Steel: Price and Policy Issues

Congressional research reportOct 31, 2007

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Order Code RL32333

Steel: Price and Policy Issues

Updated October 31, 2007

Stephen Cooney

Specialist in Industrial Organization and Business

Resources, Science, and Industry Division

Steel: Price and Policy Issues

Summary

The rapid growth of steel production and demand in China is widely considered

as a major cause of continued high steel prices and prices of steelmaking inputs.

Steel companies have achieved much greater pricing power, in part through an

ongoing consolidation of the industry. High prices persist, despite the revocation in

2003 of President Bush’s broad safeguard order on imports.

U.S. steel production in 2006 was 108 million tons. The integrated side of the

industry continues to lose share domestically to the minimills. Imports rebounded

in 2006 to reach the highest tonnage level ever, though they declined in 2007. Input

prices, especially ferrous scrap and iron ore, remain high, meaning higher costs,

which have been largely passed along to industrial consumers.

China now produces 40% of the world’s steel and is the world’s largest

steelmaker and steel consumer. This contributed to a large global increase in demand

for both steel and steelmaking inputs. China has become a large net exporter as well.

In 2006, its steel exports to the U.S. market more than doubled, and it became the

second-largest import source.

Congress became increasingly concerned over allegedly unfair trade competition

from China, and has considered many proposals to deal with these issues. In the

110th Congress, bills were introduced to allow penalty tariffs to offset a country’s

manipulation of its currency exchange rate for trade advantage. The Commerce

Department undertook a countervailing duty case against China, and the U.S.

government also brought a case in the World Trade Organization against China over

subsidies, including subsidization of steel exports. The U.S. steel industry sponsored

in 2007 a report that detailed alleged government subsidies to the Chinese industry.

The U.S. International Trade Commission (ITC) has terminated some trade

remedy cases and orders against imported steel products. But in other cases, orders

have been upheld, and new cases are proceeding. President Bush decided in a China

safeguard case not to provide relief for domestic producers of steel pipe, despite a

positive ITC determination. The Byrd Amendment, under which domestic steel

producers receive distributions of trade remedy duties, was repealed by P.L. 109-171,

and is no longer in effect from October 1, 2007.

Internationally, the Organization for Economic Cooperation and Development

has abandoned the effort to achieve an international agreement to ban subsidies for

steel mills. In April 2006 the World Trade Organization (WTO) Appellate Body

ruled against the “zeroing” methodology used by the U.S. Commerce Department in

calculating dumping margins.

Contents

Introduction

.....................................................1

Current State of the Steel Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

U.S. Production and Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

North American and Global Steel Industry Consolidation . . . . . . . . . . . . . . 7

ArcelorMittal: Global Industry Giant . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

North American Restructuring Affects Other U.S. Companies . . . . . . 10

Building New U.S. Mills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Local Ownership Ends at Canadian and Mexican Mills . . . . . . . . . . . 15

Labor Relations Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

World Steel Output Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

U.S. Import Patterns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Steel Price Trends and Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Steel Prices Remain at a High Plateau . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Steel Input Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Steel Scrap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Rise in the Price of Iron Ore . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

The Cost and Supply of Coke . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

The Price of Natural Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Shipping Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

The Impact of the Growth of China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

China as a Steel Producer, Consumer, and Exporter . . . . . . . . . . . . . . 30

China’s Proposed Steel Industry Restructuring . . . . . . . . . . . . . . . . . . 33

The U.S. WTO Case Against Chinese Subsidies . . . . . . . . . . . . . . . . . 37

Chinese Measures to Restrain Steel Exports . . . . . . . . . . . . . . . . . . . . 38

China’s Foreign Investment Policy on Steel . . . . . . . . . . . . . . . . . . . . 39

Congressional Reaction to Competition from China . . . . . . . . . . . . . . 40

Steel Policy Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

Failure to Achieve a Global Steel Subsidies Agreement . . . . . . . . . . . . . . . 44

Repeal of the Byrd Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Industry Petitioners Lose Wire Rod Antidumping Case —

Pursue Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

President Bush Denies Relief in China Safeguard Case . . . . . . . . . . . . . . . 50

ITC Revokes Duties for Steel Flat Products in 2006 . . . . . . . . . . . . . . . . . . 52

ITC Broadly Upholds Steel AD/CVD Tariffs in 2007 . . . . . . . . . . . . . . . . . 54

WTO Decision on “Zeroing” and Proposed U.S. Trade Law Changes . . . . 56

List of Figures

Figure 1. Sources of U.S. Steel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Figure 2. Employment in the U.S. Steel Industry . . . . . . . . . . . . . . . . . . . . . . . . . 6

Figure 3. Steel Exports by Country . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

List of Tables

Table 1. Top Global and North American Steel Producers . . . . . . . . . . . . . . . . . . 8

Table 2. Steel Price Series, 2001-2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Steel: Price and Policy Issues

Introduction

With growing demand at home and abroad, the domestic steel industry is strong

and profitable, but also more subject to globalized ownership and international

competitive pressures. Many American businesses are concerned by a long-term

increase in the price of steel that has resulted from these trends. Some Members of

Congress were once concerned that the steel safeguard tariffs, imposed in 2002 by

President Bush under the terms of Section 201 of U.S. trade law, could have been

keeping steel prices artificially high. Before those tariffs were terminated on

December 4, 2003, the costs of raw materials and other inputs in steelmaking rose,

thus creating a cost-driven increase in the price of steel. After the tariffs were

removed, the price increase nevertheless accelerated. On the other hand, after decades

of implementing efficiency improvements while struggling to be profitable, many

steel companies in 2004 found themselves making more money than in many years.

Higher steel prices for consuming industries since then have been exacerbated by

global economic growth, which increased demand for steel.

In 2005 the rate of growth of U.S. industrial output moderated, and the price of

steel, domestic steel output, and steel mill companies’ earnings all declined. But the

growth of China contributed to a large increase in global demand for both steel and

steelmaking inputs, thus keeping the cost of domestic steel high. China has become

both the world’s largest steelmaker and steel consumer. China also became a net

exporter of steel, including such a large increase of exports to the U.S. market that

it became the second-largest national import supplier in 2006.

Since 2005 a number of policy decisions have adversely affected the interests

of domestic steel producers:

The Organization for Economic Cooperation and Development

(OECD) abandoned its efforts to negotiate an agreement among all

major steel-producing countries to ban domestic subsidies for steel

mills.

Congress approved and President Bush signed into law a federal

deficit reduction bill repealed the Continued Dumping and Subsidy

Offset Act (“Byrd Amendment”), under which many domestic steel

producers received distributions of antidumping and countervailing

duties charged on imports.

The U.S. International Trade Commission (ITC), in two five-year

sunset reviews of existing trade remedy tariffs on widely traded

products, decided in December 2006 that the threat of material injury

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to domestic producers no longer existed from imports of cut-tolength steel plate or from imports of corrosion-resistant cold-rolled

steel from most countries, and thereby eliminated the subject remedy

duties.

The ITC decided in late 2006 that domestic steel wire rod producers

were not materially injured, and thereby terminated an antidumping

case brought by domestic steel companies against imports from

China, Turkey, and Germany.

President Bush decided in a special trade safeguard case not to

provide trade relief for domestic producers of steel pipe against

imports from China.

The World Trade Organization (WTO) Appellate Body in April

2006 ruled that the so-called “zeroing” methodology used by the

U.S. Commerce Department in calculating dumping margins

violates WTO rules, when used in administrative reviews. The

Commerce Department has modified its assessments in a way that

led to lower dumping margins in steel industry cases.

But in decisions that were more positive for the steel industry in sunset reviews

of andtidumping and countervailing duty (AD-CVD) orders, the ITC decided to keep

most penalty duties on hot-rolled, line pipe and reinforcing bar imports, though it

eliminated AD duties on many steel products used by the domestic petroleum

industry. Furthermore, the Bush Administration announced in February 2007 that it

was taking a case against China to the WTO under the organization’s rules on

prohibited subsidies. The U.S. domestic steel industry has complained about

pervasive and continuing government subsidies of Chinese producers. In its

announcement, the U.S. government explicitly included steel among the Chinese

industries that had benefitted from subsidies. Both steel producers and steel

consuming industries have complained that China manipulates its exchange rate to

enhance its trade competitiveness, and a number of bills have been introduced in

Congress that would define China’s exchange rate policy as a distortion of trade and

subject to U.S. retaliatory measures.

Whatever the net impact of these policy developments, the price of steel is

generally double or triple the price when steel safeguards were introduced in 2002.

Although costs of steelmaking inputs have also increased, as this report describes in

detail, the steel industry as a whole has become highly profitable, in direct contrast

to its condition just a few years earlier.

Profitability may be partly the result of global industry consolidation. Two of

the four largest U.S. steelmakers are now foreign-owned, as opposed to none of the

top 10 steelmakers being foreign-owned less than 15 years ago. There is also only

one significant Canadian-owned steelmaker left, and it is in the process of being

acquired by U.S. Steel. Most of the industry in Mexico is now owned by companies

from outside North America. ArcelorMittal, the world’s largest steelmaker, with

operations on virtually every continent, is now also the largest steel producer in North

America, though U.S. Steel may regain the lead. Some American companies,

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particularly U.S. Steel, have also expanded abroad, but to a much lesser extent than

foreign investment here. While financially stronger and more profitable than at any

time in the last generation, the steel industry in the United States and North America

is also far more internationalized in its ownership. Moreover, while the sustained

high price of steel has encouraged a spate of plans and actual new construction of

steel mills, in virtually all cases the mills are being financed and controlled by foreign

interests.

Current State of the Steel Industry

U.S. Production and Employment

The sharp rise in demand for steel, plus the consolidation of the industry, led to

higher steel prices and profits almost across the board in the industry in 2004. But

in 2005, production, prices and apparent domestic consumption all declined. The

resurgence of supply in 2004 coincided with a dramatic rise in domestic steel prices.

As production declined with demand in 2005, prices also declined. But they

remained historically strong, and fell nowhere near the levels seen before the

imposition of trade safeguard remedies in 2002. In 2006 overall prices remained

high, even as domestic production increased significantly and imports set an all-time

record.

Despite the volatility in steel prices over the past decade, domestic steel output

has remained surprisingly constant. Since 1997, U.S. domestic raw steel production

has only been more than 110 million net tons in one year (2000), and less than 100

million tons also in just one year (2001). In 2004, output increased from 103 million

tons to nearly 110 million tons, as U.S. mills benefitted from a worldwide recovery

in demand and prices. Then output fell back a little, to less than 105 million tons in

2005, before recovering again to more than 108 million tons in 2006. Capacity

utilization (defined in the industry as “capability utilization”) declined from 94.6%

in 2004 to stabilize at 87.5% in 2005-06.1

As prices have now remained strong for an extended period, several new U.S.

mills or expansions of existing mills are being completed or are on the drawing

board.2 It remains to be seen if this leads to an extended period of long-term growth

in domestic capacity. The restructuring and consolidation of the steel industry, which

is detailed below, has, according to many analysts, led to greater control over

production. This has led to higher prices as demand increased.3

American Iron and Steel Institute (AISI). Annual Statistical Report, 2006, Tables 23 and

25. All tonnage figures in this CRS report are “short tons” (2,000 lbs.), as commonly used

in the U.S. steel industry. The exception in this report are international data, which are

reported in metric tons (MT, or “tonnes”) that are about 10% larger.

Wall St. Journal, “Steel’s Latest Hot Spot: The U.S.” (August 14, 2007), p. A10. New U.S.

steel mill investments are discussed in the following section.

See, for example, John Anton of Global Insight, “Steel Makers in U.S. Acting Responsibly,

(continued...)

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Through the first part of 2007, overall prices remained high, as declining

demand and prices for automotive steels were offset by higher prices in some other

products. Total shipments of steel mill products were down by 4% through August

2007 and capacity utilization slipped to 86.1%, but the industry has continued to be

highly profitable, both domestically and globally.4

Though production has been stable in recent years, the relationship between the

two steelmaking technologies used in the United States has dramatically reversed in

terms of market shares. Figure 1 illustrates the changing patterns of U.S. steel

supply. Integrated mills produce steel from iron ore, using coke and other inputs.

They are characterized by unionized workforces and, in competing with both

minimills and imports, have been absorbing high levels of employee and retiree

benefit costs.5 The production of the large integrated mills using basic oxygen

furnace (BOF) technology (the last U.S. open hearth plant closed in 1991) hovered

around 60 million tons per year in the 1990s, then fell substantially below that figure

after 2000. The integrated side of the industry has consolidated by closing older

operations and increasing productivity. In 2004, production from integrated mills

increased 4% to 52.6 million tons, but in 2005 it decreased to 47.1 million tons, the

lowest level from this type of furnace since 1982. In 2006, BOF output fell again to

46.4 million tons. Integrated mills remain the sole source of certain high-volume

products, such as external sheet for automobiles, and U.S. motor vehicle production

has been on a down trend for the past two years.

Minimills employ electric-arc furnaces (EAFs), a newer technology. They have

overtaken integrated mills as the leading source of steel by tonnage in the United

States, and are now virtually the only domestic source of “long” products, such as

concrete reinforcing bars, steel wire rod, and construction beams. Although they may

use various forms of iron ore input, most minimills rely primarily on steel scrap,

which they remelt. The minimill sector is largely non-union, and, by contrast with

the integrated mills, provides defined-contribution employee pension packages

instead of benefits defined by union contract.6

Minimills steadily increased production after the recession of 1991 and gained

market share. Figure 1 shows that their production topped 50 million tons for the

first time in 2000, when it reached 47% of domestic raw steel production, up from

37% at the beginning of the 1990s. Minimill output fell significantly in 2001, then

recovered steadily. In 2006, annual minimill production exceeded 60 million tons

for the first time, and accounted for 57% of U.S. output, compared to 43% for the

integrated mills — almost exactly the reverse of the situation 10 years earlier.

(...continued)

Rest of the World Needs to Join,” Steel Monthly Report (November 2006), pp. 1-2.

Data from American Iron & Steel Institute(AISI), “Selected Steel Industry Data” (August

2007).

The so-called “legacy cost” issue is discussed detail in CRS Report RL31748, The

American Steel Industry: A Changing Profile, pp. 25-29. See also CRS Report RL33169,

Comparing Steel and Automotive Industry Legacy Cost Issues.

The best-known business model in the minimill industry, that of Nucor Inc., the largest

EAF producer, is described in detail in Business Week, “The Art of Motivation” (May 1,

2006), pp. 57-62.

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Figure 1. Sources of U.S. Steel

Millions of Net Tons

Basic Oxygen Furnace & Open Hearth

Electric Arc Furnace

Imports

Source: American Iron & Steel Institute. Annual Statistical Reports.

Figure 1 also shows the level of imports, which has been somewhat erratic, but

on an upward trend and reached an all-time record in 2006. They increased steadily

in the 1990s, then surged in 1998 to more than 40 million tons. The movement of

imports has been up and down since that peak. During the application of safeguard

tariffs, imports fell in 2003 to 23.1 million tons, the lowest level since 1993. Once

the safeguards were removed, and given strong domestic demand, imports increased

more than 50% in 2004, to 35.8 million tons. Imports in 2005 fell back to 32 million

tons. But they increased again to a new record of 45.1 million tons in 2006. Part of

the reason, as is observed later in the discussion of prices, is the shift in the structure

of demand toward products used in energy and industrial production, even as demand

for flat steel in the auto and appliance industries softened. Another major shift in the

2006 was in the sources of U.S. imports, as is discussed below. Through August

2007, imports declined about a quarter by tonnage, according to the American Iron

and Steel Institute.

This figure does not show the rising significance of steel exports as a share of

total U.S. steel production. This has become increasingly significant as the decline

in the exchange rate of the U.S. dollar against most foreign currencies. While

exports of steel mill products were around 5-6 million tons between 1997 and 2002,

the export trend began to strengthen in 2003, and reached 9.7 million tons in 2006.7

While imports declined substantially through early 2007, exports increased by 10%,

AISI. 2006 Annual Statistical Report, Table 14.

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and had risen to one-third the level of imports for the year.8 But the overall bulk of

U.S. steel exports are to the North American Free Trade Agreement partners, Canada

and Mexico. Of 9.7 million tons exported in 2006, 6.1 million tons went to Canada,

and another 2.2 million tons to Mexico. Together, they accounted for 85% of all U.S.

steel mill exports.9

Figure 2. Employment in the U.S. Steel Industry

Employees, thousands

200

150

100

Iron and Steel Mills (NAICS 3311)

Steel Products From Purchased Steel (NAICS 3312)

Source: U.S. Department of Labor. Bureau of Labor Statistics.

The recovery of the steel industry was reflected in steel mill employment levels

in 2005, as measured under the North American Industry Classification System

(NAICS 3311). As reported in average annual employment levels by the Bureau of

Labor Statistics, 2005 was the first year since 1990 that employment in the industry

did not decrease (Figure 2). It grew marginally from 95,400 to 95,700, despite

continued progress in both the minimill and integrated sectors in reducing the

worker-hours required to produce a ton of steel.10 This compares to an overall

decline of almost 50% in steel mill employment since 1990, which had occurred year

by year, whatever the economic conditions in the industry. The only difference had

been slower decline in the mid-1990s, as opposed to a faster decline during and after

the late 1990s, when the industry was under heavy pressure from imports or low

demand levels because of recessionary conditions. In 2006, employment attrition

resumed, at a slow pace, to 94,400 steel mill employees.

AISI. “Selected Data” (August 2007).

AISI. 2006 Annual Statistical Report, Table 16.

