Steel imports to be the barest necessity of the US market
THE WHOLE WORLD IS AWAITING
Steel imports to be the barest necessity of the US market
Over the past ten years, the US metallurgy has been tenaciously upheld by powerful lobby even though this economic sector accounted for meager 0.5% of employed population. What is more, ratio between workers engaged in steel production and workers stirred to steel-consuming industries is estimated to be equal 1:40 (or even 1:50). The same can be said about the ratio between steel-producing and steel-consuming enterprises.
Steel imports turned into the barest necessity for the US market since domestic industry is unable to satisfy existing demand while foreign suppliers contribute 30% to the total steel consumption of the USA. In the past two months, confrontation between adherents of protectionism and disciples of the free steel market reached its apogee. Ambiguous position of the US government further entangled this situation and certainly postponed its settlement to the end of 2001.
Damage inquiry
In June 2001, the President of the USA claimed that for the past 50 years US metallurgy (with its 200 thousand employees) constantly suffered from negative external influence. Such destructive factors included excessive world productive capacities notable for their inefficiency, state financing of metallurgic industry accomplished by other countries worldwide and as a result saturation of the world steel markets. To prevent direct damage to US industry and its employees, the US government elaborated special program aimed at renovation of market relations on the world steel market and elimination of dumping.
The US trade representative Robert Zellick together with the Department of Commerce had to conduct negotiations with major trade partners of the USA to smooth away excessive productive capacities and compel foreign metallurgic enterprises to adjust their export supplies to the USA in compliance with the US legislation. However, other countries gave a hostile reception to the US plans claiming that foreign legislation can not be applied for regulation of their internal affairs while US position poses danger to their sovereignty.
Along with this, Robert Zellick together with the Department of Commerce and Department of the Treasury had to initiate negotiations on the rules that would regulate metal trade in future and eliminate subsidies, which caused market deformation mentioned above.
However, greatest concern of the world metallurgic suppliers has been provoked by the US trade representative’s applying to the US International Trade Commission. Robert Zellick has been charged with a task to initiate an inquiry into losses endured by the US metallurgy and caused by imported steel and steel products (pursuant to article 201 of the Trade Legislation adopted in 1974). Should the USA succeed in this unprecedented legal prosecution, metal imports to the country would be significantly cut off.
What is more, Robert Zellick noted that limitation of steel imports would greatly contribute to restructuring of the US steel-making industry. At the same time, leading European experts insist that in such conditions total abridgement of import supplies would be ineffective even despite restructuring of the US metallurgy ripened into paramount necessity. Forthcoming limitation of steel imports further aggravated relations between European steel-makers and US government compelling the former enterprises to prolong negotiations with their US counterparts. To add, special duty levied on European steel imports in December 2000 already had far-reaching implications seriously injuring European producers.
On June 22, 2001 the US International Trade Commission initiated an official inquiry into possible losses of US metallurgy caused by steel imports (document No. ER0622Y1 appeared on the site www.usitc.gov). Such investigation does not embrace separate countries giving major heed to imported commodities. What is more, countries that concluded agreements on free trade with the USA (Canada, Mexico, a number of Caribbean countries, Israel, and countries of Andean trade agreement) will be examined separately and more benevolently.
To start with, the US International Trade Commission had to ascertain that certain steel products had been imported in such quantities that inflicted significant damage on local producers. Initiated inquiry would embrace the following commodity groups:
- flat-rolled carbon steel (commodity groups 7207-7212 and 7224-7226), 139 products on the whole;
- long-rolled carbon steel (commodity groups 7206, 7207, 7213-7217, 7224, 7227-7229, 7301, 7302, 7308, 7312, 7314, 7317, and 8305), 182 products on the whole;
- tubes made of carbon steel (commodity groups 7304-7307, and 8431), 174 products;
- products made of stainless and alloyed tool steel (commodity groups 7218-7229, 7304, 7306, 7307, 7312, and 7314), 118 products on the whole.
