Even Steel Goes Soft…

As the global, finance-led recession winds its way through world markets, some particularly exposed sectors have been construction, durable goods and their suppliers – notably steel. As a consequence, one SM favorite, Lakshmi Mittal, has seen his fortunes take quite a hit of late

“Son, global steel production is a game I’m confident we can play & win… American politics on the other hand…”

Over the past eight months, Lakshmi Mittal, Britain’s wealthiest man, has lost around $51bn (£35bn). Mittal, who controls steel producer Arcelor Mittal, has profited from the construction boom of the past decade, driven by the emerging economies of China and India. His stake in the business in June was worth $65bn. But, as demand for steel has crashed, so has the Arcelor Mittal share price. His holding is now worth $14bn – a staggering loss, although he is not exactly on the streets yet.

And, as if punishment from the market wasn’t enough, a strongly Democratic Congress, empowered by a frenzied effort to pass a hastily-conceived stimulus may be ushering in new protectionist winds

The stimulus bill passed by the House last night contains a controversial provision that would mostly bar foreign steel and iron from the infrastructure projects laid out by the $819 billion economic package.

A Senate version, yet to be acted upon, goes further, requiring, with few exceptions, that all stimulus-funded projects use only American-made equipment and goods….

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p>As the world’s largest steel producer, with an annual output nearly 3x its closest rival, ArcelorMittal will be disproportionately affected by any effort to to place origin restrictions on steel – despite the company’s US operations. One of India’s true world-class manufacturing sector co’s – Tata Steel – is the number 6 producer globally with over 20% more annual production than the first American firm on the list.

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p>Unfortunately, in a world where political pull may determine a steel company’s fate more than product engineering or the laws of supply & demand, a foreign firm headed by an Indian family doesn’t exactly get much sympathy on the Hill. Thankfully, however, Arcelor does have some local allies as US-based steel-consuming firms rally against the provisions. They recognize that de facto import restrictions both increase in their prices and set horrible global precedents -

Proponents of expanding the “Buy American” provisions enacted during the Great Depression, including steel and iron manufacturers and labor unions, argue that it is the only way to ensure that the stimulus creates jobs at home and not overseas.

Opponents, including some of the biggest blue-chip names in American industry, say it amounts to a declaration of war against free trade. That, they say, could spark retaliation from abroad against U.S. companies and exacerbate the global financial crisis.

U.S. industrial giants including Caterpillar, General Electric and the domestic aerospace industry are emerging as strong opponents. The measures, they argue, could violate trade deals the United States has signed in recent years, including an agreement on expanding access to government procurements reached through the World Trade Organization.

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p>These quotes from a Caterpillar rep were particularly noteworthy -

“There is no company that is going to benefit more from the stimulus package than Caterpillar, but I am telling you that by embracing Buy American you are undermining our ability to export U.S. produced products overseas,” said Bill Lane, government affairs director for Caterpillar in Washington. More than half of Caterpillar’s sales — including big-ticket items like construction cranes and land movers — are sold overseas.

“Any student of history will tell you that one of the most significant mistakes of the 1930s is when the U.S. embraced protectionism,” Lane said. “It had a cascading effect that ground world trade almost to a halt, and turned a one-year recession into the Great Depression.”

Given strong Democrat majorities in both houses of Congress, our best Hope may end up being that Dear Leader uses a veto against his own party, against his own campaign rhetoric, and aligned with the common sense of his stellar economic advisors. Unfortunately, given how much political capital Obama’s invested in rapid adoption of a massive stimulus bill, this “win” might be a loss for us all.

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p>


Update – Looks like pressure from the Great White North is making Obama administration take this issue seriously

DAVOS, Switzerland — The Canadian government expressed optimism Saturday that the U.S. might climb down from a so-called “Buy American” trade policy that several countries have warned could start a trade war.

Conciliatory signals from the White House and from American officials at the World Economic Forum in Davos, Switzerland, have fuelled hopes for a resolution.

…”I’m going to say this for, like, the fourth time: The administration is reviewing that provision,” Mr. Gibbs said.

