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ISG positioned to become steel industry's savior
CLEVELAND | Like a seasoned shopper digging through clearance bins, International Steel Group Inc. has made bargain-hunting a way of life.
In business for just two years, the company has catapulted to the top of the industry by buying bankrupt steelmakers at bargain prices, cutting costs including retirees' pensions and reinventing the companies so they can produce more steel cheaper than nearly anyone else in the United States.
LTV. Acme. Bethlehem. The former steel giants have all been saved by ISG of Cleveland.
ISG has been criticized by some investors for taking on heavy debt and questioned by some analysts who are skeptical that its cost-cutting plan will work at plants many consider not worth saving. But overall, ISG has received a positive response.
''ISG has been pretty successful, more successful than any time in the past,'' said Mary Beth Deily, an associate professor of economics at Lehigh University who follows the industry.
ISG has succeeded at ''dealing with the union and getting everybody on board and moving ahead and getting the workers to kind of buy into what sacrifices they have to make to keep this capacity running,'' Deily said.
Certainly, it convinced bankrupt Weirton Steel Corp., which was gasping for its last independent breaths when ISG swooped in last week with a $255 million buyout offer.
Weirton Steel, the small company across the Ohio River in West Virginia, had fought fiercely for years to stand on its own. It was once the largest American company wholly owned by its workers, although that ownership has since dwindled to about 21 percent.
''Without question,'' Weirton union President Mark Glyptis said of ISG's offer, ''I view this as a godsend.''
Glyptis, who heads the 2,700-member Independent Steelworkers Union, knows that if the sale is approved by a bankruptcy court, Weirton will follow the ISG model, shedding costs through job cuts and benefit reductions for retirees.
Workers and company officials realized there was no other way to survive when a long-running foreign import crisis resulted in bankruptcies and shutdowns. ''We believe ISG provides the answer,'' Weirton Chief Executive Officer D. Leonard Wise said.
The deal makes sense for ISG, too, said Michael Locker, a New York steel analyst. He said ISG would acquire one of the nation's largest tin-plate mills, continue to gain market share, seize more control of steel prices and solidify its role as a major player in consolidation.
''It makes them a leader,'' Locker said.
Still, some analysts doubt ISG can afford to keep a promise to keep most of Weirton's operations open long-term because of problems getting raw materials and long-standing inefficiencies that may be beyond repair.
Charles Bradford of Bradford Research/Soleil Securities Corp. says Weirton is in an undesirable geographic location because it's far from the Great Lakes region, where ore is mined.
''Weirton has to put it on a train and ship it, and that adds to its costs,'' he said. ''This is basically a mill that should have closed decades ago.''
Locker also is skeptical ISG will keep open all of Weirton's operations mainly because of the continuing worldwide coke shortage. Weirton, which uses 1.2 million tons of coke annually in ironmaking, had to idle one of its two blast furnaces because of the shortage.
Analysts say they'll be watching to see how much new debt ISG takes on once the Weirton deal is completed. ISG recently paid down a big chunk of its $750 million in debt with proceeds from its $462 million December initial stock offering, silencing critics who were concerned about the pace with which ISG was taking on fixer-uppers.
The deal ''is not the greatest,'' Bradford said, but added, ''There can be some value. This is not a stupid move.''
An infant in an industry that dates to the 1800s, ISG could have the capacity to become the country's top producer of integrated steel, meaning steel made from raw materials, supplanting U.S. Steel.
Analysts say ISG has succeeded so far because of its new approach. Bucking a tradition of continual steel output, ISG pulls back production when demand drops, preventing an abundance of product that pushes prices lower.
The company has made no secret about its desires to keep adding to its portfolio, which began in April 2002 when WL Ross & Co. LLC purchased LTV Corp.
Acme Metals Inc. of Riverdale, Ill., and heavyweight Bethlehem Steel were next. ISG, which is in suburban Richfield, has acquired plants in 10 states.
ISG agreed to buy a number of properties in the Lehigh Valley when it took over Bethlehem Steel's assets. It is slowly selling off most of them. The company is selling the 21-story Martin Tower headquarters to Freedman & Co. Real Estate of Mount Laurel, N.J. It has purchase agreements for the majority of the 1,600 acres on Bethlehem's south side it acquired in the deal. Some of the land, however, is tied up in litigation.
ISG continues to run the former Bethlehem Steel facility, Homer Research Laboratories, at Lehigh University's Mountaintop Campus. The steel research facility employed about 75 people, ISG said last year.
Since 1997, 41 steel companies have gone bankrupt, and every one is considered an ISG target.
''We've been speaking for quite a while about the need for there being a smaller number of quite a bit larger companies that are more diverse,'' ISG Chairman Wilbur Ross told The Associated Press.
Ross predicted his company would have a contract at Weirton equivalent to the landmark deal struck with the steelworkers union at LTV. Employees there have a say in day-to-day operations and an interest in ISG's success: They get profit-sharing checks at the end of each quarter. Workers say they'd rather help solve problems than file grievances, because everyone profits in the end.
Mark Granakis, president of the 1,255-member United Steelworkers of America Local 979 in Cleveland, said the union appreciates Ross' creative approach despite the pain that can accompany it. That included dumping pensions and benefits for 82,000 retirees when the company took over LTV.
''You can look at it as either losing jobs or keeping the jobs that are left, and I chose to be positive about it,'' Granakis said.
As many as 1,100 union and nonunion jobs may be eliminated permanently in Weirton, leaving a work force of slightly more than 2,000.
Granakis encouraged his union counterparts in Weirton to be open-minded. ISG has kept promises to listen to the rank-and-file, and together they share the success, Granakis said.
For example, buoyed by positive earnings, Ross handed out unexpected bonus checks during the Christmas holiday.
''I would say it has worked out pretty well for the both of us,'' Granakis said.
ISG is scheduled to release year-end earnings Thursday. Filings with the SEC show it posted a $58 million operating profit for the first half of this fiscal year. By comparison, U.S. Steel lost $87 million in the first half, in part because of higher pension and natural gas costs.