Two of the most important regulatory factors in the history of the steel industry have already been covered: labor market regulation and trade disputes in Chapters 6 and 7. They are so critical and nuanced, they warranted special treatment.
We now turn to competition and environmental policy.
Because of its history of oligopolistic pricing, inevitably the steel industry came up against antitrust issues. The Pittsburgh Price system was dismantled just at the time that rising import pressures shifted the regulatory battle to Trade Law. Those were the dominant regulatory issues of the 1960s to 1980s.
However, regulation should not just be seen as a compliance issue in the perpetual debate between the role of free markets and public policy. Regulation can also play a positive role in facilitating product innovation and market development. An example is the SAE (Society of Automotive Engineers) product standards that originated in the early 20th-century automotive industry but have become the global standards for steel and manufacturing.
More recently, environmental regulation has preoccupied the industry and driven many of its capital allocation and investment choices. The rise of environmental concerns put steel at the center of issues involving water and air quality and recycling.
Steel Pricing and Antitrust: The Pittsburgh Pricing System
The role of competition, price setting, and commercial policy was the major single regulatory issue in the era of Big Steel in the first half of the 20th century.
The effect of U.S. Steel dominance in the industry was its imposition of the Pittsburgh Plus pricing system on the entire country. This system dictated that all steel prices be based on the costs of production and transportation from Pittsburgh, no matter where the steel was originally produced. This allowed producers based in Pittsburgh to compete with local producers all around the country, since these producers were unable to undersell steel made in markets that U.S. Steel dominated. Although its origins are obscure, Pittsburgh Plus was firmly in place by 1901 and U.S. Steel championed its continued existence. Despite losing a suit by the Federal Trade Commission in 1924, U.S. Steel fought to keep the Pittsburgh Plus system in place in a modified form until it lost a US Supreme Court decision on the matter in 1948.
The system was in large part founded on regional economics. The emergence of a large iron and steel industry in the Chicago region during the 19th century was a function of entrepreneurial effort and geographical advantage. Mills could obtain raw materials from the vast iron ore deposits in the Lake Superior region relatively cheaply and easily. Because most of the iron ore used by the American steel industry during its rise was mined in Minnesota and Michigan, mills located along the Great Lakes were well positioned to enjoy lower costs than their competitors elsewhere. They used the “Pittsburgh Plus” pricing system to protect Pennsylvania mills from competition in other regional markets like the Midwest.
However, the advantages to U.S. Steel itself were only temporary. In the longer term it is not clear that the company itself was well served by the monopolistic pricing regime.
U.S. Steel was founded with the hope that its size would lead to economic benefits in the form of market power, operating, and network efficiencies. While some cost savings were achieved, and some of the superior management of the Carnegie companies did transfer to the new entity, in the grand scheme of things, size appears to have acted as a drag on the new company rather than as an advantage. Warren1 hints at some of this tension when he notes that those “who had worked at Carnegie found it difficult to work in reasonable amity with rival companies rather than competing ruthlessly with them as in the past.” In the face of attempts to manage prices and exercise leadership, U.S. Steel saw its many small rivals eat away at its markets. Between 1901 and 1927, U.S. Steel’s market share in raw steel dropped from 65.7% to 41.1%. This period of U.S. Steel’s relative competitive latency allowed for the growth of companies such as Bethlehem Steel, which by 1903 was run by U.S. Steel “defector” Charles M. Schwab. U.S. Steel’s price leadership strategies in the early 20th century may have led to a high return on sales, but the company’s dollar sales were essentially stagnant despite significant additions to capacity and production.
By 1936, the stagnation at U.S. Steel was such that Fortune magazine “recalled that the Corporation’s policy had once been summarized as “No inventions: no innovations” and Charles M. Schwab reported that the chairman of U.S. Steel admitted to him that the Corporation, in fact, had missed every “new thing” in steel. Under Carnegie’s reign, Pittsburgh-based steel facilities had competed successfully against growing location-based advantages of other regions by relying on innovation, efficiency, and superior management. U.S. Steel under Gary did participate in the geographic dispersion of American steelmaking but its “Pittsburgh Plus” pricing led to a hobbling of the corporation’s growth into new markets and eventually shrank the region in which Pittsburgh-area steel was competitive. Even in its infancy, U.S. Steel was an illustration of inertia and captivation by sunk-cost investments.
The era of price fixing for Big Steel came to an end. The Anti-Trust actions eliminated the system just as the competitive technologies of foreign producers were being introduced and, as described in Chapter 6, collective bargaining was becoming the central price-setting mechanism in the industry.
The Role of SAE Standards
The impact of regulation is most often described in negative terms for its alleged adverse effects on management, costs, and free markets. However, regulation can also play a major role in expanding markets through development of industry standards. A clear example comes from steel and automotive standards.