However, special attention should be drawn to massive appendix containing steel products exempted from damage investigation. Among other products, this list included wire rod (already being charged with sanctions imposed on February 16, 2000 in compliance with article 201) and main pipes, which fell under similar inquiry started on February 18, 2000. Besides, mentioned appendix embraced numerous specific products made of carbon steel, which seem to be of no interest for Ukraine since domestic enterprises had been never engaged in their production.
Pursuant to existing procedure, damage investigation would last for the period of 180 days. Then, obtained results would be passed to the President of the USA. To add, final decision of the US International Trade Commission should be accomplished without appeal though in certain circumstances WTO and NAFTA member states have an opportunity to revise the US decisions.
Subsequent problems
In the recent years, adherents of protectionism ran up against strong opposition of steel-consuming industries advocating liberalization of the US steel market. Such organizations as American Institute for International Steel (www.aiis.org) and Consuming Industries Trade Action Coalition (www.citac-trade.org) constantly oppose any proposals of metallurgy lobby aimed at further imposing of various duties and quotas on imported steel and steel products.
Special researches conducted by American Institute for International Steel in the mid-2001 (Paying the Price for Big Steel) and Consuming Industries Trade Action Coalition in April 2001 (Cost of Steel Duties and Quotas for Consuming Industries) estimated the influence of imposed import duties on the US economy and steel-making enterprises in particular. For the most part, mentioned researches gave proper heed to the draft Steel Revitalization Act to be adopted in 2001. Among other things, this document made provision for quotas levied on raw materials and end products, special credit program designed for 10 years and backing the US steel-makers, and introduction of a 1.5%-duty imposed on internal sale of steel products (such duty would replenish pension funds established for retired workers of steel-making enterprises).
Experts vindicating the US metallurgy claim that since the beginning of 1998 this economic sector had lost 15 thousand working places due to dumping prices and state financing of foreign metallurgic enterprises. What is more, the situation has been aggravated by insignificant capacity of foreign steel markets, excessive steel production, augmented prices for power resources, enormous healthcare expenditures for 75 thousand pensioners, high dollar exchange rate, and inappropriate management. However, in the past 15 years abruptly spurred unemployment coincided with recovered steel production. In 2000, the USA produced 110 million tonnes of steel against 77 million tonnes of steel reported in 1977. Thus, experts insist that import supplies had almost no effect on development of the US metallurgy while grown unemployment had been caused by incremented labor productivity (which augmented by 174% since 1980).
In such conditions, the US government attempts to boost demand for domestically produced steel and save working places at steel-making enterprises. However, limitation of import supplies will negatively affect steel-consuming industries. Trying to save 3.7 thousand working places, the USA will undoubtedly lose 19-32 thousand working places belonging to steel-consuming industries. What is more, taxpayers would have to spend USD 1.35-2.98 billion to compensate quotas imposed on imported steel. Taking into account that governmental program was designed for 5 years, total expenditures of the state would amount to USD 6.75-14.5 billion.
Profound calculations show that further saving of working places at steel-consuming enterprises would cost USD 1.33-2.34 billion per year (i.e. USD 565 thousand per one working place annually). More severe import limitations will increase such expenditures to USD 5.8 billion per year (though in such case some 13 thousand working places will be saved). Proceeding from the mentioned statistics, introduction of import quotas seems to be rather inexpedient and improbable.
Ukraine and its resources
Potential shrinking of the US market for imported steel products augmented prices for steel produced by the US enterprises and as a result raised the price of derivative products and services. Limitation of steel imports shifted the problems of the US steel-making industry to the shoulders of the whole American society while propagandistic campaign aimed at protection of domestic producers diverted public attention to the importing countries including Ukraine. So, what will be the impact of the mentioned events on Ukraine’s steel imports to the USA?