Employees per thousand tons of steel mill shipments have declined by almost half since

1990, from 1.93 to 1.11 in 2006. AISI, Annual Statistical Report 2006, chart in executive

summary.

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Figure 2 also illustrates employment levels in industries that fabricate steel

products from primary steel produced elsewhere (NAICS 3312). This includes

rolling mills, and pipe and tube producers. These data showed a little more

fluctuation with domestic macroeconomic trends than employment in the mills that

make steel. By 1995, employment regained the level of 70,000 seen in 1990, and by

2000 it had increased to more than 73,000. The recession of 2001, followed by the

increased price of raw steel after late 2003, saw the annual employment level decline

to about 60,000.

North American and Global Steel Industry Consolidation

One of the stated purposes of the presidential action of 2002 on steel safeguards

was to effect a restructuring of the domestic steel industry.11 To a great extent, that

restructuring has been achieved. There are now two dominant players among

integrated steel mill companies in the United States and North America, and two

clear market leaders among the minimill producers. Moreover, the leading North

American and global producer, Mittal Steel, in 2006 acquired the global number-two

producer, Arcelor.12 The recovery of pricing power in the domestic industry may be

attributable to industry consolidation, as well as to rising global demand spurred by

China. But, ironically, the establishment of industry pricing power, plus the rise of

global demand and steel prices and the falling exchange rate of the dollar, have also

made establishment of new production facilities in the United States an attractive

proposition.

“I have determined that the safeguard measures will facilitate efforts by the domestic

industries to make a positive adjustment to import competition...[including] consolidation

of United States steel producers...” President George W. Bush. Memorandum on “Action

under Section 203 of the Trade Act of 1974 Concerning Certain Steel Products” (March 5,

2002) in Message to Congress (House Doc. 107-185), March 6, 2002, p.56.

Both companies are headquartered in western Europe, although Mittal Steel’s production

assets were widely distributed around the world, including Indonesia, Kazakhstan, South

Africa, Poland, Ukraine, South Africa, Mexico and the United States. Arcelor was itself the

result of consolidation of two French-owned steel companies, the Luxembourg steel

company and a Spanish steel company. Arcelor’s global assets included control of CST of

Brazil, the world’s largest merchant exporter of semi-finished slab steel. It had no U.S.

production assets, though it acquired the leading Canadian producer, Dofasco, in January

2006. See: Bloomberg.com, “Mittal Makes $22.7 Bln. Unsolicited Bid for Arcelor” (January

27, 2006); Wall St. Journal, “Arcelor Transfers Dofasco Unit to Block Takeover” (April 5,

2006), p. A3; Wall St. Journal, “Arcelor Assails Mittal’s Structure” (May 4, 2006), p. C4;

Wall St. Journal, “Profits Decline at Mittal, Arcelor as They Continue Takeover Duel” (May

13, 2006), p. A2; and, “Arcelor Expected to Reject Higher Mittal Bid That Evens Voting

Rights” (May 20, 2006), p. A3; AMM, “Arcelor Trips Mittal with Severstal Deal” (May 30,

2006). On accession of the Arcelor board to Mittal’s increased offer in June 2006, see Wall

St. Journal, “Arcelor Agrees to Acquisition by Rival Mittal” (June 26, 2006), p. A3, and

“Arcelor Shareholders Accept Mittal Takeover Offer” (online ed., July 26, 2006); and,

Chicago Tribune, “Steelmakers Forge Merger Deal” (June 26, 2006), p. 1. For a detailed

analysis of the implications and impact of a Mittal-Arcelor deal on the global steel market,

see Economist, “Age of Giants” (February 4-10, 2006), pp. 55-56; and, “Little Love Lost”

(July 1, 2006). Lakshmi Mittal’s account of his own business strategy is in Wall St. Journal,

“Big Steel” (August 3, 2006), p. A6.

CRS-8

Table 1 shows the results of global consolidation in the industry in recent years,

and the relative position for leading companies in the United States, Canada, and

Mexico. The table includes the world’s 20 leading producers, then all of the other

top producers in North America, whether they are domestic- or foreign-owned. The

table reveals that not only is the largest steelmaker in North America a company

based outside the region, but also that recent and pending acquisitions have put much

of the domestic industry in the hands of foreign-owned companies. Locally owned

Canadian and Mexican steel companies have virtually disappeared or are

disappearing.

Table 1. Top Global and North American Steel Producers

ArcelorMittala

Nippon Steel

POSCO

JFE Steel

Tata Steelb

Shanghai Baosteel

U.S. Steel

Nucor

Tangshan

Riva

OAO Severstal

ThyssenKrupp

Evraz Holding Groupd

Gerdau

Anshan

Jiangsu Shagang

Wuhan Iron & Steel Group

Sumitomo

Steel Authority of India Ltd.

Techint Group

SSAB/Ipscoe

BlueScope Steel

AK Steel

Essar/Algoma Steelf

Steel Dynamics

Stelcog

Altos Hornos de Mexico

Commercial Metals Co.

Vallourec

Acerinox

Wheeling-Pittsburgh Steel

Global

Rank

105

113

Country

Lux.

Japan

Korea

Japan

India

China

USA

China

Italy

Russia

Germany

Russia

Brazil

China

Japan

India

Argentina

Sweden

Australia

USA

India

USA

Canada

Mexico

USA

France

Spain

USA

Makes Steel in

N.Am.?

2006 Output

(MT mils.)

117.98

32.91

31.20

32.20

23.95

22.59

21.25

20.31

19.06

18.19

17.60

16.80

16.10

15.57

15.00

14.63

13.76

13.58

13.50

12.83

7.21

6.83

5.65

5.19

4.26

3.81

3.36

3.09

2.79

2.58

2.27

Source: Adapted from Metal Bulletin (March 12, 2007) for data on tonnage and global rankings.

a. Includes total 2006 production of both Arcelor and Mittal Steel.

b. Acquired Corus Group of UK/Neth. in Apr. 2007, incl. U.S specialty steel operations; output is

combined total for 2006.

c. Produces stainless steel at operation in Mexico.

d. Acquired Oregon Steel; combined 2006 output.

e. Ipsco agreed to acquisition by SSAB in Jun. 2007; combined 2006 output.

f. Algoma Steel of Canada agreed to acquisition by Essar in Jun. 2007 — combined 2006 output;

Essar has also acquired Minnesota Steel, a new mill being built in the Mesabi iron range.

g. Agreed to acquisition by U.S. Steel (Aug. 2007).

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ArcelorMittal: Global Industry Giant. At the top of the table is

ArcelorMittal, whose combined 2006 output of 118 million MT was three times that

of any other company. Lakshmi Mittal, an entrepreneur originally from India, has

been building a global steel empire with operations in places as varied as Poland,

South Africa, and Central Asia. With completion of the Arcelor deal, Mittal controls

a combined company that produces 10% of global steel output.13 Among Mittal’s

earlier acquisitions was a U.S. integrated steel mill, Inland Steel. He also acquired

a major Mexican producer, the integrated steel works on the Pacific coast at Lazaro

Cardenas. But his major coup in becoming the leading North American steelmaker

was the acquisition of the International Steel Group (ISG). This occurred after the

North American steel industry had nearly collapsed with more than three dozen

bankruptcies after 1998. About one-third of the companies on earlier lists of leading

U.S. and Canadian steel mill operators in 2002-2003 disappeared from independent

existence, either having gone out of business or merged into other companies.

The first bankruptcy that started a consolidation process was that of LTV Steel,

which became the foundation for ISG in 2002, when financier Wilbur L. Ross led a

group that bought the company out of liquidation. Ross put together a steel empire

under the ISG name that soon came to challenge U.S. Steel as the largest U.S.

integrated steel producer. He acquired another venerable, but bankrupt, producer,

Bethlehem Steel, in 2003. In 2004, ISG acquired Weirton Steel, a former National

Steel spinoff that had tried to survive as an independent, employee-owned

corporation, but was finally forced to sell out after 20 years. Ross’ group also

acquired a South Carolina minimill operation, Georgetown Steel, which had gone

into bankruptcy twice in recent years. Ross’ group was not responsible for the

pension and health care legacy costs of the acquired companies. The underfunded

pension funds of bankrupt steel producers were taken over by the Pension Benefit

Guaranty Corporation (PBGC), an entity chartered by Congress, while retirees lost

their company-sponsored health care benefits. Ross also negotiated new labor

contracts with the United Steelworkers (USWA) and other unions representing the

integrated mills. These agreements conflated the number of job descriptions within

integrated mills and otherwise streamlined the organization of labor within plants.14

But ISG’s own days as an independent operator were short-lived.

In 2004 Ross reached an agreement with Mittal, under which the latter’s global

holdings were first consolidated as Mittal Steel, then merged with the holdings of

ISG in April 2005 for a payment of about $4.5 billion to Ross and other ISG

shareholders. Thus, Mittal Steel became the largest domestic U.S. steel producer,

considering both the ISG acquisition and its previously owned Inland Steel

operations, as well as the largest in the world.15

Wall St. Journal, “Arcelor Agrees to ... Mittal” (June 26, 2006); Bloomberg.com,

“ArcelorMittal Buys Villacero Mill for $1.4 Billion” (December 20, 2006).

For a quick summary of steel legacy cost developments, see CRS Report RL33169,

Comparing Automotive and Steel Industry Legacy Cost Issues, esp. pp. 6-7 and 12-13. An

earlier and more detailed account is in CRS Report RL31748, The American Steel Industry:

A Changing Profile.

Ispat International N.V., Ispat International to Acquire LNM Holdings to Form Mittal

(continued...)

CRS-10

In approving the subsequent ArcelorMittal merger under U.S. antitrust law, the

Justice Department did indicate a concern with how the deal would affect the tinplate

market. Ultimately, Justice determined that ArcelorMittal would have to dispose of

its Sparrows Point integrated steel mill (formerly owned by Bethlehem Steel) near

Baltimore. In August 2007, it was announced that Sparrows Point would be sold to

a joint venture led by Esmark, which had also acquired Wheeling-Pittsburgh Steel

(see below), with participation by companies from Brazil and Ukraine.16 Mittal Steel

also decided in 2005 to end steelmaking operations at Weirton, though tin-coating

operations there are continuing.17

North American Restructuring Affects Other U.S. Companies. Only

two other companies with major operations in the United States are among the top

10 globally — U.S. Steel and Nucor, the two largest U.S.-headquartered companies.

Both have substantially increased the global scale of their operations through

acquisitions made during the period of low prices and difficult operating conditions

after 2001. They are respectively seventh and eighth on the global list, with each

producing more than 20 million metric tons worldwide in 2006.

Historically, the largest domestic steelmaker had been U.S. Steel, the integrated

steelmaking company that had held the title for a century until 2002. It significantly

expanded its domestic operations, and took an important step in the domestic

consolidation process, when it acquired another major integrated company, National

Steel, out of bankruptcy in 2003. As in the creation of ISG, U.S. Steel only made this

acquisition after PBGC declared National Steel’s pension fund insolvent and took it

over. Also, U.S. Steel used the new pattern of labor relations with the USWA,

established earlier by ISG in its dealings with the union, to write a new labor contract

for all its U.S. steelmaking operations — both the continuing U.S. Steel plants and

the newly acquired National Steel facilities.18

(...continued)

Steel Co. — International Steel Group to Merge with Mittal Steel for Cash and Stock,” news

release (October 25, 2004); Washington Post, “Steelmaker to Be Sold for $4.5 Billion”

(October 26, 2004), p. E1; Wall St. Journal, “Deal Would Create No. 1 Steelmaker”

(October 26, 2004); Financial Times, “Mittal Plan to Create First Global Steel Group”

(October 26, 2004); and “Merger Reveals Details of Mittal Empire” (October 29, 2004);

Business Week, “A New Goliath in Big Steel” (November 8, 2004), pp. 47-8; and, “The Raja

of Steel” (December 20, 2004), pp. 50-2.

Wall St. Journal, “Mittal Sells Mill in U.S. as Part of Arcelor Deal” (August 3, 2007), p.

A6; AMM, “Esmark Joint Venture to Buy Sparrows Point Mill” (August 3, 2007); and,

“Justice Asking for Trustee to Sell Sparrows Point Mill” (August 8, 2007).

Ibid., “Mittal Tells Weirton Plant: Tin Is In, But Furnace Out” (December 15, 2005); and,

“Mittal Formally Announces Weirton Plant’s Shutdown” (January 2, 2006). In 2007,

ArcelorMittal announced closure of all operations except the tinplate mill at Weirton; ibid.,

“Arcelor Mittal to Shut Weirton Hot-Strip Mill” (October 19, 2007), p. 6.

The story of U.S. Steel winning a takeover battle for National against AK Steel, with the

support of the USWA, was described as it unfolded in AMM, January 10, 13, 24 and 27;

February 3 and 10; April 21 and May 21, 2003; See also, Bloomberg.com, “AK Steel Makes

Rival $1.02 Billion Bid for National Steel” (January 23, 2003). On the USWA role in

(continued...)

CRS-11

In 2007, U.S. Steel made other major North American acquisitions, purchasing

Lone Star Technologies, a specialist in producing tubular steel products, for $2.3

billion and Stelco, the last major independent Canadian steelmaker (see below). The

takeover of Stelco would increase U.S. Steel’s North American steelmaking capacity

to more than 25 million tons, enough to make it again the leading producer on the

continent. U.S. Steel is also the U.S. domestic steelmaker that has been most active

in expansion abroad in recent years, having acquired a large integrated mill in

Kosiče, Slovakia (now known as USSK) and another in Serbia. With the Stelco

acquisition, U.S. Steel would have more than 30 million MT in global steel capacity,

enough to move up in Table 1 to fifth place among world steel companies.19

All of the net expansion in U.S. production in recent years has occurred in the

minimill sector. Nucor is the leading U.S. minimill operator. Before the creation

of ISG, it temporarily became the largest domestic steel producer in 2002, passing

U.S. Steel. It now operates 18 mills in 13 states, and poured more than 20 million

MT of steel in 2006. In recent years, Nucor has expanded mostly by acquisitions,

notably through buying financially struggling Birmingham Steel Corporation out of

a “prepackaged” bankruptcy in 2002. Birmingham Steel at that time was the secondlargest U.S. minimill operator.20

The second-largest minimill operator in North America is GerdauAmeristeel,

the subsidiary of a company based in Brazil. While in 2006 it produced only about

a third of the tonnage of Nucor in the domestic market, it has clearly distanced itself

from the remaining minimill companies and is the other major U.S. minimill

consolidator. Gerdau in 2002 acquired a Canadian-based company with U.S.

minimill operations, Co-Steel, plus one mill from Birmingham Steel. It consolidated

these mills together with its own North American operations to create Gerdau

Ameristeel, operating in both the United States and Canada. Then, in 2004, Gerdau

acquired North Star Steel, controlled by Cargill Inc., which was seeking to exit the

steelmaking business.21 In July 2007 GerdauAmeristeel also announced that it had

reached agreement on a $4.2 billion deal to acquire Chaparral Steel, a company with

minimills in Texas and Virginia, and which is a major competitor in the market for

structural beams.22

(...continued)

reorganizing the industry and renegotiating labor contracts more generally, see AMM,

December 24, 2002, January 8, 2003 and “A Template for Change” in January 20, 2003

print ed., pp. 2-4; Business Week, “Salvation from the Shop Floor” (February 3, 2003), pp.

100-01.

On these acquisitions, see AMM, “U.S. Steel Completes Purchase of Lone Star” (June 18,

2007), p. 6; U.S. Steel, “U.S Steel Agrees to Acquire Stelco,” press release (August 26,

2007); AMM, “U.S. Steel Agrees to Buy Stelco in $1.1 Billion Deal” (August 28, 2007).

For a summary of Nucor’s acquisitions and other developments, including Gerdau’s

expansion, in consolidation of minimill operations, see AMM, “Out of Easy Targets, Buyers

Are Beginning to Look Upstream” (February 7, 2005 print ed.), pp. 10-11.

AMM, September 10 and November 3, 2004.

Wall St. Journal, “Gerdau Sets Deal to Acquire Chaparral Steel” (July 11, 2007), p. A10;

(continued...)

CRS-12

A result of this consolidation is that two companies based outside North

America, Mittal, the largest operator of U.S. integrated steel mills, and Gerdau, the

second-largest operator of U.S. minimills, together control between a quarter and a

third of annual North American industry output. This is an historic change for a

domestic industry that had been almost exclusively North American-based.23

In effect, the industry is highly integrated across North America. There are no

tariffs or trade barriers across the borders under terms of the North American Free

Trade Agreement. Although imports from Canada and Mexico are fully subject to

U.S. antidumping and countervailing duties, they were exempted by President Bush

from the safeguard tariffs, and therefore achieved share gains in the U.S. market.

Also, the USWA, the major union in the industry, operates in both the United States

and Canada. It is not present in Mexico, where government interference in union

affairs was a major issue in 2006.24

The smaller integrated steel mills have almost disappeared as independent

entities under the wave of international consolidation. Rouge Steel, originally

founded by Henry Ford to supply his Detroit motor vehicle manufacturing operation,

was acquired by a large Russian company, Severstal. The company subsequently

rose to the eleventh position in world steel production rankings in 2005, as shown in

Table 1. As part of Arcelor’s efforts to fend off potential acquisition by Mittal,

Severstal’s CEO, Alexei Mordashov, agreed in May 2006 to merge his company with

Arcelor, which would have made the combined company the new top global steel

producer. Mordashov was to take a 32% share of the combined company, with the

right to appoint one-third of the directors, but Arcelor’s shareholders ultimately

approved the merger with Mittal and rejected the deal with Severstal.25 While this

deal failed, Severstal has taken the major financial interest in building a new minimill

in Mississippi (see below).

