coal and iron ore, and less-than-hoped-for
gains in the supply of scrap metal, have emerged as
major chokepoints, limiting gains in steel production.
Tight supplies of these raw materials will substantial-
ly limit gains in steel production and undercut Soviet
plans to modernize existing steelmaking capacity
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LDCs: Steel Production, Apparent Consumption, and Net Imports
The Soviet 11th Five-Year Plan (1981-85) calls for
the production of crude steel and rolled steel products
to increase to 168 million tons and 118 million tons,
respectively, by 1985-roughly the same levels first
planned for 1980. We doubt that even these modest
goals are obtainable. Indeed, we estimate that output
of crude steel will increase to about 155 million tons
by 1985 and rolled steel output to about 108 million
tons-roughly the same tonnage increase achieved
during 1976-80. To meet even these goals, the Soviets
will have to take tough steps to assure that the
industry has adequate raw materials, labor, and fuel
for relatively trouble-free operation and that in-
creased investment allocations are forthcoming. We
believe that it will be difficult for the Soviets to
provide the needed investments. Recent statements by
Brezhnev indicate that industrial investment will be
cut back from the original goals of the 1981-85 plan,
and we believe these reductions are likely to have at
least some adverse impact on steel industry develop-
ments.
The Soviet steel industry's inability to meet the
country's growing need for the more sophisticated
believe that the Soviets will not be able to produce this
type of pipe in quantity during the 1980s. Until at
least the mid-1980s, the Soviets will also need to buy
large amounts of cold-rolled sheet for machine build-
ing, automobiles, and consumer durables; tin plate for
canning and packaging; and various types of sheet
products for transformers and electric motors. We
estimate that total import needs to cover gaps in
domestic production capabilities will total $17-20
billion in 1981-85. Soviet needs for Western steel
could rise by an additional several billion dollars as a
result of their projected inability to meet planned
production goals. Actual import levels will depend on
overall hard currency availability and how Moscow
allocates its scarce cash resources.)
Western Reaction to Soviet Needs
Given the depressed outlook for non-Communist de-
mand, West European and Japanese steel firms will
compete fiercely for exports to the USSR. In recent
years Soviet sales have accounted for 15 to 18 percent
of EC steel exports to countries outside the Communi-
ty. West Germany supplies more than half of these
shipments, making it the most dependent on the
Soviet market among non-Communist producers.
Among other EC members, France and Italy each sell
5 to 9 percent of their non-EC steel exports to the
Soviet Union. Japan is in roughly the same category;
6 percent of Japanese steel exports go to the USSR.
steel products has resulted in a sharp jump in Soviet
steel imports from the West-from an average of
about $2.5 billion in 1975-79 to roughly $3.5 billion in
1980-8 1. Steel now ranks second only to grain in the
Soviet import bill. Imports of large-diameter pipe will
be especially important in view of Soviet plans for the
construction of oil and gas pipelines, including the
proposed Siberia-to-Europe line. This line will require
about 3 million tons of high-quality steel pipe. We
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USSR: Steel Production, 1970-81
1970
115.9
1971
120.6
1972
125.6
1973
131.5
1974
136.2
1975
141.3
1976
144.7
1977
146.7
1978
151.5
1979
149.0
1980
147.9
1981
149.0
Despite its pressing need for steel products, the USSR
has extensive bargaining leverage in dealing with
Western steel firms-particularly those in Western
Europe. Individual firms beset with massive excess
capacity are anxious to increase utilization rates.
Steel plants have enormous fixed costs; lengthening
production runs would cut average cost per unit of
output by increasing capacity utilization rates. West
European governments, for their part, are eager to see
an improvement in this sector. With unemployment at
record levels, West European leaders are anxious to
stop further deterioration in steel industry employ-
ment. Although the Japanese industry faces less
severe problems than its West European counterpart,
we believe it too will focus sales efforts on the Soviet
Union. With prospects for increasing exports to other
markets bleak and domestic demand still depressed,
the Soviet market is one of the few alternatives for
increasing sales.
The impact of easy credit terms on the volume of
Soviet steel import is problematical. Total hard cur-
rency savings to the USSR from subsidized credits
and low steel prices could amount to several billion
dollars, particularly if market interest rates remain
high and the apparent trend toward increased credit
subsidies for nontubular steel continues. The USSR,
however, probably will not channel all these savings
into increased purchases. The leadership may decide
to allocate these funds to other areas, such as grain,
rather than increase the volume of imported steels
Other Issues Ahead
The shake-out in the industrial country steel industry
has a long way to go. OECD-wide there will still be
substantial excess capacity in place at the peak of the
next business cycle. Even if a vigorous recovery begins
next year, the capacity overhang would still be in the
75- to 100-million-ton range by 1985. In this environ-
ment, firms and governments will be under intense
pressure to push exports in an attempt to maintain
output and employment
Given the pressure to export, the US ruling that seven
EC countries have illegally subsidized their steel
exports is drawing strong condemnations from West-
ern Europe. The EC Commission has already an-
nounced that it believes the ruling violates the US
Competitive pressures in Japan and Western Europe
are likely to result in bargain prices and credit terms
for Soviet steel purchases.
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Major OECD Steel Industries: Total Steel Employment
as a Share of Industrial Employment
pledge made at the Versailles Summit to promote free
trade. West German officials have warned that the
ruling will make it more difficult for Bonn to resist
pressure from those EC countries that have longed for
an excuse to restrict imports of US agricultural goods.
The Italians have complained that the ruling not only
will result in loss of an important export market, but
also will intensify competition within the Community
and jeopardize the EC steel restructuring program.
Most of the 5 percent of EC steel output once directed
to the United States may now be targeted to the EC
internal market, putting additional downward pres-
sure on prices and increasing calls for government
support. Production quotas-recently extended
through June 1983-may have to be revised down-
ward.
may already be taking shape. Kaiser Steel, the ninth-
ranking US producer, has announced the closing of its
blast furnaces and steelmaking shop at its mill in
Fontana, California. In. the future, the mill will
operate only as a reroller, using imported semifinished
steels
Semifinished steel is already an important part of
LDC steel exports. One new mill in Tubarao, Brazil,
is being built exclusively for the production of semi-
finished steel for export to the world market. Looking
even further ahead, if LDC producers manage to
maintain a substantial cost advantage over OECD
producers, they probably will begin to add new capac-
ity beyond domestic needs. Expansion plans for the
late 1980s will show whether some LDCs, such as
Brazil and South Korea, plan to make the leap to
major export capability much as Japan did in the
Growing exports of steel from the LDCs pose further
adjustment problems for industrial country steel pro-
ducers. Because of their cost advantages, the LDCs
probably will capture a growing share of developed
country markets for basic grades of steel. Indeed,
some German steelmen suggest that the future of the
European industry may lie in the rolling and finishing
of imported feedstock. In the United States this shift
1960s
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