…If the wording of the legislation can’t be changed before the U.S. Senate votes on the stimulus bill, Mr. Day suggested Canada or other countries could still be exempted afterward.

…”I want to be clear: I’m not saying [Mr. Obama] is going to do that. But that is within their legal framework, for him to do that, if he makes that determination,” Mr. Day said.

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43 thoughts on “Even Steel Goes Soft…

  1. Pretty much what I’ve been saying the past couple days. Other countries are going to retaliate if they can’t export into the U.S. It is a little depressing that Obama is pushing this so heavily.

  2. Democratic Congress, empowered by a frenzied effort to pass a hastily-conceived stimulus may be ushering in new protectionist winds – Other than the natural effect that other countries will retaliate (as Sam mentioned), this would also result in the US losing its soft power to negotiate various geopolitical issues. Isn’t that what happened during the last depression? US became more protectionist and insular, resulting in Europe and Japan becoming insular and nationalist, eventually giving rise to Hitler and Stalin, resulting in the deaths of tens of millions of people?

    M. Nam

  3. The pendulum is swinging the other way, restoring balance. This big balloon of unfettered growth has been punctured–exactly what the planet needs. Since I’m in France where people bring out the champagne for the flimsiest of reasons, you can bet I’m bathing in the stuff. What we need is a complete clean-up of this garbage at the top. Mittal too to the trash compactor.

  4. If this is going to hurt revenues major steel producing countries, they ought to rasie capital by other means. Like selling off US paper and not buying any more — and inform the financial press that this is happening. In a completely unrelated question how will Obama raise $819 biiion if no-ones going to lend it to him? (Yes I am being flippant here — the amount of protection here most probably is not worth losing sleep over. The point is, the US is in a weak state right now and its time for other countries to start playing hardball with the US, if their interests are threatened.)

  5. B.T.W. I amnot sure how this wil hit Mittal. Arcelor Mittal has been shutting down plants in theUS with layoff’s. Protection might even help them gain business for these plants. The huge problem remains in the drastic fall in demand (Admittedly protectionism is’nt helping here because it tends to make the pie smaller).

  6. Problem with all these protectionist measures is that they’re trying to “uncreate” the global marketplace. It’s pointless. Protecting the US Steel Industry via such measures will not help reduce cost or improve productivity; the time/money should be used to aid the US industry in making technological leaps, which is what’s always kept the United States ahead.

    Besides the fact that the US will face retaliation from countries that supply product here and/or those that hold US paper as leverage, it’s just a poor idea because it really won’t make a macroscopic impact. The world likes Caterpillar products – they make damn good equipment. A price increase or a supply chain that isn’t robust that can’t provide the right type of steel in volume only slows down their ability to produce.

    US Steel cannot crank out the volume needed for the American marketplace. It will drive up cost artificially, backlog the supply chain, and will only create jobs in a handful of locations.

    If other nations are providing an advantage to their industries, match it and keep the stakes at par.

  7. 6 · praz said

    All this feels oh so similar with what Ayn Rand wrote in her fictions..

    huh?

    I missed the part where Mittal is dilbertately ruining his steel mills, so that when it is nationalized by Obama, everything comes to a standstill, and everyone will realize that the entire world depends on a few people like Mittal.

  8. Just like Bush’s corn based ethenol mandate (10% of all US gasoline) caused havoc in food and fertilizer prices and created the third bubble, the “buy American Steel” will be disastrous. The corn ethenol debacle created a third bubble in the US (We already had housing and OIL bubble going) and we didnt need that. This type of short sighted stupid policy is exactly the fear I had about an overwhelming Dem. victory (in spite of the fact that I have not and will probably never vote Republican in a presidential election). Thank god Dems dont have a filibuster proof majority.

  9. Mittal like other successful members of his indian business caste is nothing but an extremely selfish and greedy man. He spent 60 million dollars on his daughters european wedding, 100 million dollars on a home in London, but when it comes to financing schools and charitable foundations in India which is direly in need of such help he takes a pass.

    One good thing from the bursting of this financial bubble is that we will not have to endure the gloating of the Moornams and Gujududes of this forum.