The remaining U.S. independent integrated mills are:

AK Steel (no. 50 on the global list), a widely diversified steel product

manufacturer with integrated steel operations.

Wheeling-Pittsburgh (no. 113) had been bankrupt, but used an

Emergency Steel Loan Guarantee to secure financing to build a new

(...continued)

AMM, “Ameristeel Agrees to Buy Chaparral for $4.22 Billion” (July 12, 2007).

A good summary list of all industry takeovers and mergers through early 2005 is in

Timothy J. Considine, The Transformation of the North American Steel Industry (April

2005, available through American Iron and Steel Institute, Washington, DC), tab. 3.

The Mexican government effectively removed from office Napoleon Gómez Urrutia, head

of the Miners and Metalworkers union, by recognizing as its head a dissident rival. It

charged Gómez with malfeasance and misuse of funds. He has legally challenged this action,

amid strong national protests against the government, and has been supported internationally

by the AFL-CIO and the USWA. A detailed report is in AMM, “A Deposed Leader Ignites

the Labor Reform Movement in Mexico” (March 13, 2006, print ed.), p. 12.

AMM, “Severstal Vote Clears Way for Arcelor-Mittal” (July 3, 2006).

CRS-13

minimill, and also become an operator of both technologies.26

Losing money again, despite a steel market that has remained strong

and relatively stable, Wheeling-Pitt became the object of a takeover

battle between Brazil’s CSN and Esmark, a steel distribution

company. It was eventually acquired by the latter.27

WCI Steel of Warren, Ohio (not on list) reorganized out of

bankruptcy in May 2006.

Republic Engineered Products, not on the list and also based in

Ohio, now specializes in bar products, primarily for the automotive

industry, and operates both an integrated mill and a minimill. The

company is the successor of Republic Steel, founded by Cyrus Eaton

in 1930. It has gone through several major changes in recent

decades, including operation as an employee-owned company and

two periods of bankruptcy. In 2005, Republic was acquired by

Industrias CH, a company based in Mexico.28

Steel Dynamics and Commercial Metals (CMC), on the bottom half of the

global list, are U.S.-based minimill operators. Two foreign-owned companies with

significant U.S. steelmaking operations are also in the lower end of the table.

Vallourec (no. 95) is the French-based parent of V&M, a tube-making specialist that

operates a minimill in Youngstown, Ohio. Acerinox of Spain is listed 105th because

it specializes in stainless steel, a low-volume but high-value product. Its North

American Stainless plant in Kentucky is the largest stainless steel plant in the United

States.

In another acquisition by a foreign steelmaker in the U.S. market, Evraz, a

Russian producer that ranked behind Severstal as the thirteenth global producer in

Table 1, acquired Oregon Steel in a $2.3 billion friendly takeover bid. The target

was a minimill producer based in Portland. Oregon Steel did not rank among the

largest U.S. minimill companies, but it was the last independently owned steelmaker

on the West Coast. The deal makes the combined company the world’s largest rail

producer (the main product of Rocky Mountain Steel Mills in Colorado, which is

owned by Oregon Steel).29 Oregon Steel also operates one of the few mills in North

Ibid., August 4 and September 10, 2003; March 8, 2004 print ed.

The outcome is summarized in ibid., “New Executive Team in Place at Wheeling-Pitt”

(December 22, 2006).

Cleveland Plain Dealer, “Mexican Company Buys Republic Engineered” (July 23, 2005),

p. C1.

Financial Times, “Evraz Group to Buy Oregon for $2.3 Billion,” and “Combination Will

Dominate Rail Market” (November 21, 2006); AMM, “Evraz Buy of Oregon Steel Fills Void

at Both Producers” (November 21, 2006). Aspects of the deal reportedly concerned the

Committee on Foreign Investment in the United States, the multiagency Executive Branch

body that reviews acquisitions by foreign-owned companies with respect to national security

issues; ibid., “Evraz-Oregon Steel Deal Raising Questions in DC” (December 13, 2006). But

it ultimately was allowed to go through; ibid., “Evraz Given ‘Go’ to Pursue $2.3B Buy of

Oregon Steel” (January 11, 2007); and, “Oregon Steel Purchase Complete” (January 25,

2007), p. 6.

CRS-14

America capable of producing large-diameter pipe, necessary for building longdistance natural gas pipelines.30

Building New U.S. Mills. While international consolidation has brought

more ownership from overseas to the U.S. and North American market, it has also

increased interest in building new steel production facilities in the United States.

Partly this can be explained by higher steel prices and exchange rate developments

that make dollar-based production more favorable. But probably the main driver is

the interest of major foreign-owned companies in establishing a larger presence in

the domestic market. With the major assets already acquired by competitors, the

alternative is to establish new production.

The biggest new project is the plan of Germany’s ThyssenKrupp,

number 12 on the list in Table 1, to build a new mill in Alabama at

an estimated cost of nearly $3 billion, in order to have steelmaking

capacity close to U.S. automotive assembly plants. This mill will

primarily roll semi-finished steel slab that the company will import

from a joint venture plant being built in Brazil.31 The project

followed ThyssenKrupp’s failure to acquire the Canadian steel

company Dofasco (see below).

With the same target of supplying the southern U.S. auto assembly

plants, a new minimill in eastern Mississippi is already starting

production. Severstal is the primary financial source and controlling

owner of the new plant, which is being managed by John Correnti,

former CEO of Birmingham Steel.32

There is also the Minnesota Steel project, originally financed locally,

to build a new steel mill on the Mesabi range, and to utilize directly

the taconite produced at a nearby mine. Essar Global Ltd., a leading

steel company in India, in 2007 acquired the project.33

See CRS Report RL33716, Alaska Natural Gas Pipelines: Interaction of the Natural Gas

and Steel Markets.

These developments are summarized in Ibid., “ThyssenKrupp Launching New Strategies

for Growth” (August 14, 2006); “TK to Step Up US Plans; Court Nixes Dofasco Plea”

(January 24, 2007); and, “Alabama Picked as Site of TK’s New Steel Plant” (May 14, 2007).

TK also plans to melt and roll stainless steel at the new plant, for shipment to its Mexican

stainless steel facility for further processing.

Ibid., “SeverCorr Rising” (December 5, 2005 print ed.), pp. 4-5; “SeverCorr Goes Hot,

Produces First Steel Sheet” (August 30, 2007); and, “Severstal Sold on SeverCorr, US Steel

Market” (October 25, 2007).

Minneapolis Star-Tribune, “Iron Range’s New Steel Plant Deal Is Sealed” (October 25,

2007); AMM, “Essar’s $1.65B Minnesota Steel Buy Completed” (October 26, 2007), p. 7.

Note, however, that Minnesota Gov. Tim Pawlenty has threatened to block the transaction

because of concern with Essar’s reported plan to build a large oil refinery in Iran; ibid.,

“Minn. Leader Tosses Wrench in Essar’s Iron Range Plans” (October 30, 2007).

CRS-15

Magnitogorsk Iron & Steel Works (MMK), a Russian company,

filed plans in 2007 with the state regulators in Ohio to build a 1 .0 to

1.5 million ton annual capacity minimill on the Ohio River near the

town of Haverhill. In the views of some analysts, MMK’s plans

remain a bit vague.34 MMK is not listed in the global table above,

but in the source for the table, it ranked twenty-third as a global steel

producer in 2006 with 12.5 million MT.

Vaguer than the MMK proposal is an otherwise unidentified “group

of European investors” also reported to be interested in building a

“billion-dollar-plus” steel mill in Ohio.35

Local Ownership Ends at Canadian and Mexican Mills. Another

feature of the table is the virtual disappearance of Canadian companies from the list.

One of the two largest and the most profitable, Dofasco, in January 2006 was the

target of a takeover battle between two large European-based companies, Arcelor and

ThyssenKrupp.36 Ultimately, control was acquired by Arcelor, which then placed

Dofasco in a trust operated by a Netherlands-based foundation to make more difficult

the parent company’s hostile takeover by Mittal. Mittal had agreed to sell Dofasco

to ThyssenKrupp, if it acquired Arcelor, but the deal was blocked by the Dutch

trust.37

Canada’s largest minimill operator was also acquired by a company based

outside North America. Ipsco had moved its headquarters to Illinois, but its origins

were in western Canada, and it maintained operations in both countries. On May 3,

2007, it announced agreement on a friendly acquisition by Svenskt Stal AB (SSAB),

a producer of high-value and specialty steel products.38 The 2006 output of the two

companies rank their combined output 39th among global steel companies.

In another friendly acquisition of a Canadian company, Essar of India acquired

Algoma Steel, based in Sault Ste. Marie, Ontario, in a $1.7 billion deal. The EssarAlgoma combination ranks 54th in Table 1, based on more than five million MT in

2006 output. Thus, the Algoma acquisition is part of Essar’s plan to operate

integrated operations in the upper Great Lakes region.39

Ibid., “Ohio May Be Near to Landing Mill Project” (October 8, 2007), p. 4; and, “MMK

Mill Plan Is Bigger, Bolder Than Anticipated” (October 22, 2007).

Ibid., “Second Group Eyes $1-Billion Ohio Steel Mill” (October 23, 2007).

For example, see ibid., January 4 and 10, 2006.

See Wall St. Journal, “Arcelor Transfers Dofasco ...” (April 5, 2006); Financial Times,

“ArcelorMittal Will Have to Sell US Plant” (November 14, 2006); and, AMM, “TK Sues

Mittal Steel Over Foiled Dofasco Purchase” (December 27, 2006).

“Ipsco To Be Acquired by SSAB for U.S. $160 per Share for a Total Equity Value of U.S.

$7.7 Billion,” joint Ipsco-SSAB press release (May 3, 2007).

AMM, “Algoma Shareholders Approve Sale to Essar” (June 12, 2007), p. 6.

CRS-16

Finally, on August 26, 2007, U.S. Steel announced an agreement to acquire

Stelco. Stelco was in 2005 Canada’s largest steel producer and remained its last

locally owned major steel company. It reorganized in 2006 after two years in

bankruptcy protection.40 Its 2006 production of 3.81 million MT, well below the

company’s earlier levels, ranked it 71st globally in Table 1. The company, based in

the Canadian steelmaking center of Hamilton, Ontario, continued to struggle

financially, losing more than $C300 million in 2006, and was reported as negotiating

sales of some major assets. U.S. Steel announced an acquisition price of $1.1 billion

(U.S.), plus assumption of Stelco’s debts and pension liabilities.41

There is also just one company in Table 1 from Mexico. Altos Hornos de

Mexico S.A. (no. 79) is the last independently owned large Mexican steel mill. It has

operated in bankruptcy for much of the last 10 years.42 Argentina’s Techint Group

moved up to number 20 on the global list after acquiring other Latin American

operations, including Hylsamex, a Mexican minimill operation. In June 2006

Techint’s subsidiary Tenaris, reportedly the world’s largest supplier of seamless pipe

for the oil and gas industry, announced that it had reached a deal to acquire Maverick

Tube Corp., based in Missouri and the largest maker of oil country tubular goods in

North America.43

Labor Relations Issues. Another structural change in the industry was the

merger of the United Steelworkers union with the Paper, Allied Industrial, Chemical

and Energy Workers International Union (PACE). The executive boards of the two

organizations agreed to the merger on January 11, 2005. The new union reportedly

totaled 850,000 members, located in bargaining units in the United States, Canada

and the Caribbean. While the merged union would have perhaps the longest formal

name in labor relations history (the “United Steel, Paper and Forestry, Rubber,

Manufacturing Energy, Allied Industrial and Service Workers International Union”),

its abbreviated name is the United Steelworkers, and Leo Gerard, the USWA

president, is the head of the merged union.44

Labor issues have affected the operations of two major U.S. producers in 200506, and represent fallout from the industry consolidation process. AK Steel locked

out 2,400 workers represented by the Armco Employees Indepenedent Federation

(AEIF), a union not affiliated with the USWA, at its integrated Middletown, Ohio

mill on March 1, 2006, after the deadline passed to negotiate a new labor contract.

On Stelco’s emergence from bankruptcy, ibid., “Mott Paying $4.7 Million for 1M Shares

in Stelco” (April 4, 2006).

Ibid., “Unexpected Challenges Hurt Stelco Results” (March 9, 2007); “Stelco, Cliffs

Agree to Sell Wabush Stake” (June 7, 2007); “U.S. Steel Agrees to Buy Stelco ...” (August

28, 2007). U.S. Steel press release (August 26, 2007); and, AMM, “USS’ Shopping Spree

Is Not Over Yet” (October 2007 print ed.), p. 12.

Ibid., “Ahmsa Expected to Remain Major Player in Mexican Steel Industry” (January 25,

2007), p. 6.

AMM, “Techint Inks Deal to Acquire All of Hylsamex for $2.25B” (May 20, 2005); and

“Tenaris Opens Door into US via $3.2B Deal for Maverick” (June 14, 2006).

Ibid., “Executive Boards of USW, PACE Union Vote to Merge” (January 12, 2005).

CRS-17

The company stated that the expired contract was outdated by the new contracts

negotiated at the other integrated mills, discussed above, operated the mill for a year

with salaried and temporary workers. Labor-management issues were further

complicated by an AEIF negotiating proposal for its members to be covered under

a mulitemployer health benefits plan operated by a third union, the International

Association of Machinists (IAM). The USWA represents other AK operations and

has tried to organize Middletown, but AEIF members in July 2006 voted to affiliate

with the IAM instead.45

Agreement between the IAM and AK management was reached after further

negotiations, and ratified by 85% of the workers represented. The company was able

to freeze pension liabilities, and going forward made defined contributions to IAM’s

multi-employer pension plan. While increasing wages, the company in return

received contract changes similar to the USWA deals at other steel companies and

health care cost sharing. Besides the wage increase, employees gained job protection

for returning workers who had been locked out, and improved language related to

grievance procedures. But the new contract does not guarantee a base workforce

(earlier more than 3,000). About 1,800 employees returned to operate the plant.46

Another company significantly affected by labor-management concerns was

Gerdau Ameristeel. Although most minimills are non-union, the Brazilian-based

company acquired three union-represented mills from North Star. It locked out union

members at the mill in Beaumont, Texas, after the existing contract expired, and talks

failed to establish a new one. But eventually the company terminated the lockout

without agreement on a new collective bargaining arrangement. Meanwhile, labor

contracts also expired at the former North Star mills in Minnesota and Iowa, though

operations continued without a new replacement contract.47 The company succeeded

in December 2006 in achieving ratification by workers of a new contract at the wire

rod mill in Perth Amboy, New Jersey, a union shop which it had acquired when it

took over Co-Steel.48 In early 2007, workers also ratified new contract agreements

The development of the dispute is described in detail in ibid., “90 Days and Counting”

(May 29, 2006 print ed.), pp. 4-5. On inter-union issues, see ibid., “AEIF Blasts USW over

Call to Strike Down Tie with IAM” (June 12, 2006); “Locked-Out Union Picks IAM, But

Will AK, USW Let It Pass?” (June 16, 2006); “AK Won’t Recognize IAM Representation”

(June 21, 2006); “AK Workers Vote IAM In, But the Issues Remain the Same” (July 31,

2006; “Now It’s the IAM’s Turn To Try To Retool What’s Broken at Middletown” (July

31, 2006 print ed., p. 9); and, “AK ‘Puzzled’ by IAM Comment about Latest

Counterproposal” (December 27, 2006).

Ibid., “Union Ratifies New Contract to End Lock-Out by AK Steel” (March 16, 2007);

and, “After a Marathon-Long 54 Weeks, the Sun Comes Out in Middletown” (March 19,

2007, print ed.).

Other labor contracts inherited from acquisitions of Co-Steel and Sheffield Steel of

Oklahoma are also expiring. The Gerdau Ameristeel labor situation is summarized in an

AMM interview with CEO Mario Longhi, appointed in 2006, “‘You Don’t Go Through

Transition Without Some Level of Challenge’” (May 15, 2006 print ed.), p. 13.

Ibid., “Union Members at Ameristeel Mill Approve Contract” (December 26, 2006).

CRS-18

between management and USWA representatives for the three former North Star

plants.49

World Steel Output Totals

World steel output in 2006 was 1.24 billion metric tons (MT), a new all-time

record. Over the past 10 years, global steel output has increased by 65%, and since

2000, it has increased by nearly 50%. The main driver in this increase in production

has been the People’s Republic of China. It produced 419 million MT in 2006,

more than four times the total it produced in 1996, when China first became the

world output leader. During this ten-year period, China’s share of global raw steel

production increased from 13.5% to 34%.50

The European Union (EU) as a whole and Japan both produce more steel than

the United States. The EU in 2006 produced 173 million MT, more than 16% of

global steel production. The leading producer was Germany (44 milllion MT),

followed by Italy (29 million MT), France (20 million MT) and Spain (18 million

MT). Among the newer EU members from Central and Eastern Europe, Poland was

the leading producer with 10 million MT.

Japan produced 116 million MT in 2006 and the United States produced 98.6

million MT. These two countries ranked number two and three globally, behind

China. Japan’s global share was 9% and the U.S. share was 8%. As Canada and

Mexico each produced in the 15-16 million MT range, the total North American

output of 130 million MT was 10.5% of the global total.

