Industrial Inertia. A Major Factor in the Location of the Steel Industry in the United States

American Geographical Society

Industrial Inertia. A Major Factor in the Location of the Steel Industry in the United StatesAuthor(s): Allan RodgersSource: Geographical Review, Vol. 42, No. 1 (Jan., 1952), pp. 56-66Published by: American Geographical SocietyStable URL: http://www.jstor.org/stable/211251 .

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INDUSTRIAL INERTIA-A MAJOR FACTOR IN THE LOCATION OF THE STEEL INDUSTRY

IN THE UNITED STATES

ALLAN RODGERS

T 1 1HE recently announced plans of the United States steel industry for the next two years indicate an investment of several billion dollars in the expansion of existing plants and the construction of new integrated

mills. A proportionately heavy share of this investment is being allocated to

the so-called "deficit" steel producing areas, which include the Eastern dis-

trict, the South, and the Detroit area. Particular emphasis is placed on plant

construction in the northern Atlantic seaboard, where two new integrated plants (one, the United States Steel mill at Morrisville, Pa., is now well

under way) are to be built, and possibly two others. The implementation of

these expansion plans will represent an important shift in the location pattern

of the steel industry in the United States. Four probable factors have led to the construction of these plants: the

need for decentralization of the highly concentrated steel industry on the

ground of national security; the need for new facilities to meet the demands

of our expanding defense program; the imminent decline in our Upper Lakes

iron-ore reserves, which has prompted the development of foreign sources

such as those in Venezuela and Labrador, more economically usable in east-

coast plants; and, finally, the enforced changes in the pricing systems used

in the steel industry, which have made it extremely difficult for steel mills

in the older producing districts such as Pittsburgh and Youngstown to com-

pete in markets on the Atlantic seaboard and the South. Certainly the most

important result of the new program will be a greater conformance of steel

production and steel consumption. Nevertheless, even with these impending

shifts, the bulk of our steel industry will remain highly concentrated within

a relatively small area. The reasons for this concentration have occupied the attention of geogra-

phers and economists alike for the past few decades,' yet our understanding of the patterns is still imperfect. This paper purposes to investigate the effect

I For example, Richard Hartshorne: Location Factors in the Iron and Steel Industry, Econi. Geogr.,

Vol. 4, I928, pp. 24I-252; idem: The Iron and Steel Industry of the United States, Journi. of Geogr.,

Vol. 28, I929, pp. I33-I53; Andreas Pred6hl: Die 6rtliche Verteilung der amerikanischen Eisen- und

> DR. RODGERS is assistant professor in the Division of Geography at the Pennsylvania State College. In January, 1948, he contributed an article on "The Manchurian Iron and Steel Industry and Its Resource Base" to the Geographical Review.



INDUSTRIAL INERTIA IN THE STEEL INDUSTRY 57

of industrial inertia, as evidenced by the basing-point system of pricing, on the location patterns of the steel industry in the United States.

FACTORS IN THE LOCATION OF STEEL PRODUCTION

The problem of regional location of steel production is not fundamentally different from that in other industries, for the desired site is one at which costs of production plus marketing costs will be at a minimurm. In the steel industry these can be largely narrowed down to transportation costs, since costs for the assembly of raw materials and shipment of the finished products to markets are of greater magnitude than other cost differentials. Although labor costs may be as high as 25 per cent2 of the total cost of the finished product, they are unimportant in the location pattern, because regional differences in labor costs per unit of output are minor today and are being rapidly eliminated by unionization and training.

The production of iron and steel requires a great many raw materials, but the only ones consumed in bulk are iron ore, coal, scrap, and fluxing stone (limestone and dolomite). Consumption of flux is normally only about one-third that of coal or ore, and it is so widely distributed that it plays a minor role in the location pattern. On the other hand, more scrap is consumed than any other major raw material, yet scrap too is of secondary importance as a location factor. This is because home or plant scrap is largely used in the open-hearth furnace rather than purchased scrap. Analysis can therefore be confined to transportation costs for the assembly, at the mill, of coal and iron ore and for the shipment of finished products to the fabricating centers.

