Federal Reserve Reforms Also, not always clear that the entity is in fact too big to fail, or whether there is simply a perception that it is too big to fail Introduces classic moral hazard Whether it is feasible in a market and political sense in the future. Auto industry Banking industry Greece?
Federal Reserve Reforms Also, not always clear that the entity is in fact too big to fail, or whether there is simply a perception that it is too big to.
Dec 25, 2015
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Federal Reserve Reforms
Also, not always clear that the entity is in fact too big to fail, or whether there is simply a perception that it is too big to fail
Introduces classic moral hazard Whether it is feasible in a market and political
sense in the future. Auto industry Banking industry Greece?
Limits to Reforms
Many institutions, public and private, have risk management strategies – not often followed for long
When times are good, firms are reluctant to take into accountant all risks out there
Problem is at both macro and micro level Very political
Micro level - US housing sector in 2000s - Fannie Mae and Freddie Mac
Macro international level - voting pressures on IMF right now
Steps taken over Past Year
Basel III provisions include new capital standards and rules to provide strong incentives to change their business models. Much tougher than existing regime.
- Tighter definition of Tier 1 capital and
- stricter definition of risk-adjusted assets.
Basel III – Dudley Conclusions
- “[E]asy access to credit that is underpriced because it is not backed by sufficient capital is not a sustainable route to prosperity.”
Issues to think about• US seeking to fix the banking and non-
banking financial system at same time as....
• Fixing health care, energy and the environment ...
• Fixing housing crisis by offering new loans to buyers – or continue with foreclosures
• Boost employment through more government spending and record budget deficits
• Coordinate with international financial community – where and to what extent?
6
Globalization Drivers
• Reductions in tariffs/quotas under WTO and FTAs
• Declines in sea/air transportation costs
• Dramatic declines in telecommunications costs
• Elimination of controls over short- and long-term capital flows
• Collapse of Soviet Union and the socialist model
7
Determinants ofSteel Industry Location
• Natural resource endowments
• Energy costs
• Transportation costs: “freight in (raw materials), freight out (customers)”
• Customer location (service/collaboration)
• National security – “defense industry”
• Exit (plant closing) costs
Global Employment Trends
Source: World Steel Association: Fact sheet 2008
Financial Crisis Overview Risk assessment and management Capital adequacy Liquidity management “Consolidated supervision” Orderly resolution of a systematically important
nonbank financial institutions Agencies taking control of institutions operations
and management as in Fannie and Freddie in 2008
Federal Reserve: Financial Reform to Address
Sytemic RiskBernanke in spring of 2009 described elements to a strategy to deal with four key issues with international implications (BIS). Sought to address:
• “Too big to fail” problem
• Financial infrastructure (“plumbing”) – systems, rules and conventions that govern trading, payment, clearing and settlement
• Regulatory policies to avoid excessive “procyclicality”
• A new “risk assessment authority” to monitor and address systemic risks at “macroprudential” level
Federal Reserve Reforms - 1
Allowing “Too Big to Fail” institutions – results in too many distortions, according to Bernanke:
• Reduces market discipline and encourages excessive risk taking by the firm
• Provides artificial incentive for firms to grow
• Creates un-level playing field with smaller firms
• Cost of bailing out too big to fail firms very, very expensive
Federal Reserve Reforms - 2
Fixing the financial infrastructure would focus on interactions among firms that support “financial plumbing”:
That is, trading, payments, clearing and settlement
Could address Credit Default Swaps and other OTC derivitives – (much of these have been unregulated)
Want central clearing counterparties for OTC trades
Federal Reserve Reforms - 3Deal with “procyclicality” Current capital standards, accounting rules and
other regulations have made the financial sector excessively procyclical and . . . .
“Led financial institutions to ease credit in booms and tighten credit in downturns more than is justified by changes in the creditworthiness of borrowers”
Modify capital standards Improve disclosure and transparency Review standards governing valuation and loss
provisioning
Federal Reserve Reforms - 4
To address broad risk assessment strategy issues looked to create a Systemic Risk Authority – probably Fed (see 2010 Dodd-Frank Act)
Take a more “macroprudential” approach to the supervision and regulation of financial firms
Look at overall economic risks, not just market or credit risks
Steps Taken
Basel III
The Dodd-Frank Act
and
the Volcker Rule
Steps taken in Recent Years
Basel III is designed to address a number of issues that were recently identified by NY Fed President Dudley:
Many large financial firms “did not have enough high-quality capital to be able to retain access to private funding markets” during large losses.
Inadequate liquidity buffers – “widespread over-reliance on short-term funding to finance long-term illiquid assets”
Steps taken over Past Year
“Lack of transparency” – hard to value derivatives, such as CDS, etc.
“Inappropriate structure of incentives encouraged excessive risk taking.”
Lack of appreciation of how much the financial system was “interconnected so that shocks were transmitted broadly through the financial system...”