The former Soviet Union was once a leading producer, and ahead of the United

States. In 2006, the production of Russia was 71 million MT (5.6% of world

production), and Ukraine was 41 million MT (3.3%). Together with the smaller

producers from the Commonwealth of Independent States, their share was about

10% of global steel production. Other major producers in a second tier include

South Korea, India, Brazil, Turkey, and Taiwan, all in a 20-50 million MT annual

range.51

U.S. Import Patterns

The pattern of U.S. imports underwent a significant change in 2006, as total

steel imports increased dramatically. During the period of the Bush safeguards,

Canada and Mexico became the top two suppliers to the U.S. market. By 2005, the

United States imported more than 9 million MT from its NAFTA partners, compared

to about 5 million MT from all western Europe, traditionally the number-one source.

A third western hemisphere producer, Brazil, became the third-largest national

Ibid., “Workers Ratify New Pacts at Ameristeel Mills” (March 9, 2007).

Data from International Iron and Steel Institute (IISI), as reported and analyzed by

Purchasing Magazine Online (February 15, 2007). A later IISI report gives Chinese

production for 2006 as 422.7m. MT.

IISI. World Steel in Figures, “Major Steel Producing Countries, 2005 and 2006.”

CRS-19

source, at 2.3 million MT in 2005. Imports from China grew to almost 2.2 million

MT, Russia and Germany were about 1.4 million MT each, with Japan, Korea, and

Turkey (about 1.2 million MT each) the other sources over a million tonnes.

There was a major rearrangement of rankings in 2006. The expanded European

Union was the top source of steel imports, with 5.7 million MT (but with a total of

1.2 million MT, Germany was the only European supplier to top one million tonnes).

Canada remained the leading national supplier, but its shipments to the U.S. market

were flat compared to the previous year at about 5.4 million MT. Imports from

Mexico were down by 11.5% and fell behind the total from China, which became the

second-largest import source, as shipments more than doubled to 4.9 million MT.

Imports from Russia grew even faster, to about the same total as Mexico. Brazil’s

exports to the United States in 2006 increased by 12% to 2.6 million MT, being

restrained by a major mill outage. Turkey, Korea and Japan all saw substantial gains

in the U.S. market, with shipments in 2006 rising to about two million MT or more

each. Imports from Canada and, especially, China, both increased in the first half of

2007, but imports from most other sources declined.

Steel Price Trends and Developments

Steel Prices Remain at a High Plateau

Notwithstanding the removal of President Bush’s steel safeguards, which had

been heavily criticized by many steel-consuming industries and their representatives

in Congress, the price of steel moved up, not down, after the President’s action.

Most economists would expect that, everything being equal, removal of the safeguard

tariffs would encourage importation of steel into the domestic market, more

competition with domestic steel producers, and, consequently, lower prices. But

instead the price of steel in early 2004 rose sharply, and has stayed at a much higher

level than it was before the initial presidential safeguard action of 2002.

A few months before the imposition of the Bush safeguards in March 2002, the

price of hot-rolled carbon steel, a benchmark industrial product, fell as low as $222

per ton. During the period that the safeguards were in effect, average steel prices

were generally just above or below $300 per ton. By September 2004, nine months

after termination of the safeguards, the average spot price of this product was $700800 per ton.52 Note that large industrial users, such as automotive producers,

generally negotiate longer-term contract prices, which may be significantly lower.53

Data on steel prices before, during and after the Bush safeguards are taken from ITC.

Steel: Monitoring Developments in the Domestic Industry (Investigation no. TA-204-9) and

Steel-Consuming Industries: Competitive Conditions with Respect to Steel Safeguard

Measures (Investigation no. 332-452), issued together as Publication no. 3632, Vol. 1, Table

II-27; Global Insight. Steel Monthly Report, various issues; and, specifically on the

September 2004 peak price, AMM, “‘Let’s Take It Slow ...’” (May 9, 2005).

This system is described in Al Wrigley, “Car Talk: Wheeling and Dealing Steel in

Detroit,” AMM, December23, 2002 print ed., p. 3. It is also summarized in Brian C. Becker

(continued...)

CRS-20

Thus, the steel users most immediately and adversely affected by high steel prices

were small and medium-sized companies that bought steel on the spot market.54

The data in Table 2 indicate that while the price of all steel products has risen

since 2001-02, there are considerable variations, depending in part on demand

patterns in consuming industries. For example, some products widely used in the

automotive industry peaked in 2004, fell back in 2005, and increased again in 2006,

but fell again in 2007, in the face of major auto industry production cuts. This

pattern is exhibited, for example, by hot-rolled and cold-rolled sheet steel, and by

hot-rolled carbon “special bar quality” (SBQ) steel. Cold-rolled sheet, used for auto

exteriors, was down by $65 per ton in 2007, and SBQ bars, widely used for auto

structural parts, was down by more than $125. Prices for products used heavily in

non-residential construction rose or fell by a much smaller amount. The price of

concrete reinforcing bar increased in 2007 over 2006. Plate, normally less expensive

than sheet steel, remained more expensive in late 2007, though down from its 2006

peak. Industrial quality rod, widely used in capital goods industries, stayed as high,

or higher, in 2007 as in 2006.

There are also considerable variations in the overall rates of price increases.

Cold-rolled stainless sheet steel (grade 304) increased almost four times in price,

from the average low of $1,295 per ton in 2003 to $4,742 in late 2007. Steel plate,

a product used in much greater volume, increased almost as rapidly, rising more than

three times in value from its 2001 lows to 2007. On the other hand, oil country

tubular goods have only risen by an average of only 40-60% from their lowest

average values (in 2003) to the 2007 level. Prices have fallen in late 2007, after an

ITC ruling revoked trade remedy duties that had been placed on imports (see below).

Cold-rolled and hot-rolled sheet in 2007 were only about double the 2001 low prices,

compared to the higher rate of increase for plate steel.

(...continued)

and Kevin Hassett, The Steel Industry: An Automotive Supplier Perspective (February 2005,

funded by the Motor & Equipment Manufacturers Assn.), p. 13.

See U.S. House. Committee on Small Business. Spike in Metal Prices — What Does it

Mean for Small Manufacturers? Hearings, March 10 and 25, 2004.

CRS-21

Table 2. Steel Price Series, 2001-2007

Products

Average Annual Price Per Short Ton ($)

2001

2002

2003

2004

2005

2006 2007a

Hot-Rolled Sheet

234

329

296

617

557

596

530

Cold-Rolled Sheet

319

422

383

693

647

695

630

Hot-Dipped Galvanized

328

440

402

734

675

762

760

Cut-to-Length Plate

258

305

314

638

792

829

790

Coiled Plate

240

314

320

674

820

829

790

Reinforcing Bar

310

306

318

447

486

526

580

HR Carbon Steel - SBQ 1000

340

353

372

546

719

838

710

Cold-Fin. Carbon Steel 1018

455

465

503

773

899

880

910

Merchant Angles (2”x2”x1/4”)

288

252

306

482

520

582

677

Low-Carbon Industrial Quality

310

317

323

568

583

592

590

High-Carbon Industrial Quality

330

333

599

605

618

670

OCTGb Carbon, Welded

880

811

788

1130

1345

1368

1270

OCTG Carbon, Seamless

1009

926

884

1228

1534

1567

1454

OCTG N80, Welded

1071

999

998

1341

1614

1735

1491

OCTG N80, Seamless

1163

1092

1072

1422

1764

1869

1549

1376

1301

1295

1734

2515

3287

4742

Flat Products

(Sheet)

(Plate)

Long Products

(Bar)

(Rod)

Tubular Products

Stainless Steel

Cold-Rolled Sheet 304

Source: Annual price data from AMM historical steel base price series, and 2007 data as reported in

AMM.com (Oct. 26, 2007). Except for OCTG, prices converted from cwt. to per ton basis by CRS and

rounded to nearest dollar. Selected categories based on those used in Global Insight, Steel Monthly

Report price forecasts.

a. Latest 2007 avg. data.

b. Oil Country Tubular Goods.

CRS-22

While the price of steel has risen all over the world since 2000, price changes

have moderated in recent years, with a tendency to converge across regions.

Comparisons are based on “SteelBenchmarker,” a historical series provided by

American Metal Market and the consulting firm World Steel Dynamics. Their data

show that the relative U.S. price of hot-rolled steel, compared with other major

markets, dramatically changed in 2002-2004. It went from lower than European and

Chinese prices in 2002-03 to higher than European and world export prices, and

double the Chinese price, for much of 2004. There was a sharp, brief fall in the U.S.

price in late 2004, but then it recovered to run higher than other market prices for

2005 and the first half of 2006. With the weakening of the dollar exchange rate and

stronger economic demand in Europe, the price of European hot-rolled steel rose by

late 2007 to $672 per metric ton (MT), while compared to a U.S. price of $577. The

latter figure was about the same as the reported world export price, helping to explain

a decline of U.S. import tonnage in 2007 from the 2006 record level. As John Anton

wrote for the economics consulting firm Global Insight, “In a real sense, the United

States and the Eurozone have switched places as far as prices and imports are

concerned.”55 The Chinese price remained far below the U.S. price, but at $470 per

MT in mid-2007, the gap was only about one-third that seen in 2004-05.56

The continued high price of steel, as well as its volatility in some recent years,

has led to suggestions that steel consumers might be able to hedge against price

changes, futures contracts were traded in global commodity markets, as in the

example of other metals. There is a counter argument that the chemistry and other

specifications of steel supplied under contract are so precise, that it is impossible to

consider it as a commodity item. Nevertheless, the board of the New York Metal

Exchange (Nymex) in October 2007, reportedly approved launching futures contracts

on hot-rolled steel, sold in units of 20 short tons, with prices settled on the basis of

those reported in the “SteelBenchmarker.” Internationally, the Dubai commodities

exchange is reported to be about to introduce a rebar futures contract, and the London

Metal Exchange to introduce a steel billets contract for trade in the Asian and

Mediterranean regions.57

Steel Input Costs

From the perspective of the steel industry, a substantial and at least semipermanent rise in the price of steel has been justified by the rapid rise in the price of

many steelmaking inputs.

Steel Scrap. Initially, the rapid rise in steel prices in 2003 was especially

linked to a rapid rise in scrap prices. This especially affected the minimill sector,

because scrap is the major input in U.S. electric arc furnaces, the production

technology they use. By 2002, total U.S. EAF production had overtaken the output

of basic oxygen furnaces, the steelmaking technology of integrated mills that produce

Global Insight. Steel Monthly Report (September 2007), p. 6.

See “SteelBenchmarker” chart in AMM, “Hot Band Rise in World Export Market Bucks

Regional Trend” (October 25, 2007).

Ibid., “Nymex’s Board Gives Final Approval to Steel Contract” (October 24, 2007).

CRS-23

raw steel from iron ore, coke and other materials. While scrap is usually the principal

input in minimill furnaces, it is also frequently added to iron in making steel at

integrated mills (up to 25-30%). Scrap enables EAFs to produce a more

competitively priced product, especially where absolute purity of the steel is not a

prerequisite. Thus, all parts of the industry are affected by changes in the scrap price,

though the minimills more than the BOFs. Since minimills are the low-cost

producers of many steel mill products, a less competitive minimill price enables the

integrated mills to raise their prices as well in a tight market.

The price of ferrous scrap tripled or even quadrupled in 2002-04, and has been

highly volatile in the period since then. During some recent periods, the price of

scrap has been higher than the price of finished steel in 2001-03.

In early 2002, the price of scrap was about $65 per ton, the composite price for

“number 1 heavy melt scrap,” a common commercial category, as reported by

American Metal Market. The price reached a plateau of about $100 from mid-2002

through mid-2003. Then the price rise accelerated to $160 by the end of 2003, and

climbed more steeply to an average of more than $237 by early March 2004. More

premium grades commanded higher prices, up to reports of more than $300 per ton.

At three different times during 2004 (March, August and November), the price of this

benchmark category of scrap peaked near or above $250. In 2005, at three different

times during that year the price of scrap again peaked at more than $220 per ton, but

at one point it also fell to about $120. In 2006, the price peaked once more above

$250, but was generally more stable. However, in March 2007, it skied to more than

$300 per ton, with better grades even higher, and it stayed above $240 through

October 2007.58

Many in the industry ascribed the rising price and reduced availability of

domestic steel primarily to the rise in scrap prices, driven in turn by rising global

demand, especially in China. For example, one witness at a House hearing linked the

rise in scrap prices to a doubling of U.S. ferrous scrap exports, from 6 million tons

in 2000 to 12 million tons in 2003. About half of the exports in the latter year went

to just two Asian countries: China, and South Korea, whose steel exports increased

because of demand in China.59 Concerned that rising metal scrap exports were

driving up domestic prices and aiding their foreign competitors, U.S. metalsconsuming industries unsuccessfully petitioned to restrict non-ferrous metal exports.

Steel users also considered such a request.60 No petition was ever filed, however, for

See charts in AMM, February 7 and May 9, 2005 print eds., both on p. 15; January 9, 2006

print ed., p. 11; June 5, 2006 print ed., p. 14; August 28, 2006 print ed., p. 11 and, December

4, 2006 print ed., p. 11; May 14, 2007 print ed., p. 11; October 15, 2007, p. 9.

House Small Business Comm. Hearing (March 10, 2004). Statement of Robert J. Stevens

(Impact Forge Inc. and President, Emergency Steel Scrap Coalition).

On export controls on both ferrous and non-ferrous scrap, see AMM, “Short Supplies,

Export Angst” (February 23, 2004 print ed.), p. 2; “Scrap Wars Create Turmoil, Skepticism”

(March 3, 2004); and, “Commerce Nixes Copper’s Plea to Cap Scrap Exports” (July 22,

2004), p. 1; also, Washington Trade Daily, “Limiting Copper Scrap Exports” (April 8-9,

2004).

CRS-24

short supply controls on steel scrap exports, nor was any legislation introduced to

restrict such exports.

U.S. ferrous scrap exports have remained high. According to Commerce

Department data, they were 11.7 million MT in 2004 and 12.4 million MT in 2005.

China in those years took nearly 30% of the total, and was still the leading

destination, but Korea fell behind Canada, Mexico, and Turkey.61 In 2006, total

ferrous scrap exports remained at the 12.4 million MT level, but exports to China fell

by a quarter, and exports to Turkey were almost equal — 2.7 million MT to China,

2.5 million MT to Turkey. In the first half of 2007, Chinese imports of U.S.-origin

ferrous scrap again declined compared to the same period in 2006, but overall scrap

exports were up 36%. Turkey imported U.S. ferrous scrap at an annual rate of more

than 3.5 million MT, and was the leading destination.62

Among other major exporters of scrap, Ukraine and Russia have restrictions

on ferrous scrap exports, which serve to maintain a scrap supply for their domestic

steel industries. The United States is a major net scrap exporter, and does not import

large amounts from these countries, but their exports are important in terms of the

overall global supply. For example, restrictions on scrap exports from the two

countries may help explain the increased interest of the Turkish steel industry in

importing scrap from the United States.

U.S. negotiators sought to eliminate scrap export restrictions as part of

negotiations with the Ukrainian government to establish bilateral permanent normal

trade relations (PNTR) and in negotiations related to U.S. acceptance of Ukraine’s

accession to the WTO. On March 6, 2006, U.S. and Ukrainian representatives signed

a WTO accession agreement. On March 23, 2006, President Bush, following

approval by Congress, signed into law a measure to establish PNTR with Ukraine

(P.L. 109-205).63 Ukraine had already passed legislation to cut its ferrous scrap

export tax in half to about $18/MT by the end of 2006. In the negotiations with the

United States, Ukraine agreed to reduce the ferrous scrap export tax further to onethird of the previous level. Further reductions or elimination of the tax were made

in negotiations with other WTO members.64

AMM, “U.S. Scrap Exports a Two-Sided Affair” (February 15, 2006), incl. table.

2006 data from unpublished AMM tables reporting revised Commerce Dept. data. Data

for January-April 2007 from AMM, “US Exports of Ferrous Scrap by Destination” (June 13,

2007), table on p. 4.

See CRS Report RS2114, Permanent Normal Trade Relations (PNTR) Trade Status for

Ukraine and U.S.-Ukrainian Economic Ties, by William H. Cooper. This report notes that

in 2005, “over half of U.S. imports from Ukraine consisted of steel plus coke that is used

in making steel.” A key U.S. policy change, sought by Ukraine and granted in February

2006 by the Commerce Dept., was change in Ukraine’s designation from a “non-market” to

a “market” economy. Domestic steel industry associations opposed this policy change,

which they said will make it much more difficult to win antidumping cases against

Ukrainian exporters; AMM, “Ukraine Still Playing Under Old Rules Despite New Trade

Status” (March 27, 2006 print ed.), p. 2.

Ibid., “Ukraine OK of Export Duty Cut Stokes Fears of Scrap Shortages,” (November 21,

(continued...)

CRS-25

Russia also agreed to include export taxes and restrictions on scrap exports as

part of its WTO accession negotiations. It accepted in the final bilateral agreement

of November 2006 that it would reduce export duties on ferrous scrap to one-third

of current levels over a five-year period following WTO accession.65

While the steel industry claims that it uses the world’s most recycled material,

reports are that the rate of recycling declined significantly in 2006. The officially

reported rate by the Steel Recycling Institute (SRI) for 2006 was 68.7%, down from

75.7% in the previous year. SRI attributed the decline in recycling to the rising

global demand for and production of steel. Its president stated that as demand

increased, more readily available supplies of scrap in urban areas were being used up,

and recyclers were having to dig into reserve supplies farther out into the

countryside.66

Rise in the Price of Iron Ore. High iron ore costs have the greatest impact

on the integrated steel industry, which must make steel from some form of iron ore.

