The Drops in Profitability in the United State - Essay Example

? The Decline and Recovery of the US Steel Industry BY YOU YOUR SCHOOL DATA HERE HERE The Decline and Recovery of the US Steel Industry Introduction The U.S. steel industry faced significant declines in production and in profitability in the early 2000s due to a variety of factors, including the highly politicized nature of this industry and its linkage with massive governmental regulations. In 2002, then President George W. Bush, in an effort to save a struggling industry, imposed import tariffs on steel both to enhance profitability for government and as an effort to prevent illegal dumping from other steel producing nations attempting to flood the U.S. with foreign steel. However, this had significant, lingering after-effects that did not produce nearly the results expected or hoped for. Additionally, the power of labor unions added significantly to the decline of this industry during the same period, something that is currently being redeveloped by the U.S. political system. The steel industry has been plagued with lowered demand for steel products in construction and in automotive due to a variety of global economic factors being felt across the globe. This report highlights all of the factors behind the decline and the current slow recovery of the steel industry, including the aforementioned tariff and labor union influence, the existence of increasing pension payouts for Baby Boomer retirees, changing consumer and industrial customer buying behaviors, changing construction patterns globally, as well as the influence of Wall Street on this industry. Decline Factors – Tariffs and Labor Impacts In the early 2000s, the U.S. steel industry was plagued with considerable problems that were causing significant disruptions to profitability. First, there were many bubbles occurring in the stock market during this period that were eroding consumer confidence and reducing construction for materials requiring steel in their construction, such as automotive products and various consumer appliances. In an effort to help companies that were on the verge of bankruptcy during this period, President Bush imposed import tariffs as an effort to slow illegal dumping of foreign-made steel and also to boost profitability for these struggling industries. These tariffs consisted of a 15 to 30 percent commission by early 2002, however the end results of this effort were the production of internal disputes with domestic steel industry ownership who felt that this limited competitive edge and also made foreign buyers seek new market opportunities for the export of their own domestically-made steel (Blecker, 2002). Therefore, even though it represented more opportunities for domestic production to increase, it limited the scope of steel-related partnerships with disgruntled foreign steel producers and limited their expansion potential across the globe. Further, the backlash of various trade disputes did, indeed, force steel manufacturers outside of the United States to begin the process of looking for new export opportunities, thus eroding even more opportunities for this industry in the process. Additionally, during this time period, less regulatory presence in the steel industry gave considerable authority to various labor unions, such as the United Steelworkers of America (USWA), which began demanding higher wage increases for workers and therefore eroding profitability in an already struggling industry (Ikenson, 2002). What was occurring was that steel industries were already experiencing lowered demand for products both domestically and abroad and were on the verge of bankruptcy at the time. The power of these unions was exerted in an effort to prevent, at any cost, plant closings in an effort to save American jobs with the USWA. These efforts were ultimately successful, in conjunction with the new tariffs imposed, and forced steel industry owners to continue production and operate, essentially, in the red for a period of years until new regulatory powers began to erode the power of these labor unions. Today, there is much more control granted to the steel industries in the face of lost profitability and due to the restrictions placed on political figures, steel operators were more likely to layoff workers temporarily during downturns in the global economy without backlash from political authorities. With this new ability to regulate their own labor affairs today, the steel industry is beginning its slow recovery and is witnessing increased profitability. Decline Factors – Rising Pension Costs and Reduced Construction Major companies in this industry, such as U.S. Steel and AK Steel, have been victimized by a growing population of Baby Boomers (people 60 and over) that have reached retirement age and are now eligible for pension payouts for the remainder of their lifetimes. Many of these contracts were drawn up in the 1990s when the steel industry was booming with the new North American Free Trade Agreement and launch of new export opportunities for U.S. made steel across the globe. However, by 2010, U.S. steel had paid out $534 million in pensions and similar benefits (Matthews, 2011). AK Steel had made similar payments total $175 million in the same period (Matthews). As a result, companies were losing profitability as they were forced to comply with very old contractual agreements made during a period when labor unions had considerable collective bargaining power. These impacts are still being felt today as more generational retirees demand pension payouts. Between 2000 and 2007, another factor driving losses in this industry was decreased building construction for industrialized nations due to economic factors that were impacting forward momentum. Prior to 2000, steel manufacturers had experienced a booming profit margin as newly developing nations, such as India and China, were beginning to expand their industrial and consumer construction bases. Therefore, these and other countries were dependent on rapid shipments of U.S. produced steel beams to assist in production efforts and to fill the gap until these countries were able to sustain their own, fast-paced construction needs (Matthews, 2009). Steel beams are used in a multitude of different building designs and this provided many export contracts for U.S. domestic steel producers. However, this was a short-lived boost in profit and production that was eroded by global consumer and industrial confidence losses and the tightening of governmental and private industry budgets as they attempted to ride out a variety of different economic slumps globally. The main problem in this scenario, which is still being felt today, is that countries that were once considered developing in the late 1990s and early 2000s are now considered fully developed, self-sustaining nations in terms of gross domestic product output, including steel products. Now that these nations have their own production facilities and mills, there is much less reliance on foreign-made steel that again erodes profitability and leaves U.S. companies looking for new market opportunities in other