Pnefgy Vol. 3, pp. 4SldSO @ Pepam Ras Ltd., 1978.
Printed
inGreat
Britain
ECONOMIC DETERMINANTS OF THE USE OF ENERGY AND MATERIALS IN THE U.S. AND JAPANESE IRON AND STEEL INDUSTRIESt THOMAS VEACHLONG,II, GIDEONFISHELSONS and STEPHEN GRUBAUGH The Committee on Public Policy Studies, The University of Chicago, 1050 East Fifty-Ninth Street, Chicago,IL 60637,U.S.A. (Received 11 April 1978)
Ahstraet-Energy and materialsuse in the Japanese and U.S. iron and steel industties is assessed using process engineeringanalyses. The energy requiredfor producinga tonne of steel in the U.S.(20.99GJ)is 50% greater than that in Japan (13.18GJ). The structures and technologies of the two industries are examined to unravel the basis for this difference. The engineering studies are complemented by an econometric analysis of the cost structures of the two industries and factor substitutabilities.The evaluations show that in the U.S. energy and capital are substitutes, but that labor and energy are complementaryeconomic factors. These conclusions are even stronger for the case of Japan, whose technologymay serve as a model for U.S. technologicalchangeover the mediumterm.Thus, governmental policies that stimulatethe constructionof new mills will have an energy conservingeffect, but may have a negative impact on employment.
1. INTRODUCTION
Resolution of two current public policy issues can have a substantial impact on the American steel industry. Fist, Congressional action on energy legislation may well change the industry’s price expectations for energy goods as well as affording it other incentives for energy husbandry. Second, the Administration’s position regarding steel imports and the effectuation of that position may modify domestic and international demand for U.S. iron and steel products. These issues are analytically separable, but the action taken on one will likely have an effect on the other. Also, there is the ancillary question of the impact of such policy initiatives on employment, both in this industry and in the economy as a whole. The steel industry is large and technologically sophisticated, and the entrepreneur’s decision manifold is commensurately complex. We can do no more than illuminate a few facets that are relevant to these issues. While we hold with those who believe that a smoothly-functioning, competitive economy should be one of the foremost goals of public policy, there are additional social and political forces that help mold society’s decisions. The strength of such forces is often derived from the marketplace capturing imperfectly, if at all, important social considerations. We believe that the private sector must ask how it can contribute more effectively to consensus decisions. Below, we initially contrast the principal features of the U.S. and Japanese industries, and then present a process-by-process comparison of their utilization of materials and energy goods. This analysis, which has an engineering flavor, is based on the operation of an average facility in each country. Although it might be assumed that industrial managers would have previous knowledge of the results of such a comparison, we have found, in this industry and others, that they are often surprised when confronted with the quantitative evaluation. This is perhaps attributable to their familiarity with specific facilities, while the data are based on a national aggregate that includes less efficient market participants. Government officials charged with research funding and evaluation should find that this technological analysis helps them identify “pressure points”, those process modifications that can yield major energy husbandry rewards if they prove to be economically viable. tFinancial support of this research by the Office of IndustrialEnergy Conservation,U.S. Departmentof Energy, is gratefullyacknowledged.This paperwas presentedat a Symposium on Life-Cycle Costing in Energy Conserualion at the 1978Annual Meeting of the American Association for the Advancementof Science in Washington,DC. (16 February 1978). +Presentaddress:FoerderInstitute,Departmentof Economics,The University of Tel-Aviv, Tel-Aviv, Israel. 451
