Steel price rise is no plus

If increase exceeds cost of tariffs, foreign mills may re-enter U.S. market

Experts warn of downside

New demand also boosts stronger domestic foes of steelmaker like Bethlehem

April 21, 2002|By Kristine Henry | Kristine Henry,SUN STAFF

Even before President Bush's tariffs on steel kicked in Friday, steel prices were on the rise - up nearly 20 percent from earlier this year. It's good news for the troubled domestic industry, but the boost is a long way from pulling troubled producers back into the black.

The industry had been suffering from prices that were at 20-year lows, brought on in part by a glut of inexpensive imports that flooded the U.S. market beginning in 1998.

Bush decided in March to impose tariffs, which go as high as 30 percent the first year, to give the domestic industry time to get back on its feet. More than 30 U.S. producers have filed for bankruptcy protection in the past five years.

But even before the tariffs took effect, Bethlehem, along with other steelmakers, was reaping the benefit of the higher steel prices.

"We are getting a significant benefit from the uplift now," said Robert. S. "Steve" Miller Jr., chairman and chief executive of Bethlehem Steel Corp. "And we are able to do a little picking and choosing of what business we want to take."

Steelmakers have been able to raise prices because of several factors.

One is the strengthening manufacturing economy. The Institute for Supply Management reported this month that its business-activity index for March rose to its highest level in two years, indicating that more companies are building more products - many of which use steel.

Many steel users and steel service centers - which serve as the middlemen between producers and manufactures - had let inventories fall as demand dropped off. Now that demand is picking up, they must order more steel not only to supply current needs but also to replenish those dried-up inventories.

And while demand is up, supplies are down - putting extra upward pressure on prices. As low prices - along with the heavy costs of paying for retiree health care and pensions - took their toll on steelmakers, some not only filed for bankruptcy protection but shut down altogether. The most notable was LTV Corp. of Cleveland, whose 6 million tons of production capacity is currently idle.

"Probably the biggest factor [in price increases] is there is not an awful lot of inventory in the system," said Leo Larkin, a steel analyst at Standard & Poor's.

Bethlehem has seen demand for its products rise about 25 percent since the beginning of the year. The Sparrows Point plant is running at about 90 percent capacity, up from 70 percent at the end of last year.

Although prices have risen nearly 20 percent, steelmakers note it's an increase over prices that were at 20-year lows in the last quarter of 2001.

Hot-rolled steel, the industry benchmark and one of the main products at Bethlehem's Sparrows Point plant, averaged $213 a ton in the fourth quarter vs. $313 a ton in the last quarter of 1997 - just before imports hit an all-time high and started driving down prices.

Hot-rolled is now about $260 a ton on the spot market. But that doesn't necessarily reflect the price that Bethlehem and others get for their product.

About half of Bethlehem's production goes to fill long-term contracts where lower prices have been locked in.

"In a situation like that," Miller said, "the spot market can spurt up, and it does not represent what real customers are paying."

Tariffs on imported hot-rolled and cold-rolled steel - key products for Sparrows Point - are 30 percent the first year and decline in the second and third years.

Some are questioning how potent the tariffs will actually be. Treasury Secretary Paul H. O'Neill has said Washington has received about 1,000 requests from foreign steelmakers for exemptions from the tariffs and that a significant number will be granted.

Analysts warn that higher prices may have a downside, especially for troubled producers such as Bethlehem, which filed for Chapter 11 bankruptcy protection in October.

If prices rise more than 30 percent from their pre-tariff levels, foreign producers could still undercut domestic producers.

"If prices go over $300, I would look for imports to be up significantly from last year," said Daniel A. Roling, a steel analyst at Merrill Lynch & Co. Inc.

And as prices start to rise, that means that relatively healthy steel producers, such as Nucor Corp. and Steel Dynamics Inc., will grow stronger while struggling producers, like Bethlehem, will still struggle to survive.

"Nucor isn't standing still in that kind of market - they're generating more and more cash, becoming more competitive and are making more improvements to equipment," Larkin said. "If anything, it may worsen it [for Bethlehem] a bit."

Bethlehem has already lost $97 million in the first three months of the year and a rise in steel prices will not be enough to restore profitability.

A large part of what led to its bankruptcy filing was the fact that its pension fund is short $1.85 billion, and its health care obligation is under-financed by nearly $3 billion. The company has asked Congress to take over at least part of those so-called "legacy" costs.

"Even with the relatively better market, we have still got a crushing legacy burden that we still cannot support," Miller said.

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