[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



                                                   S. Hrg. 102-000 deg.

   SPIKE IN METAL PRICES: WHAT DOES IT MEAN FOR SMALL MANUFACTURERS?

=======================================================================

                                HEARING

                               before the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                     WASHINGTON, DC, MARCH 10, 2004

                               __________

                           Serial No. 108-57

                               __________

         Printed for the use of the Committee on Small Business


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house


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                      COMMITTEE ON SMALL BUSINESS

                 DONALD A. MANZULLO, Illinois, Chairman

ROSCOE BARTLETT, Maryland, Vice      NYDIA VELAZQUEZ, New York
Chairman                             JUANITA MILLENDER-McDONALD,
SUE KELLY, New York                    California
STEVE CHABOT, Ohio                   TOM UDALL, New Mexico
PATRICK J. TOOMEY, Pennsylvania      FRANK BALLANCE, North Carolina
JIM DeMINT, South Carolina           ENI FALEOMAVAEGA, American Samoa
SAM GRAVES, Missouri                 DONNA CHRISTENSEN, Virgin Islands
EDWARD SCHROCK, Virginia             DANNY DAVIS, Illinois
TODD AKIN, Missouri                  GRACE NAPOLITANO, California
SHELLEY MOORE CAPITO, West Virginia  ANIBAL ACEVEDO-VILA, Puerto Rico
BILL SHUSTER, Pennsylvania           ED CASE, Hawaii
MARILYN MUSGRAVE, Colorado           MADELEINE BORDALLO, Guam
TRENT FRANKS, Arizona                DENISE MAJETTE, Georgia
JIM GERLACH, Pennsylvania            JIM MARSHALL, Georgia
JEB BRADLEY, New Hampshire           MICHAEL MICHAUD, Maine
BOB BEAUPREZ, Colorado               LINDA SANCHEZ, California
CHRIS CHOCOLA, Indiana               BRAD MILLER, North Carolina
STEVE KING, Iowa                     [VACANCY]
THADDEUS McCOTTER, Michigan

         J. Matthew Szymanski, Chief of Staff and Chief Counsel

                     Phil Eskeland, Policy Director

                  Michael Day, Minority Staff Director

                                  (ii)


                            C O N T E N T S

                              ----------                              

                               Witnesses

                                                                   Page
Ross, Mr. Wilbur, International Stell Group, Inc.................     5
Atwell, Mr. Wayne, Morgan Stanley................................     7
Hickey, Mr. William, Jr., Lapham-Hickey Steel Corp...............     8
Bodner, Mr. Emanuel, Bodner Metal and Iron Corp..................    10
Stevens, Mr. Robert, Impact Forge, Inc...........................    12
Klinefelter, Mr. William J., United Steelworkers of America......    14
Hemme, Ms. Barbara, Youngberg Industries, Inc....................    16
Martinson, Mr. Kyle, Revcor, Inc.................................    17
Trilla, Mr. Les, Trilla Steel Drum Corp..........................    20

                                Appendix

Opening statements:
    Manzullo, Hon. Donald A......................................    37
Prepared statements:
    Ross, Mr. Wilbur, International Stell Group, Inc.............    41
    Atwell, Mr. Wayne, Morgan Stanley............................    58
    Hickey, Mr. William, Jr., Lapham-Hickey Steel Corp...........    66
    Bodner, Mr. Emanuel, Bodner Metal and Iron Corp..............    72
    Stevens, Mr. Robert, Impact Forge, Inc.......................   104
    Klinefelter, Mr. William J., United Steelworkers of America..   111
    Hemme, Ms. Barbara, Youngberg Industries, Inc................   114
    Martinson, Mr. Kyle, Revcor, Inc.............................   122
    Trilla, Mr. Les, Trilla Steel Drum Corp......................   126
    Visclosky, Hon. Peter J., U.S. House of Representatives (IN-
      1).........................................................   131
    Kopenhaver, Ms. Janet, American Wire Producers Association...   135
    Harbaugh, Mr. William L., Burrell Mining Products, Inc.......   138
    ITW CIP Stampings............................................   142
    Zawacki, Mr. Jim, GR Spring and Stamping, Inc................   146
    Bates, Mr. Christopher M., Motor and Equipment Manufacturers 
      Association................................................   147
    Ashley, Mr. L. Gary, Conveyors and Drives, Inc...............   151
    The Associated General Contractors of America................   153
    Hemme, Ms. Barbara, Youngberg Industries, Inc................   156
    Martinson, Mr. Kyle, Revcor, Inc.............................   157
    Taylor, Mr. William E., VERSABAR CORPORATION.................   159
    Tyler, Mr. S. Mark, OEM Fabricators, Inc.....................   161
    Pfeiffer, Mr. Rick, Fisher Hamilton, L.L.C...................   162
    Honnold, Mr. Fred, The Syracuse Stamping Co..................   163
    Piwonka, Mr. Richard, Lastercoil Spring......................   164
    LeBouef, Mr. Gene, Jr., Corrugated Industries of Florida, 
      Inc........................................................   165
    Trilla, Mr. Lester, Trilla Steel Drum Corporation............   168
    Hoelke, Mr. Robert T., United States Steel Corporation.......   170

                                 (iii)

 
    SPIKE IN METAL PRICES: WHAT DOES IT MEAN FOR SMALL MANUFACTURERS

                              ----------                              


                       WEDNESDAY, MARCH 10, 2004

                  House of Representatives,
                                Committee on Small Business
                                                   Washington, D.C.
    The Committee met, pursuant to call, at 10:07 a.m. in Room 
2360, Rayburn House Office Building, Hon. Donald Manzullo, 
[chairman of the Committee] presiding.
    Present: Representatives Manzullo, Kelly, Akin, Shuster, 
Chocola, King, Velazquez, Ballance, Napolitano, Bordallo and 
Sanchez.
    Chairman Manzullo. Good morning, and thank you for all 
being here today as we examine the recent spike in metal 
prices, particularly in the steel industry, also copper and 
other types of commodities, and the effects on small 
manufacturers. I would especially like to thank those of you 
who have come great distances to be with us today.
    A few weeks ago, I started receiving calls from several 
manufacturers in the congressional district that I am 
privileged to represent regarding an unexpected and 
unprecedented increase in steel prices. For industries still 
reeling from the effects of the 18 month tariffs period in 
which they saw price increases of up to 50 percent, this 
certainly was not welcome news.
    When the tariffs were lifted on December 4, 2003, American 
manufacturers were expecting at the very least a stabilization 
of prices, and many had anticipated reductions in the price of 
steel. What they got was the exact opposite. Instead, steel 
prices have surged since the tariffs have been rescinded. 
According to some industry reports, prices have almost doubled 
in the last four months alone.
    For example, according to the trade publication, American 
Metal Market, the price of hot-rolled steel, one of the most 
widely used types, has soared by more than 80 percent in the 
last year and by almost half since December of 2003.
    The prices of other metals have also risen dramatically in 
recent weeks. The price of copper soared to an eight year high 
of nearly $3,000 a metric ton during the third week in 
February. The price of nickel has more than doubled in the past 
year.
    These unprecedented increases are nearly impossible for 
manufacturers to absorb. They are caught in the middle between 
the suppliers and the customers. They need steel and other 
metals to fulfill contracts already obligated, but they are 
seeing surcharges added to quoted prices from their suppliers 
that they cannot pass along to the customers due to contractual 
constraints.
    I have also been informed by many manufacturers in the 
district that I represent that they are being told that there 
is no steel available for them, even though they have 
longstanding contracts in effect. Talk about being stuck 
between a rock and a hard place.
    That said, and listen to me very carefully. We are not here 
today to point fingers or place blame on any one segment of the 
industry. I am deeply concerned about the effects these price 
increases are having on small manufacturers.
    This hearing is an inquiry to assemble facts, and you will 
note that everybody in the steel industry is present--the 
integrated mills, the mini mills, the steel suppliers, the 
scrap dealers and the consumers. Everybody is at the table to 
try to bring to light the problems that are going on and 
possibly move towards some type of a resolution, if any is 
possible. I want you guys to discuss, but do not fight among 
yourselves, okay?
    I recognize one of the factors contributing to this 
situation with regard to the steel shortage is the massive 
industrialization of the People's Republic of China. Due to 
what equates to state subsidized business practices, coupled 
with artificially deflated currencies, Chinese companies are 
able to absorb global price increases in both raw and finished 
products.
    As we have said before, as a nation the U.S. must exert 
more pressure on the Chinese Government to comply with the WTO 
requirements and to stop manipulating their currency. They are 
not playing fair, and it is killing our businesses here in the 
United States. It appears as if there is not one single factor 
that would indicate why prices and shortages are occurring to 
the degree they have, but rather a culmination of many factors. 
There is no quick fix here.
    Again, the goal of the hearing is to try to discover what 
caused the various metal prices to rise so high and so fast and 
also what impact it has had on the U.S. manufacturers, 
especially the small manufacturers.
    I want to remind all of our witnesses that we are here 
today not to point fingers or place blame on any one part of 
the industry. We are interested in the root cause of the price 
increases and to determine if there is any middle ground on 
which we can work together.
    [Chairman Manzullo's statement may be found in the 
appendix.]
    I would now recognize Congresswoman Nydia Velazquez, who is 
our Ranking Minority Member, for her opening statement.
    Ms. Velazquez. Thank you, Mr. Chairman. Today, we are once 
again examining the issue of rising steel prices and its effect 
on both U.S. industry and consumers, mainly small 
manufacturers.
    The price of steel has skyrocketed by over 60 percent in 
the last five months. This incredible surge has been the result 
of several factors. They include the increased internal demand 
for steel and foreign trade policies that have limited access 
to many international steel markets.
    This trend is in complete reversal to what our Committee 
witnessed two years ago when we first examined this issue. At 
that time, there was a flood of cheap foreign steel inundating 
the United States. It devastated domestic steel producers and, 
coupled with an overvalued dollar, resulted in many of them 
being forced to close their doors.
    The solution put forth by the White House was to invoke 
tariffs that were deemed as necessary to protect the domestic 
steel industry. Those tariffs were viewed by many, including 
Members of this Committee, as resulting in an increased cost of 
steel.
    Although originally slated to last three years, after just 
21 months the tariffs were repealed due to changed economic 
circumstances. With the lifting of the tariffs, many expected 
to see prices fall with an influx of imported steel. However, 
the exact opposite occurred, and prices went through the roof.
    Similar to the situation two years ago, the cause was 
complex and cannot be attributed to any single cost. Many would 
like to simplify today's problem and blame China. However, the 
situation is the convergence of many factors, including growing 
demand, increased supplier costs, limited international 
suppliers and rising energy costs.
    Much like the crisis two years ago, this is not a cut-and-
dry problem in terms of the impact on small businesses and very 
much depends on where you sit. Certainly these spikes in prices 
are affecting portions of the manufacturing sector, but also 
mills and exporters. Many that are small businesses have not 
been able to operate in the current environment.
    Recently, the idea of implementing export control on scrap 
steel was suggested as a way to soften the domestic supply 
shortage. This seems surprising considering the Bush 
Administration tried to restrict what was coming into our 
country with tariffs, and now he wants to restrict what is 
being exported the same way. He sends very mixed messages about 
our nation's trade policies.
    One of the main arguments against export control is that 
they are too costly for the economy. These controls hinder the 
free market from working and prevent the flow of goods from 
reaching the highest bidder.
    I find it ironic that when the steel industry has been in 
such dire need for decades, we will reintroduce policies such 
as export controls which ultimately failed us during the 1970s. 
As with any complicated problem, there is no simple solution.
    I look forward to hearing from the witnesses to find a fix 
that reduces costs to steel consumers and protects producers. 
Finding a solution to this problem is just as pressing as 
finding ways to give entrepreneurs access to health care, 
capital and reduced energy costs, all of which are pulling 
resources away from our most important economic driver, small 
businesses.
    Thank you, Mr. Chairman.
    [Ranking Member Velazquez's statement may be found in the 
appendix.]
    Chairman Manzullo. Thank you very much.
    The rules are we keep the testimony at five minutes. I know 
most of you could talk for the entire hour, but we have to do 
that. We do that so we can leave plenty of room for questions 
and interaction at the end.
    We have been advised there may be a series of three votes 
coming at 10:15, so we are being subjected to the tyranny of 
the voting bells. I do not know how long that distraction will 
occur.
    Do you want to have a short opening statement? Go ahead. I 
really would like to get going, Sue.
    Mrs. Kelly. I would like to just simply say something, and 
that is, as the Ranking Member pointed out, our problem here is 
a very complicated one, but when you consider the fact that our 
problem is the fact that we here in the United States in our 
steel mills are so much more productive with such better 
quality that the low dollar has affected this market because 
other people want our steel.
    It is not just steel. It is that low dollar also affecting 
the fact that the scrap can go offshore and get more money. You 
cannot blame the scrap dealers, but we also need to find a way 
to keep the high quality steel that we are able to produce here 
in the United States, which is a tremendous amount, here in the 
United States for our manufacturers. It is a long-range jobs 
problem, and I hope that some of you on this panel will address 
the jobs problem.
    Thank you for allowing me to say something.
    Chairman Manzullo. Sue, thank you for raising your hand 
because what I want to do is start the testimony when we come 
back from the votes.
    We have a couple minutes now if anybody else wants to give 
just a very brief statement.
    Ms. Sanchez. Mr. Chairman?
    Chairman Manzullo. Yes? Go ahead.
    Ms. Sanchez. Thank you.
    Chairman Manzullo. Very brief.
    Ms. Sanchez. Yes, very brief. I want to commend Chairman 
Manzullo and Ranking Member Velazquez for calling this 
important hearing today. It is the second time that the 
Committee has had a hearing on this particular topic, and it is 
noteworthy that it does impact many small businesses in the 
United States.
    With that, I am just going to ask unanimous consent to 
place any opening statements in the record to allow my other 
colleagues a chance to also give opening statements as well.
    Chairman Manzullo. Does any other Member of the panel want 
to give a statement?
    Grace Napolitano, who lost 21,000 jobs in one day what, 
four years ago, Grace?
    Mrs. Napolitano. Yes, sir. You are correct.
    Chairman Manzullo. Go ahead.
    Mrs. Napolitano. We formulated a task force on 
manufacturing in my area because of the issue of the spiking in 
steel prices back when.
    I am glad, and thank you, Mr. Manzullo. Chairman Manzullo 
has been at the forefront in helping us bring this issue to the 
forefront. We need to work together. We need to be able to 
instead of finding the almighty dollar benefit, we are losing 
the jobs that will in turn negate any kind of benefit to this 
country.
    Thank you very much for being here, and thank you, Mr. 
Manzullo. We look forward to the testimony.
    Chairman Manzullo. Does anybody else wish to be recognized?
    [No response.]
    Chairman Manzullo. Okay. We are going to adjourn. We will 
come back as soon as we are done voting.
    [Recess.]
    Chairman Manzullo. The Committee will come back to order.
    We are going to go a little bit out of order. We will take 
Mr. Ross first, then Mr. Hickey and then Mr. Atwell based upon 
the fact that they have to make 1:00 flights. The next votes 
will not be for two or three hours.
    Our first witness is Mr. Wilbur Ross. Mr. Ross, if you 
could pull that mike real close to your mouth there?
    Mr. Ross organized International Steel Group, ISG, in April 
of 2002 as its board chairman. ISG acquired the steelmaking 
assets of LTV and Acme Steel Corporation and in April 2003 
raised a $1 billion borrowing and acquired bankrupt Bethlehem 
Steel to become the nation's second largest integrated steel 
producer.
    We have all the principals here in the steel industry. Mr. 
Ross, we look forward to your testimony. When you see that 
yellow light come on, that means that you have one minute to 
go.
    Mr. Ross. Thank you, Mr. Chairman.
    Chairman Manzullo. Okay. We look forward to your testimony.
    The complete written testimonies of all the witnesses and 
the Members of Congress will be made part of our record. Thank 
you.

