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Steel Standing: U.S. Steel celebrates 100 years
Sunday, February 25, 2001 By Len Boselovic, Post-Gazette Staff Writer
So what does U.S. Steel have to show for itself after 100 years? By a couple of key measures, not all that much. At the end of its first century, the Pittsburgh-based steel giant produced only about 8 percent more steel than it did in 1902, its first full year in business. And the market value of its stock -- excluding its Marathon energy shares -- is marginally less than the $1.4 billion it was worth 100 years ago today, when Andrew Carnegie gave up steelmaking for philanthropy and financier J.P. Morgan and Carnegie Steel President Charles Schwab made U.S. Steel the nation's first billion-dollar company.
And even though U.S. Steel remains the nation's largest steelmaker, that distinction means considerably less than it did in the days when the Industrial Age steamed along on rails manufactured by a company known simply as "The Corporation." It's hard to elevate the industry's stature when nearly a dozen U.S. steelmakers are mired in bankruptcy and industry leaders are persistently pleading for protection from imports. Being No. 1 under those circumstances doesn't earn much respect.
But U.S. Steel's production numbers and stock prices aren't a fair measure of what it's accomplished. As it celebrates this momentous occasion, consider how it beat the extremely short odds on long-term survival.
"It's the exceptional firm that lasts a hundred years," said Ralph Oliva, executive director of the Institute for the Study of Business Markets at Penn State's Smeal College of Business Administration.
"The firms that last a long time seem to have within them a timeless core of principles that guide them, mixed with a sense of responsibility to respond to changing environments."
The industry's current plight notwithstanding, at least U.S. Steel can say it did enough things right to reach the century mark. That's a claim Microsoft, Intel, Cisco Systems and other darlings of the Internet Economy won't be able to make for many more years.
Big Steel just got smaller
Morgan and Schwab's plan was to combine Carnegie Steel with Morgan's Federal Steel, the No. 2 producer, and throw in John D. Rockefeller's iron ore mines and fleet of ore boats for good measure. The resulting company owned a vast portfolio of mines, transportation facilities and steel mills that allowed U.S. Steel to control steelmaking from start to finish.
If judged strictly by its success at seizing a larger share of the country's swelling steel market, the merger was a failure. According to "The Corporation," a company-commissioned history written by Brian Apelt, U.S. Steel went from controlling 67 percent of the market in 1901 to controlling only about 50 percent by 1911, when federal trustbusters began their long, eventually futile attempt to break up Morgan and Schwab's creation.
Carnegie Mellon University Professor David Hounshell said financing the merger -- Carnegie insisted on being paid in cash -- put a lot of pressure on U.S. Steel to cover the bond obligations. As a result of the cash commitment, the country's appetite for steel grew faster than U.S. Steel's ability to grow. New competitors, including a company run by Schwab, quickly diminished the company's market dominance. After resigning as U.S. Steel's first president in 1903, Schwab turned Bethlehem Steel into U.S. Steel's most potent rival.
In more recent times, competition has come from imports and minimills, small domestic producers with lower costs. Imports became an issue after 1959, when a 116-day strike idled 90 percent of domestic mills. It was the first year the country imported more steel than it exported.
Minimills such as Nucor, whose corporate lineage runs back to the bankrupted maker of the REO Speedwagon delivery truck, began nipping at U.S. Steel in the '70s and '80s. First, they went after low value products such as steel bar used to reinforce concrete. Big Steel fled those markets and sought refuge in the more lucrative sheet steel business. In the '90s, the minis were invading that turf as well.
A hundred years after it controlled two-thirds of the domestic market, U.S. Steel shipments account for about 8 percent of U.S. consumption. Size, it seems, has its limits.
"There's always been this thought that if you're really, really big, you can survive anything," said Fariborz Ghadar, director of Penn State's Center for Global Business Studies.
"The fact of the matter is, that only goes so far. It's not how big and tough you are or how vertically integrated you are. It's how flexible you are and how quickly you can respond in the market."
Government in its face
Steel's importance to the economy provided a strong foundation over most of U.S. Steel's 100 years. It also invited plenty of government scrutiny.