A number of experts claim that 90% of Ukrainian economy functions in close connection with foreign trade turnover. This indicator is twice as much as the figures registered in Germany and Great Britain. What is more, Ukrainian dependence on foreign trade turnover exceeds that of Japan and the USA five times and six times correspondingly. Export supplies contribute 50% to Ukraine’s gross domestic product. At the same time, 40% of Ukraine’s GDP is spent to cover its expenditures on import supplies. Within 1997-2000, Ukrainian dependence on import supplies grew from 37% to 47%. Favorable market situation on the world market for ferrous metals and sluggishness of Ukrainian market incremented exports of Ukrainian-made metal products from USD 3.9 billion in 1999 to USD 4.8 billion in 2000. Thus, Ukrainian metallurgy accounted for 27% of Ukraine’s GDP and 42% of the total export revenues.
In 2000, Ukraine contributed 8.5% to the total world exports of metal products, which caused grave concern of its competitors.
As regards trade relations with the USA, in 2000 Ukraine boasted to have positive trade balance with this country since Ukrainian exports (USD 705 million) significantly exceeded volumes of imported products (USD 162 million). For the most part, Ukraine exported raw materials (semis) and other metallurgic produce. Iron, semis made of carbon steel, raw aluminum, refined copper and unprocessed copper alloys, ferroalloys, ores and titanium concentrate accounted for almost 50% of Ukrainian exports to the USA.
According to the data with US Census Bureau, in 2000 Ukrainian metal exports to the USA made up 93.5% of the figures reported in 1999. At the same time, the State Statistics Committee of Ukraine claimed that augmentation of Ukrainian metal exports amounted to 70.4%. Thus, the USA undoubtedly consumed re-exported metal products even despite the fact that importers traditionally boast of transparent supplying schemes. Besides, US Census Bureau informed that in 2000 Ukraine accounted for 2.97% of the total metal imports to the USA (compared to 2.45% reported by the State Statistics Committee). Due to the fact that Ukrainian supplies do not exceed 3% of the total US imports, the USA has no reason to initiate antidumping inquiry against Ukraine.
It should be noted that such raw materials as iron and semi-finished steel (slabs and square billets) are notable for their low price. At the same time, US metallurgic enterprises use them to produce expensive high-tech products, which makes Ukrainian metal supplies extremely profitable for Ukraine’s counterparts abroad. What is more, Ukrainian metallurgy bears significant losses due to export of raw materials instead of finished products. However, in view of the worsened economic situation on the world market for ferrous metals Ukraine should not curtail its export supplies carrying away these commodities from the future bilateral agreements. Mutually beneficial supplies of Ukrainian-made iron and semis to the USA are able to allay the US position and serve as guideline for further negotiations.
Meanwhile, on February 1, 2001 the United States Department of Commerce initiated separate investigation into influence of iron ore (briquettes, agglomerate, and pellets) and ferrous semi (ingots, square billets, blooms, and slabs) imports on national security of the USA (see The Metal No. 4’2001 for details). Taking into account similar inquiries initiated earlier and economic and political basis for the current investigation, it is possible to associate an inquiry into Ukrainian imports with the US President’s initiative aimed at comprehensive import limitation under article 201 of the US Trade Legislation. In turn, Ukraine should pay proper attention to such assumptions to succeed in further negotiations with the USA on imports of Ukrainian-made metal products.
Despite in 2001 Ukrainian metal exports to the USA distinctly dropped, total export supplies of Ukrainian metallurgic enterprises featured certain augmentation compared to the figures reported in the respective period of 2000. Such incrementing has been primarily stipulated by high mobility of Ukrainian metal traders, which managed to quickly switch metal supplies from the countries introducing protective measures to the new free markets. It is worth mentioning that scrupulous monitoring and forecasting of global and regional markets for ferrous metals greatly contributed to their swiftness. In this connection, shrinking of the US market seems to bring no sweeping changes to Ukrainian export of ferrous metals in 2001-2005. At the same time, situation on the world market for rolled steel and forecasts for its development in 2001-2005 prove that Ukraine should protect the position of its metallurgy on the world market more vigorously.
