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Testimony of Joseph D. Russo, President
IPSCO Steel Inc.
1770 Bill Sharp Boulevard
Muscatine, Iowa 52761
(319) 381-5333
____________________

Written Testimony
Before the House Committee on Banking and Financial Services
February 3, 1998
11:00 a.m.
Room 2128 Rayburn House Office Building

 

Good morning Chairman Leach and other Members of the House Banking and Financial Services Committee. My name is Joe Russo and I am President of IPSCO Steel Inc. U.S. We operate a new 1.2 million ton per year steel mini-mill in Montpelier, Iowa that produces flat plate and hot-rolled steel coils. We have invested $450 million in land, buildings, equipment and working capital for this greenfield facility. Our sister company, IPSCO Tubulars Inc., operates a pipe facility in Camanche, Iowa and a pipe mill in Geneva, Nebraska whose combined production capacity is 345,000 tons per year. It is also in the process of constructing a facility with an annual capacity of 300,000 tons per year in Blytheville, Arkansas. In addition, another sister company PaperCal Steel Co. operates a 200,000 ton per year coil processing facility in St. Paul, Minnesota. We directly employ between 800 and 1000 employees in these operations and create thousands of additional jobs through the construction, supply of materials, services, and transportation of products to and from our mills.

We are members of the 48 member American Iron and Steel Institute (AISI), whose 36 U.S. members represent about two-thirds of U.S. steel production, the Steel Manufacturers Association (SMA) a 59 member organization that accounts for virtually 100% of electric furnace minimill production in the U.S. and the Committee on Pipe and Tube Imports ("CPTI"), a twenty nine member organization of U.S. steel pipe and tube producers that represents about 80% of pipe and tube production. The leadership of these organizations have approved our testimony to also be on behalf of and represent the current views of these organizations.

This morning I appear before the Committee to express our views about the Asian financial crisis and its potential impact on the steel industry.

Mr. Chairman and members of the Committee, we are confident and so are steel analysts that our Iowa plant is one of the lowest cost producers of flat plate and hot-rolled coils in the world. Therefore, we fear no fair competition, domestic or foreign. But we are here today to tell you about our concerns about unfair foreign competition and government-distorted trade policies that have and can severely impact our return on investment and our ability to expand low cost capacity to serve the U.S. and world markets. The success of the IMF package for Korea and other Asian countries in a way that not only alleviates the near-term liquidity crisis but also eradicates government directed lending practices that target favored industries is critical to the future success of our company, our workers, and the entire U.S. steel industry.

According to the International Iron and Steel Institute ("IISI") statistics, in 1997, South Korea, a country with 46 million people was the sixth leading steel producer in the world at 42.2 million metric tons, behind only China, Japan, the U.S., Russia and Germany. Korean steel production per capita is 2.5 times greater than the U.S. In addition, Pohang Iron and Steel Company (POSCO), founded by the Korean government in just 1967, is forecast to be the largest single steel producer in the world in 1998 with estimated production of over 28 million tons.

The Korean government still owns 36% of POSCO, which gives it a controlling interest in the company and the ability to direct the company. The Korean government has clearly strongly supported and targeted a build up of its steel industry, but never more so than the case of Hanbo Steel, Korea’s second largest steel company. Hanbo is certainly the poster child for the entire Asian economic crisis. Between 1992 and 1996, Korean banks, led by the government-owned Korean Development Bank, loaned almost 5.8 billion dollars to Hanbo to build a greenfield 9 million ton steel complex on Asan Bay in Tangjin, Korea.

At the start of this period, Hanbo’s debt-equity ratio was already 5 to 1. By the time the company declared bankruptcy in January 1997, the debt-equity ratio had ballooned to over 22 to 1. Hanbo, a clearly uncreditworthy company, obtained these loans because of government directed lending practices and the Korean government policy to expand the steel industry. There can be no doubt that these loans were government directed. The largest creditor was a government owned bank and a number of Hanbo executives, government officials and bankers have been sentenced to jail in Korea for bribery. You simply don’t bribe government officials to get you bank loans unless government officials can get you bank loans. Even after the company filed for bankruptcy, the government continued with subsidies. As Trade Minister Han Seung Soon stated on February 4, 1997 "The priority is to finish the construction of Hanbo’s steel mill by the end of this year through additional financing and commissioned management by Pohang Iron and Steel." Another Finance Ministry official, Yoon Tue Yong, said that, "for the benefit of the national economy, we must keep the plant operating."