The relative importance of coal and iron ore depends on the location of the producing and consuming regions, the comparative quantities transported, and the comparative freight rates.

It is evident from Table I that if steel location were determnined only by the quantities of materials handled, the industry would be largely ori- ented to coal and ore sites. However, when the factor of comparative freight rates is taken into account (Table II), the relative importance is reversed.

The weighted transportation costs indicate that the transportation of

Stahlindustrie, Weltwirtschaftiches Archiv, Vol. 27, I928, PP. 239292,; Walter Isard: Some Locational Factors in the Iron and Steel Industry since the Early Nineteenth Century, Jourus. of Polit. Econ., Vol. 56, 1948, PP. 203-2I7; Walter Isard and William Capron: The Future Locational Pattern of Iron and Steel Production in the United States, ibid., Vol. 57, i949, pp. ii8-I33.

2 See "Economics of Iron and Steel Transportation," Board of Investigation and Research, 79th Con gr., ist Sess., Senate Doc. 8O, I945, PP. I27-I28, for a computation of wage costs as of the I939 Census of Manufactures.



58 THE GEOGRAPHICAL REVIEW

steel to the fabricating centers should account for more than half of all transportation costs in other words, the market should be the key locational force. This conclusion is strengthened by a consideration of the consumption of purchased scrap. Although only about one-third of a ton of purchased scrap is consumed in the production of one ton of steel products, the amount varies with availability and costs, and surplus supplies of cheap scrap are

TABLE I-MATERIALS TRANSPORTED PER TON OF STEEL PRODUCTS

AMOUNTa % OF MATERIAL (IIt toils) TOTAL

Coal I.42 34 Iron ore I 74 42 Finished steel products I .00 24

Total materials handled 4. i6 I00

a Coal and iron ore handled are equivalent to materials consumed per ton of steel products. Com- puted from data based on an approximate consumption of 50 per cent pig iron and 50 per cent purchased and home scrap in the open-hearth furnace.

TABLE II-WEIGHTED TRANSPORTATION COSTS OF STEEL PRODUCTS

AMOUNT COSTa WEIGHTED % OF TOTAL MATERIAL (Itn toils) PER TON-MILE COST COST

Coal I .42 I .04 I4,768 25.7

Iron ore I.74 0.70 I2,I80 2I.I

Finished steel products I .00 3 .o6 30,600 53 .2

Total transportation cost 57,548 I00.0

a Computed from data in "Economics of Iron and Steel Transportation" [see text footnote 2],

pp. I20-I26. The computation is based on an average of ton-mile costs for the shipment of coal and iron ore to the various steel producing centers and finished steel to representative consuming areas by com- bined rail and water routes. This method has been checked with a computation of freight revenue per ton for each of these commodities, and the same general relationship was found to hold true.

normally available only at old-established market centers. Ultimately, therefore, the market should have more than double the attractive force of either coal or iron ore. As a result, it might be expected that these transportation cost differentials would be reflected in the steel production pattern, with the market exercising a dominant attractive force for plant location.

PRODUCTION AND CONSUMPTION PATTERNS

In the steel production pattern (Fig. i) the high degree of concentration of the industry is apparent. The Pittsburgh-Cleveland-Buffalo triangle and its satellites contain more than half the nation's hot rolled products capacity. Comparison with the steel consumption pattern (Fig. 2) reveals an obvious disconformity. Although markets for hot rolled steel products are still highly concentrated because these products are primarily producers' rather than




HOT ROLLED STEEL PRODUCTS PERCENTAGES OF NATIONAL CAPACITY 2 0

JAN U ARY 1, 19 48 11. - , 5_ o 05

FIG. I

0~~~~~

0~~~~~ 0 03-

C 0~~~~~~~~~~~~~~~~~~~~~~~~1.