   STATEMENT OF WILBUR ROSS, INTERNATIONAL STEEL GROUP, INC.

    Mr. Ross. Mr. Chairman and Members of the House of 
Representatives Committee on Small Business, thank you for 
inviting me to testify today.
    International Steel Group has been surprised by the 
rapidity of costs and steel price increases both here and 
abroad. We did not initiate any of those increases. We have 
lagged in implementing them, and in general we price our 
products below our major competitors. We can do so because we 
are the lowest cost integrated producer.
    Also, we are very concerned that if prices were to remain 
at current levels for long, other materials would be 
substituted for steel, so we actually prefer lower price 
levels. Frankly, we are confident that steel prices will soon 
decline.
    You can see from Exhibits 1, 2, 3 and 4 in my prepared 
testimony that spot prices for hot-rolled band, the industry's 
generic sheet product, in China, Europe and the former Soviet 
Union have paralleled the U.S. pattern. It costs an additional 
$70 per metric ton to ship steel from abroad to the midwest, so 
imports are not the solution to the problem.
    There are several reasons why steel prices have been so 
volatile, and those are summarized in Exhibits 4 and 5. The 
price spike in the second quarter of 2002 was primarily due to 
the bankruptcy shutdown of the LTV and Acme facilities, 10 
percent of the industry. When our company acquired and 
reactivated those plants, prices fell, even though the tariffs 
remained, and that proved that the tariffs were only a minor 
factor.
    Also, at the $209 price for hot-rolled band at the trough 
early in 2002, prices were unsustainably low. No steelmaker in 
the U.S., Europe or China could deliver quality product 
profitably at that price. Exhibit 4 shows that those prices 
were actually far below the levels in the early 1990s, even 
though costs have obviously risen since then.
    In fact, even with the recent steel price increases, 15 
steel companies remain in bankruptcy today. Almost everyone in 
the industry has been unprofitable every quarter since 2002. 
The reason is that input costs have risen at an extraordinary 
rate, and 50 percent of integrated mill revenues are on long-
term contracts which do not automatically adjust to reflect 
increased cost.
    In contrast, small steel buyers, as well as some major 
ones, tend to purchase in the volatile spot market. They have 
made the speculative decision not to lock in steel costs when 
they quote prices of their product for future delivery. This 
strategy works well in some years and poorly in others, such as 
the present.
    Congress might consider a program for insurance for small 
businesses against fluctuating prices of steel and other 
commodities which, like steel, have no futures market.
    In any event, major raw materials needed by an integrated 
mill to make a ton of steel are 1.6 tons of iron ore, 0.4 tons 
of coke, 0.2 tons of scrap and 2.5 MBTU of natural gas.
    Exhibits 6 through 9 of my prepared testimony show that in 
the past two years, these commodities have added $178 to the 
cost of a ton of steel. Increased wages and other miscellaneous 
items add another $6 a ton, and higher raw material costs tie 
up more capital in inventory and receivables, adding another $4 
per ton of cost.
    Assuming that half of one's business is conducted under 
fixed price contracts, the spot half of the business must go up 
faster in order to avoid insolvency for the company.
    In addition, the industry needs about $40 per ton of 
EBITDA, earnings before interest, taxes, depreciation and 
amortization, just to cover debt service and make capital 
expenditures. At the trough, the industry was losing about $8 a 
ton of EBITDA, so it needed $48 a ton of price increases just 
to be able to sustain operations. That level would not make up 
for the cumulative industry losses of $132 per ton from 2001 
through 2003.
    Cyclical industries must earn back in strong markets the 
money lost in weak markets.
    Chairman Manzullo. How are you doing on time there, Mr. 
Ross? Your five minutes just ran out.
    Mr. Ross. I will finish up quickly.
    Chairman Manzullo. Can you summarize there?
    Mr. Ross. Yes, sir.
    Chairman Manzullo. Thank you.
    Mr. Ross. Scrap, we believe, is in fact in big supply 
worldwide, but had not been reclaimed because prices were low. 
Consumption is 340 million tons. There are eight billion tons 
out there. We think that marketplace will start to change.
    We also think that with U.S. Steel solving the fire problem 
at the Pinnacle Coke & Coal Mine and China solving a similar 
one, coke may be in a little bit less short supply.
    We oppose the idea of putting export controls on scrap. We 
think it would be preferable to force other countries not to 
limit their exports of raw materials as they are doing. Putting 
export controls on scrap would exacerbate our balance of 
payment problems, which were reported this morning to be a 
$43.1 billion deficit for the most recent month, and would also 
just provoke China to do retaliatory things.
    [Mr. Ross' statement may be found in the appendix.]
    Chairman Manzullo. Okay. Let us cut you off there so we 
will have some time for questions.
    Let us go to Mr. Atwell, who is a market analyst on steel 
with Morgan Stanley. We look forward to your testimony.
    If you want to pull that mike up close to you, we would 
appreciate that. Thank you.

           STATEMENT OF WAYNE ATWELL, MORGAN STANLEY

    Mr. Atwell. Thank you. Good morning, Mr. Chairman, Members 
of the Committee. Thank you for inviting me. I am honored to 
speak here this morning.
    My name is Wayne Atwell. I am an equity analyst with Morgan 
Stanley and follow the steel and nonferrous industry. I grew up 
in Pittsburgh. My father worked for the steel industry. I have 
followed the industry for 35 years and have toured 300 mills on 
four continents, so I have seen a lot of equipment.
    The sharp runup in the domestic steel price has its origin 
in a complicated set of domestic and foreign factors. We 
believe there are three primary drivers forcing the price of 
steel up. First, the weak dollar; second, dramatic growth in 
the Chinese economy; and, third, under investment in 
infrastructure.
    We did not expect a rollback of the 201 to have much of an 
impact on the industry as the strong dollar and high price for 
global raw materials was causing a shortage. The weak dollar 
has driven up the price of steel globally. What has happened is 
the euro is up 33 percent against the dollar in the last two 
years. The Canadian dollar is up 20 percent. These two areas 
account for 40 to 50 percent of our imports.
    As a result, imports of steel last year were down 30 
percent and exports were up 40 percent, so this is the best 
trade balance we have seen in 10 years. We have actually seen, 
ironically, an improvement in the steel industry despite the 
fact that domestic steel consumption was down last year, so 
what we have seen is almost the entire shortage is trade 
balance oriented, i.e., the weak dollar.
    The rapid growth in steel consumption in China has put 
material pressure on raw materials. China imports all of its 
iron ore growth. They do not have self-sufficiency in iron ore, 
and all of their steel industry growth has to be funded with or 
provided from offshore.
    They also are a major supplier of coke. What has happened 
in the last several years is coke, which they used to sell on 
the world market for $55, is now up to $200 to $300. They have 
historically been a large exporter of metallurgical coal. They 
actually imported metallurgical coal last month, and 
metallurgical coal has gone from $40 up to between $125 and 
$200.
    China's intense demand for raw materials has put pressure 
on the dry bulk fleet. We have seen fleet prices, bulk prices, 
up five to sevenfold in the last 18 months, which again has 
forced up raw material costs. Basically this has forced costs 
up for the integrated steel companies such as ISG and U.S. 
Steel. This has forced the industry to turn to scrap based 
suppliers such as mini mills. This has increased the bill and 
demand for scrap.
    Scrap has gone from $110 in 2002 to $140 in the third 
quarter and is currently roughly $300. This has forced the 
industry to put on surcharges. There is a $100 surcharge now, 
and we think that could be $150 before long.
    This in fact has backed up in steel pricing. Having 
followed the industry a long time, I can say I have never seen 
an environment like this. Hot-rolled spot was $255 January of 
last year. It is currently running $550 to $600. We think that 
is probably going to be the peak. We think what happens is that 
as scrap prices start coming down it puts some pressure on 
steel pricing.
    Steel prices are very high here, probably among the highest 
in the world, but this is not unique to the United States. In 
my testimony, I have a chart going back 25 years, which shows 
steel prices. You will see from this pattern that this is the 
sharpest, fastest increase that we have seen in almost two 
generations.
    What I see happening is the seasonable factors for scrap, 
which typically peaks in the first quarter. Nine out of 10 
years scrap has peaked in the first quarter because of the poor 
weather conditions and difficulty to accumulate scrap. We think 
scrap probably peaks within one to two months.
    If that in fact is correct, that will force the mini mills 
to roll back some of their surcharge. If that happens, you will 
see prices start coming down. We think if we have this 
Committee convene in six months, people will be talking about 
the sharp decline in steel prices.
    I would suggest that the free market be permitted to act. 
We think that steel prices are quite close to peaking and, if 
the market is permitted to act freely, should in fact force 
down prices.
    I would encourage a number of our friends here who are 
steel buyers to be very careful in inventory accumulation 
because if in fact I am right and we see prices down $50 to 
$100, they could end up with very large inventory losses.
    This is a very difficult period, tough on everybody, but I 
do not know that there is a government solution to this. I 
think the free market is probably the best mechanism to solve 
our problem.
    Those are pretty much the extent of my comments.
    Chairman Manzullo. I appreciate that.
    We are going to skip then to Bill Hickey, Jr. He is the 
president of Lapham-Hickey Steel Corporation, which is a steel 
service center in Chicago.
    Mr. Hickey, we look forward to your testimony. Pull that 
mike real close to your mouth there.

