All things considered, the trade-off between a rapidly deteriorating rationale for steel price controls and the benefits to steel consumers from decontrol overwhelmingly favors the latter course of action. Delay will serve only to increase the long run real costs to the economy by forcing it to depend on an inadequate supply of domestic steel, or upon unreliable and opportunistic foreign sources subject to sudden and severe price increases. It is ironic that the validity of this argument is widely recognized by most purchasers of steel, but apparently not by the Cost of Living Council. The time has come to base such all-important decisions on economic realities rather than "politics" and "public relations." We believe strongly that prompt decontrol of steel prices is needed, and is feasible now. It would, first of all, decelerate and then reverse the trend of market dislocations and resulting unemployment. Secondly, it would reduce the excessive premiums now being paid for imported steel. But third, and most importantly, it would act as a signal to domestic producers that Government recognizes the need for a healthy steel industry and intends to structure its policies and actions accordingly. This, in turn, will activate both short and long term plans to alleviate present shortages and prevent even more serious ones from developing further down the road. The resulting increase in capacity would not only provide more steel for the growing domestic market, but would help us to increase our exports and make a better contribution to the balance of trade. 2 Published export prices for European steel have risen by 84% in the past year alone (December to De cember) and by 126% since the beginning of the Economic Stabilization Program (Exhibit 5). Currency realignments played a very small part in this-the major thrust has come from opportunistic pricing. IRON & STEEL INDUSTRY PROFITS COMPARED with TOTAL MANUFACTURING INDUSTRY PROFITS-7% NET WORTH TOTAL 12.1 IRON & STEEL 6.2 43210 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 EXHIBIT 3 Note: The composite prices are weighted averages of prices of merchant bars, concrete reinforcing bars, wire rods, hot roiled : Source: American Iron & Steel Institute. PREPARED STATEMENT OF GEORGE A. STINSON, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, NATIONAL STEEL CORPORATION On behalf of National Steel Corporation, I would like, first, to express my appreciation for the opportunity to present this statement to the Committee to explain the impact on National Steel of the application of the Economic Stabilization Act of 1970 and to give my views on the question whether Congress should extend that Act past its present April 30, 1974 expiration date. While my presentation will necessarily deal primarily with the application of the Act to National Steel, which is this country's third largest steel producer, I believe that our experience generally parallels that of other steel manufacturers in the United States. To this extent, therefore, my views will reflect those of the domestic steel industry. Most of the United States economy has been under price controls for almost two and one-half years now. That is a long time to expect such a program to operate without producing serious distortions. In fact, such distortions do exist in abundance, and, I feel, will only be aggravated by continuance of price controls. The distortions attributable to the price control program that have come to public attention mostly involve shortages of specific products because of price ceilings that make their production uneconomic. However, entirely apart from these short-run disruptions to the normal supply and demand patterns, the long continuance of price controls is having an ever more pronounced effect in discouraging capital investment in a number of industries vital to the nation's economy. Let me say, in a more specific summary expression of our views, with respect to the steel industry that the application of the Act has (1) resulted in severe inequities for the steel industry; (2) created gross distortions of our costs, (3) tended to create disastrous shortages of vital steel products and jeopardize orderly marketing, and (4) thwarted the growth of the steel industry needed to meet growing demand with the resultant potential loss of many thousands of jobs and job opportunities in America. In all of these respects, the application of the Act has been largely at cross purposes with its stated purposes which include fostering orderly economic growth and preventing gross inequities, serious market disruptions and domestic shortages of raw materials. The problems outlined above have been alleviated only in part by the steel price increases authorized February 28, 1974 by the Cost of Living Council. Because of its failure to accomplish its stated objectives, we respectfully submit to the Committee that the Act should not be extended. Let me now deal with each of these broad categories of failures as they affect National Steel and the steel industry. SEVERE INEQUITIES The domestic steel industry has had an extended recent history of low financial performance most pronounced in the last seven years when it has been at the bottom or near it in its rate of financial return compared to all other American industry. It is, obviously, not the purpose of the Economic Stabilization Act to insure or improve profitability for any