T. V. LONG, 11 et ai.
452
Although technological analyses are of interest in isolation,‘-3 the central policy questions involve economic factors that determine the technological structure. To investigate these determinants, we employ state-of-the art econometric techniques. This analysis yields information regarding the economic substitutabilities of capital, labor, energy and materials as factors of production. The econometric studies highlight major differences between the U.S. and Japanese industries. If we judge that the U.S. steel industry’s physical capital will become similar to Japan’s over time, the Japanese experience can be used to predict more confidently the effects of policy measures. The aggregate analyses should be helpful to the steel industry decision-maker in reducing the complex problems he faces to more tractable ones. Finally, although life-cycle costing questions are not explicitly addressed, we do explore the implications of several economic “rules of thumb” and examine their influence on steel industry decisions. These are the “bottom-line” realities that public policy must acknowledge. 2. AN OVERVIEW
OF THE TWO INDUSTRIES
The rapid growth of the Japanese steel industry ranks with that of industries based on innovations (computers, television, solid-state electronics, lasers, synthetic fibers, aerospace) as a major feature of the post-World War II era. By contrast, U.S. steel production increased in this period by approx. 60%, soundly outrun by increases in real GNP. From a wartime level of 81 million tonnes in 1944, production rose to 132 million tonnes in 1974 (Table 1). Kawahito lays to rest the common misconception that the Japanese steel industry was destroyed in wartime, noting that only 13.7% of the steel-making capacity was damaged! However, Japanese production dipped to a very low level in 1946, and the principal stimulus to its recovery was the enhanced demand associated with the Korean War. The tripling of Japanese output between 1%5 and 1974, when it almost equaled that of the U.S., will be our focus. Over this period, Scherer et al. estimate that technological and technique changes increased the minimum size of an integrated steel plant that produces at lowest unit cost from 3.6 million tonnes-per-year in 1%5 to 9.1 million tonnes-per-year in 1974.5 Thus, we might anticipate that significant differences between the two industries result from the more recent vintages of Japanese facilities and the scale economies that they incorporate. The principal energy-consuming steps in steel-making are shown in Fig. 1. The mined ore is subjected to a beneficiation process (10% of total energy use for agglomerization, sintering, pelletizing) before it is introduced along with coke and limestone into the blast furnace. Based on its coke consumption, the blast furnace is the most energy-using phase of steel production (54%), and coke production itself requires 7% of all energy consumed. After the iron ore is initially reduced, the steel furnace uses but 4% of total energy. The rolling and forming operations require approx. 20% of the direct energy, but an equally important factor is the degree to which home scrap (steel that must be recycled, requiring a repetition of energyconsuming steps) is produced by various finishing technologies. Table 1. Steel production in the U.S. and Japan (1944-76). Units are thousands of metric tonnes. Sources: Ref. 4 and Annual Sralisrical Report, Ametican Iron and See/ Institure, 1976 (Washington, DC.; 1977). YEAR
1944
JAPAN
U.S.
6,400
81,300
1946
560
60,400
1948
1,700
80,400
1951
6,500
95,400
1960
22,100
91,900
1965
41,200
122,500
1968
66,900
121,600
1972
96,900
120,900
1974
117,100
132,200
1976
107,400
116,100
The use of energy and materials in the U.S. and Japanese iron and steel industries
BLAST NRNACE
ORE
SLAB,
BENEFICIATION
54%
10%
IRON-
AND
.
COLD
HOT
COKE
STEEL
BLmM
STRIP
STRIP
7%
4%
4%
7%
4%
STEELMAKING.
75%
ROLLING.
SHAPES, AND
453
PLATES PIPES
5%
ZO%
OTHER,
5%
Fig. 1. Percentage of energy consumption by process in an integrated steelworks. Source: Ref. I.
Some major technological features of Japanese and U.S. steel production are contrasted in Fig. 2. Both nations pretreat a large percentage of their ore, but the U.S. pelletizes, while Japan sinters. The ratio of hot blast furnace metal to total charge (blast furnace metal plus scrap) injected into the steel furnace is significantly higher in Japan than in the U.S. This is in part a product of scrap availability and the relative prices in the two countries, and it reflects a sustained effort by the Japanese to increase their blast furnace capacity. The most striking difference is the large percentage of open hearth furnaces still in use in the U.S. Electric furnace capacities are approximately equal in the two nations, but Japan’s basic oxygen furnace (BOF) production is larger. BOF furnaces are more energy efficient than open-hearth operations, but they are limited to a scrap charge of about 30%, while open hearths can accept any percentage of high-quality scrap. Finally, Japanese industry employs continuous casting techniques to a considerably greater degree than in the U.S. There are two ramifications of this. In conventional ingot casting, the poured ingot is allowed to cool, and it must be reheated in soaking pits using scarce natural gas before rolling and finishing. Continuous casting avoids this cool-down process. Second, the yield per tonne of liquid steel is increased by as much as 25%.6 This material productivity increase translates directly into an increase in energy efficiency. 3. PROCESS
ENERGY USE
Let us consider energy consumption in the blast furnace step, as illustrated in Fig. 3. Almost all of the energy used is furnished by coke, and the figures shown correspond to the heating
PERCENTAGE OF STEEL-MAKING BY PROCESS HOT METAL RATIO
OPEN HEARTH
61.8%
U.S.