     STATEMENT OF WILLIAM HICKEY, JR., LAPHAM-HICKEY STEEL 
                          CORPORATION

    Mr. Hickey. Mr. Chairman, I want to thank you and the other 
Members of the Committee for this invitation.
    Chairman Manzullo. You have to speak up louder than that.
    Mr. Hickey. Mr. Chairman?
    Chairman Manzullo. There you are.
    Mr. Hickey. Thank you. I want to thank you and the other 
Members of the Committee for the invitation to address the 
issue of the spike in metal prices and what it will do to small 
manufacturers across the country.
    I am Bill Hickey. I am here representing the Metals Service 
Center Institute and the company that I am president of, 
Lapham-Hickey Steel Corporation.
    The MSCI is a trade association of steel and aluminum 
service centers. This group of 350 companies is the steel 
industry to most of the 300,000 steel consumers in the country. 
We, as an industry, are the companies that inventory, store, 
process and deliver metal to the industrial base in this 
country from Maine to southern California and all points in 
between.
    The company that I am president of was founded in 1926 in 
Chicago, Illinois, and currently has six locations where we 
store, process and deliver steel to a wide variety of 
industrial metal consumers.
    Mr. Chairman, as I make my comments on this topic today, I 
would suggest we change one word in the question posed to us in 
this topic. Instead of asking what the metal price spike will 
mean for small manufacturers, I would suggest that this 
historic spike in steel prices will affect all manufacturers in 
this country.
    Today, we are experiencing the swiftest, largest increase 
in steel prices that I have seen in my almost 30 years in this 
industry. The factors of this increase are many--scrap pricing, 
transportation costs, coke shortages, just to name a few. The 
other part of this equation is what is causing this 
corresponding product demand? The answer to that question is 
China.
    I keep wondering when someone in Washington, D.C. will 
connect the dots on our current economic problems in 
manufacturing. Since the mid 1990s when the People's Republic 
of China devalued their currency by almost 80 percent and then 
pegged that currency to the U.S. dollar, we have seen the most 
massive shift in manufacturing in the history of the world from 
one country, the United States, to another country, the 
People's Republic of China.
    Look at the evidence and tell me if you do not also see 
this issue. Since the People's Republic of China devalued their 
currency, the balance of trade with the United States has gone 
from about balanced to a deficit of $104 billion in 2002 and a 
staggering $125 billion deficit in 2003. This massive deficit 
is part of the almost $500 billion trade gap that we have as a 
nation. A chart reflecting this is attached as my Exhibit 1.
    China is not the only trading partner that is manipulating 
their currency for competitive advantage. Japan, South Korea 
and Taiwan also use currency market intervention to maintain a 
predetermined value of their currency against the dollar to 
ensure their manufacturers, big and small, will be able to 
produce and sell goods in the United States. This effort is 
ongoing as we speak and enhanced by the dollar holdings of 
their countries, which is shown in Exhibit 2.
    The other factor feeding demand in Asia which has the 
effect of driving up prices in already overheated metal 
markets, is a banking system that lends money to companies that 
will never repay the funds, but will not be closed for domestic 
political reasons, i.e., they do not want unemployment.
    It seems that as we reaffirmed last week with the February 
employment report, it is okay to have 43 consecutive months of 
manufacturing employment decline in the United States and the 
reduction of almost three million manufacturing jobs since July 
of 2000, but it is not acceptable to question how the existing 
trade policy of this country is either free or fair.
    My final point is about the near term effect of what has 
and is happening to raw material prices as a percentage of cost 
in finished goods prices. This explosion in steel and other 
metals prices should raise product prices of the goods produced 
out of these metals. I know that this steel cost increase will 
raise the cost to my customers of the products they make for 
their customers.
    This required cost increase in products to cover higher 
component cost I believe will not occur with most products 
coming to this country from Asia. The reason that these costs 
will not increase is these countries will continue to subsidize 
their exports to the United States. The results will be an 
acceleration of large and small manufacturing plants closing in 
the United States and relocating to low cost countries.
    In summary, let us connect the dots. Half of our trade 
deficit is with four countries that either pegged their 
currency or intervene in currency markets to ensure the 
exchange rates allow their manufacturing companies to ship 
products to the United States. This flood of manufactured goods 
displaces American produced goods, and our manufacturing 
companies close and three million manufacturing jobs disappear 
in 43 months.
    I know the members of the Metals Service Center Institute 
are asking for enforcement of our existing trade laws to level 
the playing field for our manufacturers. When will the United 
States Government act?
    Thank you.
    [Mr. Hickey's statement may be found in the appendix.]
    Chairman Manzullo. Thank you, Mr. Hickey.
    Our next witness is Emanuel Bodner, president of Bodner 
Metal & Iron Corporation of Houston.
    With regard to Mr. Hickey, Mr. Ross and Mr Atwell, I will 
leave it up to you whenever you have to leave to catch your 
airplanes. If you suddenly get up and disappear we will 
understand that, but hopefully we will have an opportunity to 
ask an array of questions.
    Manny, we look forward to your testimony. Do you want to 
pull the mike close to you?

  STATEMENT OF EMANUEL BODNER, BODNER METAL & IRON CORPORATION

    Mr. Bodner. Thank you. I appreciate the kind introduction, 
Mr. Chairman.
    Chairman Manzullo. A little bit closer.
    Mr. Bodner. I do not see a switch on the microphone. I 
appreciate the kind introduction. I am Emanuel Bodner, and I am 
president of Bodner Metal & Iron Corporation in Houston. We are 
a family owned business with 25 employees, and we have been in 
business since 1948. We supply both the domestic and export 
markets.
    I am here this morning on behalf of ISRI, I-S-R-I, the 
Institute of Scrap Recycling Industries, the trade association 
of the recycling industry. I would like to generally explain 
what our industry does. We receive scrap from both industrial 
and commercial and the general public.
    Material includes prompt industrial scrap, in addition to 
obsolete scrap, including the washers and dryers, the 
automotives, the automobiles and the agricultural types of 
sources. We process that variety of scrap that comes into our 
facilities into a specific grade. There are many grades, and 
these are specific grades that we supply into our consumers, 
our customers, which are the mills and the foundries.
    I would like to make five points here this morning. The 
first point is that, number one, there is ample supply of 
scrap, and there is no shortage of scrap. Every mill, at least 
to my knowledge, is able to obtain sufficient tonnage in order 
to maintain their production requirements. In fact, we see some 
mills in some areas adding capacity, in my mind which would 
lead one to believe there is sufficient raw material.
    The second point I would like to say is that exports and 
prices of scrap are not unusually high. In fact, today's export 
levels have been duplicated only seven times when looked over 
the last 33 years. Pricing expressed in 1998 dollars are not at 
historic highs.
    I want to say to you all on the subject of pricing I want 
us to bear in mind that mills, our customers, set the price. I 
respectfully submit that scrap is a good value at whatever the 
price because do not forget it is highly competitive. There are 
alternatives to scrap.
    Chairman Manzullo. Manny, take a sip of water. I will not 
take it out of your time.
    Mr. Bodner. Can I take a long sip?
    Chairman Manzullo. Go ahead. Take a little bit of rest here 
on your throat.
    Mr. Bodner. Thank you.
    Chairman Manzullo. You bet. Go ahead.
    Mr. Bodner. I would like to submit that scrap is a good 
value at whatever the price because, quite frankly, if it is 
not a good value because of the highly competitive nature of 
our commodity it will seek a value at which it is a good price, 
and that is the price it is traded.
    I would also like to submit that when we hear of scrap 
surcharges as it is reported in the press that the scrap 
surcharge includes the cost of scrap, but it also includes the 
cost of transportation because of energy, as some mills are 
reporting, the additional margin that is over cost in order to 
improve investor return.
    The third item I would like to say is that history is on 
our side. We heard it this morning. History will show that the 
pressure on prices will soon come to an end.
    Another sip of water, please.
    The fourth item. Extra controls on scrap have historically 
resulted, as in 1973 and 1974, in even their higher prices 
because when you artificially remove a commodity from the 
marketplace, the demand remains even or even increases.
    It is simple supply and demand. There is nothing 
complicated. Price is going to go up. In other words, if you 
add controls on scrap to try to keep the price in check and 
level, it is not going to work. History has proven that time 
and time again.
    Item 5. Free trade will regulate this market as it is doing 
so already. The fact is in the month of March that we have seen 
the steam, the fuel in the drive for scrap to begin its 
reseeding, the price in the different areas of the country. Do 
not forget. In some areas in the north and the south they are 
different. It is not a constant price. It varies according to 
the region. While scrap is a globally traded commodity, pricing 
is local and regional.
    In the month of March we have seen a reduction in pricing. 
Some areas it has gone up. Some areas it has stayed the same. 
Some areas I understand it has even gone down. The correction 
is taking place.
    I very much appreciate this opportunity to participate in 
this discussion.
    [Mr. Bodner's statement may be found in the appendix.]
    Chairman Manzullo. Thank you. When we get into the 
questions and answers, I think Mr. Ross takes exception with 
you, but that will be after everyone testifies.
    I know you are itching to do that. We will give you an 
opportunity to do that.
    Our next witness is Mr. Robert Stevens, CEO of Impact 
Forge, Inc., out of Columbus, Indiana, with Steel Consumers. 
Mr. Stevens, we look forward to your testimony.

        STATEMENT OF ROBERT STEVENS, IMPACT FORGE, INC.

