[Herbert Knox Smith, the Commissioner of Corporations, submitted to the President, Jan. 22, 1912, a report on the cost of production in the steel industry. Accompanying the report was a letter of submittal which in effect is a summary of the results of the inquiry. This letter is here reproduced entire to show not only the facts and conclusions but the form in which such matters are presented to the President. (Report on the Steel Industry, Part II, cost of production, preliminary report, pp. xiii-xviii.) ]

Department of Commerce and Labor,

Bureau of Corporations,

Washington, January 22, 1912.

Sir : I have the honor to submit a report on the cost of production of iron and steel.

The cost of steel making is a basic industrial fact, which bears on tariff legislation, prices and profits in a great industry, and the concentrated control of a great natural resource.

The Bureau has used the actual records of companies covering, roughly, two-thirds of the country's production of iron and steel for 1902 to 1906. These data are most complete. More limited figures for 1902 to 1910 make it clear that these five-year figures substantially represent present conditions also.

The costs of the United States Steel Corporation for the chief materials and products are also given for 1910.

During 1902 to 1906 the steel industry was based on Lake ore, but very low costs for Southern pig iron appear in the report.

"Book costs" and "intercompany" profits. Many of these companies were highly "integrated"; that is, they linked up under one control, through various subsidiaries, ore mines, blast furnaces, steel works, etc. Their "cost sheets," however, did not correspond with this integration. The costs of each subsidiary were shown as though it were independent, and included profits paid to other subsidiaries. To illustrate, one subsidiary of a combination, operating blast furnaces, would pay to another subsidiary, which mined ore, a price for ore that included a profit to the ore company. This price would, however, be entered by the furnace company as a part of its costs. That is, they were "book costs," and they included considerable profits really received by the same interests.

These intermediate profits are very important. For example, the average "book cost" of Bessemer pig iron over the five-year period was $13.89 per ton. "Transfer" profits were $1.79, leaving a net cost of $12.10. (Gross tons are used throughout, except where otherwise specified.)

The bureau deducted these intermediate "transfer" profits for all the important simpler products. The resulting "revised cost" must, however, be handled with great caution. The margin between this revised cost and the selling price is, of course, much larger than the margin over the "book cost"; but, on the other hand, that larger margin must cover all the stages of production, and therefore a much larger investment. The profit above the "book cost" of a subsidiary is to be applied simply to the investment of that company. On the other hand, the profit above the revised cost of an integrated company, carrying through many stages of production, must be set against that entire investment.

The Bureau has presented the cost data, combined for a number of companies, in two forms for each product: (1) It gives first the average book cost thereof; (2) it has then deducted the average intermediate "transfer" profits, thus showing the revised cost.

One of these companies, the United States Steel Corporation (hereafter referred to as the Steel Corporation), has also large intercompany profits on transportation, chiefly in carrying its ore on its own railroads. In the Steel Corporation's costs, which are given later, these "transportation" profits are also deducted; but not here. Only the Steel Corporation has such profits to any considerable degree, and to deduct them in the present combined figures would give an average for all companies which would be true neither for the Steel Corporation nor for the other concerns.

Cumulative effect of cost of ore. A fundamental fact is the cost and profit on ore. Ore is the raw material for iron and steel, and its costs have an underlying and cumulative effect through all stages of production and ultimately on the prices of the finished product. The report shows that there were high intermediate profits on ore going into pig iron, with marked cumulative effect on all finished products.

Cost of steel rails. It is impossible to give here the detailed cost figures of the full report. Simply the general principles are stated, the nature of the information, and its more striking relations to the public interest. An illuminating view of costs in general, however, can be had from an outline of steel-rail production and costs.

Starting with the chief raw materials, ore and coke, the "book cost" of ore for the five-year period was $2.64. The only "transfer" profit in the cost of ore itself was an intercompany royalty of $0.02 per ton, leaving a net average cost of ore of $2.62.

For Connellsville coke, the principal kind used, the cost was $1.43 (net ton), with no intermediate profits.

Passing now to the next step, Bessemer pig iron. Intermediate profits in ore and in coke, as they go into pig iron, are large. Furthermore, these costs, profits, and freights to the furnace are multiplied because it takes about 1.8 tons of Bessemer ore and over 1 net ton of coke for 1 ton of pig iron. The average book cost of the ore for 1 ton of pig iron was $7.36; coke, $3.81; and limestone, $0.43. The so-called "cost above materials," necessary for converting that ore into pig iron, was: Labor, $0.73; other operating cost, $0.80; and depreciation and general expense, $0.76. The total makes a book cost of pig iron of $13.89. Taking out now the transfer profit, $1.79, there is left a net cost of $12.10.

Advancing to Bessemer rail ingots, there appears a book cost of $17.59. All the preceding intermediate profits, however, have been carried forward in the book cost of the raw material, pig iron. Thus, the total "transfer" profits for ingots were $1.84, leaving a net ingot cost of $15.75.

For heavy Bessemer rails, finally, the book cost was $21.27. This is based on the book cost of ingots. The final transfer profits were $2.47. Deducting these leaves $18.80 as the revised cost. The total difference is thus a very considerable amount. About one-fourth of this revised cost was for labor in all stages of production, as appearing directly in the cost sheets.

In the text, the general principles and form of presentation for other products are the same as for rails.

Rail investment. The relation of these integration profits to entire integration investment may be roughly illustrated here. The price of Bessemer steel rails has been fixed for over 10 years at about $28 a ton. The cost, eliminating transfer (but not transportation) profits, is $18.80 per ton. This leaves a margin of $9.20. The total mining and manufacturing investment (excluding transportation properties) actually behind this steel-rail production, from ore to rails, is from $80 to $55 a ton. On this investment the margin, $9.20, represents a profit of from about 11 to 17 per cent. The margin between revised cost and price must in this way be distributed over the entire investment thus attributable to the product in question.