Statement of Keith Busse
President & CEO, Steel Dynamics, Inc.
Chairman, Board of Directors, Steel Manufacturers Association
Congressional Steel Caucus
March 16, 2005
Steel Manufacturers Association
1150 Connecticut Avenue, NW, Suite 715
Washington, DC 20036
U.S.A.
Tel (202) 296-1515
Fax (202) 296-2506
http://www.steelnet.org
We appreciate being able to appear at the Congressional Steel Caucus hearing today to discuss steel industry legislative priorities. I am Keith Busse, President & CEO of Steel Dynamics, Inc., an electric furnace minimill company described by analysts as one of the most productive and competitive steel companies in the world. Our company has 4.5 million tons of raw steel making capacity, and 4.2 million tons of steel mill product shipping capability. We aggressively use technology and reward our employees for their productive effort.
I am also Chairman of the Steel Manufacturers Association, the trade group that principally represents the North American electric furnace steel producers and rerollers and whose 38 company members employ 40,000 people operating 125 steel plants. Our U.S. members produced about one half of the steel made in the U.S. in 2004.
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The Steel Industry in 2004
The increase in world steel demand in 2004 benefited the world steel industry, which has been selling steel at unjustifiably low prices relative to production costs. The downside has been a meteoric increase in the costs of materials for steel-making, including ferrous scrap.
In early 2004, unprecedented increases in scrap prices adversely affected minimill operating costs. The industry is still experiencing these cost pressures. The cause of these steep price increases in raw materials is mostly due to the emergence of China’s insatiable appetite for steel which feeds the growing manufacturing base. Actions by several countries to curb their scrap and other steel-making raw materials exports have intensified the problem. The cost pressures faced by all producers from increased world demand for steel-making raw materials will be a major challenge in 2005, and beyond.
From Table I, we estimate that U.S. consumption rebounded to 131 million net tons in 2004, an increase of 16.6% over 2003. The U.S. mills shipped about 112.5 million tons, or 8.4 million more than 2003. Total imports were up to 33.4 million tons in 2004, from 23.9 million tons in 2003, almost 40% higher. Finished steel imports also rose almost 40%.
I am glad to report that the US steel industry is in far better shape today than it has been over the past six years. But we need continued operating results that exceed our cost of capital to reach the investment levels that will guarantee the industry’s future health. Here are some of the things that need to be done:
An Adequate On-Shore Steel Supply, A Requisite For a Strong U.S. Economy
It is beyond doubt that steel is essential for the maintenance of a strong U.S. manufacturing base. U.S. manufacturers need steel for a wide array of products from automobiles to construction to appliances.
But North America is the only major world entity that has domestic steel consumption substantially higher than its domestic steel supply. The U.S. is dependent upon foreign steel sources of supply for about 10-20 million tons annually, although much more than that has historically been imported. In contrast, Europe’s steel supply is much higher than domestic needs, by about 127 million tons, while Asia’s excess amounts to about 23 million tons.
U.S. steelmakers are currently making heavy investments in future steel production. The year 2004 should have demonstrated why U.S. manufacturers cannot become more dependent upon foreign sources of supplies. When they need steel, they need it now, not from uncertain high cost foreign sources of supply with protracted and expensive transportation costs.
Our steel producers expect success in their own markets through innovation, productivity, and market-based competition. They reasonably believe the U.S. government, in its own interest, should respond effectively to dumped steel imports from subsidized foreign producers, many of whom export their excess supplies at any cost.
An Orderly Decline of the Dollar
Although the dollar has declined 35 percent against the Euro since 2001, the dollar has declined little against major Asian currencies, principally because China and Japan have undervalued their currencies against the dollar, investing heavily in U.S. Treasury bonds to prop up the dollar and keep the value of their currencies at below-market levels. Since 2001, 92 percent of the nearly $1 trillion increase in U.S. publicly held debt has been financed by foreign lenders.
Unfortunately, heavy intervention by Asian central banks aimed at holding down their currencies against the dollar shows little signs of abating. Asian economies have continued to undervalue their currencies to aid the sale of their products to American consumers. Since 2001, Asia’s official reserves have increased by $1.2 trillion, equivalent to two-thirds of the U.S. cumulative deficit over the period. The U.S. is by far the world’s biggest debtor, with the highest trade and current account deficits incurred by any country in history.
This could cause the collapse of the dollar as the world’s reserve currency, followed by domestic inflation and a decline in the U.S. standard of living, an outcome we should avoid at all costs. The steel industry has a direct stake in this outcome.
The U.S. government should announce it supports a further orderly decline in the dollar against several Asian currencies. Efforts by Asian countries to intervene by maintaining fixed or managed rates to prevent the dollar’s fall should cease, otherwise we will continue to hollow out our manufacturing base with disastrous results.
The Problem with China’s Currency Value
China’s government continues to maintain an artificially low value of the Chinese currency against the U.S. dollar. Some estimates put the total under-valuation as high as 40 percent. U.S. companies cannot effectively compete against the subsidies caused by this currency manipulation.