. . .................... .o . P E C E N T , ..

10.0

HOT ROLLED STEEL PRODUCTS- 2r0

PERCENTAGES OF NATIONAL CONSUMPTION 2.0 ,,. ..,... _ ~~~~~~~~~~* oa

FIG. 2-Wide spacing indicates all other consumption within the various states. Consumption computed from Census of Manufactures, I947; Preliminary Report, Ser. MCioo-io, Dec. 30, I949, and various state data distributed by consuming districts, using information provided by Iron Age in its study "Steel Consumption in I948" (Vol. I63, 1949, PP. 72A-72H).



6o THE GEOGRAPHICAL REVIEW

consumers' goods, there is a far wider dispersion than in steel production. But the over-all patterns fail to present the complete picture, because the degree of disparity varies with the product. For example, the Pittsburgh- Cleveland-Buffalo region produces more than three-quarters of our pipe and tube output and more than half of our output of sheets and strip yet con- sumes only about one-tenth of the production of pipe and tubes and less than one-eighth of the production of sheets and strip.

One of the principal reasons for the lack of conformity between production and consumption is industrial inertia. Steel production requires extremely heavy investments in specialized and relatively permanent capital equipment; construction costs of an integrated mill run as high as three hundred dollars per ton of steel-ingot capacity.3 For this reason the industry offered strong resistance to locational change when existing equipment was not fully depreciated. Yet the success of the established mills depended in

large measure on their ability to sell at a profit in the new outlying market centers. To solve this problem, the industry adopted a basing-point system of pricing, which enabled mills in the older-established centers around Pittsburgh to penetrate the new market areas and yet postpone construction there almost indefinitely. This pricing practice was in use for more than half a century, with major effects on the location of steel production and in turn on the nation's over-all industrial location pattern.

THE SINGLE-BASING-POINT SYSTEM

The single-basing-point system, known as "Pittsburgh plus," was in

force during the first quarter of this century and was modified only in re-

sponse to a Federal Trade Commission order in I924. Under this system steel was sold at the Pittsburgh base price plus the rail freight from Pittsburgh to the consuming center, regardless of the location of the producing plant. As a result Pittsburgh producers were able to quote the same prices as

competitors whose plants were closer to the new market centers. Thus

geographical position was eliminated as a substantial element in competition, and distant markets were opened to producers in the older districts on the

basis of an approximate price parity with competitors elsewhere. Production tended to expand in the older districts, and the industry was enabled to minimize the potential costs of building new mills in outlying market areas.

The higher prices prevailing at outlying producing points restricted demand in their areas. Although centers such as Chicago obtained a maxi-

3 U. S. Nlews anid World Report, Dec. I, I950, p. 35.



INDUSTRIAL INERTIA IN THE STEEL INDUSTRY 6I

mum yield from the so-called "phantom freight" they collected, which possibly protected their infant industry, when once the regional demand was satisfied and they were forced to sell toward Pittsburgh, their returns were reduced both by the lower delivered prices and by rising transportation costs. Moreover, fabricators were attracted to the older districts, primarily because steel costs were lowest, but also because location near Pittsburgh

TABLE III -NATIONAL PRODUCTION CAPACITY FOR, AND CONSUMPTION OF, HOT ROLLED STEEL PRODUCTS

(In percentages)

Con- Sur- Ca- Con- Sur- Ca- Con- Sur- Ca- sump- plus pacityb sump- plus pacityb sump- plus

Region and State pacitya tiona or Jan. i, tionC or Jan. i, tiond or I920 I9I9-2I Deficit I938 I937 Deficit I948 I947 Deficit

Mountain and Far West I.4 4.0 -2.6 2.4 6.9 -4.5 5.6 8.6 -3.0 California 0.0 2.3 -2.3 I.0 4.7 -3.7 2.6 5.4 -2.8

