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purchase price less the tax revenues that will be initiated and generated by the purchase. Compare this to a purchase from foreign sources where the expenditure is placed in a foreign economy with no opportunity for U.S. taxation. Here, we will not comment on other factors such as the impact on our balance of trade, reduced number of jobs for the labor force or reduced capital investment.
The attached chart indicates the flow of funds when the Government purchases from a U.S. company. For these illustrative purposes we have utilized the following assumptions:
Average return on sales before tax of 10 percent. Corporate income tax rate on incremental income of 48 percent. Overall (corporate and personal) tax rate on incremental U.S. source income of 25 percent.
Multiplier effect of two. As can be seen the net cost to the Government on a $1 million purchase from U.S. sources is $476,000. Therefore, in this example the “breakeven point” in the purchasing decision is when the foreign source price is equal to 47 percent of the U.S. source price.
66-676 0 - 81 - 15
and Retained Earnings
TOTAL GOVERNMENT COST
$1,000,000 Less (48,000)
STATEMENT OF THE LUKENS STEEL Co., CHARLES A. CARLSON, JR., CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
Charles A. Carlson, Jr., Chairman and Chief Executive Officer, Lukens Steel Company, said that Lukens, which currently employs approximately 4,000 men and women, is a supplier of steel plates for high technology, heavy wall pressure vessels used in the petroleum, chemical, petrochemical, nuclear and synfuels industries.
Lukens facilities for the production and heat treating of such steelplate and plate shapes are currently underutilized as a result of the very low level of activity in the shops of the nation's three major heavy wall vessel fabricators. Partially as a result of this lack of domestic business, Lukens' own workforce is reduced by 500 persons from a year ago.
American heavy wall pressure vessel fabricators have the facilities in place, techological knowhow and available capacity to meet domestic requirements and a desire to participate in the development of the American synfuels industry. However, due primarily to predatory pricing practices, Japanese fabricators have captured some 80 percent of the heavy wall pressure vessel fabrication tonnage in the past six months, including apparently the 14 gasifiers for the nation's first commercial coal gasification plant to be financed with government-guaranteed loans under the Synfuels Act.
Lukens protests a government-backed program supported with taxpayers' dollars using foreign fabrications and containing foreign steel plate at the encouragement of the Department of Energy and the expense of American industry and American labor.
A study prepared for Congress by the Library of Congress demonstrates that the return to the economy and the government in the form of taxes of a domestic purchase outweighs the savings of foreign procurement unless the offshore price is more than 50 percent below the domestic price.
The continuing incorporation of Japanese capital equipment in synfuels projects merely exchanges our energy dependence from the Mideast to Japan and the use of foreign technology in the initial commercial project will provide the Japanese with a competitive and technological advantage as additional projects become available.
Provisions should be made to assure American participation in the fabrication of major capital equipment for the synfuels program to avoid the shutdown of vital high technology fabrication facilities, the unemployment of skilled workers in both the fabrication and steel industries and the loss of technological leadership.
Lukens Steel Company is pleased to have this opportunity to submit a statement to the Subcommittee on Trade of the House Ways and Means Committee regarding the distressing and potentially harmful trends taking place in the trade with Japan of high-technology, heavy-walled pressure vessels.
As a matter of background, I am Charles A. Carlson, Jr., Chairman and Chief Executive Officer of Lukens Steel Company. Our company was founded in Coatesville, Chester County, Pennsylvania in 1810 and has been in continuous operation there since that time. We also operate a steel plate rolling mill in Conshohocken, Montgomery County, Pennsylvania, which was acquired in 1978 following the bankruptcy of the former Alan Wood Steel Company. I might add that the financial troubles of that firm were due in part to foreign steel imports.
Lukens is the second largest employer in Chester County and provides employment for approximately 4,000 men and women, many from third or fourth generation steelworker families.