The SMA urges the U.S. Congress and the Administration to use China’s extraordinary access to the U.S. market to negotiate a more realistic relationship of the Yuan to the dollar. Mr. English, we support your legislation “Stopping Overseas Subsidies Act”. This legislation would apply U.S. countervailing-duty law to non-market economies such as China. We are encouraged that you had 64 co-sponsors in the 108th Congress of HR 3716. Moreover, we support the China Act of 2005, identical to HR 3058, which 85 members of the House supported. It requires the Secretary of the Treasury to analyze China’s currency manipulation and to levy tariffs equal to the manipulation.
We also have been working with Congress and the China Currency Coalition on drafting “The China Currency Fair Trade Act of 2005.” This proposed legislation seeks to hold China accountable under relevant U.S. trade laws for the serious adverse effects of their manipulation.
If this bill is enacted, it would provide U.S. domestic industries with the option of pursuing relief against subsidized, injurious imports from China under either or both of two statutory avenues, the U.S. countervailing-duty statute and the U.S. China-specific market-disruption statute. Each of these alternatives is meant to address as quickly and as effectively as possible the harm to U.S. manufacturers caused or threatened by China’s exchange rate manipulation and the renminbi’s undervaluation, and is intended to do so in a manner that is consistent with the international legal obligations of the United States at the WTO and the IMF.
Energy Policy: The Need for Regulatory Practices That Will Reward Enhanced Demand Response in Energy Markets
Steel, like other manufacturing industries in America, must compete in world markets where labor costs and other key costs are often far below those of the U.S. To maintain our relatively highly paid manufacturing jobs in U.S. mills, we must use new technology to increase productivity, and reduce the non-labor costs of making steel. Steel minimills are also heavily dependent on electricity, which has increased in price across the country, while service reliability has simultaneously declined.
This year, Congress is once again considering comprehensive energy legislation. SMA generally supports this effort. In particular, it is apparent that re-directed national policies are required to support better development and use of the country’s natural gas, coal and nuclear resources. SMA supports legislation to establish uniform electricity reliability standards as well. We are concerned that repeal of the Public Utility Holding Company Act of 1935 must be accompanied by adequate state and federal regulatory authority to safeguard consumer interests. In particular, FERC’s authority to rein in the transmission and generation market power must be clear-cut.
Finally, Congressional guidance is needed for FERC and state regulators to adopt regulatory policy changes that are needed to encourage more effective demand response participation in electricity markets. SMA electric furnace steel companies are among the most frequently curtailed and price responsive electric loads in the country. Collectively, they represent an enormous demand response resource for enhancing grid reliability and reducing electricity costs for all consumers. This operational flexibility, however, extracts serious productivity and lost production costs. Through our experience with various demand response and curtailable service programs, we have found that the biggest impediments to enhanced customer demand response often are: 1) the unwillingness of FERC to remove unnecessary barriers to load participation in energy, capacity and ancillary service markets, and 2) the unwillingness of FERC and state regulators to coordinate their efforts on these issues.
Last year’s conference report on energy (HR 6) contained several amendments to PURPA that aim to encourage enhanced demand response. We believe those provisions should be more explicit to produce effective regulatory changes. We recently met with Senate Energy and Natural Resources committee staff concerning suggested modifications to the demand response provisions of HR6 that SMA’s members believe are needed. The changes are modest, but are important. In particular, they would require FERC to identify and address the regulatory barriers to improved customer participation in demand response programs.
The Need for Mercury Removal at the Source
The SMA continues to work together with the U.S. Environmental Protection Agency and the environmental community to safeguard the environment. We make a contribution each year through recycling that is unsurpassed in any other industry. While we have taken the lead in negotiations with the agency on an Area Source role for Electric Arc Furnaces in addressing mercury primarily through developing a scrap work practice, we are hopeful that any final rule will not impose an unnecessary burden on our EAF industry.
We support a national pollution prevention initiative to control mercury in the scrap supply applying to the source of the problem. Mercury, an unwanted contaminant, needs to be eliminated from cars. Financial incentives should be adopted to compensate scrap suppliers for their mercury removal efforts, paid for by those who benefit from the use of the mercury. Along with the exercise of regulatory authority, these initiatives may require federal legislation. End of pipeline regulation of mercury contained in the scrap purchased by our steel mills is neither feasible nor fair.
If mercury in sufficient quantity cannot be eliminated at the source, the country could face an annual pile-up of millions of tons of unusable scrap, which would be an environmental disaster far surpassing the mercury contained in automobile scrap. This would substantially curtail domestic steel production, or cause the imposition of huge unsustainable penalties due to a steel company’s inability to capture this element when scrap is melted in our furnaces.
In closing Mr. Chairman, we wish to thank you for allowing us to describe a few important issues. There are others such as the need for tax reform, health care improvements, trade issues, including biased WTO rulings, import monitoring, government subsidized steel capacity growth, retention of Buy American legislation, and the need to replace much of America’s obsolescent infrastructure.
The steel industry is grateful for the strong support of the Steel Caucuses, without which the industry would make little progress toward its public policy goals. Thank you.