Steel industry - History of Business in the U.S.
Definition: Enterprises that process iron ore into hardened steel; sell, distribute, and use the metal for production; and sell and distribute the resulting products
Significance: Steel is fundamentally necessary for modern lifestyles, particularly in transportation and the construction of large buildings and infrastructure. Although the steel industry continues to employ thousands of American workers, the proportion of the world steel supply produced in the United States has significantly declined since the 1970’s.
Many historians use the term“second industrial revolution” to describe the modernization that occurred in the years from the U.S. Civil War to World War II. The foundation for this transformation can be largely attributed to the use of Bessemerprocessed steel. Fromthe 1860’s to 1945, the growth of the iron and steel industry in the United States was truly impressive. In 1860, the nation’s pig iron production was only 25 percent of Britain’s output; by 1895, it was 19 percent larger than Britain’s, and by 1906, it was four times larger than that of Britain. In 1945, the United States produced more than half of the world’s steel output. Since the 1960’s, however, the relative position of the U.S. steel industry has significantly declined.
Before the mid-nineteenth century, steel was too expensive to be used on a large scale. In the cementation process of manufacturing, bars of wrought iron and charcoal were heated together for about a week. The process required three tons of expensive coke (coal with volatile material removed by heating) for each ton of steel removed. About 1850, English inventor Henry Bessemer and American inventor William Kelly discovered independently that impurities could be removed from iron by blowing air through the molten iron. Their discovery, usually called the Bessemer process, provided an inexpensive means to mass-produce steel from pig iron. Both Bessemer and Kelly obtained patents, but bankruptcy forced Kelly to sell his patent to Bessemer in 1857.
Recognizing that heavy railroad cars quickly pounded iron rails to pieces, a few British companies soon began using the Bessemer technique to make steel rails. In 1862, John Edgar Thompson, president of the Pennsylvania Railroad, purchased the expensive rails from Britain, and after a few years, he concluded that their durability justified the additional cost. In 1864, the Eureka Iron Works of Wyandotte, Michigan, became the first American company to produce Bessemer steel, and the following year the company began manufacturing steel rails on a small scale. At this time, nevertheless, many industrialists believed that the new way of making steel was only a passing fad.
Andrew Carnegie, who entered the iron business in 1861, became the dominant leader of the emerging steel industry. When visiting Europe in 1872, he investigated companies using the Bessemer process, and he returned to his headquarters in Pittsburgh determined to construct a huge plant able to massproduce steel using the process.Heand several associates organized Carnegie, McCardless, and Company, which between 1873 and 1875 built the Edgar Thomas SteelWorks, in Braddock, a suburb of Pittsburgh. Built at a cost of about $1.1 million, the plant was able to produce 225 tons of steel rails per day. The investment was risky, but it paid huge dividends.
Carnegie became the “King of Steel” for a number of reasons, including his emphasis on efficiency, his determination to undersell his competitors, and his choice of capable associates, particularly Henry Phipps and Henry Clay Frick. Rather than stock manipulation, Carnegie concentrated on production. From his earlier experience with the Pennsylvania Railroad, he believed that the way to make money was to decrease unit costs by speeding up the flow. In addition to keeping detailed data on costs per unit of output, he pioneered the system of business organization called vertical integration, which meant eliminated middlemen, and controlled all aspects of the business, from the extracting of raw materials to the selling of finished products. He was also ruthless in firing incompetent managers and in demanding that workers endure long hours, dangerous working conditions, and low wages.
When Carnegie began manufacturing steel, other producers entered into an agreement to price rails at $70 per ton, but Carnegie sold his rails at $65 per ton.Within two decades, Carnegie had reduced the price to $25 per ton. His business methods allowed him to sell enough rails to keep his plants in continuous operation, and he used most of the resulting profits to invest in new plants and buy out many of his competitors. His growing empire included the Homestead Steel Works, the Keystone BridgeWorks, the Pittsburgh Bessemer SteelWorks, and the Frick Coke Company. In 1892, the same year as the controversial Homestead strike, he and his associates consolidated their holdings into the Carnegie Steel Company, which was initially capitalized at $324 million. By 1900, the company produced one quarter of the country’s output and earned a profit of $40 million a year, of which Carnegie himself received about $25 million.
