American Steel Industry - Research Paper Example

American Steel Industry Introduction The American steel industry is an incorporated steel producer based in the United s. It operates in many countries all over the world with major operations in Canada and Central Europe. The industry is ranked among the ten largest steel producers in the world in terms of sales. It is still the largest domestic steel producer in the U.S. although it does not produce as much steel as it would be expected. This paper looks at some of the aspects that apply to the American steel industry. This includes industry concentration, barriers of entry that exist in the industry, nature and extent of competition in the global market, pricing policies among other aspects. Industry concentration One of the industrial relations patterns that have emerged and which the international leadership of the united steelworkers of America appears to be advocating is a new cooperative partnership, modeled after the 1986 National Steel Agreement. This new industrial relations model includes significant quality and flexibility-enhancing work restructuring coupled with an increased share of compensation linked to firm performance and productivity in exchange for job security guarantees and unprecedented employee and union participation and information sharing at all levels of the company (Anon 2). Economic, technological and institutional changes in the 1980s have fundamentally transformed the industrial relations system in the American steel industry. Prior to the 1980s, the bargaining structure in steel matched the concentrated and centralized nature of the industry as a whole. Not only did a multi-employer bargain set the pattern for the wider industry, but also there was coordination of pay for particular jobs through the co-operative arrangements. Barriers to entry The inaccessibility to potential entrants of requisite iron ore supplies of high grade has imposed a major barrier to entry to the American steel industry. In the period since the reconstruction of Europe and Japan following the Second World War, earlier reductions in tariffs on steel have invited the influx of foreign supplies; until at present foreign producers are supplying an appreciable minor fraction of the American market. These foreign suppliers are drawing on iron ore reserves that have not been generally accessible to potential entrant firms that might have produced steel in America. As a result, the barrier to entry to the American steel market that depended on the close holding of domestically available iron ore deposits by established American firms has been appreciably reduced. Global competition American steel has apparently regained its long-run competitiveness but a number of problems remain. The integrated firms still face strong competition from domestic mini-mills and foreign steelmakers. In 1950, more than 45% of the world’s steel was produced in the U.S. The conditions under which the U.S. steel industry thrived during this period consisted of steadily increasing demand for steel and the superiority of U.S. production technology and productivity in the world market. Under these conditions, industrial relations mechanisms were set up whereby the U.S. steel oligopoly could ensure labor force stability with the union through the establishment of coordinated bargaining and standardized work organization. The American steel industry was hit particularly hard by the changes in the economic environment occurring over the last 15 years. Historical data from the last 50 years indicate that the period from 1975 to 1991 represented a dramatic shift from earlier periods (Scheuerman, 23). The large integrated sector of the steel industry experienced wrenching changes in terms of declining demand for its products as well as an increase in foreign and domestic mini-mill competition. The impacts of these changes included low operating rates, large financial losses for steelmakers, bankruptcies and massive plant closures and employment reductions. Product differentiation The product-differentiation advantages of the established American firms, however, still kept high the barrier to entry to the American market. In the steel industry progressive introduction in the 19th and early 20th century of blast furnaces using open-hearth furnaces, continuous rolling mills, and other new facilities greatly increased the importance of scale economics for the integrated steel firm and provided a very significant deterrent to entry. Since then, the scale of a steel plant of minimum optimal scale has certainly become no smaller, but the size of the domestic market has increased many folds. As a result, a steel plant of minimum optimal scale now supplies a very small percentage of the market rather than a substantial one and scale economies no longer impose a significant barrier to entry. American steel industry has consequently achieved a high degree of market and product diversification. It has developed a cost strategy and a differentiation advantage over its rival firms through: technological innovation utilization of its capacity geographical diversification interrelated strategic business units merging with weaker firms introduction of low cost services In order to maintain its market share and competitive advantage, the steel industry has diversified its products geographically both in America and other parts of the world. Price policies In the competitive era, the demand for steel was unstable due to the fluctuating requirements of the railroads in the regulated structure of the early 20th century, the demand for steel varied. The