PITTSBURGH, Aug. 19 /PRNewswire/ -- The long-term survival of a once
vibrant and healthy American specialty metals industry faces serious risks,
but the U.S. political system refuses to view this as a significant problem,
according to Dr. Jack W. Shilling, an executive with a major specialty metals
manufacturer. This assessment and ways to fix the problem were presented by
Shilling in testimony today at a field hearing organized by the Senate and
House Steel Caucus.
    In his remarks, Shilling, who serves as chairman of the specialty steel
industry trade group, explained that-unlike conventional steel-specialty
metals products are critical to a wide variety of industrial markets.
"Moreover," said Shilling, "our products are crucial to our national defense.
They are essential elements of virtually every U.S. military platform."
Shilling referred the hearing participants to a recent white paper entitled
The Future of the Specialty Steel Industry of North America that lists, among
other examples, stainless wire for bomb springs and tank fuses; flat-rolled
armor plate for planes, ships, and Humvees; and super alloys for aircraft
engines. (Complete white paper attached.)
    "Today, we face a very serious problem as a nation," Shilling stated. "We
are at a cross roads. The U.S. may gradually lose its specialty metals
manufacturing and technology base." Shilling identified offshore outsourcing
to improve profitability and significant imbalances in incentives to invest in
the U.S. versus overseas as primary reasons for the erosion. "As we speak,
significant financial incentives are provided by foreign countries primarily
to gain access to our technology," Shilling continued. "At the same time,
disincentives to invest in the U.S. continue to mount. Unfortunately, the U.S.
government, unlike many of our trading partners, has no defined strategy in
place to help guide this process."
    Shilling urged the Bush Administration and Congress to move quickly to
develop and articulate a strategy in support of the U.S. specialty metals
industry to include: balancing U.S. and overseas investment incentives both in
manufacturing and R&D; eliminating barriers to earning a profit through
regulatory, tax and tort reform and addressing rising health care costs and
post-retirement benefits that burden U.S. manufacturers; preserving the
integrity and effectiveness of current U.S. trade laws; restricting foreign
government subsidies and eliminating uneconomic steel-making capacity;
enforcing statutes that require the Department of Defense purchase specialty
metals from U.S. manufacturers; and challenging Chinese government
manipulation of its currency, which provides a built-in competitive advantage.
    Shilling concluded by reiterating that the nation relies on the specialty
metals industry to support America's national defense. "Today, there are fewer
companies producing specialty steels in North America than at any time in the
last 50 years. Overall, our industry is still marginally healthy, but the
handwriting is on the wall. Now is the time to act."
    Dr. Jack W. Shilling is Executive Vice President, Corporate Development
and Chief Technology Officer, Allegheny Technologies Incorporated,
headquartered in Pittsburgh, PA. ATI is one of the largest and most
diversified specialty materials producers in the world.
    He serves as chairman of the Specialty Steel Industry of North America
(SSINA), a Washington, DC-based trade association representing virtually all
continental specialty steel producers. Specialty steels are high technology,
high value stainless and other specialty alloy products.
    David A. Hartquist, an international trade attorney with the Washington,
DC law firm Collier Shannon Scott, PLLC, serves as lead counsel to SSINA.


         THE FUTURE OF THE SPECIALTY STEEL INDUSTRY OF NORTH AMERICA

                                  July 2004


    INTRODUCTION
    This paper describes the challenges facing the Specialty Steel Industry of
North America (SSINA), the importance of the industry to the national defense
and the industrial economy, and suggests public policies to support the long-
term survival of this industry.

