Chesterton Tribune

The Mittal deal and national security: ISG is chief maker of US military plate steel

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Military steel on land and at sea

 

By KEVIN NEVERS

Second of Two Parts

At a United Steelworkers of America rally on Aug. 26, 2001, President Bush, enjoying for the moment a cozier relationship with the union than his predecessor in office ever had, raised the stakes of the import crisis which by that time had bankrupted a score of steelmakers. “If you’re worried about the security of the country and you become over-reliant upon foreign steel, it can easily affect the capacity of our military to be well supplied,” he said. “Steel is an important jobs issue; it is also an important national security issue.”

Two weeks and two days later, terrorists flew jetliners into the World Trade Center and the Pentagon.

Two months later, on Oct. 22, 2001, the U.S. International Trade Commission (ITC) issued its ruling in the Section 201 investigation ordered by the president earlier in the year. Its conclusion: 12 domestic steel industries—including slabs, plate, hot-rolled, cold-rolled, and coated—had been seriously injured by the unfair trade practices of subsidized foreign producers.

By March 5, 2002, when the president acted on the recommendation of the ITC and imposed a three-year schedule of tariffs on a range of imported steel products, this nation was at war in Afghanistan and had started to make contingency plans for war in Iraq.

And war takes steel. A lot of it.

Almost since the first wave of dumped steel hit American shores and prices began their catastrophic plunge—generally dated to July 1998—U.S. Rep. Pete Visclosky, D-1st, had been telling anyone who would listen that the U.S. stood to lose more than tens of thousands of jobs, as one steelmaker after another was lowballed into chapters 7 and 11. It also stood to lose the capacity to home-grow its steel, a commodity as vital to national defense as oil. And only hours after the biggest bankruptcy of them all was announced, on the morning of Oct. 15, 2001, Visclosky was quick to sound a dire warning. Bethlehem Steel Corporation, he said, “is the only company in the United States that makes the steel to build aircraft carriers and tanks. We cannot depend on China and Brazil to build our ships, tanks, personnel carriers, and other items necessary to our national defense.”

Long before the import crisis befell the industry, however, Congress had recognized the strategic significance of steel, and indeed steel has the honor of being the only industry cited by name in the Military Selective Service Act (MSSA), originally enacted as the Selective Service Act of 1948. Although the greatest part of the MSSA establishes the workings of the selective service system—eligibility, selection and induction, exemptions and deferments—in an odd provision which reads almost like an afterthought it also specifically authorizes the president to order the seizure of any mill whose owner declines to fill or otherwise to prioritize any order for steel placed by any defense contractor.

Thus: “The President is empowered, through the Secretary of Defense, to require all producers of steel in the United States to make available, to individuals, firms, associations, companies, corporations, or organized manufacturing industries having orders for steel products or steel materials required by the armed forces, such percentages of the steel production of such producers, in equal proportion deemed necessary for the expeditious execution of orders for such products or materials. Compliance with such requirement shall be obligatory on all such producers of steel and such requirement shall take precedence over all orders and contracts theretofore placed with such producers. If any such producer of steel . . . refuses to comply with such requirement, the President, through the Secretary of Defense, is authorized to take immediate possession of the plant or plants of such producer and, through the appropriate branch, bureau, or department of armed forces, to insure compliance with such requirement.”

And in fact there is precedent—of a sort—for such a seizure. On April 8, 1952—at the height of the Korean War—President Truman instructed his Secretary of Commerce to seize and operate most of the country’s mills in anticipation of a nationwide strike called by the USWA. His reasons, as stipulated in Executive Order 10340: “the weapons and other materials needed by our armed forces . . . are produced to a great extent in this country, and steel is an indispensable component of substantially all of such weapons and materials”; “steel is likewise indispensable to the carrying out of programs of the Atomic Energy Commission of vital importance to our defense efforts”; and “a continuing and uninterrupted supply of steel is also indispensable to the maintenance of the economy of the United States, upon which our military strength depends.”

The U.S. Supreme Court later vacated that executive order in Youngstown Sheet & Tube Co. v. Sawyer—on the grounds that the president had exceeded both his statutory and constitutional authority and that seizure was an improper means to resolve labor disputes and prevent work stoppages—but a larger point perhaps was made: the unwillingness of the Executive Branch to shilly-shally in the face of a perceived threat to the “continuing and uninterrupted supply of steel.”