Our company is unique in the steel industry in that it devotes all of its facilities and resources to the development, production and marketing of steel plate and plate products. As a result, Lukens ranks third in the steel industry in steel plate production capability and produces carbon, alloy and clad plates, heads and plate shapes. We produce steel plates in thicknesses up to 30 inches, as wide as 195 inches and weighing as much as 50 tons apiece.
The thickness, size and weight capabilities of Lukens have a distinct bearing on the pressure vessel business about which I would like to comment today. While there are numerous markets and applications for Lukens steel plates, Lukens' specialty capabilities in heavy plate production and heat treating make our company particularly suited to service those companies which design, fabricate and construct pressure vessels used in petroleum refineries, chemical plants, nuclear power plants and, hopefully, the new breed of synthetic fuels plants.
The fabrication of these vessels requires sophisticated technology, skilled manpower, and production facilities of specialized design. Numerous fabricators have such facilities including three companies in the United States which are capable of producing vessels with walls up to 12 inches thick. They are Chicago Bridge and Iron, Combustion Engineering and Babcock and Wilcox. Their facilities for the fabrication of heavy-wall vessels are located in Cordova, Alabama; Birmingham, Alabama; Memphis, Tennessee; Chattanooga, Tennessee; and Mount Vernon, Indiana. These companies are customers of Lukens Steel Company, but none are operating at anywhere near capacity. Two of the five facilities (Cordova and Mount Vernon) are now in “moth balls” for lack of work and the remaining three are limping along with virtually no backlog and are on the verge of closing their doors for lack of work.
This means that Lukens plate manufacturing capabilities are likwise underutilized. Our unemployment level also is partially a reflection of the unemployment in the fabrication industry. We currently employ about 500 fewer steelworker than a year ago.
If this lack of current vessel business were due solely to the state of the economy, one might find the conditions regrettable but understandable. It is true that heavywall vessel technology was developed to serve a nuclear industry which today is virtually non-existent, but the technology, once developed, was applied to process vessels in other industries, such as the petroleum industry and ultimately the Synfuels industry. In these industries there have been opportunities for business in 1980. What has happened to these opportunities? Let me tell you what happened to the petroleum industry opportunities of which we were aware and in which we had an interest as a possible steel plate supplier since March of this year.
In April, Japan Steel Works underbid American competitors by 20 percent to win a contract for the fabrication of nine pressure vessels weighing 7,000 tons for Chevron Oil Co., Pascagoula, Mississippi. If Lukens Steel Company had given the American fabricator the steel plate free of charge that firm's bid would not have been lower than the Japanese bid.
In June, an American fabricator bidding at cost on six pressure vessels weighing • 3,400 tons for Phillips Petroleum, Borger, Texas, found they were underbid by Kobe Steel, Ltd. of Japan, a firm that would have to transport the fabricated vessels over 8,000 miles.
In July and August, Kobe underbid American fabricators for two pressure vessels weighing 1,000 tons for The Oil Shale Company of Avon, CA, and Mitsubishi Heavy Industries, Ltd. was awarded a contract for vessels weighing 900 tons for Chevron, again at Pascagoula.
During this same time period, two refinery vessel contracts were won by American fabricators requiring approximately 2,800 tons of steel plate, less than 20 percent of the 14,500 tons awarded from April through August this year for petroleum industry process vessel projects of which Lukens was aware.
With this background, you can understand our consternation at learning that 14 pressure vessels for the first commercial coal gasification plant to be built with taxfinanced government loan guarantees under the new Synfuels Program would likely be built by Japanese fabricators using approximately 2,000 tons of Japanese steel plate. The presidents of our two local unions, our own elected representatives and I have expressed our concern regarding this development in letters and telegrams, copies of which are submitted with this statement.