Central 38.9 49.5 -io.6 46.6 5I.5 -5.I 46.3 5I.2 -4.9 Illinois 7.3 I2.9 -5.6 7.8 II.3 -3.5 8.2 i i.6 -3.4 Indiana I0.7 5.7 +5-0 II.9 4.5 +7.4 I2.6 5.l +7.5 Michigan 0.0 8.5 -8.5 5.I I6.2 -II.I 3.6 I3.5 -9.9 Ohio I9.8 I2.6 +7.2 20.3 I2.I +8.2 2I.0 I0.9 +I0.I

South and Southwest 2.4 5.9 -3.5 5.I I0.4 -5.3 6.3 II.5 -5.2 Alabama I.4 o.8 +o.6 3.2 I.2 +2.0 4.3 I.5 +2.8

Middle Atlantic 56.9 36.I +20.8 45.3 28.2 +I7.I 4I.2 25.I +I6.1 West Virginia 2.4 o.8 +I.6 3.5 I.4 +2.I 2.8 I.4 +I.4 Pennsylvania 49.0 22.3 +26.7 32.7 I7.0 +I5.7 28.0 I3.8 +I4.2 Maryland and D. C. I.4 I.5 -0.I 3.6 I.8 +I.8 5. I I.9 +3.2 New York 3.7 7.6 -3.9 4-7 5.7 -I.0 4.6 5.3 -0.7

New England 0.4 4-5. -4.I o.6 3.0 -2.4 o.6 3.6 -3.0 Total IOO.O I00.0 IOO.O IOO.O IOO.O IOO.O

a C. R. Daugherty, M. G. de Chazeau, and S. S. Stratton: Economics of the Iron and Steel Industry (2 vols., New York and London, I937), Vol. i, p. 62. Computed and corrected from Chart 9.

b From directories of the iron and steel works of the United States and Canada, I938 and I948. c Computed from unpublished data compiled by Marion Worthing from TNEC Schedule A, which

was corrected by Miss Worthing from data reported by the American Iron and Steel Institute for ship- ments of steel products during I937.

d Census of Manufactures, I947: Preliminary Rept., Ser. MCioo-io, Dec. 30, I949. Compiled and corrected by the method described on page 255 of Walter Isard and J. H. Cumberland: New England as a Possible Location for an Integrated Iron and Steel Works, Econl. Geogr., Vol. 26, I950, pp. 245-259.

meant the widest possible radius of distribution for steel products. Thus the single-basing-point system favored the location of fabrication in the Pitts- burgh district and in turn stimulated increased development of the basic steel industry there.

Table III is a comparison between regional capacity for producing hot rolled steel products and consumption of these products in I920, 1937, and I947. The figures for I920 confirm the conclusions stressed above; for although the first two decades of this century were characterized by continu- ing movement of population and markets westward, the steel industry did not reorient its productive capacity to serve these outlying markets. The degree of concentration of steel production as compared with consumption




is best illustrated by the fact that in I924 the Pittsburgh-Cleveland-Buffalo region produced about 6o per cent of the national output yet probably con-

sumed less than one-fourth of this total.4

THE MULTIPLE-BASING-POINT SYSTEM

After Pittsburgh plus was declared illegal, the steel industry adopted a multiple-basing-point system of pricing. Under the new system, the number of basing points was increased, and differentials above the Pittsburgh base price were established at these points.5

The establishment of additional basing points undoubtedly diminished the advantages accruing to producers in the Pittsburgh district and provided a great incentive for both production and fabrication in the outlying market areas. The advantages that had rested solely with Pittsburgh and its satellites were now spread somewhat more evenly over a small group of centers. Nevertheless, although competition was intensified and the market areas of the older centers were contracted, the Pittsburgh district still remained in the distinctly favorable position of maintaining the lowest base price. Delivered prices were still kept high enough to make it profitable for Pittsburgh producers to compete in the outlying market areas at a profit without building facilities there.

