US firms oppose supporting weaker allies

AS Firoz

IN a letter to the US Administration, the US mini mills have recommended changes in the country’s bankruptcy laws. They feel that the current laws favour inefficient units. Then they have opposed the federal loan guarantee scheme that has so far helped the integrated mills. The integrated mills swear by the this scheme as they can fall back upon it whenever threatened by bankruptcy.

The mini mills have opposed both these schemes because with such support, the life of the inefficient units can be unduly extended and thereby such units will suck away the investment funds from the capital market. This will hit funds availability for the rest.

The mini mills have started seeing where they are placed in the battle for survival. United with the large integrated steel mills they are fighting imports, a common interest for all. But, they have realised by now that their fortunes cannot be totally tied with their weaker brothers. The message is clear: the Government has to see that funds are available for the efficient ones and the mini mills in the first place. Second, if capacity liquidation is to take place, let that start with the ‘inefficient’ mills, most of which are in the integrated sector.

What was that provoked the mini mills in the country to recommend a large policy change related to steel ? Everything looked alright for the industry as the Administration promised everything it could do for the ailing industry in its fight for survival (in its battle against imports).

The mini mills realised that by talking about global capacity cut, President Bush is bringing the axe over the US steel-makers too. If anything is to be achieved globally, the US mills will also have to make some sacrifice. If any capacity is to be sacrificed, the minis would not like that to be from its body. They also have seen that by all efficiency criteria they will escape more or less unhurt. They know that the axe will have to fall on the integrated mills. Planning ahead, they have made this strategic move.

Who are inefficient by their definition ? The firms with old and inefficient assets that cannot generate enough capital to maintain their facilities; those involved in unsuccessful transformations in the past as the result of mergers and acquisitions, companies led by poorly executed business ideas, ranging from poor choices of technology and bad management to inadequate production levels and those struggling to survive with perennial problems have all been branded as headaches for the industry. The mini mills want lifelines to be cut off for such firms. No further proof is required to believe that all these criteria are characteristics of most of the integrated mills in the country. There are only exceptions among the minis that could find a place in the list.

The mini mills have other reasons to worry. One, if the investment funds are wasted on sick mills, they will have no prospects for growth. After all, the US is a huge market with about 25-30 million tonnes of imports. If protected, they would be the only ones to be able to competitively take advantage of the emerging opportunities. If there is a negative perception on the prospects of steel with the poor performers around, they may even have to work hard for working capital. When it comes to the crunch, during the bad patches in the business cycle, the fight for funds can be really nasty if there are too many chasing those.

Two, they are by now convinced that the global steel crisis is going to stay for a while. Even if the market turns around today, the basic character of it is not going to change much. The forces responsible for the turmoil today will be back again. No amount of protection from the Administration will help them, so long they are pitted against companies living on mercy. They must have understood by now that it is the sick companies who are more aggressive in pricing. Three, the mills must have realised by now that US integrated mills with high labour cost and relatively inflexible input pricing will never stand a chance to prove they are efficient by global standards. But, with a supportive government, they can always convince the banks and the shareholders that they stand a chance if modernised. Those in the death bed do not think of death. They expect to get well and get sympathies and blessings. It may however be difficult to push this line very far among the more intelligent bankers today. But, the mini mills do not want to take any chances. Nothing can be worse than these mills getting another lease of life. Therefore, the mini mills have sought incentives from the government for the inefficient mills not merely to close but with complete physical elimination of the assets they have.

(The author is chief economist at the Steel Exporters’ Forum. The views are his own).