What Can The Dying Steel Industry Teach Us

The steel industry is dying in the US.  At least the integrated mills that create steel from ore is.  In steel town after steel town the furnaces are cold and rather quickly demolished.  Along with the jobs that went with them.

The sportswriter in Price tells the story of the decline of the once prosperous Pennsylvania steel town of Aliquippa, but thanks to his focus on some of the athletes who made it out, Price is explaining something much bigger than perhaps even he realizes. Through his subjects like Law, Price is revealing the certain folly of the efforts from both major political parties to fix what has little to do with money or policy, and lots to do with personal decisions.

The quote at the top is Law responding to the view held by some Aliquippa residents that the limping town’s most famous sons need to give something back to what is dying. By U.S. standards, Aliquippa is poor. But that’s where it gets a little bit hazy. While Aliquippa registers as poor (per capita annual income of $20,000) by rich American standards, most of the world’s poor would be very pleased to live there. And at that income.

Indeed, while its residents get by with aforementioned per capita earnings of $20,000, residents of Shanghai have it much worse in a comparative sense. Per capita income in what is China’s richest city comes in at roughly $7,000 annually. How we define poverty (or something close to it) in the U.S. is not how people around the world define it. America’s poor live very well when their living standards are measured against the rest of the world. No doubt this explains why the world’s poorest frequently risk everything to get to the United States. To those on the outside looking in, the United States doesn’t have a poverty problem; rather it’s the country where the world’s poorest seek to move in order to cure their poverty.

As the income stats in Aliquippa reveal yet again, even America’s poorest live very well in a relative sense. “Poor” is an adjective that means many different things to many different people. Measured against the rest of the world, the poor in the U.S. don’t have a problem that involves a lack of money.

Yet explicit in the poverty fixes conceived by the U.S. political left is that poverty can be erased fairly simply with bigger and bigger checks. Ok, but Price’s interview of Law shows how simplistic such a view is. As Law notes, while money will for a time revive houses that are in dis-repair, it’s not going to solve American-style destitution that is rooted in bad decisions.  Law reminds the reader that once the houses are cleaned up the drug use that frequently leads to bad outcomes will resume on the way to briefly restored houses falling back into dis-repair. Law is very explicitly saying that Aliquippa’s economic problems aren’t financial; rather they’re driven by individual error.

And that speaks to Law’s bigger point. Responding more specifically to the view that he perhaps owes the residents of a limping Aliquippa, Law essentially asks “why?” As he tells Price, “There wasn’t nobody out there [when I was in high school] running with me at midnight, there wasn’t nobody dealing with what I was dealing with at home.” Translated, Law’s correct personal decisions are what made it possible for him to escape a bad situation. Law’s personal choices ensured that he would escape American-style poverty whether he made the NFL or not. Why does he owe his hard-earned wealth to those who, coming up in the same environment as he did, chose the wrong life paths?

Regarding the quote that begins this piece, Law ended it with a question ahead of a confident assertion. Thinking about what will become of Aliquippa assuming he and other rich former residents pay to rebuild it, Law asked “How you going to maintain it? It’s going to get right back like it was before we fixed it up.” Law’s question followed by his prediction signaled yet again that Aliquippa doesn’t have a money problem. If we ignore per capita income that by global standards is quite high, Law’s point is that bad decision-making of the drug and alcohol variety among the town’s existing residents would quickly reverse any near-term fixes that Law and others could fund. Aliquippa’s problem once again has little to do with money.

And that’s why enterprise zones and tax cuts talked up by the right won’t mean much either. Too often forgotten by political conservatives is that new American arrivals from around the world who don’t even speak English cure their poverty most often upon reaching U.S. soil. The jobs available stateside offer levels of pay that afford lifestyles unheard of for the poor in other parts of the world. To the rest of the world, the whole of the U.S. is an enterprise zone.

So for Democrats to presume that more money will fix what is a creation of bad decisions amounts to highly wishful thinking. And while reductions in the tax burden are always appealing, an erasure of the tax burden in Aliquippa isn’t going to change a situation that is defined by bad choices.

