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Big Steel
This page intentionally left blank
Daniel Madar

Big Steel
Technology, Trade, and Survival
in a Global Market
© UBC Press 2009

All rights reserved. No part of this publication may be reproduced, stored in

a retrieval system, or transmitted, in any form or by any means, without prior
written permission of the publisher, or, in Canada, in the case of photocopying
or other reprographic copying, a licence from Access Copyright (Canadian
Copyright Licensing Agency), www.accesscopyright.ca.

20 19 18 17 16 15 14 13 12 11 10 09   5 4 3 2 1

Printed in Canada with vegetable-based inks on FSC-certified ancient-forest-free

paper (100 percent post-consumer recycled) that is processed chlorine- and
acid-free.

Printed in Canada on acid-free paper

Library and Archives Canada Cataloguing in Publication

Madar, Daniel R., 1941-

Big steel : technology, trade, and survival in a global market / by Daniel Madar.

Includes bibliographical references and index.

ISBN 978-0-7748-1665-6 (bound); ISBN 978-0-7748-1666-3 (pbk);
ISBN 978-0-7748-1667-0 (e-book)

1. Steel industry and trade. I.Title.

HD9510.5.M33 2009        338.4’7669142        C2008-907950-7

UBC Press gratefully acknowledges the financial support for our publishing program
of the Government of Canada through the Book Publishing Industry Development
Program (BPIDP), and of the Canada Council for the Arts, and the British Columbia
Arts Council.

This book has been published with the help of a grant from the Canadian Federation
for the Humanities and Social Sciences, through the Aid to Scholarly Publications
Programme, using funds provided by the Social Sciences and Humanities Research
Council of Canada.

UBC Press
The University of British Columbia
2029 West Mall
Vancouver, BC V6T 1Z2
604-822-5959 / Fax: 604-822-6083
www.ubcpress.ca
 Contents

Preface / vii

Acknowledgments / ix

1 Introduction / 1

2 A Tough Industry / 17

3 Prices, Preferences, and Strategy / 61

4 Trading Steel / 83

5 Survival / 133

6 Steel in a Global Perspective / 175

Notes / 195

Bibliography / 223

Index / 234
This page intentionally left blank
Preface

Positioned at the centre of manufacturing, the steel industry is a key eco-

nomic sector. Its member companies share changeable financial health,
exposure to strongly cyclical demand, vulnerability to oversupply, and a
tendency toward price warfare. The most common grades of steel are highly
standardized, readily traded, and widely usable. Trade over great distances
is encouraged by economies of scale and favourable transportation costs,
enabling buyers to enjoy diverse supplies and competitive prices. World steel
production grew slowly until this decade, when demand in Asia began to
soar. In response, output increased by 58 percent, reaching 1.3 billion tonnes
in 2007. More than one-third of that is exported, and 81 percent of net
exports come from China, Japan, Ukraine, Russia, and Brazil.
With that prodigious volume, misalignment of production and demand
can be severely problematic. When there is excess supply, the industry’s
economics tempt producers to cut prices instead of output. That encourages
price warfare, which is a dangerous game in an industry with high fixed
costs. Trade makes it possible for overstocks in home markets to be shifted
elsewhere and, when local prices require it, to be offered at discount. Prices
themselves vary widely – a 337 percent increase in this decade for hot-rolled
coil, for example – and economic downturns can lead just as quickly in the
opposite direction. All of this makes the industry a contingent milieu, and
with most forms of trade protection illegal under WTO rules, producers are
on their own. Major steelmakers are consolidating as they search for stability
and diversified markets. The unexpected merger in 2006 of the world’s two
largest, Arcelor and Mittal, portends a massive global consolidation. Soon
after that event, Canada’s three big producers were acquired by steelmakers
from Europe, the United States, and India.
Canada and the United States are each other’s largest steel suppliers, and
the industry’s multiple products flow in both directions. Why that trade
exists in an active and competitive world market can be explained by prox-
imity, as the two countries’ steelmakers are located around the Great Lakes
viii Preface

heartland and serve the same industries. Familiarity and common commer-
cial networks are additional advantages. Gaining those advantages is one
reason why foreign steelmakers – including Brazilian, Indian, and Russian
ones that were once on the industrial world’s periphery – acquire Canadian
and American firms.
The steel industry’s position in the international economy is the subject
of this book. Discussed are the economics and technology of steelmaking,
pricing and export strategies, the industry’s migration to Asia and Latin
America, survival strategies, and the industry’s future in a globalized econ-
omy. Living not too far from the steel town of Hamilton, Ontario, has made
me aware of the industry’s sheer size and presence. Imagining tall furnaces,
massive mills, ships unloading tonnes of coal and ore, and plumes of flame
illuminating the night should evoke in the reader a suitably expansive sense
of this book’s subject. One of its recurring themes will be scale economies,
which is a concept fully appropriate to this monumental industrial entity.
An understanding of the situation and workings of steelmakers is this book’s
objective.
Acknowledgments

