Sunday, May 13, 2001

Steel performance causes chills at the mills

Wave of acquisitions could be next for beleagured industry

By Alan Clendenning
The Associated Press

and Mike Boyer
The Cincinnati Enquirer

        The workers toiling around the huge furnaces at Allegheny Ludlum's steel mill in Brackenridge, Pa., always take notice of strangers in business suits. A few months ago, there were visitors from Germany. The next group was Japanese.

        Both events sent rumors flying around the bars of Brackenridge, a town of 3,500 about 15 miles northeast of Pittsburgh. Will a foreign company buy the mill? Is a merger with another steel maker in the works?

        “When a tour comes through, we have no idea who they are,” said Peter Varos, financial secretary for the mill's chapter of the United Steelworkers of America. “A lot of guys are talking, and thinking they'll sell the company.”

        Such talk isn't confined to Brackenridge. So many U.S. steel makers have turned in such poor financial performances recently that experts say a wave of mergers among them is inevitable — and the only way to revitalize the industry.

        “We don't need one or two deals,” said Waldo Best, an industry analyst with Morgan Stanley Dean Witter & Co. “We need 10 or 20.”

        But mergers have been difficult to arrange because of a variety of obstacles, among them the heavy debt loads carried by companies.

        There's also a reluctance by top managers to negotiate with buyers because they generally own little stock in their companies, and thus don't stand to reap huge benefits in a buyout, said Charles Bradford, a metals analyst at Bradford Research Inc. in New York.

        Mr. Bradford is among a number of analysts who have been advocating consolidation, but he also sees major hurdles because of the weakened state of many U.S. producers.

        Steel company stocks are cheap but the companies also carry huge liabilities on their accounting books which no buyer would want. Bethlehem Steel, for example, has about $2 billion in liabilities, he said.

        Middletown's AK Steel, because its management has successfully demonstrated a turnaround at the company that was on the verge of bankruptcy a decade ago, would be viewed as a logical consolidiator.

        “They've done the best job of turning themselves around,” Mr. Bradford said. “But every time I raise the question of consolidation they say they've looked at everybody and can't find anybody who makes any sense.”

        Mergers and acquisitions among the so-called minimill operators probably makes more sense because they don't have the high labor and pension costs of the integrated producers, he said.

        Co-Steel, one of the owners of Gallatin Steel, the flat-rolled minimill producer outside Warsaw, Ky., made no secret of its interest in seeking a buyer for its interest a couple years ago but without success, Mr. Bradford said.

        Consolidation might take the form of three or four companies getting together and streamlining their operations, he said. Momentum for that kind of large-scale merger could come from any of a number of large overseas steel producers.

        Because the large auto and appliance makers want to buy from one source around the world, Mr. Bradford said, any steelmaker “without 15 million tons of capacity may not be viable in another five years.”

        Still, would-be deal makers are busy, said Michael Locker, president of Locker Associates, a New York-based consulting firm that works with the steelworkers' union.

        “The investment bankers are all running around trying to find matches,” Locker said. “Eventually the shoe will drop.”

Bankruptcies filed

               In recent years, 18 U.S. steel makers have filed for bankruptcy protection. Two have locked their gates and 15,000 steelworker jobs have been lost. The producers that persevered are struggling on the down side of a harsh market cycle.

        The problems started in 1997 when the Asian financial crisis halted a construction boom in Asia, leaving a glut of steel on a world market already softened by overproduction.

        The nation's No. 1 steel maker, USX Corp.'s U.S. Steel Group, reported a first-quarter loss of $98 million, or $1.12 a share. That compares to a profit of $43 million, or 45 cents a share, in the first quarter of 2000.

        The company recently announced a reorganization that would separate its Pittsburgh-based steel arm from its energy division, Houston-based USX-Marathon Group. USX said splitting the businesses will give the companies more flexibility to expand through acquisitions.

        Steel workers are worried the stock price declines may tempt foreign companies to make cheap acquisitions that could bring plant closures and layoffs. Some U.S. steel mills are owned by foreign companies, but most are in domestic hands.

        “They're going to buy these companies for a song and a dance, rather than what they might be worth in a better market,” said Joe Rosel Jr., a United Steelworkers union official at the Bethlehem Steel Corp. plant in Sparrow's Point, Md.

        Mr. Rosel, a third-generation steel worker, said the 3,500 workers at Sparrow's Point are more worried now than they have been in the past about consolidation in part because the industry struggled while the rest of the U.S. economy was thriving.

        “It used to be when times were bad, then we'd be OK in good times,” he said. “Now we don't make money hardly in the good times either.”

Foreign "dumping'

               The U.S. steel industry has complained for decades that a big part of the industry's problem is alleged “dumping” by foreign companies — that is, selling steel below the cost of production to gain market share.

        After years of futile efforts to convince federal officials to impose high tariffs and quotas on foreign steel imports, steel makers have found friends within the new Bush administration. Last week, the Commerce Department issued a preliminary order authorizing penalties against steel makers from 11 countries, though the earliest they could be fined is August.

        In Brackenridge, mill employees always grouse about cheap imports. Some are concerned about the possibility of a sale, while others are not.

        A spokesman for Allegheny Ludlum — which has 14 steel mills, most of them in Pennsylvania — wouldn't comment on sale rumors. The spokesman, Dan Greenfield, said the recent visitors to the Brackenridge plant might have simply been steel customers.

        Mr. Varos, the union official, said employees close to retirement worry that selling the plant would mean layoffs and loss of some pension benefits. Younger workers aren't so concerned because few believe their jobs will last until they're ready to retire, he said.

        Employment now stands at about 1,500 — down from the 4,500 who worked at the mill when Varos was hired 35 years ago.

        After finishing a 13-hour shift, Ron Smith sat sipping a Rolling Rock beer in Joe and Laura's Locker Room bar, close to the plant. Mr. Smith, a 50-year-old maintenance foreman, said he thinks the mill will close within a decade, but that he plans to retire sooner than that and wouldn't mind working for another owner in the interim.

        “As many years as I've got here, I really don't care who runs the place,” said Mr. Smith, who started working at the mill in 1973 after serving in the Army in Vietnam. “The people I work with, they're all over 40, and I really don't think it matters to them who they work for.”

No simple deal

               Selling steel mills or the companies themselves is no easy matter.

        Many owe billions of dollars in so-called “legacy costs” — pension and medical-care benefits for hundreds of thousands of steel workers who retired early or lost their jobs during industry consolidation in the 1980s.

        U.S. steel makers also have heavy debt loads because the equipment used to make steel is expensive, and the cost of modernization is staggering. On top of that, older plants could face huge costs to clean up pollution or contamination left behind.

        At least one big U.S. steel maker is in an expansion mode.

        Nucor Corp., the nation's No. 2 steel maker, in March agreed to pay about $115 million to buy Auburn (N.Y.) Steel Co.

        Nucor, based in Charlotte, N.C., makes steel from scrap and uses non-union workers, but the company wasn't immune from the steel price slump affecting the entire industry. It reported a 60 percent drop in first-quarter earnings, as sales fell 17 percent to $1.03 billion from a year earlier.

        Company president Daniel DiMicco said Nucor is still considering other purchases, though he wouldn't name targets.

        “We believe at the present time that the acquisition strategy is a sound one in North America.”


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