  10. One good thing from the bursting of this financial bubble is that we will not have to endure the gloating of the Moornams and Gujududes of this forum.

    Huh? Instead of throwing out a wild accusation (gloating?), maybe you can provide a rational thought out post on why protectionist measures are good/bad for the US economy, which is irreversibly tied to the world now. The same ideas apply to all the software companies doing business. Should the US raise barriers and force call centers back to the United States?

    While the United States pushed for a global economy, it has to have the ability to take the positives with the negatives. When we fail to compete in the global landscape, raising barriers is not going to address the root problem of not providing the best value. Politicians on the right and left who’re looking to make snap decisions need to take a long term view. See RC’s post for reference on the ethanol issue.

    The financial system is broken and will continue to be broken until real transparency is forced. A transparent system allows all, not just the few behind big desks in Wall Street or Washington DC to see what’s going on.

  11. Some one please tell me how the largest steel producer in the US is going to lose out if the bill mandates only US made steel be used.

    Talk about mountain from a mole hill.

  12. 11 · bania_menace said

    Mittal like other successful members of his indian business caste is nothing but an extremely selfish and greedy man.

    Like this successful member of ‘that’ caste?

  13. Bania menace it is not Mittal’s job to provide for schools & charitable foundations in India. The money he spent on his daughter’s wedding or his London home is his own money and he is free to spend it as he sees fit. From what I know, Mittal has made his money the old fashioned way……that is, he worked for it. He took risks when he bought all those sick companies in the former communist and third world countries, turned them around and reaped the benefits (along with his shareholders). Just the way he would not have deserved a helping hand had his bets gone wrong, he does not deserve brickbats for enjoying his success.

  14. 15 · Fish out of water said

    Bania menace it is not Mittal’s job to provide for schools & charitable foundations in India. The money he spent on his daughter’s wedding or his London home is his own money and he is free to spend it as he sees fit.

    Spoken like a true bania. No one said it was his job. The wealthy industrialists of other nations fund numerous colleges and charitable foundations, but the selfish and greedy hindu banias of India are of a much lower character.

    According to reports Indians have 1.5 trillion dollars of black money stashed in swiss banks; the most by far of any country despite India being among the very poorest nations on earth with hundreds of millions of hindus going to bed hungry every night. Clearly the native culture is at fault here for seeing nothing wrong with such bloodsucking.

  15. 11 · bania_menace said

    One good thing from the bursting of this financial bubble is that we will not have to endure the gloating of the Moornams and Gujududes of this forum.

    yet prema remains a fixture; i guess you can have it both ways by championing naked capitalism and authoritarianismcommunism .

  16. Spoken like a true bania. No one said it was his job. The wealthy industrialists of other nations fund numerous colleges and charitable foundations, but the selfish and greedy hindu banias of India are of a much lower character. According to reports Indians have 1.5 trillion dollars of black money stashed in swiss banks; the most by far of any country despite India being among the very poorest nations on earth with hundreds of millions of hindus going to bed hungry every night. Clearly the native culture is at fault here for seeing nothing wrong with such bloodsucking.

    SM Intern, I need advice on whether to point out that India’s GINI index is lower than America’s or That Charity in the US gets more recognition, thus encouraging more of it, or to point out that Mittal does give to charity, or that Mittal made his money outside India and owes India squat or whether to just ignore the troll.

  17. Dizzy – I think you handled it quite well ;-) Ignoring rude comments moving forward is the fastest way to disincent them.

  18. and then there is this. This is the biggest piece of bull I have read in a while. It should also be pointed out that the foreign workers pay exactly the same amount of taxes as the American workers and usually are paid less for similar jobs. Also the cap on work visas is 65,000 for the year.

  19. 15 · bania_menace said

    Spoken like a true bania. No one said it was his job. The wealthy industrialists of other nations fund numerous colleges and charitable foundations, but the selfish and greedy hindu banias of India are of a much lower character.

    I’m perplexed that the above comment wasnt deleted. It singles out a specific community for a bigoted attack. That said, if the ‘hindu banias’ are shrugging it off, it is testament to their magnanimity and/or sense of security. Some details from the wiki on punjabi banias.