BOF
24.4%
56.0%
PERCENTAGE CONTINUOUS CASTING
ELECTRIC
19.7% (of
JAPAN
69.2%
80.8%
1.3%
BLAST FURNACE PRETREATED TO TOTAL ORE RATIO SINTER PELLETS
17.8% (of
(1976) 26.6%
11% capacity)
25% output)
69.5%
(1976) 60.5%
II
.5%
Fig. 2. Technological differences, U.S. and Japan iron and steel industries (1974). U.S.
JAPAN
TOTAL
= 29.6
TOTAL
=
18.R
-
=
-
=
3.5
RECOVERED
NET
8.6
= 21.0
W/TONNE
RECOVERED
NET
= 15.3
GJ,TONNE
Fig. 3. Blast furnace comparison, 1974. Energy units: GJltonne hot metal. Data sources: U.S.. Ref. 1: Japan, based on data from Japan Steel Union Statistics 1975; Japan’s Iron and Steel Industry 1975(Kawata Publicity, Inc.; Tokyo; 1975):and A. Doernberg, “Energy Use in Japan and the United States” (Brookhaven National Laboratory; August, 1977).
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454
LONG, 11et al.
value of coal required to produce the coke used in the iron-making process; i.e. they reflect an average coking efficiency of 66% in the U.S.’ and 80% in Japan.’ Although a great deal more energy is recovered in the U.S. as byproducts (coke oven gas, tars, crude light oil and coke breeze), American industry consumes one-third more energy for this step than is used in Japan. The 15.3GJ/tonne energy consumption calculated for this process in the Japanese industry is in good agreement with an aggregate value of 15.2GJltonne given in Ref. 8. What are the principal technological features contributing to this difference? Certainly, the larger scale of the Japanese blast furnaces is an important difference. New capacity increased Japanese blast furnace productivity from 1.85 tonnes/m’-day in 1972 to 2.04 tonnes/m3-day in 1973.9In the latter year, the average production of a blast furnace in Japan was 1.3 million tonnes per year as compared with an average of 560 thousand tonnes per year in the U.S.8*‘”To get a rough idea of the effect that this scale difference alone could have on energy use, let us suppose that the amount of each input (capital, labor, energy) required per unit output decreased at exactly the same rate as scale increases. That is, each factor varies exactly as does the long run total cost with increasing scale. Engineering economies of scale could then be expressed as --J&s. _ Outputus. n EJAPAN ( OutputJAPAN >’ in which Eu.s. and ErArANare the respective total output energy requirements.” Silberston has estimated that a proper value of a for the steel industry is 0.80.” Rearranging the above equation to estimate the anticipated energy requirement in a Japanese facility, log &PAN = log Eus. + a [log (Gutput)lAPAN- log (Gmput)u.s.l = log 117.6x -lo6+ O.f$O[log (13.0 x 106)- log (5.6 x 106] = 8.07. Thus, E~MAN= 228.0 x lo6 and
EJAPAN = 17.5GJltonne. >est GutputJAF’AN
Thus, scale economies could result in a Japanese blast furnace energy consumption that is 3.5 GJ/tonne (or 17%) lower than that in the U.S. Other factors that have enabled the Japanese to cut their coke consumption significantly are:* Operation at significantly increased top pressures (2.5-3.0 kg/cm3 vs 0.5-1.5 kg/cm3 formerly). Higher oxygen enrichment (up to 5%) and heavy-oil injection. High temperature blasting (1lOO-1200°Cvs 950°C earlier). Greater use of preheated ores (sintering and pelletizing). Improved coke quality. Computer control of blast furnace operation. Several of these factors are not independent of the larger scale of the Japanese furnaces. The most modern Japanese blast furnaces use but 10.9GJ of coke and 13.3 GJ of fuel per tonne of hot metal.’ Table 2 shows the energy required to produce a tonne of steel by the three major processes. Table 2. Energy consumed in pro&wing 1.00 tonne of crude steel; alternative steel-making processes. Units: GJkonne crude steel. Data source: U.S., Ref. I; Japan, Ref. 8.