    Mr. Stevens. Thank you, Mr. Chairman. Can you hear okay? 
Okay.
    I would like to thank you and the Members of the Committee 
for having me speak today. I am Bob Stevens, chairman and CEO 
of the Impact Forge Group. I started this business with my co-
founders in the basement of my home 18 years ago, and with the 
help of an SBA loan, and I thank you for that belatedly, we 
grew the business by taking over three companies in financial 
difficulty, and with four companies we grew to 950 employees.
    Because of what has happened in the economy and 
internationally, we are down to 530. Today, my business is at 
risk, as is the business of many small and medium sized 
companies, because of the sharp increase in the price of steel 
and steel scrap.
    I would like to address for the Committee, number one, the 
problem; number two, the causes; and, number three, the 
solution I have.
    As far as the problem, starting January 1 of this year, our 
little company has been paying over $10,000 a day in steel 
scrap surcharges, and it is estimated that effective on April 1 
that is going to double to about $20,000 a day. That is absurd, 
ladies and gentlemen.
    As far as the causes, I have attached as the last page of 
my written testimony a one-page chart that shows what has 
happened. The export of steel scrap in the United States since 
2000 has risen from 6.3 million tons to almost 12 million tons 
last year. At the same time, the price has driven from under 
$100 to over $300 a ton, and we do not see any relief in sight 
on the high quality scrap that is being used.
    As far as why these prices are going up, we must take a 
look at those exports. We also take a look at the restrictions 
that other governments are putting on their exported steel 
scrap. We have Russia that has had taxes on steel scrap for 
quite some time, and we have the Ukraine that started out with 
a tax, and now they have restricted all scrap exports.
    This week, Korea, the same Korea that bought 2.5 million 
tons of scrap from the United States last year, has put a 
restriction on their export of scrap, rebar, and I have also 
read steel bars, and they are also encouraging their steel 
mills not to export steel products to other countries.
    Of course, we have China that has all sorts of 
restrictions, things they are doing with their currency, and 
also they are restricting their coke. There is no free trade 
here. There is no level playing field. These are actions by 
foreign governments to protect their domestic industries, and 
they hurt American companies like ours.
    A secondary cause of this is also very troubling, and that 
is the transfer of U.S. manufacturing jobs overseas. When an 
auto parts manufacturer moves abroad, that means that the 
prompt steel scrap that is generated from that factory moves, 
so our economy that lost 2.8 million jobs in the last three 
years, now we are losing the future scrap to provide the raw 
material that the steel mills I buy 120,000 tons of steel a 
year from. We are losing the future.
    Our economy has been hollowed out by dumped and subsidized 
imports and the transfer of companies overseas. We are now 
seeing the result in the permanent loss of jobs. In our case, 
one customer moved their entire factory from Indiana down to 
Mexico, and overnight we lost $12 million of business and over 
100 jobs.
    The sharp price increase in scrap and the tight supply are 
harming all manufacturers, buyers of steel and steel products, 
including construction, all these buildings that you see 
around, automotive and appliance forgings and many more, 
including foundries. These are not steel mills, but foundries 
that buy the raw scrap and make it into castings. They are 
being devastated by this also.
    We cannot afford to absorb the $10,000 to $20,000 per day 
in scrap surcharges. Therefore, we are in negotiations with our 
customers to either pay the scrap surcharges, or we will be 
forced to stop shipments, which are the same terms that have 
been mandated to us by the steel mills.
    As far as a solution, I have been pushing and have helped 
form the Emergency Steel Scrap Coalition to address this 
crisis. Our coalition consists of a diverse group of steel 
scrap consumers and steel users, including construction 
companies, parts makers, forgers, foundries and others.
    My message to Congress and the Administration today is that 
we need help, and we need it now. I hope that other companies 
will join us by signing up with scrapemergency.com, which is 
our website.
    We already have existing and tested U.S. law that provides 
a potential remedy, the temporary imposition of steel scrap 
export restrictions, and the Commerce Department may impose 
such restrictions if all the problems that we have addressed 
today are reviewed. We believe that this is the fastest route. 
It can happen in less than four months.
    Although there are many issues that are affecting the price 
of steel scrap, this is one that we can address quickly, and we 
ask for your support. Thank you.
    [Mr. Stevens' statement may be found in the appendix.]
    Chairman Manzullo. Thank you for your testimony.
    Our next witness is Bill Klinefelter. He is the assistant 
to the president, the legislative and political director, of 
the United Steelworkers of America.
    Mr. Klinefelter, we look forward to your testimony.

  STATEMENT OF WILLIAM J. KLINEFELTER, UNITED STEELWORKERS OF 
                            AMERICA

    Mr. Klinefelter. Good morning, Mr. Chairman, Members of the 
Committee. We really appreciate this opportunity to testify 
today.
    We as a union are deeply concerned about the health of 
small manufacturing in the United States. We are not just basic 
steel. We have 600,000 members in the United States and Canada, 
and many of them work in small manufacturing, so we are 
concerned about their well being as well.
    Look, the manufacturing sector in this country has taken a 
hit. We have lost three million manufacturing jobs. It depends 
on whose figures you use. We support all kinds of tax 
incentives for business. We support trying to do something 
about the health care system in the United States to make our 
industry competitive.
    Look, we are here today to say look, when the Congress 
comes up with legitimate things to deal with the crisis in 
manufacturing in this country, the United Steelworkers of 
America will be standing there right with you to try to get 
those things done because those jobs are ours.
    We think that this price increase is temporary, and it is 
due to a number of factors, including the rising import cost, 
the reduced inventories, reduced steelmaking capacity and the 
decline of the U.S. dollar.
    This affects both integrated and the mini mills. For 
integrated steelmakers, iron ore prices have jumped by almost 
20 percent in 2004. Coke has been in short supply, and natural 
gas costs have climbed as much as 70 percent in 2002.
    Scrap prices, as you have heard and will again today many 
times, are volatile. They go up and down. I mean, this is the 
way the market works. When you are dealing with the spot 
market, that is the kind of thing you are going to deal with.
    In addition, the decline in the U.S. dollar and the 
recovering global economy has made steel imports more 
expensive. For example, the domestic price of hot-rolled steel 
has increased by 13 percent since January 2000, while the 
average import price has climbed by 19 percent over the same 
period.
    Look, the steel price environment has been affected by the 
loss of 12 to 15 million tons of American capacity. You know, I 
do not take any pleasure and the union does not take any 
pleasure coming here and telling you so, that this was going to 
happen.
    When we do not enforce the trade laws of this country, when 
this industry has been under assault for 30 years and when all 
of a sudden we have the collapse of the steel industry in the 
United States and everybody is pushing us, you know, we need 
consolidation, we need to reduce our capacity, well, you take 
out 12 to 15 million tons, and this is what happens in the long 
run to prices.
    I think that one of the interesting things I came across 
today when I was preparing this testimony--Geneva Works, 2.6 
million tons. Now, Geneva Works was built out in Utah during 
World War II for the government so that the Japanese could not 
bomb it, but it was in production for all that time until 
recently. It went bankrupt and finally went down after lots of 
struggles, lots of sacrifices by the union, but Geneva Works 
went down.
    Geneva Works is going to serve a useful purpose. Geneva 
Works has been bought by the Chinese, by a Chinese steel 
company, and they are going to transfer that equipment and add 
it to their productive capacity in China. I mean, I think that 
at some point in time, you know, we really in this country have 
to think about what we are doing.
    The manufacturing sector needs the attention of 
policymakers to regain its competitiveness and stem the loss of 
domestic jobs. Attempts of small manufacturers by interfering 
to artificially lower steel prices, however well intentioned, 
would hurt the domestic steel industry, which has yet to return 
to profitability, and ultimately injure the very small 
manufacturers we all seek to help.
    Some have suggested that the U.S. trade laws be relaxed to 
increase steel imports and lower import prices. I cannot 
overemphasize how disastrous such an approach would be. Unfair 
trade has contributed directly to the destabilization of 
domestic steel prices. Unfair trade should not be rewarded. It 
is not the time to let the people who have been convicted get 
out of jail.
    This is a very volatile situation, and those trade orders 
have to stay in effect. We have to encourage the Administration 
now to do away, but to strengthen the trade laws of the United 
States as we go forward in the DOHA Round.
    This has been a bad period for the industry. They have lost 
$11 billion. Forty-four steel companies have filed for 
bankruptcy protection since 1997.
    Chairman Manzullo. How are you doing on time there, Bill? 
We are out of time.
    Mr. Klinefelter. Okay. Including nine since 2003.
    Let me just say to you one last thing. I do not know what 
the future is going to be, but I heard the future last night on 
TV.
    There was this thing on ABC about this small entrepreneur 
in Massachusetts who had a software company. He said I do not 
want to send my jobs overseas. What did he do? Eighty thousand 
dollar programming jobs. He put an ad in the newspaper, and he 
said I will pay you $40,000. He had 100 people sign up.
    We are de-middle classing the United States, and we are 
doing it at a far more rapid pace than I ever even thought was 
possible. I do not know if that is what we want to be. We want 
to be the low income, low wage, low priced country? We are on 
that course.
    Chairman Manzullo. Thank you for your testimony.
    Our next witness is Barbara Hemme, whose son is celebrating 
his seventeenth birthday today. Where are you, Michael? Are you 
back there somewhere? Good to have you out here.
    Barbara was at a manufacturers breakfast in the district 
that I represent about three weeks ago and mentioned something 
about the price of steel. I said well, you can do something 
about it, so we asked her to come. She is with the Youngberg 
Industries.
    Barbara, we look forward to your testimony.

     STATEMENT OF BARBARA HEMME, YOUNGBERG INDUSTRIES, INC.

    Ms. Hemme. Thank you, Mr. Chairman and Members of the House 
Committee, for letting us be here and giving us this 
opportunity. We are most grateful.
    I am actually the corporate secretary and controller of 
Youngberg Industries, which is a family owned business that was 
started in 1947. We are a job shop, and we specialize in vacuum 
furnaces and general fabrications.
    Just a few short years ago, we were one of the largest 
employers in Belvidere, Illinois. Our company had over 90 
employees, and we were enjoying a reasonable profit. Five years 
ago, that began to change. We witnessed profit erosions so 
severe that we laid off much of our work force. Part of that 
was caused by NAFTA, part of it because of the recession, where 
we saw a decrease in our sales and profits.
    Generally, as steel welders and fabricators, we are 
generally the first to see any economic upturns and downturns. 
Recent history has proved no different. In the third and fourth 
quarter of 2003, our sales did begin to increase. We felt the 
recession was over, and we could get back to a comfortable 
profit margin.
    When steel tariffs were removed, quotes for steel price 
increases and surcharges began coming in from the steel 
distributor. Included in my written testimony are some graphs 
that directly affected Youngberg Industries. You can see in the 
written testimony on that first graph that prices were fairly 
flat in the months of October, November, December, and then 
once the increases started they were changing weekly as we were 
getting information from our steel service centers.
    Not only were those increases happening to us weekly, but 
sometimes day by day. It gets even worse at the beginning of a 
month. Steel prices? We cannot even predict what they will be.
    In addition to the price increases, our steel service 
centers are also holding us to tighter terms, so where before 
we could maybe float our cash for 45 to 60 days, maybe 15 to 30 
days, and now all of a sudden I am even being asked to prepay 
for a load of steel. A load of steel, just so you know, can be 
anywhere between $20,000 and $80,000. That is a large chunk of 
change for a small company like ours.
    In addition, our customers will pay us in about three 
months to four months, mainly because we buy steel at the 
beginning of our process. It takes 12 to 16 weeks to build a 
vacuum furnace, and then we have 60 to 90 day terms because our 
customers are holding us on the other end.
    We are the ones who are feeling the pinch from both sides. 
That requires us obviously to go to the bank and get higher 
credit lines, so now we are paying more interest on top of 
everything else.
    In addition to the price increases, we are experiencing 
material shortages. Our purchasing department often has to call 
all over the country, and we will find one plate at this 
service center, one plate at that service center, and we just 
cannot in a lot of cases even get the steel that we need. We 
cannot predict this because we are a job shop, and it is based 
on the order that we receive from our customer.
    In addition, we have been told that there is a limited 
supply of T-1 plate, as I put in my testimony. We are very 
grateful that this is going to Iraq. However, it does create a 
steel shortage for us, and our second largest customer does in 
fact use the T-1 steel plate. That would be a major food 
company in the United States that I am sure that you would 
recognize the name of that particular customer.
    These shortages and price increases do not only affect 
Youngberg Industries. We have been receiving phone calls from 
companies all over Rockford and Belvidere when they found out I 
was giving testimony. Their concern is these are even smaller 
companies of 20 employees and less, which is the majority of 
the companies in the Rockford and Belvidere area.
    These companies are afraid that they will be out of 
business next week. They do not have time for a lot of 
congressional hearings to take place. They need an answer now 
because they will be out of business tomorrow. That was a 
concern that they all asked me to share with you is please 
understand the urgency of this.
    I did look up some statistics. There are 533 businesses in 
the Belvidere/Rockford area that have less than 20 employees, 
and that is the kind of shops we are talking about losing.
    We do have a couple of suggestions. Because there is no 
simple solution to this matter, first, take some kind of action 
now, whatever it is. Help us out. Over and above that, help 
equalize trade.
    Third, please stop looking at American jobs as being all 
college educated. Many, many, many Americans can only work with 
their hands, and these are the kind of people that hold these 
types of positions. We need your help, and we need it fast, or 
we will lose manufacturing in the United States permanently.
    Last of all, please take a look at things like health care 
and insurance. Next to my payroll and my steel costs, my third 
highest cost is the cost of health insurance and workmen's 
compensation insurance caused by government regulations, so we 
ask please, we beseech you, help out the small businesses.
    We are one voice here. I am representing many, many small 
businesses in our particular area.
    [Ms. Hemme's statement may be found in the appendix.]
    Chairman Manzullo. Thank you, Barbara.
    Our next witness is also a constituent whose company, 
Revcor, is located in nearby Carpentersville, Illinois. Kyle 
Martinson. Kyle, we look forward to your testimony.