Despite these changes, there was no general association of basing points and producing points, and Pittsburgh remained the starting point for most basing-point calculations. The delayed establishment of many producing points as basing points resulted in higher delivered prices in their areas, so that demand was restricted and the growth of new capacity in the outlying market areas was retarded.

From Table III it is evident that by I937 there had been significant shifts in the relative importance of the steel producing districts (Fig. 3). Certainly the most important change was the decline in relative importance of Pennsylvania. In I920 this state produced about half of the nation's steel products, in I937 less than one-third. Concurrently there was a rise in

4 Capacities from Iroui Age, Jan. I, I925; consumption based on a rough approximation from

various data. 5 If the base price of pipe was $60 a ton at Gary, and the freight rate to Houston was Sio a ton,

and that combination was the lowest from all basing points, then all steel sellers regardless of their location

would have to sell pipe in Houston at $70 a ton. If the base price at Pittsburgh was also $6o, and the

freight rate to Houston was $SI5 a ton, then the Pittsburgh producer would realize a mill net yield of

$55 (delivered price $70 minus freight sI5). This lower yield on the part of the Pittsburgh producers is

called "freight absorption." However, normally the Gary price was set higher than that at Pittsburgh,

so that freight absorption might be much less. In other words, the price was still set high enough so that

Pittsburgh mills could compete in the distant markets at a profit without building new facilities there.




0

PER CENT

0 0

5.0

HOT ROLLED STEEL PRODUCTS 2.0 PERCENTAGES OF NATIONAL CAPACITY 20

1938 0.5

FIG. 3

0~~~~~~~~~ 0

1947~~~ 0>*SRLSPOUTO \ 0 0

0

0 ~~~~~~~~~~~~PER CENT

.0~~~~~~~~~~~~~~~~~

0~~~~~~~~~~~~~~~~~~01.

* 50 SURPLUS OR DEFICIT PRODUCTION OF ROLLED STEEL PRODUCTS BY CONSUMING DISTRICTS 0 20

1947 0SURPLUS PRODUCTION 0 05 0 DEFICIT PRODUCTION 0f

FIG. 4-Important surplus and deficit districts are emphasized by use of plus or minus symbols.




production in the outlying centers. However, although production in the deficit areas increased markedly, it barely kept pace with the rise in consumption in these areas, so that the over-all pattern did not change greatly; there was still a disparity between production and consumption of steel.

But for the exigencies created by the last war the production pattern might have continued relatively unchanged. The urgent need in the South and West for steel for ship construction, armaments, and so on forced an expansion of production there. About one-fourth of a program of more than two billion dollars was devoted to new construction in these hitherto neglected areas. Large integrated establishments were created at Fontana, Calif., at Provo, Utah, and at Houston, Tex., and there were increases in capacity in the Birmingham district. As a result of these changes plus postwar expansion programs, the regional patterns of production and consumption of steel altered significantly (Table III).

The Far West and the Mountain States, which had experienced a major boom in production during the war, in I947 consumed almost 9 per cent of the nation's output of rolled steel products and produced almost two- thirds of its own requirements. The South and Southeast, however, although its production had increased during the war, still produced only about half of its needs. The relative position of the Central district remained almost constant. There was still no significant output of steel in New England, which in I947 was producing only one-sixth of its requirements. The Middle Atlantic district remained the only surplus area in the country, though its share of the nation's output had decreased at the expense of the South and the West.

F. 0. B. MILL PRICING AND THE FUTURE

In I948 the basing-point system was declared illegal by the Supreme Court, and subsequently the various steel companies adopted an ?o.b. mill system of pricing. Students of the basing-point problem believe that the Supreme Court ruling did not prohibit freight absorption. It is expected that with the new political realignment in Congress this practice will be legally sanctioned, so that a modified form of basing-point pricing will probably return. Under the ?o.b. pricing system each producing region has had a competitive advantage within a relatively limited area. Therefore, mills in areas of surplus capacity, such as Pittsburgh and Youngstown, have made determined efforts to cultivate and expand local markets. These markets, however, can never absorb the total output of such centers. Witness the