SAE (Society of Automotive Engineers) standards have become pervasive metrics not only for steel inputs into automobile production but also for general manufacturing usage throughout the global steel industry. The setting of industrial standards for steel materials goes back to the earliest days of the auto industry and the precursor of the SAE, the Materials Branch of the Association of Licensed Automobile Manufacturers (ALAM) in the first decade of the 20th century.
In 1910, engineers in the young American automobile industry initiated an extensive program of intercompany technical standards dealing with dimensions of parts and accessories, specifications for purchased materials particularly steel and engineering practices such as the design of screws.2 The earliest steel specifications were set by the Mechanical Branch of the ALAM between 1905 and 1909. The Association comprised the numerous small assemblers, outside of Ford and GM, who each had their own unique parts designs and found it almost impossible to obtain parts elsewhere if their regular parts suppliers failed. In 1910, the SAE was formed and its engineer members eventually became the leaders in setting technical standards for the industry.
The Standards Committee of the SAE was divided into divisions, each of which developed standards for specific groups of parts or materials. For instance, the standards for steel tubing reduced varieties from 1,100 to 150 by 1911.3 The most stringent material specifications were for iron and steel alloys. Previously steels had been sold by brand name or by each manufacturer’s own specifications. It was estimated that through the standards, the steel costs for manufacturers were reduced by 20%.
At first, it was the smaller auto companies that created, followed, and acknowledged the value of the standards. However, by 1915 GM took an active interest in the SAE standards, particularly those for steel, and one of its metallurgists became Chair of the Standards Committee. GM was less concerned with detailed specifications for individual parts, because like Ford, it had imposed its own internal standards for its internal parts divisions. This reflected the fact that external purchase of parts by auto companies had fallen from 55% to 26% during World War I. Large automobile manufacturers did not purchase many small parts, but they still depended on materials and equipment from other industries. Here standard specifications continued to be immensely valuable.
By the mid-1920s, GM engineers were the most prominent in the SAE. Five of the Standards Committee’s division chairmen or vice-chairs were from GM and they were on 16 of the 21 committees dealing with motor vehicles. The other major car companies, other than Ford, were also active participants. By the early 1930s, the SAE Handbook paid most attention to standards relating to systematized interindustry purchasing. The detailed standards for automobile parts, so important to the parts-purchasing automobile builders of earlier years, had disappeared.
The automotive industry by the 1920s primarily used SAE standards for purchase specifications. Interestingly, the bitterest opposition to purchasing standards came from suppliers of steel. In the early years, many of them deemed SAE chemical and dimensional standards for steel as an inappropriate intrusion. Producers of spring steel particularly objected to being told by what specific method they were to produce their product. As the volume of steel purchasing by the auto industry increased in the 1920s, steel producers came into compliance and cooperated with the use of SAE standards as a way to systematize the purchasing process.
Steel, the Environment, and the EPA
For current steel management, labor market regulation has been displaced by environmental regulation as the thing that keeps them awake at night.
Technical experts in steel believe that over the next decade the determinative variable in future technology trends within the steel industry will come from outside. They will be driven by environmental and energy policies. Ironically, at the same time, steel has more than met the much disputed Kyoto GHG standards over the past decade.
The steel industry has identified climate change as a major challenge for more than two decades. Long before the findings of the Intergovernmental Panel on Climate Change (IPCC) 2007, major steel producers recognized that solutions were needed to tackle CO2 emissions. They have been highly proactive in improving energy use and reducing greenhouse gas emissions and are now operating close to the limits of the existing steel production technologies.
Even the best steel mills are now limited by the laws of thermodynamics in how much they can still improve their energy efficiency. With most major energy savings already achieved, further large reductions in CO2 emissions are not possible using present technologies. The kind of further reductions being called for by governments and international bodies require the invention and implementation of radical new production technologies.
A set of breakthrough technologies is needed; the kind of paradigm shift in industrial production that can change the way steelmakers around the world operate.
Various research programs have already identified more than 100 new technologies, and classified them in terms of the CO2 reduction they could achieve. Some technologies are ready to use but would deliver only a small reduction in CO2 emissions. The more ambitious projects in terms of CO2 reduction are now going through various steps of scaling up from lab to commercial reality.
The coal-based ironmaking technologies associated with carbon capture are the most likely candidates for early viability. Hydrogen and electrolysis are further into the future, as these technologies will require deeper reengineering of steel production and the development of new processes from first principles. Biomass solutions are probably in the intermediate future. In the even longer term, new avenues of research are likely to emerge. These include the integration of steelmaking with solar power generation, with new energy technologies and with new, fourth- or even fifth-generation nuclear power plants. Such solutions are not yet part of the ongoing development program, but could be added in the near future.
Nonetheless, the focal point for the next decade will be environmental policy and regulation. At the core is the basic steel producing furnace technology.
GHGs are the Big Story that will lead the development of steel technology over the next decade. The EU is in the lead. There are two choices. Either you can adapt the Blast Furnace, which is further along the road right now. Or, replace the Blast Furnace but this is a longer story.