           STATEMENT OF KYLE MARTINSON, REVCOR, INC.

    Mr. Martinson. Thank you, Mr. Chairman. Distinguished 
Committee Members of the U.S. Committee on Small Business, I 
would like to express my appreciation and what an honor it is 
to be before you today.
    My name is Kyle Martinson. I am Director of Purchasing for 
Revcor in Carpentersville. I am a lifetime certified purchasing 
manager by the Institute of Supply Management and also a 
respondee to the business activity report that each of you are 
familiar with issued each month.
    My comments today concern our corporate headquarters and 
manufacturing in Carpentersville, Illinois, about 45 miles 
northwest of Chicago. In 26 years of experience in metal 
buying, I have bought both at the mill direct and the service 
center level.
    We currently buy at the service center level from these 
companies. They slit master coils into smaller coils that we 
are able to utilize in our manufacturing. They inventory and 
provide JIT or just-in-time delivery, as well as provide 
metallurgical support and advice when requested.
    As to volume, in 2003, we purchased approximately 5,700 
tons of slit coil stock, primarily galvanized, and 
approximately 800 tons of cold drawn bar stock. These total 
expenditures represented approximately $5.7 million.
    Today's metal buyer is faced with market conditions not 
seen during my career. It might be useful to recap how we got 
here. Recent events date back to the current Administration's 
implementation of what became known as the Section 201.
    Almost overnight, steel prices for slit and delivered stock 
rose 15 percent for those buyers who could even find it. The 
industry felt these tariffs were necessary to allow the 
domestic industry to become well financially and to even the 
playing field against offshore competition.
    Fast forward to November of 2003 when the decision was made 
to lift these tariffs. No one expected pricing to drop. Demand 
was relatively high. The Great Lakes in our area were just 
closing, so offshore tonnage would be limited, and pricing 
gains the industry had gained we thought they would be able to 
retain. We did not think it would be Attention K-Mart Shoppers 
at all. The weakened dollar meant that foreign producers could 
sell elsewhere.
    We began putting our buy together for 2004 in October, and 
at that time we had anticipated a significant savings going 
into 2004. We had firm price agreements with our suppliers 
where we allowed some adjustment plus or minus a certain 
percentage based upon the producer price index that we reviewed 
in July and in December of each year.
    Less than two months later, these agreements were voided 
force majeure; a combination of coke shortages, energy costs, 
scrap metal shortages and the industry felt it was necessary to 
implement surcharges. We were being instructed to sign these 
new surcharges before steel was going to be shipped.
    We have pricing agreements with our customers who are 
telling us they cannot and will not pay higher prices than 
previously agreed on. We are in the process of trying to pass 
through these surcharges now.
    With regard to scrap surcharges, it is my understanding the 
steel industry has been declared national defense critical. How 
can we allow scrap to be exported to China for big bucks when 
the domestic industries tell us there is a shortage that drives 
these surcharges? I am all for maximizing profit where 
possible, but gouging is an entirely different matter.
    Through industry downsizing, consolidation and 
bankruptcies, we have two players now controlling a major 
portion of domestic steel production capacity. A few players in 
turn domestically provide less opportunity for a competitive 
bidding process we steel buyers have known for so long. Are 
there not any antitrust issues at stake here? Two companies now 
control 50 percent or more of the domestic capacity.
    The situation has now become instead of buying offshore, 
completed subassemblies, component items and the associated 
jobs are being done offshore. In your own district, the 
Rockford Register Star headlined 11,800 Jobs Lost Since 1998 in 
a metropolitan community of approximately 300,000 people.
    American industry can compete, but before we grant favored 
nation trade status to China should we not insist they allow 
their currency to float internationally with other currencies 
instead of being propped up and supported by their central 
government? Does this not amount to a subsidy on the part of 
the Chinese Government?
    The last comment I would like to make is the perceived 
arrogance of the U.S. steel mills. As we sit here, contracts 
and supply agreements are being voided and handed back to 
customers. Major integrated mills feel it is necessary that 
since the electric mini mills have higher surcharges that they 
need higher transaction pricing, so even orders that they are 
late on will now be PIE, price in effect, at time of shipment 
will apply.
    Surcharges are one thing. Our customers may not like it, 
but they understand it. Transaction pricing is entirely 
different. These are negotiated between you and the supplier, 
increases here you are forced to absorb.
    Chairman Manzullo. Okay. We are forced to ask you to------.
    Mr. Martinson. To summarize, if I may?
    Chairman Manzullo. Quickly?
    Mr. Martinson. Major concerns here are availability. Will 
we be able to get the metal we need for our production?
    Pricing. Can we afford the metal, and will we be able to 
pass along any of these force fed increases?
    Information. We have orders on steel that is due next 
month. We do not know how much we are going to pay for it. We 
have almost essentially issued a blank check.
    Lastly, there are rumors that a fuel surcharge is going to 
be implemented before long due to escalating fuel prices. This 
is just insult on job of injury.
    Thank you.
    [Mr. Martinson's statement may be found in the appendix.]
    Chairman Manzullo. Kyle, we thank you for your testimony.
    Our last witness is Les Trilla. Les has appeared before our 
Committee I think on two occasions before. Is that correct?
    Mr. Trilla. Yes, sir.
    Chairman Manzullo. His father or grandfather was a 
cartwright and started making wooden barrels 600 years ago, and 
you have continued that tradition as a shop in a suburb of 
Chicago.
    Les, we look forward to your testimony.