Youngstown district, which normally produces about one-tenth of the nation's steel output yet absorbs only about one-eighth of its own production. Mills in such an area must seek markets elsewhere, and to do so they must absorb freight. However, freight absorption has become more difficult because of successive rises in freight rates during the past few years, so that on many standard products the amount of freight that must be absorbed is probably too great to warrant penetration of distant markets. The result has been an increasing tendency toward specialization in the more highly finished grades of steel, since the larger margin of profit permits mills to absorb larger amounts of freight. Normally there is only a limited market for such high-priced products, but today the shortage of steel has enabled the mills to force them on fabricators who previously had purchased only standard grades of steel. Nevertheless, it seems probable that the ultimate effect of the new pricing system will be serious for areas whose capacity is more than the needs of their local consuming areas.

Undoubtedly the new pricing system will promote a greater dispersion of the industry and a greater accordance of steel production with the market. Dispersion will be further stimulated by an expected spread of fabrication away from the older basing-point centers. In addition, the attraction of the market will be augmented by such factors as the increased use of foreign ores induced by the prospective decline in the Upper Lakes high-grade iron- ore production, commercial development of continuous casting of steel, which will reduce the costs of plant construction, and fuel economies made possible by the use of oxygen and enriched air in the blast furnaces, open hearths, and Bessemer converters.

The dispersal of production will not be precipitate; for it is uneconomic to locate a fully integrated mill with a capacity great enough to benefit from the economies of large-scale production in regions whose demand is too small to absorb its output. Inadequate consumption may therefore be the major limiting factor in the construction of new capacity in the outlying market areas. However, the increased spread of production that has taken place in the last decade makes it no longer necessary to construct new plants in such areas at the excessive costs mentioned earlier, since expansion can be effected by additions to present capacity at considerably lower costs per unit of output. An analysis of the data presented in Table III and Figure 4 would seem to indicate that additions may be expected in the Detroit area, in the South and Far West, and on the Atlantic seaboard. This conclusion is




strengthened by the announced expansion programs of the major steel companies (Table IV).

It seems apparent, then, that industrial inertia has served to de-emphasize the importance of markets as a locational force in the steel industry. Recent

TABLE IV-PROJECTED REGIONAL INCREASE IN STEEL-INGOT CAPACITY, I95 I-I953 *

% OF % OF DISTRICT INCREASE TOTAL NATIONAL CAPACITY

(In tons) INCREASE I948

Eastern 4,746 23.2 I i.6 Cleveland-Detroit-Buffalo 3,552 I7.3 I2.7 Pittsburgh-Youngstown-Wheeling 4,84I 23.6 35.5 Other Ohio, Indiana, and Kentucky I,543 7.5 5.9 Chicago-Gary 2,232 I0.9 I8.6 St. Louis-Kansas City 565 2.8 I.5 South, including Texas 2,275 II.I 4.8 West 745 3.6 5.6

Total 20,499 I00.0 96.2

* Source: Iron Age, Feb. I, I95I, P. I22; Steel, Apr. 23, I95I, P. 43; New York Times, June 9, I95I,

P. 26, and Sept. 6, I95I, p. SI. Some of these increases will not be completed until early I953. Although these figures include the new United States Steel plant at Morrisville, Pa., and the National Steel mill at Paulsboro, N. J. (both on the Delaware River), they do not include the proposed plants at New London, Conn., and the Barium Steel Corporation plant at Phoenixville, Pa. Completion of these facilities would add more than two and a quarter million tons to the capacity of the Eastern district.

changes in pricing methods plus the requirements of our defense program will undoubtedly promote a greater accordance of production and consumption. As the industry expands its capacity and replaces obsolete equipment, there will probably be a greater proportionate expenditure in the newer market centers, and close scrutiny will be made of existing equipment in the areas of surplus capacity.



Industrial Inertia. A Major Factor in the Location of the Steel Industry in the United States

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