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Steel treasury in the US and Methodology of EC

 Changes in relat ive steel product ion costs among countr ies may have a strong influence on steel trade flows. Given any initial market si...




 Changes in relat ive steel product ion costs among countr ies may have a strong influence on steel trade flows. Given any initial market situation, relative cost reductions by one country should allow it to expand into areas formerly controlled n .~ . by the countries whose relative costs have increased. This chapter examines the cost of steelma~in9 in the Uni ted States over the past 20 years relative to the costs in Japan and in the European Community. For reasons of data availability, different methodologies have been used for the Japanese and the EC compar isons. In the case of Japan, costs are compared wi th those of the united States on a factor by factor basis for a number of key input factors. In the case of the EC, price and profit data are used to compare European production costs with those of the United States for three particular steel products.


 The methodology used for Japan allows a much more intensive study of costs, including identification of the source of relative cost changes. The methodology used for the EC is not without advantages, however. It allows a more extensive coverage of aggregate costs and allows inferences about individual prod- ~i ucts. Both methods allow us to examine the correlation between relative cost changes and the trade position of the United States steel industry. -94- A number of studies have estimated steelmaking costs for the United States, Japan, or the EC. Some of these studies have done intercountry cost comparisons but, with few exceptions, they have covered only one or a few years. Although they collectively cover many years, their methodologies are so incompatible as to prevent conclusions from them about longterm trends in relative costs.


 The only recent study discovered whi..:h. presents comparative, cost estimates over a long per iod of time was prepared by Pifer" Marshall, anò I~errill (P~¡M) for the American Iron anò Steel Institute (27). The PMM study includes an II-year time series of comparative costs between the United States and Japan for the same items studied here (27, pp. 29, 33). unfortunately, PMM did not construct independent cost estimates for basic input items. PMM have informed the authors that they relied on preliminary estimates made by the FTC staff for this report. The FTC document which PMM used was in draft form and contained errors and omissions. These shortcomings are reflected in the figures reported by PMM and explain most of the differences between their figures and those appearing in this chapter. I I. THE UNI TED STATES AND JAPAN ,Methodology The method employed to examine steelmaking costs in this section is quite simple in concept. Data were collected for -95- the Un i ted Sta tes and Japan on the quant i ty and average pr ice of selected inputs used in the manufacture of steel dur ing each ':;! of the years 1956 through 1976.


 Weighting each quantity by the appropr iate pr ice 9 ives the total cost for each input in each year. Dividing each cost by the steel output in the respective 4 year yields the cost of the input per unit of output. The unit costs for individual inputs are summed across inputs to give the cost of all the selected inputs per uni~. of output. The movements over time of these summed costs are used to gauge changes in relative costs between the two countries. Changes in relative costs can be traced to the individual inputs or groups of inputs causing them, and the extent to which shifts were due to changes in the quantity employed or changes in the .pr ice of the input can be determined. The inputs selected for examination are iron ore, scrap iron and steel, labor, and a number of energy inputs--coking coal, other coal, fuel oil, natural gas, and electr ic power. These inputs accounted for over 70 percent of variable steelmaking costs in the United States in recent years and over 60 percent of total costs. They are believed to have been the I;,:t ,~