I would like to thank my colleagues Lewis Soroka for reading part of Chapter
2 and Livianna Tossutti for checking my statistics. Appreciation goes also to
the anonymous reviewers for their consideration of the book in its intended
breadth and for their helpful and practical suggestions. Responsibility for
any errors or flaws that remain is, of course, mine. Most of all I would like
to thank my UBC Press editors: Emily Andrew for her encouragement and
advice as the project progressed, and Randy Schmidt for ushering it exped-
itiously into print. My appreciation goes to the production staff at UBC Press
for their promptness, graciousness, and professionalism and especially to
my production editor, Megan Brand, for her prompt and enthusiastic man-
agement of turning a manuscript into print. Finally, I am grateful to the
International Iron and Steel Institute for permission to use the dramatic
graph of world steel production in Chapter 1 and to Corus Steel for permis-
sion to reproduce the four diagrammatic figures of steel production in
Chapter 2.
This page intentionally left blank
1
Introduction

The invention of the Bessemer converter in 1855 made it possible to produce

steel in volume, transforming an expensive specialty product into “the
quintessential material input” of modern economies.1 Steel possesses an
ideal combination of versatility and great strength. “Upon impact it does
not break, shatter or easily distort ... and it can be rolled into shapes and
subjected to temporary or continuous tensions without its ability to perform
being seriously affected.”2 Modern steelmaking technology can produce
enormous quantities in a wide range of products and grades, and improve-
ments in process efficiency have made the metal relatively inexpensive. Steel
is the mainstay of some of the biggest industries – transportation, petroleum,
machinery, shipbuilding, appliances, and construction – and the volumes
involved make the steel commodity market, at $1 trillion annually, the world’s
largest.3 Steel can be re-melted, making it also the world’s most recycled
product.
In 2004, world steel output passed the milestone of 1 billion tonnes – up
from 750 million tonnes only eight years previously – driven by burgeoning
growth in China and India. World steel production for 2007 was 1.3 billion
tonnes. Figure 1.1 shows the pattern in tonnes produced. In rates of growth,
there was actually an 0.5 percent decline between 1990 and 1995, and growth
of 2.4 percent between 1995 and 2000. Then came the acceleration: 6.2
percent between 2000 and 2005 and 8.3 percent in the two years alone
between 2005 and 2007. By comparison, the rate of growth between 1970
and 1990 averaged 1.3 percent.4
Turbulence and instability characterize the industry, and the purpose of
this study is to understand its situation in an international economy in which
steelmakers have proliferated, governments have withdrawn their historic
supports and protections, and steel has become a widely traded commodity.
For established producers in the industry’s historical homeland of Europe
and North America, the past four decades have seen a stark transformation.
2 Introduction

1.4

1.2

1.0
Crude steel (tonnes)

0.8

0.6

0.4

0.2

0
1950 1960 1970 1980 1990 2000

Year

Figure 1.1 World crude steel production, 1950-2007. Reproduced with permission of the
International Iron and Steel Institute.

In Europe, struggling steelmakers in both the state and the private sector
have been consolidated and privatized, with the most viable parts combined
into new firms and governments relieved of expensive and often obsolescent
enterprises. One result has been Arcelor, an amalgamation of producers in
France, Spain, and Luxembourg. In the United States, where there had been
no state ownership, the process proceeded through bankruptcies, with rescue
then coming from investors and consolidators. The largest successor was
International Steel Group, whose components included the former Bethlehem
Steel. There has been some of each measure in Canada, with the Ontario
government assisting the recovery of one producer, Algoma Steel, while
leaving the other, Stelco, to face bankruptcy court.5 At the same time, Canada
has been spared the United States’ and Europe’s large mill closings. Govern-
ment protection against import competition was withdrawn as members of
the General Agreement on Tariffs and Trade (GATT) and subsequently the
World Trade Organization (WTO) agreed to reduce tariffs and other trade
barriers in a series of agreements beginning in 1948. These changes have left
European and North American producers to their own devices in fully con-
testable national markets.
The state’s withdrawal of patronage compels us to focus on the industry
itself. Here, the global trade in steel directs our attention toward pricing,
market-capturing strategies, and the industry’s international dispersion. At
the heart of the industry’s workings are technologies and cost structures,
 Introduction 3