A Comparison of Steel and Iron
The American Industrial Revolution required large amounts of iron and steel products. During the first half of the nineteenth century, only cast and wrought iron could be produced commercially in the quantities needed for industrial purposes. Both materials had significant disadvantages. Cast iron (2 to 5 percent carbon) can be cast into shapes easily but is brittle. Wrought iron, which uses very little carbon, is malleable but cannot be cast into shapes. Steel, which contains up to 2 percent carbon, can be cast and is also malleable. However, until the mid-nineteenth century, it could be produced only in small and expensive batches. After Sir Henry Bessemer introduced the first commercial method of massproducing steel, the material began replacing both cast and wrought iron for industrial and military needs.
From 1901 to the 1970’s
In 1898, J. P. Morgan, the preeminent finance capitalist of the age, moved into the steel industry, consolidating several small companies into Federal Steel, which challenged Carnegie’s dominance. Morgan envisioned that the further integration of the steel industry into one gigantic company would eliminate much inefficiency, thereby reducing costs and increasing profits. Carnegie wanted to retire and devote his remaining years to philanthropy, as expressed in his 1889 essay, “The Gospel of Wealth.” In 1901, Morgan asked Charles M. Schwab, president of Carnegie Steel, to inquire about how much money he wanted for the company.
Carnegie gave Schwab a penciled note with the figure of $480 million (over $10 billion in 2007 dollars). Morgan accepted the offer, and he then combined Carnegie Steel Company with othercompanies to establish the United States Steel Corporation, which was capitalized at $1.37 billion, becoming by far the world’s largest business enterprise. The new corporation employed 168,000 people and owned 213 manufacturing plants, forty-one mines, and almost one thousand miles of railroad. By 1903, it produced almost one-third of world’s steel output and about half of the output in the United States.
After 1904, Bethlehem Steel became U.S. Steel’s major competitor. The steel industry operated as an oligopoly, in which these two corporations and a few others set prices, and the smaller companies tended to follow their lead. Under the energetic leadership of Schwab (who had left U.S. Steel in 1903), Bethlehem Steel established an executive profit-sharing plan, applied a system of incentives to wages, and gave managers a maximum degree of discretion. During World War I, Schwab often acted as a senior spokesperson for the industry, and he was the principal factor in Bethlehem’s success in obtaining war contracts.
Throughout its history, the steel industry has experienced turbulent cycles of boom and bust. From 1900 to 1940, production grew at an average annual rate of 2.9 percent, but it varied greatly from year to year. Demand for steel products fell during the Great Depression of the 1930’s, but demand soared during World War II, when steel products of many kinds became crucially important in fighting the war and making the United States the “arsenal of democracy.” From 1941 to 1945, the nation manufactured some 88,410 tanks, 12 million rifles, 8,812 major naval vessels, and 4,900 merchant ships. The total raw steel output reached 334.5 million metric tons, which was almost twice as much as that of Japan, Germany, and Italy combined. In 1945, the last year of the war, the United States produced about half of the world’s steel output.
During the next thirty years, American production grew at a rate of 6 percent a year. To most Americans, the steel industry seemed to have a secure future, and young workers began working in the mills with expectations of stable employment until retirement age. Gradually, however, the United States found it difficult to compete with foreign producers, particularly the Japanese, who often had more modern plants and a comparative advantage in labor costs. By 1959, exports have been exceeded by imports, and the imbalance grew rapidly during the 1960’s. Several countries expanded production much more rapidly than the growth in demand, frequently with their governments’ support. American companies frequently complained that foreign competitors were guilty of dumping, or selling their products more cheaply than production costs.
Since the 1970’s
In 1971, U.S. consumption of imported steel reached a record level of 18.3 million tons, or 18 percent of the domestic market. With voluntary restraints, imports declined during the next four years, but then they grew to account for 35 percent of the market in 1998. Although U.S. production had reached a record high of 151 million tons in 1973, demand had plummeted the next year, resulting in the closing of hundreds of plants and the loss of a million jobs. In 1978, U.S. companies produced 137 million tons of steel, and four years later, production hit a low point of 73 million tons.
During the 1980’s, the United States produced 15 percent of the world’s output in steel. Output declined from 154 million tons in 1982 to 112 million tons in 1987 (a 25 percent drop). By then, imported steel had grown to 28 percent of consumption. The number of integrated steel companies declined from twenty companies in 1976 to fourteen in 1987. Reduced output combined with continuing modernization resulted in a significant decline in employment. Between 1973 and 1990, employment in the U.S. industry declined by 66 percent—from 500,000 steel workers to only 170,000 workers.