    WHO WE ARE AND WHAT WE DO
    The Specialty Steel Industry of North America is comprised of eleven
companies engaged in the fully integrated manufacture and distribution of
specialty metals in mill product form (sheet, strip, plate, billet, ingot,
bar, rod, wire, etc.).  Our customers use these materials to make end use
items serving virtually all segments of the economy, including defense;
aerospace; consumer products; electronics, computers and communications;
automotive and transportation; energy generation and distribution; chemical
processing; pharmaceuticals; oil and gas production, distribution and
refining; food processing; medical devices, instrumentation and hardware, and
others.  The "specialty" nature of these materials refers to their unique
chemistry and high tech processing requirements.  The materials themselves
include stainless steels, tool steels, electrical steels, and nickel alloys
among others.  SSINA members also make other materials such as cobalt based
alloys, titanium, zirconium and other metals for critical high-temperature
applications.  It is not an exaggeration to state that none of the industries
mentioned above could function effectively (not just efficiently) without
these materials.  Importantly, missing from this list is "steel", per se.  The
focus of the businesses represented by SSINA is not conventional "steel."
    These specialty materials are vitally important to virtually every U.S.
military platform.  Whether it is the stainless wire for bomb springs and tank
fuses; the flat-rolled armor plate for plane, ship armament and ground
vehicles such as Humvees used to protect our troops in Iraq and Afghanistan;
the high-temperature alloys, super alloys, and other metals critical in
aircraft engines, airframes, and rockets; the alloy tool steel used in the
production of machine tools for the manufacturer of tanks; alloys for the F18,
Joint Strike Fighter, Black Hawk and Apache helicopters; or materials for
nuclear propulsion, American-made specialty metals are a vital component of
U.S. military strength.
    Specialty steels touch our daily lives in a wide range of ways.  They are
essential in today's industrialized economy and serve critical applications in
all the industries mentioned above.  Believe it or not, a significant amount
of high technology stainless steel is used in every cell phone and computer
manufactured today.  Our health depends on the use of special grades of
stainless steel in the processing of foods and pharmaceuticals, in the
manufacture of orthopedic implants and surgical equipment, in the manufacture
and use of electronic diagnostic equipment like CT scanners.  The list is
virtually endless and all of it is somewhat taken for granted by the consuming
public.
    SSINA membership includes both small and large companies engaged in the
activities mentioned above.  Many of the member companies are multi-national
companies with operations and sales in all major global markets.
    The U.S. industry, represented by SSINA, is modern and efficient, and at
the leading edge throughout the world in both new product development and the
development and deployment of the most current technology to produce these
materials.  Maintaining this high-technology base has been the key to our
success in a highly competitive global market place.  Doing so has taught us
over many years that process and product development are interrelated.  Our
production facilities are frequently our laboratories.  Process development is
essential if new products are to be made and sold cost-effectively.
    In pursuit of these objectives, the industry spends substantial amounts
annually on research and development, among the highest in the metals
industries.  Most of this funding is provided by the member companies
themselves, with some additional U.S. government-supported research and
development.
    The industry provides relatively high wages to its workforce, both union
and nonunion, and a sophisticated, highly productive workforce is crucial to
its success.  SSINA members have manufacturing facilities in 18 states.

    THE POTENTIAL PROBLEM WE FACE
    In a manner very similar to the loss of many other manufacturing
industries in the U.S., and assuming disturbing trends that exist today
continue virtually unabated into the future, the U.S. over an extended period
of time may gradually lose its domestic specialty metals manufacturing base,
along with its leading edge position in metals technology.  Maintaining a
healthy domestic specialty metals industry is vital to the security interests
of the U.S.  Domestic manufacturing of these critical materials is needed in
times of war.  The ability of the U.S. to maintain leading edge technology in
these specialty metals depends on the continued existence of a healthy
domestic manufacturing capability.  We cannot let this domestic capability
move offshore.
    The potential loss of our leading edge position in specialty metals
technology is particularly disturbing and could occur for the following
reason.  If domestic manufacturing of these specialty metals were to be
outsourced to any significant extent, research and development will be shifted
abroad as well, taking advantage of lower costs and ties to the manufacturing
process.  As noted above, "our factories are our laboratories."  This issue is
not well understood or appreciated outside of the industry, but is viewed as
an absolute by those well informed about the nature of specialty metals
product and process development.  It is naove, at best, to think that a
leading edge position in these technologies and related defense applications
can be maintained in the U.S. in the absence of healthy and vibrant domestic
manufacturing activity.

    WHY AND HOW COULD THIS HAPPEN?

    *  Lack of a Coherent U.S. Strategy Related to Manufacturing

    As is the case with many other domestic manufacturing industries, U.S.
specialty metals companies and their customers may be forced to accelerate
efforts to source manufacturing offshore in order to reduce costs, generate
positive cash flow, and improve earnings and a return on invested capital.
Such a process is driven by the nature of the free enterprise system, but also
is fueled by any significant imbalance in the relative magnitude of
incentives/disincentives to invest here versus overseas.  Unfortunately, the
U.S. government has no defined strategy in place to help guide this process,
unlike many foreign trading partners.  It is not a level playing field.  In
addition, the very nature of the U.S. free enterprise system encourages
individual companies to pursue the financial interests of their shareholders
without regard to any overarching national objectives.
    Significant financial incentives are currently being provided by foreign
host countries in order to encourage foreign direct investment and gain access
to U.S. technology.  Numerous examples of this across the spectrum of the
manufacturing sector appear almost daily in the business press, not as
problems but as opportunities for U.S. corporations and their shareholders.
    At the same time, disincentives to invest here continue to mount.  The
list is long and includes exponentially rising costs of healthcare and post-
retirement benefits, exorbitant regulatory and legal costs, high taxes, along
with increasing concerns regarding the enforcement of U.S. trade laws and the
ability of the U.S. to establish fair trade practices with its global trading
partners.
    The overall level of profitability and return on invested capital within
SSINA member companies is currently unacceptable, despite their ongoing
investment in domestic manufacturing capability and R&D.  This situation is
not sustainable, and adds to the pressure to reallocate jobs and investments
elsewhere.
    Some of the issues impacting SSINA member companies and their customers
are discussed in more detail in the following sections.

