An Economic History of the American Steel Industry

Robert P. Rogers

• Publisher: Routledge
• Year: 2009
• ISBN:
  9781135969165
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This book provides a basic outline of the history of the American steel industry, a sector of the economy that has been an important part of the industrial system. The book starts with the 1830's, when the American iron and steel industry resembled the traditional iron producing sector that had existed in the old world for centuries, and it ends in 2001. The product of this industry, steel, is an alloy of iron and carbon that has become the most used metal in the world. The very size of the steel industry and its position in the modern economy give it an unusual relevance to the economic, social, and political system.

1 Introduction

Plan for chapter

This book outlines the history of the American steel industry. The narrative starts with the 1830s, when the American iron and steel industry resembled the traditional Old World iron sectors, and it ends with 2001. In this period, steel, an alloy of iron and carbon, became the most commonly used metal in the world. Its very size and position give the steel industry an unusual relevance to modern society.

After explaining why the industry is important, this chapter describes its basic technology and presents the taxonomy used in subsequent chapters to describe the history of steel in America.

The importance of steel

The size and position of the steel industry give it an unusual economic, historical, and political importance. Thus, one can examine the reasons for studying steel under these three categories.

Economic

Steel is important in the economy. In 2000, the value added in the steel industry constituted over one percent of GDP originating in manufacturing. In 1970, the steel industry employed 531,196 people and even after its decline in 2000, it still had 225,000 on its payroll. Steel also influences other parts of the economy. As shown in Table 1.1, it is an important input into large industries such as automobiles, construction, oil, and machinery. Thus, what happens in steel affects the whole economy.

Another reason for the importance of steel is that its market structure is typical of modern industrial markets. Historically, the steel industry has been so concentrated among a few firms that one could readily accept the hypothesis of noncompetitive pricing. Table 1.2, showing the market shares of some of the large firms in 2000, gives one an idea of the present concentration of the American steel industry. Much of this concentration can be accounted for by the large plant size needed for low-cost operation, but more of it results from mergers. Some of these mergers were likely undertaken with the objective of concentrating the market in order to control output and raise prices.

Table 1.1 The major buyers of steel product, 2000

Nevertheless, no one firm or group of firms has ever totally controlled the industry. When growth occurred in the industry and new technologies were developed, new firms often entered. For instance, Steel Dynamics listed in Table 1.2 was only founded in 1996. Table 1.2 also shows the prominence of the minimill firms which arose from a new technology. Furthermore, the presence of imports often did much to decrease the ability of domestic firms to raise prices. Thus, steel is typical of many parts of the economy in that prices are neither perfectly competitive nor totally monopolistic.

Table 1.2 The production and market shares of selected large American steel firms, 2000

Historical

The historical importance of the steel industry can be illustrated by many examples. The growth of the industry did much to change the United States. By providing the steel for factories, office buildings, and other major construction projects, such as subways, highways, and large bridges, the industry facilitated the growth of the industrial and urban economy. Many of the leading growth sectors such as railroads in the late nineteenth century, automobiles in the 1920s, and armaments in the 1940s were heavily dependent upon steel.

New industries developed that used steel as a major input; examples include canning, steel drums, bicycles, and machinery. The increasing availability of steel led to great changes in construction, agriculture, and ocean shipping. While the introduction of the auto industry increased the demand for steel, innovations in the steel industry did much to foment the development of the automobile.

The demand for steel inputs led to great changes. The labor requirements of the steel industry provided impetus for the migration into Pennsylvania and the Midwest from Eastern and Southern Europe and the Southern states. The sheer size of the labor force led to conflicts over governance between the companies and the unions. The development of the Michigan and Minnesota iron ore deposits facilitated the growth of navigation on the Great Lakes. The demand for coal from the steel industry led to great increases in that industry.

There were also many examples of technological spillovers from the steel industry to other industries resulting from its emphasis on teamwork and exact chemistry and technologies. For instance, the first large aluminum company, Alcoa, was located in Pittsburgh, a major steel center.

Political

The geographic concentration of steel firm employment makes politicians highly sensitive to the fortunes of the particular companies and unions. There is also a perception that a modern nation needs a large steel industry. The uses of steel in warships and later armored land vehicles and airplanes have lent a national defense implication to the industry’s situation. Furthermore, many policymakers believe that a modern manufacturing sector requires a domestic source of steel.

