Buy America? Not So Fast...
Editor's note: A previous version of this article referenced the "Buy American" program rather than "Buy America." The Fool regrets the error.
AK Steel CEO James Wainscott defends his company's push against foreign steel by saying, "we simply couldn't stand by and watch America our great country become the dumping ground for these products." While the financial reality of this anti-dumping crusade may be more about money than American pride, it brings up a touchy question: What is American steel?
Building a bridge
When looking for a company to supply the steel needed for the Verrazano Bridge, the Metropolitan Transportation Authority of New York (MTA) went with Chinese steel. The MTA said it, "could not find an American fabricator." That didn't go over well in the U.S. steel industry or in the press.
The MTA shifted to a claim that no U.S. steel company could meet its specifications and timeline for the Verrazano project. It was, however, able to find a U.S. steel mill for the Tappan Zee bridge project. The Tappan Zee is being built with steel from ArcelorMittal's U.S. mills.
Both AK Steel and ArcelorMittal make heavy use of blast furnaces, which is a more costly process than mini-mills, which use electric arc furnaces and scrap steel. That's put AK and Arcelor in a bad position profitwise because oversupply has pushed steel prices down. AK Steel has fared worse, posting losses in each of the last five years. Its cumulative loss over that span was more than $12 a share.
ArcelorMittal has posted losses in each of the last two years, and its first-quarter loss of $0.12 a share continues the streak into this year.
However, ArcelorMittal is, technically, a European company with deep roots in India. The mill being tapped is in the U.S., but the company that owns the mill is anything but. This subtle distinction doesn't seem to be too much of a concern to anyone.
What is U.S. steel?
The reason is that the steel is still being made in the United States. That's a more important part of the equation than who owns the mill. It is, in the end, about U.S. jobs. So why is there a push-back against Novolipetsk Steel, a foreign steel company with an American subsidiary that has steel plants in Pennsylvania and Indiana?
As long as it comes out of the U.S. plants, it's U.S. steel, right? Not quite -- Novolipetsk Steel is a Russian company. That makes it a prime target, especially right now. U.S. steel proponents are making hay of the Crimea situation. The issue being addressed is deeper, however.
AK Steel and ArcelorMittal make steel in the United States. Novolipetsk imports giant steel slabs that it then uses to fabricate steel products. California Steel Industries, jointly owned by a Japanese company and Brazil's Vale, does the same thing—but its steel comes from Japan and South America, among other regions.
Right now, Novolipetsk and California Steel can't compete for projects with "buy America" rules. Because they make steel in the United States, however, ArcelorMittal and AK Steel can. Novolipetsk and California Steel are trying to get that rule changed. The U.S. steel industry isn't pleased with the idea.
Not make or break
This isn't a make-or-break issue for U.S. steel companies like AK Steel or foreign ones with U.S. operations like ArcelorMittal. Far more important is steel pricing. However, it plays an important part, because foreign companies selling steel at low prices in the U.S. market (the aforementioned "dumping"), allows uncompetitive industry practices to continue.
If unprofitable steel companies are allowed to keep making steel, the oversupply currently facing the industry won't resolve itself naturally or in a timely fashion. Until the industry clears out the extra capacity, ArcelorMittal and AK Steel are going to have a hard time turning a profit. That's also true of companies that may be dumping steel. Keep an eye on the "buy America" clause, and if you own steel companies, wherever they call home, hope the current limits stay in place.
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The article Buy America? Not So Fast... originally appeared on Fool.com.Reuben Brewer has no position in any stocks mentioned. The Motley Fool owns shares of Companhia Vale Ads. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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