   STATEMENT OF LESTER TRILLA, TRILLA STEEL DRUM CORPORATION

    Mr. Trilla. Thank you very much. Good morning, Mr. Chairman 
and Members of the Committee. Thank you for the opportunity to 
appear here before the Committee to discuss the impact of the 
steel pricing crisis on my company.
    My name is Lester Trilla. I am president and CEO of Trilla 
Steel Drum Corporation with locations in Chicago, Illinois, and 
Fenton, Missouri. Trilla is a manufacturer of steel drums used 
in filling and transportation of hazardous materials, food and 
many other products. As you earlier stated, Trilla is a family 
owned, family run business for more than three generations.
    I traveled to Washington today to tell you about the 
problems my company and my industry is facing in light of 
pricing and supply problems with steel. Over the past two 
months, the price of steel has skyrocketed beyond our belief. 
It is even worse in the situation we faced when steel tariffs 
were initially imposed almost exactly two years ago.
    We buy domestic steel at Trilla Steel Drum. Our supplier 
informed us within the last three weeks that they will not 
honor quoted prices, but will determine the price of an order 
by market price in effect at the time of shipment. Basically, 
they are rescinding all pricing agreements.
    When asked how they were going to determine the price at 
time of shipment, the company's representative told us that he 
was not sure because they did not yet have a system in place 
that they could do daily pricing changes. This is a seller's 
market like we have never seen.
    Our steel supplier also informed they were raising our 
price for the intermediate period of time. While we were paying 
$390 a ton in December and had plenty of supply, we are 
currently paying over $530 a ton today, and we have been told 
to expect the steel price--my statement says $680 a ton, but 
since I wrote this statement it has gone over $800 a ton in 
April. The most recent spot quotes I have received are for over 
$850 a ton today, almost three times what I was paying five 
months ago.
    These rapid, unexpected price increases are devastating to 
our business, which always runs on very tight margins, less 
than 17 percent gross margins. Where cold-rolled steel is our 
primary raw material, steel makes up 45 to 60 percent of the 
cost of making a steel drum. When you include other 
components--rings, fittings--steel makes up 60 to 70 percent of 
our cost.
    All these costs are much higher than my European 
counterparts and Asian counterparts who are now taking business 
to these other shores in filling the drums, making and filling 
the drums in other parts of the world.
    The fact that our steel supplier will not honor a quoted 
price or let us know how much we will end up paying for a 
shipment adds tremendous uncertainty to our business; so much 
uncertainty, in fact, that if we had a choice I would have to 
look elsewhere for steel. We have quoted a price for our 
customers and must honor those prices to our customers.
    Our customers already balked at the significant higher 
prices that were necessitated by steel tariffs. We lost 30 
percent of our longstanding customers, which we had for over 
three generations, and we imposed a 20 percent price increase 
to respond to the steel tariffs.
    We are certain that we will lose more customers when we 
have to raise prices again, but Trilla simply cannot absorb 
these huge increases. We have notified our customers that we 
must raise our prices for orders placed after March 15. This is 
unfortunate. We can only hope that our customers understand the 
squeeze that we are in and will not go to alternate suppliers 
or alternate containers.
    Furthermore, apart from the problem of increased steel 
costs, we are faced with unavailability of steel supply. Steel, 
as I stated earlier, is my chief raw material. We use 11 
different sizes, and without a steady and reliable supply of 
these products I cannot produce steel drums without steel. A 
very simple fact.
    At the price we are being quoted, there should be more 
steel produced, but this is not the case. Last month, our steel 
supplier cut the volume of steel that they would supply to us 
without consulting us. The volume they said they will now 
supply is not adequate for our needs, and we will have no place 
else to go for steel. As you heard earlier from other people, 
there is no steel on the market.
    We must maintain a two-week level of inventory for work in 
process, et cetera, but in February I ran out of most of my 
major materials, and five of the 11 sizes that I had were very 
short. We totally ran out of one size. This will force me to 
cut back on my production.
    At the same time, exports of raw material, raw material 
that I use to make steel drums, has gone up 40 percent, so we 
are exporting steel rather than using it here in the United 
States.
    Faced with the bleak supply picture I just described, we 
contacted two other domestic steel mills in our area, but to no 
avail. Domestic steel producers seem to be either unable or 
unwilling to sell a new customer.
    We have contacted the foreign steel mills we used to do 
business with before the imposition of steel tariffs, but they 
will not even return our calls. Their disappearance from the 
market is------.
    Chairman Manzullo. How are you doing on time, Les? Can you 
sum up?
    Mr. Trilla. The last sentence. The steel tariffs have 
forced us to buy domestic steel. As we knew then, they could 
only supply 70 percent of what we needed. We needed to import 
30 percent of steel for the consumption of steel here in the 
United States.
    The rest is in my testimony. I thank you very much.
    [Mr. Trilla's statement may be found in the appendix.]
    Chairman Manzullo. Thank you very much.
    Just when we thought we had figured in all the components 
of this crisis, someone throws in the frozen Great Lakes. It is 
amazing.
    I want to turn to you, Mr. Ross, and perhaps have an 
interchange there with Mr. Bodner. You took exception to a 
statement he made. Why do you not go ahead and share that with 
us?
    Mr. Ross. Well, I am not sure which statement you are 
referring to.
    Chairman Manzullo. I think it was that the price of 
material was determined when it hit the mills.
    Mr. Ross. Yes. What I took exception to was his theory that 
people are loading great, big profit components onto it. That 
would not explain why the industry has been losing money, so he 
is wrong in that regard.
    Second, the reason that we do not have enough capacity to 
meet the demand is that so many steel companies have been 
forced out of business by the illegal foreign trade practices 
of before, so to now say that a shortage that was created in 
part by bad acts, illegal acts on the part of foreigners, and 
that they, therefore, should be rewarded now that the shortage 
they created has occurred I find amazingly illogical, so I 
disagree very much with that.
    I do sympathize with the problems of our consumers, and I 
think the real reason that they are feeling the pressure is 
that China subsidizes its steel consuming industries and its 
other industries. They constantly make loans that they know 
will not be repaid, loans that are just absorbing losses, and 
that is why the Chinese companies, whose steel mills are 
charging the same prices as we are, they are consuming 
industries and not passing it along because they are being 
subsidized. That is what is really wrong.
    The global problem of steel prices is what it is, but it is 
wrong that China gets away with subsidizing the people who are 
manufacturing and competing with Mr. Bodner and other people. 
That is illegal. Something should be done about it.
    I was appalled to learn the other day in the GAO report on 
our Customs Service in many product areas--for example, 
textiles--less than one one-hundredth of one percent of what 
comes into this country is even looked at by anybody from 
Customs, so how we can say we are going to enforce our trade 
laws and we do not even know what is coming in is really very 
horrible.
    I really do think the problem is China and others 
subsidizing the processing industries to the direct 
disadvantage of our companies, and if Mr. Bodner and his 
companies get put out of business we will have nobody to sell 
steel to, so we are very sympathetic to them. The evil is 
China. The evil is not the domestic mills.
    Chairman Manzullo. Mr. Bodner, did you want to respond to 
that? You do not have to, but I will give you the opportunity.
    Mr. Bodner. I appreciate it. I very much appreciate, first 
of all, the chance to be able to be sitting right next to him. 
I very much appreciate that.
    We can talk in absolutes. We can talk in generalities. 
There are always going to be exceptions, and we always can find 
that. I can only refer to what is reported in the press.
    There is an article in the Wall Street Journal January 23, 
2004, where a steel industry executive is quoted as saying: 
``We have put in surcharges on raw materials. At this point in 
time, with the addition of those surcharges, the price we 
charge our customers is up more than the cost of our raw 
materials.'' It goes on to say: ``We will enjoy the higher 
margins in 2004 than in 2003 across all product lines.''
    Now, I want to be very clear that the scrap industry, with 
the scrap industry that we have, several customers, our 
customers are our suppliers of scrap, yet our customers are our 
consumers of scrap. In turn, our customers will also be the 
manufacturers of the products that our consumers are producing.
    Our industry throughout history, and anyone who knows me 
for any length of time, they know that we seek relationships. 
We seek the dialogues. It is not us versus them. It is us in a 
way that we can continue to work together and so on and so 
forth.
    Chairman Manzullo. Let me ask you. Go ahead, Mr. Ross, 
please.
    Mr. Ross. I would just like to ask Mr. Bodner one question. 
Are your profits up so far this year, sir?
    Chairman Manzullo. This is interesting. Go ahead, if you 
would like.
    Mr. Bodner. Our company is a private company, but I will 
share. I will have to say they are. Are your profits up?
    Mr. Ross. We, as we just reported, are not yet profitable.
    Mr. Bodner. I would like to keep it in perspective. Mr. 
Chairman, if I could say this?
    Chairman Manzullo. Go ahead. Go ahead.
    Mr. Bodner. When I speak, you see, I do not know the 
history and how far you go back, sir.
    The history of our industry is that historically scrap 
prices are low. As I have said before, the history of our 
commodity is that it will trade at a good value because of the 
competition because if it does not trade at a good value------.
    Chairman Manzullo. My five minutes have expired so I am 
going to live by the same rules as you do.
    Let me go to Ms. Velazquez because I want to leave plenty 
of time for the other Members of the Committee to ask 
questions.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Mr. Ross, at the end of your statement you mentioned that 
you have urged the President to invoke the 7.5 per annum import 
growth capping China's WTO accession agreement. What response 
have you gotten from the Administration?
    Mr. Ross. Well, we are in discussions with them. We have 
not received any commitment from them to impose the 7.5 percent 
annual growth limits.
    Ms. Velazquez. What do you think at the end the 
Administration is going to do?
    Mr. Ross. I wish I did. I am a businessman, not a 
politician. I would defer to your judgment on that, ma'am.
    Ms. Velazquez. Well, we are losing jobs, and this situation 
is part of failed economic and trade policies.
    Mr. Ross. Yes.
    Ms. Velazquez. I hope that the President got an opportunity 
now to show that there is not a disconnect between what is 
going on in your part of the world.
    Mr. Ross. Yes. I think there is a serious disconnect 
because it is industry after industry that is getting the 
illegal subsidy from China.
    It is hard enough to compete with $11 or $15 an hour labor 
against 89 cents, but when they also are having their 
companies--almost their whole textile industry loses money 
right now, and it is amazing that with 89 cent an hour labor 
they still lose money.
    The banks make them loans to subsidize the loss. Then they 
forgive the loan. That is really tough to compete against, and 
it is wrong. That is why I think we should impose the caps.
    Seven and a half percent a year is wonderful growth. Our 
country would be in heaven if we could grow seven and a half 
percent a year.
    Ms. Velazquez. Mr. Ross, in your testimony you also 
mentioned that ISG has generally continued to price its product 
below your major competitors.
    Mr. Ross. That is correct, ma'am.
    Ms. Velazquez. Can you provide this Committee with an 
overview of how ISG is able to achieve lower prices?
    Mr. Ross. Yes. The companies we have acquired thus far, 
namely Bethlehem, LTV and Acme, all had been bankrupt companies 
in part because of huge burdens for------.
    Chairman Manzullo. Could you pull the mike a little bit 
closer?
    Mr. Ross. I am sorry. In part because of huge burdens for 
unfunded pension liability, which they turned over to PBGC 
before we came on the scene. Second, they were burdened by vast 
sums for retiree health benefits, which they also canceled 
before we came on.
    Collectively, those liabilities that were shucked off in 
the bankruptcy are $10 billion, so we do not have to earn that 
$10 billion. We can pass it on in lower prices, plus we made a 
new agreement with the steelworkers, which now is gradually 
becoming hopefully an industry standard, that lets the 
companies operate much more efficiently, so we are now using 
about one person hour to make a ton of steel, whereas the old 
companies have been using about two and a half people hours to 
make a ton.
    Ms. Velazquez. Thank you, Mr. Ross.
    Mr. Klinefelter, the Section 201 tariffs that were put in 
place to protect steel producers and allow them to get back on 
their feet, to what degree has the steel industry returned to 
profitability?
    Mr. Klinefelter. Well, I think that in terms of 
profitability I do not think that we are there yet, but I think 
that look, I have heard this conflict here this morning about 
consolidation and concentration in the hands of just a few 
companies.
    Well, I mean, U.S. Steel and ISG are only one-third of the 
U.S. steel industry out of 120 million tons, but the fact of 
the matter is this is the President's program. When the 
industry went to the President and said and the union said we 
want you to do something about the basic steel industry in this 
country, the President, his Secretary of Commerce and Secretary 
of Treasury said to us, yes, we will consider it if you 
consider consolidation. They strove for consolidation of the 
basic steel industry in the United States, and now they are 
getting it.
    We are aware of the fact that there are companies where 
consolidation is not complete. There are other companies, I 
believe, which will be part of it. I think it is a necessary 
thing for the industry.
    It was a necessary thing for the steelworkers, but let us 
not forget that hundreds of thousands of people have had their 
pensions reduced because of this situation and hundreds of 
thousands of retirees who can ill afford it. People between the 
ages of 55 and 65 and people over 65 have lost their 
supplemental health care because of what has happened here.
    Look, you know, we are talking about prescription drugs. 
You know, look. Health care in this country is on the back of 
the private sector. We are talking about drugs.
    Ms. Velazquez. Thank you. Thank you.
    Ms. Hemme?
    Ms. Hemme. Yes?
    Ms. Velazquez. Thank you very much for your testimony. I 
heard you loud and clear. We need to act, and we need to do it 
now.
    One of the issues that you raise is the lack of health 
care. This is a major issue for a small business to be able to 
retain workers. We passed an association health plan last year. 
I would encourage your industry to reach out to the Republican 
leadership because they are in control.
    We passed this legislation. We voted this legislation out 
from the House, and all we need is the leadership from the 
White House to get this legislation acted upon on the Senate 
side.
    Chairman Manzullo. Thank you.
    Congressman Chocola?
    Mr. Chocola. Thank you, Mr. Chairman. I would like to thank 
you all for joining us today.
    Mr. Ross, I used to be a businessman. I am now a 
politician, but I have not been here long enough to totally 
have forgotten what business was like.
    I was in the manufacturing business. We bought about 80,000 
to 100,000 tons of galvanized steel a year. I just talked to 
the folks there at that company the other day. They are seeing 
