Capacity Utilization - Primary Metal Processing
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Steel is making headlines again, this time regarding its use—specifically, imported steel’s use—in products for national defense.
To quote Stephen Barlas, who writes the Around Washington column in The FABRICATOR®:
President Trump expanded his war against imported steel with a second presidential memorandum citing national
security concerns. This followed his first, focusing on foreign steel used in energy pipelines.
The Commerce Department plans to make recommendations on implementation of this second memorandum. It wants
to take a closer look at foreign overcapacity, dumping, illegal subsidies, and other factors as it tries to determine whether
steel imports threaten American economic security and military preparedness. Under Section 232 of the Trade Expansion
Act, the president has broad power to adjust imports—including through the use of tariffs—if excessive foreign imports
are found to be a threat to U.S. national security.
A strong steel industry is a sign of economic clout and industrial independence, and nearly every country wants one. The unintended result is the aforementioned overcapacity. Add a country such as China, one with a population of 1.4 billion people and
an economy based on central planning, and the outcome is almost surely to be even more overcapacity. The government has to
create jobs somehow, and building steel mills and subsidizing the cost of making steel products is one way to do it.
How is the U.S. steel industry faring? Capacity utilization is one measure. A monthly assessment of its capacity utilization is
tracked, analyzed, and reported by the Federal Reserve Board of Governors, and the data goes back to 1986.
In 1986 the industry was in terrible shape. Orders were coming in, but it was using only about 70 percent of its capacity. In
1987 its fortunes changed, and by November its capacity utilization exceeded 85 percent. It would average 86 percent over the
next 12 years, hitting a maximum of 94 percent capacity utilization (January 1989) and a minimum of 76 percent (May 1991)
(see Figure 1).
The bottom fell out in March 2000. Capacity utilization decreased from 87 percent to 68 percent in less than two years. It
hasn’t reached 86 percent since then. After it recovered, it averaged 79 percent until the recession of 2008. After the ensuing
recovery—steelmakers wouldn’t use that term, of course—it has fared even worse. Over the last seven years, it has used about 73
percent of its capacity. In other words, using the average utilization of the 1990s as a benchmark, in recent years the industry’s
capacity is underutilized by 13 percent.
Capacity utilization isn’t the only measure of an industry’s health, but if the industry prevails and President Trump enacts legislation based on Section 232, steel consumers of all sorts can expect higher prices.
Imported steel back in the news