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Steel mega-merger planned

Before going ahead, U.S. Steel, Bethlehem need help from U.S. and USW

Wednesday, December 05, 2001

By Len Boselovic, Post-Gazette Staff Writer

U.S. Steel disclosed yesterday it is working on a blockbuster merger with Bethlehem Steel and possibly one or more other domestic producers. However, the steelmaker said the merger, which could create a company that controls as much as a third of U.S. steelmaking capacity, won't get done without billions of dollars in federal aid and big concessions from the United Steelworkers of America.


 
 
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USX Chairman Thomas J. Usher specified three requisites for consolidation: approval of President Bush's plan for import relief; government assistance for industry pension and retiree health care obligations; and a "progressive new labor agreement" that would significantly reduce operating costs.

"U.S. Steel believes that consolidation of the industry under the right circumstances will be a positive step toward restoring the health of this vital part of the American economy," Usher said.

Usher has held preliminary discussions with Bethlehem, Wheeling-Pittsburgh Steel, and other unidentified steelmakers as well as with the USW. Usher said parties to those discussions generally support consolidation on the terms he outlined.

But nonunion steel producers, who aren't burdened with retiree obligations, objected to Usher's prescription for the beleaguered industry.

"To say that we can only do this if you rescue us is baloney," said Keith Busse, president and chief executive officer of Steel Dynamics, a profitable nonunion producer based in Fort Wayne, Ind.

"I think it's corporate welfare and I'm against it," he said.

Pressure for consolidation in the industry, whose infirmities include cheap imports, weakening demand, mounting competition from low-cost nonunion producers and a strong dollar, has been building for some time. About two dozen steel companies are in bankruptcy and prices are the lowest they have been in at least 20 years.

"While there's no guarantee consolidation is going to solve the problem, it certainly seems to be a better idea than every one sitting around and trying to muddle through the way they have," said Tony Taccone, a partner with First River Consulting in Pittsburgh.

Usher's proposal would remove what analysts say have been two of the biggest roadblocks to creating a more competitive industry -- a new "progressive" labor contract and help on burdensome retiree costs. Moreover, if the plan eliminates inefficient capacity, it could be a big boost for domestic steelmakers, said James Burnham, a Duquesne University professor who specializes in the steel industry and international trade.

Some of the pressure for consolidating has come from the Bush administration, which asked the industry to develop a restructuring plan in exchange for government help on trade and on excess global steelmaking capacity. On Friday, the U.S. International Trade Commission is expected to give Bush its recommendations for protecting the industry from imports.

Based on last year's production, U.S. Steel and Bethlehem together would create a steelmaker with 34,000 U.S. employees, 168,000 retirees, annual sales of $10.3 billion and the ability to produce 24.6 million tons of steel annually. If consolidation works the way Burnham and other advocates hope it will, the combined company would end up with fewer employees than that and reduce its production capacity by closing inefficient mills.

But the prospect of such moves has made USW officials wary of consolidation. Yesterday, USW President Leo Gerard said the union was "committed to working constructively toward a rational consolidation, one that ensures the preservation and revitalization of existing U.S. steelmaking capacity."

However, he sounded a cautionary note on eliminating jobs.

"There may be too many steel companies, but there are not too many steel workers, and any restructuring must preserve the jobs of the workers who have made sacrifice after sacrifice in order to keep the industry alive," Gerard said.

Bankrupt Bethlehem Steel issued a statement supporting Usher's proposal.

"The devastation we are witnessing may have created the window of opportunity to once and for all fix what has been a recurring problem frustrating steel industry and government officials alike for more than a quarter of a century," said Robert S. Miller Jr., Bethlehem's chairman and chief executive officer.

Miller said the plan calls for the government to pick up a portion of Bethlehem's $3 billion obligation to provide health and life insurance to the company's 75,000 retirees. The government would fund those benefits for current retirees and their dependents, while future benefits for the company's 13,000 active workers would be funded by the company.

The price tag for the federal program would depend "on who are the other companies that join this party," Miller said. He said U.S. Steel would not seek government assistance for its retiree obligations, an assertion U.S. Steel spokesman John Armstrong declined to comment on.

Four or five steelmakers are part of the early discussions, Miller added, declining to identify the others. Wheeling-Pitt spokesman James Kosowski confirmed the company's participation, but declined further comment. National Steel is believed to have been part of the discussions. National spokesman Ron Freeman also declined comment.

Usher's plan faces opposition from more than just nonunion steelmakers. Foreign steelmakers are bound to object, accusing the steelmakers of demanding the same sort of government subsidies they object to their overseas competitors receiving.

Additionally, the more steelmakers that are involved in the merger, the more antitrust issues will be a concern. Taccone doesn't think that will be as much of a problem as some believe. He said that given the lengthy talks between the industry and Bush administration officials, chances are slim that the industry would propose a plan that wouldn't receive antitrust clearance.

"Even if it's a 30-million-ton steel producer, I don't think it would be an issue," Taccone said.

The industry has made several stabs at consolidating in the past, but without much success.

Analysts said those mergers didn't create all the savings mergers make possible because USW contracts prevented steelmakers from increasing productivity and reducing employee-related costs.

"I think they've been the main obstacle to date," said Chris Olin of Midwest Research in Cleveland.

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