    Punjabi Banias and non-Vaishya castes like Khatris / Kshatriya, Aroras, and Soods were the premier mercantile communities of the province as opposed to Rajputs, Gujjars and Jats, who were primarily agriculturalists…

    I highlight the ‘Soods’ above because Mayor Manjula Sood was recently profiled by Preston.

  20. I am not sure if they were the founders but Sri Ram College, Lady Sri Ram College, Hindu College and Kirori Mal college in Delhi and NM, HR, Mithibai and KM in Bombay all have strong Bania connections.

  21. Market fundamentalists are incapable of reflection. Was the market right when Mittal’s worth was $65 billion or when it is worth $14 billion?

  22. 22 · Desi riksha said

    Was the market right when Mittal’s worth was $65 billion or when it is worth $14 billion?

    Yes.

  23. 22 · Desi riksha said

    Market fundamentalists are incapable of reflection. Was the market right when Mittal’s worth was $65 billion or when it is worth $14 billion?

    and the alternative would be?

  24. 19 · umber desi said

    It should also be pointed out that the foreign workers pay exactly the same amount of taxes as the American workers and usually are paid less for similar jobs.

    They pay the same taxes at the same rate of pay, but as you also mention, they are usually paid less for similar jobs, so their instantaneous tax contribution is smaller. Also, since they come in on H-1B at different points in their career, the cumulative tax contributed upto that point in time (to the US) is also smaller. On the other hand, they are sometimes not allowed all the exemptions an American would be, and often their Social Security contributions don’t accrue to their benefit. Still, on average, one could say that the taxes paid by the entering H-1B, over the course of his H-1B, are smaller than the taxes paid by a native worker at the same point in his career, instantaneously or cumulatively. So the ‘we should be able to hire H-1Bs because they pay taxes too, and they should therefore be entitled to benefit from taxpayer-supported bailouts’ argument is very weak.

  25. Ex H1-B

    I am not sure if I follow your argument. I am not sure if anyone is talking about cumulative taxes being paid by foreign and domestic workers over the course of their careers. I was talking about the falacy in the article that says that the FIs are being supported by American Tax Payers and the same FIs are hiring foreign workers. I will repeat, foreign workers pay taxes at same rates as domestic workers at the same income range. Also majority of H1-Bs go to technology companies, the number is capped at 65,000 for people who don’t have graduate degrees from American institutions. I think this is much noise about a non-issue and that is what I was trying to point out.

  26. Also, in the article I linked, what is the point of comparing the average salary of a foreign worker working in Financial Services to the median U.S. income? A comparison to the average income of an American worker in the same industry is more apt.

  27. Umber desi, I thought as an accountant you would be able to follow my argument. If you say that H-1Bs pay taxes at the same rate as Americans, then it is valid also to point out, that since, on average, they make less for similar jobs (by your own admission), the instantaneous tax contribution from an H-1B is smaller than it would have been if the job were held by an American. Also, an H-1B hasn’t been labor-active since his teens as so many Americans are, so the H-1B’s lifetime cumulative tax contribution at any point in his career is also likely less than an American’s, even when the American is not as well qualified, or is in a different, more modestly paying job. The argument for why there should be H-1Bs, or why taxpayer-bailed-out banks should be allowed to hire H-1Bs – should therefore be made on different grounds than that H-1Bs pay taxes too – because that is a very weak argument, if it holds up at all.

    And as for them mostly being in technical jobs – the article has them in jobs as investment analysts, corporate law, etc. I also know that many non-technical jobs are often represented as technical jobs to enable easier visa sail-through. There are actually many H-1Bs in straight-up finance jobs. If banks are laying off Americans, after being bailed out so massively by the American taxpayer, and then turning around and hiring H-1Bs at lower paying similar jobs, then it appears an unstated social contract is being broken, and it certainly needs looking into.

  28. The argument that only American Tax Payer dollars are used to pay for the bail out is flawed in my opinion as it is not absolutely not true that the foreign workers on work visas are paying lesser taxes for same income ranges. Obviously a foreign worker has not paid taxes prior to when he or she joined the American workforce, but then no benefits accrue to them for that period as well.

