STEEL: Who Said Competition?

U. S. Steel Corp.’s Benjamin Fairless is dark, chunky, genial and tough. Cocking his head to one side and narrowing his eyes, the president of the firm which usually makes 35% of the nation’s steel ingots is given to saying that the corporation ought to get a price high enough to cover costs. Last week, to explain prices to the TNEC, Ben Fairless produced an expert, University of Chicago Statistics Professor Theodore Ott Yntema. Substance of sharp-eyed, youthful Expert Yntema’s very technical mathematical-metaphysical testimony: the corporation is burdened with large inflexible costs; steel sales do not rise in proportion as the price falls; therefore, price cuts reckon without inflexible costs and demand, lead to bankruptcy.

All this public justification of steel prices was but a prelude to the big steel news of the week. In Shillings’ Mining Review (iron ore trade paper) for Jan. 20 appeared a full-page advertisement announcing: Oliver Iron Mining Company, Subsidiary of the United States Steel Corporation. Producer of iron ores from the Lake Superior District. Mesabi ores for sale on long or short term contracts. Wolvin Building, Duluth, Minn.

Except for the fact that Big Steel’s ore subsidiary had never, except as an accommodation, sold ore to others, except for the hint that the biggest U. S. ore producer was going to compete with the others who have had the market to themselves, except for these things, the Oliver advertisement would hardly have attracted any notice. The notice it did attract was heightened by the additional report that its first sale was breaking the “inflexible” price by 25%.

Fabulous is the story of U. S. iron ore, legendary its characters. In the early ‘gos two brothers, Alfred and Leonidas Merritt, borrowed $420,000 from John D. Rockefeller to exploit Minnesota’s famed Mesabi ironrange, overextended themselves financing transportation facilities, building up a $29,400,000 corporation. During the ’93 panic, John D. called his loan, took over the property at a $29,000,000 profit. Meanwhile, in 1892, another U. S. steel pioneer was at work on the Mesabi—Henry W. Oliver, who joined up with Andrew Carnegie’s right-hand man, Henry C. Frick—over the opposition of “Pioneering don’t pay” Carnegie, who predicted from a Sussex retreat that “this ore venture . . . will result in more trouble and less profit than ‘almost any other branch of our business.” In 1896 Frick and Oliver went to see Rockefeller, leased his vast mines for a royalty of 25¢ a ton (when other mines were drawing royalties of 65¢ a ton); guaranteed that Carnegie Steel Co. would bring out at least 600,000 tons a year; agreed to ship this plus another 600,000 tons a year from the Oliver mine over Rockefeller railroad and steamship lines.

News of this alliance with Rockefeller broke the ore market from $4 to $2.50 a ton. Other mine owners, fearing a squeeze, tried to sell out at any price. When finally U. S. Steel was formed, the Corporation, fearing that Rockefeller might use his ore as a base for a rival steel corporation, bought him out for $79,000,000. John D., running his original $29,000,000 profit up another $50,000,000 exclaimed: “I was astonished that the steel makers had not seen the necessity of controlling their ore supplies.”

As a result of the Rockefeller deal, plus Frick’s investment of $500,000 in Oliver, the Corporation started out with two-thirds of the Mesabi’s then known reserves (current estimate: two billion tons, of which the Corporation today controls over half). In production Oliver has turned out upwards of 40% of the national ore output, practically all for its parent company. Meantime the rest of the ore business concentrated in a few other big hands. Best known 19th Century iron ore man was Ohio Boss Mark Hanna, whose M. A. Hanna Co. turned over its ore properties to tough Ernest Tener Weir’s National Steel Corp. in return for a 27% interest in its steel business. Another was Sam Mather, descendant of Puritan Massachusetts’ Divines Increase and Cotton Mather, and one of Hanna’s friends. One of Sam Mather’s associates was New York’s unlucky Democrat, Samuel J. Tilden, who would have been President if an electoral commission had not voted Republican when it reviewed the votes from Florida, Louisiana, Oregon, South Carolina. A famed member of an old ore family was late Supreme Court Justice Pierce Butler, whose family’s firm of Butler Bros, is one of Little Steel’s suppliers.

Once ten years ago the independent ore producers were almost merged with the Little Steel companies to make another great steel corporation. Cleveland’s anti-Morgan Financier Cyrus Eaton (then in the money) united with the Mathers (who own large blocks of stock in the independents they supply) to project a Midwestern Steel Co. that was to have included Republic, Youngstown Sheet, Inland, Wheeling, and probably Otis steels.

During the struggle for control in the ’30s, one apple cart was not overturned. This was the iron ore price. From 1925 to 1928, the price was $4.25 a ton (25¢ higher than in 1896). In 1929, it was moved up to $4.50, and frozen there through the Depression to 1936, despite price cutting in finished steel. Early in 1937, it was moved up again to $4.95, pegged there through the 1938 recession. (Similarly through all the gyrations in the U. S. economy from 1925 to 1936, Lake freight on iron ore cost 83¢ a ton, in 1937 it was raised to 93¢ .)

Last week Big Steel broke ranks with a bang. It not only went into competition on the sale of ore, but it cut prices deep. Ford, who must buy about 700,000 tons of ore a year to keep his own blast furnaces producing pig iron at capacity, has always tried to buy below the quoted price, but last week a reported price of $3.75 a ton (25% off) made him on 130,000 tons by Oliver set a new post-War low. If the quoted ore price comes down similarly the cost structure of the whole steel industry will change. Two tons of ore go into a ton of pig iron, so there would be a saving of $2.40 a ton in the price of pig iron (which in the ’30s fluctuated between $13.50 and $25.34 a ton).

To Henry Ford the difference between the $4.95 quoted price and $3.75 a ton may mean a saving of $1,200,000 a year in raw material costs, excluding any additional savings if the price of steel comes down. (Iron and steel content of each car averages about 1½ tons, and Ford’s own steel capacity is about 600,000 tons, supplying about 60% of his needs in a good year.)

Meanwhile, Ford’s competitors, just as tough buyers, accustomed to make their money multiplying profit margins as small as $10 a car by millions of cars, are eager to shave as much off the cost of each ton of iron and steel as Ford saves in new ore costs. Helping them is the custom that the year’s first iron ore sale sets the price. This puts Big & Little Steel salesmen in Detroit under pressure to meet Ford’s costs, puts Big & Little Steel fabricators under pressure to force their ore-supplying affiliates to meet Big Steel’s price to Ford. Last week’s price cut had all the earmarks of one whose savings would be shared all down the line. If so, it will provide a chance to test the doctrine that lower prices don’t help sales.