Mittal

On March 19, 2003, one year and two weeks after President Bush imposed his three-year schedule of tariffs—which he would later repeal prematurely—U.S. and coalition forces invaded Iraq, and in the succeeding months the Defense Department’s contractors developed, and are still demonstrating, a voracious appetite for steel and in particular for military grade plate, used for the most part to armor a variety of light, medium, and heavy tactical vehicles. International Steel Group (ISG), which acquired Bethlehem’s extensive plate operations and later added to them with the acquisition of U.S. Steel Corporation’s 160-inch mill at Gary Works, has been diligently filling those orders since early 2004, and last year Coatesville and Conshohocken shipped more military grade plate than they had in the previous seven years combined.

In a matter of weeks, though, ISG will no longer own those plate operations. Mittal Steel Company will, and while the U.S. is by no means losing the actual physical capacity to produce military grade plate, that capacity will be under the control of a foreign firm headquartered in Rotterdam, The Netherlands.

Some salient facts:

•ISG produces around 85 percent of all of the military grade plate supplied to the Defense Department’s contractors, the company’s vice-president of plate operations, Tom Cera, told the Chesterton Tribune. Algoma Steel Inc. of Ontario, Canada, produces the rest.

•ISG is one of only three steelmakers in North America, Cera said, to have heat-treating facilities with quench-and-temper capability, the process which gives military grade plate its fracture resistance and formability. Algoma is the second; Oregon Steel Mills Inc. of Portland, Ore., the third.

•Orders for military grade plate may be spiking now, but it nevertheless represents a tiny product line for ISG. Last year the company shipped only between 50,000 and 60,000 tons of it, Cera said, or 2.4 percent of its total annual plate capacity of 2.5 million tons and a minuscule 0.27 percent of its total annual steelmaking capacity of 22 million tons. Prior to the Iraq War, its annual shipments of military grade plate were even smaller: in the neighborhood of 25,000 tons.

•The military grade plate produced by ISG must perform to limits established by generally classified government specifications, Cera said.

•ISG sells its military grade plate exclusively to the Defense Department’s contractors, Cera said, although at one time Bethlehem did sell a limited quantity of it to Israel.

•When the merger of ISG and Mittal closes, approximately 88 percent of the company will be privately owned by Lakshmi Mittal and his family; the rest, by the public shareholders of ISG and Ispat International.

Congress has not been insensitive to the national security implications posed by foreign ownership of domestic industrial and technological capacity. In 1988 it amended the Defense Production Act of 1950 to include the so-called Exon-Florio provision, which authorizes the president to suspend or prohibit the foreign acquisition of any U.S. company when two conditions are met: when evidence credibly indicates that a foreign acquirer could act to jeopardize national security, and when no other laws—like, say, the MSSA—provide the applicable authority to protect national security.

On behalf of the president, the inter-agency Committee on Foreign Investment in the United States (CFIUS), administered by the Treasury Department, conducts a review of the impending acquisition once it has received notification from the transacting parties. According to the Treasury Department’s website, CFIUS considers five factors in that review: “domestic production needed for projected national defense requirements”; “the capability and capacity of domestic industries to meet national defense requirements, including the availability of human resources, products, technology, materials, and other supplies and services”; “the control of domestic industries and commercial activity by foreign citizens as it affects the capability and capacity of the U.S. to meet requirements of national security”; “the potential effects of the transaction on the sales of military goods, equipment, or technology to a country that supports terrorism or proliferates missile technology or chemical and biological weapons”; and “the potential effects of the transaction on U.S. technological leadership in areas affecting U.S. national security.”

CFIUS has a statutory 30-day window to complete its review of an impending acquisition after receiving notification, Treasury spokesman Tony Fratto told the Tribune. On occasion, it then opens a further 45-day “investigation,” and “on the rarest of occasions”—when the acquisition could credibly be considered a threat to national security—CFIUS makes an appropriate recommendation to the president, who then has 15 days to act. CFIUS conducts between 60 and 70 Exon-Florio reviews every year, Fratto said, and only “rarely” recommends the suspension or prohibition of an acquisition.

