Federal Reserve Reforms



Also, not always clear that the entity is in fact
too big to fail, or whether there is simply a
perception that it is too big to fail
Introduces classic moral hazard
Whether it is feasible in a market and political
sense in the future.



Auto industry
Banking industry
Greece?
Limits to Reforms


Many institutions, public and private, have risk
management strategies – not often followed for
long
When times are good, firms are reluctant to take
into accountant all risks out there

Problem is at both macro and micro level

Very political


Micro level - US housing sector in 2000s Fannie Mae and Freddie Mac
Macro international level - voting pressures
on IMF right now
Steps taken over Past Year
Basel III provisions include new capital
standards and rules to provide strong
incentives to change their business
models. Much tougher than existing
regime.
- Tighter definition of Tier 1 capital and
- stricter definition of risk-adjusted assets.
Basel III – Dudley Conclusions
- “[E]asy access to credit that is underpriced
because it is not backed by sufficient
capital is not a sustainable route to
prosperity.”
•
•
•
•
•
Issues to think about
US seeking to fix the banking and nonbanking financial system at same time
as....
Fixing health care, energy and the
environment ...
Fixing housing crisis by offering new
loans to buyers – or continue with
foreclosures
Boost employment through more
government spending and record budget
deficits
Coordinate with international financial
Globalization Drivers
• Reductions in tariffs/quotas under WTO and
FTAs
• Declines in sea/air transportation costs
• Dramatic declines in telecommunications
costs
• Elimination of controls over short- and longterm capital flows
• Collapse of Soviet Union and the socialist
model
6
Determinants of
Steel Industry Location
• Natural resource endowments
• Energy costs
• Transportation costs: “freight in (raw
materials), freight out (customers)”
• Customer location (service/collaboration)
• National security – “defense industry”
• Exit (plant closing) costs
7
Global Employment Trends
Source: World Steel Association: Fact sheet 2008
Financial Crisis Overview

Risk assessment and management

Capital adequacy

Liquidity management

“Consolidated supervision”


Orderly resolution of a systematically important
nonbank financial institutions
Agencies taking control of institutions operations
and management as in Fannie and Freddie in
2008
Federal Reserve:
Financial Reform to Address
Sytemic Risk
Bernanke in spring of 2009 described elements to a
strategy to deal with four key issues with international
implications (BIS). Sought to address:
• “Too big to fail” problem
• Financial infrastructure (“plumbing”) – systems, rules
and conventions that govern trading, payment,
clearing and settlement
• Regulatory policies to avoid excessive “procyclicality”
• A new “risk assessment authority” to monitor and
address systemic risks at “macroprudential” level
Federal Reserve Reforms - 1
Allowing “Too Big to Fail” institutions – results in
too many distortions, according to Bernanke:
• Reduces market discipline and encourages
excessive risk taking by the firm
• Provides artificial incentive for firms to grow
• Creates un-level playing field with smaller firms
• Cost of bailing out too big to fail firms very, very
expensive
Federal Reserve Reforms - 2
Fixing the financial infrastructure would focus on
interactions among firms that support “financial
plumbing”:



That is, trading, payments, clearing and
settlement
Could address Credit Default Swaps and other
OTC derivitives – (much of these have been
unregulated)
Want central clearing counterparties for OTC
trades
Federal Reserve Reforms - 3
Deal with “procyclicality”


Current capital standards, accounting rules and
other regulations have made the financial sector
excessively procyclical and . . . .
“Led financial institutions to ease credit in booms
and tighten credit in downturns more than is justified
by changes in the creditworthiness of borrowers”

Modify capital standards

Improve disclosure and transparency

Review standards governing valuation and loss
provisioning
Federal Reserve Reforms - 4



To address broad risk assessment strategy
issues looked to create a Systemic Risk
Authority – probably Fed (see 2010 Dodd-Frank
Act)
Take a more “macroprudential” approach to the
supervision and regulation of financial firms
Look at overall economic risks, not just market
or credit risks
Steps Taken
Basel III
The Dodd-Frank Act
and
the Volcker Rule
Steps taken in Recent Years


Basel III is designed to address a number
of issues that were recently identified by
NY Fed President Dudley:
Many large financial firms “did not have
enough high-quality capital to be able to
retain access to private funding markets”
during large losses.
Inadequate liquidity buffers –
“widespread over-reliance on short-term
funding to finance long-term illiquid
assets”
Steps taken over Past Year