developing nations. However, many of these developing countries in need of steel for construction and consumer products are far from the United States geographically, thus making importation by local neighboring nations more cost effective in the short- and long-term. Factors Leading to Recovery for the Industry The U.S. has recently experienced growth in steel production due to a variety of factors, one of these is changing consumer behavior patterns across the world as more countries become fully self-sustainable in a variety of industries. For example, with growth in China, India and Japan comes more job opportunities in various white collar fields, thus providing consumers with much more disposable income than in decades prior. With higher incomes comes more demand for luxury products to enhance lifestyle, such as appliances, automobiles, and other durable goods requiring steel. The U.S. currently sustains some of the most technologically superior steel mills and steel making processes over other industrialized nations, thus providing new opportunities to satisfy demand through export of U.S. domestic steel products. According to industry professionals, the U.S. steel industry is expected to witness increases in overall steel output (including export opportunities) of 14.6 percent in the coming year (King, 2010). Part of this growth is attributed to the 2009 stimulus package provided by the U.S. governmental system that was designed to help domestic businesses increase their production capacity and improve their technological resources for manufacturing. Additionally, though an after-effect and not necessarily related to steel production, new market entrants in areas of consumer product marketing have come up with new and innovative methods of reaching consumer audiences. These improvements include more education regarding marketing strategy and advertising, therefore reaching more international consumers in developed and developing countries alike. This growth in know-how regarding advertising and consumption improve the output of steel producers, especially in terms of automobile demand. In fact, today, demand for automotive-related steel is so high that it is difficult (today) to keep up with this demand at the global level (Clarke, Fields, Jutte, Morton, Press & Ridenour, 2006). New and innovative products, such as the hybrid electric vehicles, continue to interest consumers globally and feed profitability for U.S. steel producers. With new market entrants in the automobile industry emerging every year, such as Kia, new opportunities arise that improve domestic production of steel in the United States. Also adding to the recovery in this industry is the influential presence of Wall Street in changing the nature of how business is conducted domestically and overseas for steel producers. Many of today’s U.S. steel manufacturers are publicly traded companies, and therefore they gain revenues through the daily stock activities of multiple international shareholders. As one example, in 2002 the stock price of one major steel producer in the U.S. was only $17 as a product of the economic downturn and burst bubbles in Wall Street related to technology and industrial stocks. However, the same company achieved an increase of over 300 percent which was driven by stock investor strategy and faith in the recovery of the steel industry. Currently, “U.S. steel is rich at about 1.4 times book value” in relation to Wall Street valuations (Martin, 2009, p.25). The influence of Wall Street has managed to boost profitability for many steel producers in the U.S. by giving them additional stock-related investment funds for improvements in technology, sales and marketing, or any other operational need that did not exist in the early 2000s. This makes these steel producers more competitive and gives them an edge over foreign steel producers. Even though steel production has dropped, overall, by 6.7 percent in 2008, Wall Street manages to improve the bottom line for these firms and thus the advantage of being publicly traded is quite obvious. This new investment faith and confidence also prevents domestic workers from being laid-off during periods where exportation or domestic steel needs are reduced which further strengthens the overall health of the consumer financial profile. Conclusion The drops in profitability in the U.S. steel industry were driven, largely, by political influence that has since been reduced over time and has given considerable relief to the steel industry ownership. Removal of regulatory influence occurs over time or through the repetitive influence of protesting steel mill owners and shareholders, however its long-term impact is finally being felt. Reduction of imported steel tariffs also assists in this effort by allowing domestic steel producers to seek out new alliances or mergers that expand domestically-owned steel production companies into many new international territories. Growth in this industry has been a product of the changing regulatory landscape, along with more creative and innovative consumer products manufacturers and the method by which they direct their sales and marketing teams. This is a tremendous factor that has led to increased growth in production for U.S. steel producers. The ability of Wall Street and consumer products manufacturers to reach new consumer markets assists in recovery and will likely continue to drive the new trend in increased production capacity and output in the coming years. Overall, it seems that in order to continue on this path toward recovery, the government influence in regulating steel producing business must be limited and less power given to collective bargaining entities such as the United Steelworkers of America. Further, with the aging population comes new opportunities for new contracts with recently-hired mill workers, thus avoiding future problems with ongoing pension and benefits payouts. References Blecker, Robert. (2002). “Let it Fall: The Effects of the Overvalued Dollar on U.S. Manufacturing and the Steel Industry”, p.27. Retrieved March 8, 2011 from http://www1.american.edu/cas/econ/faculty/blecker/dollarpaper.pdf Clarke, T., Fields, M., Jutte, L., Morton, J., Press, J. & Ridenour, E. (2006). “No More Protection”, Wall Street Journal. December 14, p.A20. Ikenson, Dan. (2002). “Steel Trap: How subsidies and protectionism weaken the US steel industry”, p.6. Retrieved March 8, 2011 from http://www.freetrade.org/pubs/briefs/tbp-014.pdf King, Mike. (2010). “US Steel Industry is Currently Facing Post-Recession Effects”. PR-Inside. Retrieved March 9, 2011 from http://www.pr-inside.com/us-steel-industry-is-currently-facing-r1747602.htm Martin, Neil A. (2009). “US Steel is no Steal”, Barron’s, New York. October 12. 89(41), p.25. Matthews, Robert G. (2009). “US Steel Posts Loss, Offers Brighter Outlook”, Wall Street Journal, July 29, p.B1. Matthews, Robert G. (2011). “Costs of Raw Materials and Labor for Latest Losses, Uncertain Profit Outlook”, Wall Street Journal. January 26, p.B4. Appendix A: Top Steel Producing States in the U.S. Source: http://www.bna.com/webwatch/steelindustry.pdf Read More