Large and small companies; billets. A significant fact is the difference between the costs of large companies, which are well integrated, and small companies, which are not. A good example here is Bessemer billets. In this product intermediate profits have also accumulated through ore, coke, pig iron, etc. For the group of large companies the book cost of billets was $19.89; for small companies, $22.54. The difference was $2.65. But now taking out transfer profits, the cost for large companies was $17.56 and for small companies $21.69, a difference of $4.13 between the two. The large companies represented here included the Steel Corporation, the Republic, Lackawanna, and Jones & Laughlin steel companies.

Part of this difference in favor of large companies must, of course, cover a greater investment, due to higher integration; part is due to superior efficiency resulting from such integration; but part represents also monopolistic control, especially in ore.

In so far as this difference means a larger per cent of return on each dollar of investment, it is a real difference in industrial position between the two groups. This difference must be considered in any public action affecting both classes of companies.

Other products. The Bureau has not attempted to revise these costs beyond the simpler finished products. As the elaboration increased, the difficulties of revision increased disproportionately. The chief intermediate profits, however, are in the raw materials, ore and coke, and certainly largely included in the pig iron. Accordingly, they are necessarily carried forward into all finished steel products.

A broad survey of "book costs" of steel products can, however, be obtained from the following table. These costs have not been revised, and therefore include considerable transfer profits.

Unrevised Book Costs.

Integration costs of United States Steel Corporation. For the foregoing combined costs of a number of concerns the Bureau computed the revised costs. But for the Steel Corporation the Bureau received, from the Corporation itself, its book costs of various products and the record which it kept of its own intermediate profits on such products for the year 1910.

Its intermediate profits are the highest and its net costs are the lowest. This fact, and its unique character and dominating position, make the costs of this Corporation a matter of public importance.

The Steel Corporation is by far the most highly integrated concern in the industry. It not only makes pig iron, steel, and most of the various rolled products, besides some more elaborated articles, but it also mines its own ore and coal, produces its own coke, and does all this more completely than any competitor. Finally, it links up its ore mines with its furnaces by its own rail and vessel lines and dock companies. In its control of ore railroads, both north and south of the Lakes, it stands in a class by itself. For this reason its "transportation" profits, as well as transfer profits, are here deducted to show its net or "integration" costs.

The results of this integration and of the Corporation's position in the industry are shown by its total integration costs, as follows:

Integration cost of ore, when mined and transported to lower Lake ports, $2.40. The book cost was $2.88.

Bessemer pig iron, integration cost, $10.21. The book cost was $14.39. Included in both cases is an item of general expense and depreciation - "additional costs"- approximated at $0.50.

Bessemer rail ingots, integration cost, $12.77. Book cost, $17.45. (Including in both cases "additional costs" approximated at $0.60.)

Heavy standard Bessemer rails, integration cost, $16.67. Book cost, $21.53. (Including in both cases "additional costs" approximated at $1.30.) The difference here, $4.86, is about equally divided between transportation profit and transfer profit. This division for rails gives a general idea of the importance of transportation profits.

These integration costs are the lowest in the domestic industry. They can not, however, be compared with the combined figures previously given for 1902 to 1906, because of the difference in the kinds of profit eliminated, the difference in dates, and the difference in companies.

The intermediate profits which were eliminated to reach these low costs are the largest per ton in the industry. But they must be set against the most extensive investment per ton of product. The margin between these costs and selling prices must cover a return on all the agencies of mining, transportation, and manufacture, from the ore and coal to the finished product.

Profits on railroads and ore reserves. The most significant profits were those on ore and on railroad transportation. In so far as the Steel Corporation enjoys monopolistic power, it lies chiefly in these two factors.

The Bureau's revisions indicate a rate of profit of about 10 per cent (for the period 1902 to 1906) on the average total investment of the Steel Corporation in ore (as estimated by the Bureau in Part I of this report, already issued). Whether such a rate of return is reasonable in itself is not of first importance. The essential fact is that 10 per cent profit is earned on the whole ore holding. Thus, while earning 10 per cent., the Steel Corporation can also carry a vast ore reserve far in excess of its present requirements and so large as to have distinctly monopolistic features, can exercise on the entire industry the undefined but real power that such concentration of the ultimate resource must give, and can assure itself of the certain increment of value that will inevitably occur with the diminishing of our available ore supply so long as the existing conditions of concentration are allowed to continue.

The ore rates on its two ore railroads have been excessive. In so far as they exceed a reasonable return, they not only benefit the Corporation by a high profit on the ore of other shippers, but correspondingly handicap the business of such competitors, who must ship over these roads. These rates were reduced in November, 1911.

Such control of public agencies of transportation by an industrial corporation carries with it just such possibilities of abuse, and raises the question whether the public interest in this industry does not require a segregation of the ore railroads of the Steel Corporation.

Very respectfully,

Herbert Knox Smith, Commissioner of Corporations.

The President.