Fratto, citing federal law, would not comment on the findings or the status of the Exon-Florio review of the proposed Mittal-ISG merger, and would not say when or even whether CFIUS received notification of it. He did say that both transacting parties are free to comment on the review if they choose to do so.

ISG spokesman Chuck Glazer referred all questions about the proposed merger to Mittal.

Mittal, for its part, has not returned repeated telephone calls or responded to e-mailed requests for information on the findings or status of the Exon-Florio review, on its intentions with respect to ISG’s plate operations, and on the extent of its existing plate operations and their military grade capability.

For Visclosky—who is hopeful of persuading Mittal to locate the headquarters of its combined U.S. operations in Northwest Indiana—the only question raised by the proposed merger is whether the actual physical capacity to produce military grade plate will remain in the U.S. And it will. “The crux of the National Security question is if the U.S. still has the capability to produce enough steel,” Visclosky’s office said in a statement released to the Tribune:

“The proposed acquisition is for a North American Division, and all of the steel produced from this entity will be produced in the U.S. While Congressman Visclosky wishes the venture would produce a wholly-owned American corporation, it will still result in a strong American subsidiary, and that will benefit Northwest Indiana’s economy.”

Neither does U.S. Sen. Evan Bayh, D-Ind., object to the proposed merger. “As a member of the Armed Services committee, Sen. Bayh has worked hard to strengthen our national security and keeps a constant watch for company changes that could impact our intelligence and security plans,” Bayh’s office said in a statement released to the Tribune:

“He believes it is important to keep the production of key military equipment here in the United States. Sen. Bayh has worked tirelessly to help preserve a strong, vital domestic steel industry, which will help ensure that the production of steel plates for the military and the knowledge it takes to make them remains in Indiana. He recently urged Mittal Steel’s leaders to establish the company’s U.S. headquarters in Northwest Indiana and will continue supporting the company’s work there.”

Sen. Richard Lugar, R-Ind., is confident that the Exon-Florio provision is working as intended and that CFIUS has acted—or will act—in the best interests of national security, a member of his staff told the Tribune.

 

Military steel on land and at sea

By KEVIN NEVERS

A Strong U.S. Steel Industry: Critical to National Defense and Economic Security, published in December 2001, divides military grade plate applications into two general classifications: land-based and sea-based.

International Steel Group produces plate for land-based applications at its Coatsville and Conshohocken mills; plate for sea-based applications, at its Burns Harbor mill.

Plate requirements and consumption totals for certain applications in the years prior to 2001, according to the report:

•The Abrams tank: 22 tons of plate. The manufacture of 8,500 tanks consumed 187,000 tons.

•A Light Armored Vehicle: eight tons. The manufacture of 3,750 LAVs consumed 30,000 tons.

•The Bradley Fighting Vehicle: six tons. The manufacture of 2,500 BFVs consumed 15,000 tons.

•An aircraft carrier: 50,000 tons. The manufacture of 10 carriers consumed 500,000 tons.

•A Trident class submarine: 10,000 tons. A Seawolf class: 4,000 tons. The manufacture of subs in three classes consumed 1 million tons.

The report notes that in the peacetime of the post-Cold War Era shipments of all types and grades of steel to the Defense Department’s contractors—not just military grade plate—have dropped markedly: “First, we need to recognize that the current level of direct steel shipments to military markets is very low by historical standards.

One need only look to the Vietnam Era to see much elevated steel shipment levels where, on average, in the 1965-69 period, U.S. steel producers shipped 2.4 million tons annually directly to military markets.

Similar increased levels of direct shipments could return in the advent of an extended ground conflict with naval support in the Middle East or elsewhere.”

On the subject of military grade plate specifically, the report maintains that a reliable domestic source of this specialized product line is vital to national security: “A strong domestic steel industry is essential if we are to assure that the technologically advanced steel plates meeting demanding military specifications continue to be available. It is also prudent to maintain domestic steel supply, because other sources may not be able to provide either consistent quality or quantities in a timely and reliable manner. Further, allowing the production of these highly sophisticated steels in other countries could reduce an American advantage by allowing our adversaries access to the same advanced steels we can now only produce in the U.S.”

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A Strong U.S. Steel Industry was a joint publication of the American Iron and Steel Institute, Specialty Steel Industry of North American, Steel Manufacturers Association, and the United Steelworkers of America.

 

Posted 3/16/2005