NCPA - National Center for Policy Analysis

Government Guaranteed Loans To Steel Companies Invited Trouble

January 9, 2001

Two years ago, powerful steel executives convinced Washington lawmakers that they needed $1 billion in loan guarantees to fend off competition from foreign competitors. Congress and the Clinton administration obliged with the Emergency Steel Guarantee Loan program.

Predictably, the arrangement has backfired. It is going to be difficult -- if not impossible -- for the borrowers to repay their loans on time. Taxpayers may be called upon to finance a bailout. And the loans have destabilized strong U.S. steel companies.

  • So far, $550 million has been allocated to seven companies -- two of which have since entered Chapter 11 bankruptcy proceedings.
  • The seven companies account for roughly 9 percent of the nation's steel capacity.
  • By propping up those marginal producers, the government has added to the steel glut -- further depressing prices and threatening the health of even the strongest U.S. steelmakers.
  • Although steelmakers throughout the world can produce 15 percent more steel than the market demands, they are adding 2 percent more capacity each year.

"If you can't compete, you deserve to die," says Keith Busse, chief executive officer of Steel Dynamics Inc. -- a company which is still profitable and doesn't need government guarantees to obtain loans.

The borrowing companies have until 2006 to pay back the loans. But Congress has already set aside $140 million to cover defaults.

Source: Robert Guy Matthews, "Steelmaker-Aid Plan Draws Industry Flak as Market Softens," Wall Street Journal, January 9, 2001.


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