Edward Lotterman
The global steel industry “is in a dynamic state,” — a Vietnam-era phrase used when much seemed astir, but no one understood exactly what. Two steel-industry issues confront us in the United States. 2025 may be the year that clarifies its future.
The first is the still-pending Nippon Steel offer to buy U.S. Steel, long the largest steel producer in our country and in the world. The proposed deal is largely regional in its impacts and limited in the years it would have any substantive effects on our economy. But with the Biden administration’s rejection of the deal, and incoming President Donald Trump’s promise to do the same, only a favorable court case in a lawsuit jointly filed by Nippon and USS could save the deal.
Meanwhile, other suitors have reportedly come forth.
But on the micro level, the immediate issue is how the sale would affect unionized workers, with the United Steelworkers union also opposing the merger. With most workers thinking the buyout would be a bad deal for them, Biden’s kibosh thus is a win. But it may prove a Pyrrhic (or bitter) victory. That’s because without Nippon’s lifeline, USS has warned of layoffs and steel-plant closures. National defense concerns about a core industry player being owned by a company in another nation, however friendly, had been raised and examined, but these now seem moot.
The second issue affecting the steel industry centers on technology, specifically making finished steel without the use of a blast furnace. This involves turning mined taconite ore directly into direct reduction iron to feed electric-arc or basic-oxygen steel furnaces.
Is this technology, on which research and development work has been done for decades, really at a point at which it could transform the steel industry in the same way that “hot blast” furnaces did 200 years ago? If so, how will that affect Minnesota’s Iron Range and mines in neighboring Michigan and Ontario?
Start with the Nippon-USS deal. Both companies have historic roots. USS was formed by merging Carnegie Steel with several small producers in a 1901 deal engineered by J.P. Morgan. Capitalized at $1.4 billion, USS was the first billion-dollar corporation in the world. With many mills and subsidiaries it dominated all aspects of steel production and sales. Most of its plants were large integrated mills, with blast and open-hearth furnaces plus rolling mills for myriad products.
Nippon Steel had a similar history in Japan, similar technologies and a similar dominant position, and both thrived for decades.
However, in the last quarter of the 20th century, worldwide steel industries met financial headwinds, and both of these companies underwent divestitures, reorganizations and mergers.
Europe, North America and Japan had heritage steel plants. But colonial powers like Britain and France had squelched steel production in their former colonies, preferring to maintain captive markets for their own domestic producers.
Countries like India had able engineers, managers and capital. After independence in 1947, India soon became a major producer. U.S. bombing of Japan during World War II forced that country to rebuild from scratch. This enabled them to leapfrog slower-moving natural technological developments in the U.S. and Europe, and their mills became among the most modern in the world. Their steel capacity soon was well-above pre-war levels. Also, emerging “Asian tigers” like Taiwan and South Korea quickly emulated Japan just at a time when new and vast coal and iron ore reserves in Australia provided cheap inputs.
Europe had not rebuilt war damaged mills from scratch to nearly the extent Japan did. Domestic politics there kept obsolete, high-cost mines and mills alive, but uncompetitive. Public subsidies allowed these largely nationalized companies to keep selling even though the true cost of production was higher than those of competitors.
In the former USSR, steel had been the foundation stone of Stalinist industrialization. Full integrated mills operated in several of the Soviet Republics. When the USSR blew apart in 1991, these industries fell to private oligarchs free of central planning. Soon, one could buy steel rebar with tags from Lithuania, Ukraine or Poland in St. Paul big box stores.
In World War II, the United States had given Brazil a complete integrated steel mill in partial return for sending 20,000 soldiers to serve under U.S. command in Italy. Brazil lacked good coal, but did have the largest and cheapest iron mines in the world. It soon became a major producer and exporter of ore and finished steel.
All the while, in the United States, managers of the dominant companies and heads of the unions who worked for them implicitly reached mutual suicide pacts, promoting inefficiencies through outdated compensation plans, work rules or technology. Life would go on until the industry and its workers hit the wall. Steel journalist John Hoerr’s 1988 book, “And the Wolf Finally Came: The Decline and Fall of the American Steel Industry” relates this in painful detail.
Unfortunately, zombie industries like Made in USA steel can take a long time to die. Ones with high fixed costs, like the huge capital investment needed for integrated steel mills, can keep operating for a long time as long as revenue from sales covers variable costs such as labor and raw materials. Returns on capital invested are meaningless when the mill that it represents has zero market value. So zombie mills can keep cranking out steel, thus depressing prices for all other producers, including newer-technology mills that would otherwise be profitable.
Both Nippon and U.S. Steel boast about their managerial sleekness post-restructuring, about their elimination of obsolete equipment and their investments in new technology. Perhaps true, but overhyped and perhaps irrelevant.
Austrian economist Josef Schumpeter described market economies as machines of “creative destruction.” By generating incentives to innovate new technologies, they kill off old ones. Even if the Nippon-USS deal would yet be approved by a mercurial President Trump, don’t count on those union jobs existing a decade from now nor the merged entity still even being in business.
Iron and steel workers once were a major factor in the U.S. labor force. Now there are some 145,000 of them out of a non-farm labor force of nearly 160 million. That is one-tenth of 1%. The 270,000 average monthly increase in jobs over the last three years is almost twice as great. Yet U.S. Steel employees are an important symbol as among the few remaining blue-collar private-sector unionized workers.
The prospects for the Nippon buyout circle back to the new direct reduction technology that may prove to be a mechanism for Schumpeter’s creative destruction. A major reason for holding on to legacy integrated mills that are obsolete is that most ore still needs smelting in a blast furnace. Moving molten iron directly from the blast furnace to a steel making furnace saves remelting and lowers costs greatly. But if steel furnaces can be fed with cold pure iron from a DRI plant just as cold steel scrap is fed into electrical mini-mills, then old integrated mills have no advantage at all.
Thus if the Mesabi Metals full-scale DRI plant at Nashwauk proves out its technology, it swiftly will be replicated elsewhere, The more nearly-pure iron becomes a general commodity, the less worth any existing mill centering on a blast furnace will have.
For Mesabi Metals and iron mines around Lake Superior, the duration and magnitude of the edge given by DRI technology will depend on whether the mines in the major exporting countries can provide a similarly flexible product. Time will tell.
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St. Paul economist and writer Edward Lotterman can be reached at stpaul@edlotterman.com.
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