To stabilize Ukraine’s position on the world and regional metal markets, Ukrainian diplomats should enhance negotiations with importers of Ukrainian-made metal products to conclude special agreements encouraging Ukrainian exports (setting stable quotas for certain Ukrainian commodities, for instance). In turn, trade and economic missions should pay more attention to changes in metallurgic segments of such markets reporting possible escalation of tension and introduction of protective measures. Finally, proper heed should be given to the USA since the latter country is notable for the highest intensity of import limitations provoking other countries to accomplish suchlike steps. What is more, it seems to be expedient to use the existing commodity skewness in Ukrainian metal exports. In other words, Ukrainian exports of semi-finished metal products (being of paramount interest for European Union, USA, and Turkey) should be strictly correlated with quota augmentation and opening of new markets for Ukrainian end metal products.
Unfortunately, Ukraine’s treating as a non-market economy possessing export-oriented metallurgy that enjoys profound state financing and bears outdated and excessive productive capacities poses severe barriers for regulation of Ukrainian metal exports. The US Administration repeatedly emphasized that foreign steel-making industries should renounce any forms of state subsidizing. In such circumstances, situation with Ukraine is aggravated with the fact that the USA is inclined to treat economic experiment in Ukrainian metallurgy as direct state financing, which is far from being correct. At the same time, the USA conceals its own active fostering of domestic steel producers (see The Metal No. 3’2001). Meanwhile, Ukrainian metallurgy recently witnessed noteworthy economic changes able to bring Ukrainian and the US positions together. For instance, multinational company Midland has purchased an interest in Zaporozhstal Iron and Steel Works while metallurgic works belonging to IStil corporation (and located in Pennsylvania) consumes Ukrainian-made billets jointly produced by IStil corporation and Donetsk Metallurgic Works. Thus, it would be expedient to involve foreign companies operating on Ukrainian market to lobby Ukrainian exports of metal products. As regards the USA, Ukraine should try to expel metal products imported by the US companies (namely Midland and IStil corporations since they operate in Ukraine) from commodity groups levied with the US import quotas and suffering from other import limitations. It should be noted that domestic steel producers also consider this problem as a matter of paramount importance for their export supplies. Thus, their individual attempts should be backed by appropriate foreign policy of Ukraine encouraging the US counterparts to treat Ukrainian imports more favorably. Should Ukraine succeed in its attempts, responsibility for its metal exports would fall on concrete steel producers, which will undoubtedly strengthen Ukraine’s position on the shattering US market.
Along with this, the most favorable period for Ukrainian exports of metal products obviously comes to the end. Threatened by the fact that domestic market consumes only 17-20% of metal produced in Ukraine, Ukrainian government recently started to elaborate system measures aimed at reviving of domestic market via augmentation of solvent demand. Undoubtedly, such measures would shift the balance between internal and external consumption of Ukrainian-made metal products. However, these steps are notable for their long-term implementation while analyzing the pattern of metal imports to Ukraine some more rapid measures can be found. In 2000, Ukraine imported 455.4 thousand tonnes of steel, as compared to 161.3 thousand tonnes (+42%) imported in the first quarter of 2001. For the most part, Ukraine consumed tube billets (18.2%), flat-rolled alloyed steel (16.9%), flat-rolled coated steel (15.5%), rebars (9%), and HR sheets and plates (6.7%). It should be noted that Ukrainian enterprises mostly imported those metal products, which are not produced in Ukraine. At the same time, Ukraine is able to produce almost all imported products by itself.
Besides, special attention should be given to the US experience related to preferential regimes for domestic steel producers and accomplishing of projects financed by state budget. What is more, the US enterprises participating in international tenders announced by the USA enjoy certain privileges as well. Ukraine should adopt special laws legalizing such practice taking world experience as a basis for its legislation. Recurring tax exemptions for builders and metal traders can turn into another effective measure stimulating domestic consumption. Along with this, such steps can supplement with economic experiment conducted in the mining and metallurgic complex of Ukraine. Thus, Ukraine should not waste time and concentrate its attention on domestic steel market.