1 OPEN
U.S.
JAPAN
HEARTH
23.9
BOF
ELECTRIC
AVERAGE
24.8
6.5
20.99
14.6
6.7
13.18
The use of energy and materials in the U.S. and Japanese iron and steel industries
455
These energy requirements include the energy consumed in producing the hot metal, but the scrap charge is assigned a zero energy content. Any accounting procedure is arbitrary, and one could equally well assign the scrap an energy content equal to that of the blast furnace metal. Attributing a zero energy value to the scrap biases the U.S. values downward relative to the Japanese, because more scrap is used per tonne of output in the U.S. than in Japan. Even so, the aggregate U.S. per tonne consumption is over 50% higher than in Japan (20.99 GJ/tonne vs 13.18GJ/tonne). Several factors influencing this result are evident. First, the Japanese basic oxygen process facilities are more energy efficient than their U.S. counterparts. This difference is probably due in great measure to the larger sizes of the Japanese operations. Second, open-hearth steelmaking has disappeared in Japan, while it still accounts for 25% of U.S. production. But the major differences, both between countries and between processes, arise because the blast furnace energies are rolled into the total energy requirement for the crude steel that is provided. With a 100% scrap charge, the electric furnace value shown is the direct energy consumption of that technology, with electricity evaluated at its thermal equivalent. For the basic oxygen furnace, 92% of the steel furnace charge in Japan and 74% in the U.S. are assessed at energy contents of the respective hot metals. The direct energy needed to drive the steel furnace is the total value less that expended in previous steps (blast furnace and ore preparation). For the U.S., the direct energy (oxygen plus total fuel) used in the basic oxygen furnace amounts to 0.74 GJ/tonne, and the figure for Japan is 0.25 GJ/tonne.‘*’ The open hearth process in the U.S. requires 3.51 GJ/tonne crude steel.’ The final factor entering into the observed difference in the total energy required is the size of the steel furnace charge utilized per tonne of crude steel output. For example, in the U.S. the open hearth furnace uses 0.70 tonnes of non-scrap input per tonne of steel, while an average BOF charge contains 0.82 tonne of hot metal and pig iron per tonne of steel. As illustrated in Fig. 1, the energy consumed in the steel-making process is small relative to that of the blast furnace and rolling steps, and the differences between the two countries are negligible in this regard. However, the integration of the steel furnace technology into the total production scheme has an important bearing on energy use in other process stages. Considerable quantities of energy also could be saved in the rolling operation. In the conventional process in the U.S., an ingot is cast from the molten steel and is allowed to cool. It then must be reheated in a gas-tired enclosure (a soaking pit) before primary rolling. Avoiding the cool-down saves a very scarce fuel, natural gas, and the U.S. steel sector is the third largest (4-digit SIC) industrial consumer of this fuel. New integrated facilities employing conventional ingot casting in Japan are designed so that the ingot can be transferred to the rolling mill before it loses its heat, and a reheat step is not required. U.S. plants were built before energy husbandry was a consideration, and the steel furnaces and rolling mills may be located several miles apart, with no possibility for closer integration because of existing structures. This physical differentiation is reflected in Table 3 in the difference of 0.8 GJ/tonne in the direct energies consumed in the casting-slabbing operations in the U.S. and Japan.. Careful synchronization of the reheating furnaces is also practiced in Japan. Molten steel is transferred directly to the casting operation in a continuous casting facility. This has two energy-related consequences: direct energy consumption is reduced by 50% (see Table 3) and the amount of home scrap that is created at this stage is diminished.? Home scrap is recycled, but all the energy consumed from the point at which the scrap is introduced in the steel-making process to the casting operation must be expended once more. The data in the column of Table 3 labeled “Steel-Scrapped” illustrate what this energy would be at a maximum-if the scrap were reintroduced into the blast furnace. (Although some scrap is introduced in the blasting stage, the greater portion is recycled in the charge to the steel furnace.) While this example overestimates the benefits from home-scrap reduction, the message is clear and holds for a large number of technologies across industries: decreasing the amount of home scrap is equivalent to reducing energy consumption. New developments in the casting procedure in Japan are a continuouscontinuous casting method, whereby 3 or 4 steel heats are successively cast, and high-speed casting that raises the speed to 2.5 m per minute. Other rolling mill advances include low-temperature tOf course, the major advantage of continuous casting is a significant increase in overall productivity.
