Focus: Steel

Dramatic economic growth in the U.S. precipitated an unprecedented rise in domestic steel consumption during the first half of 1998. To maintain price stability and ensure adequate inventory in the face of an anticipated shortfall in domestic production, U.S. steel mills and large steel consumers dramatically increased their purchases of imported steel products above historical levels. Although the 1998 boom proved short-lived, this initial "blip" in demand resulted in a surge in foreign steel imports which U.S. steel watchers -- led by the domestic industry lobby -- now seek to counter through calls for retaliatory and other punitive measures, including quotas and anti-dumping charges.

Among the steel-exporting countries caught in this crossfire is Japan, whose exports of steel products rose last year from its traditional level of 2% to 4% of total U.S. domestic consumption. In Japan's view, this increase was caused by cyclical market forces and several extraordinary factors specific to 1998.

Looking forward, many analysts forecast that U.S. steel demand will decline in 1999, reducing anticipated U.S. demand for imported steel products. Orders contracted in 1998 have largely been shipped and the global market has already begun to make adjustments. Even if U. S. demand remains strong, the recent strong rise in the yen has decreased Japan's cost competitiveness in this sector. Therefore, U.S. imports from Japan in 1999 are expected to return to the more modest levels recorded in 1997 through natural market forces of supply, demand and pricing.

This expectation reflects the views of the private sector. It does not reflect a commitment by the Government of Japan, which remains committed to the use of market based solutions as the best method to resolve occasional trade imbalances such as those that faced the U. S. domestic steel industry in 1998.

As the engine of world economic growth, steel consumption in the United States grew to unprecedented levels in 1998 rising to the highest levels in recorded history. The addition of more than 12 million tons of U. S. domestic steel capacity between 1995 and 1998 was exceeded by an even sharper rise in U.S. consumption. In short, U.S. steel producers lacked the capacity to meet the needs of domestic steel consumers.

In fact, by mid-year 1998, in direct response to anticipated demand, U.S. mills began to import large volumes of hot-rolled sheets, semi-finished slabs and other imported products from traditional suppliers in Japan as well as manufacturers in a number of Asian, Latin American and central European countries.

U.S. auto makers and other large steel consumers also dramatically increased their purchases of imported steel products in the latter part of 1997 and early 1998. Foreign steel producers, facing declining demand in Asia and Latin America, were able -- and indeed eager -- to fill this demand, particularly in the hot-rolled sheet market which had been de-emphasized by U.S. mills in favor of production strategies that focused on higher value-added and more profitable products.

Unanticipated power outages, equipment failures and scheduled and unscheduled blast furnace relines accentuated this trend, further reducing the ability of U.S. mills to operate at full capacity. Prices continued to rise into April of 1998, reflecting the consensus view of a robust steel market.

As late as last summer, many economists and analysts predicted that 1998 would represent the best year ever for the U.S. steel industry. Based upon forecasts of a sustained shortfall in U.S. steel production and the extended time lag between order and delivery, many forward contracts for imported steel products were booked in the first half of the year to ensure successful delivery in September, October and November. Imports of hot-rolled carbon steel sheets continued to rise, registering a 27 percent volume increase during the first half of 1998 in comparison with 1997.

Two unforeseen factors, however, unexpectedly intervened --choking off the overheating steel market -- playing havoc with earlier forecasts of ever higher demand. First, the strike at General Motors went on far longer than expected. As the primary steel consumer in the U.S. -- accounting for seven percent of total U.S. steel consumption through direct purchases and an additional eight percent through procurements from component suppliers -- the GM strike significantly depressed demand. Second, crude oil prices continued to fall across global markets, adversely effecting oil exploration budgets and the need to purchase the pipes and tubes used to transport and store this substance.

As a result of these events, steel distribution centers, which had been stockpiling steel products in anticipation of continuing strong demand, gradually found themselves burdened with excess inventory, including stocks obtained from Japanese and other offshore suppliers, which had been ordered while demand remained high.

In spite of this growing imbalance, U.S. mills continued to ship record amounts of steel during the second and third quarters. In fact, during September of 1998 -- as U.S. mills began a vocal campaign of allegations claiming they were being hurt by foreign imports -- they actually recorded their second highest level of shipments in history. These levels were surpassed only by shipments in September of the previous year.

Ultimately,however, the market had to adjust to this unexpected decline in demand and the increased supply of domestic and imported products. Given the longer transportation time required for offshore production, imported goods -- produced in response to the optimistic forecasts made in the first half of 1998 -- continued to arrive for several months after U.S. mills began to cut back on their production.

As a result of this excess supply, a more competitive pricing environment emerged. U.S. domestic steel shipments declined after July of 1998 and U.S. steel producers and their employees, understandably disturbed by this dramatic change of circumstances, have sought to counter these developments through aggressive calls for retaliatory and punitive measures in an attempt to impose quotas and anti-dumping charges against foreign producers. This has artificially raised the price of imported steel products, allowing domestic producers to increase their pricing above what would otherwise be possible. In fact, several U.S. mills announced price increases last August, after the U.S. government ruled that U.S. domestic producers were being injured by foreign imports. Additional increases have been announced since preliminary duties of up to 59 percent were imposed by the U.S. government on stainless steel imports from eight countries less than one month ago. Should this trend continue, U.S. consumers will pay higher prices for automobiles, appliances and other steel-intensive products.

Looking forward, however, many analysts and economists forecast that steel demand will decline in the U.S. in 1999. Fewer forward purchases will be made -- allowing a gradual dissipation of the excess inventory that had been accumulated in 1998. Based on these natural market forces, imports of steel products from foreign producers are expected to decrease. In the case of Japan -- whose share of the U.S. market rose from two to four percent in 1998 -- imports are expected to fall back to the more customary levels experienced in 1997 and earlier years.

Even if demand should remain strong, moves by U.S. mills to expand their share of the hot-rolled steel segment have weakened prices to levels where Japanese producers are no longer competitive. This pressure is compounded by the recent strong rise in the yen, which has decreased Japan's cost competitiveness as a steel producer.

This expectation of lower steel demand in the U.S. reflects the views of the private sector and does not reflect a commitment by the Government of Japan to reduce or otherwise "manage" exports through interventions or other extraordinary means. On the contrary, the Government of Japan -- like its U.S. counterpart -- remains committed to the use of market based solutions as the best method to resolve occasional trade imbalances and bilateral misunderstandings of this nature whenever they might occur in the future.

In a meeting with U.S. Trade Representative Ambassador Charlene Barshefsky and Secretary of Commerce William Daley on January 12, 1999, the Japanese Minister of International Trade and Industry, Kaoru Yosano, discussed a number of bilateral trade issues, including the Japan-U.S. steel trade. After this meeting Minister Yosano expressed his belief that private sector estimates forecasting lower Japanese imports would "allay the U.S. concern over steel imports from Japan." He then called upon the U.S. government to "work together with Japan to maintain and strengthen free trade."

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