line of business. However, it is most pertinent to this Committee's inquiry to note that the most important factor in this profitability decline has been the informal and formal control of prices of steel products which has been in effect in this country since 1962 when "jawboning" and guideline techniques were first imposed on steel prices. This governmental pressure on steel prices has, of course, become much more severe under the Economic Stabilization Act since the imposition of controls on August 16, 1971. My point in referring to the earlier period of informal controls is to emphasize that we went into the period of formal controls with very unsatisfactory financial margins due to prolonged governmental pressure on our prices. Perhaps most pertinent to your inquiry here today is our experience since August 1971. Throughout the Economic Stabilization Program since that date the steel industry has been subject to specially strict price constraints: 1. Steel manufacturers have been required to defer for substantial periods of time price increases that were fully cost-justified under applicable regulations. 2. A substantial portion of the cost increases incurred by steel manufacturers during the year 1972 was altogether eliminated as cost justification by the Phase IV regulations. This was an especially harsh rule for the steel industry, because steel manufacturers had not (as many other industries had) implemented price increases on most major products during Phase III to reflect cost increases incurred during 1972. 3. From February 1973 through February 1974, the only price increases allowed steel manufacturers were limited increases for sheet steel products that were put into effect October 1, 1973 and January 1, 1974, a limited pass-through of scrap costs and a negligible increase of 0.39% allowed on January 25, 1974 on certain steel products. As a result, steel firms had to absorb substantial additional cost increases with no offsetting price increases. The price relief allowed February 28, 1974 permitted no recoupment of the costs the industry had long been absorbing. In other words, throughout the Economic Stabilization Program, the steel industry has borne more than its full share of the burdens of the Program. In fact, since August 1971, steel pricing has been anti-inflationary at the expense of the industry. Let me pinpoint our experience since August 1971 by referring specifically to the impact of these controls on the price-cost history of sheet steel since that time. Sheet steel is the most widely used category of steel products, accounting for 40% of all steel shipments. In the case of my own Company, sheet steel accounts for approximately 75% of our steel shipments. During the period from August 1971 to the end of 1973, our direct manufacturing costs increased by 25% which includes a labor cost increase of 35%. During that same period, however, prices were allowed to increase only 10%-and this with considerable lag behind cost increases. During a 21-month period from January 1, 1972, to September 30, 1973, no price increase of any amount was allowed. During 1973, demand increased very strongly, which allowed us to ship at a sharply higher rate, but the resultant profit margins remained at near historically low levels. During this same year steel imports, reflecting cost increases and improving profit margins abroad, sold in this country as much as 40% above the artificially-low domestic prices in line with prevailing prices of steel products abroad. The result has been that, despite massive capital spending by the domestic steel industry of approximately $15 billion during the 1960's to improve technology and efficiency, the American steel industry has experienced historic low levels in its rate of financial return and has been unable to expand its capacity to meet pressing present and future needs. We believe the blame must be laid primarily at the door of price controls. We believe this reflects the view of those administering the Act that steel, as the most widely used basic industrial material, must be called on to be ahead of the pace in fighting inflation and that the result has been a severe inequity to our industry. We believe any such view ignores the corollary that it is of vital importance, because of steel's widespread usage, that it be a financially healthy and viable industry. DISTORTIONS OF COSTS The inherent complexity of our economy has made it well-nigh impossible to achieve even-handed control of prices and the result has been that the prices of many commodities which we purchase have risen at an astounding rate in the last 29 months while controls have been in effect, a trend which has assumed alarming proportions particularly in the last 12 months. In some cases the price of these commodities, such as pig tin, have been determined by the international markets, beyond the reach of the Cost of Living Council. In others, such as zinc, shortages have forced huge price increases and led to de-control by the Cost of Living Council. In the case of still others, such as steel scrap, high foreign demand has drained the domestic supply by massive exports at previously unheard of high prices, leaving the net inadequate domestic supply to sell at prices more than 200% above traditional price ranges. Let me give you the following examples of price escalation during the period since August 1971 and the year 1973: |