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456
LONG,
11 et
a/.
Table3. Energyrequirementsfor casting-slabbingand for continuouscasting. Units: GJltonne.Source:Ref.7. STEEL-SCRAPPED
DIRECT
CASTINGSLABBING CONTINUOUS
ENEKGY
CASTING
REDUCTION
TOTAL
U.S.
JAPAN
U.S.
JAPAN
U.S.
JAPAN
U.S.-JAPAN
2.2
1.4
3.7
1.5
5.9
2.9
i
I.2
0.7
0.9
0.6
2.0
1.4
0.6
1.0
0.7
2.8
0.9
3.9
1.5
2.4
0
controlled rolling and the use of hot-skid pusher type reducing fumaces.8 Energy use in Japanese hot strip mills was reduced from 2.5 GJ/tonne in 1971to 2.2 GJ/tonne in 1973,with an even greater increase in total productivity.’
4. ECONOMETRIC ANALYSIS
Once having investigated the technological differences between the Japanese and U.S. industries, we turn to more meaningful questions: why do they exist and what are their econometric impacts? What are the observable characteristics of the two economic environments? To investigate these questions, we develop an econometric analysis of the structures of the iron and steel industries in 12 countries over the period MO-74. This analysis is based on a new class of economic cost and production functions, the transcendental logarithmic functions.3*‘s’6 A detailed description of our analytical method has been presented? and we here report only results for the U.S. and Japan. Before proceeding to the translog analysis, the quality of the data set is investigated by estimating the more usual Cobb-Douglas production function:
Q=aK"LBMYE" 9 in which Q = the sectoral output; K = capital services; L = labor; M = materials; E = energy; and (I, (Y,/3, y, S are parameters. The results of this estimation are shown in Table 4. The estimated parameters are cross-national, time-series averages, and they correspond roughly to factor shares. They agree well with factor shares calculated from direct costs, and there is a high coefficient of explanation (R* = 0.998), as is often found for time-series regressions. The direct estimation of a Cobb-Douglas production function is a purely technological exercise, and it does not depend on the conditions of first- or second-order economic optimization. We now turn to the translog analysis, in which the parameters are estimated from the equations yielded by first-order cost minimization conditions. The translog cost function, C, has the following functional dependence:
Table 4. Estimationof total outputusing a Cobb-Douglasproductionfunction: Q = aK”L8MyEd. Standarderrors are given in parentheses.R* = 0.998. FACTOR
CAPITAL LABOR
(a) (8)
MATERIALS ENERGY RETURNS
MAGNITUDE
(y) (6) TO
SCALE
0.170
(0.018)
0.121
(0.030)
0.669
(0.030)
0.038
(0.016)
0.998
(0.051)
The use of energy and materials in the U.S. and Japanese iron and steel industries
451
in which Y is total output; PK, &, PE and PM are the prices of capital, labor, energy and materials; and t is a time parameter. Although we are carrying out analyses that include materials as one of the factor inputs, we also consider the simpler translog functional form, where a materials factor is omitted and assumed separable, i.e. lnC=lna+~ailnPi+1/2~~~bljInPiInPj, I
1 i
in which i, j = K, L, E. Maximum likelihood techniques are employed.3 There are several types of information that can be extracted using these econometric procedures. First, one can estimate the percentage of the total cost that is attributable to each of the factors, the factor shares. Table 5 displays these for the U.S. and Japan in 1%8. This table is based on a production function in which we estimate total output as a function of the four factors: capital, labor, energy and materials. A comparison of the U.S. estimates with separately compiled factor shares utilizing direct cost data reveals good agreement. The most striking differences between the U.S. and Japan are the much larger percentage attributable to labor costs in the U.S. and a correspondingly large materials cost in Japan. The primary competitive advantage of Japanese steel derives from productivity gains that have moderated the impact of higher wages. Elasticities of substitution can also be obtained from the econometric studies, and mean elasticities over the 12 countries and 14 years are shown in Table 6. These data are generated from a modified value-added cost function, which is specified using the three factors of production: capital, labor and energy. The own elasticities are negative, as they should be for a well-behaved function. For the off-diagonal elements, a positive sign indicates that the two factors are substitutes, while a negative sign connotes factor complementarity. Capital and labor have an elasticity of substitution of 1.04, very close to the unit elasticity assumed in the traditional