close relationship between the demand for steel and the spirit of investment thus rendered the industry vulnerable to alternating periods of depression and prosperity and made some form of stabilization desirable. The steel corporation thus considered the stabilization of product markets to be one of its primary responsibilities (Misa 25). Consolidation alone was not sufficient for the stabilization of product prices in the steel industry. The steel corporation established a general price policy for the industry. New competition pressed American steel industry to supplement its market power with more formal price-fixing, namely a series of voluntary price agreements that became known as the “Pittsburgh-plus basing point price system. Under the Pittsburgh-plus, all mills added freight from Pittsburgh to their base prices. This promised to lessen the rigor of price competition, to slow the entry of new capacity, and to ensure that leading mills had access to scattered markets. It is generally recognized that the basing point pricing system in the steel industry served to stabilize the prices of steel products. Given the steel corporation’s dominant role in establishing steel prices throughout the industry, it is easy to assume that its primary goal was to use its market power to set the highest prices consistent with its individual pursuit of profits. Evidence of Collusion One common form of tacit collusion is price leadership, an arrangement in which one firm in the industry, in effect, makes pricing decisions for the entire group. Other firms are expected to adopt the prices set by the price leader, even though no explicit agreement exists. Often, the price leader will be the largest firm in the industry. But in some price-leadership arrangements, the leadership role may rotate from one firm to another. For instance, analysts suggested that for many years the steel industry conformed to the price-leadership model; with U.S. steel and Bethlehem steel assuming the leadership role at different times (Scheuerman 40). The dominant issue is whether subsidization of foreign producers by their governments is such a distortion. On the one hand, if actions by foreign governments result in domestic consumers receiving lower-priced steel, this is almost like a free transfer of resources from abroad to domestic users. Unless there is some strong apprehension that foreign producers will collude and raise prices later on- which appears unlikely from an efficient point of view- there is no reason to continue to allocate resources to the domestic industry. On the other hand, if subsidization by foreign governments results in increased imports to the U.S. market, as it almost surely will, this may be considered to be a policy of exporting unemployment and all the associated social costs. Current trends The American steel industry underwent dramatic change from 1972 to 1987. In this dynamic environment, National Steel Corporation (NSC) and the United Steelworkers of America (USW) embarked on a program of industrial restructuring with a co-operative partnership as its core. The arrangement addressed the major concerns of both NSC and the USW by focusing on the economic viability of the firm and the employment security and welfare of the workforce. NSC and the USW contractually came to agreement on this co-operative arrangement in 1986, but the document was the product of several years of joint consultation at all levels of the union and the firm. The agreement was negotiated in an atmosphere of trust and a genuine desire to co-operate (Warren 52). However, this restructuring effort, like others, did not move ahead with the immediacy that parties might have wished. The case reflects recent trends in American industry. As such, it can serve as a model for other co-operative arrangements. The industry has been ranked as the tenth largest steel producer in the world and it is still growing as compared to other producers. However, it is faced with stiff competition although the USW has played a big part in boosting the industrial operations globally. Future of the industry Domestic steel firms are currently in the midst of a series of capacity contractions that should, in the long run, make the industry more competitive with international producers. Some of these contractions have taken the form of plant closures; others have been in the form of mergers and acquisitions, both with domestic and foreign firms. The major question facing the industry is whether these capacity contractions will take the form of outright plant closures or whether the industry will be allowed to restructure itself through mergers (Warren 20). It should be realized that protecting the steel industry as it exists today is the only one of the many possible ways of ensuring adequate steel supplies. One obvious alternative is to build up a strategic stockpile, which is the policy already followed for a number of critical materials. Also, there is no need to protect all of the steel industry; the capacity for current and future security requirements plants could be allowed to close down without any effect on national security. Works Cited Anon. "History of U.S. Steel". U.S. Steel, 2010. Web. 6/4/2011   Misa, Thomas. Nation of Steel: The Making of Modern America. New York: Johns Hopkins University Press, 1998. Print Scheuerman, William. The Steel Crisis: The Economics and Politics of a Declining Industry. New York: Praeger Publishers, 1986. Print Warren, Kenneth. Big Steel: The First Century of the United States Steel Corporation, 1901-2001. New York: University of Pittsburgh Press, 2001. Print Read More