Hard as it is for truly compassionate people to admit, the United States doesn’t have a poverty problem. Not even close. Empirical evidence supporting the previous claim is per capita income figures that reveal even down-and-out towns like Aliquippa as quite well-to-do in a global sense. Looked at anecdotally, evidence that the U.S. doesn’t have a poverty problem is the continued inflow of striving immigrants from around the world. If there were no opportunity for the globally poor to thrive in the U.S. upon arrival, they would surely go elsewhere.

http://www.realclearmarkets.com/articles/2016/11/01/aliquippas_ty_law_exposes_a_wasted_war_on_poverty_102409.html

It wasn’t so long ago that the American steel industry was a vibrant and dynamic industry.  The technology in American steel plants was as good as it got and the mills were constantly improving themselves. The video below is a case in point, showing the use of a continuous caster.

https://theartsmechanical.wordpress.com/2015/06/19/hich-speed-steel/

Yet what’s happened to Weirton Steel?

First, it was costs associated with the repeated regulations imposed by the Environmental Protection Agency. Then, after 1994 and the passing of the North American Free Trade Agreement (Nafta) it was cheaper competition from places such as Mexico. In the end, there was no way Weirton could compete, and an industry that has fed and clothed the city for generations essentially died.

“Her husband introduced Nafta,” said a former steel worker, sitting at the the bar of the Columbia Club, located at one was once Gate No 1 of the Weirton Steel Corporation’s main factory. He had worked at the plant for 34 years. “If anyone in this in this state votes for her, they’re crazy.”…

But in places such as Weirton, down to fewer than 20,000 people from a peak of 33,000 it is hard not to feel that while some parts of the country may have seen the benefits of global trade, this hardscrabble community, with its fast-food joints and strip bars, has been passed by.

Ed Sutton, a city government worker who said he would be voting for Mr Trump, said that “nothing had replaced the steel jobs”. “They talk about creating all these jobs. But they’re just retail jobs that pay minimum wage, or just above,” he said.

Ms Clinton, meanwhile, said this spring, in a comment she came to quickly regret, she was going to “put a lot of coal miners and coal companies out of business”.

The death of the steel industry had devastated not just the economy of the city, but had destroyed a sense of security and torn at the fabric that had maintained blue-collar communities for decades.

Jim Carey, who was also drinking the Columbia Club, grew up in the city but left to go to law school. Jobs at the mill had allowed a man to buy a house, build a small pool and send his children to college. Now, that had all gone.

“Nowadays, the best thing going for Weirton is that it is just 35 minutes from Pittsburgh airport,” said Mr Carey, who was planning to vote for Ms Clinton.

http://www.independent.co.uk/news/world/americas/us-elections/inside-the-west-virginia-steel-town-destroyed-by-nafta-where-94-of-jobs-have-disappeared-and-donald-a7389846.html

Nafta may have been part of it, but the decline started long before then.  The real problem is the inability to create and develop capital intensive businesses in the US. There’s a reason that almost all the steel mills are owned by foreign companies these days, along with far more of American heavy industry than most people realize.

It didn’t used to be like that.  It wasn’t really so long ago that you could build a new steel mill in the US. See the link below for an example.

https://theartsmechanical.wordpress.com/2015/09/05/building-a-steel-mill/

On Tuesday — the day before he welcomes President Obama at a plant in Pittsburgh — Mr. Longhi said that the company would apply for permits to replace its blast furnace at a plant in Fairfield, AL with an electric arc furnace. The new furnace will be in operation by 2017.

What does that mean?

A quick primer on steelmaking: The blast furnace is the way U.S. Steel has made metal since the days of Andrew Carnegie. Inside the massive cylindrical structure, iron ore is melted down, part of a process that generates batches of steel from raw materials. It’s a lumbering piece of equipment that is expensive to maintain, and turn on and off. It usually produces a slightly higher quality and more exact form of steel that can be used for high-grade applications such as the automotive industry.

In an electric furnace, steel is made by melting shredded up automobiles, refrigerators and other forms of scrap. “The EAF (electric arc furnace) can be started and stopped at will without exposing the mill to excessive costs associated with the shutdown or start-up process,” says John Packard, publisher of Steel Market Update. It’s also generally the less expensive option, especially with the higher iron ore and coal prices of recent years.