It has been estimated that the Synfuels program will require taxpayer support in the range of $88 billion through an assortment of government loans, grants, guarantees and subsidies over the long term. It is also a program which offers the potential for jobs in the American steel industry as well as jobs in the shops of American pressure vessel fabricators. Our steel industry has the capability of providing the steel and the fabricators have the capability to meet the vessel requirements. Just one of the three major vessel fabricators, Chicago Bridge and Iron Co., was quoted in the September 29, 1980 issue of Business Week as stating that alone it could turn out more than 60 of the high-pressure vessels used in coal gasification projects in a single year. If we have the technological knowhow,
the capacity and the desire to produce the fabrications for the American Synfuel Program in this country, why is the first government-backed commercial coal gasification plant likely to be built using Japanese pressure vessels?
The answer is twofold:
First, the Department of Energy encourages worldwide bidding to achieve the most favorable price.
Second, the Japanese engage in predatory pricing practices that they wouldn't tolerate from an American supplier attempting to sell in Japan.
In June of this year, Lukens Steel Company wrote in support of the Babcock and Wilcox Company protest that foreign bidding was being sought in connection with the procurement of two 700 ton vessels for the Solvent Refined Coal Project (SRC I) at Newman, Kentucky. In response to that protest, Thomas Anderson, Director, Office of Program Support, Procurement and Contracts Management Directorate, Department of Energy, on July 3 wrote:
"We believe discussions with foreign firms may be a prudent course of action in view of the substantial preliminary estimated cost of the vessels (at least $15 million) and corresponding potential for significant savings in Government funding needed for the project.”
This being an official position of the Department, it is not surprising that foreign bids were also sought for the Great Plains Coal Gasification Plant at Beulah, ND. However, we feel it is important to point out that a savings in purchase price may be a loss to the economy and to government tax revenues.
We are providing a chart which shows the return to the economy of a $1 million domestic purchase as well as a supporting report to Pennsylvania Senator John H. Heinz III, dated February 28, 1978, from the Library of Congress Congressional Research Service. These two documents indicate that unless the foreign price is more than 50 percent lower than the domestic price, our government stands to lose taxes it would otherwise have gained. These calculations do not take into account the adverse impact on our balance of trade deficit on the imports, reduced jobs and increased unemployment and welfare costs, or reduced capital investment by affected industries.
As to our second statement—that the Japanese secured the Great Plains contract as the result of predatory pricing-our knowledge is not firsthand. It is our understanding, however, that the Japanese achieved the significant 20 percent price spread only by quoting an unrealistically low freight cost from Japan to the Beulah, ND, site. It has been reported that foreign fabricators also have underutilized capacity and, as a result, they price their work to bring whatever the market will bear, regardless of cost. From their own nationalistic point of view they believe it more beneficial to subsidize their industries and to export their unemployment. This has been evident not only in the case of the Beulah, ND, project, but in most of the those instances where the Japanese have secured the vessel contracts cited earlier in my statement.
I have grave concern about this trend, particularly as it relates to our national synfuels program. This program is one which the President has heralded as a step toward independence from foreign energy sources. Because this is the lead project in a major national program, the first suppliers of the high technology equipment, such as pressure vessels, gain a distinct competitive and technological advantage in bidding subsequent projects when they become available. If the Great Plains Project is indicative of the type of price competition American suppliers will face in future synfuels projects and if no provisions are made to assure American purchases for major capital equipment in these projects, we will find America has gained energy independence at the price of dependence on foreign suppliers for the equipment for energy resource conversion. In essence, we will not have gained the energy independence being sought.
The continued export of this technology at the rate we have seen in just 6 months this year can only lead to the shutdown of vital high technology fabrication facilities, the unemployment of skilled workers in both the fabrication and steel industries and the loss of technological leadership. Japanese fabricators are sowing the seeds from which we will reap a higher trade deficit, larger unemployment rolls in industries already hard hit, and greater demands on government funds for unemployment and welfare compensation. We believe the situation cries out for congressional and administration attention.
Again, we appreciate this opportunity to express our views about a subject of vital concern to our company, our employees, and our community.