Steel producers managed to realize profits every year from the 1940’s to 1981. Since then, however, the industry has often registered huge losses, totaling billions of dollars. During the 1980’s, the industry lost about $12 billion, and twenty-five companies were forced to file for bankruptcy. The bankruptcies continued into the twenty-first century. Bethlehem Steel and seven other steel companies filed for bankruptcy in 2002 alone.
David Roderick, president of U.S. Steel (then called USX) from 1979 to 1989, was a former boxer and Marine who was determined to use tough methods to increase efficiency.Hefocused on the need to “direct available funds where they will provide the greatest returns.” In the first six years of his presidency, the corporation closed 150 facilities and reduced capacity by almost a third, from 38 million tons to 26.2 million tons. The number of employees fell from 166,800 to 88,753, and salaried employees declined by half. In an effort toward more efficient production, USX built a $4 billion integrated mill on Lake Erie. At the same time, Roderick was determined to diversity the corporation. In 1981, after USX purchased Marathon Oil, the corporation’s revenue from steel fell from 80 percent to half of its revenue. In 1985, the purchase of Texas Oil and Gas Corporation was controversial, because it was financed by doubling the number of USX’s outstanding shares. By 1999, USX produced 1.5 percent of global output and 13 percent of U.S. output.
Since the 1980’s, all steel producers have experienced a severe cost-price squeeze. The industry’s most dynamic sector has been the mini-mills that primarily use scrap metal. In 1977, the mini-mill sector produced about 5 percent of the nation’s output. This gradually grew to 22 percent by 1991 and then exploded to almost 50 percent in 1998. In the twenty-two years to 1995, the capacity of the minimills grew from 5 million to 47 million tons, while the capacity of large integrated mills dropped from 154 million to 64 million tons. The leading minimill producer, Nucor, was profitable every year from 1966 to 2007. Nucor went from 2,300 workers in 1975 to 18,000 workers in 2007. By instituting profit sharing for workers and eliminating perks for managers, Nucor was able to avoid unionization of its plants.
In 2007, the International Iron and Steel Institute reported that the world’s production of steel totaled 1,343 million metric tons. The United States, at 97 metric tons, was responsible for only 7 percent of this output, compared with 36 percent for China, 16 percent by the European Union, and 9 percent by Japan. Chinese imports to the United States quadrupled from 1998 to 1905. Despite the downsizing of U.S. firms, however, most of them were able to report good profits between 2004 and 2007, in large part because of the great demand for steel in China and other developing countries.
Hall, Christopher. Steel Phoenix: The Fall and Rise of the American Steel Industry. New York: St. Martin’s Press, 1997. The story of the downfall of the traditional steel industry and the emergence of the new industry dominated by mini-mills using scrap iron.
Hessen, Robert. Steel Titan: The Life of Charles M. Schwab. Pittsburgh: University of Pittsburgh Press, 1990. Traces the steel baron’s career from day laborer to first president of U.S. Steel and founder of Bethlehem Steel, with attendant scandals and controversies.
Hillstrom, Kevin, et al., eds. Industrial Revolution in America: Iron and Steel, Railroads, and Steam Shipping. 3 vols. Santa Barbara: ABC-CLIO, 2005. Each of the three volumes discusses three areas of the Industrial Revolution, considering origins, innovations, entrepreneurs, labor organization, and workers’ lives.
Livesay, Harold. Andrew Carnegie and the Rise of Big Business. New York: Longman, 2006. A relatively brief and compelling biography of the captain of industry, with analysis of background topics such as capitalism, the emergence of big business, and the Gilded Age.
Strohmeyer, John. Crisis in Bethlehem: Big Steel’s Battle to Survive. Pittsburgh: University of Pittsburgh Press, 1994. Pulitzer Prize winner’s account of how complacency and rigidity by management and labor resulted in the company’s decline between 1956 and 1984.
Warren, Kenneth. Big Steel: The First Century of the United States Steel Corporation, 1901-2001. Pittsburgh: University of Pittsburgh Press, 2008. A comprehensive history of the behemoth organization that produced 30 percent of the world’s steel output in 1901 but only 1.5 percent a century later.
See also: American Federation of Labor and Congress of Industrial Organizations; Aircraft industry; antitrust legislation; automotive industry; railroads; Steel mill seizure of 1952.