Consolidation talk picks up speed

Seeing the U.S. integrated steel industry struggle through what is arguably its darkest hour is like watching a rowboat head for the falls: Almost everyone watching agrees on what needs to be done, but getting things turned around, they'll also agree, is nearly impossible.

Legacy Costs

So what's to be done? It's clear that decades of inertia must end and that integrated steel mills — those that produce steel from scratch with iron ore, coke, and limestone-must consolidate or die.

As news of LTV's imminent death surfaced this autumn and the U.S. International Trade Commission (USITC) readied its tariff recommendation for President Bush, No. 1 U.S. steelmaker U.S. Steel-which spun off from USX Corp. and regained its independence last week-announced that it had entered into merger talks with some other steel companies, which include Bethlehem Steel, Bethlehem, Pa.; National Steel, Mishawaka, Ind.; and likely Wheeling-Pittsburgh Steel Corp., Wheeling, W.Va.

But almost everyone who knows the industry confides that the monster pushing the industry toward the edge is the steel mills' collective burden of retiree pension and health care benefits. Not only is it a fixed cost that gets bigger at every retirement party, it represents the single greatest impediment to the mergers that so desperately need to happen. Who wants to merge only to pick up that much more liability?

U.S. Steel says that the government must create a program to aid with legacy costs for mergers to go forward.

"What we say is that if these issues are dealt with, we would be happy to participate in the consolidation of the industry," U.S. Steel spokesman John Armstrong said. If they don't get done, "we will go along and pursue other avenues as far as strengthening the company."

And whether or not the federal government takes direct action by setting up special funds for pensions and health care, Uncle Sam probably would still be on the hook for much of those costs by default through the Pension Benefit Guaranty Corp. (PBGC) and Medicaid, according to Armstrong.

In fact, the PBGC's list of beneficiaries includes several metals companies, including Northwestern Steel & Wire, Sterling, Ill., and, most recently, Empire Specialty Steel, Dunkirk, N.Y. A spokesman for the PBGC, a federal agency formed in 1974 to be the insurance program for defined-benefit pensions and funded by pension plans themselves, said the PBGC's would take over LTV's program if buyers of the company's assets don't.

"If it becomes necessary for us to step in, we will step in and become the trustee of the benefits package and pay those benefits," said the spokesman, who asked not to be identified.

The union also has to do its part to go forward, one analyst said.

"The union has to reduce benefits," said Mike Gambardella, an industry analyst for JPMorgan. "That's the first thing that has to happen. If they don't do that ... I think the alternative is that other constituents that have been trying to find a solution to the industry's problem then don't feel the incentive to do anything."

Marking legacy costs as the major impediment to consolidation-and most industry observers agree-The United Steelworkers of America (USWA) union has suggested that the federal government foot the bill.

"[Leveling the playing field] can only be done by relieving American producers of their legacy costs, because our steel industry is the only one among the major industrialized nations in which the cost of retiree health benefits isn't subsidized in one fashion or another," USWA President Leo Gerard said in a recent union release.

Then again, there are those who believe the health care and benefits albatross is but a handful of feathers compared to other conundrums, namely the disparity in world currencies and excess world capacity. For example, before the Asian crisis and the increase in steel imports to the U.S. in the late 1990s, hot-rolled coil was selling in Europe for about 600 deutschemarks (DM) per ton, which translated into about $341, New York City-based steel industry analyst Charles Bradford said. Fast forward to a few weeks ago: That same 600 DM was worth about $270 — a $70 reduction based on currency alone.

"All the talk about retiree health care is minimal by comparison," he said.

"The problem is, who has the excess [capacity] and how do you get rid of it?" Bradford said. "We're probably just as guilty as anybody.

"GM has twice the retiree liability of the entire steel industry," Bradford added. "Ford's is equal to the entire industry. You give it to steel, you've got to give it to everyone else."

Nevertheless, Bradford said he's been a big fan of consolidation for many years and also admits, "Every time I bring up the idea, I hear, 'My company is in good shape, but I don't want to hurt my company by taking over somebody else's retiree health care liabilities.'"

Whether through nationalized health care, which Bradford contends is the only answer to the legacy cost conundrum allowable under World Trade Organization rules, or a government bailout customized for the steel industry, most people agree that some form of federal help is the only way for the steel industry to leap the legacy cost hurdle.

Then, of course, you have the bankruptcies, which have sunk about 20 steel producers since 1997.

Bankruptcies

In an industry roiling in the perfect storm, LTV is playing the lead in "Titanic" after filing for bankruptcy in December 2000 and now announcing, one year later, that its common stock is worthless.

"This is the second time in a generation that this has happened," Rep. Pete Visclosky, D-Ind., whose district in northwest Indiana is home to more steelworkers than any other in the county, said of the LTV bankruptcy. "But people understand this is the final act."

Indeed. The company has hot-idled its steel mills in preparation for selling them, presumably in February. That's when the company will be holding an auction in Cleveland to sell the assets at its Indiana Harbor facility in East Chicago, Ind., and its Cleveland Works East plant. LTV already has sold its VP Buildings unit and is seeking a buyer for its Copperweld unit, the country's largest producer of steel tube and pipe.

LTV officials told a bankruptcy court judge last month that it had no more cash to pay retirement and unemployment benefits. LTV spokesman Mark Tomasch said the company's legacy costs were more than $150 million a year, which went to support 100,000 retiree beneficiaries on the backs of 7,500 active workers. The company has been unable to address that conundrum over the past year and now is liquidating its assets.

"In our case, we will just cease paying those costs, but we also go out of business," Tomasch said. "It's the worst solution there is, I guess."

Tomasch said the problem is that the industry has not moved with the market, due in large part because the current labor contracts were forged when integrated steelmakers basically had no domestic competition.

"That's not the case today," Tomasch said. "As long as you're faced with costs that cannot be addressed or changed to keep in step with a changing marketplace that's a formula for disaster.

"Unless something fundamental changes in the economics, there are going to be more LTV situations," he said. "In fact, there are going to be more this year."

Visclosky, co-sponsor of H.R. 808, the Steel Revitalization Act of 2001, and perhaps the most avid steel industry advocate in Congress, said that consolidation talks "certainly are anticipated" but repeated the familiar refrain that government intervention is needed to remove the overhang of legacy cost liabilities.

"Even though [U.S. Steel] is in a stronger financial position, relatively speaking, everyone is losing money," Visclosky said.