U.S. Steel's production peaked at 35.8 million tons in 1953. It hit its all-time low of 5.5 million tons in 1932. The Great Depression also took the wind out of U.S. Steel's high-flying stock. As hard as it may be for today's shareholders to believe, Apelt says U.S. Steel's share price hit $261.75 -- $2,617.50 in today's dollars -- in 1929. Three years later, it bottomed out at $21.25.
Steel's might was most evident during the war years. U.S. Steel's employment reached an all-time high of 340,498 in 1943 vs. 2000 employment of 52,500. The company estimates it provided a third of the steel goods armed forces used in World War II.
In gearing up for wartime demand, U.S. Steel built the Geneva Works in Utah so that the plant would be out of reach of a feared Japanese invasion. That threat never materialized. Fifty years later, after the Geneva plant was sold to new owners, low-cost imports from Japan and other nations drove it into bankruptcy.
Even in peace time, the government has always kept a watchful eye on U.S. Steel. Fears that strikes would undermine the U.S. economy, that price increases would spark inflation and that pollution from steel mills would jeopardize the environment prompted government intervention on numerous occasions. Two of the more notable: President Truman's attempt to take over steel mills in 1952 and President Kennedy forcing U.S. Steel to rescind a price increase 10 years later.
In the 1980s, as the company struggled to put its steel house in order, federal regulators prevented it from taking two bold steps. The U.S. Justice Department denied its 1984 bid to acquire National Steel. Pressure from Congress led it to abandon plans to import British Steel slabs to its Fairless Works outside Philadelphia. It's a low-cost strategy domestic steel companies pursue to this day.
Diversification's child
In the end, U.S. Steel pinned its survival on energy, spending $10 billion on Marathon Oil and Texas Oil & Gas in the 1980s. Last year, energy accounted for 85 percent of USX's revenue, 94 percent of its operating income and all of its net income.
Yet, in a steel city such as Pittsburgh, energy isn't the first business to come to mind when you mention USX. Former Chairman Charles A. Corry once joked that nobody in Pittsburgh ever asked him whether he had drilled any good oil wells lately.
The diversification Corry and his predecessor, David M. Roderick, engineered saved U.S. Steel. But the company was by no means a stranger to the concept when Roderick and Corry went shopping.
Before oil and natural gas, U.S. Steel's businesses included shipbuilding, oil field supply, bridge building, fabrication, chemicals, real estate development and cement. In the war years, it made everything from horseshoes to howitzers, landing craft to steel mats used as landing strips for fighters and bombers.
While U.S. Steel provided most of the steel for the Panama Canal, it provided every cubic yard of cement for the mammoth project. The company's purchase of Atlas Portland Cement Co. in 1930 made it the world's largest cement producer.
Built to last?
One hundred years ago, the need to get bigger to compete drove Morgan and Schwab to form U.S. Steel. A century later, consolidation is again at the forefront of industry buzz. Last week, French steelmaker Usinor said it will create the world's biggest steel company by acquiring Luxembourg's Arbed and Spain's Aceralia.
Analysts insist that few steel markets are as ripe for consolidation as the United States. However, there are serious obstacles, including union contracts and unfunded employee and environmental liabilities. What few mergers there have been haven't produced tangible enough results to entice others to join the mating game.
U.S. Steel has shopped around but has yet to find a domestic deal it can live with. Moreover, given the increasingly global nature of the business, the company realizes it has to be a player overseas. Last year, U.S. Steel acquired Slovak steelmaker VSZ, giving it a foothold in a promising foreign market.
"The Slovakian thing shows they've still got some spark," says Duquesne University business school professor James Burnham. "It's a very interesting start on the road to reinventing the corporation."
Just how far down that road U.S. Steel will make it remains to be seen. The company is studying whether it should maintain separate stocks for its steel and energy businesses. The study, to be completed in a few months, could lead to the sale of one, or both, of the businesses.
USX Chairman Thomas J. Usher is upbeat about survival, writing in Apelt's history: "I am optimistic that, in some form, there will be a U.S. Steel a hundred years from now."
He says the steelmaker is entering the new century as it began the last, "as a world-class company."
Usher's optimism aside, expecting U.S. Steel to be around for its bicentennial celebration would be a stretch, given that very few firms last as long as it already has.
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