ars. In addition, there will be significant demands ⚫ funds to meet the standards of the Occupational fety and Health Act (OSHA) and to convert to the etric system. Therefore, at a minimum, it is estiated that capital expenditures to maintain present pacity during the 1974-1980 period will approxiate $1.75 billion per year in 1973 dollars or about ual to the $1.7 billion average of total capital exnditures for the 1963-1972 period.

3. Pollution Abatement Expenditures: The indushas estimated that pollution abatement expendires may go as high as $3.5 billion during the 74-1980 period. It would appear, however, that nitations arising from the capacity of suppliers to ovide the necessary equipment and on the ability install such equipment suggest some moderation the estimate. It is more likely, therefore, that ese expenditures will approximate $2.5-$3.0 lion or an average of about $400 million per year. is is conservative by comparison to the Booz. len Hamilton (see footnote 12, page 26) estimate $2.4 to $3.5 billion for a shorter period of time, 72 to 1976. The pollution abatement expenditures e estimated on the basis of what would appear to the likely level of industry expenditures in terms 1973 prices.

4. Other: This category represents miscellaneous penditures which are not included in other cateries. Capital expenditures in this category are excted to average approximately $200 million per ar during the 1974-1980 period.

To summarize, the industry estimates that annual pital expenditures in the 1974-1980 period for the ur categories discussed will be approximately:

Financing Future Capital Expenditures Tables 13 and 13A are tabulations of the United ates steel industry's capital expenditures for the riod 1953-1972 and the sources of the funds used finance these expenditures.

From 1953 to 1962 steel industry capital expendies, while varying considerably from year to year, eraged just under $1.1 billion per year. These exnditures were for new capacity (much of it obned by increasing the output of existing units her than by constructing entirely new facilities), well as for cost reduction and product improveent. During this period, a substantial level of interI cash flow plus a net increase in long-term debt of out $1.5 billion permitted the industry to meet this penditure level and, in addition, to place itself in a

stronger financial position than at the beginning of the period.

During the second ten-year period from 1963 through 1972, the companies in the steel industry embarked upon a heavy program of capital expenditures, not to expand capacity, but to reduce costs, improve product quality, and to replace worn-out plant and equipment. In addition, by the latter part of the 1960's the industry was making substantial expenditures for equipment to meet rising environmental standards (Table 14). During the five year peak, from 1965 through 1969, total capital expenditures averaged over $2 billion a year. In 1963 earnings began increasing and cash flow was nearly adequate to sustain the growing capital expenditure burden. By 1967, however, as earnings began to fall, cash flow was no longer sufficient for capital needs. All during this ten-year period, the steel industry added heavily to its long-term debt at the high interest rates evidenced during the period. The percentage of debt to equity rose from 26.7 percent at the end of 1962 to 38 percent at the end of 1972 (Table 15). As a result, since the late 1960's the steel industry has had a considerably higher debt to equity ratio than manufacturing industry as a whole (Table 15A). In addition to drawing on long-term debt as a source of funds during this period, the industry reduced its dividend payments, and its holdings of cash and securities declined. While steel industry profits recovered somewhat in 1972 (and again in 1973), return on sales is below average and return on stockholders' equity is considerably below the average of all major manufacturing industries, as discussed earlier in this report.

As to the sources of funds for the $3 to $4 billion per year required for future capital expenditures, it appears that the key has to be improved profit performance to generate internal funds, and also to justify external financing. Any major reliance on external financing is dependent upon a substantial increase in the cash flow from earnings, 13, a prerequisite which does not apply to many foreign steel producers.

There have been numerous attempts to establish the future cash flow for the steel industry both by outside authorities (e.g., the Booz. Allen & Hamilton study referred to earlier) as well as industry experts. In all instances where even the most optimistic of realistic assumptions were made, the projections produced a substantial shortfall. Using 1973 as an indicator of the near future, this shortfall is demonstrated in the following comments.

13(a) Booz Allen & Hamilton, Inc.. "Study of the Economic Impact on the Steel Industry of the Costs of Meeting Federal Air and Water Pollution Abatement Requirements." (b) Final Report of the National Commission on Materials Policy, June, 1973.

-Recent History

Although a substantial number of raw materials e required in the steelmaking process, iron ore and al are required in the greatest volume. 15 The true pact of these raw materials lies in the fact that ey are essential ingredients in the steelmaking ocess which are continually being exhausted and ey can only be replaced with new discoveries. In der for the steel industry to meet the projected emands for the future, it must have continuing upplies of these raw materials in large quantities. Recent history demonstrates several significant ctors with respect to iron ore and coal. First, the uality of domestic iron ores is diminishing dramatially. This is evidenced by the fact that in 1951 the erage Fe content of crude iron ore mined in the nited States was 39.2 percent, but by 1971 it had opped to 24.5 percent.16 Second, this country's liance on foreign iron ores has increased from 7.4 ercent in 1951 to 31.8 percent in 1972.17 Furtherore, for the long-term, substantial reliance on ese ores must continue. Third, the coal and iron e mining industries, as is true of most other indusies in the United States, have been seriously afected by the general trend of sharply rising costs, articularly costs of equipment (See Table 17). ourth, the two industries, coal mining in particular, ave been the subject of costly special government @gulation.