These things have led to government measures to protect steel firms from foreign competition. Almost from the founding of the United States, there has been pressure to put tariffs on iron and steel products. Furthermore, the government used other trade barriers such as quotas, trigger price regulations, and locality preference in government procurement.

The technology of the industry

Two sectors exist in the modern steel industry: the integrated sector which transforms iron ore into steel products, and the minimill sector which uses iron or scrap steel to make the final product. The former accounts for about half of the steel production, but the latter is growing.

The integrated steel mill is a combination of four components: the smelting furnace which changes the iron ore into raw or “pig iron,” the steel furnace which refines the iron into steel, the continuous casters, and rolling mills; the latter two form the steel into the shapes useful to mill customers. The minimill sector, which mainly uses scrap steel as an input, has three components: the steel furnace, the caster, and the rolling mills. A few minimill firms, however, have integrated backwards by building the direct reduction steel smelters described below.

Here, the parts of the steel production process are described. In the last 170 years, there were three ways of smelting iron ore: the Catalan furnace, the blast furnace, and the direct reduction furnace. The Catalan furnace used a combination of air blast and hammering to purify iron ore to get a product that can be shaped into a useful iron implement. This furnace was used in isolated areas by firms called bloomaries until the mid twentieth century. Even in the nineteenth century, however, this process was obsolete, accounting for only a small portion of the total production.

The most common type of iron smelter was (and is) the blast furnace, in which a mixture of iron ore, limestone, and coke (purified coal made by cooking the coal without burning it) is oxidized by a blast of air. As a result of this reaction, a mixture of molten iron and carbon collects at the bottom of the furnace, and it is periodically tapped and drained out of the furnace. Historically the resulting iron was cast into shapes called “pigs” before being moved to the steel furnace—hence the term “pig iron.” In recent times, however, the iron has been moved to the steel furnace in a molten form.

The third method of smelting iron is the direct reduction process. In this process, hydrogen and carbon monoxide are passed over iron ore, and the oxygen is taken out of the ore. A mixture of iron and carbon is then left in the form of briquettes or pellets. This process requires a source of cheap natural gas; thus, it is used in Venezuela and Saudi Arabia. It is not all that common in other areas, but it does have a presence in the United States.

The steel furnace, the next step in the production process, exposes molten pig iron to oxygen or air and carbon. This gets the excess carbon and other impurities out of the metal and, then, it raises the level of carbon to that needed to form a specified grade of steel. Historically, six types of steel furnaces have been used in the United States, the blister furnace, the crucible furnace, the Bessemer converter, the open hearth process, the basic oxygen furnace, and the electric arc furnace.

The first two were used in the period before steel became a basic industrial product. Blister steel was made by heating bars of iron covered with charcoal in a furnace for several days (Ashton 1968, p. 54). Crucible steel was made from blister steel by melting it in clay pots or crucibles. When it was cooled, it was a much harder and more useful product. Both these products were very expensive, resulting in a very limited use.

In the period of mass steel use, the other four furnaces dominated the industry: the Bessemer, open hearth (OH), basic oxygen (BOF), and electric furnace (EF). The latter two account for all present-day American production, but the other two have great historical importance. In the Bessemer process, molten iron, scrap, and some other trace ingredients are put into a vessel; air is then blown through the bottom of the vessel, and the impurities are oxidized. The process takes about 50 minutes. The Bessemer process was important historically because it was the first process by which steel could be produced at a cost low enough for wide use.

The open hearth furnace still accounted for about 19 percent of American production in 1975, but the last American OH shut down in 1992. In the OH, scrap, pig iron, and other ingredients are put in a vessel, and air and other gases are blown and burned over the top of the pool of molten metal to eliminate the impurities and leave steel. It takes from five to eight hours to get these impurities out.

For two reasons, OH accounted for the largest amount of steel in the early twentieth century. First, with this process, the charge of scrap steel was variable, and thus mills could take advantage of variations in the price and availability of scrap. Second, the OH process could be altered to take into account the exact nature of the steel output demanded by the customer. In contrast, the Bessemer process worked within very restricted parameters.

