The state of steel.

• Author: Coffin, Donald A.

The steel industry continues to be of major interest to Indiana, given its long history as one of the primary sources of employment and income in the state. But steel has long been a declining source of employment and income, both for northwest Indiana and for the nation. Nonetheless, given its continued real importance as an employer and its symbolic importance as the source of much of northwest Indiana's growth, understanding the current state of the steel industry has value.

As recently as 1969, employment in the steel mills accounted for nearly 30 percent of total local employment in northwest Indiana, but only 0.8 percent in the U.S. as a whole. By December 2002, those percentages had declined to 8 percent in northwest Indiana and less than 0.2 percent in the nation. Although this is not a totally legitimate comparison (value added in steel relative to Gross Domestic Product would be more appropriate, but such data are not readily available), the total value of steel output in 1969 was $70.9 billion, compared with a GDP of $3,492 billion (2.1 percent), while in 1998 steel output was valued at $37.6 billion, compared with a GDP of $8,508, or 0.4 percent (all values are in 1996 dollars).

Changes in the health of the steel industry nationally can be expected to drive changes locally, and understanding the national setting has clear importance. Looking initially at the extent of competition in the U.S. steel industry, we will note the transition from an oligopoly to a competitive global industry. We will examine capacity, output, and output utilization trends. We will see how prices have changed over time relative to prices in general. We will consider how changes in price, national income, and the prices of competing products have affected the demand for U.S.-produced steel. We will consider how the steel industry has been restructuring, and we will close with a look at the future of the steel industry. Our primary concern is to describe these changes in detail, rather than undertake a search for their causes.

The Extent of Competition

Competition within an industry has important consequences. The greater the extent of competition, the greater the pressures on firms to operate efficiently, the less control firms have over price, and the lower the average rate of profit is likely to be. We generally have two measures used to indicate the extent to which an industry is competitive: concentration ratios, which measure the share of the market that belongs to the largest firms, and the Herfindahl-Hirschmann Index (see inset).

In 1970, the steel industry was difficult to classify, but it was not highly competitive (see Table 1). The four largest firms--U.S. Steel, Bethlehem Steel, Republic Steel, and National Steel--probably had some degree of market power and some ability to use price as a competitive weapon. By 1997, competition in the steel industry had increased substantially, even without accounting for import competition. The steel industry in the U.S. is now substantially competitive, with no firms having any significant control over price.

Capacity, Utilization, and Output Trends

Following World War II, the U.S. steel industry dominated the world. Imports into U.S. steel markets were essentially nonexistent, following the destruction of much of the steel-making capacity in Germany and Japan. A significant proportion of U.S.-produced steel was exported. Between 1950 and the end of the twentieth century, domestic steel output grew by about 48 percent. Imports, however, grew by 37,000 percent. Between 1970 and 2000, they grew by 196 percent. Domestic production grew by less than 10 percent during those three decades. U.S. dominance in steel ended by 1970 and domestic purchasers of steel have become increasingly reliant on imported steel (see Table 2).

Not surprisingly, production capacity in the U.S. also increased in the post-World War II period, as shown in Figure 1. Based on a U.S. Department of Commerce capacity series on the U.S. iron and steel manufacturing industry, the industry's capacity in 1948 was about 107 percent of its pre-World War II (1939) capacity. Production capacity grew irregularly, but steadily, until 1977, by which time capacity had increased nearly 60 percent over its 1948 level. Note that capacity grew slightly faster than output (0.7 percent per year for capacity compared with 0.6 percent per year for output). Since 1977, capacity has declined to about the same level as in 1959, which is roughly 30 percent above its 1948 level.

Increased Capacity

What drove this increased capacity? Both the domestic and world markets for steel expanded in the post-World War II period, so much of the explanation can be found in demand. The economic theory of investment suggests that firms will expand their capacity more rapidly when desired capacity is above actual capacity. One measures this by examining the relationship between capacity utilization and capital investment, measured here as the percentage increase in capacity. As capacity utilization increases, firms are likely to conclude that the optimal amount of capital is also increasing, and respond by increasing their investment in new plants and equipment. If capacity utilization falls, pressures on firms to invest in new...