 inputs most important in causing relative cost changes among countries. Among the excluded inputs are fluxes, alloys, oxygen, water, and other purchased materials. Taxes and the cost of transporting finished products to market were also -96- excluded from consideration. II Capital costs, which are not directly comparable to var iable costs, were also excluded. Although it would have been preferable to include all variable inputs and cost factors, the necessary price and quantity data were not available. Underlying the use of the unit cost figures calculated is an implicit assumption that the relative cost between the United States and Japan of excluded inputs has not shifted significantly over time. ..-.. . Even for the selected variables, price and quantity data which are exactly comparable for the two countries do not exist for some inputs. Attempts were made to adjust the data in some instances to make it more comparable but the possibility of error was not eliminated. There are a few basic comparability problems wh ich wi 1 1 be discussed pr ior to deal ing wi th ind iv idual var iabIes. First, comparability of input quantities suffers because of differences among countries in the definition of the steel industry. Particularly troublesome are differences in the degree of vertical integration. For example, in the United States, finishing the edges of steel plate is usually done at the steel mill; and, for data collection purposes, the labor and energy inputs required are considered to be employed in the steel industry. Industry sources have said that in Japan II Appendix 3B discusses recent transportation costs for finished products moving between Japan and the Uniteå States. -97- steel plates are more often finished by the service centers or by the users. If this is true, the labor and energy used are not counted as steel industry inputs in Japan. A second general problem ar ises due to the difficulty of defining "the price" of an input. Even in specifying the ideal, one must choose between data which reflect the marginal cost of inputs and those which reflect the average cost. Since many inputs are purchased under long-ter.m. c.ontrac;t in the steel, indus~ry, there may be significant differences between the average cost and the margi~al cost; and it is not clear which would be preferable. Marginal conditions, as reflected by spot market prices, may give an accurate indication of opportunity costs and an immediate signal of changed market conditions not provided by average prices. If average prices include a large contract component, for example they will probably understate opportunity cost during a period of rising input prices. On the other hand, current market pr ices may be overly responsive to transient changes £/ and give a poor indication of fundamental conditions. Real world data present additional problems. In few cases do we have the choice between average and marginal indicators; often there is only one data source available. Average, del ivered input costs were available for many inputs for Japan; :) 2/ This is especially true when a market is very thin due to neavy vertical integration into the supply of the input. i ! -98- but for the U.S., the available data were generally market prices for some characteristic market or the average transfer value of a particular commodity. Since U.S. companies are heavily integrated into the production of iron ore and coal, many transfers of these commodities are intracompany; and it is unclear whether publ ished information based on these transfer values reflects average or marginal cost. Perhaps a more ser ious obstacle to p~~cise cost comparability between the U.S. and Japan involves output data rather than input data. Steel is not a homogeneous proóuct. There are hunóreds of steel products which vary in many dimensions-- the type of steel used, carbon, stainless, etc.; the shape of the product, plate, wire, pipe, etc.; the dimensions of the product, thick, thin, light, heavy, etc.; and most difficult to measure, the quality of the product which involves such factors as the finish, production tolerances, and even promptness and reI iabil ity of del ivery. The input requirements vary with the product and unless two countr ies produce the same product mix, cost comparisons lose their meaning. Failure to adjust for product mix can result in misleading conclusions concerning cost competitiveness. As a simple example, if country A produced only steel str ip and country B produced only sheet, it would be inappropriate to conclude that A and B were cost com- . petitive in labor simply because each had an average labor cost of $90 per ton of output. Since strip production is very labor intensive compared to sheet production, country 


A could be -99- presumed to have a clear labor cost advantage. Country A could undoubtably produce sheet for less than $90 per ton labor cost, and it would undoubtably cost country B more than $90 per ton for labor to produce str ip. Compl icating the theoretical problems of adjusting for \')': product mix is the fact that in available data sources product classifications are limited and differ among countries, making comparisons of output mixes difficult. ~r'example, while the -,; U.S. industry classifies stainless and alloy steel as "specialty steels," the Japanese incl ude under that term certain types of carbon steel products. The var iable input affected most by the product mix is labor. The Bureau of Labor statistics series upon which the labor usages in this report are based do include some corrections for differences in product type and shape (43, pp. 20-25), but these correcti~ns are far from complete and assume no differences in product quality. Two types of distortions in comparative costs due to data problems can be distinguished. One is distortions which make the two countries' relative costs at any point in time misleading; the other is distortions which make changes in the relative costs over time mi slead ing. An example is d istor t ions wh ich might ar ise due to an excluded input

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