But it also impacts the minimills, which generally must use at least small amounts

of pig iron or other iron units for purity. They have been seeking cheaper sources of

iron units, also as an alternative to high-priced scrap.

In February 2005, when the major global steel making companies arranged their

supply contracts for the coming year, Nippon Steel agreed to an unprecedented

71.5% price increase with the large Brazilian iron mining company, CVRD. This

deal set the pattern for international iron ore purchases by other integrated steel

companies, and compares with the previous high one-year price increase of less than

20% in 1980.67 In 2006 CVRD negotiated a further 19% iron ore price increase with

major European and Asian producers. After protracted negotiations with the major

iron ore producers, Chinese steelmakers also accepted the same level of prices

increase for 2006.68 In late 2006 the Chinese steelmaker Shanghai Baosteel initiated

(...continued)

2005), p. 7; and interview of May 26, 2006, with Jean Kemp, Director of Steel Trade Policy,

Office of U.S. Trade Representative. Business Week, in its issue of September 3, 2007,

reported that, despite an ongoing political crisis, the Ukraine parliament in July 2007

“approved laws that lowered export taxes on metals [that] ... should help pave the way for

Ukraine’s entry” into the WTO by 2008 (p. 51).

Office of the U.S. Trade Representative (USTR). Trade Facts, “Results of Bilateral

Negotiations on Russia’s Accession to the World Trade Organization (WTO): NonAgricultural Goods Market Access” (November 19, 2006), p. 2.

AMM, “Steel Recycling Rate Falls to 68.7% in ‘06: SRI” (August 24, 2007), p. 6.

AMM, “CVRD Wins 71.5% Increase in Japanese Iron Ore Deal — Asian Steelmakers

Gird for Domino Effect” (February 23, 2005), p. 1.

CVRD did, however, agree to a 3% reduction in the price of iron ore pellets. AMM,

“CVRD Deals Call for 19% Hike in Iron Ore Fines” (May 19, 2006), and “ CVRD Seals

Iron Ore Supply Deals with Arcelor, China Steel [Taiwan]” (May 25, 2006); Wall St.

Journal, “China’s Steelmakers Hold Out as Suppliers Set Pricing Deals” (May 19, 2006),

p. B4; and, “Steel Prices Are Likely to Jump, Adding to Manufacturers’ Woes” (May 24,

2006), p. A2; Washington Post, “China Agrees to Steep Increase for Iron Ore” (June 21,

(continued...)

CRS-26

price negotiations with CVRD on behalf of the Chinese steel industry for the next

year’s price level. The result was a further 9.5% price increase for iron ore, which

set the standard for the world level, since China imports 40% of all internationally

traded iron ore.69

Domestic U.S. iron ore production, which is in the form of taconite that is

subsequently pelletized, increased in 2004-05. It is not directly affected by the global

increase in iron price. After averaging less than 50 million MT in 2001-03,

production was 54.7 million MT in 2004, 54.5 million MT in 2005, and 52.9 million

MT in 2006. But these annual levels were still much less than the recent peak of

more than 63 million MT in 2000. Most iron ore used by the U.S. steel industry is

domestically produced. Exports and imports in 2005-06 were close to level, with

imports slightly higher. Exports were 8.3 million MT in 2006, with 11.5 million MT

imported. Canada and Brazil are by far the leading suppliers of imported ores and

pellets.70 U.S. steelmakers are not insulated from the high global price of iron ore,

which doubled in price from $26 per ton in 2002 to $52 in 2006, according to the

U.S. Geological Survey.71 According to a press report, the typical price in mid-2007

was $60 per ton.72

Minimills frequently use direct-reduced iron (DRI), a product that converts raw

iron ore into units that may be substituted for scrap. However, this product requires

large amounts of natural gas, and the rise in price of this input has led to the three

DRI plants in the United States being dismantled to be reassembled and put into

production in Trinidad and Saudi Arabia. A new coal-fired plant is being built in the

Minnesota iron range, as noted earlier. This development indicates renewed interest

in this historically important producing region.73

The Cost and Supply of Coke. Coking coal has been in relatively short

supply, both domestically and internationally. According to the Department of

Energy, U.S. domestic production of coke, derived from a grade known as

metallurgical coal and used almost exclusively in blast furnaces by integrated steel

mills, was 22 million tons in 1997. It was more than 20 million tons annually from

1998 through 2000, 18 million tons in 2001 and about 17 million tons in 2002-03.

(...continued)

2006), p. D10.

Wall St. Journal, “China Steelmakers Agree to Ore Deal; Likely Benchmark” (December

22, 2006), p. A2; AMM, “N. America Iron Ore Pellet Price Yet to Be Set” (December 26,

2006).

Iron ore data from Dept. of the Interior. U.S. Geological Survey. Mineral Commodity

Summaries, 2004 and 2006; and, January 2007 Monthly Report.

Ibid., p. 82.

Wall St. Journal, “Ship Shortage Pushes Up Prices of Raw Materials” (October 22, 2007),

p. A1.

AMM, “The Sourcing Game,” and “In Alternative Iron, Finding the Right Fit May Mean

Moving the Plant” (May 15, 2006 print ed.), pp. 4-7. Transportation costs and problems,

particularly a shortage of rail cars, have also contributed to raw material sourcing problems

for the steel industry.

CRS-27

It remained below 17 million tons annually in 2004-06.74 With China as the key

source of coke on the world market, and China’s own domestic demand growing,

availability has been squeezed, and the price has risen. The consequence in recent

years has been volatility in both the price and availability of coke.

These problems were exacerbated by a mine fire and an interruption in coke

supplies from U.S. Steel, a major coke producer, to other steelmakers in 2003-04.

This created a shock wave through the integrated steel industry. According to one

industry source, the cost of coke rose from $145/ton to $250/ton between November

2003 and early 2004.75 With the recovery in domestic steel demand, imports had to

make up the gap. They more than doubled, from 2.8 million tons in 2003 to 6.9

million tons in 2004, then leveled off to 3.5-4.0 million tons annually after integrated

steel production declined somewhat and domestic coke sources came back on line in

2005.76 Full supplies have been subsequently resumed for U.S. Steel, but the

company has declared itself out of the merchant coke market. Existing coke plants

are being reopened or modernized, and some new ones are being developed, although

in the latter case coke plants sometimes engender opposition on environmental

grounds.77

China is the world’s leading supplier of coke in international trade, and the

United States has been the number-two importer, behind the European Union (EU).78

As more Chinese coke output is being used in domestic steel production, export

growth flattened.79 A witness before the House Small Business Committee noted that

the Chinese coke export price had risen from $55 per ton to between $200-300 per

U.S. Dept. of Energy. Energy Information Administration (EIA). “Coke Overview, 19492003” (February11, 2005); and, “Quarterly Coal Report” (January-March 2007), table 2.

Scott Robertson, “For Some Steelmakers, a Lump of Coal Would be a Welcome Gift,”

AMM print ed. (March 15, 2004), p. 3. The information on the price rise is from industry

consultant Charles Bradford, in Tom Balcerek, “Back Behind the Wheel,” AMM print ed.

(February 9, 2004), p. 6. The thrust of the article, however, is that higher scrap prices have

made the integrated industry overall more competitive against minimills.

EIA. “Quarterly Coal Rept.” (January-March 2007), table 2.

Weirton Steel, once a purchaser of coke from U.S. Steel, has ceased to produce raw steel

since its acquisition by Mittal. Another former U.S. Steel customer, Wheeling-Pittsburgh

has been rebuilding and modernizing its coke plant in Follansbee, WV, but the process has

been more difficult and costly than originally planned. AMM.com: “More Demand Attracts

More Supply?” (July 23, 2004); “Wheeling-Pitt Mulling Post-BF Coke Strategy” (August

9, 2004), “Some Coke Batteries at 50% as Woes Continue” (January 21, 2005); AMM,

“Construction of Ohio Coke Plant May Start Soon” (January 2, 2006), p. 1, and, “Things

Aren’t Quite Going to Plan with W-P’s Oven Rehab” (May 15, 2006 print ed.), p. 8. Plans

for other coke plants are affected by environmental issues; ibid., “Sun Drops Coke Plant

Plan; Others Still in Works for Now” (November 9, 2006); and, “Proposed Ohio Coke Plant

Hits Another Snag” (June 8, 2007), p. 6.

AMM.com, “Mills Face Coke Quandary as Chinese Prices Soar” (May 16, 2003).

A Chinese official stated that, “China would limit coal exports in 2004 to meet the

increasing domestic demand;” “China Coal Policy,” China Business News On-Line (January

29, 2004); also; “China Coke Exports Seen Even Lower,” Platts International Coal Report

(December 8, 2003).

CRS-28

ton by early 2004, and that in February 2004, China was actually a net importer of

coking coal versus typical net exports of 1 million tons per month.80

As a consequence, China sought to tighten its allocation system, and to

substantially reduce exports by reducing export quotas and raising the price of export

licenses. The EU brought a World Trade Organization case against China, which

then agreed that the amount of coal exported to the EU would not decline in 2004.81

China also maintained this level of exports in 2005, but the EU has argued that such

temporary amelioration does not resolve the complaint. “They are under an

obligation to remove restrictions on the export of coke for steelmaking,” according

to EU external trade commissioner Peter Mandelson.82 Chinese coke prices dropped

from a short-lived peak of more than $400 per MT in 2004, to less than $150 in late

2005.

In contrast to the situation in 2003-04, “massive investment” in Chinese coke

resources had created a surplus of supply over demand. U.S. prices fell below $140

by the end of 2005.83 In early 2007, average receipts at U.S. coke plants were

reported to be less than $100 per ton by the Energy Department.84

But trends reversed again later in the year. In August 2007, Warren

Consolidated Industries of Ohio, the smallest U.S. integrated steel operation and one

wholly dependent on the merchant coke market, predicted that a sharp rise in coke

prices of “$55-70 per ton” in the second half of 2007 would have seriously adverse

operational cost consequences for a company already losing money.85 Industry

analysts reported September 2007 coke prices in China of $325 per ton, which would

translate to $450, when delivered to the U.S. market, owing to high costs of shipping

(see below). By contrast, the cost of making coke domestically was $250 pere ton,

which, according to an analyst, is “... why all these companies are scrambling to

become self-sufficient.” U.S. merchant coke producers were also scrambling to get

on the bandwagon. For example, the International Coal Group, acompany controlled

by Wilbur Ross, that produced only 100,000 tons of metallurgical coal in 2006,

planned to increase output to 2.4 million tons by 2009.86

The Price of Natural Gas. Natural gas is widely used in the steel industry,

by both integrated mills and minimills. Steel must be heated and cooled frequently

House Small Business Committee hearing (March 10, 2004), statement of W. Atwell, p.

Europe Energy 2004, “EU and China End Their Coke Trade Battle” (June 4, 2004);

interview with Jean Kemp, Director for Steel, Office of U.S. Trade Representative (January

27, 2005).

AMM, “EU Presses China to Change Coke Export Rules” (November 9, 2005), p. 4.

AMM, “A Cool Down in Coke Prices” (November 7, 2005), pp. 4-5.

EIA. “Quarterly Coal Report” (January-March 2007), table 23.

AMM, “WCI Facing Difficult 2d Half But Planning a Turnaround” (August 10, 2007).

Ibid., “Coke Prices Said Set to Jump Near ‘04 Record Pace;” and, “ Higher Prices, Strong

Demand Spur Met Coal Production Hike” (October 11, 2007), p. 8.

CRS-29

in the course of melting or remelting materials, as well as shaping and tempering

steel mill products. Among all steelmaking inputs, perhaps none has risen higher in

price recent years than gas. As of November, 2005, the benchmark Henry Hub cash

price of natural gas, at $13.83 per million BTUs, was more than double the level of

one year earlier. On comparative indices of input costs, natural gas in late 2005 was

nearly five times its long-term benchmark level and more than double the level of

one year earlier. Scrap was about double its benchmark, while coal was still within

about 15% of its benchmark.87

Gas prices have ameliorated since then. The late 2005 spike was partly caused

by Gulf “shut in” production, resulting from hurricanes Ivan (2004), Katrina, and

Rita (both 2005). With a mild winter, prices dropped more than $2/mmBTU in

January-February, and settled at just over $7/mmBTU in March-May 2006.88

Despite concern regarding winter demand in 2006-07, the average spot price did not

again reach a level close to $10 during that period. Prices are holding steady for

2007, although the consulting firm Global Insight predicted that at $8-9 per million

BTUs, 2007-08 winter gas prices would be somewhat higher than year-earlier

levels.89

Shipping Costs. Both rail and ocean shipping costs have increased

substantially in recent years, though these rising costs have affected the steel industry

in different ways. Rail transportation costs, seen as railways have consolidated and

created more “capitive shippers,” have had a negative effect on industry, particularly

in raising the costs and reducing the options for shipping inputs like scrap and

delivering finished product to customers. According to the Government

Accountability Office (GAO), while rail rates have declined over the long term, they

increased by 9% in 2005, basically for all products across the board.90 The steel

industry specifically reported increases of around a third in rail costs since 2003, and

in some cases as high as 60%. “Transportation costs have escalated to the point that

they now account for 15-20% of the total cost of producing steel.”91

On the other hand, the high increase in ocean shipping rates has not been

unfavorable from the perspective of U.S. steelmakers. According to the Wall Street

Journal, the average price of renting a ship in October 2007 to carry raw materials

Gas price statistics from Global Insight, Steel Monthly Report (November 2005), tab. 1;

and, Natural Gas Weekly (January 11, 2006).

Global Insight. Steel Monthly Report (March 2006), p. 8; and Natural Gas Monthly (May

2006), pp. 1-2 and table 5.

Ibid. (September 2007), p. 2.

U.S. Government Accounting Office. Freight Railroads: Updated Information on Rates

and Other Industry Trends (GAO-08-218T), Testimony before U.S. Senate. Committee on

Commerce, Science and Transportation. Subcommittee on Surface Transportation and

Merchant Marine (October 23, 2007), p. 1.

Thomas A. Danjczek, Steel Manufacturers Assn. Statement, U.S. House. Transportation

and Infrastructure Committee (September 20, 2007), p. 2. For more details on the rail

competition issue, see CRS Rept. CRS Report RL34117, Rail Access and Competition

Issues, by John Frittelli.

CRS-30

from Brazil to China has tripled to $180,000 per day over the cost one year earlier.

That means the cost per ton of shipping iron ore works out at about $88 per ton, or

higher than the $60 per ton price of the ore itself.92 The Global Insight analyst finds

that this means higher prices for steel imports, as well as a discouragement to the

export of ferrous scrap to competing steel producing nations. With relative prices in

the United States falling compared to those of other global producers, “When leadtime risks and the explosion in sea-borne freight rates are incorporated, the advantage

in [steel] imports is minimized or even negated.” This source notes that investment

in ocean shipping, iron ore mines and coke ovens globally should eventually reduce

such domestic price advantages, but all this will take time to come on stream.93

The Impact of the Growth of China

While U.S. domestic demand and input cost factors have helped account for an

overall increase in the price of steel in the domestic market, China’s emergence as

a major, market-oriented economic power is having more of an impact on steel

markets and prices than anything else today. Chinese steel mainly goes to its

domestic market. What has concerned the U.S. steel industry is that, as China adds

new and modernized steel capacity, it will be used increasingly to export surplus steel

as domestic demand is adequately met. Moreover, the steel industry and its

customers have alleged that Chinese steel and steel product exports are unfairly

subsidized. On February 2, 2007, the Office of the U.S. Trade Representative

(USTR) filed a complaint at the WTO against China regarding this general issue.

The Chinese government has responded by some reductions of measures that

encourage steel exports. More broadly it has also taken limited steps to allow its

currency to rise against the dollar on foreign exchange markets, which makes

Chinese products less competitive against U.S.-produced goods. But the steps taken

to date have not been sufficient to satisfy the domestic U.S. steel industry, the Bush

Administration, nor critics of China in Congress.

China as a Steel Producer, Consumer, and Exporter. China has

become the world’s largest steel producer, as discussed in the earlier section on world

output. At the same time, in the years after 2000, it briefly became the largest

importer. It absorbed increasing amounts of the world supply of scrap and other

inputs, while its demand drove the global price of steel higher, notably in 2004.

China’s rapidly growing appetite for steel also drew in high levels of imports from

other major Asian producers such as Japan, Korea and Taiwan, probably diverting

them from the U.S. market. The consequences were higher prices for steelmaking

inputs in the United States and lower availability of imported finished steel at

competitive prices. Meanwhile, U.S. steel consuming industries increasingly must

compete with fabricated steel products from Chinese suppliers.

The Chinese government in 2004 sought to restrain growth by curtailing

consumer credit, thus reducing the growth in demand for products made of steel, such

Wall St. Journal, “Ship Shortage ...”

Global Insight. Steel Monthly Report (September 2007), p. 2.

CRS-31

as motor vehicles. It has also sought to brake the development of capacity, or at least

to insure that new, modern facilities replace outdated mills. But, as Global Insight

analyst John Anton noted, if this were the Chinese central government’s policy, it did

not work.

