By KEVIN NEVERS

It’s not news that the U.S. military’s aircraft carriers and submarines, tanks and personnel carriers, require large quantities of high-strength heat-treated alloy, the bulk of it produced in the plate mills of Mittal Steel USA.

Much less well-known—though hardly surprising—is the enormous variety of applications to which the U.S. military puts other specialized forms and grades of steel: titanium alloy for the thrust nozzles of missiles; niobium alloy for jet engine tail feathers; chromium nickel steel for the transmission gears of helicopters; high-strength superalloy for submarine fasteners.

While these niche products are hardly big sellers for U.S. steemakers—“comprising only a small portion of overall domestic sales,” according to the American Iron and Steel Institute (AISI)—they are all vital components of the national defense, like the horse shoe for want of which they kingdom was lost.

Yet a reliable homegrown supply of strategic steel is under threat, the AISI believes, because U.S. steelmakers are under threat: “market-distorting foreign competition”—think China, for instance—and “U.S. economic policies that are hostile to domestic investment and U.S.-based manufacturing”—high costs related to energy consumption, environmental regulations, and employee benefits—are exerting destabilizing pressure on this country’s manufacturing base.

The worst-case scenario, as envisioned by the AISI in a report released this month entitled “Steel and the National Defense”: “It could become impossible to produce (steel) here; the U.S. military would lose its principal source of strategic metals; and we as a nation would become dangerously dependent upon unreliable foreign sources of supply.”

In other words, not only would the U.S. military lose its domestic source of steel for high-tech horse shoes. The country as a whole would lose its domestic source of steel for vital infrastructure of all kinds: bridges, pipelines, rail networks, airport runways, electric generators and transmission towers, commercial, industrial, and municipal construction. The result, the AISI predicts: “sharply reduced security preparedness in the face of:

•Highly variable, and certainly higher, costs;

•Uncertain supply, impacted by unsettled foreign economies and politics;

•Quality, design, and performance problems;

•Inventory problems, long lead times, and extended construction schedules.”

For U.S. Rep. Pete Visclosky, the new chair of the Congressional Steel Caucus, the AISI report makes troubling reading. “To ensure that our national defense needs will be met, it is crucial that we have a robust and vibrant domestic steel industry,” he said in a statement released on Wednesday. “It is poor policy to rely on foreign steel for our national security—instead, we need a long-term investment in domestically-produced, high-quality, and reliable steel that will serve and strengthen our national security interests.”

Threats: China et al.

In 2005, after its ravenous appetite for steel had driven the price of the stuff through the roof and generated record profits for U.S. steelmakers, China became a net exporter of steel, the AISI says. And during the last half of 2006 China became “the leading foreign supplier of steel to the U.S. market.”

It continues, moreover, to expand its production capacity in an effort to grab global market share, to which end it is helped by a currency devalued by as much as 40 percent and a cost structure simplified by a lack of meaningful enforcement of environmental and health and safety regulations.

The Chinese government also significantly subsidizes its steel industry, the AISI says, “in the form of favorable tax treatment, export credit support, (research and development) support, and direct funding of new projects.”

China’s is not the only government, though, which intervenes in its national steel industry, the AISI says. Much of the current global overcapacity is attributable “to government support and other types of aid,” which in turn prompt “excess production and market-distorting international competition.”

And once the genie of overcapacity is out of the bottle, the AISI says, it is “virtually impossible” to squeeze it back in.

Threats:

Economic Policies

A healthy domestic production capability, the AISI says, depends on a level-playing field which encourages “continued investment in the United States in both manufacturing and technology.”

U.S. steelmakers’ cost structure, however—reflecting the expense of energy, environmental regulations, post-retirement benefits, and corporate income taxes—can make the price of a finished product unattractively high.

Meanwhile, many companies, including steel consumers, are looking overseas for greener investment pastures. Among the incentives to invest abroad cited by the AISI are “favorable tax treatment, lower operating costs due to government intervention, outright subsidies (including currency manipulation), and inconsistent application of the principles of free and fair trade.”

Conclusions

The AISI concludes its report with a number of policy prescriptions:

•“The Chinese government’s support of its steel industry provides an artificial advantage in international competition. If left unchallenged, this support will result in the transfer of significant U.S. manufacturing capability to China.”

•“The U.S. government must call upon other governments to exercise restraint and refrain from subsidizing the growth of capacity that will jeopardize our commercial markets.”

•“The U.S. government must adopt policies that encourage continued investment in domestic manufacturing.”

“A strong and viable domestic steel industry,” the AISI notes, “is critical to America’s national defense, national economic security, and homeland security. Virtually every military platform is dependent on U.S.-produced steels and specialty metals.”

Posted 1/12/2007