“Lack of transparency” – hard to value
derivatives, such as CDS, etc.
“Inappropriate structure of incentives
encouraged excessive risk taking.”
Lack of appreciation of how much the
financial system was “interconnected so
that shocks were transmitted broadly
through the financial system...”
Basel III
- Standards emphasize banks to use more
common equity in numerator by creating
an explicit quantitative capital standard
- Tier 1 capital to include more common
equity and that equity to be more narrowly
defined as “tangible common equity”
- Ratio of that equity to rise to 4.5% of risk
adjusted capital
- Also add 2.5 percent for “capital
conservation buffer”
Basel III
- Much higher proportion of ratio is now met
by common equity;
- that common equity is much better quality;
- the amount of risk-adjusted assets has
increased and better reflects underlying
risk;
- new capital conservation buffer is added;
- and much more.
Basel III
- Total of 7% + (old Tier 2?) will exceed
Basel I/II rules
- Also, new stricter rules for risk-adjusting
assets (the denominator) will force capital
needs up.
- Together, significant upgrade of current
standards.
- Will also provide incentives to standardize
OTC derivatives contracts and clear such
standardized trades through central
counterparties
Dodd-Frank Act 2010





Well over 2000 pages
Gave to Fed most authority = to at least 250
projects associated with implementing the act,
including 50 rulemakings and sets of formal
guidelines
Lots of coordination with lots of other USG
agencies over the next few years
Overlays the existing regulatory structure
Will generates tens of thousands of pages of
new rules
Dodd-Frank Act 2010



Designed to address not just the safety and
soundness of each individual firm
But also the overall stability of the financial
system and economy – the macroprudential
approach
“The crisis demonstrated that a too narrow
focus on the safety and soundness of individual
firms can result in a failure to detect and thwart
emerging threats to' financial stability that cut
across many firms.” Bernanke
Federal Reserve Reforms

Problems?