Chinese steel production has grown at incredible rates, rising 14% in 2001 and

nearly 25% annually since. In context, China and the United States produced

roughly the same tonnage in 2000, but China is likely to produce almost three

times the U.S. output in 2005.94

China once more became a net steel exporter in 2005: 27.6 million MT of

exports, against 27.1 million MT of imports, according to official sources.95 China

also fell behind the United States in total steel imports. In March 2006 a top official

of the China Iron and Steel Association (CISA), an industry body, reassured an

international audience that Chinese steel exports would be about 20 million MT in

2006. This was described by him as a “ reasonable” level, given total capacity of

more than 400 million MT, and he also stated that capacity would be nearly matched

with domestic demand.96 Some private sector sources said that while China still has

significant labor cost advantages, these are counterbalanced by raw material and

energy costs, as both are in short supply in China.97

Despite such assurances and statements, China’s total steel exports in 2006

reportedly more than doubled to 57.4 million MT, while imports fell by a quarter.98

According to the U.S. industry, China was a net steel exporter of 33 million MT in

2006.99 Moreover, in the first half of 2007, official Chinese data indicated that

exports of finished steel from China virtually doubled over the rate for the same

period in 2006. Some of this increase, however, may be attributable to Chinese

producers seeking to beat government measures to discourage steel exports, which

are described below.100

The International Iron and Steel Institute, representing steel producers globally,

has estimated that the rate of growth of Chinese demand for steel will slow in

forthcoming years. Nevertheless, it may still account for more than half of the

anticipated world growth in steel consumption between 2005 and 2015.101 But an

Global Insight, Steel Monthly Report (November 2005), p. 1. According to IISI figures

cited earlier, China in 2005 actually produced four times as much steel as the U.S.

Reported in AMM, “December Increase Makes China Slight Net Exporter of Steel in ‘05”

(January 13, 2006), p. 7.

Ibid., “China’s Steel Exports Will Not Explode in ‘06: CISA Official” (March 29, 2006).

Ibid., “Is the China Threat Overstated?” (May 8, 2006 print ed.), p. 14.

Ibid., “China’s Finished Steel Exports Up” (January 11, 2007), p. 6.

AISI, SMA, and Specialty Steel Institute of North America. “American Steel Industry

Comments on Chinese Steel Paper,” press release (June 1, 2007).

100

AMM, “Finished Steel Exports Soar 98% in First Half” (July 11, 2007), p. 13.

101

Hans Mueller, “IISI Sees Global Expansion Until 2015,” Metal Producing and

(continued...)

CRS-32

analysis produced in May 2007 by a Chinese metals industry organization

emphasized that China has no intention of creating an export-oriented steel industry.

It acknowledged a temporary situation of domestic overcapacity, as government

measures took effect to close old capacity, and to rationalize and modernize the

industry. It further noted measures (summarized in this CRS report below) that the

government was taking to curtail disruptive exports. But the report also noted that

the growth in Chinese demand for and production of steel has coincided with a

resurgence of the industry worldwide, so it argued that the net effect has not been to

harm other countries’ producers.102

Figure 3, based on data presented by industry analyst Charles Bradford to the

Steel Manufacturers Association in May 2007, shows that the Chinese steel industry,

along with that of the United States, is actually one of the two major national

producers least dependent on exports. In the case of China, 2006 exports were only

11% of output, in Bradford’s calculations, while the U.S. figure was just less than

10%. Three leading Asian producers outside China (Japan, Korea and Taiwan)

exported a third or more of production. Canada, Brazil and Russia exported half or

more of their output, Germany two-thirds, and Ukraine nearly 90%. But the problem

is that with China accounting for such a huge share of global output, marginal shifts

by its industry in the direction of increased exports lead to major market disruptions

for other suppliers.103

101

(...continued)

Processing (November-December 2006), pp. 15-16.

102

China Chamber of Commerce of Metals, Minerals and Chemicals Importers & Exporters

(CCCMC). China’s Steel Industry: Dealing with Growth, Consolidation and Rationalization

(May 2007).

103

Leading representatives of the U.S. steel industry are skeptical as to whether a Chinese

promise to limit exports to 10% of production can resolve this issue, or will ever be

implemented; AMM, “US Industry Doubtful of China Pledge on Steel Export Limits” (June

25, 2007), p. 4.

CRS-33

Figure 3. Steel Exports by Country

As a Percent of Total Output 2006

100%

86.7%

Percent

80%

60%

67.9%

54.2%

53.6% 49.6%

40.5% 35.6%

40%

33.1%

20%

11.1% 9.7%

Ukraine Germany Russia

Brazil Canada China

So.

(Taiw an) Korea

Japan

China

U.S.

Source: Bradford Research Inc. and International Iron and Steel Institute.

The concern of U.S. producers is that whenever domestic Chinese demand falls

short of expectations, the U.S. market will see a sharp increase in steel imports from

China. For example, by 2000, China was exporting more than one million MT of

steel annually to the United States. These exports fell off to 582,000 MT in 2003, as

U.S. demand declined and trade safeguards were implemented. But Chinese imports

in the United States almost tripled to more than 1.4 million MT in 2004, increased

again by a third to 1.9 million MT in 2005, and more than doubled again in 2006, as

discussed above. Data for 2006 seem to indicate that, while steel demand in China

is continuing to increase, it is not keeping pace with the building of new, modern

steelmaking capacity, and Chinese exports are likely to grow.104 While the Chinese

central government may be committed to eliminating old capacity, consolidated,

internationally competitive Chinese producers may be even more of a problem for the

U.S. industry in an open market environment.

China’s Proposed Steel Industry Restructuring. In July 2005, the

Chinese government released the China Iron and Steel Industry Development Policy,

prepared by the National Development and Reform Commission (NDRC).

According to official sources, this policy is to consolidate and modernize the

industry, with a specific goal of “strategic reorganization” to create by 2010 two 30million-ton annual capacity producers and several “internationally competitive”

companies at the 10-million-ton level. In a joint statement to the WTO Transitional

Review Mechanism on China’s accession, the United States, Canada and Mexico in

October 2005, “agreed with the goal of an efficient, rationalized steel industry” in

China, but seriously questioned the methods envisioned in the proposed new policy.

104

Ibid. “China Is Awash in Steel and Racing to Exploit a Price Advantage” (June 19, 2006

print ed.), pp. 6-7.

CRS-34

First, they questioned how a state policy with an explicit goal to

shape a specific market outcome would work without “government

making decisions that should be made by the marketplace.”

Specifically they questioned the role that state-owned banks would

have in restructuring the steel industry, the roles of administrative

agencies, and how conflicts between central, provincial and local

governments would be resolved.

Second, they noted that two articles on the state’s role in

implementing policy were questionable under WTO anti-subsidy

rules. Article 16 of the Chinese policy provided for various types of

state support in developing and modernizing the industry. Article 18

“encouraged” the Chinese steel industry to use domestically

produced equipment, and to import equipment only if domestically

made equipment were insufficiently advanced, unavailable or in

short supply.105

The U.S. government included these concerns in direct bilateral discussions with

China on steel policy. In December 2005, the Bush Administration declined to

provide safeguard relief for the domestic steel pipe industry against Chinese imports

(see below). But at that time it did propose to the Chinese a dialogue on steel policy,

within the context of the U.S.-China Joint Commission on Commerce and Trade. In

2006, the U.S. side noted “serious concerns” with the proposed Chinese Steel Policy,

including preferences for domestically produced equipment and technologies, import

and export controls, controls on foreign investment, and “de facto” technology

transfer requirements. “More generally,” U.S. representatives expressed concern

with the entire approach of the policy, in substituting government decision making

for market forces, in direct contrast to Chinese commitments at the time when they

joined the WTO.106

The American steel industry similarly expressed concern with government

interference in the Chinese steel industry. A July 2006 report sponsored by all the

major U.S. steel producer organizations claimed that Chinese steelmakers are

unfairly aided by a wide range of government measures. Entitled The China

Syndrome, the report stated that the Chinese approach includes high levels of

continued government ownership (80% of Shanghai Baosteel, for example),

subsidization through loans from state-owned banks at less than commercial rates,

debt writeoffs, assistance with raw material input costs, and maintenance of an

artificially low currency exchange rate. Some of this effective subsidization results

105

World Trade Organization. Committee on Subsidies and Countervailing Measures.

“Transitional Review Mechanism Pursuant to Section 18 of the Protocol on the accession

of the People’s Republic of China: Questions from Canada, Mexico and the United States

Concerning Subsidies” (G/SCM/Q2/CHN/15, October 13, 2005).

106

Assistant USTR for China Affairs Timothy Stratford. “Statement at Congressional Steel

Caucus Hearing” (June 14, 2006), esp. p. 3. A report on this hearing, which includes

congressional rejoinders to the USTR policy statement is in AMM, “China Fuels Fire of

Caucus Trade Grilling” (June 19, 2006 print ed.), p. 2.

CRS-35

from active national government policy, it was alleged, and some results from the

central government’s failure to control provincial and local government entities.107

In 2007, a more detailed report sponsored by the U.S. steel industry provided a

partial tabulation of the documented subsidies it said were received by the Chinese

steel industry. Limited to publicly reported data by the 20 largest Chinese steel

producers, the report, entitled Money for Metal, calculated that subsidies received by

the Chinese industry totaled U.S.$52 billion (393 billion renminbi, in Chinese

currency). It summarized its analysis of the principal subsidies as follows:

$17.3 billion in preferential loans and directed credit from

government-controlled banks, accounting for the “majority of all

loans in China.”

$18.6 billion in “equity infusions and/or debt-to-equity swaps ... At

least 37 different Chinese steel companies have benefitted, including

all of the major producers.”

$5.1 billion in land-use discounts, necessitated because private land

ownership by industrial enterprises is “nearly impossible in China.”

The report alleges that steel companies are charged only a pittance

for the land-use rights they acquire.

$1.3 billion in “government-mandated mergers.” As part of the

policy of industry consolidation, favored companies, such as

Shanghai Baosteel, have been transferred controlling equity stakes

in smaller competitors at little or no cost.

$258.6 million in direct cash grants, sometimes linked to specific

construction contracts, reported by steel companies.108

The system of subsidization, the report alleges, is linked to government control

of the industry, which it details in a tabular presentation on the 20 largest steel

companies. Of these companies, all except one (number 17 by output) are wholly or

majority-owned by governments. However, in calculating government ownership,

the table essentially lumps together central, provincial, and local levels of

ownership.109 The conflict between the policy goals of these levels of government

is explicitly stated in the report:

All three levels of government maintain separate, and sometimes distinct,

policies that impact the steel industry. While these policies are often in concert

with one another ... the numerous policy directives from the various levels of

government underscore the often competing interests between the central,

provincial and local governments ... Notably, ... many provincial and local

107

Alan H. Price, et al., The China Syndrome: How Subsidies and Government Intervention

Created the World’s Largest Steel Industry (July 2006). For a summary, see AMM, “Steel

Groups say China in Violation of WTO Rules” (July 14, 2006).

108

This summary is abridged from the executive summary in the same authors’ Money for

Metal: A Detailed Examination of Chinese Government Subsidies to Its Steel Industry (July

2007), pp. ii-iii. The detailed analysis of these subsidies is in pp. 25-42, with other types of

subsidies discussed in pp. 52ff.

109

Ibid., Table 1, pp. 8-9.

CRS-36

governments are encouraging the expansion of the local steel industry at the

same time that the central government purports to be eliminating obsolete

capacity and limiting overall capacity.110

The central Chinese government itself recognizes a problem, which it ascribes

to obsolete excessive productive capacity. It indicated plans to shut 100 million MT

of excess capacity, particularly among more than 200 smaller mills in two northern

interior provinces.111 In 2007, after many months of delay, the NDRC drew up an

expanded list of 682 steel facilities, located at 334 sites, which were to be closed by

2010 at the latest. Although the operations affected number in the hundreds, the total

steelmaking capacity would be about 35-40 million MT, or less than 5% of China’s

capacity, according to independent analysis. NDRC is quoted as saying that there

will be further announcements of closures. “However,” the analysis notes, “the

government cannot stop mills developing larger, more efficient facilities that comply

with NDRC guidelines while increasing capacity.”112

Money for Metal does not maintain that there is a monolithic Chinese steel

policy controlled by a single government entity, but rather that industry ownership

and control is in the hands of different government entities with different agendas.

The Chinese industry it describes is not really controlled by “government” as much

as it is controlled by “governments,” in a Communist state that is in a process of

transitioning itself to a more market-oriented economy. The report seems to project

a future in which the U.S. steel industry may confront either a more consolidated and

efficient Chinese industry, able to export whenever it has excess capacity for

domestic demand, or a rampantly expanding industry, which can always cut price to

export excess output — or both existing simultaneously, and subsidized by all levels

of government in China.113

CISA has rejected this analysis of a highly subsidized domestic industry. It

reportedly stated, in a response to the report, that dominance of the industry by a

group of leading, government-controlled companies was a false image, and the

calculation of $52 billion in subsidies “in the past decade lacks proofs and is full of

false accusations.” It maintained that the domestic industry is both more broadly

based and privately held than the U.S. industry report would indicate. In any case,

CISA noted, “It is a common practice for each country, including the U.S., to

subsidize its steel industry as it develops.”114

110

Ibid., pp. 12-13, 19; the intervening pages cite many examples of conflicts between

central government five-year plans, and the implementation in local plans.

111

AMM, “China Reiterates Plan to Cut Excess Iron, Steel Capacity” (July 5, 2006).

112

Steel Business Briefing. SBB Analytics: China, “The NDRC on the War Path” (May 7,

2007), quote from p. 3.

113

Similar points were made by the domestic steel industry in an October 2007 ITC hearing

on China’s steel industry that was requested by Congress. See AMM, “Steelmakers Mount

Attacks Against China on Two Fronts” (October 31, 2007).

114

Ibid., “CISA Lambastes US’ China Steel Subsidy Report” (August 8, 2007).

CRS-37

The CISA position reflected the official reaction of the Chinese government to

the U.S. industry report, as expressed in the session of the U.S.-China Steel Dialogue,

held in early August 2007. The Chinese delegation reportedly attacked the paper as

“propaganda” and replete with “misconceptions.” They claimed that the U.S.

industry abused U.S. trade remedy laws and was itself the beneficiary of subsidies.

One allegation was that PBGC’s takeover of steel industry pensions (see above)

represented a U.S. government bailout of the steel industry. This itself is a common

misconception; though chartered by Congress as a government corporation, PBGC

receives no federal appropriations and is funded by premiums paid by covered private

industry pension plans.115 The meeting apparently ended with no substantive

agreement on policy issues.116

The U.S. WTO Case Against Chinese Subsidies. The Bush

Administration found responses by China regarding U.S. complaints about state

subsidies to be insufficient. On February 2, 2007, the Office of the USTR announced

that it was seeking consultations with China at the WTO on a range of policies that

effectively subsidized Chinese producers, explicitly including the steel industry.

Consultation is the first step in bringing a case under WTO rules against a trading

partner. The USTR statement noted that, “Several of the subsidy programs at issue

appear to grant export subsidies, which provide incentives for foreign investors in

China and their Chinese partners to export to the United States and other markets.”

The statement did note progress in China “to open its market and reform its trade

practices since becoming a Member of the WTO,” and that China made “express

commitments in its accession protocol to abide by WTO prohibitions on the granting

of export and import substitution subsidies. However, the Chinese government has

continued to use a number of industrial policy tools — including these kinds of

subsidies — to support Chinese industry.”117

In specific response to the Administration action, China eliminated one type of

alleged subsidy and announced a new tax program to address other subsidy issues.

This necessitated a re-filing of the U.S. case at the WTO in May 2007. The United

States was joined by Mexico as an original complainant, with Canada, the EU, Japan,

and Australia as third parties to the case.118

Furthermore, other nations have also taken, or are reported to be considering,

trade remedy measures aimed at restrianing steel imports from China. The Canadian

International Trade Tribunal ruled that a type of OCTG product imported from China

injured a Canadian producer, setting the stage for AD/CVD tariffs to be set by the

115

See CRS Report RS22650, “The Pension Benefit Guaranty Corporation and the Federal

Budget,” by William J. Klunk.

116

AMM, “Chinese Fight Back at US-China Steel Dialogue” (August 6, 2007).

117

Office of USTR. “United States Files WTO Case Against China over Prohibited

Subsidies,” press release (February 2, 2007); FT.com, “US-China Tensions Rise over

Subsidies” (February 2, 2007); Washington Post, “U.S. Takes China to WTO over

Subsidies” (February 3, 2007), p. D3; AMM, “US Files Case Against China on Subsidies”

(February 5, 2007).

118

CRS interview with Jean Kemp, Office of USTR (June 22, 2007).

CRS-38

Canadian Border Services Agency.119 European and Mexican steel producers have

initiated or are reportedly planning requests to their authorities for broad trade

restriction measures on Chinese steel imports.120

Chinese Measures to Restrain Steel Exports. The Chinese government

has also taken specific actions to curtail or eliminate policy measures, which,

although they may be legal under U.S. trade law or WTO rules, have the effect of

encouraging steel exports as opposed to domestic sales. These measures included

reduction or elimination of China’s general value-added tax (VAT) rebate of as much

as 17% on exported steel products and adding an export duty on some steel items.

As expressed in the May 2007 Chinese industry paper, “The reduction and

elimination of the VAT tax rebate is designed as a ‘bridge’ measure to rein in exports

while other elements of China’s steel policy take effect and bring supply and demand

into balance domestically.”121 Moreover, in May 2007 China announced

establishment of a steel export licensing system that would apply to “a significant

portion of China’s steel exports.”122

The U.S. government has stated its preference for market-based policy reforms,

including the elimination of systemic subsidies, rather than administrative actions on

foreign trade, as a solution to the question of unfair competition from China. But the

breadth of the U.S. WTO case on Chinese subsidies throughout its economy indicates

how deep-rooted such policies are, and how difficult they may be to eliminate.