65 percent increases in their steel costs between January 1 and 
March 31. National Steel used to be headquartered in my 
district, so I have I guess some real life experience with this 
issue.
    Maybe, Mr. Atwell, you could help on this as well. What 
capacity is the worldwide steel industry operating at right 
now?
    Mr. Atwell. Almost 100 percent. It is a billion ton 
industry, 900 million to a billion tons. Maybe there are five 
to 10 million tons in Europe.
    I was marketing, and one of my clients said well, where is 
the excess capacity? We cannot find it. What you are seeing is 
really unprecedented.
    If I could just add, there is a lot of pain here, which 
nobody is happy about, but I think what you are seeing is 
probably the maximum amount of pain. I have a chart in my 
testimony that shows prices almost vertical. In the time I have 
been in the industry, it has never happened before.
    The process that people are dealing with now is short-term 
oriented. If they can figure out how to deal with this, prices 
would never go up for that long and never stay high very long, 
as you would probably remember, so I think we have to deal with 
this period, but essentially the industry is running flat out.
    Mr. Chocola. One other thing, Mr. Ross. You said you need 
about $40 a ton of EBITDA to cover. Since you do not have to 
bear the burden of some of these legacy costs, does that $40 
cover your future liabilities with your future pension 
requirements?
    Mr. Ross. Yes. We do have a defined contribution pension 
plan, and in fact we put in a VEBT, voluntary employee benefit 
trust. Even though we had no legal responsibility to the 
retirees, we felt a moral responsibility, so as our 
profitability gets over $30 some odd dollars a ton we begin 
sharing incremental profit with the VEBT to try to provide 
through the USWA some benefit, some recoupment of benefits to 
these old folks who have been unfortunately disadvantaged.
    Mr. Chocola. Is that the primary reason you stated that you 
think you are the low cost producer in the industry?
    Mr. Ross. Those reasons plus having bought the assets out 
of bankruptcy, we have less capital involved and, therefore, 
less borrowing expense. Those are the basic reasons.
    Mr. Chocola. Mr. Atwell, you are an equity analyst? Is that 
right?
    Mr. Atwell. Right.
    Mr. Chocola. What is your recommendation on steel industry 
stocks right now?
    Mr. Ross. Thank God you did not ask me that, Mr. 
Congressman.
    Mr. Atwell. Good question. We actually are recommending 
U.S. Steel. The reason is I am a pure capitalist I guess bottom 
line.
    Chairman Manzullo. Can I throw a disclaimer in here at this 
point so the SEC does not come after the Chairman or what?
    Mr. Atwell. Yes. I do not own any U.S. Steel, but actually 
I should say we have done business with them. We actually were 
just involved in an equity offering, so we probably have and 
will continue to try to get business from U.S. Steel.
    I would recommend U.S. Steel because they have a very 
strong position in natural resources, they are in balance in 
iron ore, and they are long in coke. Everybody else is a net 
buyer of iron ore and they are a net buyer of coke, so U.S. 
Steel is selling coke, and the rest of the industry is buying.
    U.S. Steel has a very strong position in Central Europe 
where they bought assets at 10 cents on the dollar, much like 
Mr. Ross did here in the United States. They are not buying 
much scrap. Unlike the mini mills, which have to pass on higher 
costs, they pass on higher prices, but do not have to pass on 
higher costs.
    The industry is a tough industry. Forty-five percent of the 
industry has gone bankrupt in the last five years. To add a 
point, this is not an industry that has historically gouged 
people. It has been failing. They are finally trying to earn a 
profit here. It is a very troubled industry, and they finally 
have a chance to make some profit.
    Basically it is a troubled industry. We think that is the 
most attractive of the names. I do not cover ISG, so I do not 
have an opinion on Mr. Ross' firm.
    Mr. Ross. Thank you.
    Mr. Chocola. I am almost out of time, so just real quickly. 
Mr. Stevens, welcome from a fellow Hoosier.
    Your recommendation for a solution is to impose 
restrictions on export of scrap steel. Is that correct?
    Mr. Stevens. Yes.
    Mr. Chocola. I was not sure if I understood the 
steelworkers' position. Do you share that opinion or not?
    Mr. Klinefelter. No, we do not at this time. We think that 
it is too early to do that. We think that this is a volatile 
thing. We think the price will come down.
    Mr. Stevens. Everybody talks about historical numbers, but 
I am worried about today and tomorrow. I do not care what 
happened 20 years ago or 30 years ago, what the historical 
average is. I am talking about our workers today. I am talking 
about the scrap surcharges that we are paying now.
    The steel bar business that I am in is related, but a 
little bit different than the steel sheet that most of the 
people here at this table are talking about. The bars that we 
take and we forge into high strength parts for vehicles, the 
wheels, the hubs that hold your wheels on, the transmissions, 
the suspension parts, truck-trailer parts, high strength 
applications, need good quality scrap.
    Although the high price of scrap is bringing more scrap out 
of the closets, so to speak, we have to talk about the quality 
of the scrap. You cannot take 1958 Oldsmobiles with big, chrome 
bumpers and put them into the mixes and come out with the 
quality steel that you need for precision steel bars and sheets 
today.
    One of the things that is happening that has not been 
mentioned is the prime, prime steel scrap that, for instance, 
the three big auto manufacturers--GM, Ford and Chrysler--are 
producing, they are making deals with the steel mills directly, 
and they are keeping it out of the market, so we do not even 
have that prime area.
    If we do not do something about the export of steel scrap, 
we all agree that China is out of control. That is a whole 
separate topic, but unless there is something to------.
    Chairman Manzullo. I do not think that is a separate topic 
because you are out of time.
    Mr. Stevens. Okay.
    Chairman Manzullo. Congresswoman Bordallo?
    Ms. Bordallo. Thank you very much, Mr. Chairman and our 
Ranking Member.
    I have two questions for Mr. Atwell of Morgan Stanley. I 
apologize for coming in late. I did not hear your testimony, so 
you may have covered it, but I will ask it again.
    Do you see the recent sharp increase in steel prices as a 
short-term bubble or problem? If so, would current world market 
conditions favor steel manufacturers in the United States in 
the effort to meet growing demands?
    Mr. Atwell. We are short on steel. We are a net importer of 
steel. We export about eight million tons, and we import about 
23 million tons, so we have not been self-sufficient in steel 
for quite some number of years.
    I look at what is happening now as temporary. There are 
three drivers--the weak dollar, very sharp growth in China and 
underspending in infrastructure. Once again I get back to the 
history. This has not been a very profitable industry. There 
has been a lack of capital spending, so equipment has not been 
maintained.
    What we are seeing is a great deal of stress on the 
business primarily emanating from China. China is growing like 
a weed, and they are putting a lot of stress on the global 
system. That is going to continue. You have seen metal prices 
across the board go up. Copper has almost doubled. Nickel has 
almost doubled. Aluminum is up sharply. Cobalt is up fourfold.
    I view this as somewhat of a short-term problem. You have 
seen an exacerbation of the situation by virtue of 
underspending. People just have not been prepared for this. I 
do look at it as a bubble.
    Ms. Bordallo. In the short term.
    Mr. Atwell. History would tell you that prices are going to 
peak within a couple of months. They are either going up, or 
they are going down. They are never stable.
    I think that if we leave the market alone it will solve 
this problem. Unfortunately, jobs are probably moving offshore 
because labor is cheaper elsewhere.
    Ms. Bordallo. I have another question that deals with the 
long-term effect of rising steel prices on manufacturing 
companies that require heavy steel input, especially in states 
like Michigan and Illinois.
    Will the rising cost of steel put them out of business, or 
will steel inflation in other manufacturing countries with less 
resources give our manufacturers any kind of an advantage?
    Mr. Atwell. You have probably seen the statistic. The cost 
of health care for an automobile is higher than the amount of 
steel in the automobile. The manufacturing consumers we have 
talked to here, they probably have a high percentage of their 
cost for steel, but in most products it is a very low 
percentage.
    Unfortunately, we will probably see the businesses move 
offshore, but in most products, unlike the people who have 
testified here, it is a rather small percentage of your total 
cost. I would say that we probably will lose jobs, but it is 
generally not a big percentage of the cost.
    The one thing that is happening in China, if you look at 
what is happening there, their labor cost is very low, their 
capital cost is low, and they can build capacity very quickly. 
In our country, six percent of our costs are commodities. Two-
thirds of our costs are labor.
    In China, basically they can afford to pay a lot more for 
raw materials because their labor is so much cheaper and their 
capital is so much cheaper, so the business model would tell 
you it is very tough to compete in the United States when you 
are a manufacturer. It is unfortunate. It is just a law of 
economics.
    Ms. Bordallo. Thank you.
    Thank you, Mr. Chairman.
    Chairman Manzullo. Thank you.
    Congressman Shuster?
    Mr. Shuster. Thank you, Mr. Chairman, and I thank all of 
you for being here today.
    I believe I have read that part of the problem is there is 
a shortage of coke in the world. Is that accurate? Can you talk 
a little bit about, somebody that may know a bit about it, why 
is there a shortage of coke? Is it because of capacity, or is 
it raw materials? What is the situation caused by?
    Mr. Atwell. As you may know, coke is a product that is made 
out of coal. You buy metallurgical coal, and you roast it, and 
you drive off the volatiles, and you end up with something 
called coke that goes into making steel.
    The steel industry has been very unprofitable. If we take 
National Steel, they usually would have to spend their 
depreciation to stay in business. They spent 10 percent of it. 
Depreciation was $200 million. They were spending $20 million a 
year.
    The industry had such a small profit level they could not 
afford to maintain their equipment. Coke is very dirty.
    Mr. Shuster. For coke?
    Mr. Atwell. For coke, yes. I mean in general, but coke in 
particular.
    Mr. Shuster. Right.
    Mr. Atwell. It costs around $300 million to build a coke 
oven battery. People just frankly could not afford it.
    China basically was dumping coke on the world market. They 
were the supplier of last resort. They dumped coke on the world 
market for $55. We paid $110 here. They ruined the business. No 
one could afford to compete with them.
    Suddenly supply and demand got tight. The price is now 
somewhere between $200 and $400. In China, you cannot get coke 
to save your life. We have not spent the money to build our 
coke ovens because the industry was very unprofitable. Half the 
industry has gone bankrupt in the last five years.
    What you have is an industry that was under stress suddenly 
is faced with a very tight market. That is really what is 
backing up a lot of this whole conversation is the tightness of 
coal. We are not sure there is going to be enough metallurgical 
coal to fuel the coke ovens once you have built them.
    Probably within two or three years there will be enough 
coke capacity, but we are not sure there is going to be enough 
coal to fire those up.
    Mr. Shuster. So right now it is capacity, but very well in 
the future it could be raw material?
    Mr. Atwell. It is capacity constrained, but then you are 
going to need the raw materials.
    Mr. Shuster. You said how much was it to build a coke 
facility?
    Mr. Atwell. It is about $300 million to build a million ton 
battery.
    Mr. Shuster. How much of that cost is driven by 
environmental regulation? Is that a tremendous problem there?
    Mr. Atwell. I am an equity analyst. I am guessing 20 
percent.
    Mr. Shuster. Is it similar to the refinery problems in this 
country, oil refineries? They have not built any because it is 
just too much burden to build them?
    Yes, sir?
    Mr. Klinefelter. Yes. The coke ovens are subject to Section 
112 of the Clean Air Act, which is the hazardous pollution 
section of the Act. Those standards are very restrictive in 
terms of public health, so I think it has been very difficult 
to meet those standards.
    I think the industry has probably done a very good job of 
getting as close as they possibly can, but they do add a 
considerable cost, the coke oven batteries.
    I think the other thing is that unfortunately many of our 
places where steel used to exist in Pittsburgh are really 
clean, and people in those communities say we do not want it. I 
mean, that is a fact.
    Mr. Shuster. Right.
    Mr. Atwell. Yes. The majority of your pollution problem in 
steel resides in the coke ovens. They are very dirty. The air 
is awful. If there is one thing you want to draw the line on it 
is coke ovens, so it is very, very difficult to get approval.
    If you are probably only rebuilding old batteries, it is 
very tough to get approval. We will probably never see another 
oil refinery built in this country, and coke ovens are 
extremely difficult to build.
    Mr. Shuster. As far as the situation with the escalating 
price of steel in this country, can you sort of divide it up 
into why it is under three sort of topics? The consolidation, 
that is part of it I know, but the world economy going up and 
this coke shortage.
    Would you be able to put a percentage of what is causing 
the biggest problem? Are all three equal?
    Mr. Atwell. Well, I would say the consolidation really has 
not contributed very much, to be honest with you because 
imports are down 30 percent, and exports are up 40 percent. 
Consolidation is healthy for the industry because it is going 
to hopefully save some of the capacity so I do not think that 
has really contributed.
    Really it all boils down to China. Eighty percent of what I 
do is try to figure out what is going on in China. What you 
have seen, just to give you some numbers, is in 1997 China 
produced 100 million tons of steel. They are now at about 240 
million tons of steel. We think they will be 270 million by the 
end of this year, 300 million by the end of next year, and 400 
million by the end of five years down the road, so they will 
have quadrupled their capacity.
    The world does not have the resource to deal with that. It 
is not a very profitable business. Capital has not been 
committed to it, so the world is suddenly suffering because of 
demand. We would not even have this conversation if it were not 
for China. China is pulling in raw materials in every single 
sector. They are pulling in every type of scrap, and it has 
caused prices to go up across the board. It really revolves 
around China.
    Mr. Klinefelter. Could I just add to that, Congressman?
    I think it is the tip of the iceberg. Right now if you look 
at China, 53 percent of the steel is going into construction. 
Fifty-three or 54 percent is going into construction. It has 
not even touched the automobile market, which is five percent 
right now of Chinese steel.
    We know by statistics that by the year 2006 they are going 
to be the fourth largest producer of automobiles in the world. 
Look, if you have 1.2 billion people, you know, you have low 
income, but you could end up with a middle class of 400 million 
people. Four hundred million people. That is a lot of cars and 
a lot of steel.
    Chairman Manzullo. Congresswoman Napolitano?
    Mr. Shuster. Thank you.
    Mrs. Napolitano. Thank you, Mr. Chair. Let me get up 
closer. I am kind of short.
    In listening to the testimony of all of you, I am struck by 
a couple of things. First of all, we have known for a few 
decades that the steel industry, the small manufacturing, had 
been hurting. Am I correct? I think most of you in small 
business understand where that has been.
    Have you taken any steps to inform and educate your 
Congress people about what is happening in your backyard? What 
has been the response? Anybody?