which make dramatic turns of fortune an abiding prospect and survival a

mutual concern. Across the industry’s global expanse, consolidation is now
blending once-national producers into entities that are new, large, and
cosmopolitan – a dramatic result of steel production’s migration to new
locales.
While the industry in Europe and the United States was reaching its full
maturity in the 1960s and beginning to pass into obsolescence (Canada’s
two main producers, Dofasco and Stelco, managed to avoid that decline –
Stelco’s bankruptcy came later, in 2004), new producers were emerging in
Asia and Latin America. Though they were originally established to supply
expanding domestic manufacturers, they were soon exporting their surpluses
and beginning to treat foreign markets as key ones. Their efforts generated
trade complaints in Europe and North America and partial protection under
anti-dumping rules. Since then, privatized Russian steelmakers, facing limited
home demand, have turned to exporting as well. More dramatically, China
has suddenly emerged as the world’s largest producer. The volume involved
– that country accounts for fully one-third of world production – has raised
concerns that Chinese steelmakers’ determined quest for growth and revenue
could overshoot demand, flood world markets with surplus steel, and col-
lapse prices. The industry’s cost structure has always made episodes of low
prices dangerous for weaker producers; the prodigious capacity of China’s
steelmakers now worries even the strongest ones.
New producers have become consolidators, and steelmakers in Europe
and North America, having shed inefficient capacity and invested heavily
in new equipment, have become attractive takeover targets. By buying Inland
Steel and later International Steel Group, Mittal Steel became, along with
United States Steel and Nucor, one of North America’s three largest producers.
Mittal Steel had itself grown to global dominance through consolidation.
Its founder, Lakshmi Mittal, had begun by acquiring mills in Asia, Mexico,
and the Caribbean and then expanded to become the world’s second-largest
producer. In 2006, Mittal stunned the industry by buying the world’s largest
producer, Arcelor.6 The new firm is massive, with output triple that of Nip-
pon Steel, the next-largest. The merger raises the unprecedented prospect
of the industry consolidating globally as major producers acquire smaller
ones and, as did Mittal and Arcelor, combining with one another.
Consolidation is also occurring in other commodity metal industries. In
2006 Brazil’s Vale (formerly Companhia Vale do Rio Doce, or CVRD), the
world’s largest iron-ore producer, purchased the world’s second-largest nickel
producer, International Nickel Company; and in 2007 the aluminum pro-
ducer Alcan Inc. was bought by the British-Australian mining conglomerate
Rio Tinto Group in a deal representing one of the largest foreign takeovers
in Canadian history. For both acquiring companies, the goal was to supply
the rapidly growing demand for industrial metals in China and India.
4 Introduction

In the steel industry, one reason for consolidating in the wake of the
Arcelor–Mittal merger is the defensive one of assembling comparable cap-
acity. A similarly defensive reason is to grow large enough to close facilities
in lean years and still remain in business. Closely related is the desire to
establish a presence in multiple markets in the hope that downturns in some
would be offset by stronger conditions in others. Gaining access by buying
incumbent producers is yet another reason. Still another is achieving comple-
mentarity. For producers of high-value–added steels, that involves acquiring
suppliers of semi-finished steel. For semi-finished steel producers, conversely,
that means acquiring advanced processing facilities. A final reason is to
secure proprietary technology and long-term clients – important assets in
the lucrative and competitive top end of the market. In that segment, a
growing demand for thin, strong, and formable sheet steel comes from the
world’s automobile industry as it seeks to produce lighter yet more crash-
resistant vehicles. Mastery of sophisticated metallurgy made firms such as
Arcelor quite valuable.
Consolidation proceeds apace. Canada’s Dofasco was purchased by Arcelor
in 2006 after a bidding war with Germany’s ThyssenKrupp AG, and Algoma
Steel a year later by Essar Global Ltd., a large, Mumbai-based conglomerate
whose steel subsidiary is India’s top flat-steel exporter. In July 2007, Stelco,
having emerged from bankruptcy, announced that it was for sale; the fol-
lowing month it was purchased by United States Steel Corporation. The
three firms are now known, respectively, as ArcelorMittal Dofasco, Essar Steel
Algoma, and United States Steel Canada. On the American side of the border,
in 2004 the Russian steelmaker OAO Severstal purchased Rouge Industries,
the Ford Motor Company’s spun-off steelmaker, and then made a series of
subsequent acquisitions to become the fourth-largest American producer.
What made these purchases attractive – even that of the decrepit Rouge
Industries – was their position in North America’s automobile industry.
Enhancing Stelco’s appeal was its capacity to supply steel for processing into
high-margin products.
Larger firms are also prime candidates. United States Steel, whose output
is four times that of either pre-merger Dofasco or Stelco, is still medium-sized
compared to ArcelorMittal. Making the company a potential takeover can-
didate is its profitability and position in the American market. Corus Steel’s
similar position in the European market – where it was the second-largest
producer – led to its purchase in 2007 by India’s Tata Steel. As one index of
the industry’s structural transformation, a major component of Corus was
the privatized remnants of British Steel.