    *  Government Procurement Policy

    A glaring example of failures in this area relates to repeated efforts in
the U.S. Congress and the Department of Defense to weaken laws requiring the
use of U.S. made specialty metals in defense applications.  In the light of
what has been mentioned above, how could anyone support this position?  Even
in this simple example, there are frequent differences of opinion about the
relative importance of maintaining a healthy specialty metals industry.  What
is more important to national security  ...  permitting the DOD to outsource
critical materials at lower cost in the short run to meet budgetary
constraints, thereby helping to destroy the domestic specialty metals industry
in the process, or continuing to support existing statutes which mandate
purchase of these materials at reasonable prices from domestic manufacturers?
This is an excellent example of an issue that cries out for a national
strategy with regard to the future of certain manufacturing industries, and
specialty metals in particular.

    *  Rising Costs of Manufacturing in the U.S.

    As documented by the National Association of Manufacturers (NAM), costs of
manufacturing in the U.S. continue to rise in comparison to other countries.
NAM's latest estimates are that external, non-production costs related to
taxes, health care, litigation, regulation and energy are at least 22% higher
in the U.S. than the average of its nine most important trade competitors.
The fact that the U.S. has been unable to develop an effective national energy
plan is a good example of the differences in approach between global trading
partners and its potential impact on the nature of future investments by U.S.
manufacturers.  It is important to note that the cost issues described by the
NAM for manufacturing in general are particularly acute problems for the
specialty metals industry.

    *  Subsidized Foreign Competition

    The industry faces powerful new entrants in the global specialty steel
marketplace, particularly in stainless and electrical steels.  Globally, there
is more capacity than demand yet additional large facilities are being added.
Suppliers in North America face significant impact from huge new competitors
in China, India and Russia.  This is happening despite attempts by the Bush
Administration to discourage foreign government subsidies and to encourage
taking uneconomic capacity out of production.
    Much of the new capacity is being funded through massive government
subsidization, particularly in China.  The Administration actively supports
negotiations through the Organization for Economic Cooperation and Development
(OECD) to restrict such subsidization.  However, the negotiations are not
going well and are unlikely to produce effective controls.  China has been
participating in the negotiations, but has not been forthcoming with respect
to restrictions on subsidization.  New Chinese capacity, initially built to
service the fast-growing Chinese market, inevitably will produce for export.
We are already seeing early signs of China's aggressive entry into the U.S.
stainless steel market.  SSINA forecasts that within the next 12 to 18 months,
China will have significant overcapacity and will begin "dumping" specialty
steel into world markets, with Chinese government support.  As supply begins
to exceed demand in China over the next few years, it is logical to expect
that countries currently exporting this product to China will begin dumping
these products into the U.S. market, as they have done in the past.  Thus the
U.S. specialty metals industry faces the prospects of increased imports of
dumped and subsidized stainless entering our markets not only from China
itself, but from all those countries currently exporting these products to
China.  SSINA seeks a level playing field with our global competitors, free of
market-distorting practices such as dumping and foreign government subsidies.

    *  Aggressive Challenges to U.S. Trade Laws

    Relentless efforts are being made to weaken U.S. trade laws in multiple
arenas -- WTO negotiations, WTO "dispute settlement" proceedings and even in
the United States Congress.
    SSINA has been a major user of such laws for nearly 40 years.  It is no
exaggeration that without these laws the domestic specialty metals industry
would have succumbed to foreign competitors which play by different rules, are
propped up by huge government subsidies and have protected home markets
allowing them to sell products below cost in the United States.  Private
enterprise companies simply cannot compete with foreign producers that may
never have to make a profit to survive.  Strong trade laws, consistent with
WTO rules, are a necessary defense to such unfair trade tactics.  The U.S.
Administration and Congress must stand firm against attempts to weaken these
crucial laws.

    * Currency Manipulation

    China has a built-in competitive advantage based upon Chinese government
manipulation of its currency, the yuan, giving China a 40 percent or greater
advantage on that basis alone, according to published reports.  SSINA is
joining with other manufacturing industries in challenging China's currency
practices.