The basic oxygen process accounted for the largest amount of steel produced in 2000: 53 percent of U.S. production. This process puts molten iron, scrap steel, and other ingredients into a vessel. Oxygen is then blown into the mix from the top of the vessel, and the impurities are oxidized out of the mixture, creating steel. The process takes about 50 minutes. In some ways, it is a modern version of the Bessemer process. Nevertheless, due to the modern ability to engineer metal, it can produce the wide variety of steel desired by the customers.

The last type of furnace, the electric furnace, transforms iron into steel by exposing the input, usually scrap, to an electric charge. With this process, a charge of iron and/or scrap is put into furnaces, and an electric arc heats the mix. Oxygen then is fed into the furnace to combine with carbon and other non-iron elements in order to leave the combination of carbon and iron that constitutes steel. The process usually takes from one to two hours depending on the amount of electricity used.

In 2000, the EF accounted for 47 percent of the total steel production. As stated above, the steel industry is divided into two sectors: the integrated mill sector and the EF sector. At present, the first sector mainly uses BOF furnaces, but integrated mills often use electric furnaces to produce specialty items and to absorb scrap created within the mill. Thus, the different types of furnaces are often combined into one conventional integrated mill.

In contrast, companies in the EF sector use only the electric furnaces. These firms usually start with recycled or scrap steel rather than newly smelted iron. This sector accounted for about 19 percent of the total steel consumption in 1976, but its share had risen to 47 percent by 2000 and 52 percent by 2004. The plants in this sector are usually smaller than other steel mills: hence the term, minimill.

In the late 1960s and 1970s, the production of stainless steel led to a variant on the EF, called the AOD (argon-oxygen decarburization) vessel. The process allows the refining of stainless steels with very low carbon levels (0.01 percent).

For both the integrated plant sector and the EF sector, the next step has been the continuous caster. This large complex machine, through a combination of cooling and rolling, shapes molten steel into the hard pieces that can be readily changed into the eventual products.

The casters produce three intermediate shapes: billets, blooms, and slabs. Billets are steel pieces about 6 feet long with dimensions of less than 6 by 6 inches, and blooms are steel pieces about 6 feet long with dimensions varying from 6 by 6 inches to 12 by 12 inches. Both shapes are used to make wire, rods, rails, and structural shapes. Historically, slabs are pieces of steel, 2 to 6 inches thick, 2 to 6 feet across and 10 to 30 feet long, though these sizes could vary. In recent years, new technology is casting thin slabs as little as a

thick. Slabs are used to make sheet steel products, plates, and welded pipe and tubes.

Continuous casters are a relatively recent development (in the last forty years). In the past, the mills used a less direct process to shape molten steel. First the steel from the furnace was cast into molds called “ingots.” Then, a separate set of rolling mills, called the primary rolling mills, rolled the ingots into billets, blooms, and/or slabs.

At present, what were once called secondary rolling mills roll these intermediate shapes into final pieces used by the customers. Examples of these shapes include wire rods, bars, rebar, small structural shapes, large structural shapes, rails, tubes, axles, and wheels. There are several types of rolling mills. The sheet mills make sheet, and the other mills make bars, rods, plates, and tubes.

A taxonomy for examining the steel industry

This book divides the history of the industry into reasonably appropriate chronological periods and then applies Michael Porter’s taxonomy to each period. (See Porter 1980 and 1998.) Porter suggests that an efficient way to analyze an industry is to divide the subject up into the areas with which firms must deal to operate effectively.

Thus, a chapter is devoted to each period, and in each chapter a section covers each of the following aspects of the steel industry: the product and its production process, the product demand, the industry firms, substitutes for steel, the input suppliers, and the industry’s relationship with the government. To operate successfully, firms in a given industry must concern themselves with each of these areas. A conclusion on overall issues ends the chapter.

The section on product examines changes in the production process. Then, a second section considers the demand for the product. In effect, this section examines developments among the particular steel customer sectors.

A third section analyzes the industry competitors and market structure. The section also describes developments with given firms that had industry-wide implications.

The next section examines developments among the substitute products such as aluminum. Under the heading of suppliers, the situations in industries supplying major input to the steel industry are discussed. Among these industries are iron ore, coal, electricity, and scrap steel. In addition to what are normally called suppliers, this section examines the market for steel labor, perhaps the most important input.

Then, the relationship of the industry to government is discussed. The go...