Industry and the Position of the State

As this sketch shows, the steel industry epitomizes globalization, which can
be defined as the spread of production, markets, and investment across
 Introduction 5

national borders. Globalization is the result of the ending of state controls

on the movement of goods and capital. Successive rounds of trade liberaliza-
tion under GATT and its successor, the WTO, have reduced or eliminated
tariffs and bound members to the non-discriminatory treatment of foreign
goods. By agreeing to tariff reductions, states have given up their power to
restrict imports by taxing them. More generally, under the WTO principle
of national treatment, states are expected to impose no special disadvantages
on foreign goods or special favours on domestic ones. These measures have
opened the way to a massive increase in global trade. Governments, eager
to promote exports, have added their encouragement.
Steel is readily exported because it is highly standardized, particularly
when it comes to commodity-grade products such as structural steel, coiled
sheet, and steel plate. To take a common example, one mill’s steel reinforcing
bars are direct substitutes for another’s. For any good, product differentiation
limits potential buyers and restricts trading opportunities; in steel, however,
such differentiation affects only top-of-the-line specialty grades. For the
much broader array of commodity-steel products, qualitative barriers are
very low. The key differentiation is price – a fact with significant trade im-
plications, as will be seen shortly. Overall, 36 percent of world steel output
is exported – up from 22 percent in 1975 – and products circulate widely.7
This commerce reflects a fundamental reorientation. Historically, steel
producers served their own national markets and occupied their respective
positions within national industries. States regarded steel as a strategic com-
modity. Its importance in manufacturing – especially in armaments produc-
tion – made it too vital to be entrusted to foreigners and too vulnerable to
wartime interruption. In national economies more generally, steel repre-
sented massive concentrations of investment, employed thousands of work-
ers, and was at the core of key industrial regions. Some governments
nationalized the industry; others encouraged or tolerated cartels. Since then,
as states have withdrawn their custody, the basis of ownership has evolved
from national to global. Privatization has exposed steel producers to the
financial markets, and the removal of investment barriers under WTO,
regional, and bilateral agreements has made those producers available to
foreign buyers.8
Governments might still wish to keep their steel producers under domestic
control, but their power to do so is limited. That much was evident in the
French government’s vigorous efforts to block Mittal’s takeover of Arcelor.
The government regarded Arcelor as a national champion and worried about
mill closings and layoffs. Though its efforts, joined by those of Arcelor’s
management, delayed the sale, it did eventually proceed. Appeals to the
European Union (EU) were to no avail. As an indicator of openness, however,
the Arcelor case is exceptional in that other governments have not resisted
international steel takeovers, though they have been attentive to the effects
6 Introduction