With the U.S. generating more scrap and requiring less steel, EAFs have been in fashion. No new blast furnace has been built in this country since the 1960s. In the last decade, more nimble EAF steelmakers like Nucor Corp. and Steel Dynamics Inc. have easily outperformed so-called integrated producers like U.S. Steel and ArcelorMittal.

U.S. Steel, significantly, does not have any EAFs, says a spokeswoman.

Mr. Longhi said the switchover would make the company more “flexible” and “efficient”, code for lower costs and, most probably, fewer man-hours. The new EAF in Alabama will have a capacity of only 1.1 million tons per year, compared to 2.1 million tons a year for the blast furnace.

Steel insiders immediately cheered Tuesday’s announcement. “This has been my argument for the last couple of years, they can’t afford to reline the blast furnace,” said Charles Bradford of Bradford Research Inc. Relining the blast furnace, a piece of routine maintenance, would have cost $100 million, Mr. Longhi said.

The plant, which employs around 2,000, is over a century old and was one of U.S. Steel’s big hubs during its 1960s glory days, when it employed over 15,000. It had been rumored as a candidate for closure as Mr. Longhi looks for fat to cut.

Analysts said the move was a sign Mr. Longhi is optimistic about steel demand — after all, the alternative was probably to shut down Fairfield — but less so about U.S. Steel’s current business model.

Making a move toward EAFs “is a corporate shift in philosophy, a recognition that times have changed,” says Mr. Packard.

Update: Blast furnaces, of course, are not entirely a technology of the past. Although no new blast furnace steel mills have been built in decades in the U.S., steel companies say they have more recently rebuilt individual old furnaces at existing mills. For example, in 2007 Severstal North America, a unit of Russia’s OAO Severstal, launched a rebuilt blast furnace at its plant in Dearborn, Mich, as part of a $1.7 billion modernization project. The state-of-the-art technology means it should not require any major repairs or overhauls for over 20 years, says spokeswoman Katya Pruett. The company also has an electric arc furnace in Columbus, Miss. “It’s been our approach all along to use both technologies – blast furnace and EAF,” says Mrs. Pruett.

http://blogs.wsj.com/corporate-intelligence/2014/01/28/times-have-changed-new-plan-for-a-century-old-u-s-steel-mill/

Note the names of the steel companies. Arcelor Mittal, Severstal and the like.  Arcelor Mittal is an Indian Company, Severstal, Russian.  The entire industry is like this.  These are not the kind of management that are going to commit to large investments here in the US.  Indeed even a short look at the internet shows a pattern of milking and plant shutdowns going back decades.

If one company goes bust, it’s probably the result of bad decisions in the management of that company.  But if they ALL go down, there’s something bigger than that.  It might be economic conditions but not across decades.  For things to be that bad for this long, for all the steel companies in the US, the companies that not so long ago were world class  to become so financially weak that they all fall to companies from India and Russia, companies loaded with debt and corruption there must be a centralizing reason or reasons.  It doesn’t take long to find that reason.  A look at the timeline of American steel’s decline follows the passage of various government regulations almost perfectly.

Actions have consequences and each regulation in the financial markets, each business tax increase made it harder for old industries like the steel industry to obtain the capital to grow.  The taxes and regulations drove the managements of those companies to chase wills of the wisps to cover for the ever higher burdens placed on their existing plant that that could not have improvements financed. In the end it became all to easy to sell out for what they could get, asset destruction on a massive scale.

The people in charge by and large ignore the consequences of the massive asset destruction in industries like steel and Aluminum.  Out of sight, out of mind and all that heavy industry was dirty and smoky and polluting anyway.  After all China will sell us all the steel we need.  Of course these are the same people who talk about crumbling infrastructure.  Here’s a clue people, that crumbling infrastructure is suffering from the same issues that are killing the steel industry.  Because it’s not just the steel industry that’s been kicked around by decades of high taxes and bad policies, it’s everything, with the consequence that stuff doesn’t get fixed, jobs don’t get done and the country is slowly destroying itself.  It’s nice to chase shiny toys and virtual products that seemingly don’t have any need for that old style steel and concrete.  People need to realize though, that all that high tech, the supposed post industrial economy still needs a functioning infrastructure and an functioning industrial base to support it.  Nothing standing can survive on bad foundations.

 

 

 

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