Consequently, short-term measures may be necessary to address the problem of

“overheated” steel exports. But in implementing this approach piecemeal and with

border measures aimed at specific products, the Chinese government may also give

the impression that it is manipulating or gaming the trading system product by

product.123 Moreover, the discouragement of steel exports may well just push the

problem downstream, as U.S. steel consuming industries find increased competition

from Chinese producers using cheap domestic steel.124

Such interpretations could be drawn from a quick review of how the Chinese

policy has moved forward since an initial policy circular of September 2006. First,

the government marginally reduced (from 11% to 8%) the export rebate on a range

of steel products (plate, coiled sheet, bars). But it also cancelled rebates of 5% on

some steelmaking alloys at that time, then later established export duties on a wider

119

AMM, “China Seamless Casing Imports Said Injuring Canadian Producer” (October 17,

2007), p. 6.

120

Ibid., “Wire Rod Case in Works by Mexican Producers” (October 31, 2007); Wall St.

Journal, “European Steel Makers to Seek EU Tariffs on China Steel Imports” (October 29,

2007) p. A2 .

121

CCCMC, China’s Steel Industry, p. 16.

122

AMM, “China Imposing Licensing System of Steel Exports” (May 1, 2007).

123

See AMM, “China Export Tax Shifting Focus to High-Value Steel” (July 30, 2007). This

article notes a shift away from exports of lower value products, such as rebar, and toward

higher value items such as heavy plate and galvanized steel coil.

124

Ibid., “Potential Wire Flood Perturbs Rod Producers” (June 7, 2007); Global Insight.

Steel Monthly Report (September 2007), p. 6.

CRS-39

range of inputs. These steps could be viewed as helping the competitive position of

China’s steel industry by keeping raw materials at home. In April 2007, at the time

of a U.S.-China economic dialogue, China eliminated the 8% rebate altogether on

some flat-rolled products, and reduced it from 11% to 5% on others. However,

China left in place the 11% rebate on steel pipe and tube exports. In May 2007,

China added export duties to steel bar and rod exports. In June 2007, after China was

included in a U.S. producers’ trade petition on pipe and tube, China announced it

would end the export rebates offered on these products as of July 1, 2007. But this

decision excluded oil country tubular goods, on which the ITC had just revoked

remedy duties on imports from other countries (see below).125

China’s Foreign Investment Policy on Steel. In view of the relative

fragmentation of China’s steel industry, which still makes Chinese companies

potential targets in an era of international consolidation and strong domestic growth,

the Chinese government also included steel companies in a proposed new foreign

investment review procedure. In its Steel Policy of 2005, China banned foreign

acquisition of large steel mills, because it apparently believed they would be

especially vulnerable to takeovers during a period of restructuring of state-owned

assets. In mid-2006 the Ministry of Finance announced a new foreign investment

review body, to be organized under the NDRC, for the purpose of protecting national

“economic safety” in cases of acquisitions by foreign investors. In December 2006

new guidelines for state-owned enterprises did not include steel on the list of seven

industries considered most crucial for national security. This left it open to

speculation that the industry would be made more responsive to market pressures,

and that foreign investors could play a role in industry consolidation.126

China’s steel industry remains atomized, but like the industry globally it is

undergoing consolidation. In 2005, there was only one Chinese company in the top

10 internationally, and only two in the top 20. As indicated in Table 1, by 2006 there

were two in the top ten: Shanghai Baosteel and Tangshan, producing 23 million MT

and 19 million MT, respectively. Three other Chinese companies were in the top 20,

giving China a total of one-quarter of the companies at this level.

Whatever the implications that may be drawn from the Chinese government’s

official statements on foreign investment, there is no apparent indication that it

intends to liberalize investment procedures in the steel industry. While Mittal Steel

was able to make one minority investment in a Chinese steel tube manufacturer, the

125

Kemp USTR interview (June 22, 2007) was extremely helpful in listing and analyzing

the principal Chinese policy actions. Some of them were described and listed in various

issues of AMM and there was a systematic listing through April 2007 in CCCMC, China’s

Steel Industry, attachment 1, but this is now out of date, and also difficult to read without

detailed knowledge of harmonized tariff codes.

126

Ibid., “China to Step Up Scrutiny of Some Foreign Holdings” (June 20, 2006), p. 6; and

“China May Loosen Grip on Steel, Nonferrous” (December 20, 2006), p. 4; Bureau of

National Affairs. Daily Report for Executives (DER), “China Sets New Guidelines to

Consolidate Government Ownership of Key Industries” (December 20, 2006), p. A-2. But

also see, Washington Post, “China Gets Cold Feet for Foreign Investment” (February 2,

2007), p. D1.

CRS-40

successor company, ArcelorMittal, has been reportedly unsuccessful in seeking to

make large minority investments in other major Chinese steel companies. These

investments have reportedly been stalled by NDRC scrutiny, and by preference for

solutions involving only Chinese companies.127

Congressional Reaction to Competition from China. Congress has

been concerned regarding the competitive impact of competition from China that has

been deemed unfair, although it has not considered legislation specifically aimed

against imports of steel or steel products. Many Members of Congress and

representatives of U.S. steel producers and consumers appear to feel that the issue of

Chinese subsidization is even broader than the types of measures that may be

addressed in the WTO case.128

China’s government has maintained a fixed exchange rate against the dollar,

leading many U.S. manufacturers to claim that in two-way trade this is unfair,

because China’s currency value does not reflect the country’s growing industrial

competitiveness. In the 109th Congress S. 295, co-sponsored by Senators Charles

Schumer and Lindsey Graham, would have added a 27.5% tariff to all imports from

China unless the President could certify within six months that China is no longer

manipulating its exchange rate. It was included as an amendment to the Foreign

Affairs Authorization Bill (S. 600, Title XXIX) on April 6, 2005, when the Senate

voted 67-33 not to table the amendment. The sponsors agreed to withdraw the

amendment, provided they were guaranteed a floor vote within six months on S. 295.

In July 2005 the Bank of China announced a new exchange rate policy, which tied

its currency to an international currency “basket,” rather than directly to the dollar —

a policy change that had the effect of a slight upward revaluation. The Senate

subsequently agreed further to postpone floor action in consideration of other steps

that the Chinese government might take.129

U.S. steel producers joined with their customers in the 109th Congress to support

legislation that would allow U.S. producers to bring countervailing duty (CVD) cases

against exporters alleged to be receiving government subsidies from governments of

countries that are designated nonmarket economies, such as China. Commerce

Department enforcement policy has been not to bring CVD cases in these

127

AMM.com, “Chinese Steelmaker Laiwu Iron Focuses on Developing Quality, Not

Quantity” (April 26, 2007); “Beijing Backs Baosteel’s Takeover of Baotou Iron & Steel”

(April 30, 2007); and, “Asia: The Silk Curtain Is Slowly Closing on Foreign Investment”

(July 1, 2007).

128

See comments in AMM, “US Case vs. China” (February 5, 2007), for example, as well

as the legislative initiatives that are described below.

129

CRS Report RS21625, China’s Currency: A Summary of the Economic Issues, by Wayne

M. Morrison and Marc Labonte. See floor speeches of co-sponsoring Sens. Graham and

Schumer on November 16, 2005 (Congressional Record, S12924-95). The principal cosponsors announced in March 2006 a further indefinite postponement of seeking action on

the measure, following discussions with high-level representatives of the Chinese

government. See New York Times, “Trade Truce with China in the Senate” (March 29,

2006); and, AMM, “Schumer-Graham Bill to Impose Punitive Tariff on China Stalls Out”

(October 2, 2006), p. 11.

CRS-41

circumstances, but rather to require U.S. producers to seek trade relief exclusively

through antidumping laws.130 On July 27, 2005, the House passed, by a vote of 255168, H.R. 3283, a bill introduced by Representative Philip English, that would have

applied U.S. countervailing duty law to nonmarket economies (NMEs, such as

China), require extensive monitoring of China’s commitments on trade and

intellectual property rights, and require the Treasury Department to report on China’s

new currency mechanism. The Senate took no action on this legislation during the

109th Congress.

Since then, the Treasury Department has reviewed China’s exchange rate policy,

as part of its semi-annual report to Congress on the dollar exchange rate and foreign

currency policies. During this period, the Treasury Department has yet to designate

China as a currency manipulator for trade advantage.131 A number of bills have been

introduced in the 110th Congress to address this issue, in an effort to encourage the

Bush Administration to take more aggressive action against alleged Chinese currency

manipulation, including trade sanctions, or remedies to assist affected U.S.

producers. The following analysis of these bills is excerpted from CRS Report

RL32165, China’s Currency: Economic Issues and the Options for Trade Policy, by

Wayne M. Morrison and Marc Labonte:

H.R. 321 (English) would require the Treasury Department to determine

if China has manipulated its currency and to estimate the rate of that

manipulation (if such a determination were made), which then would

require the imposition of additional tariffs on Chinese products (equal to

the estimated rate of manipulation). The bill also calls on the United States

to file a WTO case against China over its currency policy and to work

within the WTO to modify and clarify rules regarding currency

manipulation.

H.R. 782 (Tim Ryan) S. 796 (Bunning) would apply U.S. countervailing

laws (dealing with government subsidies) to products imported from

non-market economies (such as China) and would establish an alternative

methodology for estimating the amount of government subsidy benefit

provided if information is not available on the amount of subsidies given

to various industries in that country. The bills also make exchange rate

misalignment actionable under U.S. countervailing law, require the

Treasury Department to determine whether a currency is misaligned in its

semi-annual reports to Congress on exchange rates, prohibit the

Department of Defense from purchasing certain products imported from

China if it is determined that China’s currency misalignment has disrupted

U.S. defense industries, and would include currency misalignment as a

factor in determining (China-specific) safeguard measures on imports of

Chinese products that cause market disruption.

130

For details on this issue, see CRS Report RL32371, Trade Remedies: A Primer, by

Vivian C. Jones.

131

The issue is summarized in CRS Report RS21625, China’s Currency: A Summary of the

Economic Issues, by Wayne M. Morrison and Marc Labonte.

CRS-42

H.R. 1002 (Spratt) would impose 27.5% in additional tariffs on Chinese

goods unless the President certifies that China is no longer manipulating

its currency.

H.R. 2942 (Tim Ryan) would apply countervailing laws to nonmarket

economies, make an undervalued currency a factor in determining

antidumping and countervailing duties, require Treasury to identify

fundamentally misaligned currencies and to list those meeting that criteria

for priority action. If consultations fail to resolve the currency issues, the

USTR would be required to take action in the WTO.

S. 364 (Rockefeller) would apply U.S. countervailing laws on non-market

economies and would make exchange rate manipulation actionable under

such laws.

S. 1607 (Baucus) would require the Treasury Department to identify

currencies that are fundamentally misaligned and to designate such

currencies for priority action under certain circumstances in its

semi-annual reports to Congress on exchange rates. If after consultations

the country maintaining the designated currency policy fails to adopt

appropriate policies within 180 days, the U.S. would make currency

undervaluation a factor in determining antidumping duties, ban federal

procurement of products or services from the designated country, bar

financing by the U.S. Overseas Private Investment Corporation (OPIC),

and would require U.S. officials to oppose multilateral financing for that

country. If the designated country failed to take appropriate measures, the

USTR would be required to file a case in the WTO, and the Treasury

Department would be directed to consider taking remedial intervention in

international currency markets. A modified version of the bill passed the

Senate Finance Committee on July 31, 2007.

S. 1677 (Dodd) requires the Treasury Department to identify countries

that manipulate their currencies regardless of their intent and to submit an

action plan for ending the manipulation; and gives Treasury the authority

to file a case in the WTO. The bill was approved by the Senate Banking

Committee on August 1, 2007.132

As it has done twice before, and within a few days of the June 2007 Treasury

report, the Office of the USTR rejected a petition under Section 301 of U.S. trade law

to bring a case against China on currency manipulation. The steel industry was

among those joining the petition. USTR Susan Schwab stated the Administration’s

policy that “firm engagement with China, in concert with international institutions

and other countries,” was “likely to be more productive” than following a process

under U.S. trade law.133

132

CRS Report RL32165, China’s Currency: Economic Issues for U.S. Trade Policy, by

Wayne M. Morrison and Marc Labonte. For a press analysis from the steel industry

perspective on Senate Finance approval of S. 1607, see AMM, “Currency Bill Gets Panel

OK, Not Treasury’s” (July 30, 2007).

133

Ibid., “Engagement with China Key, USTR Says in Axing ‘301’ Petition” (June 15,

2007), p. 2.

CRS-43

Meanwhile, the Chinese government intervened in a U.S. antidumping case to

request that its designation be changed to that of a market economy for the purposes

of U.S. antidumping law. On December 22, 2005, the Department of Commerce

received a request from respondents in an antidumping investigation on imports of

lined paper (A-570-901) to revise U.S. policy and to designate China as a market

economy. On February 2, 2006, Commerce also received a submission from the

Chinese government in support of this request. But the Commerce Department found

that “despite recent and ongoing reform efforts, the significant extent of continued

government intervention in certain important sectors of the economy warrants

maintaining China’s designation as an NME country.”134

Later in 2006 the Commerce Department instituted an investigation into

allegedly dumped and subsidized imports of paper from Asian countries, including

China. This is the first CVD investigation since 1991 to target an NME. On

December 15, 2006, the ITC found material injury to domestic producers in the case,

allowing it to proceed. On the same day, the Commerce Department requested public

comments on application of U.S. CVD laws to imports from China.135 Responding

to this request on January 19, 2007, Representatives English, Artur Davis, Peter

Visclosky and 29 other House members, including many from the Congressional

Steel Caucus, wrote that it was their “strong contention that countervailing duty law

should be applied to nonmarket economy countries ...” and that it is “a fundamental

misinterpretation of current law to not apply CVD law to NME countries.”136 On

April 9, 2007, the Commerce Department International Trade Administration

announced a preliminary determination that countervailable subsidies were being

provided by the Chinese government to the paper industry, and that determination

was confirmed on October 18, 2007.137

On August 1, 2007, Senator Max Baucus, chair of the Finance Committee, and

two co-sponsors introduced another trade bill, S. 1919, which, in part, deals with the

NME issue. Section 401 of this bill is similar to other legislation by including NMEs

under CVD rules. Unlike the other bills concerned with subsidization in NMEs,

however, this one is silent on the currency manipulation issue.138

134

U.S. Dept. of Commerce. “Fact Sheet: The People’s Republic of China’s Request for

Review of Non-Market Economy Status,” and “The People’s Republic of China (PRC)

Status as a Non-Market Economy (NME),” memorandum, antidumping investigation A-570901 (May 15, 2006).

135

DER, “ITC Sees Possible Injury from Asian Paper; Commerce Seeks Comment on

Chinese CVDs” (December 18, 2006), p. A-12; U.S. Dept. of Commerce. International

Trade Administration. “Application of the Countervailing Duty Law to Imports from the

People’s Republic of China: Request for Comment,” Federal Register (December 15, 2006),

p. 75507.

136

Reps. Artur Davis, Philip English, et al. Letter to Secretary of Commerce Carlos

Gutierrez (January 19, 2007).

137

Federal Register (April 9, 2007), esp. p. 17486, and, (October 25, 2007), pp. 60645-48;

AMM, “Subsidy Duties vs. China Hold; Industry Cheers” (October 22, 2007).

138

Congressional Record (August 1, 2007), S10609-10; AMM, “New Bill Attempts to Plug

(continued...)

CRS-44

Steel Policy Issues

Failure to Achieve a Global Steel Subsidies Agreement

In recognition of the global nature of steel industry issues, President Bush

proposed international discussions on the elimination of excess steel capacity and

restrictions on future domestic industry subsidies, as part of his general steel policy

announcement of 2001. Other governments agreed to join representatives of the

Bush Administration in discussing overcapacity and trade issues under the auspices

of the Organization for Economic Cooperation and Development (OECD), in a

process that started in mid-September 2001. The industrial, steel-producing members

of the OECD were joined by major non-OECD steel producers, such as India, Russia,

and, during later stages of the talks, China. The early stages produced indications by

participating governments of capacity reductions totaling about 140 million MT of

crude steelmaking capacity that could be made in their countries by the end of

2005.139 But this was not followed by definitive commitments to close capacity, nor

have the participants agreed on the basis for an international agreement to end

domestic subsidies to the steel industry. Negotiations were suspended indefinitely

in 2004, though the parties agreed to continued future meetings.

By June 2003, the OECD’s staff had reportedly constructed a draft proposal that

outlined compromise proposals on “six elements negotiators believe are crucial in

forming the framework of an agreement.”140 But the parties deadlocked beyond that

point, as the recovery of global steel markets and the subsequent end of the U.S.

safeguard tariffs seemed to reduce the impetus for compromise. Countries such as

Brazil and India want a recognized right to continue to subsidize certain aspects of

their steel industries, and rejected any offer to accept a phase-in period to full

elimination of subsidies. There was also a related issue as to whether subsidies

should still be countervailable, even if they are notified by signatories and are

considered legitimate under exceptions to an agreement. The United States, on the

one side, and Japan and the EU on the other, differed as to whether subsidies should

be allowed for R&D activities and environmental upgrades, as might be required, for

example, by the Kyoto Treaty on Climate Change. The U.S. steel industry itself

consistently lobbied the U.S. Administration to oppose any international acceptance

of steel industry subsidies, except as related to a plant closure.141

While the basic principle of far-reaching subsidies discipline was apparently

accepted, no agreement could be reached by mid-2004. At that point participants

138

(...continued)

Holes in How Trade Issues Are Handled” (August 3, 2007), p. 4.