On February 18, 1997, the Committee on Pipe and Tube Imports and three U. S. flat rolled steel producers filed a request with USTR and the Department of Commerce to pursue a dispute settlement case at the WTO for Korean government Subsidies Code violations with regard to Hanbo subsidies. The administration has not taken any action yet and to the best of our knowledge this is largely because, once again, foreign policy and national security concerns within the administration have been able to outweigh our trade policy interests.

The Korean government has admitted that it has paid off small and medium sized trade creditors of Hanbo so that they would not also go into bankruptcy. While the goal may be laudable, the direct payment by a government of the company’s debts represents a direct subsidy to Hanbo steel. For the past year, Hanbo has not, to our knowledge, published any financial statements so we have no idea how much the company continues to lose. In July, it was announced that the government controlled POSCO and Dongbu Steel had jointly bid 1.8 billion dollars for the assets of Hanbo. However, amidst suspicions that the government was forcing POSCO to make the bid and after extremely adverse world market reactions to the bid, the sale never materialized. At this point, it is clear that Hanbo can never reorganize itself and go back into business. What is unclear is whether the bankruptcy trustees in Korea are free enough from government control to fairly represent the creditors interests and sell Hanbo’s assets to the highest bidders regardless of whether they intend to operate the equipment in Korea or move the equipment to another country.

This committee has already heard enough testimony as to why the financial crisis occurred and how the IMF and Treasury Department plan on solving it. However, since the inception of the discussions with the IMF, our trade counsel and our associations have pressed the Treasury Department to make sure that U.S. taxpayer dollars would not be used to subsidize our competitors in Korea. Initially, we were very pleased with the conditions announced by the Korean government and the IMF. These included:

  • "The commercial orientation of bank lending will be fully respected, and the government will not intervene in bank management and lending decisions. Remaining directed lending will be eliminated immediately.
  • No government subsidized support or tax privileges will be provided to bail out individual corporations."

If the Korean government lived up to these commitments it would radically transform the manner in which business is conducted in Korea and return competition between U.S. and Korean companies to a level playing field. Although we are encouraged that the Administration is committed to enforcing the IMF conditions, our greatest concern is that neither the IMF nor the Treasury Department have the resources to monitor the trade aspects of the agreement. We are also concerned that the administration and the IMF may not have the fortitude to enforce the agreement or pull additional funding when violations of the agreement occur. It appears our concerns are well founded. In a January15, 1998 Wall Street Journal article, IMF president Michel Camdessus said the IMF "wouldn’t object to special loans to the export sector...." Obviously, IMF president Camdessus is unaware that Article 3.1 of the Subsidies Code specifically prohibits export subsidies.

In summary, we would ask the Committee and the Congress to do the following:

3. Make sure there is strict enforcement of the IMF conditions and require quarterly reports from the Treasury Department and Department of Commerce that verify that no U.S. or IMF funds are being used to subsidize Korean industry;

4. If the IMF allows the Korean government to use IMF funds for export subsidies in direct violation of the Subsidies Code, the U.S. Congress should refuse to appropriate more funds to the IMF;

5. Congress should urge the administration to pursue WTO dispute settlement over past Subsidies Code violations concerning Hanbo Steel and to aggressively police and prosecute all Subsidies Code violations by our trading partners.

Mr. Chairman, IPSCO is proud to have invested almost half a billion dollars in Iowa and has plans for additional investments expanding our steel capacity in the U.S. We did this based on a belief that the U.S. government is committed to fair trade so that low cost and high quality, not government subsidies determine who gets the sale. Thank you for this opportunity to testify here today. I would be pleased to answer questions from Members of the Committee.

January 28, 1998/A:\Testwrit.wpd



 

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