on competition. The biggest exception is China, which limits foreign partici-

pation to joint ventures, though conversely the government regards foreign
takeovers as a suitable way for Baosteel, its major producer, to expand.
Nonetheless, in 2007 large foreign takeovers began to raise concerns in
both Canada and the United States. In June 2007, Canada’s Minister of Fi-
nance announced the formation of a Competition Policy Review Panel
(CPRP) to examine Canada’s Competition Act and the Investment Canada
Act, with particular attention to whether the legislation should be changed
to address investment by state-owned entities and considerations of national
security.9 This reconsideration was prompted by public reaction to a spate
of very large foreign takeovers, including Arcelor’s acquisition of Dofasco.10
In October 2007, the industry minister ordered that issues concerning in-
vestment by state-owned enterprises and their national security implications
be removed from the panel’s mandate – an indication that the government
might take up the question separately. A key recommendation of the panel’s
report, issued on June 26, 2008, was that existing investment restrictions
should be reduced in the interest of improving productivity.11 In July 2007,
President George W. Bush signed the Foreign Investment and National Se-
curity Act. From now on, the treasury department’s Committee on Foreign
Investment, which monitors foreign acquisitions, will be required to fully
investigate those investments that involve companies owned or backed by
foreign governments.12 Until then there had been no broad restrictions on
foreign investment except in sectors where there was a risk to national secur-
ity. The new American law was taken as a model by the German government,
which was concerned that existing German and EU rules were not specific
enough to cover foreign-government–backed entities, particularly Russian
and Chinese ones.13 Legislation passed by Germany to amend the Foreign
Business Act now allows the government to block foreign investment of
more than 25 percent in a German firm. The legislation was modified in
January 2008 at the request of the European Commission (EC) to exempt
firms of the European Union.14 Meanwhile, in Japan, business reacted with
anxiety to a government plan to change merger and acquisition rules so
that the subsidiaries of foreign firms would be able to pay for takeovers with
the parent firm’s shares. The worry was that Japanese firms would be more
vulnerable to large and wealthy foreign buyers. Specifically mentioned were
Japanese specialty-steel producers.15
For those doing the buying, steel acquisitions are attractive both domestic-
ally and internationally. A strong domestic attraction is access to the acquired
producer’s home markets. A strong international attraction, created by lib-
eralized trade, is the prospect of assigning facilities to entire world markets.
Doing so can involve simply exporting items currently in production or, more
expansively, investing in a fully specialized mill. The main constraints,
 Introduction 7

representing costs of trade, are locational and logistical. The fact that those
costs are much lower in domestic than in international trade suggests why
buying access to a producer’s home market is a popular strategy. If the cost
difference were to disappear, very different ways of organizing world steel
production would become feasible.16 At the same time, the amount of steel
traded internationally, as was just seen, is substantial – an indication that
foreign markets are served quite readily at current costs of trade.
Another limit on state authority is WTO rules that forbid the subsidization
of exports. Subsidies paid directly to producers are permitted; however, these
are actionable when they cause harm to the producers of other WTO mem-
bers, when they impair the common benefits of WTO rules, or, more gener-
ally, when they cause “serious prejudice to the interests of another WTO
member.”17 If those effects can be established, subsidies are subject to
countervailing tariffs. WTO rules encourage members to resolve subsidy
disputes through consultation. With steel products, such consultation oc-
curred in 2002 when the EU, in multilateral discussions under the auspices
of the Organisation for Economic Co-operation and Development (OECD)
about the health and future of the steel industry, agreed to eliminate almost
all subsidies to its steelmakers. In formal WTO proceedings, most cases have
involved export subsidies. Much more infrequent are cases involving non-
prohibited but actionable subsidies because they must be shown specifically
to cause injury. Such harm is difficult to prove because the trade effects of
payments to producers, in contrast to export subsidies, are usually more
diffuse. The result has been a general reluctance to challenge other members’
domestic industrial practices.18 An exception is the United States, which uses
direct industry subsidies less than its trading partners and has less reason to
fear “retaliatory investigations.”19 Because actionable subsidies may be chal-
lenged by any WTO member, however, states awarding them are aware that
they do not have an entirely free hand.
Anti-dumping complaints are easier to prove and less expensive to litigate,
and through them states have retained a powerful tool of intervention.
Under WTO standards, states may impose tariffs to eliminate discount mar-
gins on imports. Investigation must show that imports are being sold below
home-market prices or below the cost of production. If material injury is
found, complainants can receive tariff relief. Safeguard rules are a similar
but less potent measure. They allow the use of tariffs to remedy injury caused
by an import surge; and unlike anti-dumping rules, they do not involve
allegations of unfair practice and do not single out particular exporters.
However, safeguard actions under current WTO rules are governed by strin-
gent requirements and may be disallowed on appeal to the WTO.20 Failure
to comply opens the way to retaliation by affected trading partners. That
prospect forced the Bush administration to revoke a set of special steel tariffs
8 Introduction

