STEEL INDUSTRY Consolidations pare down players
When the dust settles, there will be three survivors, an expert says.
The American steel industry, haunted by 21 bankruptcies in recent years, is boiling down to a few companies that hope size can guarantee survival.
Companies such as 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.
Now 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.
"There were nine [major steelmakers], and there will be three left when this is all done," said Tom Danjczek, president of the Steel Manufacturers Association, 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, which was formed to acquire the steel-making plants of LTV Corp.
Several factors are driving the consolidation.
For one, consolidation offers steelmakers more clout in dealing with their biggest, and most troublesome, customers -- the Big 3 automakers.
Richard 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.
"If there are only three or four American steel suppliers, they can't do that," McLaughlin said.
The 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 consumes large amounts of steel.
Consolidation 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.
"Consolidation certainly gives them a better chance at profitability," McLaughlin said.
Consolidation 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.
Those underfunded pensions were a huge barrier to acquirers, in many cases making the sale of a steel mill impossible.
Why should the government insure pensions set up by private industry?
"The government was going to end up paying many of these costs anyway," 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.
"A far more humane way to do it was to take over these legacy costs and allow the industry to consolidate," Dixon said.
Will it be enough?
Some observers doubt consolidation will save American steelmakers, however.
"Even 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 compete" with cheap imported steel, said Dan Quinn, an analyst with Morningstar.
"It's a declining industry -- the fundamentals are terrible," he said.
Estimates 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.
The consolidation of the steel industry in the United States is being replicated around the world.
Arcelor, a Luxembourg company and the largest maker of steel anywhere, was formed by the merger of three smaller companies.
Dutch 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.