Cobb-Doublas production functions. The other two elasticities may be surprising: capital and energy appear to be substitutes, and energy and labor are weak complements. These observations are borne out when one makes point estimates of the substitutabilities for the Japanese and U.S. industries for several years: 1963, 1%8 and 1972. The results are shown in Table 7. In both countries capital and energy are substitutes, although this is a relatively weak effect in the U.S. However, in Japan, with its more modern capital facilities, it is unambiguously true that the greater capital intensiveness has replaced energy-use-per-unitoutput. On the other hand, energy and labor are used in tandem in the U.S., and this relation is even more strongly reflected in the Japanese industry, where energy-labor complementarity has increased over time. Table 5. Factor shares estimated using a translog cost function for total output and comparison with direct cost data.
I
I
FACTOR
/
I
ECONOMETRIC J968 FACTOR SHARES
I
JAPAN
U.S.
U.S.
CAPITAL
18.7
17.8
17.8
LABOR
10.4
28.6
31.9
MATERIALS
67.4
48.7
3.4
4.8
53.3 ENERGY
Table 6. Elasticities
I
DIRECI COST DATA
I
SO..?
of substitution over cross-national, time-series data estimated at sample mean factor shares Modified value-added translog cost function estimation.
T. V.
458 Table
7. Allen
LONG,
11 et al.
partial elasticities” of substitution estimated using a modified value-added translog cost function. JAPAN
U.S.
1963
O.jY
0.18
1968
0.52
0.12
lY?Z
0.54
I
0.12
I 1 JAPAN
U.S.
1963
-0.71
-0.17
1968
-0.91
-0.23
1972
-1.03
-0.26
oLE
J
The information provided in the signs and magnitudes of the substitution elasticities is relevant to the policy decisions enumerated at the beginning of this paper. If capital and energy are substitutes, then actions that promote new capital investment would be likely to result in energy conservation. Conversely, if capital and energy are complements, then such measures would be counterproductive. Berndt and WoodI have carried out an analysis similar to the one presented here, but for the total U.S. manufacturing sector over the period 1947-71. Their results are precisely opposite to ours-they find capital and energy to be complements, and labor and energy to be substitutes. Gregory and Grit&l6 utilize cross-national, time-series data as we do, but for the total manufacturing sector. They conclude that for U.S. industry, both capital and labor are substitutes for energy. Thus a policymaker could have his pick: all possible combinations are represented. Our results are not necessarily incompatible with either those of Berndt and Wood or those of Gregory and Griffin. We report the analysis of a single industry, while their studies are of the aggregate U.S. manufacturing sector. It is possible that a single industry exhibits behavior that is at odds with that of the aggregate. Our results for the iron and steel industry are supported by evidence from engineering analyses: over time, it appears that the introduction of new capital facilities has resulted in a decrease in the quantities of both labor and energy necessary to produce a unit of output.*t The elasticities observed for Japan are perhaps even more relevant to the U.S. decision maker. The values observed reflect the introduction of new technology. Over the near-to medium term, the changes made in U.S. steel facilities will be much like those made in the last decade in Japan, and with the same effect on labor and energy use. Thus, we can anticipate an increasing energy-capital substitutability and enhanced labor-energy complementarity. Energy conservation stimuli such as investment tax credits and accelerated depreciation schedules should be successful. But they also imply a diminished labor requirement per unit output. In
order that this does not have an adverse effect on total employment, the combined productivity increases must be great enough to make U.S. industry more competitive, with a concomitant growth in sales and output. 5. ECONOMICS
AND THE POLICY
ISSUES
In concluding, it is helpful to reflect on some basic economic rules that guide the decisions made in a market economy and thereby influence the issues under consideration. FM, the industtial manager will adopt the technology that has the lowest total unit cost. He may choose to use natural gas rather than coal, even given that the price of a Btu of natural gas is greater tWe have recently completed a seven-nation, time-series analysis of aggregate manufacturing that yields results that are similar to ours for the iron and steel industry. In a forthcoming article, we will argue the superiority of our data base and analytical methods to those of Refs. 13 and 16.