    Also there is no reason to believe that foreign workers are not laid off at financial institutions receiving bail out money, I know more than 5 cases that contradict the notion. The H1 numbers are dated as the petitions are filed in April for October validity so to argue that banks receiving bail out money are firing domestic workers while hiring foreign workers is inaccurate.

    To you point about whether banks or any industry should hire foreign workers at all, that is a topic you will have to take up with the hiring managers at these instituions as I am on a work visa and clearly my opinion is biased.

  29. Re-reading your comments, I think we are talking past each other. I am not contending that foreign workers should be hired soley because they also pay taxes. My point is that article provides inaccurate reasons as to why foreign workers are a problem.

  30. 28 · ex-H1B said

    after being bailed out so massively by the American taxpayer

    h1b taxes are not being used for the bailout? are they kept in a separate lockbox?

  31. 28 · ex-H1B said

    Umber desi, I thought as an accountant you would be able to follow my argument. If you say that H-1Bs pay taxes at the same rate as Americans, then it is valid also to point out, that since, on average, they make less for similar jobs (by your own admission), the instantaneous tax contribution from an H-1B is smaller than it would have been if the job were held by an American. Also, an H-1B hasn’t been labor-active since his teens as so many Americans are, so the H-1B’s lifetime cumulative tax contribution at any point in his career is also likely less than an American’s, even when the American is not as well qualified, or is in a different, more modestly paying job. The argument for why there should be H-1Bs, or why taxpayer-bailed-out banks should be allowed to hire H-1Bs – should therefore be made on different grounds than that H-1Bs pay taxes too – because that is a very weak argument, if it holds up at all. And as for them mostly being in technical jobs – the article has them in jobs as investment analysts, corporate law, etc. I also know that many non-technical jobs are often represented as technical jobs to enable easier visa sail-through. There are actually many H-1Bs in straight-up finance jobs. If banks are laying off Americans, after being bailed out so massively by the American taxpayer, and then turning around and hiring H-1Bs at lower paying similar jobs, then it appears an unstated social contract is being broken, and it certainly needs looking into.

    So far increase in gay marriages have not yet been tied to H1-Bs. Maybe I should write an article that ties them both together. That way, if it gets published, it will become true.

  32. The basic rationale for H-1B was: temporary labor shortage in that job category. This is tested through evidence of recruitment, and that the prevailing wage is paid.

    Now when an H-1B is hired, like any legal worker they have to pay taxes. How could that be the rationale to hire them in the first place? Like I said myself, H-1Bs might not get all the exemptions an American worker gets, or may not ‘vest’ in his social security contribution. This is an example of unfairness to the H-1B.

    Similarly, when there is no labor shortage, whether in the firm, the local area, or in the job category, hiring an H-1B cannot be justified as easily as during a boom. That would be unfair to the existing labor pool. That’s why this should be looked at.

    And as far as ‘the bailout came in October but the H-1B was hired in April’ argument – accountants know that corporations can write off losses against previous years profits etc – I don’t know the details – but that is also a very weak argument.

  33. Ex H1-B,

    Where is anyone saying that paying taxes is the rationale for hiring foreign workers? October and April 2008 are both in the same year, my point is that when banks received bail out money, October onwards, they couldn’t be filing petitions for foreign workers (other than transfers) as the visa petitions are filed in April and the quota gets filled in relatively short time frame. Again, don’t know what this has to do with writing off losses against previous years profits.

  34. Similarly, when there is no labor shortage, whether in the firm, the local area, or in the job category, hiring an H-1B cannot be justified as easily as during a boom. That would be unfair to the existing labor pool. That’s why this should be looked at.

    Essentially, you’re arguing that the U.S. government, through immigration policy, ought to regulate its labor market so that it can take on no risk (since H-1Bs are trained in foreign countries) while accruing the benefits when it needs them (and making up for poor coordination between economic and educational policy). I think it is in that context of fairness that we ought to look at this. In a world in which some countries have per capita incomes at 48,000 PPP and others have $1,100, and capital is free to roam but labor is not, the argument that H-1B workers are in some sense taking jobs unfairly seems very narrow to me.

