The American steel industry, haunted by 21 bankruptcies in recent years, is boiling down to a few huge companies who hope size can guarantee survival.þþCompanies like Birmingham Steel Corp. of Birmingham, Ala., National Steel Corp. of Mishawaka, Ind., and Calumet Steel Co. of Chicago Heights are operating in bankruptcy or have shut down, the victims of a pricing slump that began in the late 1990s and continued until last year.þþNow the survivors, mostly big companies like United States Steel Corp., are scavenging the remains of their competitors, buying blast furnaces and rolling mills at deep discounts. The consolidation gives the buyers more clout with customers, cuts administrative costs and increases their capacity at little cost.þþÿThere were nine [major steelmakers] and there will be three left when this is all done,ÿ said Tom Danjczek, speaking of integrated mills that transform ore and coke into steel. He predicts the survivors will be United States Steel, AK Steel Corp. and International Steel Group Inc., with another handful of independent mini-mills.þþSeveral factors are driving the consolidation.þþFor one, consolidation offers steelmakers more clout in dealing with their biggest, and most troublesome, customers--the Big 3 automakers.þþRichard McLaughlin, a practice director at Hatch Consulting, said a fragmented steel industry allows automakers to play one steelmaker against another to get the cheapest deal.þþÿIf there are only three or four American steel suppliers, they can't do that,ÿ McLaughlin said.þþThe same principle applies in Europe and Asia, where automakers are among the largest steel users. It is also true of the appliance industry, which also uses a lot of steel.þþConsolidation does not cost much because, at least for now, there is a glut of steelmaking capacity. . The Laclede steel mill near St. Louis, for example, was sold to investors for just $1 million. Bethlehem Steel Corp., one of the nation's largest steelmakers, is being sold for $1.5 billion, small change when its 11 million-ton capacity is considered.þþÿConsolidation certainly gives them a better chance at profitability,ÿ McLaughlin said.þþConsolidation has also gotten a push from the federal government. The federal Pension Benefit Guaranty Corp. has taken over the underfunded pension plans of defunct steelmakers, saving huge sums for acquirers. The pension funds at LTV Steel Co., Bethlehem and National Steel could potentially cost the PBGC $7 billion or more.þþThose underfunded pensions were a huge barrier to acquirers, in many cases making the sale of a steel mill impossible.þþWhy should the government insure pensions set up by private industry?þþÿThe government was going to end up paying many of these costs anyway,ÿ said Mike Dixon, a spokesman for United States Steel. If a defunct steelmaker cannot be sold, it is certain to fire its employees and liquidate.þþÿA far more humane way to do it was to take over these legacy costs and allow the industry to consolidate,ÿ Dixon said.þþSome observers doubt consolidation will save American steelmakers, however.þþCheap importsþþÿEven though the domestic industry has improved, and there is no question it has improved, in the long term I don't know how they are going to competeÿ with cheap imported steel, said Dan Quinn, an analyst with Morningstar.þþÿIt's a declining industry--the fundamentals are terrible,ÿ he said.þþEstimates vary, but the world's steel industry can produce roughly 100 million more tons of steel each year than it can sell. Talks are under way among industrialized nations about reducing capacity by closing economically marginal steel plants, but critics doubt much will be achieved.þþThe consolidation of the steel industry in the U.S. is being replicated around the world.þþArcelor, a Luxembourg company and the largest maker of steel anywhere, was formed by the merger of three smaller companies.þþDutch billionaire Lakshmi Mittal, who bought Chicago-based Inland Steel in 1998, is now bidding on a South African firm, the largest steelmaker on that continent. In Japan, two major steelmakers merged to form JFE Holdings.þþLast spring President Bush imposed tariffs of up to 30 percent on many types of imported steel. Meanwhile, China has become a major importer of steel needed for its booming economy and that has increased demand.þþThe weak dollar has also helped make imports costlier.þþÿWith the recent decline in the U.S. dollar, our prices are in line with the rest of the world,ÿ said Charles Bradford, head of Bradford Research.þþBest of all, at least from its competitors' viewpoint, LTV Steel Corp. temporarily shut down in early 2002, pulling 7.6 million tons of capacity out of the market.þþHot-rolled steel, a benchmark for prices, nearly doubled to $400 a ton for a time last year, although it has since dropped to a relatively healthy $300.þþSteel's problems began with the Asian financial crisis of the late 1990s, when steelmakers cut prices sharply as demand fell. Russia and Brazil flooded the market with inexpensive steel. The then-strong dollar worsened the situation by making imports less costly.þþWhen the U.S. slipped into recession, weakened steelmakers quickly went under. And the failures continue.þþSome see opportunity among the bankrupt steelmakers.þþAK Steel on Thursday sweetened its bid for National Steel Corp., which operates a mill in Granite City, Ill. The bid, which was accepted by National Steel, beat out U.S. Steel's offer. The deal must gain bankruptcy court approval.þþLast year Nucor Corp., the biggest of the mini-mills, bought Birmingham Steel Corp. and Trico Steel Co.þþThe busiest acquirer is also the newest--the International Steel Group of Cleveland, formed last spring to buy LTV Steel, which was in bankruptcy.þþInternational Steel chairman Wilbur L. Ross specializes in buying and repairing distressed businesses. He quickly won a more favorable contract with the United Steelworkers of America union, due to be voted on soon, and got LTV's big mill in Indiana Harbor making steel again.þþInternational Steel also bought the bankrupt and idle Acme Metals Inc. of Riverdale.þþAcme and the old LTV plant fit well together.þþAcme's coke oven had cooled, ruining it because coke ovens are designed to always remain warm. Without coke, Acme could not operate its blast furnace, which produces iron to be made into steel.þþThe Indiana Harbor plant had the opposite problem. Its blast furnaces were working below capacity, an expensive waste.þþHot iron by railþþSo International Steel began shipping hot iron aboard insulated railcars from its furnaces in Indiana to Acme, 14 miles away in Illinois. Each day, 400 tons of liquid metal make the trip.þþGordon Spelich, a vice president at International Steel, said the arrangement costs little and improves efficiency. ÿThat lowers our cost on every ton we make,ÿ he said.þþPrivately-held International Steel shows no signs of slowing.þþIf its offer for Bethlehem Steel Corp. goes through, it would become the nation's second-largest steelmaker.þþThe United Steelworkers generally supports the consolidation of the industry, and has negotiated flexible contracts to help acquirers keep open or reopen mills. The number of steelworkers has fallen from 235,000 five years ago to 188,000 late last year.þþBut even union officials are pessimistic about the future. LTV and Acme, which together once employed approximately 9,000 people, are down to just 3,000.þþÿAcme had around 1,100 employeesÿ when it entered bankruptcy, said Cary Burnell, an analyst for the union.þþÿNow that International Steel has resumed operations, it has about 300 employees,ÿ he said.þ
Source: Chicago Tribune