Basel III
- Standards emphasize banks to use more common equity in numerator by creating an explicit quantitative capital standard
- Tier 1 capital to include more common equity and that equity to be more narrowly defined as “tangible common equity”
- Ratio of that equity to rise to 4.5% of risk adjusted capital
- Also add 2.5 percent for “capital conservation buffer”
Basel III
- Much higher proportion of ratio is now met by common equity;
- that common equity is much better quality;
- the amount of risk-adjusted assets has increased and better reflects underlying risk;
- new capital conservation buffer is added;
- and much more.
Basel III
- Total of 7% + (old Tier 2?) will exceed Basel I/II rules
- Also, new stricter rules for risk-adjusting assets (the denominator) will force capital needs up.
- Together, significant upgrade of current standards.
- Will also provide incentives to standardize OTC derivatives contracts and clear such standardized trades through central counterparties
Dodd-Frank Act 2010
Well over 2000 pages Gave to Fed most authority = to at least 250
projects associated with implementing the act, including 50 rulemakings and sets of formal guidelines
Lots of coordination with lots of other USG agencies over the next few years
Overlays the existing regulatory structure Will generates tens of thousands of pages of
new rules
Dodd-Frank Act 2010
Designed to address not just the safety and soundness of each individual firm
But also the overall stability of the financial system and economy – the macroprudential approach
“The crisis demonstrated that a too narrow focus on the safety and soundness of individual firms can result in a failure to detect and thwart emerging threats to' financial stability that cut across many firms.” Bernanke
Federal Reserve Reforms Problems?
Implementation Financial innovations Moral Hazard Political pressures Integrate with extra-national rules and
regulations
25
The Global Steel Industry
26
Topics
• Globalization drivers - review
• The steelmaking process
• U.S. steel industry background and analysis
• The global steel industry today
• The road ahead
27
The Steel Making Process - I
28
The Steel Making Process - II
29
The Steel Making Process - III
30
Question: How to Measure the Health of the Industry?
• Employment
• Gross production
• Prices
• Net shipments
• Value added
• Industry profitability
• Share of global exports
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 20090
50
100
150
T housands
T otal E m ployees P roduction workers
U S S teel Industry E m plo yees(Januar y)
American Steel Industry
Source: BLS
US Steel Industry Employment by
Occupation
Source: World Steel Association: Fact sheet 2008
33
American Steel Industry
Source: US ITA: Steel Industry Executive Summary February 2012
Share of Global Steel Production
Source: US ITA: Steel Industry Executive Summary February 2012
2001 2002 2003 2004 2005 2006 2007 2008
X-Axis
0
2
4
6
8
10
12
14
Millions
W o rld Canada Ch ina
US E xports of S teel Mill P roductsQ uantity in Metric T ons
American Steel Industry
Source: US Census Bureau
2001 2002 2003 2004 2005 2006 2007 2008
X-Axis
$0
$5
$10
$15
$20
Billions of US dollars
W ORLDCANADA
MEXICO CHINA INDIA
U S Exports o f Steel Mill ProductsBy Valu e
American Steel Industry
Source: US Census Bureau
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 20080
10
20
30
40
Billions US $
0
20
40
60
80
100
Millions metric tons
Qu an tity (rig h t scale) Valu e
U S S teel Im ports
American Steel Industry
Source: US Census Bureau
39
Steel Plants 1978:BOF and EAF Operating Capacity
EAF Capacity BOF Capacity
BOF 97.6EAF 20.3 117.9
million tonsper year
Source: Steel Plant Database
Copyright 2003, University of Pittsburgh
40
EAF Capacity BOF Capacity
BOF 52.8EAF 68.9 121.7
million tonsper year
Source: Steel Plant Database
Copyright 2003, University of Pittsburgh
Steel Plants 2002:BOF and EAF Operating Capacity
41
U.S. Management Mindsets:1950-1980
• Taylorism: “scientific management”
• Economies of scale: bigger is better
• Vertical integration
• Ignore the Japanese
42
Emergence of Japanese Competition for US: 1970s+
• Underestimating the Japanese
• Misreading customers’ sensitivity to price v. availability
• Mismanaging technology: “followers”
43
Industry Response
• Imports are due to: – “cheap labor,” government subsidies, “unfair trading
practices”
• Compete via:– reliability in deliveries (no strikes)– lobbying for trade barriers
• 1982– Substantial capacity cut, reduction of work force especially in
Pittsburgh area– Firms promised workers attractive health insurance and
retirement benefits (“legacy” costs)– Substantial productivity increases
44
Emergence of Global Competition
1980s:• Japanese establish leadership• Others (Korea, Taiwan) follow Japanese
model• European Union forces industry-
rationalization1990s:• Collapse of Soviet Union brings
Russian/Ukrainian producers into world market
45
Rise of the Mini-mill Competitors in the US
• Nucor Steel: First user of “thin slab casting” - 1989
• Largest U.S. carbon steel producer by 2001• Very flat management• Highly paid nonunion workers• Several imitators, e.g. Steel Dynamics• More than half of US market by 2000s• Not competitive in very “high end” products
46
State of Industry Today
• Continuous technological change in the presence of competition driving costs down
• Consolidation of industry within countries– In U.S.: U.S. Steel, ISG/Mittal and Nucor
• Emergence of multinational steel companies– Mittal/Arcelor– Tata/Corus– U.S. Steel (Slovakia, Serbia)
47
State of Industry (cont)
• Reduction in U.S. capacity at older producers, frequently via bankruptcies and Wilbur Ross/Mittal
• Temporary tariffs 2002-2003 helped process of consolidation
• Substantial reduction in company “legacy” costs– $8.2 billion in steelworker pension liabilities
assumed by federal government– USW retirees’ health benefits cut
• Substantial investment by foreign companies in U.S.