Outlooks and conclusions
Experts with DerzhZovnishInform claim that undetermined situation and vague outlooks for development of the US economy in the end of 2001 and the first quarter of 2002 seems to be the major factor to be taken into account by Ukraine during future negotiations with the USA on ferrous metal trade. Rapid economic growth registered in 1999 and the first half of 2000 had been primarily stipulated by the so-called new economy companies (rendering Internet services and producing computer software) and companies dealing with electronics and telecommunications. Anticipated high revenues led to hyper-capitalization of this economic sector coincided with high interest rate of banking credits. However, low performance of new economy companies reported in 2000 resulted in abrupt drop of their share price, numerous bankruptcies and mass dismissal of part-time employees.
Taking into consideration acute susceptibility of the US population to the situation at the US stock exchanges (NASDAQ index, for the most part) and grown inflation expectations supplemented with slackened demand for durable goods, new US Administration has been taking unprecedented financial and economic measures to normalize the US economy (for instance, lowering interest rate for banking credits and proposing to reform taxation system). Unstable market situation at the US stock exchanges reported in the mid-2001 had been aggravated with pessimistic forecasts of major investors disappointed with the fact that financial regulating gave almost no effect on the whole economic situation.
Being quite aware that implemented macroeconomic measures will give first results only in the second quarter of 2002, the US government concentrated its attention on immediate political actions accomplished to preserve public confidence in perspectives of the US economy. First of all, such measures should have prevented setback of primary industries (including metallurgy), which was likely to follow the downsurge of high-tech economic sectors. However, despite forecasted deceleration of global economic growth in 2001-2005 (especially in EU countries, Japan, and USA), perspectives of the US economy and consequently the outlooks for the US steel consumption remain comparatively optimistic.
From this point of view, the US President’s announcement of initiating antidumping inquiry into imported metal products in compliance with article 201 of the US Trade Legislation seems to be an ordinary political action. In view of the facts mentioned above, economic motives of such severe and non-system measures are quite improbable since following the 1998 steel crisis the former US Administration didn’t dare to initiate the similar antidumping inquiry in 1999-2000. What is more, the US diplomats and foreign trade representatives did not expect such announcement and were not ready to explain the expediency of such measures immediately.
Taking this into account, Ukraine should not foster the conclusion of Universal Agreement on US-bound Steel Exports. Besides, Ukrainian steel-making enterprises should not be afraid of losing the US market since existed limitations imposed on Ukrainian-made rolled steel has indirectly stimulated Ukrainian exports of iron and semi-finished steel (+70.1%). The latter products enjoy stable demand of the US iron and steel works. Besides, the US steel-making industry is notable for insufficient productive capacities. Thus, imported slabs turned into the matter of paramount importance for reaching the scheduled level of production performance.
At the same time, it should be noted that in 1996-2000 the USA has given no warnings regarding slab imports. What is more, slab import has not even been embraced by initiated inquiry. In other words, limiting Ukrainian imports of rolled metal and encouraging Ukrainian supplies of semi-finished steel the US enterprises appropriate potential revenues of Ukrainian producers since in such case low production cost of the US metal products and high surplus value in their final price make it much more profitable to import metal products from abroad.
As regards Ukrainian-made finished rolled products, Ukraine accounted for meager 4% of the total US imports in 2000. At the same time, Ukraine contributed 9.5% to the total US imports of iron and semi-finished steel and 3% to the total supplies of the finished rolled products. Despite existing and forthcoming barriers hampering Ukrainian imports to the USA, domestic producers are inclined to fight for every bit of the US market and constantly search for new market niches. Such intentions seem to be quite reasonable whereas Ukraine should refrain from augmentation of its export supplies to this closing market. At the same time, its complete closure is improbable since a lot of US consumers benefit from its existence.