    However, I have sympathy for the motivations of the people who are trying to protect their jobs – I just think they should do it in the name of worker rights, not in the name of their citizenship status or nationalism. I also am fully aware that citizenship status (including temporary worker status) is used as a way to undercut labor organizing – and that’s a huge problem. But I hope that another solution can be found than ‘these are our jobs fullstop’ (with concomitant racism xenophobia etc).

    I hope…

  35. I have sympathy for the motivations of the people who are trying to protect their jobs – I just think they should do it in the name of worker rights

    How about they do it by being good at their job and charge competitive rates? Just a thought…

    M. Nam

  36. And as for them mostly being in technical jobs – the article has them in jobs as investment analysts, corporate law, etc.

    I have not seen specific numbers, but there are hardly any H-1bs in Corporate Law.

    I agree with Vinod and others here on trade protectionism. However, I am not so sure that offshoring and outsourcing are good for the US. Maybe some restrictions on outsourcing could be put on the financial sector so they dont take billions of tax payers money and outsource/offshore jobs.

  37. I am not so sure that offshoring and outsourcing are good for the US.

    As long as the American public wants cheap goods, O/O are here to stay. Especially in this environment where households are being severely stretched, O/O will only increase.

    Maybe some restrictions on outsourcing could be put on the financial sector so they dont take billions of tax payers money and outsource/offshore jobs.

    Any company that takes in TARP money has to be treated as a Government company/Public Sector and there are already rules that restrict O/O in such companies. In addition:

    • nobody working there should get a bonus. Ever. (Does anyone in DMV get a bonus?)
    • nobody working there should be allowed to quit and join another TARP company unless both companies approve. If you are working as a janitor for the DMV and want to work as a janitor for the public school, you need permission from both places. Similarly if you are working for Citigroup as an investment banker, you cannot go to JP Morgan unless your manager at Citigroup signs off on it. If you are working for GM as a lathe operator, you are prohibited from joining Chrysler as a lathe operator for the same reason (but you can join Ford since they did not take TARP money).

    M. Nam

  38. - nobody working there should get a bonus. Ever. (Does anyone in DMV get a bonus?) - nobody working there should be allowed to quit and join another TARP company unless both companies approve. If you are working as a janitor for the DMV and want to work as a janitor for the public school, you need permission from both places. Similarly if you are working for Citigroup as an investment banker, you cannot go to JP Morgan unless your manager at Citigroup signs off on it. If you are working for GM as a lathe operator, you are prohibited from joining Chrysler as a lathe operator for the same reason (but you can join Ford since they did not take TARP money).

    You dont have to get permission from the employer to leave a public sector job. Also public sector employees do get bonuses. They are just not as big and pervasive as they are in the private sector.

    As long as the American public wants cheap goods, O/O are here to stay. Especially in this environment where households are being severely stretched, O/O will only increase.

    Yes, but that does not mean that its necessarily a good thing for America. Also the WTO does not cover restrictions on movement of services/employees so a simple federal legislation can disincentivize O/O.

  39. PAFD: One does not need permission to leave a PS job – but there’s a protocol to be followed when you leave a PS job to go to another PS job. If you’re in NYPD, you can’t just quit and join the FBI. There’s a process for it. All I’m saying is that the same process should be applicable to people working in companies that took TARP money.

    M. Nam

  40. If you’re in NYPD, you can’t just quit and join the FBI. There’s a process for it.

    Not that it matters, but, no, there is no process for leaving NYPD and joining the FBI. You resign from NYPD and then you join the FBI after going through their interview process. The FBI might do a reference check with NYPD just as they would do a reference check with KFC if thats where you were working before you applied for the FBI job.

  41. I don’t mean to threadjack or anything, but all this discussion of H1 visas has distracted us from the real issue:

    Summer is coming. Which means gas prices are going to go back up, unless we do something about it…

  42. Great post. I agree. Continuing to prop up China’s oh-so-dainty economy is good for America.

    sarcasm