Sequestration of CO2, putting it under ground is a major American focus. The US Energy Department supports it. But putting it in the ground may only be a partial and temporary solution.
A paradigm shift in technology will look in a different direction. But, the record for new iron making processes is not good. There are three candidates in the European initiative. They don’t reduce CO2 very much.
Steel Consultant
Electric Arc Furnaces (EAFs) have an inherent advantage among steel-producing facilities because they have a smaller carbon footprint. They use about 30% less carbon to produce a ton of steel. However, the story is more complicated. There is concern that they may just shift the burden to the electricity provider.
International experts in the industry do not see a fundamental breakthrough in steel’s carbon footprint any time soon.
We don’t see a breakthrough near term. There may be improvements in energy efficiency or synergies between companies that improve net CO2 results. The combination of better raw materials with new technology can go a long way on better CO2 results.
Otherwise you are smelting bad stuff.
Steel Consultant
There may be improvements in energy efficiency or synergies between companies that improve net CO2 results, but this is at existing facilities. More can be done in iron-making but it needs a new site. Co-generation as done in some mines currently could also marginally contribute. More could be done at greenfields but there is no movement likely in this direction from the companies or the public in the near term.
Steel and Recycling
How we view environmental regulation in the steel industry is also affected by how we look at the industry itself. Throughout the book we have looked at the steel industry in terms of supply chains. Production can be thought of not as just a value creation but also as a process of materials transformation in which environmental change and the organization/disorganization of matter and energy are integral rather than incidental to economic activity. In future, it is suggested that we will be seeing supply chains as systems of material flows and balances with material inputs and final outputs in the form of waste and pollution as all part of one system.
By continually reducing energy usage by up to 1% a year, the steel industry has not only met and surpassed the Kyoto Green House Gas targets, it has also made enormous strides in reducing particulates and effluent discharges in the past 20 years. All steel mills, for instance, try to minimize discharges and recycle their water. Steel making uses a lot of water. Some mills have achieved zero discharge; they recycle every drop of water.
The strongest stories come from the EAF mills. Beyond the general claim for steel, which is true in comparison to other industrial materials like aluminum and plastic, there is the record of steel producers’ operations themselves and how they have changed in recent years.
We were the first steel company to have all operations registered to ISO 14001 environmental standards. It shows up in performance. There were always concerns about cooling water and effluent from steel mills. We have no discharge from our mill. We weren’t on a waterway so we had to figure out how to minimize water usage. We now have a zero effluent water system. Not even from the washrooms.
Steel Executive
The achievements in steel have literally been remarkable from one end of the ecological story to the other. More importantly, the steel companies have not only cleaned up their own operations but contributed to the clean up and environmental standards for the society and economy as a whole through their scrap retrieval and recycling operations. However much remains to be done, some of it controversial. The record of the steel industry is undeniable. But the conversation is not over.
The steel scrap story requires further elaboration, both not only because EAF steel producers account for approximately half of North American steel production but also because the steel scrap story is an important economic narrative in its own right. It also gives another perspective on how steel contributes to the economy in new and different ways.
The EAFs have a strong green story to tell. They use a lot less energy than BOF mills (25%) and generate a lot less GHGs (10%). Some 98% of their material is recycled.
Steel mills, particularly EAF producers, often have their own scrap divisions or subsidiary companies. The mills use low-grade feedstock for commodity products like rebar. They use recycled auto and appliance material for higher grade products.
High-grade product is available as waste from auto and other manufacturing plants. Shredding comes 60–70% from cars being recycled. Appliances are next and the Loose Material (LOC) is the remainder.
Scrap operations do a value chain analysis of the scrap supply chain. Some material also comes from old buildings and this recovered steel can be endlessly recycled into construction applications. Recycled steel from cars are more limited.
We shred 20,000 cars per month. One per minute. The cars are crushed.
We take about 400 tons per month from the municipalities, drawing from 70 municipalities.
Railcars are another source. We have recently contracted to source 3000 rail cars from a financial services company.
Steel Executive
They also work with dealers and pull product from municipal dump sites. About 10–15% of the feed comes from municipal dump sites. The latter would be made much easier if preliminary sorting was done by consumers through Blue Box sorting in municipalities where households sort their trash into metals, glass, and so on., when they put their garbage out for garbage collection each week.
In fact some municipalities are starting to re-mine their dump sites to extract metallics. In municipal dumps, the steel is easily separated because it is magnetic and can be drawn out. Everything else must be hand sorted. Small motors for instance are 88% recyclable. The rest is copper.
Steel Executive
Contamination issues are critical to the inputs. From the standpoint of the industry, if there were no local steel mills, the material would still have value and be transferred somewhere in the world.
The EU has the most complete recycling program and rules. The life cycle perspective on industrial products, their consumption, and waste management should be a guide for policy for the future across the industrial materials sector.