Implementation

Financial innovations

Moral Hazard

Political pressures

Integrate with extra-national rules and
regulations
The Global Steel Industry
25
Topics
•
•
•
•
•
Globalization drivers - review
The steelmaking process
U.S. steel industry background and analysis
The global steel industry today
The road ahead
26
The Steel Making Process - I
27
The Steel Making Process - II
28
The Steel Making Process - III
29
Question: How to Measure the
Health of the Industry?
•
•
•
•
•
•
•
Employment
Gross production
Prices
Net shipments
Value added
Industry profitability
Share of global exports
30
American Steel Industry
U S Steel Industry Em ployees
(January)
T housands
150
100
50
0
1999
2000
2001 2002
2003
2004
T otal Employees
Source: BLS
2005
2006
2007
Production workers
2008
2009
US Steel Industry
Employment by Occupation
Source: World Steel Association: Fact sheet 2008
American Steel Industry
33
Source: US ITA: Steel Industry Executive Summary February 2012
Share of Global Steel Production
Source: US ITA: Steel Industry Executive Summary February 2012
American Steel Industry
US Exports of Steel Mill Products
Quantity in Metric Tons
Millions
14
12
10
8
6
4
2
0
2001
2002
2003
2004
2005
2006
X-Axis
World
Source: US Census Bureau
Canada
China
2007
2008
American Steel Industry
US Exports of Steel Mill Products
By Value
Billions of US dollars
$20
$15
$10
$5
$0
2001
2002
2003
2004
2005
2006
2007
X-Axis
WORLD
CANADA
Source: US Census Bureau
MEXICO
CHINA
INDIA
2008
American Steel Industry
US Steel Imports
Billions US $
Millions metric tons
40
100
80
30
60
20
40
10
20
0
0
1998
1999
2000
2001
2002
2003
2004
Quantity (right scale)
Source: US Census Bureau
2005
2006
2007
Value
2008
Steel Plants 1978:
BOF and EAF Operating Capacity
BOF
EAF
117.9
97.6
20.3
million tons
per year
EAF Capacity
Source: Steel Plant Database
BOF Capacity
39
Copyright  2003, University of Pittsburgh
Steel Plants 2002:
BOF and EAF Operating Capacity
BOF
EAF
121.7
52.8
68.9
million tons
per year
EAF Capacity
Source: Steel Plant Database
BOF Capacity
40
Copyright  2003, University of Pittsburgh
U.S. Management Mindsets:
1950-1980
• Taylorism: “scientific management”
• Economies of scale: bigger is better
• Vertical integration
• Ignore the Japanese
41
Emergence of Japanese
Competition for US: 1970s+
• Underestimating the Japanese
• Misreading customers’ sensitivity to price v.
availability
• Mismanaging technology: “followers”
42
Industry Response
• Imports are due to:
– “cheap labor,” government subsidies, “unfair trading
practices”
• Compete via:
– reliability in deliveries (no strikes)
– lobbying for trade barriers
• 1982
– Substantial capacity cut, reduction of work force especially in
Pittsburgh area
– Firms promised workers attractive health insurance and
retirement benefits (“legacy” costs)
– Substantial productivity increases
43
Emergence of Global
Competition
1980s:
• Japanese establish leadership
• Others (Korea, Taiwan) follow Japanese
model
• European Union forces industryrationalization
1990s:
• Collapse of Soviet Union brings
Russian/Ukrainian producers into world
market
44
Rise of the Mini-mill
Competitors in the US
• Nucor Steel: First user of “thin slab casting” 1989
• Largest U.S. carbon steel producer by 2001
• Very flat management
• Highly paid nonunion workers
• Several imitators, e.g. Steel Dynamics
• More than half of US market by 2000s
• Not competitive in very “high end” products
45
State of Industry Today
• Continuous technological change in the
presence of competition driving costs down
• Consolidation of industry within countries
– In U.S.: U.S. Steel, ISG/Mittal and Nucor
• Emergence of multinational steel companies
– Mittal/Arcelor
– Tata/Corus
– U.S. Steel (Slovakia, Serbia)
46
State of Industry (cont)
• Reduction in U.S. capacity at older producers,
frequently via bankruptcies and Wilbur
Ross/Mittal
• Temporary tariffs 2002-2003 helped process of
consolidation
• Substantial reduction in company “legacy” costs
– $8.2 billion in steelworker pension liabilities
assumed by federal government
– USW retirees’ health benefits cut
• Substantial investment by foreign companies in
47
U.S.
State of Industry (cont)
• Severstal acquisition of Oregon Steel for $2.3
billion (11/06); Sparrows Point with 3.6 million
tons capacity (5/08); Wheeling-Pittsburgh (9/08)
• US Steel acquisition of Lone Star Steel for $2.3
billion (3/07)
• IPSCO acquired by Svensk Stal for $7.7 billion
(5/07)
• Thyssen building 4.0 million ton $3.4 billion
integrated works in Alabama (5/07)
– will use imported slabs from Brazil
• U.S. Steel rebuild of Clairton Cokeworks on hold48
Import Rules for the American
Steel Industry
• “Steel Import Monitoring and Analysis System”
under US Commerce Department
• Created in 2003 along with the imposition of
tariffs on foreign steel imports
• US based companies must obtain a license
and report in detail all imports of foreign steel
• System was extended in March 2009 for four
years to 2013
• Likely will be made permanent
The World Steel Industry
50
Carbon Steel Price Index
(USD/Tonne)
Global Steel Industry Production
52
Source: US ITA: Steel Industry Executive Summary February 2012
Global Steel Production by Major
Producers
53
Source: US ITA: Steel Industry Executive Summary February 2012
World Steel Industry
Share of World Production
Percent of Total
100%
80%
60%
40%
20%
0%
1998
1999
2000
2001
2002
US
Source: World Steel Association
2003
China
2004
All Asia
2005
2006
2007
2008
World Crude Steel Production
World Steel Association
55
World Steel Production 2008
China
EU
Japan
US
Russia
India
South Korea
Germany
Ukraine
Brazil
Italy
Turkey
Taiwan
France
Spain
Mexico
Canada
UK
Belgium
Poland
Iran
0
100
Source: World Steel Association
200
300
400
500
600
World Steel Industry
US Average Unit Export Prices
Average price/metric ton
$1,500
$1,000
$500
$0
2001
2002
2003
2004
2005
2006
2007
2008
Global Concentration Ratios
58
Industry Concentration Ratios
59
Continuous Adjustment Ahead
• Global vertical specialization in production
facilities
• Continued consolidation of companies
• A three sector steel industry?
60
Global Vertical Specialization
“Relying on subsidiaries or suppliers in different
countries at each stage of adding value to take
advantage of each country’s strengths.”
Facilitated by low or nonexistence tariffs and
reliable and low cost:
• Transportation
• Telecommunications
61
Global Vertical Specialization
• Example: cell phones:
– Design end products in Sweden (Ericsson)
or Finland (Nokia)
– Design key components (e.g. chips) in U.S.
– Produce key components in Taiwan/Korea
– Assemble them in China
– Distribute them in the U.S.
– Provide technical assistance for customers
out of India
62
A Three Sector Industry?
• Integrated producers: ore to hot metal in
coke-fired furnaces to finished steel
(“automobile grade”)
• “Minimill” producers: scrap/reduced ore in
electric furnaces to finished steel
• “De-integrated model:” Why ship ore and coal
instead of slabs across oceans?
– Transportation costs v. Customer service/collaboration
– Roll imported slabs/bars into products for near-by customers
– India, Russia, Ukraine, Brazil as slab providers
63
Summary
• Global recession likely to accelerate the final
stages of completing a long-delayed
consolidation/globalization of the steel
industry worldwide
• China becoming a major factor in global
markets – depends on domestic demand
• The global organization of production and
processing relative to customer location
remains in flux due to energy cost trends and
64
environmental considerations
Arcelor Mittal: #1 Producer
Dutch/British/US/World . . .
65
Top 15 Global Steel Producers
2007
(By million metric tons of crude steel)
Source: World Steel Association
66
Steel Industry Employment
(1,000 Workers)
BLS forecasts
a 25% drop
Source: Bureau of Labor Statistics
68
LEADING EXPORTERS/IMPORTERS
2006
69
World Steel Association
Brazilian Player
70
American Steel Industry
71