48
State of Industry (cont)
• Severstal acquisition of Oregon Steel for $2.3 billion (11/06); Sparrows Point with 3.6 million tons capacity (5/08); Wheeling-Pittsburgh (9/08)
• US Steel acquisition of Lone Star Steel for $2.3 billion (3/07)
• IPSCO acquired by Svensk Stal for $7.7 billion (5/07)
• Thyssen building 4.0 million ton $3.4 billion integrated works in Alabama (5/07)– will use imported slabs from Brazil
• U.S. Steel rebuild of Clairton Cokeworks on hold
Import Rules for the American Steel Industry
• “Steel Import Monitoring and Analysis System” under US Commerce Department
• Created in 2003 along with the imposition of tariffs on foreign steel imports
• US based companies must obtain a license and report in detail all imports of foreign steel
• System was extended in March 2009 for four years to 2013
• Likely will be made permanent
The World Steel Industry
50
Carbon Steel Price Index
(USD/Tonne)
52
Global Steel Industry Production
Source: US ITA: Steel Industry Executive Summary February 2012
53
Global Steel Production by Major Producers
Source: US ITA: Steel Industry Executive Summary February 2012
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 20080%
20%
40%
60%
80%
100%
Percent of Total
US China All Asia
Share o f W orld Production
World Steel Industry
Source: World Steel Association
55
World Crude Steel Production
World Steel Association
World Steel Production 2008
Source: World Steel Association
China
EU
Japan
US
Russia
India
South Korea
Germany
Ukraine
Brazil
Italy
Turkey
Taiwan
France
Spain
Mexico
Canada
UK
Belgium
Poland
Iran
0 100 200 300 400 500 600
2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8$ 0
$ 5 0 0
$ 1 ,0 0 0
$ 1 ,5 0 0
Ave ra g e p rice /m e tric to n
U S A v e r a g e U n it E x p o r t P r ic e s
World Steel Industry
58
Global Concentration Ratios
59
Industry Concentration Ratios
60
Continuous Adjustment Ahead
• Global vertical specialization in production facilities
• Continued consolidation of companies
• A three sector steel industry?
61
Global Vertical Specialization
“Relying on subsidiaries or suppliers in different countries at each stage of adding value to take advantage of each country’s strengths.”Facilitated by low or nonexistence tariffs and reliable and low cost:
• Transportation• Telecommunications
62
Global Vertical Specialization
• Example: cell phones: – Design end products in Sweden (Ericsson)
or Finland (Nokia)– Design key components (e.g. chips) in U.S.– Produce key components in Taiwan/Korea– Assemble them in China – Distribute them in the U.S. – Provide technical assistance for customers
out of India
63
A Three Sector Industry?
• Integrated producers: ore to hot metal in coke-fired furnaces to finished steel (“automobile grade”)
• “Minimill” producers: scrap/reduced ore in electric furnaces to finished steel
• “De-integrated model:” Why ship ore and coal instead of slabs across oceans?
– Transportation costs v. Customer service/collaboration
– Roll imported slabs/bars into products for near-by customers
– India, Russia, Ukraine, Brazil as slab providers
64
Summary
• Global recession likely to accelerate the final stages of completing a long-delayed consolidation/globalization of the steel industry worldwide
• China becoming a major factor in global markets – depends on domestic demand
• The global organization of production and processing relative to customer location remains in flux due to energy cost trends and environmental considerations
Arcelor Mittal: #1 ProducerDutch/British/US/World . . .
65
66
Top 15 Global Steel Producers 2007
(By million metric tons of crude steel)
Source: World Steel Association
68
Steel Industry Employment(1,000 Workers)
Source: Bureau of Labor Statistics
BLS forecasts a 25% drop
69
LEADING EXPORTERS/IMPORTERS2006
World Steel Association
70
Brazilian Player
71
American Steel Industry
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