The use of energy and materials in the U.S. and Japanese iron and steel industries
459
than one of coal, if more Btus of coal are required so that the total cost of the coal is greater than that of natural gas. However, the choice could be in favor of natural gas even if the quantity necessary were such that its costs were greater than that of the coal. Natural gas is a cleaner fuel and can be burned more easily in many applications. Consequently, the capital services and labor utilized in the gas-burning technology may be sufficiently less than those associated with a coal fired one to give the natural gas facility a clear cost advantage. A rational decision based on predicted total costs has led both Japanese and American industry to their technological structures. In the U.S., labor has been a costly factor while the prices of energy goods and their cost shares have been small. The opposite has been the case in Japan. As energy prices and costs rise, we can anticipate that the U.S. steel industry will move to adopt technologies similar to the Japanese. The replacement of capital facilities will be a slow process because of a second “rule of thumb”. A facility should be replaced when its marginal operating cost exceeds the total (operating plus capital) unit cost of the challenger technology. This is the reason that seventyyear-old blast furnaces are still in operation in the U.S., even though they are admittedly inefficient in their use of energy and exhibit low labor productivity. Finally, we should recognize that the Japanese steelmakers’ decision to price discriminate and sell in the U.S. market at a price lower than the total unit cost (capital plus variable cost) in Japan makes good economic sense. For a given facility and fixed costs, one should increase production so long as marginal cost is less than marginal revenue. In the face of lagging demand and large excess capacity, the Japanese will rationally pursue this policy. This is doubly true for the Japanese steel companies because of their high debt-to-equity ratio. This policy is a proper focus for government action if it results in the exit of so many U.S. industrial participants that the Japanese are able to extract excessive profits in a subsequent period of high demand for steel. One must also take into consideration the de facto trade policies of the Japanese toward American steel imports. The three rules provide an environment in which we can better assess policies that affect the steel industry. Higher energy prices will stimulate companies to pursue conservation, but only to the extent that total costs are lowered. Government initiatives that result in the construction of new capital facilities will serve energy conservation, because energy and capital appear to be substitutes in this industry. However, capital replacement will proceed only if the total cost of production with the new facility is less than the variable cost using the existing plant. Technological changes that cut labor costs as well, such as increases in scale, will have a better chance of penetrating than those that save energy alone. Scherer et al.* conclude that relative factor prices do not affect the minimum optimal scale of an integrated steel mill, which has grown by 250% in the last decade. Thus, we anticipate that there will be a distinct trend to greater rationalization in the U.S. industry. Capital replacement may have a negative impact on the labor market, and the policymaker must be prepared for this eventuality. Sectoral growth can completely compensate for this, but it will also increase energy consumption. In our studies energy and labor appear to be complementary, and this relation is magnified in the larger-scale Japanese mills. The U.S. industry has a clear competitive advantage in its access to a sufficient supply of high-quality coal, and this should be pursued. From society’s perspective, investigating the possibilities for saving natural gas may be a more important energy conservation objective than developing better blast furnace technologies. However, the latter may pay the extra dividend of making the U.S. industry more competitive in world markets and thereby stimulating economic growth. Thus, we close by again noting that implementation of a single policy can have several ramifications, and that these may sometimes be in conflict. Notice: This report was prepared as an account of work sponsored by the United States Government. Neither the United States nor the United States Department of Energy, nor any of their employees, nor any of their contractors, subcontractors, or their employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness or usefulness of any information, apparatus, product or process disclosed, or represents that its use would not infringe privately owned rights.
REFERENCES 1. NATO/CCWS Rep. No. 47; Industrial international data base, rational use of energy program pilot study: the steel industry. U.S: Department of Energy, Oak Ridge, Tennessee (1977). 2. R. S. Berry, T. V. Long, II and H. Makino, Energy Policy 3, 144(1975).
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