Assuming 85 percent of future production is from the same type facilities, a total of approximately 27 million additional net tons of iron ore will be required annually by 1980 in order to meet the requirement of 25 million additional net tons of raw steel production. The capital cost of developing the required additional iron ore capacity is a significant element of steel industry economics.

In the early 1950's, when ore was plentiful in the ranges of Minnesota and Michigan, it was easily mined, to a great extent from open pits. Much of this ore was of a direct shipping grade that could be used in blast furnaces with relatively little additional processing. The capital investment cost per annual ton of domestic raw ore mined at that time was estimated by the industry to be approximately $5.00.

Today, domestic low-quality ore is principally mined from hard rock, taconite type material. As noted previously, the average Fe content of this ore is substantially lower than that of ores mined twenty years ago. In order to upgrade these ores, huge capital investments have been required for crushing, concentrating and pelletizing facilities. These investments have also resulted in an improved blast furnace feed. In addition, because of marked changes in the composition and accessibility of these ores, dramatic changes in extractive and processing equipment have been required, thereby further increasing the investment needed to exploit the ore bodies.

To develop new mines and construct the extraction and beneficiation facilities in the United States, assuming no new infra-structures (rail communications, townsites and power), the general rule now suggests a cost of $35 to $40 per annual ton of capacity. Development of new taconite ore bodies in the future will entail substantial costs for infrastructure because these reserves are so remote from population centers. Although these costs are not quantified here because they vary substantially depending on the location of the reserves, they will become an extremely significant factor in developing future reserves.

In the case of foreign ores, the capital cost for developing a new ore body is estimated to range between $30 and $50 per ton, depending on the location, grade of crude ore, the amount of beneficiation and agglomeration needed and the infra-structure costs which are invariably required because of the remoteness of these ore bodies.

General Commentary

The preceding analyses have demonstrated that if · United States steel industry is to meet the future mestic steel demands without substantial relice on foreign producers and also to make a sitive contribution to the domestic economy, it reires expanded profitability in the immediate fue, in order to provide the cash flow and the incene necessary for investment in new facilities. This ofitability can be achieved largely by eliminating mal and indirect price controls, and by adopting de policies which offset questionable trade praces of foreign steel producers and their home govments.

Federal income tax policies will also play an imrtant role in the health of the domestic steel instry. For the future, they should work toward the als of reducing the portion of profits and internal sh generation which is devoted to income tax burns, and increasing the investment in steel manucturing facilities.

In the past decade changing Federal income tax licies have had an important effect on the funds ailable for investment in productive plant and uipment.

In 1962, the enactment of the investment credit d the adoption of the Guideline Procedure for lives depreciable property were designed to stimulate vestment. These measures helped to offset the fects of inflation and the outmoded concepts ider which the capital recovery provisions of the x laws were administered. The effectiveness of the edit was subsequently impaired by suspension id repeal. The effectiveness of both the investment edit and the guideline procedure have been imaired by stringent administrative interpretations hich, for example, have narrowly defined the types structures which qualify for the investment tax edit and for the industry guideline classes.

The Revenue Act of 1964 reduced the corporate tax te from 52 percent to 48 percent. The report of the ommittee on Ways and Means stated, "This tax ite reduction should be an important factor in imroving the rate of profitability for corporations and, herefore, should provide an incentive for business Ivestment and economic modernization and rowth." When considered with the effects of the uideline depreciation and the investment credit of

several years earlier, the reduction in industry's total tax burden was significant.

In years subsequent to 1964, the steel industry's cash flow was greatly impaired by a series of legislative and, as noted above, administrative actions. The absence of the investment credit for almost three years resulted in a substantial reduction of available cash. The tax surcharge which applied to corporations for 21⁄2 years effected another reduction in cash flow resulting from tax policies. Provisions of the Tax Reform Act of 1969 also increased corporate tax burdens. The steel industry was affected by this Act through the reduction in percentage depletion rates, the elimination of mineral production payments, the restrictions on the utilization of foreign taxes arising from foreign mining operations as tax credits for United States Federal tax purposes, the minimum tax, the restrictions of accelerated depreciation on industrial buidings, and in particular by the repeal of the investment credit. For the steel industry the only positive element, a minimal one, was the provision permitting amortization of certain pollution control facilities. Subsequently, even this provision proved to be almost totally ineffective. (See footnote 25, page 40).

The last significant legislation affecting the industry in the past decade was the Revenue Act of 1971. Other than restoration of the investment credit, which was merely a return to a previously existing realistic provision of law, there was only nominal tax relief. The tax deferral available to Domestic International Sales Corporations has been of little benefit to the industry because of the tremendous advantages foreign steel producers have enjoyed, until recently, in the international steel marketplace. By giving its official sanction to the Class Life (ADR) Depreciation System, Congress accepted an action by the Treasury Department, which will, eventually, have some favorable impact on corporate cash flow. However, for the steel industry, primarily because of the effects of the minimum tax, and to some extent because of administrative interpretations, its effects have been less than anticipated. Furthermore, because it is applicable only to additions of property after 1970, its full effects will be significantly delayed.

The negative factors of this period, beginning with the suspension of the investment credit in 1966,

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