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Sunday, December 09, 2001

By Len Boselovic, Post-Gazette Staff Writer

The American steel industry, battered by one crisis after another for more than three years, may be poised for a comeback.

Top U.S. negotiator hopes to cut world overcapacity

One hundred years after a merger made U.S. Steel the country's first billion-dollar company, it is asking the federal government to assume billions of dollars in nonpension benefit obligations for thousands of retired workers.

It also is asking the United Steelworkers, a union that represents a steadily shrinking percentage of the industry's workforce, to accept major concessions that would lower costs.

Freed of those expenses and restrictions, the steelmaker would be in better trim to compete against foreign producers that have already bulked up through government-assisted mergers.

A revival of U.S. steel companies could be possible because of a combination of factors:

* Relief from imports, which have been blamed for two dozen bankruptcies, plant closings and massive layoffs, should be available early next year.

*The Bush administration is talking with other steel-producing nations to eliminate inefficient mills, which contribute to a global glut of steel.

* Domestic producers, who were ordered by President Bush to devise a restructuring plan as a prelude to import relief, have proposed an oft-prescribed cure for what ails industry -- consolidation.

Analysts who have studied the star-crossed industry for years are amazed that, for once, all of its stars seem to be aligned.

"The reality is something's probably going to be done," says Tony Taccone, a partner with First River Consulting in Pittsburgh.

The optimism is surprising given the steel industry's dismal track record with consolidation.

LTV Steel and Wheeling-Pittsburgh Steel, producers enduring their second bankruptcies, are the product of mergers. Bethlehem Steel never achieved the momentum it hoped for when it acquired rival Lukens in 1998 and is now also bankrupt.

Analysts lay some of the blame for the failed mergers on restrictive union contracts and on billions of dollars in retiree benefit liabilities inherited by the acquirers.

To avoid that fate, U.S. Steel, the only unionized steelmaker healthy enough to make consolidation possible, is asking for help from government and concessions from unionized workers.

One other industry precondition to consolidation -- government protection from imports -- will be addressed early next year when Bush acts on recommendations made Friday by the U.S. International Trade Commission. The suggestions fell short of what the industry was seeking.

"Besides imports, the biggest problem the industry has is consolidation," says Richard McLaughlin of Hatch Beddows & Co., a steel consulting firm.

It's easy to see why consolidation is so appealing to besieged steelmakers.

Compared with other industries, steelmaking is fragmented. With so many producers chasing the same customers, the industry lacks clout in negotiating prices. Nowhere is that more evident than in the automotive industry.

"For the first time, they could stand up to Ford, GM and Chrysler and have some market strength by not being set off against one another," says John Anton, a steel consultant for DRI-WEFA.

Two of U.S. Steel's potential partners, Bethlehem Steel and National Steel, are big automotive suppliers. If LTV, another automotive supplier, goes out of business as it has said it plans to do, the combined steelmaker would have even more leverage.

Pricing power wouldn't be the only benefit of consolidation. With more flexible union contracts, producers could boost productivity and cut costs by closing inefficient mills and laying off unneeded workers.

"If the merger goes through and everything stays open, you'll go from eight or nine weak companies to one large weak company," Anton says. "There's no reason to do this if there's not going to be plant shutdowns."

USW officials say they support the broad outlines of the consolidation terms USX Chairman Thomas J. Usher outlined last week. However, the union has insisted on a government-supervised consolidation that does not jeopardize jobs, a demand they reiterated last week.

"There may be too many steel companies, but there are not too many steel workers," USW President Leo Gerard says.

Unlike most countries, the United States can't make all the steel it needs, even with the horde of new, nonunion mills built in the mid-1990s. A large part of the import problem stems from that the fact that foreign producers must export because they produce more steel than their home markets can use.

"Even in full production mode, we're importing 20 percent of our needs, McLaughlin says.

But just because the country is steel short -- about 20 percent of U.S. needs are imported -- doesn't mean outdated, uncompetitive U.S. mills shouldn't be closed, Anton says. It's an issue bound to be addressed in the global capacity reduction talks the Bush administration is holding with other steel-producing nations.

In addition to negotiating plant shutdowns and layoffs, steelmakers will have to win more flexible work rules and pay plans that link pay to profitability. McDonald & Co. analyst Mark Parr estimates it costs unionized steelworkers $70 to $105 in labor to produce a ton of basic sheet steel vs. a nonunionized mill's labor costs of $15 or $20 per ton. The nonunionized mill's advantage may not be as significant as those numbers indicate, Parr says, but the figures demonstrate just how much more competitive unionized producers must become.

"It can be done. It's just a question of is there the will to do it?" he says.

Perhaps the biggest nut to crack is the so-called legacy costs: pensions and medical and life insurance benefits unionized steelmakers promised their workers. The programs are akin to Social Security in that there are far more retirees than active workers.

Five of nine major unionized steelmakers had unfunded pension liabilities at the end of last year, a gap that widened this year because of the stock market's performance and falling interest rates. Bethlehem Steel, which had a $325 million pension deficit at the end of last year, now has a $2 billion shortfall, says Chairman Robert S. Miller Jr.

Retiree health care costs are even more of a concern. Steelmakers, like most other companies, do not set aside much money to fund the benefits, instead paying for them out of operations. Additionally, while the government's Pension Benefit Guaranty Corp. insures a portion of pension benefits, there is no such safety net for other retiree benefits.

At year-end, the nine unionized producers had unfunded retiree medical benefits of nearly $9 billion. Bethlehem, Wheeling-Pitt and National, the three producers in merger talks with U.S. Steel, had a deficit of $3.7 billion on plans covering nearly 104,000 retirees.

USX Chairman Thomas J. Usher's insistence on a federal bailout of the retiree plans has raised howls of protest from nonunionized steelmakers and steel consumers. The Steel Manufacturers Association, which represents nonunionized producers, calls the plan an "unmitigated raid on the U.S. Treasury."

Other industries who provide medical care to retirees would want the same. Moreover, funding them with taxpayer money would fly in the face of Republican abhorrence of socialized medicine.

"This is an administration [in which] talking about public health insurance is like talking about communism," Anton says.

Just how willing Congress would be to foot the bill for a such a small but vital part of the economy remains to be seen. Neil Trautwein, director of employment policy for the National Manufacturers Association, says Congress has been so caught up in debates over benefits for displaced workers and mental health coverage that it hasn't even focused on unfunded retiree liabilities. "I'm not sure this has crested the radar screen yet," Trautwein says.

Anton wonders how much voters care about the industry's problems given that they are concentrated in basically five states: Pennsylvania, Ohio, Michigan, Indiana and Illinois.

"In the rest of the country, I don't think this issue has much legs at all," he says.

Even steelmakers who oppose federal aid for the benefits say resolving the problem would spur the mergers and acquisitions the industry needs.

Acquisitions "make absolutely no sense if you have to take all the legacy costs to your balance sheet. That's clearly, clearly a big hurdle," says Alan McCoy, spokesman for AK Steel, which has unionized and nonunion mills.

More than legacy costs prevented Bethlehem from taking full advantage of its purchase of Lukens, Miller says, pointing to depressed market conditions that few analysts predicted.

"You might even question whether that [acquisition] was right, but it just doesn't matter. This is where we are. What makes sense going forward is a ... consolidation of the industry," Miller says.

In order for that to happen, the government has to provide some legacy relief, he adds.

In spite of all the political, economic, commercial and diplomatic twists and turns resolving the problem will take, hope is building that the job will get done. Many believe the industry has been so devastated that Washington has no choice but to act.

"The government will find a way to finesse it," Taccone predicts.