139

This estimate was cited in DER, “Major Steel-Producing Countries Launch Talks on

Banning Subsidies at OECD Meeting” (December 20, 2002).

140

Nancy E. Kelly, “Steel Talks to Kick Off in Paris, Six Issues Seen Hot for Debate,”

AMM (June 10, 2003).

141

The major issues and course of the talks were reviewed in detail in CRS Report

RL31842, Steel: Section 201 Safeguard Action and International Negotiations, by Stephen

Cooney, pp. 35-40 (out of print, but available from author).

CRS-45

agreed that, while the OECD would continue to monitor developments in steel

markets, further discussions would be suspended pending a review in early 2005.142

But a January 2005 meeting at the OECD produced no further evident progress in the

discussions. A number of private sector U.S. representatives of the steel industry at

the discussions stated that many governments were further subsidizing new

steelmaking capacity as the global market for steel boomed. The OECD members

present did agree to continue the operations of the Steel Committee.143

To further preparations for this meeting, OECD staff drafted a proposed

“blueprint” for a steel subsidies agreement. It was generally designed to ban a broad

range of steel industry subsidies across the board; in commentaries on the blueprint,

OECD officials stated that 90% or more of historical subsidies would be prohibited.

The details of the document proposed a series of solutions to outstanding issues.

A major issue was “actionability,” e.g., subjection of subsidies to trade remedy

laws. If a proposed subsidy were notified to the review committee that was to be

formed under the proposal, and this were duly “approved” by that committee by

“consensus” (unanimity), then subsidies should not be countervailable under trade

laws of participating countries. The OECD staff claimed that “all subsidies that are

actionable, remain actionable,” and that proposed de minimis standards in the

blueprint actually reduced the levels that are allowed anyway under U.S. trade law.144

Representatives of the American steel industry reacted negatively to the

blueprint. Most discussion focused on “exceptions” that would be permitted, and

types of payments that would constitute allowable subsidies. An executive of U.S.

Steel, for example, was especially concerned about the question of “actionability,”

that is, subsidies allowed under the agreement could not be subject to U.S. trade

remedy laws. The general view of the industry, as reported in trade journal articles,

was that an agreement designed to ban subsidies should not instead focus on carving

out exceptions to subsidy discipline.145

By October 2005 the responses to the OECD staff blueprint did not indicate that

the participating countries were moving toward a consensus on outstanding issues.

142

The official paper describing the state of negotiations in addressing key issues is OECD

SG/STEEL (2004)3. “Steel Agreement Issues” (June 29, 2004). Reports on the stalemate

include DER, “OECD Steel Subsidy Talks Suspended Until 2005” (June 30, 2004), p. A-1;

Inside U.S. Trade, “Countries Agree to Shelve Formal OECD Steel Talks” (June 28, 2004).

143

AMM, “High Steel Demand Cited for Killing Global Subsidy Deal” (January 19, 2005),

p. 1.

144

OECD. “Blueprint for a Steel Subsidies Agreement,” attachment to letter from Deputy

Secretary General Herwig Schlögl (March 31, 2005); and, “Steel Subsidies Agreement:

Blueprint,” presentation by Wolfgang Hübner to AISI/SMA (May 17, 2005). Reports on

development and release of the blueprint were in AMM, “Steel Subsidy Talks Get Another

Chance to Work” (March 24, 2005); and, “OECD Delivers Blueprint for Steel Subsidies

Pact” (April 4, 2005).

145

AMM, “Pre-Agreed OECD Subsidies Dubbed a ‘Deal-Killer’ for U.S.” (April 8, 2005);

and, “OECD’s Blueprint Bites into Steel Subsidy Limits” (May 18, 2005).

CRS-46

The OECD therefore terminated the high-level discussions.146 The OECD Steel

Committee, comprised of representatives of member governments and other invited

participants, continues in existence. In future meetings, the committee may review

steel industry developments in Asian countries, raw material issues, and globalization

of the steel sector.147

Repeal of the Byrd Amendment

Related in part to the financial difficulties of the U.S. steel industry in the late

1990s, the Continued Dumping and Subsidy Offset Act (CDSOA), was signed into

law in October, 2000. The CDSOA is known as the “Byrd Amendment,” because the

West Virginia Senator added it to the FY2001 Agriculture appropriations bill (P.L.

106-387).148 It requires antidumping and countervailing duties to be deposited in a

special account and distributed annually to domestic industry petitioners, who meet

eligibility criteria, to offset expenses incurred as a result of the dumped or subsidized

imports. Steel companies benefitted from distributions under this law, which was

successfully challenged in the WTO. The U.S. government lost its appeal and said

that it would comply with the WTO finding.149 Both houses of Congress approved

a bill that included repeal of this provision, but required the distribution of duties

collected on entries of goods made and filed before October 1, 2007 (P.L. 109-171,

§7601). The repeal went into effect as scheduled, and AD/CVD duties henceforth

will revert directly to the U.S. Treasury Department.150 Some U.S. trading partners

did not consider this an adequate implementation of the WTO ruling.

The U.S. steel industry has generally been a major recipient of the customs

duties distributed under the Byrd Amendment. “At least $1.4 billion in Byrd

Amendment payouts have been distributed since 2001, two-thirds of which went to

only three industries: bearings, steel and candles,” according to one source.151 For

Fiscal Years 2001-04, steel companies received disbursement checks totaling $129

million out of a total of $1.035 billion, according to GAO calculations. U.S. Steel

was the largest recipient in the industry, at $22.6 million. AK Steel received $11.3

million. ISG received a total of $10.4 million during this period, while one of its

predecessor companies, Bethlehem Steel, received $6 million before its acquisition

by ISG. The other major steel industry recipients were three stainless and specialty

146

DER, “OECD Calls Off Deadlocked Multilateral Steel Negotiations” (October 7, 2005).

147

Communication to CRS from U.S. Dept. of Commerce. International Trade

Administration (January 11, 2006); AMM, “Long-Dead Steel Subsidy Talks Still Influential:

OECD Official” (June 19, 2006 print ed.), p. 2.

148

Included as Title X; codified at 19 USC §1675c.

149

For a summary history of the measure, see CRS Report RL33045, The Continued

Dumping and Subsidy Offset Act (‘Byrd Amendment’) , by Vivian C. Jones and Jeanne J.

Grimmett.

150

AMM, “Consumers Cheer As Byrd Makes Final Landing” (October 3, 2007), p. 8.

151

Ibid.

CRS-47

steel producers, Carpenter Technology, Allegheny Ludlum and North American

Stainless, which each received between $10 million and $13 million.152

By far the leading beneficiary of Byrd Amendment disbursements was the

Timken Company, a major manufacturer of roller bearings and steel used in bearings,

and other bearing manufacturers that Timken acquired or controlled. According to

the GAO, $205 million was paid out in 2001-04 to Timken alone, while a further

$135 million was paid out to Torrington (a company acquired by Timken in 2003),

and $55 million was paid to MPB Corporation, a subsidiary of Timken. These

amounts totaled nearly $400 million, accounting for almost all the funds distributed

to the U.S. domestic bearings industry, and about 40% of all duties distributed under

the Byrd law.153

For FY2005, this pattern continued, albeit with some adjustments. Overall, total

disbursements under the program fell from $284 million to $227 million, with more

than a third of the funds again going to Timken ($81 million). U.S. Steel’s receipts

took a large one-year drop from $7.1 million to $1.5 million, while the total received

by the newly formed Mittal Steel, including its subsidiaries, was more than $3

million. The leading steel industry recipient in FY2005 was AK Steel, which

received $7.1 million. Stainless and specialty steel companies were again among the

leading recipients, while the only minimill operator to receive more than $1 million

was Gerdau.154

The Bush Administration proposed repeal of the Byrd Amendment in its

FY2004-06 budget requests, on the grounds not only of the need to comply with

WTO rulings, but also because it argued that the law represented a form of “doubledipping” and corporate welfare. Legislation to modify or repeal the law was

introduced in the Senate in the 108th Congress, but no action was taken on these

measures.155 In the 109th Congress, H.R. 1121, a measure to repeal the Byrd

Amendment, was introduced on March 3, 2005, by Representative Jim Ramstad, a

member of the Ways and Means Committee, and co-sponsored by Representative

Clay Shaw, chairman of that committee’s Trade Subcommittee. The Consuming

Industries Trade Action Coalition, which has consistently opposed steel industry

trade policy efforts, announced that repeal of the law was a top priority in the 109th

152

U.S. Government Accountability Office. Issues and Effects of Implementing the

Continued Dumping and Subsidy Offset Act, GAO Report 05-979 (September 2005), fig. 8

and tab. 8.

153

Ibid., tab. 5. The skewed distribution of funds under the law was a major point made in

comments by the GAO, and critics such as House Ways and Means Committee Chairman

Bill Thomas; see “Trade Law Opponents Point to Stats from GAO,” Washington Post

(September 27, 2005). Discussion of the reasons for this distribution and further analysis

are in CRS Report RL33045.

154

AMM, “More or Less, It’s a Nice Chunk of Change” (December 12, 2005 print ed.), p.

155

CRS Report RL33045.

CRS-48

Congress.156 The GAO found that, “Some steel companies acknowledged that the

CDSOA disbursements have not been significant in relation to their size or capital

expenditure needs,” and that disbursements for many amounted to less than 1% of

net sales in a recent fiscal year. But it also found that the industry generally agreed

that the law has had a “positive impact.”157 Both the steel industry and the USWA

strongly supported keeping the law in place.158

On October 26, 2005, with the support of Chairman Bill Thomas, the House

Ways & Means Committee added repeal of the Byrd Amendment to a budget

reconciliation package. A motion to delete the Byrd repeal, offered by Representative

Stephanie Tubbs Jones, was defeated 21-18. The full package was then approved in

committee 22-17.159 Repeal of the provision thus became part of the bill on budget

reconciliation and deficit reduction (H.R. 4241), which went to the House floor,

where it was approved on November 18, 2005, by a vote of 217-215.160

Subsequently, the Senate voted 72-19 to instruct conferees on the legislation not to

accept any repeal of the Byrd Amendment.161 Nevertheless, a modified version of the

repealer was included in S. 1932, the conference report on the Deficit Reduction Act

of 2005. The bill was passed by the Senate on December 21, 2005, on a vote of 5150, decided by the casting vote of Vice President Cheney.162

In the House-Senate conference on S. 1932, the effective date of repeal was

pushed back until October 1, 2007, reportedly at the insistence of Senator Larry

Craig.163 On the floor, a colloquy between Senator Craig and Majority Leader Bill

Frist clarified that duties assessed under antidumping and countervailing duty

(AD/CVD) orders on entries of imports before that date will be distributed to eligible

supporters of the orders, as specified in the law, even though final distribution may

occur after that date.164

156

AMM, “CITAC Adds Muscle to Push Repeal of Byrd Amendment” (February 18, 2005),

p.1.

157

GAO Rept., p. 70.

158

See, for example, Washington Post, “... Stats from GAO,;” on quotes from USWA

President Gerard; and, AMM, November 21, 2005, and November 28, 2005 print ed. on steel

industry reaction to inclusion of Byrd Amendment repeal in House legislation.

159

DER, “Ways and Means Committee Approves Repeal of Byrd Law” (October 27, 2005),

p. A-25.

160

AMM, “House Repeals Byrd, Senate Fate Uncertain” (November 21, 2005), p. 1.

161

DER, “Senate Urges Conferees to Drop Byrd Law Repeal from Budget Bill” (December

16, 2005), p. A-9.

162

Inside U.S. Trade, “Bill Containing Byrd Repeal Clears Senate with Cheney’s Vote”

(December 21, 2005); Washington Post, “Senators Vote to Kill Trade Law” (December 22,

2005), p. D1; Wall St. Journal, “U.S. Firms Face Loss of Trade-Duty Revenues” (December

23, 2005).

163

Congress Daily, “‘Byrd’ Repeal in Budget Measure Contains Key Compromise”

(December 20, 2005).

164

Congressional Record (December 21, 2005), S14206.

CRS-49

The EU, Canada, Japan and Mexico, which were involved in the WTO case

against the Byrd Amendment policy, have implemented retaliatory tariffs as

authorized by the WTO. The annual total of these tariffs against U.S. exports is $114

million. They remain in place, pending the final repeal of the law, and some of the

complainant governments have indicated concern that trade remedy duties collected

by October 1, 2007, will continue to be disbursed.165 Distributions continue to be

administered under the Byrd Amendment. The FY2006 distribution was scheduled

to include at least $41 million to Timken from Japanese and German bearings cases,

and $7.2 to U.S. steelmakers from hot-rolled steel and stainless steel strip from

Japan.166

Industry Petitioners Lose Wire Rod

Antidumping Case — Pursue Others

As noted in a Congressional Budget Office analysis, the steel industry is by far

the largest user of U.S. AD/CVD orders. The CBO in 2004 counted 131 AD/CVD

orders against imports of steel mill products then in place, plus a further 30 orders

against imported iron and steel pipe products, and 30 orders against assorted other

iron and steel products.167

On November 10, 2005, five U.S. producers of carbon and alloy steel wire rod

joined in a petition to the Commerce Department, alleging that they were being

injured by imports of this product from China, Turkey and Germany. The petitioners

especially focused on China, stating that Chinese producers were being “aggressive,”

and noting margins of 300%, compared to lower margins for the other countries.

Imports from the three countries increased from 12% of the U.S. market in 2002 to

a quarter of the market or more in 2004 and the first half of 2005, according to the

petitioners.168

On December 1, 2005, the ITC held its hearing on the preliminary determination

of material injury, listening to the petitioners, as well as representatives of wire rod

users, who claimed that imports were necessary, following shortages experienced in

165

DER, “Trade Partners Give Cautious Response to U.S. Movement on Byrd Amendment”

(January 23, 2006), p. A-1. On May 1, 2006, the EU raised its trade sanctions against the

Byrd Amendment by about 30%, to $37 million per year; European Commission. “EU

Imposes Revised Measures in Response to Continued US Byrd Amendment Payments,”

press release (May 1, 2006). The response of the U.S. government to continued sanctions

was that it fully implemented WTO findings by repealing the Byrd Amendment; WTO.

“2006 News Items — Dispute Settlement Body” (June 19, 2006), pp. 4-5.

166

Ibid., “Byrd Still Has Wings” (June 18, 2007), p. 10.

167

Congressional Budget Office. “Economic Analysis of the Continued Dumping and

Subsidy Offset Act of 2000,” attachment to letter from Director Douglas Holtz-Eakin to

Rep. Bill Thomas, Chairman, House Ways and Means Committee (March 2, 2004), p.3. The

CBO count pre-dated the December 2006 decision to terminate 17 AD/CVD orders on

imports of corrosion-resistant carbon steel and cut-to-length steel plate, as discussed below.

168

AMM, “U.S. Wire Rod Makers Rap Imports from 3 Nations” (November 14, 2005), p.

CRS-50

2004.169 On December 23, 2005, the ITC announced, in a unanimous 6-0 decision,

a negative injury finding that terminated the case.170

While fewer AD/CVD cases have been brought by the steel industry in recent

years, it is continuing to use this instrument to defend its trade interests. In June

2007, six U.S. producers of welded steel pipe and the USWA filed a new petition

asking for AD and CVD duties to be placed on imports of pipe not more than 16” in

diameter from China, and the ITC in July voted for a preliminary finding of injury.

It also voted similarly in July in a case involving imported nails from China and the

United Arab Emirates. In both cases, the ITC vote was unanimous.171 The only

remaining U.S. producer of steel wire garment hangers, M&B Metal Products of

Alabama, filed a regular AD case in July 2007 against imports from China, after his

industry failed to receive remedy assistance in a China safeguard case (see below).

He also won a unanimous ITC preliminary determination of injury.172 The ITC also

made a preliminary determination in August 2007 of injury in a case brought by the

U.S. pipe and tube industry on light-walled steel rectangular pipe and tube imports

from China, Mexico, Korea, and Turkey.173

President Bush Denies Relief in China Safeguard Case

While the ITC rejected the wire rod producers’ antidumping case, it had ruled

in favor of a safeguard petition brought by steel pipe producers under the special

China safeguard provision of Section 421 of the 1974 Trade Act.174 The Section 421

safeguard was negotiated with China as part of the U.S. agreement to China’s WTO

accession package, and added by Congress to U.S. trade law in 2000. But as in three

previous cases on which the ITC had recommended remedies under this provision,

including one case involving steel wire used in coat hangers, President Bush rejected

any safeguard remedies.

Safeguard actions are different from AD/CVD cases, in that petitioners do not

have to demonstrate actions by exporters that are deemed unfair under U.S. trade law.

In a regular safeguard case, however, petitioners do have to demonstrate “substantial”

injury, e.g., injury from imports that is greater than any other cause. In a China

safeguard case, petitioners need only demonstrate a lesser standard of injury, that of

169

AMM, “He Said, She Said as Rod Case Commences” (December 5, 2005 print ed), p. 2.

170

USITC. News release 05-152, “ITC Votes to End Cases on Carbon and Certain Alloy

Steel Wire Rod from China, Germany and Turkey,” Investigation nos. 731-TA-1099-1101

(December 23, 2005); DER, “ITC Finds No Injury from Imports of Wire Rod from China,

Germany, Turkey” (December 28, 2005), p. A-15; AMM, “ITC Finds No

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