The steel industry in a war economy
Chester, Helen Elizabeth
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In the foregoing chapters we have seen the position of the steel industry in the last war, its behavior in the intervening period and its situation so far in the present conflict. It is difficult to present an analysis of steel securities without going into the factors of production. Without a knowledge of the bearing of these items unon the industry no reliable analysis can be made. An investor must at least be familiar with and know the operations of an industry--not necessarily in detail but at least to have a general picture in order to comprehend the effect of fluctuating business conditions. This is the main reason why production, capacity, prices, taxes, labor, and earnings were discussed. In the last World War and the present, business conditions are similar. The year 1913 was a prosperity year followed by the depression - a severe steel depression in 1914. Then war prosperity took the lead. Similarly, 1937 was a prosperity year followed by the depression year of 1938. In 1939, the present conflict began with an artificial war prosperity here. Just how long it will last no one can definite say, but we know that this artificial prosperity will thrive until we have two naval fleets and a huge mechanized army. The long term trend of steel production is synonymous with the industrial growth of the nation and coincident with the business cycles. Since steel is the raw material of other industries, general business conditions are effective to the industry's ups and downs. This is the foundation for the belief in industrial circles that if a barometer of business is wanting, watch steel production. The United States Steel Corporation, formed in 1901, dominates the steel industry in America and ranks first as a steel producer in the world, Bethlehem is a close running second. Both are heavy steel producers, but Bethlehem has also munition and ship-building plants which explain why she had a running start in business in the last war in comparison with the bigger United States Steel. Steel production proved to be adequate for the needs of the last war proves that steel masters know how and can produce volume. This is still true. With prices set at a level which insured profits, coupled with a free rein to produce, the steel industry made tremendous profits in the last war and, consequently, have its investors handsome returns. It was very profitable to hold steel stocks in the last war. Iron and Steel ingot capacity has seen a shift in emphasis. In the early days of steel making, pig iron was used. As time went on engineers found a way to use scrap iron and thus preserve iron ore deposits. Where once the normal furnace charge was 100% pig iron, it is now 50%, with steel scrap constituting the remaining 50%. The cheap price of scrap has been the incentive to an increased use for scrap and, consequently, the less money is absorbed in fixed charges. However, the percentage of both consumed varies moderately in their ratio to each other. Price fixing or price stabilization has been the policy of the steel industry through the ages based on the belief that stable prices insure well rounded production and eliminates cut-throat competition. Instituted and strictly maintained by Judge Gary of the United States Steel Corporation, no company has sought to alter the system. Then the government criticized the price structure as monopolistic, the basing system was elaborated to the Multiple Base System, but the inherent principle was never changed. However, prices are not as rigid as they appear to be on paper. Numerous price concessions are made from which the base price is the goal. Earnings in the last world war soared and investors took part in their enjoyment for three years of war prosperity without government controls. Furthermore, the controls, fixed prices and excess profits taxes did not take effect until 1918 and at that did not curtail disbursements to stockholders severely. By keeping large earnings in liquid form, spelling working capital, refinancing, and remodeling the plants, steel shares received greatly added values after the war. The derresion of 1929 did not overlook the steel industry. It struck severely, mainly because of the enormous plant investment required and the small amount of operations. The strength of war taxes today outshines those of twenty years ago. The levy made in 1917 did not affect the industry as much as the present tax program will. In this war, growth companies will be hard put. Bethlehem Steel has already earned its tax tease, while United States Steel still has a little way to go. The present program, taxing before dividend disembursments, reduces steel securities to ones of medium attraction. In the 1930 decade, the main problems facing the Industry were ones of plant rehabilitation, indebtedness, refinancing, labor, and wages. Progressive management has cored with these problems successfully. Rehabilitation of slants has revolved about the establishment of the continuous rolling mill which has resulted in a greater use of capital investment, greater efficiency, and improved output per man. Indebtedness has been solved by refinancing and saving millions in interest payments annually. The steel industry has fought to maintain an open shop and a twelve hour day. Controversies with the C.I.O., and N.I.R.B. has not changed the shop policy, but has reduced the work day. Steel wages were finally set at 62 1/2¢ per hour. Today the rate has advanced to 82¢ and further increases are threatening. Since labor is resuming its strides, the industry is in a crucial position. Any strike interferes with production, but any strive of prolonged duration will interfere not only with the rate of operations, but with the tide of events abroad. England is dependent upon our steel industry and we have promised all our aid. Labor is becoming more powerful and demanding. Moreover, Washington is not taking any active or preliminary steps to curb labor. As the labor costs go up, the net earnings will come down and similarly the net return on investment. The rise of light steels and alloys is the steady development of a new trend in the industry. With the continuous rolling mill as its means of supply and increased uses from various channels constituting its demand, light steels and alloys are going ahead. They are pioneer industries, now, and have the happy prospects of the expansion stage before they become staid, settled industries of the intensive stage. With a demand for substitutions and increased uses for an old product light steels and alloys are far from there hey-day. Plastics, as yet, are no threat to the steel industry. Much research and improvement is necessary before they will become a competitor. The mechanized warfare today is placing the steel Industry in all-time high levels. The pattern of events experienced in the last war are not being followed, but rather, corrected at the beginning. There will be no runaway or ice markets or tremendous earnings. Steel securities have risen with the inception of war, but will in no way approach the heights of the last. On the other hand, returns on investment promise to be moderate. The market investor can never be sure of a return every year. The dividend records prove this. But the market speculator who looks for appreciation rather then disbursement, provided he saw the trend at the proper time, could make tremendous gains and realize profits. Steel securities never qualify as sound investments which yielded a return annually. There are more years of unpaid dividends than there are paid. This is mainly due to the cyclical mature of the industry and its "prince and pauper" characteristics.
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