imposed under safeguard provisions in 2002. In contrast to regular tariffs,

which have steady effects, both anti-dumping and safeguard interventions
are intended to operate exceptionally and case-by-case in very specific prod-
uct subcategories. For producers facing longer-term international competi-
tion, neither is a dependable protection.
A third tool of intervention is competition law. By making collusion illegal
and by authorizing measures to prevent or disband monopolies, it provides
a means – should states choose to use it – of regulating the effects of con-
solidation. This bears on one incentive for global steel mergers – maintaining
price stability by coordinating output levels among a workably small family
of producers. The incentive to coordinate is rooted in the steel industry’s
cost structure, as will be seen shortly.
The world’s automobile industry provides a preview of the kind of inte-
grated global steel market made possible by trade liberalization. With an
annual output of some 50 million cars whose average steel content, by weight,
is 70 percent, the automobile industry is a prime customer. Consolidation
has occurred there as well, with smaller firms such as Saab being acquired
by larger ones such as General Motors (GM). With that has come the sharing
of components and vehicle platforms. Product standardization allows com-
ponent production to be dispersed internationally and assembly plants to
be located in the large markets of Europe, the Americas, and Asia. For steel-
makers, this opens an expansive prospect. Although North America’s Big
Three automakers descended into grave financial difficulty as a result of the
global financial crisis of 2008, the longer-term outlook is that world auto-
mobile production will continue (although the automobile industry may be
a re-organized one). Demand for automotive steels will also continue.
Though automakers prefer to deal with nearby mills, standardized require-
ments and dispersed production enable steelmakers to become global pro-
viders. One way of doing so is by acquiring steel firms, such as Dofasco and
Stelco, which have an established automotive business. A more comprehen-
sive strategy involves helping design vehicles that require a steelmaker’s
proprietary sheet steel and that are slated for manufacture at multiple world
sites. With that eventuality in mind, major steelmakers are entering into
increasingly close product-development relationships with world automobile
producers. The best-positioned candidates are those, such as ArcelorMittal,
that have design expertise and that can supply their proprietary product
worldwide either on their own or in co-operation with other steelmakers.

Sectors, Cost Structures, and Prices

It is easy to view industries as more or less alike. Trade politics studies, for
example, often assume that firms demanding protection are motivated by
simple rent seeking. That assumption makes it possible to model firms’
behaviour mathematically and to portray purposeful political advocacy, but
 Introduction 9

it too readily generalizes among industries that may be very different.21

Modern economies have multiple sectors with differing capital structures,
technologies, markets, and international exposure. That fact became strik-
ingly clear to researchers investigating the applicability of strategic trade
policy. After studying the telecommunications, jet transport aircraft, auto-
mobile, and steel industries, they concluded: “The features of the sectors we
discussed were so strikingly different, when examined with a sufficient degree
of care, and the problems confronted by firms in those sectors were so dispar-
ate, that it made little sense to speak of a ‘trade policy problem.’” This was
true in industries that were themselves conveniently regarded in aggregate:
“even across areas that might be thought to have much in common as a class
– ‘high-tech’ or ‘smokestack’ industries – careful examination of their market
structure, conduct, and performance demonstrated clear and particular dif-
ferences.” The trade problems of the automobile industry, the researchers
found, were quite different from those of their smokestack industry counter-
parts in steel. For trade policy, also readily characterized in aggregate, the
clear implication is that different industries require different treatments.22
Steel production shows how dissimilar different parts of the same industry
can be. Technology divides the steel industry into two very distinct sectors
– integrated producers and minimills. Integrated producers (a shorthand
reference to vertical integration) refine iron ore into steel and roll it into an
array of products. The process is continuous, requiring close coordination
among adjoining facilities. The volumes involved make those facilities mas-
sive. Those facilities in turn impose formidable capital requirements and
expensive cost structures. Minimills roll steel products from melted scrap.
Their comparatively simple and cheap technology gives them a cost and
price advantage, and they are efficient at moderate volumes. In an undiffer-
entiated industry, firms are affected by the same conditions in the same way.
In the steel industry, however, conditions related to capital costs and min-
imum efficient scale have created problems for integrated producers and
opportunities for minimills. Because the integrated sector is the one that has
been beset by difficulties, and because it accounts for two-thirds of steel
production worldwide, it is the focus of this study. Integrated producers will
be referred to simply as steelmakers unless minimills are being mentioned
specifically. For the same convenience, steelmakers – again, unless minimills
are a point of focus – will be spoken of as the steel industry.
To proceed beyond categorical assumptions, it is necessary to understand
the steelmakers’ basic technology and economics. The key fact to appreciate
is that cost structures and cyclical demand make the steel industry inherently
volatile and difficult. Expensive technology imposes high fixed costs that
must be covered through good times and bad. Because that technology is
efficient at high volumes and produces in a continuous process, it encourages
producers to cover fixed costs by maintaining output. They can do so in the
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