    Mr. Hickey. Congresswoman, my representative is Bill 
Lipinski in Chicago. Congressman Lipinski has been wonderful in 
our discussions on these issues. We have talked at length about 
the problems of unfair trade, dumped products, loss of 
manufacturing.
    You know, he certainly has tried very hard to work with all 
Administrations, the last Administration and the current 
Administration, to address some of these issues. All we keep 
asking for is let us enforce the trade laws. We do not get 
anybody here in any Administration that wants to talk about 
this.
    Mrs. Napolitano. Why do you think that is? Anybody?
    Mr. Hickey. Bring the former Secretary of the Treasury 
Reuben back and ask him.
    Mrs. Napolitano. No. I am------.
    Mr. Hickey. I do not know why. We cannot get an answer. We 
cannot get an answer.
    We ask them why they want to export the middle class, why 
they want to export manufacturing jobs from the United States. 
We cannot get an answer from the past Administration or the 
existing Administration.
    Mr. Klinefelter. Congresswoman, we have set ourselves on a 
low cost trajectory in this country. Zelwig, the Trade 
Ambassador, his favorite company is Wal-Mart. Let us just keep 
the prices down, keep the prices down, keep the prices down and 
trade away the good paying jobs because that is the way we 
should go.
    You know, it is the whole idea of the way the global trade 
situation is set up now, and it is not to our advantage in 
terms of jobs. I do not know. The only ones who are going to 
turn that around is if the society takes a different tact.
    I mean, these are policies. I mean, these are not laws of 
nature. These are things that can be changed. It takes the 
Congress of the United States and the Administration to do 
that, but it can be done.
    Mr. Stevens. Congresswoman, I have met with Senator Lugar, 
Senator Bayh and Congressman Mike Pence in our district. First 
of all, they have generally not been informed about the serious 
nature until I started meeting with them and bringing this 
information to them.
    We are getting support slowly, but surely. We do hear a lot 
of comments about well, we believe in free trade and fair 
trade, and I think most people in this room would believe in 
the principles of free trade and fair trade, but I also think 
that most people in this room, that if you take a look at the 
reality, anybody that thinks we have free trade and fair trade 
in the international market also has to believe in the tooth 
fairy.
    I mean, it is ridiculous what is out there, and as 
Americans we need to stand up and say enough is enough.
    Mrs. Napolitano. Why do you think then that the 
Administration does not want to enforce the lack of engagement 
into this debate, to go to the WTO and ask for the enforcement 
of China following the rules like we tried to? What is it? What 
is keeping us from doing that?
    Certainly in the vote, when we took the vote to give them 
most favored nation status, that did not play into the debate. 
Why was it not brought up and said look, it is hurting you?
    I get a little concerned because, number one, I found out 
from my businesses in my area a couple years ago, and we 
started a task force to find out where we were going with this. 
I brought it to the Chairman, and we have been bringing in the 
testimony.
    Until you speak up and join forces, this Administration is 
not going to do anything. We are losing the jobs. We are 
exporting our economy, and yet we are sitting here still saying 
where are you? Why are you not moving on this, Administration?
    Ms. Hemme. May I speak, Congresswoman?
    Mrs. Napolitano. Yes, ma'am.
    Ms. Hemme. First of all, Mr. Manzullo is our 
representative, so he has------.
    Mrs. Napolitano. He does a fabulous job.
    Ms. Hemme. He is absolutely wonderful. He spent a lot of 
time at this breakfast meeting that he discussed talking to the 
small business manufacturers in the Belvidere/ Rockford area. 
He has been addressing their needs the best that he can.
    One thing that I have found is that people do not have the 
funds to necessarily help their Congress people or to talk to 
them. They do not feel comfortable. They are just small 
business owners just trying to make a nickel. That causes them 
not to group together and band to go after this.
    I will tell you that my phone rang off the hook from the 
time--we have only known about this for three weeks, and I have 
been nonstop for three weeks on the phone with small, very 
small businesses. They are all concerned. They just do not know 
how to bring it.
    They do not know the process, and they do not understand 
it. All they know is they want to provide jobs for the people 
that work for them. They are very ethically based and morally 
based, and they just want to provide a good living. Not even a 
great one. These are working class people here, not even 
necessarily middle class.
    Mrs. Napolitano. Thank you.
    Mr. Chair, I request permission to enter into the record a 
letter that is being formulated by my small business 
manufacturers to enter into the record because apparently they 
were supposed to get it to you. I do not know if you have 
received it.
    Chairman Manzullo. Without objection. of course.
    Mrs. Napolitano. Thank you. Thank you.
    Chairman Manzullo. I have a couple questions here. Mr. 
Atwell, first of all with regard to scrap metal, does the 
United States have a trade surplus in that?
    Mr. Atwell. Yes. We are a net exporter of scrap. I think we 
export maybe about 20 percent of our scrap, something like 
that. I think we are about a 60 million ton nation, and we 
export 12 million tons right now. It does go up and down.
    Chairman Manzullo. How much did we import?
    Mr. Atwell. Virtually very little.
    Chairman Manzullo. Okay. Emanuel, you made a statement that 
no one seized upon, although there was an interesting 
discourse. You know, what a great moment in time to have this 
discourse taking place.
    You said there is no shortage of scrap in the United 
States. Someone mentioned a 1958 Buick, and that was the 
machine that had the diamond teeth. Do you remember? Somebody 
called in the chromemobile. Did you mention that? Was that Bob?
    Emanuel, talk to us about that. A lot of people said there 
is a shortage of scrap. There is no shortage of scrap? 
Obviously there is a shortage of scrap. You say there is no 
shortage of scrap. Talk to us about it.
    Mr. Bodner. There are conflicting reports obviously. We 
heard them this morning. There is no shortage of scrap, sir.
    This is just me speaking and our industry as well. It is 
not just me. It is the industry. We are concerned about 
manufacturing in the United States. The manufacturing sector is 
most important for the creation of jobs, the creation of the 
products, the creation of the wealth of our country. There is 
no question about that.
    With the decrease in manufacturing in the United States, 
there is a grade of scrap which is produced from manufacturing. 
It is logical, therefore, that with certain grades of scrap, 
because the manufacturing base has decreased, there is a 
decrease in that grade of material. That is on the one hand.
    On the other hand, though, the industry is resilient, and 
it produces a scrap. It will seek the available resources and 
produce a scrap and produce a scrap of quality, of consistency 
and of durability that will continue to meet the demands of the 
steelmaker.
    You have heard experts on the steel side. I am going to 
speak from the scrap side. If I am wrong, I know I will be 
corrected. You make some steel just like you make a cake. You 
have some egg, you have some flour, you have a little salt, you 
have some pepper, and if you like chocolate chips you might put 
chocolate chips.
    The same thing when you are making some steel. You add 
different varieties of scrap, different industrial 
specifications of scrap. You also add coke. If you are making 
some specialty grades, you add some specialty material.
    This is history. This is nothing new. I go back again with 
my original testimony. As far as I know, as far as we are 
aware, there is no mill, there is no consumer in the United 
States, that has gone without scrap that needs scrap.
    Chairman Manzullo. Okay. Let me hold you right there. Does 
anybody disagree with that statement?
    Mr. Stevens, is it your industry that represents the mini 
mills?
    Mr. Stevens. No. We represent consumers that buy from the 
mini mills.
    Chairman Manzullo. Okay.
    Mr. Stevens. I cannot speak for the mini mills other than 
to say that I know that the scrap situation is very tight, and 
this tight situation is what, together with the exports, is 
driving up the prices.
    Chairman Manzullo. The mini prices are saying there is a 
shortage of scrap?
    Mr. Stevens. There is a tight supply.
    Chairman Manzullo. Mr. Atwell, is that correct?
    Mr. Atwell. I have never heard them say there is a 
shortage. It is very tight, and it is a market that clears so 
what has happened is scrap is being pulled offshore. There is a 
shortage of coke and iron ore, and so scrap has been pulled 
offshore.
    Freight rates are up sevenfold. If you are making steel in 
Europe, you need two and a half tons of raw material to make a 
ton of steel. If you bring in scrap, you need 1.1 tons of scrap 
to make a ton of steel. Freight rates have gone up from $5 to 
$25, so a lot of this relates to the freight shortage.
    We are seeing the dry bulk freight is backed up loading 
iron ore in Australia and unloading it in China. Fifteen 
percent of the freight is tied up in the world in ports because 
of congestion, so that has raised the freight rates sevenfold.
    This whole thing backs up and is very circular, so I would 
not say there is a shortage. I would say it is extremely tight, 
and the person willing to pay the most gets the scrap.
    Chairman Manzullo. I have another question, but, Mrs. 
Velazquez, did you want to have some more questions? I do not 
want to take your time.
    Ms. Velazquez. No, Mr. Chairman.
    Chairman Manzullo. Mr. Shuster, did you have any more 
questions you wanted to ask?
    Mr. Shuster. No.
    Chairman Manzullo. I want to ask Les a question. Les, 
before the tariffs went into effect, you used to buy a 
substantial amount of specialty steel for your barrels from 
South Korea because you had a problem with the American mills 
were not using the special treatment to make these barrels as I 
guess nonpermeable as possible.
    What has happened with that supply?
    Mr. Trilla. We bought from Korea due to cleanliness issues, 
and we were able to lower our cost for high grade drums going 
into food products and hazardous products.
    We use the specialty steel, as you recall, to produce a 
higher grade, higher quality drum for better coatings, et 
cetera, et cetera. We always were a domestic buyer, but we had 
to go offshore for quality of cleanliness.
    Chairman Manzullo. And you paid more for that, did you not?
    Mr. Trilla. I paid more for the steel, right. They will not 
come back.
    You know, contrary to what we are hearing from the panel 
here, I am requesting that the government relax all the quotas 
and all the restrictions in this shortage period of time. You 
know, we allow Korea, we allow these other countries that may 
have been criminal, as they were called earlier, to come back 
into our marketplace because in the world market, the world 
market for my product, and I just returned this weekend from an 
international meeting in Spain. Tough duty, but I just 
returned.
    We compared pricing as we do in our raw materials, et 
cetera, and the product that goes into our product costs right 
around $400 to $450 a ton in Europe and the Far East, and now 
in the United States it is going to be over $800 a ton. I would 
like to know the answer to that. Why do we have to pay $800 a 
ton if we have consolidation, we have government intervention, 
and I do not want to pick on Mr. Wilbur who is gone, but it is 
government subsidized.
    If his industry does not have the hospitalization or the 
pension liabilities that my company has and every other company 
has, that is government intervention just like China.
    We do not have the luxury of small businesses that have 
that. Bankruptcy worked in his industry. Thank you. He paid 
less for his company. The steel industry now has lower costs 
because of all this government subsidy.
    What about us? Let us open it up to the world market. Let 
us get the world market cooking again. We could take action 
against China, but let the doors open up.
    Chairman Manzullo. Mr. Klinefelter, you had a response?
    Mr. Klinefelter. Yes. In terms of this government subsidy 
for the retirees' health care and pensions, PBGC is a 
government corporation that the companies pay fees to in order 
to provide the benefits, as you know, for these pension plans 
when they go bankrupt, so it is not the government that is 
proving these benefits. It is what is collected from the 
corporations who are members of the PBGC.
    As for health care, there is no health care. All there is 
is medicare. If we want to give up medicare, I suppose there is 
that, but there is no government subsidy for any of the 250,000 
retirees who have lost their health care in this situation.
    Mr. Trilla. I agree with that statement, Mr. Chairman. I am 
not saying that the employees--they got hurt. The corporations, 
U.S. Steel, ISG, et cetera, are benefits of these government 
subsidies which add to the profitability, which we hear we 
should buy U.S. Steel stock, and I agree with that, but, you 
know, the small manufacturer, the jobs that we place. You need 
employees.
    As we heard earlier, I have hospitalization costs for----
--.
    Chairman Manzullo. You still work for a union, do you not?
    Mr. Trilla. The second operation I bought in St. Louis was 
non-union. We put a union in there. We run union shops. We 
believe in union shops, but, you know, our people are getting 
hurt.
    Chairman Manzullo. He is a Republican, Bill. I just want 
you to know that.
    Mr. Trilla. Yes. I am a Republican.
    Mr. Klinefelter. Some of our best employees are 
Republicans.
    Chairman Manzullo. There you are. You bet.
    Mr. Klinefelter. Including U.S. Steel.
    Mr. Trilla. But still, you know, we as a small industry, a 
small world out here, which probably represents 60 or 70 
percent of gross national product, our employees are suffering, 
and the big companies--once again, it is a big industry, and I 
am sorry I am not a big industry.
    They are getting all the advantages, all the abilities. 
They get all the steel they want. My biggest competitor gets 
all the steel it wants from the gentleman that left the room, 
and he does not have a salesman that calls in Chicago.
    Chairman Manzullo. Mr. Stevens?
    Mr. Stevens. Gentlemen, the whole program, as Mr. Atwell 
talked about what happened in the coke industry. China builds 
their coke industry. They sell the product at half the world 
price.
    They drive the American manufacturers out of business, and 
then they come back. There is nobody left in the United States, 
and we get into this situation which it is a vicious circle 
that drives more jobs offshore.
    The same thing that Bill just mentioned about what is 
happening with all of the steel mills being built and the 
capacity in China with bad credit. They already have $500 
billion of bad debt that they admit to, and everybody estimates 
it is double that. They are still giving credit out to anybody 
that can breathe with no hope of it getting paid back.
    This is the big problem. We are allowing this situation to 
expand where it is going to put everybody in the whole damn 
world out of business because they are out of control.
    Chairman Manzullo. Mr. Bodner, and then I want to go ahead 
and conclude. Go ahead.
    Mr. Bodner. I would just like to remind everyone here that 
we certainly understand the difficulty of the industry, but do 
not forget the scrap industry, that while scrap pricing could 
be somewhat high at this point, that our industry has come off 
since the 1980s. That was a very hard period of time.
    Historically, scrap prices are low. There are some spikes, 
as was discussed here today. Those are already being corrected. 
The answer is not inputting controls on scrap. That is clear. 
The evidence I have not seen today would suggest that that 
would be our solution.
    Chairman Manzullo. This has been a fascinating panel with 
the major players being involved in it.
    I want to take the opportunity to thank you for coming to 
Washington, for sharing your concerns with us. It has been 
extremely enlightening. I enjoyed the exchanges on it.
    This hearing is adjourned.
    [Whereupon, at 12:45 p.m. the Committee was adjourned.]

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