    SOLUTIONS TO THESE PROBLEMS
    SSINA supports the following public policy positions crucial to the
preservation of the specialty metals industry in the United States:

    *  The Administration and Congress should develop and articulate a
       coherent strategy in support of U.S. specialty metals manufacturing,
       balancing incentives for multi-national corporations to invest overseas
       with ones encouraging them to invest in the United States, both in
       manufacturing and R&D.

    *  Eliminate barriers to earning a profit in U.S. specialty metals
       manufacturing operations.  The National Association of Manufacturers
       has documented much of what needs to be done in a letter to The
       Honorable Donald L. Evans, Secretary of Commerce, dated June 24, 2003.
       Some of the more important initiatives include regulatory, tax and tort
       reform; addressing the exponentially rising costs of health care and
       post-retirement benefits, which burden many U.S. manufacturers, unlike
       many of our foreign competitors; and stabilizing and reducing energy
       costs.  The Administration has established an office in the Department
       of Commerce to develop a strategy to combat these phenomena.  The
       situation is urgent.  We encourage the Bush Administration and Congress
       to develop policies such as those recommended by NAM to deal with these
       accelerating problems.

    *  Discourage the manipulation of currencies by China and other countries,
       which give them an artificial advantage in global markets.

    *  Enforce and maintain strong trade laws to encourage investment by U.S.
       specialty metals manufacturers and discourage dumping and foreign
       government subsidization.

         *  Fight to preserve the integrity and effectiveness of current U.S.
            trade laws.
         *  Pass legislation providing for a "private right of action"
            enabling U.S. manufacturers to obtain treble damages, as in
            antitrust cases, for injuries proven to have resulted from foreign
            dumping and subsidization.
         *  Reevaluate U.S. strategy regarding the World Trade Organization.
            WTO decisions in the dispute settlement process continue to
            undercut the ability of member companies to enforce their domestic
            trade laws.  The system is not working and needs to be changed.

    *  Continue efforts to negotiate effective bilateral and multilateral
       agreements with U.S. trading partners consistent with the philosophy
       described above, e.g., restricting foreign government subsidies and
       eliminating uneconomic steel-making capacity.

    *  Support the continuance and enforcement of statutes requiring that the
       DOD purchase their specialty metals requirements from domestic
       manufacturers.

    *  Implement the program of steel import licensing promised months ago by
       the Bush Administration.

    *  Preserve the Continued Dumping and Subsidy Offset Act allowing injured
       U.S. producers to receive compensation for damages caused by foreign
       producers.

    *  Support continuance of the antidumping cases that are currently in
       effect for stainless sheet and strip, coiled plate and wire rod
       currently being considered in sunset review processes.

    The foregoing measures are not designed to protect an inefficient
industry.  Quite the opposite.  They are designed to create a level playing
field and thereby encourage domestic investment in an industry that is a
technological leader in its field and critical to the long-term security
interests of the U.S.

    CONCLUSIONS
    Is there a crisis today with regard to the specialty metals industry? No,
but there could be if we don't act.  Today there are fewer companies producing
specialty steels in North America than at any time in the last 50 years.  The
nation relies on this industry to support our national defense.  Overall, our
industry is still marginally healthy, but the handwriting is on the wall.  Now
is the time to act.  If we wait until the domestic industry is gone, it will
be too late to reconstruct it in an acceptable timeframe.  It is not a matter
of equipment.  It is a matter of people -- highly trained and experienced
people at all levels -- from the manufacturing floor to the R&D center.  The
unique nature of these materials and their processing is not taught in
universities.  It must be learned on the job.  Once those well-paid, highly-
skilled jobs are lost, they cannot be replaced easily or quickly.  So far, the
U.S. political system has not recognized this as a significant problem, and
therefore has not put in place well thought-out solutions.  It seems content
to let the "free trade" free enterprise system run its course, while the U.S.
lives by the rules.  If it does not act soon, it may be too late.
    It is not realistic to expect that all types of manufacturing stay in this
country.  Global competition is good for U.S. industry and for U.S. consumers.
When multi-national companies move some of their production to other countries
in order to participate in economic growth occurring there, this can benefit
the U.S.  However, the U.S. should not lose jobs and manufacturing ability,
and weaken our industrial and defense capacity for the wrong reasons.  It is a
question of balance, as with most things in life.  Today, the scales tip
heavily in favor of moving manufacturing off shore.  It's tough being a
manufacturer in the U.S. today and it's getting tougher every day.  This trend
must be reversed, particularly in the case of specialty metals.  SSINA
supports the development of government policies to enforce trade laws designed
to eliminate anticompetitive practices and encourage investment and job
development in the U.S.

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